Download Private Placement Memorandum

Private Placement Memorandum
:LQWRQ 5RDG 6RXWK _ 6XLWH _ 5RFKHVWHU 1< _ 3 _ ) CONFIDENTIAL—NOT FOR DISTRIBUTION
PRIVATE PLACEMENT MEMORANDUM
Royal Oak Realty Trust Inc.
Common Stock
Royal Oak Realty Trust Inc. acquires, owns and operates commercial net leased real estate as a real estate
investment trust, or REIT, for federal income tax purposes. As described in our property selection criteria, we focus on
office and industrial net leased properties. We elected REIT status for the year ended December 31, 2014, and intend to
continue to operate our business to qualify as a REIT. Through our subsidiary Royal Oak Realty Trust LLC (referred to
as the Operating Company), we have acquired, indirectly through single purpose entities, various net leased properties
described in this Memorandum. Royal Oak Realty Trust Inc. was formed under the name Buckingham Net Leased
Properties Group Inc. but changed its name as of the end of December 2015. We are managed by Cambridge Street
Asset Management LLC, an asset manager majority-owned and controlled by our sponsor Daniel Goldstein. Our
properties are managed by Cambridge Street Property Management LLC, an affiliated property manager.
We are offering shares of our common stock to “accredited investors” in a private placement under the federal
and state securities laws. The price per share in this offering was $50.00 initially. On a quarterly basis, our independent
directors committee reviews and determines the value of our shares, which we refer to as the “Determined Share Value”.
The Determined Share Value has been set at $54.00 as of July 2, 2016. Our minimum investment is 2,000 shares, or
$108,000, as of July 2, 2016. Shares purchased through an investment advisor may be purchased at 50% of the
minimum investment. In some circumstances, we may reduce the minimum investment for certain investors. At our
discretion, depending on our capital requirements, we may defer collecting the full purchase price, and issuing the related
shares, with respect to some subscriptions. We may call the deferred subscription amount from time to time, or at one
time in full, for six months and the investor will purchase the shares at the Determined Share Value in effect on the date
of the subscription. We contribute the proceeds of the offering described in this Memorandum to the Operating
Company in exchange for membership interests. The Operating Company uses the proceeds to acquire additional
properties meeting the investment criteria we describe in this Memorandum, to reimburse the Asset Manager for certain
expenses incurred in this offering, to repay debt from time to time and for general business and operating purposes,
including certain fees described in this Memorandum.
An investment in our common stock involves significant risks, including a risk of losing your entire investment.
We have described the material risks that we have identified under the heading “Risk Factors” in this Memorandum.
These risks include, among others, those related to: owning illiquid shares of stock that are not traded in any market and
are subject to transfer restrictions; investing in commercial real estate generally; the effect of the economy of the various
regions where our properties are located on property valuations; weakness in the economy affecting our tenants’ ability
to pay rent and other net charges; our ability to find additional properties meeting our criteria; no minimum level of
funds required to be raised in the offering which may limit our ability to acquire additional properties and further
diversify the portfolio; our cash flow being insufficient to fund expected distributions; potential funding of distributions
from borrowings or proceeds of sales of additional shares of our common stock diluting future investors; and tax risks
related to our ability to qualify as a REIT and maintain that qualification. You should carefully consider these risks
before deciding to purchase shares of our common stock.
THIS OFFERING IS BEING MADE IN RELIANCE UPON THE AVAILABILITY OF EXEMPTIONS
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND APPLICABLE STATE
SECURITIES LAWS AND IS MADE SOLELY TO ACCREDITED INVESTORS. TRANSFER OF THE SHARES IS
RESTRICTED BY FEDERAL AND STATE SECURITIES LAWS AND BY OUR FORMATIVE DOCUMENTS.
THERE IS NO TRADING MARKET FOR THE SHARES AND THERE IS NO EXPECTATION THAT SUCH A
MARKET WILL DEVELOP IN THE FORESEEABLE FUTURE.
THE SHARES OF COMMON STOCK OFFERED BY THIS MEMORANDUM HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY OTHER APPLICABLE
SECURITIES LAW. NEITHER THIS OFFERING NOR AN INVESTMENT IN THE SHARES HAVE BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE
ATTORNEY GENERAL OF THE STATE OF NEW YORK, ANY OTHER STATE SECURITIES
COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS MEMORANDUM. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Private Placement Memorandum is January 3, 2017
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Prospective Investor
CONFIDENTIAL
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IMPORTANT NOTICES TO INVESTORS
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE INTENDED TO BE SOLD
ONLY TO ACCREDITED INVESTORS, AS DEFINED IN RULE 501(a) OF REGULATION D,
PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
THE SHARES OFFERED HEREBY MAY NOT BE RESOLD OR OTHERWISE DISPOSED OF
BY AN INVESTOR UNLESS, IN THE OPINION OF COUNSEL ACCEPTABLE TO US, REGISTRATION
UNDER FEDERAL AND APPLICABLE STATE SECURITIES LAW IS NOT REQUIRED OR
COMPLIANCE IS MADE WITH THE REGISTRATION REQUIREMENTS OF SUCH LAWS.
AN INVESTMENT IN OUR COMMON STOCK INVOLVES SIGNIFICANT RISKS. ONLY
INVESTORS WHO CAN BEAR THE ECONOMIC RISK OF AN INVESTMENT OF THIS TYPE FOR AN
INDEFINITE PERIOD OF TIME AND THE RISK OF LOSS OF THEIR ENTIRE INVESTMENT
SHOULD INVEST IN THE SHARES. SEE “RISK FACTORS.”
SPECIAL NOTICE TO FLORIDA RESIDENTS
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
FLORIDA SECURITIES AND INVESTOR PROTECTION ACT (THE “FLORIDA ACT”), AND THEY
THEREFORE HAVE THE STATUS OF SECURITIES ACQUIRED IN AN EXEMPT TRANSACTION
UNDER SECTION 517.061 OF THE FLORIDA ACT. EACH OFFEREE WHO IS A FLORIDA
RESIDENT HAS THE RIGHT TO VOID THE PURCHASE OF THESE SECURITIES WITHIN THREE
DAYS AFTER THE FIRST TENDER OF CONSIDERATION IS MADE BY THE PURCHASER TO THE
ISSUER OR AN AGENT OF THE ISSUER, OR WITHIN THREE DAYS AFTER THE AVAILABILITY
OF THAT PRIVILEGE IS COMMUNICATED TO THE PURCHASER, WHICHEVER OCCURS LATER.
THE FOREGOING IS INTENDED TO CONSTITUTE NOTICE REQUIRED BY SECTION
517.061(11)(a)(5) OF THE FLORIDA ACT. ACCORDINGLY, EACH PURCHASER HAS THREE DAYS
AFTER THE TENDER OF THE PURCHASE PRICE OF THE SECURITIES TO THE CORPORATION
OR TO ANY AGENT OF THE CORPORATION, TO CAUSE A WRITTEN NOTICE OR TELEGRAM TO
BE SENT TO THE CORPORATION AT THE ADDRESS PROVIDED IN THE CONFIDENTIAL
PRIVATE PLACEMENT MEMORANDUM. SUCH LETTER OR TELEGRAM MUST BE SENT AND, IF
POSTMARKED, POSTMARKED ON OR PRIOR TO THE AFOREMENTIONED THIRD DAY. IF A
PERSON IS SENDING A LETTER, IT IS PRUDENT TO SEND A LETTER BY CERTIFIED MAIL,
RETURN RECEIPT REQUESTED, TO ASSURE THAT IT IS RECEIVED AND ALSO TO EVIDENCE
THE TIME IT WAS MAILED. SHOULD A PERSON MAKE THIS REQUEST ORALLY, HE OR SHE
MUST ASK FOR WRITTEN CONFIRMATION THAT HIS OR HER REQUEST HAS BEEN RECEIVED.
In making any investment decision with respect to our common stock, you should rely only on the
information contained in this Memorandum and information supplemental to this Memorandum which we provide
to you in writing. We have not authorized any person to provide you with different or inconsistent information. Our
officers, and those of the Asset Manager, Cambridge Street Asset Management LLC, are the only individuals
authorized to provide additional information to you about us, this Offering, the common stock, and our business,
plans, prospects and results.
The information in this Memorandum, and in any written supplemental information we deliver to you, is
only accurate as of the date set forth on such information. Neither the delivery of this Memorandum nor any sale
made hereunder shall under any circumstances create any implication that there has been no change in our affairs
since the date hereof.
No offeree will be accepted as a subscriber who does not make the representations set forth in the
Subscription Agreement accompanying this Memorandum, including the representation that such offeree is an
accredited investor and is acquiring the shares of common stock for investment and not with a view to resale or
distribution thereof. Investors also will be required to represent that they are familiar with and understand the terms
of this Offering.
We reserve the right to reject any subscriptions, for any or no reason, and to withdraw or terminate the
Offering at any time. The offeree, by accepting delivery of this Memorandum, agrees to either destroy this
Memorandum, or return this Memorandum and any enclosed documents to us, if the offeree does not qualify as an
“accredited investor” or meet the other suitability standards, does not desire to purchase any of the shares offered
hereby, or submits a subscription which is not accepted for any reason.
This Memorandum does not constitute an offer to sell or a solicitation of an offer to buy any of the shares
of common stock offered hereby in any state or other jurisdiction in which such an offer or solicitation is not
authorized. Except as otherwise indicated, all information contained in this Memorandum is given as of the date of
this Memorandum.
Prior to the sale of common stock, we are providing each offeree and/or the offeree’s representative the
opportunity to ask questions of and receive answers from our officers or those of the Asset Manager, to seek any
information believed necessary to verify the accuracy of this Memorandum or required in making a decision
concerning the purchase of the shares. We will provide the requested information to the extent that we possess such
information or can acquire it without unreasonable effort or expense.
Requests and inquiries regarding this Memorandum should be directed to:
Royal Oak Realty Trust Inc.
1870 South Winton Road, Suite 10
Rochester, New York 14618
Telephone: (585) 434-1660
Attention: Daniel Goldstein or Mark Allen
The discussion of the federal income tax considerations of ownership of the shares is provided for
informational purposes only. Investors should consult with their own tax advisors regarding the purchase,
ownership, and disposition of any shares. Use of or reliance upon any discussion of federal income tax
considerations contained in this Memorandum may be insufficient to itself to serve as a basis for a reasonable-cause
defense to the Internal Revenue Service. Any discussion of federal income tax considerations may be adversely
affected by subsequent changes in fact or in law.
PROSPECTIVE INVESTORS ARE NOT TO CONSTRUE THE CONTENTS OF THIS
MEMORANDUM AS LEGAL, BUSINESS OR TAX ADVICE. EACH PROSPECTIVE INVESTOR
SHOULD CONSULT ITS OWN ADVISORS AS TO THE LEGAL, BUSINESS, TAX, AND RELATED
MATTERS CONCERNING THIS INVESTMENT.
- ii CONFIDENTIAL
INVESTOR SUITABILITY STANDARDS
We will only accept subscriptions from prospective investors who tell us that they are accredited investors
and we reasonably believe that representation. An investment in shares of our common stock is suitable only for
persons who have adequate financial means, desire a relatively long-term investment, and will not need immediate
liquidity of their investment. To purchase our common stock, each investor must represent in the Subscription
Agreement that the investor has received this Memorandum, is an “accredited investor” as such term is currently
defined in Regulation D, based on meeting one of the following criteria:
x
the investor has a net worth (or joint net worth with a spouse) in excess of $1 million exclusive
of the value of the investor’s primary residence (and excluding any indebtedness secured by the
primary residence in principal amount up to the residence’s fair market value*); or
x
the investor has income during the preceding two years in excess of $200,000 per year (or
$300,000 jointly with an investor’s spouse) and reasonably expect income at that level in the
current year; or
x
the investor is an entity (a corporation, partnership, trust, or limited liability company), with
total assets in excess of $5 million; or
x
the investor is an entity, all the beneficial owners of which are accredited investors.
*Note: Indebtedness secured by the person’s primary residence is not included as a liability
unless the mortgage indebtedness exceeds the fair market value of the residence at the time of
investment or unless the amount of such indebtedness outstanding at the time of the investment
exceeds the amount outstanding 60 days before such time, other than as a result of the
acquisition of the primary residence. In each such case, the amount of such excess must be
included as a liability.
In addition, state securities regulators may impose suitability standards for this type of offering. In most
cases, if an investor qualifies as an “accredited investor” the investor will also satisfy the suitability standards
imposed by the states. Under state regulations, the definition of “net worth” excludes the value of the investor’s
home, furnishings, and automobiles so an investor might be an accredited investor under federal Regulation D but
not meet the state suitability standards. Prospective investors residing in jurisdictions outside New York State may
be asked to meet certain additional suitability standards.
In the case of sales to fiduciary accounts, these suitability standards must be met by the fiduciary account
and by the person who directly or indirectly supplied the funds for the purchase of our common stock if such person
is the fiduciary or by the beneficiary of the account.
PATRIOT Act Representation
Each investor will be required to represent that the investor is not, nor is he acting as an agent,
representative, intermediary or nominee for, a person identified on the list of blocked persons maintained by the
Office of Foreign Asset Control, U.S. Department of Treasury, and has complied with all applicable U.S. laws,
regulations, directives and executive orders relating to anti-money laundering, including but not limited to the
following laws: (1) the Sharing and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001, Public Law 107-56 (“PATRIOT Act”); and (2) Executive Order 13224
(Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support
Terrorism) of September 23, 2001. Each investor will also be required to represent that the source of funds for the
investor’s investment were not derived from sources prohibited under the PATRIOT Act.
- iii CONFIDENTIAL
Table of Contents
Page
Summary........................................................................................................................................................................1
Risk Factors ...................................................................................................................................................................8
Investment Risks.......................................................................................................................................................8
Real Property Risks ..................................................................................................................................................9
Financing Risks ......................................................................................................................................................12
Federal Income Tax Risks ......................................................................................................................................14
Conflict of Interest and Related Party Transactions ...............................................................................................17
Special Note Regarding Forward-Looking Statements ...............................................................................................19
Estimated Use of Offering Proceeds and Capitalization..............................................................................................20
Estimated Use of Offering Proceeds.......................................................................................................................20
Capitalization..........................................................................................................................................................20
Investment Objectives and Operating Policies ............................................................................................................22
Investment Objectives ............................................................................................................................................22
Property Selection Criteria......................................................................................................................................22
Leverage Policy ......................................................................................................................................................23
Properties, Financing and Leases ................................................................................................................................24
Properties ................................................................................................................................................................24
Financing ................................................................................................................................................................28
Leases .....................................................................................................................................................................31
Management ................................................................................................................................................................34
General....................................................................................................................................................................34
Executive Officers and Directors............................................................................................................................34
Our Board of Directors ...........................................................................................................................................37
Independent Directors Committee ..........................................................................................................................37
Audit Committee ....................................................................................................................................................39
Compensation of Directors .....................................................................................................................................39
Indemnification and Limited Liability of Officers and Directors ...........................................................................39
The Asset Manager .................................................................................................................................................39
The Asset Acquisition Committee ..........................................................................................................................40
The Investor Relations Committee .........................................................................................................................41
The Asset Management Agreement........................................................................................................................41
Management Decisions...........................................................................................................................................43
The Property Manager ............................................................................................................................................43
The Property Management Agreement ...................................................................................................................44
Fees and Other Compensation to Our Managers and Affiliates ..................................................................................46
The Operating Company .............................................................................................................................................48
General....................................................................................................................................................................48
Current Capitalization.............................................................................................................................................48
The Operating Agreement ......................................................................................................................................48
Financial Information .............................................................................................................................................51
Conflicts of Interest .....................................................................................................................................................52
General....................................................................................................................................................................52
Affiliates .................................................................................................................................................................52
Interests in Other Real Estate Investments .............................................................................................................52
Affiliated Asset Manager........................................................................................................................................52
Affiliated Property Manager ...................................................................................................................................53
Independent Directors Committee Oversight .........................................................................................................53
Lack of Separate Representation ............................................................................................................................53
Certain Provisions of Our Charter and By-Laws .........................................................................................................55
General....................................................................................................................................................................55
Common Stock .......................................................................................................................................................55
i
Table of Contents (continued)
Page
Restrictions on Transfer..........................................................................................................................................55
Preferred Stock .......................................................................................................................................................55
Ownership Limit.....................................................................................................................................................55
Suitability Standards and Minimum Purchase Requirements .................................................................................57
Distributions ...........................................................................................................................................................57
Distribution Reinvestment Plan ..............................................................................................................................58
Share Redemption Program ....................................................................................................................................59
Stockholder Reports................................................................................................................................................60
Stockholder Meetings .............................................................................................................................................60
The Offering ................................................................................................................................................................61
General....................................................................................................................................................................61
Closings of the Offering .........................................................................................................................................61
Suitability Criteria ..................................................................................................................................................62
PATRIOT Act Representations ..............................................................................................................................62
Minimum Investment..............................................................................................................................................63
How to Subscribe....................................................................................................................................................63
Federal Income Tax Considerations ............................................................................................................................65
Federal Income Taxation of the Corporation..........................................................................................................65
Requirements for Qualification of REIT ................................................................................................................66
Earnings and Profits................................................................................................................................................72
Failure to Qualify and Statutory Relief...................................................................................................................72
Sale-Leaseback Transactions ..................................................................................................................................72
Taxation of U.S. Stockholders ................................................................................................................................72
Information Reporting Requirements and Backup Withholding Tax .....................................................................74
Tax Aspects of the Operating Company .................................................................................................................75
State and Local Tax ................................................................................................................................................77
Changes in Tax Laws..............................................................................................................................................77
ERISA Considerations.................................................................................................................................................78
General....................................................................................................................................................................78
Plan Assets..............................................................................................................................................................78
ii
EXHIBIT A – Most Recent Annual Consolidated Financial Statements of Royal Oak Realty Trust Inc. and
Subsidiaries
EXHIBIT B – Most Recent Quarterly Consolidated Financial Statements of Royal Oak Realty Trust Inc. and
Subsidiaries
EXHIBIT C – Most Recent Annual and Quarterly Calculation of Funds From Operations (“FFO”), Adjusted
Funds From Operations (“AFFO”) and Modified Adjusted Funds From Operations
(“MAFFO”) Per Weighted Average Share/Unit for Royal Oak Realty Trust Inc. and
Subsidiaries
EXHIBIT D – Supplements: Material Updates and Notifications since the Date on the Cover of this
Memorandum
EXHIBIT E – Subscription Agreement, Investor Qualification Questionnaire, and Irrevocable Proxy
EXHIBIT F – Distribution Reinvestment Plan
-iCONFIDENTIAL
Summary
The following summarizes certain information contained elsewhere in more detail in this Memorandum and
highlights the terms of the offering of our common stock made by this Memorandum, which we refer to as the
“Offering”. You should read this Memorandum in its entirety, including the various documents included as
exhibits, before making any investment decision with respect to our common stock. We refer to Royal Oak Realty
Trust Inc. as “we” or “us” or the “REIT” or the “Corporation”. We refer to Royal Oak Realty Trust (Operating
Company) LLC, which also does business as Royal Oak Realty Trust LLC, as the “Operating Company”.
Sometimes we refer to Mr. Glazer (now deceased) and Mr. Goldstein as the “Initial Sponsors” and Mr. Goldstein
alone as the “Sponsor”.
Royal Oak Realty Trust Inc. was formed on January 6, 2014 as a Maryland corporation under the name
Buckingham Net Leased Properties Group Inc. Our offices are located at 1870 South Winton Road, Suite 10,
Rochester, New York, 14618, and our telephone number is (585) 434-1660. We are using the proceeds of this
Offering to acquire income-producing, net-leased commercial real estate through our controlling interest in Royal
Oak Realty Trust LLC (the “Operating Company”), to reimburse Cambridge Street Asset Management LLC, as
asset manager (the “Asset Manager”) (formerly known as Buckingham Properties Asset Management LLC) for
certain expenses for our formation and this offering, including any loans made to the Operating Company in
connection with acquiring properties, and for general business and operating purposes. The Corporation elected to
operate as a real estate investment trust, or “REIT,” for federal and state income tax purposes, beginning with its
year ended December 31, 2014.
We conduct substantially all of our real estate activities through the Operating Company. Since its
formation on May 8, 2013, the Operating Company has acquired the net leased properties discussed in further detail
below under “Properties”. At each closing of this Offering, we contribute the proceeds to the Operating Company in
exchange for membership interests. The Operating Company then invests those funds in properties directly or by
issuing units of membership interest (“Units”) to the sellers. Each Unit is substantially the economic equivalent of a
share of common stock. We have entered into an Asset Management Agreement with our Asset Manager, pursuant
to which the Asset Manager is responsible for making acquisitions and dispositions that we believe meet our
investment criteria.
Daniel Goldstein worked beside his partner and co-Initial Sponsor, Laurence Glazer, in acquiring,
developing and managing commercial real estate in the Rochester, New York area from 2004 to Mr. Glazer’s death
on September 5, 2014. They identified a desire by other real estate investors, and potential investors, in the
community to rely on the experience of the Initial Sponsors to create a pool of commercial real estate assets in
which accredited investors could invest alongside the Initial Sponsors. They identified commercial net leased
properties as appropriate for investment by others in reliance on the Initial Sponsors’ expertise in acquisition and
management where most, if not all, of the operating expenses are assumed by a credit-worthy tenant. Mr. Goldstein
and his team continue to identify and acquire, on attractive terms, properties which are structurally sound with longterm leases on “net leased” terms where the tenants pay most, or all, of the occupancy costs of their buildings, such
as maintenance and repairs, real estate taxes, insurance, and utilities. This pool of properties provides predictable
cash flows and diversification of real estate risks. Since entity-level federal income tax is generally eliminated for
REITs, more cash flow is available to make the distributions required to maintain REIT status. We believe that,
with a combination of favorable portfolio purchases and financing, and reliable long-term tenants, the acquired
properties should provide a predictable, favorable, return to the equity investors.
The Corporation ........................... Royal Oak Realty Trust Inc., a Maryland corporation. The Corporation elected
to be taxed as a real estate investment trust, or REIT, for federal income tax
purposes for the year ended December 31, 2014, and intends to operate to
continue to qualify for REIT status. The Corporation holds Units of
membership interests in the Operating Company. The Initial Sponsors formed
the Corporation on January 6, 2014 under the name Buckingham Net Leased
Properties Group Inc. The name was changed in December 2015. The
Corporation offers shares of its common stock to accredited investors who wish
to participate in the ownership of a pool of commercial real estate properties as
stockholders of a real estate investment trust. The Corporation has three
independent directors, in addition to two nominees of the Asset Manager, on its
board of directors.
The Operating Company ............. Royal Oak Realty Trust (Operating Company) LLC, a New York limited
liability company doing business as Royal Oak Realty Trust. The Operating
Company owns the Current Properties through its subsidiaries and expects to
acquire additional real property, either directly or through various single purpose
entities which it will own. The Operating Company’s name was changed from
Buckingham Net Leased Properties Group LLC in December 2015.
The Investment Fund ................... The Corporation, the Operating Company and its subsidiaries together constitute
the “Investment Fund”. The structure of the Investment Fund (sometimes
referred to as an “UPREIT”) allows us to grow through both equity
contributions from the sale of our common stock and the tax-deferred
contribution of properties in exchange for membership Units of the Operating
Company.
We are externally managed by the Asset Manager and do not have any direct
employees.
The Sponsors ................................. Daniel Goldstein and Laurence Glazer (d. September 5, 2014), our Initial
Sponsors, formed the Operating Company on May 8, 2013, to acquire certain
real estate properties previously owned by the Sponsors as a base pool of
properties for forming the Corporation and to provide the opportunity for other
investors to acquire interests in an expanding pool of net leased properties.
The Current Properties ............... Our current portfolio consists of thirteen properties in six states with a combined
gross asset value of approximately $70.7 million and a total annualized base rent
of approximately $5.9 million. For detailed information regarding our current
properties, including a complete list of our current portfolio and information
regarding financing and leases, please see “Properties, Financing and Leases”
below.
Investment Objectives .................. Our investment objectives are to:
x
preserve, protect and return the stockholders’ capital contributions;
x
purchase income-producing properties which will allow us to pay cash
distributions to our investors monthly, targeted at 7% annual cash on cash
based on the then-current Determined Share Value;
x
operate the properties effectively and efficiently to maintain and attract
tenants and achieve stable cash flow;
x
provide limited future liquidity to our investors through redemptions; and
x
realize capital appreciation upon the ultimate sale of the real estate assets
we acquire.
See “Investment Objectives and Operating Policies”. Distributions payable by
REITs, other than long-term capital gains are not entitled to the lower “qualified
dividend” tax rates and are generally taxed at the ordinary income rate of the
individual stockholder. See “Risk Factors-Federal Income Tax Risks.”
Property Selection Criteria.......... We will purchase additional properties upon the recommendation of the Asset
Manager. Mr. Goldstein, manager of the Asset Manager, will select and
evaluate the properties that we may acquire, subject to the approval of the Asset
Acquisition Committee, currently comprised of Mr. Goldstein, Patrick C. Burke
and Richard R. LeFrois, as independent advisors. In making its
recommendation, the Asset Manager will examine and evaluate several criteria,
including:
x
general office, medical office and industrial properties (warehouse,
distribution, manufacturing, etc.) net leased to credit worthy tenants;
-2CONFIDENTIAL
x
existing lease terms with maturities of at least eight years;
x
base rental rates consistent with comparable market rents;
x
net leased facilities, where the operating costs are either paid by the tenants
directly or paid by the tenants as additional rent; and
x
strategically sound geographic locations of the leased facilities with
diversification in geography, business line, and physical characteristics.
Variations from these criteria must be approved by the Independent Directors
Committee of our Board of Directors. See “Investment Objectives and
Operating Policies – Property Selection Criteria”.
Leverage Policy............................. The Investment Fund targets a leverage ratio with total debt not greater than
65% of the approximate market value of its assets. The actual leverage ratio
will vary over time but should not exceed 75% without the approval of the
Independent Directors Committee. We expect the leverage ratio to decrease as
debt is repaid and additional properties acquired. See “Investment Objectives
and Operating Policies – Leverage Policy”.
The Offering.................................. The Corporation initially offered shares of common stock for $50.00 per share
to investors meeting the federal securities laws definition of “accredited
investors” and certain additional investor criteria. The Independent Directors
Committee of our Board of Directors has determined, in light of a valuation of
our properties and stock by an independent valuation firm and other
considerations, that the Determined Share Value of each share of our Common
Stock currently is $54.00, effective July 2, 2016. Effective July 2, 2016 our
minimum investment is 2,000 shares, or $108,000. Shares purchased through an
investment advisor may be purchased at 50% of the minimum investment. The
Determined Share Value and offering price will be adjusted from time to time
by the Independent Directors Committee. The Corporation may accept a
subscription for a dollar amount that is more than it will need for property
investments at the closing immediately following the date of subscription but
hold the issuance of the shares and payment of the price for them for up to six
months. The Corporation will issue shares to a Subscriber at the Determined
Share Value set forth in the Subscription Agreement for up to six months
following the date of the Subscription Agreement. The Corporation will provide
notice to a Subscriber with a deferred subscription at least ten days prior to the
date payment of the balance of the subscription price is due. The Asset Manager
reserves the right to lower the minimum investment in limited circumstances to
an amount of not less than $54,000 (or lesser amount approved by our
Independent Directors Committee). The common stock is subject to restrictions
on transfer. There is no minimum or maximum number of shares that we may
issue. Accordingly, our ability to purchase additional properties will be directly
related to the number of shares sold in the Offering from time to time. See a
description of the intended uses of the proceeds of this Offering under the
heading “Estimated Use of Offering Proceeds and Capitalization.”
Offering Price; Determined
Share Value ................................... The Offering price was fixed at $50.00 per share through December 31, 2014,
and is reviewed at least annually by our Independent Directors Committee. The
Independent Directors Committee considers the net asset value of the portfolio
and, in its discretion, other factors in setting the “Determined Share Value” of
our common stock. The Independent Directors Committee has set the
Determined Share Value at $54.00 per share effective as of July 2, 2016, until
adjusted further on review by the Independent Directors Committee. The
Independent Directors Committee may review the Determined Share Value
-3CONFIDENTIAL
more frequently if there is a significant change in the property portfolio, or
material events which may materially affect the value of a particular property, or
otherwise affect the value of the common stock. The Asset Manager may, but is
not required to, engage consultants, appraisers and other real estate or
investment professionals to assist in the Independent Directors Committee’s
valuations.
Closing of
the Offering ................................... The initial closing of the Offering occurred on March 1, 2014 with additional
closings as of the first of each month thereafter, as needed, through the date of
this Memorandum. We will continue offering the shares of our common stock
and conduct subsequent closings periodically until the board of directors of the
Corporation decides to conclude the Offering. Sales of shares may be
suspended from time to time for various reasons determined by the Asset
Manager to be in the best interests of the Corporation.
Distributions to Stockholders
and Members ................................ Distributions are made when and as declared by our board of directors. We
intend, but are not required, to make monthly distributions to investors (both
stockholders and members of the Operating Company) equal to a 7% annual
return per annum on the then-current Determined Share Value. Our board of
directors approved a change in the frequency of the payment of dividends and
distributions from quarterly to monthly beginning with distributions, if any,
declared for July 2016.
Distribution payments are expected to be made within approximately 15 days
following the end of each calendar month.
To qualify as a REIT, we must distribute 90% of our taxable income to our
stockholders. Although we intend that distributions will principally be funded
by operating income, we may make distributions from operating cash flow,
borrowings, or proceeds of subsequent sales of our common stock. Covenants
in our bank debt may limit our distributions. See “Certain Provisions of Our
Charter and By-Laws – Distributions.”
Management
of the Investment Fund ................ The Investment Fund is managed by the Asset Manager pursuant to the Asset
Management Agreement. The Asset Manager secures the equity capital and
debt financing for the Investment Fund, identifies and arranges for the purchase
of additional properties and other matters as described in the Asset Management
Agreement. The Corporation has a board of directors, including three
independent directors, which oversees the management of the business and
affairs of the Corporation by the Asset Manager. The independent directors
function as a committee of the board of directors (the “Independent Directors
Committee”) to approve any transactions outside our stated investment criteria
and certain matters where our managers may have conflicting interests. The
Asset Management Agreement provides for the various duties and
responsibilities of the Asset Manager and for the fees and other compensation,
which will include compensation in the form of our common stock or options or
other rights to acquire our common stock. The Operating Company is managed
by the Corporation, and indirectly by the Asset Manager. See “Management”.
The Asset Manager and
Asset Management Agreement .... Cambridge Street Asset Management LLC, a New York limited liability
company (formerly known as Buckingham Properties Asset Management LLC).
The Asset Manager is majority-owned and controlled by Daniel Goldstein. The
Corporation and the Asset Manager have entered into an Asset Management
Agreement. The Asset Manager manages the equity capital and debt financing
of the Corporation, identifies and arranges for the purchase of additional
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properties and other matters as described therein. Other services include
property management oversight, REIT compliance monitoring, preparation of
accounting and tax statements for investors, and related services. The Asset
Management Agreement provides for the various duties and responsibilities of
the Asset Manager and for the fees and other compensation, which may include
compensation in the form of our common stock or options or other rights to
acquire our common stock. See “Management – The Asset Manager and The
Asset Management Agreement” and “Fees and Other Compensation to Our
Managers and Affiliates”.
The Property Manager and
Property Management
Agreements.................................... Our properties have been managed by property managers with significant
knowledge and experience in managing commercial, office and similar
properties, including Buckingham Properties LLC, a New York limited liability
company, principally owned and controlled by the Glazer Estate. As of
January 1, 2016, all of our properties are managed by Cambridge Street Property
Management LLC, a property manager principally owned by Daniel Goldstein.
The Independent Directors Committee approved the form and substance of the
standard Property Management Agreement with Cambridge Street Property
Management LLC. Some of our properties may be managed, from time to time,
by unaffiliated third party property managers when Cambridge Street Property
Management LLC is unable to manage them at competitive rates and services.
Our properties are owned by the Operating Company indirectly, through various
single purpose entities, and are managed under Property Management
Agreements between the Operating Company, the entity owning the property
and the Property Manager. The services provided by the Property Manager
include ongoing management (including preparation of operating and capital
budgets for each individual property, quarterly and annual reports, etc.),
oversight of compliance with conditions, qualification of tenants, capital
improvements and rent collection. Various other duties are undertaken by the
Property Manager on behalf of the owner or Operating Company in the Property
Management Agreement which also provides for the fees and other
compensation to the Property Manager. See “Management–The Property
Manager” and “–The Property Management Agreements” and “Fees and Other
Compensation to Our Managers and Affiliates”.
Fees and Other Compensation
to Our Managers and Affiliates... Our Asset Manager and our Property Manager receive compensation for
services and reimbursement of costs under the Asset Management Agreement
and the Property Management Agreements. See “Fees and Other Compensation
to Our Managers and Affiliates”. We believe that our fees are comparable to
fees negotiated in arms’ length transactions.
Distribution Reinvestment
Plan ................................................ We have adopted a Distribution Reinvestment Plan that allows our investors to
have dividends and other distributions otherwise distributable to our investors to
be invested in additional shares of our common stock. The purchase price for
the shares will be 98% of the Determined Share Value.
See “Certain Provisions of Our Charter and By-Laws – Distribution
Reinvestment Plan.”
Restrictions on Transfer
of Common Stock.......................... The shares of common stock in the Corporation are offered pursuant to an
exemption from the registration requirements of the Securities Act of 1933 and
applicable state law and are not transferable except by the laws of descent and
distribution, or otherwise in accordance with applicable law. Any transfer of the
shares is also subject to the Corporation’s consent, and to the provisions of our
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Articles of Amendment and Restatement of Articles of Incorporation, as
amended (“Charter”) and the By-laws, designed to protect our REIT status. See
“Certain Provisions of Our Charter and By-Laws – Restrictions on Transfer.”
Risk Factors .................................. An investment in the Corporation is subject to various risks and special
considerations. You should consider carefully the risks described below and
under “Risk Factors” and elsewhere in this Memorandum before purchasing
shares of our common stock in this Offering:
x
an investment in the Corporation involves various investment risks,
including an arbitrarily established initial share price, lack of liquidity,
limitations on transfer and restrictions on ownership, compensation to
affiliates, and internal valuation of the Current Properties and the portfolio
of properties held from time to time;
x
an investment in the Corporation involves certain real property risks,
including failure to identify additional suitable properties, tenant creditworthiness, timing of investment of offering proceeds, limited liquidity of
properties, competition for acquisitions, and environmental risks;
x
an investment in the Corporation involves certain financing risks, including
possible lack of access to financing, interest rates fluctuations, and
transaction costs;
x
an investment in the Corporation involves certain tax risks, including failure
to qualify for or loss of REIT status, taxation on distributions, pressure
placed on cash flow by REIT distribution requirements, restrictions on
structure to maintain REIT status, and risk of disqualified income; and
x
an investment in the Corporation involves certain risks regarding conflicts
of interest.
Conflicts of Interest ...................... The interests of our Asset Manager and our Property Manager, and their owners,
may vary from those of the investors in our shares of common stock in a variety
of ways. Those conflicts may result in management favoring their interests over
those of other investors. Mr. Goldstein controls and is the majority owner of our
Asset Manager. He also controls and owns a majority interest in our Property
Manager. Mr. Goldstein is also President and a director of the Corporation and,
through the Asset Manager, has the power to nominate himself and a second
director to our Board. Each of the Asset Manager and the Property Manager
obtain fees related to the size of our portfolio and the rents we derive from our
properties which could motivate them to acquire properties and enter into leases
that present greater risk than if they were compensated based on other criteria.
Mr. Goldstein or other members of our Asset Manager or Property Manager or
our directors may acquire properties that do not, initially, meet our investment
criteria, and renovate, refinance and lease-up such properties to conform to our
criteria and earn fees or profits from those transactions. The Asset Manager
may then recommend we acquire these properties. All of the members of the
Asset Acquisition Committee and a majority of our Independent Directors
Committee must approve any such acquisition. Our officers and directors have
other real estate interests and investments which require their time and attention.
For a fuller explanation of the potential conflicts, see “Risk Factors” and
“Conflicts of Interest”.
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Royal Oak Realty Trust Inc.
Transaction Structure
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Risk Factors
An investment in our common stock involves substantial risks and uncertainties, including the risk that you might
lose your entire investment. You should carefully consider all of the information contained in this Memorandum, its
exhibits and any supplements and the following risks before making any investment decision regarding our common
stock. The following are the risks we believe are material to our business, prospects, ability to invest in properties,
make distributions, and operate as a real estate investment trust for federal income tax purposes. The occurrence of
one or more of these risks, or other risks which we have not identified, could materially and adversely affect our
business and our ability to meet our investment objectives.
Investment Risks
We have a limited history operating as a pooled investment and a limited number of Properties in our current
portfolio making it difficult for investors to evaluate an investment in our Investment Fund.
The Corporation was organized on January 6, 2014. The Operating Company was formed on May 8, 2013,
and as of the date of this Memorandum holds the properties we describe under the heading “Properties, Financing
and Leases” below. We have a limited operating history and may not be able to continue to achieve our investment
objectives and, accordingly, an investment in our shares of common stock may entail more risk than the shares of
common stock of a real estate investment trust with a more substantial operating history. We expect to invest in
additional properties after the date of this Memorandum, from time to time. Our investors will not have the
opportunity to evaluate the properties prior to our investment in them. Our failure to invest the proceeds of the
Offering from time to time in suitable properties, providing for adequate cash flows to fund our operations and
distributions, could have a material adverse effect on our ability to make distributions to our stockholders, and the
value of an investment in our shares may decline.
The subscription price is based on the Determined Share Value set by our Independent Directors Committee, and
not based on an independent trading market or arms’ length determination of value.
The initial subscription price for our common stock of $50.00 per share was set by the Sponsors without
any independent valuation. The Independent Directors Committee decided that the Determined Share Value of the
common stock is $54.00 as of July 2, 2016 (until adjusted further on review by the Independent Directors
Committee). In making that determination, the members of the Independent Directors Committee considered a
valuation of the Corporation’s common stock as of February 29, 2016 by an independent valuation firm, and such
other matters, including the effect of a change in the Determined Share Value on the subscription price, the dividend
yield, the reinvestment of distributions and the redemption program, as the Independent Directors considered
relevant. The Determined Share Value, which establishes the Offering price, is not directly related either (i) to the
amount which could be realized upon liquidation of the Corporation or (ii) to the fair market value of the Current
Properties.
There is no public trading market for the Shares, and the Corporation does not currently expect one to develop.
The transfer of shares is subject to certain restrictions and risks.
There is no current public market for our shares and the Corporation does not currently expect that any
such public market will develop in the future. The shares are not registered under federal or state securities laws;
they cannot be resold unless they are subsequently registered under such laws or unless an exemption from
registration is available. REIT rules limit concentration of ownership of the shares which may limit the potential
buyers for our shares. Investors must be prepared to bear the economic risk of holding the shares for an indefinite
period of time.
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We have not set a minimum or maximum size for the Offering or identified all of the additional properties we
expect to acquire with the net proceeds of the Offering, so you will not be able to evaluate fully our portfolio and
tenant mix.
We invest the Offering proceeds available for investment, after the payment of fees and expenses, in the
acquisition of office and industrial commercial real estate. We have established criteria for acquiring new
properties. However, you will be unable to evaluate the transaction terms, location, and financial or operational data
concerning the properties before we invest in them. Except for the investments described in this Memorandum or in
one or more supplements to this Memorandum, you will have no opportunity to evaluate the terms of transactions or
other economic or financial data concerning our investments. You will be relying entirely on the ability of our Asset
Manager to identify properties and propose transactions, on the Asset Acquisition Committee and, in certain
circumstances, the Independent Directors Committee, to oversee and approve such investments. We may accept an
investor’s subscription, but defer calling all or a portion of the subscription amount for up to six months if we do not
have an immediate need for new capital at the time of subscription. The investor’s subscription is binding on the
subscriber throughout this period, during which the Operating Company may purchase or enter into contracts to
purchase one or more properties which may not be described to the investor before the subscription amount is called
and the shares issued.
Payment of fees to our Asset Manager and our Property Manager will reduce cash available for investment and
distribution.
Our Asset Manager performs services for us in connection with the offer and sale of our stock and the
selection and acquisition of our properties. Our Property Manager provides traditional property management
services for our properties. Daniel Goldstein controls and owns a majority interest in our Asset Manager and
Property Manager. Both the Asset Manager and the Property Manager are paid transaction and monthly fees for
these services, which reduces the amount of cash available for investment in properties and distribution to
stockholders and holders of Units of the Operating Company. The fees paid to our Asset Manager and our Property
Manager were not determined on an arm’s-length basis. After the date of our initial offering, the Independent
Directors Committee has reviewed industry data with respect to the fees paid to our Asset Manager, including data
on publicly registered non-traded REITs and other locally controlled private REITs. Although the data supported a
conclusion that the Asset Manager’s initial fee structure was competitive with the publically-registered non-traded
REITs, the Asset Manager voluntarily agreed to reduce its fees going forward, with the asset management fee
stepping down from time to time based on the size of the portfolio as a whole. The fees paid to our Property
Manager are consistent with those of other property managers in the region. Although the Independent Directors
Committee has approved the fees payable to the Asset Manager and Property Manager, we cannot assure you that a
third-party unaffiliated with our Asset Manager or Property Manager would not be willing to provide such services
to us at a lower price.
The definition of “accredited investor” that we rely on for the suitability of our investors under federal and state
law may change, making it more difficult for us to raise capital.
As required by the Dodd-Frank Act, the SEC is reviewing the definition of “accredited investor”. That
review is ongoing. In testimony before the Committee on Financial Services of the U.S. House of Representatives
on November 18, 2015, SEC Chair Mary Jo White stated that the staff of the SEC is still evaluating alternative
criteria for the definition proposed by the public and industry participants “giving careful consideration to both the
need to facilitate capital formation and the need to protect investors.” We cannot predict when the SEC will
announce or act upon changes to the definition of “accredited investor” or speculate as to what those changes may
be. If the criteria for individuals to qualify as an “accredited investor” is made significantly more stringent, we may
find it more difficult to raise capital.
Real Property Risks
We may experience difficulty in acquiring attractive properties matching our Property Selection Criteria.
We expect to invest in additional properties from time to time after the date of this Memorandum. We have
no assurance that we will be successful in identifying and purchasing properties which meet our Property Selection
-9CONFIDENTIAL
Criteria. See “Investment Objectives and Operating Policies – Property Selection Criteria”. We may not be able to
enter into binding agreements with respect to such investments until we have the debt and equity financing assured.
We have not set a minimum size for the Offering and sometimes will not know how much equity is available from
time to time. Accordingly, we may not be able to commit to acquire a property or arrange its financing until the
equity funds are committed. As a result, our investors’ returns may be reduced to the extent we are delayed in our
selection and acquisition of real estate properties.
If we are unable to raise substantial funds from the sale of our common stock, we will be limited in the
investments which we make.
We have no minimum in the number of shares of our common stock we may sell in this Offering and are
relying on our Sponsor to find investors willing to subscribe for shares of our common stock. If we do not raise a
substantial amount in the Offering over time, the number of properties we are able to acquire will be limited,
reducing the expected diversification in our portfolio by types, tenants and geographic regions.
We are dependent on our tenants for substantially all of our revenue, so our success is materially dependent on
the financial stability of our tenants.
Each of our Current Properties is occupied by a single tenant (or affiliated tenants) and the success of our
investment in those properties is dependent on the financial stability of these tenants in the aggregate. A default of a
tenant on its lease payments would cause us to lose the revenue from the property. While we own relatively few
properties, our exposure to each tenant is more significant than we expect it to be as we acquire more properties. In
the event of a default, we may experience delays in enforcing our rights as landlord and may incur substantial costs
in protecting our investment and re-letting our property. If a lease is terminated, we cannot assure our investors that
the property could be leased for the same amount of rent previously received or that we could sell the property
without incurring a loss.
If a tenant files for bankruptcy, we may be precluded from collecting all sums due to us.
If a tenant, or the guarantor of a lease of a tenant, commences, or has commenced against it, any legal or
equitable proceeding under any bankruptcy, insolvency, receivership or other debtor’s relief law, we may be unable
to collect all sums due to us under that tenant’s lease. Any or all of the lease obligations of our tenants, or any
guarantor of our tenants, could be subject to a bankruptcy proceeding which may bar our efforts to collect prebankruptcy debts from these entities or their properties, unless we are able to obtain an enabling order from the
bankruptcy court. If our lease were rejected by a tenant in bankruptcy, we would only have a general unsecured
claim against the tenant and may not be entitled to any further payments under the lease. A bankruptcy proceeding
could hinder or delay our efforts to collect past due balances and ultimately preclude collection of these sums,
resulting in a decrease or cessation of rental payments and reducing returns to our investors.
Competition with third parties for properties and other investments may result in our paying higher prices for
properties which could reduce our profitability and the return on your investment.
We compete with many other entities engaged in real estate investment activities, including individuals,
corporations, banks, insurance companies, other REITs, real estate limited partnerships, and other entities, many of
which have greater resources than we do. Some of these investors may enjoy significant competitive advantages
that result from, among other things, a lower cost of capital and enhanced operating efficiencies. 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 increased prices. If competitive pressures cause us to pay
higher prices for properties, our ultimate profitability may be reduced and the value of our properties may not
appreciate or may decrease significantly below the amount paid for such properties. At the time we elect to dispose
of one or more of our properties, we will be in competition with sellers of similar properties to locate suitable
purchasers, which may result in us receiving lower proceeds from the disposal or result in us not being able to
dispose of the property due to the lack of an acceptable return. This may cause you to experience a lower return on
your investment than initially expected or a decrease in the Determined Share Value of our common stock.
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Changes in national, regional or local economic, demographic or real estate market conditions may adversely
affect our results of operations and returns to our stockholders.
We are subject to risks generally attributable to the ownership of real estate 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 our tenants; changes in interest rates and availability of
financing; and changes in government rules, regulations and fiscal policies, including changes in tax, real estate,
environmental and zoning laws.
Our tenants could be adversely affected by an economic downturn which could jeopardize their ability to pay
their rents.
A significant economic downturn, whether in the geographic regions where the properties are located, in a
particular industry, or generally may adversely affect the ability of our tenants to pay their rents. If a tenant were
unable to pay rent on a timely basis, we may need to remove that tenant and re-lease or sell the property at a time
when the economic conditions are not favorable and we may suffer a loss on the investment.
Changes in supply of, or demand for, similar real properties in a particular area may increase the price of real
properties we seek to purchase and decrease the price of real properties when we seek to sell them.
The real estate industry is subject to market forces. We are unable to predict certain market changes
including changes in supply of, or demand for, similar real properties in a particular area. Any potential purchase of
an overpriced asset could decrease our rate of return on these investments and result in lower operating results and
overall returns to our stockholders.
Real properties are illiquid investments, and 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.
Real properties are somewhat illiquid investments. We may be unable to adjust our portfolio in response to
changes in economic or other conditions. In addition, 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. The length of our leases and the credit of our tenants will also affect our ability to sell
our properties. We cannot predict whether we will be able to sell any real 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 real property.
In addition, we intend to comply with the safe harbor rules relating to the number of properties that can be
disposed of in a year, the tax bases and the costs of improvements made to these properties, and other items that
enable a REIT to avoid taxation on the sale of assets. Thus, our ability at any time to sell assets may be restricted.
In addition, we may be required to expend funds to correct defects or to make improvements before a property can
be sold. We cannot assure you that we will have funds available to correct such defects or to make such
improvements. This lack of liquidity may limit our ability to vary our portfolio promptly in response to changes in
economic or other conditions and, as a result, could adversely affect our financial condition, results of operations,
cash flows and our ability to pay distributions on, and the market price of, our common stock.
In connection with its acquisition of properties contributed by a seller to the Operating Company, the Operating
Company may enter into an agreement with the seller not to sell the property for a certain period or to sell only in
a Code Section 1031 exchange.
In acquiring a real property, we may agree to restrictions that prohibit the sale of that real 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 real property or a requirement that sales occur only in transactions that qualify as exchanges under Section
1031 of the Code. We have one property, 770 Linden Avenue, Rochester, N.Y., which is subject to a five year tax
protection agreement (commencing December 2015) restricting our ability to sell the property unless we indemnify
the Seller for the tax liability which a sale may cause unless the sale is in connection with a sale of all or
substantially all of our properties or as a result of a government exercise of rights of eminent domain. All these
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provisions may restrict our ability to sell a property, which could reduce the amount of cash available for
distribution to our stockholders.
The inherent risks associated with investing in real estate could adversely affect the Operating Company’s cash
flow and ability to make distributions to its members, including the Corporation.
The Corporation will be subject to risks inherent in the ownership of property which are beyond its control,
such as fluctuations in occupancy rates and operating expenses and variations in rental schedules, which in turn may
be adversely affected by general and local economic conditions, the demand for the Property, zoning laws, reduced
costs of operating competing properties, shortages or increased costs of fuel or other energy sources, and increasing
real property tax rates. Not all of our properties are leased under absolute net lease terms, so it is possible that
certain expenditures associated with real estate ownership (principally repair or replacement of structural elements)
may decrease our net income. Thus, the cost of operating the Property may exceed the rental income earned
thereon. Also, environmental risks such as those relating to hazardous substances and unfavorable environmental
legislation are typically associated with real estate investments. Generally, it is impossible or economically
infeasible to obtain insurance against losses resulting from such environmental matters.
Compliance with governmental laws and regulations is complex and failure to comply may reduce the investment
return of the investors.
All real property and the operations conducted on real property are subject to federal, state, and local laws
and regulations relating to environmental protection and human health and safety. These laws and regulations may
impose joint and several liability on the Operating Company and/or the Corporation for the costs to investigate or
remediate the property, regardless of fault or whether the acts causing the contamination were legal. The presence
of hazardous substances on the property, or the failure to properly remediate these substances, may hinder the
Operating Company’s ability to sell or rent the property. Further, the Operating Company’s compliance with new or
stricter interpretations of existing laws or regulations may require it to make additional expenditures.
If any environmentally hazardous material is determined to exist on a property we own, the investment return of
our investors may be adversely affected.
The Asset Manager undertakes customary environmental diligence prior to purchasing any property.
However, as a current or previous owner of real estate, the Operating Company may be required to remove or
remediate hazardous or toxic substances on, under or in such property under various federal, state and local
environmental laws, ordinances and regulations. These laws may impose liability whether or not the Operating
Company knew of, or was responsible for, the presence of such hazardous or toxic substances. Our use and
operation of a property may also be restricted by environmental laws or require certain expenditures. Failure to
comply with environmental laws may result in sanctions upon the Operating Company by governmental agencies or
the Operating Company’s liability to third parties. The cost of compliance or defense against claims from a
contaminated property will likely affect our investors’ return on investment.
