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Logo of GromaREIT

GromaREIT

The Real Estate Innovation Trust, using tech to unlock the MUR asset class
Real Estate Tech Residential Real Estate D2C AI & Machine Learning Blockchain
Featured image of GromaREIT
Allocation
$2M
Share Price
$1
Security type
Class A Common shares
Minimum investment
$1,000
Deadline
February 1, 2025
Invest in GromaREIT
$1,000 minimum investment · Form CRS
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Investment summary

Leading VC-backed
Company is backed by a leading VC firm
Notable angel backing
Company is backed by a notable angel investor
Power Founders
Founders previously exited or operated a large business
  • GromaREIT: Democratizing access to real estate investment
  • Opportunity: Gain access to a new real estate strategy with the GromaREIT
  • Assets: Modern Urban Rentals are upgraded 2-20 unit rental buildings
  • Market: 1M+ small multifamily buildings in the US, starting in Boston.
  • Advantage: Proprietary AI, Grobot, to acquire, modernize & operate MURs
  • Stats: 47 properties in Boston, ~$31M AUM, 97% occupancy
  • Team: Real estate and tech experts supported by a top-tier Advisory Board

Disclosures & Disclaimers

This is an offering for Class A Common Stock in GromaREIT. It is not an offering for a share, membership or partnership interest in Groma Fund I or any of its affiliates.

OpenDeal Broker LLC charges you a two percent (2%) administrative fee on the gross principal transaction with a minimum fee of $5 and a maximum of $300. The fee is added to the total amount of your investment at checkout.

Past financial results are no guarantee of future performance. Click here for important information regarding Financial Projections which are not guaranteed.

The company has neither generated significant revenue, nor has it had any significant operating history.

Overview

GromaREIT: Democratizing access to real estate investment

For generations, building wealth through real estate ownership has been a cornerstone of the American dream. Owning a small multifamily building and living in one unit while renting out the other was once a common path to building generational wealth. However, owning property, especially rental units, has become increasingly expensive and inaccessible. Today, economic realities like high housing costs and interest rates make it harder to get started on this path. 

At Groma, we believe everyone should be able to participate in the wealth-building opportunities owning real estate provides. We launched the GromaREIT to unlock small multifamily investment, allowing individuals of all investor types to build wealth through real estate ownership.

Groma initially focuses on acquiring, modernizing, and operating 2-20 unit rental properties in the Boston region. Our novel technology simplifies everything, from identifying investment-worthy properties to optimizing maintenance and operations. This tech-forward approach minimizes expenses and maintenance surprises and maximizes investor returns.

Investing in the GromaREIT means not having to take out a mortgage, saving for a down payment, or responding to late-night resident calls. Invest in flexible amounts and enjoy income from a diversified portfolio of multifamily properties, and appreciation of your investment as the assets grow in value over time.

Portfolio

Upgraded Triple-Deckers: The Modern Urban Rental 

In Brooklyn, they’re called walk-ups; in San Francisco, four-plexes; in Chicago, three-flats. Chances are you've lived in one or know someone who has. While located in great neighborhoods, today, these buildings often run into one of two scenarios; becoming rundown through lack of appropriate care or being fully converted into condos, often shrinking from three units into two luxury assets.

Instead, Groma upgrades these properties into Modern Urban Rentals (MURs), preserving and improving urban rental housing.

MURs prioritize high-quality finishes and energy efficiency, creating homes for middle-income professionals like nurses, tech workers, lab techs, and teachers. They’re comparable in quality to new construction, without the on-site amenities like a concierge or gym, but also without the sky-high price tag.

These revitalized assets satisfy the demand for walkable, transit-oriented housing while preserving and improving existing housing. The GromaREIT intends to hold each property for the long term (at least ten years), enabling us to stabilize the properties and making it easier for individuals, including the residents in our buildings, to invest in the MUR ecosystem alongside us.

As of Q1 2024, the GromaREIT has:

  • 47 buildings in the Greater Boston area
  • 305 residential units
  • 97% occupancy for residential units

Market

Starting in Boston, Ready to Scale Nationally 

The GromaREIT is built for scale, targeting areas with high rental demand, a large inventory of multifamily properties, low crime rates, and desirable living environments. Across the United States alone, an estimated one million properties have the potential to be transformed into Modern Urban Rentals.

We kicked off the GromaREIT in Boston due to a combination of factors: high density of triple-decker housing, booming rental demand, and a dynamic demographic profile. Greater Boston boasts a population of 4.8 million, making it the 11th-largest metropolitan area in the US. With 35 colleges and universities fueling a talented workforce, Boston also has historically low unemployment rates (2.7% as of November 2023).

As we prepare for expansion, we assess regional growth characteristics. Our research has identified 25+ markets – including Brooklyn, Chicago, LA, Boston, and Austin – that share Boston's potential for successful Modern Urban Rental development.

This targeted approach ensures we invest in areas poised for sustained growth, offering our investors value and aligning with our commitment to revitalizing neighborhoods through responsible development.


Strategy

Grobot: AI Meets Real Estate

The GromaREIT sets itself apart by focusing on undervalued multifamily assets and unlocking their potential. To accomplish this, we developed Grobot, a proprietary AI-driven property acquisition, renovation, and operations platform. Small multifamily assets can present unique challenges from a combination of factors: primarily renovating older buildings to bring them to modern standards and managing properties geographically dispersed across cities. We address these inefficiencies by integrating AI and automation throughout our property lifecycle: acquiring the right properties, bringing them to modern environmental/living standards, and operating them efficiently with a high-quality resident experience.

Acquire

We source properties in three key ways 1) on-market via MLS, where properties are listed 2) soft-market via our broker relationships and 3) via our own proprietary sourcing methods for truly off-market deals. Grobot includes an AI auto-modeling tool that we use to find the ideal properties to invest in. This tool integrates data from 30+ third-party data sources, including walk scores, crime rates, etc., alongside Groma’s own first-party data, which showcases leasing trends, demand, and which regions are potentially underpriced. By analyzing thousands of properties rapidly, we eliminate unsuitable properties and allow our acquisitions team to tour and analyze only the most promising ones for the GromaREIT, and maintenance teams. In many markets, like Boston, freezing temperatures are a reality of winter, and ahead of any storms, Groma can automatically set minimum temperatures in all units to prevent damage like burst pipes.

Modernize

Upgrading each property is key in transforming a multifamily into a Modern Urban Rental. The first step is integrating smart home functionality into every property. This provides a better resident experience (no more lost keys with smart locks!) and enables remote management capabilities for Groma’s in-house property operations and maintenance teams. In many markets, like Boston, freezing temperatures are a reality of winter, and ahead of any storms, Groma can automatically set temperatures in all units to prevent damage like burst pipes.

Operate

Managing ongoing operations can be costly, especially without on-site property managers, which are common at larger multifamily buildings but impractical for a distributed portfolio like Groma’s. Grobot is trained on vast datasets of communication logs, ledgers, and best practices, while also having access to appliance manuals and other key documents. Grobot is the first to field resident requests and can help them fix some issues themselves. When they can’t, Grobot reads the manuals, looks at prior tasks, and produces a maintenance technician task with all the relevant details. This allows our vertically integrated property management team to focus on improving the resident experience and increasing returns to investors.


Grobot plays a role at each stage of the real estate life cycle to help lower operating costs, improve resident services, and scale portfolio growth.

Operations

Groma's Platform Drives Sustainable MUR Growth

Groma's real estate technology improves the financial performance of MURs and provides a better resident experience. Below we have outlined a sample building based on the data from the 39 buildings we acquired in 2020 and 2021: after three-plus years of ownership and utilizing Groma's platform, our platform can generate a significant reduction in operational costs alongside an increase in rental income. This three-year timeframe reflects the typical stabilization period for newly acquired properties, allowing for a clearer picture of Groma's operational impact.

  • Acquisition Price: $1,100,00
  • Unit Count: 3 Units
  • Unit Layout: 2-3 Beds 1-2 Baths
  • Renovation Budget: $90,000
  • Debt LTV (how much of the total purchase price is debt): 60-65%

At Purchase v. Year Three of Groma Operations 

Track record

Building on Proven Success of the MUR Strategy

Groma acquired its first 39 properties from mid-2020 to late 2021. These served as the first implementation of the Modern Urban Rental strategy and our testing ground for integrating our technology throughout the real estate lifecycle. These properties are currently generating a ~6% yield, and as of Q4 2023, the GromaREIT is a partial owner of these buildings. The GromaREIT acquired its first property in 2022 and continues to invest in and expand its portfolio.

As of Q4 2023 the GromaREIT has:

  • 5 quarters of consistent distributions
  • $80,934.82 distributions paid
  • 44 / 47 properties stabilized and cash flowing

Team

Groma’s Team Blends Real Estate and Technology Expertise

GromaCorp, Inc. (“GromaCorp”) is the operator and sponsor of the GromaREIT.

Groma’s team of 30 is led by executives with decades of experience in both real estate and technology. Groma’s president, Seth Priebatsch, has made his career leveraging technology to redefine industries, first food service and now real estate. Our team has completed over $10B in real estate transactions, and four executives join with the unique experience of successfully growing and exiting high-tech growth companies: LevelUp ($400 million exit, 2018) and Grubhub ($7 billion exit, 2021).

Offering

GromaREIT: Fractionalized Multifamily Rental Investment

The key objectives of the GromaREIT are to:

  • Provide consistent passive income through quarterly distributions
  • Preserve and increase your principal investment
  • Use technology to improve the resident experience and investor returns 

Disclaimers: The above table shows average industry returns and a subjective analysis of the criteria of those returns. Individual investment choices, asset classes, and indices will vary. There is no guarantee that GromaREIT’s real estate will perform similarly to the average of real estate as an asset class shown above.

The Groma Real Estate Innovation Trust (GromaREIT) leverages technology with the goal of driving steady investment growth, consistent distributions, and diversification – all with a convenient investment process.

  • Passive Income: Earn income from rental properties. Our technology lowers operating expenses, and our renovations increase market rentability. The benefits flow back to you in distributions and asset appreciation.
  • Diversified Portfolio: When you buy a traditional home, you’re effectively making a huge bet on the long-term performance of a single asset. This can go very well, but it can also go very poorly, as is the case with any narrow bet. Diversification across a broader portfolio of assets tends to substantially reduce risk relative to single asset ownership.
  • Appreciation: Watch your investment grow alongside Boston's multifamily market and the other markets we invest in in the future.
  •  Frictionless Investing: The Groma team handles all operations from investment to property management.

The GromaREIT charges a 1% asset management fee and a 12.5% performance fee after certain returns criteria are met. Please refer to the PPM for a full breakdown of these and other fees. You can also view the table above for a hypothetical example of returns for REIT investments more generally.

Impact

Groma’s practices also have significant environmental upside. We upgrade our buildings to be more environmentally efficient, helping reduce our residents' carbon impact without asking them to change their behavior. We also help to preserve modern workforce housing in the Greater Boston area, a metro with a major housing shortage and a great need for cost-efficient rentals.

We also use blockchain technology to enable smaller transactions and a broader array of community investors with the end goal of allowing renters to turn their monthly rent checks into fractionalized real estate investments. In 2022, renters spent $700 billion on rent in the United States alone. While these dollars provide necessary living space, they do not help renters build their own personal wealth. By investing in the GromaREIT, we enable our community members to build a “digital starter home,” investing in real estate at their own pace and democratizing access to real estate wealth creation.

Funding

GromaREIT shareholders range from high-net-worth individuals to institutional partners. Seth Priebatsch, the founder and President of Groma, has invested over $5M in the GromaREIT and has also invested over $5M in GromaCorp, the operating company.

The GromaREIT has raised ~$16M in equity so far and has ~$31M in assets under management spread across 47 buildings in the Greater Boston area.

 With $30M raised from top VCs and entrepreneurs, GromaCorp is well-funded and ready to scale the GromaREIT. As well-funded as GromaCorp is, we nevertheless custody GromaREIT assets (properties, cash, equity) separately from GromaCorp, minimizing your exposure to “tech startup” risk.

Meet the GromaCorp Advisory Board

  • The Groma Advisory Board is composed of industry leaders and experts who help us achieve our vision. They hail from backgrounds in real estate, traditional finance, blockchain, academia, politics, and more.

Summary

GromaREIT provides access to a diversified portfolio of strategically upgraded multifamily buildings known as Modern Urban Rentals (MURs). These buildings are carefully selected in growing markets with high rental demand, offering the potential for income generation and appreciation.

Our AI platform, Grobot, supports our team in identifying, renovating, and operating these properties. Grobot's data-driven approach optimizes resident experiences, operational efficiency, and investor returns.  In our first 39 buildings, we have achieved an average distribution of ~6%, which is not inclusive of any appreciation in the underlying assets themselves. We believe this demonstrates the potential of the MUR opportunity to generate a healthy mix of current income and potential asset appreciation over time.

At Groma, we believe in shared success. Every member of our team has a stake in the GromaREIT, aligning our interests with those of our investors. We are excited about the prospects for the GromaREIT and look forward to the opportunity to have you invest alongside us. If you have any questions, reach out to our team directly via the Republic platform or at investor-relations@groma.com.

Remember, all investments involve risk. Real estate is no exception. For a comprehensive understanding of GromaREIT's risks, please review our Private Placement Memorandum.

Disclaimers

Important Disclosures

This material is being furnished on a confidential basis to a limited number of sophisticated investors for the purpose of providing certain information about an investment in the common stock of Groma NAV REIT, Inc (“Groma NAV REIT”). The recipient agrees that it will, and will cause its representatives and advisors to, use the information only to evaluate its potential interest in Groma NAV REIT and for no other purpose and will not, and will cause its representatives and advisors not to, divulge any such information to any other party.  Any reproduction of this information in whole or in part is prohibited.  This material is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase Interests.  Any such offer or solicitation will only be made pursuant to the confidential private placement memorandum of Groma NAV REIT, as amended and/or supplemented from time to time (the “PPM”), which qualifies in its entirety the information set forth herein and which should be read carefully prior to investment in Groma NAV REIT for a description of the merits and risks of an investment in Groma NAV REIT.  Any decision to invest in Groma NAV REIT should be made after reviewing the PPM, conducting such investigations as the investor deems necessary and consulting the investor’s own legal, accounting, tax and other advisors in order to make an independent determination of the suitability and consequences of an investment in Groma NAV REIT.  Neither Groma NAV REIT nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein and nothing contained herein should be relied upon as a promise or representation as to past or future performance of Groma NAV REIT or any other entity.  An investment in Groma NAV REIT is speculative and entails a high degree of risk.  No assurance can be given that Groma NAV REIT’s investment objective will be achieved or that investors will receive any return of or on their capital.

Prospective investors are advised that past performance is not necessarily indicative of future results, and there can be no assurance that Groma NAV REIT will achieve comparable results to any performance data provided herein.  Prospective investors are encouraged to contact GromaCorp, Inc. or Republic to discuss the information provided herein.

Except where otherwise indicated, the information herein was compiled as of September 17, 2023 and Groma NAV REIT does not have any obligation to update material.

The offering is not an offer to sell, nor shall any Interests be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.  Any securities referenced herein have not been registered under the United States Securities Act of 1933, as amended, or under any applicable state securities laws or the securities lase of any other jurisdiction, nor is any such registration contemplated.  The information contained in this material has not been recommended, approved or disapproved by the United States Securities and Exchange Commission or by any State securities commission or any similar body nor have any of the foregoing authorities passed on the accuracy or adequacy of this material.  Any representation to the contrary is a criminal offense.

Risks of early stage investment. Not an offer to buy or sell securities. This is a long-term speculative illiquid investment. Investment is not FDIC or SiPC insured. 

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All funding-portal activities are conducted by OpenDeal Portal LLC doing business as Republic, a funding portal which is registered with the US Securities and Exchange Commission (SEC) as a funding portal (Portal) and is a member of the Financial Industry Regulatory Authority (FINRA). OpenDeal Portal LLC is located at 335 Madison Avenue, 16th Floor, New York, NY 10017, please check out background on FINRA’s Funding Portal page.

