497 1 form497_090413.htm FORM 497 - UPDATED PROXY form497_090413.htm
Filed pursuant to SEC Rule 497(c)
Securities Act Registration No. 333-181853
 
 
 
mackenzie logo
 
 
    PROSPECTUS
September 4, 2013.
MacKenzie Realty Capital, Inc.
Up to a Maximum of 5,000,000 Shares of Common Stock
 
 
We are a newly formed, externally managed non-diversified company that has elected to be treated as a business development company under the Investment Company Act of 1940 (or the “1940 Act”).  Our investment objective is to generate both current income and capital appreciation through debt and equity real estate-related investments. We are advised by MCM Advisers, LP. MacKenzie Capital Management, LP provides us with non-investment management services and the administrative services necessary for us to operate.
 
We were formed to continue and expand the business of our portfolio of assets we recently acquired from eight private funds, which we refer to as our “Legacy Funds,” and which are managed by an affiliate of our investment adviser. The portfolio had a fair value, as determined by our Board of Directors, of approximately $6.92 million on February 28, 2013. As consideration for our acquisition of that portfolio, 692,217 shares of our common stock were issued to the Legacy Funds.  See “Legacy Portfolio Acquisition.”  We intend to invest primarily in debt and equity real estate-related securities, and we currently expect to elect to be taxed as a real estate investment trust when we become eligible to make that election.
 
We are offering on a continuous basis up to 5,000,000 shares of our common stock at an initial offering price of $10 per share.  After our initial closing, we will sell our shares on a continuous basis at a price of $10; however, if our net asset value per share increases above $10 per share, we may supplement this prospectus and sell our shares at a higher price in order to avoid selling our shares at a price which, after deduction of selling commissions and dealer manager fees, is below our net asset value per share. Because of the possibility that the price per share will change, persons who subscribe for shares in this offering must submit subscriptions for a fixed dollar amount rather than for a number of shares and, as a result, may receive fractional shares of our common stock. We are required to file post-effective amendments to this registration statement, which are subject to Securities and Exchange Commission (or “SEC”) review, to allow us to continue this offering for at least two years.
 
This is our initial public offering. Other than the recent Legacy Portfolio Acquisition, we have not conducted any business and have not had any income in any of the last three fiscal years.  Investing in our common stock may be considered speculative and involves a high degree of risk, including the risk of a substantial loss of investment.  See “Risk Factors” beginning on page 13 to read about the risks you should consider before buying shares of our common stock, including the risk of leverage.
 
 
You should not expect to be able to sell your shares regardless of how we perform; and if you are able to sell your shares, you will likely receive less than your purchase price and current net asset value.
 
 
We do not intend to list our shares on any securities exchange for 8 years after completion of this offering, and we do not expect a secondary market in the shares to develop.
 
 
We plan to implement a share repurchase program, but we do not expect to repurchase more than 5% of the shares that were outstanding in the prior year on average.  In addition, any such repurchases will be at a 10% discount to the current offering price in effect on the date of repurchase.
 
 
 Distributions are not guaranteed, and we are permitted to return a limited amount of our capital, or borrow, to fund distributions (though we intend to do neither).
 
 
You should consider that you may not have access to the money you invest for an indefinite period of time.
 
 
An investment in our shares is not suitable for you if you need access to the money you invest.  See “Share Repurchase Program” and “Suitability of Stockholders.”
 
 
Because you will be unable to sell your shares, you will be unable to reduce your exposure on any market downturn unless and until we list the shares.
 
NEITHER THE SEC, THE ATTORNEY GENERAL OF THE STATE OF NEW YORK NOR ANY OTHER STATE SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED OF OUR COMMON STOCK, DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE OR PASSED ON OR ENDORSED THE MERITS OF OUR OFFERING.  ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE USE OF FORECASTS IS PROHIBITED AND ANY REPRESENTATION TO THE CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE AMOUNT OR CERTAINTY OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE WHICH MAY FLOW FROM AN INVESTMENT IN OUR COMMON STOCK IS NOT PERMITTED.
 
Price to Public
 
Sales Load(2)
 
Net Proceeds to us(3)
Total Maximum(1) 
$
50,000,000
 
$
4,750,000
 
$
43,500,000
 
 

 
 
 

 
(1)
There is no minimum number of shares we must sell to effect this offering.  The total maximum (“Total Maximum”) assumes the sale of the maximum number of 5,000,000 shares offered in this offering.
(2)
We will pay selected brokers (the “Selling Agents”) a sales load of 7.0% of the offering price, which load is reduced based on the number of shares purchased from a Selling Agent, and we will also pay our dealer manager, ARI Financial Services, Inc. (“ARI”), a dealer manager fee of up to 2.0% of the offering price (the “Dealer Manager Fee”).  If shares are purchased through investment advisers, we will only pay the Dealer Manager Fee to ARI, and no commissions will be payable.  For purposes of the table, we have assumed a sales charge of 7%.  To the extent purchasers qualify for the volume discounts or purchase through certain investment advisory accounts, the sales load amount shown in the table would be less and our net proceeds may be more.  Selling Agents may also receive a marketing support fee of 0.5% of the offering price from us (the “Marketing Support Fee”).  We or our adviser may also pay (i) direct bona fide accountable due diligence or marketing expenses and/or (ii) other non-cash compensation to certain broker-dealers, each up to 0.25% of the offering price, but in no event will the total compensation to broker-dealers exceed 10% of the offering price.  See “Arrangements with Dealer Manager and Selected Broker Dealers.”
(3)
We have incurred $550,000 in costs in connection with this offering, and additional amounts will be reimbursed by our investment adviser, MCM Advisers, LP, except to the extent the full 9.5% in broker fees described above are not incurred.  In such case, the difference will be available to be paid or reimbursed to brokers for marketing expenses or other non-cash compensation.  Therefore, our offering costs have either been paid by our existing stockholders (and will not be directly born by investors in this offering), or will be paid by our adviser, or will be paid out of the amount not paid under the 9.5% in broker fees described above. We will also pay our investment adviser a portfolio structuring fee of 3.5% of the gross proceeds of this offering (the “Portfolio Structuring Fee”) for its initial investment advisory services to us.

There are no arrangements to place offering proceeds in escrow, trust, or similar arrangement.  Our securities are being offered on a best efforts basis and we expect bi-monthly closings.   The termination date of the offering will be no later than two years after the first closing. The minimum initial investment for an individual is $5,000. Out of that amount (assuming the Total Maximum is sold), $375 will normally be paid in sales load and Marketing Support Fees, $100 will normally be paid for the Dealer Manager Fee, and $175 will be paid for the Portfolio Structuring Fee.  Therefore, of the initial $5,000 investment, $4,350 will normally be used for investment purposes.  To the extent an investor qualified for a volume discount or purchased as a client of certain investment advisers, more of their capital could be used for investment purposes.  To the extent the full 9.5% of broker fees are not incurred, the remaining portion of 9.5% of a subscription may be used to pay other organizational and marketing expenses, resulting in the same net proceeds to us.

The date of this prospectus is September 4, 2013
 
This prospectus contains important information about us that a prospective investor should know before investing in our common stock. Please read this prospectus before investing and keep it for future reference. Upon the completion of this offering, we will file annual, quarterly and current reports, proxy statements and other information about us with the SEC.  We will also provide our stockholders with quarterly reports containing the information contained in any quarterly report filed by us with the SEC. This information will be available free of charge by contacting us by mail at 1640 School Street, Moraga, California 94556, by telephone at (925) 631-9100 or (800) 854-8357, or on our website at http://www.mackenzierealty.com. The SEC also maintains a website at http://www.sec.gov that contains such information. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus.
 
This prospectus is part of a registration statement that we have filed with the SEC to register a continuous offering of our shares of common stock. Periodically, as we make material investments or have other material developments, we will provide a prospectus supplement that may add, update, or change information contained in this prospectus. We will endeavor to avoid interruptions in the continuous offering of our shares of common stock, including, to the extent permitted under the rules and regulations of the SEC, filing post-effective amendments to the registration statement to include new annual audited financial statements as they become available or if our net asset value declines more than 10% from our net asset value as of the effective date of this registration statement. There can be no assurance, however, that our continuous offering will not be suspended while the SEC or any state securities authority reviews any such amendment until it is declared effective.

You should rely on the information contained in this prospectus and any prospectus supplement. We have not, and the Selling Agents have not, authorized any other person to provide you with different information or to make representations as to matters not stated in this prospectus and any prospectus supplement. If anyone provides you with different or inconsistent information, you should not rely on it. We are offering to sell, and seeking offers to buy, securities only in jurisdictions where offers and sales are permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of such prospectus or prospectus supplement. We will amend or supplement this prospectus in the event of any material change to the information contained herein.  Attached at the end of this prospectus is a Table of Definitions that should be referenced in connection with reading this prospectus or any prospectus supplement.


 
 

 


MacKenzie Realty Capital, Inc.

TABLE OF CONTENTS

 
 
 
SUMMARY      1
THE OFFERING      7
FEES AND EXPENSES     10
RISK FACTORS     13
FORWARD-LOOKING STATEMENTS AND PROJECTIONS     28
USE OF PROCEEDS     29
DISTRIBUTIONS     30
CAPITALIZATION     31
DILUTION     32
LEGACY PORTFOLIO ACQUISITION     33
DISCUSSION OF THE COMPANY’S EXPECTED OPERATING PLANS     36
BUSINESS     39
PORTFOLIO COMPANIES     44
MANAGEMENT     47
PORTFOLIO MANAGEMENT     52
INVESTMENT ADVISORY AGREEMENT     53
ADMINISTRATION AGREEMENT     57
LICENSE ARRANGEMENT     58
SUBSCRIPTION AGREEMENTS     58
CERTAIN RELATIONSHIPS AND TRANSACTIONS     58
CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS     61
REGULATION AS A BUSINESS DEVELOPMENT COMPANY     62
DETERMINATION OF NET ASSET VALUE     67
DIVIDEND REINVESTMENT PLAN     68
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS     70
DESCRIPTION OF SECURITIES     79
SHARES ELIGIBLE FOR FUTURE SALE     84
SHARE REPURCHASE PROGRAM     84
ARRANGEMENTS WITH DEALER MANAGER AND SELECTED BROKER DEALERS     86
SAFEKEEPING, TRANSFER AND DISTRIBUTION PAYING AGENT AND REGISTRAR     88
BROKERAGE ALLOCATION AND OTHER PRACTICES     88
LEGAL MATTERS     88
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS     88
AVAILABLE INFORMATION     88
INDEX TO FINANCIAL STATEMENTS     F-1
 
 
Suitability of Stockholders
 
We have established minimum income and net worth standards for purchasers of our shares of common stock (“Shares”) because there is not likely to be a substantial or active secondary market for trading our Shares.   We believe these standards are reasonable for us and the risks associated with the purchase of our shares.  Generally, purchasers must have either (i) a minimum annual gross income of $70,000 and a minimum net worth of $70,000; or (ii) a minimum net worth of $250,000; though purchasers in certain states must meet higher minimums, limit the percentage of their net worth invested in us, or purchase a minimum number of shares, as described below under “Regulation as a Business Development Company—State Registration Matters.”  Net worth will be determined exclusive of home, home furnishings, and automobiles.  In the case of sales to fiduciary accounts, these minimum standards must be met by the beneficiary, the fiduciary account, or by the donor or grantor who directly or indirectly supplies the funds to purchase the shares if the donor or grantor is the fiduciary.
 
Each person selling Shares on our behalf must make every reasonable effort to determine that the purchase of Shares is a suitable and appropriate investment for each investor.  In making this determination, each person selling Shares on our behalf will ascertain that the prospective investor:
 
 
meets the minimum income and net worth standard established;
 
can reasonably benefit from ownership in MRC based on the prospective stockholder’s overall investment objectives and portfolio structure;
 
is able to bear the economic risk of the investment based on the prospective stockholder’s overall financial situation;
 
 

 
 
 
 
has apparent understanding of (i) the fundamental risks of the investment; (ii) the risk that the stockholder may lose the entire investment; (iii) the lack of liquidity of our Shares; (iv) the restrictions on transferability of our shares; and (v) the tax consequences of the investment.
 
Each person selling Shares on our behalf will make this determination on the basis of information it obtains from each prospective investor.  Relevant information for this purpose will include the age, investment objective, investment experience, income, net worth, financial situation, and other investments of the prospective stockholders, as well as any other pertinent factors.  The Manager and any Sponsor (as defined in our articles of incorporation (or “Charter”) to include any person who organizes, manages or controls us, and any Affiliate of such person, such as our Investment Adviser, Manager and Administrator) or each person selling Shares on our or a Sponsor’s behalf will maintain records for at least six years of the information used to determine that an investment in our Shares is suitable and appropriate for a stockholder.
 

 
 

 

SUMMARY
 
This summary highlights some of the information in this prospectus. It is not complete and may not contain all of the information that you may want to consider. You should read carefully the more detailed information set forth under “Risk Factors” and the other information included in this prospectus and the documents to which we have referred.
 
On February 28, 2013, we acquired a portfolio of assets we refer to as the “Legacy Portfolio” from eight private funds (MP Income Fund 16, LLC, MP Income Fund 18, LLC, MP Income Fund 19, LLC, MP Value Fund 5, LLC, MP Value Fund 7, LLC, MPF Flagship Fund 9, LLC, MP Income Fund 20, LLC, and Mackenzie Patterson Special Fund 6, LLC), which we refer to collectively as the “Legacy Funds.” We refer to this transaction in its entirety as the “Legacy Portfolio Acquisition.” Except where the context suggests otherwise, the terms “we,” “us,” “our” and “MRC” refer to MacKenzie Realty Capital, Inc., the terms “MCM Advisers,” “Adviser” or “Investment Adviser” refer to MCM Advisers, LP, and the terms “MacKenzie Capital Management,” the “Manager” or the “Administrator” refer to MacKenzie Capital Management, LP.
 
MacKenzie Realty
 
We are a newly formed, externally managed non-diversified company that has elected to be treated as a business development company (“BDC”) under the 1940 Act.  Our investment objective is to generate both current income and capital appreciation through real estate-related investments. We are advised by MCM Advisers, and MacKenzie Capital Management provides us with non-investment management services and administrative services necessary for us to operate.
 
We were formed to continue and expand the business of the Legacy Funds, the assets of which we acquired on February 28, 2013.  As part of this continuation and expansion, we intend to invest primarily in debt and equity real estate-related securities, and we currently expect to elect to be taxed as a real estate investment trust, or REIT, when we become eligible to make that election.
 
Our investments will generally range in size from $10 thousand to $3 million, similar to the investments in the Legacy Portfolio. However, we may make larger investments from time to time on an opportunistic basis. We intend to focus primarily on real estate-related securities.  We will purchase most of our securities (i) directly from existing security holders, (ii) through established securities markets, and (iii) in the case of unregistered, privately offered securities, directly from issuers.  We will invest primarily in debt and equity securities issued by U.S. companies that primarily own commercial real estate that are either illiquid or not listed on any exchange.
 
Consistent with the approach taken by the Legacy Funds, we will generally seek to invest in interests of real estate-related limited partnerships and REITs.  Under normal market conditions, we will invest at least 80% of our total assets in common stocks and other equity or debt securities issued by real estate companies, including REITs and similar REIT-like entities. A real estate company is one that (i) derives at least 50% of its revenue from the ownership, construction, financing, management or sale of commercial, industrial or residential real estate and land; or (ii) has at least 50% of its assets invested in such real estate.  We will not invest in general partnerships, joint ventures, or other entities that do not afford limited liability to their security holders.  However, limited liability entities that we may invest in may in turn hold interests in general partnerships, joint ventures, or other non-limited liability entities.  We generally consider purchasing securities issued by entities that have (i) completed the initial offering of their securities, (ii) operated for a period of at least two years, and typically more than five years, from the completion of their initial offering, and (iii) fully invested their capital in real properties or other real estate-related investments.
 
We may also acquire (i) individual mortgages secured by real property (i.e., we may originate such loans or we may purchase outstanding loans secured by real estate), (ii) securities of issuers that own mortgages secured by income producing real property, and (iii) using no more than 20% of our available capital, securities of issuers that own assets other than real estate.
 
Legacy Portfolio Acquisition
 
We acquired the Legacy Portfolio from the Legacy Funds, which are advised by MCM Advisers and managed by MacKenzie Capital Management.   The Legacy Portfolio had a fair value of approximately $6.92 million on February 28, 2013, as determined by our Board of Directors. As consideration for our acquisition of the Legacy Portfolio, a total of 692,217 shares of our common stock were issued to the Legacy Funds.  So long as MacKenzie Capital Management remains our Administrator, the Legacy Funds, MacKenzie Capital Management, or one or more of its Affiliates will continue to own at least $200,000 worth of our common shares.  See “Legacy Portfolio Acquisition.”  As of February 28, 2013, the Legacy Portfolio included investments in equity securities issued by 47 portfolio companies.  Additional information regarding the Legacy Portfolio is provided below under “Portfolio Companies” and “Discussion of the Company’s Expected Operating Plans,” as well as in the schedule of investments and the related notes thereto included in this prospectus.  The Legacy Funds’ financial statements for the periods ended June 30, 2011 and June 30, 2012 are included as an exhibit to the registration statement of which this prospectus is a part, and may be reviewed at the SEC’s website at http://www.sec.gov.

 
 
1

 
About MacKenzie Capital Management
 
We are managed by MacKenzie Capital Management, a California limited partnership that is owned by three sub-partnerships that are owned in varying percentages by MacKenzie Capital Management and MCM Advisers employees and the extended family of Messrs. C.E. Patterson, Chip Patterson, Glen Fuller and Robert Dixon.  The general partner of the Manager is MCM-GP, Inc., a California corporation owned by the same individuals.  The majority of the beneficial interests of the Manager are owned by C.E. Patterson, Berniece A. Patterson, Robert Dixon, Glen Fuller, and Chip Patterson, in addition to other family members.  Certain non-family employees of the Manager own minority interests in the Manager that represent in the aggregate less than 10% of the equity in the Manager.  Our Manager manages all of our affairs except for providing investment advice.  Our Manager and its predecessor companies have been engaged in the management and sponsorship of offerings that invest primarily in real estate related securities since 1982.
 
About MCM Advisers
 
We are advised by MCM Advisers, whose investment team members have an average of nearly 19 years of experience investing in real estate-related securities. MCM Advisers’ investment team also presently advises 53 private equity funds other than the Legacy Funds.  Those private funds (as well as the Legacy Funds) have investment objectives and strategies that are similar to ours.
 
We expect to benefit from the ability of our Investment Adviser’s investment team to identify attractive investment opportunities, conduct diligence on and value prospective investments, negotiate terms, secure collateral against our loans, and manage and monitor a relatively diversified portfolio of those investments. Our Investment Adviser’s investment team members have broad investment backgrounds, with prior experience at investment banks, commercial banks, unregistered investment funds and other financial services companies, and have collectively developed a broad network of contacts to provide us with our principal source of investment opportunities.
 
Our Adviser is registered with the SEC and is owned by the same beneficial owners and in the same proportions as the Manager.  Our Adviser is led by its investment team: C.E. Patterson, Founder and Managing Director of the General Partner of our Manager and our Adviser; Glen W. Fuller, who serves as Chief Operating Officer and Managing Director of the General Partner of our Manager and our Adviser; Chip Patterson, who serves as Managing Director and General Counsel, and Director of the General Partner of our Manager and our Adviser; Robert E. Dixon, who serves as Chief Investment Officer and Managing Director of the General Partner of our Manager and our Adviser; Paul F. Koslosky, who serves as Chief Financial Officer and Treasurer of the General Partner of our Manager and our Adviser; and Christine E. Simpson, who serves as Chief Portfolio Manager and Senior Vice President of Research for the General Partner of our Manager and our Adviser.  We consider C.E. Patterson, Glen Fuller, Chip Patterson, Robert Dixon, Paul Koslosky, and Christine Simpson to be MCM Advisers’ investment team.
 
Potential Market Opportunity
 
We intend to pursue a strategy focused on investing primarily in illiquid or non-traded debt and equity securities issued by U.S. companies that primarily own commercial real estate.  These companies are likely to be non-traded REITs (“NTRs”), small-capitalization publicly-traded REITs, public and private real estate limited partnerships (“RELPs”), limited liability companies (“LLCs”), and tenancies-in-common (“TICs”).  We believe the size of this market and certain recent developments, coupled with MCM Adviser’s network, create an attractive investment environment for our strategy for a number of reasons, including:
 
 
·
Expected opportunities for investor liquidity have disappeared.  Most NTRs intended to offer their shareholders a quarterly shareholder redemption program.  When the recent economic downturn began, most NTR sponsors suspended their shareholder redemption plans to conserve cash.  Similarly, many of the RELPs, LLCs and TICs that may have intended to liquidate by now have experienced a decline in property value and are unable to liquidate profitably.  As a result, many of them will experience a longer holding period than their investors originally intended.
 
 
·
Economic downturn created demand for additional capital.  During the recent economic downturn, many companies decided to reduce the amount of space they lease, increasing vacancies in office buildings and retail properties.  Some companies in the retail, hospitality, and multi-family sectors deferred maintenance in order to preserve cash.  For these reasons, we believe there are many real estate companies that need access to additional capital for tenant improvements, deferred maintenance, and other capital expenditures.
 
 
·
Many loans are due or coming due in the next few years.  During the last economic expansion from 2003 – 2008, many real estate acquisitions were financed with loans having 5 or 10 -year maturities.  Many companies have had and will have difficulty refinancing these loans as a result of a decline in the value of their property, forcing them to look for less traditional, and more expensive, lenders.
 
 
 
 
2

 
 
 
·
Small transaction sizes allow for a profitable niche.  The secondary market trading volume for the entire NTR industry is less than $10 million per month, and most individual transactions are less than $100,000.  Similarly, most of the RELPs, LLCs, and TICs that we target for loans will need less than $10 million in recapitalization loans or equity.  As a result, most real estate investment firms cannot efficiently compete with us in such small transactions.  Our Adviser has 30 years of experience closing such transactions with very low transaction costs.
 
Investment Strategy
 
Our investment objective is to generate both current income and capital appreciation through debt and equity real estate-related investments.  Our Independent Directors will review our investment policies with sufficient frequency, but at least annually, to determine that the policies we are following are in the best interests of our stockholders.  Each such determination and the basis therefor will be contained in the minutes of our Board of Directors.
 
We seek to accomplish our objective by a combination of rigorous analysis of the net asset value of and risks associated with a potential security acquisition, and a disciplined requirement that any security must be acquired at a significant discount to its net asset value.  Although we may acquire any type of security by any method, we anticipate our acquisitions will generally be accomplished in the following ways:
 
 
·
Tender offers.  We intend to acquire shares of NTRs and other real estate companies via registered and non-registered tender offers (e.g., offers to purchase securities directly from the existing holders).  This is generally our preferred acquisition method, as it allows us to name the price at which we are willing to buy such securities.  By purchasing securities at significant discounts to net asset value (“NAV”), we simultaneously reduce the risk of a loss of capital due to a decline in NAV while increasing total returns when the discount is realized.  Also, by purchasing seasoned securities that are several years old, we significantly reduce our intended holding period and correspondingly increase our annualized rate of return.
 
 
·
Direct loans and private placements.  We may occasionally make direct loans to private real estate companies and arrange for private placements of equity issued directly to us by private real estate companies.  These direct investments would only be made after we have an equity investment in the company, which companies are smaller so that we are more familiar with their properties and management.
 
 
·
Purchases of small-cap REITs on the open market.  We believe that small-capitalization REITs (typically less than $250 million) are largely ignored by institutional investors and by Wall Street analysts, and as a result they often trade for significant discounts to their net asset value.  While these REITs tend to be highly illiquid with very small trading volumes, our smaller size allows us to focus on these REITs and to purchase them in quantities that are meaningful for us.  Similar to the shares of NTRs we purchase at discounts to NAV, we believe these acquisitions can provide superior risk-adjusted returns.
 