The insurance covering improvements on the Properties might not be adequate to cover losses incurred.
Although the Operating Company maintains, or requires the tenants to maintain, comprehensive insurance
coverage on the Properties, some catastrophic losses may be either uninsurable or not economically insurable. If a
disaster occurs, the Corporation could suffer a complete loss of capital invested in, and any profits, losses, or tax
deferrals expected from, our Properties. If uninsured damages to a Property were to occur and if the Operating
Company did not have adequate cash to fund repairs, the Operating Company may be forced to sell the Property at a
loss or to borrow capital to fund the repairs.
Financing Risks
We finance our property acquisitions with mortgage debt and other borrowings, which may increase our business
risks.
We generally acquire real estate properties with mortgage loans secured by those properties and we will
need to finance and refinance our properties from time to time. We have a line of credit which allows us to finance
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a portion of the cash required for an acquisition in advance of our raising the equity required for the property or
securing the mortgage financing for that property. In some cases, the mortgage loans may also be guaranteed, in
whole or as to certain carve-out matters, by the Corporation and/or the Operating Company. The line of credit is
guaranteed by the Corporation, our Asset Manager, our Property Manager and our Sponsor. We may also borrow
funds if necessary to satisfy the requirement that we distribute to stockholders at least 90% of our annual REIT
taxable income, or otherwise as is necessary or advisable to assure that we maintain our qualification as a REIT for
federal income tax purposes.
Incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may
result in foreclosure actions initiated by lenders and our loss of the property securing the loan that is in default. For
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 of the proceeds. The Corporation or the Operating Company may be required to give full or partial
guarantees to mortgage lenders. If the Corporation or the Operating Company gives a guaranty, we will be
responsible to the lender for satisfaction of the debt or any special liability under a carve-out guaranty if it is not paid
by the Operating Company or the applicable subsidiary. If our Sponsor guaranties any of the indebtedness of the
Operating Company, he will be paid a fee of up to 0.5% of the principal amount of the loan guaranteed to
compensate for the risk of the guaranty. Our Sponsor has been, and may continue to be, required to issue guaranties
of certain limited matters under the Operating Company’s loans, such as environmental liabilities, to the extent we
are unable to satisfy such liabilities, referred to as “carve-out” guarantees. We will indemnify the Sponsor for any
payments he may be required to make under such “carve-out” or other guarantees (see “Risk Factors – Financing
Risks”). If any mortgages contain cross-collateralization or cross-default provisions, there is a risk that more than
one of our real properties may be affected by a default. 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.
We have a line of credit and may also obtain other types of financing. The Corporation or Operating
Company may borrow money to pay a portion of the equity needed for the purchase of various properties. Under
our line of credit, the Operating Company may, if the various conditions are satisfied, borrow up to 90% of the
purchase price of a property on a short-term basis (92% if certain transaction costs are included). The advances
under the line of credit require repayment in full within 180 days after the acquisition from the proceeds of sales of
our common stock and/or mortgage financing of the acquired property. We are required to maintain certain
financial ratios and comply with other covenants, and each loan is subject to substantial review and approval
requirements for the specific property. If we borrow under the line of credit or other mezzanine financing, there is a
risk we will be unable to raise the equity or secure the mortgage financing required to repay the loan on time and the
risk that the lender will fail to approve an advance for a property that we wish to buy.
Instability in the debt markets may make it more difficult for us to finance or refinance properties, which could
reduce the number of properties we can acquire and the amount of cash distributions we can make to our
stockholders.
If mortgage debt is unavailable on reasonable terms as a result of increased interest rates or other factors,
there is a risk we may not be able to re-finance our properties when the loans come due, or we may be unable to
refinance on favorable terms. If interest rates are higher when we refinance debt, our income could be reduced. We
may be unable to refinance debt at appropriate times, which may require us to sell properties on terms that are not
advantageous to us, or could result in the foreclosure of such properties. If any of these events occur, our cash flow
would be reduced. This, in turn, would reduce cash available for distribution to our stockholders and holders of
Units in the Operating Company and may hinder our ability to raise more capital by issuing securities 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 obtaining certain financing, a lender could impose restrictions on us that affect our
ability to incur additional debt and our distribution and operating policies. Loan documents we enter into may
contain customary negative covenants that may limit our ability to further mortgage the property, discontinue
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insurance coverage or impose other limitations. Our line of credit requires us to maintain certain financial ratios and
contains other financial covenants and operating covenants and restrictions. Such restrictions or limitations may
have an adverse effect on the operations of the Operating Company and the distributions made to our stockholders.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to
make distributions to our stockholders.
To date, we have financed our properties with fixed rate debt and plan to continue to do so. However, we
do incur indebtedness under our acquisition line of credit that bears interest at variable rates. We intend to repay
advances with proceeds of this offering, but may not be successful in doing so, or in doing so promptly.
Accordingly, increases in interest rates would increase the Operating Company’s interest costs, which could have a
material adverse effect on its operating cash flow and the ability to pay distributions. 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
properties at times which may not permit realization of the maximum return on such investments.
Although the properties will generally be acquired and financed in single purpose entities, the lenders may
require recourse against the Operating Company, the Corporation or other responsible persons for certain
matters. Mr. Goldstein or his affiliates have been required to guarantee our line of credit and may be required to
personally guarantee obligations of our property-owning subsidiaries. If those guarantors are required to pay any
amounts to lenders on those guarantees, those guarantors will seek indemnity from the Operating Company
and/or the Corporation for such obligations, in effect exposing all of the assets of the Operating Company and/or
the Corporation to certain obligations related to the properties.
While we expect that most properties will be acquired and financed in separate, single-purposes entities
(often referred to as “SPEs” or “SPVs”), borrowings on our line of credit are guaranteed by our Sponsor personally
and by the Asset Manager and the Property Manager, as well as the Corporation. In addition, lenders will require
certain aspects of the debt to be recourse to the Corporation, the Operating Company or other responsible persons.
These recourse obligations may include lender liability for certain environmental matters and, under certain
circumstances, repayment of the debt in the event of the insolvency of the owner of the property. The Corporation
and the Operating Company have agreed to indemnify the Sponsor and his affiliates for any payments they may be
required to make under their personal guaranties for various elements of otherwise non-recourse financing,
commonly referred to as “non-recourse carve-outs”. The effect of the lender requirements is to make certain aspects
of otherwise non-recourse debt a general obligation of the Operating Company and/or the Corporation.
Transaction costs incurred in connection with obtaining debt financing reduce cash available for investment and
distribution.
Certain transaction costs, including origination fees, debt financing fees, guaranty fees and counsel fees,
will be incurred by the Operating Company in obtaining debt financing. These transaction costs increase the risk
that the amount available for payment of distributions to our stockholders upon a liquidation of our portfolio would
be less than the purchase price of the shares of stock in this Offering.
Federal Income Tax Risks
Failure to continue to qualify as a REIT could adversely affect our operations and our ability to make
distributions.
The Corporation elected to be taxed as a REIT for federal income tax purposes for the tax year ended
December 31, 2014, and intends to operate to maintain REIT status. Our qualification as a REIT depends on our
satisfaction of numerous requirements (some on an annual and quarterly basis) established under highly technical
and complex provisions of the Internal Revenue Code for which there are only limited judicial or administrative
interpretations and involve the determination of various factual matters and circumstances not entirely within our
control. The complexity of these provisions and of the applicable income tax regulations that have been
promulgated under the Internal Revenue Code is greater in the case of a REIT that holds its assets through an
UPREIT structure, as we do. Moreover, no assurance can be given that legislation, new regulations, administrative
interpretations or court decisions will not change the tax laws with respect to qualification as a REIT or the federal
income tax consequences of that qualification.
- 14 CONFIDENTIAL
If we were to fail to qualify as a REIT for any taxable year, we would be subject to 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 in which we lose our REIT status. Losing our REIT status 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 be deductible in computing our taxable income and we
would no longer be required to make distributions. To the extent that distributions had been made in anticipation of
our qualifying as a REIT, we might be required to borrow funds or liquidate some investments to pay the applicable
corporate income tax. In addition, although we intend to operate in a manner intended to qualify as a REIT, it is
possible that future economic, market, legal, tax or other considerations may cause our board of directors to
recommend that we revoke our REIT election.
To maintain REIT status we must meet annual distribution requirements, which may result in us distributing
amounts that would otherwise be used to purchase properties or otherwise support our operations.
To obtain the favorable tax treatment accorded to REITs, we normally will be required each year to
distribute to our stockholders at least 90% of our real estate investment trust taxable income, determined without
regard to the deduction for distributions paid and by excluding net capital gains. We will be subject to federal
income tax on our undistributed taxable income and net capital gain and to a 4% nondeductible excise tax on any
amount by which distributions we pay with respect to any calendar year are less than the sum of:
x 85% of our ordinary income,
x 95% of our capital gain net income, and
x 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 or sell assets to fund these distributions. If we
fund distributions through borrowings, then we will have to repay debt using money we could have otherwise used
to acquire properties resulting in our ownership of fewer real estate assets. If we sell assets or use offering proceeds
to pay distributions, we also will have fewer investments. Fewer investments may impact our ability to generate
future cash flows from operations and, therefore, reduce your overall return. Although we intend to make
distributions sufficient to meet the annual distribution requirements and to avoid corporate income taxation on the
earnings that we distribute, it is possible that we might not always be able to do so.
Our investors who participate in our Distribution Reinvestment Plan may have current tax liability with respect to
our distributions, without the corresponding cash distribution which is being reinvested in our common stock.
An investor who participates in our Distribution Reinvestment Plan will be deemed to have received, and
for income tax purposes will be taxed on, the amount of cash distributions reinvested in shares of our common stock
to the extent the amount reinvested was not a tax-free return of capital. As a result, unless an investor is a taxexempt entity, the investor may have to use funds from other sources to pay the investor’s tax liability on the value
of the shares of common stock received.
Distributions payable by REITs do not qualify for the reduced tax rates that apply to certain other corporate
distributions.
In the case of individual taxpayers, long-term capital gains and distributions of qualified dividends are
generally taxable at a federal rate of 15%, or 20% for higher income taxpayers. Distributions payable by REITs,
other than long-term capital gains, however, generally are taxed at the ordinary rates applicable to the income of the
individual recipient, rather than the 20% rate. The more favorable rates applicable to regular corporate distributions
could cause investors who are individuals to perceive investments in REITs to be relatively less attractive than
investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the
stock of REITs, including our common stock.
Certain business activities could potentially be subject to the prohibited transaction tax, which could reduce the
return on your investment.
Our ability to dispose of property during the first few years following acquisition is restricted to a
substantial extent as a result of our REIT status. Under applicable provisions of the Internal Revenue Code
- 15 CONFIDENTIAL
regarding prohibited transactions by REITs, we will be subject to a 100% tax on any gain realized on the sale or
other disposition of any property (other than foreclosure property) we own, directly or through any subsidiary entity,
including our Operating Company, that is deemed to be inventory or property held primarily for sale to customers in
the ordinary course of trade or business. Whether property is inventory or otherwise held primarily for sale to
customers in the ordinary course of a trade or business depends on the particular facts and circumstances
surrounding each property.
We intend to avoid the 100% prohibited transaction tax by:
x
conducting our operations in such a manner so that no sale or other disposition of an asset we own,
directly or through any subsidiary other than a taxable REIT subsidiary, will be treated as a prohibited
transaction,
x
structuring certain dispositions of our properties to comply with certain safe harbors available under
the Internal Revenue Code for properties held at least four years, or
x
conducting activities that may otherwise be considered prohibited transactions through a taxable REIT
subsidiary.
However, despite our present intention, no assurance can be given that any particular property we own, directly or
through any subsidiary entity, including our Operating Company, but excluding our taxable REIT subsidiaries, will
not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or
business.
In certain circumstances, we may be subject to federal and state income taxes as a REIT, which would reduce
our cash available for distribution to you.
Even if we qualify and maintain our status as a REIT, we may be subject to federal and state income taxes.
For example, net income from a “prohibited transaction” will be subject to a 100% tax. We may not be able to make
sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn
from the sale or other disposition of our real estate assets and pay income tax directly on such income. In that event,
our stockholders would be treated as if they earned that income and paid the tax on it directly. However,
stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their
deemed payment of such tax liability. We may also be subject to state and local taxes on our income or property,
either directly or at the level of the companies through which we indirectly own our assets. Any federal or state
taxes we pay will reduce our cash available for distribution to you.
REIT distribution requirements could adversely affect our ability to execute our business plan.
From time to time, we may generate taxable income greater than our income for financial reporting
purposes, or our taxable income may be greater than our cash flow available for distribution to stockholders. If we
do not have other funds available in these situations we could be required to borrow funds, sell investments at
disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to pay
out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax
and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce the value of our
equity. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of
maximizing profits.
To maintain our REIT status, we may be forced to forego otherwise attractive opportunities, which may delay or
hinder our ability to meet our investment objectives and reduce our stockholders’ overall return.
To qualify as a REIT, we must satisfy certain tests on an ongoing basis concerning, among other things, the
sources of our income, nature of our assets and the amounts we distribute to our stockholders. We may be required
to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business
or when we do not have funds readily available for distribution. Compliance with the REIT requirements may
hinder our ability to operate solely on the basis of maximizing profits and the value of our stockholders’ investment.
- 16 CONFIDENTIAL
In order to qualify as a REIT, we retain the right to prohibit certain acquisitions and transfers of shares of our
common stock which limits our investors’ ability to purchase or sell shares.
In general, after our first taxable year, we cannot qualify as a REIT if we have:
x
x
more than 50% of the value of our outstanding common stock owned, directly or indirectly, by
five or fewer stockholders during the last half of each taxable year, or
fewer than 100 persons owning our outstanding common stock during at least 335 days of a 12month taxable year.
In our Charter, we prohibit certain acquisitions and transfers of shares in an attempt to ensure our continued
qualification as a REIT. For example, if any person or group of persons acquires, directly or indirectly, beneficial or
constructive ownership of more than 9.8% of our outstanding common stock in violation of the ownership limit,
those shares are deemed held in a trust for the benefit of a charity. Our prohibition may prevent our existing
stockholders from acquiring additional shares, redeeming their shares, or selling their shares to others who may be
deemed to, directly or indirectly, beneficially own our common stock. Our board of directors may waive this
restriction under certain circumstances. We cannot assure an investor that the 9.8% ownership limit will be effective
in permitting the Corporation to retain its REIT status.
Recharacterization of sale-leaseback transactions may cause us to lose our REIT status.
In certain circumstances, we may purchase real properties and lease them back to the sellers of such
properties. While we will use commercially reasonable efforts to structure any such sale-leaseback transaction such
that the lease will be characterized as a “true lease” for tax purposes, thereby allowing us to be treated as the owner
of the property for U.S. federal income tax purposes, we cannot assure you that the IRS will not challenge such
characterization. In the event that any such sale-leaseback transaction 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 might also cause us to fail to meet the distribution requirement for a taxable year.
Changes in tax laws may adversely affect our ability to operate our business efficiently while maintaining our
REIT status or change the taxation of our distributions to our stockholders.
The rules dealing with federal income taxation are constantly under review by persons involved in the
legislative process and by the IRS and the U.S. Department of the Treasury. We cannot predict how changes in the
tax laws might affect our stockholders or us. New legislation, Treasury Regulations, administrative interpretations
or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax
consequences of such qualification. Federal income tax rates, deductions and other terms are subject to change from
time to time as well, including increases in tax rates applicable to our distributions to the extent not a return of
capital. Changes to the tax laws, with or without retroactive application, could adversely affect our stockholders or
us.
Conflict of Interest and Related Party Transactions
Our relationship with our Asset Manager and our Property Manager, and their affiliates will subject us to certain
conflicts of interest.
We will be subject to conflicts of interest arising out of our relationships with our Asset Manager and our
Property Manager, and their affiliates. For example, the acquisition fee payable to our Asset Manager may lead to
paying more for a property than might be possible if no fees were involved. The initial members of the Operating
Company, which included the Initial Sponsors, contributed properties with a tax basis less than their current market
value and may not wish to have the Operating Company dispose of those properties, which could trigger a tax gain,
even if it would otherwise make business sense to do so. See “Conflicts of Interest” for a more detailed discussion
of the conflicts of interest between us and our Asset Manager, our Property Manager, and their affiliates, and the
oversight conducted by our Independent Directors Committee.
- 17 CONFIDENTIAL
Our Asset Manager, our Property Manager, their officers and employees, and our Sponsor face competing
demands relating to their time, and this may cause our operating results to suffer.
Our Asset Manager, our Property Manager, their officers and employees, and Mr. Goldstein are key
personnel, officers, and may be owners of other real estate and have other business interests as well. 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.
Our officers face conflicts of interest related to the positions they hold with affiliated entities, which could hinder
our ability to successfully implement our business strategy and to generate returns to our investors.
Mr. Goldstein, our President is manager of our Asset Manager and our Property Manager and owns a
majority interest in each of those entities. Mr. Goldstein owes loyalty and certain fiduciary duties to members of
these other entities, which may conflict with the duties that he owes to us and our stockholders. His loyalties to
these other entities could result in actions or inactions that prefer those entities and potentially could harm the
implementation of our business strategy and our investment and leasing opportunities. If we do not successfully
implement our business strategy, we may be unable to generate cash needed to make distributions to our
stockholders and to maintain or increase the value of our assets.
There is no separate legal counsel for the Corporation, the Operating Company, and their affiliates, which could
result in conflicts of interest.
Nixon Peabody LLP acts as legal counsel to the Corporation and the Operating Company in connection
with the Offering, and also represented the Initial Sponsors in connection with formation of the Asset Manager and
the structuring of the transactions described in this Memorandum. 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, Nixon Peabody may be precluded from representing any one or all of such parties in the adversarial
matter. Nixon Peabody LLP’s representation of the Corporation does not include representation of any prospective
investors in connection with their purchase of shares of the Corporation’s common stock, each of whom should rely
on their own counsel. Prospective investors are advised to consult with their own legal, tax and financial advisors
with respect to any investment in the shares. Partners of Nixon Peabody LLP own less than 2% of the outstanding
shares of the Corporation.
- 18 CONFIDENTIAL
Special Note Regarding Forward-Looking Statements
Some of the statements contained in this Memorandum and its Exhibits contain forward-looking statements
within the meaning of the federal securities laws. These forward-looking statements are subject to a number of risks
and uncertainties, many of which are beyond the Corporation’s control, any of which singly or in combination could
cause our business and operations to perform less favorably than we expect. Other than statements of historical
facts, the statements in this Memorandum regarding the Investment Fund’s strategy, future operations, financial
position, estimated revenues, projected costs, prospects, plans and objectives of management, are forward-looking
statements. When used in this Memorandum, the words “will,” “believe,” “anticipate,” “intend,” “estimate,”
“expect,” “project” and similar expressions are also intended to identify forward-looking statements, although not all
forward-looking statements contain such identifying words.
All forward-looking statements speak only as of the date of this Memorandum. We do not undertake any
obligation to update or revise publicly any forward-looking statements, whether as a result of new information,
future events or otherwise. Although we believe that our plans, intentions and expectations reflected in or suggested
by the forward-looking statements made in this Memorandum are reasonable based upon the information that we
know at this time, there are numerous known and unknown risks, uncertainties, assumptions and changes in
circumstances that may cause us not achieve our plans, intentions or expectations.
There are important factors that could cause our actual results to differ materially from our expectations,
which may include:
x
the success of our business and investment strategy;
x
our ability to elect and maintain our qualification as a REIT for U.S. federal income tax purposes;
x
adverse economic or real estate developments in the markets where we have properties, and the effect
of general market, real estate market, economic and political conditions;
x
our ability to make additional investments and acquire attractive properties in a timely manner or on
acceptable terms;
x
our ability to raise equity and secure debt financing to allow us to continue to increase our portfolio of
properties;
x
tenant turnover as a result of non-renewals, defaults, or early terminations of leases;
x
vacancies or our inability to rent our properties on favorable terms or rental rates;
x
adverse changes in the financial circumstances of our tenants;
x
our ability to generate sufficient cash flows to make distributions to our stockholders;
x
the degree and nature of our competition;
x
changes in credit market conditions, including increases in interest rates, and our ability to obtain
financing for our property investments in a timely manner and on terms that are favorable and
consistent with what we project when we invest in the property; and
x
adverse changes in governmental regulations, tax law and rates, and similar matters.
For a more detailed discussion of some of the risk factors we have identified, see the section entitled “Risk
Factors” above. These cautionary statements qualify all forward-looking statements attributable to the Investment
Fund or persons acting on its behalf and you are cautioned not to place undue reliance on forward-looking
statements.
- 19 CONFIDENTIAL
Estimated Use of Offering Proceeds and Capitalization
Estimated Use of Offering Proceeds
We contribute the proceeds of the Offering described in this Memorandum to the Operating Company in
exchange for membership interests. The Operating Company uses the proceeds to select, acquire, and operate real
properties meeting the investment criteria and Property Selection Criteria we describe in this Memorandum, to repay
debt and for general business and operating purposes of the Corporation and the Operating Company. Included in
those business and operating expenses are the costs of formation of the Corporation and the Operating Company and
the preparation and updating of the offering documents, including fees paid to third party professionals, such as
lawyers and accountants, and various state and federal filing fees. Our ability to purchase additional properties is
directly related to the number of shares sold in the Offering from time to time.
We do not currently compensate any brokers or others in connection with the sale of our shares. Up to
0.75% of the gross proceeds of the Offering from time to time is used to reimburse the Asset Manager for out-ofpocket costs incurred in connection with the Offering of our common stock and the sale or exchange of membership
interests in the Operating Company, including marketing expenses such as potential investor meetings, printing and
mailing costs, and, if brokers are engaged to assist in the Offering, broker fees and expenses. Certain fees are paid
by the Operating Company to our Asset Manager and our Property Manager for their services. See “Fees and Other
Compensation to Our Managers and Affiliates” below.
Capitalization
The Corporation was formed on January 6, 2014. It is authorized to issue 40,000,000 shares of its common
stock, par value $0.001, and up to 100,000 shares of preferred stock. In mid-January 2014, the Corporation issued
initial capitalizing shares to the Initial Sponsors for cash. The unaffiliated cash investors in the Operating Company
converted their membership interests for shares of the Corporation’s common stock as of February 28, 2014 on a
one-for-one basis. The Initial Sponsors converted most of their interests in the Operating Company for shares in the
Corporation on the same basis, to the extent consistent with the Corporation’s plan to elect REIT status at the end of
2014. Mr. Glazer’s interests and stock are now owned, directly or indirectly, by the Glazer Estate. In December
2015, the Corporation changed its name from Buckingham Net Leased Properties Group Inc. to Royal Oak Realty
Trust Inc. From time to time, as the Corporation issues additional shares of common stock for cash, the Corporation
contributes the net proceeds of the sale to the Operating Company in exchange for membership interests. The
number of outstanding shares of the Corporation’s common stock and the number of outstanding Units of the
Operating Company (which are convertible on a one-for-one basis into shares of common stock) as of the most
recent annual and quarterly periods are included on the financial statements provided as Exhibits A and B.
The Independent Directors Committee has approved an equity compensation plan which authorizes that
Committee to issue equity compensation awards in the form of stock options, restricted stock, stock appreciation
rights or restricted stock units to the members of the Independent Directors Committee and the officers of the
Corporation and certain others. The awards will be designed to provide additional incentives to build the portfolio
of commercial properties of the Corporation and tie the interests of the Independent Directors and other participants
to those of other shareholders. While 700,000 shares of common stock are allocated to the Plan, the Independent
Directors Committee is only authorized to issue awards with respect to 10% of this amount, or 70,000 shares, until
the Corporation has issued 700,000 shares to investors. After that threshold is met, the Independent Directors
Committee may issue awards beyond the initial 70,000 shares but the awards are limited to 10% of the number of
shares of our common stock outstanding from time to time. Stock options may only be issued under the plan to our
directors and officers, and must be issued with an exercise price at fair market value (expected to be the Determined
Share Value from time to time). Stock options may be issued only upon payment of the cash exercise price,
although payment of any tax withholding obligations may be made by the Corporation withholding a portion of the
awarded shares or by surrender of previously owned shares, or in another manner approved by the Independent
Directors Committee.
On June 26, 2014, the Independent Directors Committee approved, and the Corporation issued, options to
purchase 10,000 shares of common stock for $50.00 to each of the Independent Directors and to Messrs. Glazer and
Goldstein as officers of the Corporation. The options vest and first become exercisable, subject to certain
- 20 CONFIDENTIAL
exceptions, 20% on each of January 6, 2015, 2016, 2017, 2018 and 2019, and expire on January 6, 2024 to the
extent not exercised. The options will terminate to the extent unvested if a director’s service terminates, except by
reason of death or disability. If service is terminated by reason of death or disability, any unvested portion of the
options immediately becomes vested and exercisable. Mr. Glazer’s options vested on his death (September 5, 2014)
but expired unexercised.
In addition, the Independent Directors Committee approved, and the Corporation issued, a performancebased award of 2,000 shares of restricted stock to Daniel Goldstein. The performance targets set by the Independent
Directors Committee were met based on the Corporation’s performance and the shares were issued to Mr. Goldstein
on January 1, 2015 and vested on January 1, 2016. The Committee may consider making additional restricted stock
grants with performance targets to Mr. Goldstein annually.
- 21 CONFIDENTIAL
Investment Objectives and Operating Policies
Investment Objectives
Our investment objectives are to:
x
preserve, protect and return the stockholders’ capital contributions;
x
purchase income-producing properties which will allow us to pay cash distributions to our
stockholders monthly, targeted at 7% annual cash on cash based on the then-current Determined Share
Value;
x
operate the properties effectively and efficiently to maintain and attract tenants and achieve stable cash
flow;
x
provide limited future liquidity to our investors through redemptions; and
x
realize capital appreciation upon the ultimate sale of the real estate assets we acquire.
The Independent Directors Committee of our Board of Directors reviews our Property Selection Criteria
and Leverage Policy periodically to determine if they continue to meet our investment objectives.
Property Selection Criteria
Our Property Selection Criteria was established by our management and is subject to change from time to
time in the discretion of the Independent Directors Committee. Variations from our Property Selection Criteria must
be approved by the Independent Directors Committee. We will purchase additional properties upon the
recommendation of the Asset Manager. Mr. Goldstein, manager of the Asset Manager, selects and evaluates the
properties that we may acquire, subject to the approval of the Asset Acquisition Committee of the Asset Manager.
The Asset Acquisition Committee is currently comprised of Mr. Goldstein and Patrick C. Burke and Richard R.
LeFrois, as independent advisors. In making its recommendation, the Asset Manager examines and evaluates
various criteria, including:
x
general office, medical office and industrial properties (warehouse, distribution, manufacturing, etc.)
net leased to credit worthy tenants;
x
existing lease terms with maturities of at least eight years;
x
base rental rates consistent with comparable market rents;
x
net leased facilities, where the operating costs are either paid by the tenants directly or paid by the
tenants as additional rent; and
x
strategically sound geographic locations of the leased facilities with diversification in geography,
business line, and physical characteristics.
The Asset Manager and the Asset Acquisition Committee also consider a number of other factors,
including the proposed purchase price, terms, and conditions; historical financial performance of the property and
tenants; potential cash flow and profitability of the property; current market and leasing conditions and
demographics of the area in which the property is located; an evaluation of title and the obtaining of satisfactory title
insurance; an evaluation of any reasonably ascertainable risks such as environmental contamination; and the current
valuation of the property and its potential for appreciation.
Any acquisition or disposition of real property or interests in an entity holding real property or the
execution of any agreement for or on behalf of the Corporation or the Operating Company relating to such
transactions requires: (a) the approval of the Asset Acquisition Committee; (b) in the case of an acquisition from, or
- 22 CONFIDENTIAL
disposition to, Mr. Goldstein or any of his affiliates, the unanimous approval of the members of the Asset
Acquisition Committee of the Asset Manager and approval by a majority of our Independent Directors Committee;
(c) if such property is not within the Property Selection Criteria then in effect, the unanimous approval of the
members of the Asset Acquisition Committee and approval by a majority of our Independent Directors Committee
and (d) if the property, or a group of related properties, has a purchase price of $10,000,000 or more, unanimous
approval of the Asset Acquisition Committee and approval of a majority of the Independent Directors Committee.
The Asset Manager is required to deliver to the Board, the Asset Acquisition Committee, and the Independent
Directors Committee, as applicable, all documents required to properly evaluate the proposed acquisition,
disposition or investment.
Leverage Policy
The Investment Fund targets a leverage ratio with total debt not greater than 65% of the approximate
market value of its assets. The actual leverage ratio will vary over time but should not exceed 75% without the
approval of the Independent Directors Committee. We expect the leverage ratio to decrease as debt is repaid and
additional properties acquired. Our Independent Directors Committee may change our leverage policy from time to
time depending on then-current market conditions and other factors impacting our business and growth strategies.
The Asset Manager has developed guidelines for its review of financing proposals for the properties to be
acquired. In each case, deviations from the guidelines may be required for financing any particular property; it is the
goal of the Asset Manager to attain financing with the following characteristics:
x
long-term financing matched to the lease terms of major tenants;
x
balloon payments not in excess of the expected fair market value of the property without a tenant
in place;
x
flexible repayment terms to allow opportunistic refinancings; and
x
non-recourse with limited carve-out guarantees.
If the Sponsor or his affiliates provide personal guarantees of our debt, they will be paid a fee equal to 0.5%
of the principal amount guaranteed or of the dollar cap on the guaranty. Our Sponsor may also be required to issue
guaranties of certain limited matters under the Operating Company’s loans, such as environmental liabilities, to the
extent we are unable to satisfy such liabilities, referred to as “carve-out” guarantees. The Operating Company and
the Corporation have agreed to indemnify the Sponsor and his affiliates for any payments he may be required to
make under such guarantors’ personal guaranties. The effect of the lender requirements is to make certain aspects of
otherwise non-recourse debt a general obligation of the Corporation and/or the Operating Company.
- 23 CONFIDENTIAL
8.68
4.36
Light
Manufacturing
Manufacturing
Flex / Industrial
Office
Manufacturing
Child Care
Center
Manufacturing
50 Hanil Drive
Tallassee, AL
2101 Cedar Street
Fremont, OH
50 Holleder
Parkway
Rochester, NY
255 Rex Blvd.
Auburn Hills, MI
1501 Buchanan
Ave
Grand Rapids, MI
979 Jackson Road
Webster, NY
770 Linden Ave
Rochester, NY
4.40
1.88
4.03
5.15
10
4.56
Light
Manufacturing
226 Jay Street
Rochester, NY
6.44
Flex / Industrial
Property
Type
Office
1350 Scottsville
Road
Rochester, NY
Property
125-205 Bryant
Wood South
Amherst, NY
Parcel
Size
(Acres)
7.29
73,000
11,300
120,800
68,830
70,125
178,200
111,564
59,670
124,850
Total
Rentable
Square Feet
41,500
100
100
100
100
100
100
100
100
100
Occupancy
%
100
December,
2015
August,
2015
June,
2015
December,
2014
October,
2014
July,
2014
June,
2014
March,
2014
August,
2013
Date of
Acquisition
May,
2013
- 24 CONFIDENTIAL
Arnold Magnetic
Technologies
Doodle Bugs!
Children’s Centers
Michigan Wheel
Operations
Continental
Structural Plastics
Isaac Heating and
Cooling
Fremont Plastics
Hanil USA
Park Capital
American Tire
Tenant
FirstSource
Advantage
12 Years
20 Years
20 Years
10 Years
15 Years
15 Years
11 Years
12 Years
10 Years
Lease Term
at
Acquisition
15 years
$394,200
$237,300
$392,600
$516,225
$386,000
$400,944
$659,160
$229,730
$692,917
Total
Annualized
Initial Base
Rent
$495,925
$4,600,000
$2,700,000
$4,500,000
$6,425,000
$4,450,000
$5,070,000
$7,800,000
$2,220,000
$7,400,000
Appraised
Value at
Acquisition
$6,100,000
$3,400,000
$2,700,000
$4,500,000
$6,425,000
$4,200,000
$5,070,000
$7,400,000
$2,450,000
$7,100,000
Purchase
Price
$5,250,000
As of December 31, 2016, our portfolio consists of fourteen properties in seven states with a combined gross asset value at acquisition of approximately
$80.0 million and a total annualized base rent of approximately $6.7 million. Detailed information regarding our current properties is provided in the following
chart:
Properties
Properties, Financing and Leases
$3,000,000
$1,600,000
$2,700,000
$3,750,000
$2,800,000
$2,800,000
$4,500,000
$1,136,913
$5,700,000
Principal
Debt
Amount at
Acquisition
$3,935,000
Flex / Office
Manufacturing
100 Wisconsin
Street, 820
Wisconsin Street,
837 Walworth
Street and 850
Walworth Street,
Walworth, WI
17.77
7.88
8.94
100%
100%
1,409,454
100%
100
100
Occupancy
%
228,494
86,725
92,846
Manufacturing
Manufacturing
142,000
8.40
Property
Type
One Sun Court
Peachtree
Corners, GA
320 MasonMontgomery
Road
Mason, OH
Property
7300 South
Narragansett Ave
Bedford Park, IL
Total
Rentable
Square Feet
Parcel
Size
(Acres)
December,
2016
August, 2016
February,
2016
January,
2016
Date of
Acquisition
- 25 CONFIDENTIAL
Miniature Precision
Components Inc.
Atlantix Global
Systems
Deerfield
Manufacturing
Archer Wire
International
Tenant
12 Years
15 Years
$6,729,614
$814,275
$733,338
$280,000
$497,000
10 Years
15 Years
Total
Annualized
Initial Base
Rent
Lease Term
at
Acquisition
$79,965,000
$9,300,000
$9,500,000
$3,450,000
$6,450,000
Appraised
Value at
Acquisition
$76,845,000
$9,300,000
$9,300,000
$3,450,000
$6,300,000
Purchase
Price
$47,921,913
$4,650,000
$5,500,000
$2,200,000
$4,100,000
Principal
Debt
Amount at
Acquisition
Properties and Acquisitions
The following describe our Properties and their acquisition. The leases and financing of these properties
are described below. See “Financing” and “Leases” below.
The property located at 125-205 Bryant Wood South, Amherst, New York, acquired on May 28, 2013,
consists of two buildings and is owned by our subsidiary 125-205 Bryant Woods South LLC (“Bryant Woods”).
Bryant Woods was initially owned by the Sponsors, who immediately exchanged their membership interests in
Bryant Woods for an aggregate of 29,091 membership interests in the Operating Company at $50.00 for each
membership interest. The combined 41,500 square foot buildings house a call center for credit card collections. The
7.29 acre property includes 500 parking spaces and is located in a suburban office park campus with a landowners’
association. The contract purchase price of $5,250,000, plus associated transaction costs, was funded by issuance of
29,091 Units (at $50 per Unit) to the Sponsors and assumption of a mortgage loan in the principal amount of
$3,935,000. At the closing of the acquisition and loan, Bryant Woods entered into a net lease with the current
occupant of the buildings, FirstSource Advantage LLC.
The property located at 1350 Scottsville Road, Chili, New York, acquired on August 16, 2013, consists of
one building and is owned by our subsidiary 1350 SR LLC (“1350 SR”). 1350 SR was initially owned by
Mr. Glazer, who contributed his membership interests in 1350 SR to the Operating Company, in exchange for an
aggregate of 28,000 membership interests in the Operating Company at $50.00 for each membership interest. The
124,850-square foot building houses a tire warehouse and distribution facility for American Tire Distributors, Inc.
and is situated on a 6.44 acre parcel. The contract purchase price of $7,400,000, plus associated transaction costs,
was funded by issuance of 28,000 Units (at $50 per Unit) to Mr. Glazer and assumption of a mortgage loan in the
principal amount of $5,700,000. 1350 SR entered into a net lease with the current occupant of the facility, American
Tire Distributors.
The property located at 226 Jay Street and 511 Smith Street, Rochester, New York, acquired on March 27,
2014, consists of a single building and is owned by our subsidiary 226 Jay St Rochester LLC (“226 Jay Street”).
The Operating Company acquired all the outstanding interests in 226 Jay Street from the seller, a non-affiliate, for
$2,450,000, plus associated transaction costs, paid in cash and through the assumption of an existing $1,136,913
mortgage note. The 59,670 square foot building includes approximately 7,000 square feet of office space on a 4.56
acre site. The seller, Park Capital LLC, is owned by two individuals who own and operate multiple businesses
which lease the facility under one lease agreement.
The property located at 50 Hanil Drive, Tallassee, Alabama, acquired on June 5, 2014, consists of a single
building and is owned by our subsidiary 50 Hanil Drive AL LLC (“50 Hanil Drive”). 50 Hanil Drive purchased the
real property and building from the seller, a non-affiliate for $7,400,000 paid in cash and financed in part by a
$4,500,000 mortgage loan. The 111,564 square foot building is situated on a 10.0 acre site. The concrete block and
masonry-framed building was built in 2007 and expanded in 2010 and 2012. The tenant, Hanil USA LLC, is a
subsidiary of TI Automotive Ltd. and is an automotive supplier that manufactures brake and fuel line bundles for all
Hyundai and KIA automobiles manufactured in the United States.
The property located at 2101 Cedar Street, Freemont, Ohio, acquired on July 18, 2014, consists of a single
building and is owned by our subsidiary 2101 Cedar St OH LLC (“2101 Cedar ”). 2101 Cedar purchased the real
property and building from the seller, a non-affiliate, for $5,070,000 paid in cash and financed through a $2,800,000
mortgage note. The 178,200 concrete block and masonry-framed building was constructed in 1969 and is leased to
Freemont Plastics Products Inc. and its parent The Plastics Group Inc. Freemont Plastics Products is a plastic blow
molding company that manufactures and supplies plastic products for the furniture, recreation, automotive, trucking,
appliance, fuel tank, and construction industries.
The property located at 50 Holleder Parkway, Rochester, New York, acquired on October 15, 2014,
consists of one building and is owned by our subsidiary 50 Holleder Parkway LLC (“50 Holleder”). 50 Holleder
was equally owned by 50 Holleder Member LLC (an entity owned by Buckingham Properties LLC insiders) and IH
Holdings 3, LLC, who contributed their membership interests in 50 Holleder to the Operating Company, in
exchange for an aggregate of 28,000 membership interests in the Operating Company at $50.00 for each
- 26 CONFIDENTIAL
membership interest. The 70,125-square foot building is the corporate headquarters of Isaac Heating & Air
Conditioning, Inc. and is used for fabrication, warehousing and distribution and is situated on a 4.36 acre parcel.
The contract purchase price of $4,200,000, plus associated transaction costs, was funded by issuance of 28,000 Units
(at $50 per Unit) to 50 Holleder Member LLC and IH Holding 3, LLC, the assumption of a mortgage loan in the
principal amount of $2,800,000 and additional cash to cover transaction costs. 50 Holleder entered into a triple net
lease with the current occupant of the facility, Isaac Heating & Air Conditioning.
The property located at 255 Rex Boulevard, Auburn Hills, Michigan, acquired on December 12, 2014,
consists of a single building and is owned by our subsidiary 255 Rex Blvd MI, LLC (“255 Rex Blvd”). 255 Rex
Blvd purchased the real property and building from Continental Structural Plastics, Inc. for $6,425,000 paid in cash
and financed through a first mortgage, non-recourse note held by Protective Life Insurance Company in the amount
of $3,750,000. The 68,830 square foot building is situated on a 5.15 acre site. The concrete block and masonryframed office building and research and development headquarters was built in 1989 with a major renovation being
completed in 2013. The entire property is leased to Continental Structural Plastics, Inc. and is guaranteed by
Continental Structural Plastics Holdings Corporation, the parent company of Continental Structural Plastics, Inc.
Continental Structural Plastics, Inc. is a manufacturer of thermoplastics, fiber composites, and sheet molded
compounds for the heavy truck, HVAC and building trade industries.
The property located at 1501 Buchanan Avenue, Grand Rapids, MI, acquired on June 29, 2015, consists of
a single building and is owned by our subsidiary 1501 Buchanan Ave MI LLC (“1501 Buchanan Ave”). 1501
Buchanan Ave purchased the real property and building from Michigan Wheel Operations, LLC for $4,500,000 paid
in cash and financed through a first mortgage, non-recourse note held by Standard Insurance Corporation in the
amount of $2,700,000. The 120,800 square foot building is situated on a 4.03 acre site. The concrete block and
masonry-framed manufacturing building and headquarters was built in 1945 with multiple renovations completed
throughout its history. The entire property is leased to Michigan Wheel Operations, LLC and is guaranteed by
Michigan Wheel Holdings, LLC, the parent company of Michigan Wheel Operations, LLC. Michigan Wheel
Operations, LLC is a manufacturer of propulsion and marine maneuverability systems for recreational, commercial
and governmental marine industries.
The property located at 979 Jackson Road, Webster, NY, acquired on August 14, 2015, consists of a single
building and is owned by our subsidiary 979 Jackson Rd LLC (“979 Jackson Rd”). 979 Jackson Rd purchased the
real property and building from an affiliate of the tenant for $2,700,000. The 11,300 square foot facility is located
on a 1.88 acre site. The masonary-framed child care center was built in 2007. The entire property is leased to DB979 Jackson LLC and guaranteed by its parent Doodle Bugs! Holding Company, Inc. A leader in child care centers,
Doodle Bugs! has thirteen locations in New York, Pennsylvania and Florida.
The property located at 770 Linden Avenue, Rochester, NY, acquired on December 17, 2015, consists of a
single building and is owned by our subsidiary 770 Linden Ave NY LLC (“770 Linden Ave”). 770 Linden Ave was
owned by Linden Properties LLC, an unrelated company which contributed its membership interests in 770 Linden
Ave to the Operating Company in exchange for 50, 727 membership interests in the Operating Company at $53.00
each; and assignment of an outstanding mortgage loan of $711,426. The approximately 73,000 square foot facility
is located on a 4.40 acre site. The masonary manufacturing, distribution and headquarters facility was built in 1970.
The entire property is leased to Magnetic Technologies Corporation and guaranteed by its parent, AMT Acquisition
Corp. Magnetic Technologies Corporation develops, produces and integrates systems of magnetic and nonmagnetic performance materials.
The property located at 7300 South Narragansett Avenue, Bedford Park, IL, acquired on January 27, 2016,
consists of a single building and is owned by our subsidiary 7300 Bedford IL LLC (“7300 Bedford”). 7300 Bedford
purchased the real property and building from an affiliate of the tenant for $6,300,000 paid in cash and financed
through a first mortgage, non-recourse note held by Genworth Life Insurance Company in the amount of
$4,100,000. The 142,000 square foot building is situated on an 8.40 acre site. The masonry and steel-framed
manufacturing and headquarters office building was built in 1989 with a recent office renovation in 2015. The
entire property is leased to Archer Wire International Corp. Archer Wire International Corp. forms wire products
for their customers that include the leading manufacturers of kitchen appliances, barbecue grills, food service
equipment, sporting goods, retailers and various commercial hardware companies.
- 27 CONFIDENTIAL
The property located at 320 Mason-Montgomery Road, Mason, OH, acquired on February 3, 2016, consists
of three buildings and is owned by our subsidiary 320 North Mason Rd OH LLC (“320 Mason”). 320 Mason
purchased the real property and buildings from Deerfield Manufacturing, Inc. for $3,450,000 paid in cash and
financed through a first mortgage, non-recourse note held by S&T Bank in the amount of $2,200,000. The
combined 92,846 square foot buildings are situated on a 8.94 acre site. The steel-framed metal manufacturing
buildings were built in 1979, 1990, and 2002. The entire property is leased to Deerfield Manufacturing, Inc. D/B/A
Ice Industries and is guaranteed by Ice Industries, Inc., the parent company of Deerfield Manufacturing, Inc.
Deerfield Manufacturing, Inc. provides stamping, fabrication, machining, welding and assembly production. The
company offers metal stamping, such as deep draw, transfer/tandem/progressive, high-volume applications, and
specialty and low volume applications. Machining services include welding, assembly, and finishes; product and
process engineering, and tool and dies; along with mechanical and hydraulic press equipment. It serves air and
specialty tank, alternative energy, appliance, computer and networking, automotive, commercial truck/off-highway,
filtration, defense, furniture, healthcare, fire and safety, HVACR manufacturer, and military and government
markets.
The property located at One Sun Court Peachtree Corners, GA, acquired on August 31, 2016, consists of
one building and is owned by our subsidiary One Sun Court GA LLC (“Sun Court”). Sun Court purchased the real
property and building from Atlantix Global Systems LLC for $9,300,000 paid in cash and financed through a first
mortgage, non-recourse note held by Woodmen of the World Life Insurance Society in the amount of $5,500,000.
The 86,275 square foot building is situated on a 7.88 acre site. The concrete and brick building was built in 1996.
The entire property is leased to Atlantix Global Systems LLC. Atlantix Global Systems is a one-stop shop for
quality new, used and refurbished IT hardware. Atlantix buys, sells, leases, rents, consigns and trades an extensive
product line including Cisco, Sun, HP, IBM, Dell, storage equipment (including NetApp and EMC), Nortel and
telecom equipment.
The properties located at 100 Wisconsin Street, 820 Wisconsin Street, 837 Walworth Street and 850
Walworth Street, Walworth, WI, acquired on December 22, 2016, consist of four buildings and are owned by our
subsidiary Walworth WI LLC (“Walworth”). Walworth purchased the real property and buildings from Miniature
Precision Components Inc. for $9,300,000 paid in cash and financed through a first mortgage, non-recourse note
held by Coastal Federal Credit Union in the amount of $4,650,000. The four buildings total 228,494 square feet and
are situated on two sites totaling 17.77 acres. The buildings were constructed in 1984 (renovated in 1993), 1984
(renovated in 1994), 1973 (renovated in 2001) and 2002. The entire property is leased to Miniature Precision
Components Inc. Miniature Precision Components Inc. is a Tier 1 supplier that provides thermoplastic components
and assemblies to the automotive industry including cooling systems, sealing systems, emission and vacuum control
systems, and air induction systems.
We will purchase additional properties upon the recommendation of the Asset Manager and in accordance
with our Property Selection Criteria, which was established by our management and will be subject to change from
time to time in the discretion of the Independent Directors Committee. See “Investment Objectives and Operating
Policies – Property Selection Criteria” for additional information.
Financing
Consistent with our leverage policy, the Corporation, the Operating Company and the individual propertyowning subsidiaries will enter into various financing arrangements. We have and will acquire properties with the
proceeds of, or by assumption of existing, mortgage loans. In some cases, the mortgage loans may also be
guaranteed, in whole or as to certain carve-out matters, by the Corporation, the Operating Company or by our
Sponsors or affiliates of the Asset Manager. We may also borrow funds if necessary to satisfy the requirement that
we distribute to stockholders at least 90% of our annual REIT taxable income, or otherwise as is necessary or
advisable to assure that we maintain our qualification as a REIT for federal income tax purposes.
We may also obtain other types of financing, including short-term loans from the Asset Manager or its
affiliates. The Corporation or Operating Company may borrow money on an unsecured basis under a line of credit
or, in order to pay a portion of the equity needed for the purchase of various properties, loans secured by a pledge of
the Units or interests in the Operating Company or its single-purpose entities which hold title to our properties.
- 28 CONFIDENTIAL
Mezzanine loans of this type typically will require guarantees of affiliates of the Asset Manager, financial
covenants, and substantial review and approval requirements for the specific property.
The Operating Company has an unsecured line of credit with Manufacturers and Traders Trust Company
(“M&T”) under which the Operating Company may borrow up to a maximum of $10,000,000. Advances under the
line of credit agreement bear interest at the one-month London Interbank Offered Rate (“LIBOR”) plus 4.5% over
the one-month LIBOR rate. Individual borrowings under the line of credit are limited to 90% of the purchase price
for the applicable property or 92% of the purchase price if closing costs are to be included. The line of credit
agreement expires at the end of February 2017, unless extended by the Operating Company for one additional year,
subject to payment of an annual facility fee of $50,000. An advance fee of 0.1% of each draw on the line of credit is
due each time a draw is made. The line of credit agreement also contains certain financial and other covenants that
apply to the Operating Company and other customary terms and conditions and events of default. The Corporation,
our Sponsor, the Asset Manager and the Property Manager have all provided unconditional guarantees of all
borrowings on the line of credit. The Operating Company may periodically draw on the line of credit in connection
with property acquisitions approved by M&T. Those draws must be repaid within six months as equity capital
becomes available and/or mortgage financing put in place. As the outstanding balance on the line of credit
fluctuates regularly, information regarding the current outstanding balance is available upon request.
The line of credit requires that the Operating Company meet certain financial covenants on a quarterly
basis, including a “tangible net worth” of not less than $13.5 million plus 80% of “net equity proceeds”, a
“minimum interest coverage ratio” of 1.83:1, a “fixed charge coverage ratio” equal to or greater than 1/50:1, a
“maximum secured leverage ratio of 0.65:1. In addition, as guarantors, the Asset Manager and Property Manager
are required to meet liquidity and “tangible net worth” tests quarterly and a net income test annually. The Sponsor is
required to maintain a minimum level of liquidity annually. Each of the terms is defined in the credit agreement,
dated February 29, 2016, with respect to the line of credit. The events of default which permit M&T to accelerate
the repayment of any advance under the line of credit include the following with respect to any of the Operating
Company, any of its subsidiaries, or the Guarantors, as applicable: payment defaults related to the line of credit and
other obligations, bankruptcy and insolvency, judgments not dismissed or stayed within 45 days, adverse changes in
the business of the Operating Company which M&T determines will have a material adverse effect on the ability to
repay any advances, and the death of Mr. Goldstein.
The financing of our Current Properties is described below.
On May 28, 2013, Bryant Woods entered into a $3,935,000 mortgage loan to CMFG Life Insurance
Company in connection with the acquisition of 125-205 Bryant Woods South, Amherst, New York. The loan bears
interest at 4.5% and is amortized over 20 years with all remaining principal ($1,335,340) due on July 10, 2028. The
loan may be prepaid at any time after the first two years, subject to a prepayment penalty. The Sponsors
individually issued a carve-out guaranty of certain obligations of Bryant Woods. The Corporation and the Operating
Company have agreed to indemnify the Sponsors for any payment they may be obligated to make on their limited
guaranty.
