POS 8C 1 tv486415_pos8c.htm POS 8C

 

As filed with the Securities and Exchange Commission on February 27, 2018

Registration File No. 333-207678

Registration File No. 811-23109

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM N-2

 

x REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

x Post-Effective Amendment No. 8

x REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

x Amendment No. 11

 

NorthStar Real Estate Capital Income Fund

(Exact name of registrant as specified in charter)

c/o Colony NorthStar Inc.

590 Madison Avenue, 34th Floor,

New York, New York 10022

(Address of principal executive offices)

(212) 547-2600

(Registrant’s telephone number, including area code)

 

Kevin P. Traenkle

NorthStar Real Estate Capital Income Fund

c/o Colony NorthStar Inc.

Chief Executive Officer and President

590 Madison Avenue, 34th Floor,

New York, New York 10022

(212) 547-2600

(Name and address of agent for service)

 

COPY TO:

Clifford R. Cone, Esq.

Jefferey D. LeMaster, Esq.

Clifford Chance US LLP

31 West 52nd Street

New York, New York 10019

(212) 878-8000

 

Approximate date of proposed public offering:    As soon as practicable after the effective date of this Registration Statement.

 

If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box. x

 

It is proposed that this filing will become effective (check appropriate box):

 

x    when declared effective pursuant to section 8(c).

 

No new interests in the Registrant are being registered by this filing. The registration fee was paid in connection with the Registrant’s previous filings.

 

x     The members of the Board of Trustees of NorthStar Real Estate Capital Income Master Fund, the master fund in which the Registrant invests substantially all of its assets, have also executed this Registration Statement.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

  

 

 

 

The information in this prospectus is not complete and may be changed. No person may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED February 27, 2018

 

Class A Shares (XNAFX) and
Class I Shares (XNIFX) of Beneficial Interest
Maximum Offering of 300,000,000 Common Shares

 

NorthStar Real Estate Capital Income Fund

Common Shares of Beneficial Interest

 

NorthStar Real Estate Capital Income Fund (the “Trust”), is a Delaware statutory trust that is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a non-diversified, closed-end management investment company. The Trust is a “feeder” in a “master-feeder” structure.

 

The Trust is offering on a continuous basis up to 300,000,000 common shares of beneficial interest, par value $0.001 (the “Shares”), at the then current net asset value (“NAV”) per Share plus any applicable Sales Load, as described in this Prospectus.

 

Investment Objectives.   The Trust’s primary investment objectives are to generate attractive and consistent income through cash distributions and preserve and protect shareholders’ capital, with a secondary objective of capital appreciation. There can be no assurance that the Trust will achieve its investment objectives.

 

Principal Investment Strategies.   The Trust invests substantially all of its assets in NorthStar Real Estate Capital Income Master Fund (the “Master Fund”), a separate, non-diversified, closed-end management investment company that is registered under the 1940 Act, with the same investment objectives as the Trust. Each of the Trust and the Master Fund intends to qualify as a regulated investment company (a “RIC”), under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2018.

 

The Master Fund pursues its investment objectives by investing at least 80% of the Master Fund’s net assets (plus the amount of leverage for investment purposes) in a diversified portfolio of real estate and real estate-related investments, comprised of: (i) commercial real estate (“CRE”) debt, including first mortgage loans, subordinate mortgage and mezzanine loans, participations in such loans and preferred equity interests; (ii) CRE equity investments, including (a) direct investments in CRE and (b) indirect ownership in CRE through private equity real estate investments (“PERE Investments”) and other joint ventures; and (iii) CRE securities, such as commercial mortgage-backed securities (“CMBS”), unsecured debt of publicly-traded real estate investment trusts (“REITs”) and collateralized debt obligation (“CDO”) notes. Although the Master Fund is a “non-diversified” investment company within the meaning of the 1940 Act, the Master Fund seeks to invest in a variety of asset types, property types and geographic locations. The Master Fund’s lending focused investment strategy emphasizes its primary investment objectives to generate attractive and consistent income through cash distributions and preserve and protect shareholders’ capital and its secondary investment objective of capital appreciation from its investments. The Master Fund may invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as “high yield” securities or “junk bonds,” may have speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. They may also be illiquid and difficult to value. For a further discussion of the Master Fund’s principal investment strategies, see “Investment Objectives and Strategies.”

 

Unlisted Closed-End Fund.   The Trust is an unlisted closed-end fund. An investment in the Trust is subject to, among others, the following risks:

 

(continued from cover page)

 

   

 

 

·The Shares are not listed on any securities exchange and it is not anticipated that a secondary market will develop.

 

·The Trust has implemented a share repurchase program, but only a limited number of the Shares may be eligible for repurchase. Accordingly, you should consider that you may not have access to the money you invest for an indefinite period of time or until the Trust completes a liquidity event. The Trust’s board of trustees (the “Board”) or the Master Fund’s board of trustees (the “Master Fund Board”) may suspend or terminate the share repurchase program at any time. See “Share Repurchase Program.”

 

·Although the Trust may complete a liquidity event approximately five years after the completion of the Offering Period (as defined below), or at such earlier time as the Board may determine, taking into consideration market conditions and other factors, there can be no assurance that there will be a liquidity event at all. As a result of the foregoing, an investment in the Trust is not suitable if you need access to the money you invest. See “Share Repurchase Program” and “Liquidity Strategy.”

 

·Because you may be unable to sell your Shares, you may be unable to reduce your exposure to the Trust in any market downturn.

 

·The Trust expects that some of its distributions will be paid to holders of the Shares (“Shareholders”) from the proceeds from this offering and, more specifically, through payments pursuant to separate expense support and conditional reimbursement agreements between Colony NorthStar FV Holdings, LLC (“Colony NorthStar FV”), an affiliate of Colony NorthStar Inc. (“Colony NorthStar”), a publicly-traded REIT and the sponsor of the Trust, and each of the Trust and the Master Fund (each an “Expense Support Agreement”). If the Expense Support Agreements are terminated, some of the Trust’s distributions may be paid from the proceeds from the purchase of Shares pursuant to a distribution support agreement (the “Distribution Support Agreement”) between the Master Fund and Colony NorthStar FV or through the partial waiver of fees by the Advisor (as defined below). You should understand that any such distributions would not be based on the investment performance of the Trust, investing through the Master Fund, and would be sustained only if the Trust, investing through the Master Fund, achieves positive investment performance in future periods.

 

·Distributions funded from the Expense Support Agreement or the Distribution Support Agreement may constitute a return of capital, which will result in a Shareholder recognizing additional gain upon the sale of Shares, including in situations in which a Shareholder may have suffered an overall loss on an investment in Shares. If either the Expense Support Agreements or the Distribution Support Agreement is terminated, the Master Fund and, consequently, the Trust may not have sufficient cash available to pay distributions at the rate it had paid during preceding periods or at all.

 

·Shares are highly illiquid and appropriate only as a long-term investment. An investment in Shares should be considered only by investors who can assess and bear the illiquidity and other risks associated with such an investment. See “Summary of Terms—Suitability Standards” and “Summary of Terms—Risk Factors.” Purchasers of Shares are subject to immediate dilution as a result of selling commissions and dealer manager fees paid by such purchasers and offering expenses the Trust incurs in connection with this offering. In addition, because the Trust continuously issues Shares in this offering, you may experience additional dilution in the net asset value of your Shares. A Shareholder’s interest in the Trust will be diluted if the Trust issues additional Shares, which could reduce the overall value of an investment in the Trust.

 

 

 

Investing in Shares involves a high degree of risk. See “Risk Factors” beginning on page 56 of this prospectus.

 

   Total 
Offering Amount(1)  $2,964,000,000 
Maximum Sales Load(2)   8.0%
Proceeds to the Trust (Before Expenses)(3)  $2,726,880,000 

 

   

 

 

(1)The Shares are offered on a continuous basis at the public offering price (the “Offering Price”) per Share equal to the Trust’s then-current net asset value per Share (“NAV per Share”), plus the Sales Load (as defined below) discussed in Note 2 below. See “Plan of Distribution.”

 

(2)“Sales Load” includes the maximum selling commissions and dealer manager fees. The actual maximum Sales Load will be calculated using a percentage of the Offering Price per Share equal to (i) selling commissions of 6.0% and dealer manager fees of 2.0% for the purchase of Class A Shares and (ii) no selling commissions or dealer manager fees for the purchase of Class I Shares. See “Plan of Distribution — Compensation of the Distributor and Selected Broker Dealers.”

 

(3)Proceeds to the Trust reflects the maximum Sales Load. The organization and offering costs of the Trust were approximately $65,000 for the period ended December 31, 2017. The Advisor (as defined below) has agreed to limit the amount of “Organization and Offering Expenses” incurred by the Trust to 1.0% of the aggregate proceeds raised in this offering, exclusive of the Sales Load. Shareholders will indirectly bear such fees and expenses.

 

Because Shareholders will pay a Sales Load of up to 8.0% of the aggregate proceeds raised in this offering, inclusive of the Sales Load, and the Trust will bear organization and offering expenses of up to 1.0% of the aggregate proceeds raised in this offering, exclusive of the Sales Load, if a Shareholder invests $100 in Shares and pays the full Sales Load for Class A Shares, approximately $91.08 of the Shareholder’s investment will actually be used by the Trust for investment in the Master Fund. See “Plan of Distribution,” which includes a discussion of the fees and expenses that will be payable to Shareholders participating in the distribution of Shares.

 

   

 

 

(continued from cover page)

 

Certain direct and indirect equity investments in CRE may be made through the Master Fund’s private REIT (the “REIT Subsidiary”), that intends to invest through wholly owned special purpose vehicles in properties with a focus on consistent income and quality locations. The REIT Subsidiary may also invest in CRE debt and securities. Investment through the REIT Subsidiary involves risks, including the risk that the failure of the REIT Subsidiary to qualify as a REIT for U.S. federal income tax purposes will have adverse tax consequences on the REIT Subsidiary and may adversely affect the performance of the Master Fund and, consequently, the Trust. For a further discussion of the Master Fund’s principal investment strategies, see “Investment Objectives and Strategies.”

 

Structure.   The Trust pursues its investment objectives by investing substantially all of the net proceeds from this offering in common shares of the Master Fund (“Master Fund Shares”). The Master Fund makes the investments described in this prospectus with the proceeds it receives from the Seed Capital Investment (as defined below) and from the issuance of Master Fund Shares to the Trust and any other investment company registered under the 1940 Act that has a principal investment strategy of investing substantially all of its assets in the Master Fund. The Trust currently intends to limit the number of Shares it sells pursuant to this offering to 300,000,000 Shares in the aggregate, not including any Shares issued pursuant to the Trust’s distribution reinvestment plan (the “DRP”).

 

Investment Adviser.   CNI RECF Advisors, LLC (the “Advisor”), a private investment firm that is registered as an investment adviser with the Securities and Exchange Commission (the “SEC”), under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) serves as the Trust’s and Master Fund’s investment adviser and is responsible for overseeing the management of the Trust’s and Master Fund’s activities, including investment strategies, investment goals, asset allocation, asset management, leverage limitations, reporting requirements and other guidelines in addition to the general monitoring of the Trust’s and Master Fund’s portfolios, subject to the oversight of the Board and the Master Fund Board. The Advisor is an affiliate of Colony NorthStar (NYSE:CLNS), a leading global real estate and investment management firm with approximately $       billion in assets under management as of December 31, 2017. Colony NorthStar provides investment management services and manages private funds, non-traded and traded real estate investment trusts and registered investment companies on behalf of a diverse set of institutional and individual investors and is supported by an experienced staff of more than 500 employees, as of December 31, 2017, across 18 offices in 10 countries.

 

Securities Offered.   The Trust is offering on a continuous basis up to 300,000,000 Shares at the Offering Price, which equals the Trust’s NAV per Share, plus the Sales Load of up to 8.0% in the aggregate, of the Offering Price for Class A Shares. The Shares are offered through ALPS Distributors, Inc. (the “Distributor”). The Distributor is not required to sell any specific number or dollar amount of the Shares, but will use its best efforts to solicit orders for the sale of the Shares. NorthStar Securities, LLC (“NorthStar Securities”) has entered into a wholesale marketing agreement with the Distributor in connection with the marketing of the Shares. See “Plan of Distribution.” The minimum initial investment is $4,000 for Class A Shares and $100,000 for Class I Shares. The Trust reserves the right to waive investment minimums. Shares may be purchased daily at a price that is not less than the Trust’s then-current NAV (exclusive of any applicable Sales Load) and the Trust will accept purchases of Shares daily. The Trust intends to terminate this offering, and end its offering period (the “Offering Period”), at such time as the Trust has reached the maximum offering of Shares. See “Plan of Distribution.”

 

Investors will pay a Sales Load of up to 8%, in the aggregate, of the Offering Price for the purchase of Class A Shares. No Sales Load will be paid in connection with sales under the DRP.

 

Seed Capital Investments.   An affiliate of Colony NorthStar has invested $2.0 million in the Master Fund (the “Seed Capital Investment”) in exchange for Master Fund Shares. The Master Fund Shares issued to Colony NorthStar FV for the Seed Capital Investment and the Master Fund Shares issued to the Trust and any other investment company registered under the 1940 Act which has a principal investment strategy of investing substantially all of its assets in the Master Fund, possess identical characteristics, rights, priorities and preferences. Colony NorthStar FV will vote its Master Fund Shares in the same proportion as which the other Master Fund Shares are voted. In addition, Colony NorthStar FV has purchased $150,000 of the Shares for purposes of satisfying the seed capital regulatory requirement under the 1940 Act.

 

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Multi-Class Structure.    The Trust is offering to the public two classes of Shares: Class A Shares and Class I Shares. The Trust is offering to sell any combination of Shares, with an aggregate number of Shares up to the maximum offering of Shares. The classes of Shares differ only with respect to the Sales Load investors must pay. An investor will pay (i) selling commissions and dealer manager fees for the purchase of the Trust’s Class A Shares and (ii) no selling commissions or dealer manager fees for the purchase of the Trust’s Class I Shares. However, regardless of class, each Share will (i) have identical rights with respect to voting and distributions, (ii) will bear its own pro rata portion of the Trust’s expenses, and (iii) have the same NAV per Share.

 

This prospectus sets forth concisely important information about the Trust and the Master Fund that a prospective investor should know before investing in Shares. Investors are advised to read this prospectus carefully and to retain it for future reference. The Trust files annual, semi-annual and quarterly reports with the SEC. The SEC also maintains a website at http://www.sec.gov that contains such information. This information is available free of charge by contacting the Trust at 5299 DTC Boulevard, Suite 900, Greenwood Village, CO 80111, Attn: Investor Relations or by telephone at (877) 940-8777, or the Trust website at http://www.northstarsecurities.com/crefund/. Information contained on the website is not incorporated by reference into this prospectus and you should not consider that information to be part of this prospectus.

 

Shares are not deposits or obligations of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and Shares are not insured by the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System or any other government agency.

 

Neither the SEC nor any state securities commission has approved or disapproved the investment merit of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

Shares distributed by ALPS Distributors, Inc.

 

The date of this prospectus is February 27, 2018.

 

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ABOUT THIS PROSPECTUS

 

This prospectus is part of a registration statement the Trust filed with the SEC, using a continuous offering process, to raise capital. Periodically, as the Trust makes material investments through the Master Fund or has other material developments, it will provide a prospectus supplement or may amend this prospectus to add, update or change information contained in this prospectus.

 

Any statement that the Trust makes in this prospectus will be modified or superseded by any inconsistent statement made by the Trust in a subsequent prospectus supplement. The registration statement filed with the SEC includes exhibits that provide more detailed descriptions of the matters discussed in this prospectus. You should read this prospectus and the related exhibits filed with the SEC and any prospectus supplement, together with additional information described below under “Available Information.”

 

You should rely only on the information contained in this prospectus. Neither the Trust nor the Distributor has authorized any other person to provide you with different information from that contained in this prospectus. The information contained in this prospectus is complete and accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or issuance of the Shares. If there is a material change in the Trust’s affairs, it will amend or supplement this prospectus.

 

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TABLE OF CONTENTS

 

SUMMARY OF TERMS 1
SUMMARY OF FEES AND EXPENSES 25
FINANCIAL HIGHLIGHTS 28
THE TRUST AND THE MASTER FUND 30
THE ADVISOR 31
USE OF PROCEEDS 33
INVESTMENT OBJECTIVES AND STRATEGIES 34
RISK FACTORS 56
MANAGEMENT OF THE TRUST AND THE MASTER FUND 112
PORTFOLIO MANAGEMENT 121
TRUST AND MASTER FUND EXPENSES 124
MANAGEMENT AND INCENTIVE FEES 127
DETERMINATION OF NET ASSET VALUE 131
CONFLICTS OF INTEREST 134
PURCHASES OF SHARES 139
SHARE REPURCHASE PROGRAM 140
LIQUIDITY STRATEGY 142
DESCRIPTION OF CAPITAL STRUCTURE 143
REGULATION 146
U.S. FEDERAL INCOME TAX CONSIDERATIONS 151
ERISA CONSIDERATIONS 179
PLAN OF DISTRIBUTION 181
INVESTOR SUITABILITY 187
DISTRIBUTIONS 188
DISTRIBUTION REINVESTMENT PLAN 190
BROKERAGE ALLOCATION AND OTHER PRACTICES 191
FISCAL YEAR; REPORTS 191
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 191
ADMINISTRATOR AND ACCOUNTING AGENT 191
CUSTODIAN, TRANSFER AND DISTRIBUTION PAYING AGENT AND REGISTRAR 191
LEGAL MATTERS 191
AVAILABLE INFORMATION 192
PRIVACY NOTICE 193
INQUIRIES 193
APPENDIX A A-1

 

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SUMMARY OF TERMS

 

This is only a summary and does not contain all of the information that a prospective investor should consider before investing in the Trust. Before investing, a prospective investor in the Trust should carefully read the more detailed information appearing elsewhere in this prospectus.

 

THE TRUST   NorthStar Real Estate Capital Income Fund (the “Trust”), is a Delaware statutory trust that is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a non-diversified, closed-end management investment company. The Trust is a “feeder” in a “master-feeder” structure. The Trust intends to qualify as a regulated investment company (a “RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2018. The Trust’s primary investment objectives are to generate attractive and consistent income through cash distributions and preserve and protect shareholders’ capital, with a secondary objective of capital appreciation. There can be no assurance that the Trust will achieve its investment objectives.
     
THE MASTER FUND   NorthStar Real Estate Capital Income Master Fund (the “Master Fund”), is a Delaware statutory trust that is registered under the 1940 Act as a non-diversified, closed-end management investment company. The Master Fund has the same investment objectives as the Trust. There can be no assurance that the Master Fund will achieve its investment objectives. The Master Fund may have investors in addition to the Trust from time to time that may (individually or in the aggregate) own a greater percentage of the Master Fund than is owned by the Trust. NorthStar Real Estate Capital Income Fund-T (the “T-Class Feeder Fund”), NorthStar Real Estate Capital Income Fund-C (the “C-Class Feeder Fund”) and NorthStar Real Estate Capital Income Fund-ADV (the “ADV-Class Feeder Fund” and, together with the T-Class Feeder Fund and the C-Class Feeder Fund, the “Feeder Funds”), each a feeder fund of the Master Fund, have commenced a public offering. The Master Fund intends to qualify as a RIC under Subchapter M of the Code for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2018.
     
THE ADVISOR   CNI RECF Advisors, LLC (the “Advisor”), a Delaware limited liability company, serves as the investment adviser of the Trust and Master Fund, and is a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). Pursuant to a separate investment advisory agreement with each of the Trust (as amended, supplemented or otherwise modified from time to time, the “Trust Advisory Agreement”) and the Master Fund (as amended, supplemented or otherwise modified from time to time, the “Master Fund Advisory Agreement”), the Advisor oversees the management of the Trust’s and Master Fund’s activities, respectively, including investment strategies, investment goals, asset allocation, asset management, leverage limitations, reporting requirements and other guidelines in addition to the general monitoring of the Trust’s and Master Fund’s portfolios, subject to the oversight of the Board and the Master Fund Board.

 

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    The Advisor also provides certain other administrative services, including marketing, investor relations and certain accounting services and maintenance of books and records on behalf of the Trust and the Master Fund pursuant to the Trust Advisory Agreement and the Master Fund Advisory Agreement, respectively. The Advisor will also furnish the Trust and Master Fund with office facilities and equipment, provide clerical services to the Trust and the Master Fund, perform the calculation and publication of the Master Fund’s NAV, and oversee the preparation and filing of the Master Fund’s tax returns, the payment of the Master Fund’s expenses and the performance oversight of various third party service providers.
     
    In accordance with the Master Fund Advisory Agreement and the Trust Advisory Agreement, the Advisor will be reimbursed for certain expenses it or its affiliates incur in connection with providing services to the Trust or the Master Fund, as provided for in the Master Fund Advisory Agreement and the Trust Advisory Agreement, respectively. The Trust and the Master Fund will also reimburse the Advisor for routine non-compensation overhead expenses incurred by the Advisor in performing administrative services for the Trust and Master Fund. For a description of the expenses subject to reimbursement, see “Trust and Master Fund Expenses.”
     
    The Advisor is an affiliate of Colony NorthStar (as defined below) and does not have employees. However, the Advisor has entered into a staffing agreement with one or more affiliates of Colony NorthStar (the “Advisor Staffing Agreement”), under which Colony NorthStar’s affiliates make certain senior management and other personnel available to the Advisor to perform services for the Trust and Master Fund.
     
    Although the Advisor has a limited operating history, it is led by an experienced executive team with, on average, over 28 years of operational and management experience in the commercial real estate and alternative investment management industries, including Thomas J. Barrack, Jr., Richard B. Saltzman, Darren J. Tangen, Mark M. Hedstrom, Kevin P. Traenkle, Ronald M. Sanders and Neale W. Redington.
     
    In executing its business strategy, the Master Fund will benefit from the Advisor’s affiliation with Colony NorthStar, a leading global real estate and investment management firm with approximately $        billion in assets under management as of December 31, 2017.  Colony NorthStar provides investment management services and manages private funds, non-traded and traded real estate investment trusts and registered investment companies on behalf of a diverse set of institutional and individual investors.

 

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    Colony NorthStar’s executive team is currently responsible for the operations of six other publicly-registered investment platforms. These platforms include Colony NorthStar and NorthStar Realty Europe Corp. (“NorthStar Realty Europe”), a publicly-traded European CRE REIT with approximately $        billion in assets under management as of December 31, 2017 and Colony NorthStar Credit Real Estate, Inc. (“CLNS Credit” and together with NorthStar Realty Europe, the “Colony NorthStar Publicly-Traded REIT Clients”), a publicly-traded CRE credit REIT with approximately $5.1 billion in assets under management and $3.3 billion in equity value as of December 31, 2017, based on the combined assets under management of NorthStar Real Estate Income Trust, Inc. (“NorthStar Income”), NorthStar Real Estate Income II, Inc. (“NorthStar Income II”) and a selected debt and credit real estate portfolio contributed from Colony NorthStar, and three companies that have raised, are raising or are expected to raise capital through retail markets, which are referred to as the Colony NorthStar Retail-Focused Companies:  NorthStar Healthcare Income, Inc. (“NorthStar Healthcare”), NorthStar/RXR New York Metro Real Estate, Inc. (“NorthStar/RXR”) and NorthStar/Townsend Institutional Real Estate Fund Inc. (“NorthStar/Townsend”). We refer to the Colony NorthStar Retail-Focused Companies together with the Colony NorthStar Publicly-Traded REIT Clients and any other current and future companies, funds or vehicles managed by Colony NorthStar or its affiliates, as the Managed Companies. Through their management of these companies, the executive team of Colony NorthStar and its affiliates have developed significant expertise in operating publicly-registered companies, including public company reporting, internal controls and risk management, legal and regulatory compliance, stock exchange requirements, fund management and operations. In addition, Colony NorthStar’s executive team has substantial experience in private debt, private equity and real estate investing.
     
    As of December 31, 2017, Colony NorthStar and its affiliates had more than 500 employees located domestically and internationally across 18 cities in 10 countries, with its principal offices located in Los Angeles, California and in New York, New York.
     
ADMINISTRATOR AND ACCOUNTING AGENT   Pursuant to a master administration, bookkeeping and pricing services agreement (the “Administration, Bookkeeping and Pricing Services Agreement”) by and among the Master Fund, the Trust, the Feeder Funds and ALPS Fund Services, Inc. (the “Administrator”), the Administrator provides the Master Fund, the Trust and the Feeder Funds with certain administration and accounting services. See “Administrator and Accounting Agent.”
     
INVESTMENT OBJECTIVES   The Trust’s primary investment objectives are to generate attractive and consistent income through cash distributions and preserve and protect shareholders’ capital, with a secondary objective of capital appreciation. There can be no assurance that the Trust will achieve its investment objectives.
     
INVESTMENT STRATEGIES   The Trust seeks to achieve its investment objectives by investing substantially all of its assets in the Master Fund. Any assets of the Trust not invested in the Master Fund will be de minimis amounts of cash or cash equivalents to meet its ongoing expenses. All investments are made at the Master Fund level; therefore, the Trust’s investment results will correspond directly to the investment results of the Master Fund.

 

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    The Master Fund pursues its investment objectives by investing primarily in a diversified portfolio of real estate and real estate-related investments, which, under normal circumstances, represent at least 80% of the Master Fund’s net assets (plus the amount of leverage for investment purposes), including: (i) CRE debt, including first mortgage loans, subordinate mortgage and mezzanine loans, participations in such loans and preferred equity interests; (ii) CRE equity investments, including (a) direct investments in CRE and (b) indirect ownership in CRE through private equity real estate investments (“PERE Investments”) and other joint ventures; and (iii) CRE securities, such as commercial mortgage-backed securities (“CMBS”), unsecured debt of publicly-traded real estate investment trusts (“REITs”) and collateralized debt obligation (“CDO”) notes. Although the Master Fund is a “non-diversified” investment company within the meaning of the 1940 Act, the Master Fund seeks to invest in a variety of asset types, property types and geographic locations. The Master Fund’s lending focused investment strategy emphasizes its primary investment objectives to generate attractive and consistent income through cash distributions and preserve and protect shareholders’ capital and its secondary investment objective of capital appreciation from its investments. The Master Fund cannot predict its portfolio composition because such composition will be dependent, in part, upon the then-current CRE market, the investment opportunities it presents and available financing, if any, as well as other micro and macro market conditions. The Master Fund’s 80% policy may only be changed with 60 days’ prior written notice to shareholders of the Master Fund (the “Master Fund Shareholders”). There can be no assurance that the Master Fund will achieve its investment objectives.
     
    Certain direct and indirect equity investments in CRE may be made through the Master Fund’s private REIT (the “REIT Subsidiary”), which intends to invest through wholly owned special purpose vehicles in properties with a focus on consistent income and quality locations. The REIT Subsidiary may also invest in CRE debt and securities. Investment through the REIT Subsidiary involves risks, including the risk that the failure of the REIT Subsidiary to qualify as a REIT will have adverse tax consequences on the REIT Subsidiary and may adversely affect the performance of the Master Fund and, consequently, the Trust.
     
    The period that the Master Fund will hold its investments will vary depending on the type of asset, interest rates, investment performance, micro and macro real estate environment, capital markets and credit availability, among other factors. The Master Fund expects to hold debt investments until the stated maturity. The Master Fund may sell all or a partial ownership interest in an asset before the end of the expected holding period if the Master Fund believes that market conditions have maximized its value to the Master Fund or the sale of the asset would otherwise be in the best interests of the Master Fund Shareholders.

 

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MARKET OPPORTUNITIES   The Advisor believes that the near and intermediate-term market for CRE lending and investments in CRE debt, equity and securities investments continues to be compelling from a risk-return perspective. The Master Fund favors a strategy weighted toward targeting CRE debt investments that maximize current income, with significant subordinate capital and downside structural protections. The Advisor believes that the Master Fund’s lending-focused investment strategy, combined with the experience and expertise of the Advisor’s management team, will provide opportunities to: (i) originate loans with attractive current returns and strong structural features directly with borrowers, thereby taking advantage of market conditions in order to seek a desirable risk-return dynamic for the shareholders; (ii) make CRE equity investments to participate in potential market and property upside; and (iii) purchase CRE debt and securities from third parties, in some instances at discounts to their face amounts (or par value). The Master Fund believes the combination of these strategies and the application of prudent leverage to its CRE investments may also allow it to: (i) realize appreciation opportunities in the portfolio and (ii) diversify its capital and enhance returns.
     
BORROWINGS   Subject to limitations imposed by the 1940 Act, the Trust may borrow money from time to time. Shareholders bear all costs and expenses incurred by the Trust either directly or indirectly, including such costs and expenses associated with any leverage incurred by the Trust.
     
    The Master Fund may finance its investments to provide more cash available for investment and to generate improved returns. The Advisor believes that careful use of leverage will help the Trust and Master Fund enhance the returns on their investments. To the extent that the Master Fund determines it is appropriate to borrow funds to make investments, such as through secured credit facilities and issuing debt securities or other forms of leverage, the costs and expenses incurred in connection with the Master Fund’s leveraging strategies will be indirectly borne by the Trust’s Shareholders. The Master Fund’s ability to incur indebtedness is limited such that its asset coverage (as defined in the 1940 Act) must equal at least 300% immediately after each time it incurs indebtedness. Although it has no current intention to do so, the Master Fund may use leverage through the issuance of preferred shares (“Preferred Shares”) so long as the Master Fund maintains asset coverage (as defined in the 1940 Act) equal to at least 200% immediately after each issuance of Preferred Shares. The Master Fund’s use of leverage is subject to risks and may cause the Master Fund’s NAV and distributions to be more volatile than if leverage was not used. There can be no assurance that the Master Fund’s leveraging strategies will be successful. See “Risk Factors — The Master Fund may use leverage in connection with its investments, which may increase the risk of loss associated with its investments.”
     
    In addition to any indebtedness incurred by the Master Fund, the special purpose vehicles that are wholly owned by the Master Fund or any subsidiary of the Master Fund, including the REIT Subsidiary, may also utilize leverage, including by mortgaging properties held by the special purpose vehicles, or by acquiring property with existing debt. Any such borrowings will generally be the sole obligation of each respective special purpose vehicle, without any recourse to any other special purpose vehicle, the REIT Subsidiary, the Master Fund, the Trust or its assets, and the Master Fund will not treat such non-recourse borrowings as senior securities (as defined in the 1940 Act) for purposes of complying with the 1940 Act’s limitations on leverage unless the financial statements of the special purpose vehicle, or the subsidiary of the Master Fund that owns such special purpose vehicle, will be consolidated in accordance with Regulation S-X and other accounting rules. If cash flow is insufficient to pay principal and interest on a special purpose vehicle’s borrowings, a default could occur, ultimately resulting in foreclosure of any security instrument securing the debt and a complete loss of the investment, which could result in losses to the REIT Subsidiary and, therefore, to the Master Fund and the Trust.

 

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    To the extent that subsidiaries of the Master Fund, including the REIT Subsidiary, directly incur leverage in the form of debt (as opposed to non-recourse borrowings made through special purpose vehicles), the amount of such recourse leverage used by the Master Fund and such subsidiaries, including the REIT Subsidiary, will be consolidated and treated as senior securities for purposes of complying with the 1940 Act’s limitations on leverage by the Master Fund. Accordingly, it is the Master Fund’s present intention to utilize leverage through debt or borrowings in an amount not to exceed 331∕3% of the Master Fund’s total assets (i.e., maintain 300% asset coverage), less the amount of any direct debt or borrowing by subsidiaries of the Master Fund, including the REIT Subsidiary, if any. Because the REIT Subsidiary’s preferred shares represent a small amount of leverage by the REIT Subsidiary, such leverage will also be consolidated for purposes of complying with the 1940 Act’s limitations on the Master Fund’s ability to issue Preferred Shares. See “Investment Objectives and Strategies — Borrowing Policy.”
     
MANAGEMENT AND INCENTIVE FEES   In light of the Advisor’s arrangement with the Master Fund and the fact that the Trust seeks to achieve its investment objectives by investing substantially all of its assets in the Master Fund, the Advisor will not charge the Trust a Management Fee and an Incentive Fee (as defined below) with respect to any period during which the only investment security held by the Trust is that of the Master Fund. As a result, as long as the Trust continues to invest in the Master Fund as part of a master-feeder arrangement, Shareholders will incur a single fee for the management services provided by the Advisor to the Trust and the Master Fund (without duplication). Pursuant to the Master Fund Advisory Agreement, and in consideration of the advisory services provided by the Advisor to the Master Fund, the Advisor is entitled to a fee consisting of two components—a base management fee (the “Management Fee”) and an incentive fee (the “Incentive Fee”), respectively.
     
    The Management Fee is calculated and payable quarterly in arrears at an annual rate of 1.25% of the Master Fund’s average daily net assets during such period.

 

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    The Incentive Fee is calculated and payable quarterly in arrears based upon the Master Fund’s “pre-incentive fee net investment income” for the immediately preceding quarter. For this purpose, “pre-incentive fee net investment income” means interest income, dividend income and any other income accrued during the calendar quarter, minus the Master Fund’s operating expenses for the quarter (including the Management Fee, expenses reimbursed to the Advisor under the Master Fund Advisory Agreement and any interest expense and distributions paid on any issued and outstanding preferred shares, but excluding the offering and organization expenses and the Incentive Fee).  Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as OID, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that the Master Fund has not yet received and may never receive in cash.  While we may make incentive fee payments on income accruals that we may not collect in the future and with respect to which we do not have a formal “claw back” right against the Advisor per se, the amount of accrued income written off in any period will reduce our pre-incentive fee net investment income in the period in which such write-off was taken and thereby may reduce such period’s incentive fee payment.  Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
     
    The Incentive Fee will be subject to a quarterly fixed preferred return to Shareholders, expressed as a rate of return on the value of the Master Fund’s adjusted capital, at the beginning of the most recently completed calendar quarter, of 1.50%, subject to a “catch-up” feature and is intended to provide the Advisor with an incentive fee of 12.5% on all of the Master Fund’s pre-incentive fee net investment income when the Master Fund’s pre-incentive fee net investment income reaches 1.715% in any calendar quarter; 12.5% of the Master Fund’s pre-incentive fee net investment income, if any, that exceeds 1.715% in any calendar quarter is payable to the Advisor once the quarterly hurdle rate is reached and the catch-up is achieved (12.5% of all the Master Fund’s pre-incentive fee net investment income thereafter is allocated to the Advisor).  There is no accumulation of amounts on the hurdle rate from quarter to quarter and accordingly there is no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle and there is no delay of payment if prior quarters are below the quarterly hurdle.
     
    For more information regarding these fees, see “Management and Incentive Fees.”
     
OPERATING EXPENSES   The Trust directly bears all expenses incurred in its operation, including amounts that the Trust reimburses to the Advisor and pays to the Administrator for services provided under the Trust Advisory Agreement and the Administration, Bookkeeping and Pricing Services Agreement, respectively, and the Trust indirectly bears its pro rata portion of all expenses incurred by the Master Fund based on its ownership of common shares of the Master Fund (“Master Fund Shares”), including amounts that the Master Fund reimburses to the Advisor and pays to the Administrator for accounting and administrative services provided to the Master Fund under the Master Fund Advisory Agreement and the Administration, Bookkeeping and Pricing Services Agreement, respectively, and amounts payable to other third-party service providers engaged by the Advisor on behalf of the Master Fund. See “Summary of Fees and Expenses” and “Trust and Master Fund Expenses.”

 

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DISTRIBUTIONS   Subject to the Board’s discretion and applicable legal restrictions, the Trust intends to authorize and declare distributions on a quarterly basis and pay such distributions on a monthly basis. The distributions are expected to be paid using distributions received from the Master Fund, net of any Trust operating expenses. Generally, the Master Fund intends to pay distributions from cash flow from operations. However, the Master Fund’s organizational documents permit it to pay distributions from any source, including borrowings, sales of assets and offering proceeds contributed to it by the Trust. Distributions may also be made in the form of taxable stock dividends. Additionally, some distributions may be paid through the partial waiver of fees by the Advisor. For so long as each of the Trust and the Master Fund qualify as a RIC, neither the Trust nor the Master Fund will have to pay corporate-level U.S. federal income taxes on any income that it distributes to its shareholders out of its tax earnings and profits. In addition, in order to qualify for and maintain RIC tax treatment, each of the Trust and the Master Fund must distribute, on a timely basis with respect to each tax year, dividends of an amount at least equal to the sum of 90% of its “investment company taxable income,” determined without regard to any deduction for dividends paid, and its net tax-exempt interest income for such tax year. See “Distributions.”
     
Expense Support and Conditional reimbursement Agreements   The Board and the Master Fund Board have approved separate expense support and conditional reimbursement agreements between Colony NorthStar FV and each of the Trust and the Master Fund (each an “Expense Support Agreement”), whereby Colony NorthStar FV has agreed to reimburse the Trust and the Master Fund for expenses to seek to ensure that each of the Trust and the Master Fund bears a reasonable level of expenses in relation to its income. The purpose of these agreements is to seek to minimize the extent to which any portion of Trust distributions or Master Fund distributions, as applicable, will be characterized as a return of capital for U.S. GAAP purposes and to reduce operating expenses until the Trust has raised capital and is generating income to absorb such expenses. However, such distributions may still be characterized as a return of capital for U.S. federal income tax purposes.
     
    Pursuant to the Expense Support Agreements, Colony NorthStar FV will reimburse, on a quarterly basis, the Trust and the Master Fund for expenses in an amount equal to the difference between the cumulative quarterly distributions paid to the Trust’s or the Master Fund’s Shareholders, as applicable, less the Trust’s or the Master Fund’s Available Operating Funds during such quarter. “Available Operating Funds” means the net investment income of the Trust or the Master Fund, as applicable, minus any reimbursement payments payable to Colony NorthStar FV pursuant to this arrangement. Colony NorthStar FV’s obligation to make an expense payment shall automatically become a liability of Colony NorthStar FV and the right to such expense payment shall be an asset of the Trust or the Master Fund, as applicable, on each day that the Trust’s or the Master Fund’s, as applicable, net asset value is calculated.

 

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    The Trust and the Master Fund have a conditional obligation to reimburse Colony NorthStar FV for any amounts funded by it under the Expense Support Agreements in any calendar quarter occurring within three years of the date on which it funded such amounts.  In addition, the Trust and the Master Fund shall not be required in any calendar quarter to reimburse Colony NorthStar FV for any expense payments made by Colony NorthStar FV to the Trust or the Master Fund if the annualized rate of regular distributions declared by the Trust or the Master Fund at the time of such calendar quarter is less than the annualized rate of regular distributions declared by the Trust at the time the expense payment was incurred by the Trust or the Master Fund.  
     
    The Expense Support Agreements may be terminated at any time by the Trust or Colony NorthStar FV or shall automatically terminate in the event of (i) the termination by the Trust of the Trust Advisory Agreement, (ii) an assignment (as that term is defined under the 1940 Act) of the Trust Advisory Agreement, or (iii) the Board makes a determination to dissolve or liquidate the Trust.
     