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Documents

Capital R (OpenDeal Broker LLC, CRD #291387) is hosting this Reg D 506(c) securities offering by Groma NAV REIT, Inc..
Company documents
Subscription Agreement PPM Supplement #3.pdf PPM Supplement #2 (05.29.24).pdf Groma PPM Supplement #1.pdf Groma PPM.pdf Groma Investor Fee Details.png Form CRS.pdf Accreditation FAQs.pdf Disclosures & Disclaimers.pdf Additional Risk Disclosures.pdf

About GromaREIT

Legal Name
Groma NAV REIT, Inc.
Founded
Jul 2021
Form
Maryland Corporation
Employees
35
Website
groma.com
Social Media
Headquarters
Google Map location of of GromaREIT
31 New Chardon Street , Boston, MA
Headquarters
31 New Chardon Street, Boston, MA, United States 02114

GromaREIT Team
Everyone helping build GromaREIT, not limited to employees

Profile picture of Seth Priebatsch
Seth Priebatsch
Founder
Founder of LevelUp, sold to Grubhub for $400mm, CRO of Grubhub, sold to JET for $7bn. deep experience in technology, scaled operational systems, and team-building. Has a dog named Tock.
Profile picture of Paul Bell
Paul Bell
Chief Legal & Financial Officer
Decades of experience in real estate law, property management, acquisitions, dispositions, and more. Leads legal and financial for Groma.
Profile picture of Christina Dorobek
Christina Dorobek
Head of Investor Strategies
CSO at LevelUp, and later GM at Grubhub, leading a team of ~300 people and growing annual revenue to many billions of dollars.
Profile picture of Grant Fishman
Grant Fishman
Head of Property Operations
Suffolk University graduate in Politics, Philosophy and Economics along with real estate investment certification from MIT School of Architecture and Planning. Grant is the head of Groma’s Property Operations division.
Profile picture of Jason Urton
Jason Urton
Chief Technology Officer
Led ~80 person engineering organization responsible for scalability, security, and product at LevelUp/Grubhub. Currently figuring out by trial and error how to be a parent to an 8-month old.
Profile picture of Michael Rosenstein
Michael Rosenstein
Head of Acquisitions
Previously led multi-family acquisitions team at Berkshire. Focuses on scaling Groma’s real estate investment strategy across sectors/regions.
Profile picture of Sloane Thomson
Sloane Thomson
VP, Physical & Digital Experience Design
Led design and UX teams at LevelUp/Grubhub. Leads the brand, digital and physical design efforts at Groma blending on- and offline experience.
Profile picture of Chris Lehman
Chris Lehman
Policy Architect
Harvard, Teach for America, and a decade of analysis and policy work for healthcare and tech startups. Chris leads our policy/gov’t efforts.
Profile picture of Jay Zagami
Jay Zagami
Chief of Staff
Founded several successful companies, including a Digital Marketing Agency (clients incl. Nestle, Sam Adams, Zipcar, Panera Bread). Most recently was at Adobe as Enterprise Account Director for State Government in their Digital Experience Practice.
6 more team members
Seth Priebatsch
Founder
Paul Bell
Chief Legal & Financial Officer
Christina Dorobek
Head of Investor Strategies
Grant Fishman
Head of Property Operations
Jason Urton
Chief Technology Officer
Michael Rosenstein
Head of Acquisitions
Sloane Thomson
VP, Physical & Digital Experience Design
Chris Lehman
Policy Architect
Jay Zagami
Chief of Staff

Press

Small Multifamily: Real Estate's $5T Opportunity (Part 2)
Thesisdriven Thesisdriven

While larger assets and single-family homes are attractive targets to institutional investors, small multifamily building...

Series A Funding Extention
Groma

Series A Funding Press Release
Groma Groma

Groma and Needham Bank Partnership
Groma Groma

FAQ

What is a NAV REIT? How are valuations done?

What is a NAV REIT? How are valuations done?

NAV REITs (NAV = Net Asset Value) have a formalized structure for valuing assets annually, roughly on the anniversary of each property's acquisition.


This valuation is used for three purposes: 1) to inform existing investors of the appreciation or depreciation of their assets on a regular basis 2) to enable new investors to join the fund at a fair market value at a given moment in time and 3) to enable existing investors to liquidate some or all of their holdings. 


Currently, our per share value is $1.00. We do not expect to calculate our initial NAV per share using appraised values of our properties until at least sometime in 2024, at which point we will follow the Net Asset Value determination method described more fully in our private placement memorandum.

What is the Groma NAV REIT?

What is the Groma NAV REIT?

The Groma NAV REIT, Inc. is a real estate investment trust focused on multifamily real estate. Because of our innovative use of technology, both to improve our properties performance and to create more paths for investors to participate in our ecosystem, we refer to ourselves as the Real Estate Innovation Trust. Our investment strategy is to invest into the Modern Urban Rental (MUR) asset class in the greater Boston area and other areas over time.


We pioneered the MUR strategy in Boston, with Groma Boston Fund I, our first investment vehicle. A track record for Groma Boston Fund I can be found on this page and more information about our overall investment strategy, along with disclosure of risks and potential benefits of investing in  GromaREIT, Inc. can be found in our private placement memorandum.

What is the target return?

What is the target return?

GromaREIT can not guarantee an overall  return, however, we target acquiring buildings that, once stabilized, we project to yield between 4% and 6% cash yields and a mid-to-high teens IRR, over a ten year hold period. The overall GromaREIT returns will not exactly mirror property level returns as properties will be in various states of maturity throughout the portfolio. Properties tend to start with zero-to-low income, but early outsized appreciation as our improvements show results. Over time, as properties mature, we tend to see their appreciation moderate per year, but them transition into durable cash-flowing properties. Our property level returns also do not account for REIT level fees such as our 1% management fee and 12.5% performance fee. A full listing of fees can be found in the Groma NAV REIT, Inc PPM.

What is a REIT? Why did you pick a REIT structure?

What is a REIT? Why did you pick a REIT structure?

A REIT is a real estate specific corporate structure that has some structural advantages for what we're looking to provide to our investors. The GromaREIT is a perpetual life NAV REIT, meaning that it can continue to grow and diversify assets over time, as well as react to new market opportunities/shifts. REITs also have some advantaged tax structures, including no taxes at the corporate (REIT) level as long as certain conditions are met, as well as a 20% deduction in dividend income until 2025. REITs can also benefit from the traditional and accelerated versions of depreciation often used by real estate investors.


We intend to elect to be taxed as a REIT commencing with our taxable year ending December 31, 2023, or, if deemed in the best interests of our shareholders, in a following year. We intend to operate in a manner that would allow us to qualify as a REIT. Our qualification as a REIT depends upon our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. We have structured and intend to continue structuring our activities in a manner designed to satisfy all requirements for qualification as a REIT. However, the REIT qualification requirements are extremely complex and interpretation of the U.S. federal income tax laws governing qualification as a REIT is limited, and it is possible our REIT status may terminate inadvertently.

Do you have more information about the risks of investing in this campaign?

Do you have more information about the risks of investing in this campaign?

You can find resources on the risks to investing here: 

Disclosures & Disclaimers 

Additional Risks Disclosures

When might I expect liquidity? How long do you intend to hold assets?

When might I expect liquidity? How long do you intend to hold assets?

We intend to grow the fund for a long (long!) time but we want to make sure that investors have access to liquidity at regular intervals. We intend to offer quarterly redemption options so you can benefit from our long-term perspective on real estate, but also not be locked in longer than you want. These redemptions will not be available until we have published our first NAV (net asset valuation) and will be subject to other limitations that are outlined in the private placement memorandum of Groma NAV REIT (the “PPM”). For example, a 5% discount on redemptions held for less than 1 year, and a 5% of the total REIT’s value can be redeemed in any given quarter. If there is more than 5% redemption requested in a quarter, the shareholders will receive redemptions pro-rata. For more information, please see the PPM.

What reporting can I expect?

What reporting can I expect?

We intend to deliver reporting quarterly via email, and an online platform. We also intend to build out some innovative blockchain technology to give our investors faster / more real-time reporting as well as broaden investor access to our REIT shares over time. We also intend to provide annual audited financial statements, which will be delivered within 120 days of the fiscal year end. We will use the accrual method of accounting and prepare our financial statements in accordance with GAAP. We will report income and deductions for tax purposes in accordance with the Internal Revenue Code and income tax regulations. For full information on our reporting obligations, please read our PPM.

                        

What are the fees and hurdles?

What are the fees and hurdles?

1% NAV Management Fee: We earn a 1.0% fee annually of the NAV of the REIT. This factors out debt. I.E. If the REIT’s assets were a single $1,000,000 property, with $700,000 of debt, the NAV would be $300,000 and the 1% fee would be $3,000 per year. If the property appreciated to $1,100,000 in year 2, and the debt principal was not paid down at all, the management fee in year 2 would be $400,000 * 1% = $4000.


12.5% Performance Fee, Subject to 5% and 7.5% Hurdles: We earn a 12.5% performance fee of the total return (dividends + appreciation) subject to two hurdles.


- The first is a 5% preferred return hurdle, below which we receive no performance fee.

- Between 5.0% and 7.5% we receive a 12.5% performance fee.

- Above 7.5% we are “caught up” to having received a total 12.5% performance fee ratio.

                                

Property Management Fees: We do property management in-house and charge a rate between 4% and 8% of rent-roll, depending on the size of the property. (Scales down for larger properties.)

                            

Project Management Fee: We do much of our general construction management in house, and for projects between $100K-$500K we charge a 10% fee. For projects less than $100K or over $500K we do not charge a construction management fee as it’s either covered by property management or handled by an external partner.

                            

Other Expenses: There are some other expenses that our outlined in the PPM, such as legal fees, title costs, transfer taxes etc... that are born by the properties in the funds. We do not expect these to exceed 1.0% of NAV in any given year in total.     


What assets will the REIT focus on?

What assets will the REIT focus on?

The fund will initially focus on the Modern Urban Rental (MUR) investment strategy, e.g. non-amenitized 2-10 unit buildings in in dense urban cores.

Are there any investment minimums?

Are there any investment minimums?

The initial minimum permitted investment in this private offering is $1,000 in shares, provided that we have the right to waive such minimum investment requirement in our discretion. 

Do you have more information about the risks of investing in this campaign?

Do you have more information about the risks of investing in this campaign?

You can find resources on the risks to investing here: 

 

Disclosures & Disclaimers 

Additional Risks Disclosures

Who will do deal sourcing, property management, leasing, maintenance?

Who will do deal sourcing, property management, leasing, maintenance?

We intend to continue with our vertically-integrated approach to real estate. Our tech stack continues to enable us to efficiently source, model, acquire, lease and manage properties. We believe this will continue to be a competitive advantage in the market in terms of the performance we can achieve. 

Still have questions? Check the discussion section.
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Risks