On August 16, 2013, the Operating Company acquired the membership interests of 1350 SR, which had
previously entered into a $5,700,000 mortgage note to Five Star Bank in connection with the acquisition of 1350
Scottsville Road, Rochester, New York. The loan bears interest at 4.7% per annum and is amortized over 20 years
with all remaining principal ($3,529,245) due on August 16, 2023. The loan may be prepaid at any time, subject to
a prepayment penalty. In addition to the mortgage on the building and property, the Five Star Bank financing is
secured by a Replacement Reserve Agreement, pursuant to which the Operating Company is required to deposit
$1,155 per month into an account with Five Star Bank as additional security for capital repairs and replacements and
for 1350 SR’s obligations to Five Star Bank. The account is capped at $100,000 and, provided that 1350 SR is in
compliance with its obligations to Five Star Bank, amounts may be disbursed from the account to reimburse
1350 SR for approved costs associated with repairs, renovations, and replacements to the property and building.
On March 27, 2014, the Operating Company indirectly assumed a $1,136,913 mortgage note with M&T
Bank in connection with the acquisition of the property at 226 Jay Street and 511 Smith Street in Rochester, New
York. In connection with the assumption of the existing mortgage note, M&T Bank, restated the terms of the note to
- 29 CONFIDENTIAL
increase the amortization to 20 years and retaining the interest rate of 6.11% that was in place at the time of
assumption. All remaining principal (estimated to be approximately $1,020,720) and accrued interest will be due on
December 1, 2017. The loan may be prepaid at any time, subject to a prepayment penalty. The above-market
interest rate on the assumed mortgage note was factored into the rental rate under the lease. If we request, and if the
bank approves the credit worthiness of the tenants at the time, the term of the loan may be extended until June 1,
2021 at the bank’s then current rates for similar loans. Prepayment of the loan requires payment of a fee calculated
to protect the bank’s yield through initial maturity. The loan is non-recourse and no guarantees were required.
On June 5, 2014, 50 Hanil Drive entered into a first mortgage non-recourse note in the amount of
$4,500,000 to ServisFirst Bank in connection with the acquisition of the property at 50 Hanil Drive, Tallassee,
Alabama. The note bears interest at a fixed rate of 4.5% and is amortized over a 21-year period with all remaining
principal (estimated to be approximately $3,572,000) and accrued interest due on October 1, 2020. The loan may be
prepaid at any time with no prepayment penalty. The loan is non-recourse but the lender required the Sponsors to
provide joint and several personal guarantees for certain non-recourse provisions of the note. The Operating
Company and the Corporation have provided indemnification to the Sponsors in regard to the personally guaranteed
non-recourse carve-outs.
On July 18, 2014, 2101 Cedar entered into a first mortgage non-recourse note in the amount of $2,800,000
to Protective Life Insurance Company in connection with the acquisition of the property at 2101 Cedar Street,
Freemont, Ohio. The note bears interest at the fixed rate of 4.5% per annum. After a six-month interest only period,
beginning on February 10, 2015, the note is amortized over 24 years with all remaining principal (estimated to be
approximately $2,040,000) and accrued interest due on August 10, 2024. The loan may be prepaid at any time,
subject to a prepayment penalty. The lender required certain carve-outs from the non-recourse nature of the note to
be guaranteed by the Operating Company and the Corporation.
On October 15, 2014, the Operating Company acquired the membership interests of 50 Holleder, which
had previously entered into a $2,800,000 mortgage note to Genesee Regional Bank in connection with the
acquisition of 50 Holleder Parkway, Rochester, New York. The loan bears interest at 4.55% per annum and is
amortized over 25 years with all remaining principal ($2,038,025) due on September 10, 2024. The loan may be
prepaid at any time, subject to a prepayment penalty. The lender required certain carve-outs from the non-recourse
nature of the note to be guaranteed by the Operating Company and the Corporation.
On December 12, 2014, 255 Rex Blvd entered into a first mortgage, non-recourse note held by Protective
Life Insurance Company in the amount of $3,750,000 in connection with the acquisition of the property at 255 Rex
Boulevard, Auburn Hills Michigan. The loan bears interest at a fixed rate of 4.375%, and after an initial six month
interest only period, will be amortized over 24 years with all remaining principal ($2,730,049) due on January 1,
2025. The lender required certain carve-outs from the non-recourse nature of the note to be guaranteed by the
Operating Company and the Corporation.
On June 29, 2015, 1501 Buchanan Blvd entered into a first mortgage, non-recourse note held by Standard
Insurance Corporation in the amount of $2,700,000 in connection with the acquisition of the property at 1501
Buchanan Avenue, Grand Rapids, Michigan. The loan bears interest at a fixed rate of 4.2%, and will be amortized
over 25 years with all remaining principal ($1,940,839) due on July 1, 2025, unless we elect to accept a new interest
rate and extend the term for an additional 10 years. The lender required certain carve-outs from the non-recourse
nature of the note to be guaranteed by the Operating Company and the Corporation.
On August 14, 2015, 979 Jackson Rd entered into a first mortgage, recourse note held by M&T Bank in the
amount of $1,600,000 in connection with the acquisition of the property at 979 Jackson Road, Webster, New York.
The mortgage loan bears interest at a fixed rate of 4.57% and is amortized over 25 years with interest only for the
first six months, and matures on September 5, 2022. The lender requires certain guarantees of the note by the
Operating Company.
On December 17, 2015, the Operating Company acquired the outstanding membership interests in 770
Linden Ave which had previously been assigned a $711,426 mortgage note to Sun Life Assurance Company of
Canada. The mortgage note to Sun Life was paid in full on December 17, 2015 from the proceeds of a new non- 30 CONFIDENTIAL
recourse mortgage note to ESL Federal Credit Union entered into by 770 Linden Ave in the amount of $3,000,000
which bears interest at 4.44% and is amortized over 25 years, with interest only for the first six months and matures
on January 8, 2028.
On January 27, 2016, 7300 Bedford entered into a first mortgage, non-recourse note held by Genworth Life
Insurance Company in the amount of $4,100,000 in connection with the acquisition of the property at 7300 South
Narragansett Avenue, Bedford Park, Illinois. The loan bears interest at a fixed rate of 3.85%, and after an initial six
month interest only period, will be amortized over 24.5 years with all remaining principal ($3,604,540) due on
February 1, 2021. The lender required certain carve-outs from the non-recourse nature of the note to be guaranteed
by the Operating Company and the Corporation.
On February 3, 2016, 320 Mason entered into a first mortgage, non-recourse note held by S&T Bank in the
amount of $2,200,000 in connection with the acquisition of the property at 320 Mason-Montgomery Road, Mason,
Ohio. The loan bears interest at a fixed rate of 4.20%, and after an initial six month interest only period, will be
amortized over 25 years with all remaining principal ($1,827,601) due on February 8, 2023.
On August 31, 2016, Sun Court entered into a first mortgage, non-recourse note held by Woodmen of the
World Life Insurance Society in the amount of $5,500,000 in connection with the acquisition of the property at One
Sun Court Peachtree Corners, Georgia. The loan bears interest at a fixed rate of 3.90%, and after an initial twelve
month interest only period, will be amortized over 24 years with all remaining principal ($4,008,862) due on
September 1, 2026.
On December 22, 2016, Walworth entered into a first mortgage, non-recourse note held by Coastal Federal
Credit Union in the amount of $4,650,000 in connection with the acquisition of the properties at 100 Wisconsin
Street, 820 Wisconsin Street, 837 Walworth Street and 850 Walworth Street. The loan bears interest at a fixed rate
of 4.375% and will be amortized over 23 years with all remaining principal ($2,798,824) due on January 1, 2029.
Leases
Bryant Woods entered into a 15-year absolute triple net lease with FirstSource Advantage LLC on May 28,
2013, for the property located at 125-205 Bryant Wood South, Amherst, New York. The monthly base rent of
$41,327 ($495,925 annually) increases 1 ½% annually. The lease has two five-year renewal options. The lease is
guaranteed by the tenant’s parent company, FirstSource Solutions Ltd., a company traded on the National Stock
Exchange of India, and by another U.S. subsidiary of the parent (FirstSource Group USA, Inc.). Pursuant to the
Property Management Agreement, Bryant Woods will pay a management fee to the Property Manager of 3% of the
base monthly rent.
1350 SR entered into a 10-year net lease with American Tire Distributors Inc., on June 21, 2013, for the
property located 1350 Scottsville Road, Rochester, New York. The monthly base rent of $57,743 ($692,917
annually) commenced on August 16, 2013 and increases to $63,465 per month ($761,585 annually) on the fifth
anniversary. 1350 SR is responsible for roof and structural repairs. All other costs, expenses, and real property
taxes associated with the building and land are the responsibility of American Tire Distributors. The lease has two
five-year renewal options. If the renewal options are exercised by American Tire Distributors, the base rent for such
renewal terms will be agreed to by the parties in accordance with the terms of the lease. Pursuant to the Property
Management Agreement, 1350 SR will pay a management fee to the Property Manager of 3% of the base monthly
rent.
226 Jay Street entered into a 12-year absolute net lease with four entities owned by the two individuals who
own the seller, Park Capital LLC on March 27, 2014 for the 226 Jay Street and 511 Smith Street, Rochester, New
York. The monthly base rent is $19,144 ($229,730 annually) for the first year and an increase of 1% per annum on
each anniversary from 2015 to 2023. The last three years of the lease have no increase in the base rent but, if the
tenants exercise their five-year renewal option, the rent during the renewal term increases by 1% annually. The
individual owners have fully guaranteed the lease through the seventh year and given a limited guaranty for the
remaining initial lease term equal to the sum of 18 months’ base rent, landlord’s reasonable attorneys’ fees, and all
- 31 CONFIDENTIAL
unpaid occupancy costs and taxes payable by the tenants under the lease. Pursuant to the Property Management
Agreement, 226 Jay Street will pay a management fee to the Property Manager of 3% of the base monthly rent.
50 Hanil Drive assumed an 11-year triple net lease with Hanil USA LLC on June 5, 2014 for the property
located at 50 Hanil Drive, Tallassee, Alabama. The landlord is responsible for only structural repairs. The monthly
base rent is $54,930 ($659,160 annually) with rent increases on October 1 of the following years: 2014 to $666,252;
2015 to $673,343; 2016 to $689,692; 2019 to $698,920, and 2022 to $708,724. The lease is scheduled to terminate
on September 30, 2025 but Hanil USA has the option to terminate the lease effective October 1, 2020 by providing
written notice to the Operating Company on or before October 1, 2019 together with the payment of the termination
fee of $1,742,914. TI Automotive Ltd., Hanil USA’s parent company, has fully guaranteed the lease through its
term. Pursuant to the Property Management Agreement, 50 Hail Drive will pay a management fee to the Property
Manager of 3% of the base monthly rent.
2101 Cedar assumed an 11-year absolute net lease with Freemont Plastics Products Inc. and its parent
company, The Plastics Group Inc. on July 18, 2014 for 2101 Cedar Street, Freemont, Ohio. Upon assumption, 2101
Cedar extended the lease with the tenants to a 15-year term. The tenants are responsible for all of the facility
operation costs, including property taxes, maintenance, repair and capital replacement costs. The monthly base rent
of $33,412 ($400,944 annually) with rent increases on September 1, 2015 to $427,680 annually, and on
September 1, 2020 to $463,320. Pursuant to the Property Management Agreement, 2101 Cedar will pay a
management fee to the Property Manager of 3% of the base monthly rent.
50 Holleder entered into a 15-year triple net lease with Isaac Heating & Air Conditioning, Inc., on August
1, 2014, for the property located at 50 Holleder Parkway, Rochester, New York. The monthly base rent of
$32,166.67 ($386,000 annually) commenced on October 15, 2014 and increases by 1% to $32,488.33 per month
($389,860 annually) on the first anniversary and then by an additional 1% annually thereafter. 50 Holleder is
responsible for roof and structural repairs. All other costs, expenses, and real property taxes associated with the
building and land are the responsibility of Isaac Heating & Air Conditioning. Pursuant to the Property Management
Agreement, 50 Holleder will pay a management fee to the Property Manager of 3% of the base monthly rent.
255 Rex Blvd entered into a 10-year lease with Continental Structural Plastics, Inc. for the property located
at 255 Rex Boulevard, Auburn Hills, Michigan. The lease is guaranteed by Continental Structural Plastics Holdings
Corporation, the parent company of Continental Structural Plastics, Inc. The monthly base rent is $43,018
($516,225 annually) with 2% annual increases thereafter. Continental Structural Plastics, Inc. is responsible for all
of the facility operating costs associated with the building and land, including real property taxes, maintenance,
repair and capital replacement costs. Pursuant to the Property Management Agreement, 255 Rex Blvd will pay a
management fee to the Property Manager of 3% of the base monthly rent.
1501 Buchanan Ave entered into a 20-year lease with Michigan Wheel Operations, LLC for the property
located at 1501 Buchanan Avenue, Grand Rapids, Michigan. The lease is guaranteed by Michigan Wheel Holdings,
LLC, the parent company of Michigan Wheel Operations, LLC. The monthly base rent is $32,716.67 ($392,600
annually) with 2% annual increases for the first five lease years and 1.5% annual increases thereafter. Michigan
Wheel Operations, LLC is responsible for all of the facility operating costs associated with the building and land,
including real property taxes, maintenance, repair and capital replacement costs. Pursuant to the Property
Management Agreement, 1501 Buchanan Ave will pay a management fee to the Property Manager of 3% of the
base monthly rent.
979 Jackson Rd entered in to a 20-year lease with DB-979 Jackson LLC for the property located at 979
Jackson Road, Webster, New York. The lease is guaranteed by the parent company, Doodle Bugs! Holding
Company, Inc. The monthly base rent is $19,775.00 ($237,300 annually) for the first year and increases 2%
annually. The net lease provides for the tenant to pay all costs of operating and maintaining the facility, including
real property taxes, insurance, maintenance, repair and capital replacements costs, excluding the replacement of
structural elements of the facility, which are the landlord’s responsibility. Pursuant to the Property Management
Agreement, 979 Jackson Road will pay a management fee to the Property Manager of 3% of the base monthly rent.
- 32 CONFIDENTIAL
770 Linden Ave entered in to a new 12-year lease with Magnetic Technologies Corporation for the
property located at 770 Linden Avenue, Rochester, New York. The lease is guaranteed by AMT Acquisition Corp.
The monthly base rent is $32,850.00 ($394,200 annually) for the first year and increases 1.5% annually. The net
lease provides for the tenant to pay all costs of operating and maintaining the facility, including real property taxes,
insurance, maintenance, repair and capital replacement costs, excluding the replacement of structural elements of the
facility and roof, which are the landlord’s responsibility. Pursuant to the Property Management Agreement, 770
Linden Ave will pay a management fee to the Property Manager of 3% of the base monthly rent.
7300 Bedford entered into a 10-year lease with Archer Wire International Corp. for the property located at
7300 South Narragansett Avenue, Bedford Park, Illinois. The initial monthly base rent is $41,416.67 ($497,000
annually) with a 1% annual increase in lease years two and three. Archer Wire International Corp. is responsible for
all of the facility operating costs associated with the building and land, including real property taxes, maintenance,
repair and capital replacement costs. Pursuant to the Property Management Agreement, 7300 Bedford will pay a
management fee to the Property Manager of 3% of the base monthly rent.
320 Mason entered into a 15-year lease with Deerfield Manufacturing, Inc. D/B/A Ice Industries for the
property located at 320 Mason-Montgomery Road, Mason, OH. The lease is guaranteed by Ice Industries, Inc., the
parent company of Deerfield Manufacturing, Inc. The monthly base rent is $23,333.33 ($280,000 annually) with
2% annual increases thereafter. Deerfield Manufacturing, Inc. is responsible for all of the facility operating costs
associated with the building and land, including real property taxes, maintenance, repair and capital replacement
costs. Pursuant to the Property Management Agreement, 320 Mason will pay a management fee to the Property
Manager of 3% of the base monthly rent.
Sun Court entered into a 15-year lease with Atlantix Global Systems LLC for the property located at One
Sun Court Peachtree Corners, GA. The monthly base rent is $61,111.46 ($733,338 annually) with 2.5% annual
increases for the first ten years and then 2.0% annual increases for the remaining five years of the lease term.
Atlantix Global Systems LLC is responsible for all of the facility operating costs associated with the building and
land, including real property taxes, maintenance, repair and capital replacement costs. Pursuant to the Property
Management Agreement, Sun Court will pay a management fee to the Property Manager of 3% of the base monthly
rent.
Walworth entered into one 12-year lease with Miniature Precision Components Inc. for the properties
located at 100 Wisconsin Street, 820 Wisconsin Street, 837 Walworth Street and 850 Walworth Street, Walworth,
WI with two ten-year options to extend the term. The monthly base rent is $67,856 ($814,275 annually) with 2.0%
annual increases after the third lease year, and then 2.0% annually throughout the renewal options. The lease is an
absolute net lease and Miniature Precision Components Inc. is responsible for all of the facility operating costs
associated with the building and land, including real property taxes, maintenance, repair and capital replacement
costs. Pursuant to the Property Management Agreement, Walworth WI LLC will pay a management fee to the
Property Manager of 3% of the base monthly rent.
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Management
General
The Investment Fund is managed by the Asset Manager pursuant to the Asset Management Agreement,
described below under the heading “The Asset Manager and the Asset Management Agreement.” The Asset
Manager secures the equity capital and debt financing for the Investment Fund, identifies and arranges for the
purchase of additional properties, and other matters as described in the Asset Management Agreement. The
Corporation has a board of directors, including independent directors, which will oversee the management of the
business and affairs of the Corporation by the Asset Manager. The Independent Directors Committee will approve
any transactions outside our stated investment criteria and certain matters where our Sponsors may have conflicting
interests. We do not currently have any direct employees. The Asset Management Agreement provides for the
various duties and responsibilities of the Asset Manager and for the fees and other compensation, which may include
compensation in the form of our common stock or options or other rights to acquire our common stock. The
Operating Company is managed by the Corporation and, indirectly, by the Asset Manager.
Our management and the management of the Asset Manager and the Property Managers have extensive
real estate management, development, ownership, acquisition, and financing experience. We believe that their
extensive experience in the real estate industry provides them with a deep knowledge of the business of acquiring,
owning, and operating commercial net leased properties.
Executive Officers and Directors
The following is information regarding our executive officers and directors:
Name
Position
Daniel J. Goldstein
President, Chief Executive Officer, Treasurer, Director
Bruce E. Bender
Vice President
Mark T. Allen
Vice President
Charles R. Knittle
Assistant Treasurer, Secretary
Thomas F. Bonadio
Independent Director
Charles E. Lannon
Independent Director
E. Philip Saunders
Independent Director
Robert C. Morgan
Director
Daniel J. Goldstein, CPA, is President, Chief Executive Officer, and Treasurer of the Corporation. He is
the Sponsor of the Investment Fund, which he co-founded with his friend and partner Laurence Glazer in 2013. Mr.
Goldstein serves as the managing member of the Asset Manager and in this capacity, he is charged with running the
day to day operations of the Corporation, including the Operating Company. As manager of the Asset Manager, Mr.
Goldstein may nominate two directors to our Board of Directors. Currently, Mr. Goldstein serves as one of the
Asset Manager-nominated directors. He also owns a majority interest in and manages the Property Manager.
Mr. Goldstein earned a Bachelor’s degree from the University of Michigan, Ann Arbor, before returning to
Rochester, New York in 1993 to work as a Certified Public Accountant. He practiced public accounting in
Rochester for eleven years, with the last four years at the partner level. In 2004, he became the Chief Financial
Officer of Buckingham Properties LLC and, in 2007, was admitted as a partner with Laurence Glazer. In early
2014, Mr. Goldstein transitioned out of his management role at Buckingham Properties LLC to focus his full
- 34 CONFIDENTIAL
attention on the role of President and chief executive officer of the Corporation and manager of the Asset Manager
and the Property Manager.
Over the course of Mr. Goldstein’s 20 plus years in accounting and finance, he developed a well-rounded
expertise in commercial real estate, particularly in the areas of financial and credit analysis, negotiation, transaction
structures and the financing of acquisition and sales. His efforts in these areas, as well as his leadership roles in the
companies he has served, have resulted in well-structured, highly profitable portfolio growth.
In 2009, Mr. Goldstein was recognized by the Rochester, New York business community as a member of
the Rochester Business Journal’s “Forty Under 40,” which recognizes forty young professionals for their
professional success and community efforts. He has given generously of his time and resources to many local
charities and currently serves on a number of Rochester community non-profit boards. In addition, Mr. Goldstein
serves as an executive officer on the Board of Directors of the Jewish Community Center of Greater Rochester
where he also serves as chairman of its $15M expansion project.
Bruce E. Bender is Vice President of the Corporation. He is also the Vice President of Acquisitions of the
Asset Manager and as such is charged with evaluating and acquiring commercial real estate on behalf of the
Investment Fund. Mr. Bender holds a minority interest in the Property Manager.
Throughout Mr. Bender’s 25-year real estate career, he has obtained a unique blend of experience by being
involved in all aspects of real estate transactions including purchasing, selling and leasing. In doing so, Mr. Bender
has been the principal representing all sides of the transactions including landlord, tenant, buyer and seller.
Prior to joining the Corporation in 2013, Mr. Bender spent the previous fifteen years at Xerox Corporation
where he held numerous management positions within its global real estate organization. Throughout this time, he
was directly responsible for acquisitions, facility management, and real estate strategy. He helped lead a core team
that handled all sale-leaseback projects for Xerox Corporation. As part of the sale-leaseback projects, he managed
broker selection, offering memorandum development, financial analysis as well as lease and purchase & sale
negotiations. He has been a licensed Real Estate Broker in New York State since 1998 and is a certified Lean Six
Sigma Green Belt.
Mr. Bender earned an MBA in Finance & Corporate Accounting from The Simon Graduate School of
Business at the University of Rochester in Rochester, NY as well as his Bachelor’s degree in Business
Administration from the University of South Florida in Tampa, FL.
Mark T. Allen is Vice President of the Corporation. He is also the Vice President of Investor Relations for
the Asset Manager, Cambridge Street Asset Management LLC. Mr. Allen joined the Asset Manager effective
March 1, 2016. Mr. Allen’s responsibilities include providing communication and disclosures to the Royal Oak
shareholders, as well as shepherding the shareholder investment experience from the time of initial investment. Mr.
Allen holds a minority-interest, subject to vesting, in the Asset Manager.
Mr. Allen’s extensive experience in commercial banking provides the Asset Manager with capital markets
insight and global relationships that help serve the needs and interests of the Corporation’s shareholders and
prospective shareholders.
Mr. Allen joined the Asset Manager following a 15-year banking career at JPMorgan Chase Bank. In his
most recent role with the bank, Mr. Allen served as the Upstate New York Region Executive for the Commercial
Bank and was responsible for the Rochester, Syracuse, Southern Tier (NY) and North Central Pennsylvania
corporate client markets. Mr. Allen was responsible for a team of seven bankers who focused on serving the global
banking needs of businesses with annual revenues between $20 million and $500 million.
In 2012, Mr. Allen was recognized by the Rochester, NY business community as a member of the
Rochester Business Journal’s “Forty Under 40” which recognizes forty young professionals for their professional
success and community efforts. He is a former board member of CenterState CEO and Big Brothers Big Sisters of
Greater Rochester and currently serves on the board of directors of the Rochester Business Charitable Organization,
and also serves on the Executive Committee for the American Heart Association’s Heart Ball.
- 35 CONFIDENTIAL
Mr. Allen has earned a Bachelor of Science degree in Finance from Miami University (OH) and a Master
of Business Administration from the Kellogg School of Management at Northwestern University.
Charles R. Knittle, CPA, is Assistant Treasurer and Secretary of the Corporation. He is also the Vice
President of Finance for the Asset Manager. In this role, Mr. Knittle drives the accounting and financial reporting
responsibilities for the growing real estate portfolio of the Investment Fund. These responsibilities include: property
performance analysis, oversight of dividend distributions, general ledger maintenance, investor reporting, as well as
day-to-day accounting matters and budgeting. Mr. Knittle holds a minority interest, subject to vesting, in the
Property Manager.
Mr. Knittle holds a Master in Business Administration with a concentration in Accounting, and a Bachelor
of Science in Management with a concentration in Corporate Finance and Accounting from St. John Fisher College.
He is also a Certified Public Accountant. He is a member of the New York State Society of Certified Public
Accountants, the Knights of Columbus, and the American Bowling Congress. While completing his MBA
coursework, Mr. Knittle was inducted into Beta Gamma Sigma, an honor society recognizing business excellence.
Mr. Knittle began his accounting career in the public accounting sector with Davie Kaplan, CPA, P.C. Just
prior to joining the Corporation and the Asset Manager, Mr. Knittle was the Assistant Controller at Ametek Power
Instruments. In that role, he assisted in overseeing organizational accounting functions, and all activities related to
the budgeting and forecasting of financial data. He also played a fundamental role in the organization’s continuous
improvement initiatives through the facilitation of an ERP implementation, as well as establishing and driving
various other process improvements.
Thomas F. Bonadio, CPA, became an independent director of the Corporation in January 2014 and was
appointed as chairman of the Audit Committee of the Board of Directors of the Corporation. He currently serves as
the CEO and managing partner of The Bonadio Group, which he founded in 1978. Mr. Bonadio specializes in
providing business advice to privately-held companies. He holds a BBA in Accounting from St. John Fisher
College, and an honorary Doctor of Law degree. Mr. Bonadio has been a Certified Public Accountant since 1973,
and is a member of the American Institute of Certified Public Accountants and the New York State Society of Public
Accountants. He has previously served as audit committee chairman for publically traded companies, including
Torvec, Inc. and Conceptus, Inc. (NASDAQ).
Mr. Bonadio currently serves on multiple private and public boards. In addition to other community
activities, Mr. Bonadio has been active in many community organizations and not-for-profits boards. He has also
served as a member of the Monroe County Jobs Creation Task Force and the St. John Fisher College Alumni
Activities Committee. He is a past Chairman of the Board of Trustees of St. John Fisher College. Mr. Bonadio was
inducted into the Rochester Business Hall of Fame in 2010.
Charles E. Lannon became an independent director in January 2014 and is the Chairman of the
Independent Directors Committee of the Board of Directors. He is also a member of the Royal Oak Audit
Committee. Mr. Lannon is an original co-founder of Sovran Self Storage, Inc., a New York Stock Exchange-traded
real estate investment trust (REIT) that was rebranded as Life Storage, Inc. in August 2016. He has been a director
of Life Storage since 1995. He currently serves as chair of its Governance Committee and a member of its Audit
Committee. Mr. Lannon is and has been the President of Strategic Advisors, Inc. (formerly known as Strategic
Capital, Inc.), a consulting firm, since 1995. Through Strategic Advisors, Inc., Mr. Lannon has provided consulting
and advisory services to many companies seeking capital, transactional and financial guidance. Also, since 1995 he
has served as an executive officer and on the board of several non-public companies. Prior to 1995, Mr. Lannon was
involved in the self-storage industry for over 10 years.
E. Philip Saunders joined the Board as an independent director in June 2014 and serves as a member of
the Independent Directors Committee and the Audit Committee. Mr. Saunders is the founder of a number of
companies including: Genesee Regional Bank, Truck Stops of America, Griffith Energy, Travel Centers of America
and Sugar Creek Corporation. In addition, he is an owner of Essex Property Management, which manages
commercial properties. Mr. Saunders also holds significant ownership interests in Valley Fuels, Sugar Creek Farms,
Western New York Energy and American Rock Salt. He is Chairman of the Board of Directors of Genesee
Regional Bank and Valley Fuels, as well as a member of the Boards of Directors of various businesses, including
American Rock Salt, Lewis Tree, Torvec Inc. and Western New York Energy. In addition, Mr. Saunders is
- 36 CONFIDENTIAL
Chairman of the Board of Directors of Paul Smith’s College and a member of the Boards of Rochester Institute of
Technology, NYS Trooper Foundation, and Young Entrepreneurs Academy.
Mr. Saunders was inducted in to the Rochester Business Hall of Fame in 2004 and has received an
honorary Doctorate of Commercial Science from Paul Smith’s College.
Robert C. Morgan serves as one of the Asset Manager-nominated directors and was elected to the Board
of Directors of the Corporation on December 18, 2014, to fill the Board seat left vacant by the death of Mr. Glazer.
Mr. Morgan is the Managing Member and Chief Executive Officer of Morgan Management LLC and founded
Morgan Management, LLC in 1998. Mr. Morgan has more than 36 years of experience as an owner, operator, and
developer of investment real estate. Through affiliated companies, Mr. Morgan manages an investment-grade real
estate portfolio valued at approximately $2.5 billion. Mr. Morgan’s holdings include over 20,000 units of multifamily apartment communities, as well as an assortment of manufactured housing communities, commercial, retail,
self-storage, office, medical office and mixed-use space.
Mr. Morgan holds a BS in business management from Rochester Institute of Technology. He currently sits
on the Board of Trustees of Nazareth College and of the University of Rochester Medical Center. Mr. Morgan was
inducted into the Rochester Business Hall of Fame in 2013.
Our Board of Directors
The management of the operations, business, and affairs of the Corporation by the Asset Manager is
overseen and conducted under the direction of our Board which is ultimately responsible for the management and
control of our affairs. Due to the conflicts of interest created by the relationships among the Asset Manager, the
Property Manager and our various affiliates, many of the responsibilities of the Board are delegated to the
Independent Directors Committee, a committee comprised of directors who:
x
are not employed by us or any of our affiliates;
x
are not employed by the entities (or their affiliates) that are responsible for directing or performing
our day-to-day business;
x
do not have any interest in the Asset Manager or the Property Manager; and
x
with respect to future directors, have been determined by a committee of our independent directors
to not have any business or professional relationships with any entity (or its affiliates) that is
responsible for directing or performing our day-to-day business, such that independent judgment is
likely to be compromised.
Our Board is currently composed of five directors. Our Charter requires that, during any time that the
Corporation is advised by the Asset Manager: (a) there be an Independent Directors Committee comprised of not
fewer than three Independent Directors, and (b) that not fewer than two nominees of the Asset Manager be members
of the Board. Under our Charter and By-laws, only the Independent Directors can approve certain matters. Each
director serves until the next annual meeting of stockholders or until a successor has been duly elected and qualified;
provided, however, that pursuant to the Subscription Agreement and Irrevocable Proxy (the “Subscription
Agreement”), our stockholders have granted an irrevocable proxy to our corporate secretary to elect two individuals
nominated by the Asset Manager for election to the Board. Currently, the directors elected upon the nomination of
the Asset Manager are Mr. Goldstein and Mr. Morgan.
Independent Directors Committee
In order to reduce or eliminate certain potential conflicts of interest, our Charter provides for an
Independent Directors Committee composed of no fewer than three Independent Directors. The Independent
Directors Committee is empowered to act on any matter: (a) permitted under Maryland law that is determined by the
committee to be of the type in which independent judgment may be compromised if addressed by the Board in its
entirety, or (b) otherwise delegated to the Independent Directors Committee pursuant to our Charter or By-laws or
the Asset Management Agreement. In making such decisions, the Independent Directors Committee may also retain
- 37 CONFIDENTIAL
its own legal and financial advisors. Our Independent Directors Committee is composed of Charles Lannon,
Thomas Bonadio and Philip Saunders. Mr. Lannon chairs the committee.
The Independent Directors Committee reviews our relationship with, and the performance of, the Asset
Manager and the Property Manager, and generally approves the terms of any transactions outside our stated
investment criteria and certain matters where our Sponsors may have conflicting interests. In addition, the
Independent Directors Committee is responsible for the following:
x
setting the Determined Share Value annually based on the net asset value of our portfolio and such
other factors as the Committee may, in its sole discretion, determine, and considering the
Determined Share Value more frequently if there is a significant change in the property portfolio, or
material events which may materially affect the value of a particular property (changes may include,
without limitation, significant property acquisitions or dispositions, property damage, changes in
tenants or their credit, or vacancies, etc.);
x
establishing and determining additional restrictions on our Share Redemption Program and the
amount of shares to be redeemed on a quarterly basis;
x
approving, permitting deviations from, making changes to, and annually reviewing our investment
objectives and Property Selection Criteria and our diversification and leverage policies;
x
approving the Asset Manager’s or Property Manager’s independent pursuit of a real estate
investment opportunity that falls within our then current investment objectives and Property
Selection Criteria, if the Investment Fund declines the opportunity;
x
approving (after the unanimous approval of the Asset Acquisition Committee) any acquisition of
properties from, or disposition of properties to, any Sponsor or any affiliate of any Sponsor;
x
approving (after the unanimous approval of the Asset Acquisition Committee) any acquisition of a
property which is not within the Property Selection Criteria then in effect;
x
approving (after the unanimous approval of the members of the Asset Acquisition Committee ) any
acquisition of a property, or a group of related properties, which has a purchase price of $10,000,000
or more;
x
reviewing all conflicts of interest that may arise in connection with our Asset Manager, Property
Manager or any of their affiliates;
x
approving any other interested person transactions;
x
approving any amendments to our Distribution Reinvestment Plan and Stock Repurchase Program;
x
waiving the one-year holding period restricting a stockholder’s transfer of his shares in the event of
a stockholder’s death or bankruptcy, or other exigent circumstances;
x
establishing and approving the terms of the Asset Management Agreement and Property
Management Agreement;
x
reviewing the total fees, expenses, assets, revenues, and availability of funds for distributions of the
Corporation at least annually or with sufficient frequency to determine that the expenses incurred are
reasonable in light of the investment performance of the Corporation and that the assets, revenues,
and funds available for distributions are in accordance with our policies and as required to qualify as
a REIT under the REIT provisions of the Code; and
x
in the event of a prohibited transfer of our common stock in violation of our Charter, deciding
whether the Corporation should purchase such stock from the trustee appointed pursuant to our
Charter.
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Audit Committee
The Independent Directors Committee established an audit committee to oversee the engagement of the
independent auditors and other functions customarily carved-out by audit committees. Our Audit Committee is
chaired by Mr. Bonadio. Messrs. Lannon and Saunders are committee members.
Compensation of Directors
We compensate our Directors, with the exception of Mr. Goldstein who receives no compensation for his
board service, with quarterly cash and stock compensation totaling $30,000 annually per director. The quarterly
payments will be made $3,750 in cash and $3,750 in our common stock at the then established Determined Share
Value. The chairman of the Independent Directors Committee receives an additional $300 stipend quarterly.
Additional equity based compensation may be awarded to all of our Directors if approved by the Independent
Directors Committee under the equity compensation plan. The Independent Directors are also reimbursed for
expenses of attendance, if any, at each annual, regular or special meeting of the Board or of any Board committee
and for their reasonable out-of-pocket expenses, if any, in connection with any meeting, property visit, and/or other
service or activity they perform or engage in as directors on behalf of the Corporation.
Indemnification and Limited Liability of Officers and Directors
To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of
directors and officers of a corporation, no director or officer of the Corporation shall be liable to the Corporation or
its stockholders for money damages. No amendment or repeal of the provisions of our Charter will limit any
indemnification rights with respect to matters occurring prior to the date of the amendment or repeal.
Our Charter provides that we will indemnify and hold harmless our directors and officers, and the Asset
Manager and its affiliates, against any and all losses or liabilities reasonably incurred by such party in connection
with or by reason of any act or omission performed or omitted to be performed on our behalf in such capacity. This
provision does not reduce the exposure of directors and officers to liability under federal or state securities laws, nor
does it limit the stockholders’ ability to obtain injunctive relief or other equitable remedies for a violation of a
director’s or an officer’s duties to us, although the equitable remedies may not be an effective remedy in some
circumstances.
Our Charter provides that a director, officer or the Asset Manager may not be indemnified with respect to:
(a) any proceeding charging improper personal benefit to the director or officer, whether or not involving action in
the director’s official capacity, in which the director was adjudged to be liable on the basis that personal benefit was
improperly received; or (b) any proceeding where the director or officer is found by a court of law to be guilty of a
felony directly related to his or her dealings with the Corporation. In any such case, the indemnification or
agreement to indemnify is recoverable only out of our net assets and not from the assets of our stockholders.
Subject to applicable law, our Charter requires us to advance amounts to a person entitled to
indemnification for legal and other expenses and costs incurred as a result of any legal action for which
indemnification is being sought only if all of the following conditions are satisfied: (a) the person seeking
indemnification provides us with a written affirmation of his or her good faith belief that he or she has met the
standard of conduct necessary for indemnification; and (b) the person seeking indemnification undertakes in writing
to repay us the advanced funds if the person seeking indemnification is found not to be entitled to indemnification.
The general effect to investors of any arrangement under which we agree to insure or indemnify any
persons against liability is a potential reduction in distributions resulting from our payment of premiums associated
with insurance or indemnification payments in excess of amounts covered by insurance. In addition,
indemnification could reduce the legal remedies available to our stockholders and us against the officers and
directors.
The Asset Manager
The Asset Manager, Cambridge Street Asset Management LLC, is a New York Limited Liability Company
controlled and majority-owned by Mr. Goldstein. Through the Asset Management Agreement, the Asset Manager
- 39 CONFIDENTIAL
has been delegated the power and authority to manage the operations of the Corporation and its subsidiaries in
accordance with the Property Selection Criteria, investment policies, and subject to the direction of the Board of
Directors of the Corporation. The Asset Manager manages the equity capital and debt financing of the Corporation,
identifies and arranges for the purchases of additional properties and other matters as described therein. Other
services include property management oversight, REIT compliance monitoring, preparation of accounting and tax
statements for investors, and related services. The Asset Manager has designated Mr. Goldstein and Robert Morgan
as its nominated members of the Board of Directors.
In addition to Mr. Goldstein, the other officers of the Asset Manager are Bruce Bender, Vice President of
Acquisitions, Charles Knittle, Vice President of Finance, and Mark Allen, Vice President of Investor Relations. (For
biographical information on Messrs. Goldstein, Bender, Knittle and Allen, see “Management – Executive Officers
and Directors”.)
The Asset Acquisition Committee
The Asset Manager’s review of commercial real properties for their possible acquisition by the Investment
Fund will be conducted by it Asset Acquisition Committee. The members of Asset Acquisition Committee are
currently Daniel Goldstein, Patrick C. Burke and Richard R. LeFrois. Biographical information about Mr. Goldstein
is set forth under the heading “Management – Executive Officers and Directors.”
Patrick C. Burke became the independent member of the Asset Acquisition Committee in January 2014.
He is the Managing Principal of the Burke Group, a Rochester, N.Y.-based advisory group founded by Mr. Burke in
1989. The Burke Group specializes in retirement plan consulting and administration, actuarial services and
compensation consulting for corporate, non-profit, and public sector clients. Mr. Burke was Rochester Regional
President of First Niagara Bank from 2005 to 2011. In addition, he is Chair of Burke Capital Group IV, a local
private equity investment partnership.
Mr. Burke holds a bachelor’s degree from Cornell University. He is active in community organizations and
is Past Chairman of the Board of Lifetime Assistance Corporation, Chairman of the Board of St. Ann’s Home,
Chairman of the St. Ann’s Investment Committee and a member of the Board of Trustees of St. Ann’s Home. He
also serves on the Cornell University Advisory Board and on the Advisory Council of Cornell’s Entrepreneurship
and Personal Enterprise Program.
As compensation for his service to the Asset Manager as an independent member of the Asset Acquisition
Committee, the Asset Manager pays Mr. Burke $3,000 on a quarterly basis. Mr. Burke has agreed to purchase
shares of our common stock with his compensation.
Richard R. LeFrois became a member of the Asset Acquisition Committee of the Asset Manager in
October 2014. Mr. LeFrois is the President and CEO of Russell P. LeFrois Builder, Inc. and LeFrois Development,
LLC. The LeFrois companies were founded in the 1960’s by Russell LeFrois, Richard LeFrois’s father. Richard
LeFrois took over leadership of the companies in 1972. Throughout Mr. LeFrois’ fifty plus year commercial real
estate career, he has developed and constructed over 10 million square feet of industrial and office space. The
LeFrois companies have an impeccable reputation for high quality construction and first class property management
services.
Russell P. LeFrois Builder is a full service design-build contracting firm that assists clients through all
stages of the building process including site selection, program development, design, municipal approval, financing
and construction. LeFrois Development owns and manages over 2.5 million square feet of commercial property in
Rochester, New York and Lakeland, Florida and continues to develop new projects in both markets. The firm
provides development, leasing and property management services for most types of commercial real estate
properties, including flex-space, educational facilities, industrial buildings and office parks. Mr. LeFrois is also a
member of and an advisor to various construction industry trade groups.
As compensation for his service to the Asset Manager as an independent member of the Asset Acquisition
Committee, the Asset Manager pays Mr. LeFrois $3,000 on a quarterly basis. Mr. LeFrois has agreed to purchase
shares of our common stock with his compensation.
- 40 CONFIDENTIAL
The Investor Relations Committee
The Asset Manager’s responsibility for overseeing all marketing, communications and other services
related to the Offering and other offerings of the capital stock of the Corporation is complemented by its Investor
Relations Committee. The members of the Investor Relations Committee are currently Daniel Goldstein and
Anthony “Tony” Tortorella. Biographical information about Mr. Goldstein is set forth under the heading
“Management – Executive Officers and Directors”.
Tony Tortorella became the independent member of the Investor Relations Committee in April 2016. Mr.
Tortorella is a principal with Cliffordale Capital, LLC, a company he founded in 2004. Cliffordale provides
investment capital and strategic guidance to a diversified group of small and mid-sized companies in the techenabled services, manufacturing, alternative energy and real estate industries. Mr. Tortorella also serves as a board
advisor to the Cliffordale portfolio companies Forsake, Inc. and Blue Sphere Corporate, Inc. Mr. Tortorella
previously enjoyed a 30+ year career in the payroll processing industry. His most recent position was President and
CEO of Ovation Payroll, which was acquired by Heartland Payment Systems, Inc. in 2013. From 1987 – 2009, Mr.
Tortorella served as an Officer and a Vice President at Paychex, Inc.
Mr. Tortorella is a long-time Rochester, NY resident and a 1981 graduate of St. John Fisher College.
As compensation for his service to the Asset Manager as an independent member of the Investor Relations
Committee, the Asset Manager pays Mr. Tortorella $3,000 on a quarterly basis. Mr. Tortorella has agreed to
purchase shares of our common stock with his compensation.
The Asset Management Agreement
The following summary of the Asset Management Agreement and the descriptions of certain provisions of
the Asset Management Agreement set forth elsewhere in this Memorandum are qualified in their entirety by
reference to the Asset Management Agreement, a copy of which is available upon request.
The Asset Management Agreement details the rights, powers and obligations of the Asset Manager and the
services provided to us in managing our day-to-day activities. The summary below is provided to illustrate the
material functions the Asset Manager performs, and it is not intended to include a detailed description of all of the
services that may be provided to us by the Asset Manager, its affiliates or third parties. Under the Asset
Management Agreement, the Asset Manager is required to devote sufficient resources to the Corporation and the
Operating Company’s administration and shall, subject to any required Board review or approval:
x
supervises all that is necessary to perform the management of the day-to-day operations of the
Corporation and the Operating Company;
x
assists the Board and the Asset Acquisition Committee in developing, establishing and monitoring
strategies related to the acquisition and disposition of properties held by the Operating Company and
setting the Property Selection Criteria;
x
assist the Board and Investor Relations Committee in developing, establishing and monitoring
strategies related to soliciting and qualifying accredited investors;
x
uses its best efforts to seek out, present and recommend to the Corporation and the Operating
Company, whether through its own efforts or those of the Asset Acquisition Committee or the third
parties retained by Asset Manager or the Corporation and the Operating Company, suitable investment
opportunities that are consistent with our investment objectives and policies and the Property Selection
Criteria, as adopted by the Board from time to time;
x
determines whether to acquire, retain or sell real properties and enter into agreements for or on behalf
of the Corporation or the Operating Company, for the purchase or sale of real property or interests in
an entity holding real property, and enter into leases with tenants of such property subject to any
required review or approval of the Asset Acquisition Committee or Independent Directors Committee;
- 41 CONFIDENTIAL
x
structures and supervises the negotiation of the terms and conditions of the acquisition and financing of
potential or existing properties or the disposition thereof, subject to any required review or approval of
the Board, Asset Acquisition Committee or Independent Directors Committee;
x
arranges for financing and refinancing of properties and making any other changes in asset or capital
structure of any special purpose entity, subject to any required prior approval of such financing or
refinancing by the Board;
x
monitors compliance with loan covenants, including reports to lenders under the terms of any
respective financing;
x
obtains such other services as may be required in acquiring or disposing of investments, disbursing and
collecting the funds of the Investment Fund, paying the debts and fulfilling the obligations of the
Investment Fund, and handling, prosecuting and settling any claims of the Investment Fund;
x
supervises the reinvestment or distribution of the proceeds from the sale of any property;
x
supervises the maintenance of the books and records of the Corporation and the Operating Company
and accounting functions, and prepare, or cause to be prepared, statements and other relevant
information for distribution to stockholders or members, as the case may be, of the Corporation and
Operating Company;
x
monitors operations and expenses of the Investment Fund, including the review and approval of
operating budgets, capital budgets and leasing plans prepared or presented by the Property Manager
(directly or through third-party service providers);
x
prepares or has prepared by a third party such property and portfolio appraisals and market equity
valuations as may be requested by the Board or the Independent Directors Committee or desirable in
the sole discretion of the Asset Manager;
x
from time to time, or as requested by the Board, make reports to the Board as to its performance of the
foregoing services;
x
manages and coordinates distributions to stockholders of the Corporation and members of the
Operating Company as declared by the Board;
x
at the request of the Board, facilitate investor communications and shareholder approvals, including
the Corporation’s and Operating Company’s annual meeting;
x
oversees all marketing, communications and other services related to the Offering and other offerings
of the capital stock of the Corporation or membership interests of the Operating Company for
investment purposes (e.g., preparation of a private placement memorandum and all ancillary offering
documents, soliciting and qualifying potential accredited investors, oversight of closings of sales of the
securities, and management and supervision of all third party service providers related to such
offerings);
x
performs any other powers of the Board or the Corporation, in its capacity as manager of the Operating
Company, which are set forth in the Charter and the Operating Agreement of the Company (as defined
below), as applicable, and which may be delegated to it by the Board from time to time;
x
secures on behalf of the Corporation and the Operating Company, such third parties necessary to
perform its obligations under the Asset Management Agreement; and
x
take all such other actions and do all things necessary or desirable to carry out the foregoing services.
Information regarding the compensation the Asset Manager will be entitled to receive for its services,
which compensation will be paid to the Asset Manager by the Operating Company on its own behalf or on behalf of
- 42 CONFIDENTIAL
the Corporation, is set forth below in “Fees and Other Compensation to Our Managers and Affiliates.” The Asset
Manager and its affiliates will also be entitled to receive: (a) distributions from the Corporation and the Operating
Company in respect of any shares or Units of member interests that any of them hold, along with the other holders
of such shares or interests, and (b) compensation for any additional services requested from time to time by the
Corporation or the Operating Company on separate agreed-upon terms, subject to approval by a majority of the
Independent Directors as being fair and reasonable to the Corporation and Operating Company.
In addition to the compensation paid to the Asset Manager, the Operating Company will pay directly or
will reimburse the Asset Manager for certain costs it incurs in connection with the services it provides to the
Operating Company, including, without limitation: (i) expenses related to the offering of the Corporation’s common
stock and the Operating Company’s Units including printing and mailing costs, marketing activities, including
meetings attended by potential investors and, if brokers are engaged, their fees and expenses up to 0.75% of the
gross proceeds of the Offering from time to time; (ii) the actual cost of goods and materials used by the Corporation
or the Operating Company; (iii) property acquisition expenses related to the identification, evaluation, selection and
acquisition of properties, including the costs of insurance premiums, legal services, brokerage and sales
commissions, whether or not we acquire such properties; and (iv) expenses related to negotiating and servicing
credit facilities and mortgage loans.
The Asset Manager, however, will not be reimbursed and will remain responsible for paying any expenses
related to:
x
employee compensation, including salaries, wages, payroll taxes and the cost of employee benefit
plans;
x
rent, telephone, utilities, office furniture, equipment and machinery, computers, supplies and other
office expenses; and
x
administrative overhead costs including those incurred in supervising, monitoring and inspecting
any real estate properties or relating to the Asset Manager’s performance of its obligations under the
Asset Management Agreement (such as travel, communication and personal costs and expenses
associated with such obligations).
The Asset Management Agreement has an initial term that continues until February 1, 2024, and will
automatically renew for successive five-year periods, unless earlier terminated in accordance with the Asset
Management Agreement. We may terminate the Asset Management Agreement at any time for cause as described
in the Asset Management Agreement. If there is a change in control of the Asset Manager (as defined in the Asset
Management Agreement) which is not approved by the Independent Directors, or if we terminate the Asset
Management Agreement at the end of the initial term or any renewal period without cause, we will pay the Asset
Manager a termination fee equal to 2 1/2 times the sum of the Asset Management Fee for the preceding twelve
consecutive calendar months. In the event of the termination of the Asset Management Agreement, our Asset
Manager is required to cooperate with us and take prompt action in accordance with the Asset Management
Agreement to assist the Board in making an orderly transition of the advisory function.
Management Decisions
The Asset Manager controls the basic management decisions of the Corporation, subject to the supervision
of the Board and, in certain cases, approval of the Independent Directors Committee. The primary responsibility for
the management decisions of the Operating Company, including the selection of investment real estate properties to
be recommended to our Board, the supervision of the negotiations for these investments, and the property
management and leasing of the properties, will reside directly in the Asset Manager which is owned, directly or
indirectly, by the Sponsors. Certain acquisitions of real property or a group of real properties will be submitted to
the Independent Directors Committee for approval.
The Property Manager
Prior to January 1, 2016, our properties were managed by Buckingham Properties LLC, principally owned
and controlled by the Glazer Estate. At the recommendation of the Independent Directors Committee after
- 43 CONFIDENTIAL
Mr. Glazer’s death, Mr. Goldstein formed the Property Manager and transitioned the management of our portfolio of
properties from other property managers to the Property Manager. Mr. Goldstein owns a majority of the Property
Manager and serves as its manager. The services provided by our Property Manager include ongoing management
(including preparation of operating and capital budgets for each individual property, quarterly and annual reports,
etc.), oversight of compliance with conditions, qualification of tenants in the event of vacancies, capital
improvements and rent collection. Various other duties are undertaken by the Property Manager on behalf of the
Operating Company in the Property Management Agreements which also provide for the fees and other
compensation to the Property Manager.
The Property Management Agreement
The following summary of the standard form of Property Management Agreement and the descriptions of
certain provisions of the Property Management Agreements set forth elsewhere in this Memorandum are qualified in
their entirety by reference to the form of Property Management Agreement, copies of which are available upon
request. Each of our properties is subject to a separate Property Management Agreement.
The Property Management Agreements detail the rights, powers and obligations of the Property Manager
and the services to be provided to us in managing the day-to-day activities of our properties held by the Operating
Company. We expect that each of the special purpose entities which the Operating Company forms to acquire
properties, which we refer to as the property owner, will enter into a separate Property Management Agreement with
the Property Manager. The Property Management Agreements are each in substantially the form summarized
herein. We may also enter into Property Management Agreements with other affiliated or unaffiliated property
managers from time to time. The summary below is provided to illustrate the material functions that the Property
Manager performs, and it is not intended to include a detailed description of all of the services that may be provided
to us by the Property Manager, its affiliates or third parties.