DISTRIBUTION SUPPORT AGREEMENT   If the Expense Support Agreements are terminated, some of the Trust’s distributions may be paid pursuant to a distribution support agreement (the “Distribution Support Agreement”) between the Master Fund and Colony NorthStar FV.  Colony NorthStar FV has agreed to purchase up to an aggregate of $10.0 million in Master Fund Shares at the then-current NAV per Master Fund Share, of which $2.0 million was contributed to the Master Fund by an affiliate of Colony NorthStar as the Seed Capital Investment, until the earlier of (a) June 30, 2019, or (b) the date upon which neither the Advisor nor any of its affiliates is serving as the Master Fund’s investment adviser. In no event shall Colony NorthStar FV be required to purchase in the aggregate greater than $10.0 million in Master Fund Shares, including the Seed Capital Investment. If the cash distributions the Master Fund pays during any month exceeds the Master Fund’s net investment income for such month, Colony NorthStar FV will purchase Master Fund Shares following the end of each month for an aggregate purchase price equal to the amount by which the distributions paid to the Master Fund Shareholders exceed the Master Fund’s net investment income for such month, up to an amount equal to a 6.0% cumulative, non-compounded annual return on Master Fund Shareholders’ invested capital prorated for such month. Notwithstanding the obligations of Colony NorthStar FV pursuant to the Distribution Support Agreement, the Master Fund is not required to pay distributions to the Master Fund Shareholders, including the Trust, at a rate of 6.0% per annum or at all. Further, a $10.0 million investment in the Master Fund by Colony NorthStar FV in accordance with the Distribution Support Agreement may not be sufficient to enable the Master Fund to pay distributions to Master Fund Shareholders at a rate of at least 6.0% per annum during the term of the agreement. Distributions funded from offering proceeds pursuant to the Distribution Support Agreement may constitute a return of capital, which is a return of an investor’s investment rather than a return of earnings or gains derived from investment activities. Distributions constituting a return of capital will lower a Shareholder’s tax basis in his or her Shares. Reducing a Shareholder’s tax basis in his or her Shares will have the effect of increasing his or her capital gain (or reducing loss) on a subsequent sale of Shares.

 

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    After the Expense Support Agreements and Distribution Support Agreement with Colony NorthStar FV has terminated, the Master Fund and, consequently, the Trust may not have sufficient cash available to pay distributions at the rate it had paid during preceding periods or at all. For more information regarding the Distribution Support Agreement, the purchase of Master Fund Shares thereunder as of the date of this prospectus and the distribution policy, please see “Distributions—Distribution Support Agreement.”
     
CAPITAL INVESTMENT AGREEMENT   Pursuant to a capital investment agreement (the “Capital Investment Agreement”) between Colony NorthStar FV and the Trust executed in May 2017, Colony NorthStar FV has purchased $20 million of Class A Shares. The Class A Shares were issued at the NAV per Share on the date of each installment subscription, with the Sales Load waived.  The purpose of the Capital Investment Agreement was to provide necessary capital for the formation of an early stage seed portfolio and better align Colony NorthStar’s interests with the Shareholders.   
     
BOARD OF TRUSTEES   The Board has overall responsibility for monitoring and overseeing the Trust’s management and operations. A majority of the Trustees are trustees who are not “interested persons” of the Trust as defined in the 1940 Act (“Independent Trustees”). These same Trustees also serve as the Trustees of the Master Fund. See “Management of the Trust and the Master Fund.”
     
THE OFFERING   The Trust is offering on a continuous basis up to 300,000,000 Shares.  Shares are offered through the Distributor at a public offering price (the “Offering Price”) equal to the Trust’s the then current NAV per Share, plus a maximum Sales Load (as defined below) of up to 8% of the Offering Price for Class A Shares.  The Trust is offering to the public two classes of Shares: Class A Shares and Class I Shares. The Trust is offering to sell any combination of Shares, with an aggregate number of Shares up to the maximum offering of Shares. The Shares differ with respect to the sales load an investor must pay. An investor will pay (i) selling commissions and dealer manager fees for the purchase of Class A Shares and (ii) no selling commissions or dealer manager fees for the purchase of Class I Shares (collectively, the “Sales Load”). However, regardless of class, each Share (i) will have identical rights with respect to voting and distributions, (ii) will bear its own pro rata portion of the Trust’s expenses and (iii) will have the same NAV per Share as each other Share.  See “Summary of Terms – Sales Load.”
     
PLAN OF DISTRIBUTION   This is a continuous offering of Shares as permitted by the federal securities laws. The Distributor has agreed to sell the Shares on a best efforts basis, subject to various conditions but not subject to a contingency of any kind, and is not required to sell any specific number or dollar amount of Shares.  On January 11, 2018, the indirect parent company of the Distributor, DST Systems, Inc. (“DST”), entered into a definitive agreement with SS&C Technologies Holdings, Inc. (“SS&C”) under which SS&C will acquire all of the outstanding common stock of DST (the “DST Transaction”).  Upon the completion of the DST Transaction, SS&C will have an indirect controlling interest in the Distributor.  The DST Transaction, which is expected to close by the third quarter of 2018, is subject to the satisfaction of customary conditions (including the completion of required regulatory filings).

 

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    NorthStar Securities, LLC (“NorthStar Securities”) has entered into a wholesale marketing agreement with the Distributor in connection with the offering of the Shares. Shares may be purchased daily at a price that is not less than the Trust’s then-current NAV (exclusive of any applicable Sales Load) and the Trust will accept purchases of Shares daily.  On February 16, 2018, Colony NorthStar and/or its subsidiaries entered into a definitive combination agreement (the “Proposed Transaction”) for the combination of NorthStar Securities with S2K Financial Holdings LLC (“S2K”).  The Proposed Transaction would include Colony NorthStar contributing its broker-dealer, NorthStar Securities, in exchange for a majority ownership in S2K, which will be called Colony S2K Holdings LLC. The Proposed Transaction, which is expected to close in the second quarter of 2018, is subject to the satisfaction of customary conditions (including the completion of required regulatory filings).
     
SALES LOAD   Investors will pay (i) a Sales Load of up to 8.0%, in the aggregate, of the Trust’s Offering Price per Share for the purchase of Class A Shares and (iii) no Sales Load for the purchase of Class I Shares. The Sales Load may be reduced or waived in connection with certain categories of sales, such as sales for which a volume discount applies, sales through investment advisers or banks acting as trustees or fiduciaries, and sales to affiliates. Shareholders should consult with their financial intermediaries about any additional fees or charges they might impose.
     
ORGANIZATION AND OFFERING EXPENSES   The Advisor and its affiliates have incurred organization and offering costs, on the Trust’s behalf, of approximately $11,000 and $2,000,000, respectively, as of December 31, 2017. The Advisor and its affiliates are entitled to receive reimbursement for costs paid on behalf of the Trust. The Trust records organization and offering costs each period based upon an allocation determined by the Advisor based on its expectation of total organization and offering costs to be reimbursed. As of December 31, 2017, organization and offering costs of approximately $11,000 and $55,000, respectively, have been allocated to the Trust.
     
    Organization costs include, among other things, the cost of organizing as a Delaware statutory trust, including the cost of legal services and other fees pertaining to the Trust’s organization. These costs are expensed as incurred. The Trust’s offering costs include, among other things, legal, accounting, printing and other expenses pertaining to this offering. The offering costs incurred directly by the Trust are accounted for as a deferred charge and are amortized over 12 months on a straight-line basis.
     
    The Trust will reimburse the offering expenses incurred by the Advisor and its affiliates on the Trust’s behalf. However, the Advisor has agreed to limit the amount of “Organization and Offering Expenses” incurred by the Trust to 1.0% of the aggregate proceeds raised in this offering, exclusive of the Sales Load. Any reimbursements of organization and offering expenses by the Trust will not exceed actual expenses incurred by the Advisor and its affiliates, and the Advisor is responsible for the payment of the Trust’s cumulative organization and offering expenses to the extent they exceed 1.0% of the aggregate proceeds raised in this offering, exclusive of the Sales Load.

 

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PURCHASES OF SHARES   Investors may buy and sell Shares through financial intermediaries and their agents that have made arrangements with the Trust and are authorized to buy and sell shares of the Trust (collectively, “Financial Intermediaries”). Such Financial Intermediaries may be authorized to designate other intermediaries to receive purchase or sale orders on the Trust’s behalf. Orders will be placed at the appropriate price, which shall be a price that is not less than the Trust’s then-current NAV (exclusive of the Sales Load) next computed after it is received by a Financial Intermediary and accepted by the Trust. A Financial Intermediary may hold shares in an omnibus account in the Financial Intermediary’s name or the Financial Intermediary may maintain individual ownership records. Financial Intermediaries may charge fees for the services they provide in connection with processing your transaction order or maintaining an investor’s account with them. Investors should check with their Financial Intermediary to determine if it is subject to these arrangements. Financial Intermediaries are responsible for placing orders correctly and promptly with the Trust and for forwarding payment promptly. Orders placed with a Financial Intermediary before the close of regular trading (generally 4:00 p.m., Eastern Time) on a day that the New York Stock Exchange is open for business will be priced based on the Trust’s NAV determined as of such day, plus any applicable Sales Load, while orders placed with a Financial Intermediary after the close of regular trading (generally after 4:00 p.m., Eastern Time) on a day that the New York Stock Exchange is open for business will be priced based on the Trust’s NAV determined on the day following the date upon which such order is received by the Financial Intermediary, plus any applicable Sales Load.
     
    An investor may also complete and sign a subscription agreement for a specific dollar amount equal to or greater than $4,000 for Class A Shares and $100,000 for Class I Shares, and pay such amount at the time of subscription; provided, however, that the Trust reserves the right to accept subscriptions of less than $4,000 or $100,000 as applicable. An investor should make his or her check payable to “NorthStar Real Estate Capital Income Fund.” Subscriptions will be effective only upon the Trust’s acceptance and it reserves the right to reject any subscription in whole or in part. Subscriptions will be priced based on the Trust’s NAV determined as of the date the subscription is received by the Trust, plus any applicable Sales Load. Subscriptions will be accepted or rejected by the Trust within ten days of receipt and, if rejected, all funds will be returned to subscribers without deduction for any expenses without interest, unless otherwise required by applicable law. Pending acceptance of an investor’s subscription, proceeds will be deposited into an account for his or her benefit. An investor generally does not have the option of rescinding a purchase order after the Shares to be purchased pursuant to the subscription agreement or through a financial intermediary have been issued to the investor.
     
    The minimum initial investment is $4,000 for Class A Shares and $100,000 for Class I Shares. The Trust reserves the right to waive investment minimums. Additional purchases must be in increments of $100, except for purchases made pursuant to the Trust’s DRP or as otherwise permitted by the Trust. See “Distribution Reinvestment Plan.”

 

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    For Shares purchased through a subscription, an approved trustee must process and forward to the Trust subscriptions made through individual retirement accounts (“IRAs”), Keogh plans and 401(k) plans. In such case, the Trust will send the confirmation and notice of its acceptance to the trustee.
     
SUITABILITY STANDARDS   An investment in the Trust involves a considerable amount of risk. Shares offered through this prospectus are suitable only as a long-term investment for persons of adequate financial means who have no need for liquidity in this investment. A Shareholder may lose all or a portion of his or her money. An investment in the Trust should not be viewed as a complete investment program.
     
ERISA PLANS AND OTHER TAX-EXEMPT ENTITIES   Investors subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and other tax-exempt entities, including employee benefit plans, IRAs, and 401(k) and Keogh plans, may purchase Shares. Because the Trust is registered as an investment company under the 1940 Act, the underlying assets of the Trust should not be considered to be “plan assets” of the ERISA plans investing in the Trust for purposes of ERISA’s fiduciary responsibility and prohibited transaction rules. Thus, neither the Trust nor the Advisor should be a fiduciary within the meaning of ERISA with respect to the assets of any ERISA plan that becomes a Shareholder, solely as a result of the ERISA plan’s investment in the Trust. See “ERISA Considerations.”
     
UNLISTED CLOSED-END STRUCTURE   Each of the Trust and the Master Fund has been organized as a closed-end management investment company. Closed-end funds differ from open-end management investment companies (commonly known as mutual funds) in that investors in a closed-end fund do not have the right to redeem their shares on a daily basis. Unlike most closed-end funds, which typically list their shares on a securities exchange, the Trust does not currently intend to list the Shares for trading on any securities exchange and does not expect any secondary market to develop for the Shares in the foreseeable future. Therefore, an investment in the Trust, unlike an investment in a listed closed-end fund, is not a liquid investment.
     
    The Trust has instituted a share repurchase program, but it may limit the number of Shares that it will offer to repurchase. As a result, an investor’s ability to sell his or her Shares may be limited and such investor may not receive a full return of invested capital upon selling his or her Shares. The Trust will not charge for the transfer of its Shares except for necessary and reasonable costs it actually incurs.
     
    The Trust believes that an unlisted closed-end structure is most appropriate for the long-term nature of the Master Fund’s investment strategy. The ability to hold positions through various market conditions is crucial to maximizing shareholder value. Features that interfere with this ability (such as daily redemptions that cause the premature sale of investments) could impair the Master Fund’s ability to execute its strategy. Accordingly, an unlisted closed-end structure helps the Master Fund achieve its investment objectives. Because Shares are not and will not be listed on a national securities exchange, the Shares will not be subject to the market price volatility associated with the public markets. However, the NAV of the Shares may be volatile.

 

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VALUATIONS   The Trust determines the NAV of Shares daily during the Offering Period and intends to determine the NAV of the Shares quarterly thereafter. The Master Fund’s valuation committee, which consists of personnel from the Advisor whose membership on the Valuation Committee was approved by the Master Fund Board (the “Valuation Committee”), values the Master Fund’s assets in good faith pursuant to the Master Fund’s valuation policies and procedures that were developed by the Valuation Committee and approved by the Master Fund Board. In circumstances where market quotes are not readily available, the Master Fund Board has adopted methods for determining the fair value of such securities and other assets, and has delegated the responsibility for applying the valuation methods to the Valuation Committee. On a quarterly basis, or more frequently if necessary, the Master Fund’s audit committee reviews and the Master Fund Board ratifies the valuation determinations made with respect to the Master Fund’s investments during the preceding period and evaluates whether such determinations were made in a manner consistent with the Master Fund’s valuation policies and procedures. The Trust, in turn, utilizes the NAV of the Master Fund Shares as determined by the Master Fund in accordance with the methodology described above in determining the NAV and offering price of the Shares. Valuations of Fund investments are disclosed quarterly in reports filed with the Securities and Exchange Commission (the “SEC”). See “Determination of Net Asset Value.”
     
LIQUIDITY STRATEGY   The Trust and the Master Fund intend to explore a liquidity event for Shareholders approximately five years following the completion of the Offering Period or at such earlier time as the Board and the Master Fund Board may determine, taking into consideration market conditions and other factors. Accordingly, investors should consider that they may not have access to the money they invest for an indefinite period of time or until a liquidity event is completed. The Trust may determine not to pursue a liquidity event if it believes that then-current market conditions are not favorable for a liquidity event.
     
    A liquidity event could include (i) the purchase by the Master Fund for cash of all the Trust’s Master Fund Shares at NAV and the distribution of that cash to the Trust’s shareholders on a pro rata basis in connection with the Trust’s complete liquidation and dissolution; (ii) subject to the approval of the shareholders of each feeder fund, including the Trust, a listing of the Master Fund Shares on a national securities exchange and the liquidation and dissolution of each feeder fund, including the Trust, at which point all shareholders of each feeder fund would become direct shareholders of the Master Fund; or (iii) a merger or another transaction approved by the Board and the Master Fund Board in which the Shareholders will receive cash or securities of a publicly-traded company. The aforementioned scenarios are referred to as “liquidity events.”
     
    While the Trust and the Master Fund intend to explore a liquidity event approximately five years following the completion of the Offering Period or at such earlier time as the Board and the Master Fund Board may determine, taking into consideration market conditions and other factors, there can be no assurance that a suitable transaction will be available or that market conditions for a liquidity event will be favorable during that timeframe. As such, there can be no assurance that there will be a liquidity event at all.

 

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DISTRIBUTION REINVESTMENT PLAN   The Trust has adopted an “opt in” DRP pursuant to which Shareholders may elect to have the full amount of their cash distributions reinvested in additional Shares. Participants in the DRP are free to participate in or terminate their participation in the DRP within a reasonable time as specified in the plan. If Shareholders do not elect to participate in the plan, they will automatically receive any distributions the Trust declares in cash.
     
    The Trust expects to issue Shares pursuant to the DRP monthly on the day of or immediately following each monthly distribution payment date at a price equal to the NAV per Share. Shares issued pursuant to the DRP will have the same voting rights as Shares offered pursuant to this prospectus. See “Distributions.”
     
PERIODIC LIQUIDITY THROUGH SHARE REPURCHASE PROGRAM   To provide Shareholders with limited liquidity, the Trust has conducted and in the future intends to conduct quarterly repurchases of Shares, but the Trust is not obligated to do so. Each repurchase offer will generally be conducted in parallel with similar repurchase offers made by the Master Fund with respect to the Master Fund Shares. Any offer to repurchase Shares will be conducted solely through written tender offer materials mailed to each Shareholder (and not through this prospectus) in accordance with the requirements of Rule 13e-4 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
     
    The Trust currently intends to limit the number of Shares to be repurchased on each date of repurchase to the number of Shares the Trust can repurchase with, in the Board’s sole discretion, (i) the aggregate proceeds it has received from the issuance of Shares pursuant to its DRP for the previous quarter, and/or (ii) the aggregate proceeds it has received from the sale of Shares, other than such Shares issued pursuant to its DRP for the previous calendar month immediately prior to the date upon which the notification to repurchase Shares was provided to Shareholders. The Board may, in its sole discretion, determine to limit the number of Shares to be repurchased to an amount that is greater than or less than the amounts described above. The Trust will further limit the number of Shares to be repurchased in any calendar quarter to 5.0% of the weighted average number of Shares outstanding in the previous full calendar quarter prior to the date upon which the notification to repurchase Shares was provided to Shareholders. In addition, beginning with our second full calendar year of operations, the Trust will limit the number of Shares to be repurchased in any calendar year to 20.0% of the weighted average number of Shares outstanding in the prior calendar year. The Trust intends to offer to repurchase such Shares at a price equal to the NAV per Share on each date of repurchase.

 

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    The Trust’s assets consist primarily of its interest in Master Fund Shares. Therefore, in order to finance the repurchase of Shares pursuant to the repurchase offers, the Trust may find it necessary to liquidate all or a portion of its interest in Master Fund Shares. As a result, the Trust will not generally conduct a repurchase offer for Shares unless the Master Fund simultaneously conducts a repurchase offer for Master Fund Shares. The Trust expects the Master Fund to conduct quarterly repurchase offers for Master Fund Shares.
     
    If the amount of repurchase requests exceeds the number of Shares the Trust seeks to repurchase, the Trust will repurchase Shares on a pro rata basis. If the Trust does not repurchase the full amount of Shares that a Shareholder requests to be repurchased, or the Trust determines not to make repurchases of Shares, a Shareholder may not be able to dispose of their Shares. Any periodic repurchase offers will be subject in part to the Trust’s available cash and compliance with the RIC qualification and diversification rules promulgated under the Code and the REIT Subsidiary’s compliance with the REIT qualification and diversification rules under the Code.
     
    While the Trust intends to conduct quarterly repurchase offers as described above, the Trust is not required to do so and the Board or the Master Fund Board may suspend or terminate such repurchase offers at any time. Shareholders may be unable to sell their Shares for an indefinite amount of time or at a desired price as investors have no right to require the Trust to redeem their Shares. See “Risk Factors—Risks Related to an Investment in the Trust.”
     
SUMMARY OF TAXATION   Each of the Trust and the Master Fund intend to operate in a manner that will allow each to qualify as a RIC under Subchapter M of the Code for U.S. federal income tax purposes, beginning with the taxable year ending December 31, 2018. For so long as each of the Trust and the Master Fund qualify as a RIC, generally, neither the Trust nor the Master Fund will have to pay corporate-level U.S. federal income taxes on any income that it distributes to its shareholders from its tax earnings and profits. In addition, in order to qualify for and maintain RIC tax treatment, each of the Trust and the Master Fund must distribute on a timely basis with respect to each tax year dividends of an amount at least equal to the sum of 90% of its “investment company taxable income,” determined without regard to any deduction for dividends paid, and its net tax-exempt interest income for such tax year.
     
    The REIT Subsidiary intends to operate in a manner that will allow it to qualify as a REIT for U.S. federal income tax purposes, beginning with the taxable year ending December 31. 2018. For so long as the REIT Subsidiary qualifies as a REIT, generally, the REIT Subsidiary will not have to pay corporate-level U.S. federal income taxes on any income that it distributes to its shareholders from its tax earnings and profits. See “Distributions” and “U.S. Federal Income Tax Considerations.”
     
FISCAL YEAR   For accounting purposes, the Trust’s fiscal year is the 12-month period ending on December 31.
     
REPORTS TO SHAREHOLDERS   As soon as practicable after the end of each calendar year, the Trust will furnish to Shareholders a statement on Form 1099-DIV identifying the sources of the distributions paid by the Trust to Shareholders for tax purposes. In addition, the Trust will prepare and transmit to Shareholders an unaudited semi-annual and an audited annual report within 60 days after the close of the period for which the report is being made, or as otherwise required by the 1940 Act.

 

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CONFLICTS OF INTEREST   The Advisor and certain of its affiliates may experience conflicts of interest in connection with the management of the Master Fund, including, but not limited to:

 

    · the allocation of the time and resources of the directors, members, officers and employees of the Advisor and/or its affiliates and the members of the investment committee between the Master Fund and other investment activities, including relating to the Managed Companies;
       
    · compensation payable by the Master Fund to the Advisor and its affiliates;
       
    · competition with certain affiliates of Colony NorthStar and the Managed Companies and the Advisor for investment opportunities;
       
    · the due diligence review of the Master Fund and the Trust by NorthStar Securities, which is an affiliate of the Advisor;
       
    · NorthStar Securities’ conflict in selling securities with respect to a number of public offerings, simultaneously with this offering, for issuers whose businesses may or may not be competitive; and
       
    · the formation of additional investment funds or entrance into other investment advisory relationships by the Advisor or its affiliates.

 

    Certain entities affiliated with the Advisor have filed an exemptive application with the SEC to engage in otherwise prohibited co-investment opportunities. If such exemptive relief is granted, the Master Fund intends to rely on such exemptive relief to engage in otherwise prohibited co-investment opportunities with certain entities affiliated with or managed by the Advisor or its affiliates. However, until any such relief is granted, the Master Fund may co-invest with affiliates of the Advisor only in accordance with existing regulatory guidance and applicable allocation policies, which may reduce the amount of transactions in which the Master Fund can participate and make it more difficult for it to implement its investment objectives. These co-investment opportunities may give rise to conflicts of interest or perceived conflicts of interest among us and the other participating accounts. To mitigate these conflicts, the Advisor and its affiliated investment advisers will seek to execute such transactions for all of the participating investment accounts, including the Master Fund, on a fair and equitable basis, taking into account such factors as the relative amounts of capital available for new investments, the investment programs and portfolio positions of the accounts, the accounts for which participation is appropriate and any other factors deemed appropriate.
     
    In addition, the Trust’s and the Master Fund’s executive officers and certain of the Trustees may also be officers, directors, managers or employees of Colony NorthStar, NorthStar Securities and/or other affiliates of Colony NorthStar or the Managed Companies. These persons have legal obligations with respect to those entities that may be similar to their obligations to the Trust and the Master Fund and may have conflicts with respect to allocation of time and resources between such entities. See “Conflicts of Interest.”

 

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RISK FACTORS   Investing in the Trust involves risks, including the risk that a Shareholder may receive little or no return on its investment or that a Shareholder may lose part or all of its investment. Below is a summary of some of the principal risks of investing in the Trust. Because the Trust invests substantially all of its assets in the Master Fund, an investment in the Trust carries all of the risks of an investment in the Master Fund. For a more complete discussion of the risks of investing in the Master Fund, see “Risk Factors.” Shareholders should consider carefully the following principal risks before investing in the Trust:

 

    · The Trust and the Master Fund have limited operating histories;
       
    · An investment in Shares is not suitable for an investor if they need access to the money they invest. See “Liquidity Strategy” and “Investor Suitability;”
       
    · Unlike an investor in most closed-end funds, Shareholders should not expect to be able to sell their Shares regardless of how the Trust performs. See “Liquidity Strategy;”
       
    · The Trust is not obligated to complete a liquidity event by a specified date; therefore, it will be difficult or impossible for a Shareholder to sell his or her Shares;
       
    · The Trust intends to offer to repurchase Shares on a quarterly basis. As a result Shareholders will have limited opportunities to sell their Shares and, to the extent they are able to sell their Shares under the program, they may not be able to recover the amount of their investment in the Shares. In addition, the Board or the Master Fund Board may suspend or terminate the share repurchase program at any time and there is no guarantee that the program will remain in place;
       
    · Unless the Master Fund experiences substantial net capital appreciation and realized gains, the repurchase price for Shares associated with the Trust’s periodic repurchase offers will be at a lower price than the price you paid for Shares, and the timing of the Trust’s repurchase offers may be at a time that is disadvantageous to Shareholders;
       
    · If a Shareholder is able to sell his or her Shares, the Shareholder will likely receive less than the purchase price and the then-current NAV per Share. In addition, Shareholders are subject to transfer restrictions and there is no guarantee that they will be able to sell their shares;
       
    · The Shares sold in this offering are not and will not be listed on an exchange and the Trust is not expected to consider alternatives for providing liquidity to the Shareholders for at least five years from the completion of the offering stage, and there can be no assurance that there will be a liquidity event at all. Therefore, if Shareholders purchase Shares in this offering, they will have limited liquidity and may not receive a full return of their invested capital if they sell their Shares;

 

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    · The Board may change the Trust’s investment objectives by providing Shareholders with 60 days’ prior notice, or may modify or waive its current operating policies and strategies without prior notice or Shareholder approval, the effects of which may be adverse;
       
    · Although the Trust has implemented a share repurchase program, it may be discontinued at any time and only a limited number of Shares will be eligible for repurchase. See “Share Repurchase Program;”
       
    · The Trust’s distributions are expected to be paid using distributions received from the Master Fund, net of any of the Trust’s operating expenses. Generally, the Master Fund intends to pay distributions from cash flow from operations. However, the Master Fund’s organizational documents permit it to pay distributions from any source, including borrowings, sales of assets and offering proceeds contributed to it by the Trust;
       
    · This is a “best efforts” offering, and if the Trust is unable to raise substantial funds, the Master Fund will be limited in the number and type of investments it may make, and the value of a Shareholder’s investment may be reduced in the event the Master Fund’s assets under-perform;
       
    · NorthStar Securities has only limited experience selling common shares on behalf of a registered closed-end management investment company and may be unable to sell a sufficient number of Shares in the Trust for the Trust and the Master Fund to achieve their investment objectives;
       
    · If the Master Fund’s distributions are funded from sources other than cash flow from operations, the Master Fund will have less cash available for investments and the Master Fund Shareholders’ overall returns may be reduced;
       
    · The Master Fund may use leverage in connection with its investments, which may increase the risk of loss associated with its investments. In addition, if a wholly owned special purpose vehicle of any subsidiary of the Master Fund, including the REIT Subsidiary, is unable to pay principal and interest on borrowings it has incurred, a default could result in foreclosure of any security instrument securing the debt and a complete loss of the investment, which could result in losses to the REIT Subsidiary and, therefore, to the Master Fund and the Trust;
       
    · The Master Fund may be unable to obtain financing required to originate or acquire investments as contemplated in its business plan, which could compel it to restructure or abandon a particular origination or acquisition and harm its ability to make distributions;

 

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    · The Advisor, the Trust and the Master Fund face cyber-security risks;
       
    · Because it invests substantially all of the assets in the Master Fund, the Trust’s NAV is inherently linked to the Master Fund’s NAV. There is no guarantee that the Trust’s NAV or the Master Fund’s NAV will not decrease;
       
    · There is a risk that Shareholders may not receive distributions or that the Trust’s distributions may not grow over time. Due to the risks involved in the ownership of real estate-related investments, there is no guarantee of any return and an investor may lose a part or all of his or her investment;
       
    · The amount of any distributions the Trust may make is uncertain. The Trust’s distribution proceeds may exceed its earnings, particularly during the period before it has substantially invested the net proceeds from this offering. Therefore, portions of the distributions that the Trust makes may be a return of the money that Shareholders originally invested and represent a return of capital to Shareholders for tax purposes;
       
    · The Trust and the Master Fund’s executive officers and other key professionals of the Advisor may also be officers, directors, employees and/or managers of Colony NorthStar, its affiliates and/or the Managed Companies. As a result, they face conflicts of interest, including time constraints, allocation of investment opportunities and significant conflicts created by the Advisor’s compensation arrangements with the Master Fund and such other entities. See “Conflicts of Interest;”
       
    · The Trust and Master Fund are dependent upon the officers, directors and/or managers of Colony NorthStar, their affiliates and/or the Managed Companies for their future success and upon the Advisor’s access to such individuals pursuant to the Advisor Staffing Agreement. If the Advisor was to lose access to these investment professionals, the Trust and Master Fund’s ability to achieve their investment objectives could be materially affected;
       
    · The Advisor or its affiliates have limited experience managing a registered closed-end management investment company or a RIC. Colony NorthStar also does not have experience with registered closed-end management investment companies;
       
    · Colony NorthStar, the parent company of the Advisor, announced that it and/or its subsidiaries have entered into the Proposed Transaction for the combination of NorthStar Securities with S2K, which could have an adverse impact on the Trust’s business;
       
    · The Incentive Fee may induce the Advisor to make and recommend speculative investments or to incur leverage;

 

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    · The Master Fund’s ability to enter into transactions with its affiliates will be restricted. The Master Fund has filed for exemptive relief from the SEC to engage in otherwise prohibited co-investment opportunities with certain entities affiliated with or managed by the Advisor and its affiliates. These co-investment opportunities may give rise to conflicts of interest or perceived conflicts of interest among us and the other participating accounts. To mitigate these conflicts, the Advisor and its affiliates will seek to execute such transactions for all of the participating investment accounts, including the Master Fund, on a fair and equitable basis, taking into account such factors as the relative amounts of capital available for new investments and the investment programs and portfolio positions of the Master Fund, the clients for which participation is appropriate and any other factors deemed appropriate;
       
    · The Master Fund may be unable to raise significant capital and invest in a diverse portfolio of investments, which may cause the value of the Master Fund Shares and Shares to vary more widely with the performance of specific assets;
       
    · The Master Fund intends to invest a substantial portion of the proceeds from this offering in a portfolio of CRE debt, equity and securities investments. The collateral securing the Master Fund’s CRE debt securities, as well as the equity investments, may decrease in value or lose all value over time, which may lead to a loss of some or all of the principal in the debt and securities investments the Master Fund makes;
       
    · Any unsecured debt and securities may involve a heightened level of risk, including a loss of principal or the loss of the entire investment;
       
    · The Master Fund’s borrowers and tenants may not be able to make debt service or lease payments owed to the Master Fund due to changes in economic conditions, regulatory requirements and other factors;
       
    · The Master Fund will be exposed to risks associated with changes in interest rates. In addition, changes in interest rates may affect the Master Fund’s cost of capital and net investment income and ability to make distributions. Specifically, in a rising interest rate environment, fixed interest rate investments may decline in value as interest rates rise;
       
    · The Master Fund’s investments may be risky and the Master Fund could lose all or part of its investments;
       
    · The CRE debt the Master Fund originates and invests in and mortgage loans underlying the CRE securities the Master Fund invests in are subject to risks of delinquency, taking title to collateral, loss and bankruptcy of the borrower under the loan. If the borrower defaults, it may result in losses to the Master Fund;

 

 21 

 

 

    · The Master Fund may make investments in assets with lower credit quality, including below investment grade securities, referred to as “high yield” or “junk bonds,” which may increase its risk of losses;
       
    · The Master Fund may be subject to risks associated with future advance or capital expenditure obligations in connection with declining real estate values and operating performance;
       
    · The Master Fund’s CRE debt and securities investments may be adversely affected by changes in credit spreads;
       
    · Provision for loan losses is difficult to estimate, particularly in challenging economic environments;
       
    · The subordinate CRE debt the Master Fund originates and invests in may be subject to risks relating to the structure and terms of the related transactions, as well as subordination in bankruptcy, and there may not be sufficient funds or assets remaining to satisfy the Master Fund’s investments, which may result in losses to the Master Fund;
       
    · Floating-rate CRE debt, which is often associated with transitional assets, may entail greater risks of default to the Master Fund than fixed-rate CRE debt;
       
    · Because real estate investments are relatively illiquid, the Master Fund may not be able to vary its portfolio in response to changes in economic and other conditions and may be unable to dispose of certain assets at a fair price, resulting in losses to the Master Fund;
       
    · Because investments in original issue discount (“OID”) are included in the pre-incentive fee net investment income, such income may exceed the quarterly hurdle rate which may result in the payment of an incentive fee, subject to a “catch-up” feature, to the Advisor without a corresponding receipt of cash income;
       
    · A significant portion of the Master Fund’s investment portfolio will be recorded at fair value as determined in good faith by or under the direction of the Master Fund’s Board and, as a result, there will be uncertainty as to the value of the Master Fund’s investments;
       
    · The price the Master Fund pays for acquisitions of real property and the terms of the Master Fund’s debt investments will be based on the Advisor’s projections of market demand, occupancy and rental income, as well as on market factors, and the return on the investments may be lower than expected if any of these projections are inaccurate;
       
    · The Master Fund may be more susceptible than diversified funds to being adversely affected by events impacting a single borrower, geographic location, security or investment type, and is not limited with respect to the proportion of capital that may be invested in a single asset;

 

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    · Shares are not traded on any securities exchange or other market, and although the Trust expects to repurchase Shares on a quarterly basis, no assurances can be given that the Trust will do so;
       
    · The Master Fund will be subject to significant competition and it may not be able to compete successfully for investments;
       
    · During a given repurchase offer, it is possible that general economic and market conditions could cause a decline in the NAV per Share prior to the repurchase date;
       
    · Legal and regulatory changes, including those implemented in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd- Frank Act”), could occur, which may materially adversely affect the Trust and the Master Fund or cause the Trust and the Master Fund to alter its business strategy;
       
    · The CRE industry has been and may continue to be adversely affected by economic conditions in the United States and global financial markets generally;
       
    · The Master Fund may be materially adversely affected by market, economic and political conditions globally and in the jurisdictions and sectors in which the Master Fund intends to invest;
       
    · The failure of the Trust or the Master Fund to qualify as a RIC under Subchapter M of the Code for U.S. federal income tax purposes would subject the Trust and/or the Master Fund to U.S. federal income tax and applicable state and local taxes, which would reduce the amount of cash available for distribution to Shareholders;
       
    · The Master Fund is exposed to the risks associated with the REIT Subsidiary and the REIT Subsidiary’s investments, including the risk that the failure of the REIT Subsidiary to qualify as a REIT could have adverse tax consequences on the REIT Subsidiary and may adversely affect the performance of the Master Fund and, consequently, the Trust;
       
    · The Trust, Master Fund and the REIT Subsidiary may have difficulty paying their required distributions if the Master Fund or the REIT Subsidiary, as applicable, recognizes income before or without receiving cash representing such income;
       
    · Complying with RIC and REIT requirements may force the Trust, the Master Fund and/or the REIT Subsidiary to liquidate or forego otherwise attractive investments;
       
    · The Master Fund will be subject to additional risks if it makes investments internationally;
       
    · Non-U.S. investments may be traded in undeveloped, inefficient and less liquid markets and may experience greater price volatility and changes in value;

 

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    · Sovereign debt defaults and European Union (“EU”) and/or Eurozone exits such as “Brexit,” could have material adverse effects on investments in European companies, while austerity and other measures introduced to limit or contain these issues may themselves lead to economic contraction, which may result in adverse effects for the Master Fund; and
       
    · Changes in foreign currency exchange rates may adversely affect the U.S. dollar value of and returns on foreign denominated investments.

 

    Accordingly, the Trust should be considered a speculative investment that entails substantial risks, and a prospective investor should invest in the Trust only if they can sustain a complete loss of their investment.

 

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SUMMARY OF FEES AND EXPENSES

 

The following table illustrates the aggregate fees and expenses, as a percentage of the average net assets attributable to Shares, that the Trust and the Master Fund expect to incur and that Shareholders can expect to bear directly or indirectly. As investors in the Trust, Shareholders will indirectly bear all fees or expenses paid for by the Trust or the Master Fund. The information is based on the Trust’s fees and expenses for the fiscal year ended December 31, 2017. The Trust does not directly pay a management fee with respect to any period during which the only investment securities held by the Trust are those of the Master Fund. As a result, as long as the Trust continues to invest in the Master Fund as part of a master-feeder arrangement, Shareholders will incur a single fee for management services provided by the Advisor to the Trust and the Master Fund.

 

   Class A   Class I 

SHAREHOLDER TRANSACTION EXPENSES

(as a percentage of the offering price for the Shares)

          
Maximum Sales load(1)   8.00%   0.00%
Offering expenses(2)   0.92%   1.00%
Total shareholder transaction expenses   8.92%   1.00%
           

ANNUAL EXPENSES

(as a percentage of the average net assets attributable to Shares)(3)

          
Management fee(4)   1.25%   1.25%
Incentive fees(12.5%)(5)   0.00%   0.00%
Interest payments on borrowed funds(6)   0.59%   0.59%
Acquired Fund Fees and Expenses(7)   0.00%   0.00%
Other expenses(8)   1.15%   1.15%
Total annual fund expenses   2.99%   2.99%

 

 

 

(1)As a percentage of the Trust’s Offering Price per Share. “Sales load” includes selling commissions and/or dealer manager fees of up to 8%, in the aggregate, of the Trust’s Offering Price per Share. For the Trust’s Class A Shares, an investor will pay selling commissions of up to 6.0% and dealer manager fees of up to 2.0%, respectively, of the Offering Price. For the Trust’s Class I Shares, an investor will not pay selling commissions or dealer manager fees. In no event will the aggregate selling commissions and dealer manager fees exceed 8.0% of the aggregate gross proceeds raised in this offering. See “Plan of Distribution — Compensation of the Distributor and Selected Broker Dealers.”

 

(2)The offering expenses consist of costs incurred by the Advisor and its affiliates and others on the Trust’s behalf for legal, accounting, printing and other offering expenses, including costs associated with technology integration between the Trust’s systems and those of the Distributor, NorthStar Securities and the broker-dealers authorized to sell Shares (the “Selected Broker Dealers”), all of whom are or will be members of the Financial Industry Regulatory Authority, Inc. (“FINRA”), or other properly licensed agents. Other such costs also include marketing expenses, salaries and direct expenses of the Advisor’s and its affiliates’ employees and others while engaged in registering and marketing the Shares, which will include development of marketing materials and marketing presentations and training and educational meetings and generally coordinating the marketing process for the Trust. Any reimbursements for any such costs will not exceed actual expenses incurred by the Advisor and its affiliates. The Advisor is responsible for the payment of the Trust’s cumulative organization and offering expenses (other than the Sales Load) to the extent they exceed 1.0% of the aggregate proceeds raised in this offering, exclusive of the Sales Load, without recourse against or reimbursement by the Trust. In addition, the Trust will indirectly bear its pro rata portion of organization and offering costs incurred by the Master Fund based on its ownership of Master Fund Shares; however, it is expected that organization and offering costs at the Master Fund level will be de minimis because no Master Fund Shares are being offered to the public.