Risk Factors
 
The value of our assets, as well as the price of our Shares, will fluctuate. Our investments may be risky, and you may lose all or part of your investment in us. Investing in MRC involves other risks, including the following:
 
 
·
We have no operating history as a BDC, nor has our Adviser managed a BDC;
 
 
·
We are dependent upon MCM Advisers’ investment team for our success;
 
 
·
There is no minimum number of Shares that must be purchased before we effect closings of Share sales, which means our expense ratio could be greater than anticipated;
 
 
·
We operate in a highly competitive market for investment opportunities;
 
 
·
Our incentive fee structure and the formula for calculating the management fee may incentivize MCM Advisers to pursue speculative investments, use leverage when it may be unwise to do so, or refrain from de-levering when it would otherwise be appropriate to do so;
 
 
·
Our portfolio may lack diversification among portfolio companies, subjecting us to a risk of significant loss if one or more of these companies defaults on its obligations under any of its debt instruments;
 
 
·
Although a large portion of the Legacy Portfolio is located in California, we do not intend to concentrate our portfolio on any specific geographic areas, however we may be subjected to a risk of significant loss if there is a downturn in a particular area in which a number of our investments are concentrated;
 

 
 
3

 
 
 
·
Investing in real estate-related companies involves a high degree of risk and our financial results may be affected adversely if one or more of our significant portfolio investments defaults on its loans or fails to perform as we expect;
 
 
·
The lack of liquidity in our investments may adversely affect our business;
 
 
·
An extended continuation of the disruption in the capital markets and the credit markets could impair our ability to raise capital and negatively affect our business;
 
 
·
We may borrow money, which would magnify the potential for gain or loss on amounts invested and will increase the risk of investing in us;
 
 
·
To the extent we use debt to finance our investments, changes in interest rates will affect our cost of capital and net investment income;
 
 
·
There will be uncertainty as to the value of our portfolio investments;
 
 
·
We may experience fluctuations in our quarterly results;
 
 
·
Shares of BDCs have in the past frequently traded at discounts to their net asset values, and we cannot assure you that the price of our Shares will not decline below our net asset value per Share if and when a market for them develops;
 
 
·
If we list the Shares on an exchange, our common stock price may be volatile and may decrease substantially;
 
 
·
There is a risk that our stockholders may not receive distributions or that our distributions may not grow over time;
 
 
·
Our common stock is not expected to be listed on an exchange for the foreseeable future;
 
 
·
Sales of stock in this offering will be dilutive to the initial net asset value, because no sales commissions were paid in connection with the Legacy Portfolio Acquisition; and
 
 
·
Regulations governing our operation as a BDC affect our ability to raise additional capital and the way in which we do so. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage.
 
See “Risk Factors” beginning on page 13, and the other information included in this prospectus, for additional discussion of factors you should carefully consider before deciding to invest in Shares.
 
Operating and Regulatory Structure
 
MRC is a newly formed Maryland corporation that is an externally managed, non-diversified company that has elected to be treated as a BDC under the 1940 Act.  As a BDC, we are required to meet regulatory tests, including the requirement to invest at least 70% of our gross assets in “qualifying assets.” Qualifying assets generally include, among other things, securities of “eligible portfolio companies.” “Eligible portfolio companies” generally include U.S. companies that are not investment companies and that do not have securities listed on a national exchange. See “Regulation as a Business Development Company.” We may also borrow funds to make investments. We currently expect to elect to be treated for federal income tax purposes, and intend to qualify annually thereafter, as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). See “Material U.S. Federal Income Tax Considerations.”
 
Our investment activities are managed by MCM Advisers and supervised by our Board of Directors.  Each member of our Board of Directors has at least 20 years of relevant experience, demonstrating the knowledge and experience required to successfully guide us.  MCM Advisers is an investment adviser that is registered under the Investment Advisers Act of 1940, as amended, or the “Advisers Act.” Under our investment advisory agreement with MCM Advisers, which we refer to as the Investment Advisory Agreement, we will pay MCM Advisers an up-front Portfolio Structuring Fee, an annual base management fee based on our “managed funds” as well as incentive fees based on our income and our performance. See “Investment Advisory Agreement.” We will also enter into an administration agreement, which we refer to as the Administration Agreement, under which we will agree to reimburse MacKenzie Capital Management for our allocable portion of overhead and other expenses incurred by MacKenzie Capital Management in performing its obligations under the Administration Agreement, including furnishing us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities, as well as providing us with other administrative services, subject to the amount being approved by our Independent Directors.  See “Administration Agreement.”
 
Both MCM Advisers and MacKenzie Capital Management are controlled by their general partner, MCM-GP, Inc., which is controlled by its board members: C.E. Patterson, Berniece Patterson, Glen Fuller, Chip Patterson, and Robert Dixon.
 
Our Corporate Information
 
Our offices are located at 1640 School Street, Moraga, California 94556, and our telephone number is (925) 631-9100 or (800) 854-8357.
 
 
4

 
 
 
Share Repurchase Program
 
We do not currently intend to list our securities on any securities exchange and do not expect a public market for them to develop in the foreseeable future. Therefore, stockholders should not expect to be able to sell their Shares promptly at a desired price. See “Share Repurchase Program.”
 
Beginning 12 months after the initial closing of the sale of Shares in this offering, and on a quarterly basis thereafter, we intend to offer to repurchase Shares on such terms as may be determined by our Board of Directors in its discretion unless, in the judgment of the Independent Directors, such repurchases would not be in our best interests or would violate applicable law. The Board will consider certain factors such as information about fees paid by other funds that engage in comparable activity, the amount of effort required to identify investment opportunities, take advantage of investment opportunities, and monitor those investment opportunities  in light of our investment strategy.  The Board will also consider the fees paid to our Adviser for managing private funds and the expenses expected to be incurred by the Adviser for managing us.  The Board will further consider the expenses the Adviser would have to incur in order to comply with various federal and state securities laws on an ongoing basis and the performance record for the Adviser in implementing a similar strategy in the past.  Any Share repurchase should not result in any tax consequence on those investors who remain invested in us or on us directly.   Similarly, a repurchase is not expected to impact our investment strategy or our portfolio turnover.  If we were to decrease meaningfully in size as the result of a Share repurchase, our expense ratio could increase modestly.

We anticipate conducting such repurchase offers in accordance with the requirements of Rule 13e-4 of the Securities Exchange Act of 1934 (the “1934 Act”) and the 1940 Act. In months in which we repurchase Shares, we expect to conduct repurchases on the same date that we hold our periodic closings for the sale of Shares in this offering.
 
We do not expect to repurchase Shares in any calendar year in excess of 5% of the weighted average number of Shares outstanding in the prior calendar year. We also intend to limit the number of Shares we will repurchase during any calendar year to the number of Shares we could otherwise repurchase with distributions that would be used to buy our common stock under our dividend reinvestment plan (our “DRIP”).  In other words, if we had distributions in the amount of $1 million in a calendar year and those distributions would be made in the form of our Shares at $10 per Share (meaning 100,000 Shares would be distributed under the DRIP), then we would not repurchase more than 100,000 Shares in that calendar year.
 
At the discretion of our Board of Directors, we may also use cash on hand, cash available from any borrowings and cash from liquidation of securities investments as of the end of the applicable period to repurchase Shares. We further anticipate that we will offer to repurchase such Shares at a price equal to 90% of the current offering price on each date of repurchase.
 
In connection with its consideration of whether to conduct such tender offers, our Board of Directors will consider any requests it has received from stockholders. If you wish to tender your Shares for repurchase, you must either tender at least 25% of the Shares you purchased in this offering or all of the Shares that you own. If you choose to tender only a portion of your Shares, you must maintain a minimum balance of $1,000 worth of Shares following a tender of Shares for repurchase. If the amount of repurchase requests exceeds the number of Shares we seek to repurchase, we will repurchase Shares on a pro-rata basis. As a result, we may repurchase less than the full amount of Shares that you request to have repurchased. If we do not repurchase the full amount of your Shares that you have requested to be repurchased, or we determine not to make repurchases of our Shares, you may not be able to dispose of your Shares. Any periodic repurchase offers will be subject in part to our available cash and compliance with the 1940 Act.  We intend to seek exemptive relief from Regulation M under the 1934 Act in connection with our proposed Share repurchase program. See “Share Repurchase Program.”
 
How to Subscribe
 
Investors who meet the suitability standards described herein may purchase Shares.  Investors seeking to purchase Shares should:
 
 
Read this entire prospectus and all appendices and supplements accompanying this prospectus.

 
Complete the execution copy of the subscription agreement. A specimen copy of the subscription agreement, including instructions for completing it, is included in this prospectus as Appendix A.

 
Deliver a check for the full purchase price of the Shares being subscribed for along with the completed subscription agreement to MacKenzie Realty Capital, Inc., 1640 School Street, Moraga, CA 94556.  You must initially invest at least $5,000 in Shares to participate in this offering—subject to higher minimums that may be imposed by particular states. After you have satisfied the applicable minimum purchase requirement, additional purchases must be in increments of $500, except for distributions received under our DRIP.  Stockholders will not be required to contribute any additional capital to us after their initial purchase of Shares.

 
By executing the subscription agreement and paying the total purchase price for the Shares subscribed for, each investor attests that he/she meets the suitability standards as stated in the subscription agreement and agrees to be bound by all of its

 
 
 
5

 
 
 
terms.

We expect to accept subscriptions and admit new stockholders at bi-monthly closings. Subscriptions will be effective only upon our acceptance, and we reserve the right to reject any subscription in whole or in part. Subscriptions will be accepted or rejected within 30 days of receipt by us and, if rejected, all funds shall be returned to subscribers without interest and without deduction for any expenses within ten business days from the date the subscription is rejected. We are not permitted to accept a subscription for Shares until at least five business days after the date you receive this prospectus.

 
6

 

THE OFFERING
 
Common Stock Offered by Us
 
A maximum of 5,000,000 Shares.
 
Common Stock to be Outstanding After this Offering
 
Approximately 5,728,217 Shares (including 692,217 Shares issued to the Legacy Funds in exchange for the Legacy Portfolio), assuming the sale of the maximum number of Shares offered in this offering.
 
Continuous Offering
 
We will continually offer our Shares for a period we do not expect to exceed two years.  During that time, we will generally conduct bi-monthly closings, at which time the offering price and our then-current NAV per Share will be provided to each prospective purchaser.
 
Use of Proceeds
 
Our net proceeds from this offering could be approximately $43,500,000 or more, and our Charter requires us to invest at least 82% of those proceeds in “Assets” (as that term is defined in our Charter). The net proceeds we receive from this offering will be used for new investments in portfolio companies in accordance with our investment objective and strategies described in this prospectus and for general working capital purposes. We will also pay from the net proceeds of this offering our operating expenses, including advisory and administrative fees and expenses, and may pay other expenses such as due diligence expenses related to potential new investments. We anticipate that substantially all of the net proceeds of this offering will be used for the above purposes within six to nine months from the completion of this offering, depending on the availability of appropriate investment opportunities consistent with our investment objective and market conditions. Pending such investments, we will invest the net proceeds primarily in cash, cash equivalents, U.S. government securities and other high-quality investments that mature in one year or less from the date of investment.
 
We do not intend to fund distributions with a return of capital, though we are permitted to return up to approximately 5% of the proceeds from this offering as distributions.  See “Use of Proceeds.”
 
Distributions
 
Subsequent to the commencement of this offering, and to the extent that we have income from operations available, we intend to distribute quarterly dividends to our stockholders, beginning with our first full quarter after the commencement of this offering.  Distributions are not assured, and though we do not intend to, we are not prohibited from borrowing or returning a limited amount of capital to fund distributions.
 
The amount of our dividends, if any, will be determined by our Board of Directors. Any dividends or other distributions to our stockholders will be declared out of assets legally available for distribution, and we will not make distributions consisting of a return of capital. The specific tax characteristics of our dividends and other distributions will be reported to stockholders after the end of each calendar year.  Distributions in kind are not permitted, except to the extent permitted in our Charter.  In no event may we borrow money to make distributions if the amount of such distribution would exceed our annual revenue, less operating costs.
 
Taxation
 
We currently expect that we will qualify as a REIT.  Once we have found sufficient suitable REIT-qualifying investments and satisfied the REIT requirements for the required period, we expect to make an election to be treated as a REIT by filing a Form 1120-REIT.  If we elect REIT status in the future, we will be taxed as a REIT rather than a C corporation and generally will not pay federal income tax on taxable income that is distributed to our stockholders.  If we elect REIT status, our distributions from earnings and profits will be treated as ordinary income and generally will not qualify as qualified dividend income (“QDI”) and will not be qualifying for purposes of the dividends received deduction (“DRD”).  As a REIT, certain dividends related to long-term capital gains may be taxed as capital gains dividends.  If we make a REIT election, we may be subject to a corporate level tax if and to the extent of certain built-in gains on certain assets if such assets are sold during the 10 year period following conversion.  Built-in gain assets are assets whose
 
7
 
 
 
 
 
 

 
 
 
 
 
 
 
   
fair market value exceeds the REIT's adjusted tax basis at the time of conversion.
 
If we fail to qualify or elect to be a REIT, we will be taxed as a corporation and, thus, we would be obligated to pay federal and state income tax on our taxable income.  In such case, our distributions from earnings and profits would be treated as QDI and return of capital; with dividends received by corporate stockholders generally qualifying for the DRD.  Our bylaws adopted pursuant to the Charter (the Bylaws”) provide that we will provide our stockholders with information necessary for the preparation of their federal tax returns within 75 days of our fiscal year end.    See “Distributions” and “Material U.S. Federal Income Tax Considerations.”
 
Investment Advisory Fees
 
Under the Investment Advisory Agreement, we will pay MCM Advisers a fee for its services consisting of three components — the Portfolio Structuring Fee, a base management fee and a subordinated incentive fee.  The Portfolio Structuring Fee is for our Adviser’s initial work performed in connection with our acquisition of all of our assets and equals 3.5% of the gross proceeds of this offering.  The base management fee is calculated based on our “managed funds,” which includes any borrowing for investment purposes.  The base management fee will range between 1.5% to 3.0%, depending on the level of our “managed funds.”
 
The subordinated incentive fee has two parts—income and capital gains.  The incentive fee components (other than during liquidation) are designed so that the Adviser does not receive an incentive fee until our stockholders have first received dividends of at least 7% annually, and then those fees are payable so that the Adviser receives 20% of our profits.

The income component is (i) 100% of our preliminary net investment income for any calendar quarter that exceeds 1.75% (7% annualized) but is less than 2.1875% (8.75% annualized) of our “contributed capital;” and (ii) 20% of our preliminary net investment income for any calendar quarter that exceeds 2.1875% (8.75% annualized) of our “contributed capital.”  The capital gains component is (i) 100% of our realized capital gains annually generated by our investments above 7% and up to 8.75% of our “contributed capital,” and (ii) 20% of our realized capital gains above 8.75% of our “contributed capital,” all computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.  If we liquidate all of our assets, the capital gains component is 20% of our realized capital gains (without the hurdle), computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.  The capital gains component may not in any event exceed 20% of our realized capital gains, net of all realized capital losses and unrealized capital depreciation.  The effect of the “catch-up” (where the Adviser gets 100% of net investment income or realized capital gains, respectively, between 7% and 8.75% of contributed capital on an annualized basis) is to make the Adviser’s overall incentive compensation equal 20% of all net investment income or realized capital gains, respectively, without regard to the 7% “hurdle,” so long as the overall return is at least 8.75%.

See “Investment Advisory Agreement.”

Administration Agreement
 
We will reimburse MacKenzie Capital Management for our allocable portion of overhead and other expenses it incurs in performing its obligations under the Administration Agreement, including furnishing us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities, as well as providing us with other administrative services, subject to the Independent Directors’ approval. In addition, we will reimburse MacKenzie Capital Management for the fees and expenses associated with performing compliance functions, and our allocable portion of the compensation of our Chief Financial Officer, Chief Compliance Officer, Financial Reporting Manager, and any administrative support staff.  If MacKenzie Capital Management withdraws as our Administrator, it must provide stockholders with 120 days’ notice and pay any expenses we incur as a result of such withdrawal. See “Administration Agreement.”
 
 
8
 
 
 
 
 
 
 

 
 
 
Leverage  
We have no current intention to borrow funds for investment purposes but may do so at a future time. If we did so borrow, we would be exposed to the risks of leverage, which may be considered a speculative investment technique. The use of leverage magnifies the potential for gain and loss on amounts invested and therefore increases the risks associated with investing in our securities. In addition, the costs associated with our borrowings, including any increase in the management fee payable to our Adviser, will be borne by our common stockholders. Under the 1940 Act, we are only permitted to incur additional indebtedness to the extent our asset coverage, as defined under the 1940 Act, is at least 200% immediately after each such borrowing. See “Regulation as a Business Development Company.”
 
Future Trading
 
We do not intend to list our common stock on any established exchange prior to eight years from completion of this public offering.  Shares of BDCs frequently trade at a discount to their NAV.  A BDC is not generally able to issue and sell common stock at a price below its NAV per share unless it has stockholder approval.  Prior to any sales in this offering, we will obtain approval from our current stockholders for us to sell Shares in this offering at a price, after deduction of selling commissions and Dealer Manager Fees, that is below NAV. The risk that our Shares may trade at a discount to our NAV is separate and distinct from the risk that our NAV per Share may decline.  Our common stock will not be listed for trading on an established exchange, and we cannot predict whether our Shares will trade above, at, or below NAV.  See “Risk Factors – Risks Relating to this Offering.”
 
License Arrangement
 
MacKenzie Capital Management, LP has granted to us a non-exclusive, royalty-free license to use the name “MacKenzie” under the Administration Agreement, so long as we engage our Adviser to serve as our investment adviser. See “License Arrangement.”
 
Dividend Reinvestment Plan
 
We have adopted an “opt out” dividend reinvestment plan. If your Shares are registered in your own name, your distributions will automatically be reinvested under our DRIP in additional whole and fractional Shares, unless you “opt out” of our DRIP so as to receive cash dividends by delivering a written notice to our dividend paying agent; except that investors residing in Ohio and Oregon may not participate in our DRIP, and investors residing in Nebraska and New Jersey must affirmatively opt in to the DRIP in order to participate. If your Shares are held in the name of a broker or other nominee, you should contact the broker or nominee for details regarding opting out of our DRIP. Stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. See “Dividend Reinvestment Plan.”
 
Certain Anti-Takeover Measures
 
Our Charter and Bylaws, as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us. These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price for our common stock. See “Description of Securities.”
 
Available Information
 
After the completion of this offering, we will be required to file periodic reports, current reports, proxy statements and other information with the SEC. This information will be available at the SEC’s public reference room at 100 F Street, NE, Washington, D.C. 20549 and on the SEC’s website at http://www.sec.gov . The public may obtain information on the operation of the SEC’s public reference room by calling the SEC at (800) 732-0330. This information will also be available free of charge by contacting us at MacKenzie Realty Capital, Inc., 1640 School Street, Moraga, California 94556, by telephone at (925) 631-9100 or (800) 854-8357, or on our website at http://www.mackenzierealty.com.
 
 
9
 
 


 
 

 



FEES AND EXPENSES
 
The following table is intended to assist you in understanding the costs and expenses that you will bear directly or indirectly when buying Shares. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by “us” or “MRC,” or that “we” will pay fees or expenses, you will indirectly bear such fees or expenses as an investor in MacKenzie Realty Capital, Inc.
 
Stockholder transaction expenses (1):
       
Sales load (as a percentage of offering price)
   
 7.50
% (2)
 
Dealer Manager Fee (as a percentage of offering price)
   
 2.00
% (3)
 
Dividend reinvestment plan expenses
   
 None
       (4)
 
Total stockholder transaction expenses (as a percentage of offering price)
   
 9.50
% (5)
 
           
First year annual fund expenses (as a percentage of net assets attributable to common stock) (*):
 
Portfolio Structuring Fee (*)
   
 3.36
%
         
Base management fee (6)
   
 2.73
%
         
Incentive fees payable under our Investment Advisory Agreement (7)
   
 0
%
         
Interest payments on borrowed funds (8)
   
 0
%
         
Other expenses (9)
   
 1.00
%
         
Total first year annual fund expenses
   
 7.09
%
         

Example

The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed that our annual operating expenses would remain at the levels set forth in the “First year annual fund expenses” table above. See Note 8 below for additional information regarding certain assumptions regarding our level of leverage subsequent to this offering.  Additionally, the example assumes we do not pay any incentive fees to our Adviser, because a 5% annual return would not exceed the hurdles that must be surpassed before those fees are payable to our Adviser under the Investment Advisory Agreement.
 
 
 
 
 
 
 
 
 
 
   
1 Year
 
3 Years
 
5 Years
 
10 Years
You would pay the following expenses on a $5,000
 investment, assuming a 5% annual return
 
$
816
   
$
1,147
   
$
1,479
   
$
2,308
 
___________________________
 (*)
The “First year annual fund expenses” table includes the up-front Portfolio Structuring fee that will be paid by us to MCM Advisers for its investment advisory services respecting our initial acquisition of all of our assets, including the Legacy Portfolio Acquisition.  The Portfolio Structuring Fee is 3.50% of the gross proceeds raised in this offering, but that amount would equal 3.36% of our estimated NAV following this offering if we issue 4,000,000 Shares in this offering at $10 per Share (resulting in an estimated $34,800,000 net proceeds, all of which we assume here will be sold in the first year), in addition to the value of the assets already contributed by the Legacy Funds ($6,922,170).  The Portfolio Structuring Fee will be payable monthly as we conduct closings in this offering, and will no longer be payable once this offering is completed.  See “Investment Advisory Agreement.”  Therefore, our estimated annual expenses for the years after the first year—when the Portfolio Structuring Fee is not incurred—are shown in the following table without the Portfolio Structuring Fee:
 
 
 
 
Annual fund expenses after first year (as a percentage of net assets attributable to common stock):
           
 
Portfolio Structuring Fee
   
None
     
 
Base management fee (6)
   
 2.73
%
   
 
Incentive fees payable under our Investment Advisory Agreement (7)
   
 0
%
   
 
Interest payments on borrowed funds (8)
   
 0
%
   
 
Other expenses (9)
   
 1.00
%
   
 
Total annual fund expenses after first year
   
 3.73
%
   

(1)
The estimated expenses presented in the “Stockholder transaction expenses” table are based on the assumption that we issue 4,000,000 Shares in this offering.  The Shares we issued to the Legacy Funds are not considered sold in this offering and therefore they are not included in any amounts shown in the “Stockholder transaction expenses” table.  There are no Organization and Offering Expenses reflected in the table, as those costs, up to $550,000, have been born by our existing stockholders (which will impact our pre-offering NAV—see “Dilution”), and any additional amounts will be paid by our Adviser.  To the extent that the sales load, dealer manager fee and Marketing Support Fees are less than 9.5%, we, and not the Adviser, may pay marketing expenses out of offering proceeds, but our net proceeds would be the same in either case.  Under our Charter, our Organization and Offering Expenses may not exceed 15% of the proceeds of this offering.
 

 
 
 
 
10

 
 
(2)
The sales load for Shares sold in this offering is a one-time fee of 7%, which may be lower if an investor qualifies for the volume discount.  For purchases through certain investment advisory accounts, ARI will only receive the 2% Dealer Manager Fee in lieu of commissions.  We may also pay broker-dealers a Marketing Support Fee, up 0.5% of the offering proceeds.  We or our Adviser may also pay (i) bona fide accountable due diligence or marketing expenses and/or (ii) other non-cash compensation to certain broker-dealers, each up to 0.25% of the offering price, but in no event will the total compensation to broker-dealers exceed 10% of the offering price.  See “Arrangements with Dealer Manager and Selected Broker-Dealers.”
 