Under the Property Management Agreement, the Property Manager:
x
collects the rents from the tenants and deposits them in an operating account of the property owner
or, if required by the property owner’s lender, into a deposit account controlled by the lender;
x
enters into service agreements required to provide tenant services, if any are required of the property
owner under the lease;
x
monitors compliance by the tenants with the terms of the lease;
x
pays from the operating account principal and interest on outstanding debt, and all other obligations
of the property owner attributable to the property; and
x
pays the applicable management fee to the Property Manager from the operating account.
In addition, if requested by the Asset Manager, the Property Manager will assist in leasing properties,
securing financing or arranging for the sale of properties.
Additional information regarding the compensation the Property Manager will be entitled to receive for its
services is set forth below in “Fees and Other Compensation to Our Managers and Affiliates.”
Our agreements with the Property Manager have three-year initial terms that typically commence with the
acquisition of each subject property. The contracts automatically renew for additional one-year periods, unless either
party provides the other with advance written notice of termination in accordance with the Property Management
Agreement. We may also terminate any Property Management Agreement at any time for cause as described in the
Property Management Agreements. If there is a change in control of the Property Manager (as defined in the
Property Management Agreements) which is not approved by the Independent Directors, or if we terminate a
Property Management Agreement at the end of the initial term or any renewal period without cause, we will pay the
Property Manager a termination fee equal to 1/2 the aggregate management fees paid to that Property Manager
during the twelve-month period immediately preceding the date of such termination. It is the duty of our Board to
evaluate the performance of our Property Manager. In the event of the termination of any Property Management
- 44 CONFIDENTIAL
Agreement, the terminated Property Manager is required to cooperate with us and take prompt action in accordance
with the Property Management Agreement to assist us making an orderly transition of the property management
function.
- 45 CONFIDENTIAL
Fees and Other Compensation to Our Managers and Affiliates
Recipient
Asset
Manager
Asset
Manager
Asset
Manager
Asset
Manager
Asset
Manager
Asset
Manager
Asset
Manager
Asset
Manager
Sponsor/gu
arantor
Property
Manager
Type of Compensation*
Reimburse out-of-pocket Offering and marketing expenses of the Corporation,
including printing and mailing costs, investor meetings and, if brokers are
engaged, their fees and expenses.
Annual asset management fee, payable quarterly, for services under the Asset
Management Agreement. If approved by the Independent Directors
Committee, possible equity incentive compensation.
Acquisition fee in connection with the acquisition of properties (no fee was
paid with respect to the initial two properties acquired: 125-205 Bryant Wood
South and 1350 Scottsville Road). If a broker is representing the Operating
Company in the transaction, the Asset Manager’s fees will be reduced to the
extent necessary so that the total commissions do not exceed 1%.
If acting as agent for leasing any property for us, a fee for leasing any property
or portion thereof. In the event any other party is entitled to a leasing fee from
us, the Asset Manager’s fees will be reduced to the extent necessary so that
Asset Manager’s leasing fee does not cause the total commissions to exceed
6% of the total base rent payments due over the term of the lease for such
lease.
If paid a fee on the underlying lease, a fee for securing the tenant’s renewal of
the lease. In the event any other party is entitled to a leasing fee from us, the
Asset Manager’s fees will be reduced to the extent necessary so that Asset
Manager’s leasing fee does not cause the total commissions to exceed 3% of
the total base rent payments due over the term of the renewal term.
If engaged by the Operating Company to secure financing for a property, a fee
equal to the difference between 1% of the principal amount of the loan and
amounts paid to any loan brokers.
Disposition fee in connection with the disposition of properties.
Reimbursement of expenses of the Corporation and the Operating Company
paid on behalf of those entities by the Asset Manager
Fee for providing certain personal guarantees of debt up to the maximum
amount guaranteed.
Fee for managing the properties.
Property
Manager
Amount
Up to 0.75% of the gross proceeds
of the Offering from time to time
1.0% of the fair market value of our
properties until the portfolio value
is $100 million, 0.9% between
$100-200 million, 0.8% between
$200-300 million, and 0.75% over
$300 million.
Up to 1% of the total purchase
price received for the Property
Up to 4% of the total base rent
payments due over the first 10
years of the term of the lease, and
2% of the total base rent payments
due over the remaining term of the
lease
Up to 2% of the total base rent
payments due over the renewal
term of the lease
Up to 1% of the principal amount
of the loan
1% of the total sale price paid for
the Property
As reflected in the Asset
Management Agreement
0.5% of the principal amount
guaranteed
3% of total monthly Base Rent if
the value of our portfolio of
properties is $100 million or less,
2.75% if the portfolio value is
between $100-300 million, and
2.5% if the portfolio value is
greater than $300 million.
Up to 4% of the total base rent
payments due over the first ten
years of the term of the lease and
up to 2% of base rent on the
remaining firm term on existing
agreements.
Up to 2% of the total base rent
payments due over the renewal
term of the lease
If engaged by the Operating Company as its agent for leasing any property, a
fee for leasing any property or portion thereof. In the event any other party is
entitled to a leasing fee from us, the Property Manager’s fees will be reduced
to the extent necessary so that the Property Manager’s fees do not cause the
total commissions to exceed 6% of the total base rent payments due over the
term of the lease for such lease.
Property
If paid a fee on the underlying lease, a fee for securing the tenant’s renewal of
Manager
the lease. In the event any other party is entitled to a leasing fee from us, the
Property Manager’s fees will be reduced to the extent necessary so that the
Property Manger’s fees do not cause the total commissions to exceed 3% of
the total base rent payments due over the term of the lease for such lease.
Property
Fees for various property modernization, tenant improvements, repairs and
Various percentages of costs as
Manager
insured loss restoration activities where the Property Manager is engaged to
described in the Property
oversee and manage such projects.
Management Agreement
* If approved by the Independent Directors Committee, the Asset Manager may be compensated in shares of common stock in lieu of
cash.
- 46 CONFIDENTIAL
In addition, the Independent Directors Committee has approved an equity compensation plan for
administration by the Independent Directors Committee. The plan provides the Independent Directors Committee with
the ability to grant to the directors and officers of the Corporation and others, awards of stock options, restricted stock
or other equity based compensation. The awards will be designed to provide additional incentives to build the portfolio
of commercial properties of the Corporation and tie the interests of the participants to those of other shareholders. The
plan is described further under the heading “Estimated Use of Proceeds and Capitalization – Capitalization”. Initially,
the Independent Directors Committee is only authorized to issue awards with respect to 70,000 shares until the
Corporation has issued 700,000 shares to investors. After that threshold is met, the Independent Directors Committee
may issue awards up to 10% of the number of shares of our common stock outstanding from time to time.
On June 26, 2014, the Independent Directors Committee approved, and the Corporation issued, options to
purchase 10,000 shares of common stock for $50.00 to each of the Independent Directors and to Messrs. Glazer and
Goldstein as officers of the Corporation. The options vest and first become exercisable, subject to certain exceptions,
20% on each of January 6, 2015, 2016, 2017, 2018 and 2019, and expire on January 6, 2024 to the extent not exercised.
The options will terminate to the extent unvested if a director’s service terminates, except by reason of death or
disability. If service is terminated by reason of death or disability, any unvested portion of the options immediately
becomes vested and exercisable. Mr. Glazer’s options became fully vested on his death but expired unexercised.
The Independent Directors Committee approved, and the Corporation issued, a contingent award of 2,000
shares of restricted stock to Daniel Goldstein. The shares of common stock were issued on January 1, 2015, as a result
of the Corporation having met performance targets set by the Independent Directors Committee, and vested on
January 1, 2016. The Committee may consider making additional restricted stock grants with performance targets to
Mr. Goldstein annually.
- 47 CONFIDENTIAL
The Operating Company
General
The Operating Company, Royal Oak Realty Trust (Operating Company) LLC (doing business as Royalty
Oak Realty Trust LLC), is a New York limited liability company that was formed on May 8, 2013 under the name
Buckingham Net Leased Properties Group LLC. The Operating Company’s Second Amended and Restated Limited
Liability Company Agreement provides that the Corporation is the managing member of the Operating Company
and that the Corporation will make capital contributions to the Operating Company with the proceeds of the sales of
its shares of common stock from time to time in exchange for an equivalent number of interests in the Operating
Company.
Current Capitalization
The Operating Company owns the Current Properties through wholly-owned subsidiaries, and expects to
acquire additional real property, either directly or through various single purpose entities. Two of the Current
Properties were contributed to the Operating Company by the Initial Sponsors in exchange for membership interests.
In addition, prior to the formation of the Corporation in January 2014, various unaffiliated investors had contributed
a total of approximately $1,435,000 to the Operating Company in exchange for Units at $50.00 per Unit. On
February 28, 2014, these unaffiliated cash investors converted all of their Units into shares of the Corporation’s
common stock on a one-for-one basis. The Sponsors also converted a portion of their Units (15,259.5 Units) on the
same basis. The number of outstanding shares of the Corporation’s common stock and the number of outstanding
Units of the Operating Company (which are convertible on a one-for-one basis into shares of common stock) as of
the most recent annual and quarterly periods are included within the financial statements provided as Exhibits A
and B.
The Operating Company may from time to time acquire property from other investors in exchange for
Units in the Operating Company or sell Units in the Operating Company to other investors. Transactions where an
investor contributes property meeting our Property Selection Criteria in exchange for interests in the Operating
Company may provide the investor with the opportunity to defer certain taxes and result in a more favorable price to
the Operating Company. Units in the Operating Company are substantially equivalent to shares of our common
stock and are exchangeable for such shares.
The Operating Agreement
The following summary of the Second Amended and Restated Operating Agreement, as amended (the
“Operating Agreement”) and the descriptions of certain provisions of the Operating Agreement set forth elsewhere
in this Memorandum are qualified in their entirety by reference to the Operating Agreement, a copy of which is
available upon request.
Organization
The Operating Company is a New York limited liability company. At the initial closing of the Offering,
the Corporation was admitted as a member to the Operating Company and, pursuant to the Operating Agreement,
the Corporation was admitted as the manager and a member of the Operating Company. The number of Units
outstanding, including the number of Units outstanding that are owned by the Corporation, as of the most recent
annual and quarterly periods are included within the financial statements provided as Exhibits A and B. The
remaining members of the Operating Company acquired their Units as a portion of the price for properties.
As manager, the Corporation is empowered to do any and all acts necessary to further the business of the
Operating Company and can cause the Operating Company to enter into transactions, subject to certain limited
exceptions, including the acquisition, disposition and financing of real estate properties. The other members of the
Operating Company do not have a right to exercise control or management power over the business and affairs of
the Operating Company, except as may otherwise be expressly provided in the Operating Agreement or required by
applicable law. Provided our decisions are made in good faith, the Corporation is under no obligation to consider
the separate interests of the non-managing members in deciding whether to cause the Operating Company to take, or
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4821-2485-6879.12
decline to take, any action. The Corporation has delegated to the Asset Manager substantially all of the operational
management duties and authority to implement the policies of the Board.
Capital Contributions and Issuance of Membership Units
As the Corporation issues shares of its common stock, it will transfer substantially all of the proceeds of the
Offering to the Operating Company as a capital contribution. In return, the Operating Agreement will be amended
to reflect the additional capital contribution and the Operating Company will issue to the Corporation the number of
Units that correlates in value to its capital contribution based on the proceeds raised in connection with the issuance
of the shares. Subject to applicable law, the Corporation may authorize the Operating Company to issue preferred or
other membership units in different classes and series to parallel in material respects any preferred stock issued by
the Corporation. These membership units may provide preferences and other variations in rights and limitations
including those related to voting, income and loss allocation, distribution priority, and dissolution and liquidation
rights. Generally, no member is personally liable for any obligations of the Operating Company for amounts in
excess of the member’s capital contributions.
Management
As the managing member of the Operating Company, the Corporation generally has exclusive and
complete right, power and authority in the management and conduct of the affairs of the Operating Company. The
Corporation serves in the capacity of managing member of the Operating Company until it resigns or the Operating
Company is dissolved. The Operating Agreement provides for the Operating Company to enter into agreements
with the Asset Manager and Property Manager and also authorizes the Corporation to enter into agreements with
other services providers on behalf of the Operating Company as required by its business including hiring legal, tax,
property and financial advisors. The Corporation has delegated to the Asset Manager most responsibilities for the
operations of the Investment Fund.
Tax Matters
The Corporation is the tax matters partner of the Operating Company with authority to make tax elections
under the Code on behalf of the Operating Company. The Corporation, however, may not make or revoke the
Operating Company’s “Entity Classification Election” under the Code or any corresponding provision of state tax
laws or take any action that will cause the Entity Classification Election of the Company to be changed from an
election to be classified as a partnership without the approval of all members.
Limitation of Liability and Indemnification
To the extent permitted by applicable law, the Operating Agreement provides no member will have
personal liability for any debts, obligations or liabilities of the Operating Company or the other members, whether
arising in tort, contract or otherwise, solely by reason of being a member of the Operating Company or agent or
acting (or omitting to act) in such capacities or participating (as an employee, consultant, contractor or otherwise) in
the conduct of the business of the Operating Company.
The Operating Company will indemnify the Manager, its affiliates (including the Asset Manager and the
Property Manager), each member of the Operating Company, and any manager, officer, shareholder, director,
member, employee, representative or agent of the Manager or its affiliates against all claims, damages, and expenses
(including attorneys’ fees) arising from the Operating Company’s operations. Indemnification under the Operating
Agreement will be provided as long as: (a) the act giving rise to liability was not committed in bad faith or the result
of active and deliberate dishonesty, and (b) the potential indemnitee did not knowingly or intentionally personally
gain a financial profit or other advantage to which he, she or it was not legally entitled or which was
disproportionate to other members.
Allocations and Distributions
The cash distributions and taxable income or loss of the Operating Company will generally be allocated to
the members in accordance with their respective pro rata shares of the Operating Company, which are based on the
number of Units held by the member as compared to the aggregate number of Units outstanding. The Operating
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4821-2485-6879.12
Agreement provides for special allocations of taxable income and loss to certain members to comply with the
provisions of Sections 704 of the Code and associated Treasury regulations.
The Operating Agreement provides that members may receive distributions of available cash from time to
time as the Corporation, acting as manager, may determine. The amount of any distribution will be equal to the
corresponding distributions to the holders of the Corporation’s common stock, and will be paid on a pro rata basis in
accordance with the ownership of Units as of the record date for such distribution, subject to any class of
membership interests which are entitled to a preference on the distribution of available cash. Distribution payments
are expected to be made within approximately 15 days following the end of each calendar month and will be paid to
members of the Operating Company at the time they are made to holders of shares of the Corporation’s common
stock and in corresponding amounts.
Conversion Rights and Assignment of Interests
On a quarterly basis subject to certain limitations, each member may convert all or a portion of such
member’s Units into shares of our common stock. We may also permit conversion upon the occurrence of
extraordinary events, in our discretion. Each Unit will be convertible into one share of common stock, subject to
adjustment in certain circumstances. Upon such conversion, the number of membership units converted will no
longer be deemed outstanding and all rights of the member with respect to the membership units converted will
immediately terminate, with the exception of a right to receive any accrued but unpaid distributions with respect to
the membership units converted. An initial conversion by some early investors in the Operating Company is
expected to occur before March 1, 2014. The common stock is not traded on any market and is subject to substantial
restrictions on transfer.
Non-managing members may not sell, transfer, pledge or assign a membership Unit without our prior
written consent and the granting or denial of such transfer shall be subject to our sole discretion, as managing
member. In order to comply with a consent to an assignment, the purported transfer must first comply with certain
conditions including those related to the suitability of the assignee.
Dissolution
The Operating Company shall continue until the first to occur of any of the following:
(i)
our determination that changes in applicable law may result in a violation of a statute, subject a
member to any tax under section 897 of the Code, or cause the Operating Company to be taxed as
a corporation;
(ii)
our determination that the Operating Company cannot carry out or meet its investment program;
(iii)
our determination that termination is required to comply with a statute, regulation or decree;
(iv)
our determination that due to a change in the securities laws of the United States that the
Operating Company cannot operate as contemplated in the Operating Agreement;
(v)
our consent, as manager, and the affirmative vote of the members holding at least 75% of the
outstanding Units to dissolve the Operating Company;
(vi)
the passage of 90 days after the sale or other disposition of all or substantially all of the assets of
the Operating Company; provided, however, if the consideration for such sale or disposition is
payable over time, the 90-day period will not commence until the payment of the final installment
of the consideration; or
(vii)
the date on which the Operating Company has no remaining members;
and with respect to (i), (ii), (iii) and (iv) a subsequent decision by the Corporation, as manager, and the affirmative
vote of the members holding at least 75% of the outstanding Units to dissolve the Operating Company.
Amendments to the Operating Agreement
Amendments to the Operating Agreement may be proposed by us, as manager. Generally, the Operating
Agreement may be amended with our approval, as manager, and the approval of the members at a meeting or by
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written consent. As manager, the Corporation will have the power to unilaterally make certain amendments to the
Operating Agreement without obtaining the consent of the non-managing members as may be required to:
(i)
reflect the issuance of additional membership units or the admission substitution, termination or
withdrawal of members in accordance with the terms of the Operating Agreement;
(ii)
to reflect a change that is of an inconsequential nature and does not adversely affect the nonmanaging members in any material respect, or to cure any ambiguity or provision of the Operating
Agreement that is not consistent with law or other provisions;
(iii)
satisfy any requirement, condition or guideline of a Federal or state agency or law; or
(iv)
reflect changes reasonably necessary for the Corporation to maintain its status as a REIT.
Term
The Operating Company will continue in full force and effect unless dissolved, merged or otherwise
terminated in accordance with the terms of the Operating Agreement or as otherwise provided by law.
Financial Information
The most recent annual consolidated financial statements of Royal Oak Realty Trust Inc. (formerly known
as Buckingham Net Leased Properties Group Inc.) and Subsidiaries are set forth as Exhibit A hereto. The most
recent quarterly consolidated financial statements of Royal Oak Realty Trust Inc. (formerly known as Buckingham
Net Leased Properties Group Inc.) and Subsidiaries are set forth as Exhibit B hereto. The Corporation, together with
its consolidated subsidiaries, will provide to shareholders and members annual audited financial statements prepared
in accordance with the accounting principles determined by the Independent Directors Committee. Beginning for
the fiscal year ended December 31, 2015 and for subsequent years, our financial statements are prepared in
accordance with GAAP. Prior to that date, our financial statements were prepared on an Income Tax Basis of
Accounting. In addition, unaudited financial statements are prepared on a quarterly basis in accordance with such
accounting principles. Shareholders and members will receive required tax information annually.
Funds from Operations (“FFO”) is a common financial measure used by REITs. We have attached to this
Memorandum the most recent annual and quarterly calculation of FFO, Adjusted Funds From Operations (“AFFO”)
and Modified Adjusted Funds From Operations (“MAFFO”) per weighted average share/unit for Royal Oak Realty
Trust Inc. and Subsidiaries (see Exhibit C).
While our calculation of FFO may be a useful tool for comparing our performance from period to period
since it excludes depreciation and amortization, which can vary based on the basis in acquired property and the
useful life estimates, and other factors, it should be considered with other operating results in understanding our
historical results. Under the guidance for FFO provided by the Board of Governors of the National Association of
Real Estate Investment Trusts (“NAREIT”), FFO is defined as net income (computed in accordance with accounting
principles generally accepted in the United States of America (“GAAP”)) excluding gains or losses from sales of
property, impairment write-downs of depreciable real estate, noncontrolling interest, extraordinary items and
cumulative effect of change in accounting principle plus depreciation from real property including adjustments for
unconsolidated partnerships and joint ventures less dividends from non-convertible preferred shares.
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Conflicts of Interest
General
We are subject to various conflicts of interest arising out of our relationship with Cambridge Street Asset
Management LLC, our Asset Manager, and Cambridge Street Property Management LLC, our Property Manager,
including conflicts related to the arrangements pursuant to which the Asset Manager, the Property Manager, and
their affiliates will be compensated by us. Our agreements and compensation arrangements with our Asset
Manager, Property Manager, and their affiliates were not determined by arm’s-length negotiations, but they were
reviewed by our Independent Director Committee and we believe such fees are consistent with industry standards.
See the “Management – The Asset Manager and The Asset Management Agreement” and “Management – The
Property Manager and The Property Management Agreement” sections of this Memorandum.
Some of the conflicts of interest in our transactions with our Asset Manager and our Property Manager, and
the limitations on our Asset Manager and our Property Manager adopted to address these conflicts, are described
below. Our Asset Manager, our Property Manager, and their affiliates will try to balance our interests with their
duties to other real estate investment and community activities. Our Independent Directors will act as a separate
committee of the Board and review all situations in which a conflict of interest may arise, and all of our directors
have a fiduciary obligation to act on behalf of our stockholders.
Affiliates
The interests of Mr. Goldstein and his affiliates may vary from those of other investors in our shares of
common stock in a variety of ways. Those conflicts may result in one or more of them favoring their interests over
those of the investors. Daniel Goldstein is President and a director of the Corporation and has the right, through the
Asset Manager, to nominate an additional Director to our Board. Our Asset Manager is majority-owned and
controlled by Mr. Goldstein. Our Property Manager is majority-owned and controlled by Mr. Goldstein. Affiliates
of Mr. Goldstein or our other directors and members of the Asset Manager’s Asset Acquisition Committee, may
acquire properties that do not, initially, meet our Property Investment Criteria, and renovate, refinance and lease-up
such properties to conform to our criteria. The Asset Manager may then recommend we acquire these properties.
Our Independent Directors Committee must approve any such acquisition. Although property acquisitions must be
approved by the Asset Acquisition Committee of the Asset Manager which has two independent members, our Asset
Manager may acquire and lease properties which are riskier than may be desirable in order to generate fees. All of
our officers and directors have other real estate interests and investments which require their time and attention.
Interests in Other Real Estate Investments
Our Asset Manager, our Property Manager, our directors, including our Sponsor, and members of the Asset
Acquisition Committee, or one of their affiliates may pursue additional real estate investment entities in the future,
whether public or private, which can be expected to involve the same investment objectives and policies as we do
and which may be involved in the same geographic area. In the event that our Asset Manager, Property Manager,
our Sponsor or one of their affiliates wishes to invest in real estate investment opportunities which are within our
then current Property Selection Criteria or investment policies, our Asset Manager, our Property Manager or their
affiliate must first offer the investment to the Fund and receive approval from our Independent Directors Committee.
Affiliated Asset Manager
Cambridge Street Asset Management LLC serves as our Asset Manager and performs all asset management
functions for the Corporation and the Operating Company pursuant to the Asset Management Agreement. Our
agreement with the Asset Manager has an initial term that continues until February 1, 2024, and which will
automatically renew for five-year periods, unless earlier terminated in accordance with the terms of the Asset
Management Agreement. It is the duty of our Board to evaluate the performance of our Asset Manager. We may
also terminate the Asset Management Agreement for cause as described in the Asset Management Agreement. The
Asset Manager may also serve as asset manager for entities owned by affiliates of ours, including our directors,
officers, and stockholders.
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Our Asset Manager and its affiliates will be paid certain compensation including an annual asset
management fee based on the fair market value of our properties and acquisition and disposition fees based on the
total purchase or sale price paid for the property, respectively. For a more detailed discussion of the anticipated
compensation to be paid to our Asset Manager, see “Management – The Asset Management Agreement.” Subject to
oversight by our Board, our Asset Manager will have considerable discretion with respect to all decisions relating to:
(i) capital-raising, (ii) the Operating Company’s acquisition and disposition strategies in keeping with our
investment objectives and Property Selection Criteria, and (iii) the Operating Company’s financing activities.
Therefore, the Asset Manager may have conflicts of interest concerning certain actions taken on our behalf,
particularly due to the fact that the Asset Manager could generate higher annual asset management fees, regardless
of the quality of the services provided to us, by causing the purchase and sale of properties which might not be in
our best interest in order to generate fees.
Affiliated Property Manager
Our properties are managed and leased by our Property Manager, Cambridge Street Property Management
LLC, pursuant to Property Management Agreements in substantially the same form, with three year terms and
automatic renewals. Prior to a renewal term, either party may provide the other party with written notice of
termination in accordance with the Property Management Agreement. It is the duty of our Board to evaluate the
performance of our Property Manager. We may also terminate the Property Manager for cause as described in each
Property Management Agreement. Management fees to be paid to our Property Manager include an annual
property management fee and, if engaged as agent for leasing any property, leasing and releasing fees.
Subject to oversight by our Board and the Asset Manager, our Property Manager has considerable
discretion with respect to all decisions relating to the day-to-day management and oversight of our properties,
subject to the terms of the leases to our tenants, and, if engaged as agent for leasing any property, leasing and
releasing of our properties. Therefore, the Property Manager may have conflicts of interest concerning certain
actions taken on our behalf, particularly due to the fact that our Property Manager could generate higher fees
regardless of the quality of the services provided to us. The fee structure may provide an incentive to the Property
Manager or its employees to acquire properties in locations where the underlying property values are unlikely to
increase in order to generate fee income or enter into leases which present greater risk than if they were otherwise
compensated. For a more detailed discussion of the fees paid to our Property Manager, see “Management – The
Property Management Agreements” and “Fees and Other Compensation to Our Managers and Affiliates”.
Independent Directors Committee Oversight
Every transaction that we enter into with our Asset Manager and our Property Manager and their affiliates
will be subject to an inherent conflict of interest. Our Board may encounter conflicts of interest in enforcing our
rights against any affiliate in the event of a default by or disagreement with an affiliate or in invoking powers, rights
or options pursuant to any agreement between us and our Asset Manager, our Property Manager or any of their
affiliates.
In order to reduce or eliminate certain potential conflicts of interest in day-to-day operations, the
Independent Directors Committee reviews the transactions and activities of Cambridge Street Asset Management
LLC, Cambridge Street Property Management LLC, and their affiliates for any conflicts of interest. Also, the
Sponsors, the Asset Manager and the Property Manager must offer to us any real estate investment opportunity they
wish to pursue independent of us which falls within our then current Property Selection Criteria and investment
policies and, if the Fund elects not to pursue the investment, seek approval to invest from the Independent Directors
Committee. Only after the Independent Directors Committee has approved the pursuit of such an independent real
estate investment opportunity may the Asset Manager or the Property Manager or their affiliates pursue such an
opportunity.
Lack of Separate Representation
Nixon Peabody LLP acts, and may in the future act, as counsel to us, the Asset Manager, the Property
Manager, and their affiliates in connection with this offering or otherwise. There is a possibility that in the future
the interests of the various parties may become adverse, and under the Code of Professional Responsibility of the
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legal profession, Nixon Peabody LLP may be precluded from representing any one or all of such parties. In the
event that a dispute were to arise between us, the Asset Manager, the Property Manager or any of their affiliates,
separate counsel for such matters will be retained as and when appropriate.
Nixon Peabody LLP’s representation of the Corporation does not include representation of any prospective
investors in connection with their purchase of shares of the Corporation’s common stock, each of whom should rely
on their own counsel. Prospective investors are advised to consult with their own legal, tax and financial advisors
with respect to any investment in the shares. Partners of Nixon Peabody LLP own less than 2% of the outstanding
shares.
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Certain Provisions of Our Charter and By-Laws
General
Our Charter authorizes the issuance of 40,100,000 shares of capital stock, of which 40,000,000 shares are
designated as common stock with a par value of $0.001 per share, and 100,000 shares are designated as preferred
stock with a par value of $0.001 per share. In addition, our Board may amend our Charter to increase or decrease
the amount of our authorized shares of capital stock.
Common Stock
The holders of common stock are entitled to one vote per share on all matters voted on by stockholders,
including election of our directors. Our Charter does not provide for cumulative voting in the election of our
directors. Therefore, the holders of a majority of the outstanding shares of common stock can elect our Independent
Directors. Subject to any preferential rights of any outstanding series of preferred stock, the holders of common
stock are entitled to such distributions as may be declared from time to time by our Board out of legally available
funds and, upon liquidation, are entitled to receive all assets available for distribution to our stockholders. Holders
of shares of common stock will not have preemptive rights, which means that our investors will not have an
automatic option to purchase any new shares that we issue.
Our Board has authorized the issuance of shares of our capital stock without certificates. Information
regarding restrictions on the transferability of our shares that, under Maryland law, would otherwise have been
required to appear on our share certificates will instead be furnished to our stockholders upon request and without
charge. We will maintain a stock ledger that contains the name and address of each stockholder and the number of
shares that the stockholder holds.
Restrictions on Transfer
The shares of common stock in the Corporation are offered pursuant to an exemption from the registration
requirements of the Securities Act of 1933 and applicable state law and are not transferable except by the laws of
descent and distribution, or otherwise in accordance with applicable law. Any transfer of the shares is also subject
to the Corporation’s consent, and to the provisions of our Charter and the By-laws, designed to protect our REIT
status, which provisions are described below under the heading “Ownership Limit”.
Preferred Stock
Our Charter authorizes our Board to designate and issue one or more classes or series of preferred stock
without stockholder approval. Our Board may determine the relative rights, preferences and privileges of each class
or series of preferred stock so issued, which may be more beneficial than the rights, preferences and privileges
attributable to the common stock. The issuance of preferred stock could have the effect of delaying or preventing a
change in control. Our Board has no present plans to issue preferred stock, but may do so at any time in the future
without stockholder approval.
Ownership Limit
In order for us to qualify as a REIT, during the last half of each taxable year, not more than 50% of the
value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals, as defined in the
Code to include certain entities. In addition, the outstanding shares must be owned by 100 or more persons during at
least 335 days of a 12-month taxable year or during a proportionate part of a shorter taxable year. Each of the
requirements specified in the two preceding sentences apply only after the first taxable year for which we made an
election to be taxed as a REIT. We may prohibit certain acquisitions and transfers of shares so as to ensure our
continued qualification as a REIT under the Code; however, we cannot assure an investor that this prohibition will
be effective. The number of outstanding shares of the Corporation’s common stock and the number of outstanding
Units of the Operating Company (which are convertible on a one-for-one basis into shares of common stock) as of
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the most recent annual and quarterly periods are included within the financial statements provided as Exhibits A
and B.
In order to assist us in preserving our status as a REIT, our Charter contains a limitation on ownership that
prohibits any person or group of persons from acquiring, directly or indirectly, beneficial ownership of more than
9.8% in number of shares or value, whichever is more restrictive, of the outstanding shares of any class or series of
our stock unless exempted by our Board. Our Charter provides that any transfer of shares that would violate our
share ownership limitations is null and void and the intended transferee will acquire no rights in such shares, unless
the transfer is approved by our Board based upon receipt of information that such transfer would not violate the
provisions of the Code for qualification as a REIT.
In addition, our Charter provides that any attempted transfer of our stock which, if effective, would result in
any of the following will be null and void and the intended transferee will acquire no rights in such stock:
x
our stock being owned by fewer than 100 persons;
x
our being “closely held” under Section 856(h) of the Code or being a “pension held REIT” under
Section 856(h)(3)(D) of the Code;
x
our beneficially or constructively owning 10% or more of the ownership interests in a tenant of our
company’s, our operating company’s or any subsidiary’s real property within the meaning of
Section 856(d)(2)(B) of the Code;
x
our beneficially or constructively owning capital stock to the extent such ownership would cause any
of our independent contractors to not be treated as such under Section 856(d)(3) of the Code; or
x
our otherwise failing to qualify as a REIT.
Shares of stock that, if transferred, would cause an individual or entity to be in excess of the 9.8%
ownership limit (without an exemption from our board of directors) will be transferred automatically to a trust
effective as of the close of business on the day before the reported transfer of such stock. The record holder of the
shares of stock that are held in trust will be required to submit such number of shares to us in the name of the trustee
of the trust. We will designate a trustee of the share trust that will not be affiliated with us. We will also name one
or more charitable organizations as a beneficiary of the share trust. Stock held in trust will remain issued and
outstanding stock and will be entitled to the same rights and privileges as all other shares of the same class or series.
The trustee will receive all distributions on the stock held in trust and will hold such distributions in trust for the
benefit of the beneficiary. Any distribution made prior to our discovery that shares of stock have been transferred to
the trust will be repaid by the recipient to the trustee. Any distribution authorized but unpaid will be paid when due
to the trustee. The trustee may vote any stock held in trust. Subject to Maryland law, the trustee will have the
authority: (a) to rescind as void any vote cast by the proposed transferee prior to our discovery that the shares have
been transferred to the trust, and (b) to recast the vote in accordance with the desires of the trustee acting for the
benefit of the beneficiary. However, if we have already taken irreversible corporate action, then the trustee will not
have the authority to rescind and recast the vote.
At our direction, the trustee will transfer the stock held in trust to a person whose ownership will not violate
the ownership limit. The transfer shall be made within 20 business days of the trustee receiving notice from us that
the stock has been transferred to the trust. During this 20-day period, we will have the option of redeeming such
stock. Upon any such transfer or redemption, the interest of the beneficiary in the shares sold will terminate and the
trustee will distribute the net proceeds of the sale or redemption to the proposed transferee and to the beneficiary as
follows. The proposed transferee will receive the lesser of: (a) the price paid by the proposed transferee for the
shares or, if the proposed transferee did not give value for the shares in connection with the event causing the shares
to be held in the trust (e.g., a gift, devise or other similar transaction), the Determined Share Value of the shares on
the day of the event causing the shares to be held in the trust, and (b) the price received by the trustee (net of any
commissions and other expenses of sale) from the sale or other disposition of the shares. Any net proceeds in excess
of the amount payable to the proposed transferee will be paid to the beneficiary.
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In addition, shares held in the trust will be deemed to have been offered for sale to us, or our designee, at a
price per share equal to the lesser of: (a) the price per share in the transaction that resulted in the transfer to the trust
(or, in the case of a devise or gift, the Determined Share Value at the time of the devise or gift), and (b) the
Determined Share Value on the date we, or our designee, accept the offer. We will have the right to accept the offer
until the trustee has sold the shares held in the trust. Upon a sale to us, the interest of the beneficiary in the shares
sold will terminate and the trustee will distribute the net proceeds of the sale to the proposed transferee.
Any person who acquires stock in violation of the foregoing restrictions or who owns stock that was
transferred to any such trust is required to give immediate written notice to us of such event, and any person who
transfers or receives stock subject to such limitations is required to give us 15 days’ written notice prior to such
transaction. In both cases, such persons shall provide to us such other information as we may request in order to
determine the effect, if any, of such transfer on our status as a REIT.
In addition, every owner of more than 5% (or such lower percentage as required by the Code or the
regulations promulgated thereunder or as may be requested by the Board) of our shares, within 30 days after the end
of each taxable year, is required to give us written notice, stating his or her name and address, the number of shares
of each class and series of our stock which he or she beneficially owns, and a description of the manner in which the
shares are held. Each such owner shall provide us with such additional information as we may request in order to
determine the effect, if any, of his or her beneficial ownership on our status as a REIT and to ensure compliance
with the ownership limits. In addition, each stockholder shall upon demand be required to provide us with such
information as we may request in good faith in order to determine our status as a REIT and to comply with the
requirements of any taxing authority or governmental authority or to determine such compliance.
The foregoing restrictions will continue to apply until our Board determines it is no longer in our best
interest to continue to qualify as a REIT. The ownership limit also does not apply to the underwriter in an Offering
of shares or to a person or persons exempted from the ownership limit by our Board based upon appropriate
assurances that our qualification as a REIT would not be jeopardized.
The foregoing restrictions could delay, defer or prevent a transaction or a change in control that might
involve a premium price for our shares or otherwise be in the best interest of our stockholders.
Suitability Standards and Minimum Purchase Requirements
State law and our Charter require that purchasers of our stock meet standards regarding (a) net worth or
income and (b) minimum purchase amounts. These standards are described above at “Suitability Standards” and
below at “Plan of Distribution — Minimum Purchase Requirements.” The standards apply not only to purchasers in
this Offering, but also to potential purchasers of an investor’s shares. As a result, the requirements regarding
suitability and minimum purchase amounts may make it more difficult for an investor to sell the investor’s shares.
Distributions
Distributions will be made as declared by our Board. We intend, but are not required, to make monthly
distributions to investors (both stockholders and members of the Operating Company) equal to a 7% annual return
per annum on the then-current Determined Share Value. Distribution payments are expected to be made within
approximately 15 days following the end of each calendar month. Distributions will be paid to investors who are
stockholders as of the record dates selected by our Board. Those subscribers making an investment (either new or
additional) at an end of calendar month closing will begin to accrue dividends in the subsequent month and receive
initial distributions approximately 15 days after the subsequent month is complete. If we issue any shares of our
common stock on dates other than the end of a calendar month, the holders of such shares will receive a pro rata
portion of the distribution, based on the ratio of the number of days in the calendar month remaining after the shares
are issued divided by 30. We anticipate receipt of monthly distributions from the Operating Company to fund the
distributions to shareholders, although such distribution cannot be guaranteed.
We are required to make distributions sufficient to satisfy the requirements for qualification as a REIT for
tax purposes. Generally, income distributed as dividends will not be taxable to us under the Code if we distribute at
least 90% of our REIT taxable income. Dividends will be declared at the discretion of our Board, but will be
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guided, in substantial part, by a desire to cause us to comply with the REIT requirements. We may borrow money,
issue securities or sell assets in order to make dividend distributions.
Distribution Reinvestment Plan
We have adopted a Distribution Reinvestment Plan that allows our investors to have dividends and other
distributions otherwise distributable to our investors to be invested in additional shares of our common stock. The
following discussion summarizes the principal terms of this plan.
Eligibility
All of our stockholders, and members of the Operating Company who may convert their membership Units
into our common stock, are eligible to participate in our Distribution Reinvestment Plan except for restrictions
imposed by us in order to comply with the securities laws of various jurisdictions. We may elect to deny an investor
participation in this plan if the investor resides in a jurisdiction or foreign country where, in our judgment, the
burden or expense of compliance with applicable securities laws makes the investor’s participation impracticable or
inadvisable. Holders of membership Units in the Operating Company may similarly reinvest their distributions in
shares of our common stock. Participants will be required to confirm their status as “accredited investors”
periodically.
An investor in our common stock or the membership units of the Operating Company may be required to
cease participation in our Distribution Reinvestment Plan if the investor no longer meets the suitability standards or
cannot make the other investor representations set forth in the then-current Subscription Agreement for shares of our
common stock. Participants must agree to notify us promptly when they no longer meet these standards. See the
“The Offering — Suitability Standards” and the Subscription Agreement.
Election to Participate
Assuming an investor is eligible, the investor may elect to participate in our Distribution Reinvestment Plan
by completing the appropriate portion of the Subscription Agreement or other approved enrollment form available
from time to time from the Asset Manager. An investor’s participation in the plan will begin with the next
distribution made after receipt of an investor’s enrollment form. Once enrolled, an investor may generally continue
to purchase shares under our Distribution Reinvestment Plan until we have terminated the plan. An investor can
choose to have all or a portion of the investor’s distribution reinvested through our Distribution Reinvestment Plan.
An investor may also change the percentage of the investor’s dividends that will be reinvested at any time if the
investor completes a new enrollment form or other form provided for that purpose.
Stock Purchases
Shares will be purchased under our Distribution Reinvestment Plan on the monthly distribution payment
dates. Fractional shares may be issued as a result of the reinvestment of distributions under the plan.
The purchase price per share will be 98% of the Determined Share Value, as determined by our
Independent Directors Committee. The Investment Fund will bear the cost of administering the Plan, including
compliance with applicable laws. This estimated Determined Share Value may bear little relationship and may
exceed what the investor might receive for the investor’s shares if the investor tried to sell them or if we liquidated
the portfolio. The Investment Fund and its officers and directors shall not be responsible or liable as to the value of
the shares or any change in the value of the shares acquired. The Investment Fund and its officers and directors
shall not be liable for any act done in good faith, or any good faith omission to act hereunder.
Voting
An investor may vote all whole shares acquired through our Distribution Reinvestment Plan at any meeting
of stockholders of the Corporation.
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Tax Consequences of Participation
If an investor elects to participate in our Distribution Reinvestment Plan and is subject to federal income
taxation, the investor will incur a tax liability for distributions allocated to the investor even though the investor has
elected not to receive the distributions in cash but rather to have the distributions withheld and reinvested pursuant
to the plan. Specifically, the investor will be treated as if the investor has received the distribution from us in cash
and then applied such distribution to the purchase of additional shares. See “Federal Income Tax Considerations —
Taxation of U.S. Stockholders — Distributions Generally.” We will withhold 28% of the amount of distributions or
distributions paid if the investor fails to furnish a valid taxpayer identification number, fail to properly report
distributions or fails to certify that the investor is not subject to withholding.
Termination of Participation
Participation in our Distribution Reinvestment Plan may be terminated by an investor at any time by
providing us with written notice. For an investor’s termination to be effective for a particular distribution, we must
have received a notice of termination at least 10 business days prior to the last day of the fiscal period to which the
distribution relates. Any transfer of an investor’s shares will effect a termination of the participation of those shares
in the Distribution Reinvestment Plan. We will terminate an investor’s participation to the extent that a
reinvestment of an investor’s dividends in our shares would cause an investor to exceed the ownership limitation
contained in our Charter.
Amendment or Termination of Plan
We may amend or terminate our Distribution Reinvestment Plan or an individual’s participation in the plan
for any reason at any time, provided that any amendment that adversely affects the rights or obligations of a
participant (as determined in the sole discretion of the Board) will only take effect upon 10 days’ prior written notice
to participants.
After termination of the Distribution Reinvestment Plan or after termination of an individual’s participation
in the Distribution Reinvestment Plan, the Asset Manager will send to each plan participant a check for the amount
of any distributions in the participant’s account that have not been invested in shares. Any future distributions with
respect to such former participant’s shares made after the effective date of termination will be sent directly to the
former participant.
Share Redemption Program
We have adopted a Share Redemption Program that enables an investor to sell shares of common stock to
us in limited circumstances. The Share Redemption Program permits investors to sell shares back to us after
December 31, 2014 if the investor has held the shares for over a year (or, if the investor invested through interests in
the Operating Company, the combined time period during which an investor has held membership Units of the
Operating Company and the underlying converted shares is over a year). Any redemption of shares under the Share
Redemption Program shall be subject to compliance with pertinent federal and state securities laws and restrictions
applicable to preserve the status of the Corporation as a REIT under the Code. During the term of the Share
Redemption Program, the Corporation will redeem shares at the request of holders on a quarterly basis at a price
equal to 95% of the Determined Share Value, subject to the program’s restrictions. Notwithstanding the foregoing, if
the stockholder has held shares for 5 years or more, the stockholder may redeem such shares at a price equal to
100% of the then in effect Determined Share Value, subject to all other restrictions, conditions and terms of the
Share Redemption Program. Any stockholder may also have up to 5% of their outstanding shares redeemed by the
Corporation in any calendar year at 100% of the Determined Share Value in effect at the time the shares are offered
for redemption. If an individual stockholder is deceased, the deceased stockholder’s estate may redeem shares held
in the deceased stockholder’s individual capacity at 100% of the Determined Share Value within one year of the
death of the stockholder, subject to all other restrictions, conditions and terms of the Share Redemption Program.
There are several restrictions on an investor’s ability to sell shares to us under the Share Redemption
Program. An investor generally must hold shares for over a year (or the combined time period during which an
investor has held membership Units of the Operating Company and the underlying converted shares is over a year)
before selling such shares to us under the Share Redemption Program; however, we may waive the one-year holding
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period in the event of the stockholder’s death or bankruptcy, or other exigent circumstances as approved by the
Independent Directors Committee. In addition, we limit the number of shares redeemed pursuant to our Share
Redemption Program, unless the Independent Directors Committee determines to redeem additional shares. No
redemptions in any quarter may exceed 1% of the shares outstanding at the beginning of the calendar year plus 50%
of any additional shares of our common stock issued during the prior calendar quarter under the Distribution
Reinvestment Plan. Redemption requests will generally not be honored if the remaining investment by the
stockholder will consist of less than one-half of the then effective minimum investment under the Offering (unless
all of the stockholder’s shares will be redeemed). Repurchases will only be made with funds legally available under
Maryland law for redemption. Also, redemptions may be limited by certain restrictions related to maintaining real
estate investment trust qualifications or by the terms of our financing documents. The Code requires that real estate
investment trusts: (i) be owned by 100 or more persons, and (ii) have no more than 50% of its shares held by five or
fewer individuals during the last half of each taxable year.
These limitations may prevent us from accommodating all requests made in any quarter. If any shares
tendered for redemption cannot be redeemed at the end of any quarter, those shares will be given first priority for
redemption in the following quarter, at the applicable percentage of the Determined Share Value then in effect,
subject to applicable restrictions.
Stockholder Reports
We will provide investors with annual financial statements, reported on by our independent auditors, and an
IRS Form 1099 and such other information as may be necessary for investors to complete their tax returns. The
Corporation will also provide a quarterly report which will include unaudited financial information, a summary of
new acquisitions or dispositions, a report on recent new equity contributions and redemptions, and any change in the
Determined Share Value.
Stockholder Meetings
We will hold an annual meeting for our stockholders in accordance with Maryland law. Our second annual
meeting was held on May 25, 2016. We expect to hold future annual meetings of stockholders in May of each year.
Stockholders will receive notice of the meetings as provided by Maryland law. Matters brought before any annual
meeting shall include the election of Directors and any other matters to be properly brought at such forum pursuant
to Maryland law. By the terms of the Subscription Agreement, investors have granted an irrevocable proxy, coupled
with an interest, to vote their shares of common stock in favor of two nominees of the Asset Manager. A special
meeting of the stockholders may be brought in accordance with our Charter and Maryland law.
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The Offering
General
The shares of common stock are offered and sold in a private placement only to accredited investors (as
defined in Rule 501 of Regulation D under the Securities Act), including high net-worth individuals, foundations
and endowments desiring access to professionally managed real estate investments and meeting certain other state
suitability requirements. Pension funds, individual retirement accounts, and self-directed 401(k) plans may be able
to invest if their fiduciaries do not require periodic valuations in addition to those intended to be made by the
Independent Directors Committee quarterly; however, the Independent Directors Committee may elect to provide
valuations which satisfy the requirement of plan fiduciaries if the Independent Directors Committee determine that
such valuations are in the best interests of our stockholders as a whole. The shares of common stock will be issued
in book-entry form, without certificates.
The shares of common stock of the Corporation being offered at the Determined Share Value as set by our
Independent Directors Committee. The initial offering price was arbitrarily determined by us at $50.00 per share.
The Independent Directors Committee has determined that as of July 2, 2016, the Determined Share Value and the
offering price is $54.00 per share (until adjusted further on review by the Independent Directors Committee). As of
July 2, 2016 the minimum investment is 2,000 shares (or $108,000). Shares purchased through an investment
advisor may be purchased at 50% of the minimum investment. The Asset Manager reserves the right to lower the
minimum investment in limited circumstances to an amount of not less than $54,000 (or lesser amount approved by
our Independent Directors Committee). The Determined Share Value is reviewed at least annually by the
Independent Directors Committee and adjusted as needed based on the net asset value of the portfolio and such other
factors as the Independent Directors Committee may, in its sole discretion, determine. The Asset Manager may, but
is not required to, engage consultants, appraisers and other real estate or investment professionals to assist in the
Independent Directors Committee’s valuations.
The shares of Common Stock are offered by subscription only to residents of those states in which the offer
and sale is not prohibited. This Memorandum does not constitute an offer to seller the solicitation of an offer to buy
any of our common stock offered hereby in any state or other jurisdiction in which such an offer or solicitation is not
authorized. No subscription will be binding upon us until we have accepted such subscription. Except as otherwise
required by law, subscriptions may not be withdrawn or canceled by subscribers. We reserve the right to reject or
refuse any subscription for any reason.
The Offering will be made directly by the officers and affiliates of the Corporation; however, the Asset
Manager reserves the right to engage placement, selling or other brokers or representatives to assist in the Offering
or selling of shares of common stock in the Corporation. None of the officers or affiliates will receive compensation
based on the number of investors or the size of their investments (although the Asset Manager and other affiliates
will be entitled to management fees and reimbursement of expenses).
Closings of the Offering
The initial closing of the Offering was held on March 1, 2014, with additional closings as of the first of
each month thereafter, as needed, through the date of this Memorandum. Additional closings are expected, although
not required, to be held at the end of each calendar quarter or at other times in the discretion of the Asset Manager.
At each closing, the Corporation will accept subscriptions for funding up to an amount which the Asset Manager
believes can be prudently invested prior to the next closing. Subscriptions maybe accepted by the Asset Manager
subject to funding and issuance of shares at a later date. The Corporation may accept a subscription for a dollar
amount that is more than it will need for property investments at the closing immediately following the date of
subscription but hold the issuance of the shares and payment of the price for them for up to six months. The
Corporation will issue shares to a Subscriber at the Determined Share Value set forth in the Subscription Agreement
for up to six months following the date of the Subscription Agreement. The Corporation will provide notice to a
Subscriber with a deferred subscription at least ten days prior to the date payment of the balance of the subscription
price is due.
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We anticipate accepting subscriptions as received subject to our right to reject or reduce subscriptions.
Upon acceptance of a subscription in whole or in part, we will issue the shares. Subscription payments of potential
investors whose subscriptions are rejected in whole, and the excess payments of those subscriptions rejected in part
will be refunded, without interest or deduction. Default remedies will apply to investors who fail to make timely
capital contributions in accordance with their Subscription Agreements on 10 business days’ prior written notice
from the Corporation.
In each case, the minimum subscription amount, the amount of subscriptions to be accepted, and the order
in which subscriptions are accepted may be altered by the Corporation from time to time in its sole discretion.
For the Corporation to qualify under the Code for taxation as a “real estate investment trust,” after the first
taxable year for which we made an election to be taxed as a REIT, the Corporation must have at least 100
stockholders during 335 days of any taxable year, and no more than 50% of the value of the outstanding capital
stock may be owned by five or fewer persons during the last half of a taxable year. To preserve the Corporation’s
REIT tax qualification, no investor, directly or indirectly, may own more than 9.8% of the capital stock outstanding,
except with the prior approval of the Board subject to restrictions imposed to preserve the Corporation’s REIT
status. Accordingly, the Corporation will adjust the procedures for accepting subscriptions, and requests for
transfers and redemptions, from time to time as it deems necessary to comply with the REIT rules under the Code.
Suitability Criteria
An investment in shares of our common stock is suitable only for persons who have adequate financial
means, desire a relatively long-term investment and will not need immediate liquidity of their investment. To
purchase our common stock an investor must represent in the Subscription Agreement that the investor has received
this Memorandum, is an “accredited investor” as such term is currently defined in Regulation D, and:
x
has a net worth at the time of purchase (or joint net worth with a spouse) in excess of $1 million; or
x
earned income during the preceding two years in excess of $200,000 per year (or $300,000 jointly with
an investor’s spouse) and reasonably expects income at that level in the current year; or
x
is an entity (a corporation, partnership, trust, limited liability company or entity under
Section 501(c)(3) of the Code), with total assets in excess of $5 million; or
x
is an entity, all the beneficial owners of which are accredited investors.