Costs of complying with other governmental laws and regulations may adversely affect our income and the cash available for any distributions.
All real property and the operations conducted on real property are subject to various other federal, state and local laws and regulations, including various fire, health, life-safety and similar regulations with which we may be required to comply, and that may subject us to liability in the form of fines or damages for noncompliance. Any material expenditures, fines, or damages we must pay will reduce our ability to make distributions and may reduce the value of your investment.
Our stockholders may be more likely to sustain a loss on their investment because our sponsor and chief executive officer do not have as strong an economic incentive to avoid losses as do sponsors and executive officers who have made significant equity investments in their companies.
Our sponsor holds a $200,000 investment in us through the purchase of approximately 200,000 Class A Shares at $1.00 per share, and Seth Priebatsch, our chief executive officer, has committed to a $5,000,000 investment in us through the purchase of approximately 5,000,000 Class A Shares at $1.00 per share, of which $500,000 has been called and invested. Additionally, if we are successful in raising enough proceeds to be able to reimburse our sponsor for our significant organization and offering expenses, our sponsor will have little exposure to loss in value of our shares. Without this exposure, our investors may be at a greater risk of loss because our sponsor and chief executive officer may have less to lose from a decrease in the value of our shares as does a sponsor or executive officer that makes more significant equity investments in its company.
The common shares we are offering have not been registered under the Securities Act or state securities laws and are subject to restrictions upon transfer, and there is no public market for our shares. As a result, it will be difficult for you to sell your common shares and, if you are able to sell your common shares, you are likely to sell them at a substantial discount.
The common shares we are offering with this memorandum have not been registered under the Securities Act or the securities laws of any state, are being offered and sold in reliance upon exemptions from the registration requirements of the Securities Act and such state securities laws and may not be transferred or resold except as permitted pursuant to registration or applicable exemption under the Securities Act and applicable state securities laws. In addition, the common shares are subject to restrictions on transferability and resale designed to protect our status as a REIT. There is no public market for our shares, and our charter does not require that we list our shares on any public securities market. It will, therefore, be difficult for you to sell your common shares. See the “Description of Our Securities — Restrictions on Ownership and Transfer” section of this memorandum for a more complete discussion on the restrictions on your ability to transfer your shares. Even if you are able to sell your common shares, the absence of a public market may cause the price you receive to be less than what you paid or less than your proportionate value of the assets we own. Therefore, repurchase of shares by us will likely be the only way for you to dispose of your shares, and we are not obligated to repurchase shares under our share repurchase program. Our share repurchase program will commence on the first anniversary of the date when we announce our initial quarterly NAV per share, subject to authorization by our board of directors; provided, however, our board of directors may repurchase shares due to the death or “qualifying disability” of a stockholder. We will repurchase shares at the transaction price on the date of repurchase (which will generally be equal to our prior quarter’s NAV per share) and not based on the price at which you initially purchased your shares; provided, however, the “transaction price” will equal $1.00 per share prior to the calculation of our initial quarterly NAV per share. Subject to limited exceptions, shares repurchased within one year of the date of issuance are expected to be repurchased at 95% of the transaction price. As a result, you may receive less than the price you paid for your shares when you sell them to us pursuant to our share repurchase program.
Your ability to have your shares repurchased through our share repurchase program (once available) is limited. We may choose to repurchase fewer shares than have been requested to be repurchased, in our discretion at any time, and the amount of shares we may repurchase is subject to caps. Further, our board of directors may make exceptions to, modify, suspend, or terminate our share repurchase program if it deems such action to be in our best interest and the best interest of our stockholders.
We may choose to repurchase fewer shares than have been requested in any particular month to be repurchased under our share repurchase program, or none at all, in our discretion at any time. We may repurchase fewer shares than have been requested to be repurchased due to lack of readily available funds because of adverse market conditions beyond our control, the need to maintain liquidity for our operations or because we have determined that investing in real property or other illiquid investments is a better use of our capital than repurchasing our shares. In addition, the total amount of shares that we will repurchase is limited, in any calendar month, to shares whose aggregate value (based on the repurchase price per share on the date of the repurchase) is no more than 2% of our aggregate NAV as of the last day of the previous calendar month and, in any calendar quarter, to shares whose aggregate value is no more than 5% of our aggregate NAV as of the last day of the previous calendar quarter (measured using the average aggregate NAV attributable to stockholders at the end of the immediately preceding three months). Further, our board of directors may make exceptions to, modify, suspend, or terminate our share repurchase program if it deems such action to be in our best interest and the best interest of our stockholders. If the full amount of all shares of our common stock requested to be repurchased in any given month are not repurchased, funds will be allocated pro rata based on the total number of shares of common stock being repurchased subject to the volume limitation. All unsatisfied repurchase requests must be resubmitted after the start of the next month or quarter, or upon the recommencement of the share repurchase program, as applicable. The vast majority of our assets consist of properties that cannot generally be readily liquidated without impacting our ability to realize full value upon their disposition. Therefore, we may not always have a sufficient amount of cash to immediately satisfy repurchase requests. Should repurchase requests, in our judgment, place an undue burden on our liquidity, adversely affect our operations or risk having an adverse impact on the Company as a whole, or should we otherwise determine that investing our liquid assets in real properties or other illiquid investments rather than repurchasing our shares is in the best interests of the Company as a whole, then we may choose to repurchase fewer shares than have been requested to be repurchased, or none at all. Because we are not required to authorize the recommencement of the share repurchase program within any specified period of time, we may effectively terminate the plan by suspending it indefinitely. As a result, your ability to have your shares repurchased by us may be limited and at times you may not be able to liquidate your investment. See “Share Repurchases—Repurchase Limitations” section this memorandum.
We have a limited operating history and limited established financing sources, and the prior performance of real estate programs sponsored by affiliates of our advisor may not be an indication of our future results.
We were formed on July 16, 2021, and therefore, have a limited operating history and you should not rely upon the past performance of other real estate investment programs sponsored by affiliates of our advisor to predict our future results. Although the members of our advisor’s management have significant experience in the acquisition, finance, management and development of commercial real estate, the prior performance of real estate investment programs sponsored by the members of our advisor’s management team and other affiliates of our advisor may not be indicative of our future results. Moreover, we have limited established financing sources. We may not succeed in achieving our goals, and our failure to do so could cause you to lose all or a portion of your investment.
Because this is a “blind pool” offering, you will not have the opportunity to evaluate our investments before we make them, which makes an investment in us more speculative.
We have not identified all of the properties we will acquire with the net proceeds from this offering. Additionally, we will not provide you with information to evaluate our investments prior to our acquisition of properties. We intend to invest the net proceeds from this offering in multifamily real estate assets. We also may, in the discretion of our board of directors, invest in other types of real estate or in entities that invest in real estate.
Our use of blockchain technology may draw enhanced scrutiny from regulators which may increase our expenses, despite significant efforts to ensure and showcase our compliance with relevant rules and regulations.
We intend to use blockchain as a database to increase reporting transparency, accuracy and immutability. Blockchain can also be an efficiency technical solution to enable access to investors, alongside traditional web and database technologies. All our intended uses of blockchain are as a supporting technology. For example, shares are tracked by a registered transfer agent, but also may be recorded on chain as a duplicate copy, but providing a new method of access to those interested in using it. In this example, any requested transfers, purchases or sales, would first have to be recorded, verified and validated, inclusive of appropriate KYC and AML checks, by the transfer agent, and then could be recorded on chain as well. Groma NAV REIT Inc. and its advisor, GromaCorp, Inc. have gone to great lengths to showcase valuable uses of blockchain technology that enhance investor disclosure and protections and are compliant with the relevant laws and regulations in their entirety. Nevertheless, the blockchain industry, and the crypto subset of that industry specifically has suffered significant reputational damage since the beginning of 2022 due to the actions of several bad actors, and this potentially casts a reputational stain on all members of the industry. It may also cause heightened scrutiny from regulators towards actors like the Company, which could cause slowdowns in our regulatory review periods or increased costs as we respond to such inquiries. However, our attention to regulatory compliance and significant commitment to such efforts may also prove to be a differentiator in the broader industry and could accordingly bring benefits to our investors. Additionally, blockchains may suffer from high fees, potential security vulnerabilities or downtime caused by the platforms or actors on said platforms. Each of these risks may cause our shares to lose value.
Regulatory changes or actions may alter the nature of an investment in us or restrict the use of digital assets in a manner that adversely affects our business, prospects, or operations.
As digital assets have grown in both popularity and market size, governments around the world have reacted differently to digital assets; certain governments have deemed them illegal, and others have allowed their use and trade without restriction, while in some jurisdictions, such as in the U.S., subject the mining, ownership, and exchange of digital assets to extensive, and in some cases overlapping, unclear and evolving regulatory requirements. Ongoing and future regulatory actions could have a material adverse effect on our business, prospects, or operations.
Digital assets may be made illegal in certain jurisdictions which could adversely affect our business prospects and operations.
Although we do not anticipate any material adverse regulations on digital assets in our jurisdictions of operation, it is possible that state or federal regulators may seek to impose harsh restrictions or total bans on digital assets which may make it impossible for us to do business. Further, although digital assets in general are largely unregulated in most countries (including the United States), regulators in certain jurisdictions may undertake new or intensify existing regulatory actions in the future that could severely restrict the right to mine, acquire, own, hold, sell, or use digital assets or to exchange it for traditional fiat currency such as the United States Dollar. Such restrictions may adversely affect us as the large-scale use of digital assets as a means of exchange is presently confined to certain regions globally. Such circumstances could have a material adverse effect on us, which could have a material adverse effect on our business, prospects, or operations and potentially the value of digital assets we acquire and thus harm investors.
Financial volatility and geopolitical instability outside of the U.S. may adversely impact the U.S. and global economies.
We could experience negative impacts to our business and results of operations as a result of macroeconomic, geopolitical and other challenges, uncertainties and volatility. For example, any terrorist attack, other act of violence or war, including military conflicts, such as the escalating conflict between Russia and Ukraine, could result in increased volatility in, or damage to, the worldwide financial markets and economy. This risk may be magnified in the case of the conflict between Russia and Ukraine, due to the significant sanctions and other restrictive actions taken against Russia by the U.S. and other countries in response to Russia’s February 2022 invasion of Ukraine, as well as the cessation of all business in Russia by many global companies. The actions of Russian military forces and support personnel in Ukraine and the foregoing actions by the U.S. other jurisdictions could have a lasting impact on regional and global economies. It is not possible to predict to what extent the foregoing events may negatively impact economies around the world, including the U.S. Continued or increased adverse macroeconomic conditions could have a material adverse effect on our business, financial condition, and results of operations.
Changes in national, regional or local economic, demographic or real estate market conditions may adversely affect our results of operations, our financial position, the value of our assets and our cash flows.
We are subject to risks incident to the ownership of real estate-related assets including: changes in national, regional or local economic, demographic or real estate market conditions; changes in supply of, or demand for, similar properties in an area; increased competition for real estate assets targeted by our investment strategy; bankruptcies, financial difficulties or lease defaults by property owners and tenants; inflation; 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. Our assets are also subject to the risk of significant adverse changes in financial market conditions that can result in a deleveraging of the global financial system and the forced sale of large quantities of mortgage-related and other financial assets. Concerns over economic recession, inflation, geopolitical issues, including events such as the Russia’s invasion of Ukraine, United Kingdom’s exit from the European Union, unemployment, the availability and cost of finance, or a prolonged government shutdown may contribute to increased volatility and diminished expectations for the economy and markets, which could result in a decline in the value of our assets. In addition, any increase in mortgage defaults in the residential market may have a negative impact on the credit markets generally as well as on economic conditions generally. We are unable to predict future changes in national, regional or local economic, demographic or real estate market conditions. These conditions, or others we cannot predict, may adversely affect our results of operations, our financial position, the value of our assets and our cash flows.
Elevated and variable inflation may materially adversely affect our financial condition and results of operations.
Inflation in the United States has recently accelerated and is currently expected to continue at an elevated level in the near-term. Rising inflation could have an adverse impact on any floating rate mortgages, credit facility and general and administrative expenses, as these costs could increase at a rate higher than our rental and other revenue. Inflation could also have an adverse effect on consumer spending, which could impact our tenants’ revenues and, in turn, our percentage rents, where applicable. In addition, leases of long-term duration or which include renewal options that specify a maximum rate increase may result in below-market lease rates over time if we do not accurately estimate inflation or market lease rates. Provisions of our leases designed to mitigate the risk of inflation and unexpected increases in market lease rates, such as periodic rental increases, may not adequately protect us from the impact of inflation or unexpected increases in market lease rates. If we are subject to below-market lease rates on a significant number of our properties pursuant to long-term leases and our operating and other expenses are increasing faster than anticipated, our business, financial condition, results of operations, cash flows or our ability to satisfy our debt service obligations or to pay distributions on shares of our common stock could be materially adversely affected.
Economic events that may cause our stockholders to request that we repurchase their shares may materially adversely affect our cash flow and our results of operations and financial condition.
Economic events affecting the U.S. economy, such as the general negative performance of the real estate sector, could cause our stockholders to seek to sell their shares to us pursuant to our share repurchase program once our share repurchase program commences at a time when such events are adversely affecting the performance of our assets. Even if we decide to satisfy all resulting repurchase requests, our cash flow could be materially adversely affected. In addition, if we determine to sell assets to satisfy repurchase requests, we may not be able to realize the return on such assets that we may have been able to achieve had we sold at a more favorable time, and our results of operations and financial condition, including, without limitation, breadth of our portfolio by property type and location, could be materially adversely affected.
We will not seek to list the shares sold in this offering on an exchange, and we are not required to provide for a liquidity event. Therefore, if you purchase shares in this offering, it will be difficult for you to sell your shares and, if you are able to sell your shares, you will likely sell them at a substantial discount.
The shares offered by us are illiquid assets for which there is not expected to be any secondary market nor is it expected that any will develop in the future. In addition, stockholders may not be able to have their shares repurchased under our share repurchase program once it commences. Therefore, it will be difficult for you to sell your shares promptly or at all. If you are able to sell your shares, you may only be able to sell them at a substantial discount from the price you paid. The shares should be purchased as a long-term investment only. While we may consider a liquidity event at any time in the future, we currently do not intend to undertake such consideration until at least 2028, five years after we launch our investment program, and we are not obligated by our charter or otherwise to effect a liquidity event at any time. If we do not pursue a liquidity event, or delay such an event due to market conditions, your shares may continue to be illiquid and you may, for an indefinite period of time, be unable to convert your investment to cash easily and could suffer losses on your investment.
Delays in liquidating defaulted mortgage loans could reduce our investment returns.
If there are defaults under any mortgage loan we acquire or originate, we may not be able to repossess and sell the underlying properties quickly. The resulting time delay could reduce the value of our investment in the defaulted mortgage loans. An action to foreclose on a property securing a mortgage loan is regulated by state statutes and regulations and is subject to many of the delays and expenses of other lawsuits if the borrower raises defenses or counterclaims. In the event of default by a borrower, these restrictions, among other factors, 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.
We may suffer from delays in locating suitable investments, which could adversely affect our ability to make distributions and the value of your investment.
Except for investors who purchase shares in this offering after such time as this memorandum is supplemented to describe one or more identified investments, you will have no opportunity to evaluate the terms of transactions or other economic or financial data concerning our investments. We could suffer from delays in locating suitable investments. The more money we raise in this offering, the more difficult it will be to invest the net offering proceeds promptly. Therefore, the size of this offering increases the risk of delays in investing our net offering proceeds. Our reliance on our advisor to locate suitable investments for us at times when the management of our advisor is simultaneously seeking to locate suitable investments for other investment programs sponsored by our advisor’s affiliates could also delay the investment of the proceeds of this offering. Delays we encounter in the selection and acquisition of income-producing properties would likely limit our ability to pay dividends to you and reduce your overall returns.
We may be unable to make or maintain cash distributions or increase distributions over time.
There are many factors that can affect the availability and timing of cash distributions to stockholders, including the amount of cash flow from operations. Below we present a historical record of our distributions thus far. These distributions were made from a combination of cash flow from earnings and financing on our properties. - On March 28, 2023, our board of directors authorized and declared distributions to stockholders of record on as of Dec 31, 2022 in the amount of $0.0025, and such distributions were paid on or about March 30, 2023. - On June 22, 2023, our board of directors authorized and declared distributions to stockholders of record on as of March 31, 2023 in the amount of $0.0025, and such distributions were paid on or about June 25, 2023. - On September 15, 2023, our board of directors authorized and declared distributions to stockholders of record on as of June 30, 2023 in the amount of $0.0025, and such distributions were paid on or about September 18, 2023. We cannot guarantee additional distributions, or if distributions are authorized, the rate of such distributions. Our current distributions are, and we expect future distributions to be, based on a combination of offering proceeds and cash available from our operations, and we cannot assure you that we will generate cash from operations to sustain our distributions. The amount of cash available for distributions is affected by many factors, such as our ability to buy assets as offering proceeds become available, income from such properties and our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. We cannot assure you that we will be able to continue to pay distributions or maintain our current level of distributions, or that distributions will increase over time. We also cannot give any assurance that rents from the properties we acquire will increase, that the properties or securities we buy will increase in value or provide constant or increased distributions over time, or that future acquisitions of real estate or any investments in securities will increase our cash available for distributions to stockholders. We may not have sufficient cash from operations to make a distribution required to maintain our REIT status. We may make distributions from the proceeds of this offering or from borrowings in anticipation of future cash flow. Any such distributions will constitute a return of capital and may reduce the amount of capital we ultimately invest in properties and negatively impact the value of your investment. For a description of the factors that can affect the availability and timing of cash distributions to stockholders, see the section entitled “Description of Our Securities — Distribution Policy” section of this memorandum.
Distributions paid from sources other than our cash flows from operations, particularly from proceeds of this offering, will result in us having fewer funds available to acquire properties, which may adversely affect our ability to fund future distributions with cash flows from operations, may dilute your interest in us, and may adversely affect the value of an investment in our common shares.
Until we are generating sufficient cash flows from operations to fund distributions to our stockholders, we may pay all or a substantial portion of our distributions from the proceeds of this offering or from borrowings, including possible borrowings from our advisor or its affiliates, the sale of additional securities and our advisor’s deferral, suspension or waiver of its fees and expense reimbursements. Our board of directors may change our distribution policy, in its sole discretion, at any time, subject to Maryland law. Under Maryland law, we may not make distributions that would: (1) cause us to be unable to pay our debts as they become due in the usual course of business; or (2) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences, if any. Distributions made from offering proceeds are a return of capital to stockholders, from which we will have already paid offering expenses in connection with this offering. We have not established any limit on the amount of proceeds from this offering that may be used to fund distributions, subject to Maryland law. There is no guarantee that we will pay any particular amount of distributions or continue to pay distributions. If we encounter any delays in locating suitable investments, we may pay all or a substantial portion of our distributions from the proceeds of this offering or from borrowings in anticipation of future cash flow, which may constitute a return of your capital. If we fund distributions from the proceeds of this offering, we will have less funds available to acquire properties. As a result, the return you realize on your investment may be reduced. Funding distributions from borrowings could restrict the amount we can borrow for investments, which may adversely affect our profitability and cash flow. Funding distributions with proceeds from the sale of assets or the proceeds of this offering may affect our ability to generate cash flows. Funding distributions from the sale of additional securities could dilute your interest in us if we sell our common shares or securities convertible or exercisable into our common shares to third-party investors. Payment of distributions from the mentioned sources could restrict our ability to generate sufficient cash flows from operations, affect our profitability or affect the distributions payable to you upon a liquidity event, any or all of which may have an adverse effect on your investment.
Our board of directors may change our investment policies without stockholder approval, which could alter the nature of your investments.