(3)
The Dealer Manager Fee of up to 2.0% will be paid by us to ARI on all Shares sold in this offering.  ARI may re-allow up to 1.5% of this amount to other broker-dealers or its representatives for wholesaling services in this offering.  A portion of that fee may be waived by ARI in certain cases, and to the extent it is, the amount in the table would be reduced.  See “Arrangements with Dealer Manager and Selected Broker-Dealers.”
 
(4)
The expenses of the DRIP are included in “Other expenses.”  See “Dividend Reinvestment Plan.”
 
(5)
To the extent investors qualify for the volume discount or purchase through certain investment advisers, the total stockholder transaction expenses could be reduced.
 
(6)
This calculation reflects our base management fee as a percentage of our net assets. Our maximum base management fee of 3% under the Investment Advisory Agreement, however, is based on our “managed funds,” which is defined as the number of Shares issued, multiplied by the price at which the Shares are sold, plus any borrowed funds (“Managed Funds”). As a result, any use of leverage would have the effect of increasing our base management fee as a percentage of our net assets.
 
The Investment Advisory Agreement provides that the base management fee of 3% only applies to our first $20 million of Managed Funds, decreasing to 2% of the next $80 million of our Managed Funds, and further decreasing to 1.5% of our Managed Funds.  See “Investment Advisory Agreement.”  Thus, the amount estimated in the table is comprised of 3% of $20,000,000 plus 2% of the $26,922,170 in Managed Funds over $20,000,000. We have not included the value of any Shares issued under our DRIP.  To the extent we issue additional Shares in this offering or issue Shares under the DRIP, the Base Management Fee and other expenses in the tables above would likely be lower as a percentage of net assets.
 
(7)
Reflects the annual incentive fees payable to MCM Advisers, assuming anticipated performance of the Legacy Portfolio and that no capital gains incentive fees are paid. Based on our current business plan, we anticipate that substantially all of the net proceeds of this offering will be invested within six to nine months after our receipt of proceeds, depending on the availability of investment opportunities that are consistent with our investment objective and other market conditions. We expect that it will take more than three months to invest all of the proceeds of this offering, in part because privately negotiated investments in illiquid securities require substantial due diligence and structuring.  As a result, we do not anticipate paying any incentive fees in the first year after completion of this offering.  Once fully invested, we expect the incentive fees we pay to increase to the extent we realize capital gains on the sale or liquidation of our portfolio company investments sufficient to first distribute the 7% return to stockholders discussed below.
 
The income incentive fee is (i) 100% of our preliminary net investment income for any calendar quarter that exceeds 1.75% (7% annualized) but is less than 2.1875% (8.75% annualized) of our “Contributed Capital” (which is defined as the number of Shares outstanding, multiplied by the price at which the Shares are sold), and (ii) 20% of our preliminary net investment income for any calendar quarter that exceeds 2.1875% (8.75% annualized) of our Contributed Capital.  The capital gains incentive fee is (i) 100% of the realized capital gains above 7%, up to 8.75%, of our Contributed Capital, and (ii) 20% of the realized capital gains above 8.75% of our Contributed Capital, all as annually computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis during our operations, less the aggregate amount of any previously paid capital gain incentive fees.  The capital gains incentive fee at liquidation is 20% of our realized capital gains, less all previously- paid capital gains fees, provided that the capital gains fee in liquidation may not exceed 20% of all of our realized capital gains in the year of liquidation.   The effect of the “catch-up” (where the Adviser gets 100% of net investment income or realized capital gains, respectively, between 7% and 8.75% of Contributed Capital on an annualized basis) is to make the Adviser’s overall incentive compensation equal 20% of all net investment income or realized capital gains, respectively, without regard to the 7% “hurdle,” so long as the overall return is at least 8.75%.
 
(8)
We do not currently intend to borrow funds for investment purposes.  If we do borrow funds in the future, it would likely be limited to the extent we determine that additional capital would allow us to take advantage of additional investment opportunities, and to the extent we are able to borrow on margin against marginable securities, which is likely to be limited to 10-15% of our gross assets. We do not currently anticipate issuing any preferred stock. The costs associated with any borrowing will be indirectly borne by our stockholders.
 
(9)
“Other expenses” include our overhead expenses which are estimated for the current fiscal year, including legal and accounting expenses, as well as our DRIP.  All of our expenses must be billed to and paid by us, unless others may be reimbursed for our expenses as permitted by our Charter.  In no event may our acquisition expenses exceed 6% of the size of any mortgage loan we purchase.
 
The example above and the expenses in the tables above should not be considered a representation of our future expenses, and actual expenses may be greater or less than those shown. While the example above assumes, as required by the SEC, a 5.0% annual return, our performance will vary and may result in a return greater or less than 5.0%. In addition, the example assumes
 
 
11

 
 
inclusion of the sales load of 9.5% and the one-time up-front Portfolio Structuring Fee in the first year. Also, while the example assumes reinvestment of all dividends at NAV, participants in our DRIP will receive a number of Shares, determined by dividing the total dollar amount of the dividend payable to a participant by the price per Share on the dividend payment date, which may be at, above or below NAV. See “Dividend Reinvestment Plan” for additional information regarding our DRIP.  Finally, while the example includes expenses we will incur in connection with our DRIP, it does not include the percentage of base management fees that will likely decrease as a result of issuing Shares under the DRIP.
 
General Expense Information
 
Our Independent Directors will determine, from time to time but at least annually after the initial term of our Investment Advisory Agreement, that our total fees and expenses are reasonable in light of our investment performance, our net assets, our net income and the fees and expenses of other comparable unaffiliated real estate funds.  Each such determination will be reflected in the Board’s
 
meeting minutes.  The Organization and Offering Expenses paid in connection with our formation or the sale of our Shares must be reasonable and may in no event exceed 15% of the proceeds raised in this offering.  The total of all asset acquisition fees and expenses, if any, must be reasonable, and may not exceed 6% of the contract price for the property, or in the case of a mortgage loan, 6% of the funds advanced.  Notwithstanding the foregoing, a majority of our directors (including a majority of the Independent Directors) not otherwise interested in the transaction may approve fees in excess of these limits if they determine the transaction to be commercially competitive, fair and reasonable to us.
 
Total Operating Expenses

The Independent Directors have the fiduciary responsibility of limiting our total allocated operating expenses to reasonable amounts, unless the Independent Directors have made a finding that, based on such unusual and non-recurring factors which they deem sufficient, a higher level of expenses is justified.  Any such findings and the reasons in support of them will be reflected in the Board’s meeting minutes.  All of our expenses must be billed to and paid by us. In the event the Independent Directors determine that expenses we would normally reimburse MCM Advisers for are not justified, MCM Advisers may be required to incur such expenses (though MCM Advisers will in no event be responsible for our direct expenses).  A Sponsor, including MCM Advisers, is permitted to be reimbursed for the actual cost of goods and services used by or for us and obtained from persons other than Affiliates.  Sponsors may also be reimbursed for necessary administrative expenses, so long as those expenses are the lower of the Sponsor’s actual cost or the amount we would be required to pay a third party.
 
Real Estate Commissions on Resale of Property
 
Neither the Adviser, our Manager, nor any of our directors will receive any brokerage commission paid on any purchase or sale of any real property we may purchase, though we do not intend to directly hold any real property assets, but instead purchase securities of companies that themselves hold real estate assets.
 

 
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RISK FACTORS
 
Investing in our common stock involves a number of significant risks. In addition to the other information contained in this prospectus and any accompanying prospectus supplement, you should consider carefully the following information before making an investment in our common stock. The risks set out below may not be the only risks we face, but are the risks we are presently aware of. If any of the following events occur, our business, financial condition and results of operations could be materially and adversely affected. In such case, our NAV and the price of our common stock could decline, and you may lose all or part of your investment.
 
Risks Relating to Our Business and Structure
 
Our investment portfolio will be recorded at fair value, with our Board of Directors having final responsibility for overseeing, reviewing and approving, in good faith, its estimate of fair value and, as a result, there will be uncertainty as to the value of our portfolio investments.
 
Under the 1940 Act, we will be required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as determined by us in accordance with our written valuation policy.  Our Board of Directors will have final responsibility for overseeing, reviewing and approving, in good faith, our estimate of fair value. Typically, there will not be a public market for the securities of the privately held companies in which we will invest. As a result, we will value these securities quarterly at fair value based on input from management and our audit committee, with the oversight, review and approval of our Board of Directors.
 
The determination of fair value and consequently, the amount of unrealized gains and losses in our portfolio, are to a certain degree, subjective and dependent on a valuation process approved by our Board of Directors. Certain factors that may be considered in determining the fair value of our investments include external events, such as private mergers, sales and acquisitions involving comparable companies. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. Our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. Due to this uncertainty, our fair value determinations may cause our net asset value on a given date to materially understate or overstate the value that we may ultimately realize on one or more of our investments. As a result, investors purchasing our common stock based on an overstated net asset value would pay a higher price than the value of our investments might warrant. Conversely, investors selling Shares during a period in which the net asset value understates the value of our investments will receive a lower price for their Shares than the value of our investments might warrant.
 
We have no operating history as a BDC.
 
As a result of our lack of operating history as a BDC, we will be subject to many of the business risks and uncertainties associated with recently formed businesses, including the risk that we will not achieve our investment objective and that the value of your investment could decline substantially.
 
Our financial condition and results of operations will depend on our ability to effectively manage and deploy capital.
 
Our ability to achieve our investment objective will depend on our ability to effectively manage and deploy capital, which will depend, in turn, on our Adviser’s ability to identify, evaluate and monitor, and our ability to finance and invest in, companies that meet our investment criteria.
 
Accomplishing our investment objective on a cost-effective basis will largely be a function of our Investment Adviser’s handling of the investment process, its ability to provide competent, attentive and efficient services and our access to investments offering acceptable terms. In addition to monitoring the performance of our existing investments, our Investment Adviser’s investment team will also be called upon, from time to time, to provide managerial assistance to some of our portfolio companies. These demands on their time may distract them or slow the rate of investment.
 
Even if we are able to grow and build upon our investment operations, any failure to manage our growth effectively could have a material adverse effect on our business, financial condition, results of operations and prospects. The results of our operations will depend on many factors, including the availability of opportunities for investment, readily accessible short and long-term funding alternatives in the financial markets and economic conditions. Furthermore, if we cannot successfully operate our business or implement our investment policies and strategies as described herein, it could negatively impact our ability to pay dividends.
 

 
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We will be dependent upon MCM Advisers’ key personnel for our future success.
 
We will depend on the diligence, skill and network of business contacts of the investment professionals of MCM Advisers.  The investment professionals at MCM Advisers will evaluate, negotiate, structure, close and monitor our investments. Our future success will depend on the continued service of our investment team and the other senior investment professionals available to MCM Advisers. We cannot assure you that unforeseen business, medical, personal or other circumstances would not lead any of the members of the investment team to terminate their relationship with us, and we do not intend to purchase any “key man” insurance coverage respecting MCM Advisers’ personnel. The loss of one or more of the investment team or other senior investment professionals who serve on MCM Advisers’ investment team could have a material adverse effect on our ability to achieve our investment objectives as well as on our financial condition and results of operations. In addition, we can offer no assurance that MCM Advisers will continue indefinitely as our Investment Adviser.
 
The members of MCM Advisers’ investment team are and may in the future become affiliated with entities engaged in business activities similar to those intended to be conducted by us, and may have conflicts of interest in allocating their time. We expect that the investment team will dedicate a significant portion of their time to the activities of MRC; however, they will be engaged in other business activities which could divert their time and attention in the future.
 
Our success will depend on the ability of MCM Advisers to attract and retain qualified personnel in a competitive environment.
 
Our growth will require that MCM Advisers retain and attract new investment and administrative personnel in a competitive market. Its ability to attract and retain personnel with the requisite credentials, experience and skills will depend on several factors including its ability to offer competitive wages, benefits and professional growth opportunities. Many of the entities, including investment funds (such as private equity funds and mezzanine funds) and traditional financial services companies, with which it will compete for experienced personnel will have greater resources than it will have.
 
We will be dependent on MacKenzie Capital Management’s key personnel for our future success.
 
We will depend on the skill, experience, and care of the professionals at our Manager to record, administer, and manage our business, including our stockholder records and financial records, preparing and filing reports to our stockholders and with the SEC and our tax returns.  We cannot assure you that these key personnel will not terminate their relationship with our Manager.  The loss of one or more of these professionals could have a material adverse effect on our ability to achieve our business objectives.
 
There are significant potential conflicts of interest respecting our Adviser’s activities that could impact our investment returns.
 
MCM Advisers’ investment team presently manages 53 private funds other than the Legacy Funds.  In addition, our executive officers and directors, as well as the current and future members of our Adviser, may serve as officers, directors or principals of other entities that operate in the same or a related line of business as we do. Accordingly, they may have obligations to investors in those entities, the fulfillment of which obligations may not be in the best interests of us or our stockholders. Any affiliated investment vehicle formed in the future and managed by our Adviser or its affiliates may, notwithstanding different stated investment objectives, have overlapping investment objectives with our own and, accordingly, may invest in asset classes similar to those targeted by us. As a result, MCM Advisers may face conflicts in allocating investment opportunities between us and such other entities. It is possible that, in the future, we may not be given the opportunity to participate in investments made by investment funds managed by our Adviser or an investment manager affiliated with our Adviser. In any such case, when MCM Advisers identifies an investment, it will be forced to choose which investment fund should make the investment.  MCM Advisers has an allocation policy designed to equitably distribute such investment opportunities consistent with the requirements of the 1940 Act.
 
If our Adviser forms other affiliates in the future, we may co-invest on a concurrent basis with such other affiliates, subject to compliance with our Charter, the 1940 Act, applicable regulations, regulatory guidance and our allocation procedures.
 
There are significant potential conflicts of interest respecting our Adviser’s compensation that could impact our investment returns.
 
In the course of our investing activities, we will pay management and incentive fees to MCM Advisers and reimburse MCM Advisers for certain expenses it incurs. As a result, investors in our common stock will invest on a “gross” basis and receive distributions on a “net” basis after expenses, resulting in a lower rate of return than an investor might achieve through direct investments. Accordingly, there may be times when the management team of MCM Advisers will have interests that differ from those of our stockholders, giving rise to a conflict. MCM Advisers will not be reimbursed for any performance-related compensation for its employees.
 
 
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There are significant potential conflicts of interest respecting our Administrator that could impact our investment returns.

Under the Administration Agreement, our Administrator granted us a royalty-free license to use the name “MacKenzie.” Under the Administration Agreement, we have the right to use the “MacKenzie” name for so long as MCM Advisers or one of its affiliates remains our investment adviser. In addition, we will pay the Administrator, an affiliate of MCM Advisers, our allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the compensation of our chief financial officer and any administrative support staff. These arrangements will create conflicts of interest that our Board of Directors must monitor.
 
There are significant potential conflicts of interest respecting related party transactions that could impact our investment returns.
 
In the ordinary course of business, we may enter into transactions with portfolio companies that may be considered related party transactions. Related party transactions carry with them the risk that their terms could benefit such parties, to our detriment.  In order to ensure that we do not engage in any transactions with any persons affiliated with us that are prohibited by the 1940 Act, we have implemented certain written policies and procedures, described below under “Certain Relationships and Transactions.”
 
Our incentive fee structure and the formula for calculating the management fee may incentivize MCM Advisers to pursue speculative investments, use leverage when it may be unwise to do so, or refrain from deleveraging when it would otherwise be appropriate to do so.
 
The incentive fee payable by us to MCM Advisers may create an incentive for MCM Advisers to pursue investments on our behalf that are riskier or more speculative than would be the case in the absence of such compensation arrangement. The incentive fee payable to our Adviser will be calculated based on a percentage of our return on invested capital. In addition, the base management fee is calculated on the basis of our Managed Funds, including assets acquired through the use of leverage. This may encourage our Adviser to use leverage to increase the aggregate amount of and the return on our investments, even when it may not be appropriate to do so, and to refrain from de-levering when it would otherwise be appropriate to do so. Under certain circumstances, the use of leverage may increase the likelihood of default, which would impair the value of our common stock. In addition, the Adviser will receive the incentive fee based, in part, upon net capital gains realized on our investments. This could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.
 
The incentive fee payable by us to our Adviser also may induce MCM Advisers to invest on our behalf in instruments that have a deferred interest feature, even if such deferred payments would not provide cash necessary to enable us to pay current distributions to our stockholders. Under these investments, we would accrue interest over the life of the investment but would not receive the cash income from the investment until the end of the term. Our net investment income used to calculate the income portion of our investment fee, however, will include accrued interest. Thus, a portion of this incentive fee would be based on income that we have not yet received in cash.
 
Although we do not currently expect to do so, we may invest, to the extent permitted by law, in the securities and instruments of other investment companies, including private funds, and, to the extent we so invest, will bear our ratable share of any such investment company’s expenses, including management and performance fees. We will also remain obligated to pay management and incentive fees to MCM Advisers with respect to the assets invested in the securities and instruments of other investment companies. With respect to each of these investments, each of our stockholders will bear his or her share of the management and incentive fee of MCM Advisers as well as indirectly bearing the management and performance fees and other expenses of any investment companies in which we invest.
 
A general increase in interest rates will likely have the effect of making it easier for our Adviser to receive incentive fees, without necessarily resulting in an increase in our net earnings.

Given the structure of our Investment Advisory Agreement, any general increase in interest rates will likely have the effect of making it easier for MCM Advisers to receive incentive fees under the Investment Advisory Agreement without any additional increase in relative performance on the part of our Adviser.
 
Our Adviser will have the right to resign on 120 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.
 
Our Adviser has the right, under the Investment Advisory Agreement, to resign at any time upon not more than 120 days’ written notice, whether we have found a replacement or not. If our Adviser resigns, we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 120 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business
 
 
 
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and results of operations as well as our ability to pay distributions are likely to be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by our Adviser and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our financial condition, business and results of operations.
 
The performance of the Legacy Portfolio may not be indicative of our Adviser’s future performance in managing our overall portfolio.
 
You should not place undue reliance on the fact that the investments included in the Legacy Portfolio are currently performing. The Legacy Portfolio should not be viewed as an indicator of either the overall performance of the Legacy Funds or the prospective performance of our portfolio in the future.
 
Any failure on our part to maintain our status as a BDC would reduce our operating flexibility.
 
We have elected to be treated as a BDC under the 1940 Act. The 1940 Act imposes numerous constraints on the operations of BDCs. For example, BDCs must invest at least 70% of their gross assets in specified types of securities, primarily in private companies or thinly- traded U.S. public companies, cash, cash equivalents, U.S. government securities and other high quality debt investments that mature in one year or less. Furthermore, any failure to comply with the requirements imposed on BDCs by the 1940 Act could cause the SEC to bring an enforcement action against us and/or expose us to claims of private litigants. In addition, upon approval of a majority of our stockholders, we may elect to withdraw our status as a BDC. If we decide to withdraw our election, or if we otherwise fail to qualify, or maintain our qualification, as a BDC, we may be subject to the substantially greater regulation under the 1940 Act as a registered closed-end investment company. Compliance with such regulations would significantly decrease our operating flexibility, and could significantly increase our costs of doing business.
 
Regulations governing our operation as a BDC affect our ability to raise additional capital and the way in which we do so. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage.
 
We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as “senior securities,” up to the maximum amount permitted by the 1940 Act. However, we have no current intention to borrow money for investment purposes.  Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 200% of gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous. Also, any amounts that we use to service our indebtedness would not be available for distributions to our common stockholders. Furthermore, as a result of issuing senior securities, we would also be exposed to typical risks associated with leverage, including an increased risk of loss. If we issue preferred stock, the preferred stock would rank “senior” to common stock in our capital structure, preferred stockholders would have separate voting rights on certain matters and might have other rights, preferences, or privileges more favorable than those of our common stockholders, and the issuance of preferred stock could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for holders of our common stock or otherwise be in your best interest.
 
We may not generally issue and sell our common stock at a price below NAV per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current NAV per share of our common stock if our Board of Directors determines that such sale is in the best interests of MRC and its stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our Board of Directors, closely approximates the market value of such securities (less any distributing commission or discount). If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, then the percentage ownership of our stockholders at that time will decrease, and you may experience dilution.
 
We may borrow money, which would magnify the potential for gain or loss on amounts invested and will increase the risk of investing in us.
 
The use of leverage magnifies the potential for gain or loss on amounts invested and, therefore, increases the risks associated with investing in our securities. We may borrow from and issue senior debt securities to banks, insurance companies and other lenders in the future, however we have no current intention to borrow for investment purposes. Holders of these senior securities would have fixed dollar claims on our assets that would be superior to the claims of our common stockholders, and we would expect such lenders to seek recovery against our assets in the event of a default. If the value of our assets decreases, leveraging would cause NAV to decline more sharply than it otherwise would have had we not leveraged. Similarly, any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could also negatively affect our ability to make dividend payments on our common stock. Leverage is generally considered a speculative investment technique. Our ability to
 
 
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service any debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. Moreover, as the management fee payable to our Adviser, will be payable based on our Managed Funds, including those assets acquired through the use of leverage, MCM Advisers will have a financial incentive to incur leverage which may not be consistent with our stockholders’ interests. In addition, our common stockholders will bear the burden of any increase in our expenses as a result of leverage, including any increase in the management fee payable to MCM Advisers.
 
As a BDC, we are required to meet an asset coverage ratio, defined under the 1940 Act as the ratio of our gross assets (less all liabilities and indebtedness not represented by senior securities) to our outstanding senior securities, of at least 200% after each issuance of senior securities. If this ratio declines below 200%, we may not be able to incur additional debt and could be required by law to sell a portion of our investments to repay some debt when it is disadvantageous to do so, which could have a material adverse effect on our operations, and we may not be able to make distributions. The amount of any leverage that we employ would depend on our Adviser’s and our Board of Directors’ assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to obtain credit at all or on terms acceptable to us.
 
Any debt facility into which we may enter would likely impose financial and operating covenants that restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a REIT under the Code.
 
We may experience fluctuations in our quarterly results.
 
We could experience fluctuations in our quarterly operating results due to a number of factors, including our ability or inability to make investments in companies that meet our investment criteria, the interest rate payable on the debt securities we acquire, the level of portfolio dividend and fee income, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
 
Our Board of Directors will be authorized to reclassify any unissued shares of common stock into one or more classes of preferred stock, which could convey special rights and privileges to its owners.
 
Under the Maryland General Corporation Law (or “MGCL”) and our Charter, our Board of Directors will be authorized to classify and reclassify any authorized but unissued shares of stock into one or more classes of stock, including preferred stock. Prior to issuance of shares of each class or series, the Board of Directors will be required by the MGCL and our Charter to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Thus, the Board of Directors could authorize the issuance of shares of preferred stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best interest. The cost of any such reclassification would be borne by our common stockholders. Certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock. For example, holders of preferred stock would vote separately from the holders of common stock on a proposal to cease operations as a BDC. In addition, the 1940 Act provides that holders of preferred stock are entitled to vote separately from holders of common stock to elect two preferred stock directors. We currently have no plans to issue preferred stock. The issuance of preferred shares convertible into shares of common stock may also reduce the net income and net asset value per share of our common stock upon conversion, provided, that we are only permitted to issue such convertible preferred stock to the extent we comply with the requirements of Section 61 of the 1940 Act, including obtaining common stockholder approval. These effects, among others, could have an adverse effect on your investment in our common stock.
 
Our Board of Directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.
 