 

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(3)Amount assumes that the Trust raises $75.0 million of proceeds (net of Sales Load) over the next year. As of December 31, 2017, the Trust had net assets of approximately $26.8 million and the Master Fund had net assets of approximately $29.5 million. Assuming the Trust raises an additional $75.0 million of proceeds (net of Sales Load), the Trust would receive proceeds (net of Sales Load and organization and offering expenses) of approximately $74.3 million, resulting in estimated net assets of approximately $101.0 million and average net assets of approximately $63.9 million, based on the Trust’s net assets of $26.8 million as of December 31, 2017. The amount assumes the Trust uses $74.3 million of its proceeds (net of Sales Load and organization and offering expenses) to purchase Master Fund Shares, and that the Master Fund’s net offering proceeds from such sales equal $74.3 million, resulting in estimated net assets of the Master Fund of approximately $103.8 million and average net assets of approximately $66.6 million, based on the Master Fund’s net assets of approximately $29.5 million as of December 31, 2017. The amounts also assume that the Master Fund borrows funds equal to 33.75% of its average net assets during such period, or $22.5 million. Actual expenses will depend on the number of Shares sold and the amount of leverage the Master Fund employs. For example, if the Trust were to raise proceeds significantly less than $75.0 million over the next twelve months, the annual expenses as a percentage of average net assets attributable to Shares would be significantly higher. There can be no assurance that the Trust will raise $75.0 million of proceeds in this offering during the next twelve months.

 

(4)This Management Fee is paid to the Advisor at the Master Fund level. The Management Fee is calculated and payable quarterly in arrears at the annual rate of 1.25% of the Master Fund’s average daily net assets during such period.

 

(5)The Incentive Fee is paid to the Advisor at the Master Fund level. The Master Fund anticipates that it may have interest income that could result in the payment of an Incentive Fee to the Advisor during certain periods. However, the Incentive Fee is based on the Master Fund’s performance and will not be paid unless the Master Fund achieves certain performance targets. The Master Fund expects the Incentive Fee the Master Fund pays to increase to the extent the Master Fund earns greater interest income through its investments with respect to real estate. The Incentive Fee is calculated and payable quarterly in arrears based upon the Master Fund’s “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a quarterly hurdle rate, expressed as a rate of return on the Master Fund’s adjusted capital, at the beginning of the most recently completed quarter, equal to 1.50% per quarter, subject to a “catch-up” feature. The “catch-up” feature entitles the Advisor to 100% of the Master Fund’s pre-incentive fee net investment income, if any, that exceeds the quarterly hurdle rate but is less than or equal to 1.715% in any calendar quarter. This portion of the Incentive Fee is referred to as the “catch-up” and is intended to provide the Advisor with an incentive fee of 12.5% on all of the Master Fund’s pre-incentive fee net investment income when the Master Fund’s pre-incentive fee net investment income reaches 1.715% in any calendar quarter; 12.5% of the Master Fund’s pre-incentive fee net investment income, if any, that exceeds 1.715% in any calendar quarter is payable to the Advisor once the hurdle rate is reached and the catch-up is achieved (12.5% of all the Master Fund’s pre-incentive fee net investment income thereafter is allocated to the Advisor). There is no accumulation of amounts on the hurdle rate from quarter to quarter and accordingly there is no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle and there is no delay of payment if prior quarters are below the quarterly hurdle. See “Management and Incentive Fees” for a full explanation of how the Incentive Fee is calculated. The amount in the table assumes that the Incentive Fee will be 0.00% of the Master Fund’s average net assets. The Master Fund did not accrue an Incentive Fee during the year ended December 31, 2017.

 

(6)Although it is permitted to do so, the Trust does not expect to borrow funds, but the Master Fund may borrow funds to make investments. To the extent that the Master Fund determines it is appropriate to borrow funds to make investments, the costs associated with such borrowing will be indirectly borne by Shareholders through the Trust’s ownership of Master Fund Shares. The figure in the table assumes the Master Fund borrows for investment purposes an amount equal to 33.75% of the Master Fund’s average net assets during such period and that the annual interest rate on the amount borrowed is 3.50% over average borrowed assets, which is based on current market conditions. The Master Fund may use various forms of leverage, which may be subject to different expenses than those assumed above. The Master Fund’s ability to incur leverage during the following twelve months depends, in large part, on the amount of money the Trust is able to raise through the sale of Shares and capital market conditions.

 

(7)Shareholders indirectly bear a portion of the asset-based fees, performance or incentive fees or allocations and other expenses incurred by the Master Fund (and, indirectly by the Trust) as an investor in PERE Investments and other vehicles that would be deemed investment companies under the 1940 Act but for the exceptions set forth in Sections 3(c)(1) or 3(c)(7) of the 1940 Act (collectively, “Portfolio Funds”). The Trust does not expect that the Master Fund will invest in Portfolio Funds during the following twelve months. If the Master Fund were to invest in Portfolio Funds in the future, it will limit its investments in Portfolio Funds to no more than 15% of its aggregate net assets.

 

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(8)Other expenses include accounting, administration, bookkeeping and pricing fees, legal and auditing fees of the Trust and the Master Fund, as well as the reimbursement of the compensation (which may include, but is not limited to salary, benefits, bonuses and incentive compensation, if any) of the Trust’s and the Master Fund’s chief compliance officer, chief financial officer and other administrative personnel and fees payable to the trustees of the Board or the Master Fund Board who do not also serve in an executive officer capacity for the Trust, the Master Fund or the Advisor. The amount presented in the table estimates the amounts the Trust and the Master Fund expect to pay over the next twelve months, assuming the Trust raises $59.4 million of proceeds (net of Sales Load and organization and offering expenses) during such time.

 

Example:

 

The following example demonstrates the projected dollar amount of total expenses that would be incurred over various periods with respect to a hypothetical investment in the Shares. In calculating the following expense amounts, the Trust has assumed its direct and indirect annual operating expenses would remain at the percentage levels set forth in the table above. The example assumes that an investor would pay the following expenses on a $1,000 investment, assuming a 5.0% annual return:

 

   1 Year   3 Years   5 Years   10 Years 
Class A  $117   $173   $232   $390 
Class I  $40   $101   $166   $337 

 

The example and the expenses in the tables above should not be considered a representation of the Trust’s future expenses, and actual expenses may be greater or less than those shown. Since the example assumes a 5.0% annual return, as required by the SEC, no incentive fee would be accrued or payable in the example. The Trust’s actual performance will vary and may result in a return greater or less than 5.0%. In addition, the example assumes reinvestment of all distributions pursuant to the DRP. For a more complete description of the various fees and expenses borne directly and indirectly by the Trust, see “Trust and Master Fund Expenses,” “Management and Incentive Fees” and “Purchases of Shares.”

 

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FINANCIAL HIGHLIGHTS

 

The information contained in the table below sets forth selected information derived from the financial statements contained in the Trust’s annual report for the year ended December 31, 2017 and for the period from May 6, 2016 (commencement of operations) through December 31, 2016 (the “Annual Report”), which have been audited by PricewaterhouseCoopers LLP (“PwC”).

 

PwC’s report, along with the Trust’s financial statements, is included in the Annual Report. The information provided below should be read in conjunction with the Annual Report and the notes accompanying the report. The Trust’s Annual Report has been filed with the SEC and is available on the SEC’s website at http://www.sec.gov, and is also available upon request by calling 1-855-890-7725. The Trust’s financial statements for the year ended December 31, 2017 and for the period from May 6, 2016 (commencement of operations) through December 31, 2016 are incorporated by reference herein.

 

 

NorthStar Real Estate Capital Income Fund

 

Financial Highlights
(For a Share Outstanding Throughout the Period)

  

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   For the   For the period from 
   Year Ended   May 6, 2016 (1) 
   December 31,    through 
   2017   December 31, 2017 
Per share data (2):          
Net asset value, beginning of period  $9.07   $9.09 
Results of operations          
Net investment income (loss)(3)   0.54    (1.22)
Net realized and unrealized appreciation (depreciation) on investments(3)   (0.26)    
Net decrease in net assets resulting from operations   0.28    (1.22)
           
Shareholder distributions          
Distributions from net investment income(4)   (0.35)    
Net increase (decrease) in net assets resulting from shareholder distributions   (0.35)    
           
Capital Transactions          
Contribution from an affiliate(3)(5)   0.05    1.20 
Offering costs(3)   (0.05)    
Net increase (decrease) in net assets resulting from capital transactions       1.20 
Net asset value, end of period  $9.00   $9.07 
           
Shares outstanding, end of period   2,971,626    11,560 
           
Total return (6)(7)   3.2%   (0.2)%
           
Ratio/Supplemental Data:          
Net assets, end of period  $26,738,841   $104,882 
           
Ratio of net investment income/(loss) to average net assets(8)(9)   6.0%   (21.4)%
           
Ratio of total operating expenses to average net asset(8)(9)   1.0%   21.4%
Ratio of expense reimbursement from Advisor to average net assets(8)(9)   (0.6)%   0.0%
Ratio of net operating expenses to average net assets(8)(9)   0.4%   21.4%
           
Portfolio turnover rate of NorthStar Real Estate Capital Income Master Fund   0.0%   Not applicable 

 

 

(1)Commencement of operations.
(2)Per Share data may be rounded in order to compute the ending NAV per Share.
(3)The per Share data was derived by using the average number of Shares outstanding during the applicable period.
(4)The per Share data was derived by using the average number of Shares outstanding during the applicable distribution period from June 1, 2017 to December 31, 2017.
(5)Represents voluntary additional capital contributions from Colony NorthStar FV. Refer to Note 4 for further details.
(6)The total return is calculated by determining the percentage change in NAV, assuming the reinvestment of all distributions in additional Shares of the Trust at the Trust’s NAV per share as of the Share closing date occurring on or immediately following the distribution payment date. There were no distributions in the prior year. The total return does not consider the effect of the Sales Load from the sale of the Shares.
(7)Total return without contributions from affiliate would have been 2.6% and (13.3)% for the year ended December 31, 2017 and for the period from May 6, 2016 (commencement of operations) through December 31, 2016, respectively.
(8)Average daily net assets for the applicable period are used for this calculation.
(9)Annualized for prior year.

 

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THE TRUST AND THE MASTER FUND

 

The Trust is a non-diversified, closed-end management investment company that is registered under the 1940 Act. The Trust was organized as a Delaware statutory trust on October 2, 2015 and has a limited operating history. The principal office of the Trust is located, c/o Colony NorthStar, Inc., at 590 Madison Avenue, 34th Floor, New York, New York 10022, and its telephone number is (212) 547-2600.

 

The Trust’s primary investment objectives are to generate attractive and consistent income through cash distributions and preserve and protect shareholders’ capital, with a secondary objective of capital appreciation. The Trust pursues its investment objectives by investing substantially all of the net proceeds from this offering in the Master Fund. There can be no assurance that the Trust will achieve its investment objectives. The Master Fund is a non-diversified, closed-end management investment company that is registered under the 1940 Act. The Master Fund was organized as a Delaware statutory trust on October 2, 2015 and has a limited operating history. The principal office of the Master Fund is located, c/o Colony NorthStar, Inc., at 590 Madison Avenue, 34th Floor, New York, New York 10022, and its telephone number is (212) 547-2600.

 

The Master Fund has the same investment objectives as the Trust. There can be no assurance that the Master Fund will achieve its investment objectives. The Master Fund makes the investments described in this prospectus with the proceeds it receives from the sale of Master Fund Shares to the Trust and any other investment company registered under the 1940 Act which has a principal investment strategy of investing substantially all of its assets in the Master Fund. The Master Fund may have investors in addition to the Trust from time to time that may (individually or in the aggregate) own a greater percentage of the Master Fund than is owned by the Trust. The Master Fund pursues its investment objectives by investing primarily in a diversified portfolio of real estate and real estate-related investments, which, under normal circumstances, represent at least 80% of the Master Fund’s net assets (plus the amount of leverage for investment purposes) including: (i) CRE debt, including first mortgage loans, subordinate mortgage and mezzanine loans, participations in such loans and preferred equity interests; (ii) CRE equity investments, including (a) direct investments in CRE and (b) indirect ownership in CRE through PERE Investments and other joint ventures; and (iii) CRE securities, such as CMBS, unsecured debt of publicly-traded REITs and CDO notes. Although the Master Fund is a “non-diversified” investment company within the meaning of the 1940 Act, the Master Fund seeks to invest in a variety of asset types, property types and geographic locations. The Master Fund will seek to create and maintain a portfolio of investments that generate attractive and consistent cash distributions. The Master Fund’s lending-focused investment strategy emphasizes its primary investment objectives of payment of current returns to investors and preservation of invested capital and its secondary investment objective of capital appreciation from its investments. For a further discussion of the Master Fund’s principal investment strategies, see “Investment Objectives and Strategies.” There can be no assurance that the Trust or the Master Fund will achieve their investment objectives.

 

The investment adviser to the Trust and the Master Fund is the Advisor. The Advisor is responsible for overseeing the management of the Master Fund’s activities. See “The Advisor.” The Advisor is an affiliate of Colony NorthStar. The Advisor may delegate certain of its obligations to the Master Fund to other affiliated entities or third parties, which may be organized under the laws of the United States or foreign jurisdictions.

 

Ultimate responsibility for monitoring and overseeing the Trust’s management and operation and the Master Fund’s investment program, management and operation is vested in the individuals who serve on the Board and the Master Fund Board, respectively. The same individuals serve on the Board and the Master Fund Board. See “Management of the Trust and the Master Fund.”

 

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THE ADVISOR

 

The Advisor is responsible for overseeing the management of the Trust’s and Master Fund’s activities, including investment strategies, investment goals, asset allocation, asset management, leverage limitations, reporting requirements and other guidelines in addition to the general monitoring of the Trust’s and Master Fund’s portfolios, subject to the oversight of the Board and the Master Fund Board. The Advisor is an affiliate of Colony NorthStar, a leading global real estate and investment management firm with approximately $        billion in assets under management as of December 31, 2017. Colony NorthStar provides investment management services and manages private funds, non-traded and traded real estate investment trusts and registered investment companies on behalf of a diverse set of institutional and individual investors and is supported by an experienced staff of more than 500 employees, as of December 31, 2017, across 18 offices in 10 countries. For a description of the Management Fee and Incentive Fee payable to the Advisor’s compensation, see “Management and Incentive Fees.”

 

The Advisor

 

The Trust and the Master Fund are managed by the Advisor pursuant to the Trust Advisory Agreement and Master Fund Advisory Agreement, respectively. The Advisor was formed on December 22, 2015, as a Bermuda exempted limited company and re-domiciled in Delaware, as a limited liability company, on January 31, 2017. The Advisor is a registered investment adviser under the Advisers Act. The principal office of the Advisor is located at CNI RECF Advisors, LLC, c/o Colony NorthStar, Inc., 515 South Flower Street, 44th Floor, Los Angeles, CA 90071.

 

Pursuant to the Trust Advisory Agreement and the Master Fund Advisory Agreement, the Advisor oversees the management of the Trust’s and Master Fund’s activities, respectively, including investment strategies, investment goals, asset allocation, asset management, leverage limitations, reporting requirements and other guidelines in addition to the general monitoring of the Trust’s and Master Fund’s portfolios, subject to the oversight of the Board and the Master Fund Board. The Advisor also provides certain other administrative, including marketing, investor relations and certain accounting services and maintenance of books and records on behalf of the Trust and the Master Fund pursuant to the Trust Advisory Agreement and the Master Fund Advisory Agreement, respectively. The Advisor will also furnish the Trust and Master Fund with office facilities and equipment, provide clerical services to the Trust and the Master Fund, perform the calculation and publication of the Master Fund’s NAV, and oversee the preparation and filing of the Master Fund’s tax returns, the payment of the Master Fund’s expenses and the performance oversight of various third party service providers.

 

In accordance with the Master Fund Advisory Agreement and the Trust Advisory Agreement, the Advisor will be reimbursed for certain expenses it or its affiliates incur in connection with providing services to the Trust or the Master Fund, as provided for in the Master Fund Advisory Agreement and the Trust Advisory Agreement, respectively. The Trust and the Master Fund will also reimburse the Advisor for routine non-compensation overhead expenses incurred by the Advisor in performing administrative services for the Trust and Master Fund. For a description of the expenses subject to reimbursement, see “Trust and Master Fund Expenses.”

 

The Advisor has a limited operating history and does not have employees. However, the Advisor has entered into the Advisor Staffing Agreement with one or more affiliates of Colony NorthStar. Pursuant to the Advisor Staffing Agreement, one or more affiliates of Colony NorthStar make certain executive team and other personnel available to the Advisor. The Advisor believes that the experienced personnel made available to the Advisor by the Advisor Staffing Agreement will assist overseeing the management of the Trust’s and Master Fund’s activities. The Advisor has appointed an investment committee to oversee the management of the Trust’s and Master Fund’s activities. The Advisor’s investment committee consists of Messrs. Richard B. Saltzman, Mark M. Hedstrom, Kevin P. Traenkle, Robert C. Gatenio and Sujan S. Patel. See “Portfolio Management — Investment Committee of the Advisor” and “Management of the Trust and the Master Fund — Board of Trustee and Executive Officers” for biographic information pertaining to the investment committee members.

 

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The Advisor’s Management Team

 

Although the Advisor has a limited operating history, it is led by an experienced executive team with, on average, over 28 years of operational and management experience in the commercial real estate and alternative investment management industries, including Thomas J. Barrack, Jr., Richard B. Saltzman, Darren J. Tangen, Mark M. Hedstrom, Kevin P. Traenkle, Ronald M. Sanders and Neale W. Redington.

 

In executing its business strategy, the Master Fund will benefit from the Advisor’s affiliation with Colony NorthStar, a leading global real estate and investment management firm with approximately $        billion in assets under management as of December 31, 2017. Colony NorthStar provides investment management services and manages private funds, non-traded and traded real estate investment trusts and registered investment companies on behalf of a diverse set of institutional and individual investors. Through their management of these companies, the executive team of Colony NorthStar and its affiliates have developed significant expertise in operating publicly-registered companies, including public company reporting, internal controls and risk management, legal and regulatory compliance, stock exchange requirements, fund management and operations. In addition, Colony NorthStar’s executive team has substantial experience in private debt, private equity and real estate investing.

 

As of December 31, 2017, Colony NorthStar and its affiliates had more than 500 employees located domestically and internationally across 18 cities in 10 countries, with its principal offices located in Los Angeles, California and in New York, New York.

 

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USE OF PROCEEDS

 

Substantially all of the net proceeds from the sale of Shares are to be invested in the Master Fund as of the date on which such proceeds are received by the Trust. The Trust expects that following the Master Fund’s receipt of the net offering proceeds, the Master Fund will invest such proceeds as soon as practicable in accordance with the Master Fund’s investment objectives and strategies, consistent with market conditions and subject to the availability of suitable investments. Any assets of the Trust not invested in the Master Fund will be de minimis amounts of cash or cash equivalents used to meet its ongoing expenses. There can be no assurance that the Trust will be able to sell all the Shares it is offering. If the Trust sells only a portion of the Shares it is offering, the Trust and the Master Fund may be unable to achieve their investment objectives.

 

The Master Fund currently anticipates that it will be able to invest substantially all of the Master Fund’s assets within approximately six months of receipt of any proceeds received from any sales of Master Fund Shares, depending on market conditions and the availability of appropriate investment opportunities. CRE equity investments may be purchased as appropriate opportunities arise, which could take up to one year or longer, and the Master Fund may choose to be more fully invested in CRE debt and securities during such period. Pending investment as described above, the proceeds will be held in obligations of the U.S. Government, its agencies or instrumentalities, highly rated money market instruments or mutual funds that invest in such instruments. As a result of this short-term investment of the proceeds, a lower return may be realized than if the Master Fund had been fully invested in accordance with its investment objectives and policies.

 

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INVESTMENT OBJECTIVES AND STRATEGIES

 

Investment Objectives

 

The Trust’s primary investment objectives are to generate attractive and consistent income through cash distributions and preserve and protect shareholders’ capital, with a secondary objective of capital appreciation. The Trust pursues its investment objectives by investing substantially all of the net proceeds from this offering in Master Fund Shares (after payment of the organization and offering expenses). The Master Fund’s investment objectives are the same as the Trust’s, and all investments are made at the Master Fund level; therefore the Trust’s investment results will correspond directly to the investment results of the Master Fund. However, there can be no assurance that the Trust or the Master Fund will achieve these investment objectives. Within the Master Fund’s investment objectives and policies, the Advisor has substantial discretion with respect to the selection, purchase and sale of the Master Fund’s assets, subject to the approval of the Master Fund Board through the adoption of the Master Fund’s investment guidelines or otherwise.

 

Neither the Trust’s nor the Master Fund’s primary investment objectives may be changed without the affirmative vote of a majority of the outstanding voting securities of the respective entity; however, the secondary investment objective may be changed or modified by the respective entity’s Board without shareholder action. As provided in the 1940 Act, a “vote of a majority of the outstanding voting securities” of an entity means the affirmative vote of the lesser of (i) more than 50% of the outstanding shares of the entity or (ii) 67% or more of the shares of such entity present at a meeting if more than 50% of the outstanding shares are represented at the meeting in person or by proxy.

 

Investment Strategies

 

The Master Fund has the same investment objectives and policies as the Trust, and there can be no assurance that the Master Fund will achieve its investment objectives. The Master Fund’s strategy is to invest primarily in a diversified portfolio of real estate and real estate-related investments, which, under normal circumstances, represents at least 80% of the Master Fund’s gross assets (including the amount of leverage for investment purposes), including: (i) CRE debt, including first mortgage loans, subordinate mortgage and mezzanine loans, participations in such loans and preferred equity interests; (ii) CRE equity investments including (a) direct investments in CRE and (b) indirect ownership in CRE through PERE Investments and other joint ventures; and (iii) CRE securities, such as CMBS, unsecured debt of publicly-traded REITs and CDO notes. Although the Master Fund is a “non-diversified” investment company within the meaning of the 1940 Act, the Master Fund seeks to invest in a variety of asset types, property types and geographic locations. The Master Fund’s lending-focused investment strategy emphasizes its primary investment objectives of the payment of current returns to investors and preservation of invested capital, and promotes its secondary investment objective of capital appreciation.

 

The Master Fund expects that a majority of its portfolio will consist of CRE debt and less than a majority of its portfolio will consist of CRE equity investments and securities. However, the Master Fund may invest in any of the asset classes mentioned in the paragraph above, and it has not established any limits on the percentage of its portfolio that may be comprised of these various categories of assets. The Master Fund cannot predict its portfolio composition because such composition will be dependent, in part, upon the then-current CRE market, the investment opportunities it presents and available financing, if any, as well as other micro and macro market conditions.

 

Certain direct and indirect equity investments in CRE may be made through the REIT Subsidiary that intends to invest through wholly owned special purpose vehicles in properties with a focus on consistent income and quality locations. The REIT Subsidiary may also invest in CRE debt and securities. Based on current market conditions, once fully invested, the Advisor anticipates that the Master Fund will gain exposure to direct and indirect equity investments in CRE by investing up to 25% of the value of its total assets in securities of the REIT Subsidiary. The Master Fund’s indirect acquisition and disposition of equity investments in CRE may be effected through the REIT Subsidiary’s wholly owned special purpose vehicles, which are expected to be organized as limited liability companies but may also take the form of limited partnerships or other entities. The REIT Subsidiary is a “wholly owned subsidiary” of the Master Fund as defined in the 1940 Act (i.e., the Master Fund owns 95% or more of the REIT Subsidiary’s outstanding voting securities). Based on market conditions, the Advisor may cause the Master Fund to reduce, liquidate and/or forego investments in the REIT Subsidiary. Investment through the REIT Subsidiary involves risks, including the risk that the failure of the REIT Subsidiary to qualify as a REIT will have adverse tax consequences on the REIT Subsidiary and may adversely affect the performance of the Master Fund and, consequently, the Trust.

 

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The period that the Master Fund will hold its investments will vary depending on the type of asset, interest rates, investment performance, micro and macro real estate environment, capital markets and credit availability, among other factors. The Master Fund expects that it will hold debt investments until the stated maturity. The Master Fund may sell all or a partial ownership interest in an asset before the end of the expected holding period if it believes that market conditions have maximized its value to the Master Fund or the sale of the asset would otherwise be in the best interests of the shareholders of the Master Fund.

 

The Master Fund has filed a notice of eligibility for exclusion from the definition of the term “commodity pool operator” with the Commodity Futures Trading Commission and the National Futures Association, which regulate trading in the futures markets. Pursuant to Section 4.5 of the regulations under the Commodity Exchange Act (the “CEA”), the Master Fund is not currently subject to regulation as a commodity pool under the CEA.

 

The Advisor’s Strengths

 

The Advisor believes it has a combination of strengths that will contribute to the Master Fund and the Trust’s performance. Given Colony NorthStar’s executive team’s extensive track record and experience and Colony NorthStar’s capabilities as a publicly traded, diversified CRE and alternative investment and asset management firm, the Master Fund may benefit from the Advisor’s arrangement with Colony NorthStar and its affiliates in executing its business strategy. These strengths include:

 

·Experienced Executive Team — Colony NorthStar has a highly experienced executive team of diverse backgrounds with, on average, over 28 years of operational and management experience at asset managers and investment firms, private investment funds, investment banks and other financial service companies, which provide an enhanced perspective for managing the Master Fund’s portfolio. The executive team of Colony NorthStar has acquired and managed the historical and existing portfolio of investments of Colony NorthStar and its Managed Companies, and possesses significant operational and management experience in the real estate industry. The Master Fund believes that the accumulated experience of Colony NorthStar’s executive team in the commercial real estate and alternative investment management industries will allow the Master Fund to deploy capital throughout the CRE capital structure fluidly in response to changes in the investment environment. Please see “Management of the Trust and the Master Fund” for biographical information regarding these individuals.

 

·Real Estate and Lending Experience — Colony NorthStar’s executive team has developed a reputation as a leading diversified CRE and alternative investment asset management team because of its strong track record in managing approximately $        billion in real estate investments as of December 31, 2017. The Master Fund believes that it can leverage Colony NorthStar’s executive team’s extensive real estate and lending experience, deep and thorough investment process and portfolio management skills and experience in managing public real estate companies, to structure and manage the Master Fund’s investments prudently and efficiently.

 

·Public Company and REIT Experience — Colony NorthStar’s executive team is skilled in public company reporting and compliance. Colony NorthStar’s executive team is responsible for the operations of six other publicly registered investment platforms, including Colony NorthStar, two publicly traded REITs and three public companies that have raised, are raising or are expected to raise capital through the retail market. Through their management of these companies, the members of Colony NorthStar’s executive team have developed significant expertise in operating publicly-registered companies, including public company reporting, internal controls and risk management, legal and regulatory compliance, stock exchange requirements, fund management and operations.

 

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·Expense Support and Conditional Reimbursement Commitment – Colony NorthStar FV has agreed to reimburse the Trust and the Master Fund for expenses to seek to ensure that each of the Trust and the Master Fund bears a reasonable level of expenses in relation to its income. Under this arrangement, Colony NorthStar FV will reimburse, on a quarterly basis, the Trust and the Master Fund for expenses in an amount equal to the difference between the cumulative quarterly distributions paid to the Trust’s or the Master Fund’s Shareholders, as applicable, less the Trust’s or the Master Fund’s Available Operating Funds during such quarter. “Available Operating Funds” means the net investment income of the Trust or the Master Fund, as applicable, minus any reimbursement payments payable to Colony NorthStar FV pursuant to this arrangement. Colony NorthStar FV’s obligation to make an expense payment shall automatically become a liability of Colony NorthStar FV and the right to such expense payment shall be an asset of the Trust or the Master Fund, as applicable, on each day that the Trust’s or the Master Fund’s, as applicable, net asset value is calculated. The Trust and the Master Fund have a conditional obligation to reimburse Colony NorthStar FV for any amounts funded by it under the Expense Support Agreements in any calendar quarter occurring within three years of the date on which it funded such amounts. In addition, the Trust and the Master Fund shall not be required in any calendar quarter to reimburse Colony NorthStar FV for any expense payments made by Colony NorthStar FV to the Trust or the Master Fund if the annualized rate of regular distributions declared by the Trust or the Master Fund at the time of such calendar quarter is less than the annualized rate of regular distributions declared by the Trust at the time the expense payment was incurred by the Trust or the Master Fund.

 

·Distribution Support Commitment—Colony NorthStar FV has agreed to purchase up to an aggregate of $10.0 million in Master Fund Shares, of which $2.0 million was contributed by an affiliate of Colony NorthStar as the Seed Capital Investment, at the current NAV per Master Fund Share until the earlier of (a) June 30, 2019, or (b) the date upon which neither the Advisor nor any of its affiliates is serving as the Master Fund’s investment adviser. In no event shall Colony NorthStar FV be required to purchase in the aggregate greater than $10.0 million in Master Fund Shares, including the Seed Capital Investment. Additionally, Colony NorthStar FV shall only be obligated to purchase Master Fund Shares under the Distribution Support Agreement in the event that the Expense Support Agreements have been terminated. If the cash distributions the Trust pays during any month exceeds the Trust’s net investment income for such month, Colony NorthStar FV will purchase Master Fund Shares following the end of each month for an aggregate purchase price equal to the amount by which the cash distributions paid to Shareholders exceed net investment income for such month, up to an amount equal to a 6.0% cumulative, non-compounded annual return on Shareholders’ invested capital, prorated for such month. Notwithstanding the obligations of Colony NorthStar FV pursuant to the Distribution Support Agreement, the Master Fund is not required to pay distributions to Master Fund Shareholders, including the Trust, at a rate of 6.0% per annum or at all. After the Expense Support Agreements and Distribution Support Agreement with Colony NorthStar FV have terminated, the Master Fund and, consequently, the Trust may not have sufficient cash available to pay distributions at the rate it had paid during preceding periods or at all. For more information regarding the share purchase commitment of Colony NorthStar FV, the purchases of Master Fund Shares thereunder as of the date of this prospectus and the Master Fund’s and Trust’s distribution policy, please see “Distributions—Distribution Support Agreement.”

 

·Capital Investment Agreement — Pursuant to the Capital Investment Agreement, Colony NorthStar FV has purchased $20 million of Class A Shares. The Class A Shares were issued at the NAV per Share on the date of each installment subscription, with the Sales Load waived. The purpose of the Capital Investment Agreement was to provide necessary capital for the formation of an early stage seed portfolio and better align Colony NorthStar’s interests with the Shareholders.

 

·Access to Proprietary Deal Sourcing — Colony NorthStar’s executive team has a strong track record in investing in various market environments. With 18 locations worldwide, Colony NorthStar seeks to leverage its global reach with local teams comprised of investment professionals who possess long-standing relationships and extensive market knowledge.

 

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Market Overview and Opportunity

 

The Advisor believes that the current market for CRE investments, with a focus on lending, including investments in CRE debt, equity and securities is very compelling from a risk/return perspective. Given the current market environment and Colony NorthStar’s executive team’s extensive real estate and lending experience, the Master Fund intends to favor a strategy weighted toward targeting CRE debt investments that maximize current income and have both subordinate capital and downside structural protections. The Advisor believes that the Master Fund’s lending-focused investment strategy, combined with the experience and expertise of the Advisor’s management team, will provide opportunities to: (i) originate loans with attractive current returns and strong structural features directly with borrowers; (ii) make direct CRE equity investments with leading operating partners/managers, targeting high-quality assets with in-place cash flow and upside potential through asset appreciation; (iii) strategically acquire indirect interests in CRE through PERE Investments or other ventures managed by leading institutional fund managers that will seek to provide current income, upside potential and portfolio diversification; and (iv) purchase CRE debt and securities from third parties, in some instances at discounts to their face amounts (or par value). The Advisor believes the combination of these strategies and the application of prudent leverage may also allow the Master Fund to (i) realize appreciation opportunities in its portfolio and (ii) provide diversification and enhance returns.

 

The Advisor believes that the following market conditions create a favorable investment environment for the Master Fund.

 

Amid positive economic growth, the Master Fund’s targeted investments provide the opportunity to participate in a CRE market where values have shown positive trends and income growth is expected to continue.   Given certain dynamics in the current market, including: (i) the continuing steady recovery of the economy (as evidenced by the decrease in unemployment and the steady increase in nonfarm payroll shown below); (ii) a low but rising interest rate environment; (iii) low aggregate new CRE supply; and (iv) robust international demand for U.S. commercial real estate, the Advisor expects real estate values to trend positively due to increased property level net operating income (“NOI”), continued strong transaction volume or a combination of both.

 

U.S. unemployment is at its lowest level since 2008. Additionally, nonfarm payrolls, which account for 80% of all U.S. workers, have increased year-over-year since 2011, implying improved levels of job growth. As shown below, unemployment has historically had an inverse relationship to CRE property values. As unemployment decreases and the economy improves, the Advisor believes CRE values should increase as well. The Advisor believes that the Master Fund’s investment strategy of focusing on debt while selectively including direct equity investments will provide an opportunity to benefit from the growth of CRE values while maintaining downside protection in the event the CRE markets do not improve or have future declines.

 

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Green Street CPPI vs. U.S. Unemployment

 

 

Source: GreenStreet Advisors and Bureau of Labor Statistics, through November 2017.

 

U.S. Nonfarm Payroll Additions

 

 

Source: Bureau of Labor Statistics, Current Employment Statistics Survey. Through December 2017. Note: gray area represents recession.

 

Continued growth in the CRE markets should result in increased investment opportunities.   Access to CRE debt is a key element of a healthy CRE market in which increased CRE transaction volume may occur. According to information from Real Capital Analytics as shown in the chart below, CRE transaction volume has increased steadily since a low in 2009 of $69 billion to $495 billion in 2016. Through the third quarter 2017, total CRE transaction volume reached $339 billion and although this is below 2016 and 2017 levels, the improving economy may continue to provide for meaningful CRE property transaction volume with sellers looking to realize profits and buyers looking to increase value. The Advisor believes the Master Fund is well-positioned to take advantage of these historically high levels of volume due to the Master Fund’s ability to provide flexible lending and capital solutions that are soundly structured to meet industry participants’ specific needs, while targeting specific portions of the CRE capital structure to seek to maximize risk-adjusted returns.

 

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CRE Transaction Volume

 

 

Source: Real Capital Analytics, through year end 2017. Based on independent reports of properties and portfolios $5 million and greater.

 

Domestic and foreign capital flowing into U.S. CRE will likely continue, bolstering the health of the U.S. CRE market.   Foreign capital has recently been deployed into U.S. CRE in record amounts due to the predictable cash flows, transparent markets, and relative downside risk protection and liquidity of U.S. real estate. As shown in the graph below, foreign investor activity reached record highs in 2015 totaling $105.8 billion, a significant increase over the amount of activity at 2007’s peak. Despite 2017 foreign investor activity slowing relative to 2016, the Advisor believes that the global investment environment and concerns over political instability will continue to encourage foreign investor appetite for U.S. CRE, driving a flight to safety in an established market that can be underwritten, resulting in higher overall values. The Advisor also believes that certain recent legislative changes to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), which reduces withholding tax levels for certain large foreign pension investors when investing in U.S. real estate, will further bolster the interest of foreign capital in U.S. CRE investment. International uncertainties such as “Brexit” and slowing economic growth in China and other developing countries has also meant that the United States offers a very attractive safe haven for international capital. Additionally, CRE has transformed from part of an alternative asset allocation strategy to a mainstream and sought after asset class for all types of investors. The Advisor believes the Master Fund’s targeted portfolio is poised to benefit from strong CRE activity enhanced by both foreign and domestic capital flows that are increasingly allocated to the sector.

 

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Inbound Foreign Capital

 

 

Source: Wells Fargo Securities, Commercial Real Estate Chartbook: Q3. December 6, 2017.

 

The increasing number of maturing CRE loans over the next three years and the resulting need for borrowers to refinance assets is expected to provide an opportunity for originating CRE debt.   As shown in the chart below, the large volume of scheduled loan maturities of approximately $1.0 trillion from 2018 through 2020 will provide significant investment opportunities for CRE lenders and capital providers, such as the Master Fund. As a result, CRE debt borrowers will need to either repay existing loans through a sale of the underlying CRE assets or seek refinancing. Both of these instances create a lending opportunity for the Master Fund and an increasing need for CRE debt.

 

Projected CRE Loan Maturities

 

 

Source: Trepp.

  

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Capital available from traditional sources of CRE debt cannot satisfy demand.   As shown in the chart below, current CRE debt origination levels demonstrate significant demand for CRE debt capital. CRE debt originations experienced a gradual increase in activity from 2007 to 2015 before experiencing a slight reduction in 2016 and 2017. Despite market-wide total originations approaching 2007 levels, 2017 CMBS issuance of $96.5 billion remains only 60% of its 2007 peak (as shown below). Banks and other traditional CRE lenders have decreased CRE debt originations in large part due to an increasingly restrictive regulatory environment, which the Advisor believes will slow the growth in CRE lending by those industries while non-traditional CRE lenders, such as the Master Fund, continue to gain market share relative to banks and CMBS conduits.

 

U.S. CRE Debt Originations

 

 

 

Source: Total originations data — Commercial Mortgage Bankers Association Annual Origination Volume Summations 2002-2017* Mortgage Bankers Origination Index estimates quarterly origination volume, which was extrapolated against actual historical originations. CMBS originations data — Commercial Mortgage Alert, through year end through 2017.

 

CMBS issuers face a number of headwinds amid multiple regulatory changes. As an example, recently introduced Dodd Frank-related risk retention rules require that CMBS sponsors retain 5% of a securitization issuance for five years. Additionally, new regulations impose higher capital charges on certain securities held by investment banks. These regulatory pressures are causing real estate debt lending motivated by securitization exit to be less profitable, requiring CMBS programs to increase underwriting standards and the cost of their loans offered to borrowers.

 

The Advisor believes that those requiring CRE debt capital may favor alternative providers such as REITs and public and private investment funds, which are not subject to many of the regulatory requirements of larger banks, insurance companies and other financial institutions. Non-regulated alternative lenders, including CRE credit/commercial mortgage REITs and other non-regulated lenders, are filling gaps in providing customized sources of financing efficiently and enabling borrowers that may not fit the criteria required by traditional lenders. As shown below, this has led to a continued gain of share by alternative lenders in the overall lending market. Alternative lenders’ market share has grown from approximately 6% to 10% of the overall lending market during the past four years, according to Real Capital Analytics.

  

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Alternative Lenders Market Share of Lending Market

 

 

 

Source: Real Capital Analytics.

 

Potential benefits exist in the Master Fund’s investments in the current interest rate environment.   With an improving economy tends to come rising interest rates, and the Master Fund’s investment strategy that focuses on originating floating rate loans and financing these investments with floating rate liabilities allows the Master Fund to benefit, especially relative to investment vehicles that focus on fixed rate loans. Quantitative easing by the U.S. Federal Reserve and maintenance of historically low interest rates have contributed to economic recovery, corporate stability and decreased unemployment, leading to increased corporate strength and rental growth. The Master Fund intends to make predominantly CRE debt investments with a coupon consisting of a credit spread over a floating rate index, usually the London Inter-Bank Offered Rate (“LIBOR”). As interest rates continue to rise as indicated by recent actions and comments taken by the U.S. Federal Reserve, the interest income produced by floating rate investments should also increase and outpace the rising cost of its corresponding floating rate liabilities, producing more revenue and improved returns on invested equity. We believe the current period of historically low, but gradually rising interest rates coupled with an improving economy may benefit the Master Fund’s floating rate investment strategy and the Master Fund Shareholders.