As used above, the term “net worth” means the excess of total assets over total liabilities. In calculating net worth,
an investor must exclude the value of the investor’s primary residence as an asset and exclude any indebtedness
secured by the primary residence, up to its fair market value. However, the amount of indebtedness secured by the
primary residence in excess of the fair market value of the residence should be considered a liability and deducted
from an investor’s net worth. In addition, if the amount of indebtedness secured by an investor’s primary residence
is increased within 60 days prior to a sale of securities in connection with this Offering other than as a result of
purchasing a new principal residence, the amount of the increase should be included as a liability for purposes of
calculating an investor’s net worth, even if the total indebtedness on the primary residence remains below its fair
market value.
Prospective investors residing in jurisdictions outside New York State may be asked to meet certain
additional suitability standards. In the case of sales to fiduciary accounts, these suitability standards must be met by
the fiduciary account, by the person who directly or indirectly supplied the funds for the purchase of our common
stock if such person is the fiduciary or by the beneficiary of the account.
If an investor invests the assets of a pension, profit-sharing, 401(k), Keogh or other qualified retirement
plan or the assets of an IRA in our common stock, the investor should be satisfied that, among other things:
x
the investment is consistent with the investor’s fiduciary obligations under the Employee Retirement
Income Security Act of 1974, as amended (“ERISA”) and the Code;
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x
the investment is made in accordance with the documents and instruments governing the investor’s
plan or Individual Retirement Account (“IRA”), including the plan’s investment policy;
x
the investment satisfies the prudence and diversification requirements of ERISA;
x
the investment will not impair the liquidity of the plan or IRA;
x
the investment will not produce unrelated business taxable income for the plan or IRA;
x
the investor will be able to value the assets of the plan annually in accordance with ERISA
requirements; and
x
the investor’s investment will not constitute a prohibited transaction under Section 406 of ERISA or
Section 4975 of the Code.
The investor should consult knowledgeable advisors in making the necessary determinations.
PATRIOT Act Representations
Each investor will be required to represent that the investor is not, nor is he acting as an agent,
representative, intermediary or nominee for, a person identified on the list of blocked persons maintained by the
Office of Foreign Asset Control, U.S. Department of Treasury, and the investor has complied with all applicable
U.S. laws, regulations, directives and executive orders relating to anti-money laundering, including but not limited
to the following laws: (1) the Sharing and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56; and (2) Executive Order 13224 (Blocking
Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism) of
September 23, 2001. We may seek additional information from prospective investors with respect to these matters
and with respect to sources of funds for investment to satisfy our obligations under the PATRIOT Act and other
applicable laws.
Minimum Investment
The shares of common stock of the Corporation are currently being offered at $54.00 per share (until
adjusted further on review by the Independent Directors Committee). As of July 2, 2016 the minimum investment is
2,000 shares (or $108,000). Shares purchased through an investment advisor may be purchased at 50% of the
minimum investment. The Asset Manager reserves the right to lower the minimum investment in limited
circumstances to an amount of not less than $54,000 (or lesser amount approved by our Independent Directors
Committee).
How to Subscribe
Investors who meet the applicable suitability standards and minimum purchase requirements described in
the “Suitability Criteria” section of this Memorandum may purchase shares of common stock. Any investor in our
common stock must:
1. Carefully read the Memorandum, and any current supplement, as well as any documents described in
the Memorandum which you have requested. Consult with your tax, legal and financial advisors.
2. Complete and sign the Subscription Agreement accompanying this Memorandum as Exhibit E,
specifying the total purchase price for the shares which you desire to purchase. Be sure to include complete contact
and tax information.
3. Complete and sign the “Accredited Investor Status” questionnaire attached to the Subscription
Agreement.
4. Complete and sign the “Irrevocable Proxy” attached to the Subscription Agreement.
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5. Complete and sign the Form W-9 included with the Subscription Agreement.
6. Carefully review the Distribution Reinvestment Plan included with the Subscription Agreement. If you
elect to participate in the Distribution Reinvestment Plan, complete and sign the Election to Participate form
included with the Plan.
7. If you wish, complete the “Transfer on Death Designation Form”.
8. At least 10 days prior to the closing date, the Corporation will notify each investor of the portion of the
purchase price it will accept at that closing. Please deliver a check to Royal Oak Realty Trust Inc., 1870 South
Winton Road, Suite 10, Rochester, New York 14618, for such amount at least 2 business days prior to the closing
date specified in the notice.
PLEASE NOTE: Even though the Corporation may not request the full amount of the purchase price of
your subscription at the first or any subsequent closing, your obligation to pay the full amount on request is legally
binding, unless the Corporation fails to request payment of some portion of the purchase price subscribed for within
six months of the first closing date after receipt of your completed Subscription Agreement.
By executing the Subscription Agreement, you attest to meeting the suitability standards as provided in the
“Suitability Criteria” section of the Memorandum and as stated in the Subscription Agreement and agree to be
bound by the terms of the Subscription Agreement.
If you will be at another address near the time of the proposed closing, please let the officers of the
Corporation know so that you can be reached with notice of the amount of your purchase price to be accepted at that
closing and the time and place your check should be delivered.
If any information about your “accredited investor” status changes prior to your delivery of any check for
the purchase price of shares of common stock, please notify the President of the Corporation in the manner
described in the Subscription Agreement.
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Federal Income Tax Considerations
The following discussion summarizes certain federal income tax considerations related to us, our investors
and our treatment as a REIT. It is not intended as a detailed description of the federal income tax consequences
applicable to a particular stockholder in view of such stockholder’s particular circumstances, or certain
stockholders subject to special treatment under the federal income tax laws (such as insurance companies, financial
institutions, broker-dealers and, except to the extent discussed below, tax-exempt organizations and non-U.S.
persons). This summary is based upon the Code, Treasury Regulations, or Regulations, current positions of the
Internal Revenue Service, or IRS, contained in Revenue Rulings, Revenue Procedures and other administrative
actions and existing judicial decisions in effect as of the date of this Memorandum, and only addresses stockholders
who hold common stock as “capital assets” within the meaning of Section 1221 of the Code, or the Code). This
discussion does not address state, local or non-U.S. tax considerations.
The following information is based on the current Code, current, temporary and proposed Treasury
regulations, the legislative history of the Code, current administrative interpretations of the IRS, including its
practices and policies as endorsed in private letter rulings, which are not binding on the IRS, and existing court
decisions. Future legislation, regulations, administrative interpretations and court decisions could change current
law or adversely affect existing interpretations of current law. Any change could apply retroactively. We have not
obtained any rulings from the IRS concerning the tax treatment of the matters discussed below. The statements in
this discussion could be challenged by the IRS and a court could agree with the IRS.
EACH PROSPECTIVE INVESTOR SHOULD CONSULT THE INVESTOR’S PERSONAL TAX
ADVISOR WITH RESPECT TO THE FEDERAL, STATE AND LOCAL INCOME, NON-U.S. AND
OTHER TAX CONSEQUENCES ARISING FROM THE PURCHASE OF THE SHARES. NOTHING IN
THIS MEMORANDUM OR ANY OTHER COMMUNICATION FROM US, OUR AFFILIATES,
EMPLOYEES OR ANY PROFESSIONAL ASSOCIATED WITH THIS OFFERING SHOULD BE
CONSTRUED AS LEGAL OR TAX ADVICE TO A POTENTIAL INVESTOR. A POTENTIAL
INVESTOR SHOULD BE AWARE THAT THE IRS MAY NOT AGREE WITH ALL TAX POSITIONS
TAKEN BY US AND THAT LEGISLATIVE, ADMINISTRATIVE OR JUDICIAL DECISIONS MAY
REDUCE OR ELIMINATE ANTICIPATED TAX BENEFITS.
Federal Income Taxation of the Corporation
Beginning with our taxable year ended December 31, 2014, we elected to be taxed as a REIT under
Sections 856 through 860 of the Code. We believe that beginning with that taxable year we have been organized
and have operated in a manner to qualify for taxation as a REIT under the Code, and we intend to continue to
operate in such a manner. We can provide no assurance, however, that we have operated or will operate in a manner
so as to qualify or remain qualified as a REIT.
The sections of the Code relating to qualification and operation as a REIT are highly technical and
complex. The following discussion sets forth the material aspects of the Code Sections that govern the federal
income tax treatment of a REIT and its stockholders. This summary is qualified in its entirety by the applicable
Code provisions, relevant rules and regulations and administrative and judicial interpretations of Code provisions
and regulations. We have not requested a ruling from the IRS with respect to any issues relating to our qualification
as a REIT, and cannot provide any assurance that the IRS will not challenge our REIT status. In addition, our
qualification as a REIT depends, among other things, upon our meeting the various qualification tests, imposed by
the Code discussed below, including asset diversification, distribution levels and diversity of stock ownership each
year.
REITs are not generally subject to federal income tax on the income they distribute to their stockholders.
To the extent that as a REIT we are not subject to income tax on the income we distribute, we will avoid “double
taxation” at both the corporate and stockholder level characteristic of ownership of stock in a C-corporation. We
will, however, be subject to federal tax in the following circumstances:
x
Any undistributed REIT taxable income, including undistributed net capital gains, will be taxed at
regular corporate rates.
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x
Any items of tax preference may be subject to the “alternative minimum tax.”
x
Any net income from “foreclosure property” (generally property we acquire through foreclosure or
after default on a loan secured by the property or a lease of the property) primarily for sale to
customers in the ordinary course of business and other non-qualifying income from foreclosure
property will be subject to tax at the highest corporate income tax rate.
x
Any net income from prohibited transactions (which are, in general, certain sales or other dispositions
of property, other than foreclosure property, that is held primarily for sale to customers in the ordinary
course of business), will be subject to a 100% tax.
x
If we are able to maintain our qualification as a REIT despite any failure to satisfy either the 75% or
95% gross income test (discussed below), we will be subject to a 100% tax on the net income
attributable to the greater of (i) the amount by which we fail the 75% gross income test or (ii) the
amount by which we fail the 95% gross income test, in either case multiplied by a fraction intended to
reflect our profitability.
x
If we maintain our qualification as a REIT, despite any failure to satisfy (i) the REIT asset tests
(discussed below), then we will have to pay a tax equal to the greater of $50,000 or the highest
corporate income tax rate multiplied by the net income generated by the non-qualifying assets during
the period of time we failed to satisfy the asset tests, or (ii) REIT requirements other than the gross
income tests and the asset tests, we will have to pay $50,000 for each other failure.
x
Any failure to distribute each year at least the sum of (i) 85% of our REIT ordinary income for such
year, (ii) 95% of our REIT capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, will be subject to a 4% excise tax on the excess of the required distribution
over the sum of the amounts actually distributed and retained amounts on which we pay income tax at
the corporate level;
x
Any acquisition of assets from a corporation generally subject to full corporate-level tax in a merger or
other transaction in which our initial basis in the assets is determined by reference to the transferor
corporation’s basis in the assets, the fair market value of the assets acquired in any such transaction
exceeds the aggregate basis of such assets, and we subsequently recognize gain on the disposition of
any such asset during the 10-year period beginning on the date on which we acquired the asset, will
generally be subject to tax at the highest regular corporate income tax rate on the lesser of the amount
of gain that we recognize at the time of the sale or disposition and the amount of gain that we would
have recognized if we had sold the asset at the time we acquired the asset, pursuant to guidelines
issued by the IRS, or the Built-In Gain Rules.
x
Any transactions that are not at arm’s length with any “taxable REIT subsidiaries” will be subject to a
100% tax.
Requirements for Qualification of REIT
In order to qualify as a REIT, we must elect to be treated as a REIT and meet certain requirements related
to our organization, income, assets and distributions.
Organizational Requirements
The Code defines a REIT as a corporation, trust or association that:
(1)
is managed by one or more trustees or directors;
(2)
has transferable shares or transferable certificates of beneficial ownership;
(3)
would be taxable as a domestic corporation but for Sections 856 through 860 of the Code;
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(4)
is neither a financial institution nor an insurance company within the meaning of the applicable
provisions of the Code;
(5)
has at least 100 persons as beneficial owners;
(6)
during the last half of each taxable year, is not closely held, i.e., not more than 50% of the value of
its outstanding stock is owned, directly or indirectly, by five or fewer “individuals,” as defined in
the Code to include certain entities;
(7)
files an election or continues such election to be taxed as a REIT on its return for each taxable
year; and
(8)
meets other tests described below, including with respect to the nature of its assets and income and
the amount of its distributions.
The Code provides that conditions (1) through (4) must be met during the entire taxable year and that
condition (5) must be met during at least 335 days of a taxable year of 12 months or during a proportionate part of a
taxable year of less than 12 months. Conditions (5) and (6) do not apply for the first taxable year for which we
make an election to be taxed as a REIT. For purposes of condition (6), an “individual” generally includes a
supplemental unemployment compensation benefit plan, a private foundation or a portion of a trust permanently set
aside or used exclusively for charitable purposes, but does not include a qualified pension plan or profit sharing
trust. Our Charter currently includes certain restrictions regarding the transfer of our common stock, which are
intended to assist us in continuing to satisfy conditions (5) and (6). If we comply with all the requirements for
ascertaining the ownership of our outstanding stock in a taxable year and have no reason to know that we have
violated condition (6), we will be deemed to have satisfied condition (6) for that taxable year.
In addition, a corporation generally may not elect to become a REIT unless its taxable year is the calendar
year. We satisfy this requirement.
If a REIT owns a corporate subsidiary that is a “qualified REIT subsidiary,” the separate existence of that
subsidiary will be disregarded for federal income tax purposes. Generally, a qualified REIT subsidiary is a
corporation, other than a taxable REIT subsidiary, all of the capital stock of which is owned by the REIT. All assets,
liabilities and items of income, deduction and credit of the qualified REIT subsidiary will be treated as assets,
liabilities and items of income, deduction and credit of the REIT itself. Thus, in applying the requirements
described herein, any qualified REIT subsidiary that we own will be ignored for federal income tax purposes and all
assets, liabilities and items of income, deduction and credit of such subsidiary will be treated as our assets, liabilities
and items of income, deduction and credit, although the subsidiary may be subject to state and local income tax in
some states. Unincorporated domestic entities that are wholly owned by a REIT, including single-member limited
liability companies, are also generally disregarded as separate entities for federal income tax purposes, including for
purposes of the REIT income and asset tests.
A REIT is also permitted to own up to 100% of the stock of one or more “taxable REIT subsidiaries.” The
subsidiary and the REIT must jointly elect to treat the subsidiary as a taxable REIT subsidiary. In addition, if a
taxable REIT subsidiary owns, directly or indirectly, securities representing 35% or more of the vote or value of a
subsidiary corporation, that subsidiary will automatically be treated as a taxable REIT subsidiary of the parent REIT.
A taxable REIT subsidiary is subject to federal, state and local income tax (where applicable), as a regular “C”
corporation.
Generally, a taxable REIT subsidiary may earn income that would not be qualifying income under the
REIT income tests if earned directly by the parent REIT. However, several provisions regarding the arrangements
between a REIT and its taxable REIT subsidiary ensure that the taxable REIT subsidiary will be subject to an
appropriate level of federal income tax. For example, the Code limits the ability of a taxable REIT subsidiary to
deduct interest payments in excess of a certain amount made to its parent REIT. In addition, the Code imposes a
100% tax on transactions between a taxable REIT subsidiary and its parent REIT or the REIT’s tenants that are not
conducted on an arm’s-length basis. Moreover, the value of securities of taxable REIT subsidiaries held by the
REIT cannot be worth more than 25% of the REIT’s total asset value. We can give an investor no assurance that
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any taxable REIT subsidiaries that we form will not be limited in their ability to deduct interest payments (if any)
made to us. We also cannot assure an investor that the IRS would not seek to impose a 100% tax on services
performed by our taxable REIT subsidiaries for our tenants, or on a portion of the payments received by us from, or
expenses deducted by, our taxable REIT subsidiaries.
In the case of a REIT that is a member of a limited liability company, or LLC, the REIT will be deemed to
own its proportionate share (based on its capital interest in the LLC and any debt securities issued by such LLC held
by the REIT) of the assets of the LLC and will be deemed to be entitled to the income of the LLC attributable to
such share. In addition, the character of the assets and gross income of the LLC retain the same character in the
hands of the REIT. Thus, our proportionate share of the assets, liabilities and items of income of the Operating
Company are treated as our assets, liabilities and items of income for purposes of applying and meeting the various
REIT requirements.
Income Test Requirements
To maintain qualification as a REIT, on an annual basis we must meet the following two gross income
requirements:
x
75% of our gross income (excluding gross income from prohibited transactions) must be derived
directly or indirectly from investments relating to real property, including investments in other REITs
or mortgages on real property (including “rents from real property” and, in certain circumstances,
interest from such mortgages), and certain temporary investments (as discussed further below)
(collectively, “Real Property Investments”); and
x
95% of our gross income (excluding gross income from prohibited transactions) must be derived from
Real Property Investments and from dividends, interest or gain from the sale or disposition of stock or
securities.
We may invest proceeds from this Offering in liquid assets such as bank deposits, government securities or
certificates of deposit prior to our investment in real properties. Any earnings from these assets qualify as income
under the 75% gross income test for one year of our receipt of the proceeds. If we do not subsequently invest the
proceeds from this Offering in real properties within this one-year period, we may invest in less liquid investments
such as certain mortgage-backed securities or shares in other REITs in order to satisfy the 75% gross income test.
To comply with this one-year requirement, we intend to track the receipt and investment of the Offering proceeds.
As the IRS has not issued any rulings or regulations governing such tracking, however, we cannot provide any
assurance that the IRS will agree with our methodology in this regard.
In order to satisfy the gross income requirements any “rents from real property” received must meet the
following conditions:
x
the amount of rent must not be based in whole or in part on the income or profits of any person, but
can be based on a fixed percentage of gross receipts or gross sales;
x
the rent cannot be from a tenant of which we and our affiliates own 10% or more of (i) the total
combined voting power of all classes of voting stock, or total value of shares of all classes of stock, if a
corporate tenant, or (ii) the interests in total assets or net profits of an entity, if not a corporate tenant;
x
the rent cannot be attributable to personal property unless it is leased in connection with real property
and the rent attributable to such personal property is less than or equal to 15% of the total rent received
under the lease based on the respective fair market values; and
x
the rent cannot be attributable to services furnished or rendered in connection with the rental of real
property, unless such services are customarily provided in the geographic area in connection with the
rental of space for occupancy only and are not otherwise considered rendered to the occupant of the
property.
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For purposes of satisfying the gross income requirements, we may include rent that is attributable to customary
services that are not provided to a particular tenant (e.g., furnishing heat and light, the cleaning of public entrances
and the collection of trash). Further, the rent should not cease to qualify merely because we perform a de minimis
amount of services for a tenant that are not usually and customarily provided, as long as the value of such services
(valued at not less than 150% of our direct cost of performing such services) is less than 1% of the total income
derived from such property. We cannot, however, include rent attributable to non-de minimis services that are
provided primarily for the convenience of a tenant unless such services are provided by an independent contractor or
a separate taxable subsidiary. To qualify, any independent contractor providing services must be adequately
compensated by us and we cannot derive any income from the independent contractor nor have 35% or more of our
ownership, held directly or indirectly, by the independent contractor or its stockholders.
We do not anticipate deriving rent attributable to personal property leased in connection with real property
that exceeds 15% of the total rent attributable to such lease or receiving rent from related-party tenants.
Although we do not directly provide, or indirectly provide through the Operating Company, any services at
our properties, we may provide certain services with respect to our properties in the future. We believe that these
services will only be of the type that are usually or customarily rendered in connection with the rental of space for
occupancy and that are not otherwise rendered to the tenants. Therefore, we believe that the provision of such
customary services will not cause rents received with respect to our properties to fail to qualify as “rents from real
property.” Noncustomary services and services rendered primarily for the tenants’ convenience will be provided by
an independent contractor or a taxable REIT subsidiary to avoid jeopardizing the qualification of rent as “rents from
real property.”
Except for amounts received with respect to certain investments of cash reserves, we anticipate that
substantially all of our gross income will be derived from sources that will allow us to satisfy the income tests
described above; however, we can make no assurance in this regard.
If we are eligible for relief under the Code, we may still qualify as a REIT despite our failure of any gross
income test. Such relief may be available if our failure to meet such gross income test is due to reasonable cause
and not willful neglect and we properly disclose the failure to the IRS. We cannot, however, make any assurance
that such relief will be available, and even if available, a 100% tax would be imposed on the greater of the amount
by which we fail the 75% gross income test or the amount by which we fail the 95% gross income test as multiplied
by a fraction intended to reflect our profitability.
Asset Test Requirements
At the close of each quarter of our taxable year, we must also satisfy the following four tests related to the
nature and diversification of our assets:
x
at least 75% of the value of our total assets must be represented by real estate assets, cash and cash
items (including receivables) and government securities;
x
no more than 25% our total assets can consist of securities (other than those securities includible in the
75% asset test);
x
no more than 20% of the value of our total assets can be represented by securities of one or more
taxable REIT subsidiaries; and
x
with the exception of stock or securities of REITs, qualified REIT subsidiaries, taxable REIT
subsidiaries, equity interests in partnerships and other securities that qualify as “real estate assets” for
purposes of the 75% asset test, we may not own:
o
securities of any one issuer whose value exceeds 5% of the value of our total assets;
o
more than 10% of any one issuer’s outstanding voting securities; and
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o
more than 10% of the value of the outstanding securities of any one issuer.
Securities for purposes of the asset tests may include debt securities. The 10% value limitation will not
apply, however, to: (i) any security qualifying for the “straight debt exception” discussed below, (ii) any loan to an
individual or an estate; (iii) any rental agreement described in Section 467 of the Code, other than with a “related
person”; (iv) any obligation to pay qualifying rents from real property; (v) certain securities issued by a State or any
political subdivision thereof, the District of Columbia, a foreign government, or any political subdivision thereof, or
the Commonwealth of Puerto Rico; (vi) any security issued by a REIT; and (vii) any other arrangement that, as
determined by the Secretary of the Treasury of the United States, is excepted from the definition of a security. For
purposes of the 10% value test, any debt instrument issued by a partnership (other than straight debt or another
excluded security) will not be considered a security issued by the partnership if at least 75% of the partnership’s
gross income is derived from sources that would qualify for the 75% REIT gross income test and any debt
instrument issued by a partnership (other than straight debt or other excluded security) will not be considered a
security issued by the partnership to the extent of the REIT’s interest as a partner in the partnership. There are
special look-through rules for determining a REIT’s share of securities held by a partnership in which the REIT
holds an interest.
The straight debt exception starts with the definition of straight debt in Section 1361 of the Code (as
modified) but permits certain contingent payments. The timing of payments of principal or interest may be
contingent if such contingency causes specified limited changes to the debt’s effective yield to maturity or the REIT
does not hold more than $1 million (by face amount or issue price) of the issuer’s debt instruments and not more
than 12 months of unaccrued interest can be required to be prepaid on such debt instruments. In addition, the time
or amount of payments may be contingent if such contingency arises only upon default or upon the issuer’s exercise
of a prepayment right and such contingencies are consistent with customary commercial practice.
The straight debt exception will not apply to any securities issued by a corporation or partnership (such as
an LLC for federal tax purposes) if the REIT and any controlled taxable REIT subsidiaries also own securities of
such issuer that would not qualify for the straight debt exception and that are worth more than 1% of the issuer’s
outstanding securities.
If we meet the asset tests at the close of any quarter, we do not lose our status as a REIT for failure to
satisfy the asset tests in a subsequent quarter solely due to a change in asset values. If our failure to satisfy the asset
tests were to result from an acquisition of securities or other property during a quarter, we can cure the failure by
disposing of a sufficient amount of non-qualifying assets within 30 days after the close of that quarter. Even after
the 30-day cure period, if we fail the 5% securities limitation or either of the 10% securities limitations, we may
avoid disqualification as a REIT by disposing of a sufficient amount of non-qualifying assets, provided the assets
causing the violation do not exceed the lesser of 1% of our assets at the end of the relevant quarter or $10,000,000
and such disposition occurs within six months of the last day of the quarter in which violation is first identified. If
we were to violate any other asset test due to reasonable cause, we may avoid disqualification after the 30-day cure
period by taking certain steps including the disposition of sufficient non-qualifying assets within the six-month
period previously described, paying a tax equal to the greater of $50,000 or the highest corporate tax rate multiplied
by the net income generated by the non-qualifying assets during the period of time that the assets were held as nonqualifying assets, and filing a schedule with the IRS that describes the non-qualifying assets. We intend to maintain
adequate records of the value of our assets to ensure compliance with the asset tests and to take such other actions
within 30 days after the close of any quarter as necessary to cure any noncompliance.
Annual Distribution Requirements
To qualify for taxation as a REIT, we must meet the following annual distribution requirements:
x
We must distribute to our stockholders an amount (other than capital gain distributions) at least equal
to the sum of: (i) 90% of our “REIT taxable income” (computed without regard to the dividends-paid
deduction and by excluding our net capital gain) and (ii) 90% of the net income, if any, from
foreclosure property in excess of the excise tax on income from foreclosure property, minus the sum of
certain items of non-cash income. We are required to pay such distributions in the taxable year to
which they relate. Dividends distributed in the subsequent year, however, will be treated as if
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distributed in the prior year for purposes of such prior year’s 90% distribution requirement if one of the
following two sets of criteria are satisfied: (a) the dividends were declared in October, November or
December, the dividends were payable to stockholders of record on a specified date in such month, and
the dividends were actually distributed during January of the subsequent year; or (b) the dividends
were declared before we timely filed our federal income tax return for such year, the dividends were
distributed in the 12-month period following the close of the prior year and not later than the first
regular dividend payment after such declaration, and we elected on our tax return for the prior year to
have a specified amount of the subsequent dividend treated as if distributed in the prior year. Even if
we satisfy this annual distribution requirement, we will be subject to tax at regular corporate tax rates
to the extent that we do not distribute all of our net capital gain or “REIT taxable income” as adjusted.
x
We must distribute during each calendar year at least the combined sum of 85% of our ordinary
income for that year; 95% of our capital gain net income for that year; and any undistributed taxable
income from prior periods. In the event that we do not satisfy this distribution requirement, we will be
subject to a 4% excise tax on the excess of such required distribution over the amounts actually
distributed. For these purposes, dividends that are declared in October, November or December of the
relevant taxable year, are payable to stockholders of record on a specified date in such month and are
actually distributed during January of the subsequent year are treated as distributed in the prior year.
x
We may not dispose of any asset that is subject to the Built-In Gain Rules during the 10-year period
beginning on the date on which we acquired the asset or, if we do, we will be required to distribute at
least 90% of the Built-In Gain (after tax), if any, recognized on the disposition of the asset.
We intend to make timely distributions sufficient to satisfy the annual distribution requirements and to
avoid the 4% excise tax. In this regard, the Operating Company’s operating agreement authorizes its managing
member to take such steps as may be necessary to cause the Operating Company to distribute to its members an
amount sufficient to permit us to meet these distribution requirements.
In order for us to deduct dividends we distribute to our stockholders, such distributions must not be
“preferential” within the meaning of Section 562(c) of the Code. Every holder of a particular class of stock must be
treated the same as every other holder of shares of such class, and no class of stock may be treated otherwise than in
accordance with its dividend rights as a class. We do not intend to make any preferential dividends.
We expect that our REIT taxable income will be less than our cash flow due to the allowance of
depreciation and other non-cash charges in computing REIT taxable income. Accordingly, we anticipate that we
generally will have sufficient cash or liquid assets to enable us to satisfy the 90% distribution requirement. It is
possible, however, that we may not have sufficient cash or other liquid assets to meet the 90% distribution
requirement or to distribute such greater amount as may be necessary to avoid income and excise tax. In such event,
we may find it necessary to borrow funds to pay the required distribution or, if possible, pay taxable stock dividends
in order to meet the distribution requirement.
In the event that we are subject to an adjustment to our REIT taxable income (as defined in
Section 860(d)(2) of the Code) resulting from an adverse determination by either a final court decision, a closing
agreement between us and the IRS under Section 7121 of the Code, an agreement as to tax liability between us and
an IRS district director or a statement by us attached to an amendment or supplement to our federal income tax
return, we may be able to correct any resulting failure to meet the 90% annual distribution requirement by paying
“deficiency dividends” to our stockholders that relate to the adjusted year but that are paid in the subsequent year.
To qualify as a deficiency dividend, the distribution must be made within 90 days of the adverse determination and
we also must satisfy certain other procedural requirements. If the statutory requirements of Section 860 of the Code
are satisfied, a deduction is allowed for any deficiency dividend subsequently paid by us to offset an increase in our
REIT taxable income resulting from an adverse determination. We, however, will be required to pay statutory
interest on the amount of any deduction taken for deficiency dividends to compensate for the deferral of the tax
liability.
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Earnings and Profits
Although not defined in the Code, “earnings and profits” is a concept used extensively throughout
corporate tax law and each corporation maintains an “earnings and profits” account to determine whether a
distribution originates from corporate earnings or another source. Distributions generally decrease earnings and
profits while income generally increases earnings and profits. If a corporation has positive earnings and profits,
distributions generally will be considered to come from corporate earnings. If a corporation has no earnings and
profits, distributions generally will be considered a return of capital and then a capital gain. At the close of any
taxable year, a REIT cannot have accumulated C corporation earnings and profits and remain qualified as a REIT.
Failure to Qualify and Statutory Relief
In addition to the statutory relief provisions discussed above, the American Jobs Creation Act of 2004
created additional relief provisions for REITs. If we fail to satisfy one or more of the requirements for qualification
as a REIT, other than the income tests and asset tests discussed above, we will not lose our status as a REIT if our
failure was due to reasonable cause and not willful neglect and we have paid a penalty of $50,000 for each such
failure.
If the statutory relief provisions do not apply to our failure to qualify as a REIT, we will be subject to
regular corporate tax rates (including any applicable alternative minimum tax) on our taxable income. Distributions
to stockholders in any year in which we fail to qualify will not be deductible by us, but we also will not be required
to make distributions during those years. If we fail to qualify as a REIT and have positive current or accumulated
earnings and profits, our distributions to stockholders will be dividends that are eligible to be taxed to individuals at
rates which are currently less than the highest ordinary income tax rates. Subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends-received deduction. Unless we are entitled to relief under
specific statutory provisions, we also will be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible to state whether in all circumstances we
would be entitled to such statutory relief.
Sale-Leaseback Transactions
Some of our investments may be in the form of sale-leaseback transactions. In most instances, depending
on the economic terms of the transaction, we will be treated for federal income tax purposes as either the owner of
the property or the holder of a debt secured by the property. We do not expect to request an opinion of counsel
concerning the status of any leases of properties as true leases for federal income tax purposes.
The IRS may challenge a specific sale-leaseback transaction that we have treated as a true lease and instead
treat it as a financing arrangement or loan for federal income tax purposes. In such event, each such loan would
likely be viewed as secured by real property to the extent of the fair market value of the underlying property for
purposes of the asset tests and the 75% gross income test. We expect that, for this purpose, the fair market value of
the underlying property would be determined without taking into account our lease. If a sale-leaseback transaction
were so recharacterized, we might fail to satisfy the asset tests or the 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 might also cause us to fail to meet the distribution requirement for a taxable year.
Taxation of U.S. Stockholders
For purposes of this Memorandum, we define a “U.S. Stockholder” to mean a holder of common stock that
for federal income tax purposes:
x
is a citizen or resident of the United States;
x
is a corporation (including an entity treated as a corporation for United States federal income tax
purposes) created or organized in or under the laws of the United States or any of its political
subdivisions;
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x
is an estate the income of which is subject to federal income taxation regardless of its source; or
x
is a trust, provided that a court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the authority to control all
substantial decisions of the trust.
If an entity classified as a partnership for federal income tax purposes holds our stock, the tax treatment of
a partner will depend on the status of the partner and on the activities of the partnership. Partners of partnerships
holding our stock should consult their tax advisors.
Distributions Generally
Distributions to U.S. Stockholders, other than capital gain dividends (which are discussed below), will
constitute taxable dividends up to the amount of our positive current or accumulated earnings and profits. In
general, dividends received from REITs are not eligible to be taxed at the preferential qualified dividend income
rates applicable to individuals who receive dividends from taxable C corporations. An exception, however, is when
individual stockholders are taxed at such rates on dividends designated by and received from REITs to the extent
that the dividends are attributable to: (i) income that the REIT previously retained in a prior year and on which it
was subject to corporate level tax, (ii) dividends received by the REIT from taxable corporations (including taxable
REIT subsidiaries), or (iii) income from sales of appreciated property subject to the Built-in Gain Rules. Because a
REIT is not subject to tax on income distributed to its stockholders, the distributions made to corporate stockholders
are not eligible for the dividends-received deduction. To the extent that we make a distribution in excess of our
positive current or accumulated earnings and profits, the distribution will be treated first as a tax-free return of
capital (reducing the tax basis in the U.S. Stockholder’s shares of our common stock) and then the distribution in
excess of the tax basis will be taxable as gain realized from the sale of the common stock. Dividends we declare in
October, November or December of any year payable to stockholders of record on a specified date in any such
month are treated as both paid by us and received by the stockholders on December 31 of that year, provided that we
actually pay the dividends during January of the following calendar year.
Capital Gain Distributions
Distributions to U.S. Stockholders that we properly designate as capital gain dividends will be treated as
long-term capital gains (to the extent they do not exceed our actual net capital gain) for the taxable year without
regard to the period for which the U.S. Stockholder has held the stock. However, corporate U.S. Stockholders may
be required to treat up to 20% of certain capital gain dividends as ordinary income. Capital gain dividends are not
eligible for the dividends-received deduction for corporations. In the case of individuals, long-term capital gains are
generally taxable at a federal rate of 15% (20% for higher income individuals, as described below), except that
capital gains attributable to the sale of depreciable real property held for more than 12 months are subject to a 25%
maximum federal income tax rate to the extent of previously claimed depreciation deductions. The American
Taxpayer Relief Act of 2012, signed into law by President Obama on January 2, 2013, among other things,
increased the maximum federal rate on long-term capital gains to 20% for certain higher-income individuals
(married couples filing joint returns with taxable income in excess of $450,000, heads of households with taxable
income in excess of $425,000 and other individuals with taxable income in excess of $400,000).
We may elect to retain and pay federal income tax on any net long-term capital gain. In this instance, U.S.
Stockholders will include in their income their proportionate share of the undistributed long-term capital gain. The
U.S. Stockholders also will be deemed to have paid their proportionate share of tax on such long-term capital gain
and, therefore, will receive a credit or refund for the amount of such tax. In addition, the basis of the U.S.
Stockholders’ shares will be increased in an amount equal to the excess of the amount of capital gain included in his
or her income over the amount of tax he or she is deemed to have paid.
Unearned Income Medicare Tax
Beginning in 2013, high-income U.S. individuals, estates, and trusts will be subject to an additional 3.8%
tax on their net investment income. The Health Care and Education Reconciliation Act of 2010, which amended the
Patient Protection and Affordable Care Act, imposes this additional 3.8% tax on net investment income in tax years
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beginning after December 31, 2012. “Net investment income” includes dividends and gains from sales of stock.
For individuals, the tax will be 3.8% of the lesser of the individual’s net investment income or the excess of the
individual’s modified adjusted gross income over $250,000 in the case of a married individual filing a joint return or
a surviving spouse, $125,000 in the case of a married individual filing a separate return, or $200,000 in the case of a
single individual.
Certain Dispositions of Shares
In general, U.S. Stockholders will realize capital gain or loss on the sale of common stock equal to the
difference between (i) the amount of cash and the fair market value of any property received by the U.S. Stockholder
on such disposition and (ii) the U.S. Stockholder’s adjusted basis of such common stock. Losses incurred on the sale
or exchange of our common stock that a U.S. Stockholder holds for less than six months (after applying certain
holding period rules) will be treated as long-term capital loss to the extent of any capital gain dividend the
stockholder has received with respect to those shares.
The applicable tax rate will depend on the U.S. Stockholder’s holding period in the asset (generally, if the
U.S. Stockholder has held the asset for more than one year, it will produce long-term capital gain) and the U.S.
Stockholder’s tax bracket. A capital gain tax rate of 25% (which is generally higher than the long-term capital gain
tax rates for non-corporate stockholders) would apply to a portion of the capital gain realized by a non-corporate
stockholder on the sale of common stock that would correspond to our “unrecaptured Section 1250 gain.” U.S.
Stockholders should consult with their own tax advisors with respect to their capital gain tax liability. In general,
any loss recognized by a U.S. Stockholder upon the sale or other disposition of common stock that the U.S.
Stockholder has held for six months or less, after applying the holding period rules, will be treated as long-term
capital loss to the extent of distributions received by the U.S. Stockholder from us that were required to be treated as
long-term capital gains.
If a U.S. Stockholder has shares of our common stock redeemed by us, such U.S. Stockholder will be
treated as if such U.S. Stockholder sold the redeemed shares if all of such U.S. Stockholder’s shares of our common
stock are redeemed or if such redemption is not essentially equivalent to a dividend within the meaning of
Section 302(b)(1) of the Code or substantially disproportionate within the meaning of Section 302(b)(2) of the Code.
If a redemption is not treated as a sale of the redeemed shares, it will be treated as a dividend distribution. U.S.
Stockholders should consult with their tax advisors regarding the taxation of any particular redemption of our shares.
Passive Activity Loss and Investment Interest Limitations
U.S. Stockholders may not treat distributions we make to them or any gain from disposing of our common
stock as passive activity income. Therefore, U.S. Stockholders will not be able to apply any “passive losses” against
such income. Dividends we pay (to the extent they do not constitute a return of capital) generally will be treated as
investment income for purposes of the investment interest limitation. Net capital gain from the disposition of our
common stock (or capital gain dividends) generally will be excluded from investment income unless the stockholder
elects to have such gain taxed at ordinary income rates.
Treatment of Tax-Exempt Stockholders
Distributions we make to a tax-exempt employee pension trust or other domestic tax-exempt employee
pension trust or other domestic tax exempt stockholder will not constitute unrelated business taxable income
(“UBTI”), unless the tax exempt stockholder has borrowed to acquire or carry our shares of common stock.
Qualified trusts that hold more than 10% (by value) of the shares of pension-held REITs may be required to treat a
certain percentage of such REIT’s distributions as UBTI. We expect that our ownership limitation will prevent us
from becoming a pension-held REIT, unless our Board grants qualified trusts waivers from our ownership
limitations.
Information Reporting Requirements and Backup Withholding Tax
U.S. Stockholders
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In general, information reporting requirements will apply to payments of distributions on our common
stock and to payments of the proceeds of the sale of our common stock, unless an exception applies. Further, under
certain circumstances, U.S. Stockholders may be subject to backup withholding at a rate of 28% on payments made
with respect to, or cash proceeds of a sale or exchange of, our common stock. Backup withholding will apply only
if:
x
the payee fails to furnish his or her taxpayer identification number (which, for an individual, would be
his or her Social Security Number) to the payor as required;
x
the IRS notifies the payor that the taxpayer identification number furnished by the payee is incorrect;
x
the IRS has notified the payee that such payee has failed to properly include reportable interest and
dividends in the payee’s return or has failed to file the appropriate return and the IRS has assessed a
deficiency with respect to such underreporting; or
x
the payee has failed to certify to the payor, under penalties of perjury, that the payee is not subject to
withholding.
In addition, backup withholding will not apply with respect to payments made to certain exempt recipients,
such as corporations and tax-exempt organizations. U.S. Stockholders should consult their own tax advisors
regarding their qualifications for exemption from backup withholding and the procedure for obtaining such an
exemption.
Backup withholding is not an additional tax. Rather, the amount of any backup withholding with respect to
a payment to a U.S. Stockholder will be allowed as a credit against the U.S. Stockholder’s federal income tax
liability and may entitle the stockholder to a refund, provided that the stockholder furnishes the required information
to the IRS.
Non-U.S. Stockholders
Generally, information reporting will apply to payments of distributions on our common stock and backup
withholding at a rate of 28% may apply, unless the payee certifies that he or she is not a U.S. person or otherwise
establishes an exemption.
The payment of the proceeds from the disposition of our common stock to or through the U.S. office of a
U.S. or foreign broker will be subject to information reporting and, possibly, backup withholding, unless the nonU.S. Stockholder certifies as to his or her non-U.S. status or otherwise establishes an exemption and provided that
the broker does not have actual knowledge that the stockholder is a U.S. person or that the conditions of any other
exemption are not, in fact, satisfied. The proceeds of the disposition of our common stock by a non-U.S.
Stockholder to or through a foreign office of a broker generally will not be subject to information reporting or
backup withholding. However, if the broker is a U.S. person, a controlled foreign corporation for U.S. tax purposes
or a foreign person 50% or more of whose gross income from all sources for specified periods is from activities that
are effectively connected with a U.S. trade or business, information reporting generally will apply, unless the broker
has documentary evidence as to the non-U.S. Stockholder’s foreign status and has no actual knowledge to the
contrary.
Applicable Treasury regulations provide presumptions regarding the status of stockholders when payments
to the stockholders cannot be reliably associated with appropriate documentation provided to the payor. These
Treasury regulations require some stockholders to have provided new certifications with respect to payments made
after December 31, 2000. Because the application of these Treasury regulations varies depending on the
stockholder’s particular circumstances, non-U.S. Stockholders should consult their tax advisors with regard to U.S.
information reporting and backup withholding.
Tax Aspects of the Operating Company
General
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We expect that substantially all of our investments will be held through the Operating Company which was
formed as a LLC. In general, a LLC is a “pass-through” entity that is not subject to federal income tax. Rather,
members are allocated their proportionate share of the items of income, gain, loss, deduction and credit of a
partnership and are potentially subject to tax thereon, without regard to whether the members receive distributions
from the LLC. We include in our income our proportionate share of the Operating Company’s income, gain, loss,
deduction and credit for purposes of the various REIT income tests and in the computation of our REIT taxable
income. In addition, we include our proportionate share of the assets held by the Operating Company in the REIT
asset tests.
Tax Allocations with Respect to Our Properties
When real property is contributed to the Operating Company in exchange for membership interests, the
Operating Company will generally take a carryover basis in that property for tax purposes. That carryover basis is
equal to the contributing member’s adjusted basis in the property rather than the fair market value of the property at
the time of contribution. Pursuant to Section 704(c) of the Code, income, gain, loss and deduction attributable to
such contributed property must be allocated in a manner such that the contributing member is charged with or
benefits from the unrealized gain or unrealized loss associated with the property at the time of the contribution. The
amount of such unrealized gain or unrealized loss generally is equal to the difference between the fair market value
of the contributed property at the time of contribution and the adjusted tax basis of such property at the time of
contribution (a “Book-Tax Difference”). Such allocations are solely for federal income tax purposes and do not
affect the book capital accounts or other economic or legal arrangements among the members.
Future contributions to the Operating Company may take the form of appreciated property. Consequently,
the Operating Company’s operating agreement requires tax allocations be made in a manner consistent with
Section 704(c) of the Code.
In general, members who contribute their interests in properties to the Operating Company, or Contributing
Members, will be allocated lower amounts of depreciation deductions for tax purposes than such deductions would
be if determined on a pro rata basis. In addition, in the event of the disposition of any of the contributed assets that
have a Book-Tax Difference, all taxable income attributable to such Book-Tax Difference generally will be
allocated to the Contributing Members and we generally will be allocated only our share of capital gains attributable
to appreciation, if any, occurring after the closing of the acquisition of such properties. This will tend to eliminate
the Book-Tax Difference over the life of the Operating Company. However, the special allocation rules of
Section 704(c) of the Code do not always entirely eliminate the Book-Tax Difference on an annual basis or with
respect to a specific taxable transaction such as a sale. Thus, the carryover basis of the contributed assets in the
hands of the Operating Company may cause us to be allocated lower depreciation and other deductions and cause
Contributing Members to be allocated more taxable income. As a result, we could recognize taxable income in
excess of distributed amounts, which might adversely affect our ability to comply with the REIT distribution
requirements, and Contributing Members may realize income on the distribution of cash because their basis has not
been increased sufficiently from income allocations. See “Annual Distribution Requirements.”
With respect to any property purchased by the Operating Company, such property initially will have a tax
basis equal to its fair market value and Section 704(c) of the Code will not apply.
Basis in Operating Company Membership Interest
Our adjusted tax basis in our interest in the Operating Company will generally be:
x
equal to the amount of cash and the basis of any other property that we contribute to the Operating
Company;
x
increased by our allocable share of the Operating Company’s income and our allocable share of
indebtedness of the Operating Company; and
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x
reduced, but not below zero, by our allocable share of any losses suffered by the Operating Company,
the amount of cash distributed to us, and constructive distributions resulting from a reduction in our
share of indebtedness of the Operating Company.
If the allocation of our distributive share of the Operating Company’s loss exceeds the adjusted tax basis of
our membership interest in the Operating Company, the recognition of such excess loss will be deferred until such
time and to the extent that we have an adjusted tax basis in our membership interest. To the extent that the
Operating Company’s distributions, or any decrease in our share of the indebtedness of the Operating Company
(such decreases being considered a cash distribution to the members), exceed our adjusted tax basis, such excess
distributions (including such constructive distributions) will constitute taxable income to us. Such taxable income
normally will be characterized as a capital gain if the membership interest in the Operating Company has been held
for longer than one year, subject to the reduced tax rates described in “Taxation of U.S. Stockholders — Capital
Gain Distributions.” Under current law, capital gains and ordinary income of corporations generally are taxed at the
same marginal rates.
Sale of the Properties
Under applicable provisions of the Code regarding prohibited transactions by REITs, we will be subject to
a 100% tax on any gain realized on the sale or other disposition of any property (other than foreclosure property) we
own, directly or through a subsidiary entity, including the Operating Company, but excluding our taxable REIT
subsidiaries, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of
trade or business. See “— Requirements for Qualification — Income Tests.” Under existing law, whether property
is held as inventory or primarily for sale to customers in the ordinary course of the Operating Company’s trade or
business is a question of fact that depends on all the facts and circumstances with respect to the particular transaction
and property. We intend to avoid the 100% prohibited transaction tax by: (a) conducting activities that may
otherwise be considered prohibited transactions through a taxable REIT subsidiary, (b) conducting our operations in
such a manner so that no sale or other disposition of an asset we own, directly or through any subsidiary other than a
taxable REIT subsidiary, will be treated as a prohibited transaction, or (c) structuring certain dispositions of our
properties to comply with certain safe harbors available under the Code for properties held at least two years. No
assurance, however, can be given that any particular property will not be treated as inventory or property held
primarily for sale to customers in the ordinary course of a trade or business.
State and Local Tax
We may be subject to state and local tax in various states and localities. Our stockholders may also be
subject to state and local tax in various states and localities. The tax treatment to us and to our stockholders in such
jurisdictions may differ from the federal income tax treatment described above. Consequently, before buying our
common stock, a potential investor should consult a tax advisor regarding the effect of state and local tax laws on an
investment in our common stock.
Changes in Tax Laws
The rules dealing with federal income taxation are constantly under review by persons involved in the
legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or
without retroactive application, could adversely affect our stockholders or us. We cannot predict how changes in the
tax laws might affect our stockholders or us. New legislation, Treasury Regulations, administrative interpretations
or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax
consequences of such qualification.
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4821-2485-6879.12
ERISA Considerations
General
The following is a summary of some non-tax considerations associated with an investment in our shares by
tax-qualified pension, stock bonus or profit-sharing plans, employee benefit plans described in Section 3(3) and
subject to Title I of ERISA, annuities described in Section 403(a) or (b) of the Code, an individual retirement
account or annuity described in Sections 408 or 408A of the Code, an Archer MSA described in Section 220(d) of
the Code, a health savings account described in Section 223(d) of the Code, or a Coverdell education savings
account described in Section 530 of the Code, which are referred to as Plans and IRAs, as applicable. This summary
is based on provisions of ERISA and the Code, including amendments thereto through the date of this prospectus,
and relevant regulations and opinions issued by the Department of Labor, or DOL, and the IRS through the date of
this prospectus. We can make no assurance that adverse tax decisions or legislative, regulatory or administrative
changes that would significantly modify the statements expressed herein will not occur. Any such changes may or
may not apply to transactions entered into prior to the date of their enactment.
While each of the ERISA and Code issues discussed below may not apply to all Plans and IRAs,
individuals making investment decisions with respect to Plans and IRAs should carefully review the rules and
exceptions described below, and determine their applicability to their situation.
In general, individuals making investment decisions with respect to Plans and IRAs should, at a minimum,
consider:
x
whether the investment is in accordance with the documents and instruments governing such Plan or
IRA;
x
whether the investment satisfies the prudence and diversification and other fiduciary requirements of
ERISA, if applicable;
x
whether the investment will result in UBTI to the Plan or IRA (see “Federal Income Tax
Considerations — Treatment of Tax-Exempt Stockholders”);
x
whether there is sufficient liquidity for the Plan or IRA, considering the minimum and other
distribution requirements under the Code and the liquidity needs of such Plan or IRA, after taking
this investment into account;
x
the need to value the assets of the Plan or IRA annually or more frequently; and
x
whether the underlying assets of the Company could be considered “plan assets” , which could
constitute or give rise to a prohibited transaction or fiduciary breach under ERISA or the Code, if
applicable.
Additionally, individuals making investment decisions with respect to Plans and IRAs must remember that
ERISA requires that the assets of an employee benefit plan must generally be held in trust, and that the trustee, or a
duly authorized named fiduciary or investment manager, must have authority and discretion to manage and control
the assets of an employee benefit plan.
Plan Assets
In the event that our properties and other assets were deemed to be assets of a Plan or IRA, referred to
herein as “Plan Assets,” our directors would, and employees of our affiliates might be deemed fiduciaries of any
Plans or IRAs investing as stockholders. If this were to occur, certain contemplated transactions between us and our
directors and employees of our affiliates could be deemed to be “prohibited transactions.” Fiduciaries of a Plan that
allow a prohibited transaction to occur may be required to reimburse the Plan for any losses suffered by the Plan as a
result of the investment. In addition, each disqualified person (within the meaning of Section 4975 of the Code)
involved could be subject to an excise tax equal to 15% of the amount involved in the prohibited transaction for each
- 78 CONFIDENTIAL
4821-2485-6879.12
year the transaction continues and, unless the transaction is corrected within statutorily required periods, to an
additional tax of 100%. Additionally, ERISA’s fiduciary standards applicable to investments by Plans would extend
to our directors and possibly employees of our affiliates as Plan fiduciaries with respect to investments made by us,
and the requirement that Plan Assets be held in trust could be deemed to be violated. Further, if our assets are
deemed to be Plan Assets, an investment by a Plan or IRA in our shares might be deemed to result in an
impermissible commingling of Plan Assets with other property.