Our investment policies may change over time. The methods of implementing our investment policies also may vary, as new real estate development trends emerge and new investment techniques are developed. Our investment objectives and strategies, the methods for their implementation, and our other objectives, policies and procedures may be altered by our board of directors without the approval of our stockholders. As a result, the nature of your investment could change without your consent.
The continuing novel coronavirus, or COVID-19, pandemic could adversely impact our operations, the value of our investments and our ability to raise capital in this offering.
The global impact of the outbreak of COVID-19 has been widespread and many countries have reacted by instituting quarantines and restrictions on travel, closing financial markets and/or restricting trading, and limiting operations of non-essential businesses. Such actions have created disruption in global supply chains and have adversely impacted many industries. Although vaccines are widely available, vaccine rates vary, vaccines may lose effectiveness without boosters, and vaccines may be less effective against new strains of COVID-19. Considerable uncertainty still surrounds the coronavirus and its potential effects, and the extent of and effectiveness of any responses taken on a national and local level. As a result, the pandemic could have a continued adverse impact on economic and market conditions. Further, as a result of shutdowns, quarantines or actual viral health issues, tenants at our multifamily apartment communities may experience reduced wages for a prolonged period of time and may be unable to make their rental payments. We may be unable to evict tenants due to federal, state and/or local laws or regulations or lender requirements implemented as a result of the COVID-19 virus outbreak. In addition, our property manager may be limited in its ability to properly maintain our multifamily apartment communities. Market fluctuations may affect our ability to obtain new borrowings. In addition, we may be unable to obtain financing for the acquisition of investments on satisfactory terms, or at all. The extent to which the coronavirus pandemic may impact our investments and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 and the actions taken to contain COVID-19 or treat its impact, new strains of COVID-19 and the availability of effective therapies or vaccines, among others. COVID-19 and the resulting current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our performance, results of operations and ability to pay distributions.
The offering price was not established on an independent basis and bears no relationship to our net asset value. The offering price is likely to be higher than the amount you would receive per share if we were to liquidate at this time because of the fees paid in connection with the issuance of our shares.
The offering price of the securities offered hereby was not established on an independent basis and bears no relationship to our net asset value, or to any other established criteria for valuing issued or outstanding shares of capital stock. The offering price is likely to be higher than the amount you would receive per share if we were to liquidate at this time because of the fees paid or payable in connection with the issuance of our shares. Further, the offering price may be significantly more than the price at which the shares would trade if they were to be listed on an exchange or actively traded by broker-dealers. Because the initial offering price is not based on any independent valuation, the offering price is not indicative of the proceeds you would receive upon liquidation.
If we are unable to raise substantial funds, we will be limited in the number and type of investments we may make, and the value of your investment in us will fluctuate with the performance of the specific properties we acquire.
This offering is being made on a “reasonable best efforts” basis, whereby we and our affiliates or any future dealer manager or broker-dealers participating in the offering are only required to use their reasonable best efforts to sell our shares and have no firm commitment or obligation to purchase any of the shares. We currently are directly issuing Class A Shares to investors through this memorandum for which no underwriting compensation will be paid in reliance on the safe harbor from broker-dealer registration under the Exchange Act. We are also offering Class A Shares on the Republic Platform, which is operated for the benefit of ODB, a broker-dealer registered with FINRA and the SEC. ODB is not purchasing the Class A Shares and is not required to sell any specific number or dollar amount of the Class A Shares. For more information regarding the Republic Platform and OpenDeal Broker, LLC, see “Plan of Distribution” section of this memorandum. We may in the future engage other broker-dealers that are registered as a broker dealer with FINRA, in which case selling commissions and dealer manager fees would be charged to investors who purchase through a dealer manger’s participating broker-dealers. As a result, the amount of proceeds we raise in this offering may be substantially less than the amount we would need to achieve a broadly diversified property portfolio. If we are unable to raise substantial proceeds from this offering, we will make fewer investments resulting in less diversification in terms of the number of investments owned, the geographic regions in which our investments are located and the types of investments that we make. In such event, the likelihood of our profitability being affected by the performance of any one of our investments will increase. Additionally, we are not limited in the number or size of our investments or the percentage of net proceeds we may dedicate to a single investment. Your investment in our shares will be subject to greater risk to the extent that we lack a diversified portfolio of investments. In addition, 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 pay distributions could be adversely affected.
A high concentration of our properties in a particular geographic area, or of tenants in a similar industry, would magnify the effects of downturns in that geographic area or industry.
If there is a concentration of our properties in any particular geographic area, as there is currently in the Greater Boston area, any adverse situation that disproportionately affects that geographic area would have a magnified adverse effect on our portfolio. Similarly, since we expect the tenants of our properties to be concentrated in the multifamily industry, any adverse effect to that industry generally would have a disproportionately adverse effect on our portfolio.
If the advisor is unable to find suitable investments or successfully implement our investment strategy, then we may not be able to achieve our investment objectives or pay distributions.
Our advisor is responsible for, among other things, identifying, structuring, and negotiating investments and providing asset management and disposition services in connection with our investments. Accordingly, our ability to achieve our investment objectives and to pay distributions depends on our advisor’s performance, including its ability to locate suitable investments and successfully structure and negotiate our investment and financing arrangements. We cannot be sure that our advisor will be successful in locating suitable investments on financially attractive terms or that our investment objectives will be achieved. If our advisor is unable to find suitable investments or otherwise fails to successfully implement our investment strategy, our performance will suffer, and, if our board of directors determines, we may liquidate. In these events, our ability to pay distributions to our stockholders and the value of your investment would be adversely affected.
If our advisor and its affiliates are unable to retain key personnel, our ability to implement our investment strategies could be delayed or hindered, which could adversely affect our ability to make distributions and the value of your investment.
Our success depends to a significant degree upon the contributions of certain of the executive officers and other key personnel of our advisor, including our President and Chief Executive Officer, Seth Priebatsch, who would be difficult to replace. Our advisor does not have an employment agreement with any of these key personnel and we cannot guarantee that all, or any particular one, will remain affiliated with our advisor. If any of such key personnel were to cease their affiliation with our advisor, our operating results could suffer. Further, we do not intend to separately maintain key person life insurance on or any person. We believe that our future success depends, in large part, upon our advisor’s ability to hire and retain highly skilled managerial, operational, and marketing personnel. Competition for such personnel is intense, and we cannot assure you that our advisor will be successful in attracting and retaining such skilled personnel. If our advisor loses or is unable to obtain the services of key personnel, our ability to implement our investment strategies could be delayed or hindered, and the value of your investment may decline.
Our advisor can resign on 60 days’ notice from its role as advisor, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business, and results of operations and cash flows.
Our advisor has the right, under the advisory agreement, to resign at any time upon not less than 60 days’ written notice, whether we have found a replacement or not. If our advisor resigns, we may not be able to find a new advisor or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, and our financial condition, business, and results of operations, as well as our ability to pay dividends, are likely to be adversely affected. In addition, the coordination of our management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by our advisor and its affiliates. Even if we are able to retain comparable management, the integration of such management and its lack of familiarity with our investment objectives may result in additional costs and time delays that may adversely affect our business, financial condition, results of operations and cash flows.
If we consummate a public offering, or if we exceed 2,000 stockholders, we will incur significant costs as a result of being a public reporting company.
If we consummate a public offering, or if we exceed 2,000 stockholders, we will be required to register our securities under the Exchange Act, and we will incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Exchange Act, as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and other rules implemented by the SEC.
Our rights and the rights of our stockholders to recover claims against our directors 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 has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter provides that no director generally will be liable to us or our stockholders for monetary damages and that we generally will indemnify them for losses unless, in the case of an independent director, such director is grossly negligent or engages in willful misconduct or, in the case of our directors who are also our executive officers or affiliates of our advisor, such directors are negligent or engage in misconduct. As a result, you and we may have more limited rights against our directors than might otherwise exist under common law, which could reduce your and our recovery from these persons if they act in a negligent manner. In addition, we may be obligated to fund the defense costs incurred by our independent directors (as well as by our other directors, officers, employees and agents) in some cases, which would decrease the cash otherwise available for distributions to you. See “Management – Limited Liability and Indemnification of Directors, Officers and Other Agents” section this memorandum.
The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to pay distributions, make additional investments and service our debt.
The Federal Deposit Insurance Corporation only insures interest-bearing accounts in amounts up to $250,000 per depositor per insured bank. While we will monitor our cash balance in our operating accounts, if any of the banking institutions in which we deposit funds ultimately fails, we may lose our deposits over $250,000. The loss of our deposits may have a material adverse effect on our financial condition.
We could be negatively impacted by changes in the condition of Fannie Mae or Freddie Mac and by changes in government support for multifamily housing.
Fannie Mae and Freddie Mac have been a major source of financing for multifamily real estate in the United States and we may use loan programs sponsored by these agencies to finance our acquisitions of multifamily properties. There have been ongoing discussions by the government and other interested parties with regard to the long term structure and viability of Fannie Mae and Freddie Mac, which could result in adjustments to guidelines for their loan products. Should these agencies have their mandates changed or reduced, lose key personnel, be disbanded or reorganized by the government or otherwise discontinue providing liquidity for the multifamily sector, our ability to obtain financing through loan programs sponsored by the agencies could be negatively impacted. Should our access to financing provided through Fannie Mae and Freddie Mac loan programs be reduced or impaired, it could significantly reduce our access to debt capital and/or increase borrowing costs and could significantly limit our ability to acquire properties on acceptable terms and reduce the values to be realized upon property sales.
Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our tenant and investor relationships. As our reliance on technology has increased, so have the risks posed to our information systems, both internal and those we have outsourced. There is no guarantee that any processes, procedures and internal controls we have implemented or will implement will prevent cyber intrusions, which could have a negative impact on our financial results, operations, business relationships or confidential information.
Various potential and actual conflicts of interest will arise, and these conflicts may not be identified or resolved in a manner favorable to us.
Our sponsor has conflicts of interest, or conflicting loyalties, as a result of the numerous activities and relationships of our sponsor, our advisor and the affiliates, partners, members, stockholders, officers, directors and employees of the foregoing, some of which are described herein. However, not all potential, apparent and actual conflicts of interest are included herein, and additional conflicts of interest could arise as a result of new activities, transactions or relationships commenced in the future. If any matter arises that we and our affiliates (including the advisor) determine in our good faith judgment constitutes an actual and material conflict of interest, we and our affiliates (including the advisor) will take such actions as we determine appropriate to mitigate the conflict. Transactions between us and our sponsor or its affiliates will require approval by our board of directors. There can be no assurance that our board of directors or our sponsor will identify or resolve all conflicts of interest in a manner that is favorable to us.
The fees we pay in connection agreements entered into with our advisor and its affiliates were not determined on an arm’s-length basis and therefore may not be on the same terms we could achieve from a third party.
The compensation paid to our advisor and other affiliates of our advisor for services they provide us was not determined on an arm’s-length basis. All service agreements, contracts or arrangements between or among our advisor and its affiliates, including the advisor and us, were not negotiated at arm’s-length. Such agreements include our advisory agreement, the Operating Partnership’s partnership agreement and any property related corporate services and other agreements we may enter into with affiliates of the advisor from time to time. In addition, we may choose not to enforce, or to enforce less vigorously, our rights and remedies under these agreements because of our desire to maintain our ongoing relationship with our advisor and its affiliates. Any such decision, however, may breach our fiduciary obligations to our stockholders. However, any recovery against our board of directors may be limited by the terms of our charter.
The advisor faces a conflict of interest because the fees it receives for services performed will be based in part on our NAV, which the advisor is ultimately responsible for determining.
The advisor will be paid a management fee for its services based on our NAV, which will be calculated by a third-party based on valuations provided by the advisor. In addition, the distributions to be received by the advisor, in its capacity as the special limited partner of the Operating Partnership, with respect to its performance participation interest in the Operating Partnership will be based in part upon the Operating Partnership’s net assets (which is a component of our NAV). The calculation of our NAV will include certain subjective judgments with respect to estimating, for example, the value of our portfolio and our accrued expenses, net portfolio income and liabilities, and therefore, our NAV may not correspond to realizable value upon a sale of those assets. The advisor 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. 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 or the price paid for the repurchase of your shares of 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 or more than the repurchase price. The valuation of our investments will affect the amount and timing of the management fee paid to the advisor and its performance participation interest. As a result, there may be circumstances where the advisor is incentivized to determine valuations that are higher than the actual fair value of our investments.
Our advisor’s management fee and performance participation interest may not create proper incentives or may induce the advisor and its affiliates to make certain investments, including speculative investments, that increase the risk of our real estate portfolio.
We pay our advisor a management fee regardless of the performance of our portfolio. Our advisor’s entitlement to a management fee, which is not based upon performance metrics or goals, might reduce its incentive to devote its time and effort to seeking investments that provide attractive risk-adjusted returns for our portfolio. We would be required to pay our advisor a management fee in a particular period even if we experienced a net loss or a decline in the value of our portfolio during that period. The existence of our advisor’s 12.5% performance participation interest in our Operating Partnership, which is based on our total distributions plus the change in NAV per share, may create an incentive for the advisor to make riskier or more speculative investments on our behalf or cause us to use more leverage than we would otherwise in the absence of such performance-based compensation. In addition, the change in NAV per share will be based on the value of our investments on the applicable measurement dates and not on realized gains or losses. As a result, the performance participation interest may receive distributions based on unrealized gains in certain assets at the time of such distributions and such gains may not be realized when those assets are eventually disposed of. Because the management fee and performance participation are based on our NAV, our advisor may also be motivated to accelerate acquisitions in order to increase NAV or, similarly, delay or curtail repurchases to maintain a higher NAV, which would, in each case, increase amounts payable to the advisor, but may make it more difficult for us to efficiently deploy new capital.
Our advisor’s liability will be limited under the advisory agreement, and we have agreed to indemnify our advisor against certain liabilities, which may lead our advisor to act in a riskier manner on our behalf than it would when acting for its own account.
Under the advisory agreement, our advisor will not assume any responsibility to us other than to render the services called for under that agreement, and it will not be responsible for any action of our board of directors in following or declining to follow our advisor’s advice or recommendations. Our advisor maintains a contractual, as opposed to a fiduciary, relationship with us. Under the terms of the advisory agreement, our advisor, its officers, members and personnel, and any person controlling or controlled by our advisor will not be liable to us, any subsidiary of ours, our directors, our stockholders or any subsidiary’s stockholders or partners for acts or omissions performed in accordance with and pursuant to the advisory agreement, except those resulting from acts constituting negligence or misconduct. In addition, we have agreed to indemnify our advisor and each of its officers, directors, members, managers and employees from and against any claims or liabilities, including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business and operations or any action taken or omitted on our behalf pursuant to authority granted by the advisory agreement, except where attributable to negligence or misconduct. These protections may lead our advisor to act in a riskier manner when acting on our behalf than it would when acting for its own account.
Our advisor faces potential conflicts of interest relating to the purchase and leasing of properties, and such conflicts may not be resolved in our favor, which could adversely affect our investment opportunities.
Our sponsor may sponsor other real estate investment programs in the future that target the same or similar asset types. We may buy properties at the same time as one or more of the other programs sponsored by affiliates of our advisor and managed by officers and key personnel of our advisor. There is a risk that our advisor will choose a property that provides lower returns to us than a property purchased by another program sponsored by affiliates of our advisor. We cannot be sure that officers and key personnel acting on behalf of our advisor and on behalf of managers of other programs that may be sponsored by affiliates of our advisor will act in our best interests when deciding whether to allocate any particular property to us. In addition, we may acquire properties in geographic areas where other programs sponsored by affiliates of our advisor own properties. Also, we may acquire properties from, or sell properties to, other programs sponsored by affiliates of our advisor. If one of the other programs sponsored by affiliates of our advisor attracts a tenant that we are competing for, we could suffer a loss of revenue due to delays in locating another suitable tenant. You will not have the opportunity to evaluate the manner in which these conflicts of interest are resolved before or after making your investment.
We will not disclose an estimated NAV per share until at least sometime in 2024, and when our board of directors deems it in the best interest of the stockholders to do so. When we do disclose such estimate NAV, the purchase price you pay for our shares in this offering may be higher than our estimated NAV per share. Any such estimated NAV per share may not be an accurate reflection of the fair value of our assets and liabilities and likely will not represent the amount of net proceeds that would result if we were liquidated or dissolved. An estimated NAV is not approved by our board of directors and is not necessarily the price at which we will issue new shares nor allow redemption of existing shares.
We are not currently required to prepare or disclose a per share estimated value of our common shares. Our advisor currently intends to use the price paid to acquire shares in this offering (ignoring purchase price discounts for certain categories of purchasers) as the per share value of our common shares until we calculate our initial NAV per share and have such NAV approved by our board of directors. While we may prepare an estimated valuation of our assets before 2024, we do not expect to calculate our initial quarterly NAV and have such NAV approved by our board of directors until sometime in 2024. For the purposes of calculating our quarterly NAV, our assets will generally initially be valued at cost, which we expect to represent fair value at that time. Thereafter, valuations of properties will be determined by the advisor based in part on appraisals of each of our properties by independent third-party appraisal firms reviewed by our independent valuation advisor at least once per year in accordance with valuation guidelines approved by our board of directors. The advisor will also conduct a quarterly valuation of our properties that will be reviewed and confirmed for reasonableness by our independent valuation advisor. Investments in real estate debt and other securities with readily available market quotations will be valued quarterly at fair market value. Certain investments, such as mortgages and mezzanine loans, are unlikely to have market quotations. In the case of loans acquired by us, such initial value will generally be the acquisition price of such loan. Each such investment will then be valued by the advisor within the first three full months after we invest in such investment and no less than quarterly thereafter. Additionally, the advisor may in its discretion consider material market data and other information that becomes available after the end of the applicable quarter in valuing our assets and liabilities and calculating our NAV for a particular quarter. For more information regarding our valuation process, see “Net Asset Value Determinations” section of this memorandum. While we may provide estimated NAV per share in certain reporting, until such NAV per share is approved by our board of directors it is only an estimate and will not be relied upon for new share issuances or redemptions. Although quarterly valuations of each of our real properties will be reviewed and confirmed for reasonableness by our independent valuation advisor, such valuations are based on asset- and portfolio-level information provided by the advisor, including historical operating revenues and expenses of the properties, lease agreements on the properties, revenues and expenses of the properties, information regarding recent or planned capital expenditures and any other information relevant to valuing the real property, which information will not be independently verified by our independent valuation advisor. Similarly, although our quarterly valuations of our real estate debt and other securities for which market quotations are not readily available will be reviewed and confirmed for reasonableness by our independent valuation advisor, such valuations are based on information provided by the advisor, which information will not be verified by our independent valuation advisor. Within the parameters of our valuation guidelines, the valuation methodologies used to value our properties and certain of our investments will involve subjective judgments and projections and may not be accurate. Valuation methodologies will also involve assumptions and opinions about future events, which may or may not turn out to be correct. Valuations and appraisals of our properties and other investments will be only estimates of fair value. Ultimate realization of the value of an asset depends to a great extent on economic, market and other conditions beyond our control and the control of the advisor and our independent valuation advisor. Further, valuations do not necessarily represent the price at which an asset would sell, since market prices of assets can only be determined by negotiation between a willing buyer and seller. As such, the carrying value of an asset may not reflect the price at which the asset could be sold in the market, and the difference between carrying value and the ultimate sales price could be material. In addition, accurate valuations are more difficult to obtain in times of low transaction volume because there are fewer market transactions that can be considered in the context of the appraisal. There will be no retroactive adjustment in the valuation of such assets, the offering price of our shares of common stock, the price we paid to repurchase shares of our common stock or NAV-based fees we paid to the advisor, to the extent such valuations prove to not accurately reflect the realizable value of our assets. Because the price you will pay for shares of our common stock in this offering, and the price at which your shares may be repurchased by us pursuant to our share repurchase program will generally be based on the prior quarter’s NAV per share (after we calculate our initial quarterly NAV per share), you may pay more than realizable value or receive less than realizable value for your investment.