 

Forward LIBOR Curve

 

  

Source: Chatham Financial, December 2017.

   

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Strong CRE fundamentals may provide additional opportunities for portfolio appreciation and current income by targeting direct CRE equity investments.   The Master Fund’s investment strategy will utilize a relative value approach to seek to optimize risk adjusted returns and diversify its portfolio, purchasing properties and borrowing efficiently to finance those properties in more liquid markets. The Master Fund intends to acquire CRE properties directly or through joint venture structures that will provide potential appreciation from (i) income growth driven by value creation through operations at the property level, and (ii) improving property and market fundamentals, including strong projected NOI growth, low aggregate new supply and declining vacancy rates. As illustrated below, NOI growth is at or approaching all-time highs in all property sectors and the Advisor expects this trend to continue.

 

NOI Growth

 

 

Source: NAREIT, through December 2017.

 

Additionally, as shown below, revenue growth across major CRE sectors is projected to remain strong in the near-term, with a projected 4.3% expansion in 2017 across all property types. This trend indicates that direct CRE ownership may provide an attractive opportunity for such investments to experience appreciation. Past performance is no guarantee of future results.

 

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Effective Revenue by Property Type
(year-over-year percent change)

 

 

Source: Wells Fargo Securities, through February 2017. Past performance is no guarantee of future results.

 

Lastly, according to the chart below, aggregate new supply of CRE properties, measured in construction starts, remains below the 2007 peak and long run averages for all property types and is estimated to continue at a slower than historical pace through 2020. The Advisor believes a significant increase in near term construction is unlikely, as banks slowly show a willingness to finance such projects and the acquisition of existing CRE properties remains less risky and more cost effective (factoring in land, labor and materials) than new construction. The Advisor believes these dynamics in CRE construction, coupled with continued declining vacancy rates and rent growth, should lead to increasing property values.

 

New Completions as a % of Existing Stock

 

 

Source: Green Street Commercial Property Outlook, November 2017. Past performance is no guarantee of future results.

 

The Master Fund intends to target property types and markets that benefit from similar compelling economic drivers, resulting in favorable market occupancy and rent growth. The Advisor believes that as CRE markets continue to improve, direct CRE ownership may complement the Master Fund’s CRE debt-focused strategy given the investment types’ low correlation, optimizing its ability to generate current income while also participating in potential property value appreciation.

 

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Colony NorthStar’s expertise in the growing market for secondary private equity real estate (“PERE”) fund transactions may allow the Master Fund to further diversify its portfolio through strategic investments with leading institutional real estate fund managers.   As shown below, the secondary market for limited partnership interests in real estate private equity funds has grown significantly since 2011. The PERE volume in 2016 lacked some of the signature large transactions that came to market in 2015, which played a significant role in that year’s $7.5 billion in transaction volume. With endowments, pension funds and other institutional investors seeking to re-balance their portfolios, take profits and access liquidity, the Advisor believes there will be compelling investment opportunities in strategically acquiring portfolios of PERE funds in 2017, which is anticipated to produce a $6.0 billion PERE pipeline. Through June 2017 there has been record volume of an estimated $22 billion of secondary transactions, $4 billion of which are CRE transactions, equivalent to the total CRE secondary transactions volume in 2016. Through Colony NorthStar and its affiliates’ $3.1 billion of net asset value of PERE experience, our Advisor has a number of competitive advantages, including in-depth knowledge of the fund landscape, institutional industry relationships, the ability to creatively structure and close on transactions to meet seller needs and the flexibility to complete both large portfolio transactions and smaller deals. Investments in secondary portfolios of PERE funds should allow the Master Fund to gain indirect equity exposure to a number of real estate assets in a single transaction, providing for efficient portfolio diversification across geographic locations and asset classes. In addition, the Master Fund intends to enter into these PERE investments as many funds are approaching the end of their lifecycle allowing for shorter duration investments. The Advisor believes its debt-focused investment strategy can benefit from the growing opportunity for the acquisition of portfolios of PERE funds, which may result in attractive current income streams through regular distributions, reduced blind pool and duration risk, increased diversification and potential upside through property value appreciation for the Master Fund.

 

Private Equity Real Estate Secondaries Volume

 

 

Source: Greenhill Cogent, through June 2017. Secondary Market Trends Outlook.

 

Due to shifts occurring in the CRE debt landscape, the current market offers opportunities in both new issue and legacy (issued prior to 2008) CRE securities.   The Advisor believes the current CRE securities market presents opportunities for investors with a proven track record, investment process and a focus on investing in the underlying CRE credit (and not solely based on credit ratings) to purchase investment grade or non-investment grade new issue and legacy CRE securities. The opportunity to purchase both senior new issue bonds, which have a higher level of liquidity, and subordinate new issue bonds including “B-pieces” at discounts, may provide attractive current returns while also generating gains through either the increase of market valuations as credit spreads tighten due to improving fundamentals or repayment at par. As discussed above, while recent regulatory changes have impacted origination volume by traditional lenders, the CMBS industry may limit future issuance resulting in attractive investment opportunities as the universe of buyers/holders of such securities decreases (particularly with respect to the junior-most “B-piece” tranches) and underwriting standards remain under control. As shown below (and similar to the benefits discussed above for commercial mortgages), CMBS investments generate attractive returns relative to other asset classes illustrated by similarly rated bonds backed by alternative collateral types. Additionally, the securitized nature of these investment grade rated bonds offers liquidity through an active trading marketplace. The Advisor believes that the Master Fund will benefit from the current regulatory environment by diversifying its portfolio with exposure to liquid investment grade CMBS and the credit enhancement of improved below investment-grade CMBS.

 

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Relative Value of Commercial Mortgage Backed Securities: Spreads of Rated Securities

 

 

Source: Barclays Capital Live, through December 2017. Past performance is no guarantee of future results.

 

* US Industry Avg. BBB is the average of indexed spreads for BBB financial, industrial, and utility bonds.

 

The current CRE secured lending and securitization markets offer the Master Fund the opportunity to obtain attractive, long-term, non-mark-to-market financing for its debt investments.   Subject to the limitations imposed by the 1940 Act, to support its activities as a CRE lender the Master Fund intends to continue to enter into credit facilities and participate in the securitization market as an issuer where it may be able to finance assets with non-recourse, non-mark-to-market and match-term leverage. “Non-mark-to-market” leverage is a term used to describe financing that generally does not require a borrower to make payments to maintain a certain loan to value ratio when the financed asset is deemed to have lost value relative to the amount of debt outstanding against that asset. “Match-term” leverage is a term used to describe borrowings where (1) the maturity of the Master Fund’s investments is less than or equal to the maturity of its borrowings and (2) floating rate assets are paired with floating rate liabilities (as previously discussed). This financing strategy has been successfully employed by Colony NorthStar’s predecessors, which entered into approximately $7.7 billion of term credit facilities and over $4.2 billion of securitization financing transactions as of June 30, 2017. The Advisor believes its sponsor’s access to financing should allow the Master Fund to prudently lever certain of its investments to achieve its targeted risk-adjusted returns (while maintaining downside protection), although there can be no guarantee that this will be the case.

 

Colony NorthStar’s executive team’s experience, reputation and successful track record provide investment opportunities through existing relationships.   The growth and achievements of Colony NorthStar’s existing platform as a leading global real estate and investment management firm with approximately $        billion in assets under management as of December 31, 2017 may provide attractive sources of new investments for the Master Fund. Through the aggregation of its portfolio and the experiences of its executive team, Colony NorthStar has significant relationships with borrowers and operators. Transactions often must close with hard deadlines and deposits at risk. Comfort with the Master Fund’s diligence process and the certainty of execution provided on past transactions of the predecessors of Colony NorthStar may provide the Master Fund with an advantage when sourcing new investment opportunities. Additionally, Colony NorthStar’s ability to provide “one-stop shopping” for solutions across the CRE capital structure may provide the Master Fund with another competitive advantage. Colony NorthStar maintains a robust CRE pipeline from which the Master Fund will benefit. The Advisor believes these benefits will lead to significant investment opportunities.

 

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In summary, after the virtual shutdown of the real estate markets in 2007, a gradual recovery has taken place. Despite increases in CRE lending, the availability of CRE capital has not returned evenly across the spectrum of CRE investments. The Advisor believes the Master Fund is well positioned to take advantage of the opportunity created by steadily increasing CRE transaction volume, the large volume of CRE loans maturing and changing regulations for traditional lenders. The Master Fund expects to capitalize on this by providing borrowers, operators and partners with a single access point for well-structured debt and equity capital throughout the CRE capital structure. The Advisor believes that complementing the downside protection of debt with the appreciation potential of equity will produce compelling portfolio attributes. The Advisor similarly expects the CRE securities market to offer attractive investment opportunities in both new issue and legacy securities given the Advisor’s expertise in underwriting credit. The Advisor further believes that the existing and future CRE environment will allow the Master Fund to favorably finance its investments. The combination of (i) the preceding factors and (ii) the expertise, experience and track record of the executive team of Colony NorthStar in various market environments and in a broad array of CRE investment disciplines provides the Master Fund with an opportunity to achieve its investment objectives, although there can be no assurance that the Trust or the Master Fund’s investment objectives will be met.

 

Targeted Investments

 

The Master Fund’s strategy is to invest primarily in a diversified portfolio of real estate and real estate-related investments, which, under normal circumstances, represent at least 80% of the Master Fund’s gross assets (including the amount of leverage for investment purposes), including: (i) CRE debt, including first mortgage loans, subordinate mortgage and mezzanine loans, participations in such loans and preferred equity interests; (ii) CRE equity investments including (a) direct and indirect CRE ownership and (b) indirect ownership through PERE Investments and other joint ventures; and (iii) CRE securities, such as CMBS, unsecured debt of publicly-traded REITs and CDO notes. Although the Master Fund is a “non-diversified” investment company within the meaning of the 1940 Act, the Master Fund seeks to invest in a variety of asset types, property types and geographic locations. The Master Fund considers an investment to be “real-estate related” if the issuer of such investment (i) derives at least 50% of its revenues from the ownership, construction, financing, management or sale of real estate, or (ii) has at least 50% of its assets in these types of real estate. Real estate-related investments include, but are not limited to: (i) securities of REITs or other real estate operating companies that (a) own property, (b) make or invest in mortgage loans, or (c) invest in long-term mortgage pools; (ii) securities of companies whose products and services are related to the real estate industry, such as manufacturers and distributors of building supplies and financial institutions that issue or service mortgages; and (iii) debt instruments that are secured by or, in the case of subordinated debt instruments, may otherwise be collateralized by, underlying real estate assets.

 

The Master Fund targets assets that generally offer predictable current cash flow and attractive risk-adjusted returns based on the underwriting criteria established and employed by the Advisor. The Master Fund seeks to acquire a portfolio that includes some or all of the following investment characteristics: (i) provides current income; (ii) is backed by what the Advisor believes to be high-quality CRE; (iii) where permissible, includes subordinate or pari passu capital investments by strong sponsors and partners that support the Master Fund’s investments and provide downside protection; (iv) possesses strong structural features that maximize repayment potential; and (v) can be efficiently financed.

 

Commercial Real Estate Debt Investments

 

The Master Fund invests in CRE debt both by directly originating loans and by purchasing them from third-party sellers. Although the Master Fund generally prefers the benefits of direct origination, opportunities may arise to purchase CRE debt, possibly at discounts to par, which will compensate the buyer for the lack of control or structural enhancements typically associated with directly structured investments. The experience of the Advisor’s management team in both disciplines will provide the Master Fund flexibility in a variety of market conditions.

 

The Master Fund’s primary focus will be to originate, acquire and manage the following types of CRE debt:

 

First Mortgage Loans.   First mortgage loans are loans that have the highest priority to claims on the collateral securing the loans in foreclosure. First mortgage loans generally provide for a higher recovery rate and lower defaults than other debt positions due to the lender’s favorable control features which at times may mean control of the entire capital structure. Because of these attributes, this type of investment receives favorable treatment from third-party rating agencies and financing sources, which should increase the liquidity of these investments.

 

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Subordinate Mortgage Loans.   Subordinate mortgage loans are loans that have a lower priority to collateral claims. Investors in subordinate mortgages are compensated for the increased risk from a pricing perspective as compared to first mortgage loans but still benefit from a direct lien on the related property or a security interest in the entity that owns the real estate. Investors typically receive principal and interest payments at the same time as senior debt unless a default occurs, in which case these payments are made only after any senior debt is repaid in full. Rights of holders of subordinate mortgages are usually governed by participation and other agreements that, subject to certain limitations, typically provide the holders with the ability to cure certain defaults and control certain decisions of holders of senior debt secured by the same properties (or otherwise exercise the right to purchase the senior debt), which provides for additional downside protection and higher recoveries.

 

Mezzanine Loans.   Mezzanine loans are a type of subordinate loan in which the loan is secured by one or more direct or indirect ownership interests in an entity that directly or indirectly owns real estate. Investors in mezzanine loans are compensated for the increased credit risk from a pricing perspective and still benefit from the right to foreclose on its security, in many instances more efficiently than first mortgage loans. Upon a default by the borrower under a mezzanine loan, the mezzanine lender generally can take control of the property owning entity on an expedited basis, subject to the rights of the holders of debt senior in priority on the property. Rights of holders of mezzanine loans are usually governed by intercreditor or interlender agreements that provide the mezzanine lender with the right to cure defaults and limit certain decisions of holders of any senior debt secured by the same properties, which provides for additional downside protection and higher recoveries.

 

Preferred Equity.   Preferred equity is a type of loan secured by the general or limited partner interest in an entity that owns real estate or real estate-related investments. Preferred equity interests are generally senior with respect to the payments of dividends and other distributions, redemption rights and rights upon liquidation to such entity’s common equity. Investors in preferred equity are typically compensated for their increased credit risk from a pricing perspective with fixed payments but may also participate in capital appreciation. Upon a default by a general partner of a preferred equity issuer, there typically is a change of control event and the limited partner assumes control of the entity. Upon an event of default by a limited partner of a preferred equity issuer, the limited partner may lose its rights with regard to operational input and become a passive investor. Rights of holders of preferred equity are usually governed by partnership agreements that govern who has control over a property and its decision making, when those rights may be revoked and typically have a cash flow waterfall that allocates any distributions of income or principal into and out of the entity.

 

Equity Participations or “Kickers.”   In connection with the Master Fund’s debt origination activities, the Master Fund intends to pursue equity participation opportunities, in instances when the Advisor believes that the risk-reward characteristics of the loan merit additional upside participation because of the possibility of appreciation in value of the underlying assets securing the loan. Equity participations can be paid in the form of additional interest, exit fees, percentage of sharing in refinance or resale proceeds or warrants in the borrower. Equity participation can also take the form of a conversion feature, permitting the lender to convert a loan or preferred equity investment into equity in the borrower at a negotiated premium to the current net asset value of the borrower. The Master Fund expects that it may be able to obtain equity participations in certain instances where the loan collateral consists of an asset that is being repositioned, expanded or improved in some fashion which is anticipated to improve future cash flow. In such case, the borrower may wish to defer some portion of the debt service or obtain higher leverage than might be merited by the pricing and leverage level based on historical performance of the underlying asset. The Master Fund expects to generate additional revenues from these equity participations as a result of excess cash flows being distributed or as appreciated properties are sold or refinanced.

 

Commercial Real Estate Equity Investments.

 

In addition to the Master Fund’s focus on origination of and investments in CRE debt, the Master Fund may also choose to selectively acquire: (i) direct and indirect interests in real estate through entities (including, without limitation, partnerships or a limited liability companies) that own commercial real property (or in an entity operating or controlling commercial real property, directly or through affiliates), which may be structured to receive a priority return or is senior to the owner’s equity (in the case of preferred equity, as discussed above); (ii) indirect interests in real estate through investments in limited partnership interests in real estate private equity funds or other joint ventures; (iii) certain strategic joint venture opportunities where the risk-return and potential upside through sharing in asset or platform appreciation is compelling; (iv) private issuances of equity or securities of public companies; and (v) investments in a loan, security or other obligations for which the business of the related obligor is significantly related to real estate.

 

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These investments may or may not have a scheduled maturity and are expected to be of longer duration (e.g., five to ten year terms) than the Master Fund’s typical debt investments. The longer an investment’s duration, the more sensitive it will be to changes in interest rates. Such investments may be fixed rate (if they have a stated investment rate) and may have accrual structures and provide other distributions or equity participations in overall returns above negotiated levels. However, these distributions may be sensitive to property level operations. These investments are also expected to be collateralized or otherwise backed primarily by U.S. real estate collateral.

 

The Advisor believes that compelling “equity” opportunities will arise that should generate significant returns and provide portfolio appreciation to assist in recouping offering expenses. The Master Fund has not established the specific terms it will require in its joint venture agreements for CRE equity investments. Instead, the Master Fund will establish the terms with respect to any particular joint venture agreement on a case-by-case basis after the Master Fund Board considers all of the facts that are relevant, such as the nature and attributes of the Master Fund’s other potential joint venture partners, the proposed structure of the joint venture, the nature of the operations, the liabilities and assets associated with the proposed joint venture and the size of the Master Fund’s interest when compared to the interests owned by other partners in the venture. The Master Fund will not, however, invest in a joint venture in which Colony NorthStar, the Advisor, any of their directors or officers or any of their affiliated persons (as defined in the 1940 Act) has an interest except as permitted by the terms of any applicable exemptive order permitting the Master Fund to co-invest with its affiliates or as permitted by the 1940 Act, including SEC interpretive positions, and with a determination by a majority of the Master Fund Board (including a majority of the Master Fund’s Independent Trustees not otherwise interested in the transaction that such transaction is fair and reasonable to the Master Fund and on terms and conditions not less favorable to it than those available from unaffiliated third parties.

 

CRE equity investments constitute a significant component of Colony NorthStar’s $        billion of managed assets as of December 31, 2017, and the Advisor intends to leverage the extensive experience of Colony NorthStar’s and its affiliates’ executive team in this specialized sector, as well as Colony NorthStar’s and its affiliates’ origination capabilities and extensive capital markets relationships to identify investment opportunities that are appropriate for the Master Fund’s investment portfolio.

 

Direct and Indirect Commercial Real Estate Equity Investments.   The Master Fund may acquire direct and indirect interests in CRE to take advantage of favorable market conditions that may produce attractive investment opportunities in CRE equity investments. The Master Fund would expect that if it does make property acquisitions, the properties would have occupancy levels consistent with the performance of the local market and would generate accretive and immediate cash flow. Although the Master Fund intends to acquire properties that can be efficiently financed with long term fixed rate debt, and in certain instances where investments have upside potential, it may initially finance with shorter duration floating rate debt to enhance our returns. In particular, the investment professionals of Colony NorthStar and its affiliates who perform services for the Master Fund pursuant to the Advisor Staffing Agreement have extensive experience in acquiring, managing and disposing of CRE properties. In addition to the CRE debt investments described above, in certain circumstances the Master Fund may make investments in distressed CRE debt (whether performing or distressed), which may result in the Master Fund owning CRE properties as a result of a loan workout, taking title or similar circumstances. The Master Fund intends to manage and dispose of any real property assets it acquires in the manner that the Advisor determines is most advantageous. Certain direct and indirect equity investments in CRE may be made through the Master Fund’s REIT Subsidiary, see “—REIT Subsidiary” below.

 

Private Equity Real Estate Investments.   The Master Fund may also invest in CRE properties by purchasing limited partnership interests in existing, substantially invested private equity real estate funds from institutional investors. These transactions may involve the acquisition of a single fund interest or a portfolio of fund interests and may be structured through joint venture arrangements, discounted purchase prices, deferred financing and other structures. In general, the sellers of limited partnership interests sell not only the interests in the fund but also their remaining unfunded commitments to the funds, which the Master Fund may be obligated to fulfill. For the vast majority of private equity real estate investments, there is no listed public market; however, there is a significant private secondary market available for sellers of private equity assets. The underlying funds are generally governed by limited partnership agreements that set forth the various rights and obligations of the general partners and each limited partner, including with respect to funding obligations, return thresholds and corporate governance matters.

 

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Commercial Real Estate Securities

 

In addition to the Master Fund’s focus on origination of and investments in CRE debt and equity, the Master Fund may also acquire third-party CRE debt or debt-related securities such as CMBS, unsecured REIT debt and interests in other securitization financing transactions that own real estate-related debt, historically referred to as CDO notes.

 

CMBS.   CMBS are commercial mortgages pooled in a trust and are principally secured by real property or interests. Accordingly, these securities are subject to all of the risks of the underlying loans. CMBS are structured with credit enhancement, as dictated by the major rating agencies and their proprietary rating methodologies, to protect against potential cash flow delays and shortfalls. This credit enhancement usually takes the form of allocation of loan losses to investors in reverse sequential order of priority (equity to AAA classes), whereas interest distributions and loan prepayments are usually applied sequentially in order of priority (AAA classes to equity).

 

The typical commercial mortgage is a five or ten-year loan, with a 30-year amortization schedule and a balloon principal payment due on the maturity date. Most fixed-rate commercial loans have strong prepayment protection and require prepayment penalty fees or defeasance. The loans are often structured in this manner to maintain the collateral pool’s cash flow or to compensate the investors for foregone interest collections.

 

Unsecured REIT Debt.   The Master Fund may also acquire senior unsecured debt of publicly-traded REITs that acquire and hold real estate. Publicly-traded REITs may own large, diversified pools of CRE properties or they may focus on a specific type of property, such as regional malls, office properties, apartment properties and industrial warehouses. Publicly-traded REITs typically employ leverage, which magnifies the potential for gains and the risk of loss. Corporate bonds issued by these types of REITs are usually rated investment grade and benefit from strong covenant protection.

 

CDO Notes.   While the Master Fund may invest in CDO notes, it does not intend for such investments to be a principal investment strategy based on current market conditions. CDOs are multiple class debt notes, secured by pools of assets, such as CMBS, CRE first mortgage or mezzanine loans and unsecured REIT debt. Accordingly, these securities are subject to all of the risks of the underlying securities that comprise the pool. CDOs are structured with credit enhancement levels, as dictated by the rating agencies and their proprietary rating methodologies, which involves an underwriting of the underlying assets and contemplated CDO structure. The most constraining rating agency determines the percentage of the total securitization of each tranche of debt (or bond class) and its subordination levels (ability to withstand losses to the underlying assets). CDOs typically require the allocation of loan losses to bond investors in reverse sequential order of priority (equity to AAA classes), whereas interest distributions and loan prepayments are usually applied sequentially in order of priority (AAA classes to equity). CDOs often include principal and interest coverage test ratios to protect against principal and interest cash flow delays or to re-direct cash flows to the then-most senior outstanding class of debt. Breaches of principal or interest coverage tests may result in an acceleration of payment of principal and/or interest to senior classes, which may result in loss to junior bond classes. Like typical securitization structures, in a CDO, the assets are pledged to a trustee for the benefit of the holders of the bonds. CDOs often have reinvestment periods, during which time, proceeds from the sale of a collateral asset may be invested in substitute collateral. Upon termination of the reinvestment period, the static pool functions very similarly to a CMBS securitization where repayment of principal allows for redemption of bonds sequentially.

 

REIT Subsidiary

 

The Master Fund may invest up to 25% of the value of its total assets in securities of the REIT Subsidiary, which, in turn, may hold CRE investments through wholly owned special purpose vehicles. The investments in real estate through the REIT Subsidiary’s wholly owned special purpose vehicles may include fee simple, leasehold ownership or a partnership interest in property. Based on market conditions, the Advisor may cause the Master Fund to reduce, liquidate and/or forego investments in the REIT Subsidiary.

 

The REIT Subsidiary is organized as a Maryland corporation that is a “wholly owned subsidiary” of the Master Fund, as defined in the 1940 Act (i.e., the Master Fund owns 95% or more of the REIT Subsidiary’s outstanding voting securities). The Master Fund will hold all of the common voting units of the REIT Subsidiary. The Advisor will not receive a fee for managing the REIT Subsidiary, though the Master Fund will indirectly incur the REIT Subsidiary’s operating expenses. Investment through the REIT Subsidiary involves risks, including the risk that the failure of the REIT Subsidiary to qualify as a REIT for U.S. federal income tax purposes will have adverse tax consequences on the REIT Subsidiary and may adversely affect the performance of the Master Fund and, consequently, the Trust.

 

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Other Investments

 

Although the Master Fund expects that most of its investments will be of the types described above, the Master Fund may make other investments, such as non-U.S. investments. In fact, the Master Fund may invest in whatever types of interests in real estate or debt-related assets that the Advisor believes are in the Master Fund’s best interests subject to any restrictions described elsewhere in this prospectus.

 

Investment Process

 

The Advisor has the authority to make all the decisions regarding the Master Fund’s investments consistent with the investment guidelines and borrowing policies approved by the Master Fund Board and subject to the limitations in the Master Fund’s declaration of trust and any fundamental investment restrictions and the direction and oversight of the Master Fund Board. With respect to investments in CRE debt, equity and securities, the Master Fund Board has adopted investment guidelines that the Advisor must follow when acquiring such assets on the Master Fund’s behalf without the approval of the Master Fund Board. The Master Fund will not, however, purchase or lease assets in which the Advisor, any of their directors or officers or any of their affiliated persons (as defined in the 1940 Act) has an interest except as permitted by the terms of any applicable exemptive order permitting the Master Fund to co-invest with its affiliates or as permitted by the 1940 Act, including SEC interpretive positions, and following a determination by a majority of the Master Fund Board (including a majority of Independent Trustees) not otherwise interested in the transaction that such transaction is fair and reasonable to the Master Fund. The Master Fund Board will formally review, at a duly-called meeting, the Master Fund’s investment guidelines on an annual basis and the Master Fund’s investment portfolio on at least a quarterly basis or, in each case, more often as they deem appropriate. The Master Fund Board may, in its sole discretion, change the Master Fund’s investment strategies, targeted investments and investment guidelines, except changes to those investment policies and restrictions described herein as requiring the affirmative vote of a majority of the outstanding voting securities of the Master Fund.

 

The Advisor will source the origination and acquisition of CRE investments from new or existing customers, former and current financing and investment partners, third-party intermediaries, competitors looking to share risk and securitization or lending departments of major financial institutions.

 

In selecting investments for the Master Fund, the Advisor will utilize Colony NorthStar’s established investment and underwriting process, which focuses on ensuring that each prospective investment is being evaluated appropriately. The criteria that the Advisor may consider when evaluating prospective investment opportunities includes, but is not limited to:

 

·stringent evaluation of the market in which a property is located, such as local supply constraints, the quality and nature of the local workforce and prevailing local real estate values;

 

·fundamental analysis of the property and its operating performance, including tenant rosters, lease terms, zoning, operating costs and the asset’s overall competitive position in its market;

 

·the operating expertise and financial strength of the sponsor, borrower, tenant operator or partner;

 

·real estate and leasing market conditions affecting the underlying real estate;

 

·the cash flow in place and projected to be in place over the term of the CRE investments;

 

·the appropriateness of estimated costs and timing associated with capital improvements of the property;

 

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·a valuation of the investment, investment basis relative to its property value and competitive set and the ability to liquidate an investment through a sale or refinancing;

 

·review of third-party reports, including appraisals, engineering reports and environmental reports;

 

·physical inspections of the property; and

 

·the overall structure of the investment and rights in the collateral documentation.

 

If a potential investment meets the Advisor’s underwriting criteria, the Advisor, through its investment committee, will review the proposed transaction structure, including security, reserve requirements, cash flow sweeps, call protection and recourse provisions, among others. The Advisor will evaluate the asset’s position within the overall capital structure and the Master Fund’s prospective rights in relation to other capital providers. In addition, the Advisor will analyze each potential investment’s risk-return profile and review financing sources, if applicable, to ensure that the investment fits within the parameters of financing strategies and to maximize performance of the underlying real estate collateral. The Master Fund will not complete any investment until the successful completion of due diligence, which includes the satisfaction of all applicable elements of the investment and underwriting process and an assessment of any property underlying CRE debt and of the Master Fund’s equity investments. In addition, the Advisor may also conduct additional environmental site assessments to the extent its management team believes such assessments are necessary or advisable.

 

Valuation Process

 

The Master Fund Board has approved valuation policies and procedures and the creation of the Valuation Committee, which consists of personnel from the Advisor. The Trust determines the NAV of Shares daily during the Offering Period and intends to determine the NAV of the Shares quarterly thereafter. The Valuation Committee values the Master Fund’s assets in good faith pursuant to the Master Fund’s valuation policy and consistently applied valuation process. Portfolio securities and other assets for which market quotes are readily available are valued at market value. In circumstances where market quotes are not readily available, the Master Fund Board has adopted methods for determining the fair value of such securities and other assets, and has delegated the responsibility for applying the valuation methods to the Valuation Committee. On a quarterly basis, or more frequently if necessary, the Master Fund’s audit committee reviews and the Master Fund Board ratifies the valuation determinations made with respect to the Master Fund’s investments during the preceding period and evaluates whether such determinations were made in a manner consistent with the Master Fund’s valuation policies and procedures. The Trust, in turn, utilizes the NAV of the Master Fund Shares as determined by the Master Fund in accordance with the methodology described above in determining the NAV and offering price of the Shares. Valuations of Master Fund investments are disclosed in reports filed with the SEC. See “Determination of Net Asset Value.”

 

Borrowing Policy

 

Each of the Trust and the Master Fund is permitted to borrow to make investments, subject to limitations imposed by the 1940 Act. To the extent that the Trust or the Master Fund determines it is appropriate to borrow funds to make investments, such as through secured credit facilities and issuing debt securities or other forms of leverage, the costs associated with such borrowing will be indirectly borne by the Trust’s and the Master Fund’s Shareholders. The Trust and the Master Fund may use leverage opportunistically and may choose to increase or decrease its leverage, or use different types or combinations of leveraging instruments, at any time based on the Trust’s or Master Fund’s assessment of market conditions and the investment environment. The 1940 Act generally limits the extent to which the Trust and the Master Fund may utilize borrowings and “uncovered” transactions that, together with any other senior securities representing indebtedness, to 331∕3% of the Trust’s and the Master Fund’s total assets at the time utilized. In addition, the 1940 Act limits the extent to which the Trust and the Master Fund may issue preferred shares to 50% of the Master Fund’s total assets (less the Master Fund’s obligations under senior securities representing indebtedness). Based on current market conditions, the Trust and Master Fund do not intend for the use of derivative instruments to be a principal investment strategy; however, to the extent the Trust and Master Fund use such instruments, “covered” reverse repurchase agreements and other derivative transactions or short selling will not be counted against the foregoing limits under the 1940 Act. The assets used to “cover” will not be counted as part of the Trust and the Master Fund’s total assets for purposes of the 331∕3% and 50% limits. Shareholders bear all costs and expenses incurred by the Trust either directly or indirectly, including such costs and expenses associated with any leverage incurred by the Trust.

 

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The Master Fund anticipates incurring leverage as part of its investment strategy. The Master Fund will “cover” its derivative positions by segregating an amount of cash and/or liquid securities to the extent required by the 1940 Act and applicable SEC interpretations and guidance from time to time. Although it has no current intention to do so, if Preferred Shares are issued and outstanding, holders of Preferred Shares of the Master Fund would elect two trustees of the Master Fund Board voting separately as a class. The costs and expenses incurred in connection with the Master Fund’s leveraging strategies will be indirectly borne by the Trust’s Shareholders and Master Fund’s Shareholders. The Master Fund’s use of leverage is subject to risks and may cause the Master Fund’s NAV and distributions to be more volatile than if leverage was not used. There can be no assurance that the Master Fund’s leveraging strategies will be successful. See “Risk Factors—The Master Fund may use leverage in connection with its investments, which may increase the risk of loss associated with its investments.”

 

The Master Fund expects to selectively employ leverage to enhance total returns through a combination of financing strategies including: (i) secured or unsecured borrowings or facilities; (ii) syndications; and (iii) securitization financing transactions and other structures. In order to pursue its leveraging strategy, the Master Fund may indirectly employ leverage through wholly-owned subsidiaries, including the REIT Subsidiary. The Master Fund will seek to secure conservatively structured leverage that is long-term, non-recourse and non-mark-to-market to the extent obtainable on a cost-effective basis.

 

In addition to any indebtedness incurred by the Master Fund, the special purpose vehicles that are wholly owned by any subsidiary of the Master Fund, including the REIT Subsidiary, may also utilize leverage, including by mortgaging properties held by the special purpose vehicles, or by acquiring property with existing debt. Any such borrowings will generally be the sole obligation of each respective special purpose vehicle, without any recourse to any other special purpose vehicle, the REIT Subsidiary, the Master Fund, the Trust or its assets, and the Master Fund will not treat such non-recourse borrowings as senior securities (as defined in the 1940 Act) for purposes of complying with the 1940 Act’s limitations on leverage unless the financial statements of the special purpose vehicle, or the subsidiary of the Master Fund that owns such special purpose vehicle, will be consolidated in accordance with Regulation S-X and other accounting rules. If cash flow is insufficient to pay principal and interest on a special purpose vehicle’s borrowings, a default could occur, ultimately resulting in foreclosure of any security instrument securing the debt and a complete loss of the investment, which could result in losses to the REIT Subsidiary and, therefore, to the Master Fund and the Trust.

 

To the extent that subsidiaries of the Master Fund, including the REIT Subsidiary, directly incur leverage in the form of debt (as opposed to non-recourse borrowings made through special purpose vehicles), the amount of such recourse leverage used by the Master Fund and such subsidiaries, including the REIT Subsidiary, will be consolidated and treated as senior securities for purposes of complying with the 1940 Act’s limitations on leverage by the Master Fund. Accordingly, it is the Master Fund’s present intention to utilize leverage through debt or borrowings in an amount not to exceed 331∕3% of the Master Fund’s total assets (i.e., maintain 300% asset coverage), less the amount of any direct debt or borrowing by subsidiaries of the Master Fund, including the REIT Subsidiary, if any. The REIT Subsidiary intends to sell a small amount of preferred shares to third party investors to assist the REIT Subsidiary in satisfying the requirement that an entity taxed as a REIT for U.S. federal income tax purposes be beneficially owned by 100 or more persons during at least 335 days of a 12-month taxable year. These preferred shares will receive a semi-annual distribution from the REIT Subsidiary, but will have no additional rights with respect to the Master Fund (e.g., the preferred shares of the REIT Subsidiary will not have priority over the Master Fund Shares in liquidation). Because the REIT Subsidiary’s preferred shares represent a small amount of leverage by the REIT Subsidiary, such leverage will also be consolidated for purposes of complying with the 1940 Act’s limitations on the Master Fund’s ability to issue Preferred Shares.

 

The 1940 Act generally limits the extent to which the Trust or Master Fund may utilize borrowings and “uncovered” transactions that may give rise to a form of leverage, including through the issuance of senior securities representing indebtedness and as a result of derivative transactions. The Trust’s and the Master Fund’s ability to incur indebtedness is limited such that its asset coverage (as defined in the 1940 Act) must equal at least 300% immediately after each time it incurs indebtedness. The Trust’s and the Master Fund’s ability to issue Preferred Shares is limited such that its asset coverage must equal at least 200% after each issuance of such Preferred Shares.

 

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Effects of Leverage.   The following table illustrates the effect of leverage on the Master Fund Shares, assuming investment portfolio total returns (comprised of income and changes in the value of securities held in the Master Fund’s portfolio) of -10%,-5%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Master Fund. See “Risk Factors—Risks Related to the Master Fund’s Financing Strategy—The Master Fund may use leverage in connection with its investments, which may increase the risk of loss associated with its investments.”

 

The table further reflects the issuance of leverage representing approximately 25.2% of the Master Fund’s total assets, and the Master Fund’s currently projected annual interest rate on its leverage of 3.5%.

 

Assumed Portfolio Total Return   -10%   -5%   0%   5%   10%
Master Fund Share Total Return   -14.55%   -7.46%   -1.18%   5.51%   12.19%

 

Master Fund Common Share Total Return is composed of two elements: Master Fund Share distributions paid by the Master Fund (the amount of which is largely determined by the net investment income of the Master Fund after paying interest on its leverage) and gains or losses on the value of the securities the Master Fund owns. As required by SEC rules, the table above assumes that the Master Fund is more likely to suffer capital losses than to enjoy capital appreciation. For example, to assume a total return of 0% the Master Fund must assume that the distributions it receives from its investments are entirely offset by losses in the value of those investments.

 

In addition, assuming the issuance of leverage representing approximately 25.2% of the Master Fund’s total assets, at an annual interest rate of 3.50% payable on such leverage, the Master Fund’s assets would need to yield an annual return (net of expenses) of approximately 0.88% in order to cover the annual interest payments. These numbers are merely estimates, used for illustration. Actual interest rates may vary and may be significantly higher or lower than the rate assumed above.

 

Operating Policies

 

Credit Risk Management.   The Master Fund may be exposed to various levels of credit and special hazard risk depending on the nature of its investments and the nature and level of credit enhancements supporting its CRE investments. The Advisor will review and monitor credit risk and other risks of loss associated with each investment. In addition, the Master Fund will seek to diversify its portfolio of assets to avoid undue geographic or borrower concentrations. The Master Fund Board will monitor the overall portfolio risk and levels of provision for loss.

 

Interest Rate Risk Management.   The Master Fund expects to follow an interest rate risk management policy intended to manage refinancing and interest rate risk. The Master Fund will generally seek to match-fund its assets and liabilities by having similar maturities and like-kind interest rate benchmarks (fixed or floating) to manage refinancing and interest rate risk. As part of this strategy, the Master Fund may engage in hedging transactions, which will primarily include interest rate swaps and may include other hedging instruments. These instruments may be used to hedge as much of the interest rate risk as the Advisor determines is in the best interest of the Master Fund Shareholders, including the Trust, given the cost of such hedges and the need to maintain the Master Fund’s qualification as a RIC. The Master Fund may elect to bear a level of interest rate risk that could otherwise be hedged when it believes, based on all relevant facts, that bearing such risk is advisable or economically unavoidable.

 

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Equity Capital Policies.   The Board may amend the declaration of trust to increase the number of authorized shares or the number of shares of any class or series that the Trust has authority to issue without Shareholder approval. After an investor’s purchase in this offering, the Board may elect to: (i) sell additional Shares in this or future public offerings; (ii) issue equity interests in private offerings; or (iii) issue Shares to Colony NorthStar pursuant to its commitment to purchase Shares at the Trust’s request as needed to fund distributions during the two-year period following commencement of this offering in the amount by which cash distributions paid for any calendar quarter exceeds the Master Fund’s net investment income for such quarter. To the extent permitted by the 1940 Act and/or the SEC or in accordance with an applicable exemptive order, the Board may also determine to issue different classes of shares that have different fees and commissions from those being paid with respect to the Shares being sold in this offering. To the extent the Trust issues additional equity interests after an investor’s purchase in this offering, an investor’s percentage ownership interest in the Trust will be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of the Master Fund’s investments, a Shareholder may also experience dilution in the fair value of his, her or its Shares.

 

See “Risk Factors” for further information on risks associated with these policies.