Under the Pension Protection Act of 2006 (the “PPA”), Section 3(42) of ERISA defines “Plan Assets” in
accordance with DOL regulations with certain express exceptions. A DOL regulation, referred to in this discussion
as the “Plan Asset Regulation,” as modified by the express exceptions noted in the PPA, provides guidelines as to
whether, and under what circumstances, the underlying assets of an entity will be deemed to constitute Plan Assets.
Under the Plan Asset Regulation, the assets of an entity in which a Plan or IRA makes an equity investment will
generally be deemed to be assets of such Plan or IRA unless the entity satisfies one of the exceptions to this general
rule. Generally, the exceptions require that the investment in the entity be one of the following:
x
in securities issued by an investment company registered under the Investment Company Act;
x
in “publicly offered securities,” defined generally as interests that are “freely transferable,” “widely
held” and registered with the Securities and Exchange Commission;
x
in an “operating company,” which includes “venture capital operating companies” and “real estate
operating companies;” or
x
in which equity participation by “benefit plan investors” is not significant.
The Plan Asset Regulation provides that equity participation in an entity by benefit plan investors is
“significant” if at any time 25% or more of the value of any class of equity interests is held by benefit plan investors.
As modified by the PPA, a “benefit plan investor” is defined to mean an employee benefit plan subject to Part 4 of
Title I of ERISA, any plan to which Section 4975 of the Code applies, and any entity whose underlying assets
include plan assets by reason of a plan’s investment in such entity.
We intend to restrict ownership of each class of equity interests held by benefit plan investors to an
aggregate value of less than 25% and thus qualify for the exception for investments in which equity participation by
benefit plan investors is not significant. In order to limit equity participation by benefit plan investors to less than
25%, each investor must disclose to the Company whether or not it is a benefit plan investor or otherwise using plan
assets for its investment, and unless otherwise agreed to by the Company, no purchase by or proposed transfer of an
interest in the Company will be permitted to the extent that such purchase or proposed transfer would result in
benefit plan investors owning 25% or more of the Company.
- 79 CONFIDENTIAL
4821-2485-6879.12
EXHIBIT A
Most Recent Annual Consolidated Financial Statements of
Royal Oak Realty Trust Inc. and Subsidiaries
ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
TOGETHER WITH
INDEPENDENT AUDITORS’ REPORT
Rochester, New York
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors and Stockholders of
Royal Oak Realty Trust Inc.:
We have audited the accompanying consolidated financial statements of Royal Oak Realty Trust Inc. and
subsidiaries (collectively, the “Company”), which comprise the consolidated balance sheets as of
December 31, 2015 and 2014, and the related consolidated statements of operations, changes in
stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated
financial statements.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with the accounting principles generally accepted in the United States of
America; this includes the design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on the auditors’ judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the Company’s preparation and fair presentation of the consolidated financial statements in
order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express
no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of significant accounting estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Royal Oak Realty Trust Inc. and subsidiaries as of December 31, 2015
and 2014, and the results of their operations and their cash flows for the years then ended in accordance
with accounting principles generally accepted in the United States of America.
Other Matter - Basis of Accounting
In our report dated March 12, 2015, we expressed an opinion on the 2014 consolidated financial
statements presented in accordance with the basis of accounting the Company used for income tax
purposes. During the year ended December 31, 2015, the Company changed its basis of accounting from
the income tax basis of accounting to accounting principles generally accepted in the United States of
America. The consolidated financial statements for 2014 have been restated to be in conformity with
accounting principles generally accepted in the United States of America.
April 25, 2016.
ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2015 AND 2014
2015
2014
ASSETS
INVESTMENT IN RENTAL PROPERTY:
Accounted for using the operating method, net of
accumulated depreciation
Accounted for using the direct financing method
$
37,117,981
7,173,407
44,291,388
$ 34,788,653
34,788,653
4,236,222
32,358
266,824
199,924
2,904,842
1,420,906
9,061,076
2,202,306
18,486
127,499
86,598
3,180,561
842,061
6,457,511
$ 53,352,464
$ 41,246,164
$
$ 23,638,679
1,699,400
157,485
50,741
161,937
209,681
143,162
124,050
1,129,877
27,315,012
OTHER ASSETS:
Cash
Restricted cash
Accrued rental income
Prepaid expenses and other assets
Intangible lease assets, net
Lease acquisition costs, net
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Mortgages payable, net of unamortized debt acquisition costs
Line of credit, net of unamortized debt acquisition costs
Accounts payable and other accrued expenses
Accrued interest
Due to related parties
Distributions/dividends declared
Tenant security deposits
Tenant real estate tax deposits
Intangible lease liabilities, net
TOTAL LIABILITIES
STOCKHOLDERS’ EQUITY:
Royal Oak Realty Trust Inc. Stockholders’ Equity Preferred stock, $.001 par value; 100,000 shares
authorized; none issued or outstanding
Common stock, $.001 par value; 40,000,000 shares
authorized; 288,332 and 207,405 shares issued and outstanding
as of December 31, 2015 and 2014, respectively
Common stock subscribed
Additional paid-in capital
Distributions/dividends in excess of accumulated earnings
Total Royal Oak Realty Trust Inc. Stockholders’ Equity
Noncontrolling interests
TOTAL STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
-
-
288
10
15,552,117
(1,700,942)
13,851,473
5,622,697
19,474,170
$
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
-1-
30,072,308
2,100,000
31,389
72,785
34,159
334,655
120,441
78,608
1,033,949
33,878,294
53,352,464
207
14
11,427,140
(807,014)
10,620,347
3,310,805
13,931,152
$
41,246,164
ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
REVENUE:
Rental income from operating leases
Earned income from direct financing leases
Rental expenses reimbursable by tenants
Interest and other income
Total revenue
2015
2014
$ 3,740,445
282,245
220,741
284
4,243,715
$ 2,215,257
282,872
1,497
2,499,626
1,421,790
1,225,773
116,755
535,905
106,000
230,445
220,741
152,735
47,949
4,058,093
872,710
770,958
43,685
252,771
255,450
175,722
282,872
225,841
53,748
2,933,757
EXPENSES:
Depreciation and amortization
Interest expense - contractual
Interest expense - amortization of debt acquisition costs
Asset management and property management fees
Acquisition fees paid to asset manager
Directors fees and related awards
Rental expenses reimbursable by tenants
Professional fees - general and acquisition-related
Other expenses
Total expenses
NET INCOME (LOSS) INCLUDING
NONCONTROLLING INTERESTS
LESS - NET (INCOME) LOSS ATTRIBUTABLE
TO NONCONTROLLING INTERESTS
NET INCOME (LOSS) ATTRIBUTABLE TO
ROYAL OAK REALTY TRUST INC.
185,622
(434,131)
(122,482)
55,856
$
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-2-
63,140
$
(378,275)
-
Adjustment of noncontrolling interests
Distributions/dividends paid and payable
288
-
Adjustment of noncontrolling interests
BALANCE, December 31, 2015
-
Net income
$
-
-
-
10
10
(14)
14
14
$
$
15,552,117
239,541
-
(245,107)
169,245
-
527,990
3,433,308
-
11,427,140
152,624
-
680,522
138,522
-
8,069,137
-
2,386,335
-
-
Additional
paid-in
capital
$
$
(1,700,942)
-
63,140
-
-
-
-
-
(957,068)
(807,014)
-
(378,275)
-
-
-
-
(428,739)
-
-
-
Distributions/
dividends in excess
of accumulated
earnings
-3-
The accompanying notes to consolidated financial statements
are an integral part of these statements.
(5)
-
-
Redemption of 5,000 shares of
common stock
Stock-based compensation
-
-
Issuance of membership units associated
with property acquisition
86
-
-
-
-
-
-
-
-
-
-
-
-
$
Common
stock
subscribed
Common stock subscribed
Issuance of 85,927 shares of
common stock, net
207
-
Net loss
BALANCE, December 31, 2014
-
Stock-based compensation
-
Issuance of membership units associated
with property acquisition
Common stock subscribed
163
44
Issuance of 163,535 shares of
common stock, net
-
-
-
$
$
Distributions/dividends paid and payable
Conversion of membership interests
into 43,870 shares of common stock
Member contributions
BALANCE, January 1, 2014
Common
stock
ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(4,673,447)
980,536
3,692,911
Members’
capital
$
$
5,622,697
(239,541)
122,482
-
-
2,688,573
-
-
(259,622)
3,310,805
(152,624)
(55,856)
-
-
1,400,000
-
(167,783)
2,287,068
-
-
Noncontrolling
interests
-
185,622
(245,112)
169,245
2,688,573
528,000
3,433,380
(1,216,690)
13,931,152
-
(434,131)
680,536
138,522
1,400,000
8,069,300
(596,522)
-
980,536
3,692,911
$ 19,474,170
$
Total
ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) including noncontrolling interests
$
Adjustments to reconcile net income (loss) including noncontrolling interests
to net cash provided by operating activities:
Depreciation and amortization
Stock-based compensation
Interest expense - amortization of debt acquisition costs
Straight-line rent and financing lease adjustments
Increase in prepaid expenses and other assets
Increase in accounts payable and other accrued expenses
Increase in accrued interest
(Decrease) increase in due to related parties
(Decrease) increase in tenant security deposits
(Decrease) increase in tenant real estate tax deposits
Total adjustments
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to investment in rental property accounted for using
the direct financing method
Additions to investment in rental property accounted for using
the operating method
Lease acquisition costs paid
Increase in restricted cash
Net cash used in investing activities
185,622
2014
$
(434,131)
1,342,074
169,245
116,755
(112,732)
(113,326)
3,554
22,044
(57,778)
(22,721)
(45,442)
1,301,673
832,506
138,522
43,685
(77,088)
(86,409)
25,335
50,741
38,069
143,162
124,050
1,232,573
1,487,295
798,442
(7,200,000)
-
(841,077)
(670,456)
(13,872)
(8,725,405)
(20,048,543)
(597,610)
(13,866)
(20,660,019)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on mortgages payable
Proceeds from issuance of common stock, net
Proceeds from common stock subscribed, not yet issued
Cash distributions/dividends paid
Principal payments on mortgages payable
Net borrowings on line of credit
Debt acquisition costs paid
Redemption of common stock
Contributions from members
Net cash provided by financing activities
7,300,000
3,119,190
528,000
(777,526)
(664,260)
350,000
(338,266)
(245,112)
9,272,026
11,050,000
7,981,414
680,536
(348,302)
(389,797)
1,750,000
(275,653)
980,536
21,428,734
NET INCREASE IN CASH
2,033,916
1,567,157
CASH, beginning of year
2,202,306
635,149
CASH, end of year
$
4,236,222
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-4-
$
2,202,306
ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
1. BUSINESS DESCRIPTION
Royal Oak Realty Trust Inc. (the “Corporation,” together with its consolidated subsidiaries, the
“Company”), a Maryland corporation, was formed on January 6, 2014 and elected to be taxed as a
real estate investment trust (“REIT”) in 2014. The Company is focused on acquiring commercial
net leased real estate. The properties are leased under long-term lease agreements. All properties
are leased on a net lease basis, to the extent possible, such that tenants pay most, if not all, of the
occupancy costs such as maintenance and repairs, real estate taxes, insurance, and utilities. At
December 31, 2015, the Company owns ten commercial stand-alone real estate properties located in
four states within the continental United States of America.
Royal Oak Realty Trust (Operating Company) LLC (the “Operating Company”) is the entity
through which the Corporation conducts substantially all of its business and owns (either directly or
through subsidiaries) substantially all of its assets. At December 31, 2015, the Corporation owns
70.5% of the economic interests in the Operating Company and serves as its managing member.
The remaining interests are held by members who acquired their interests by contributing property
to the Operating Company (see Note 10).
Prior to changing their names in December 2015 and January 2016, respectively, Royal Oak Realty
Trust Inc. and Royal Oak Realty Trust (Operating Company) LLC were known as Buckingham Net
Leased Properties Group Inc. and Buckingham Net Leased Properties Group LLC, respectively.
The accompanying consolidated financial statements present the consolidated financial position,
results of operations, changes in equity, and cash flows of the Corporation, the Operating Company
and its subsidiaries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
All material intercompany balances and transactions have been eliminated in consolidation.
Basis of Accounting:
The accompanying consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (“GAAP”). In prior years,
the Company presented its consolidated financial statements on the basis of accounting that the
Company uses for income tax purposes, which is a basis of accounting other than GAAP.
Adjustments and reclassifications have been made to the 2014 consolidated financial statements to
conform to the current year presentation.
-5-
Use of Estimates:
The preparation of consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the reporting periods.
Significant estimates include, but are not limited to, the allocation of purchase price between
investment in rental property and intangible assets and liabilities, the allowance for doubtful
accounts, the depreciable lives of rental property, the amortizable lives of intangible assets and
liabilities, and taxable income. Accordingly, actual results may differ from those estimates.
Revenue Recognition:
Rental property leases are accounted for using either the operating method or the direct financing
method. Such methods are described below:
Operating method - Revenue is recognized as rents are earned. When scheduled rentals vary
during the lease term, income is recognized on a straight-line basis so as to produce a constant
periodic rent over the term of the lease.
Direct financing method - Unearned income is deferred and amortized into income over the
lease terms so as to produce a constant periodic rate of return on the Company’s net investment
in the leases.
Accrued Rental Income and Allowance for Doubtful Accounts:
Accrued rental income includes the aggregate difference between the scheduled rents which vary
during the lease term and the income recognized on a straight-line basis.
Management periodically reviews the sufficiency of the allowance for doubtful accounts, taking into
consideration its historical losses and existing economic conditions, and makes adjustments to the
allowance as it considers necessary. Accounts are charged off against the allowance for doubtful
accounts when management determines that such accounts are uncollectible. Management has
determined that no allowance is necessary at December 31, 2015 and 2014.
Investment in Rental Property:
Rental property accounted for using the operating method is recorded at cost or fair value. Rental
property accounted for using the direct financing method is recorded at its net investment (which at
the inception of the lease generally represents the cost of the property). When assets are retired or
disposed of, the related cost and accumulated depreciation are removed from their respective
accounts. The difference between the cost or fair value and accumulated depreciation of assets
disposed of, less any amount realized from the disposition, is reflected in the Consolidated
Statements of Operations as gain or loss on disposition of rental property.
-6-
Acquisitions of properties are accounted for utilizing the acquisition method and, accordingly, are
recorded at the estimated fair values of the assets acquired and liabilities assumed. Acquisitionrelated costs such as transaction costs and acquisition fees paid under asset management agreements
(see Note 7) are expensed as incurred. The results of operations of acquired properties are included
in the Consolidated Statements of Operations from the respective date of acquisition. The fair
value of rental property acquired is allocated to tangible assets, consisting of land, buildings and
improvements, and identifiable intangible assets and liabilities, such as amounts related to in-place
leases, acquired above- and below-market leases, and mortgages payable. Estimated fair value
determinations are based on management’s judgment, which is based on various factors including
market conditions, the industry in which the tenant operates, the characteristics of the real estate
and/or real estate appraisals.
The Company allocates purchase price to the fair value of the tangible assets of an acquired
property determined by valuing the property as if it were vacant. The as-if-vacant value is allocated
to land, buildings and improvements based on management’s determination of the relative fair value
of the assets.
The fair value of in-place leases is based upon the Company’s evaluation of the specific
characteristics of the leases. Factors considered in these analyses include an estimate of carrying
costs during hypothetical expected lease-up periods considering current market conditions, and
costs to execute similar leases, including leasing commissions. The Company also considers
information obtained about each property as a result of its pre-acquisition due diligence, marketing
and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In
estimating carrying costs, management also includes real estate taxes, insurance and other operating
expenses. Acquired in-place leases as of the date of acquisition are amortized over the remaining
lease terms.
Acquired above- and below-market lease values are recorded based on the present value (using an
interest rate that reflects the risks associated with the lease acquired) of the differences between the
contractual amounts to be paid pursuant to the in-place leases and management’s estimate of fair
market value lease rates at the time of acquisition for the corresponding in-place leases measured
over a period equal to the remaining non-cancelable term of the in-place leases. The capitalized
above- and below-market lease values are amortized as adjustments to rental revenue over the
remaining non-cancelable terms of the respective leases.
Should a tenant terminate its lease, the unamortized portion of the in-place lease value is charged to
amortization expense and the unamortized portion of above- or below-market lease value is charged
to rental revenue.
Management estimates the fair value of assumed mortgages payable based upon indications of thencurrent market pricing for similar types of debt with similar maturities.
Depreciation:
Depreciation is provided using the straight-line method over the estimated useful lives of the related
assets, which are as follows:
Land improvements
Buildings and improvements
-7-
15 years
15 - 40 years
Depreciation expense was $1,070,672 and $671,821 for the years ended December 31, 2015 and
2014, respectively.
Long-Lived Assets:
Long-lived assets, including investment in rental property, are generally stated at cost or fair value.
However, the Company reviews long-lived assets to be held and used for possible impairment when
events or changes in circumstances indicate their carrying amounts may not be recoverable. If such
events or changes in circumstances are present, a loss is recognized to the extent the carrying value
of the asset is in excess of the sum of the undiscounted cash flows expected to result from the use of
the asset and its eventual disposition. An impairment loss is measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset. At December 31, 2015 and 2014,
there were no such impairments.
Restricted Cash:
The terms of one of the Company’s mortgages payable requires the Company to deposit certain
replacement and other reserves with the lender. Such restricted cash amounted to $32,358 and
$18,486 at December 31, 2015 and 2014, respectively.
Intangible Assets and Liabilities:
Intangible lease assets and liabilities represent the estimated fair value of in-place and above- and
below-market leases. These costs are being amortized using the straight-line method over the
remaining non-cancelable terms of the respective leases, which range from 10 to 15 years.
Lease acquisition costs represent direct leasing costs such as related party asset manager fees, third
party professional fees and tenant inducements incurred related to lease transactions. These costs
are being amortized using the straight-line method over the terms of the related leases, which range
from 10 to 20 years.
Debt Acquisition Costs:
In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update
(“ASU”) 2015-03 Interest - Imputation of Interest. This update requires that debt acquisition costs
related to a recognized debt liability be presented in the balance sheet as a direct deduction from the
carrying amount of that debt liability, consistent with debt discounts. The Company has elected
early adoption of ASU 2015-03. As a result of the implementation of ASU 2015-03, on a
retrospective basis, the Company has reclassified debt acquisition costs previously reported as an
other asset on the accompanying Consolidated Balance Sheet as of December 31, 2014.
Debt acquisition costs are being amortized to interest expense using the straight-line method, which
approximates the effective interest method, over the terms of the related debt, which range from 1 to
25 years.
-8-
Common Stock Subscribed:
The Company offers its common stock on a subscription basis. Common stock subscribed
represents funds received for future common stock purchases that have not yet been completed as of
the date of the Consolidated Balance Sheets.
Noncontrolling Interests:
Noncontrolling interests represent the 29.5% and 25.2% interest in the Operating Company at
December 31, 2015 and 2014, respectively, which is accounted for as a separate component of
Stockholders’ Equity. Members represented by these interests hold membership units, which have
the same economic interest as shares of common stock.
The Company periodically adjusts the carrying value of noncontrolling interests to reflect its share
of the book value of the Operating Company. Such reallocations are recorded to additional paid-in
capital as an adjustment of noncontrolling interests in the accompanying Consolidated Statements of
Changes in Stockholders’ Equity.
Income Taxes:
The Corporation has made an election to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the “Code”), beginning with its taxable year ended
December 31, 2014. The Corporation believes it is organized and operates in such a manner as to
qualify for treatment as a REIT and intends to operate in the foreseeable future in such a manner so
that it will remain qualified as a REIT for federal income tax purposes. To maintain REIT status
and not be subject to federal income taxation at the corporate level, the Corporation is generally
required to distribute at least 90% of its adjusted taxable income, as defined in the Code, to its
stockholders and satisfy certain other organizational and operating requirements. The Company
qualified for REIT status for each years ended December 31, 2015 and 2014.
Although it may qualify for REIT status for federal income tax purposes, the Corporation is subject
to state and local income or franchise taxes in certain states in which some of its properties are
located.
The Operating Company is a Limited Liability Company and has elected to be treated as a
partnership for federal and state income tax purposes. Under this election, the taxable income or
loss of the Operating Company is reported on the members’ income tax returns.
The Company recognizes and measures uncertain tax positions using a two-step approach. The first
step is to evaluate the tax position for recognition by determining if the weight of available evidence
indicates it is more likely than not that the position will be sustained upon examination, including
resolution of related appeals or litigation processes, if any. In making this assessment, the Company
must assume that the taxing authority will examine the income tax position and have full knowledge
of all relevant information. The second step is to measure the tax benefit as the largest amount that
is more than fifty percent likely of being realized upon ultimate settlement. The Company considers
many factors when evaluating and estimating tax positions and tax benefits, which may require
periodic adjustments and which may or may not accurately forecast actual outcomes.
-9-
Stock-Based Compensation:
The Company recognizes costs related to all stock-based payments, including stock options and
restricted stock awards, based upon their fair value on the grant date (see Note 12). Such costs are
expensed ratably on a straight-line basis over the requisite service or vesting periods.
3. INVESTMENT IN RENTAL PROPERTY AND LEASE ARRANGEMENTS
The Company generally leases its investment rental properties to established tenants. At December
31, 2015, eight of the investment rental property leases have been classified as operating leases and
two leases have been classified as direct financing leases. All leases have initial terms of ten to
twenty years and provide for minimum rentals. In addition, the leases generally provide for limited
fixed increases in rent throughout the lease term. Generally, the tenant is also required to pay all
property taxes and assessments, substantially maintain the interior and exterior of the building, and
carry property and liability insurance coverage. The leases also typically provide the tenant with
one or more multi-year renewal options subject to generally the same terms and conditions as the
initial lease.
The following table summarizes the carrying amount of rental property subject to non-cancelable
operating leases with tenants at December 31:
2015
$ 2,597,993
3,749,631
32,721,637
39,069,261
(1,951,280)
$37,117,981
Land
Land improvements
Buildings and improvements
Less - accumulated depreciation
2014
$ 2,273,393
3,524,181
29,871,687
35,669,261
(880,608)
$34,788,653
Estimated future minimum rental receipts required by non-cancelable operating leases with tenants
are as follows:
Year ending December 31,
2016
2017
2018
2019
2020
Thereafter
$ 3,701,349
3,901,118
3,954,903
4,034,369
4,085,044
24,369,356
$44,046,139
- 10 -
The following table summarizes the components of net investment in direct financing leases at
December 31, 2015:
2015
$ 14,709,324
3,181,475
(10,717,392)
$ 7,173,407
Minimum lease payments to be received
Estimated unguaranteed residual value
Less - unearned revenue
Net investment in direct financing leases
Estimated future minimum rental receipts required by non-cancelable direct financing leases with
tenants are as follows:
Year ending December 31,
2016
2017
2018
2019
2020
Thereafter
$
615,633
652,316
661,078
674,300
686,724
11,419,273
$14,709,324
Since lease renewal periods are exercisable at the option of the tenant, the above amounts only
include future minimum lease payments due during the initial lease terms.
4. INTANGIBLE ASSETS AND LIABILITIES
The following is a summary of intangible assets and liabilities and related accumulated amortization
at December 31:
2015
2014
$ 190,560
(28,395)
$ 162,165
$ 190,561
(12,184)
$ 178,377
Acquired in-place leases
Less - accumulated amortization
$3,205,686
(463,009)
$2,742,677
$3,205,686
(203,502)
$3,002,184
Intangible lease assets, net
$2,904,842
$3,180,561
Acquired below-market leases
Less - accumulated amortization
Intangible lease liabilities, net
$1,200,400
(166,451)
$1,033,949
$1,200,400
(70,523)
$1,129,877
Lease intangibles:
Acquired above-market leases
Less - accumulated amortization
- 11 -
2015
$1,565,967
(145,061)
$1,420,906
Lease acquisition costs
Less - accumulated amortization
Lease acquisition costs, net
2014
$895,511
(53,450)
$842,061
Amortization expense, excluding above-market and below-market leases, amounted to $351,118
and $200,889 for the years ended December 31, 2015 and 2014, respectively. Acquired abovemarket leases amortized to rental revenue amounted to $16,211 and $12,184 for the years ended
December 31, 2015 and 2014, respectively. Acquired below-market leases amortized to rental
revenue amounted to $95,928 and $52,388 for the years ended December 31, 2015 and 2014,
respectively.
Estimated future amortization of above- and below-market leases to rental income from operating
leases is as follows:
Year ending December 31,
2016
2017
2018
2019
2020
Thereafter
$ 79,717
79,717
79,717
79,717
79,717
473,199
$871,784
Estimated future amortization of in-place leases and lease acquisition costs is as follows:
Year ending December 31,
2016
2017
2018
2019
2020
Thereafter
$ 378,093
378,093
378,093
378,093
378,093
2,273,118
$4,163,583
- 12 -
5. LINE OF CREDIT
The Operating Company has a line of credit agreement with M&T Bank (“M&T”) which provides
for maximum borrowings of $5,000,000. Each advance under the line of credit agreement must be
for a minimum of $100,000 and bears interest, which is payable monthly, at the one-month London
Interbank Offered Rate (“LIBOR”) plus 3.5%. The line of credit agreement is unsecured, but
requires that borrowings not be greater than (i) 90% of the purchase price for the related property or
(ii) if closing costs are to be included, 92% of the purchase price for the related property. The line
of credit agreement was renewed in December 2015, subject to payment of an annual facility fee of
$20,000. An advance fee of 0.1% of each advance on the line of credit is due each time an advance
is made. The Operating Company is subject to various financial and non-financial covenants under
the line of credit agreement. The Corporation, a related party as described in Note 7, and a sponsor
who formed the Operating Company have provided unconditional guarantees of all borrowings on
the line of credit agreement. Outstanding borrowings on the line of credit agreement, net of
unamortized debt acquisition costs of $0 and $50,600 at December 31, 2015 and 2014, respectively,
were $2,100,000 and $1,699,400 at December 31, 2015 and 2014, respectively.
The one-month LIBOR was approximately 0.43% at December 31, 2015.
Effective February 2016, the line of credit agreement with the Bank was amended. Under the terms
of the amended line of credit agreement, maximum borrowings are limited to $10,000,000 with
interest payable at the one-month LIBOR plus 4.5%. Advances under the amended line of credit
agreement are payable in full no later than 180 days following the date of such advance. The
Corporation, two related parties as described in Note 7, and a sponsor who formed the Operating
Company have provided unconditional guarantees of all borrowings on the line of credit agreement.
In order to obtain this amendment to the line of credit, the Company was required to pay a
commitment fee of $50,000. The amended line of credit agreement is renewable annually subject to
a review by the Bank and the payment of an annual facility fee of $50,000.
The amended line of credit agreement is subject to financial and non-financial covenants (see Note
6).
6. MORTGAGES PAYABLE
Mortgages payable consist of the following at December 31:
2015
Mortgage payable to Five Star Bank in monthly
installments of $36,689, including interest at 4.7%,
with a balloon payment of $3,529,245 due in August
2023. Secured by related rental property and lease
rents.
Mortgage payable to ServisFirst Bank in monthly
installments of $27,635, including interest at 4.5%,
with a balloon payment of $3,573,771 due in October
2020. Secured by related rental property and lease
rents.
- 13 -
2014
$ 5,276,070
$ 5,463,562
4,303,749
4,438,834
2015
2014
Mortgage payable to Protective Life and Annuity
Insurance Company (“Protective”) in monthly
installments of $21,053, including interest at 4.375%,
with a balloon payment of $2,720,132 due in January
2025. Secured by related rental property and lease
rents.
3,712,850
3,750,000
Mortgage payable to CMFG Life Insurance Company
in monthly installments of $24,895, including interest
at 4.5%, with a balloon payment of $1,335,340 due in
July 2028. Secured by related rental property and
lease rents.
3,613,713
3,746,572
Mortgage payable to ESL Federal Credit Union in
monthly installments of interest only through July
2016 followed by monthly installments of $16,683,
including interest at 4.44%, with a balloon payment of
$2,031,412 due in January 2028. Secured by
substantially all assets of the related rental property.
3,000,000
-
Mortgage payable to Protective in monthly
installments of $15,916, including interest at 4.5%,
with a balloon payment of $2,039,652 due in August
2024. Secured by related rental property and lease
rents.
2,744,918
2,800,000
Mortgage payable to Genesee Regional Bank
(“GRB”) in monthly installments of $15,643,
including interest at 4.55%, through November 2021.
Thereafter the interest rate will be revised, at the
Company’s discretion, to either GRB’s prime rate plus
.75% or the then 3-year Federal Home Loan Bank
advance rate plus 2.0%, subject to a minimum rate of
4%. A balloon payment of $2,045,910 is due in
November 2024. Secured by related rental property
and lease rents.
2,734,930
2,794,974
Mortgage payable to Standard Insurance Company
(“Standard”) in monthly installments of $14,552,
including interest at 4.2%. The interest rate will be
adjusted effective July 2025 and July 2035 to
Standard’s then prevailing interest rate for loans with
similar terms. It is scheduled to mature in July 2040.
Secured by related rental property and lease rents.
2,674,311
-
- 14 -
2015
Mortgage payable to M&T in monthly installments of
interest only through March 2016 followed by
monthly installments of $9,019, including interest at
4.57%, with a balloon payment of $1,346,318 due in
September 2022. Secured by related rental property
and lease rents.
2014
1,600,000
Mortgage payable to M&T in monthly installments of
$8,277, including interest at 6.11%, with a balloon
payment of $1,020,721 due in December 2017.
Secured by related rental property and lease rents.
1,088,370
30,748,911
Debt acquisition costs
Less - accumulated amortization
Debt acquisition costs, net
-
1,119,229
24,113,171
(791,889)
115,286
(676,603)
Mortgages payable, net of unamortized debt
acquisition costs
$30,072,308
(523,623)
49,131
(474,492)
$23,638,679
Certain mortgage payable agreements are subject to prepayment premiums and may be terminated
by the lender under certain events of default as defined under the related agreements.
Under the line of credit agreement and certain mortgages payable, the Company is subject to
various covenants, including maintaining a minimum debt service coverage ratio. There are also
financial reporting requirements and other covenants as defined in the related agreements. Some of
the mortgages payable have non-recourse carve-outs that are guaranteed by the Corporation,
Operating Company or sponsors who formed the Operating Company. The Corporation and the
Operating Company have indemnified the sponsors for any payments required to be made under any
carve-out guaranty.
Estimated future principal payments to be made under the above mortgage agreements are as
follows:
Year ending December 31,
2016
2017
2018
2019
2020
Thereafter
$
851,289
1,958,095
946,243
989,910
4,565,373
21,438,001
$30,748,911
- 15 -
Estimated future amortization of debt acquisition costs to interest expense is as follows:
Year ending December 31,
2016
2017
2018
2019
2020
Thereafter
$ 80,402
79,956
75,057
75,057
64,066
302,065
$676,603
7. RELATED PARTY TRANSACTIONS
Asset Management Agreement:
The Corporation and the Operating Company have entered into an asset management agreement
(the “Asset Management Agreement”) with Cambridge Street Asset Management LLC
(“CSAM”, formerly Buckingham Properties Asset Management LLC prior to its name change
effective November 2015), a related party which is wholly-owned by the President and Chief
Executive Officer of the Corporation. Under the terms of the Asset Management Agreement,
CSAM is responsible for, among other things, providing management of the day-to-day
operations of the Company, providing suitable investment opportunities to the Company,
determining acquisition and disposition strategies of the Company, entering into leases with
tenants, managing financing activities, monitoring of compliance with loan covenants,
monitoring other operations of the Company, and providing support to the Company’s officers
and directors to assist in their governance function and responsibilities.
In exchange for services provided under the Asset Management Agreement, CSAM is
compensated as follows:
(a) Effective August 1, 2015, annual asset management fees payable on a pro-rata basis in
advance on the first business day of each calendar quarter, equal to an annual rate of:
i.
1.0% if the gross asset value is $100 million or less;
ii.
0.9% if the gross asset value is over $100 million and is $200 million or less;
iii.
0.8% if the gross asset value is over $200 million and is $300 million or less; or
iv.
0.75% if the gross asset value is over $300 million.
The “gross asset value” is the sum of the valuations of each of the properties in the
Company’s portfolio as determined as of December 31 of the preceding year plus, for
each quarter following the acquisition of any property, the gross purchase price set forth
in the acquisition contract for each property acquired after such year end.
- 16 -
Prior to August 1, 2015, the annual asset management fee was equal to 1% of the gross
fair market value of the Company’s holdings as determined as of the first day of each
quarter.
(b) Acquisition fees equal to 1% of the gross purchase price paid for each rental property
acquired, including any property contributed to the Operating Company in exchange for
membership interests. Prior approval of the acquisition fee is required for rental
property contributed by the sponsors who formed the Operating Company. In addition,
if CSAM is engaged to secure financing for a rental property, a fee equal to the
difference between 1% of the principal amount of the loan and any fees paid to any
mortgage brokers;
(c) In the event that CSAM acts on behalf of the Operating Company in leasing any
properties, a leasing fee equal to (i) 4% of the total gross base rent payments due over
the first ten years of the initial term of the lease and 2% of the remainder of the lease
term (prior to August 1, 2015, the 4% leasing fee was based on total gross base rent
payments due over the entire initial lease term) and (ii) 2% of the total gross base rents
of any renewal term. The leasing fee payable to CSAM will be reduced to the extent
necessary (including to 0%) if the aggregate of CSAM’s leasing fee and any fee payable
to any other third party by the Operating Company or the Corporation with respect to
the lease or renewal would be more than 6% of the total gross base rent payments for an
initial term or 3% for a renewal term; and
(d) A disposition fee equal to 1% of the gross purchase price received upon disposition of a
rental property.
The initial term of the Asset Management Agreement is effective through February 1, 2024,
after which it automatically renews for successive five year periods, unless either party provides
written notice of termination in accordance with the Asset Management Agreement. In the
event the Company elects to terminate the Asset Management Agreement due to a change in
control of CSAM, as defined in the Asset Management Agreement, or at the end of the initial
term or any renewal period without cause, the Company will be required to pay CSAM a
termination fee of 2 ½ times the aggregate asset management fees paid to CSAM during the
twelve-month period immediately preceding the date of such termination.
Property Management Agreements:
As of December 31, 2015, five of the Operating Company’s ten subsidiaries and CSAM had
entered into separate property management agreements (the “Property Management
Agreements”) with Cambridge Street Property Management LLC (“CSPM”), a related party
that is majority-owned by the President and Chief Executive Officer. It is also partially owned
by other officers of the Corporation. Under the terms of the Property Management Agreements,
CSPM manages the day-to-day operations of the Company’s rental properties which include,
among other things, collection of rent, monitoring of compliance with lease terms, payment of
mortgages payable and other obligations, and payment of the management fee.
- 17 -
In exchange for services provided under the Property Management Agreements, CSPM is
compensated as follows:
(a) For property management services, the fee is based upon the aggregate value of the
Corporation’s investment in rental property, as defined in the Property Management
Agreements, as follows:
a. 3% of total monthly base rent collected if the value is $100 million or less,
b. 2.75% of total monthly base rent collected if the value is greater than $100
million but equal to or less than $300 million, or
c. 2.5% of total monthly base rent collected if the value is greater than $300
million.
(b) In the event that CSPM is retained to provide leasing services on behalf of the
Company, a leasing fee shall be payable for a new lease or lease expansion in an
amount up to 4% of the scheduled gross base rental payments to be made under the
terms of the new lease or lease expansion during the first ten years of the lease and 2%
of the scheduled gross base rental payments to be made thereafter. The leasing fee
payable to CSPM will be reduced to the extent necessary (including to 0%) if the
aggregate leasing fees payable to additional brokers (including CSAM, if applicable)
would be more than 6% of the total scheduled gross base rental payments under the
terms of the new lease or lease expansion;
(c) In the event that CSPM is retained to provide leasing services on behalf of the
Company, a leasing fee shall be payable for lease renewals or extensions in an amount
up to 2% of the base rent due over the renewal/extension period. The leasing fee
payable to CSPM will be reduced to the extent necessary (including to 0%) if the
aggregate leasing fees payable to additional brokers (including CSAM, if applicable)
would be more than 3% of the base rent due over the renewal/extension period;
(d) In the event that CSPM is retained to provide financing services, a financing fee shall
be payable equal to the difference between 1% of the principal amount of the loan and
any fees paid to any mortgage brokers (including CSAM, if applicable);
(e) In the event that additional services should be deemed required and CSPM is retained to
provide those services, various fees for other services provided by CSPM shall be
payable, including modernization, tenant improvements, repairs and insured restoration
loss activities. In addition, if requested, CSPM may also engage and oversee legal
actions related to the rental property pertaining to the collection of rents or enforcement
of the related lease. CSPM will charge an hourly fee of $75 plus expenses in addition
to any third party expenses associated with these matters.
- 18 -
The initial term of each of the Property Management Agreements is effective for three years and
automatically renews for successive one year periods until terminated by either party upon sixty
days written notice prior to the end of the initial term or any renewal period. In the event of a
change in control of CSPM, as defined in the Property Management Agreements, or if the
Company terminates a Property Management Agreement at the end of any term without cause,
the Company will be required to pay CSPM a termination fee of 50% of the aggregate fees paid
to CSPM during the twelve-month period immediately preceding the date of such termination.
Effective January 1, 2016, all property management agreements (the “Management
Agreements”) with Buckingham Properties LLC (“BP”), a related party in which certain
stockholders of the Corporation have either a direct or indirect ownership interest, were
terminated and new property management agreements were entered into with CSPM. As of
December 31, 2015, five of the Operating Company’s ten subsidiaries and CSAM had entered
into separate Management Agreements with BP. The terms of the agreements are similar to the
Property Management Agreements described above, with the following exceptions:
(a) The initial term of each agreement is one year.
(b) Compensation for managing the property is up to 3% of total (gross base) rent payments
collected each month from the rental properties for property management services;
(c) In the event that BP is retained to provide leasing services on behalf of the Company, a
leasing fee shall be payable for a new lease or lease expansion in an amount up to 4% of
the total scheduled gross base rental payments to be made under the terms of the new
lease or lease expansion. The leasing fee payable to BP will be reduced to the extent
necessary (including to 0%) if the aggregate leasing fees payable to BP and additional
brokers (including CSAM, if applicable) would be more than 6% of the total scheduled
(gross base) rental payments under the terms of the new lease or lease expansion;
Management fees incurred under the Asset Management Agreement, Property Management
Agreements, and Management Agreements totaled $522,506 and $252,771 for the years ended
December 31, 2015 and 2014, respectively, of which $1,682 and $8,031 is reported in due to related
parties in the accompanying Consolidated Balance Sheets at December 31, 2015 and 2014,
respectively. In addition, asset acquisition fees under these agreements totaled $106,000 and
$255,450 for the years ended December 31, 2015 and 2014, respectively.
Leasing and financing fees paid or payable to CSAM, CSPM and/or BP totaled $680,364 and
$662,831 for the years ended December 31, 2015 and 2014, respectively. Leasing fees are reported
as lease acquisition costs while financing fees are reported as a reduction of mortgages payable in
the accompanying Consolidated Balance Sheets.
At December 31, 2015 and 2014, an additional $32,477 and $153,906, respectively, were included
in due to related parties in the accompanying Consolidated Balance Sheets for reimbursed expenses
and leasing fees due to CSAM, CSPM, and BP.
- 19 -
During the year ended December 31, 2015, two of the Operating Company’s subsidiaries entered
into month-to-month property management agreements with an unrelated third party which were
terminated during the year. Management fees incurred under these agreements totaled $13,399 for
the year ended December 31, 2015.
8. INCOME TAXES
The Corporation qualified for REIT status for both years ending December 31, 2015 and 2014 as
distributions/dividends exceeded 90% of taxable income; accordingly, no provision for federal taxes
has been provided in the accompanying Consolidated Statements of Operations.
The following table reconciles net income (loss) including noncontrolling interests to taxable
income for the years ended December 31:
Net income (loss) including noncontrolling interests
Less: Net (income) loss attributable to noncontrolling
interests
Net income (loss) attributable to Corporation
Straight-line rent adjustments
Rent received in advance, net
Earned income from direct financing leases adjustment
Adjustments for above/below market leases
Book-to-tax depreciation and amortization adjustment
Stock-based compensation in excess of tax
Property acquisition costs
Other adjustments
Adjusted taxable income (loss)subject to 90% REIT
dividend requirement
2015
$185,622
2014
$(434,131)
(122,482)
63,140
(231,941)
101,569
26,593
(79,717)
(92,052)
9,245
145,694
(15,053)
55,856
(378,275)
(134,357)
55,521
(40,204)
121,218
102,522
360,472
(90,184)
$(72,522)
$(3,287)
As of the date the accompanying consolidated financial statements were available to be issued, the
Company’s 2015 tax returns have not been filed. The above table represents management’s
estimate of adjusted taxable income for the year ended December 31, 2015.
The Company is required to file income tax returns with federal and state taxing authorities. The
Corporation’s federal and state income tax returns remain subject to examination by the respective
taxing authorities for the 2014 and 2015 tax years. The Operating Company’s federal and state
income tax returns remain subject to examination by the respective taxing authorities for the 2013
through 2015 tax years. The Company has determined that it has no uncertain tax positions, which
includes the tax status of the Company.
- 20 -
9. CREDIT RISK CONCENTRATIONS
The Company maintained bank balances that, at times, exceeded the federally insured limit during
the years ended December 31, 2015 and 2014. The Company has not experienced any losses
relating to these deposits and management does not believe that the Company is exposed to any
significant credit risk with respect to these amounts.
The Company had revenue from five tenants which each represented between 11% and 17% of total
revenue for the year ended December 31, 2015. The Company had revenue from three tenants
which each represented between 16% and 29% of total revenue for the year ended December 31,
2014.
10. NONCONTROLLING INTERESTS
During the years ended December 31, 2015 and 2014, certain entities contributed their properties to
the Operating Company. The Operating Company issued 50,728 non-managing membership units
valued at $2,688,573 in connection with the contribution of property during the year ended
December 31, 2015. The Operating Company issued 28,000 non-managing membership units
valued at $1,400,000 in connection with the contribution of property during the year ended
December 31, 2014. Noncontrolling interests as reported in the accompanying Consolidated
Balance Sheets are held in the form of membership units in the Operating Company. At December
31, 2015, a total of 120,759 non-managing membership units were outstanding, which represent a
29.5% interest in the Operating Company. At December 31, 2014, a total of 70,031 non-managing
membership units were outstanding, which represented a 25.2% interest in the Operating Company.
Membership units are economically equivalent to the Company’s common stock and, subject to
certain restrictions, are convertible into the Company’s common stock at the option of the respective
holder on a dollar-for-dollar basis. Holders of the membership units do not have voting rights.
11. DISTRIBUTION REINVESTMENT PLAN
The Company has a Distribution Reinvestment Plan (the “Plan”) available to any holder of shares of
common stock or membership units that are convertible into shares. In general, the Plan allows
participants to purchase common stock from distributions received. Under the Plan, all distributions
to be reinvested under the Plan will be used to purchase shares of common stock as of the quarterly
distribution date for the applicable distribution. The Corporation offers shares, pursuant to the Plan,
at 98% of the Determined Share Value, which is $53 at December 31, 2015. At December 31, 2015
and December 31, 2014, there were 7,025 and 831 shares, respectively, issued and outstanding
under the Plan. Distributions/dividends declared at December 31, 2015 as reported in the
accompanying Consolidated Balance Sheet include 1,991 shares of common stock totaling $103,388
to be reinvested under the Plan in January 2016.
- 21 -
12. STOCK INCENTIVE PLAN
The Company has a long-term stock incentive plan (the “Incentive Plan”) under which its
Independent Directors have authority to grant stock options, stock appreciation rights, restricted
stock awards, restricted stock units or performance share units (collectively, the “Stock Awards”) to
employees, officers, directors, and consultants of the Company. Stock options are granted with an
exercise price determined by the Company’s Independent Directors, provided that the exercise price
per share of common stock shall not be less than the fair value of such share of common stock at the
date of grant. The term of the stock options is determined at the time of grant, but generally the
stock options vest ratably over a five-year period. In the event of a change in control of the
Company, all awards immediately vest and are exercisable or fully earned at the maximum amount,
except as otherwise determined by the Independent Directors. The Company may issue a maximum
of 700,000 shares under the Plan. However, the Company may not issue more than 70,000 shares
under the Plan until the Company has issued at least 700,000 shares of common stock. Once the
Corporation has issued a minimum of 700,000 shares of common stock, the shares issued under the
Plan may not exceed 10% of the total issued and outstanding shares of the Corporation.
Stock Options:
Stock-based compensation cost for a stock option is estimated at the grant date based on each
option’s fair value as calculated using the Black-Scholes option pricing model, which incorporates
various assumptions including expected dividend yields, volatility, option lives and interest rates.
The Corporation recognizes stock-based compensation cost as an expense ratably on a straight-line
basis over the requisite service period. In determining the service period, the Corporation considers
service requirements and the vesting period.
In June 2014, the Corporation issued 50,000 stock options to the five members of the Corporation’s
Board of Directors. The terms of the stock options were determined at the grant date. The stock
options vest evenly over an approximate period of five years with 20% of such options vesting each
January 6 commencing January 6, 2015. However, the stock options vest immediately in the event
the holder of such options dies or becomes disabled. The stock options expire on January 6, 2024.
The following key assumptions were used to determine the grant date fair value of the stock options
issued during the year ended December 31, 2014:
Expected volatility rate
Expected dividend yield
Risk-free interest rate
Expected lives
25.9%
7%
1.64%
5 years
The expected volatility rate was based on an analysis of the historical volatility of a similar industry
sector index. The expected dividend yield was based on the historical annual dividends. The
expected lives for options, with a lifetime of approximately ten years, was based on the vesting
period of the options. The risk-free interest rate for the expected life of the options was based on
the U.S. Treasury yield curve.
- 22 -
The following presents stock options granted, exercised, and cancelled during the year ended
December 31:
2015
Outstanding - beginning of year
Granted
Exercised
Cancelled
Outstanding - end of year
Exercisable - end of year
2014
WeightedAverage
Exercise
Price per
Option
$50
$50
$50
$50
Number of
Options
50,000
(10,000)
40,000
8,000
WeightedAverage
Exercise
Price per
Option
$50
$50
$50
Number of
Options
50,000
50,000
10,000
The weighted average remaining contractual term for stock options is eight years at December 31,
2015. The Company recognized compensation cost of $42,578 and $69,189 related to stock options
during the years ended December 31, 2015 and 2014, respectively.
The following is a summary of the status of the Company’s non-vested stock options as of
December 31 and changes during the years then ended:
2015
Unvested - beginning of year
Granted
Vested
Forfeited/Terminated
Unvested - end of year
2014
WeightedAverage
Exercise
Price per
Option
$50
$50
$50
Number of
Options
40,000
(8,000)
32,000
Number of
Options
50,000
(10,000)
40,000
WeightedAverage
Exercise
Price per
Option
$50
$50
$50
At December 31, 2015, there is approximately $128,000 of total unrecognized compensation cost
related to unvested stock options that is expected to be recognized over a period of 3 years.
Restricted Stock Awards:
Stock-based compensation cost for restricted stock is estimated based on the determined share value
at the grant date. The Corporation recognizes stock-based compensation cost as an expense ratably
on a straight-line basis over the requisite service period. In determining the service period, the
Corporation considers service and performance requirements and the vesting period.
During each of the years ended December 31, 2015 and 2014, 2,000 shares of restricted stock were
granted to the President and Chief Executive Officer of the Corporation.
- 23 -
The following presents restricted stock granted, vested, and cancelled during the years ended
December 31:
2015
Number of
Shares
Outstanding and unvested beginning of year
Granted
Vested and issued
Cancelled
Outstanding and unvested - end
of year
2014
Grant Date
Fair Value
per Share
$50
2,000
2,000
(2,000)
$50
$50
$50
2,000
Number of
Shares
2,000
-
Grant Date
Fair Value
per Share
$50
$50
2,000
The Company recognized compensation cost of $66,667 and $33,333 related to restricted stock
during the years ended December 31, 2015 and 2014, respectively.
Board of Directors Stock Awards:
Members of the Company’s Board of Directors, excluding the President and Chief Executive
Officer of the Corporation, receive shares of common stock each quarter as partial compensation for
serving on the Board of Directors. Stock-based compensation cost for stock issued to board
members is estimated at the determined share value at the grant date. The Company recognized
compensation cost of $60,000 and $36,000 related to stock issued to board members during the
years ended December 31, 2015 and 2014, respectively.
13. COMMITMENT
In December 2015, the Company entered into a lease agreement with a tenant which provides for a
tenant improvement allowance of up to $700,000 for certain improvements to the property. The
work is to be performed by the tenant, subject to the approval of the Company, and must be
completed by September 2016. Any unused portion of the tenant improvement allowance will be
forfeited by the tenant in September 2016.
14. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest was $1,203,729 and $720,217 for the years ended December 31, 2015 and
2014, respectively.
- 24 -
The following are non-cash transactions and have been excluded from the accompanying
Consolidated Statements of Cash Flows:
x
The Company has distributions/dividends payable totaling $334,655 and $209,681 which
were declared as payable to members and stockholders at December 31, 2015 and 2014,
respectively.
x
During the years ended December 31, 2015 and 2014, the Company issued common stock
totaling $314,190 and $87,122, respectively, under the terms of the Plan with $103,388 and
$46,400 of these balances included in distributions/dividends declared, respectively.
x
During the years ended December 31, 2015 and 2014, the Operating Company issued nonmanaging membership units valued at $2,688,573 and $1,400,000, respectively, in
connection with rental property acquisitions.
x
During the year ended December 31, 2014, the Company assumed mortgages with total
balances outstanding of $3,936,913 to finance the acquisition of rental properties.
x
At December 31, 2014, there were additions to investment in rental property accounted for
using the operating method totaling $129,650 included in accounts payable.
x
At December 31, 2014, there were additions to debt acquisition costs totaling $70,000
included in due to related parties.
15. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through April 25, 2016, which is the date the
accompanying consolidated financial statements were available to be issued.
Distributions/dividends declared of $334,655 as reported in the accompanying Consolidated
Balance Sheet at December 31, 2015 were paid to members and stockholders in January 2016. Of
this amount, $231,267 was paid in cash while the remaining $103,388 was paid in the form of stock
under the terms of the Plan.
In December 2015, the Company’s Board of Directors approved a $0.9275 per unit/share
distribution/dividend, to be prorated on a daily basis and paid in April 2016, to the common
stockholders and members during the three months ending March 31, 2016. In March 2016, the
Company’s Board of Directors approved a $0.9275 per unit/share distribution/dividend, to be
prorated on a daily basis and paid in July 2016, to the common stockholders and members during
the three months ending June 30, 2016.