Our advisor faces conflicts of interest relating to joint ventures with its affiliates, which could result in a disproportionate benefit to the other venture partners at our expense.
We may enter into joint ventures with other programs sponsored by affiliates of our advisor for the acquisition, development or improvement of properties. Our advisor may have conflicts of interest in determining which program sponsored by affiliates of our advisor should enter into any particular joint venture agreement. In addition, our advisor may face a conflict in structuring the terms of the relationship between our interests and the interest of the affiliated co-venturer managing the joint venture. Since our advisor and its affiliates will control both the affiliated co-venturer and, to a certain extent, us, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co-venturer receiving benefits greater than the benefits that we receive. In addition, we may assume liabilities related to the joint venture that exceed the percentage of our investment in the joint venture.
Our advisor and its affiliates and their officers and other key personnel face competing demands relating to their time, and this may cause our operating results to suffer.
Our advisor, its affiliates and their officers are key personnel of general partners, sponsors, directors, managers, owners and advisors of other real estate investment programs, including, with respect to our advisor, certain of our advisor’s key personnel and their respective affiliates, some of which may in the future have investment objectives and legal and financial obligations similar to ours, and may own real properties or provide services with respect to other real properties, some of which may compete with us, as well as owning other business interests. Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. If this occurs, the returns on our investments may suffer.
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 and our charter 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 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 may 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 material to the matter giving rise to the proceeding and either was committed in bad faith 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.
There is no separate counsel for us, our advisor, and certain of our and our advisor’s affiliates, which could result in conflicts of interest.
Troutman Pepper Hamilton Sanders LLP acts as legal counsel to us and also represents our advisor and certain of our and our advisor’s affiliates. There is a possibility in the future that the interests of the various parties may become adverse and, under the Code of Professional Responsibility of the legal profession, Troutman Pepper Hamilton Sanders LLP may be precluded from representing any one or all such parties. If any situation arises in which our interests appear to be in conflict with those of our advisor or its affiliates, additional counsel may be retained by one or more of the parties to assure that their interests are adequately protected. Moreover, should a conflict of interest not be readily apparent, Troutman Pepper Hamilton Sanders LLP may inadvertently act in derogation of the interest of the parties, which could affect our ability to meet our investment objectives.
No investor may own more than 9.8% of our stock unless exempted by our board of directors, which may discourage a takeover that could otherwise result in a premium price to our stockholders.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. There is a limitation on ownership that prohibits any person or entity from actually, constructively or beneficially acquiring or owning more than 9.8% in value or in number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our capital stock, or more than 9.8% in value or in number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our common stock, unless exempted, prospectively or retroactively, by our board of directors. Our board of directors may waive this ownership limit with respect to a particular person if the board receives certain representations and warranties as required by our charter. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our capital stock. See “Description of Our Securities – Restrictions on Ownership and Transfer” section of this memorandum.
Our charter permits our board of directors to authorize us to issue preferred stock on terms that may subordinate the rights of the holders of our current common stock or discourage a third party from acquiring us.
Our board of directors is permitted, subject to certain restrictions set forth in our charter, to authorize the issuance of shares of preferred stock without stockholder approval. Further, our board of directors may classify or reclassify any unissued shares of common or preferred stock into other classes or series of 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 the stock and may amend our charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of any class or series of stock that we have authority to issue without stockholder approval. Thus, our board of directors could authorize us to issue shares of preferred stock with terms and conditions that could subordinate the rights of the holders of our common stock or 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 holders of our common stock.
Our advisor manages our portfolio pursuant to very broad investment guidelines and generally is not required to seek the approval of our board of directors for each investment, financing or asset allocation decision made by it, which may result in our making riskier investments and which could adversely affect our results of operations and financial condition.
Our board of directors approved very broad investment guidelines that delegate to the advisor the authority to execute acquisitions and dispositions of real estate and real estate debt on our behalf, in each case so long as such investments are consistent with the investment guidelines and our charter. Our advisor will implement on our behalf the strategies and discretionary approaches it believes from time to time may be best suited to prevailing market conditions in furtherance of that purpose, subject to the limitations under our investment guidelines and our charter. There can be no assurance that our advisor will be successful in implementing any particular strategy or discretionary approach to our investment activities. Our board of directors reviews our investment guidelines on an annual basis (or more often as it deems appropriate) and reviews our investment portfolio periodically. The prior approval of our board of directors or a committee of independent directors will be required only as set forth in our charter (including for transactions with affiliates of our advisor) or for the acquisition or disposition of assets that are not in accordance with our investment guidelines. In addition, in conducting periodic reviews, our directors rely primarily on information provided to them by our advisor. Furthermore, transactions entered into on our behalf by our advisor may be costly, difficult or impossible to unwind when they are subsequently reviewed by our board of directors.
You will have limited control over changes in our policies and operations, which increases the uncertainty and risks you face as a stockholder.
Our board of directors determines our major policies, including our policies regarding financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without your vote except to the extent that such policies are set forth in our charter. Our board’s broad discretion in setting policies and your inability to exert control over those policies increases the uncertainty and risks you face as a stockholder. Under the Maryland General Corporation Law and our charter, our stockholders are generally entitled to vote only on the following matters: a) election and removal of directors; b) amendment of the charter, except that our board of directors may amend our charter without stockholder approval to i) increase or decrease the aggregate number of shares of stock or the number of shares of any class or series of stock that we have the authority to issue, and ii) change our name or the name or other designation or the par value of any class or series of our stock and the aggregate par value of our stock; c) our liquidation or dissolution; and d) to the extent required under Maryland law, a merger, conversion or consolidation of us, a statutory share exchange, or the sale or other disposition of all or substantially all of our assets. With respect to all matters, other than the election or removal of directors, our board of directors must first adopt a resolution declaring that a proposed action is advisable and direct that such matter be submitted to our stockholders for approval or ratification. These limitations on voting rights may limit your ability to influence decisions regarding our business. Holders of our common shares will have identical voting rights except that, with respect to a) any amendment of our charter that would materially and adversely affect the rights, preferences and privileges of only a particular class of common stock, b) any matter submitted to stockholders that relates solely to a particular class of common stock or c) any matter submitted to stockholders in which the interests of a particular class of common stock differ from the interests of all other classes of common stock, only the affirmative vote of the holders of a majority of such affected class of common stock, with no other class of common stock voting except such affected class of common stock voting as a separate class, will be required.
We may change our targeted investments without stockholder consent.
We expect our portfolio of investments in commercial real estate to consist primarily of multifamily real estate. Though this is our current target portfolio, we may make adjustments to our target portfolio based on real estate market conditions and investment opportunities, and we may change our targeted investments and investment guidelines at any time without the consent of our stockholders. Any such change could result in our making investments that are different from, and possibly riskier than, the investments described in this memorandum. A change in our targeted investments or investment guidelines, which may occur without your consent, may increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could adversely affect our ability to make distributions to you and the value of the securities we are offering through this memorandum.
Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act.
We intend to continue to conduct our operations so that neither we, nor our Operating Partnership nor the subsidiaries of our Operating Partnership are investment companies under the Investment Company Act. However, there can be no assurance that we and our subsidiaries will be able to successfully avoid operating as an investment company. See “Memorandum Summary—Are there any Investment Company Act considerations?” section of this memorandum. A change in the value of any of our assets could negatively affect our ability to maintain our exemption from regulation under the Investment Company Act. To maintain compliance with the applicable exemption under the Investment Company Act, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional assets that we might not otherwise have acquired or may have to forego opportunities to acquire assets that we would otherwise want to acquire and would be important to our investment strategy. If we were required to register as an investment company but failed to do so, we would become subject to substantial regulation with respect to our capital structure (including our ability to use borrowings), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), and portfolio composition, including disclosure requirements and restrictions with respect to diversification and industry concentration, and other matters. Compliance with the Investment Company Act would, accordingly, limit our ability to make certain investments and require us to significantly restructure our business plan, which could materially adversely affect our NAV and our ability to pay distributions to our stockholders.
Investing in our common shares may involve an above average degree of risk and is intended for long-term investors.
The investments we make in accordance with our investment objectives and strategies may result in a higher amount of risk of loss of principal than alternative investment options. Our investments in real estate assets may be highly speculative and aggressive, and therefore, an investment in our common shares may not be suitable for someone with lower risk tolerance. In addition, our common shares are intended for long-term investors.
Our taxable income may substantially exceed our net cash flow, which may make it difficult for us to meet the REIT distribution requirements.
If we have differences in timing between the recognition of taxable income and the actual receipt of cash, we may generate less cash flow than taxable income. As a result of the foregoing, we may be required to (1) sell assets in adverse market conditions, (2) borrow on unfavorable terms, (3) distribute amounts that would otherwise be used for future acquisitions or used to repay debt or (4) make a taxable distribution of our common shares as part of a distribution in which stockholders may elect to receive common shares or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with the REIT distribution requirements.
Our NAV per share amounts may change materially if the appraised values of our real estate assets materially change from prior appraisals or the actual operating results for a particular quarter differ from what we originally budgeted for that quarter.
We anticipate that after we calculate our initial NAV per share, the annual appraisals of our real estate assets will be conducted on a rolling basis, such that properties may be appraised at different times but each property would be appraised at least once per year. When these appraisals are considered by the advisor for purposes of valuing the relevant real estate asset, there may be a material change in our NAV per share amounts from those previously reported. In addition, actual operating results for a given quarter may differ from what we originally budgeted for that quarter, which may cause a material increase or decrease in the NAV per share amounts. We will not retroactively adjust the NAV per share reported for the previous quarter. Therefore, because a new annual appraisal may differ materially from the prior appraisal or the actual results from operations may be better or worse than what we previously budgeted for a particular quarter, the adjustment to take into consideration the new appraisal or actual operating results may cause the NAV per share to increase or decrease, and such increase or decrease will occur in the quarter the adjustment is made.
It may be difficult to reflect, fully and accurately, material events that may impact our quarterly NAV.
The advisor’s determination of our quarterly NAV per share will be based in part on appraisals of each of our real estate assets provided annually by independent third-party appraisal firms in individual appraisal reports reviewed by our independent valuation advisor and quarterly valuations of our real estate debt and other securities for which market prices are not readily available provided by the advisor and reviewed by our independent valuation advisor, each in accordance with valuation guidelines approved by our board of directors. As a result, our published NAV per share in any given quarter may not fully reflect any or all changes in value that may have occurred since the most recent appraisal or valuation. The advisor will review appraisal reports and monitor our real estate and real estate debt, and is responsible for notifying the independent valuation advisor of the occurrence of any property-specific or market-driven event it believes may cause a material valuation change in the real estate valuation, but it may be difficult to reflect fully and accurately rapidly changing market conditions or material events that may impact the value of our real estate and real estate debt or liabilities between valuations, or to obtain complete information regarding any such events in a timely manner. For example, an unexpected termination or renewal of a material contract, a material increase or decrease in vacancies or an unanticipated structural or environmental event at a property may cause the value of a property to change materially, yet obtaining sufficient relevant information after the occurrence has come to light and/or analyzing fully the financial impact of such an event may be difficult to do and may require some time. As a result, the NAV per share may not reflect a material event until such time as sufficient information is available and analyzed, and the financial impact is fully evaluated, such that our NAV may be appropriately adjusted in accordance with our valuation guidelines. Depending on the circumstance, the resulting potential disparity in our NAV may be in favor or to the detriment of either stockholders who repurchase their shares, or stockholders who buy new shares, or existing stockholders.
NAV calculations are not governed by governmental or independent securities, financial or accounting rules or standards.
The methods we expect to be used by our advisor to calculate our NAV, including the components used in calculating our NAV, is not prescribed by rules of the SEC or any other regulatory agency. Further, there are no accounting rules or standards that prescribe which components should be used in calculating NAV, and our NAV is not audited by our independent registered public accounting firm. We expect to calculate and publish NAV solely for purposes of establishing the price at which we sell and repurchase shares of our common stock, which will not occur until sometime in 2024, and you should not view our NAV as a measure of our historical or future financial condition or performance. The components and methodology used in calculating our NAV may differ from those used by other companies now or in the future. In addition, calculations of our NAV, to the extent that they incorporate valuations of our assets and liabilities, are not prepared in accordance with generally accepted accounting principles. These valuations may differ from liquidation values that could be realized in the event that we were forced to sell assets. Additionally, errors may occur in calculating our NAV, which could impact the price at which we sell and repurchase shares of our common stock and the amount of our advisor’s management fee and performance participation interest. Our advisor has implemented certain policies and procedures to address such errors in NAV calculations. If such errors were to occur, the advisor, depending on the circumstances surrounding each error and the extent of any impact the error has on the price at which shares of our common stock were sold or repurchased or on the amount of our advisor’s management fee or performance participation interest, may determine in its sole discretion to take certain corrective actions in response to such errors, including, subject to our sponsor’s policies and procedures, making adjustments to prior NAV calculations. You should carefully review the disclosure of our valuation policies and how NAV is expected to be calculated under “Net Asset Value Determinations” section this memorandum.
You will not have the benefit of an independent review of the memorandum or us, which is customarily performed in underwritten offerings.
We are directly issuing Class A Shares to investors through this memorandum (other than shares issued through the Republic Platform and other broker dealers) for which no underwriting compensation will be paid in reliance on the safe harbor from broker-dealer registration set out in Rule 3a4-1 under the Exchange Act. We have not, but may in the future, engage a wholesale dealer manager registered as a broker dealer with FINRA, in which case selling commissions and dealer manager fees would be charged to investors who purchase through a dealer manger’s participating broker-dealers. As of the date of this memorandum, there has been no due diligence investigation of us that can be considered to be an independent review and, therefore, may not be as meaningful as a review conducted by an unaffiliated broker-dealer or investment banker. In addition, we do not, and do not expect to, have research analysts reviewing our performance or our securities on an ongoing basis. Further, if you purchase through a financial professional that does not conduct an independent review, you will not have the benefit of an independent review of us, our performance, the value of our common shares or the terms of this offering.
Your interest in us will be diluted if we issue additional shares, which could reduce the overall value of your investment.
Existing stockholders and potential investors in this offering do not have preemptive rights to any shares we issue in the future. Upon commencement of this offering, our charter will authorize us to issue 6,000,000,000 common shares, all of which are classified as Class A Shares. Our board of directors may amend the charter from time to time to increase or decrease the aggregate number of authorized shares of stock or the number of authorized Class A Shares or any other class or series of stock without stockholder approval. After you purchase shares in this offering, our board may elect to (1) sell additional shares in this or future private placements or public offerings; (2) issue shares of capital stock under a long-term incentive plan to our independent directors or to employees of our advisor or its affiliates; (3) issue shares to our advisor, its successors or assigns, in payment of an outstanding fee obligation or as consideration in a related-party transaction; or (4) issue shares to sellers of properties we acquire in connection with an exchange of property for limited partnership interests of our Operating Partnership. To the extent we issue additional equity interests after your purchase in this offering, your percentage ownership interest in us will be diluted. Investors will also experience dilution if we issue equity compensation pursuant to our equity incentive plan. Further, depending upon the terms of such transactions (most notably the offering price per share, which may be less than the price paid per share in any offering under this memorandum) and the value of our real estate assets, existing stockholders may also experience a dilution in the book value of their investment in us.
Payments to the advisor in the form of common stock or Operating Partnership units it elects to receive in lieu of fees or distributions will dilute future cash available for distribution to our stockholders.
The advisor may choose to receive our common stock or Operating Partnership units in lieu of certain fees or distributions. The holders of all Operating Partnership units are entitled to receive cash from operations pro rata with the distributions being paid to us and such distributions to the holder of the Operating Partnership units will reduce the cash available for distribution to us and to our stockholders. Furthermore, under certain circumstances the Operating Partnership units held by the advisor are required to be repurchased, in cash at the holder’s election, and there may not be sufficient cash to make such a repurchase payment; therefore, we may need to use cash from operations, borrowings, offering proceeds or other sources to make the payment, which will reduce cash available for distribution to you or for investment in our operations. Repurchases of our shares or Operating Partnership units from the advisor paid to the advisor as a management fee are not subject to the repurchase limits of our share repurchase program or any Early Repurchase Deduction, and such sales will receive priority over other shares being put for repurchase during such period. Repurchases of our shares or Operating Partnership units from the advisor with respect to its performance participation interest will not be subject to the Early Repurchase Deduction, but, in the case of shares, such repurchases will subject to the monthly and quarterly volume limitations and will not receive priority over other shares being put for repurchase during such period.
Our board of directors has opted out of provisions of the Maryland General Corporation Law relating to deterring or defending hostile takeovers. Although we will not currently be afforded this protection, our board of directors could opt into these provisions of Maryland law in the future, which may discourage others from trying to acquire control of us and may prevent you from receiving a premium price for their shares in connection with a business combination.
Under Maryland law, “business combinations” between a Maryland corporation and certain interested stockholders, or affiliates of interested stockholders, are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as: ● any person who beneficially owns, directly or indirectly, 10% or more of the corporation’s outstanding voting stock; or ● an affiliate or associate of the corporation who, at any time during the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding securities of the corporation. ● after the five-year prohibition, any business combination between a Maryland 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: o 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and o two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. Also, under Maryland law, 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 stockholders entitled to cast two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquirer, an officer of the corporation or an employee of the corporation who is also a director of the corporation, are excluded from the vote on whether to accord voting rights to the control shares. We have opted out of these provisions of Maryland law, by board resolution in the case of the business combination provisions provided that the applicable business combination is first approved by our board of directors and in our bylaws in the case of the control share acquisition provisions. However, should our board opt into these provisions of Maryland law or, in the case of the business combination provisions, our board does not first approve the applicable business combination, it may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer. Similarly, provisions of Title 3, Subtitle 8 of the Maryland General Corporation Law could provide similar anti-takeover protection. For more information about the business combination, control share acquisition and Subtitle 8 provisions of Maryland law, see “Certain Provisions of Maryland Law and Our Charter and Bylaws”.
If we sell real estate assets by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows and our ability to make distributions to our stockholders.