Our Board of Directors will have the authority to modify or waive our investment objective, current operating policies, investment criteria and strategies without prior notice and without stockholder approval.  Our investment objective is not fundamental and may be changed without stockholder approval.  Stockholders will receive notice within sixty (60) days if the Board of Directors decides to change our investment objective.  The principal investment strategies are not fundamental and may be changed without prior notice.  We cannot predict the effect any changes to our current operating policies, investment criteria and strategies would have on our business, net asset value, operating results and value of our stock. However, the effects might be adverse, which could negatively impact our ability to pay you dividends and cause you to lose all or part of your investment.
 
There is a risk that our stockholders may not receive distributions or that our distributions may not grow over time.
 
We may make distributions on a quarterly basis to our stockholders only out of assets legally available for distribution.  Our assets would be “legally available” if, after giving effect to the distribution, (i) we would be able to pay any outstanding debt, and (ii) our total assets would be greater than the sum of our total liabilities plus the amount needed to satisfy any preferential rights upon dissolution held by any stockholders who have preferential rights on dissolution superior to those receiving the distribution, if we were
 
 
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to be dissolved at the time of distribution.  We plan on making distributions only from income and gains on our portfolio, will not borrow to make distributions, and do not intend on making distributions from our offering proceeds, though we are not prohibited from borrowing for distributions or distributing up to approximately 5% of our offering proceeds.  Funding distributions by returning capital would decrease our assets actually invested according to our investment objectives, and borrowing to fund distributions would increase the risks associated with leverage as discussed elsewhere in this prospectus.
 
We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. In addition, due to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions. See “Regulation as a Business Development Company.”
 
Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy.
 
We and our portfolio companies will be subject to applicable local, state and federal laws and regulations. New legislation may be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types of investments we are permitted to make, any of which could harm us and our stockholders, potentially with retroactive effect. Additionally, any changes to the laws and regulations governing our operations relating to permitted investments may cause us to alter our investment strategy in order to avail ourselves of new or different opportunities. Such changes could result in material differences to the strategies and plans described in this prospectus and may result in our investment focus shifting from the areas of expertise of our Adviser’s investment team to other types of investments in which the investment team may have less expertise or little or no experience. Thus, any such changes, if they occur, could have a material adverse effect on our results of operations and the value of your investment.
 
We will incur significant costs as a result of being a public company.
 
As a public company, we will incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the 1934 Act, as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, and other rules implemented by the SEC.
 
An extended continuation of the disruption in the capital markets and the credit markets could impair our ability to raise capital and negatively affect our business.
 
As a BDC, we may need to raise additional capital for investment purposes. Without sufficient access to the capital markets or credit markets, we may be forced to curtail our business operations or we may not be able to pursue new business opportunities. Since the middle of 2007, the capital markets and the credit markets have been experiencing extreme volatility and disruption and, accordingly, there has been and will continue to be uncertainty in the financial markets in general. Ongoing disruptive conditions in the financial industry and the impact of new legislation in response to those conditions could restrict our business operations and could adversely impact our results of operations and financial condition.
 
If we are unable to renew or replace any debt facilities and consummate new facilities on commercially reasonable terms, our liquidity  could be reduced significantly. If we are unable to repay amounts outstanding under any such facilities and are declared in default or are unable to renew or refinance these facilities, we would not be able to initiate significant originations or to operate our business in the normal course. These situations may arise due to circumstances that we may be unable to control, such as inaccessibility to the credit markets, a severe decline in the value of the U.S. dollar, a further economic downturn or an operational problem that affects third parties or us, and could materially damage our business. Moreover, we are unable to predict when economic and market conditions may become more favorable.
 
We currently expect to elect to be taxed as a REIT, but may not be able to qualify as a REIT.
 
We currently expect to elect to be a REIT for federal income tax purposes.  As described in more detail below in "U.S. Federal Income Tax Considerations", in order to qualify as a REIT, a substantial percentage of our income must be derived from, and our assets consist of, real estate assets, and, in certain cases, other investment property. We believe the composition of our assets and income will qualify for making a REIT election.  In addition, we intend to acquire and manage investments to satisfy the REIT tests.  Whether a particular investment is considered a real estate asset for such purposes depends upon the facts and circumstances of the investment.  Due to the factual nature of the determination, at this time we do not know whether any particular investment will qualify as a real estate asset or satisfy the REIT income tests.  In determining whether an investment is a real property asset, we will look at the Code and the interpretation of the Code by the Internal Revenue Service (“IRS”) in regulations, published rulings, private letter rulings and other guidance.  In the case of a private letter ruling issued to another taxpayer, we would not be able to bind the IRS to the holding of such ruling.  If we fail to qualify as a REIT we may not be able to achieve our objectives and the value of our stock may decline.

 
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As a REIT, we may be subject to a corporate level tax on certain built in gains if certain assets were sold during the 10 year period following such election.
 
A REIT generally operates without incurring any corporate level federal income tax, which is accomplished by the REIT annually distributing at least 90% of its REIT taxable income. If it satisfies the minimum distribution requirement, the REIT generally is entitled to a deduction for dividends paid. The REIT stockholders are then required to report the REIT dividend as ordinary income. A REIT stockholder’s receipt of dividends generally will not qualify as qualified dividend income or for the dividends received deduction discussed above.
 
Upon our REIT election, we will be subject to a corporate level tax on certain built-in gains if such assets are sold during the 10 year period following conversion. Built-in gain assets are assets whose fair market value exceeds the REIT’s adjusted tax basis at the time of conversion. In addition, a REIT may not have any earnings and profits accumulated in a non-REIT year. Thus, upon conversion to a REIT, the putative REIT is generally required to distribute to its stockholders all accumulated earnings and profits, if any. Such distribution would be taxable to the stockholders as dividend income, and, as discussed above, may qualify as qualified dividend income for non-corporate stockholders and for the dividends received deduction for corporate stockholders.
 
The foregoing is a general and abbreviated summary of the provisions of the Code and the Treasury Regulations in effect as they directly govern the taxation of us and our security holders. These provisions are subject to change by legislative and administrative action, and any such change may be retroactive. Security holders (and prospective holders) are urged to consult their tax advisers regarding specific questions as to U.S. federal, foreign, state, local income or other taxes. See “Material U.S. Federal Income Tax Considerations–Potential Election to Be Treated as a REIT.”
 
If we elect to be taxed as a REIT, loss of our status as a REIT would have significant adverse consequences.

If after properly electing to be a REIT we fail to qualify as a REIT in any taxable year, then we would be subject to federal income tax (including any applicable minimum tax) on our taxable income computed in the usual manner for corporate taxpayers without any deduction for distributions to our stockholders. Unless entitled to relief under specific statutory provisions, we would be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status, assuming we had previously been treated as a REIT.  To renew our REIT qualification at the end of such a four-year period, we would be required to distribute all of our current and accumulated earnings and profits before the end of the period and the funds available for satisfying our obligations and for distribution to our stockholders could be significantly reduced.

When we elect to be treated as a REIT, we will be required to make distributions, other than capital gain distributions, to our stockholders each year in the amount of at least 90% of our REIT taxable income. As a result, we will continue to need additional capital to make new investments. If additional funds are unavailable or not available on favorable terms, our ability to make new investments will be impaired.

When we elect to be treated as a REIT, we will be required to distribute at least 90% of our REIT taxable income, and as such we may require additional capital to make new investments or carry existing investments.   We may acquire additional capital from the issuance of securities senior to our common shares, including additional borrowings or other indebtedness or the issuance of additional securities. We may also acquire additional capital through the issuance of additional equity. However, we may not be able to raise additional capital in the future on favorable terms or at all. Unfavorable economic conditions could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us.  We may issue debt securities, other instruments of indebtedness or preferred stock, and we borrow money from banks or other financial institutions, which we refer to collectively as “senior securities.”  As a result of issuing senior securities, we will also be exposed to typical risks associated with leverage, including increased risk of loss. If we issue preferred securities which will rank “senior” to our common shares in our capital structure, the holders of such preferred securities may have separate voting rights and other rights, preferences or privileges more favorable than those of our common shares, and the issuance of such preferred securities could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for security holders or otherwise be in our best interest.
 
To the extent our ability to issue debt or other senior securities is constrained, we will depend on issuances of additional common shares to finance new investments. If we raise additional funds by issuing more of our common shares or senior securities convertible into, or exchangeable for, our common shares, the percentage ownership of our stockholders at that time would decrease, and you may experience dilution.

We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.
 
Since we contemplate investing in real estate through partnerships and other REITs, we may have to recognize taxable income attributable to those investments prior to the time we receive cash distributions with respect to such investments.  As indicated above, in order to benefit from REIT taxation, we need to distribute at least 90% of our REIT taxable income.  If we do not receive cash
 
 
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representing such income at the same time as we recognize such income, we may have cash flow difficulties in order to make the required distributions necessary to benefit from REIT taxation.

We may in the future choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive.
 
We may in the future elect to pay dividends in our own stock, as opposed to cash.  In such case or in the event you participate in the DRIP, you may be required to pay tax in excess of the cash you receive from us.

Risks Related to Our Investments
 
We have not yet identified the portfolio companies we will invest in using the proceeds of this offering.

While we acquired the Legacy Portfolio in connection with this offering, we have not yet identified all of the additional potential investments for our portfolio that we will acquire with the proceeds of the offering. As a result, you will be unable to evaluate any future portfolio company investments prior to purchasing our shares. Additionally, our Adviser will select our investments subsequent to the closing of this offering, and our stockholders will have no input with respect to such investment decisions. These factors increase the uncertainty, and thus the risk, of investing in our common stock.
 
The achievement of our investment objectives cannot be guaranteed.
 
We may not be successful in locating real estate-related securities suitable for purchase.  We may not be able to purchase securities at an acceptable price.  Even if suitable securities are located at an acceptable price, our performance will be affected by many factors that are beyond the control of our Adviser, including unpredictable economic and financial events.  Accordingly, we do not guarantee our distributions or the return of your capital.  For example, a review of the performance of prior funds sponsored by our Adviser reveals that not all such funds are successful, or will be successful, in producing their targeted returns.
 
The indirect ownership of real properties involves a number of risks.
 
Our investments will be primarily in entities that directly or indirectly own real property, real estate joint ventures, or other real property-based investments.  As a result, an investment in MRC will be subject to all of the risks inherent in real estate investments.  Among these are the following:

 
·
the operation of real property is subject to the general competitive conditions in the relevant real estate markets, which have suffered in the recent economic crisis;
 
 
·
downturns in local economies, overbuilding and other general economic conditions may adversely affect the operations of real property, especially with the current economic conditions;
 
 
·
indebtedness secured by a portfolio of real properties may bear a variable interest rate that could result in increased debt service payments (and reduced cash flow) if interest rates rise;
 
 
·
the lack or uncertainty of availability or high cost of financing, especially in current markets, may adversely affect the ability of the real estate owners to sell their properties and the terms of any such sales;
 
 
·
the availability and cost of financing or refinancing is uncertain, especially in current markets, and may adversely affect the ability of the real estate owners to sell their properties and the terms of any such sales (for example, some of the REITs in which previous funds have invested have struggled to refinance their existing indebtedness, resulting in a depressed stock price, and, in some cases, causing issuers to file for bankruptcy protection);
 
 
·
the real properties may be damaged and suffer losses which are not adequately insured;
 
 
·
property tax reform, rent control, and other regulatory and governmental action may adversely affect the value of the real properties; and
 
 
·
energy shortages and allocations and increased energy prices in the areas where the real properties are located may adversely affect their operations or otherwise reduce their value.

Investment in mortgage loans or issuers that own or originate mortgage loans involves a number of risks.
 
  We may make investments in mortgage loans or in issuers that own or originate mortgage loans. As a result, an investment in MRC will be subject to all of the risk inherent with mortgage loans.  Among these are the following:
 
 
·
We will be at risk of defaults by the borrowers on those mortgage loans.  These defaults may be caused by many conditions beyond the control of us or our Adviser, including interest rate levels and local and other economic conditions affecting real estate
 
 
 
 
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values, including the turmoil in the credit markets that began in 2007 and continues today.  Our Adviser will not know whether the values of the properties securing the mortgage loans will remain at the levels existing on the dates of origination of those mortgage loans. If the values of the underlying properties drop, our risk will increase because of the lower value of the security associated with such loans;
 
 
·
If an issuer in which we invest relies on originating, holding, or servicing mortgage loans for a significant portion of its income, defaults on such mortgage loans could impair the value of the issuer itself and consequently put our investment in such issuer at risk (for example, previous funds managed by our Adviser suffered losses investing in mortgage companies or originators);
 
 
·
Fixed-rate, long-term mortgage loans could yield a return that is lower than the then-current market rates if interest rates rise.  If interest rates decrease, we could be adversely affected to the extent that mortgage loans are prepaid because we may not be able to generate equivalent returns upon reinvestment of the funds;
 
 
·
Declines in real estate values may induce mortgagors to voluntarily default on their loans, increasing the risk of foreclosure and loss of capital (for example, some of the hotel REITs have just “walked away” from the hotels they owned);
 
 
·
Issuers may file for bankruptcy if they cannot meet the demands of their debt service, and bankruptcy judges have wide latitude to modify the terms of indebtedness, which could result in lower than expected returns on our investment; and
 
 
·
Delays in liquidating defaulted mortgage loans could reduce our or an issuer’s investment returns.  If there are defaults under those mortgage loans, we or the issuer may not be able to repossess and sell the underlying properties quickly.  The resulting time delay could reduce the value of our or the issuer’s investment in the defaulted mortgage loans.  An action to foreclose on a property securing a mortgage loan is regulated by state statutes and regulations and is subject to many of the delays and expenses of other lawsuits if the defendant raises defenses or counterclaims.  Further, given the recent economic events, foreclosure actions may flood the courthouses, causing further delays in prosecuting such actions.  In the event of default by a mortgagor, these restrictions, among other things, may impede our or issuer’s ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us or the issuer on the mortgage loan. For example, previous funds managed by our Investment Adviser have invested in a mortgage where the borrower defaulted in Arkansas.  Our Manager began foreclosure proceedings in July 2007, but did not get a foreclosure sale set until December 2009 due to various circumstances beyond the control of our Adviser; thereafter, the foreclosure was further delayed by a bankruptcy filing that has yet to be resolved.
 
We will not participate in the management of the real estate owned by our portfolio companies.
 
The issuers of the securities to be held by us will have exclusive management and control of the operation of their real estate portfolios, and we must rely exclusively on the management capabilities of such issuers, regardless of whether the Investment Adviser agrees with the decisions of such issuers (though as a BDC, we will offer to provide managerial assistance to our portfolio companies). If our Investment Adviser decides that an action taken by an issuer is contrary to our interests, we may take legal action to protect our interests. We could be forced to bear the costs of a challenge or lawsuit, which could be substantial, and there can be no certainty that legal action undertaken to halt any such actions would be successful.
 
Information on our target securities may be difficult to obtain.
 
Complete and current information regarding securities to be acquired and properties owned by issuers of such securities (particularly properties which may be performing poorly) may in many cases (particularly in the case of securities of companies not registered with the SEC) not be available to our Adviser or, even if available, it may not be economical for our Adviser to obtain such information.  As a result, we may purchase securities with less than adequate information.  Further, the information that is obtained may not be reliable.  For example, prior funds sponsored by our Manager invested in a company that filed for bankruptcy protection, and those funds lost all their invested capital, because the company had stated that none of its loans were cross-collateralized (meaning that one failed property or development would not impair the value of the other properties), when this was untrue.  The company had several loans go into default, thereby impairing the value of all remaining properties.

Investments in publicly traded securities present market risks that are not present with private securities.
 
Publicly-traded investments such as REITs present certain market risks that are not present when investing directly in real estate or in private partnerships that own real estate.  The trading price of public securities can change in response to various factors, not all of which relate to the real estate owned by the entities.  A “bear market” can cause all publicly traded securities to trade at lower prices, even if the fundamental economic factors driving the value of real estate remain unchanged.  If the trading price of a public entity is too adversely affected by such factors, it can be subject to takeover attempts by opportunistic investors who see the ability to acquire assets at below net asset value.  Because we will not likely be a significant holder of such securities, there may be little or nothing that we or our Adviser can do to prevent the sale of such entities at prices that are below the estimated net asset value of the real estate owned by the entities, which would adversely affect our performance.

 
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Investments in privately- held securities may present more risks than investments in publicly- held securities.
 
Privately-held partnerships and companies, unlike public entities, are not required to file periodic reports with the SEC or state securities regulators.  As a result, our Adviser’s evaluation of a possible investment in a private entity may be based on incomplete or misleading information.  In addition, as privately-held entities generally have significantly fewer investors than public companies, a private issuer may be more concerned about a possible takeover by an investor such as us.  The private issuer may therefore be more reluctant to approve a transfer of securities to us or admit us as a record owner, which would result in the loss of rights associated with record ownership, including voting rights.
 
Accurate valuation of illiquid real estate-related securities is difficult. 
 
Our Adviser’s techniques used to value our target securities necessarily involve reliance on both objective and subjective criteria and assumptions and predictions that may or may not be realized.  As a result, despite our Adviser’s analysis, there is no assurance that any particular investment will in fact be made by us on terms that reflect the true economic value of the securities purchased.
 
We will compete with other entities and persons to purchase real estate-related securities.
 
The market for the real estate-related securities sought by us is limited and generally inefficient, and competition for these securities may reduce the availability and increase the prices of the securities.  For example, in the previous two years, two new competitors have entered the marketplace buying some of the same type of securities that we intend to buy.
 
Lack of Diversification.
 
Some of our target portfolio companies, as well as investments in the Legacy Portfolio, are private partnerships or other privately held entities that invest in only a single parcel of real property.  Due to such issuers’ lack of diversification, the value of their securities may be more volatile than securities issued by entities with larger, more diverse portfolios.
 
The hotel and lodging industry has unique risks.
 
We may invest in interests in hotel or lodging property portfolios.  An investment in these securities will be subject to the special risks inherent in investments in the lodging industry.  However, the hotel and lodging industry risk is not a principal risk, as we will not concentrate our investments in this specific industry.  Lodging properties are management and labor intensive and particularly susceptible to the impact of economic and other conditions outside the control of the portfolio managers.  Also, compared to other types of properties, hotel maintenance typically involves maintenance of corresponding personal property such as furniture and supplies.  As a result, hotels may be exposed to more fluctuations in costs and inflation, and be subject to more potential liability, from events such as property loss or theft, labor difficulties, supplier problems and personal injuries.  Demand for particular accommodations and related hotel services may vary seasonally and may be affected by economic recessions, changes in travel patterns caused by airline schedules and strikes and other factors, including current economic conditions.  To meet competition in the industry, to maintain franchise standards, or to maintain economic values, continuing expenditures must be made for modernizing, refurnishing, and maintaining existing facilities prior to the expiration of their anticipated useful lives.  If such expenditures are not made, the value and profitability of the hotels may be diminished.  In addition, inflationary pressures could increase operating expenses of the hotels, including energy costs, above expected levels, and have secondary effects upon occupancy rates in such hotels by increasing the expense or decreasing the availability of means of travel.  All of the factors noted above may contribute to producing operating results of wider variation than for other types of properties.
 
We are susceptible to claims under Federal and state securities laws.
 
Due in part to the diverse and relatively risky nature of our acquisition procedures, we may be more susceptible to investigations, litigation, or other proceedings under securities laws.  Any such investigation, litigation, or other proceeding undertaken by state or Federal regulatory agencies or private parties could necessitate the expenditure of material amounts of our capital for legal and other costs.  Moreover, the dedication of human and capital resources of our Adviser and our Manager to such proceedings could limit the Manager’s effectiveness in managing MRC, even if MRC is ultimately successful in its defense.  If and to the extent that claims or suits for rescission are brought and successfully concluded for failure to register this offering or other offerings or for acts or omissions constituting offenses under Federal or applicable state securities laws, we could be materially and adversely affected, jeopardizing our ability to operate successfully.
 
Our purchase of securities may be subject to complex tender offer rules.

Because of the nature of the market for real estate-related securities, we expect to buy securities from time to time through tender offers.  Federal securities laws impose a number of obligations and requirements upon a party who undertakes a tender offer.  Sanctions and penalties could be imposed on us if we do not fully comply with these complex requirements.  Further, because of the perceived hostile nature of tender offers, some issuers may respond by taking legal action against us and our affiliates. We could be
 
 
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forced to bear some of the costs of a suit, which could be substantial, and there can be no certainty that we would be successful in fighting such a suit.  Likewise, we may participate in legal actions against issuers to force them to provide investor lists when their governing documents so require, but the issuers refuse to comply.
 
Issuers of securities we own may vote to change the structure of the portfolio company or propose a “roll-up.” 
 
 In recent years, general partners of portfolio company targets have successfully consolidated several related limited partnerships into a larger entity (these consolidations are somtimes referred to as “roll-ups”).  The new entities have usually been in the form of infinite-life REITS or master limited partnerships, and often are listed to trade on one of the stock exchanges.  In other cases, limited partners have been asked to approve the conversion of their partnership interests into common stock of a new corporation or into unsecured debentures.  In most roll-ups to date, the sponsoring general partners used an estimated market price for shares of the new entity to determine the exchange value for the limited partnership units.  Shares of the new entities may fall below the exchange value and historically have often traded substantially below the exchange value.  If our Adviser decides that a roll-up proposed by a portfolio company is contrary to our interests, we may take legal action to protect our interests. We could be forced to bear the costs of a suit, which could be substantial, and there can be no certainty that legal action undertaken to halt a roll-up by a portfolio company would be successful.  See a more detailed discussion of such roll-up transactions below in the section entitled “Certain Relationships and Transactions.”
 
Our Adviser may experience a substantial delay in identifying and locating suitable investments for us.
 
It may take time for our Adviser to identify suitable securities for investment.  Moreover, once suitable securities are identified, a considerable delay may be experienced in consummating their purchase.  In such event, corresponding delays would be experienced by us before distributions and allocations are received from our investments.
 
We may temporarily invest our cash reserves in volatile securities. 

Our Adviser may at times make the decision to invest some of our cash reserves into publicly-traded REITs as a means to earn better than money market rates.  This action has risk associated with it as the market for such publicly- traded assets may be volatile.  In the past few years, some such investments made by other funds managed by our Adviser have declined dramatically in value, making it impossible to recover the cash reserves unless and until the market price of the securities returns to previous levels.  In some cases, such issuers have ceased operations, resulting in a loss of capital for such funds.
 
We may use leverage, including margin accounts. 
 
We may utilize short-term borrowing and may acquire securities or make distributions through use of brokerage margin account loan agreements.  Utilization of margin loans involves the risk of losses greater than the equity involved.  Any such borrowing is subject to the leverage limitations under the 1940 Act that are described above.
 
The FDIC deposit insurance limits may be exceeded. 
 
Our cash deposits with banks are insured by the Federal Deposit Insurance Corporation up to $250,000 per account.  We will at times exceed such limits in our deposit accounts, which could subject us to a loss of any amount over such limit if the deposit institution were to fail.
 
The tax consequences of an investment in us will depend on the activities and reporting positions taken by the entities in which we invest.
 
We will have little or no control over the reporting activities of the issuers of securities we buy.  Accordingly, it is not possible to determine the potential tax consequences generated by an investment in us.  Our Adviser will not prepare or review income tax information returns of the issuers of securities in which we invest.  These issuers have made and will make a number of decisions on such tax matters as the expensing or capitalizing of particular items, the proper period over which capital costs may be depreciated or amortized, the allocation of acquisition costs between real property, improvements and personal property, and many other items.  An IRS audit of an issuer’s information return may result in the disallowance of certain deductions and may cause audits of your individual returns.  An opinion of counsel generally is not available with respect to these issues, either because they involve factual determinations, or because they involve legal doctrines not fully developed under existing case law.
 