Effective February 2016, the line of credit agreement with the Bank was amended (see Note 5).
Subsequent to December 31, 2015, the Company has continued to expand its operations through
acquisition of rental properties. At the date these consolidated financial statements were available
to be issued, the Company had acquired two additional properties for a combined purchase price of
$9,750,000 which were partially funded through mortgages totaling $6,300,000.
- 25 -
EXHIBIT B
Most Recent Quarterly Consolidated Financial Statements of
Royal Oak Realty Trust Inc. and Subsidiaries
ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
TOGETHER WITH
INDEPENDENT ACCOUNTANTS’ COMPILATION REPORT
Rochester, New York
INDEPENDENT ACCOUNTANTS’ COMPILATION REPORT
To the Board of Directors and Stockholders of
Royal Oak Realty Trust Inc.:
Management is responsible for the accompanying consolidated financial statements of Royal Oak Realty
Trust Inc. and subsidiaries, which comprise the consolidated balance sheet as of September 30, 2016 and
the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the
nine months then ended, and the related notes to the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. We have performed a
compilation engagement in accordance with Statements on Standards for Accounting and Review
Services promulgated by the Accounting and Review Services Committee of the AICPA. We did not
audit or review the consolidated financial statements nor were we required to perform any procedures to
verify the accuracy or completeness of the information provided by management. Accordingly, we do not
express an opinion, a conclusion, nor provide any form of assurance on these consolidated financial
statements.
The consolidated balance sheet as of December 31, 2015 was audited by us, and we expressed an
unmodified opinion on it in our report dated April 25, 2016. We have not performed any auditing
procedures on the 2015 consolidated balance sheet since April 25, 2016.
November 15, 2016.
ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
2016
(Unaudited)
December 31,
2015
(Audited)
ASSETS
INVESTMENT IN RENTAL PROPERTY:
Accounted for using the operating method, net of
accumulated depreciation
Accounted for using the direct financing method
$
OTHER ASSETS:
Cash
Restricted cash
Accrued rental income
Due from related parties
Prepaid expenses and other assets
Intangible lease assets, net
Lease acquisition costs, net
54,640,584
7,146,660
61,787,244
$
2,146,447
42,767
609,117
16,200
35,973
4,133,590
2,120,343
9,104,437
TOTAL ASSETS
37,117,981
7,173,407
44,291,388
4,236,222
32,358
423,914
199,924
2,904,842
1,420,906
9,218,166
$
70,891,681
$
53,509,554
$
38,165,296
1,950,000
28,292
101,908
203,888
190,642
284,081
28,540
1,330,372
42,283,019
$
30,072,308
2,100,000
31,389
72,785
34,159
157,090
334,655
120,441
78,608
1,033,949
34,035,384
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Mortgages payable, net of unamortized debt acquisition costs
Line of credit
Accounts payable and other accrued expenses
Accrued interest
Due to related parties
Rents received in advance
Distributions/dividends declared
Tenant security deposits
Tenant real estate tax deposits
Intangible lease liabilities, net
TOTAL LIABILITIES
STOCKHOLDERS’ EQUITY:
Royal Oak Realty Trust Inc. Stockholders’ Equity Preferred stock, $.001 par value; 100,000 shares
authorized; none issued or outstanding
Common stock, $.001 par value; 40,000,000 shares
authorized; 484,877 and 288,332 shares issued and outstanding
as of September 30, 2016 and December 31, 2015, respectively
Common stock subscribed
Additional paid-in capital
Distributions/dividends in excess of accumulated earnings
Total Royal Oak Realty Trust Inc. Stockholders’ Equity
Noncontrolling interests
TOTAL STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
-
485
8
25,372,858
(2,703,695)
22,669,656
5,939,006
28,608,662
$
See independent accountants’ compilation report and accompanying
notes to consolidated financial statements.
-1-
-
70,891,681
288
10
15,552,117
(1,700,942)
13,851,473
5,622,697
19,474,170
$
53,509,554
ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(UNAUDITED)
REVENUE:
Rental income from operating leases
Earned income from direct financing leases
Rental expenses reimbursable by tenants
Interest and other income
Total revenue
$ 3,762,767
481,803
286,700
183
4,531,453
EXPENSES:
Depreciation and amortization
Interest expense - contractual
Interest expense - amortization of debt acquisition costs
Asset management and property management fees
Acquisition fees paid to asset manager
Directors fees and related awards
Rental expenses reimbursable by tenants
Professional fees - general and acquisition-related
Other expenses
Total expenses
1,494,863
1,259,709
122,394
553,726
190,500
122,833
286,700
219,715
62,673
4,313,113
NET INCOME INCLUDING
NONCONTROLLING INTERESTS
218,340
LESS - NET INCOME ATTRIBUTABLE
TO NONCONTROLLING INTERESTS
(125,211)
NET INCOME ATTRIBUTABLE TO
ROYAL OAK REALTY TRUST INC.
$
See independent accountants’ compilation report and accompanying
notes to consolidated financial statements.
-2-
93,129
$
$
-
-
-
-
-
8
8
(10)
10
Common
stock
subscribed
$
$
25,372,858
(529,235)
-
436,992
(54,670)
76,934
9,890,720
-
15,552,117
Additional
paid-in
capital
$
$
(2,703,695)
-3-
-
93,129
-
-
-
-
(1,095,882)
(1,700,942)
See independent accountants’ compilation report and accompanying
notes to consolidated financial statements.
485
-
Adjustment of noncontrolling interests
$
-
Net income
BALANCE, September 30, 2016
-
Common stock subscribed
(1)
-
Stock-based compensation
Redemption of 1,032 shares of
common stock
198
Issuance of 197,577 shares of
common stock, net
288
-
$
Distributions/dividends paid and payable
BALANCE, December 31, 2015
Common
stock
Distributions/
dividends in excess
of accumulated
earnings
ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(UNAUDITED)
$
$
5,939,006
529,235
125,211
-
-
-
-
(338,137)
5,622,697
Noncontrolling
interests
$ 28,608,662
-
218,340
437,000
(54,671)
76,934
9,890,908
(1,434,019)
$ 19,474,170
Total
ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income including noncontrolling interests
$
Adjustments to reconcile net income including noncontrolling interests
to net cash provided by operating activities:
Depreciation and amortization including intangibles associated with
investment in rental property
Stock-based compensation
Interest expense - amortization of debt acquisition costs
Straight-line rent and financing lease adjustments
Increase in due from related parties
Decrease in prepaid expenses and other assets
Decrease in accounts payable and other accrued expenses
Increase in accrued interest
Decrease in due to related parties
Increase in rents received in advance
Increase in tenant security deposits
Decrease in tenant real estate tax deposits
Total adjustments
218,340
1,409,795
76,934
122,394
(158,456)
(16,200)
178,747
(3,097)
29,123
(34,159)
46,798
163,640
(50,068)
1,765,451
Net cash provided by operating activities
1,983,791
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to investment in rental property accounted for using
the operating method
Lease acquisition costs paid
Increase in restricted cash
Net cash used in investing activities
(19,747,941)
(816,219)
(10,409)
(20,574,569)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on mortgages payable
Proceeds from issuance of common stock, net
Cash distributions/dividends paid
Principal payments on mortgages payable - prepayment
Principal payments on mortgages payable - scheduled
Net repayments on line of credit
Debt acquisition costs paid
Proceeds from common stock subscribed
Redemption of common stock
Net cash provided by financing activities
11,800,000
9,307,601
(994,725)
(2,900,000)
(603,821)
(150,000)
(340,381)
437,000
(54,671)
16,501,003
NET DECREASE IN CASH
(2,089,775)
CASH, beginning of period
4,236,222
CASH, end of period
$
See independent accountants’ compilation report and accompanying
notes to consolidated financial statements.
-4-
2,146,447
ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(See Independent Accountants’ Compilation Report - Unaudited)
1. BUSINESS DESCRIPTION
Royal Oak Realty Trust Inc. (the “Corporation,” together with its consolidated subsidiaries, the
“Company”), a Maryland corporation, was formed on January 6, 2014 and elected to be taxed as a
real estate investment trust (“REIT”) in 2014. The Company is focused on acquiring commercial
net leased real estate. The properties are leased under long-term lease agreements. All properties
are leased on a net lease basis, to the extent possible, such that tenants pay most, if not all, of the
occupancy costs such as maintenance and repairs, real estate taxes, insurance, and utilities. At
September 30, 2016, the Company owns thirteen commercial stand-alone real estate properties
located in six states within the continental United States of America.
Royal Oak Realty Trust (Operating Company) LLC (the “Operating Company”) is the entity
through which the Corporation conducts substantially all of its business and owns (either directly or
through subsidiaries) substantially all of its assets. At September 30, 2016, the Corporation owns
80.1% of the economic interests in the Operating Company and serves as its managing member.
The remaining interests are held by members who acquired their interests by contributing property
to the Operating Company (see Note 10).
Prior to changing their names in December 2015 and January 2016, respectively, Royal Oak Realty
Trust Inc. and Royal Oak Realty Trust (Operating Company) LLC were known as Buckingham Net
Leased Properties Group Inc. and Buckingham Net Leased Properties Group LLC, respectively.
The accompanying consolidated financial statements present the consolidated financial position,
results of operations, changes in equity, and cash flows of the Corporation, the Operating Company
and its subsidiaries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
All material intercompany balances and transactions have been eliminated in consolidation.
Basis of Accounting:
The accompanying consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (“GAAP”) applicable to
interim financial information. Accordingly, they do not include all of the disclosures that would be
required by GAAP to constitute complete financial statements for the Company’s annual reporting
period ending December 31. Management has included all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the accompanying consolidated
financial statements.
-5-
Operating results for the nine months ended September 30, 2016 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2016. Accordingly, the
September 30, 2016 consolidated financial statements should be read in conjunction with the
Company’s consolidated financial statements for the year ended December 31, 2015.
Use of Estimates:
The preparation of consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the reporting period.
Significant estimates include, but are not limited to, the allocation of purchase price between
investment in rental property and intangible assets and liabilities, the allowance for doubtful
accounts, the depreciable lives of rental property, the amortizable lives of intangible assets and
liabilities, and taxable income. Accordingly, actual results may differ from those estimates.
Revenue Recognition:
Rental property leases are accounted for using either the operating method or the direct financing
method. Such methods are described below:
Operating method - Revenue is recognized as rents are earned. When scheduled rentals vary
during the lease term, income is recognized on a straight-line basis so as to produce a constant
periodic rent over the term of the lease.
Direct financing method - Unearned income is deferred and amortized into income over the
lease terms so as to produce a constant periodic rate of return on the Company’s net investment
in the leases.
Accrued Rental Income and Allowance for Doubtful Accounts:
Accrued rental income includes the aggregate difference between the scheduled rents which vary
during the lease term and the income recognized on a straight-line basis.
Management periodically reviews the sufficiency of the allowance for doubtful accounts, taking into
consideration its historical losses and existing economic conditions, and makes adjustments to the
allowance as it considers necessary. Accounts are charged off against the allowance for doubtful
accounts when management determines that such accounts are uncollectible. Management has
determined that no allowance is necessary at September 30, 2016 and December 31, 2015.
Investment in Rental Property:
Rental property accounted for using the operating method is recorded at cost or, if contributed, fair
value. Rental property accounted for using the direct financing method is recorded at its net
investment (which at the inception of the lease generally represents the cost of the property). When
assets are retired or disposed of, the related cost and accumulated depreciation are removed from
their respective accounts. The difference between the cost or fair value and accumulated
depreciation of assets disposed of, less any amount realized from the disposition, is reflected in the
Consolidated Statement of Income as gain or loss on disposition of rental property.
-6-
The Company accounts for its acquisitions of investments in rental property, subject to operating
leases, in accordance with the authoritative guidance for business combinations. Accordingly, such
acquisitions are recorded at the estimated fair values of the assets acquired and liabilities assumed.
Acquisition-related costs such as transaction costs and acquisition fees paid under asset
management agreements (see Note 7) are expensed as incurred. The results of operations of
acquired properties are included in the Consolidated Statement of Income from the respective date
of acquisition. The fair value of rental property acquired is allocated to tangible assets, consisting
of land, buildings and improvements, and identifiable intangible assets and liabilities, such as
amounts related to in-place leases, acquired above- and below-market leases, and mortgages
payable. Estimated fair value determinations are based on management’s judgment, which is based
on various factors including market conditions, the industry in which the tenant operates, the
characteristics of the real estate and/or real estate appraisals.
The Company allocates purchase price to the fair value of the tangible assets of an acquired
property determined by valuing the property as if it were vacant. The as-if-vacant value is allocated
to land, buildings and improvements based on management’s determination of the relative fair value
of the assets.
The fair value of in-place leases is based upon the Company’s evaluation of the specific
characteristics of the leases. Factors considered in these analyses include an estimate of carrying
costs during hypothetical expected lease-up periods considering current market conditions, and
costs to execute similar leases, including leasing commissions. The Company also considers
information obtained about each property as a result of its pre-acquisition due diligence, marketing
and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In
estimating carrying costs, management also includes real estate taxes, insurance and other operating
expenses. Acquired in-place leases as of the date of acquisition are amortized over the remaining
lease terms.
Acquired above- and below-market lease values are recorded based on the present value (using an
interest rate that reflects the risks associated with the lease acquired) of the differences between the
contractual amounts to be paid pursuant to the in-place leases and management’s estimate of fair
market value lease rates at the time of acquisition for the corresponding in-place leases measured
over a period equal to the remaining non-cancelable term of the in-place leases. The capitalized
above- and below-market lease values are amortized as adjustments to rental revenue over the
remaining non-cancelable terms of the respective leases.
Should a tenant terminate its lease, the unamortized portion of the in-place lease value is charged to
amortization expense and the unamortized portion of above- or below-market lease value is charged
to rental revenue.
Management estimates the fair value of assumed mortgages payable based upon indications of thencurrent market pricing for similar types of debt with similar maturities.
-7-
Depreciation:
Depreciation is provided using the straight-line method over the estimated useful lives of the related
assets, which are as follows:
Land improvements
Buildings and improvements
15 years
15 - 40 years
Depreciation expense was $1,125,291 for the nine months ended September 30, 2016.
Long-Lived Assets:
Long-lived assets, including investment in rental property, are generally stated at cost or fair value.
However, the Company reviews long-lived assets to be held and used for possible impairment when
events or changes in circumstances indicate their carrying amounts may not be recoverable. If such
events or changes in circumstances are present, a loss is recognized to the extent the carrying value
of the asset is in excess of the sum of the undiscounted cash flows expected to result from the use of
the asset and its eventual disposition. An impairment loss is measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset. At September 30, 2016 and
December 31, 2015, there were no such impairments.
Restricted Cash:
The terms of one of the Company’s mortgages payable requires the Company to deposit certain
replacement and other reserves with the lender. Such restricted cash amounted to $42,767 and
$32,358 at September 30, 2016 and December 31, 2015, respectively.
Intangible Assets and Liabilities:
Intangible lease assets and liabilities represent the estimated fair value of in-place and above- and
below-market leases. These costs are being amortized using the straight-line method over the
remaining non-cancelable terms of the respective leases, which range from 10 to 15 years.
Lease acquisition costs represent direct leasing costs such as related party asset manager fees, third
party professional fees and tenant inducements incurred related to lease transactions. These costs
are being amortized using the straight-line method over the terms of the related leases, which range
from 10 to 20 years.
Debt Acquisition Costs:
Debt acquisition costs are presented in the accompanying Consolidated Balance Sheets as a direct
deduction from the debt to which they relate. Debt acquisition costs related to the line of credit
commitment fees are presented in other assets in the accompanying Consolidated Balance Sheets.
Debt acquisition costs are being amortized to interest expense using the straight-line method, which
approximates the effective interest method, over the terms of the related debt, which range from 1 to
25 years.
-8-
Common Stock Subscribed:
The Company offers its common stock on a subscription basis. Common stock subscribed
represents funds received for future common stock purchases that have not yet been completed as of
the date of the Consolidated Balance Sheets.
Noncontrolling Interests:
Noncontrolling interests represent the 19.9% and 29.5% interest in the Operating Company at
September 30, 2016 and December 31, 2015, respectively, which is accounted for as a separate
component of Stockholders’ Equity. Members represented by these interests hold membership
units, which have the same economic interest as shares of common stock.
The Company periodically adjusts the carrying value of noncontrolling interests to reflect its share
of the book value of the Operating Company. Such reallocations are recorded to additional paid-in
capital as an adjustment of noncontrolling interests in the accompanying Consolidated Statement of
Changes in Stockholders’ Equity.
Income Taxes:
The Corporation has made an election to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the “Code”), beginning with its taxable year ended
December 31, 2014. The Corporation believes it is organized and operates in such a manner as to
qualify for treatment as a REIT and intends to operate in the foreseeable future in such a manner so
that it will remain qualified as a REIT for federal income tax purposes. To maintain REIT status
and not be subject to federal income taxation at the corporate level, the Corporation is generally
required to distribute at least 90% of its adjusted taxable income, as defined in the Code, to its
stockholders and satisfy certain other organizational and operating requirements.
Although it may qualify for REIT status for federal income tax purposes, the Corporation is subject
to state and local income or franchise taxes in certain states in which some of its properties are
located.
The Operating Company is a Limited Liability Company and has elected to be treated as a
partnership for federal and state income tax purposes. Under this election, the taxable income or
loss of the Operating Company is reported on the members’ income tax returns.
The Company recognizes and measures uncertain tax positions using a two-step approach. The first
step is to evaluate the tax position for recognition by determining if the weight of available evidence
indicates it is more likely than not that the position will be sustained upon examination, including
resolution of related appeals or litigation processes, if any. In making this assessment, the Company
must assume that the taxing authority will examine the income tax position and have full knowledge
of all relevant information. The second step is to measure the tax benefit as the largest amount that
is more than fifty percent likely of being realized upon ultimate settlement. The Company considers
many factors when evaluating and estimating tax positions and tax benefits, which may require
periodic adjustments and which may or may not accurately forecast actual outcomes.
-9-
Stock-Based Compensation:
The Company recognizes costs related to all stock-based payments, including stock options and
restricted stock awards, based upon their fair value on the grant date (see Note 12). Such costs are
expensed ratably on a straight-line basis over the requisite service or vesting periods.
Prior period reclassifications:
Certain reclassifications have been made to the December 31, 2015 Consolidated Balance Sheet to
conform with the current period presentation.
3. INVESTMENT IN RENTAL PROPERTY AND LEASE ARRANGEMENTS
The Company generally leases its investment rental properties to established tenants. At September
30, 2016, eleven of the investment rental property leases have been classified as operating leases
and two leases have been classified as direct financing leases. All leases have initial terms of ten to
twenty years and provide for minimum rentals. In addition, the leases generally provide for limited
fixed increases in rent throughout the lease term. Generally, the tenant is also required to pay all
property taxes and assessments, substantially maintain the interior and exterior of the building, and
carry property and liability insurance coverage. The leases also typically provide the tenant with
one or more multi-year renewal options subject to generally the same terms and conditions as the
initial lease.
The following table summarizes the carrying amount of rental property subject to non-cancelable
operating leases with tenants at:
September 30,
2016
$ 4,002,735
5,174,319
48,540,101
57,717,155
(3,076,571)
$54,640,584
Land
Land improvements
Buildings and improvements
Less - accumulated depreciation
December 31,
2015
$ 2,597,993
3,749,631
32,721,637
39,069,261
(1,951,280)
$37,117,981
Estimated future minimum rental receipts required by non-cancelable operating leases with tenants
are as follows:
Year ending September 30,
2017
2018
2019
2020
2021
Thereafter
$ 5,240,292
5,509,718
5,630,205
5,699,350
5,790,067
36,139,782
$64,009,414
- 10 -
The following table summarizes the components of net investment in direct financing leases at:
September 30,
2016
$ 14,200,774
3,181,475
(10,235,589)
$ 7,146,660
Minimum lease payments to be received
Estimated unguaranteed residual value
Less - unearned revenue
Net investment in direct financing leases
December 31,
2015
$ 14,709,324
3,181,475
(10,717,392)
$ 7,173,407
Estimated future minimum rental receipts required by non-cancelable direct financing leases with
tenants are as follows:
Year ending September 30,
2017
2018
2019
2020
2021
Thereafter
$
591,362
657,801
670,958
683,846
695,390
10,901,417
$14,200,774
Since lease renewal periods are exercisable at the option of the tenant, the above amounts only
include future minimum lease payments due during the initial lease terms.
4. INTANGIBLE ASSETS AND LIABILITIES
The following is a summary of intangible assets and liabilities and related accumulated amortization
at:
September 30,
2016
Lease intangibles:
Acquired above-market leases
Less - accumulated amortization
December 31,
2015
$ 190,561
(40,553)
$ 150,008
$ 190,560
(28,395)
$ 162,165
Acquired in-place leases
Less - accumulated amortization
$4,699,380
(715,798)
$3,983,582
$3,205,686
(463,009)
$2,742,677
Intangible lease assets, net
$4,133,590
$2,904,842
Acquired below-market leases
Less - accumulated amortization
Intangible lease liabilities, net
$1,594,048
(263,676)
$1,330,372
$1,200,400
(166,451)
$1,033,949
- 11 -
September 30,
2016
Lease acquisition costs
Less - accumulated amortization
Lease acquisition costs, net
December 31,
2015
$2,382,186
(261,843)
$2,120,343
$1,565,967
(145,061)
$1,420,906
Amortization expense, excluding above-market and below-market leases, amounted to $369,571 for
the nine months ended September 30, 2016. Acquired above-market leases amortized to rental
revenue amounted to $12,158 for the nine months ended September 30, 2016. Acquired belowmarket leases amortized to rental revenue amounted to $97,225 for the nine months ended
September 30, 2016.
Estimated future amortization of above- and below-market leases to rental income from operating
leases is as follows:
Year ending September 30,
2017
2018
2019
2020
2021
Thereafter
$ 115,445
115,445
115,445
115,445
115,445
603,139
$1,180,364
Estimated future amortization of in-place leases and lease acquisition costs is as follows:
Year ending September 30,
2017
2018
2019
2020
2021
Thereafter
555,623
555,623
555,623
555,623
555,623
3,325,810
$6,103,925
- 12 -
5. LINE OF CREDIT
The Operating Company has a line of credit agreement, amended in February 2016, with M&T
Bank (“M&T”) which provides for maximum borrowings of $10,000,000. Each advance under the
line of credit agreement must be for a minimum of $100,000 and bears interest, which is payable
monthly, at the one-month London Interbank Offered Rate (“LIBOR”) plus 4.5%. The line of credit
agreement is unsecured, but requires that borrowings not be greater than (i) 90% of the purchase
price for the related property or (ii) if closing costs are to be included, 92% of the purchase price for
the related property. Advances under the line of credit agreement are payable in full no later than
180 days following the date of such advance. The Corporation, two related parties as described in
Note 7, and a sponsor who formed the Operating Company have provided unconditional guarantees
of all borrowings on the line of credit agreement. The Company was required to pay a commitment
fee of $50,000 at the time this line of credit was amended. The line of credit agreement is
renewable annually subject to a review by the Bank and the payment of an annual facility fee of
$50,000.
Prior to the amendment in February 2016, the line of credit provided for maximum borrowings of
$5,000,000 and bore interest at the one-month LIBOR plus 3.5%.
Outstanding borrowings on the line of credit agreement were $1,950,000 and $2,100,000 at
September 30, 2016 and December 31, 2015, respectively.
The one-month LIBOR was approximately 0.53% at September 30, 2016. The line of credit
agreement is subject to financial and non-financial covenants (see Note 6).
6. MORTGAGES PAYABLE
Mortgages payable consist of the following at:
September 30,
2016
Mortgage payable to Woodmen of the World Life
Insurance Society in monthly installments of interest
only through September 2017 followed by monthly
installments of $29,438, including interest at 3.90%,
with a balloon payment of $4,036,300 due in
September 2026. Secured by related rental property
and lease rents.
$5,500,000
Mortgage payable to Five Star Bank in monthly
installments of $33,124, including interest at 4.7%,
with a balloon payment of $3,654,716 due in August
2023. Secured by related rental property and lease
rents.
5,143,920
- 13 -
December 31,
2015
$
-
5,276,070
September 30,
2016
December 31,
2015
Mortgage payable to Genworth Life Insurance
Company in monthly installments of $21,562,
including interest at 3.85%, with a balloon payment of
$3,605,115 due in January 2021. Secured by related
rental property and lease rents.
4,091,565
-
Mortgage payable to Protective Life and Annuity
Insurance Company (“Protective”) in monthly
installments of $21,053, including interest at 4.375%,
with a balloon payment of $2,720,132 due in January
2025. Secured by related rental property and lease
rents.
3,644,229
3,712,850
Mortgage payable to CMFG Life Insurance Company
in monthly installments of $24,895, including interest
at 4.5%, with a balloon payment of $1,335,340 due in
July 2028. Secured by related rental property and
lease rents.
3,510,078
3,613,713
Mortgage payable to ESL Federal Credit Union in
monthly installments of $16,683, including interest at
4.44%, with a balloon payment of $2,031,412 due in
January 2028. Secured by substantially all assets of
the related rental property.
2,989,555
3,000,000
Mortgage payable to Protective in monthly
installments of $15,916, including interest at 4.5%,
with a balloon payment of $2,039,652 due in August
2024. Secured by related rental property and lease
rents.
2,693,550
2,744,918
Mortgage payable to Genesee Regional Bank
(“GRB”) in monthly installments of $15,643,
including interest at 4.55%, through November 2021.
Thereafter the interest rate will be revised, at the
Company’s discretion, to either GRB’s prime rate plus
.75% or the then 3-year Federal Home Loan Bank
advance rate plus 2.0%, subject to a minimum rate of
4%. A balloon payment of $2,045,910 is due in
November 2024. Secured by related rental property
and lease rents.
2,688,481
2,734,930
- 14 -
September 30,
2016
December 31,
2015
Mortgage payable to Standard Insurance Company
(“Standard”) in monthly installments of $14,552,
including interest at 4.2%. The interest rate will be
adjusted effective July 2025 and July 2035 to
Standard’s then prevailing interest rate for loans with
similar terms. It is scheduled to mature in July 2040.
Secured by related rental property and lease rents.
2,626,924
2,674,311
Mortgage payable to S&T Bank in monthly
installments of $11,932, including interest at 4.2%,
through February 2023. Thereafter the interest rate
will be revised to the published Federal Reserve
Board’s 3 year interest rate swap rate plus 2.35%. A
balloon payment of $1,628,549 is due in February
2026. Secured by related rental property and lease
rents.
2,196,025
Mortgage payable to M&T in monthly installments of
$9,019, including interest at 4.57%, with a balloon
payment of $1,346,318 due in September 2022.
Secured by related rental property and lease rents.
1,583,096
1,600,000
Mortgage payable to ServisFirst Bank in monthly
installments of $8,806, including interest at 4.5%,
with a balloon payment of $1,154,576 due in October
2020. A prepayment of $2,900,000 was made in
August 2016. Secured by related rental property and
lease rents.
1,313,682
4,303,749
1,063,985
39,045,090
1,088,370
30,748,911
Mortgage payable to M&T in monthly installments of
$8,277, including interest at 6.11%, with a balloon
payment of $1,020,721 due in December 2017.
Secured by related rental property and lease rents.
Debt acquisition costs
Less - accumulated amortization
Debt acquisition costs, net
(1,074,615)
194,821
(879,794)
Mortgages payable, net of unamortized debt
acquisition costs
$38,165,296
-
(791,889)
115,286
(676,603)
$30,072,308
Certain mortgage payable agreements are subject to prepayment premiums and may be terminated
by the lender under certain events of default as defined under the related agreements.
- 15 -
Under the line of credit agreement and certain mortgages payable, the Company is subject to
various covenants, including maintaining a minimum debt service coverage ratio. There are also
financial reporting requirements and other covenants as defined in the related agreements. Some of
the mortgages payable have non-recourse carve-outs that are guaranteed by the Corporation,
Operating Company or sponsors who formed the Operating Company. The Corporation and the
Operating Company have indemnified the sponsors for any payments required to be made under any
carve-out guaranty.
Estimated future principal payments to be made under the above mortgage agreements are as
follows:
Year ending September 30,
2017
2018
2019
2020
2021
Thereafter
$
931,102
2,104,681
1,125,307
2,324,762
4,716,471
27,842,767
$39,045,090
Estimated future amortization of debt acquisition costs to interest expense is as follows:
Year ending September 30,
2017
2018
2019
2020
2021
Thereafter
$116,941
112,487
111,597
105,316
79,818
353,635
$879,794
7. RELATED PARTY TRANSACTIONS
Asset Management Agreement:
The Corporation and the Operating Company have entered into an asset management agreement
(the “Asset Management Agreement”) with Cambridge Street Asset Management LLC
(“CSAM”), a related party that is majority-owned by the President and Chief Executive Officer.
Under the terms of the Asset Management Agreement, CSAM is responsible for, among other
things, providing management of the day-to-day operations of the Company, providing suitable
investment opportunities to the Company, determining acquisition and disposition strategies of
the Company, entering into leases with tenants, managing financing activities, monitoring of
compliance with loan covenants, monitoring other operations of the Company, and providing
support to the Company’s officers and directors to assist in their governance function and
responsibilities.
- 16 -
In exchange for services provided under the Asset Management Agreement, CSAM is
compensated as follows:
(a) Annual asset management fees payable on a pro-rata basis in advance on the first
business day of each calendar quarter, equal to an annual rate of:
i.
1.0% if the gross asset value is $100 million or less;
ii.
0.9% if the gross asset value is over $100 million and is $200 million or less;
iii.
0.8% if the gross asset value is over $200 million and is $300 million or less; or
iv.
0.75% if the gross asset value is over $300 million.
The “gross asset value” is the sum of the valuations of each of the properties in the
Company’s portfolio as determined as of December 31 of the preceding year plus, for
each quarter following the acquisition of any property, the gross purchase price set forth
in the acquisition contract for each property acquired after such year end.
(b) Acquisition fees equal to 1% of the gross purchase price paid for each rental property
acquired, including any property contributed to the Operating Company in exchange for
membership interests. Prior approval of the acquisition fee is required for rental
property contributed by the sponsors who formed the Operating Company. In addition,
if CSAM is engaged to secure financing for a rental property, a fee equal to the
difference between 1% of the principal amount of the loan and any fees paid to any
mortgage brokers;
(c) In the event that CSAM acts on behalf of the Operating Company in leasing any
properties, a leasing fee equal to (i) 4% of the total gross base rent payments due over
the first ten years of the initial term of the lease and 2% of the remainder of the lease
term and (ii) 2% of the total gross base rents of any renewal term. The leasing fee
payable to CSAM will be reduced to the extent necessary (including to 0%) if the
aggregate of CSAM’s leasing fee and any fee payable to any other third party by the
Operating Company or the Corporation with respect to the lease or renewal would be
more than 6% of the total gross base rent payments for an initial term or 3% for a
renewal term; and
(d) A disposition fee equal to 1% of the gross purchase price received upon disposition of a
rental property.
The initial term of the Asset Management Agreement is effective through February 1, 2024,
after which it automatically renews for successive five year periods, unless either party provides
written notice of termination in accordance with the Asset Management Agreement. In the
event the Company elects to terminate the Asset Management Agreement due to a change in
control of CSAM, as defined in the Asset Management Agreement, or at the end of the initial
term or any renewal period without cause, the Company will be required to pay CSAM a
termination fee of 2 ½ times the aggregate asset management fees paid to CSAM during the
twelve-month period immediately preceding the date of such termination.
- 17 -
Property Management Agreements:
As of September 30, 2016, each of the Operating Company’s thirteen subsidiaries and CSAM
have entered into separate property management agreements (the “Property Management
Agreements”) with Cambridge Street Property Management LLC (“CSPM”), a related party
that is majority-owned by the President and Chief Executive Officer. It is also partially owned
by other officers of the Corporation. Under the terms of the Property Management Agreements,
CSPM manages the day-to-day operations of the Company’s rental properties which include,
among other things, collection of rent, monitoring of compliance with lease terms, payment of
mortgages payable and other obligations, and payment of the management fee.
In exchange for services provided under the Property Management Agreements, CSPM is
compensated as follows:
(a) For property management services, the fee is based upon the aggregate value of the
Corporation’s investment in rental property, as defined in the Property Management
Agreements, as follows:
a. 3% of total monthly base rent collected if the value is $100 million or less,
b. 2.75% of total monthly base rent collected if the value is greater than $100
million but equal to or less than $300 million, or
c. 2.5% of total monthly base rent collected if the value is greater than $300
million.
(b) In the event that CSPM is retained to provide leasing services on behalf of the
Company, a leasing fee shall be payable for a new lease or lease expansion in an
amount up to 4% of the scheduled gross base rental payments to be made under the
terms of the new lease or lease expansion during the first ten years of the lease and 2%
of the scheduled gross base rental payments to be made thereafter. The leasing fee
payable to CSPM will be reduced to the extent necessary (including to 0%) if the
aggregate leasing fees payable to additional brokers (including CSAM, if applicable)
would be more than 6% of the total scheduled gross base rental payments under the
terms of the new lease or lease expansion;
(c) In the event that CSPM is retained to provide leasing services on behalf of the
Company, a leasing fee shall be payable for lease renewals or extensions in an amount
up to 2% of the base rent due over the renewal/extension period. The leasing fee
payable to CSPM will be reduced to the extent necessary (including to 0%) if the
aggregate leasing fees payable to additional brokers (including CSAM, if applicable)
would be more than 3% of the base rent due over the renewal/extension period;
(d) In the event that CSPM is retained to provide financing services, a financing fee shall
be payable equal to the difference between 1% of the principal amount of the loan and
any fees paid to any mortgage brokers (including CSAM, if applicable);
- 18 -
(e) In the event that additional services should be deemed required and CSPM is retained to
provide those services, various fees for other services provided by CSPM shall be
payable, including modernization, tenant improvements, repairs and insured restoration
loss activities. In addition, if requested, CSPM may also engage and oversee legal
actions related to the rental property pertaining to the collection of rents or enforcement
of the related lease. CSPM will charge an hourly fee of $75 plus expenses in addition
to any third party expenses associated with these matters.
The initial term of each of the Property Management Agreements is effective for three years and
automatically renews for successive one year periods until terminated by either party upon sixty
days written notice prior to the end of the initial term or any renewal period. In the event of a
change in control of CSPM, as defined in the Property Management Agreements, or if the
Company terminates a Property Management Agreement at the end of any term without cause,
the Company will be required to pay CSPM a termination fee of 50% of the aggregate fees paid
to CSPM during the twelve-month period immediately preceding the date of such termination.
Management fees incurred under the Asset Management Agreement and Property Management
Agreements totaled $553,726 for the nine months ended September 30, 2016. In addition, asset
acquisition fees under these agreements totaled $190,500 for the nine months ended September 30,
2016.
Leasing and financing fees paid or payable to CSAM and CSPM totaled $851,456 for the nine
months ended September 30, 2016. Leasing fees are reported as lease acquisition costs while
financing fees are reported as a reduction of mortgages payable in the accompanying Consolidated
Balance Sheets.
At September 30, 2016 and December 31, 2015, $16,200 and $0, respectively, were included in due
from related parties in the accompanying Consolidated Balance Sheets for management fees and
leasing fees due from CSAM and CSPM.
At September 30, 2016 and December 31, 2015, $0 and $34,159, respectively, were included in due
to related parties in the accompanying Consolidated Balance Sheets for management fees,
reimbursed expenses, and leasing fees due to CSAM and CSPM.
8. INCOME TAXES
The Company is required to file income tax returns with federal and state taxing authorities. The
Corporation’s federal and state income tax returns remain subject to examination by the respective
taxing authorities for the 2014 through 2016 tax years. The Operating Company’s federal and state
income tax returns remain subject to examination by the respective taxing authorities for the 2013
through 2016 tax years. The Company has determined that it has no uncertain tax positions, which
includes the tax status of the Company.
- 19 -
9. CREDIT RISK CONCENTRATIONS
The Company maintained bank balances that, at times, exceeded the federally insured limit during
the nine months ended September 30, 2016. The Company has not experienced any losses relating
to these deposits and management does not believe that the Company is exposed to any significant
credit risk with respect to these amounts.
The Company had revenue from four tenants which each represented between 10% and 13% of total
revenue for the nine months ended September 30, 2016.
10. NONCONTROLLING INTERESTS
Noncontrolling interests as reported in the accompanying Consolidated Balance Sheets are held in
the form of membership units in the Operating Company. At September 30, 2016, a total of
120,776 non-managing membership units were outstanding, which represent a 19.9% interest in the
Operating Company. Membership units are economically equivalent to the Company’s common
stock and, subject to certain restrictions, are convertible into the Company’s common stock at the
option of the respective holder on a dollar-for-dollar basis. Holders of the membership units do not
have voting rights.
11. DISTRIBUTION REINVESTMENT PLAN
The Company has a Distribution Reinvestment Plan (the “Plan”) available to any holder of shares of
common stock or membership units that are convertible into shares. In general, the Plan allows
participants to purchase common stock from distributions received. Under the Plan, all distributions
to be reinvested under the Plan will be used to purchase shares of common stock as of the quarterly
distribution date for the applicable distribution. The Corporation offers shares, pursuant to the Plan,
at 98% of the Determined Share Value, which is $54 at September 30, 2016. At September 30,
2016 and December 31, 2015, there were 18,188 and 7,025 shares, respectively, issued and
outstanding under the Plan. Distributions/dividends declared at September 30, 2016 as reported in
the accompanying Consolidated Balance Sheet include 1,676 shares of common stock totaling
$88,673 to be reinvested under the Plan in October 2016.
- 20 -
12. STOCK INCENTIVE PLAN
The Company has a long-term stock incentive plan (the “Incentive Plan”) under which its
Independent Directors have authority to grant stock options, stock appreciation rights, restricted
stock awards, restricted stock units or performance share units (collectively, the “Stock Awards”) to
employees, officers, directors, and consultants of the Company. Stock options are granted with an
exercise price determined by the Company’s Independent Directors, provided that the exercise price
per share of common stock shall not be less than the fair value of such share of common stock at the
date of grant. The term of the stock options is determined at the time of grant, but generally the
stock options vest ratably over a five-year period. In the event of a change in control of the
Company, all awards immediately vest and are exercisable or fully earned at the maximum amount,
except as otherwise determined by the Independent Directors. The Company may issue a maximum
of 700,000 shares under the Plan. However, the Company may not issue more than 70,000 shares
under the Plan until the Company has issued at least 700,000 shares of common stock. Once the
Corporation has issued a minimum of 700,000 shares of common stock, the shares issued under the
Plan may not exceed 10% of the total issued and outstanding shares of the Corporation.
Stock Options:
Stock-based compensation cost for a stock option is estimated at the grant date based on each
option’s fair value as calculated using the Black-Scholes option pricing model, which incorporates
various assumptions including expected dividend yields, volatility, option lives and interest rates.
The Corporation recognizes stock-based compensation cost as an expense ratably on a straight-line
basis over the requisite service period. In determining the service period, the Corporation considers
service requirements and the vesting period.
At September 30, 2016, there were outstanding options to purchase 40,000 shares under the
Incentive Plan, of which 16,000 shares are exercisable. The weighted-average exercise price of all
outstanding and exercisable stock options is $50 and the weighted average contractual term is
approximately seven years at September 30, 2016. The Company recognized compensation cost of
$31,934 related to stock options during the nine months ended September 30, 2016.
Restricted Stock Awards:
Stock-based compensation cost for restricted stock is estimated based on the determined share value
at the grant date. The Corporation recognizes stock-based compensation cost as an expense ratably
on a straight-line basis over the requisite service period. In determining the service period, the
Corporation considers service and performance requirements and the vesting period.
During the nine months ended September 30, 2016, no shares of restricted stock were granted under
the Incentive Plan.
- 21 -
Board of Directors Stock Awards:
Members of the Company’s Board of Directors, excluding the President and Chief Executive
Officer of the Corporation, receive shares of common stock each quarter as partial compensation for
serving on the Board of Directors. Stock-based compensation cost for stock issued to board
members is estimated at the determined share value at the grant date. The Company recognized
compensation cost of $45,000 related to stock issued to board members during the nine months
ended September 30, 2016.
13. COMMITMENT
In December 2015, the Company entered into a lease agreement with a tenant which provides for a
tenant improvement allowance of up to $700,000 for certain improvements to the property. The
work is to be performed by the tenant, subject to the approval of the Company, and must be
completed by the end of November 2016. Any unused portion of the tenant improvement allowance
will be forfeited by the tenant in December 2016. As of September 30, 2016, $665,439 of the
allowance has been used by the tenant and is included in investment in rental property in the
accompanying Consolidated Balance Sheet.
In August 2016, the Company entered into a lease agreement with a tenant which provides for a
tenant improvement allowance of up to $250,000 for certain improvements to the property. The
work is to be performed by the tenant, subject to the approval of the Company, and must be
completed by the end of February 2018. Any unused portion of the tenant improvement allowance
will be forfeited by the tenant. This allowance has not been used by the tenant as of September 30,
2016.
14. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest was $1,230,586 for the nine months ended September 30, 2016.
The following are non-cash transactions and have been excluded from the accompanying
Consolidated Statement of Cash Flows:
!
The Company has distributions/dividends payable totaling $190,642 which was declared as
payable to members and stockholders at September 30, 2016.
!
During the nine months ended September 30, 2016, additions to investment in rental
property accounted for using the operating method includes purchase accounting allocation
to intangible lease assets and intangible lease liabilities of $1,100,047.
!
During the nine months ended September 30, 2016, the Company issued common stock
totaling $583,307 under the terms of the Plan.
- 22 -
15. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through November 15, 2016, which is the date the
accompanying consolidated financial statements were available to be issued.
Distributions/dividends declared of $190,642 as reported in the accompanying Consolidated
Balance Sheet at September 30, 2016 were paid to members and stockholders in October 2016. Of
this amount, $101,969 was paid in cash while the remaining $88,673 was paid in the form of stock
under the terms of the Plan.
In September 2016, the Company’s Board of Directors approved a $0.315 per unit/share
distribution/dividend per month for the months of October, November, and December 2016. Such
distributions/dividends are to be prorated on a daily basis based on the number of days of ownership
on record during each of the months during the quarter ending December 2016. The
distribution/dividend amounts for each month of the quarter ending December 2016 are to be paid
on or before the forty-fifth day after the first date of ownership on record for each month of the
quarter or as promptly as practicable thereafter.
- 23 -
EXHIBIT C
Most Recent Annual and Quarterly Calculation of Funds From Operations
(“FFO”), Adjusted Funds From Operations (“AFFO”) and Modified Adjusted
Funds From Operations (“MAFFO”) Per Weighted Average Share/Unit for
Royal Oak Realty Trust Inc. and Subsidiaries
ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES
FUNDS FROM OPERATIONS, ADJUSTED FUNDS FROM OPERATIONS, AND
MODIFIED ADJUSTED FUNDS FROM OPERATIONS PER WEIGHTED AVERAGE
SHARE/UNIT
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
2015
2014
Funds From Operations (FFO):
Excess (Shortage) of revenue over expenses
Depreciation and amortization
FFO
$
$
$
185,622
1,421,790
1,607,412
$
$
$
(434,131)
872,710
438,579
Adjusted Funds from Operations (AFFO):
Stock Compensation Expense (option vesting)
Amortization of Financing Costs
U.S. GAAP Straight-Line Rent Adjustment
AFFO
$
$
$
$
169,245
116,755
(231,941)
1,661,471
$
$
$
$
138,522
43,685
(134,357)
486,429
Modified Adjusted Funds from Operations (MAFFO):
Acquisition Costs
MAFFO
$
$
145,694
1,807,165
$
$
360,472
846,901
Weighted Average Shares/Units Outstanding
FFO Per Unit
AFFO per Unit
MAFFO per Unit
337,330
$
$
$
4.77
4.93
5.36
154,479
$
$
$
2.84
3.15
5.48
As used herin, the Company calculates FFO, as defined by The National Association of Real Estate
Investment Trusts (NAREIT), to be equal to net income (computer in accordance with generally
accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation
and amortization, and after adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds
from operations on the same basis.
AFFO is calculated as FFO, minus U.S. GAAP straight-line rent adjustment, plus stock
compensation expense, plus interest expense attributable to the amortization of debt acquisition
costs.
MAFFO is calculated as AFFO, plus acquisition costs expensed.
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EXHIBIT D
Supplements:
Material Updates and Notifications
since the date on the cover of this Memorandum
EXHIBIT E
Subscription Agreement, Investor Qualification Questionnaire,
and Irrevocable Proxy
Royal Oak Realty Trust Inc.
Instructions for Investing
If you wish to purchase shares of the Common Stock of Royal Oak Realty Trust Inc., you
should take the following steps:
1. Carefully read the Confidential Private Placement Memorandum and any current
supplements and exhibits, as well as any other documents described in the Memorandum which you
have requested. Consult with your tax, legal and financial advisors.
2. Complete and sign the attached Subscription Agreement, specifying the total purchase
price for the shares which you desire to purchase. Be sure to include your complete contact and tax
information.
3. Complete and sign the Accredited Investor Qualification Questionnaire attached as
Exhibit A to the Subscription Agreement.
4. Complete and sign the “Irrevocable Proxy” attached as Exhibit B to the Subscription
Agreement.
5. Complete and sign the Form W-9 included with the Subscription Agreement.
6. Carefully review the Distribution Reinvestment Plan included with the Subscription
Agreement. If you elect to participate in the Distribution Reinvestment Plan, complete and sign
the Election to Participate form included with the Plan.
7. Prepare a check payable to the order of Royal Oak Realty Trust Inc. in the amount of your
investment.
8. If you wish to designate a transferee under the Maryland Uniform Transfer on Death
Statute (Maryland Estates and Trusts Code §16-101 et seq.), please complete the Transfer on Death
Designation Form.
After you receive notice of the next closing date, at least two business days prior to that closing,
please deliver Royal Oak Realty Trust Inc., 1870 Winton Road South, Suite 10, Rochester, New York
14618 the following completed and signed documents: (i) Subscription Agreement, (ii) Accredited
Investor Qualification Questionnaire, (iii) Irrevocable Proxy,
(iv) Form W-9, (v) if dividend reinvestment is desired, the Election to Participate, (vi) your check,
and (vii) if you wish, the Transfer on Death Designation Form.
By executing the Subscription Agreement, you attest to meeting the suitability standards as provided
in the “Suitability Criteria” section of the Memorandum and as stated in the Subscription Agreement and
agree to be bound by the terms of the Subscription Agreement.
Please let Dan Goldstein know if you will be traveling or out of town at the end of any calendar
quarter when you wish to invest, so that you can be reached with notices.
If your circumstances change so that information about your “accredited investor” status changes
please let Dan Goldstein know before delivering your check.
ROYAL OAK REALTY TRUST INC. INTENDS THAT THE SHARES OF COMMON
STOCK OFFERED WILL BE SOLD ONLY TO ACCREDITED INVESTORS. TRANSFER OF THE
SHARES IS RESTRICTED BY FEDERAL AND STATE SECURITIES LAWS AND CERTAIN
PROVISIONS OF OUR ARTICLES OF INCORPORATION DESIGNED TO PRESERVE OUR
QUALIFICATION AS A REIT. THERE IS NO TRADING MARKET FOR THE SHARES AND
THERE CAN BE NO ASSURANCE THAT SUCH A MARKET WILL DEVELOP IN THE
FORESEEABLE FUTURE.
Name of Subscriber: _____________________
Total Amount of Subscription: $____________
Number of shares of Common Stock: _______
Royal Oak Realty Trust Inc.
SUBSCRIPTION AGREEMENT
Common Stock, par value $.001
THIS SUBSCRIPTION AGREEMENT (this “Agreement”) is between Royal Oak Realty
Trust Inc. (the “Corporation”), a Maryland corporation, and the subscriber(s) signing below (the
“Subscriber”).
RECITALS
The Subscriber wishes to purchase from the Corporation, and the Corporation wishes to
issue and sell to the Subscriber, shares of common stock of the Corporation, in accordance with
and subject to the terms and conditions of this Agreement and the Confidential Private Placement
Memorandum, as supplemented from time to time (the memorandum, together with all
amendments and supplements, the “Memorandum”) and the provisions of the Articles of
Incorporation and By-laws of the Corporation, and the other documents referred to in the
Memorandum and available for review by the Subscriber. Certain terms capitalized in this
Agreement but not defined are used with the meaning given such terms in the Memorandum.
The Subscriber wishes to purchase the number of shares of the common stock of the
Corporation, par value $.001 (“Common Stock”) set forth above and on the signature page to this
Agreement, and has entered into this Agreement as a condition to the sale and issuance of the
Common Stock.
The Subscriber acknowledges the voting agreement contained in this Agreement and will
enter into the irrevocable proxy attached hereto as Exhibit B to elect two nominees of Cambridge
Street Asset Management LLC, the Asset Manager, to the Board of Directors of the Corporation.
NOW, THEREFORE, in consideration of payment of the Purchase Price (as defined
below) and the issuance of the shares of Common Stock, and the representations, warranties and
covenants contained herein, the parties agree as follows:
1.
Subscription. The Subscriber irrevocably subscribes to purchase from the Corporation
the number of shares of Common Stock represented by the Purchase Price set forth above and on
the signature page of this Agreement (the “Shares”) on the terms and conditions described in this
Agreement and in the Memorandum and the Corporation’s Articles of Incorporation and Bylaws,
copies of which are available upon request.
2.
Acceptance. The Subscriber acknowledges that the subscription represented by this
Agreement is not binding on the Corporation until accepted by it. The Corporation reserves the
right to reject this subscription for the Shares in whole or part, for any reason, at any time prior
to the issuance of the Shares. In the event of the subscription offered in this Agreement is not
accepted, as evidenced by the signature of an officer of the Corporation below, on or before the
Closing Date (as defined below), this Agreement shall thereafter have no force or effect with
respect to that portion of the Shares, unless extended as provided in Section 3(b) below. The
Corporation shall promptly return or cause to be returned to the Subscriber any portion of the
Purchase Price that relates to the portion of the subscription for Shares not accepted, without
interests. The Corporation may accept the subscription represented by this Agreement but
purchase some or all of the Shares at a later date, but not later than six months from the date of
this Agreement without the express written consent of Subscriber.
3.
Closings. The Subscriber understands that closings of the offer and sale of the Shares are
scheduled to occur at the end of each month, unless otherwise provided by the Asset Manager.
At each closing, upon the acceptance by the Corporation of any subscription for Shares, whether
in whole or in part, the Corporation shall issue and sell to Subscriber the number of Shares which
may be purchased with the amount of the Purchase Price accepted for that closing. The number
of Shares sold and issued to the Subscriber shall then be recorded on the books of the
Corporation. The Subscriber acknowledges and agrees as follows.