If we decide to sell any of our real estate assets, we intend to sell them for cash, if possible. However, nothing prohibits us from selling our real estate assets and providing financing to purchasers. If we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our cash distributions to stockholders. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price, and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to pay cash 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 enter into joint ventures, partnerships and other co-ownership arrangements for the purpose of making investments. In such arrangements, we may 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 that 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 advisor from focusing its 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 will be subject to additional risks of our joint venture partner or partners when we enter into a joint venture, which could reduce the value of our investment.
We have and may continue to enter into joint ventures with other real estate groups. The success of a particular joint venture may be limited if our joint venture partner becomes bankrupt or otherwise is unable to perform its obligations in accordance with the terms of the particular joint venture arrangement. The joint venture partner may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, a dispute between us and our joint venture partners may result in litigation, which may cause us to incur additional expenses, require additional time and resources from our advisor and result in liability, each of which could adversely affect our operating results and the value of your investment. In addition, we may assume liabilities related to the joint venture that exceed the percentage of our investment in the joint venture.
Fees and expenses may adversely impact our ability to pay dividends.
Identifying attractive investment opportunities and performing due diligence with respect to prospective investments will require significant expenditures, which we will bear whether or not we acquire the investment. In addition, acquiring investments may require us to participate in auctions or other forms of competitive bids, which may also require significant expenditures, including expenses relating to legal fees, the fees of third-party advisors, and other costs. Moreover, even after investments are made, the returns may not be realized by the stockholders for a period of several years. Payment or accrual of fees will result in immediate dilution to the value of your investment, and any such current payments will reduce the amount of cash available to acquire investments. Payment of such fees and expenses increases the risk that the amount available for distribution to our stockholders would be less than the purchase price of the securities sold in this offering.
Our operating results may be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and there can be no assurance that we will be profitable or that we will realize growth in the value of our real estate properties.
Our operating results are subject to risks generally incident to the ownership of real estate, including: ● changes in general economic or local conditions; ● changes in supply of or demand for similar or competing properties in an area; ● changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive; ● changes in tax, real estate, environmental and zoning laws; and ● periods of high interest rates and tight money supply. These and other risks may prevent us from being profitable or from realizing growth or maintaining the value of our real estate properties. Groma NAV REIT Inc. issued its first dividend in the first quarter of 2023. There is no guarantee we can continue to issue dividends at all, or at the same rate.
A concentration of our investments in the multifamily sector or in certain geographic regions may leave our profitability vulnerable to a downturn or slowdown in the sector or state or region.
We expect that our property portfolio will be comprised solely of multifamily properties. As a result, we will be subject to risks inherent in investments in a single type of property. If our investments are solely in the multifamily sector, the potential effects on our revenues, and as a result, on cash available for distribution to our stockholders, resulting from a downturn or slowdown in the multifamily sector could be more pronounced than if we had more fully diversified our investments. The underlying value of our properties and the ability to make distributions to our stockholders depend upon the ability of the residents of our properties to generate enough income to pay their rents in a timely manner, and the success of our investments depends upon the occupancy levels, rental income and operating expenses of our properties and our company. Residents’ inability to timely pay their rents may be impacted by employment and other constraints on their personal finances, including debts, purchases and other factors. These and other changes beyond our control may adversely affect our residents’ ability to make rental payments. In the event of a resident default or bankruptcy, we may experience delays in enforcing our rights as landlord and may incur costs in protecting our investment and re-leasing our property. We may be unable to re-lease the property for the rent previously received. We may be unable to sell a property with low occupancy without incurring a loss. These events and others could cause us to reduce the amount of distributions we make to stockholders and the value of our stockholders’ investment to decline. In order to attract residents, we may be required to expend funds for capital improvements and property renovations when residents do not renew their leases or otherwise vacate their apartment homes. In addition, we may require substantial funds to renovate an apartment community in order to sell it, upgrade it or reposition it in the market. If we have insufficient capital reserves, we will have to obtain financing from other sources. We intend to establish capital reserves in an amount we, in our discretion, believe is necessary. A lender also may require escrow of capital reserves in excess of any established reserves. If these reserves or any reserves otherwise established are designated for other uses or are insufficient to meet our cash needs, we may have to obtain financing from either affiliated or unaffiliated sources to fund our cash requirements. We cannot assure our stockholders that sufficient financing will be available or, if available, will be available on economically feasible terms or on terms acceptable to us. Moreover, certain reserves required by lenders may be designated for specific uses and may not be available for capital purposes such as future capital improvements. Additional borrowing for capital needs and capital improvements will increase our interest expense, and therefore our financial condition and our ability to make cash distributions to our stockholders may be adversely affected. In addition, if our investments are concentrated in a particular state or geographic region, and such state or geographic region experiences economic difficulty disproportionate to the nation as a whole, then the potential effects on our revenues, and as a result, on cash available for distribution to our stockholders, could be more pronounced than if we had more fully diversified our investments geographically. The geographic concentration of our portfolio may make us particularly susceptible to adverse economic developments in the real estate markets of those areas. In addition to general, regional, and national economic conditions, our operating results may be impacted by the economic conditions of the specific markets in which we have concentrations of properties. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for multifamily property space resulting from the local business climate, could adversely affect our property revenue, and hence net operating income.
If capitalization rates increase, or interest rates increase or remain elevated, the value of our assets may decrease and we may not be able to sell our assets at anticipated prices. Additionally, banking instability may lower the effective availability of capital, impacting our operations.
The value of real estate is generally based on capitalization rates. Capitalization rates generally trend with interest rates. Consequently, if interest rates go up, so do capitalization rates. Based on historical interest rates, current interest rates are low, as are current capitalization rates. However, if interest rates rise in the future, capitalization rates may also rise, and as a result, the value of real estate will decrease. If capitalization rates increase, our assets will likely achieve a lower sales price than anticipated, potentially resulting in reduced returns. The failure of Silicon Valley Bank, Silvergate, and Signature, as well as general instability in the banking industry may limit the availability of credit, negatively impacting our ability to finance our operations or for others to finance theirs, resulting in a smaller potential buyer pool of our assets. We had no direct relationship with Silicon Valley Bank, Silvergate, or Signature. We did have and continue to have a relationship with First Republic, which experienced financial instability around the same time as the banks listed above. First Republic was acquired by Chase in 2023 and continues to operate within the Chase ecosystem.
We will depend on residents for our revenue, and therefore, our revenue and our ability to make distributions to our stockholders will depend upon the ability of the residents of our properties to generate enough income to pay their rents in a timely manner. A substantial number of non-renewals, terminations or lease defaults could reduce our net income and limit our ability to make distributions to our stockholders.
The underlying value of our properties and the ability to make distributions to our stockholders will depend upon the ability of the residents of our properties to generate enough income to pay their rents in a timely manner, and the success of our investments depends upon the occupancy levels, rental income and operating expenses of our properties and our company. Residents’ inability to timely pay their rents may be impacted by employment and other constraints on their personal finances, including debts, purchases and other factors. These and other changes beyond our control may adversely affect our residents’ ability to make rental payments. In the event of a resident default or bankruptcy, we may experience delays in enforcing our rights as landlord and may incur costs in protecting our investment and re-leasing our property. We may be unable to re-lease the property for the rent previously received. We may be unable to sell a property with low occupancy without incurring a loss. These events and others could cause us to reduce the amount of distributions we make to stockholders and the value of our stockholders’ investment to decline.
A property that experiences significant vacancy could hinder our ability to make distributions and could be difficult to sell or re-lease.
A property may experience significant vacancy through the eviction of residents and/or the expiration of leases. Certain of the multifamily properties we acquire may have some level of vacancy at the time of our acquisition of the property and we may have difficulty obtaining new residents. If vacancies continue for a long period of time, we may suffer reduced revenues resulting in lower cash distributions to stockholders. In addition, the resale value of the property could be diminished because the market value may depend principally upon the occupancy of, and rental rates at, such property.
We may obtain only limited warranties when we purchase a property and would have only limited recourse if our due diligence did not identify any issues that lower the value of our property, which could adversely affect our financial condition and ability to make distributions to our stockholders.
The seller of a property often sells its property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all our invested capital in the property as well as the loss of rental income from that property.
Our strategy for acquiring value-enhancement multifamily properties involves greater risks than more conservative investment strategies.
We expect to implement a “value-enhancement” strategy for the conventional multifamily homes we invest in. Our value-enhancement strategy involves the acquisition of under-managed, stabilized apartment communities in high job and population growth neighborhoods and the investment of additional capital to make strategic upgrades of the interiors of the apartment homes. These opportunities will vary in degree based on the specific business plan for each asset, but could include new appliances, upgraded cabinets, countertops and flooring. Our strategy for acquiring value-enhancement multifamily properties involves greater risks than more conservative investment strategies. The risks related to these value-enhancement investments include risks related to delays in the repositioning or improvement process, higher than expected capital improvement costs, possible borrowings necessary to fund such costs, and ultimately that the repositioning process may not result in the higher rents and occupancy rates anticipated. In addition, our value-enhancement properties may not produce revenue while undergoing capital improvements. Furthermore, we may also be unable to complete the improvements of these properties and may be forced to hold or sell these properties at a loss. For these and other reasons, we cannot assure you that we will realize growth in the value of our value-enhancement multifamily properties, and as a result, our ability to make distributions to our stockholders could be adversely affected.
Our inability to sell a property when we desire to do so could adversely impact our ability to make distributions to you.
The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. We may be required to expend funds to correct defects or to make improvements before a property can be sold. There can be no assurance that we will have funds available to correct these defects or to make these improvements. Moreover, in acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would restrict our ability to sell a property.
We may be required to indemnify the purchasers of our investments, which could hurt our ability to make distributions or result in a decline in the value of your investment.
In connection with the disposition of a property from our portfolio, we may be required to make representations about our assets typical of those made in connection with the sale of any property. We may also be required to indemnify the purchasers of such investment to the extent that any such representations turn out to be inaccurate, incorrect, or misleading. These arrangements may result in contingent liabilities, which might ultimately have to be funded by us out of assets other than the net proceeds made available from such disposition, which would hurt our ability to make distributions to you and result in a decline in the value of our assets and hence your investment in us.
We may acquire or finance properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties, which could have an adverse effect on your investment.
Our financing agreements may contain lock-out provisions, which are provisions in loan agreements that prohibit us from prepaying a debt obligation before a certain time (or that prohibit us from prepaying without incurring significant additional expense). Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties, and thus affect cash available for distributions to you. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties. Lock-out provisions could impair our ability to take other actions during the lock-out period that could be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of our units, relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.
Acquiring or attempting to acquire multiple properties in a single transaction may adversely affect our operations.
From time to time, we may attempt to acquire multiple properties in a single transaction. Portfolio acquisitions can be more complex than single-property acquisitions, and the risk that a multiple-property acquisition does not close may be greater than in a single-property acquisition. Portfolio acquisitions may also result in us owning investments in geographically dispersed markets, placing additional demands on our ability to manage the properties in the portfolio. In addition, a seller may require that a group of properties be purchased as a package even though we may not want to purchase one or more properties in the portfolio. In these situations, if we are unable to identify another person or entity to acquire the unwanted properties, we may be required to operate or attempt to dispose of these properties. To acquire multiple properties in a single transaction we may be required to accumulate a large amount of cash. We would expect the returns that we earn on such cash to be less than the ultimate returns in real property and therefore, accumulating such cash could reduce the funds available for distributions. Any of the foregoing events may have an adverse effect on our operations.
The costs associated with complying with the Americans with Disabilities Act may reduce the amount of cash available for distribution to our stockholders.
Investment in properties may also be subject to the Americans with Disabilities Act of 1990, as amended, or the ADA. Under the ADA, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. We are committed to complying with the ADA to the extent to which it applies. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. With respect to the properties we acquire, the ADA’s requirements could require us to remove access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. We will attempt to acquire properties that comply with the ADA or place the burden on the seller or other third party, such as residents, to ensure compliance with the ADA. We cannot assure you that we will be able to acquire properties or allocate responsibilities in this manner. Any monies we use to comply with the ADA will reduce the amount of cash available for distribution to our stockholders.
We may be unable to adjust our portfolio in response to changes in economic or other conditions or sell a property if or when we decide to do so, limiting our ability to pay cash distributions to you.
We plan to invest in real estate assets, which are generally illiquid investments. Many factors that are beyond our control affect the real estate market and could affect our ability to sell properties for the price, on the terms or within the time frame that we desire. These factors include general economic conditions, the availability of financing, interest rates and other factors, including supply and demand. Because real estate investments are relatively illiquid, we have a limited ability to vary our portfolio in response to changes in economic or other conditions. Further, before we can sell a property on the terms we want, it may be necessary to expend funds to correct defects or to make improvements. However, we can give no assurance that we will have the funds available to correct such defects or to make such improvements. We may be unable to sell our properties at a profit. Our inability to sell properties at the time and on the terms we want could reduce our cash flow and limit our ability to make distributions to you and could reduce the value of your investment. Moreover, in acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Our inability to sell a property when we desire to do so may cause us to reduce our selling price for the property. Any delay in our receipt of proceeds, or diminishment of proceeds, from the sale of a property could adversely impact our ability to make distributions to our stockholders.
If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, we could lose invested capital and anticipated profits.
We will carry comprehensive general liability coverage and umbrella liability coverage on all our properties with limits of liability that we deem adequate to insure against liability claims and provide for the costs of defense. Similarly, we will be insured against the risk of direct physical damage in amounts we estimate to be adequate to reimburse us on a replacement cost basis for costs incurred to repair or rebuild each property, including loss of rental income during the rehabilitation period. Material losses may occur in excess of insurance proceeds with respect to any property, as insurance may not be sufficient to fund the losses. However, there are types of losses, generally of a catastrophic nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are either uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential terrorist acts could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase specific coverage against terrorism as a condition for providing mortgage loans. It is uncertain whether these insurance policies will be available, or available at reasonable cost, which could inhibit our ability to finance or refinance our potential properties. In these instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate, or any, coverage for these losses. The Terrorism Risk Insurance Program Reauthorization Act of 2015 is designed for a sharing of terrorism losses between insurance companies and the federal government, and extends the federal terrorism insurance backstop through 2020. We cannot be certain how this act will impact us or what additional cost to us, if any, could result. If an act of terrorism damaged or destroyed one or more of our properties, we could lose both our invested capital and anticipated profits from that property.
Delays in acquisitions of properties may have an adverse effect on your investment.
There may be a substantial period of time before the proceeds of our offering are invested. Delays we encounter in the selection or acquisition of properties could adversely affect our ability to make distributions and the value of an investment in our units.
Competition with third parties in acquiring properties and other investments may reduce our profitability and the return on your investment.
We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, REITs, real estate limited partnerships, and other entities engaged in real estate investment activities, many of which have greater resources than we do. Larger real estate investors may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase. Any such increase would result in increased demand for these assets and, therefore, increased prices paid for them. If we pay higher prices for properties and other investments, our profitability will be reduced and you may experience a lower return or loss on your investment.
Costs of complying with governmental laws and regulations related to environmental protection and human health and safety may be high.
All real property investments and the operations conducted in connection with such investments are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Some of these laws and regulations may impose joint and several liability on customers, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. Under various federal, state and local environmental laws, a current or previous owner or operator of real property may be liable for the cost of removing or remediating hazardous or toxic substances on such real property. These environmental laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such real property as collateral for future borrowings. Environmental laws may also impose restrictions on the manner in which real property may be used or businesses may be operated. Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. Additionally, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties, may affect our properties. There are also various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply, and which may subject us to liability in the form of fines or damages for noncompliance. In connection with the acquisition and ownership of our properties, we may be exposed to these costs in connection with such regulations. The cost of defending against environmental claims, any damages or fines we must pay, compliance with environmental regulatory requirements or remediating any contaminated real property could materially and adversely affect our business and results of operations, lower the value of our assets and, consequently, lower the amounts available for distribution to our stockholders.
The multifamily residential properties in which we invest must comply with the Fair Housing Amendment of 1988.
The multifamily residential properties in which we invest domestically, if any, must comply with the Fair Housing Amendment Act of 1988 (“FHAA”) which requires that multifamily communities first occupied after March 13, 1991 be accessible to handicapped residents and visitors. Compliance with the FHAA could require removal of structural barriers to handicapped access in a community, including the interiors of apartment units covered under the FHAA. Recently there has been heightened scrutiny of multifamily housing communities for compliance with the requirements of the FHAA and the ADA and an increasing number of substantial enforcement actions and private lawsuits have been brought against multifamily communities to ensure compliance with these requirements. Noncompliance with the FHAA and the ADA could result in the imposition of fines, awards of damages to private litigants, payment of attorneys’ fees and other costs to plaintiffs, substantial litigation costs and substantial costs of remediation.
If we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows and our ability to make distributions to our stockholders.
If we decide to sell any of our properties, we intend to sell them for cash, if possible. However, nothing prohibits us from selling our properties and providing financing to purchasers. If we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our cash distributions to stockholders. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price, and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to pay cash 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 enter into joint ventures, partnerships and other co-ownership arrangements for the purpose of making investments. In such arrangements, we may 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 that 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 advisor from focusing its 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.
Competition from other multifamily communities and housing alternatives for residents could reduce our profitability and the return on your investment.
The multifamily property market in particular is highly competitive. This competition could reduce occupancy levels and revenues at our multifamily properties, which would adversely affect our operations. We face competition from many sources, including from other multifamily properties in our target markets. In addition, overbuilding of multifamily properties may occur, which would increase the number of multifamily units available and may decrease occupancy and unit rental rates. Furthermore, multifamily properties we acquire most likely compete, or will compete, with numerous housing alternatives in attracting residents, including owner-occupied single and multifamily units available to rent or purchase. Competitive housing in a particular area and the increasing affordability of owner-occupied single- and multifamily units available to rent or buy (caused by declining mortgage interest rates and government programs to promote home ownership) could adversely affect our ability to retain our residents, lease multifamily units and increase or maintain rental rates.
Increased construction of similar properties that compete with our multifamily communities in any particular location could adversely affect the operating results of our properties and our cash available for distribution to our stockholders.
We may acquire multifamily communities in locations that experience increases in construction of properties that compete with our multifamily communities. This increased competition and construction could: 1. make it more difficult for us to find residents to lease multifamily units in our multifamily communities; 2. force us to lower our rental prices in order to lease multifamily units in our multifamily communities; or 3. substantially reduce our revenues and cash available for distribution to our stockholders.