 

Disposition Policies

 

Although the Master Fund generally expects to hold its CRE debt until the stated maturity of such debt, the period that the Master Fund will hold its investments will vary depending on the type of asset, interest rates, micro- and macro-economic conditions and credit environments, among other factors. The Advisor will continually perform a hold-sell analysis on each investment the Master Fund owns in order to determine the optimal time to hold the asset and generate a strong return to the Master Fund Shareholders, including the Trust. Economic and market conditions may influence the Master Fund to hold its investments for different periods of time. The Master Fund may sell an asset before the end of the expected holding period if it believes that market conditions have maximized its value to the Master Fund or the sale of the asset would otherwise be in the best interests of the Master Fund Shareholders.

 

RIC Qualification of the Trust and the Master Fund

 

The Trust and the Master Fund intend to elect to be treated, and to intend to qualify annually, as RICs under Subchapter M of the Code beginning with the taxable year ending December 31, 2018. As a RIC, the Trust generally will not have to pay corporate-level U.S. federal income taxes on any income that it distributes to Shareholders from its tax earnings and profits. Similarly, as a RIC, the Master Fund generally will not have to pay corporate-level U.S. federal income taxes on any income that it distributes to the Trust and any other Master Fund Shareholders from its tax earnings and profits. To qualify as a RIC in any tax year, the Trust and the Master Fund must, among other things, satisfy both an income composition test and an asset composition test. Because the Trust invests substantially all of its assets in the Master Fund, the Trust will generally qualify as a RIC if the Master Fund qualifies as a RIC. If the Trust or the Master Fund fail to qualify as a RIC, in any taxable year, and do not qualify for certain statutory relief provisions, the Trust and/or the Master Fund would be required to pay U.S. federal income tax on its taxable income, and distributions to its shareholders would not be deductible by it in determining its taxable income.

 

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RISK FACTORS

 

Investing in the Trust involves risks, including the risk that an investor may receive little or no return on his, her or its investment or that an investor may lose part or all of such investment. Therefore, investors should consider carefully the following principal risks before investing in the Trust. Certain of the risks discussed below relate to the investments generally made by the Master Fund. These risks will, in turn, have an effect on the Trust through its investment in the Master Fund. Also discussed below are the principal risk factors relating solely to an investment in the Trust and the Shares specifically, as well as those factors generally associated with investment in a trust with investment objectives, investment policies, capital structure or trading markets similar to those of the Trust. The risks described below are not, and are not intended to be, a complete enumeration or explanation of the risks involved in an investment in the Trust and the Shares. Prospective investors should read this entire prospectus and consult with their own advisers before deciding whether to invest in the Trust. In addition, as the investment program of the Trust or the Master Fund changes or develops over time, an investment in the Trust may be subject to risks not described in this prospectus. The Trust will update this prospectus to account for any material changes in the risks involved with an investment in the Trust.

 

Risks Related to an Investment in the Trust

 

The Trust and the Master Fund have limited operating histories.

 

The Trust and the Master Fund are non-diversified, closed-end management investment companies with limited operating histories. As a result, prospective investors have limited track record or history on which to base their investment decision. The Trust and the Master Fund are subject to all of the business risks and uncertainties associated with any new business, including the risk that the Trust and the Master Fund will not achieve their investment objectives.

 

There can be no assurance that the Trust will make a specified level of cash distributions or that such distributions will increase year-to-year.

 

There can be no assurance that the Master Fund will achieve investment results that will allow the Trust to make a specified level of cash distributions or year-to-year increases in cash distributions. All distributions will be paid at the discretion of the Board and may depend on the Master Fund’s earnings, the Master Fund’s net investment income, the Master Fund’s financial condition, compliance with applicable regulations and such other factors as the Board may deem relevant from time to time.

 

In the event that the Master Fund encounters delays in locating suitable investment opportunities, all or a substantial portion of the Master Fund’s distributions may constitute a return of capital to the Trust. To the extent that the Trust pays distributions to Shareholders using proceeds it receives from Fund distributions, such Trust distributions would similarly constitute a return of investor capital and will lower a Shareholder’s tax basis in the Shares. A return of capital generally is a return of an investor’s investment rather than a return of earnings or gains derived from investment activities.

 

The NAV of the Trust and Master Fund may fluctuate significantly and there is no assurance that it will not decrease.

 

The Trust invests substantially all of its assets in the Master Fund, which inherently links the Trust’s NAV to the Master Fund’s NAV. Therefore, changes in the Master Fund’s NAV will likely cause a corresponding change in the Trust’s NAV. The Master Fund’s NAV may be significantly affected by numerous factors, including the risks described in this prospectus, many of which are outside of the Trust’s and the Master Fund’s control. There is no guarantee that the Trust’s NAV or the Master Fund’s NAV will not decrease and they both may fluctuate significantly.

 

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If the Master Fund pays distributions from sources other than its cash flow from operations, it will have less cash available for investments and the overall return may be reduced.

 

Generally, the Master Fund intends to pay distributions from cash flow from operations. However, the Master Fund’s organizational documents permit it to pay distributions from any source, including borrowings, sales of assets and offering proceeds contributed to it by the Trust. Distributions may also be made in the form of taxable stock dividends. Additionally, some distributions may be paid through the partial waiver of fees by the Advisor. The Master Fund has not established a limit on the amount of proceeds it may use to fund distributions. Pursuant to each Expense Support Agreement, Colony NorthStar FV has agreed to reimburse the Trust and the Master Fund for expenses to ensure that each of the Trust and the Master Fund bears a reasonable level of expenses in relation to its income. The purpose of these agreements is to seek to minimize the extent to which any portion of Trust distributions or Master Fund distributions, as applicable, will be characterized as a return of capital for U.S. GAAP purposes and to reduce operating expenses until the Trust has raised capital and is generating income to absorb such expenses. However, such distributions may still be characterized as a return of capital for U.S. federal income tax purposes. If the Expense Support Agreements are terminated, pursuant to the Distribution Support Agreement, in certain circumstances where the Master Fund’s cash distributions exceed the Master Fund’s net investment income, Colony NorthStar FV has committed to purchase up to $10.0 million in Master Fund Shares, of which $2.0 million was contributed by an affiliate of Colony NorthStar to the Master Fund as the Seed Capital Investment, at the current NAV per Master Fund Share to provide additional cash to support distributions to Master Fund Shareholders. The sale of these Master Fund Shares pursuant to the Distribution Support Agreement would result in the dilution of the ownership interests of the Master Fund Shareholders, including, indirectly, the Shareholders. Upon termination or expiration of the Expense Support Agreements and Distribution Support Agreement, the Master Fund and, consequently, the Trust may not have sufficient cash available to pay distributions at the rate it had paid during preceding periods or at all. Until the offering proceeds contributed to it by the Trust are fully invested by the Master Fund and otherwise during the course of its existence, the Master Fund may not generate sufficient cash flow from operations to fund distributions. If the Master Fund pays distributions from sources other than the Master Fund’s cash flow from operations, the Master Fund will have less cash available for investments, it may have to reduce its distribution rate, the Master Fund’s net asset value may be negatively impacted and the overall return may be reduced.

 

No public trading market for the Shares exists or will exist, and as a result, an investment in the Shares is illiquid.

 

Each of the Trust and the Master Fund has been organized as a closed-end management investment company. Closed-end funds differ from open-end management investment companies (commonly known as mutual funds) in that investors in a closed-end fund do not have the right to redeem their shares on a daily basis. Unlike most closed-end funds, which typically list their shares on a securities exchange, the Trust does not currently intend to list the Shares for trading on any securities exchange, and the Trust does not expect any secondary market to develop for the Shares in the foreseeable future. Moreover, the Trust does not have any arrangements with anyone to act as a market maker with respect to the Shares. The Shares therefore are not readily marketable and Shareholders must be prepared to hold Shares for an indefinite period of time. Thus, an investment in the Trust, unlike an investment in a typical closed-end fund, is not a liquid investment.

 

The Trust believes that an unlisted closed-end structure is most appropriate for the long-term nature of the Master Fund’s strategy. The Master Fund believes that in order to meet it and the Trust’s objectives it should retain the flexibility to respond to market conditions. Features that interfere with the ability to hold investments for full term (such as daily redemptions that cause the premature sale of investments) could impair the Master Fund’s ability to execute its investment strategy. Accordingly, an unlisted closed-end structure helps the Trust and the Master Fund achieve their investment objectives. The NAV of the Shares may be volatile. As the Shares are not traded, a Shareholder will not be able to dispose of its investment in the Trust no matter how poorly the Trust performs.

 

The Trust is not obligated to complete a liquidity event by a specified date; therefore, it will be difficult or impossible for a Shareholder to sell his or her Shares.

 

The Shares are not currently listed on any securities exchange, and the Trust does not expect a public market for them to develop in the foreseeable future, if ever. Therefore, Shareholders should not expect to be able to sell their Shares promptly or at a desired price. No Shareholder will have the right to require the Trust to repurchase his or her Shares or any portion thereof. Because no public market will exist for the Shares, and none is expected to develop, Shareholders will not be able to liquidate their investment prior to the Trust’s liquidation or other liquidity event, other than through the Trust’s share repurchase program, or, in limited circumstances, as a result of transfers of Shares to other eligible investors. Shareholders that are unable to sell their shares will be unable to reduce their exposure on any market downturn.

 

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The Trust and the Master Fund intend to explore a liquidity event for Shareholders approximately five years following the completion of the Offering Period or at such earlier time as the Board and the Master Fund Board may determine, taking into consideration market conditions and other factors. A liquidity event could include (i) the purchase by the Master Fund for cash of all the Trust’s Master Fund Shares at net asset value and the distribution of that cash to the Trust’s shareholders on a pro rata basis in connection with the Trust’s complete liquidation and dissolution; (ii) subject to the approval of the shareholders of each feeder fund, including the Trust, a listing of the Master Fund Shares on a national securities exchange and the liquidation and dissolution of each feeder fund, including the Trust, at which point all shareholders of each feeder fund would become direct shareholders of the Master Fund; or (iii) a merger or another transaction approved by the Board and the Master Fund Board in which the Shareholders will receive cash or securities of a publicly-traded company. While the Trust and the Master Fund intend to explore a liquidity event approximately five years following the completion of the Offering Period or at such earlier time as the Board and the Master Fund Board may determine, taking into consideration market conditions and other factors, there can be no assurance that a suitable transaction will be available or that market conditions for a liquidity event will be favorable during that timeframe. The completion of a liquidity event is in the sole discretion of the Board, and depending upon the event, may require Shareholder approval, and there can be no assurance that the Trust will complete a liquidity event within the proposed timeframe or at all. A Shareholder may need to retain his, her or its Shares for an indefinite period of time because the Trust and the Master Fund may determine not to pursue a liquidity event.

 

The Trust intends to offer to repurchase your Shares on a quarterly basis. As a result, Shareholders will have limited opportunities to sell their Shares and, to the extent they are able to sell their Shares under the program, they may not be able to recover the amount of their investment in the Shares. In addition, the Board or the Master Fund Board may suspend or terminate the share repurchase program at any time and there is no guarantee that the program will remain in place.

 

To provide Shareholders with limited liquidity, the Trust has conducted and in the future intends to conduct repurchase offers to allow you to sell your Shares to the Trust on a quarterly basis. Any offer to repurchase Shares will be conducted solely through written tender offer materials mailed to each Shareholder (and not through this prospectus) in accordance with the requirements of Rule 13e-4 of the Exchange Act.

 

The share repurchase program will include numerous restrictions that limit your ability to sell your shares. The Trust currently intends to limit the number of Shares to be repurchased on each date of repurchase to the number of Shares the Trust can repurchase with, in the Board’s sole discretion, (i) the aggregate proceeds it has received from the issuance of Shares pursuant to its DRP for the previous quarter, and/or (ii) the aggregate proceeds it has received from the sale of Shares, other than such Shares issued pursuant to its DRP for the previous calendar month immediately prior to the date upon which the notification to repurchase Shares was provided to Shareholders. The Board may, in its sole discretion, determine to limit the number of Shares to be repurchased to an amount that is greater than or less than the amounts described above. The Trust will further limit the number of Shares to be repurchased in any calendar quarter to 5.0% of the weighted average number of Shares outstanding in the previous full calendar quarter prior to the date upon which the notification to repurchase Shares was provided to Shareholders. In addition, beginning with our second full calendar year of operations, the Trust will limit the number of Shares to be repurchased in any calendar year to 20.0% of the weighted average number of Shares outstanding in the prior calendar year. To the extent that the number of shares submitted to the Trust for repurchase exceeds the number of shares that the Trust is able to purchase, it will repurchase shares on a pro rata basis, not on a first-come, first-served basis. Further, the Trust will have no obligation to repurchase shares if the repurchase would violate the restrictions on distributions under federal law or Delaware law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency. These limits may prevent the Trust from accommodating all repurchase requests made in any year. If you invest through a fee-based program, also known as a wrap account, of an investment dealer, your liquidity may be further restricted by the terms and conditions of such program, which may limit your ability to request the repurchase of your Shares that are held in such account.

 

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The Board or the Master Fund Board may amend, suspend or terminate the repurchase program upon 30 days’ notice. The Trust will notify you of such developments in supplements to this Registration Statement. In addition, although the Trust has adopted a share repurchase program, it has the discretion to not repurchase your Shares, to suspend the plan, and to cease repurchases. Further, the plan has many limitations and should not be relied upon as a method to sell Shares promptly and at a desired price.

 

Unless the Master Fund experiences substantial net capital appreciation and realized gains, the repurchase price for Shares associated with the Trust’s periodic repurchase offers will be at a lower price than the price you paid for Shares, and the timing of the Trust’s repurchase offers may be at a time that is disadvantageous to Shareholders.

 

The Trust has no obligation to repurchase Shares at any time, and repurchases will only be made in accordance with the Trust’s share repurchase program. The Trust intends to offer to repurchase such Shares at a price equal to the NAV per Share on each date of repurchase. Therefore, if the Master Fund does not experience net capital appreciation and realize gains following the date you purchase your Shares, any offer price by the Trust to repurchase your Shares will be lower than the price you paid.

 

In addition, in the event an investor chooses to participate in the Trust’s share repurchase program, the investor will be required to provide the Trust with notice of intent to participate prior to knowing what the NAV per Share will be on the repurchase date. Although an investor will have the ability to withdraw a repurchase request prior to the repurchase date, to the extent an investor seeks to sell shares to the Trust as part of its share repurchase program, the investor will be required to do so without knowledge of what the repurchase price of the Shares will be on the repurchase date.

 

Shareholders will experience dilution.

 

Investors in this offering will purchase Shares at the then current NAV per Share but, after deducting the Sales Load of up to 8.0% of the Offering Price for Class A Shares and estimated offering expenses of up to 1.0% of the aggregate proceeds raised in the offering, exclusive of the Sales Load, investors in this offering will incur immediate dilution.

 

In addition, Shareholders will not have preemptive rights. The Trust’s declaration of trust authorizes it to issue an unlimited number of Shares. If the Trust engages in a subsequent offering of Shares or securities convertible into Shares, issues additional Shares pursuant to its DRP or otherwise issues additional Shares, investors who purchase Shares in this offering who do not participate in those other stock issuances will experience dilution in their percentage ownership of the Trust’s outstanding Shares. Furthermore, an investor may experience a dilution in the value of the Shares depending on the terms and pricing of any Share issuances (including the Shares being sold in this offering) and the value of the Master Fund’s assets at the time of issuance.

 

The purchase price at which an investor purchases Shares will be determined daily and will equal the NAV per Share as of such date, plus the Sales Load.

 

The purchase price at which an investor purchases Shares will be determined daily and will equal the NAV per Share as of such date, plus the Sales Load. As a result, in the event of an increase in the Trust’s NAV per Share, an investor’s purchase price may be higher than the price per Share on the prior day, and therefore an investor may receive fewer Shares than if an investor had subscribed at the prior day’s price per share.

 

If the Trust is unable to raise substantial funds, the number and type of investments the Master Fund may make will be limited and the value of an investor’s investment in the Trust will fluctuate with the performance of the specific assets the Master Fund acquires.

 

The offering is being made on a “best efforts” basis, meaning that the Distributor is only required to use its best efforts to sell the Shares and has no firm commitment or obligation to purchase any Shares in the offering. As a result, the amount of proceeds the Trust raises in the offering may be substantially less than the amount the Master Fund would need to create a diversified portfolio of investments. If the Trust is unable to raise substantial funds, the Master Fund will make fewer investments resulting in less diversification in terms of the type, number and size of investments that it makes. As a result, the value of a Shareholder’s investment may be reduced in the event the Master Fund’s assets under-perform. Moreover, the potential impact of any single asset’s performance on the overall performance of the portfolio increases. In addition, the Master Fund’s ability to achieve its investment objectives could be hindered, which could result in a lower return on the investments. Further, the Trust has certain fixed operating expenses, including certain expenses as a public reporting company, regardless of whether the Trust is able to raise substantial funds in this offering. The Trust’s inability to raise substantial funds would increase its fixed operating expenses as a percentage of gross income, reducing the Trust’s net income and limiting its ability to make distributions.

 

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The Board may change the Trust’s primary investment objectives by providing Shareholders with 60 days’ prior notice, or may modify or waive its current operating policies and strategies without prior notice or Shareholder approval, the effects of which may be adverse.

 

The Trust’s primary investment objectives are to pay attractive and consistent current income through cash distributions and to preserve, protect and return capital contributions of its investors, with a secondary objective of capital appreciation. The Trust seeks to achieve its investment objectives by investing substantially all of its assets in the Master Fund. The Trust’s primary investment objectives may be changed by the Board by providing Shareholders with at least 60 days’ prior notice. In addition, the Board has the authority to modify or waive the Trust’s current operating policies, investment criteria and strategies without prior notice and without shareholder approval. Also, the Master Fund Board may similarly change the Master Fund’s primary investment objectives by providing Fund shareholders with 60 days’ prior notice, and may modify or waive its current operating policies and strategies without prior notice to Fund shareholders. The Trust cannot predict the effect any changes to the Trust’s or the Master Fund’s investment objectives, current operating policies, investment criteria and strategies may have on their businesses, NAVs or operating results. However, the effects might be adverse, which could negatively impact the Trust’s ability to pay you distributions and cause you to lose all or part of your investment.

 

The Trust will have significant flexibility in investing the net proceeds of this offering and may use the net proceeds from this offering in ways with which investors may not agree or for purposes other than those contemplated at the time of this offering. Since the Shares are not listed on a national securities exchange, you will be limited in your ability to sell your Shares in response to any changes in the Trust’s investment objectives, operating policies, investment criteria or strategies.

 

The Advisor, the Trust, and the Master Fund face cyber-security risks.

 

The Advisor, the Trust, and the Master Fund depend heavily upon computer systems to perform necessary business functions. Despite the implementation of a variety of security measures, their computer systems could be subject to cyber-attacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering. Like other companies, the Advisor, the Trust and the Master Fund may experience threats to their data and systems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, the Advisor’s, the Trust’s or the Master Fund’s computer systems and networks, or otherwise cause interruptions or malfunctions in the Advisor’s, the Trust’s or the Master Fund’s operations, which could result in damage to the Advisor’s, the Trust’s or the Master Fund’s reputation, financial losses, litigation, increased costs, regulatory penalties and/or customer dissatisfaction or loss.

 

NorthStar Securities has only limited experience selling common shares on behalf of a registered closed-end management investment company and may be unable to sell a sufficient number of Shares for the Trust to achieve its investment objectives.

 

NorthStar Securities has entered into a wholesale marketing agreement with the Distributor. Although certain personnel of NorthStar Securities have experience selling shares on behalf of a registered closed-end management investment company, NorthStar Securities has only limited experience. There is no assurance that it will be able to sell a sufficient number of Shares to allow the Trust to have adequate funds to cover its expenses and invest in Master Fund Shares such that the Master Fund may purchase a relatively broad portfolio of investments. As a result, the Trust may be unable to achieve its investment objectives, and you may lose some or all of your investment.

 

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Non-traded products have been the subject of increased scrutiny by regulators and media outlets resulting from inquiries and investigations initiated by FINRA and the SEC. The Trust may face difficulties in raising capital should negative perceptions develop regarding non-traded products. As a result, the Trust may be unable to raise substantial funds, which will limit the number and type of investments the Master Fund may make and the Master Fund’s ability to diversify its assets.

 

The Shares, like other non-traded products, are intended to be significantly distributed through the independent broker-dealer channel (i.e., U.S. broker-dealers that are not affiliated with money center banks or similar financial institutions). Governmental and self-regulatory organizations like the SEC and FINRA impose and enforce regulations on broker-dealers, investment banking firms, investment advisers and similar financial services companies. Self-regulatory organizations such as FINRA adopt rules, subject to approval by the SEC, that govern aspects of the financial services industry and conduct periodic examinations of the operations of registered investment dealers and broker-dealers.

 

Broker-dealers are subject to regulations that cover all aspects of the securities business. Much of the regulation of broker-dealers has been delegated to self-regulatory organizations, principally FINRA. These self-regulatory organizations have adopted extensive regulatory requirements relating to matters such as sales practices, compensation and disclosure, and conduct periodic examinations of member broker-dealers in accordance with rules they have adopted and amended from time to time, subject to approval by the SEC. The SEC, self-regulatory organizations and state securities commissions may conduct administrative proceedings that can result in censure, fine, suspension or expulsion of a broker-dealer, its officers or registered employees. These administrative proceedings, whether or not resulting in adverse findings, can require substantial expenditures and can have an adverse impact on the reputation or business of a broker-dealer. The principal purpose of regulation and discipline of broker-dealers is the protection of clients and the securities markets, rather than protection of creditors and stockholders of the regulated entity.

 

As a result of this increased scrutiny, FINRA may impose additional restrictions on sales practices in the independent broker-dealer channel, and accordingly the Master Fund may face increased difficulties in raising capital in this offering. Should the Master Fund be unable to raise substantial funds in the offering, the number and type of investments the Master Fund may make will be curtailed, and the Master Fund may be unable to achieve the desired diversification of investments. This could result in a reduction in the returns achieved on those investments as a result of a smaller capital base limiting the Master Fund’s investments. It also subjects the Master Fund to the risks of any one investment, and as a result returns may be more volatile and capital could be at increased risk.

 

The amount of any distributions the Trust may make is uncertain. The Trust’s distribution proceeds may exceed its earnings, particularly during the period before it has substantially invested the net proceeds from this offering. Therefore, portions of the distributions that the Trust makes may be a return of the money that Shareholders originally invested and represent a return of capital to Shareholders for tax purposes.

 

The Trust intends, subject to change by the Master Fund Board, to authorize and declare distributions on a quarterly basis and pay such distributions on a monthly basis. The Trust will pay these distributions to Shareholders out of assets legally available for distribution. While the Advisor may agree to limit the Trust’s expenses to ensure that such expenses are reasonable in relation to the Trust’s income, the Trust cannot assure you that it will achieve investment results that will allow it to make a targeted level of cash distributions or year-to-year increases in cash distributions. All distributions will be paid at the discretion of the Master Fund Board and may depend on the Master Fund’s earnings, the Master Fund’s net investment income, the Master Fund’s financial condition, maintenance of the Master Fund’s and the Trust’s RIC statuses, compliance with applicable regulations and such other factors as the Master Fund Board may deem relevant from time to time. The Trust’s ability to pay distributions might be adversely affected by, among other things, the impact of one or more of the risk factors described in this prospectus. In addition, the inability to satisfy the asset coverage test applicable to the Trust as an investment company may limit its ability to pay distributions. All distributions will be paid at the discretion of the Master Fund Board and will depend on the Trust’s earnings, financial condition, maintenance of its RIC status, compliance with applicable investment company regulations and such other factors as the Master Fund Board may deem relevant from time to time. The Trust cannot assure you that it will pay distributions to Shareholders in the future.

 

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In the event that the Master Fund encounters delays in locating suitable investment opportunities, all or a substantial portion of the Master Fund’s distributions may constitute a return of capital to the Trust. To the extent that the Trust pays distributions to Shareholders using proceeds it receives from Master Fund distributions that represent a return of capital to the Trust, such Trust distributions would similarly constitute a return of investor capital and will lower a Shareholder’s tax basis in his or her Shares. Reducing a Shareholder’s tax basis in his or her Shares will have the effect of increasing his or her gain (or reducing loss) on a subsequent sale of Shares. A return of capital generally is a return of an investor’s investment rather than a return of earnings or gains derived from the Master Fund’s investment activities. Distributions from the proceeds of this offering or from borrowings will be distributed after payment of fees and expenses and could reduce the amount of capital the Master Fund ultimately invests.

 

Shares and Master Fund Shares purchased by the Advisor and its affiliates could be subject to certain risks, including that the affiliates may have an interest in disposing of the Master Fund’s assets at an earlier date so as to recover their investment in the Master Fund Shares and that substantial purchases of Master Fund Shares by the affiliates may limit the Advisor’s ability to fulfill any financial obligations that it may have to the Master Fund or incurred on the Master Fund’s behalf.

 

The Advisor and its affiliates may purchase Shares for any reason deemed appropriate; provided, however, that it is intended that once this offering of common shares is completed, neither of the Advisor nor its affiliates, including Colony NorthStar, will hold 5.0% or more of the outstanding Shares or Master Fund Shares. The Advisor and its affiliates will not acquire any Shares with the intention to resell or redistribute such Shares. The purchase of the Shares by the Advisor and its affiliates could create certain risks, including, but not limited to, the following:

 

·the Advisor and its affiliates may have an interest in disposing of the Trust’s assets at an earlier date so as to recover their investment in the Shares; and

 

·substantial purchases of the Shares by the Advisor and its affiliates may limit the Advisor’s ability to fulfill any financial obligations that it may have to the Trust or incurred on the Trust’s behalf.

 

If the Expense Support Agreements are terminated, pursuant to the Distribution Support Agreement, Colony NorthStar FV has agreed to purchase up to an aggregate of $10.0 million in Master Fund Shares, of which $2.0 million was contributed by an affiliate of Colony NorthStar to the Master Fund as the Seed Capital Investment, at the current NAV per Master Fund Share until the earlier of (a) June 30, 2019, or (b) the date upon which neither the Advisor nor any of its affiliates is serving as the Master Fund’s investment adviser. In no event shall Colony NorthStar FV be required to purchase in the aggregate greater than $10.0 million in Master Fund Shares, including the Seed Capital Investment. If the cash distributions the Master Fund pays during any month exceeds the Master Fund’s net investment income for such month, Colony NorthStar FV will purchase Master Fund Shares following the end of each month for an aggregate purchase price equal to the amount by which the distributions paid to Master Fund Shareholders exceed net investment income for such month, up to an amount equal to a 6.0% cumulative, non-compounded annual return on Master Fund Shareholders’ invested capital prorated for such month. Notwithstanding the obligations of Colony NorthStar FV pursuant to the Distribution Support Agreement, the Master Fund is not required to pay distributions to its Master Fund Shareholders, including the Trust, at a rate of 6.0% per annum or at all. Further, a $10.0 million investment in the Master Fund by Colony NorthStar FV in accordance with the Distribution Support Agreement, may not be sufficient to enable the Master Fund and, consequently, the Trust to pay distributions to Shareholders at a rate of at least 6.0% per annum during the term of the agreement. Distributions funded from offering proceeds pursuant to the Distribution Support Agreement may constitute a return of capital, which is a return of an investor’s investment rather than a return of earnings or gains derived from investment activities. Distributions constituting a return of capital will lower a Shareholder’s tax basis in his or her Shares. Reducing a Shareholder’s tax basis in his or her Shares will have the effect of increasing his or her gain (or reducing loss) on a subsequent sale of Shares. After the Expense Support Agreements and Distribution Support Agreement with Colony NorthStar FV have terminated, the Master Fund and, consequently, the Trust may not have sufficient cash available to pay distributions at the rate it had paid during preceding periods or at all.

 

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Risks Related to the Master Fund’s Business

 

The CRE industry has been and may continue to be adversely affected by economic conditions in the United States and global financial markets generally.

 

The Master Fund’s business and operations are dependent on the CRE industry generally, which in turn is dependent upon broad economic conditions. Recently, concerns over global economic conditions, energy and commodity prices, geopolitical issues, deflation, Federal Reserve short term rate decisions, foreign exchange rates, the availability and cost of credit, the sovereign debt crisis, the Chinese economy, the United States mortgage market and a potentially weakening real estate market in the United States have contributed to increased economic uncertainty and diminished expectations for the global economy. These factors, combined with volatile prices of oil and declining business and consumer confidence, may precipitate an economic slowdown, as well as cause extreme volatility in security prices. Global economic and political headwinds, along with global market instability and the risk of maturing commercial real estate debt that may have difficulties being refinanced, may continue to cause periodic volatility in the CRE market for some time. Adverse conditions in the CRE industry could harm our business and financial condition by, among other factors, the tightening of the credit markets, decline in the value of the Master Fund’s assets and continuing credit and liquidity concerns and may otherwise negatively impact our operations.

 

The Master Fund may be materially affected by market, economic and political conditions globally and in the jurisdictions and sectors in which it will invest or operate.

 

The Master Fund may be materially affected by market, economic and political conditions globally and in the jurisdictions and sectors in which it will invest or operate, including factors affecting interest rates, the availability of credit, currency exchange rates and trade barriers. These market and economic conditions may affect the cost of capital and net investment income, thereby effecting distributions. For example, if interest rates were to rise, investments in fixed interest rate assets and securities may decline in value and borrowers of floating rate debt may not be able to service debt payments. Factors such as these are outside the Master Fund’s control and could adversely affect the liquidity and value of its investments, and may reduce the ability of the Master Fund to make attractive new investments.

 

In particular, economic and financial market conditions began to significantly deteriorate approximately eight years ago as compared to prior periods. Global financial markets experienced considerable declines in the valuations of debt and equity securities, an acute contraction in the availability of credit and the failure of a number of leading financial institutions. As a result, certain government bodies and central banks worldwide, including the U.S. Treasury Department and the U.S. Federal Reserve, undertook unprecedented intervention programs, the long-term effects of which remain uncertain. The U.S. economy has experienced and continues to experience relatively high levels of unemployment and constrained lending. The Master Fund’s investment strategy and the availability of opportunities relies in part on the continuation of certain trends and conditions observed in the market for debt securities and the larger financial markets and, in some cases, on the improvement of such conditions. Although certain financial markets have improved since the recent liquidity crisis and recession, to the extent economic conditions deteriorate, such conditions may adversely impact the investments of the Master Fund. Trends and historical events do not imply, forecast or predict future events and past performance is not necessarily indicative of future results. There can be no assurance that the assumptions made or the beliefs and expectations currently held by the Advisor or its affiliates will prove correct, and actual events and circumstances may vary significantly.

 

Challenging economic and financial market conditions could significantly reduce the amount of income the Master Fund’s earns on its CRE investments and further reduce the value of the Master Fund’s investments.

 

Challenging economic and financial market conditions may cause the Master Fund to experience an increase in the number of CRE investments that result in losses, including delinquencies, non-performing assets and taking title to collateral and a decrease in the value of the property or other collateral which secures its investments, all of which could adversely affect the Master Fund’s results of operations. The Master Fund may need to establish significant provisions for losses or impairment, be forced to sell assets at undesirable prices and/or incur substantial losses.

 

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For example, certain borrowers may, due to macroeconomic conditions, be unable to repay loans or other indebtedness during this period. A borrower’s failure to satisfy financial or operating covenants imposed by lenders could lead to defaults and, potentially, termination of the loans and foreclosure on its assets, to the extent such loans or indebtedness are secured, which could trigger cross-defaults under other agreements and jeopardize the borrower’s ability to meet its obligations under its debt securities. The Master Fund may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting borrower. In addition, if one of the borrowers were to commence bankruptcy proceedings, even though the Master Fund may have structured its interest as senior debt, depending on the facts and circumstances, a bankruptcy court might recharacterize the Master Fund’s debt holding and subordinate all or a portion of its claim to that of other creditors. The current adverse economic conditions also may decrease the value of collateral securing some of the Master Fund’s loans or other debt instruments and the value of its equity investments.

 

These developments may increase the volatility of the value of investments made by the Master Fund. These developments also may make it more difficult for the Master Fund to accurately value its investments or to sell its investments on a timely basis. These developments, including rising interest rates, could adversely affect the ability of the Master Fund to use leverage for investment purposes and increase the cost of such leverage, which would reduce returns. These developments also may adversely affect the broader economy, which in turn may adversely affect the ability of issuers of debt securities owned by the Master Fund to make payments of principal and interest when due, leading to lower credit ratings of the issuer and increased defaults by the issuer. Such developments could, in turn, diminish significantly the Master Fund’s revenue from investments and adversely affect the Master Fund’s NAV.

 

Risks Related to the Master Fund’s Investments

 

The Master Fund’s CRE debt, equity and securities investments will be subject to the risks typically associated with CRE.

 

The Master Fund’s CRE debt, equity and securities investments will be subject to the risks typically associated with real estate, including:

 

·local, state, national or international economic conditions, including market disruptions caused by regional concerns, political upheaval, the sovereign debt crisis and other factors;

 

·real estate conditions, such as an oversupply of or a reduction in demand for real estate space in an area;

 

·lack of liquidity inherent in the nature of the asset;

 

·tenant/operator mix and the success of the tenant/operator business;

 

·the ability and willingness of tenants/operators/managers to maintain the financial strength and liquidity to satisfy their obligations to the Master Fund and to third parties;

 

·reliance on tenants/operators/managers to operate their businesses in a sufficient manner and in compliance with their contractual arrangements with the Master Fund;

 

·ability and cost to replace a tenant/operator/manager upon default;

 

·property management decisions;

 

·property location and conditions;

 

·property operating costs, including insurance premiums, real estate taxes and maintenance costs;

 

·the perceptions of the quality, convenience, attractiveness and safety of the properties;

 

·branding, marketing and operational strategies;

 

·competition from comparable properties;

 

·the occupancy rate of, and the rental rates charged at, the properties;

 

·the ability to collect on a timely basis all rent;

 

·the effects of any bankruptcies or insolvencies;

 

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·the expense of leasing, renovation or construction;

 

·changes in interest rates and in the availability, cost and terms of mortgage financing;

 

·unknown liens being placed on the properties;

 

·bad acts of third parties;

 

·the ability to refinance mortgage notes payable related to the real estate on favorable terms, if at all;

 

·changes in governmental rules, regulations and fiscal policies;

 

·tax implications;

 

·changes in laws, including laws that increase operating expenses or limit rents that may be charged;

 

·the impact of present or future environmental legislation and compliance with environmental laws, including costs of remediation and liabilities associated with environmental conditions affecting properties;

 

·cost of compliance with the Americans with Disabilities Act of 1990;

 

·adverse changes in governmental rules and fiscal policies;

 

·social unrest and civil disturbances;

 

·acts of nature, including earthquakes, hurricanes and other natural disasters;

 

·terrorism;

 

·the potential for uninsured or underinsured property losses;

 

·adverse changes in state and local laws, including zoning laws; and

 

·other factors which are beyond the Master Fund’s control.

 

The value of each property is affected significantly by its ability to generate cash flow and net income, which in turn depends on the amount of rental or other income that can be generated net of expenses required to be incurred with respect to the property. Many expenses associated with properties (such as operating expenses and capital expenses) cannot be reduced when there is a reduction in income from the properties. As a result, these investments may be risky and the Master Fund may lose all or part of its investments.

 

These factors may have a material adverse effect on the ability of the borrowers to pay their loans and the ability of the borrowers on the underlying loans securing the Master Fund’s securities to pay their loans, as well as on the value and the return that the Master Fund can realize from assets it acquires.

 

A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could harm the Master Fund’s investments.

 

Many of the Master Fund’s investments may be susceptible to economic slowdowns or recessions, which could lead to financial losses and a decrease in revenues, earnings and assets. An economic slowdown or recession, in addition to other non-economic factors such as an excess supply of properties, could have a material negative impact on the values of the Master Fund’s investments. Declining real estate values will likely reduce the Master Fund’s level of new loan originations, since borrowers often use increases in the value of their existing properties to support the purchase or investment in additional properties. Borrowers may also be less likely to achieve their business plans and be able to pay principal and interest on the Master Fund’s CRE debt investments if the economy weakens and property values decline. Further, declining real estate values significantly increase the likelihood that the Master Fund will incur losses on its investments in the event of a default because the value of its collateral may be insufficient to cover its cost. In addition, declining real estate values will reduce the value of any of the Master Fund’s properties, as well as ability to refinance properties and use the value of existing properties to support the purchase or investment in additional properties. Slower than expected economic growth pressured by a strained labor market, along with overall financial uncertainty, could result in lower occupancy rates and lower lease rates across many property types and may create obstacles for the Master Fund to achieve its business plans. The Master Fund may also be less able to pay principal and interest on its borrowings, which could cause it to lose title to properties securing its borrowings. Any sustained period of increased payment delinquencies, taking title to collateral or losses could adversely affect both the Master Fund’s CRE investments as well as its ability to originate, sell and securitize loans, which would significantly harm the Master Fund’s revenues, results of operations, financial condition, business prospects and the Master Fund’s ability to make distributions.

 

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The Master Fund will be subject to significant competition and it may not be able to compete successfully for investments.

 

The Master Fund will be subject to significant competition for attractive investment opportunities from other real estate investors, some of which have greater financial resources than it, including publicly-traded REITs, non-traded REITs, insurance companies, commercial and investment banking firms, private institutional funds, hedge funds, private equity funds and other investors, including other Colony NorthStar-sponsored programs. The personnel made available to the Advisor has observed increased competition since 2015 and expects that trend to continue through 2018. The Master Fund may not be able to compete successfully for investments. In addition, the number of entities and the amount of funds competing for suitable investments may increase. If the Master Fund pays higher prices for investments or originates loans on less advantageous terms to it, its returns may be lower and the value of the Master Fund’s assets may not increase or may decrease significantly below the amount it paid for such assets. If such events occur, the Master Fund may experience lower returns on its investments.

 

The Master Fund may be more susceptible than diversified funds to being adversely affected by events impacting a single borrower, geographic location, security or investment type, and is not limited with respect to the proportion of capital that may be invested in a single asset.

 

As the Master Fund is not required to invest in a diversified pool of assets, the Master Fund can invest a greater portion of its assets in obligations of a single issuer. The Master Fund may therefore be more susceptible than a diversified fund to being adversely affected by events impacting a single borrower, geographic location, security or investment type.

 

The Master Fund has no established investment criteria limiting the geographic or industry concentration of its investments. If its investments are concentrated in an area or asset class that experiences adverse economic conditions, its investments may lose value and the Master Fund may experience losses.

 

Certain of the Master Fund’s investments may be secured by a single property or properties in one geographic location or asset class. Additionally, properties that the Master Fund may acquire may be concentrated in a geographic location or in a particular asset class. These investments carry the risks associated with significant geographical or industry concentration. The Master Fund has not established and does not plan to establish any investment criteria to limit its exposure to these risks for future investments. As a result, properties underlying its investments may be overly concentrated in certain geographic areas or industries and the Master Fund may experience losses as a result. A worsening of economic conditions, a natural disaster or civil disruptions in a geographic area in which the Master Fund’s investments may be concentrated, or economic upheaval with respect to a particular asset class, could have an adverse effect on the Master Fund’s business, including reducing the demand for new financings, limiting the ability of borrowers to pay financed amounts and impairing the value of the collateral or the properties the Master Fund may acquire, which may in turn limit the Master Fund’s ability to make required payments under its financings or to refinance such borrowings.