Our taxable gain or loss will likely be measured by the issuer’s tax basis in the real property, rather than by our purchase price for its securities.
 
Some of our investments are and will be made through partnerships and other REITs.  The Federal income tax basis of the real estate held by those entities may be based upon their purchase price paid, as opposed to the purchase price we paid to acquire those
 
 
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securities.  Thus, there is a risk that we may have to report more income or gain on such entities disposition of its real estate than the amount of income or gain we would have reported if we purchased the real property directly.
 
An issuer of securities in which we invest could be deemed a “publicly traded partnership.”
 
Some of our investments are and will be made through partnerships.  If interests in the partnerships are traded on an established exchange or readily tradable on a secondary exchange (or substantial equivalent) the partnership will be treated as publicly traded partnerships.  As such, the partnership might be treated as a C corporation, resulting in its income being subject to double level taxation.  In addition, the real estate held within the partnership would no longer be taken into account in satisfying the REIT asset test.
 
We are currently in a period of capital markets disruption and we do not expect these conditions to improve in the near future.
 
The U.S. capital markets have been experiencing extreme volatility and disruption for several years and the U.S. economy was recently in a period of recession. Disruptions in the capital markets have increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. We believe these conditions may continue for a prolonged period of time or worsen in the future. A prolonged period of market illiquidity may have an adverse effect on our business, financial condition and results of operations. Unfavorable economic conditions could also increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could limit our investment originations, limit our ability to grow and negatively impact our operating results.
 
The recent economic recession could impair our portfolio companies and harm our operating results.
 
Certain of our portfolio companies may still be susceptible to the effects of the recent recession and may be unable to repay our loans during this period. Therefore, assets may become non-performing and the value of our portfolio may decrease during this period. Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments. The recent recession could lead to financial losses in our portfolio and a decrease in revenues, net income and the value of our assets.
 
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize our portfolio company’s ability to meet its obligations under the debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company. Any extension or restructuring of our loans could adversely affect our cash flows. In addition, if one of our portfolio companies were to go bankrupt, even though we may have structured our interest as senior debt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize our debt holding and subordinate all or a portion of our claim to that of other creditors.
 
The lack of liquidity in our investments may adversely affect our business.
 
We will invest in many companies whose securities are not publicly traded, and whose securities will be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of these investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. As a result, we do not expect to achieve liquidity in our investments in the near-term. Our investments will usually be subject to contractual or legal restrictions on resale or are otherwise illiquid because there is usually no established trading market for such investments. The illiquidity of most of our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.
 
Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.
 
Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as “follow-on” investments, in order to: (i) increase or maintain in whole or in part our equity ownership percentage; (ii) exercise warrants, options or convertible securities that were acquired in the original or a subsequent financing; or (iii) attempt to preserve or enhance the value of our investment. We may elect not to make follow-on investments or otherwise lack sufficient funds to make those investments. We will have the discretion to make any follow-on investments, subject to the availability of capital resources. The failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we do not want to increase our concentration of risk, we prefer other opportunities, we are subject to BDC requirements that would prevent such follow-on investments, or the follow-on investment would affect our REIT tax status.

 
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Our portfolio may lack diversification among portfolio companies, subjecting us to a risk of significant loss if one or more of these companies fails to perform.
 
Our portfolio may hold a limited number of portfolio companies. We will not have fixed guidelines for diversification, and our investments may be concentrated in relatively few companies. As our portfolio is less diversified than the portfolios of some larger funds, we are more susceptible to failure if a single investment fails. Similarly, the aggregate returns we realize may be significantly adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment.
 
We do not intend to concentrate our portfolio on any specific geographic area, however, we may be subjected to a risk of significant loss if there is a downturn in a particular area in which a number of our investments are concentrated.
 
We do not intend to concentrate our portfolio on any specific geographic areas. However, a downturn in any particular area in which we are invested could significantly impact the aggregate returns we realize.  As of February 28, 2013, our investments in Northern California represented approximately 31% of the fair value of the Legacy Portfolio, our investments in Southern California represented approximately 14% of the fair value of the Legacy Portfolio, and our investments in Maryland represented approximately 11% of the fair value of the Legacy Portfolio. If a geographic area in which we have significant investments suffers from adverse business or economic conditions, as Northern and Southern California have to varying degrees, a material portion of our investment portfolio could be affected adversely, which, in turn, could adversely affect our financial position and results of operations.
 
We may not realize gains from our equity investments.
 
Certain investments that we may make in the future include warrants or other equity securities. Investments in equity securities involve a number of significant risks, including the risk of further dilution as a result of additional issuances, inability to access additional capital and failure to pay current distributions. Investments in preferred securities involve special risks, such as the risk of deferred distributions, credit risk, illiquidity and limited voting rights. In addition, we may from time to time make non-control, equity investments in portfolio companies. Our goal is ultimately to realize gains upon our disposition of such equity interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity interests. We will often seek puts or similar rights to give us the right to sell our equity securities back to the portfolio company issuer. We may be unable to exercise these put rights for the consideration provided in our investment documents if the issuer is in financial distress.
 
Risks Relating to This Offering
 
We will have broad discretion over the use of proceeds of our initial public offering and will use proceeds in part to satisfy operating expenses.
 
We will have significant flexibility in applying the proceeds of our initial public offering and may use the net proceeds from our initial public offering in ways with which you may not agree, or for purposes other than those contemplated at the time of our initial public offering. We will also pay operating expenses, and may pay other expenses such as due diligence expenses of potential new investments, from net proceeds. Our ability to achieve our investment objective may be limited to the extent that net proceeds of our initial public offering, pending full investment, are used to pay operating expenses.
 
Our Shares will not be listed for at least eight years, and prior to listing our stock on an exchange, there will be no public market for our common stock, and we cannot assure you that the market price of Shares will not decline following any listing.
 
There will be no public trading market for our common stock, and we cannot assure you that one will develop or be sustained. We do not intend to list our common stock on an established exchange prior to eight years from completion of this public offering. We cannot predict the prices at which our common stock will trade once such a listing may occur. The listing price for our common stock will be determined through discussions with the underwriters and may not bear any relationship to the market price at which it may trade after such listing. Shares of closed-end management investment companies offered in an initial public offering that are listed for trading on an established exchange often trade at a discount to the initial public offering price due to sales loads, including underwriting discounts, and related offering expenses. In addition, shares of BDCs have in the past frequently traded at discounts to their net asset values, regardless of sales load, underwriting discounts, and offering expenses, and our stock may also be discounted in the market if and when we apply for listing. This characteristic of BDCs is separate and distinct from the risk that our NAV per Share may decline. We cannot predict whether our Shares will trade above, at or below our NAV if and when they trade on an exchange. The risk of loss associated with this characteristic of BDCs may be greater for investors expecting to sell Shares purchased in the offering soon after the offering. In addition, if our common stock trades below its NAV, we will generally not be able to sell additional Shares to the public at its market price without first obtaining the approval of our stockholders (including our unaffiliated stockholders) and our Independent Directors for such issuance.
 
 
 
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We have not mandated a minimum number of Shares to be sold in this offering, which could result in a higher expense ratio.
 
Because of our somewhat unique plan of distribution of this offering, including our anticipated longer offering period, and for other reasons, we have not imposed any minimum number of Shares that must be subscribed for before we effect initial closings in this offering.  This means that purchasers of Shares, especially in the early period of our offering, will be subject to higher expense ratios until we obtain enough capital to lower our expense ratio among stockholders to the levels we anticipate.
 
Our common stock price may be volatile and may decrease substantially.
 
The trading price of our common stock if and when we apply for listing on a national exchange may fluctuate substantially. The price of our common stock that will prevail in the market after our listing may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, but are not limited to, the following:
 
 
·
price and volume fluctuations in the overall stock market from time to time;
 
 
·
investor demand for our shares;
 
 
·
significant volatility in the market price and trading volume of securities of BDCs or other companies in our sector, which are not necessarily related to the operating performance of these companies;
 
 
·
changes in regulatory policies or tax guidelines with respect to REITs or BDCs;
 
 
·
failure to qualify as a REIT, or the loss of REIT status;
 
 
·
any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
 
 
·
changes, or perceived changes, in the value of our portfolio investments;
 
 
·
departures of MCM Advisers’ key personnel;
 
 
·
operating performance of companies comparable to us; or
 
 
·
general economic conditions and trends and other external factors.
 
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Due to the potential volatility of our stock price if and when we apply for listing, and once a market for our stock is established, if any, we may become the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.
 
The value of the Legacy Portfolio may decrease.
 
If the value of the Legacy Portfolio decreases following its February 28, 2013 valuation, a related write-down would reduce our net assets.
 
We cannot assure you that we will be able to successfully deploy the proceeds of our initial public offering within the timeframe we have contemplated.
 
We currently anticipate that substantially all of the net proceeds of our initial public offering will be invested in accordance with our investment objective within six to nine months after our receipt of proceeds in this offering. We cannot assure you, however, that we will be able to locate a sufficient number of suitable investment opportunities to allow us to successfully deploy substantially all of the net proceeds of our initial public offering in that timeframe. To the extent we are unable to invest substantially all of the net proceeds of our initial public offering within our contemplated timeframe after the completion of our initial public offering, our investment income, and in turn our results of operations, will likely be materially adversely affected.
 
Provisions of the MGCL and of our Charter and Bylaws could deter takeover attempts and have an adverse impact on the price of our common stock.
 
The MGCL and our Charter and Bylaws contain provisions that may discourage, delay or make more difficult a change in control of MRC or the removal of our directors. We are subject to the Maryland Business Combination Act, subject to any applicable requirements of the 1940 Act. Our Board of Directors has adopted a resolution exempting from the Business Combination Act any business combination between us and any other person, subject to prior approval of such business combination by our Board of Directors, including approval by a majority of our Independent Directors. If the resolution exempting business combinations is repealed or our board does not approve a business combination, the Business Combination Act may discourage third parties from trying to acquire control of us and increase the difficulty of consummating such an offer. Our Bylaws exempt from the Maryland
 
 
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Control Share Acquisition Act acquisitions of our stock by any person. If we amend our Bylaws to repeal the exemption from the Control Share Acquisition Act, the Control Share Acquisition Act also may make it more difficult for a third party to obtain control of us and increase the difficulty of consummating such a transaction.  It is the view of the SEC staff that amending our Bylaws to subject us to the Maryland Control Share Acquisition Act is inconsistent with 1940 Act §18(i).
 
We have also adopted measures that may make it difficult for a third party to obtain control of us, including provisions of our Charter authorizing our Board of Directors to classify or reclassify shares of our stock in one or more classes or series, and to amend our Charter without stockholder approval if such amendment does not adversely affect the rights, preferences and privileges of our stockholders. These provisions, as well as other provisions of our Charter and Bylaws, may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests of our stockholders.
 

 
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FORWARD-LOOKING STATEMENTS AND PROJECTIONS
 
This prospectus contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about MacKenzie Realty, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:
 
 
·
an economic downturn could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;
 
 
·
a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities;
 
 
·
interest rate volatility could adversely affect our results, particularly if we elect to use leverage as part of our investment strategy; and
 
 
·
the risks, uncertainties and other factors we identify in “Risk Factors” and elsewhere in this prospectus and in our filings with the SEC.
 
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this prospectus should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in “Risk Factors” and elsewhere in this prospectus. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. We will amend or supplement this prospectus in the event of any material change to the information contained herein during the prospectus delivery period.  The forward-looking statements in this Prospectus are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933 (the “Securities Act”).
 

 
28

 


USE OF PROCEEDS
 
We estimate that the net proceeds we will receive from the sale of 5,000,000 Shares in this offering will be approximately $43,500,000, after deducting the selling commissions and fees described below.  To the extent that investors qualify for the volume discount or purchase as clients of investment advisers, the selling commissions will be reduced and we will have additional proceeds available to us.
 
We plan to use the net proceeds of this offering for new investments in portfolio companies in accordance with our investment objective and strategies described in this prospectus and for general working capital purposes.  Based on the expenses estimated for this offering, we could use offering proceeds of up to approximately 5% to fund distributions, though we have no plans to do so.
 
We will also pay operating expenses, including advisory and administrative fees and expenses, and may pay other expenses such as due diligence expenses of potential new investments, from the net proceeds of this offering. We anticipate that substantially all of the net proceeds of this offering will be used for the above purposes within six to nine months from the consummation of this offering, depending on the availability of appropriate investment opportunities consistent with our investment objective and market conditions. We cannot assure you we will achieve our targeted investment pace.
 
Pending such investments, we will invest the net proceeds primarily in cash, cash equivalents, U.S. government securities and other high-quality investments that mature in one year or less from the date of investment. The management fee payable by us will not be reduced while our assets are invested in such securities. See “Regulation as a Business Development Company — Temporary Investments” for additional information about temporary investments we may make while waiting to make longer-term investments in pursuit of our investment objective.  There is no limit on the amount of our offering proceeds that can be used to fund distributions, though we do not intend to return offering proceeds as distributions.
 
The following table provides an estimate of our offering-related expenses and the relation of those expenses to the gross proceeds from the sale of 5,000,000 Shares at $10 per Share:
 
     
Amount
   
Percentage
   
 
Gross offering proceeds
  $ 50,000,000       100 %  
 
Less Offering and Organization Expenses:
                 
 
Sales Commissions
    3,500,000       7.0 %  
 
Marketing Support Fee
    250,000       0.5 %  
 
Dealer Manager Fee
    1,000,000       2.0 %  
 
Portfolio Structuring Fee
    1,750,000       3.5 %  
 
Net offering proceeds available for investment
  $ 43,500,000       87 %  

 
Our Charter requires us to invest at least 82% of the proceeds of this offering as described in this prospectus.
 
The estimated expenses presented in the table are based on the assumption that we issue a total of 5,000,000 Shares in this offering at $10 per Share.  As explained below under “Determination of Net Asset Value,” the per-Share price may change, which would correspondingly impact the above estimates.  The shares we issued to the Legacy Funds are not considered sold in this offering and therefore they are not included in any amounts shown in the table.  Under our Charter, our Organization and Offering Expenses may not exceed 15% of the proceeds of this offering.
 
The sales load for Shares sold in this offering is a one-time fee of 7%, which may be lower if an investor qualifies for the volume discount.  Sales to clients of certain investment advisers will incur only the Dealer Manager Fee of 2% in lieu of commissions, so to the extent Shares are purchased by such investors, the “Sales Commissions” amounts in the above table would be lower and the “Net offering proceeds” amount would be higher.  We may pay broker-dealers a Marketing Support Fee of 0.5% of the offering proceeds.  The Dealer Manager Fee of up to 2% will be paid by us to ARI on all Shares sold in this offering, a portion of which may be reallowed to Selling Agents.  To the extent that ARI waives any portion of the Dealer Manager Fee, the “Sales Commissions” amounts in the above table would be lower and the “Net offering proceeds” amount could be higher.  Broker-dealers may also receive reimbursement for bona fide accountable due diligence or marketing expenses up to 0.25% of the offering proceeds and non-cash compensation of up to 0.25% of the offering proceeds.  These payments will be made by our Adviser, unless commissions, the Dealer Manager Fee and Marketing Support Fees are less than 9.5%, in which case the difference may be used to pay marketing expenses.  Therefore, our net proceeds of estimated at 87% in the above table will be the same in either case.  See “Arrangements with Dealer Manager and Selected Broker-Dealers” below.
 
Our Organization and Offering Expenses, up to $550,000, have been paid by our existing stockholders prior to this offering and additional amounts will be paid by our Adviser.  Accordingly, investors in this offering will not pay those expenses and they are not included in the above table, though they are reflected in our pre-offering NAV.  See “Dilution” below.  The one-time Portfolio Structuring fee of 3.5% will be paid by us to MCM Advisers for its advisory services respecting the acquisition of all of our portfolio, including the Legacy Portfolio Acquisition.  See “Investment Advisory Agreement.”
 

 

 
29

 

DISTRIBUTIONS

To the extent that we have income from operations available, we intend to distribute quarterly dividends to our stockholders, beginning with our first full quarter after the commencement of this offering. Based on the expenses estimated for this offering, we could use offering proceeds of up to approximately 5% to fund distributions, though we have no plans to do so.  Similarly, we are not prohibited from borrowing to fund distributions, but we have no plans to do so.  Our quarterly dividends, if any, will be determined by our Board of Directors and will be distributed pro-rata to holders of our Shares. Any dividends or other distributions to our stockholders will be declared out of assets legally available for distribution.  We would make a distribution of assets “legally available” if, after giving effect to the distribution, (i) we would be able to pay any outstanding debt, and (ii) our total assets would be greater than the sum of our total liabilities plus the amount needed to satisfy any preferential rights upon dissolution held by stockholders who have preferential rights on dissolution superior to those receiving the distribution, if we were to be dissolved at the time of distribution.  In no event are we permitted to borrow money to make distributions if the amount of such distribution would exceed our annual revenues, less expenses.  The specific tax characteristics of our dividends and other distributions will be reported to stockholders after the end of each calendar year.
 
We currently expect to elect to be taxed, and intend to qualify annually thereafter, as a REIT under the Internal Revenue Code of 1986 (“Code”) when we become eligible to make that election. If we elect to be treated as a REIT, we will be required to make distributions, other than capital gain distributions, to our stockholders each year in the amount of at least 90% of our REIT taxable income. See “Material U.S. Federal Income Tax Considerations.” We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, to the extent that we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.
 
Our current intention is to make any distributions in additional Shares under our DRIP out of assets legally available therefore, unless you elect to receive your dividends and/or long-term capital gains distributions in cash, or unless you reside in a state in which the securities regulator has restricted your ability to participate in our DRIP. See “Dividend Reinvestment Plan.” If you hold Shares in the name of a broker or financial intermediary, you should contact the broker or financial intermediary regarding your election to receive distributions in cash.
 
Any distribution we receive from a portfolio company that is made as a result of the sale of a portion of the assets held by that entity and that results in the remaining net asset value, as approved by the Board, of that particular entity falling to less than 110% of our carrying cost for that entity, shall be used, for tax purposes, first to reduce our carrying cost for that entity.  The amount used for this purpose is not reported as income and will be reinvested.  The remaining balance, if any, will be reported as income.

 
      Our Charter only permits in-kind distributions of readily marketable securities, beneficial interests in a liquidation trust or property as determined by our Board of Directors.
 

 
30

 


CAPITALIZATION
 
Our audited financial statements for the periods ended June 30, 2012 and February 28, 2013 are provided near the end of this prospectus.  The following table provides:
 
  · our cash and capitalization as of February 28, 2013 (including the Legacy Portfolio Acquisition); and
     
  · our cash and capitalization as of February 28, 2013, as adjusted to reflect the sale of 5,000,000 shares of our common stock in this offering, after deducting the estimated selling commissions, Dealer Manager Fee, selling and Marketing Support Fees and Portfolio Structuring Fee, all payable out of the proceeds of this offering, in addition to $127,203 of Organization and Offering Expenses that were incurred after February 28, 2013, but that will not be born by investors in this offering.
 
     
As of February 28, 2013
     
Including the
Legacy
Portfolio
Acquisition
 
As Adjusted
to Reflect
the
Offering
           
 
Assets:
               
 
Cash and cash equivalents
 
$
  5,937
   
$
43,378,734
 
 
Total assets
 
$
 7,277,490
   
$
50,777,490
 
 
Total liabilities
 
$
      80,574
   
$
       80,574
 
 
Net assets:
               
 
Common stock, par value $0.0001; 80,000,000 shares authorized
               
 
Shares issued and outstanding, pro forma, as adjusted
   
 728,217
     
  5,728,217
 
 
Capital in excess of par value
   
7,282,097
     
57,281,597
 
 
Total net assets
 
$
7,196,916
   
$
50,696,916
 

 
 
31

 
 
DILUTION

The potential per-Share dilution to existing investors in this offering—the Legacy Funds and one affiliated fund—would be represented by the amount by which the offering price per Share exceeds our pro forma NAV per Share after the completion of this offering. Net asset value per Share is determined by dividing our NAV, which is our gross assets less total liabilities, by the number of outstanding Shares.
 
Our February 28, 2013 NAV was $6,859,373, or $9.42 per Share. This amount is net of $422,797 of Organization and Offering Expenses paid through that date.  After accounting for the remaining $127,203 of Organization and Offering Expenses we have paid (amounts above $550,000 are paid by our Adviser), and after giving effect to the sale of 5,000,000 Shares of our common stock in this offering at a public offering price of $10 per Share, and after deducting the selling commissions, the Dealer Manager Fee, Marketing Support Fees and the Portfolio Structuring Fee aggregating (a maximum of) $6,500,000, our pro forma NAV is expected to be approximately $50,232,169, or approximately $8.77 per Share.
 
The following table illustrates the impact on NAV for investors in this offering, on a per-Share basis, taking into account the assumptions described above:
 
 
Net asset value as of February 28, 2013, before this offering
 
$
9.42
 
 
Pro forma February 28, 2013 net asset value after completion of this offering, and after deducting the selling commissions, the Dealer Manager Fee, selling and Marketing Support Fees, the Portfolio Structuring Fee, and the remaining portion of Organization and Offering Expenses not paid by our Adviser
 
$
8.77
 
 
Dilution experienced by investors in this offering
 
$
1.23
 
 
Dilution experienced by investors in this offering, as a percentage of the offering price
   
13%
 
 
Examples of Dilutive Effect of the Issuance of Shares Below NAV
 
The following table illustrates the reduction to NAV and dilution that would be experienced by a stockholder if we issued 1,500,000, 3,000,000 and 4,000,000 Shares in this offering, at a discount to the then-current NAV.
 
The examples are based upon our NAV following the Legacy Portfolio Acquisition, after which we had 728,217 Shares outstanding, with net assets of $6,859,373, or NAV per Share of $9.42.  The table illustrates the dilutive effect on a stockholder of (i) the sale of an additional 1,500,000 Shares, (ii) the sale of another 1,500,000 Shares, and (iii) the sale of another 1,000,000 Shares.  The table assumes all Shares are sold at $10 per Share and that the aggregate offering expenses and commissions, in addition to the Portfolio Structuring Fee, are 13%.
 
   
Following Legacy Portfolio Acquisition
   
Example 1
1,500,000 Shares Sold
   
Example 2
3,000,000 Shares Sold
   
Example 3
4,000,000 Shares Sold
 
                         
Price per Share
  $ 10.00     $ 10.00     $ 10.00     $ 10.00  
Net Proceeds per Share to MRC
  $ 10.00     $ 8.70     $ 8.70     $ 8.70  
                                 
Net Assets After Transactions
                               
NAV
  $ 6,859,373     $ 19,909,373     $ 32,959,373     $ 41,659,373  
Total Shares Outstanding
    728,217       2,228,217       3,728,217       4,728,217  
NAV per Share
  $ 9.42     $ 8.94     $ 8.84     $ 8.81  
Change
    --       (5.15)%       (6.15%)       (6.47%)  


 

 
32

 


LEGACY PORTFOLIO ACQUISITION
 
On February 28, 2013, we acquired the Legacy Portfolio from the Legacy Funds.  The Legacy Portfolio’s total value was approximately $6.92 million at February 28, 2013, and represents approximately the following percentages of the total investment portfolio on a fair value basis of the following funds:
 
 
Fund Name
     
Percentage of MRC Total
Investment Portfolio Contributed by
Legacy Fund on a Fair Value Basis
MP Income Fund 16, LLC
     
14%
MP Income Fund 18, LLC
     
11%
MP Income Fund 19, LLC
     
8%
MP Value Fund 5, LLC
     
14%
MP Value Fund 7, LLC
     
20%
MPF Flagship Fund 9, LLC
     
20%
MP Income Fund 20, LLC
     
4%
Mackenzie Patterson Special Fund 6, LLC
     
9%
     
     100%

We acquired the Legacy Portfolio in exchange for 692,217 Shares of our common stock (which Shares are not a part of this offering).  After the Legacy Portfolio Acquisition, our NAV per Share was $9.42, reflecting the fair value of the Legacy Portfolio as of February 28, 2013. The acquisition of the Legacy Portfolio was a taxable transfer of assets, and, as a result, we expect to take a tax basis in the assets acquired equal to the amount paid for them. The amount paid equaled the sum of the fair market value of our stock issued as consideration and any cash paid as consideration.  Accordingly, the Legacy Portfolio Acquisition is not expected to have any direct tax consequences on any investor in this offering.
 