Our strategy for acquiring value-add multifamily properties involves greater risks than more conservative investment strategies.
We expect to implement value add strategy for certain of the multifamily units we acquire. Our value-add strategy involves the acquisition of under-managed, stabilized multifamily communities in high job and population growth neighborhoods and the investment of additional capital to make strategic upgrades of the interiors of the multifamily units. These opportunities will vary in degree based on the specific business plan for each asset, but could include new appliances, upgraded cabinets, countertops and flooring. Our strategy for acquiring value add multifamily properties involves greater risks than more conservative investment strategies. The risks related to these value add investments include risks related to delays in the repositioning or improvement process, higher than expected capital improvement costs, possible borrowings necessary to fund such costs, and ultimately that the repositioning process may not result in the higher rents and occupancy rates anticipated. In addition, our value add properties may not produce revenue while undergoing capital improvements. Furthermore, we may also be unable to complete the improvements of these properties and may be forced to hold or sell these properties at a loss. For these and other reasons, we cannot assure you that we will realize growth in the value of our value add multifamily properties, and as a result, our ability to make distributions to our stockholders could be adversely affected.
Short-term multifamily unit leases expose us to the effects of declining market rent, which could adversely impact our ability to make distributions to our stockholders.
We expect that substantially all of our multifamily unit leases will be for a term of one year or less. Because these leases generally permit the residents to leave at the end of the lease term without penalty, our rental revenues may be impacted by declines in market rents more quickly than if our leases were for longer terms.
Increased levels of unemployment could adversely affect the occupancy and rental rates of the multifamily properties we acquire.
Increased levels of unemployment in residential markets could significantly decrease occupancy and rental rates. In times of increasing unemployment, residential occupancy and rental rates have historically been adversely affected by: 1. oversupply or reduced demand for apartment homes; 2. rental residents deciding to share rental units and therefore rent fewer units; 3. potential residents moving back into family homes or delaying leaving family homes; 4. a reduced demand for higher-rent units; 5. a decline in household formation; 6. persons enrolled in college delaying leaving college or choosing to proceed to or return to graduate school in the absence of available employment; 7. the inability or unwillingness of residents to pay rent increases; and 8. increased collection losses. These factors generally have contributed to lower rental rates, and our results of operations, financial condition and ability to make distributions to you may be adversely affected if these factors do not improve or worsen.
Local, state or national policy changes could adversely affect our business model.
Across the country, and world, many towns, cities, states and countries have sought different policy approaches to regulate housing providers. Some of these policies provide regulatory clarity and may benefit, or be neutral to, our business model. However, many policies could be negative to our business model. For example, rent control or rent stabilization laws, or other laws regulating housing, could prevent us from raising rents sufficiently to offset increases in operating costs. Eviction moratoriums, or changes to eviction processes, could make it impossible, or expensive, for us to remove non-performing tenants under a reasonable timeframe. These are just a few examples of a broad range of potential policy and regulatory changes that could impact our business model. While we always aim to engage with city councils to both stay on top of plans and trends, as well as advocate for policies that we believe are better approaches for the housing challenges many cities face, there is no guarantee that these efforts will be successful, or that our predictions of outcomes or policy changes will be accurate. We always seek to project potentially unfavorable real estate policy changes into the prices we’re willing to pay for buildings, which can create opportunities to buy at a discount, but can also create risks where we overpay for properties ahead of negative policy changes, or underbid for properties and lose opportunities when negative policy changes don’t end up happening.
Our multifamily properties will be subject to property taxes that may increase in the future, which could adversely affect our cash flow.
Our multifamily properties will be subject to real and personal property taxes, as well as excise taxes, that may increase as tax rates change and as the properties are assessed or reassessed by taxing authorities. As the owner of the properties, we will be ultimately responsible for payment of the taxes to the applicable government authorities. If we fail to pay any such taxes, the applicable taxing authority may place a lien on the real property and the real property may be subject to a tax sale.
Presence of mold in our investment properties will increase our expenses and adversely affect our ability to make distributions to our stockholders.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed for a long period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of mold to which residents could be exposed at any of our properties could require us to undertake a remediation program to contain or remove the mold from the affected property, which could be costly. In addition, exposure to mold by residents or others could expose us to liability if property damage or health concerns arise. Expenses associated with any remediation programs or personal or property damage liability will adversely affect our cash flow and our ability to make distributions to our stockholders.
Our investments in multifamily real estate-related assets will be subject to the risks typically associated with real estate.
Our investments in mortgage, mezzanine or other real estate loans will generally be directly or indirectly secured by a lien on real property (or the equity interests in an entity that owns real property) that, upon the occurrence of a default on the loan, could result in our taking ownership of the entity that owns the real estate. We will not know whether the values of the multifamily apartment communities ultimately indirectly securing our loans will remain at the levels existing on the dates of origination or acquisition of those loans. If the values of the underlying multifamily apartment communities drop, our risk will increase because of the lower value of the security associated with such loans. In this manner, real estate values could impact the values of our loan investments. Therefore, our multifamily real estate-related assets will be subject to the risks typically associated with real estate, which are described above under the heading “General Risks Related to Investments in Real Estate” section this memorandum.
Any mortgage loans we acquire or originate and the mortgage loans underlying any mortgage securities we may invest in are subject to delinquency, foreclosure and loss, which could result in losses to us.
Commercial real estate loans generally are secured by commercial real estate properties and are subject to risks of delinquency and foreclosure. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things: tenant mix, success of tenant businesses, occupancy rates, property management decisions, property location and condition, competition from comparable types of properties, changes in laws that increase operating expenses or limit rents that may be charged, any need to address environmental contamination at the property, the occurrence of any uninsured casualty at the property, changes in national, regional or local economic conditions and/or specific industry segments, declines in regional or local real estate values, declines in regional or local rental or occupancy rates, increases in interest rates, real estate tax rates and other operating expenses, changes in governmental rules, fiscal policies and regulations (including environmental legislation), natural disasters, terrorism, social unrest and civil disturbances. In the event of any default under any mortgage loan held by us, we will bear a risk of loss of principal and accrued interest 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 cash flow from operations. Foreclosure on a property securing a mortgage loan can be an expensive and lengthy process that could have a substantial negative effect on our anticipated return on the foreclosed investment. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law.
The mezzanine and bridge loans in which we may invest would involve greater risks of loss than loans secured by a first deed of trust or mortgage on property.
We may invest in mezzanine and bridge loans that take the form of subordinated loans secured by a pledge of the ownership interests of either the entity owning (directly or indirectly) the real property or the entity that owns the interest in the entity owning the real property. These types of investments may involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property because the investment may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our 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.
The B Notes in which we invest may be subject to additional risks relating to the privately negotiated structure and terms of the transaction, which may result in losses to us.
We may invest in B Notes in the future. A B Note is a mortgage loan typically (i) secured by a first mortgage on a single large commercial property or group of related properties and (ii) subordinated to an A Note secured by the same first mortgage on the same collateral. As a result, if a borrower defaults, there may not be sufficient funds remaining for B Note holders after payment to the A Note holders. Since each transaction is privately negotiated, B Notes can vary in their structural characteristics and risks. For example, under the agreement between the A Note holders and the B Note holders, the A Note holders, whose economic interests may not align with the economic interests of the B Note holders, typically are empowered to take the lead on loan administration, on decisions whether to enforce or negotiate a work-out of a defaulted or stressed loan, and on pricing and market timing for the sale of foreclosed property. While the B Note holders can exercise some influence over those decisions through consent rights, the B Note holders typically lose their consent rights under certain circumstances, including if the liquidation value of the B Note, based on an appraisal, falls below an agreed threshold. We cannot predict the terms of each B Note investment. Further, B Notes typically are secured by a single property, and so reflect the increased risks associated with a single property compared to a pool of properties.
We may invest in real estate-related equity, which is subordinate to any indebtedness, but involves different rights.
We may invest in noncontrolling equity positions and other real estate-related interests. Preferred equity investments are subordinate to any indebtedness obtained by the entity, but senior to the owners’ common equity. These interests are not secured by the underlying real estate, but upon the occurrence of a default, the preferred equity provider has the right to effectuate a change of control in certain circumstances with respect to the ownership of the property. Preferred equity investments typically earn a preferred return rather than interest payments and often have the right for such preferred return to accrue if there is insufficient cash flow to pay currently. The preferred return provided as a term of our preferred equity investments is not a measure of our investment performance and is not indicative of distributions that we may provide to investors. It should not be relied on to predict an investor’s returns and is subject to the development and performance of the project for which the preferred equity is being provided. Furthermore, the preferred return is only a contractual preference on allocations, and is subordinate to any construction debt and senior preferred equity and there is no guarantee that it will be achieved or paid.
We may invest in the preferred equity of other entities, the management of which may adversely affect our business.
We may invest in the preferred equity of other entities. However, we will not control the management, investment decisions, or operations of these companies. Management of those enterprises may decide to change the nature of their assets, or management may otherwise change in a manner that is not satisfactory to us. We will have no ability to affect these management decisions and we may have only limited ability to dispose of our investments.
We expect to incur indebtedness and other borrowings, which could adversely impact the value of your investment if the value of the property securing the debt falls or if we are forced to refinance the debt during adverse economic conditions.
We expect that in most instances, we will acquire multifamily real estate by using either existing financing or borrowing new funds. In addition, we may incur mortgage debt and pledge all or some of our real properties as security for that debt to obtain funds to acquire additional real properties. We may borrow if we need funds to satisfy the REIT tax qualification requirement that we distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. We also may borrow if we otherwise deem it necessary or advisable to assure that we qualify as a REIT. There is no limitation on the amount we may borrow against any single improved property. We expect that our debt levels will be higher until we have raised equity capital and repaid a portion of our initial leverage. High debt levels would cause us to incur higher interest charges, would result in higher debt service payments and could be accompanied by restrictive covenants. These factors could limit the amount of cash we have available to distribute and could result in a decline in the value of your investment. If there is a shortfall between the cash flow from an asset and the cash flow needed to service mortgage debt on a 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 U.S. federal income tax purposes, a foreclosure of any of our properties would 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 would recognize taxable income on foreclosure, but would not receive any cash proceeds. In such event, we may be unable to pay the amount of distributions required in order to maintain our REIT status. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we provide 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 mortgages contain 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 which could result in our losing our REIT status and would result in a decrease in the value of your investment.
Changes in the debt markets could have a material adverse impact on our earnings and financial condition.
The domestic debt markets are subject to changing levels of volatility, resulting in, from time to time, the tightening of underwriting standards by lenders and credit rating agencies, which results in lenders increasing the cost of debt financing. Should the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of future acquisitions. This may result in future acquisitions generating lower overall economic returns and potentially reducing future cash flow available for distribution. If these disruptions in the debt markets persist, our ability to borrow monies to finance the purchase of, or other activities related to, multifamily real estate assets will be negatively impacted. If we are unable to borrow monies on terms and conditions that we find acceptable, we likely will have to reduce the number of assets we can purchase, and the return on the assets we purchase may be lower. In addition, we may find it difficult, costly or impossible to refinance indebtedness that is maturing. In addition, the state of the debt markets could have an impact on the overall amount of capital invested in real estate, which may result in price or value decreases of real estate assets. Although this may benefit us for future acquisition, it could negatively impact the value of our assets after the time we acquire them.
High lending rates may make it difficult for us to finance or refinance assets, which could reduce the number of assets we can acquire and the amount of cash distributions we can make.
If we place debt on assets, we run the risk of being unable to refinance the assets when the loans come due, or of being unable to refinance on favorable terms. If interest rates are higher when the assets are refinanced, we may not be able to finance the assets and our income could be reduced. If any of these events occur, our cash flow would be reduced. This, in turn, would reduce our cash flow and cash available for distribution to members, as well as hinder our ability to raise more capital by issuing more Shares or by borrowing more money.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
In connection with providing us financing, certain of our lenders may impose restrictions on us that affect our distribution, investment and operating policies and our ability to incur additional debt. Loan documents we enter into may also contain covenants that limit our ability to further borrow against the asset or discontinue insurance coverage. These or other limitations may adversely affect our flexibility and our ability to achieve our distribution, investment and operating objectives.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to pay distributions to our stockholders.
We expect that we will incur indebtedness in the future. To the extent that we incur variable rate debt, increases in interest rates would increase our interest costs, which could reduce our cash flows and our ability to pay 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 assets at times that may not permit realization of the maximum return on such investments.
Changes to, or the elimination of, LIBOR may adversely affect interest expense related to borrowings under our credit facilities and real estate-related investments.
We may in the future pay interest on credit facilities and asset-level loans, and receive interest through our real estate-related investments, based on LIBOR, which is the subject of recent national, international and regulatory guidance and proposals for reform. On July 27, 2017, the United Kingdom's Financial Conduct Authority announced it intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The administrator of LIBOR ceased the publication of the one-week and two-month LIBOR settings immediately following the LIBOR publication on December 31, 2021. On November 30, 2020, the ICE Benchmark Administration Limited announced its plan to extend the date that the remaining U.S. LIBOR values would cease being computed and published from December 31, 2021 to June 30, 2023. The Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee, which identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative to U.S. dollar LIBOR in derivatives and other financial contracts. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities, published by the Federal Reserve Bank of New York. It is expected that new contracts will not reference LIBOR and will instead use SOFR or other alternative reference rates. At this time, we are not able to predict when LIBOR will cease to be available or how markets will respond to SOFR or other alternative reference rates as the transition away from LIBOR is anticipated in coming years.
Any real estate debt securities that we originate or purchase is subject to the risks of delinquency and foreclosure.
We may originate and purchase real estate debt securities, which are subject to risks of delinquency and foreclosure and risks of loss. Typically, we will have limited recourse, if any, to the personal assets of our borrowers. The ability of a borrower to repay a debt security secured by an income-producing asset depends primarily upon the successful operation of the asset, rather than upon the existence of independent income or assets of the borrower. If the net operating income of the asset is reduced, the borrower’s ability to repay the debt security may be impaired. An asset’s net operating income can be affected by, among other things: ● increased costs, including added costs imposed by franchisors for improvements or operating changes required, from time to time, under the franchise agreements; ● asset management decisions; ● asset location and condition; ● competition from comparable types of assets; ● changes in specific industry segments; ● declines in regional or local real estate values, or occupancy rates; and ● increases in interest rates, real estate tax rates and other operating expenses. We bear the risks of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the multifamily real estate debt security, which could have a material adverse effect on our cash flows from operations and limit amounts available for distribution to you. In the event of the bankruptcy of a multifamily real estate debt security borrower, the multifamily real estate debt security to that borrower will be deemed to be collateralized only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the multifamily real estate debt security will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a multifamily real estate debt security can be an expensive and lengthy process that could have a substantial negative effect on our anticipated return on the foreclosed multifamily real estate debt security. We also may be forced to foreclose on certain assets, be unable to sell these assets and be forced to incur substantial expenses to improve operations at the asset.
Our failure to qualify as a REIT would subject us to U.S. federal income tax and potentially state and local tax, and would adversely affect our operations and the price of our common shares.
We intend to elect to be taxed as a REIT commencing with our taxable year ending December 31, 2023, or, if deemed in the best interests of our shareholders, in a following year. We intend to operate in a manner that would allow us to qualify as a REIT. Our qualification as a REIT depends upon our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. We have structured and intend to continue structuring our activities in a manner designed to satisfy all requirements for qualification as a REIT. However, the REIT qualification requirements are extremely complex and interpretation of the U.S. federal income tax laws governing qualification as a REIT is limited, and it is possible our REIT status may terminate inadvertently. Our ability to satisfy the asset tests depends on our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income or quarterly asset requirements also depends on our ability to successfully manage the composition of our income and assets on an ongoing basis. Accordingly, if certain of our operations were to be recharacterized by the IRS, such recharacterization could jeopardize our ability to satisfy all the requirements for qualification as a REIT. Furthermore, future legislative, judicial or administrative changes to the U.S. federal income tax laws could be applied retroactively, which could result in our disqualification as a REIT. If we fail to qualify as a REIT for any taxable year, and we do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT qualification. Losing our REIT qualification would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
In certain circumstances, we may incur tax liabilities that would reduce our cash available for distribution to you.
Even if we qualify as a REIT, we may be subject to U.S. federal, state and local income taxes. For example, net income from the sale of properties that are “dealer” properties sold by a REIT (a “prohibited transaction” under the Code) will be subject to a 100% tax. We may not make sufficient, timely distributions to avoid excise taxes applicable to REITs. Similarly, if we were to fail an income test (and did not lose our REIT status because such failure was due to reasonable cause and not willful neglect) we would be subject to tax on the portion of our income that caused us to fail to meet the income test requirements. We also may decide to retain net capital gain we recognize from the sale or other disposition of our property and pay U.S. federal income tax directly on such gain. In that event, our stockholders would be treated as if they recognized that gain and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns and thereon seek a refund of such tax. We also will be subject to corporate tax on any undistributed REIT taxable income. We also may be subject to state and local taxes on our income or property, including franchise, payroll and transfer taxes, or at the level of the other companies through which we indirectly own our assets, such as taxable REIT subsidiaries, which are subject to full U.S. federal, state, local and foreign corporate-level income taxes. Any taxes we pay directly or indirectly will reduce our cash available for distribution to you.
If we fail to invest a sufficient amount of the net proceeds from selling our common shares in real estate assets within one year from the receipt of the proceeds, we could fail to qualify as a REIT.
Temporary investment of the net proceeds from sales of our common shares in short-term securities and income from such investment generally will allow us to satisfy various REIT income and asset requirements, but only during the one-year period beginning on the date we receive the net proceeds. If we are unable to invest a sufficient amount of the net proceeds from the sales of our common shares in qualifying real estate assets within such one-year period, we could fail to satisfy one or more of the gross income or asset tests and/or we could be limited to investing all or a portion of any remaining funds in cash or cash equivalents. If we fail to satisfy any such income or asset test, unless we are entitled to relief under certain provisions of the Code, we could fail to qualify as a REIT.
To qualify as a REIT, we must meet annual distribution requirements, which may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives and reduce your overall return.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain. To the extent that we do not distribute our net capital gains or distribute at least 90% but less than 100% of our REIT taxable income, as adjusted, we will have to pay tax on those amounts at regular federal corporate tax rates. We will be subject to U.S. federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay (or are deemed to have paid) with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these distributions. Although we intend to make distributions sufficient to meet the annual distribution requirements and to avoid U.S. federal income and excise taxes on our earnings while we qualify as a REIT, it is possible that we might not always be able to do so.
If we were considered to actually or constructively pay a “preferential dividend” to certain of our stockholders, our status as a REIT could be adversely affected.