(a)
At each closing, the Corporation will accept subscriptions for funding up to an
amount which the Asset Manager believes can be prudently invested in properties
or used to reduce indebtedness and other general corporate purposes in the
following fiscal quarter.
(b)
If the total subscriptions for shares of common stock of the Corporation exceed
the amount described in Section 3(a) for any closing date, subscriptions for that
closing date will be accepted in the order received by the Corporation or may be
accepted for deferred purchase on notice to the Subscriber.
(c)
If any portion of Subscriber’s subscription for Shares pursuant to this Agreement
is not accepted by the Corporation at any closing, the funds tendered by the
Subscript will be returned without interest, provided, however, at the written
request of the Subscriber, the Corporation may accept and hold the subscription
for a subsequent closing and this Agreement will be a continuing subscription to
purchase any remaining Shares at a subsequent closing. The Corporation will
give the Subscriber ten (10) days prior notice to pay the Purchase Price for any
Shares to be included in a subsequent closing.
(d)
Any portion of a subscription for Shares pursuant to this Agreement not called for
funding and purchase within six months after the first closing date after receipt of
all of the documents will be deemed cancelled and the funds tendered in
connection with any unaccepted portion of Purchase Price received with respect
to the Subscription will be returned without interest, unless the Corporation
receives written notice from the Subscriber at least 5 business days prior to the
-24813-5207-2236.1
end of the six-month period requesting extension of the subscription and this
Agreement and the Corporation accepts that offer.
Purchase of Shares. The Subscriber agrees as follows.
D
The purchase price to be paid to the Corporation for the Shares shall be the
“Determined Share Value” as established from time to time by the Independent
Directors Committee. The current Determined Share Value and price per share in
this offering is $5.00 and will be adjusted from time to time to equal the
Determined Share Value (the “Purchase Price”). The Subscriber hereby
irrevocably agrees to pay the Purchase Price, based on the number of Shares for
which the Subscriber has subscribed as set forth above and on the signature page
of this Agreement.
E
As soon as practicable after receiving this Agreement, the Accredited Investor
Status Questionnaire and the Irrevocable Proxy, the Corporation will provide the
Subscriber with written notice of whether the Corporation intends to accept all ora
portion of the Purchase Price at the upcoming closing. At least two (2) business
days prior to the closing, Subscriber shall tender a check payable to the
Corporation in an amount equal to the Purchase Price set forth in theCorporation’s
notice.
F
Subscriber’s obligation to pay the all of the Purchase Price subscribed for in this
Agreement is a legally binding and enforceable obligation of Subscriber payable
upon notice or notices as set forth above from time to time. If Subscriber fails to
pay any portion of such Purchase Price, the Corporation may, in its sole
discretion, treat Subscriber in default and exercise any or all of the following
remedies:(w) not issue the Shares to Subscriber, (x) assess interest on all unpaid
portions of the Purchase Price from the earliest date any unpaid portion of the
Purchase Price was due at the rate of 2% per month, or such lesser rate as may be
the highest rate of interest permitted under applicable law, (y) exercise all
available remedies at law or in equity, and (z) on ten (10) days prior notice to
Subscriber, repurchase any Shares previously issued to Subscriber at a price per
share equal to 90% of the per share Purchase Price paid by Subscriber for such
Shares and cancel this Agreement with respect to all remaining Shares.
Representations and Warranties of Subscriber. The Subscriber represents and warrants to
the Corporation with respect to the purchase of the Shares as follows.
D
The Subscriber is acquiring the Shares for the Subscriber’s own account, as
principal, not as a nominee or agent for another person, for investment purposes
only, and not with a view to, or for resale, or distribution thereof in whole or in
part. No other person has a direct or indirect beneficial interest in such Shares
other than, if the Subscriber is an entity, as shareholders, members, partners or
other equity owners of Subscriber. Further, the Subscriber does not have any
contract, undertaking, agreement or arrangement with any person to sell, transfer
or grant participations to such person, or to any third person, to with respect to
-3-
4813-5207-2236.1
any of the Shares for which the Subscriber is subscribing. The funds invested by
Subscriber are from personal resources secured in compliance with any and all
applicable provisions of the Patriot Act, including the Bank Secrecy Act, and all
other applicable laws. If Subscriber is an entity, it has no obligation or current
intention to distribute the Shares to the equity owners of Subscriber.
(b)
The Subscriber has full power and authority to enter into this Agreement, the
execution and delivery of this Agreement has been duly authorized by all
applicable entity action, if applicable, and this Agreement constitutes a valid and
legally binding obligation of the Subscriber. If Subscriber is an entity, Subscriber
will provide evidence to the Corporation of its due formation and authorization of
the investment described in this Subscription Agreement.
(c)
The Subscriber acknowledges that the offering and sale of the Shares is intended
to be exempt from registration under the Securities Act of 1933, as amended (the
“Securities Act”) and applicable state securities laws by virtue of Section 4(2) of
the Securities Act and the provisions of Regulation D promulgated thereunder
(“Regulation D”) and makes the following representations and warranties to the
Corporation, the Asset Manager, and their respective officers, directors,
managers, employees and representatives.
(d)
(i)
The Subscriber agrees that each of the Corporation, the Asset Manager,
and their respective officers, directors, managers, employees and
representatives may and is relying on the representations made by the
Subscriber in this Agreement.
(ii)
The Subscriber has the financial ability to bear the economic risk of loss
of the Subscriber’s investment in the Shares, has adequate means for
providing the Subscriber’s current needs and personal contingencies, and
has no need for liquidity with respect to the Subscriber’s investment in the
Shares of the Corporation.
(iii)
The Subscriber (or, if the Subscriber is an entity, the person making the
investment decision on behalf of such entity) has such knowledge and
experience in financial and business matters as to be capable of evaluating
the merits and risks of the prospective investment in the Shares.
(iv)
If the Subscriber is an entity, the Subscriber also represents it has not been
organized for the purpose of acquiring the Shares and, upon the request of
the Corporation, will provide the Corporation with such information as
may be required by the Corporation to reasonably determine that the entity
was formed for other purposes.
The Subscriber is an “accredited investor,” as that term is defined in Rule 501 of
Regulation D and one or more of the categories set forth in Exhibit A hereto
correctly and in all respects describes the Investor, and the Investor has so
-44813-5207-2236.1
indicated by checking the applicable box or boxes corresponding to the applicable
category or categories on Exhibit A.
(e)
The Subscriber acknowledges and agrees as follows.
(i)
The Subscriber (or the Subscriber’s legal or financial representative) has
been furnished with the Memorandum and has carefully read the
Memorandum including any exhibits thereto and understands and has
evaluated the risks set forth under “Risk Factors” and the other
considerations described in the Memorandum, and has relied solely on the
information contained in the Memorandum and that provided as indicated
in subsections (ii) and (iii) below.
(ii)
The Subscriber (or the Subscriber’s legal or financial representative) has
been given the opportunity for a reasonable time prior to the date of this
Agreement to ask questions of, and receive answers from, designated
officers of the Corporation and the Asset Manager, concerning the terms
and conditions of the offering of the Shares and other matters pertaining to
this investment, and has been given the opportunity for a reasonable time
prior to the date hereof to obtain such additional information necessary to
verify the accuracy of the information contained in the Memorandum or
that which was otherwise provided in order to evaluate the merits and risks
of purchasing the Shares to the extent the Corporation possesses such
information or can acquire it without unreasonable effort or expense.
(iii)
The Subscriber (or the Subscriber’s legal or financial representative) has
been given the opportunity to receive and review the Articles of
Incorporation and By-Laws of the Corporation, the Second Amended and
Restated Operating Agreement as amended of Royal Oak Realty Trust
(Operating Company) LLC (doing business as Royal Oak Realty Trust
LLC) (the “Operating Company”), the Asset Management Agreement
between the Corporation and the Operating Company and Cambridge
Street Asset Management LLC as the Asset Manager, the Property
Management Agreement between the Corporation and the Operating
Company and Cambridge Street Property Management LLC as the
Property Manager; and the Distribution Reinvestment Plan.
(iv)
The Subscriber (or the Subscriber’s legal or financial representative) has
not relied upon any oral representation or oral information in connection
with the offering of the Shares which is not contained in the Memorandum
or the documents described above.
(v)
The Subscriber (or the Subscriber’s legal or financial representative) has
determined that a purchase of the Shares is a suitable investment for the
Subscriber and that as of the date hereof the Subscriber could bear a
complete loss of such investment.
-54813-5207-2236.1
(f)
The Subscriber acknowledges and agrees that the Shares are subject to substantial
restrictions on transfer both under the securities laws and to comply with REIT
requirements. The Subscriber acknowledges and agrees that there is no trading
market for the Shares, nor is one expected to develop. Accordingly, the
Subscriber agrees as follows.
(i)
The Subscriber will not sell or otherwise transfer the Shares without
registration under the Securities Act and applicable state securities laws or
an exemption therefrom, and fully understands and agrees that the
Subscriber must bear the economic risk of the Subscriber’s purchase for
an indefinite period because, among other reasons the Shares have not
been registered under the Securities Act or under the securities laws of any
state and, therefore, cannot be resold, pledged, assigned or otherwise
disposed of unless they are subsequently registered under the Securities
Act and under the applicable securities laws of such states or an exemption
from such registration is available and in compliance with the other
transfer restrictions described in this Agreement and the Memorandum.
(ii)
The Subscriber is aware that the Shares, when issued, will be “restricted
securities” as such term is defined in Rule 144 under the Securities Act of
1933 unless all of the conditions of Rule 144 are met. The Corporation is
under no obligation: to register the Shares on the Subscriber’s behalf, or to
assist Subscriber in complying with any exemption from registration under
the Securities Act or applicable state securities laws, or to make public the
information which may be required for a sale under Rule 144.
(iii)
The Subscriber understands that to qualify after its first year of election of
REIT status, the Corporation cannot have (x) more than 50% of the value
of its outstanding common stock owned, directly or indirectly, by five or
fewer stockholders during the last half of each taxable year, (y) fewer than
100 persons owning its outstanding common stock during at least
335 days of a 12-month taxable year, or (z) any person or group of persons
that acquires, directly or indirectly, beneficial ownership of more than
9.8% of its outstanding common stock, and as such the Corporation may
prohibit a transfer of Shares to obtain or maintain its qualification as a
REIT.
(g)
Any information which the Subscriber has furnished to the Corporation with
respect to the Subscriber’s financial position and business experience is correct
and complete as of the date of this Agreement and if there should be any material
change in such information the Subscriber will immediately furnish such revised
or corrected information to the Corporation;
(h)
The Subscriber understands and agrees to the restrictions and the limitations on
voting pursuant to this Agreement and the Irrevocable Proxy. The Subscriber
consents to the placing of the legends on any notice of ownership of uncertificated
Shares or, if issued, share certificates representing the Shares, reflecting such
-6-
4813-5207-2236.1
restrictions and limitations, and to the issuance of stop-transfer orders to any
transfer agent of the Corporation’s securities, with respect to any Shares that may
be registered in the name of the Subscriber or beneficially owned by the
Subscriber.
6.
(i)
The Subscriber understands that an investment in the Shares is a speculative
investment which involves a degree of risk of loss of the Subscriber’s entire
investment.
(j)
The Subscriber’s overall commitment to investments which are not readily
marketable is not disproportionate to the Subscriber’s net worth, and an
investment in the Shares will not cause such overall commitment to become
excessive.
(k)
The Subscriber acknowledges that no Shares were offered or sold to it by means
of any form of general solicitation or general advertising.
(l)
The Subscriber consents to the management of the Corporation’s business by
Cambridge Street Asset Management LLC or its successor, as Asset Manager, as
provided in the Corporation’s Articles of Incorporation and the Asset
Management Agreement, and by Cambridge Street Property Management LLC or
its successor, as Property Manager, as provided in the Property Management
Agreement, subject to the review by the board of directors of the Corporation.
The Subscriber understands the affiliations among certain members of the
Corporation’s board of directors, the Asset Manager and the Property Manager
and the conflicts of interest resulting therefrom, including the possibility that such
persons may invest in parallel or competing investments with the Corporation,
subject to such limitations as are described in the Memorandum or approved by
the Independent Directors.
(m)
The Subscriber understands that the voting agreement and irrevocable proxy
contained in this Agreement grants to an officer of the Corporation the exclusive
power to vote the Subscriber’s Shares in favor of the election to the Board of two
nominees of the Asset Manager, but does not affect the ability of the Subscriber to
vote the Shares with respect to the election of Independent Directors.
(n)
The Subscriber agrees that foregoing representations, warranties and agreements
shall survive the closing or closings of the purchase and sale of the Shares
pursuant to this Agreement.
Voting Agreement and Irrevocable Proxy.
(a)
Upon acceptance of this subscription of Shares of the Corporation, the Subscriber
hereby agrees to vote all shares of Common Stock now and hereafter owned by
Subscriber, directly or indirectly, to: (i) elect two individuals designated by the
Asset Manager to the Board, and (ii) continue to vote in favor of the election for
such designees for so long as Subscriber owns such Shares, and acknowledges
-7-
4813-5207-2236.1
and agrees that any successor owner of the Shares shall be required to agree and
vote such shares as provided herein.
(b)
In order to insure voting in accordance with this Agreement, the Subscriber agrees
to execute an irrevocable proxy simultaneously with the execution of this
Agreement in the form of Exhibit B attached hereto granting to the corporate
secretary, or in the event there is no corporate secretary, the chief financial
officer, of the Corporation the right to vote, or to execute and deliver stockholder
written consents, in respect of all shares of Common Stock owned by Subscriber.
Both Corporation and Subscriber understand and agree such irrevocable proxy
relates solely to voting for the election of directors of the Corporation in
accordance with this Agreement and does not constitute the grant of any rights to
said proxy to vote as to any other matters or for any other purpose.
(c)
The Subscriber agrees that if any capital stock or other securities (other than any
shares or securities of another corporation issued pursuant to a plan of merger) are
issued on, or in exchange for, any of the Shares held by Subscriber by reason of
any stock dividend, stock split, reinvestment plan, consolidation of shares,
reclassification, or consolidation involving the Corporation, such shares or
securities shall be deemed to be Shares owned by Subscriber for purposes of this
Agreement.
7.
Indemnification. Subscriber agrees to indemnify and hold harmless the Corporation from
and against any and all losses arising out of or resulting from: (a) any breach by Subscriber of
any representation or warranty made by Subscriber in this Agreement; and (b) the failure by
Subscriber to perform any covenant, agreement or obligation set forth in this Agreement,
including, without limitation, the failure to pay any portion of the Purchase Price within the time
set forth in Section 4.
8.
Miscellaneous.
(a)
Confidentiality. Subscriber agrees that it is in the best interest of the Corporation,
and Subscriber agrees to keep confidential and not disclose to any person any
information that Subscriber may obtain from the Corporation pursuant to financial
statements, reports and other materials submitted by the Corporation to Subscriber
pursuant to this Agreement or otherwise, all of which the Corporation and the
Asset Manager deem confidential, proprietary or secret, except as may be
required by applicable law or regulatory authority, or until such information
becomes known to the public; provided, however, Subscriber may disclose (i)
such information to their respective affiliates, attorneys, consultants and other
professionals to the extent necessary to obtain their services in connection with
Subscriber’s investment in the Corporation, so long as such affiliates, consultants
or professionals agree to be bound by the provisions of this Section 8(a), and (ii)
the U.S. federal income tax treatment (as defined in Treasury Regulation §
1.6011-4) and U.S. federal income tax structure (as defined in Treasury
Regulation § 1.6011-4) of the transactions contemplated by this Agreement and
-84813-5207-2236.1
all materials of any kind (including opinions or other tax analyses) that are or
have been provided to Subscriber relating to such tax treatment or tax structure.
(b)
Governing Law. This Agreement shall be governed by and construed in
accordance with the substantive laws of the State of New York, without regard to
principles of choice of law other than the provisions of General Obligations Law
Sections 5-1401 and 5-1402, except to the extent that the General Corporate Law
of Maryland is mandatorily applicable to the Shares. The Subscriber hereby
consents to the jurisdiction of the courts of the State of New York and Federal
courts located in Monroe County, New York, with respect to any matter related to
this Agreement or any investment in the Shares and will not object to the laying
of venue in Monroe County, New York.
(c)
Entire Agreement; Amendment. The parties have not made any representations or
warranties with respect to the subject matter hereof not set forth herein. This
Agreement, the Articles of Incorporation, and Bylaws of the Corporation, together
with the Asset Management Agreement and Property Management Agreement
and any other agreements or instruments described in the Memorandum, each as
amended from time to time, constitute the entire agreement between the parties
with respect to the subject matter hereof. All understandings and agreements
heretofore had between the parties with respect to the subject matter hereof are
merged in this Agreement and such documents and agreements. This Agreement
may not be changed, modified, extended, terminated or discharged orally, but
only by an agreement in writing that is signed by all of the parties to this
Agreement.
(d)
Notices. Any notice, report, consent or other communication required or
permitted to be given hereunder shall be in writing, and shall be given by
delivering such notice in person, by registered or certified United States mail,
postage prepaid and return receipt requested, or by recognized overnight delivery
service and shall be given when received at the following addresses of the parties
hereto:
The Corporation :
Royal Oak Realty Trust Inc.
1870 Winton Road South, Suite 10
Rochester, New York 14618
Attention: Daniel Goldstein
Subscriber
The address set forth on the signature page of this Agreement.
Any party may at any time change its address by notice given to the other party in the manner set
forth above.
-94813-5207-2236.1
(e)
No Waivers. Neither the failure nor any delay on the party of a party to exercise
any right, remedy, power or privilege under this Agreement shall operate as a
waiver thereof, nor shall any single or partial exercise or waiver of any right,
remedy, power or privilege preclude any other or further exercise of the same or
of any other right, remedy, power or privilege. No waiver shall be effective
unless it is in writing and is signed by the party asserted to have granted such
waiver.
(f)
No Third Party Beneficiaries. Nothing in this Agreement, express or implied, is
intended or will be construed to give any person other than the parties hereto, or
their respective administrators, successors or permitted assigns, any legal or
equitable right, remedy or claim under or in respect of any provision contained
herein.
(g)
Severability. If any provision of this Agreement, or the application thereof to any
person or any circumstance, is invalid or unenforceable: (i) a suitable and
equitable provision shall be substituted therefor in order to carry out, so far as
may be valid and enforceable, the intent and purpose of such invalid or
unenforceable provision, and (ii) the remainder of this Agreement and the
application of such provision to other persons, entities or circumstances shall not
be affected by such invalidity or unenforceability.
(h)
Titles and Subtitles. The titles of the paragraphs and subparagraphs of this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
(i)
Assignability. Neither this Agreement nor any right, remedy, obligation or
liability arising hereunder or by reason hereof will be assignable by the
Subscriber.
(j)
Successors and Assigns. Except as otherwise expressly provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, permitted assigns, heirs, executors and administrators of the parties
hereto.
(k)
Waiver of Jury Trial. The parties to this Agreement each hereby waives, to the
fullest extent permitted by law, any right to trial by jury of any claim, demand,
action, or cause of action: (i) arising under this Agreement, or (ii) in any way
connected with or related or incidental to the dealings of the parties hereto in
respect of this Agreement or the offer and sale of the Shares pursuant to this
Agreement and the Memorandum, whether now existing or hereafter arising, and
whether in contract, tort, equity, or otherwise. The parties to this Agreement each
hereby agrees and consents that any such claim, demand, action, or cause of
action will be decided by court trial without a jury and that the parties to this
Agreement may file a counterpart or a copy of this Agreement with any court as
written evidence of the consent of the parties hereto to the waiver of their right to
trial by jury.
- 10 -
4813-5207-2236.1
(l)
Counterparts. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, and all of which together shall
constitute one instrument.
(m)
Survival of Warranties.
The representations, warranties, covenants and
agreements of the Corporation and Subscriber contained in or made pursuant to
this Agreement shall survive the execution and delivery of this Agreement and
shall in no way be affected by any investigation made by Subscriber or the
Corporation.
(n)
Further Action. The parties agree to execute any and all such other and further
instruments and documents, and to take any and all such further actions
reasonably required to effectuate this Agreement and the intent and purposes
hereof.
[Signature page follows]
- 11 4813-5207-2236.1
IN WITNESS WHEREOF, and intending to be legally bound, the Subscriber has
executed this Agreement on the date first written below to be effective immediately, subject to
acceptance by Royal Oak Realty Trust Inc.
Name of Subscriber(s):
By:
Subscriber Signature
Title (if applicable)
By:
Co-Subscriber Signature
Please indicate type of joint tenancy or other interest:
TEN COM
-
as tenants in common
I
TEN ENT
Initial
-
as tenants by the entireties (not
available in NY for securities) Initial
JT TEN
as joint tenants with right
of survivorship (and not as
Initial
tenants in common)
If you desire to designate a beneficiary or beneficiaries under the Maryland Uniform Transfer on Death Statute
(Maryland Estates and Trusts Code §16-101 et seq.) you must initial here and complete the “Transfer on Death
Designation Form”.
I
I
Date: ____________________, 20 ___
Initial _______
SUBSCRIPTION TERMS
Purchase Price of shares of common stock, par value $.001, subscribed for: $
(Note: The Purchase Price will be applied to purchase the Shares subscribed at a per share price equal to
the Determined Share Value in effect on the date of this Subscription Agreement.)
The Subscriber acknowledges and agrees that the Corporation may accept the entire amount of the
Subscriber’s subscription up to the aggregate Purchase Price set forth above but only issue and sell the
Shares to Subscriber from time to time. In such event, the Corporation will give Subscriber 10 days’
prior notice of its intention to issue all or a portion of the Shares upon receipt of the Purchase Price, at the
Determined Share Value on the date the Subscription Agreement is accepted. If the Subscriber fails to
pay the Purchase Price for such Shares on the date set forth in the Corporation’s notice, Shares will not be
issued and Subscriber will be liable to the Corporation as described in this Agreement.
Typed or printed address of Subscriber:
Preferred address for receiving notices (Complete
only if different from prior column):
Social Security or Federal Tax Identification No.:
Type of Entity (if applicable):
Telephone # of Subscriber:
Email address of Subscriber:
_____ Please initial if you wish to receive
notices only by email at the above address.
[Form of acceptance by Royal Oak Realty Trust Inc. follows]
4813-5207-2236.1
For Royal Oak Realty Trust Inc.
Subscriber’s subscription for shares of Royal Oak Realty Trust Inc. Common Stock is hereby
accepted for an initial Purchase Price of $
for _________ Shares closing on
____________________, 20___. The Corporation will give Subscriber 10 days’ prior written
notice from the Corporation of the number of Shares and aggregate Purchase Price due at any
Closing if fewer than all of the Shares subscribed for will be issued at the next closing.
ROYAL OAK REALTY TRUST INC.
By:
Name:
Title:
Date of Initial Acceptance:
4813-5207-2236.1
[Page intentionally left blank]
4813-5207-2236.1
Exhibit A
ROYAL OAK REALTY TRUST INC.
ACCREDITED INVESTOR STATUS QUESTIONNAIRE
The Subscriber hereby represents and warrants, as an integral part of the attached
Subscription Agreement, that he, she or it is correctly and in all respects described by the
category or categories set forth directly next to which the Subscriber has marked below:
Name of Subscriber(s): _________________________________
[MARK BELOW THE CATEGORY OR CATEGORIES THAT DESCRIBE YOU]
Ƒ
The Subscriber is a natural person whose net worth, either individually or jointly with
such person’s spouse, at the time of his or her purchase, exceeds $1,000,000.
Note: As used above, the term “net worth” means the excess of total assets over total liabilities. In
calculating net worth, the Subscriber must exclude the value of the Subscriber’s primary residence as an
asset and exclude any indebtedness secured by the primary residence, up to its fair market value.
However, the amount of indebtedness secured by the primary residence in excess of the fair market value
of the residence should be considered a liability and deducted from the Subscriber’s net worth. In
addition, if the amount of indebtedness secured by the Subscriber’s primary residence is increased within
60 days prior to Subscriber’s purchase of securities in connection with this Offering other than as a result
of purchasing a new principal residence, the amount of the increase should be included as a liability for
purposes of calculating an Subscriber’s net worth, even if the total indebtedness on the primary residence
remains below its fair market value.
Ƒ
The Subscriber is a natural person who had individual income in excess of $200,000, or
joint income with that person’s spouse in excess of $300,000, in each of the last two
years and reasonably expects to reach the same income level in the current year.
Ƒ
The Subscriber is a corporation, partnership or other organization described in
Section 501(c)(3) of the Internal Revenue Code, or Massachusetts or similar business
trust, not formed for the specific purpose of acquiring the securities offered, with total
assets in excess of $5,000,000.
Ƒ
The Subscriber is an entity which falls within one of the following categories of
“accredited investors” set forth in Rule 501(a) of Regulation D under the Securities Act
(please mark applicable description):
ƑD
A bank as defined in Section 3(a)(2) of the Securities Act, or any savings and
loan association or other institution as defined in Section 3(a)(5)(A) of the
Securities Act whether acting in its individual or a fiduciary capacity.
ƑE
A broker or dealer registered pursuant to Section 15 of the Securities Exchange
Act of 1934.
ƑF
An insurance company as defined in Section 2(13) of the Securities Act.
ƑG
An investment company registered under the 1940 Act or as a business
development company as defined in Section 2(a)(48) of that Act.
ƑH
A Small Business Investment Company licensed by the U.S. Small Business
Administration under Section 301(c) or (d) of the Small Business Investment
Act of 1958.
ƑI
Any plan established and maintained by a state, its political subdivisions, or any
agency or instrumentality of a state or its political subdivisions, for the benefit
of its employees, if such a plan has total assets in excess of $5,000,000.
ƑJ
Any private business development company as defined in Section 202(a)(22) of
the Investment Advisors Act of 1940.
ƑK
An employee benefit plan within the meaning of Title I of ERISA, if the
investment decision is made by a plan fiduciary, as defined in Section 3(21) of
such Act, which is either a bank, savings and loan association, insurance
company or registered investment adviser acting as a plan fiduciary as defined
in Section 3(21) of ERISA.
ƑL
An employee benefit plan within the meaning of Title I of ERISA with total
assets in excess of $5,000,000, whether or not the investment decision regarding
this investment was made by a bank, savings and loan association, insurance
company or registered investment adviser acting as plan fiduciary.
ƑM
A self-directed employee benefit plan within the meaning of Title I of ERISA, if
investment decisions are made solely by persons that are accredited Subscribers
as defined in Rule 501 of Regulation D under the Securities Act.
ƑN
A trust, with total assets in excess of $5,000,000, not formed for the specific
purpose of acquiring the securities offered, whose purpose is directed by a
sophisticated person as described in Rule 506(b)(2)(ii) of Regulation D under
the Securities Act.
Ƒ
The Subscriber is an entity in which all of the equity owners are accredited investors and
described in one or more of the categories set forth in paragraphs 1 through 4 above and
has provided evidence of the accredited investor status of each such equity owner with its
subscription.
Ƒ
The Subscriber is a grantor trust (a “Trust”) and (a) the Trust is a revocable trust treated
as a grantor trust under Section 676 of the Internal Revenue Code and all income, gain
and loss of the Trust is treated as income, gain and loss of the grantor and reported by the
grantor on his or her individual income tax return, and (b) the grantor of the Trust is (i) a
natural person whose net worth, either individually or jointly with such person’s spouse,
at the time of his or her purchase, exceeds $1,000,000, and/or (ii) a natural person who
had an individual income in excess of $200,000, or joint income with that person’s
spouse in excess of $300,000, in each of the last two years and reasonably expects to
reach the same income level in the current year.
Ƒ
The Subscriber is a person who/which is not a “United States Person” as described in
Rule 902 of Regulation S under the Securities Act and the Subscriber does not fall within
any of the categories set out at items 1 through 5 above. Please provide a brief
description of the non-U.S. Person:
Signature of each Subscriber
_______________________________
Print Subscriber(s) Name
4813-5207-2236.1
_____________
Date
Exhibit B
IRREVOCABLE PROXY
The undersigned hereby grants to the corporate secretary and the chief financial officer,
each acting alone, of Royal Oak Realty Trust Inc. (the “Corporation”), an irrevocable proxy
pursuant to the provisions of Section 2-507 of the Maryland General Corporation Law to vote, or
to execute and deliver written consents or otherwise act with respect to, all shares of common
stock (the “Shares”) of the Corporation now owned or hereafter acquired by the undersigned as
fully, to the same extent and with the same effect as the undersigned might or could do under any
applicable laws or regulations governing the rights and powers of stockholders of a Maryland
corporation in connection with the election of directors of the Corporation as provided in that
certain Subscription Agreement and Irrevocable Proxy (the “Agreement”) by and between the
undersigned and the Corporation, in favor of the election of the nominees of the Asset Manager
(Cambridge Street Asset Management LLC or its successors) to the Board of Directors of Royal
Oak Realty Trust Inc., as provided in the voting agreement set forth in the Agreement. The
undersigned hereby affirms that this proxy is given as a condition of said agreement as such is
coupled with an interest and is irrevocable. The undersigned agrees and acknowledges that this
proxy shall be valid and binding on the undersigned and any successors and assigns of the Shares
and shall continue in full force and effect as set forth in the Agreement.
THIS PROXY SHALL REMAIN IN FULL FORCE AND EFFECT AND BE
ENFORCEABLE AGAINST ANY DONEE, TRANSFEREE OR ASSIGNEE OF THE
SHARES, AND IN THE EVENT OF THE DEATH OR INCAPACITY OF SUBSCRIBER.
___________
Signature of Subscriber
Date
___________
Signature of Co-Subscriber
________________________________
Print Subscriber(s) Name(s)
4813-5207-2236.1
Date
ROYAL OAK REALTY TRUST INC.
1870 Winton Road South, Suite 10
Rochester, NY 14618
Telephone: (585) 287-5856
Attention: Daniel J. Goldstein, President
TRANSFER ON DEATH DESIGNATION FORM 1
Maryland Uniform Transfer-on-Death (TOD) Security Registration Act
Maryland Estates and Trusts Code §16-101 et seq.
Upon receipt of a properly completed and executed copy of this form, Royal Oak Realty Trust Inc. (the “Company”) will register your
shares (or re-register outstanding shares) of common stock in the Company (the “Shares”) in your name to be transferred on death
(“TOD”) to the Beneficiary or Beneficiaries you name below.
x Only shares of Company common stock registered to individuals, joint tenants with right of survivorship or tenants by the
entirety may designate a TOD Beneficiary or Beneficiaries.
x Completing this form will transfer the Shares to your Beneficiary on your death.
x This form preempts any terms in your will concerning the shares in question.
x The Company will re-register Shares in the name of your Beneficiary upon presentation of appropriate evidence of your
death.
x The Company has adopted a policy to follow the TOD rules of the Securities Transfer Association, as modified from time to
time by the Company in connection with TOD transfers (the “TOD Rules”). [See below]
x This Agreement shall be governed by Rules and construed in accordance with the laws of the State of Maryland.
x Upon receipt of this form, properly completed, the Company will register or re-register your Shares as follows:
Shareholder TOD Beneficiary under Uniform Transfer on Death (TOD) Registration Act Subject to TOD Rules
1. SHAREHOLDER INFORMATION
ƑIndividual
ƑJoint Tenants with Rights of Survivorship
ƑTenants by the Entirety
A. _____________________________________________________________________________________
Shareholder’s First Name
Middle Initial
Last Name
_____________________________________________________________________________________
Shareholder’s Social Security Number
Shareholder’s Date of Birth
_____________________________________________________________________________________
Shareholder’s Address
_____________________________________________________________________________________
City
State
Zip
Phone Number
Additional shareholder, if any
B. _____________________________________________________________________________________
Shareholder’s First Name
Middle Initial
Last Name
_____________________________________________________________________________________
Shareholder’s Social Security Number
Shareholder’s Date of Birth
_____________________________________________________________________________________
Shareholder’s Address
_____________________________________________________________________________________
City
1
State
Zip
Phone Number
Royal Oak Realty Trust Inc. provides this form for your convenience. Designating a Beneficiary on this Transfer on Death Form has
significant legal consequences upon your death. You should consult your attorney in connection with this and any other estate
planning issues.
2. BENEFICIARY
Please note: Unless otherwise indicated, the Company will assume equal Beneficiary distribution if more than one Beneficiary is
designated. The sum of all Beneficiaries must equal 100% of the Shares set forth below and the sum of all Contingent
Beneficiaries must equal 100%.
The Beneficiary Designation is:
ƑAn Original TOD
ƑA Beneficiary Change to an Existing TOD
A. _____________________________________________________________________________________
Beneficiary’s First Name
Middle Initial
Last Name
_____________________________________________________________________________________
Beneficiary’s Social Security Number
Beneficiary’s Date of Birth
_____________________________________________________________________________________
% of Shares
Relationship
_____________________________________________________________________________________
Beneficiary’s Address
_____________________________________________________________________________________
City
State
Zip
Phone Number
B. _____________________________________________________________________________________
Beneficiary’s First Name
Middle Initial
Last Name
_____________________________________________________________________________________
Beneficiary’s Social Security Number
Beneficiary’s Date of Birth
_____________________________________________________________________________________
% of Shares
Relationship
_____________________________________________________________________________________
Beneficiary’s Address
_____________________________________________________________________________________
City
State
Zip
Phone Number
3. SPOUSAL CONSENT
Any resident of a community property state who designated Beneficiaries other than a spouse must obtain the spouse’s consent. If
there is more than one Shareholder, each Shareholder’s spouse must sign.
I voluntarily and irrevocably consent to (i) the naming of another person as Primary Beneficiary of this account or (ii) the naming
of myself as Primary Beneficiary and others as Contingent Beneficiaries of this account. I give any interest in these assets to the
Shareholder, to the extent necessary to accomplish the Beneficiary designation made above.
_____________________________________________________________________________________
Signature
Printed Name
Date
_____________________________________________________________________________________
Signature
Printed Name
Date
4. SHARES SUBJECT TO THIS TOD BENEFICIARY DESIGNATION
I hereby designate TOD to the Beneficiary(ies) named in this Designation Form with respect to:
________
Please initial
All of my Shares of the Company owned by me/us including Shares acquired through the
Dividend Reinvestment Plan.
________
______ Shares of the Company owned by me/us.
Please initial
________
Please initial
_______% of all Shares owned by me/us including my Shares acquired through the
Dividend Reinvestment Plan
Please remove TOD Beneficiary designations from ______ Shares owned by me.
________
Please initial
5. SHAREHOLDER SIGNATURE
I have read and understand the attached Rules for TOD Registration and hereby instruct the Company to register my Shares, in
transfer on death form, for the benefit of the Beneficiary(ies) designated above or remove the designation of a Beneficiary as stated
above. I direct the Company to transfer these Shares and any shares into which these have been exchanged, in accordance with this
direction and the Rules as they may be amended, modified or supplemented from time to time. I agree that this TOD Designation
shall be governed by and construed in accordance with the laws of Maryland regarding nonprobate transfers. The Company
reserves the right, at any time without prior notice, to suspend, limit, modify or terminate TOD Registrations.
_____________________________________________________________________________________
Signature
Printed Name
Date
_____________________________________________________________________________________
Signature
State of New York
County of ________
Printed Name
Date
)
) ss.:
)
On the __ day of ______ in the year _____ before me, the undersigned, personally appeared
___________________________ personally known to me or proved to me on the basis of satisfactory
evidence to the the individual(s) whose name(s) is (are) subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by
his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the
individual(s) acted, executed the instrument.
_________________________
Notary Public
TOD LIMITATIONS & MODIFICATIONS
The Company’s TOD registrations are governed by its TOD Rules, as altered, modified or supplemented by the Company from
time to time. The phrase “Subject to TOD Rules” in a TOD Registration shall incorporate the “STA TOD Rules” of the Securities
Transfer Association, subject to any modifications adopted by the Company from time to time, including the following:
A.
You may change or revoke your Beneficiary designation at any time by:
(i) submitting a new notarized Transfer on Death Designation Form, or
(ii) providing the Company with a notarized letter of instruction detailing the same information included on this form. A
notarized letter of instruction must be submitted to the Company to revoke the designation of Beneficiary.
B.
A Beneficiary must be designated by name. Designations of lineal descendants or lineal descendants per stirpes will not be
accepted. Multiple beneficiaries may be designated. If no percentage interest is designated, the Company will treat all
Beneficiaries as holding equal interests as tenants in common.
C.
If one joint Shareholder has died, the surviving joint Shareholder must provide the Company with evidence of the death of
the deceased joint Shareholder (certified death certificate) and inheritance tax waivers and/or affidavits of domicile of the
deceased joint Shareholder, if applicable. The surviving joint Shareholder may re-register the Shares into sole ownership and
can change or delete the Beneficiary(ies).
C.
Upon notification of the death of all Shareholders and receipt of the required documentation as outlined in the Rules, the
Shares will be transferred to the Beneficiary(ies) named in this form. If more than one Beneficiary is designated, the Shares
will be registered as tenants in common upon the death of the Shareholder(s).
D.
If there is no proof of the Beneficiary’s death and the Beneficiary is not located within six months of the Shareholders’ death,
the Company may transfer the Shares to the estate of the deceased Shareholder. The Company shall have no obligation to
attempt to locate the missing Beneficiary(ies).
E.
The Company shall not have any duty to:
(i) verify information in a request for registration of a Shareholder’s TOD direction;
(ii) give notice to any person of the date, manner and persons to whom a transfer will be made under the Shareholder’s TOD
direction;
(iii) attempt to locate Beneficiaries;
(iv) determine any fact or law that would cause the Shareholder’s TOD direction to be revoked in part or in whole or that
would change the distribution provided in the Shareholder’s TOD direction;
(v) respond to inquiries from anyone other than the Shareholder during the Shareholder’s lifetime; or
(vi) mail any notices with respect to these Rules to an address other than the address of record.
In addition to these modifications, please note the following Securities Transfer Association TOD restrictions:
x
A TOD Registration may not be changed or revoked by will, codicil, or telephone conversation.
x
A custodian under the Uniform Gifts to Minors Act (UGMA) may not be designated as a Beneficiary because the UGMA
applies only to gifts made during the lifetime of the donor. A custodian under the Uniform Transfer to Minors Act
(UTMA) may be designated as a Beneficiary.
x
The name(s) of the Beneficiary(ies) and the legend “Subject to STA TOD Rules” must appear in the Share registration at
all times.
EXHIBIT F
Distribution Reinvestment Plan
4821-2485-6879.12
Royal Oak Realty Trust Inc.
DISTRIBUTION REINVESTMENT PLAN
Royal Oak Realty Trust Inc., a Maryland corporation (the “Corporation”) and Royal Oak
Realty Trust (Operating Company) LLC (doing business as Royal Oak Realty Trust LLC, the
“Operating Company”) have adopted this Distribution Reinvestment Plan (the “Plan”), to be
administered by Cambridge Street Asset Management LLC or its successor as Plan
Administrator of the Plan (the “Plan Administrator”) as agent for participants in the Plan
(“Participants”), on the terms and conditions set forth below. As of June 30, 2015, we have
appointed American Stock Transfer and Trust Company LLC as our Transfer Agent and Plan
Administrator.
1.
Election to Participate. Any holder of shares of common stock of the
Corporation, par value $.001 per share (the “Shares”) or membership units of the Operating
Company that are convertible into Shares (“Membership Units”) (Shares and Membership Units
are collectively, “Securities”) may become a Participant by making a written election to
participate by written notice to the Plan Administrator and providing the Plan Administrator with
a completed and executed Election to Participate, provided, however, that no Person may
participate in the Plan unless such Person is an “Accredited Investor” (as defined below). Any
stockholder or member who has not previously elected to participate in the Plan, may so elect at
any time by completing and executing an Election to Participate form obtained from the Plan
Administrator or any other appropriate documentation as may be acceptable to the Plan
Administrator which shall include representations that the proposed Participant is an “Accredited
Investor” (as defined below). Participants in the Plan may choose to have the full amount of
their cash distributions (other than “Excluded Distributions” as defined below) or any lesser
percentage thereof with respect to the Securities owned by them reinvested pursuant to the Plan.
A Participant may change the percentage of the Participant’s Securities subject to participation in
the Plan at any time by executing a new Election to Participate form obtained from the Plan
Administrator or any other appropriate documentation for that purpose as may be acceptable to
the Plan Administrator. Under the Emergency Economic Stabilization Act, passed by Congress
in 2008, you must reinvest at least 10% of your dividend distribution each dividend period.
2.
Distribution Reinvestment. The Plan Administrator will receive all cash
distributions other than Excluded Distributions paid by the Corporation or the Operating
Partnership with respect to participating Securities of Participants (collectively, the
“Distributions”). Participation will commence with the next Distribution payable after receipt of
the Participant’s election pursuant to Paragraph 1 hereof, provided it is received at least ten (10)
business days prior to the last day of the period to which such Distribution relates. Subject to the
preceding sentence, regardless of the date of such election, a holder of Securities will become a
Participant in the Plan effective on the first day of the period following such election, and the
election will apply to all Distributions attributable to such period and to all periods thereafter. As
used in this Plan, the term “Excluded Distributions” shall mean those cash or other distributions
designated as Excluded Distributions by the Board.
3.
General Terms of Plan Investments.
(a)
4816-2799-7727.5
All Distributions to be reinvested under the Plan will be used to purchase
shares of Common Stock as of the monthly distribution date for the
applicable Distribution. The Corporation intends to offer Shares pursuant
to the Plan at 98% of the Determined Share Value (as such term is defined
in the Corporation’s Articles of Incorporation), regardless of the price per
Security paid by the Participant for the Securities in respect of which the
Distributions are paid.
(b)
Organizational, offering or marketing expenses will not be paid or
reimbursed to Cambridge Street Asset Management LLC, as the Asset
Manager, for Shares purchased pursuant to the Plan.
(c)
For each Participant, the Plan Administrator will maintain an account
which shall reflect for each period in which Distributions are paid (a
“Distribution Period”) the Distributions received by the Plan
Administrator on behalf of such Participant. A Participant’s account shall
be reduced as purchases of Shares are made on behalf of such Participant
on the monthly distribution payment date.
(d)
Distributions shall be invested in Shares by the Plan Administrator
promptly following the payment date with respect to such Distributions to
the extent Shares are available for purchase under the Plan. If sufficient
Shares are not available, any such funds that have not been invested in
Shares within 30 days after receipt by the Plan Administrator and, in any
event, by the end of the fiscal quarter in which they are received, will be
distributed to Participants. Any interest earned on such accounts will be
paid to the Corporation and will become property of the Corporation.
(e)
Participants may acquire fractional Shares, computed to three decimal
places, so that 100% of the Distributions will be used to acquire Shares.
The ownership of the Shares shall be reflected on the books of the
Corporation or its transfer agent.
4.
Absence of Liability. Neither the Corporation nor the Plan Administrator shall
have any responsibility or liability as to the value of the Shares or any change in the value of the
Shares acquired for the Participant’s account. Neither the Corporation nor the Plan Administrator
shall be liable for any act done in good faith, or for any good faith omission to act hereunder.
5.
Suitability. Each Participant shall notify the Plan Administrator in the event that,
at any time while participating in the Plan, there is a material change in the Participant’s
financial condition or an inaccuracy of any representation relating to the suitability of the
Participant as an investor and qualification of the Participant as an “Accredited Investor” as such
term is defined in Rule 501(a) of Regulation D, promulgated under the Securities Act of 1933, as
amended (an “Accredited Investor”) made by Participant in connection with the Participant’s
purchase of the Securities. A material change shall include any anticipated or actual decrease in
net worth or annual gross income or any other change in circumstances that would cause the
Participant to fail to meet the suitability standards as an investor and qualification as an
Accredited Investor previously represented.
6.
Reports to Participants. Promptly after each dividend reinvestment, the Plan
Administrator will mail to each Participant a statement of account describing, as to such
2
4816-2799-7727.5
Participant, the Distributions received, the number of Shares purchased and the per Share
purchase price for such Shares pursuant to the Plan for the year to date.
7.
Taxes. Taxable Participants may incur a tax liability for Distributions even
though they have elected not to receive their Distributions in cash but rather to have their
Distributions reinvested in Shares under the Plan. If a Participant fails to furnish a valid taxpayer
identification number, fails to properly report distributions or fails to certify that the Participant
is not subject to withholding, the Plan Administrator will withhold 28% of the amount of
Distributions paid with respect to such Participant’s Securities.
8.
Termination.
(a)
A Participant may terminate or modify participation in the Plan at any
time by written notice to the Plan Administrator. To be effective for any
Distribution, such notice must be received by the Plan Administrator at
least ten (10) business days prior to the last day of the Distribution Period
to which it relates.
(b)
A Participant’s transfer of Securities will terminate participation in the
Plan with respect to such transferred Securities as of the first day of the
Distribution Period in which such transfer is effective, unless the
transferee of such Securities in connection with such transfer demonstrates
to the Plan Administrator that such transferee meets the requirements for
participation hereunder and affirmatively elects participation by delivering
an executed authorization form or other instrument required by the Plan
Administrator.
9.
State Regulatory Restrictions. The Plan Administrator is authorized to deny
participation in the Plan to residents of any state or foreign jurisdiction that imposes restrictions
on participation in the Plan that conflict with the general terms and provisions of this Plan, or
where, in the Plan Administrator’s sole discretion, the burden or expense of compliance with the
applicable securities laws of such state or foreign jurisdiction would make the stockholder’s or
member’s participation in the Plan impracticable or inadvisable.
10.
Amendment or Termination by Corporation.
(a)
The terms and conditions of this Plan may be amended by the Corporation
at any time, including but not limited to an amendment to the Plan to
substitute a new Plan Administrator to act as agent for the Participants, by
mailing an appropriate notice at least ten (10) days prior to the effective
date thereof to each Participant.
(b)
The Corporation may terminate the Plan by providing ten (10) days’ prior
written notice to all Participants.
(c)
The Plan Administrator may terminate a Participant’s individual
participation in the Plan, at any time by providing ten (10) days’ prior
written notice to a Participant, if the Participant’s participation in the Plan
3
4816-2799-7727.5
may: (i) adversely affect the status of the Corporation as a real estate
investment trust pursuant to Section 856 of the Internal Revenue Code, (ii)
result in a Participant who is not an Accredited Investor, (iii) violate or
create adverse consequences under any law, rule, regulation or statement
of policy of any governmental body or agency having jurisdiction over the
Corporation and its securities including, without limitation, the Employee
Retirement Income Security Act of 1974 or Internal Revenue Code,
(iv) with regard to Shares, be prohibited by the Corporation’s Articles of
Incorporation or Bylaws, or (v) with regards to Membership Units, be
prohibited by Royal Oak Realty Trust LLC’s Articles of Organization or
Amended and Restated Operating Agreement.
(d)
After termination of the Plan or termination of a Participant’s participation
in the Plan, the Plan Administrator will send to each Participant a check
for the amount of any Distributions in the Participation’s account that have
not been invested in Shares. Any future Distributions with respect to such
former Participant’s Securities made after the effective date of the
termination of the Participant’s participation will be sent directly to the
former Participant.
11.
Authorization. Any determination, decision, or action of the Board in connection
with the construction, interpretation, administration, or application of the Plan shall be final,
conclusive, and binding upon all Participants, unless otherwise determined by the Board.
12.
Governing Law. This Plan and the Participants’ election to participate in the
Plan shall be governed by the laws of the State of New York, unless otherwise, and only to the
extent, required to be governed by the Maryland General Corporate Law, as amended.
13.
Notice. Any notice or other communication required or permitted to be given by
any provision of this Plan shall be in writing to the following address:
Cambridge Street Asset Management LLC
1870 South Winton Road Suite 10
Rochester, NY 14618
Attention: Shareholder Services
or such other address provided by the Plan Administrator or Corporation by written notice to all
Participants. Notices to a Participant may be given by letter addressed to the Participant at the
Participant’s last address of record with the Plan Administrator. Each Participant shall notify the
Plan Administrator promptly in writing of any changes of address.
Effective as of February 1, 2014
Name changes effective as of December, 2015
4
4816-2799-7727.5
Royal Oak Realty Trust Inc.
DISTRIBUTION REINVESTMENT PLAN
ELECTION TO PARTICIPATE
The Distribution Reinvestment Plan (the “Plan”) of Royal Oak Realty Trust Inc. (the “Corporation”) provides the opportunity for our
stockholders and holders of units in Royal Oak Realty Trust LLC (the “Operating Company”) to reinvest distributions we make with
respect to the Corporation’s common stock or the membership units in the Operating Company. In order to become a participant in
the Plan, please sign this Election of Participation below and return it to our asset manager, Cambridge Street Asset Management
LLC, at the following address:
Cambridge Street Asset Management LLC
1870 South Winton Road, Suite 10
Rochester, NY 14618
For this Election to Participate to apply to any distribution, it must be received no later than 10 business days before the last day of the
applicable calendar quarter. If this Election is received after that date, you will receive a cash distribution for such quarter and your
enrollment will be processed for any distribution declared with respect to the following quarter. Once you have enrolled in the Plan,
your enrollment will continue for all subsequent distributions until we receive written notice from you withdrawing from the Plan.
Royal Oak Realty Trust Inc. has appointed American Stock Transfer and Trust Company LLC as our Transfer Agent and Plan
Administrator (“Plan Administrator”) to administer Royal Oak Realty Trust Inc. Dividend Reinvestment Plan.
By signing below, you:
x
elect to participate in the Plan, until such time as you provide the Administrator with written notice of your desire to no
longer participate;
x
appoint the Plan Administrator as your agent under the terms of the Plan;
x
represent to the Corporation that you are an “accredited investor,” as that term is defined in Rule 501 of Regulation D
promulgated under the Securities Act of 1933, as amended;
x
agree to notify the Secretary of the Corporation of any material change to the information you have previously represented to
the Corporation regarding your financial position and business experience; and
x
affirm that the Form W-9: Request for Taxpayer Identification Number and Certification provided by you to the Corporation
remains correct and complete.
Under the Emergency Economic Stabilization Act, passed by Congress in 2008, you must reinvest at least 10% of your dividend
distribution each dividend period. If no other designation is made below, all (100%) of the Shares or Membership Units registered in
your name will participate in the Distribution Reinvestment Plan.
If you wish to have fewer than all of the Shares or Units registered in your name participate in the Plan, please designate below:
Number of your Shares or Membership Units as to which any distribution is to be reinvested pursuant to the Plan: _____
OR
Percentage of your Shares or Membership Units as to which any distribution is to be reinvested pursuant to the Plan: _____%
The undersigned (if shares or units are jointly owned, all holders must sign), intending to be legally bound, directs the Plan
Administrator to reinvest distributions as set forth in the foregoing request.
Date:
__________________________
_____________________________________
(Print or Type Name)
By:
______________________________
Title (if applicable):_____________________
Date:
__________________________
_____________________________________
(Print or Type Name)
By:
______________________________
Title (if applicable):_____________________
Contact telephone number: _______________
4847-6638-5695.3
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