 

The Master Fund has no established investment criteria limiting the size of each investment it makes in CRE debt, equity and securities investments. If the Master Fund has an investment that represents a material percentage of its assets and that investment experiences a loss, the value of a Shareholder’s investment in the Trust could be significantly diminished.

 

Other than the RIC diversification requirements, the Master Fund is not limited in the size of any single investment it may make and certain of its CRE debt, equity and securities investments may represent a significant percentage of the Master Fund’s assets. The Master Fund may be unable to raise significant capital and invest in a diverse portfolio of assets which would increase its asset concentration risk. Any such investment may carry the risk associated with a significant asset concentration. Should any investment representing a material percentage of the Master Fund’s assets, experience a loss on all or a portion of the investment, the Master Fund could experience a material adverse effect, which would result in the value of a Shareholder’s investment in the Trust being diminished.

 

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The Master Fund may not be effective in originating and managing its investments.

 

The Master Fund, through the Advisor, originates and generally manages its investments. The Master Fund’s origination capabilities depend on its ability to leverage the Advisor’s relationships in the market and deploy capital to borrowers and tenants that hold properties meeting the Master Fund’s underwriting standards. Managing these investments requires significant resources, adherence to internal policies and attention to detail. Managing investments may also require significant judgment and, despite the Master Fund’s expectations, it may make decisions that result in losses. If the Master Fund is unable to successfully originate investments on favorable terms, or at all, and if the Master Fund is ineffective in managing those investments, the Master Fund’s business, financial condition and results of operations could be materially adversely affected.

 

The Master Fund relies on the investment expertise, skill and network of the Advisor.

 

Since the Master Fund has no employees, it depends on the investment expertise, skill and network of business contacts of the Advisor. The Advisor evaluates, negotiates, structures, executes, monitors and services the Master Fund’s investments. The Master Fund’s future success depends to a significant extent on the continued service and coordination of the Advisor and its experienced executive team. The departure of any members of the Advisor’s experienced executive team could have a material adverse effect on the Master Fund’s ability to achieve its investment objectives.

 

The Master Fund’s ability to achieve its investment objectives depends on the Advisor’s ability to identify, analyze, invest in, finance and monitor companies that meet the Master Fund’s investment criteria. The Advisor’s capabilities in managing the investment process, providing competent, attentive and efficient services to the Master Fund, and facilitating access to financing on acceptable terms depend on the employment of investment professionals in an adequate number and of adequate sophistication to match the corresponding flow of transactions. To achieve the Master Fund’s investment objectives, the Advisor may need to hire, train, supervise and/or manage investment professionals to participate in the Master Fund’s investment selection and monitoring process. The Advisor may not be able to find investment professionals in a timely manner or at all. Failure to support the Master Fund’s investment process could have a material adverse effect on the Master Fund’s business, financial condition and results of operations.

 

In addition, the Master Fund Advisory Agreement has a termination provision that allows the parties to terminate the agreement without penalty, upon 60 days’ notice to the other party. If this agreement is terminated, it may adversely affect the quality of the Master Fund’s investment opportunities. In addition, in the event the Master Fund Advisory Agreement is terminated, it may be difficult for the Master Fund to replace the Advisor, as applicable. Furthermore, the termination of any of these agreements may adversely impact the terms of any financing facility into which the Master Fund may enter, which could have a material adverse effect on the Master Fund’s business and financial condition.

 

If the Master Fund and the Advisor are unable to perform due diligence on potential investments in a timely manner, the Master Fund may lose attractive investment opportunities.

 

Assessing a potential investment opportunity involves extensive due diligence and the Master Fund will not complete any investment until the successful completion of such diligence, which includes the satisfaction of all applicable elements of the investment and underwriting process and a Phase I assessment of any property underlying CRE debt and of the Master Fund’s equity investments. In addition, the Advisor may also conduct additional environmental site assessments to the extent its management team believes such assessments are necessary or advisable. If the Master Fund and the Advisor are unable to perform their due diligence on potential investments in a timely manner, the Master Fund may lose attractive investment opportunities.

 

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The CRE debt the Master Fund originates and invests in and mortgage loans underlying the CRE securities the Master Fund invests in are subject to risks of delinquency, taking title to collateral, loss and bankruptcy of the borrower under the loan. If the borrower defaults, it may result in losses to the Master Fund.

 

The Master Fund CRE debt investments are secured by commercial real estate and will be subject to risks of delinquency, loss, taking title to collateral and bankruptcy of the borrower. The ability of a borrower to repay a loan secured by commercial real estate is typically dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced or is not increased, depending on the borrower’s business plan, the borrower’s ability to repay the loan may be impaired. If a borrower defaults or declares bankruptcy and the underlying asset value is less than the loan amount, the Master Fund will suffer a loss. In this manner, real estate values could impact the value of the Master Fund’s CRE debt and securities investments. Therefore, the Master Fund’s CRE debt and securities will be subject to the risks typically associated with real estate.

 

Additionally, the Master Fund may suffer losses for a number of reasons, including the following, which could have a material adverse effect on the Master Fund’s financial performance:

 

·If the value of real property or other assets securing the Master Fund CRE debt deteriorates.   The majority of the Master Fund CRE debt investments are fully or substantially non-recourse. In the event of a default by a borrower on a non-recourse loan, the Master Fund will only have recourse to the real estate-related assets (including escrowed funds and reserves, if any) collateralizing the debt. There can be no assurance that the value of the assets securing the CRE debt investments will not deteriorate over time due to factors beyond the Master Fund’s control, as was the case during the credit crisis and as a result of the recent economic recession. Further, the Master Fund may not know whether the value of these properties has declined below levels existing on the dates of origination. If the value of the properties drop, the Master Fund’s risk will increase because of the lower value of the collateral and reduction in borrower equity associated with the related CRE debt. If a borrower defaults on the Master Fund CRE debt and the mortgaged real estate or other borrower assets collateralizing such CRE debt are insufficient to satisfy the loan, the Master Fund may suffer a loss of principal or interest.

 

·If a borrower or guarantor defaults on recourse obligations under a CRE debt investment.   The Master Fund will sometimes obtain personal or corporate guarantees from borrowers or their affiliates. These guarantees are often triggered only upon the occurrence of certain trigger, or “bad boy,” events. In cases where guarantees are not fully or partially secured, the Master Fund will typically rely on financial covenants from borrowers and guarantors which are designed to require the borrower or guarantor to maintain certain levels of creditworthiness. As a result of challenging economic and market conditions, many borrowers and guarantors faced, and continue to face, financial difficulties and were unable, and may continue to be unable, to comply with their financial covenants. If the economy does not strengthen, the Master Fund’s borrowers could experience additional financial stress. Where the Master Fund does not have recourse to specific collateral pledged to satisfy such guarantees or recourse loans, it will only have recourse as an unsecured creditor to the general assets of the borrower or guarantor, some or all of which may be pledged to satisfy other lenders. There can be no assurance that a borrower or guarantor will comply with its financial covenants or that sufficient assets will be available to pay amounts owed to the Master Fund under the CRE debt and related guarantees.

 

·The Master Fund’s due diligence may not reveal all of a borrower’s liabilities and may not reveal other weaknesses in its business.   Before making a loan to a borrower, the Master Fund will assess the strength and skills of an entity’s management and other factors that it believes are material to the performance of the investment. This underwriting process is particularly important and subjective with respect to newly-organized entities because there may be little or no information publicly available about the entities. In making the assessment and otherwise conducting customary due diligence, the Master Fund will rely on the resources available to it and, in some cases, an investigation by third parties. There can be no assurance that the due diligence processes will uncover all relevant facts or that any investment will be successful. Furthermore, historic performance evaluated in connection with the Master Fund’s underwriting process may not be indicative of future performance.

 

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·Delays in liquidating defaulted CRE debt investments could reduce the Master Fund’s investment returns.   The occurrence of a default on a CRE debt investment could result in the Master Fund taking title to collateral. However, the Master Fund may not be able to take title to and sell the collateral securing the loan quickly. Taking title to collateral can be an expensive and lengthy process that could have a negative effect on the return on the Master Fund’s investment. Borrowers often resist when lenders, such as the Master Fund, seek to take title to collateral by asserting numerous claims, counterclaims and defenses, including but not limited to lender liability claims, in an effort to prolong the foreclosure action. In some states, taking title to collateral can take several years or more to resolve. At any time during a foreclosure proceeding, for instance, the borrower may file for bankruptcy, which would have the effect of staying the foreclosure action and further delaying the foreclosure process. The resulting time delay could reduce the value of the Master Fund’s investment in the defaulted loans. Furthermore, an action to take title to collateral securing a loan is regulated by state statutes and regulations and is subject to the delays and expenses associated with lawsuits if the borrower raises defenses, counterclaims or files for bankruptcy. In the event of default by a borrower, these restrictions, among other things, may impede the Master Fund’s ability to take title to and sell the collateral securing the loan or to obtain proceeds sufficient to repay all amounts due to the Master Fund on the loan. In addition, the Master Fund may be forced to operate any collateral for which it takes title for a substantial period of time, which could be a distraction for its management team and may require it to pay significant costs associated with such collateral. The Master Fund may not recover any of its investment even if it takes title to collateral.

 

The Master Fund may make certain CRE debt and securities investments that involve heightened risks.

 

The Master Fund may make investments in certain assets that involve heightened risks, such as transitional assets, non-performing assets and construction or development assets. These types of investments may involve greater risks than investments in stabilized, performing assets and make the Master Fund’s future performance more difficult to predict. For example:

 

·Transitional properties are often associated with floating-rate loans and increases in a borrower’s monthly payment as a result of an increase in prevailing market interest rates that may make it more difficult for the borrowers with floating-rate loans to repay the loan and could increase the risk of default of their obligations under the loan.

 

·Non-performing real estate assets are challenging to evaluate as they do not have a consistent stream of cash flow to support normalized debt service, lack stabilized occupancy rates and may require significant capital for repositioning. Further, strategies available to create value in a non-performing real estate investment, including development, redevelopment or lease-up of a property or negotiating a reduced payoff, may not be successful.

 

·Construction loans have the potential for cost overruns, the developer’s failing to meet a project delivery schedule, market downturns and the inability of a developer to sell or refinance the project at completion in accordance with its business plan and may affect the repayment of the Master Fund’s CRE debt investments.

 

In addition, the Master Fund may invest in subordinate, unrated or distressed mortgage loans or unrated or non-investment grade CRE securities, which typically result from increased leverage, lack of strong operating history, borrowers’ credit history, underlying cash flow from the properties and other factors. As a result, these investments typically have higher risk of default and loss, particularly during economic downturns. See “The Master Fund may make investments in assets with lower credit quality, including below investment grade securities, referred to as “high yield” or “junk bonds,” which may increase its risk of losses.”

 

The Master Fund may be subject to risks associated with future advance or capital expenditure obligations, such as declining real estate values and operating performance.

 

The Master Fund’s CRE debt investments may require it to advance future funds. The Master Fund may also need to fund capital expenditures and other significant expenses for its real estate property investments. Future funding obligations subject it to significant risks, such as a decline in value of the property, cost overruns and the borrower and tenant may be unable to generate enough cash flow and execute its business plan, or sell or refinance the property, in order to repay its obligations to the Master Fund. The Master Fund could determine that it needs to fund more money than it originally anticipated in order to maximize the value of its investment even though there is no assurance additional funding would be the best course of action. Further, future funding obligations may require the Master Fund to maintain higher liquidity than it might otherwise maintain and this could reduce the overall return on its investments. The Master Fund could also find itself in a position with insufficient liquidity to fund future obligations.

 

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The Master Fund may be unable to restructure its investments in a manner that it believes maximizes value, particularly if it is one of multiple creditors in a large capital structure.

 

In order to maximize value the Master Fund may be more likely to extend and work out an investment, rather than pursue other remedies such as taking title to collateral. However, in situations where there are multiple creditors in large capital structures, it can be particularly difficult to assess the most likely course of action that a lender group or the borrower may take and it may also be difficult to achieve consensus among the lender group as to major decisions. Consequently, there could be a wide range of potential principal recovery outcomes, the timing of which can be unpredictable, based on the strategy pursued by a lender group or other applicable parties. These multiple creditor situations tend to be associated with larger loans. If the Master Fund is one of a group of lenders, it may not independently control the decision making. Consequently, it may be unable to restructure an investment in a manner that it believes would maximize value.

 

CRE debt restructurings may reduce the Master Fund’s net interest income.

 

While the U.S. economy has strengthened since the significant deterioration that began approximately eight years ago, a return to weak economic conditions in the future may cause the Master Fund’s borrowers to be at increased risk of default and it, or a third party, may need to restructure loans if the borrowers are unable to meet their obligations to the Master Fund and it believes restructuring is the best way to maximize value. In order to preserve long-term value, the Master Fund may determine to lower the interest rate on loans in connection with a restructuring, which will have an adverse impact on its net interest income. The Master Fund may also determine to extend the maturity and make other concessions with the goal of increasing overall value; however, there is no assurance that the results of its restructurings will be favorable to it. Restructuring an investment may ultimately result in the Master Fund receiving less than had it not restructured the investment. The Master Fund may lose some or all of its investment even if it restructures in an effort to increase value.

 

The Master Fund’s CRE debt and securities investments may be adversely affected by changes in credit spreads.

 

The CRE debt the Master Fund originates or acquires and securities investments it invests in may be subject to changes in credit spreads. When credit spreads widen, the economic value of the Master Fund’s investments decrease even if such investment is performing in accordance with its terms and the underlying collateral has not changed.

 

Provision for loan losses is difficult to estimate, particularly in a challenging economic environment.

 

In a challenging economic environment, the Master Fund may experience an increase in provisions for loan losses and asset impairment charges, as borrowers may be unable to remain current in payments on loans and declining property values weaken the Master Fund’s collateral. The determination of provision for loan losses will require the Master Fund to make certain estimates and judgments, which may be difficult to determine, particularly in a challenging economic environment. The Master Fund’s estimates and judgments will be based on a number of factors, including projected cash flow from the collateral securing the Master Fund CRE debt structure, including the availability of reserves and recourse guarantees, likelihood of repayment in full at the maturity of a loan, potential for refinancing and expected market discount rates for varying property types, all of which remain uncertain and are subjective. The Master Fund’s estimates and judgments may not be correct, particularly during challenging economic environments, and, therefore, the Master Fund’s results of operations and financial condition could be severely impacted.

 

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Both the Master Fund’s borrowers’ and tenants’ forms of entities may cause special risks or hinder the Master Fund’s recovery.

 

The Master Fund expects that most of the borrowers for the Master Fund’s CRE debt investments and tenants in the real estate investments will be legal entities rather than individuals. The obligations these entities will owe the Master Fund are typically non-recourse so it can only look to the collateral, and at times, the assets of the entity may not be sufficient to recover its investment. As a result, the risk of loss may be greater than for leases with or originators of loans made to individuals. Unlike individuals involved in bankruptcies, these legal entities will generally not have personal assets and creditworthiness at stake. As a result, the default or bankruptcy of one of the Master Fund’s borrowers or tenants, or a general partner or managing member of that borrower or tenant, may impair the Master Fund’s ability to enforce its rights and remedies under the related mortgage or the terms of the lease agreement, respectively.

 

The subordinate CRE debt the Master Fund originates and invests in may be subject to risks relating to the structure and terms of the related transactions, as well as subordination in bankruptcy, and there may not be sufficient funds or assets remaining to satisfy its investments, which may result in losses to the Master Fund.

 

The Master Fund originates, structures and acquires subordinate CRE debt investments secured primarily by commercial properties, which may include subordinate mortgage loans, mezzanine loans and participations in such loans and preferred equity interests in borrowers who own such properties. The Master Fund has not placed any limits on the percentage of its portfolio that may be comprised of these types of investments, which may involve a higher degree of risk than the type of assets that it expects will constitute the majority of the Master Fund’s debt investments, namely first mortgage loans secured by real property. These investments may be subordinate to other debt on commercial property and are secured by subordinate rights to the commercial property or by equity interests in the borrower. In addition, real properties with subordinate debt may have higher loan-to-value ratios than conventional debt, resulting in less equity in the real property and increasing the risk of loss of principal and interest. If a borrower defaults or declares bankruptcy, after senior obligations are met, there may not be sufficient funds or assets remaining to satisfy the Master Fund’s subordinate interests. Because each transaction is privately negotiated, subordinate investments can vary in their structural characteristics and lender rights. The Master Fund’s rights to control the default or bankruptcy process following a default will vary from transaction to transaction. The subordinate investments that the Master Fund originates and invests in may not give it the right to demand taking title to collateral as a subordinate real estate debt holder. Furthermore, the presence of intercreditor agreements may limit the Master Fund’s ability to amend loan documents, assign its loans, accept prepayments, exercise its remedies and control decisions made in bankruptcy proceedings relating to borrowers. Similarly, a majority of the participating lenders may be able to take actions to which the Master Fund objects, but by which the Master Fund will be bound. Even if the Master Fund has control, it may be unable to prevent a default or bankruptcy and the Master Fund could suffer substantial losses. Certain transactions that the Master Fund may originate and invest in could be particularly difficult, time consuming and costly to work out because of their complicated structure and the diverging interests of all the various classes of debt in the capital structure of a given asset.

 

The Master Fund may make investments in assets with lower credit quality, including below investment grade securities, referred to as “high yield” or “junk bonds,” which may increase its risk of losses.

 

The Master Fund may invest in unrated or non-investment grade CRE securities, enter into leases with unrated tenants or participate in subordinate, unrated or distressed mortgage loans. Securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated are often referred to as “high yield” securities or “junk bonds,” and may have speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. The non-investment grade ratings for these assets typically result from the overall leverage of the loans, the lack of a strong operating history for the properties underlying the loans or securities, the borrowers’ credit history, the properties’ underlying cash flow or other factors. Because the ability of obligors of properties and mortgages, including mortgage loans underlying CMBS, to make rent or principal and interest payments may be impaired during an economic downturn, prices of lower credit quality investments and CRE securities may decline. As a result, these investments may have a higher risk of default and loss than investment grade rated assets. The existing credit support in the securitization structure may be insufficient to protect the Master Fund against loss of principal on these investments. Any loss the Master Fund may incur may be significant and may reduce distributions and may adversely affect the value of the Shares.

 

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Investments in non-performing real estate assets involve greater risks than investments in stabilized, performing assets and make the Master Fund’s future performance more difficult to predict.

 

The Master Fund may make investments in non-performing real estate assets in which the operating cash flow generated from the underlying property is insufficient to support current debt service payments. Traditional performance metrics of real estate assets are generally not as reliable for non-performing real estate assets as they are for performing real estate assets. Non-performing properties, for instance, do not have stabilized occupancy rates and may require significant capital for repositioning. Similarly, non-performing loans do not have a consistent stream of cash flow to support normalized debt service. In addition, for non-performing loans, often there is greater uncertainty as to the amount or timeliness of principal repayment. Borrowers will typically try to create value in a non-performing real estate investment, including by development, redevelopment or lease-up of a property. However, none of these strategies may be effective and the subject properties may never generate sufficient cash flow to support debt service payments. If this occurs, the Master Fund may negotiate a reduced payoff, restructure the terms of the loan or enforce rights as lender and take title to collateral securing the loan with respect to CRE debt investments. It is challenging to evaluate non-performing investments, which increases the risks associated with such investments. The Master Fund may suffer significant losses with respect to these investments which would negatively impact the Master Fund’s operating performance and its ability to make distributions.

 

Floating-rate CRE debt, which is often associated with transitional assets, may entail greater risks of default to the Master Fund than fixed-rate CRE debt.

 

Floating-rate loans are often, but not always, associated with transitional properties as opposed to those with highly stabilized cash flow. Floating-rate CRE debt may have higher delinquency rates than fixed-rate loans. Borrowers with floating-rate loans may be exposed to increased monthly payments if the related interest rate adjusts upward from the initial fixed rate in effect during the initial period of the loan to the rate calculated in accordance with the applicable index and margin. Increases in a borrower’s monthly payment, as a result of an increase in prevailing market interest rates may make it more difficult for the borrowers with floating-rate loans to repay the loan and could increase the risk of default of their obligations under the loan.

 

The Master Fund may invest in CRE ownership through private equity investments, which carry with it unique risks.

 

The Master Fund may invest in direct CRE ownership or indirect ownership through PERE Investments or other joint ventures. PERE Investments typically refer to investments that are made through privately negotiated transactions using private capital. Private equity funds, often organized as limited partnerships, are the most common vehicles for making PERE Investments. Private equity funds that focus on real estate have generally been dependent on the availability of debt or equity financing to fund the acquisitions of their investments. Depending on market conditions, however, the availability of such financing may be reduced dramatically, limiting the ability of such private equity funds to obtain the required financing or reducing their expected rate of return. The risks of investing in private equity funds are generally related to: (i) the ability of the private equity fund to select and manage successful investment opportunities; (ii) the quality of the management of a company in which a private equity fund invests; (iii) the ability of a private equity fund to liquidate its investments; and (iv) general economic conditions. Additionally, managers of private equity funds will charge the Master Fund asset-based fees and typically will also be entitled to receive performance-based compensation. These are in addition to the Management Fee and Incentive Fee paid to the Advisor. With respect to PERE Investments, Master Fund Shareholders will bear fees and expenses at the Master Fund level and also at the PERE Investment level.

 

Securities of private equity funds, as well as the portfolio companies these funds invest in, tend to be more illiquid, and highly speculative. There is no regular market for interests in private equity funds, which typically must be sold in privately negotiated transactions. Any such sales would likely require the consent of the investment manager and could occur at a discount to the stated net asset value. If the Master Fund determines to sell its interest in a private equity fund, the Master Fund may be unable to sell such interest quickly, if at all, and could therefore be obligated to continue to hold such interest for an extended period of time, or to accept a lower price for a quick sale.

 

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Investments in private equity funds are also regularly held in non-voting form or with limited voting rights related to a certain percentage of its investment. To the extent that the Master Fund (i) holds non-voting interests, or (ii) contractually foregoes the right to vote its interests in a private equity fund, the Master Fund will not be able to vote on matters that require the approval of the interest holders of the private equity fund, including matters that may be adverse to the Master Fund’s interests. This restriction could diminish the influence of the Master Fund as compared to other investors in the private equity fund, and could adversely affect the Master Fund’s investment in the private equity fund, which could result in unpredictable and potentially adverse effects on the Master Fund.

 

The Master Fund’s acquisitions of PERE Investments in Secondary Transactions (as defined below) are based on available information and assumptions.

 

The Master Fund generally will acquire PERE Investments from one or more sellers who is/are existing limited partners in the portfolio funds in one or more transactions on the secondary market (“Secondary Transactions”). The overall performance of PERE Investments acquired in a Secondary Transaction will depend largely on the acquisition price paid for such PERE Investments, which may be negotiated based on incomplete or imperfect information, including valuations provided by the portfolio fund managers, which may be based on interim unaudited financial statements, research, market data or other information available to the manager. Such information may prove to be incomplete or imperfect, which could adversely affect the performance of the PERE Investments. Additionally, in determining the acquisition price, the Master Fund will be relying on certain assumptions with respect to the investments held by the portfolio funds, projected exit dates, future operating results, market conditions, the timing and manner of dispositions and other similar considerations. Actual realized returns on PERE Investments will depend on various factors, including future operating results, market conditions at the time of disposition, legal and contractual restrictions on transfer that may limit liquidity, any related transaction costs, and the timing and manner of disposition, all of which may materially differ from the assumptions on which the Master Fund relied in negotiating the acquisition price.

 

The Master Fund may agree to a deferred component of the purchase price for the acquisition of a PERE Investment, which increases the Master Fund’s leverage and may create additional risks.

 

The Master Fund may agree with a seller for all or a portion of the purchase price for a PERE Investment acquired in a Secondary Transaction to be paid by it over a period of time (a “Deferred Purchase Price Acquisition”), which increases the Master Fund’s leverage by the amount of the deferred payment obligation. In addition, the terms of any Deferred Purchase Price Acquisition may require the Master Fund to pay all or a portion of cash flows received from the portfolio funds to the seller to reduce the unpaid purchase price.

 

PERE Investments acquired in Secondary Transactions may include a pool of portfolio funds that are acquired on an “all or nothing” basis.

 

The Master Fund may have the opportunity to acquire a portfolio of portfolio funds from a seller on an “all or nothing” basis. Certain of the portfolio funds in the portfolio may be less attractive (for commercial, tax, legal or other reasons) than others, and certain of the sponsors of such portfolio funds may be more familiar to the Master Fund than others, or may be more experienced or highly regarded than others. In such cases, it may not be possible for the Master Fund to carve out from such purchases those investments which the Master Fund considers (for commercial, tax, legal or other reasons) less attractive. In addition, because the purchaser in a Secondary Transaction generally will step into the position of the seller, the Master Fund generally will not have the ability to modify or amend a portfolio fund’s constituent documents (e.g., limited partnership agreement) or otherwise negotiate the legal or economic terms of the interests being acquired. Additionally, the Master Fund’s acquisition of portfolio funds in a Secondary Transaction will generally be subject to the consent of each portfolio fund manager and may, in some cases, be subject to rights of first refusal or similar rights by existing portfolio fund investors. In the event a portfolio fund manager withholds its consent to a transfer to the Master Fund or the investors in a portfolio fund exercise any rights of first refusal to acquire all or a portion of the interests to be transferred to the Master Fund, it could adversely impact the performance of the PERE Investment portfolio and the Master Fund.

 

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PERE Investments may be short-lived assets and the Master Fund may not be able to reinvest capital in comparable investments.

 

Because certain PERE Investments are short-lived, the Master Fund may be unable to reinvest the distributions received from the portfolio funds in investments with similar returns, which could adversely impact the Master Fund’s performance.

 

The Master Fund may be subject to risks associated with construction lending, such as declining real estate values, cost overruns and delays in completion.

 

The Master Fund’s CRE debt investments may include loans made to developers to construct prospective projects, which may include ground-up construction or repositioning an existing asset. The primary risks to the Master Fund of construction loans are the potential for cost overruns, the developer’s failing to meet a project delivery schedule, market downturns and the inability of a developer to sell or refinance the project at completion in accordance with its business plan and repay the CRE debt. These risks could cause the Master Fund to have to fund more money than it originally anticipated in order to complete the project.

 

Insurance may not cover all potential losses on CRE investments which may impair the value of the Master Fund’s assets.

 

The Master Fund will generally require that each of the borrowers under its CRE debt investments obtain comprehensive insurance covering the collateral, including liability, fire and extended coverage. The Master Fund also generally will obtain insurance directly on any property it acquires. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods and hurricanes that may be uninsurable or not economically insurable. The Master Fund may not obtain, or require borrowers to obtain certain types of insurance if it is deemed commercially unreasonable. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it infeasible to use insurance proceeds to replace a property if it is damaged or destroyed. Further, it is possible that the Master Fund’s borrowers could breach their obligations to it and not maintain sufficient insurance coverage. Under such circumstances, the insurance proceeds, if any, might not be adequate to restore the economic value of the property, which might decrease the value of the property and in turn impair the Master Fund’s investment.

 

The Master Fund may obtain only limited warranties when it purchases a property, which will increase the risk that it may lose some or all of its invested capital in the property or rental income from the property which, in turn, could materially adversely affect the Master Fund’s business, financial condition and results from operations and the Master Fund’s ability to make distributions to the Trust.

 

The seller of a property often sells such property in an “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, the related real estate purchase and sale agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. Despite the Master Fund’s efforts, it may fail to uncover all material risks during the diligence process. The purchase of properties with limited warranties increases the risk that the Master Fund may lose some or all of its invested capital in the property, as well as the loss of rental income from that property if an issue should arise that decreases the value of that property and is not covered by the limited warranties. If any of these results occur, it may have a material adverse effect on the Master Fund’s business, financial condition and results of operations and the Master Fund’s ability to make distributions.

 

The Master Fund will depend on borrowers and tenants for a substantial portion of its revenue and, accordingly, the Master Fund’s revenue and its ability to make distributions to the Trust will be dependent upon the success and economic viability of such borrowers and tenants.

 

The success of the Master Fund’s origination or acquisition of investments will significantly depend on the financial stability of the borrowers and tenants underlying such investments. The inability of a single major borrower or tenant, or a number of smaller borrowers or tenants, to meet their payment obligations could result in reduced revenue or losses.

 

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If the Master Fund overestimates the value or income-producing ability or incorrectly price the risks of its investments, the Master Fund may experience losses.

 

Analysis of the value or income-producing ability of a commercial property is highly subjective and may be subject to error. The Master Fund will value its potential investments based on yields and risks, taking into account estimated future losses on the CRE loans and the properties included in the securitization’s pools or CRE equity investments and the estimated impact of these losses on expected future cash flow and returns. In the event that the Master Fund underestimates the risks relative to the price it pays for a particular investment, the Master Fund may experience losses with respect to such investment.

 

Lease defaults, terminations or landlord-tenant disputes may reduce the Master Fund’s income from its real estate investments.

 

The creditworthiness of tenants in real estate investments could become negatively impacted as a result of challenging economic conditions or otherwise, which could result in their inability to meet the terms of their leases. Lease defaults or terminations by one or more tenants may reduce the Master Fund’s revenues unless a default is cured or a suitable replacement tenant is found promptly. In addition, disputes may arise between the landlord and tenant that result in the tenant withholding rent payments, possibly for an extended period. These disputes may lead to litigation or other legal procedures to secure payment of the rent withheld or to evict the tenant. Upon a lease default, the Master Fund may have limited remedies, be unable to accelerate lease payments and have limited or no recourse against a guarantor. Tenants as well as guarantors may have limited or no ability to satisfy any judgments it may obtain. The Master Fund may also have duties to mitigate its losses and it may not be successful in that regard. Any of these situations may result in extended periods during which there is a significant decline in revenues or no revenues generated by a property. If this occurred, it could adversely affect the Master Fund’s results of operations.

 

A significant portion of the Master Fund’s leases may expire in the same year.

 

A significant portion of the leases for the Master Fund’s real estate investments may expire in the same year. As a result, the Master Fund could be subject to a sudden and material change in value of its real estate investments and available cash flow from such investments in the event that these leases are not renewed or in the event that it is not able to extend or refinance the mortgage notes payable on the properties that are subject to these leases.

 

The Master Fund may not be able to relet or renew leases at the properties underlying CRE debt investments or the properties held by the Master Fund on favorable terms, or at all.

 

The Master Fund’s investments in real estate will be pressured if economic conditions and rental markets continue to be challenging. For instance, upon expiration or early termination of leases for space located at its properties, the space may not be relet or, if relet, the terms of the renewal or reletting (including the cost of required renovations or concessions to tenants) may be less favorable than current lease terms. The Master Fund could receive above market rental rates which will decrease upon renewal, which would adversely impact its income and could harm its ability to service its debt and operate successfully. Weak economic conditions would likely reduce tenants’ ability to make rent payments in accordance with the contractual terms of their leases and lead to early termination of leases. Furthermore, commercial space needs may contract, resulting in lower lease renewal rates and longer releasing periods when leases are not renewed. Any of these situations may result in extended periods where there is a significant decline in revenues or no revenues generated by a property. Additionally, to the extent that market rental rates are reduced, property-level cash flow would likely be negatively affected as existing leases renew at lower rates. If the Master Fund is unable to relet or renew leases for all or substantially all of the space at these properties, if the rental rates upon such renewal or reletting are significantly lower than expected, or if the Master Fund’s reserves for these purposes prove inadequate, the Master Fund will experience a reduction in net income and may be required to reduce or eliminate cash distributions.

 

The bankruptcy, insolvency or financial deterioration of any of the tenants could significantly delay the ability to collect unpaid rents or require the Master Fund to find new tenants.

 

The Master Fund’s financial position and its ability to make distributions may be adversely affected by financial difficulties experienced by any major tenants, including bankruptcy, insolvency or a general downturn in the business, or in the event any major tenants do not renew or extend their relationship as their lease terms expire.

 

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The Master Fund will be exposed to the risk that tenants may not be able to meet their obligations to it or other third parties, which may result in their bankruptcy or insolvency. Although loans and leases may permit the Master Fund to evict a tenant, demand immediate repayment and pursue other remedies, bankruptcy laws afford certain rights to a party that has filed for bankruptcy or reorganization. A tenant in bankruptcy may be able to restrict the ability to collect unpaid rents or interest during the bankruptcy proceeding. Furthermore, dealing with a tenants’ bankruptcy or other default may divert management’s attention and cause the Master Fund to incur substantial legal and other costs.

 

Bankruptcy laws provide that a debtor has the option to assume or reject an unexpired lease within a certain period of time of filing for bankruptcy, but generally requires such assumption or rejection to be made in its entirety. Thus, a debtor cannot choose to keep the beneficial provisions of a contract while rejecting the burdensome ones; the contract must be assumed or rejected as a whole. However, where under applicable law a contract (even though it is contained in a single document) is determined to be divisible or severable into different agreements, or similarly, where a collection of documents is determined to constitute separate agreements instead of a single, integrated contract, then in those circumstances a debtor/trustee may be allowed to assume some of the divisible or separate agreements while rejecting the others. If the debtor has the ability, and chooses to assume, some of the divisible agreements while rejecting the other divisible agreement, or if a non-debtor tenant is unable to comply with the terms of an agreement, the Master Fund may be forced to modify the agreements in ways that are unfavorable to it.

 

Because real estate investments are relatively illiquid, the Master Fund may not be able to vary its portfolio in response to changes in economic and other conditions, which may result in losses to the Master Fund.

 

Many of the Master Fund’s investments will be illiquid, possibly preventing the Master Fund from selling such investments at an advantageous time or price, or possibly requiring the Master Fund to dispose of other investments at unfavorable times or prices in order to satisfy its obligations. A variety of factors could make it difficult for the Master Fund to dispose of any of its assets on acceptable terms even if a disposition is in the best interests of the Master Fund Shareholders. The Master Fund cannot predict whether it will be able to sell any property for the price or on the terms set by it or whether any price or other terms offered by a prospective purchaser would be acceptable to the Master Fund. The Master Fund also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Certain properties may also be subject to transfer restrictions that materially restrict the Master Fund from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of financing that can be placed or repaid on that property. The Master Fund may be required to expend cash to correct defects or to make improvements before a property can be sold, and there can be no assurance that it will have cash available to correct those defects or to make those improvements. The Code also places limits on the Master Fund’s ability to sell certain properties held by the REIT Subsidiary.

 

Borrowers under certain of the Master Fund’s CRE debt investments may give their tenants or other persons similar rights with respect to the collateral. Similarly, the Master Fund may also determine to give its tenants a right of first refusal or similar options. Such rights could negatively affect the residual value or marketability of the property and impede the Master Fund’s ability to sell the collateral or the property.

 

As a result, the Master Fund’s ability to sell investments in response to changes in economic and other conditions could be limited. To the extent the Master Fund is unable to sell any property for its book value or at all, the Master Fund may be required to take a non-cash impairment charge or loss on the sale, either of which would reduce the Master Fund’s earnings. Limitations on the Master Fund’s ability to respond to adverse changes in the performance of its investments may have a material adverse effect on the Master Fund’s business, financial condition and results of operations and the Master Fund’s ability to make distributions. Since the Trust is investing substantially all of its assets into the Master Fund, its performance may be adversely affected by the Master Fund’s liquidity risks.

 

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To the extent capital improvements are not undertaken, the ability of tenants to manage properties effectively and on favorable terms may be affected, which in turn could materially adversely affect the Master Fund’s business, financial conditions and results of operations and the Master Fund’s ability to make distributions.

 

To the extent capital improvements are not undertaken or are deferred, occupancy rates and the amount of rental and reimbursement income generated by the property may decline, which would negatively impact the overall value of the affected property. The Master Fund may be forced to incur unexpected significant expense to maintain properties. Any of these events could have a material adverse effect on the Master Fund’s business, financial condition and results of operations and the Master Fund’s ability to make distributions.

 

Environmental compliance costs and liabilities associated with properties or the Master Fund’s real estate-related investments may materially impair the value of the Master Fund’s investments and expose it to liability.

 

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner of real property, such as the Master Fund and tenants, may be liable in certain circumstances for the costs of investigation, removal or remediation of, or related releases of, certain hazardous or toxic substances, including materials containing asbestos, at, under or disposed of in connection with such property, as well as certain other potential costs relating to hazardous or toxic substances, including government fines and damages for injuries to persons and adjacent property. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and the costs it incurs in connection with the contamination. These laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence or disposal of such substances and liability may be imposed on the owner in connection with the activities of a tenant at the property. The presence of contamination or the failure to remediate contamination may adversely affect the Master Fund’s or its tenants’ ability to sell or lease real estate, or to borrow using the real estate as collateral, which, in turn, could reduce the Master Fund’s revenues. The Master Fund, or its tenants, as owner of a site, including if the Master Fund takes ownership through foreclosure, may be liable under common law or otherwise to third parties for damages and injuries resulting from environmental contamination emanating from the site. The cost of any required investigation, remediation, removal, fines or personal or property damages and the Master Fund’s or its tenants’ liability could significantly exceed the value of the property without any limits.

 

The scope of the indemnification the Master Fund’s tenants may agree to provide the Master Fund may be limited. For instance, some of the Master Fund’s agreements with tenants may not require them to indemnify it for environmental liabilities arising before the tenant took possession of the premises. Further, there can be no assurance that any such tenant would be able to fulfill its indemnification obligations. If the Master Fund is deemed liable for any such environmental liabilities and is unable to seek recovery against its tenant, the Master Fund’s business, financial condition and results of operations could be materially and adversely affected.

 

Furthermore, the Master Fund may invest in real estate, or mortgage loans secured by real estate, with environmental problems that materially impair the value of the real estate. Even as a lender, if the Master Fund takes title to collateral with environmental problems or if other circumstances arise, the Master Fund could be subject to environmental liability. There are substantial risks associated with such an investment.

 

If the Master Fund enters into joint ventures, its joint venture partners could take actions that decrease the value of an investment to the Master Fund and lower the Master Fund’s overall return.

 

The Master Fund may in the future enter into joint ventures with third parties to make investments. The Master Fund may also make investments in partnerships or other co-ownership arrangements or participations. The Master Fund will not, however, invest in a joint venture in which Colony NorthStar, the Advisor or any of their directors or officers or any of their affiliated persons (as defined in the 1940 Act) has an interest except as permitted by the 1940 Act, including SEC interpretive positions, and with a determination of the Master Fund Board (including a majority of the Master Fund’s Independent Trustees) not otherwise interested in the transaction that such transaction is fair and reasonable to the Master Fund.