As stated above, in order to qualify as a REIT, we must distribute as dividends to our stockholders at least 90% of our annual REIT taxable income, determined without regard to the dividends-paid deduction and excluding net capital gains. Historically, in order for dividends to be counted as satisfying the annual distribution requirements for REITs, and to provide a REIT with a REIT-level tax deduction, the dividends could not be “preferential dividends.” A dividend is not a preferential dividend if the distribution is pro rata among all outstanding shares within a particular class and in accordance with the preferences among different classes of shares as set forth in a REIT’s organizational documents. REITs that file annual and periodic reports with the SEC under the Exchange Act are not subject to the rules prohibiting preferential dividends. If we elect to pursue and ultimately consummate an initial public offering, we will become a reporting company under the Exchange Act, and the preferential dividend rule will be inapplicable to us. However, if we do not consummate an initial public offering, we will remain a private REIT, and we will not be exempt from the preferential dividend rules until we sell stock to at least 2,000 stockholders and register a class of our securities under the Exchange Act. We cannot guarantee that we will commence and consummate a public offering or when we may be otherwise required to register under the Exchange Act. If we paid a preferential dividend, the entire amount of such dividend would not be deductible by us and would be ineligible for consideration in determining if we met the 90% distribution test, and our status as a REIT could be terminated for the year in which such determination is made if we were unable to cure such failure and for a period of four years thereafter.
If our leases are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT.
To qualify as a REIT, we must satisfy two gross income tests, under which specified percentages of our gross income must be derived from certain sources, including “rents from real property.” See “Material U.S. Federal Income Tax Considerations — Gross Income Tests”. In order for rent paid to us to qualify as “rents from real property” for purposes of the REIT gross income tests, the leases must be respected as true leases for U.S. federal income tax purposes and not be treated as service contracts, joint ventures, or some other type of arrangement. If our leases are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT, which would materially adversely impact the value of an investment in our securities and in our ability to pay distributions to you.
The use of taxable REIT subsidiaries, which may be required for REIT qualification purposes, would increase our overall tax liability and thereby reduce our cash available for distribution to you.
Some of our assets may need to be owned by, or operations may need to be conducted through, one or more taxable REIT subsidiaries. Any of our taxable REIT subsidiaries would be subject to U.S. federal, state and local income tax on their taxable income. The after-tax net income of our taxable REIT subsidiaries would be available for distribution to us. Further, we would incur a 100% excise tax on transactions with our taxable REIT subsidiaries that are not conducted on an arm’s-length basis. While we intend that all transactions between us and our taxable REIT subsidiaries would be conducted on an arm’s-length basis, and therefore, any amounts paid by our taxable REIT subsidiaries to us would not be subject to the excise tax, no assurance can be given that no excise tax would arise from such transactions.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on your investment.
For so long as we qualify as a REIT, our ability to dispose of property may be restricted to a substantial extent as a result of our REIT qualification. Under applicable provisions of the Code regarding prohibited transactions by REITs, while we qualify as a REIT, we will be subject to a 100% penalty tax on any gain recognized on the sale or other disposition of any property (other than foreclosure property) that we own, directly or indirectly through any subsidiary entity other than a taxable REIT subsidiary, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of a trade or business, unless certain safe harbor provisions apply. 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. Any losses we incur on such prohibited transactions may not be used to offset gains from prohibited transactions. Any taxes we pay would reduce our cash available for distribution to you. To avoid incurring prohibited transactions tax, we may forgo disposition opportunities that would otherwise be available if we were not a REIT.
Recharacterization of sale-leaseback transactions may cause us to fail to qualify as a REIT, or when qualified, lose our REIT status, which would subject us to U.S. federal income tax at corporate rates, which would reduce the amounts available for distribution to you.
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 sale-leaseback transaction such that the lease will be characterized as a “true lease,” thereby allowing us to be treated as the owner of the property for U.S. federal income tax purposes, the IRS could challenge such characterization. In the event that any such sale-leaseback is challenged and recharacterized as a financing transaction or loan for U.S. federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale-leaseback transaction were so recharacterized, we might fail to satisfy the REIT qualification asset tests or income tests and, consequently, lose our REIT status effective with the year of recharacterization. Alternatively, the amount of our REIT taxable income could be recalculated, which also might cause us to fail to meet the annual distribution requirement for a taxable year in the event we cannot make a sufficient deficiency dividend.
The taxation of distributions to our stockholders can be complex; however, distributions that we make to our stockholders generally will be taxable as ordinary income.
Distributions that we make to our taxable stockholders out of current and accumulated earnings and profits (and not designated as capital gain dividends or qualified dividend income) generally will be taxable as ordinary income. However, a portion of our distributions may (1) be designated by us as capital gain dividends generally taxable as long-term capital gain to the extent that they are attributable to net capital gain recognized by us, (2) be designated by us as qualified dividend income generally to the extent they are attributable to dividends we receive from any taxable REIT subsidiaries we may own, or (3) constitute a return of capital generally to the extent that they exceed our accumulated earnings and profits as determined for U.S. federal income tax purposes. A return of capital is not taxable, but has the effect of reducing the basis of a stockholder’s investment in our common shares.
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 U.S. federal 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. Therefore, unless you are a tax-exempt entity, you may be forced to use funds from other sources to pay your tax liability on the reinvested dividends.
Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.
Currently, the maximum tax rate applicable to qualified dividend income payable to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates for qualified dividends and are taxed at ordinary income rates. Although this does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the shares of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common shares. However, U.S. stockholders that are individuals, trusts and estates generally may deduct 20% of ordinary dividends from a REIT for taxable years beginning after December 31, 2017, and before January 1, 2026.
We may not request an opinion of counsel as to our status as a REIT, which increases the risk that we may not be appropriately structured and operated to qualify and maintain qualification as a REIT.
REITs engaging in a registered public offering must obtain a written opinion of counsel as to whether the REIT will qualify for taxation as a REIT under the Code and make that opinion available to the public as part of its registration process. Opinions of counsel as to an entity’s eligibility to qualify as a REIT are not binding on the IRS and are not guarantees that such an entity will qualify and continue to qualify as a REIT. In addition, legal counsel’s tax opinions are based upon the law existing and applicable as of the date of the opinions, all of which can change, either prospectively or retroactively. However, accounting firms and law firms that render opinions to entities desiring to qualify as REITs would advise their clients as to the likelihood of meeting the qualification requirements and may suggest changes in an entity’s intended structure or intended method of operation to enhance the likelihood that an entity will meet the applicable requirements. While we have consulted with our legal counsel, we are not required to request, and may not request, a written opinion that sets forth our legal counsel’s opinion on whether we will be appropriately structured and operated to meet the complex requirements necessary to be taxed as a REIT. Accordingly, no such opinion is available for you to review, and you face a greater risk that we may not be appropriately structured and operated to qualify and maintain our qualification as a REIT. Moreover, to the extent that we were required to request a written opinion, it is uncertain what level of opinion we would receive.
Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets, if properly identified under applicable Treasury Regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a taxable REIT subsidiary. This could increase the cost of our hedging activities because our taxable REIT subsidiaries would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a taxable REIT subsidiary generally will not provide any tax benefit, except for being carried forward against future taxable income of such taxable REIT subsidiary.
Complying with REIT requirements may force us to forgo or liquidate otherwise attractive investment opportunities.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities (other than government securities, interests in taxable REIT subsidiaries and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, interests in taxable REIT subsidiaries and qualified real estate assets) can consist of the securities of any one issuer, and no more than 20% of the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate assets from our portfolio or not make otherwise attractive investments in order to qualify and maintain our qualification as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
You may be restricted from acquiring or transferring certain amounts of our common shares.
In order to qualify as a REIT, among other requirements, no more than 50% in value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals, as defined in the Code to include certain kinds of entities, during the last half of any taxable year, other than the first year for which our REIT election is effective. To assist us in qualifying as a REIT, among other purposes, our charter contains share ownership limits. Generally, any of our shares owned by affiliated owners will be added together for purposes of the share ownership limits. If anyone attempts to transfer or own shares in a way that would violate the share ownership limits (or would prevent us from continuing to qualify as a REIT), unless such ownership limits have been waived prospectively or retroactively by our board of directors, those shares instead will be deemed transferred to a trust for the benefit of a charitable beneficiary and will be either repurchased by us or sold to a person whose ownership of the shares will not violate the aggregate share ownership limit or the common share ownership limit and will not prevent us from qualifying as a REIT. If this transfer to a trust fails to prevent such a violation or a disqualification as a REIT, then the initial transfer or ownership will be null and void from the outset. Anyone who acquires or owns shares in violation of the aggregate share ownership limit or the common share ownership limit, unless such ownership limit or limits have been waived prospectively or retroactively by our board of directors, or the other restrictions on transfer or ownership in our charter, bears the risk of a financial loss when the shares are repurchased or sold.
The ability of our board of directors to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.
Our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we will not be allowed a deduction for distributions paid to stockholders in computing our taxable income and will be subject to U.S. federal income tax at regular corporate rates, as well as state and local taxes, which may have adverse consequences on our total return to stockholders.
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the price of our common shares.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of the U.S. federal income tax laws applicable to investments similar to an investment in our common shares. Additional changes to the tax laws are likely to continue to occur, and we cannot assure you that any such changes will not adversely affect your taxation, the investment in the common shares or the market value or the resale potential of our properties. You are urged to consult with your own tax advisor with respect to the impact of recent or proposed legislation on your investment in the common shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our common shares. Non-U.S. stockholders will be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax on distributions received from us and upon the disposition of our shares. Subject to certain exceptions, distributions received from us will be treated as dividends of ordinary income to the extent of our current or accumulated earnings and profits. Such dividends ordinarily will be subject to U.S. withholding tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty, unless the distributions are treated as “effectively connected” with the conduct by the non-U.S. stockholder of a U.S. trade or business. Pursuant to the Foreign Investment in Real Property Tax Act of 1980, or “FIRPTA,” capital gain distributions attributable to sales or exchanges of U.S. real property interests, or “USRPIs,” generally will be taxed to a non-U.S. stockholder as if such gain were effectively connected with a U.S. trade or business. However, a capital gain distribution will not be treated as effectively connected income if (1) the distribution is received with respect to a class of shares that is regularly traded on an established securities market located in the United States and (2) the non-U.S. stockholder does not own more than 10% of the class of our shares at any time during the one-year period ending on the date the distribution is received. We do not anticipate that our shares will be “regularly traded” on an established securities market, and, therefore, this exception is not expected to apply. Gain recognized by a non-U.S. stockholder upon the sale or exchange of our common shares generally will not be subject to U.S. federal income taxation unless such shares constitute a USRPI within the meaning of FIRPTA. Our common shares will not constitute a USRPI so long as we are a “domestically-controlled qualified investment entity.” A domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of such REIT’s shares is held directly or indirectly by non-U.S. stockholders. We believe, but cannot be sure, that we will be a domestically-controlled qualified investment entity. Even if we do not qualify as a domestically-controlled qualified investment entity at the time a non-U.S. stockholder sells or exchanges our common shares, gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a USRPI if: (1) our common shares are “regularly traded,” as defined by applicable Treasury regulations, on an established securities market, and (2) such non-U.S. stockholder owned, actually and constructively, 10% or less of our common shares at any time during the five-year period ending on the date of the sale. However, as noted above, we do not anticipate that our common shares will be “regularly traded” on an established securities market. We encourage our non-U.S. stockholders to consult an independent tax advisor to determine the tax consequences applicable to them.
General Risks
There are special considerations that apply to tax-qualified pension, profit-sharing, employee benefit plans described in Section 3(3) of ERISA (such as a 401(k) plan), and other retirement plans or accounts subject to Section 4975 of the Code (such as an IRA or annuity described in Section 408 or 408A of the Code, annuities described in Sections 403(a) or (b) of the Code, Archer MSAs described in Section 220(d) of the Code, health savings accounts described in Section 223(d) of the Code, and Coverdell education savings accounts described in Section 530 of the Code) that are investing in our securities. If you are investing the assets of such a plan or account in our securities, you should satisfy yourself that: ● your investment is consistent with your fiduciary and other obligations under ERISA, the Code and other similar law applicable to your plan or account; ● your investment is made in accordance with the documents and instruments governing your plan or account, including your plan’s or account’s investment policy, if applicable; ● your investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA (if applicable) and all other applicable provisions of ERISA, the Code, and other applicable law; ● your investment in our shares, for which no trading market exists or is expected to develop, is consistent with, and will not impair, the liquidity needs of the plan or account, including liquidity needs to satisfy minimum and other distribution requirements and tax withholding requirements that may be applicable; ● your investment will not produce an unacceptable amount of unrelated business taxable income, or “UBTI,” for the plan or account; ● you will be able to value the assets of the plan or account annually or more frequently in accordance with ERISA, the Code, and other applicable law requirements and any applicable provisions of the plan or account; ● your investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code; and ● our assets will not be treated as “plan assets” of your plan or account under ERISA and U.S. Department of Labor regulations. Certain of these considerations are described in more detail below and in the section titled “Investment by Certain Tax-Exempt Entities, including Retirement Plans, and Other ERISA Considerations” section this memorandum.
Certain employee benefit plans, retirement plans and IRAs are subject to valuation requirements that may not be suited for investment in our common shares.
With respect to the annual valuation requirements described above, we expect to use the net offering price of a common share in our offering as the per common share value thereof. While we may periodically conduct any appraisals or valuations of our investments before 2024, but we do not expect to publish any additional estimated fair value per share until sometime in 2024. You should ensure that this approach to valuation is acceptable to the trustee or custodian of any plan or account before any investment in our common shares is made by such plan or account. The estimated value noted above (the gross offering price) is not likely to reflect the proceeds you would receive upon our liquidation or upon the sale of your common shares. Accordingly, we can make no assurances that such estimated value will satisfy the applicable annual (or more frequent) valuation requirements under ERISA and the Code. The U.S. Department of Labor or the IRS may determine that a plan fiduciary or an IRA custodian is required to take further steps to determine the value of our common shares. In the absence of an appropriate determination of value, a plan fiduciary or an IRA custodian may be subject to damages, penalties or other sanctions.
If the fiduciary of an employee benefit plan subject to ERISA, the Code or similar applicable law or any other retirement plan (including an IRA) fails to meet the required fiduciary and other standards under ERISA, the Code, or similar applicable law as a result of an investment in our shares, the fiduciary could be subject to civil (and criminal, if the failure is willful) penalties.
ERISA imposes certain requirements on employee benefit plans and on those persons who are fiduciaries with respect to such plans. A person is generally a “fiduciary” with respect to a plan if the person exercises discretionary authority or control with respect to the management of the plan or the management or disposition of the plan assets or provides investment advice for a fee with respect to plan assets. Investments by plans are subject to ERISA’s general fiduciary requirements, including the requirement of investment prudence and diversification and the requirement that a plan’s investments be made in accordance with the documents governing the plan. The prudence of a particular investment must be determined by the responsible fiduciary of a plan by taking into account the plan’s particular circumstances and all of the facts and circumstances of the investment. Each plan fiduciary who is responsible for making the investment decisions whether to purchase or commit to purchase and to hold our common shares should determine whether, under the general fiduciary standards of investment prudence and diversification and under the documents and instruments governing the plan, an investment in the common shares is appropriate for the plan, taking into account the overall investment policy of the plan and the composition of the plan’s investment portfolio and the risks and lack of liquidity inherent in an investment in the common shares. Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA and the Code may result in the imposition of civil (and, if willful, criminal) penalties, and can subject the fiduciary to claims for damages or for equitable remedies. In addition, if an investment in our shares constitutes a prohibited transaction under ERISA or the Code, the “party-in-interest” or “disqualified person” who engaged in the prohibited transaction may be subject to the imposition of excise taxes with respect to the amount involved, and for IRAs, the tax-exempt status of the IRA may be lost and all of the assets of the IRA may be deemed distributed and subjected to tax. ERISA plan fiduciaries and IRA custodians should consult with counsel before making an investment in our common shares. IRA owners are strongly urged to consult with the custodian or trustee of their IRAs before making any investment in our securities.
Significant investment by benefit plan investors (as defined by ERISA) could result in treatment of our assets as plan assets.
The U.S. Department of Labor has promulgated regulation Section 2510.3-101, as modified by ERISA Section 3(42), which we refer to as the “Plan Assets Regulation,” describing what constitutes the assets of an entity whose underlying assets are considered to include “plan assets” of such plans, accounts, and arrangements (each of which we refer to as a “benefit plan”) with respect to the benefit plan’s investment in an entity for purposes of the fiduciary responsibility provisions of Title I of ERISA and Section 4975 of the Code. Under the Plan Assets Regulation, if a benefit plan invests in an “equity interest” of an entity that is neither a “publicly offered security” nor a security issued by an investment company registered under the Investment Company Act, the benefit plan’s assets are deemed to include both the equity interest itself and an undivided interest in each of the entity’s underlying assets, unless it is established that the entity is an “operating company” or the equity participation by “benefit plan investors” (as defined in Section 3(42) of ERISA) is not “significant.” Under the Plan Assets Regulation and Section 3(42) of ERISA, equity participation in an entity by benefit plan investors is “significant” on any date if, immediately after the most recent acquisition of any equity interest in the entity, 25% or more of the value of any class of equity interest in the entity is held by benefit plan investors. We refer to this as the “25% limitation.” For purposes of making determinations under the 25% limitation, (i) the value of any equity interests held by a person (other than a benefit plan investor) that has discretionary authority or control with respect to the assets, any person who provides investment advice for a fee (direct or indirect) with respect to such assets, or any affiliate of such a person, is disregarded, and (ii) an entity that holds plan assets shall be considered to be a benefit plan investor only to the extent of its equity interests held by other benefit plan investors. The definition of a “benefit plan investor” generally excludes governmental, church and foreign benefit plans, but for purposes of calculating the 25% limitation, includes IRAs. We are not currently a publicly traded company (and we do not have any present intent to become one), we will not be registered under the Investment Company Act, and we do not intend to limit equity participation in our securities by benefit plan investors to less than 25% of the total value of each class of our equity securities. We, do, however, intend to structure and conduct our operations so that we meet the “operating company” exception. Specifically, we intend to structure and operate so that we (Groma NAV REIT, Inc.) qualify as a “venture capital operating company” investing in a series of other “operating companies,” as defined in the Plan Assets Regulation. Additionally, we believe that each subsidiary that owns one or more properties will qualify as a “real estate operating company” for ERISA purposes. However, it is possible that we may not qualify as an “operating company” for purposes of the Plan Assets Regulation. Therefore, if participation in us through the acquisition of any class of equity interest by benefit plan investors is “significant” within the meaning of the Plan Assets Regulation and Section 3(42) of ERISA, our assets could be deemed to be the assets of benefit plans investing in our securities, which could severely restrict our operations or subject us to fines if we fail to comply with the requirements of ERISA, including among other things: i. the prudence and other fiduciary responsibility standards of ERISA would apply to investments we make; ii. certain transactions in which we might seek to engage could constitute “prohibited transactions” under ERISA and the Code, which, absent an exemption, could restrict us from acquiring an otherwise desirable investment or from entering into an otherwise favorable transaction; iii. our assets could be subject to ERISA’s reporting and disclosure requirements; iv. the fiduciary causing the benefit plan to make an investment in our securities could be deemed to have delegated its responsibility to manage the assets of the benefit plan; and v. the indicia of ownership of our assets would have to be maintained within the jurisdiction of the district courts of the United States unless certain regulatory exceptions were applicable. If we determine that we fail to meet the operating company exception to plan assets treatment and we also determine that participation by benefit plan investors equals or exceeds 25% of the total value of any class of our equity securities, we may redeem stockholders in sufficient quantities to reduce benefit plan investor participation so that it is no longer “significant.”
If you invest in our shares through an IRA or other retirement plan, you may be limited in your ability to withdraw required minimum distributions.
If you establish a plan or account through which you invest in our shares, federal law may require you to withdraw required minimum distributions from such plan in the future. Our shares may generate insufficient distributions, and the relative illiquidity of our shares may not allow you to sell your shares on a timely basis or to receive sufficient proceeds, to allow you to satisfy the required minimum distribution requirements under your plan or account. Even if you are able to sell your shares, such sale may be at a price less than the price at which you initially purchased the shares. If you fail to withdraw required minimum distributions from your plan or account, you may be subject to certain taxes and tax penalties.
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