The assets of the Legacy Funds were selected from other funds managed by our Adviser and its affiliates because (i) the Legacy Funds have been operating longer than initially intended, (ii) they have been profitable, (iii) the Legacy Funds would benefit from the transaction through lower expenses of MRC versus the Legacy Funds’ structures, and (iv) they had a combination of assets that were attractive to us.
 
Upon consummation of this offering, the Legacy Funds will in aggregate hold 728,217 shares, or approximately 12.7% of our total outstanding shares, assuming the sale of 5,000,000 shares in this offering.
 
Legacy Portfolio Valuation
 
The Legacy Funds’ assets consist of loans, securities issued by RELPs or LLCs holding single parcels of real property, securities issued by RELPs or LLCs holding multiple parcels of real property, and securities issued by NTRs and listed REITs.  The following table shows those assets’ fair value as of February 28, 2013 and the percentage of all of the Legacy Funds’ fair value as of February 28, 2013.

Type of Asset
 
February 28, 2013
Fair Value
   
% of Legacy Fund
Aggregate Value
(February 28, 2013)
 
Loans
  $ 0       0 %
Securities issued by RELPs/LLCs holding single parcels of real property
    2,845,856       41 %
Securities issued by RELPs/LLCs holding multiple parcels of real property
    1,763,207       25 %
Securities issued by non-listed REITs
    419,491       6 %
Securities issued by listed REITs
    1,419,826       21 %
Cash and other current assets
    473,790       7 %
    $ 6,922,170       100 %

As of February 28, 2013, approximately 21% of the Legacy Portfolio assets were securities, the fair value of which was provided from the exchanges on which they are publicly traded.  For 72% of the Legacy Portfolio assets, the value was based on third party data (such as audited net operating income or revenue obtained from the securities’ issuers, and applying third party market capitalization rates or gross revenue multipliers for recent transactions in the subject market from providers such as REIS, Inc. or Hotel Transaction Almanac), and applying a 33% discount to such value to account for illiquidity.  The remaining 7% was cash.

The Legacy Funds’ financial statements for the periods ended June 30, 2011 and June 30, 2012 are included as an exhibit to the registration statement of which this prospectus is a part, and may be reviewed at the SEC’s website at http://www.sec.gov.

 
33

 
 
In establishing the fair value of the Legacy Funds’ assets, our Board, including all of the Independent Directors, exercised its fiduciary duties to us and our stockholders.  The Board considered management’s valuation methodologies, including numerous third party pricing sources and the audited financial statements provided by several Legacy Fund asset issuers, in arriving at the conclusion that the values fairly represented the market value of those assets on February 28, 2013, which values were included in MRC’s audited financial statements included in this prospectus.

Balance Sheet & Schedule of Investments as of February 28, 2013
 
February 28, 2013
 
Pre-Offering
 
Pro Forma Post-Offering
         
Assets
               
Cash and cash equivalents
 
$
5,937
   
$
43,378,734
 
Investments in portfolio entities, at fair value (cost $6,448,380)
   
6,448,380
     
6,448,380
 
Other assets
   
485,630
     
485,630
 
Deferred offering cost
   
337,543
     
464,746
 
Total Assets
 
$
7,277,490
   
$
50,777,490
 
                 
Liabilities
               
Accrued expenses and other liabilities
 
$
80,574
   
$
80,574
 
Total Liabilities
   
80,574
     
80,574
 
                 
Net Assets
               
Common Stock, par value $0.0001 per share; 80,000,000 shares authorized, 728,217 shares issued and outstanding, pro forma as adjusted
   
73
     
573
 
Capital in excess of par value
   
7,282,097
     
57,281,597
 
Sales and Offering Costs
   
0
     
 (6,500,000)
 
Deficit
   
(85,254)
     
(85,254)
 
Total Net Assets
   
7,196,916
     
50,696,916
 
Total Assets (1)
 
$
7,277,490
   
$
50,777,490
 
 
 
(1)
Additionally, refer to “Capitalization” for further details of our capital after this offering.
 
Below is our audited Schedule of Investments as of February 28, 2013, all of which are equity investments:
Name
 
Asset Type
 
Shares /
Units
 
Cost Basis
 
Fair Value
Per Unit
 
Total Fair
Value
 
% of
Invest-
ments
Agree Realty Corp.
 
Public REIT
 
          4,200.00
 
$
117,894
 
$
28.07
 
$
117,894
 
1.83%
Apartment Investment & Mgmt. Co.
 
Public REIT
 
          3,888.00
   
115,163
   
29.62
   
115,163
 
1.79%
Ashford Hospitality Trust Inc.
 
Public REIT
 
        32,400.00
   
381,348
   
11.77
   
381,348
 
5.91%
Associated Estates Realty Corporation
 
Public REIT
 
          4,000.00
   
69,920
   
17.48
   
69,920
 
1.08%
Commonwealth REIT
 
Public REIT
 
        16,900.00
   
426,725
   
25.25
   
426,725
 
6.62%
FelCor Lodging Trust
 
Public REIT
 
          6,400.00
   
32,128
   
5.02
   
32,128
 
0.50%
Maxus Realty Trust
 
Public REIT
 
          8,800.00
   
151,624
   
17.23
   
151,624
 
2.35%
MPG Office Trust, Inc.
 
Public REIT
 
        13,000.00
   
33,670
   
2.59
   
33,670
 
0.52%
One Liberty Properties, Inc.
 
Public REIT
 
          3,000.00
   
65,160
   
21.72
   
65,160
 
1.01%
Rouse Properties, Inc.
 
Public REIT
 
          1,577.00
   
26,194
   
16.61
   
26,194
 
0.41%
       
 
   
1,419,826
         
1,419,826
   
                               
BellaVista Capital, Inc.
 
Private REIT
 
      123,987.00
   
74,392
   
0.60
   
74,392
 
1.15%
Hines REIT
 
Private REIT
 
          2,692.31
   
13,569
   
5.04
   
13,569
 
0.21%
T REIT Inc.
 
Private REIT
 
        21,956.98
   
1,317
   
0.06
   
1,317
 
0.02%
USA Real Estate Investment Trust
 
Private REIT
 
                 6.60
   
330
   
50.00
   
330
 
0.01%
       
 
   
89,608
         
89,608
   
                               
250 West 57th Street Associates, LLC
 
LP Interest
 
                 0.67
   
66,670
   
100,000.00
   
66,670
 
1.03%
AEI Net Income & Growth XIX, LP
 
LP Interest
 
                 1.70
   
170
   
100.00
   
170
 
0.00%
AEI Net Income & Growth XX, LP
 
LP Interest
 
               16.00
   
11,432
   
714.50
   
11,432
 
0.18%
Brown Palace Hotel Associates, LP
 
LP Interest
 
                 0.25
   
35,750
   
143,000.00
   
35,750
 
0.55%
Civic Center, L.P.
 
LP Interest
 
                 2.00
   
163,994
   
81,997.00
   
163,994
 
2.54%
CRI Hotel Income Partners, LP
 
LP Interest
 
        15,961.00
   
64,642
   
4.05
   
64,642
 
1.00%
Del Taco Restaurant Properties I
 
LP Interest
 
             287.00
   
207,358
   
722.50
   
207,358
 
3.22%
Del Taco Restaurant Properties II
 
LP Interest
 
             273.00
   
60,459
   
221.46
   
60,459
 
0.94%
Del Taco Restaurant Properties III
 
LP Interest
 
             628.00
   
125,983
   
200.61
   
125,983
 
1.95%
Del Taco Income Properties IV
 
LP Interest
 
          2,296.00
   
59,696
   
26.00
   
59,696
 
0.93%
 
 
 
34

 
 
 
 
 
Divall Insured Income Property 2, LP
 
LP Interest
 
             830.30
   
211,926
   
255.24
   
211,926
 
3.29%
DRV Holding Company, LLC
 
LP Interest
 
             500.00
   
500,000
   
1,000.00
   
500,000
 
7.75%
El Conquistador Limited Partnership
 
LP Interest
 
                 2.00
   
80,976
   
40,487.90
   
80,976
 
1.26%
Empire State Building Assoc., LLC
 
LP Interest
 
                 1.00
   
110,000
   
110,000.00
   
110,000
 
1.71%
Hotel Durant, LLC
 
LP Interest
 
                 7.10
   
577,299
   
81,344.12
   
577,299
 
8.95%
Inland Land Appreciation Fund I, LP
 
LP Interest
 
             149.40
   
18,166
   
121.59
   
18,166
 
0.28%
Inland Land Appreciation Fund II, LP
 
LP Interest
 
             211.00
   
27,951
   
132.47
   
27,951
 
0.43%
Madison Place Associates
 
LP Interest
 
                 6.80
   
77,943
   
11,462.25
   
77,943
 
1.21%
MPF Pacific Gateway—Class B†
 
LP Interest
 
               23.20
   
6,287
   
271.00
   
6,287
 
0.10%
National Property Investors 6, LP
 
LP Interest
 
                 7.00
   
145
   
20.70
   
145
 
0.00%
Northland Cable Properties Seven, LP
 
LP Interest
 
               79.00
   
1,694
   
21.44
   
1,694
 
0.03%
Post Street Renaissance Partners Cl. A
 
LP Interest
 
                 9.10
   
177,844
   
19,543.25
   
177,844
 
2.76%
Post Street Renaissance Partners Cl. D
 
LP Interest
 
               11.60
   
542,115
   
46,734.09
   
542,115
 
8.41%
Rancon Realty Fund IV, LP
 
LP Interest
 
             975.00
   
173,706
   
178.16
   
173,706
 
2.69%
Rancon Realty Fund V
 
LP Interest
 
             935.00
   
165,691
   
177.21
   
165,691
 
2.57%
Secured Income, LP
 
LP Interest
 
        25,600.00
   
223,232
   
8.72
   
223,232
 
3.46%
Uniprop Income Fund II, LP
 
LP Interest
 
        12,156.00
   
56,890
   
4.68
   
56,890
 
0.88%
       
 
   
3,748,019
         
3,748,019
   
                               
Coastal Realty Bus. Tr. – REEP, Inc. †
 
Investment Trust
 
        72,320.00
   
72,320
   
1.00
   
72,320
 
1.12%
Coastal Realty Bus. Tr. – Sec. Inc.†
 
Investment Trust
 
        37,577.00
   
327,671
   
8.72
   
327,671
 
5.08%
Coastal Realty Bus. Tr. —Series F-2†
 
Investment Trust
 
        10,000.00
   
58,800
   
5.88
   
58,800
 
0.91%
Coastal Realty Bus. Tr. —Series H-2†
 
Investment Trust
 
        47,284.17
   
246,351
   
5.21
   
246,351
 
3.82%
Coastal Realty Bus. Tr. —Series L-2†
 
Investment Trust
 
          7,950.00
   
18,444
   
2.32
   
18,444
 
0.29%
Coastal Realty Bus. Tr. —Series Q†
 
Investment Trust
 
               10.00
   
467,341
   
46,734.09
   
467,341
 
7.25%
       
 
   
1,190,927
         
1,190,927
   
                               
Total Investments
         
$
6,448,380
       
$
6,448,380
 
100%
† Investments in related parties.
 

 
35

 

DISCUSSION OF THE COMPANY’S EXPECTED OPERATING PLANS
 
The following discussion should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this prospectus. In addition to historical information, the following discussion and other parts of this prospectus contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under “Risk Factors” and “Forward-Looking Statements and Projections” appearing elsewhere herein.
 
Overview
 
We are a newly formed, externally managed non-diversified company that has elected to be treated as a BDC under the 1940 Act. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We are managed by MCM Advisers, and MacKenzie Capital Management provides the non-investment management services and administrative services necessary for us to operate.
 
At the first meeting of the Board of Directors, our original Articles of Incorporation and Bylaws were reviewed and ratified by a majority vote of the directors and Independent Directors.  Subsequently, amendments to our Articles of Incorporation and Bylaws were reviewed and ratified by a majority vote of the directors and Independent Directors, as well as by our existing stockholders.  The Board of Directors has also established written policies on investments and borrowing and will monitor the administrative procedures, investment operations and performance of MRC and MCM Advisers to assure that such policies are carried out.
 
We were formed to continue and expand the business of the Legacy Funds. As part of this continuation and expansion, we intend to invest primarily in real estate-related securities.
 
On February 28, 2013, we acquired the Legacy Portfolio from the Legacy Funds, which are managed by our Adviser. The Legacy Portfolio had a fair value of $6.92 million as of February 28, 2013, as determined by our Board of Directors. As consideration for our acquisition of the Legacy Portfolio, an aggregate of 692,217 shares of our common stock were issued to the Legacy Funds. See “Legacy Portfolio Acquisition.”
 
As of February 28, 2013, the Legacy Portfolio had approximately $6.45 million of debt and equity investments issued by 47 portfolio companies, in addition to cash. Additional information regarding the Legacy Portfolio is provided below under “Portfolio Companies,” as well as in the schedule of investments and the related notes thereto included in this prospectus.
 
We are an externally managed BDC under the 1940 Act. As a BDC, we are required to comply with certain regulatory requirements. For instance, we have to invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies and cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. This offering will significantly increase our capital resources. See “Regulation as a Business Development Company.”
 
Revenues
 
We plan to generate revenue primarily from dividends and/or capital gains from our investments. Further, we may generate revenue in the form of commitment, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. Any such fees will be generated in connection with our investments and recognized as earned.
 
Expenses
 
Our primary operating expenses will include the payment of: (i) investment advisory fees (which include the Portfolio Structuring Fee) to our Adviser; (ii) our allocable portion of overhead and other expenses incurred by MacKenzie Capital Management in performing its obligations under the Administration Agreement; and (iii) other operating expenses as detailed below. Acquisition expenses may not exceed 6% of the size of any mortgage loan we purchase.  Our investment advisory fees will compensate our Investment Adviser for its work in identifying, evaluating, negotiating, closing, monitoring and servicing our investments, including our initial portfolio from the Legacy Funds. See “Investment Advisory Agreement.”  Our expenses must be billed to and paid by us, except that a Sponsor may be reimbursed for actual cost of goods and services used by us and certain necessary administrative expenses. We will bear all other expenses of our operations and transactions, including:
 
 
·
the cost of calculating our NAV, including the cost of any third-party valuation services;
 
 
·
the cost of effecting sales and repurchases of our Shares and other securities;
 
 
·
interest payable on debt, if any, to finance our investments;
 
 
 
 
36

 
 
 
·
fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing due diligence reviews of prospective investments and third-party advisory fees;
 
 
·
transfer agent and safekeeping fees;
 
 
·
fees and expenses associated with marketing efforts;
 
 
·
federal and state registration fees, any stock exchange listing fees in the future;
 
 
·
federal, state and local taxes;
 
 
·
Independent Directors’ fees and expenses;
 
 
·
brokerage commissions;
 
 
·
fidelity bond, directors and officers errors and omissions liability insurance and other insurance premiums;
 
 
·
direct costs and expenses of administration and sub-administration, including printing, mailing, long distance telephone and staff;
 
 
·
fees and expenses associated with independent audits and outside legal costs;
 
 
·
costs associated with our reporting and compliance obligations under the 1934 Act, the 1940 Act and applicable federal and state securities laws; and
 
 
·
all other expenses incurred by either MacKenzie Capital Management or us in connection with administering our business, including payments under the Administration Agreement that will be based upon our allocable portion of overhead and other expenses incurred by MacKenzie Capital Management in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the costs of compensation and related expenses of our chief compliance officer and our chief financial officer and any administrative support staff.
 
In addition, we have already born $550,000 of Organization and Offering Expenses.  Any additional amounts will be paid by our Adviser.
 
Financial Condition, Liquidity, and Capital Resources
 
We will generate cash from the net proceeds of this offering and any future offerings of securities and cash flows from operations, including earnings on investments in the Legacy Portfolio and future investments, as well as interest earned from the temporary investment of cash in U.S. Government securities and other high-quality debt investments that mature in one year or less. We may also fund a portion of our investments through additional borrowings from banks and issuances of senior securities.  After our initial closing, we will sell our Shares on a continuous basis at a price of $10; however, if our NAV per Share increases above $10 per Share, we will sell our Shares at a higher price as necessary to ensure that Shares are not sold at a price which, after deduction of selling commissions and Dealer Manager Fees, is below our NAV per Share, unless we have operative stockholder approval to sell Shares below NAV.  We will not begin making sales of Shares in this offering until after our current stockholders have provided such approval, and we similarly will seek to obtain stockholder approval to sell below NAV at our first annual meeting of stockholders held after this offering commences.  In connection with each closing on the sale of Shares under this prospectus, our Board of Directors or a committee thereof is required to make the determination within 48 hours of the time that we price our Shares for sale that we are not selling our common stock at a price below our then current NAV, unless we have operative stockholder approval to sell Shares below NAV. Prior to each closing, to the extent required to disclose material information, including changes in the offering price per Share, to prospective investors, we will update the information contained in this prospectus by filing a prospectus supplement with the SEC.
 
Our aggregate borrowings (if any), secured and unsecured, are expected to be reasonable in relation to our net assets and will be reviewed by the Board of Directors at least quarterly.  The maximum amount of such borrowing is limited by law.  See “Regulation as a Business Development Company.”
 
Our primary use of funds will be investments in portfolio companies, cash distributions to holders of our common stock (primarily from investment income and realized capital gains), payments to any lenders or senior security holders, and the payment of operating expenses.  Immediately after this offering and depending on its size, we expect to have cash resources of approximately $43.4 million. See “Legacy Portfolio Acquisition” and “Use of Proceeds.”
 
Distribution Policy
 
To the extent that we have income available, we intend to distribute quarterly dividends to our stockholders, beginning with our first full quarter after the commencement of this offering. Our quarterly dividends, if any, will be determined by our Board of Directors after a quarterly review and distributed pro-rata to holders of our Shares. Any dividends to our stockholders will be declared
 
 
37

 
 
out of assets legally available for distribution.  In no event are we permitted to borrow money to make distributions if the amount of such distribution would exceed our annual accrued and received revenues, less operating costs.  Distributions in kind are not permitted, except as provided in our Charter.
 
We currently expect to elect to be taxed, and intend to qualify annually thereafter, as a REIT under the Code when we become eligible to make that election. If we elect to be treated as a REIT, we will be required to make distributions, other than capital gain distributions, to our stockholders each year in the amount of at least 90% of our REIT taxable income.  See “Material U.S. Federal Income Tax Considerations.” We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, to the extent that we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.
 
Our current intention is to make any distributions in additional Shares under our DRIP out of assets legally available therefore, unless you elect to receive your dividends and/or long-term capital gains distributions in cash, or your participation in our DRIP is restricted by a state securities regulator. See “Dividend Reinvestment Plan.” If you hold Shares in the name of a broker or financial intermediary, you should contact the broker or financial intermediary regarding your election to receive distributions in cash. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we are prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.
 
Other Contractual Obligations
 
We have entered into two contracts under which we have material future commitments, the Investment Advisory Agreement, under which MCM Advisers serves as our investment adviser, and the Administration Agreement, under which MacKenzie Capital Management furnishes us with certain non-investment management services and administrative services necessary to conduct our day-to-day operations. Each of these agreements is terminable by either party upon proper notice. Payments under the Investment Advisory Agreement in future periods (after the up-front payment of the Portfolio Structuring Fee) will be (i) a percentage of the value of our Managed Funds; and (ii) incentive fees based on our income and our performance above specified hurdles (except in the year of liquidation).  Payments under the Administration Agreement will occur on an ongoing basis as expenses are incurred on our behalf by MacKenzie Capital Management.  However if MacKenzie Capital Management withdrawals as our administrator, it will be liable for any expenses we incur as a result of such withdrawal. See “Investment Advisory Agreement” and “Administration Agreement.” For a discussion of the estimated amount of our obligations under these contracts based on a number of assumptions, see “Fees and Expenses.”
 
It is our Board of Directors’ duty to evaluate the performance of MCM Advisers before entering into or renewing the Investment Advisory Agreement.  The criteria used in such evaluation will be reflected in the Board meeting minutes.  The Investment Advisory Agreement has an initial term of two years.  The Advisory Agreement is terminable by a majority of the Independent Directors or our stockholders, without penalty upon not more than 60 days’ written notice, and may be terminated by MCM Advisers on 120 days’ written notice to us.  In the event of the termination of the Investment Advisory Agreement, MCM Advisers is obligated to cooperate with us and take all reasonable steps requested to assist the Board in making an orderly transition of the advisory function.   Upon termination, the Board of Directors will appoint any successor adviser and determine its compensation.
 
The Administration Agreement may be terminated by us without penalty upon 120 days’ written notice and the Administrator must provide our stockholders with 120 days’ notice to terminate.  If either of these agreements is terminated, the costs we incur under new agreements may increase. In addition, we will likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under both our Advisory Agreement and our Administration Agreement. Any new Investment Advisory Agreement would also be subject to approval by our stockholders.
 
Related Parties
 
We entered into the Advisory Agreement with MCM Advisers.  MCM Advisers and its affiliates may also manage other funds in the future that may have investment mandates that are similar, in whole and in part, with ours. MCM Advisers and its affiliates may determine that an investment is appropriate for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, MCM Advisers or its affiliates may determine that we should invest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff, and consistent with MCM Advisers’ allocation procedures.
 
Under the Administration Agreement with MacKenzie Capital Management, LP, our Administrator granted to us a non-exclusive, royalty-free license to use the name “MacKenzie.”  Under the terms of the Administration Agreement, MacKenzie Capital Management will provide us with the office facilities and administrative services necessary to conduct our day-to-day operations.
 
 
 
 
38

 
 
As consideration for our acquisition of the Legacy Portfolio, an aggregate of 692,217 Shares were issued to the Legacy Funds. For information on the ownership of our Shares, see “Control Persons and Principal Stockholders.”
 
As discussed elsewhere in this prospectus, MCM Advisers’ affiliates manage other funds with similar investment strategies as ours.  Under both the 1940 Act and the Advisers Act, our funds may not be comingled with the assets of such other funds.
 
BUSINESS
 
MacKenzie Realty
 
We are a newly formed, externally managed non-diversified company that has elected to be treated as a BDC under the 1940 Act. Our investment objective is to generate both current income and capital appreciation through real estate debt and equity investments. Our investments are managed by MCM Advisers, and MacKenzie Capital Management provides the administrative services necessary for us to operate.  We were formed to continue and expand the business of the Legacy Funds. As part of this continuation and expansion, we intend to invest primarily in debt and equity real estate-related securities.   Under normal market conditions, we will invest at least 80% of our total assets in common stocks and other equity or debt securities issued by real estate companies, including REITs and similar REIT-like entities. A real estate company is one that (i) derives at least 50% of its revenue from the ownership, construction, financing, management or sale of commercial, industrial or residential real estate and land; or (ii) has at least 50% of its assets invested in such real estate.  Our investments will generally range in size from $10 thousand to $3 million, similar to the investments in the Legacy Portfolio. However, we may make larger investments from time to time on an opportunistic basis.
 