 

Such investments may involve risks not otherwise present with other methods of investment, including, for instance, the following risks:

 

·the joint venture partner in an investment could become insolvent or bankrupt;

 

·fraud or other misconduct by the joint venture partners;

 

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·the Master Fund may share decision-making authority with its joint venture partner regarding certain major decisions affecting the ownership of the joint venture and the joint venture property, such as the sale of the property or the making of additional capital contributions for the benefit of the property, which may prevent the Master Fund from taking actions that are opposed by its joint venture partner;

 

·the joint venture partner may at any time have economic or business interests or goals that are or that become in conflict with the Master Fund’s business interests or goals, including, for instance, the operation of the properties;

 

·the joint venture partners may be structured differently than the Master Fund for tax purposes and this could create conflicts of interest and risk to the Master Fund’s ability to qualify as a RIC for U.S. tax purposes;

 

·the Master Fund may rely upon its joint venture partners to manage the day-to-day operations of the joint venture and underlying assets, as well as to prepare financial information for the joint venture and any failure to perform these obligations may have a negative impact on the Master Fund’s performance and results of operations;

 

·the joint venture partner may experience a change of control, which could result in new management of the joint venture partner with less experience or conflicting interests to the Master Fund and be disruptive to the Master Fund’s business;

 

·such joint venture partner may be in a position to take action contrary to the Master Fund’s instructions or requests or contrary to the Master Fund’s policies or objectives;

 

·the terms of the joint ventures could restrict the Master Fund’s ability to sell or transfer its interest to a third party when it desires on advantageous terms, which could result in reduced liquidity;

 

·the joint venture partners may not have sufficient personnel or appropriate levels of expertise to adequately support the Master Fund’s initiatives; and

 

·to the extent it is permissible and approved for the Master Fund to partner with other Managed Companies, Colony NorthStar may have conflicts of interest that may not be resolved in the Master Fund’s favor.

 

Any of the above might subject the Master Fund to liabilities and thus reduce its returns on the investment with that joint venture partner. In addition, disagreements or disputes between the Master Fund and the joint venture partner could result in litigation, which could increase the Master Fund’s expenses and potentially limit the time and effort the Master Fund’s officers and trustees are able to devote to its business.

 

Further, in some instances, the Master Fund and/or its joint venture partner may have the right to trigger a buy-sell arrangement, which could cause the Master Fund to sell its interest, or acquire its partner’s interest, at a time when the Master Fund otherwise would not have initiated such a transaction. The Master Fund’s ability to acquire its partner’s interest may be limited if the Master Fund does not have sufficient cash, available borrowing capacity or other capital resources. In such event, the Master Fund may be forced to sell its interest in the joint venture when the Master Fund would otherwise prefer to retain it.

 

The Master Fund may make opportunistic investments that may involve asset classes and structures with which it has less familiarity, thereby increasing the Master Fund’s risk of loss.

 

The Master Fund may make opportunistic investments that may involve asset classes and structures with which it has less familiarity. When investing in asset classes with which it has limited or no prior experience, the Master Fund may not be successful in its diligence and underwriting efforts. The Master Fund may also be unsuccessful in preserving value, especially if conditions deteriorate and it may expose itself to unknown substantial risks. Furthermore, these assets could require additional management time and attention relative to assets with which the Master Fund is more familiar. All of these factors increase the Master Fund’s risk of loss.

 

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The Master Fund will be subject to additional risks if it makes investments internationally.

 

The Master Fund may acquire real estate assets located outside of the United States and it may originate or acquire senior or subordinate loans made to borrowers located outside of the United States or secured by properties located outside of the United States. Based on current market conditions, the Master Fund does not intend for non-U.S. investments to be one of its principal investment strategies. Any international investments the Master Fund makes may be affected by factors peculiar to the laws of the jurisdiction in which the borrower or the property is located and these laws may expose the Master Fund to risks that are different from and/or in addition to those commonly found in the United States. The Master Fund may not be as familiar with the potential risks to its investments outside of the United States and the Master Fund may incur losses as a result.

 

Any international investments the Master Fund makes could be subject to the following risks:

 

·governmental laws, rules and policies, including laws relating to the foreign ownership of real property or mortgages and laws relating to the ability of foreign persons or corporations to remove profits earned from activities within the country to the person’s or corporation’s country of origin;

 

·translation and transaction risks relating to fluctuations in foreign currency exchange rates;

 

·adverse market conditions caused by inflation or other changes in national or local political and economic conditions;

 

·challenges of complying with a wide variety of foreign laws, including corporate governance, operations, taxes and litigation;

 

·changes in relative interest rates;

 

·changes in the availability, cost and terms of borrowings resulting from varying national economic policies;

 

·changes in real estate and other tax rates, the tax treatment of transaction structures and other changes in operating expenses in a particular country where the Master Fund has an investment;

 

·the Master Fund’s status as a RIC not being respected under foreign laws, in which case any income or gains from foreign sources would likely be subject to foreign taxes, withholding taxes, transfer taxes and value added taxes;

 

·lack of uniform accounting standards (including availability of information in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”));

 

·changes in land use and zoning laws;

 

·more stringent environmental laws or changes in such laws;

 

·changes in the social stability or other political, economic or diplomatic developments in or affecting a country where the Master Fund has an investment;

 

·changes in applicable laws and regulations in the United States that affect foreign operations; and

 

·legal and logistical barriers to enforcing the Master Fund’s contractual rights in other countries, including insolvency regimes, landlord/tenant rights and ability to take possession of the collateral.

 

Certain of these risks may be greater in emerging markets and less developed countries, which may have less efficient and less liquid markets, creating greater price volatility and fluctuations in value. Each of these risks might adversely affect the Master Fund’s performance and impair its ability to make distributions to shareholders required to maintain the Master Fund’s RIC qualification. In addition, there is less publicly available information about foreign companies and a lack of uniform financial accounting standards and practices (including the availability of information in accordance with U.S. GAAP) which could impair the Master Fund’s ability to analyze transactions and receive timely and accurate financial information from tenants or borrowers necessary to meet its reporting obligations to financial institutions or governmental or regulatory agencies.

 

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Sovereign debt defaults and EU and/or Eurozone exits such as “Brexit,” could have material adverse effects on investments in European companies, while austerity and other measures introduced to limit or contain these issues may themselves lead to economic contraction, which may result in adverse effects for the Master Fund.

 

The Master Fund may invest in companies from any geographic region; however, the Master Fund may invest in European companies and companies that may be affected by the Eurozone economy. Recent concerns regarding the sovereign debt of various Eurozone countries and proposals for investors to incur substantial write-downs and reductions in the face value of Greek sovereign debt have given rise to new concerns about sovereign defaults, the possibility that one or more countries might leave the EU or the Eurozone and various proposals, which are still under consideration and unclear in material respects, for support of affected countries and the Euro as a currency. The outcome of this situation cannot be predicted. Sovereign debt defaults and EU and/or Eurozone exits such as “Brexit,” could have material adverse effects on investments by the Master Fund in European companies, including, but not limited to, the availability of credit to support such companies’ financing needs, uncertainty and disruption in relation to financing, customer and supply contracts denominated in Euro and wider economic disruption in markets served by those companies, while austerity and other measures introduced in order to limit or contain these issues may themselves lead to economic contraction and resulting adverse effects for the Master Fund. Legal uncertainty about the funding of Euro denominated obligations following any breakup or exits from the Eurozone, particularly in the case of investments in companies in affected countries, could also have material adverse effects on the Master Fund.

 

The Master Fund may invest in a variety of CRE securities, including CMBS and other subordinate securities, which entail certain heightened risks.

 

The Master Fund may invest in a variety of CRE securities, including CMBS and other subordinate securities, subject to the first risk of loss if any losses are realized on the underlying mortgage loans. CMBS entitle the holders thereof to receive payments that depend primarily on the cash flow from a specified pool of commercial or multifamily mortgage loans. Consequently, CMBS and other CRE securities will be adversely affected by payment defaults, delinquencies and losses on the underlying mortgage loans, which increase during times of economic stress and uncertainty. Furthermore, if the rental and leasing markets deteriorate, including by decreasing occupancy rates and decreasing market rental rates, it could reduce cash flow from the mortgage loan pools underlying the CMBS investments that the Master Fund may make. The market for CRE securities is dependent upon liquidity for refinancing and may be negatively impacted by a slowdown in new issuance.

 

Additionally, CRE securities such as CMBS may be subject to particular risks, including lack of standardized terms and payment of all or substantially all of the principal only at maturity rather than regular amortization of principal. The value of CRE securities may change due to shifts in the market’s perception of issuers and regulatory or tax changes adversely affecting the CRE debt market as a whole. Additional risks may be presented by the type and use of a particular commercial property, as well as the general risks relating to the net operating income from and value of any commercial property. The exercise of remedies and successful realization of liquidation proceeds relating to CRE securities may be highly dependent upon the performance of the servicer or special servicer. Expenses of enforcing the underlying mortgage loan (including litigation expenses) and expenses of protecting the properties securing the loan may be substantial. Consequently, in the event of a default or loss on one or more loans contained in a securitization, the Master Fund may not recover a portion or all of its investment. Ratings for CRE securities can also adversely affect their value.

 

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The Master Fund is exposed to the various risks associated with investments in CMBS.

 

The Master Fund invests in CMBS, which represent interests in pools of commercial mortgages that are principally secured by commercial properties. Mortgage loans on commercial properties often are structured so that a substantial portion of the loan principal is not amortized over the loan term but is payable at maturity (as a “balloon payment”), and repayment of a significant portion of loan principal thus often depends upon the future availability of real estate financing and/or upon the value and saleability of the real estate at the relevant time. Therefore, the unavailability of real estate financing may lead to default on the mortgage loan. Most commercial mortgage loans underlying CMBS are effectively nonrecourse obligations of the applicable borrowers, meaning that there is no recourse against a borrower’s assets other than the specific property encumbered as security. If borrowers are not able or willing to refinance or dispose of the encumbered property to pay the principal and interest owed on such mortgage loans, payments on the related CMBS (particularly subordinated classes of CMBS) will likely be adversely affected. The ultimate extent of the loss, if any, to the classes of CMBS may only be determined after a negotiated discounted settlement, restructuring or sale of the mortgage note, or the foreclosure (or deed-in-lieu of foreclosure) of the mortgage encumbering the property and subsequent liquidation of the property. Foreclosure can be costly and delayed by litigation and/or bankruptcy. Factors such as the property’s location, the legal status of title to the property, its physical condition and financial performance, environmental risks and governmental disclosure requirements with respect to the condition of the property may make a third-party unwilling to purchase the property at a foreclosure sale or to pay a price sufficient to satisfy the obligations with respect to the related CMBS. Revenues from the assets underlying a commercial mortgage loan and related CMBS may be retained by the borrower and/or used to make payments to others, maintain insurance coverage, pay taxes or pay maintenance costs. Such diverted revenues generally are not recoverable without a court-appointed receiver to control cash flow from the collateral. The holder of CMBS does not have a contractual relationship with the borrowers of the underlying commercial mortgage loans and typically has no right directly to enforce compliance by the borrowers with the terms of the loan agreements, nor any rights of set-off against the borrowers, nor will it have the right to object to certain changes to the underlying loan agreements, nor to move directly against the collateral supporting the related loans. CMBS investments are often less liquid, particularly in periods of stress, are generally more complex and less transparent, and may have more complicated tax profiles than traditional investments. The Master Fund may invest in subordinated classes of CMBS, which involve greater credit risk, tend to be less liquid and may be more difficult to value than senior classes of CMBS. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may substantially decrease the liquidity and value of subordinated CMBS, especially in a thinly traded market. Subordinated classes of CMBS may include lower-rated or unrated securities that are considered speculative with respect to the issuer’s continuing ability to pay principal and interest in accordance with their terms.

 

The Master Fund Board may change the Master Fund’s investment strategies, targeted investments and investment guidelines without shareholder consent.

 

The Master Fund Board may change the Master Fund’s investment strategies, targeted investments and investment guidelines at any time without the consent of Master Fund Shareholders, which could result in the Master Fund making investments that are different from, and possibly riskier than, the investments described in this prospectus. A change in the Master Fund’s targeted investments or investment guidelines may increase its exposure to interest rate risk, default risk and real estate market fluctuations, all of which could adversely affect the value of the Master Fund Shares and the Master Fund’s ability to make distributions to the Trust.

 

The Master Fund may invest in CDO notes, which may involve significant risks.

 

The Master Fund may invest in CDO notes which are multiple class securities secured by pools of assets, such as CMBS, mortgage loans, subordinate mortgage and mezzanine loans and REIT debt. Like typical securitization structures, in a CDO, the assets are pledged to a trustee for the benefit of the holders of the CDO bonds. Like CMBS, CDO notes are affected by payments, defaults, delinquencies and losses on the underlying loans or securities. CDOs often have reinvestment periods that typically last for five years during which proceeds from the sale of a collateral asset may be invested in substitute collateral. Upon termination of the reinvestment period, the static pool functions very similarly to a CMBS where repayment of principal allows for redemption of bonds sequentially. To the extent the Master Fund may invest in the equity interest of a CDO, it will be entitled to all of the income generated by the CDO after the CDO pays all of the interest due on the senior securities and its expenses. However, there may be little or no income or principal available to the holders of CDO equity interests if defaults or losses on the underlying collateral exceed a certain amount. In that event, the value of the Master Fund’s investment in any equity interest of a CDO could decrease substantially. In addition, the equity interests of CDOs are illiquid and often must be held by a REIT and because they represent a leveraged investment in the CDO’s assets, the value of the equity interests will generally have greater fluctuations than the value of the underlying collateral.

 

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A significant portion of the Master Fund’s investment portfolio will be recorded at fair value as determined in good faith by or under the direction of the Master Fund’s Board and, as a result, there will be uncertainty as to the value of the Master Fund’s investments.

 

Under the 1940 Act, the Master Fund is required to carry its portfolio investments at market value or, if there is no readily available market value, at fair value. There is often no public market for the Master Fund’s target investments. Many of the Master Fund’s investments are not exchange-traded, but are, instead, traded on a privately negotiated over-the-counter (“OTC”) secondary market for institutional investors. As a result, the Master Fund’s Board has adopted methods for determining the fair value of such securities and other assets, and has delegated the responsibility for applying the valuation methods to the Valuation Committee. On a quarterly basis, or more frequently if necessary, the Master Fund’s audit committee reviews and the Master Fund Board ratifies the valuation determinations made by the Valuation Committee with respect to the Master Fund’s investments during the preceding period and evaluates whether such determinations were made in a manner consistent with the Master Fund’s valuation policies and procedures. Valuations of Master Fund investments will be disclosed quarterly in reports filed with the SEC. See “Determination of Net Asset Value.”

 

Certain factors that may be considered in determining the fair value of the Master Fund’s investments include actual or pending transactions or reorganizations, seniority in the capital structure, changes to business operations, rental income or expenses, third party data, dealer quotes for securities traded on the OTC secondary market for institutional investors, the nature and realizable value of any collateral, the portfolio company’s earnings and its ability to make payments on its indebtedness, the markets in which the portfolio company does business, comparison to comparable publicly-traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates and/or imperfect information, determinations of fair value may differ materially from the values that would have been used if an exchange-traded market for these securities existed. Due to this uncertainty, the Master Fund’s fair value determinations may cause the Master Fund’s NAV, and consequently the Trust’s NAV, on a given date to materially understate or overstate the value that it may ultimately realize upon the sale of one or more of its investments. For a description of the factors that may be considered when valuing the Master Fund’s CRE investments where a market price is not readily available, see “Determination of Net Asset Value— Investments where a market price is not readily available.”

 

The price the Master Fund pays for acquisitions of real property and the terms of its debt investments will be based on the Master Fund’s projections of market demand, occupancy and rental income, as well as on market factors, and the Master Fund’s return on its investment may be lower than expected if any of the Master Fund’s projections are inaccurate.

 

The price the Master Fund pays for real property investments and the terms of its debt investments will be based on the Master Fund’s projections of market demand, occupancy levels, rental income, the costs of any development, redevelopment or renovation of a property, borrower expertise and other factors. In addition, as the real estate market continues to strengthen with the improvement of the U.S. economy, the Master Fund will face increased competition, which may drive up prices for real estate assets or make loan origination terms less favorable to the Master Fund. If any of the Master Fund’s projections are inaccurate or it ascribes a higher value to assets and their value subsequently drops or fails to rise because of market factors, returns on the Master Fund’s investment may be lower than expected and could experience losses.

 

Risks Related to the Master Fund’s Financing Strategy

 

The Master Fund may be unable to obtain financing required to acquire or originate investments as contemplated in its business plan, which could compel it to restructure or abandon a particular acquisition or origination and harm its ability to make distributions.

 

The Master Fund expects to fund a portion of its investments with financing. The Master Fund’s business may be adversely affected by disruptions in the debt and equity capital markets and institutional lending market, including the lack of access to capital or prohibitively high costs of obtaining or replacing capital. Access to the capital markets and other sources of liquidity was severely disrupted during the credit crisis and, despite recent improvements, the markets could suffer another severe downturn and another liquidity crisis could emerge. There can be no assurance that any financing will be available to the Master Fund in the future on acceptable terms, if at all, or that it will be able to satisfy the conditions precedent required to use its credit facilities, if entered into, which could reduce the number, or alter the type, of investments that the Master Fund would make otherwise. This may reduce the Master Fund’s income. To the extent that financing proves to be unavailable when needed, the Master Fund may be compelled to modify its investment strategy to optimize the performance of the portfolio. Any failure to obtain financing could have a material adverse effect on the continued development or growth of the Master Fund’s business and harm the Master Fund’s ability to operate and make distributions.

 

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The Master Fund may not successfully align the maturities of its liabilities with the maturities on its assets, which could harm the Master Fund’s operating results and financial condition.

 

The Master Fund’s general financing strategy is focused on the use of “match-funded” structures. This means that the Master Fund will seek to align the maturities of its liabilities with the maturities on its assets in order to manage the risks of being forced to refinance its liabilities prior to the maturities of its assets. In addition, the Master Fund plans to match interest rates on its assets with like-kind borrowings, so fixed-rate investments are financed with fixed-rate borrowings and floating-rate assets are financed with floating-rate borrowings, directly or indirectly through the use of interest rate swaps, caps and other financial instruments or through a combination of these strategies. The Master Fund may fail to appropriately employ match-funded structures on favorable terms, or at all. The Master Fund may also determine not to pursue a fully match-funded strategy with respect to a portion of its financings for a variety of reasons. If the Master Fund fails to appropriately employ match-funded strategies or determines not to pursue such a strategy, its exposure to interest rate volatility and exposure to matching liabilities prior to the maturity of the corresponding asset may increase substantially which could harm the Master Fund’s operating results, liquidity and financial condition.

 

The Master Fund’s performance can be negatively affected by fluctuations in interest rates and shifts in the yield curve may cause losses.

 

The Master Fund’s financial performance is influenced by changes in interest rates; in particular, such changes may affect the Master Fund’s CRE securities, floating-rate borrowings and CRE debt to the extent such debt does not float as a result of floors or otherwise. Changes in interest rates, including changes in expected interest rates or “yield curves,” affect the Master Fund’s business in a number of ways. Changes in the general level of interest rates can affect the Master Fund’s net interest income, which is the difference between the interest income earned on the Master Fund’s interest-earning assets and the interest expense incurred in connection with its interest-bearing borrowings and hedges. Changes in the level of interest rates also can affect, among other things, the Master Fund’s ability to acquire CRE securities, acquire or originate CRE debt at attractive prices and enter into hedging transactions. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond its control. If the U.S. Federal Reserve continues to increase market interest rates in the future, the interest rate on any variable rate borrowings will increase and will create higher debt service requirements, which would adversely affect the Master Fund’s cash flow and could adversely impact the Master Fund’s results of operations.

 

Interest rate changes may also impact the Master Fund’s net book value as CRE securities and hedge derivatives, if any, are marked to market each quarter. Generally, as interest rates increase, the value of the Master Fund’s fixed rate securities decreases, which will decrease the book value of the Master Fund’s equity.

 

Furthermore, shifts in the U.S. Treasury yield curve reflecting an increase in interest rates would also affect the yield required on the Master Fund’s CRE securities and therefore their value. For instance, increasing interest rates would reduce the value of the fixed rate assets the Master Fund holds at the time because the higher yields required by increased interest rates result in lower market prices on existing fixed rate assets in order to adjust the yield upward to meet the market and vice versa. This would have similar effects on the Master Fund’s CRE securities portfolio and the Master Fund’s financial position and operations as a change in interest rates generally.

 

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In a period of rising interest rates, the Master Fund’s interest expense could increase while the interest it earns on its fixed-rate assets or capped floating rate assets would not change, which would adversely affect the Master Fund’s profitability.

 

While interest rates are currently expected to remain at historically low rates in the near term, there is a consensus that the U.S. Federal Reserve will increase benchmark interest rates during the life of the Master Fund, which could negatively impact the price of debt securities and could adversely affect the value of the Master Fund’s investments. The Master Fund’s operating results will depend in large part on differences between the income from the Master Fund’s assets less its operating costs, reduced by any credit losses and financing costs. Income from the Master Fund’s assets may respond more slowly to interest rate fluctuations than the cost of its borrowings. Consequently, rising interest rates, particularly of short-term interest rates, may significantly influence the Master Fund’s net income. Increases in these rates may decrease the Master Fund’s net income and fair value of the Master Fund’s assets. Interest rate fluctuations resulting in the Master Fund’s interest expense exceeding the income from the Master Fund’s assets would result in operating losses for the Master Fund and may limit the Master Fund’s ability to make distributions. In addition, if the Master Fund needs to repay existing borrowings during periods of rising interest rates, it could be required to liquidate one or more of its investments at times that may not permit realization of the maximum return on those investments, which would adversely affect the Master Fund’s profitability.

 

Hedging against interest rate and currency exposure may adversely affect the Master Fund’s earnings, limit its gains or result in losses, which could adversely affect cash available for distribution.

 

The Master Fund may enter into swap, cap or floor agreements or pursue other interest rate or currency hedging strategies, to the extent permitted by the 1940 Act. The Master Fund’s hedging activity will vary in scope based on interest rate levels, currency exposure, the type of investments held and other changing market conditions. Interest rate and/or currency hedging may fail to protect or could adversely affect the Master Fund because, among other things:

 

·interest rate and/or currency hedging can be expensive, particularly during periods of rising and volatile interest rates;

 

·available interest rate and/or currency hedging may not correspond directly with the risk for which protection is sought;

 

·the duration of the hedge may not match the duration of the related liability or asset;

 

·the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs the Master Fund’s ability to sell or assign its side of the hedging transaction;

 

·the counterparties with which the Master Fund trade may cease making markets and quoting prices in such instruments, which may render the Master Fund unable to enter into an offsetting transaction with respect to an open position;

 

·the party owing money in the hedging transaction may default on its obligation to pay; and

 

·the Master Fund may purchase a hedge that turns out not to be necessary, i.e., a hedge that is out of the money.

 

There can be no assurance that any such hedging transactions will be effective in mitigating risk in all market conditions or against all types of risk. Any hedging activity the Master Fund engages in may adversely affect the Master Fund’s earnings, which could adversely affect cash available for distribution. Therefore, while the Master Fund may enter into such transactions to seek to reduce interest rate and/or currency risks, unanticipated changes in interest rates or exchange rates may result in poorer overall investment performance than if the Master Fund had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged or liabilities being hedged may vary materially. Moreover, for a variety of reasons, the Master Fund may not be able to establish a perfect correlation between hedging instruments and the investments being hedged. Any such imperfect correlation may prevent the Master Fund from achieving the intended hedge and expose it to risk of loss.

 

Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearinghouse or regulated by any U.S. or foreign governmental authorities and involve risks and costs.

 

The cost of using hedging instruments increases as the period covered by the instrument lengthens and during periods of rising and volatile interest rates. The Master Fund may increase its hedging activity and thus increase its hedging costs during periods when interest rates are volatile or rising and hedging costs have increased. In addition, hedging instruments involve risk since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, there are no regulatory or statutory requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory, commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements.

 

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The Trust and the Master Fund are subject to credit risk with respect to the counterparties to its derivatives contracts (whether a clearing corporation in the case of exchange-traded instruments or our hedge counterparty in the case of OTC instruments) purchased by the Master Fund. Counterparty risk is the risk that the other party in a derivative transaction will not fulfill its contractual obligation. Changes in the credit quality of the companies that serve as the Master Fund’s counterparties with respect to their derivative transactions will affect the value of those instruments. The business failure of a hedging counterparty with whom the Master Fund enters into a hedging transaction will most likely result in a default. Default by a party with whom the Master Fund enters into a hedging transaction may result in the loss of unrealized profits and force the Master Fund to cover its resale commitments, if any, at the then-current market price. It may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty and the Master Fund may not be able to enter into an offsetting contract in order to cover its risk. By entering into derivatives, the Master Fund assumes the risks that its counterparty could experience financial or other hardships that jeopardize its ability to perform its obligations. There can be no assurance that a liquid secondary market will exist for hedging instruments purchased or sold, and the Master Fund may be required to maintain a position until exercise or expiration, which could result in losses.

 

The Master Fund may use short-term borrowings to finance its investments and it may need to use such borrowings for extended periods of time to the extent it is unable to access long-term financing. This may expose the Master Fund to increased risks associated with decreases in the fair value of the underlying collateral, which could have an adverse impact on the Master Fund’s results of operations.

 

While the Master Fund expects to seek non-recourse, non-mark-to-market, long-term financing through securitization financing transactions or other structures, such financing may be unavailable to it on favorable terms or at all. Consequently, the Master Fund may be dependent on short-term financing arrangements that are not matched in duration to its financial assets. Short-term borrowing through repurchase arrangements, credit facilities and other types of borrowings may put the Master Fund’s assets and financial condition at risk. Any such short-term financing may also be recourse to the Master Fund, which will increase the risk of its investments. The Master Fund’s financing structures may economically resemble short-term, floating-rate financing and usually require the maintenance of specific loan-to-collateral value ratios and other covenants. In the event that the Master Fund is unable to meet the collateral obligations for its short-term financing arrangements, the Master Fund’s financial condition could deteriorate rapidly.

 

The Master Fund may use leverage in connection with its investments, which may increase the risk of loss associated with its investments.

 

The Master Fund may finance the origination and acquisition of a portion of its investments with credit facilities, securitization financing transactions and other term borrowings, which may include repurchase agreements. The use of leverage may substantially increase the risk of loss. The Master Fund’s ability to execute this strategy depends on various conditions in the financing markets that are beyond its control, including liquidity and credit spreads. The Master Fund may be unable to obtain financing on favorable terms or, with respect to its investments, on terms that parallel the maturities of the debt originated or acquired, if it is able to obtain financing at all. If this strategy will not be viable, the Master Fund will have to find alternative forms of long-term financing for its assets, as secured revolving credit facilities and repurchase agreements may not accommodate long-term financing. This could subject the Master Fund to more restrictive recourse borrowings and the risk that debt service on less efficient forms of financing would require a larger portion of the Master Fund’s cash flow, thereby reducing cash available for distribution to the Trust, for the Master Fund’s operations and for future business opportunities.

 

The Master Fund may also seek securitization financing transactions with respect to some of its investments but it may be unable to do so on favorable terms, if at all. If alternative financing is not available on favorable terms, or at all, the Master Fund may have to liquidate assets at unfavorable prices to pay off such financing. The return on the Master Fund’s investments and cash available for distribution may be reduced to the extent that changes in market conditions cause the cost of the Master Fund’s financing to increase relative to the earnings that it can derive from the assets it originates or acquires.

 

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Short-term borrowing through repurchase agreements, credit facilities and other borrowings may put the Master Fund’s assets and financial condition at risk. Repurchase agreements economically resemble short-term, floating-rate financing and usually require the maintenance of specific loan-to-collateral value ratios. If the fair value of the assets subject to a repurchase agreement decline, the Master Fund may be required to provide additional collateral or make cash payments to maintain the loan-to-collateral value ratio. If the Master Fund is unable to provide such collateral or cash repayments, it may lose its economic interest in the underlying assets. Further, such borrowings may require the Master Fund to maintain a certain amount of cash reserves or to set aside unleveraged assets sufficient to maintain a specified liquidity position that would allow the Master Fund to satisfy its collateral obligations. These facilities may be restricted to financing certain types of assets, such as first mortgage loans, which could impact the Master Fund’s asset allocation. In addition, such short-term borrowing facilities may limit the length of time that any given asset may be used as eligible collateral. As a result, the Master Fund may not be able to leverage its assets as fully as it would choose, which could reduce the Master Fund’s return on assets. In the event that the Master Fund is unable to meet these collateral obligations, the Master Fund’s financial condition could deteriorate rapidly.

 

The 1940 Act will limit the extent to which the Master Fund may use borrowings and “uncovered” transactions that may give rise to a form of leverage.

 

The Master Fund anticipates using leverage, which will magnify investment, market and certain other risks. The Master Fund may use leverage directly at the Master Fund level which will create exposure to such leverage indirectly at the Trust level. While such implicit leverage will not constitute actual borrowing of the Trust for purposes of the 1940 Act, in an effort to mitigate the overall risk of leverage, the Trust does not intend to incur additional direct long-term leverage at the Trust level, but may use leverage for short-term purposes. Since the Trust generally may not withdraw from the Master Fund, the Trust’s level of implicit leverage from its indirect investment in the Master Fund cannot be controlled. This may constrain the Trust’s ability to utilize additional direct leverage at the Trust level. Leverage involves risks and special considerations for holders of the Shares, including the likelihood of greater volatility of net asset value and market price of the common shares of the Master Fund than a comparable portfolio without leverage; the risk that fluctuations in interest rates on borrowings and short-term debt or in the dividend rates on any preferred shares that the Master Fund may pay will reduce the return to shareholders or will result in fluctuations in the distributions paid on the common shares; and the effect of leverage in a declining market, which is likely to cause a greater decline in the net asset value of the common shares than if the Master Fund were not leveraged.

 

As a closed-end investment company registered with the SEC, the Master Fund is subject to the federal securities laws, including the 1940 Act, the rules thereunder, and various SEC and SEC staff interpretive positions. In accordance with these laws, rules and positions, the Master Fund may “set aside” liquid assets (often referred to as “asset segregation”), or engage in other SEC- or staff-approved measures, to “cover” open positions with respect to certain portfolio management techniques, such as engaging in reverse repurchase agreements, dollar rolls, entering into credit default swaps or futures contracts, or purchasing securities on a when-issued or delayed delivery basis, that may be considered senior securities under the 1940 Act. The Master Fund intends to cover its derivative positions by maintaining an amount of cash or liquid securities in a segregated account equal to the face value of those positions and by offsetting derivative positions against one another or against other assets to manage the effective market exposure resulting from derivatives in its portfolio. To the extent that the Master Fund does not segregate liquid assets or otherwise cover its obligations under such transactions, such transactions will be treated as senior securities representing indebtedness for purposes of the requirement under the 1940 Act that the Master Fund may not enter into any such transactions if the Master Fund’s borrowings would thereby exceed 331∕3% of its total assets, less all liabilities and indebtedness of the Master Fund not represented by senior securities. However, these transactions, even if covered, may represent a form of economic leverage and will create risks. In addition, these segregation and coverage requirements could result in the Master Fund maintaining securities positions that it would otherwise liquidate, segregating assets at a time when it might be disadvantageous to do so or otherwise restricting portfolio management. Such segregation and cover requirements will not limit or offset losses on related positions.

 

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In addition to any indebtedness incurred by the Master Fund, the special purpose vehicles that are wholly owned by the Master Fund or any subsidiary of the Master Fund, including the REIT Subsidiary, may also utilize leverage, including by mortgaging properties held by the special purpose vehicles, or by acquiring property with existing debt. Any such borrowings will generally be the sole obligation of each respective special purpose vehicle, without any recourse to any other special purpose vehicle, the REIT Subsidiary, the Master Fund, the Trust or its assets, and the Master Fund will not treat such non-recourse borrowings as senior securities (as defined in the 1940 Act) for purposes of complying with the 1940 Act’s limitations on leverage unless the financial statements of the special purpose vehicle, or the subsidiary of the Master Fund that owns such special purpose vehicle, will be consolidated in accordance with Regulation S-X and other accounting rules. If cash flow is insufficient to pay principal and interest on a special purpose vehicle’s borrowings, a default could occur, ultimately resulting in foreclosure of any security instrument securing the debt and a complete loss of the investment, which could result in losses to the REIT Subsidiary and, therefore, to the Master Fund and the Trust.

 

To the extent that subsidiaries of the Master Fund, including the REIT Subsidiary, directly incur leverage in the form of debt (as opposed to non-recourse borrowings made through special purpose vehicles), the amount of such recourse leverage used by the Master Fund and such subsidiaries, including the REIT Subsidiary, will be consolidated and treated as senior securities for purposes of complying with the 1940 Act’s limitations on leverage by the Master Fund. Accordingly, it is the Master Fund’s present intention to utilize leverage through debt or borrowings in an amount not to exceed 331∕3% of the Master Fund’s total assets (i.e., maintain 300% asset coverage), less the amount of any direct debt or borrowing by subsidiaries of the Master Fund, including the REIT Subsidiary, if any. Because the REIT Subsidiary’s preferred shares represent a small amount of leverage by the REIT Subsidiary, such leverage will also be consolidated for purposes of complying with the 1940 Act’s limitations on the Master Fund’s ability to issue preferred shares.

 

Credit facilities may contain recourse obligations and any default could materially adversely affect the Master Fund’s business, liquidity and financial condition.

 

The Master Fund may finance certain of its CRE investments through the use of repurchase agreements with one or more financial institutions. Obligations under certain repurchase agreements could be recourse obligations to the Master Fund and any default thereunder could result in margin calls and further force a liquidation of assets at times when the pricing may be unfavorable to the Master Fund. The Master Fund’s default under such repurchase agreements could negatively impact the Master Fund’s business, liquidity and financial condition.

 

The Master Fund may enter into a variety of arrangements to finance its investments, which may require it to provide additional collateral and significantly impact the Master Fund’s liquidity position.

 

The Master Fund may use a variety of structures to finance its investments. To the extent these financing arrangements contain mark-to-market provisions, if the market value of the investments pledged by the Master Fund declines due to credit quality deterioration, it may be required by its lenders to provide additional collateral or pay down a portion of its borrowings. In a weakening economic environment, the Master Fund would generally expect credit quality and the value of the investment that serves as collateral for its financing arrangements to decline, and in such a scenario, it is likely that the terms of its financing arrangements would require partial repayment from it, which could be substantial. Posting additional collateral to support its financing arrangements could significantly reduce the Master Fund’s liquidity and limit its ability to leverage its assets. In the event the Master Fund does not have sufficient liquidity to meet such requirements, its lenders can accelerate its borrowings, which could have a material adverse effect on the Master Fund’s business and operations.

 

Lenders may require the Master Fund to enter into restrictive covenants relating to its operations, which could limit the Master Fund’s ability to make distributions.

 

When providing financing, a lender may impose restrictions on the Master Fund that affect its distribution and operating policies and its ability to incur additional borrowings. Financing arrangements that the Master Fund may enter into may contain covenants that limit its ability to further incur borrowings and restrict distributions to the Trust or that prohibit it from discontinuing insurance coverage or replacing the Advisor. Credit facilities the Master Fund may enter into may contain financial covenants, including a minimum unrestricted cash covenant. These or other limitations would decrease the Master Fund’s operating flexibility and its ability to achieve its operating objectives, including making distributions.

 

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Risks Related to the Advisor and Its Affiliates

 

The Advisor and its affiliates, including the Master Fund’s officers and some of its trustees, will face conflicts of interest caused by compensation arrangements with the Master Fund and its affiliates, which could result in actions that are not in the best interests of the Shareholders of the Trust or the Master Fund.

 

The Advisor and its affiliates will receive substantial fees, directly or indirectly, from the Master Fund in return for their services, and these fees could influence the advice provided to the Master Fund. Among other matters, the compensation arrangements could affect their judgment with respect to offerings of equity by the Master Fund, which allows NorthStar Securities to earn additional fees, and the Advisor to earn increased asset management fees. In addition, the decision to utilize leverage will increase the Master Fund’s assets and, as a result, may increase the amount of income incentive fees payable to the Advisor. Additionally, employees of Colony NorthStar may in the future have portions of their individual compensation arrangements tied to the performance of the Trust and/or the Master Fund. This may cause such individuals to recommend or approve riskier investments or rely more on leverage than would otherwise by the case.

 

The Master Fund may be obligated to pay the Advisor incentive compensation even if the Master Fund incurs a net loss due to a decline in the value of its portfolio.

 

The Master Fund Advisory Agreement entitles the Advisor to receive incentive compensation on income regardless of any capital losses. In such case, the Master Fund may be required to pay the Advisor incentive compensation for a fiscal quarter even if there is a decline in the value of the Master Fund’s portfolio or if the Master Fund incurs a net loss for that quarter.

 

Any incentive fee payable by the Master Fund that relates to its net investment income may be computed and paid on income that may include interest that has been accrued, but not yet received. If an investment defaults and was structured to provide accrued interest, it is possible that accrued interest previously included in the calculation of the incentive fee will become uncollectible. The Advisor is not under any obligation to reimburse the Master Fund or the Trust for any part of the incentive fee it received that was based on accrued income that the Master Fund never received as a result of a default by an entity on the obligation that resulted in the accrual of such income, and such circumstances would result in the Master Fund paying an incentive fee on income it never received.

 

The Incentive Fee may induce the Advisor to make and recommend speculative investments or to incur leverage.

 

The Incentive Fee received directly or indirectly by the Advisor from the Master Fund may create an incentive for them to make investments on the Master Fund’s behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. The way in which the Incentive Fee payable to the Advisor is determined may encourage it to use leverage to increase the return on the Master Fund’s investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor holders of the Master Fund Shares. Such a practice could result in the Master Fund investing in more speculative securities than would otherwise be in its best interests, which could result in higher investment losses, particularly during cyclical economic downturns, and which may reduce the amount of cash flow available for distribution by the Master Fund to the Trust.

 

The Advisor’s platform may not be as scalable as the Master Fund anticipates and the Master Fund could face difficulties growing its business without significant new investment in personnel and infrastructure.

 

If the Master Fund’s business grows substantially, the Advisor may need to make significant new investments in personnel and infrastructure to support that growth. The Advisor may be unable to make significant investments on a timely basis or at reasonable costs and its failure in this regard could disrupt the Trust and the Master Fund’s business and operations.

 

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If the Advisor’s portfolio management systems are ineffective, the Master Fund may be exposed to material unanticipated losses.

 

The Advisor will refine its portfolio management techniques, strategies and assessment methods. However, the Advisor’s portfolio management techniques and strategies may not fully mitigate the risk exposure of the Master Fund’s operations in all economic or market environments, or against all types of risk, including risks that the Master Fund might fail to identify or anticipate. Any failures in the Advisor’s portfolio management techniques and strategies to accurately quantify such risk exposure could limit the Master Fund’s ability to manage risks in its operations or to seek adequate risk adjusted returns and could result in losses.

 

Colony NorthStar, the parent company of the Advisor, announced that it and/or its subsidiaries have entered into the Proposed Transaction for the combination of NorthStar Securities with S2K, which could have an adverse impact on the Trust’s business.

 

On February 16, 2018, Colony NorthStar, the parent company of the Advisor, and/or its subsidiaries entered into the Proposed Transaction for the combination of NorthStar Securities and S2K. The Proposed Transaction would include Colony NorthStar contributing its broker-dealer, NorthStar Securities, in exchange for a majority ownership in S2K, which will be called Colony S2K Holdings LLC.