Legacy Portfolio Acquisition
 
We acquired the Legacy Portfolio from the Legacy Funds on February 28, 2013.  See “Legacy Portfolio Acquisition.”  Additional information regarding the Legacy Portfolio is provided under the headings “Portfolio Companies” and “Discussion of the Company’s Expected Operating Plans,” as well as in the schedule of investments and the related notes thereto included in this prospectus.
 
Recent Developments
 
Recent Portfolio Activity Since February 28, 2013
 
We sold our shares of Maxus Realty Trust in April, 2013 for $176,000, for an unaudited $24,376 pre-tax gain.
 
About MCM Advisers
 
We are managed by MCM Advisers, whose investment team members have an average of nearly 19 years of experience investing in real estate-related securities. MCM Advisers’ investment team also presently manages 53 private funds (other than the Legacy Funds) which have investment objectives and strategies that are similar to ours.
 
We expect to benefit from the ability of our Adviser’s investment team to identify attractive investment opportunities, conduct diligence on and value prospective investments, negotiate terms, secure collateral against our loans and manage and monitor a diversified portfolio of those investments. Our Adviser’s investment team members have broad investment backgrounds, with prior experience at investment banks, commercial banks, unregistered investment funds and other financial services companies, and have collectively developed a broad network of contacts to provide us with our principal source of investment opportunities.
 
Our Adviser is led by C.E. Patterson, Founder and Managing Director of the General Partner of our Manager and our Adviser. Mr. Patterson is assisted by Berniece A. Patterson, who serves as Chair of the Board of the General Partner of our Manager and our Adviser, Glen W. Fuller, who serves as Chief Operations Officer and Managing Director of the General Partner of our Manager and our Adviser, Chip Patterson, who serves as Managing Director and General Counsel of the General Partner of our Manager and our Adviser, Robert E. Dixon, who serves as Chief Investment Officer and Managing Director of the General Partner of our Manager and our Adviser, Paul F. Koslosky, who serves as Chief Financial Officer and Treasurer of the General Partner of our Manager and our Adviser, Christine E. Simpson, who serves as Chief Portfolio Manager and Senior Vice President of Research for the General Partner of our Manager and our Adviser, and Jen L. Moser, who serves as Vice President of Administration for the General Partner of our Manager and our Adviser.  We consider C.E. Patterson, Glen Fuller, Chip Patterson, Robert Dixon, and Paul Koslosky, and Ms. Christine Simpson to be MCM Advisers’ investment team.
 
Potential Market Opportunity
 
We intend to pursue a strategy focused on investing primarily in illiquid or non-traded debt and equity securities issued by U.S. companies generally owning commercial real estate.  These companies are likely to be NTRs, small-capitalization publicly traded
 
 
39

 
 
REITs, public and private RELPs, LLCs, and TICs.  We believe the size of this market and certain recent developments, coupled with our Adviser’s network, create an attractive investment environment for our strategy for a number of reasons1, including:
 
 
·
  
Expected sources of liquidity have disappeared.  Most NTRs intended to offer their stockholders a quarterly shareholder redemption program.  When the recent economic downturn began, most NTR sponsors suspended their shareholder redemption plans to conserve cash.  Similarly, many of the RELPs, LLCs and TICs that may have intended to liquidate by now have experienced a decline in property value and are unable to liquidate profitably.  As a result, many of them will experience a longer holding period than their investors originally intended.
 
 
 
·
Economic downturn created demand for additional capital.  During the recent economic downturn, many companies decided to reduce the amount of space they lease, increasing vacancies in office buildings and retail properties.  Some companies in the retail, hospitality, and multi-family sectors deferred maintenance in order to preserve cash.  For these reasons, we believe there are many real estate companies that need access to additional capital for tenant improvements, deferred maintenance, and other capital expenditures.
 
 
·
Many loans are due or coming due in the next few years.  During the last economic expansion from 2003 – 2008, many real estate acquisitions were financed with loans that mature in 5 or 10 years.  Many companies will have difficulty refinancing these loans as a result of a decline in the value of the property, forcing them to look for less traditional, and more expensive, lenders.
 
 
·
Small transaction sizes allow for a profitable niche.  The secondary market trading volume for the entire NTR industry is less than $10 million per month, and most individual transactions are less than $100,000.  Similarly, most of the RELPs, LLCs and TICs that we target for loans will need less than $10 million in recapitalization loans or equity.  As a result, most real estate investment firms cannot efficiently compete with us in such small transactions.  Our Adviser has 30 years of experience closing such transactions with very low transaction costs.
 
Investment Strategy
 
Our investment objective is to generate both current income and capital appreciation through debt and equity real estate-related investments.  We will seek to accomplish this by a combination of rigorous analysis of the net asset value of and risks associated with a potential security acquisition, and a disciplined requirement that any security must be acquired at a significant discount to its net asset value.  Although we may acquire any type of security by any method, we anticipate our acquisitions will generally be accomplished in the following ways:
 
 
·
Tender offers.  We intend to acquire shares of NTRs and other real estate companies via registered tender offers and non-registered tender offers.  This is generally our preferred acquisition method, as it allows us to name the price at which we are willing to buy such securities.  By purchasing securities at significant discounts to NAV, we simultaneously reduce the risk of a loss of capital due to a decline in NAV while increasing total returns when the discount is realized.  Also, by purchasing seasoned securities that are several years old, we significantly reduce our intended holding period and correspondingly increase our annualized rate of return.
 
 
·
Direct loans and private placements.  We may occasionally make direct loans to private real estate companies and arrange for private placements of equity issued directly to us by private real estate companies.  These direct investments would only be made after we have an equity investment in the company, which companies are smaller so that we are more familiar with their properties and management.
 
 
·
Purchases of small-cap REITs on the open market.  We believe that small-capitalization REITs (typically less than $250 million) are largely ignored by institutional investors and by Wall Street analysts, and as a result they often trade for significant discounts to their net asset value.  While these REITs tend to be highly illiquid with very small trading volumes, our smaller size allows us to focus on these REITs and to purchase them in quantities that are meaningful for us.  Similar to the shares of NTRs we purchase at discounts to NAV, we believe these acquisitions can provide superior risk-adjusted returns.
 
Investments
 
We will engage in various investment strategies in order to achieve our overall investment objectives. The strategy we select depends upon, among other things, market opportunities, the skills and experience of our Investment Adviser’s investment team and our overall portfolio composition. Our strategies will generally seek to acquire securities that produce ongoing distributable income
 
______________________________
See, for example, Direct Investments Spectrum, March/April 2013, for a discussion of issues impacting the marketplace.
 
 
 
 
 
40

 
 
for investors, yet with a primary focus on purchasing such securities at a discount from what our Investment Adviser estimates to be the actual value of the real estate underlying the securities.
 
Types of Investments
 
We will target the following real estate-related investments that yield meaningful current income and, in many cases, provide the opportunity for capital appreciation.
 
 
·
Real Estate-Related Limited Partnerships.  Limited partnerships which may be public or private, and which were formed primarily to own real property.  They may actively operate the property, they may develop the property, or they may passively own property operated by a third party.
 
 
·
REITs.  Corporations or trusts that are formed to own real property and are exempted from corporate income tax provided that they distribute at least 90% of their net income in the form of dividends to their stockholders.
 
 
·
Other Real Estate-Related Investments.  May include equity interests in LLCs, TICs, mortgages, loans, bonds, or any other security whose underlying value derives from real estate. We may invest in other real estate-related investment entities.  We will not invest in general partnerships, joint ventures, or other entities that do not afford limited liability to their security holders.  However, limited liability entities in which we may invest may in turn hold interests in general partnerships, joint ventures, or other non-limited liability entities.  
 
Targeted Securities
 
Our Adviser has advised on a significant number of investments in the real estate industry.  We intend to leverage this prior investing experience to continue to target attractive investments in the real estate industry. Securities to be acquired by us will generally consist of the following:
 
 
·
Securities Issued by Owners of Real Property.   We will acquire securities issued by limited partnerships, REITs or other investment entities that have invested directly or indirectly in real property, real estate joint ventures, or other real property based investments.  We will buy securities issued by entities owning a variety of property types, including apartments, shopping centers, office buildings, nursing homes, min-warehouses, and hotels.
 
 
·
Direct Real Property Obligations, Derivatives, and Other Securities.  We may also acquire (i) individual mortgages secured by real property (i.e., originate, or purchase outstanding loans secured by real estate), (ii) securities of issuers that own mortgages secured by income-producing real property, and (iii) using no more than 20% of our capital available for investment, securities of issuers that own assets other than real estate.
 
We will generally acquire securities in one of two ways:
 
 
·
Securities Issued Previously Pursuant to a Registration Statement.  In general, we will seek to acquire securities originally registered by the issuer with the SEC.  These target securities are typically public limited partnership interests and shares in REITs issued by national real estate syndicators and companies.  These issuers typically have hundreds or thousands of limited partners or stockholders and own numerous real property assets.
 
 
·
Securities Issued in Private Transactions.   We may acquire securities that are or were privately placed by issuers that (i) are limited partnerships, REITs, or other real estate-related entities, (ii) have sold their securities in private offerings to only a limited number of investors who have met suitability standards that are generally higher than those imposed by public partnerships, and (iii) have invested in only a single parcel or a few parcels of real property.
 
Investment Selection
 
Our Adviser’s investment team is responsible for all aspects of our investment process. The current members of the investment team are C.E. Patterson, Glen Fuller, Chip Patterson, Robert Dixon, Paul Koslosky, and Christine Simpson.  The investment strategy involves a team approach, whereby potential transactions are screened by various members of the investment team.  See “Portfolio Management.”
 
Our process for acquiring targeted real estate-related securities will typically involve three steps: (i) identifying securities of the type we may be interested in acquiring; (ii) evaluating the securities to estimate their value to us, and (iii) either acquiring securities on national markets or locating security holders who may be interested in selling or purchasing such securities on secondary markets.  Different circumstances may require different procedures, or different combinations of procedures, and we will adjust our acquisition strategy to fit the particular circumstances.  Nonetheless, the typical stages of our investment selection process are as follows:
 


 
41

 


Deal Generation/Origination

We intend to source investments through long-standing and extensive relationships with industry contacts, brokers, commercial and investment bankers, entrepreneurs, services providers such as lawyers and accountants, as well as current and former clients, portfolio companies and investors. Our Adviser’s investment team supplements these lead generators by also utilizing broader marketing efforts, such as advertisements in real estate periodicals, newspapers and other publications, attendance at prospective borrower industry conventions, an active calling effort to smaller private equity firms and sponsors, and through web presence and search tool optimizations.
 
Screening

In screening potential investments, our Adviser’s investment team utilizes the same value-oriented investment philosophy they employed in their work with the Legacy Funds and commits resources to managing downside exposure.
 
Due Diligence

Our Adviser conducts diligence on prospective portfolio companies consistent with the approach its investment team adopted in their work with the Legacy Funds. We believe that the investment team has a reputation for conducting extensive due diligence investigations in their investment activities. In conducting due diligence, our Adviser uses publicly available information as well as information from its relationships with former and current management teams, consultants, competitors and investment bankers.
 
Our Adviser’s due diligence typically includes:
 
 
·
review of historical and prospective financial information and regulatory disclosures;
 
 
·
research relating to the company’s management, industry, markets, products and services and competitors;
 
 
·
verification of collateral; and
 
 
·
asset and business value appraisals by third party advisers.
 
Upon the completion of due diligence and a decision to proceed with an investment in a company, the investment professionals leading the investment present the investment opportunity to our Adviser’s investment team, which then determines whether to pursue the potential investment. Additional due diligence with respect to any investment may be conducted on our behalf by attorneys and independent accountants prior to the closing of the investment, as well as other outside third-party advisers, as appropriate. Any fees and expenses incurred by MCM Advisers in connection with due diligence investigations undertaken by third parties will be subject to reimbursement by us, if not otherwise reimbursed by the prospective borrower, which reimbursements will be in addition to any management or incentive fees payable by us under our Investment Advisory Agreement with MCM Advisers.
 
Ongoing Relationships with Portfolio Companies
 
Managerial Assistance

As a BDC, we will offer, and must provide upon request, significant managerial assistance to our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. We may also receive fees for these services. MCM Advisers will provide such managerial assistance on our behalf to portfolio companies that request this assistance.
 
Monitoring

Our Adviser will monitor our portfolio companies on an ongoing basis. It will monitor the financial trends of each portfolio company to determine if it is meeting its business plan and to assess the appropriate course of action for each company.  Our Adviser has several methods of evaluating and monitoring the performance and fair value of our investments, which include the following:
 
 
·
Assessment of success in adhering to each portfolio company’s business plan and compliance with covenants;
 
 
·
Periodic and regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor, to discuss financial position, requirements and accomplishments;
 
 
·
Comparisons to our other portfolio companies in the industry, if any;
 
 
·
Attendance at and participation in board meetings; and
 
 
 
 
42

 
 
 
·
Review of monthly and quarterly financial statements and financial projections for portfolio companies.
 
Valuation Procedures
 
We will conduct the valuation of our assets under which our NAV will be determined at all times consistent with GAAP and the 1940 Act. More detail about our valuation procedures follow:
 
Securities for which market quotations are readily available on an exchange will be valued at such price as of the closing price on the day closest to the valuation date. Where a security is traded but in limited volume, we may instead utilize the weighted average closing price of the security over the prior 10 trading days. We may also use published secondary market trading information for securities that do not trade on a national exchange in order to value assets. When doing so, we will determine whether the trading information obtained is sufficient according to GAAP to determine the fair value of the security. If determined adequate, we will use the trading price obtained.
 
Securities for which reliable market data are not readily available or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of our Investment Adviser or Board of Directors, does not represent fair value, which we expect will represent a substantial majority of the investments in our portfolio, shall each be valued as follows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminary valuation conclusions are documented and discussed with our senior management; and (iii) the Board of Directors will discuss valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser and, where appropriate and necessary, a third-party valuation firm.
 
The recommendation of fair value for securities for which market data are not readily available or for which a pricing source is not sufficient may include the following:
 
 
·
private placements and restricted securities that do not have an active trading market;
 
 
·
securities whose trading has been suspended or for which market quotes are no longer available;
 
 
·
debt securities that have recently gone into default and for which there is no current market;
 
 
·
securities whose prices are stale;
 
 
·
securities affected by significant events; and
 
 
·
securities that the Investment Adviser believes were priced incorrectly.
 
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements will express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements.
 
Competition
 
We will compete for investments with other BDCs and investment funds (including private equity funds). Additionally, because competition for investment opportunities generally has increased among alternative investment vehicles, such as hedge funds, those entities have begun to invest in areas they have not traditionally invested in, including making investments in real estate companies. As a result of these new entrants, competition for investment opportunities in real estate-related companies may intensify. Many of these entities have greater financial and managerial resources than we do, or may not be subject to the extensive level of regulation that we are. We believe we will be able to compete with these entities primarily on the basis of the experience and contacts of our Adviser, our responsive and efficient investment analysis and decision-making processes, the investment terms we offer, and our willingness to make smaller investments.  For additional information concerning the competitive risks we face, see “Risk Factors — Risk Relating to Our Business and Structure — We may face increasing competition for investment opportunities.”
 
Staffing
 
We do not currently have any employees.  Our day-to-day investment operations will be managed by our Adviser, whose investment team currently consists of C.E. Patterson, Glen Fuller, Chip Patterson, Robert Dixon, Paul Koslosky, and Christine Simpson.  Our Adviser may hire additional investment professionals, based upon its needs, subsequent to the completion of this offering. See “Investment Advisory Agreement.”
 
In addition, we will reimburse our Manager for our allocable portion of overhead and other expenses incurred by it in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and the compensation of our chief financial officer, our chief compliance officer (or “CCO”), and any administrative support staff. See “Administration Agreement.”
 
 
 
43

 
 
 
Properties

Our executive offices are located at 1640 School Street, Moraga, California 94556, and are provided by our Manager in accordance with the terms of the Administration Agreement. We believe that our office facilities are suitable and adequate for our business as it is contemplated to be conducted.
 
Legal Proceedings
 
None of us, our Adviser or our Manager, is currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us, or against our Adviser or Administrator. From time to time, we, our Adviser or our Manager, may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
 
PORTFOLIO COMPANIES
 
The following table provides information as of February 28, 2013 for each portfolio company included in the Legacy Portfolio. The general terms of our expected debt and equity investments are described in “Business — Investments.” Other than these investments, our only formal relationships with our portfolio companies will be the managerial assistance we may provide upon request (we have not yet received any such request) and the board observer or participation rights we may receive in connection with our investment. We do not “control” and are not an “affiliate” of any of these portfolio companies, as each term is defined in the 1940 Act. In general, under the 1940 Act, we would “control” a portfolio company if we owned more than 25% of its voting securities and would be an “affiliate” of a portfolio company if we owned more than 5% of its voting securities.
 
Name and Address of Portfolio Company
Sector
 
% of Class
 
Fair Value
250 West 57th Street Associates, One Grand Central Place, 60 East 42nd St.  New York, NY 10165
Office
 
0.09%
 
$
66,670
Agree Realty Corp., 31850 Northwestern Highway Farmington Hills, MI 48334
Retail
 
0.03%
   
117,894
Apartment Investment & Management Co., 4582 South Ulster Street Suite 1100 Denver, CO 80237
Apartment
 
0.00%
   
115,163
AEI Net Income & Growth XIX, 1300 Wells Fargo Place, 30 East 7th St.  St Paul, MN 55101
Retail
 
0.01%
   
170
AEI Net Income & Growth XX, 1300 Wells Fargo Place, 30 East 7th St.  St Paul, MN 55101
Retail
 
0.07%
   
11,432
Ashford Hospitality Trust, 14185 Dallas Parkway Suite 1100 Dallas, TX 75254
Hotel
 
0.05%
   
381,348
Associated Estates Realty Corporation, 1 AEC Parkway Richmond Hts. Ohio 44143-1550
Apartment
 
0.01%
   
69,920
BellaVista Capital, Inc., 15700 Winchester Blvd.   Los Gatos, CA 95030
Apartment
 
1.11%
   
74,392
Brown Palace Hotel Associates, 10200 E Girard Ave., Bldg. B, Suite 336  Denver, CO 80231
Hotel
 
0.23%
   
35,750
Civic Center, L.P., One New York Plaza, 32nd Floor, New York,  NY 10004
Office
 
2.27%
   
163,994
Coastal Realty Business Trust – REEP, 1640 School St.  Moraga, CA 94556
Apartment
 
16.46%
   
72,320
Coastal Realty Business Trust – Secured Income,  1640 School St. Moraga, CA 94556
Apartment
 
3.82%
   
327,671
Coastal Realty Business Trust—Series F-2,  1640 School St. Moraga, CA 94556
Retail
 
0.00%
   
58,800
Coastal Realty Business Trust—Series H-2, 1640 School St. Moraga, CA 94556
Hotel
 
0.01%
   
246,351
Coastal Realty Business Trust—Series L-2,  1640 School St. Moraga, CA 94556
Office
 
0.00%
   
18,444
Coastal Realty Business Trust—Series Q, 1640 School St. Moraga, CA 94556
Hotel
 
3.09%
   
467,341
Commonwealth REIT, Two Newton Place 255 Washington Street Suite 300 Newton, Massachusetts 02458
Office
 
0.02%
   
426,725
CRI Hotel Income Partners, LP, 11200 Rockville Pike, Suite 300  Rockville, MD 20852
Hotel
 
1.84%
   
64,642
Del Taco Restaurant Properties I, 25521 Commercentre Dr. Lake Forest, CA 92630
Retail
 
3.28%
   
207,358
Del Taco Restaurant Properties II,  25521 Commercentre Dr. Lake Forest, CA 92630
Retail
 
1.01%
   
60,459
Del Taco Restaurant Properties III, 25521 Commercentre Dr. Lake Forest, CA 92630
Retail
 
1.33%
   
125,983
Del Taco Income Properties IV,  25521 Commercentre Dr. Lake Forest, CA 92630
Retail
 
1.39%
   
59,696
Divall Insured Income Property 2, LP, 1100 Main St., Suite 1830 Kansas City, MO 64105
Apartment
 
1.79%
   
211,926
DRV Holding Company, LLC,  12647 Alcosta Blvd., Suite 470  San Ramon, CA 94583
Land
 
16.60%
   
500,000
El Conquistador Limited Partnership, 702 River Place Madison, WI 53716
Apartment
 
5.26%
   
80,976
Empire State Building Associates, LLC, One Grand Central Place, 60 East 42nd St. New York, NY 10165
Office
 
0.03%
   
110,000
FelCor Lodging Trust, 545 E. John Carpenter Frwy. Suite 1300 Irving, Texas 75062
Hotel
 
0.01%
   
32,128
Hines REIT, 2800 Post Oak Blvd., Suite 4700 Houston, TX 77056
Office
 
0.00%
   
13,569
Hotel Durant, LLC, 1000 Marina Village Pkwy, #100  Alameda, CA 94501
Retail
 
7.10%
   
577,299
Inland Land Appreciation Fund I, LP,  2907  Butterfield Rd. Oak Brook, IL 60523
Land
 
0.58%
   
18,166
Inland Land Appreciation Fund II, LP,  2907  Butterfield Rd. Oak Brook, IL 60523
Land
 
0.42%
   
27,951
Madison Place Associates,  2275 East Bayshore Rd, Suite 130  Palo Alto, CA 94303
Apartment
 
6.80%
   
77,943
Maxus Realty Trust, 104 Armour North Kansas City, Missouri 64116
Apartment
 
    0.63%
   
151,624
MPF Pacific Gateway—Class B,  1640 School Street Moraga, CA 94556
Office
 
  15.82%
   
6,287
MPG Office Trust, Inc., 355 South Grand Avenue Suite 3300 Los Angeles, CA 90071
Office
 
0.02%
   
33,670
National Property Investors 6, LP, 80 International Drive, PO Box 1089, Greenville SC 29602
Apartment
 
0.01%
   
145
Northland Cable Properties Seven, LP,  101 Stewart St., Suite 700  Seattle, WA 98101
Cable
 
0.16%
   
1,694
One Liberty Properties, Inc., 60 Cutter Mill Road Suite 303 Great Neck, New York 11021
Retail
 
0.02%
   
65,160
Post Street Renaissance Partners Class A, 545 Post Street  San Francisco, CA 94102
Hotel
 
4.21%
   
177,844
Post Street Renaissance Partners Class D,  545 Post Street  San Francisco, CA 94102
Hotel
 
3.58%
   
542,115
Rancon Realty Fund IV, LP,  41391 Kalmia St, Suite 200  Murrieta, CA 92562
Office
 
1.48%
   
173,706
Rancon Realty Fund V,  41391 Kalmia St, Suite 200  Murrieta, CA 92562
Office
 
1.11%
   
165,691
 
 
 
44

 
 
Rouse Properties, Inc. 1114 Avenue of the Americas Suite 2800, New York, New York 10036
Retail
 
0.00%
   
26,194
Secured Income, LP,  340 Pemberwick Rd  c/o Wilder Richman Resources Corp., Greenwich, CT  06831
Apartment
 
2.60%
   
223,232
T REIT Inc.,  1551 N Tustin Ave., Suite 200  Santa Ana, CA 92705
Office
 
0.48%
   
1,317
Uniprop Income Fund II, LP,  280 Daines St.,  3rd Floor  Birmingham, MI 48009
Apartment
 
0.37%
   
56,890
USA RE Investment Trust,  650 Howe Ave., Suite 730  Sacramento, CA 95825
Land
 
0.04%
   
330
Totals
       
$
6,448,380

Recent Developments (Since February 28, 2013)

We sold our shares of Maxus Realty Trust in April, 2013 for $176,000, for an unaudited $24,376 pre-tax gain.
 
Portfolio Company Descriptions
 
Below is a brief description of each of the eleven largest portfolio securities, including their respective percentages of our portfolio, as of February 28, 2013.
 
Hotel Durant, LLC – 8.95%
 
This LLC owns four retail properties located in Florida and Georgia.  The properties are leased on a triple-net basis to Best Buy, Fedex, and Tire Centers with leases expiring from 2015 – 2017.  We acquired the membership units at an approximate 30% discount to our estimate of their liquidation value, and the investment currently produces an 11% current yield on our cost.
 
Post Street Renaissance Partners — Class D Units — 8.41%
 
The partnership owns the Prescott Hotel and Postrio Restaurant in San Francisco, California. Post Street experienced difficulty in 2010, defaulting on its mortgage. During the latter part of 2010, the partnership, in co-operation with our Adviser, initiated a new Class offering (“Class D Units”) to raise capital for the partnership to avoid a foreclosure on the property by the lender. With the new capital raised, the partnership made all past-due loan payments and is now current on its loan. Any remaining proceeds are to be held in reserve for debt service.
 
Along with the new offering, there were changes to the original limited partnership agreement which provide for a different allocation of profits and distributions. Class D unit holders are first priority until they receive their original capital contribution plus a 12% cumulative non-compounded return. Then, 1% of distributions are made to the general partner and 99% to the Class A limited partners until such time as they have received distributions of $3 million. Lastly, any remaining proceeds will be distributed 80% to Class D unit holders and 20% to the holders of the remaining classes of partnership units.
 
DRV Holding Company, LLC —7.75%
 
The Legacy Funds invested $500,000 in DRV Holding Company, LLC (“DRV”) in January, 2013, and have an option to invest an additional $310,000 in DRV by the end of 2013 (which option has followed the asset into MRC’s portfolio).  DRV is a special purpose entity organized and managed by The True Life Companies to acquire, develop and sell raw land in El Dorado Hills, California that is intended to be a residential community.
 
Coastal Realty Business Trust — Series Q—7.25%
 
Coastal Realty Business Trust — Series Q participated in the recapitalization of Post Street Renaissance Partners Series D, discussed above. Each unit of CRBT Series Q is economically equivalent to one unit of Post Street Renaissance Partners Series D.  Coastal Realty Business Trust is a Nevada business trust whose trustee is MacKenzie Capital Management, LP, established as a holding company for certain assets such as these.  MacKenzie Capital Management, LP receives no fees or expense reimbursements for serving as the trustee.
 
CommonWealth REIT —6.62%
 
CommonWealth is a publicly- traded office and industrial REIT. As of the end of 2012, CommonWealth owned 440 properties at a total cost of $7.8 billion. CommonWealth generated funds from operations of over $2.50 per share in 2012, and pays a dividend of $1.00 annually, which is a 4.0% yield on our cost.  The stock’s ticker symbol is CWH.
 
 
 
45

 
 
 
Ashford Hospitality Trust, Inc. —5.91%
 
This publicly- traded REIT owns 94 hotels around the country, primarily mid-scale quality.  The stock pays a dividend of $0.48, which is a 4.1% yield on our cost.  The stock’s ticker symbol is AHT.
 
Coastal Realty Business Trust —Secured Income—5.08%
 
CRBT participated in the purchase of units of Secured Income, LP which is described below.
 
Coastal Realty Business Trust — Series H-2—3.82%
 
CRBT Series H-2 participated in a tender offer for shares of a non-traded REIT that owns and operate various properties such as senior housing, hotels and resorts, retail, golf courses, marinas and others.  The stock currently pays a dividend at the annualized rate of $0.425, which is 8.2% on our cost.
 
Secured Income, LP—3.46%
 
This partnership is a private limited partnership formed in 1986 to own and operate apartment buildings.  It currently owns one 252 unit property located in Frederick, Maryland.  This partnership does not currently pay a distribution, but we believe the property will be marketed for sale this year.  An affiliate of our Administrator recently purchased a co-general partnership interest in the partnership and is working with the managing general partner to achieve liquidity for this investment in the near future.
 
Divall Insured Income Property 2, LP—3.29%
 
This partnership is a publicly- held, non-traded limited partnership formed in 1987 to own and lease restaurant properties.  The partnership owns 11 fast food restaurants.  All of the properties are triple-net leased to the operators and are debt-free.  The most recent distribution was paid at an annualized rate of $22.20 per unit, an annualized distribution rate of 10.1% on our cost.
 
Del Taco Restaurant Properties I — 3.22%
 
Del Taco is a publicly- held, non-traded partnership formed in 1983 to own and lease restaurant properties. The partnership’s six Del Taco Restaurant properties increased its revenue and operating income in 2011 from 2010. The properties are located in the Los Angeles area and are debt-free which allowed the partnership to distribute its cash flow to its investors. The most recent quarterly distribution was paid at an annualized rate of $78.80 per unit, providing an annualized distribution rate of 10.9% on our cost.
 
Portfolio Composition
 
Below are the sectors that comprised the investments in the Legacy Portfolio as of February 28, 2013, in each case calculated as a percentage of the total Legacy Portfolio investments as of that date.
 
 
Targeted Industries
 
Fair Value
 
% of Total Investments
(at fair value)
 
Apartment
 
$
                       1,462,202
     
22.68
%
 
Hotel
   
                       1,947,519
     
30.20
%
 
Cable
   
                  1,694
     
0.03
%
 
Land
   
                       546,447
     
8.47
%
 
Retail
   
                       1,310,445
     
20.32
%
 
Office
   
                       1,180,073
     
18.30
%
     
$
                       6,448,380
     
100.00
%


 
46

 


MANAGEMENT

Our Board of Directors oversees our management. The Board of Directors currently consists of three members, two of whom are Independent Directors. Directors’ terms are one year.  Our Board of Directors elects our officers, who serve at the discretion of the Board of Directors. The responsibilities of each director will include, among other things, the oversight of our investment activity, the quarterly valuation of our assets, and oversight of our financing arrangements. The Board of Directors has also established an audit committee and a nominating and corporate governance committee, and may establish additional committees in the future.
 
Our Adviser has been providing advice to clients about real estate-related assets and other investments since 1982.  Much of that advice has focused on the types of real estate-related investments MRC intends to make, through the Adviser’s management of the Legacy Funds and many other similarly- organized investment vehicles.  Accordingly, our officers and directors who are affiliated with our Adviser and/or Manager have the requisite experience with the types of assets we seek to acquire.
 
Board of Directors and Executive Officers
 
Directors
 
 
Name
 
Age
 
Position
 
Director
Since
 
 
Interested Director
             
 
C.E. “Pat” Patterson
 
72
 
Chairman of the Board of Directors
 
2012
 
 
Independent Directors
             
 
Tim Dozois
 
51
 
Director
 
2012
 
 
Tom Frame
 
71
 
Director
 
2012
 
                 
The address for each of our directors is 1640 School Street, Moraga, California 94556.
 
Executive Officers Who Are Not Directors
 
 
Name
 
Age
 
Position
 
Robert Dixon
 
42
 
Chief Executive Officer and President
 
Paul Koslosky
 
51
 
Chief Financial Officer and Treasurer
 
Glen Fuller
 
40
 
Chief Operating Officer
 
Chip Patterson
 
42
 
General Counsel and Secretary
 
Jeri Bluth
 
38
 
Chief Compliance Officer
 
Christine Simpson
 
48
 
Chief Portfolio Manager

The address for each of our executive officers is 1640 School Street, Moraga, California 94556.
 
Biographical Information
 
Directors
 
Our directors have been divided into two groups — interested directors and Independent Directors. An interested director is an “interested person” as defined in 1940 Act §2(a)(19).
 
Interested Director
 
C.E. “Pat” Patterson.  Mr. Patterson, an MRC director since May of 2012, is co-founder and president of the Manager and the Adviser, and a director of their general partner, and a beneficial owner of all three companies, all since 1982.

Mr. Patterson, age 72, has spent his entire business career in the financial services industry.  In July 1965, following his graduation from the University of Oregon with a Bachelor of Science degree, he was selected as a junior executive trainee by Merrill Lynch, Pierce, Fenner and Smith, Inc.  This intensive two-year training program was conducted in New York and included “on-the-floor” experience on all the major stock and commodity trading floors in the U.S. and Europe as well as a one-year position in Securities Research.  Subsequently assigned to Merrill’s Oakland, California office, Mr. Patterson had responsibility as an account executive for individual investors through September of 1971.

In September 1971, Mr. Patterson joined Eastman Dillon, Union Securities, Inc. with responsibility for Institutional Accounts in San Francisco and Hawaii.  Upon the merger of Blyth & Co. with Eastman Dillon, Mr. Patterson was appointed assistant manager and then resident manager of the firm’s Oakland office.  He became a vice president of the firm in 1975.  From September 1976 to March
 
47
 

 
 
1978, Mr. Patterson was associated with Smith Barney, Harris Upham, Inc. as a vice president, sales; with Merrill Lynch, Pierce, Fenner and Smith, Inc. as a senior account executive from September 1978 – February 1979; and with Paine Webber, Jackson & Curtis as an account vice president from January 1979 – March 1982.  During this period his primary responsibility was the counseling of individual clients, but he also was responsible for research and marketing of specialized financial products.

In January 1982, Mr. Patterson founded Patterson Financial Services, Inc. (now MCM Advisers, LP) with Berniece A. Patterson as a financial planning firm.  He founded Patterson Real Estate Services, a licensed California Real Estate Broker, in July 1982.  As president of MCM Advisers, LP, Mr. Patterson is responsible for all investment counseling activities.  He supervises the analysis of investment opportunities for the clients of the firm.  In February 1988, Mr. Patterson co-founded the predecessor of the Manager.  The Manager acts as the general partner and Manager to a number of prior investment funds.  Mr. Patterson is the president of the Manager.

Mr. Patterson is a former Certified Financial Planner, has completed the College of Financial Planning’s Due Diligence course, and is a past member of both the Institute of Certified Financial Planners and the International Association for Financial Planning
 
Independent Directors
 
Tim Dozois.  Mr. Dozois, age 51 and an MRC director since May of 2012, has been the Vice President and Corporate Counsel for Pendrell Corporation, a NASDAQ listed company specializing in intellectual property solutions, since June of 2010. He has 23 years of experience supporting leading corporations in securities law compliance, mergers, acquisitions, and real estate acquisition, financing, and management. Prior to joining Pendrell Corporation, Mr. Dozois was a partner for a brief period with Zupancic Rathbone Law Group, Inc., a firm that specializes in structured financing with a particular emphasis on the acquisition, financing and management of troubled real property assets. From January 1996 until March of  2010, Mr. Dozois served as an equity partner of Davis Wright Tremaine LLP, a Seattle-based law firm of approximately 500 lawyers.
 
Mr. Dozois received his B.S. in Financial Management from Oregon State University and his J.D from the University of Oregon School of Law, where he was Order of the Coif.
 
Tom Frame.  Mr. Frame, age 71 and an MRC director since May of 2012, was a co-founder of TransCentury Property Management and solely founded Paradigm Investment Corporation.  TransCentury began in May of 1973 and has syndicated and managed over 10,000 residential units. During the last 35 years, Mr. Frame has been a principal in the acquisition, financing, restoration, and sale of over $500,000,000 in residential and commercial real estate.  Paradigm was founded in June 1986 to sponsor and manage private, closed end “mutual funds.”  Paradigm managed a portfolio of over $7,000,000 in limited partnership securities.  The last of the funds successfully liquidated in December of 2000.
 
Mr. Frame received a BA and BS degree from the University of Kansas in Physics and Mathematics in June 1964, a Juris Doctor degree from the San Francisco Law School in June 1975, and a MBA with honors from Pepperdine University in April 1986.  Mr. Frame is currently managing his own investments which include residential units, commercial property, and a portfolio of securities.
  
   Robert E. Dixon.  Robert E. Dixon, age 42, has been the senior vice president and co-chief investment officer of the Manager and the Adviser since 2005, and a director of their general partner, and a beneficial owner of all three companies since 2005.  Mr. Dixon is C.E. and Berniece Patterson’s son-in-law.
 
Robert Dixon served as an officer and director of Sutter Holding Company, Inc. from March 2002 until 2005.  Mr. Dixon founded Sutter Capital Management, LLC, an investment management firm, in 1998 and sold it in 2005 to MCM Advisers, Inc.  Mr. Dixon has been president of Sutter Capital Management since its founding.  Mr. Dixon received his Master of Business Administration degree from Cornell University in 1998 and has held the Chartered Financial Analyst® designation since 1996.  From October 1994 to June 1996 he worked for MacKenzie Patterson, Inc. as a securities research analyst.  He worked for Lehman Brothers, Inc. in equity sales and trading during 1993 and 1994.  Mr. Dixon received his bachelor’s degree in economics from the University of California at Los Angeles in 1992.
 
Paul F. Koslosky.  Mr. Koslosky, age 51, has been the chief financial officer and treasurer for the Manager and the Adviser since 2004.  He owns a beneficial interest in each the Manager, the Adviser, and their general partner.  He is responsible for accounting and reporting for the Manager, the funds it manages, and other related business interests. Mr. Koslosky graduated from California State University, Hayward in 1983 with a Bachelor of Science degree in Business Administration.  He spent five years with Zellerbach Paper Company, a billion-dollar paper distributor, as staff accountant and, eventually, financial reporting manager.  Prior to joining the Manager in 1997, he worked for Doric Development, an Alameda, California real estate developer with numerous related business interests.  At Doric he served as accounting manager responsible for

 
 
48

 
 
the accounting and reporting for commercial development and construction.  He served as controller from 1995 to 1997 responsible for accounting, reporting, cash management, and human resources for Doric and its related companies.

Glen W. Fuller.  Mr. Fuller, age 40, has been senior vice president and secretary of the Manager since 2000 and the Adviser since 2000, and a director of their general partner, and a beneficial owner of all three companies since 2000.  Mr. Fuller is Berniece Patterson’s son and C.E. Patterson’s stepson.  Prior to becoming senior vice president of the Manager, he was with the Manager for two years as a portfolio manager and research analyst.  Prior to joining the Manager, Mr. Fuller spent two years running the over the counter trading desk for North Coast Securities Corp. (previously Morgan Fuller Capital Group) with responsibility for both the proprietary and retail trading desks.  Mr. Fuller was also the registered options principal and registered municipal bond principal for North Coast Securities Corp., a registered broker-dealer. Mr. Fuller previously held his NASD Series 7, general securities registration.  Mr. Fuller has a Bachelor of Arts in Management.  Mr. Fuller has also spent time working on the floor of the New York Stock Exchange as a trading clerk and on the floor of the Pacific Stock Exchange in San Francisco as an assistant specialist for LIT America.

Chip Patterson.  Chip Patterson, age 42, has been the senior vice president and general counsel of the Manager and the Adviser since 2003, a director of their general partner since 2003, and a beneficial owner of all three companies since 2003.  Chip Patterson is C.E. Patterson’s son and Berniece Patterson’s stepson.

Chip Patterson graduated magna cum laude from the University of Michigan Law School with a Juris Doctor Degree and with high distinction and Phi Beta Kappa from the University of California at Berkeley with a Bachelor of Arts Degree in Political Science.  Prior to joining the Manager in July 2003, he was a securities and corporate finance attorney with the national law firm of Davis Wright Tremaine LLP.  Prior to law school, Chip Patterson taught physics, chemistry, and math at the high school level for three years.  He also has prior experience in sales, retail, and banking, and is a licensed California Real Estate Broker.

Jeri R. Bluth. Ms. Bluth, age 38, has been the Chief Compliance Officer for the Manager and the Adviser since 2009.  She owns a beneficial interest in each the Manager and the Adviser.  Mrs. Bluth oversees compliance for all the funds advised by the Adviser, and she will oversee MRC’s compliance with its Code of Ethics, Bylaws, Charter, and applicable rules and regulations.

Mrs. Bluth began her career with MacKenzie Patterson Fuller, Inc. in July of 1996 in the Investor Services Department. During Mrs. Bluth’s career with the Manager, she graduated from St. Mary’s College of California in June 2001, with a Bachelor of Arts degree in Business Management.

Christine E. Simpson. Mrs. Simpson, age 48, has been employed by the Manager and its affiliates since 1990, and has been the Adviser’s Vice President of Research and Trading since 2005.  Mrs. Simpson is responsible for handling the day-to-day operations of the Manager’s research department.  During Mrs. Simpson’s career with the Manager, she graduated: with a Bachelor of Arts degree in Business Management from St. Mary’s College of California in October 2004 (with honors), with a Masters of Science degree in Financial Analysis and Investment Management in September 2006, and a Masters in Business Administration in June 2008.  As a result of these and other professional experiences, Mrs. Simpson possesses particular knowledge and experience in real estate that strengthen the investment committee's collective qualifications, skills and experience.

Board Leadership Structure
 
Our Board of Directors monitors and performs an oversight role with respect to our business and affairs, including with respect to investment practices and performance, compliance with regulatory requirements and the services, expenses and performance of our service providers. Among other things, our Board of Directors approves the appointment of our Adviser and officers, reviews and monitors the services and activities performed by our Adviser and executive officers and approves the engagement, and reviews the performance of, our independent registered public accounting firm.  Our Board will also quarterly ratify our Adviser’s selection of securities for our portfolio.
 
Under our Bylaws, our Board of Directors may designate a chairman to preside over the meetings of the Board of Directors and meetings of the stockholders and to perform such other duties as may be assigned to him by the board. We do not have a fixed policy as to whether the chairman of the board should be an Independent Director and believe that we should maintain the flexibility to select the chairman and reorganize the leadership structure, from time to time, based on the criteria that is in our best interests and our stockholders best interests at such times.
 
Presently, C.E. Patterson serves as the chairman of our Board of Directors. C.E. Patterson is an “interested person” of MRC as defined in Section 2(a)(19) of the 1940 Act because he is on the investment committee of our Adviser and is the manager and managing member of our Adviser and Administrator, respectively. We believe that C.E. Patterson’s history with the Legacy Funds, familiarity with our investment platform, and extensive knowledge of the real estate industry and the investment valuation process in particular qualify him to serve as the chairman of our Board of Directors. We believe that we are best served through this existing
 
 
49

 
 
leadership structure, as C.E. Patterson’s relationship with our Adviser provides an effective bridge and encourages an open dialogue between management and the Board of Directors, ensuring that both groups act with a common purpose.
 
Our Board of Directors does not currently have a designated lead Independent Director. We are aware of the potential conflicts that may arise when a non-Independent Director is chairman of the board, but believe these potential conflicts are offset by our strong corporate governance policies. Our corporate governance policies include regular meetings of the Independent Directors in executive session without the presence of interested directors and management, the establishment of audit and nominating and corporate governance committees comprised solely of Independent Directors and the appointment of a Chief Compliance Officer, with whom the Independent Directors meet regularly without the presence of interested directors and other members of management, for administering our compliance policies and procedures.
 
None of the Directors currently serve as a director for any other public company.  Further, no Director holds any ownership interest in MRC.  The Independent Directors will be paid an annual retainer of $20,000 and the chair of the audit committee will be paid an additional retainer of $1,000 and each Director will be paid a meeting attendance fee of $1,000 for attending in-person meetings and $500 for telephonic meetings, not expected to be held more than quarterly, of the Board and the audit committee.
 
We recognize that different board leadership structures are appropriate for companies in different situations. We believe that the Board’s structure is appropriate for our operations as a BDC under the 1940 Act and having a class of securities which is registered under the 1934 Act, in that its members possess an appropriate depth and breadth of experience relating to our planned investment program.  We intend to re-examine our corporate governance policies on an ongoing basis to ensure that they continue to meet our needs.
 
Board’s Role In Risk Oversight
 
Our Board of Directors performs its risk oversight function primarily through (i) its two standing committees, which report to the entire Board of Directors and are comprised solely of Independent Directors, and (ii) active monitoring of our chief compliance officer and our compliance policies and procedures.
 
As described below in more detail under “Committees of the Board of Directors,” the audit committee and the nominating and corporate governance committee assist the Board of Directors in fulfilling its risk oversight responsibilities. The audit committee’s risk oversight responsibilities include overseeing our accounting and financial reporting processes, our systems of internal controls regarding finance and accounting, our valuation process, and audits of our financial statements. The nominating and corporate governance committee’s risk oversight responsibilities include selecting, researching and nominating directors for election by our stockholders, developing and recommending to the board a set of corporate governance principles and overseeing the evaluation of the board and our management.
 
Our Board of Directors also performs its risk oversight responsibilities with the assistance of the CCO. The Board of Directors will annually review a written report from the CCO discussing the adequacy and effectiveness of our compliance policies and procedures and those of our service providers. The CCO’s annual report will address, at a minimum, (i) the operation of our compliance policies and procedures and those of our service providers since the last report; (ii) any material changes to such policies and procedures since the last report; (iii) any recommendations for material changes to such policies and procedures as a result of the CCO’s annual review; and (iv) any compliance matter that has occurred since the date of the last report about which the Board of Directors would reasonably need to know to oversee our compliance activities and risks. In addition, the CCO will meet separately in executive session with the Independent Directors at least once each year.
 
We believe that our board’s role in risk oversight will be effective, and appropriate given the extensive regulation to which we are already subject as a BDC. As a BDC, we are required to comply with certain regulatory requirements that control the levels of risk in our business and operations. For example, our ability to incur indebtedness is limited such that our asset coverage must equal at least 200% immediately after each time we incur indebtedness, we generally have to invest at least 70% of our gross assets in “qualifying assets” and we are not generally permitted to invest in any portfolio company in which one of our affiliates currently has an investment.
 
We recognize that different board roles in risk oversight are appropriate for companies in different situations. We intend to re-examine the manners in which the board administers its oversight function on an ongoing basis to ensure that they continue to meet our needs.
 
Committees of the Board of Directors

An audit committee and a nominating and corporate governance committee have been established by our Board of Directors. All directors are expected to attend at least 75% of the aggregate number of meetings of the Board of Directors and of the respective committees on which they serve. We require each director to make a diligent effort to attend all board and committee meetings as well as each annual meeting of our stockholders.
 

 
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Audit Committee
 
The audit committee operates under a charter approved by our Board of Directors, which contains the responsibilities of the audit committee. The audit committee’s responsibilities include establishing guidelines and making recommendations to our Board of Directors regarding the valuation of our loans and investments, selecting our independent registered public accounting firm, reviewing with such independent registered public accounting firm the planning, scope and results of their audit of our financial statements, pre-approving the fees for services performed, reviewing with the independent registered public accounting firm the adequacy of internal control systems, reviewing our annual financial statements and periodic filings and receiving our audit reports and financial statements. The audit committee is currently composed of Messrs. Dozois and Frame, neither of whom is an “interested person” of ours as that term is defined in Section 2(a)(19) of the 1940 Act. Mr. Dozois serves as chairman of the audit committee.
 
Nominating and Corporate Governance Committee
 
The nominating and corporate governance committee operates under a charter approved by our Board of Directors. The members of the nominating and corporate governance committee are Messrs. Dozois and Frame, neither of whom is an “interested person” of MacKenzie Realty, as that term is defined in Section 2(a)(19) of the 1940 Act. Mr. Frame serves as chairman of the nominating and corporate governance committee. The nominating and corporate governance committee is responsible for selecting, researching and nominating directors for election by our stockholders, selecting nominees to fill vacancies on the Board of Directors or a committee thereof, developing and recommending to the Board of Directors a set of corporate governance principles and overseeing the evaluation of the Board of Directors and our management. The nominating and corporate governance committee currently does not consider nominees recommended by our stockholders.
 
The nominating and corporate governance committee seeks candidates who possess the background, skills and expertise to make a significant contribution to the Board of Directors, our operations, and our stockholders. In considering possible candidates for election as a director, the nominating committee takes into account, in addition to such other factors as it deems relevant, the desirability of selecting directors who:
 
 
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are of high character and integrity;