 

The Proposed Transaction may be time consuming and disruptive to NorthStar Securities’ business operations, including its service to the Trust. It is also expected that, as part of the Proposed Transactions, there may be changes to certain of NorthStar Securities’ management team. In addition, it may be difficult for NorthStar Securities to address integration challenges following the completion of the Proposed Transaction, and the anticipated benefits of the integration may not be realized fully or at all. In addition, because the Trust is dependent upon NorthStar Securities to raise capital, changes to NorthStar Securities that may be disruptive to its business and operations may affect its ability to raise capital for the Trust. Further, the completion of the Proposed Transactions may give rise to additional conflicts of interest among Colony S2K Holdings LLC, the Trust and other companies that Colony S2K Holdings LLC provides services for.

 

The Proposed Transaction is subject to the satisfaction of customary conditions and there can be no assurance that it will be consummated. In the event that the Proposed Transaction is not consummated, Colony NorthStar and NorthStar Securities will have expended considerable resources but neither the Trust, Colony NorthStar or NorthStar Securities will realize any expected benefits of the Proposed Transaction.

 

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Risks Related to the Trust and the Master Fund

 

Any adverse changes in Colony NorthStar’s financial health, the public perception of Colony NorthStar, or the Trust’s and the Master Fund’s relationship with Colony NorthStar or its affiliates could hinder the Master Fund’s operating performance and the return on the Shares.

 

The Master Fund will engage the Advisor to manage its operations and its portfolio of CRE debt, securities and equity investments. The Master Fund’s ability to achieve its investment objectives and to pay distributions is dependent upon the performance of Colony NorthStar and its affiliates as well as the investment professionals of Colony NorthStar and its affiliates in the identification, origination or acquisition of investments, the determination of any financing arrangements, the management of the Master Fund’s assets and operation of its day-to-day activities.

 

Because Colony NorthStar is publicly-traded, any negative reaction by the stock market reflected in its stock price or deterioration in the public perception of Colony NorthStar could result in an adverse effect on fundraising in the offering and the Master Fund’s ability to acquire assets and obtain financing from third parties on favorable terms. Any adverse changes in Colony NorthStar’s financial condition or the Trust’s and the Master Fund’s relationship with Colony NorthStar could hinder the Advisor’s ability to successfully manage the Master Fund’s operations and its portfolio of investments. In addition, Colony NorthStar FV has agreed to reimburse the Trust and the Master Fund for expenses to ensure that each of the Trust and the Master Fund bears a reasonable level of expenses in relation to its income. Colony NorthStar FV has also agreed, in the event the Expense Support Agreements have been terminated, to purchase, either directly or through one or more of its affiliates, up to an aggregate of $10.0 million in Master Fund Shares, of which $2.0 million was contributed by an affiliate of Colony NorthStar to the Master Fund as the Seed Capital Investment, under certain circumstances in which the Trust’s cash distributions exceed the Master Fund’s net investment income in order to provide additional cash to support distributions to Shareholders until the earlier of (a) June 30, 2019, or (b) the date upon which neither the Advisor nor any of its affiliates is serving as the Master Fund’s investment adviser. Colony NorthStar FV will have no obligation to keep in place the Expense Support Agreements or to extend the Distribution Support Agreement and may determine not to do so. If Colony NorthStar FV cannot satisfy this commitment to the Master Fund or otherwise breaches this commitment to the Master Fund, the Master Fund and, consequently, the Trust would not have this source of capital available to them and the Master Fund’s and Trust’s ability to pay distributions to Master Fund Shareholders and the Shareholders, respectively, would be adversely impacted.

 

The Trust and Master Fund are dependent upon the officers, directors and/or managers of Colony NorthStar and its affiliates for their future success and upon the Advisor’s access to such individuals pursuant to the Advisor Staffing Agreement. If the Advisor was to lose access to these investment professionals, the Trust and Master Fund’s ability to achieve their investment objectives could be materially affected.

 

Colony NorthStar and its affiliates may determine not to provide assistance, personnel support or other resources to the Advisor, the Trust or the Master Fund, which could impact the Trust’s and Master Fund’s ability to achieve its investment objectives and pay distributions. The Advisor, the Trust and the Master Fund rely on the personnel of Colony NorthStar and its affiliates and other support for the purposes of originating, acquiring and managing the Trust’s and Master Fund’s investment portfolio. Colony NorthStar, however, may determine not to provide assistance to the Advisor, the Trust or the Master Fund and terminate the Advisor Staffing Agreement. Consequently, if Colony NorthStar and its professionals determine not to provide the Advisor, Trust or the Master Fund with any assistance or other resources and terminate the Advisor Staffing Agreement, the Trust and Master Fund may not achieve the same success that they would expect to achieve with such assistance, personnel support and resources.

 

The Advisor or its affiliates have limited prior experience managing a registered closed-end management investment company or a RIC.

 

While members of the Advisor’s experienced executive team have significant experience investing in the Master Fund’s target securities, the Advisor is a recently formed entity and has limited investment advisory experience, including limited experience managing a registered closed-end management investment company or a RIC. Therefore, the Advisor may not be able to successfully operate the Trust’s and Master Fund’s business or achieve their investment objectives. As a result, an investment in the Shares may entail more risk than the shares of a comparable company with a substantial operating history.

 

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The 1940 Act and the Code impose numerous constraints on the operations of registered closed-end management investment companies and RICs that do not apply to the other types of investment vehicles. Moreover, qualification for RIC tax treatment under subchapter M of the Code requires satisfaction of source-of income, diversification and other requirements. The failure to comply with these provisions in a timely manner could prevent the Trust or the Master Fund from qualifying as a RIC or could force the Trust or the Master Fund to pay unexpected taxes and penalties, which could be material. The Advisor’s and Colony NorthStar’s and its affiliates’ lack of experience in managing a portfolio of assets under such constraints may hinder the Master Fund’s ability to take advantage of attractive investment opportunities and, as a result, achieve the Trust’s and the Master Fund’s investment objectives.

 

Neither the Trust nor the Master Fund owns the NorthStar name, but has been granted a license by Colony NorthStar to use the NorthStar name. Use of the name by other parties or the termination of this license may materially adversely affect the Master Fund’s business, financial condition and results of operations and the ability to make distributions.

 

Pursuant to the Trust Advisory Agreement and the Master Fund Advisory Agreement, respectively, the Trust and the Master Fund has been granted a non-exclusive, royalty-free license to use the name “NorthStar.” Under these licenses, the Trust and the Master Fund each will have a right to use the “NorthStar” name as long as the Advisor continues to advise the Trust and the Master Fund, respectively. Colony NorthStar will retain the right to continue using the “NorthStar” name. The Trust and the Master Fund will be unable to preclude Colony NorthStar from licensing or transferring the ownership of the “NorthStar” name to third parties, some of whom may compete against the Master Fund. Consequently, the Trust and the Master Fund will be unable to prevent any damage to the goodwill associated with their names that may occur as a result of the activities of Colony NorthStar or others related to the use of the name. Furthermore, in the event the license is terminated, the Trust and the Master Fund will be required to change their names and cease using the “NorthStar” name. Furthermore, “NorthStar” is commonly used and Colony NorthStar’s right to use the name could be challenged, which could be expensive and disruptive with an uncertain outcome. Any of these events could disrupt the Trust’s and Fund’s recognition in the market place, damage any goodwill they may have generated and may materially adversely affect their business, financial condition and results of operations and their ability to make distributions.

 

A Shareholder may be more likely to sustain a loss on his, her or its investment because Colony NorthStar does not have as strong an economic incentive to avoid losses as do sponsors who have made significant equity investments in their companies.

 

Colony NorthStar and its affiliates have only invested the statutorily required amount in the Trust. Therefore, if the Trust is successful in raising enough proceeds to be able to reimburse Colony NorthStar for the Trust’s organization and offering costs, Colony NorthStar will have limited exposure to loss in the value of the Shares. Without this exposure, a Shareholder may be at a greater risk of loss because Colony NorthStar does not have as much to lose from a decrease in the value of the Shares as do those sponsors who make more significant equity investments in their companies.

 

The Master Fund will be highly dependent on information systems and systems failures could significantly disrupt its business.

 

As a diversified CRE company, the Master Fund’s business will be highly dependent on information technology systems, including systems provided by the Advisor and third parties for which the Master Fund has no control. Any failure or interruption of the Master Fund’s systems could cause delays or other problems in its activities, which could have a material adverse effect on the Master Fund’s financial performance. Potential sources for disruption, damage or failure of the Master Fund’s information technology systems include, without limitation, computer viruses, security breaches, human error, cyber attacks, natural disasters and defects in design.

 

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The use of estimates and valuations may be different from actual results, which could have a material effect on the Master Fund’s consolidated financial statements.

 

The Master Fund and Master Fund Board will make various estimates that affect reported amounts and disclosures. Broadly, those estimates will be used in measuring the fair value of certain financial instruments, establishing provision for loan losses and potential litigation liability. Market volatility may make it difficult to determine the fair value for certain of the Master Fund’s assets and liabilities. Subsequent valuations, in light of factors then prevailing, may result in significant changes in the values of these financial instruments in future periods. In addition, at the time of any sales and settlements of these assets and liabilities, the price the Master Fund ultimately realizes will depend on the demand and liquidity in the market at that time for that particular type of asset and may be materially lower than its estimate of the current fair value. Estimates are based on available information and judgment. Therefore, actual values and results could differ from the Master Fund’s and Master Fund Board’s estimates and that difference could have a material adverse effect on the Master Fund’s consolidated financial statements.

 

The Trust’s distribution policies are subject to change.

 

The Trust expects to pay distributions to Shareholders using distributions received from the Master Fund, net of any Trust operating expenses. The Master Fund Board will determine an appropriate distribution on Master Fund Shares based upon numerous factors, including a targeted distribution rate, RIC qualification requirements, the amount of cash flow generated from operations, availability of existing cash balances, the Master Fund’s borrowing capacity under any credit agreements, access to cash in the capital markets and other financing sources, the Master Fund’s view of its ability to realize gains in the future through appreciation in the value of its assets, general economic conditions and economic conditions that more specifically impact the Master Fund’s business or prospects. Distribution levels are subject to adjustment based upon any one or more of the risk factors set forth in this prospectus, as well as other factors that the Master Fund Board may, from time-to-time, deem relevant to consider when determining an appropriate distribution.

 

The Master Fund may not be able to make distributions.

 

The Master Fund’s ability to generate income and to make distributions may be adversely affected by the risks described in this prospectus and any document filed with the SEC under the Exchange Act. All distributions will be made at the discretion of the Master Fund Board, subject to applicable law, and depend on the Master Fund’s earnings, its financial condition, maintenance of its RIC qualification and such other factors as the Master Fund Board may deem relevant from time-to-time. The Master Fund may not be able to make any distributions.

 

If the fiduciaries fail to meet the fiduciary and other standards under the Employment Retirement Income Security Act, or ERISA, or the Code, as a result of an investment in the Shares, they could be subject to criminal and civil penalties.

 

Special considerations apply to the purchase of Shares by employee benefit plans subject to the fiduciary rules of Title I of the ERISA, including pension or profit sharing plans and entities that hold assets of such plans, or ERISA Plans, and plans and accounts that are not subject to ERISA, but are subject to the prohibited transaction rules of Section 4975 of the Code, including IRAs, Keogh Plans, and medical savings accounts (collectively, we refer to ERISA Plans and plans subject to Section 4975 of the Code as “Benefit Plans”). Each fiduciary or other person responsible for the investment of the assets of a Benefit Plan should consult with their own counsel and satisfy themselves that:

 

·the investment is consistent with the fiduciary obligations under ERISA and the Code or any other applicable governing authority in the case of a government plan;

 

·the investment is made in accordance with the documents and instruments governing the Benefit Plan;

 

·the investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA, if applicable, and other applicable provisions of ERISA and the Code;

 

·the investment will not impair the liquidity of the Benefit Plan;

 

·the investment will not unintentionally produce unrelated business taxable income for the Benefit Plan;

 

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·the investor will be able to value the assets of the Benefit Plan annually in accordance with the applicable provisions of ERISA and the Code; and

  

·the investment will not constitute a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code.

 

Fiduciaries may be held personally liable under ERISA for losses as a result of failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA. In addition, if an investment in the Shares constitutes a non-exempt prohibited transaction under ERISA or the Code, the fiduciary of the Benefit Plan who authorized or directed the investment may be subject to imposition of excise taxes with respect to the amount invested and an IRA investment in the Shares may lose its tax-exempt status.

 

Governmental plans, church plans and foreign plans that are not subject to ERISA or the prohibited transaction rules of the Code, may be subject to similar restrictions under other laws. Plan fiduciaries making an investment in our shares on behalf of such a plan should satisfy themselves that an investment in the Shares satisfies both applicable law and is permitted by the governing plan documents.

 

Because the Trust is registered an as investment company under the 1940 Act, the underlying assets of the Trust should not be considered to be “plan assets” of any Benefit Plan investing in the Trust for purposes of the fiduciary responsibility and prohibited transaction rules under Title I of ERISA or Section 4975 of the Code. Thus, none of the Trust, the Master Fund or the Advisor should be a fiduciary within the meaning of ERISA or Section 4975 of the Code with respect to the assets of any Benefit Plan that becomes a Shareholder, solely as a result of the Benefit Plan’s investment in the Trust.

 

Payment of fees to the Advisor and its affiliates will reduce cash available for investment and distribution and will increase the risk that a Shareholder will not be able to recover the amount of its investment in the Shares.

 

The Advisor and its affiliates will perform services for the Master Fund in connection with the selection, acquisition, origination, management and administration of its investments. The Master Fund will pay them substantial fees for these services, which will result in immediate dilution to the value of the Shares and will reduce the value of cash available for investment or distribution. The Master Fund may increase the compensation it pays to the Advisor subject to approval by the Master Fund Board and other limitations in the Master Fund’s declaration of trust, which would further dilute an investment in the Shares and the amount of cash available for investment or distribution.

 

Therefore, these fees increase the risk that the amount available for distribution upon a liquidation of the Master Fund’s portfolio would be less than the purchase price of the Shares in this offering. These substantial fees and other payments also increase the risk that the Trust will not be able to resell its Master Fund Shares at a profit, even if the Master Fund Shares are listed on a national securities exchange.

 

The Advisor may not be successful, or there may be delays, in locating suitable investments, which could limit the Master Fund’s ability to make distributions and lower the overall return on the Shares.

 

The Master Fund will rely upon the Advisor or its affiliates, which will use Colony NorthStar’s investment professionals, including Richard B. Saltzman, Mark M. Hedstrom, Kevin P. Traenkle, Robert C. Gatenio and Sujan S. Patel, to identify suitable investments. The Managed Companies may also rely on Thomas J. Barrack, Jr., Darren J. Tangen, Ronald M. Sanders and Neale W. Redington for their expertise. The Advisor may not be successful in locating suitable investments on financially attractive terms, and the Master Fund may not achieve its objectives. If the Master Fund, through the Advisor, is unable to find suitable investments promptly, the Master Fund may hold the proceeds from the offering in an interest-bearing account or invest the proceeds in short-term assets. The Master Fund expects that the income it earns on these temporary investments will not be substantial. Further, the Master Fund may use the principal amount of these investments, and any returns generated on these investments, to pay for fees and expenses in connection with the Master Fund’s operation and with distributions. Therefore, delays in investing proceeds the Master Fund’s receives from the amounts raised by the Trust from this offering could impact the Master Fund’s ability to generate cash flow for distributions or to achieve its investment objectives.

 

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The Advisor may acquire assets where the returns are substantially below expectations or which result in net losses. In the event the Master Fund is unable to timely locate suitable investments, the Master Fund may be unable or limited in its ability to pay distributions and the Master Fund may not be able to meet its investment objectives. The Advisor’s or its affiliates’ investment professionals, face competing demands upon their time, including in instances when the Master Fund has capital ready for investment and consequently the Master Fund may face delays in execution. Further, the more money the Trust raises in this offering, the more difficult it is for the Master Fund to invest the net offering proceeds promptly and on attractive terms. Therefore, the large size of the offering increases the risk of delays in investing the net offering proceeds. Delays the Master Fund encounters in the selection and origination or acquisition of investments would likely limit its ability to pay distributions and lower overall returns.

 

The Master Fund’s ability to achieve its investment objectives and to pay distributions will depend in substantial part upon the performance of the Advisor and third-party servicers.

 

The Master Fund’s ability to achieve its investment objectives and to pay distributions will depend in substantial part upon the performance of the Advisor in the origination and acquisition of the Master Fund’s investments, including the determination of any financing arrangements, as well as the performance of the third-party servicers of the Master Fund’s real estate debt investments. Shareholders must rely entirely on the management abilities of the Advisor and the oversight of the Master Fund Board, along with those of the third-party servicers. There is no assurance that the Master Fund’s investment allocation policy will successfully eliminate the impact of any conflicts of interests among the Master Fund and other Managed Companies. If the Advisor performs poorly and as a result is unable to originate and acquire the Master Fund’s investments successfully, the Master Fund may be unable to achieve its investment objectives or to pay distributions at presently contemplated levels, if at all. Similarly, if the third-party servicers perform poorly, the Master Fund may be unable to realize all cash flow associated with its real estate debt investments.

 

If the Trust raises substantial offering proceeds in a short period of time, the Master Fund may not be able to invest all of the offering proceeds promptly, which may cause distributions and investment returns to be lower than they otherwise would be.

 

The more Shares the Trust sells in this offering, the greater the Master Fund’s challenge is to invest all of the net offering proceeds. The large size of the offering increases the risk of delays in investing the net proceeds promptly and on attractive terms. Pending investment, the net proceeds of the offering may be invested in permitted temporary investments, which include short-term U.S. Government securities, bank certificates of deposit and other short-term liquid investments. The rate of return on these investments, which affects the amount of cash available to make distributions, has fluctuated in recent years and most likely will be less than the return obtainable from the type of investments in the real estate industry the Master Fund seeks to originate or acquire. Therefore, delays the Master Fund encounters in the selection, due diligence and origination or acquisition of investments would likely limit its ability to pay distributions and lower overall returns.

 

Because the Master Fund will be dependent upon the Advisor and its affiliates to conduct its operations and the Trust will also be dependent upon NorthStar Securities to raise capital, any adverse changes in the financial health of these entities or the Trust’s or the Master Fund’s relationship with them could hinder the Master Fund’s operating performance and the return on investment.

 

The Master Fund will be dependent on the Advisor and its affiliates to manage its operations and its portfolio and the Trust will also be dependent upon NorthStar Securities to raise capital. The Advisor and its affiliates, as applicable, depend upon the fees and other compensation or reimbursement of costs that they receive from the Master Fund and other Managed Companies in connection with the origination, acquisition, management and sale of assets to conduct their operations. The Distributor also depends upon the fees that it will receive in connection with this offering. Any adverse changes in the financial condition of the Advisor or its affiliates or the Trust’s relationship with the Distributor and NorthStar Securities could hinder their ability to successfully support the Master Fund’s business and growth, which could have a material adverse effect on the Master Fund’s financial condition and results of operations.

 

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The Master Fund and the Trust depend on third-party contractors and vendors and the Master Fund’s and the Trust’s results of operations and the success of the offering could suffer if its third-party contractors and vendors fail to perform or if the Master Fund and the Trust fail to manage them properly.

 

The Master Fund and the Trust use third-party contractors and vendors including, but not limited to, its external legal counsel, auditors, compliance firms, fund administrators, research firms, property managers, appraisers, insurance brokers, environmental engineering consultants, construction consultants, financial printers, proxy solicitation firms and transfer agent. If the Master Fund’s and the Trust’s third-party contractors and vendors fail to successfully perform the tasks for which they have been engaged to complete, either as a result of their own negligence or fault, or due to the Master Fund’s or the Trust’s failure to properly supervise any such contractors or vendors, it could incur liabilities as a result and the Master Fund’s and the Trust’s results of operations and financial condition could be negatively impacted.

 

Risks Related to Conflicts of Interest

 

The Advisor and certain of its affiliates may experience conflicts of interest in connection with the management of the Master Fund, which could hinder the Master Fund’s ability to implement its business strategy and to generate returns to Shareholders.

 

The Advisor and certain of its affiliates may experience conflicts of interest in connection with the management of the Master Fund, including, but not limited to: the allocation of time and resources of the Advisor and its affiliates and members of the investment committee between the Master Fund and other investment activities, including relating to the Managed Companies; compensation payable by the Master Fund to the Advisor and its affiliates; competition with certain affiliates of the Advisor and the Managed Companies for investment opportunities; the due diligence review of the Master Fund and the Trust by NorthStar Securities, which is an affiliate of the Advisor; NorthStar Securities’ conflict in selling securities with respect to a number of public offerings, simultaneously with the Trust’s, for issuers whose business may be competitive; differing recommendations given by the Advisor to the Master Fund versus other clients; restrictions on the Advisor’s existing business relationships or use of material non-public information with respect to potential investments by the Master Fund; and the formation of additional investment funds or entrance into other investment banking, advisory, investment advisory, and other relationships by the Advisor or its affiliates.

 

The Master Fund’s executive officers and the key investment professionals of the Advisor and its affiliates, including members of the Advisor’s investment committee, who will perform services for the Master Fund may also be executive officers, directors and managers of the Advisor and its affiliates. As a result, they owe duties to each of these entities, their members and limited partners and investors, which duties may from time-to-time conflict with the fiduciary duties that they owe to the Master Fund and the Master Fund Shareholders. In addition, Colony NorthStar may grant equity interests in the Advisor to certain management personnel performing services for the Advisor. The loyalties of these individuals to other entities and investors could result in action or inaction that is detrimental to the Master Fund’s business, which could result in less effective execution of the Master Fund’s business plan and harm its investment opportunities. If the Master Fund does not successfully implement its business strategy, the Master Fund may be unable to generate the cash needed to make distributions and to maintain or increase the value of its assets. See “Conflicts of Interest.”

 

In addition to the fees the Master Fund pays to the Advisor, the Master Fund will reimburse the Advisor for costs and expenses incurred on its behalf, including indirect personnel and employment costs of the Advisor and its affiliates and these costs and expenses may be substantial.

 

The Master Fund pays the Advisor fees for the administrative services it provides to the Master Fund and the Master Fund will also have an obligation to reimburse the Advisor for costs and expenses it incurs and pays on its behalf. Subject to certain limitations and exceptions, the Master Fund will reimburse the Advisor for both direct expenses as well as indirect costs, including personnel and employment costs of the Advisor. The costs and expenses the Advisor incurs on the Master Fund’s behalf, including the compensatory costs incurred by the Advisor and its affiliates can be substantial. There are conflicts of interest that arise when the Advisor makes allocation determinations. The Advisor could allocate costs and expenses to the Master Fund in excess of what they anticipate and such costs and expenses could have an adverse effect on the Master Fund’s financial performance and ability to make cash distributions.

 

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The Advisor faces conflicts of interest relating to performing services on the Master Fund’s behalf and such conflicts may not be resolved in the Master Fund’s favor, meaning that the Master Fund could invest in less attractive assets, which could limit its ability to make distributions and reduce Shareholders’ overall investment.

 

The Master Fund relies on the Advisor or its affiliate’s investment professionals to identify suitable investment opportunities for the Master Fund as well as the other Managed Companies. The Master Fund’s investment strategy may be similar to that of, and may overlap with, the investment strategies of the other Managed Companies, managed, advised or sub-advised by the Advisor and its affiliates (which collectively are referred to as “Colony NorthStar” for the purposes of this section). The Master Fund’s investment strategy may also be similar to that of, and may overlap with, the investment strategies of a variety of closed-end and open-end private funds, public traded and non-traded real estate investment trusts, registered investment companies, and other clients (together with any future funds or investment vehicles the “Clients”) of an affiliate of Advisor. Therefore, many investment opportunities sourced by Colony NorthStar or one or more of the partners that are suitable for the Master Fund may also be suitable for other Managed Companies and/or Clients.

 

The Master Fund relies on Colony NorthStar’s investment professionals to identify suitable investment opportunities for the Master Fund as well as the other Managed Companies. The Master Fund’s investment strategy may be similar to that of, and may overlap with, the investment strategies of the other Managed Companies. Therefore, many investment opportunities that are suitable for the Master Fund may also be suitable for other Managed Companies.

 

This investment allocation policy of the Advisor and its affiliates applies to investment opportunities (“Eligible Investments”) that are sourced by partners, officers, directors (or other persons performing similar functions) or employees of the Advisor or its affiliates (“Included Persons”). Unless otherwise determined by the Advisor or its affiliates, this investment allocation policy does not apply to investment opportunities (i) sourced by anyone who is not an Included Person, such as certain companies, funds, joint ventures, strategic partners or vehicles, which are cosponsored, co-branded or subject to a strategic relationship with Colony NorthStar, or representatives thereof, (ii) presented to an Included Person by a person or entity who is not an Included Person if such Included Person is acting in his or her capacity as a fiduciary (such as an officer or director) to a person or entity that is not an Included Person, or (iii) sourced by an Included Person if such Included Person is acting pursuant to a staffing agreement or similar arrangement with a person or entity that is not a Client.

 

When making investment allocation decisions regarding a suitable investment for one or more Clients, the Advisor and its affiliates shall take into account the agreements, documents, materials or principles of the Clients and shall consider, without limitation, the following factors:

 

·investment objectives, dedicated mandates, strategy and criteria;

  

·current and future cash requirements of the investment and the Client;

 

·effect of the investment on the diversification of the portfolio, including by geography, size of investment, type of investment and risk of investment;

 

·leverage policy and the availability of financing for the investment by each Client;

 

·anticipated cash flow of the investment to be acquired;

 

·income tax effects of the investment;

 

·the size of the investment;

 

·the amount of funds available for investment;

 

·ramp-up or draw-down periods;

 

·cost of capital;

 

·risk return profiles;

 

·targeted distribution rates;

 

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·anticipated future pipeline of suitable investments;

 

·the expected holding period of the investment and the remaining term of the Client, if applicable;

 

·legal, regulatory or tax considerations, including any conditions of an exemptive order;

 

·affiliate and/or related party considerations; and

 

·whether a Client has other sources of investment opportunities besides Included Persons.

 

A dedicated mandate may cause some Clients to have priority over certain other Clients with respect to certain Eligible Investments.

 

If it is determined that an Eligible Investment is most suitable for a particular Client, the Eligible Investment will be allocated to such Client. If it is determined that an Eligible Investment is equally suitable for two or more Clients, then the Advisor and its affiliates may allocate the Eligible Investments among such Clients on a rotational basis. In general, a rotational allocation methodology means that if a Client has been previously allocated an Eligible Investment as a result of the rotational process, it may be skipped in the rotation until all other Clients for which a particular Eligible Investment is equally suitable have been allocated an Eligible Investment. New Clients will be initially added to the end of the allocation rotation. The Advisor and its affiliates shall determine which Clients shall participate in an Eligible Investment prior to entering into a transaction, except in limited circumstances, such as where pre-allocation would be impracticable.

 

If the Advisor and its affiliates determine that an Eligible Investment is not suitable for any Client, then the Chief Investment Officer of the Advisor and its affiliates has the authority to determine that such Eligible Investment may be pursued by a person or entity that is not a Client, even if such person or entity has a relationship with Colony NorthStar.

 

While these are the current procedures for allocating investment opportunities, Colony NorthStar may sponsor or co-sponsor, co-brand or co-found additional investment vehicles in the future and, in connection with the creation of such investment vehicles or otherwise, Colony NorthStar may revise the investment allocation policy. The result of such a revision to the investment allocation policy may, among other things, be to increase the number of parties who have the right to participate in investment opportunities sourced by Colony NorthStar and/or its partners, thereby reducing the number of investment opportunities available to the Master Fund. Changes to the allocation policy that could adversely impact the allocation of investment opportunities to the Master Fund in any material respect may be proposed by Colony NorthStar and must be approved by the Master Fund Board. In the event that Colony NorthStar adopts a revised allocation policy that materially impacts the Master Fund’s business, the Trust will disclose this information in the reports it files publicly with the SEC, as appropriate.

 

The decision of how any potential investment should be allocated among the Master Fund and other Managed Companies for which such investment may be most suitable may, in many cases, be a matter of highly subjective judgment which will be made by Colony NorthStar in its sole discretion. Shareholders may not agree with the determination and such determination could have an adverse effect on the Master Fund’s investment strategy. The Master Fund’s right to participate in the investment allocation process described above will terminate once it is no longer advised by the Advisor or an affiliate of Colony NorthStar.

 

NorthStar Securities may sell future Colony NorthStar-sponsored programs or other offerings during the Trust’s offering, and may face potential conflicts of interest arising from competition among the Trust and these other programs for investors and investment capital and such conflicts may not be resolved in the Trust’s favor.

 

NorthStar Securities does and may in the future act as the dealer manager, or engage in wholesaling activities for other Managed Companies such as NorthStar/RXR and NorthStar/Townsend, which are currently in the process of offering shares or are expected to offer shares. In addition, future Colony NorthStar-sponsored programs may seek to raise capital through public offerings conducted concurrently with the Trust’s offering. NorthStar Securities could also act as the dealer manager of offerings not sponsored by Colony NorthStar. As a result, NorthStar Securities may face conflicts of interest arising from potential competition with these other programs for investors and investment capital. Such conflicts may not be resolved in the Trust’s favor and an investor will not have the opportunity to evaluate the manner in which these conflicts of interest are resolved before or after making his, her or its investment.

 

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Risks Related to Regulatory Matters, the Trust’s and the Master Fund’s RIC Tax Status and the REIT Subsidiary’s REIT Status

 

The Trust and the Master Fund are subject to substantial regulation, numerous contractual obligations and extensive internal policies and failure to comply with these matters could have a material adverse effect on the Trust’s and the Master Fund’s business, financial condition and results of operations.

 

The Trust, the Master Fund and any of their subsidiaries are subject to substantial regulation, numerous contractual obligations and extensive internal policies. Given the organizational structure, the Trust and the Master Fund are subject to regulation by the SEC, the Internal Revenue Service, or the IRS, and other governmental bodies and agencies. These regulations are extensive, complex and require substantial management time and attention. If the Trust and/or the Master Fund fail to comply with any of the regulations that apply to their businesses, the Trust and the Master Fund, as applicable, could be subjected to extensive investigations as well as substantial penalties and its business and operations could be materially adversely affected. The Trust’s and the Master Fund’s lack of compliance with applicable law could result in, among other penalties, the Master Fund’s ineligibility to contract with and receive revenue from the federal government or other governmental authorities and agencies. The Master Fund also expects to have numerous contractual obligations that it must adhere to on a continuous basis to operate its business, the default of which could have a material adverse effect on the Master Fund’s business and financial condition. The Trust’s and the Master Fund’s internal policies may not be effective in all regards and, further, if the Trust and the Master Fund fail to comply with their internal policies, they could be subjected to additional risk and liability.

 

The impact of financial reform legislation on the Master Fund and the Trust is uncertain.

 

The passage of the Dodd-Frank Act has resulted in extensive rulemaking and regulatory changes that may affect the Trust and the financial industry as a whole, many of its provisions remain subject to extended implementation periods and delayed effective dates and will require extensive rulemaking by regulatory authorities. While the full impact of the Dodd-Frank Act on the Trust, the Master Fund and the Master Fund’s investments may not be known for an extended period of time, the Dodd-Frank Act, including future rules implementing its provisions and the interpretation of those rules, along with other legislative and regulatory proposals directed at the financial services industry or affecting taxation that are proposed or pending in the U.S. Congress, may negatively impact the Trust, the Master Fund or their cash flows or financial condition, impose additional costs on the Master Fund’s investments, intensify the regulatory supervision of the Master Fund’s investments or otherwise adversely affect the Trust or the Master Fund.

 

Over the last several years, there has been an increase in regulatory attention to the extension of credit outside of the traditional banking sector, raising the possibility that some portion of the non-bank financial sector will be subject to new regulation. While it cannot be known at this time whether these regulations will be implemented or what form they will take, increased regulation of non-bank credit extension could negatively impact the Trust or the Master Fund, impose additional costs on the Trust or the Master Fund, intensify the regulatory supervision, or otherwise adversely affect the Trust or the Master Fund’s businesses.

 

The Master Fund’s ability to enter into transactions with its affiliates will be restricted.

 

The Master Fund is prohibited under the 1940 Act from participating in certain transactions with certain of its affiliates without relying on an available exemption or the prior approval of the SEC. For purposes of the 1940 Act, the following persons will be considered an affiliate of the Master Fund and the Master Fund will generally be prohibited from buying any securities from or selling any securities to such affiliate: (i) any person that owns, directly or indirectly, 5% or more of the Master Fund’s outstanding voting securities; (ii) any person that owns, directly or indirectly, 5% of the outstanding voting securities of the Advisor; or (iii) any person in which the Advisor or a person controlling or under common control with the Advisor owns, directly or indirectly, 5% of such person’s voting securities. The 1940 Act also prohibits certain “joint” transactions with certain of the Master Fund’s affiliates, which could include investments in the same CRE debt, equity and/or securities investments, without the prior approval of the SEC. If a person, directly or indirectly, holds more than 5% of the voting securities of the Master Fund or the Advisor, or is under common control with the Master Fund or the Advisor, the Master Fund will be prohibited from buying any securities or other property from or selling any securities or other property to such person or certain of that person’s affiliates, or entering into “joint” transactions with such person, absent an available exemption or the prior approval of the SEC. Similar restrictions limit the Master Fund’s ability to transact business with its officers or trustees or their affiliates.

 

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In addition, the Master Fund will not be permitted to co-invest with certain entities affiliated with or managed by the Advisor in transactions originated by the Advisor or its affiliates unless it first obtains an exemptive order from the SEC or co-invests alongside the Advisor or its affiliates in accordance with existing regulatory guidance and the allocation policies of the Advisor and its affiliates, as applicable. The Master Fund currently intends to rely on the exemptive application filed by certain entities affiliated with or managed by the Advisor or its affiliates that seek relief from the SEC to engage in certain types of co-investment transactions. However, there can be no assurance that the entities affiliated with the Advisor will obtain such exemptive relief or that Master Fund and the Advisor will be able to rely on such exemptive relief. Until any such relief is granted, the Master Fund may co-invest with affiliates of the Advisor only in accordance with existing regulatory guidance and applicable allocation policies, which may reduce the amount of transactions in which the Master Fund can participate and make it more difficult for it to implement its investment objectives. Until exemptive relief is obtained, the Master Fund will be unable to participate in certain negotiated transactions with the Advisor and its affiliates, including funds or other investment ventures with similar investment strategies as the Master Fund.

 

In addition, entering into certain transactions that are not deemed “joint” transactions (for purposes of the 1940 Act and relevant guidance from the SEC) may potentially lead to joint transactions within the meaning of the 1940 Act in the future. This may be the case, for example, with issuers who are near default and more likely to enter into restructuring or work-out transactions with their existing debt holders, which may include the Master Fund and its affiliates. In some cases, to avoid the potential of future joint transactions, the Advisor may avoid allocating an investment opportunity to the Master Fund that it would otherwise allocate, subject to the Advisor’s then-current allocation policies and any applicable exemptive orders, and subject to the Advisor’s obligations to allocate opportunities in a fair and equitable manner consistent with their fiduciary duties owed to the Master Fund and other accounts advised by the Advisor, if any, and policies related to approval of investments.

 

The Advisor is subject to extensive regulation, including as an investment adviser in the United States, which could adversely affect its ability to manage the Trust’s business.

 

Certain of Colony NorthStar’s affiliates, including the Advisor, are subject to regulation as an investment adviser and/or fund manager by various regulatory authorities that are charged with protecting the interests of the Advisor’s Managed Companies, including the Trust and the Master Fund. Instances of criminal activity and fraud by participants in the investment management industry and disclosures of trading and other abuses by participants in the financial services industry have led the U.S. Government and regulators in foreign jurisdictions to consider increasing the rules and regulations governing, and oversight of, the financial system. This activity is expected to result in continued changes to the laws and regulations governing the investment management industry and more aggressive enforcement of the existing laws and regulations. The Advisor could be subject to civil liability, criminal liability, or sanction, including revocation of their registration as investment advisers in the United States, revocation of the licenses of its employees, censures, fines or temporary suspension or permanent bar from conducting business if it is found to have violated any of these laws or regulations. Any such liability or sanction could adversely affect its ability to manage the Trust’s or the Master Fund’s business.

 

The Advisor must continually address conflicts between its interests and those of its managed companies, including the Trust and the Master Fund. In addition, the SEC and other regulators have increased their scrutiny of potential conflicts of interest. However, appropriately dealing with conflicts of interest is complex and difficult and if the Advisor fails, or appears to fail, to deal appropriately with conflicts of interest, it could face litigation or regulatory proceedings or penalties, any of which could adversely affect its ability to manage the Trust’s or the Master Fund’s business.

 

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Certain provisions of the Trust’s organizational documents and certain statutes may limit the ability of a third party to acquire control of the Trust.

 

The Trust’s declaration of trust and bylaws, as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third party from attempting to acquire the Trust. The Board may, without Shareholder action, authorize the issuance of Shares in one or more classes or series, including preferred shares, and the Board may, without Shareholder action, amend the Trust’s declaration of trust. These anti-takeover provisions may inhibit a change of control in circumstances that could give the Shareholders the opportunity to realize a premium over the value of the Shares.

 

The Trust’s and the Master Fund’s failure to qualify as a RIC would subject the Trust and the Master Fund to U.S. federal income tax and reduce cash available for distribution.

 

The Trust and the Master Fund intend to operate in a manner so as to qualify as a RIC under Subchapter M of the Code for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2018. Qualification as a RIC involves the application of highly technical and complex Code provisions for which only a limited number of judicial and administrative interpretations exist. Even an inadvertent or technical mistake could jeopardize the Trust’s and the Master Fund’s RIC status. The Trust’s and the Master Fund’s qualification as a RIC will depend on their satisfaction of certain asset, income, distribution, and other requirements on a continuing basis. Moreover, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for the Trust and the Master Fund to continue to qualify as a RIC. If the Trust and/or the Master Fund fail to qualify as a RIC in any taxable year, the Trust and/or the Master Fund would be subject to U.S. federal and applicable state and local income tax on their taxable income at corporate rates, in which case the Trust and/or the Master Fund might be required to borrow or liquidate some of its investments in order to pay the applicable tax. Prior to the Trust and the Master Fund electing RIC status or losing RIC status after election, the Trust’s and the Master Fund’s net income available for investment or distribution would be reduced because of the additional tax liability. In addition, distributions to Shareholders would no longer qualify for the dividends-paid deduction and the Trust and the Master Fund would no longer be required to make distributions. For a discussion of the RIC qualifications tests and other considerations relating to the Trust’s and the Master Fund’s elections to be taxed as a RIC, see “U.S. Federal Income Tax Considerations.”

 

Complying with RIC requirements may force the Trust and/or the Master Fund to borrow funds to make distributions to their shareholders or otherwise depend on external sources of capital to fund such distributions.

 

To qualify for and maintain RIC tax treatment, each of the Trust and the Master Fund must distribute on a timely basis, with respect to each tax year, dividends of an amount at least equal to the sum of 90% of its “investment company taxable income,” determined without regard to any deduction for dividends paid, and its net tax-exempt interest income for such tax year. If the Trust and the Master Fund qualify as RICs and satisfy this distribution requirement, the Trust and the Master Fund generally will not be subject to U.S. federal income tax on their “investment company taxable income” and net capital gains (that is, the excess of net long-term capital gains over net short-term capital losses) that they distribute (including amounts that are reinvested pursuant to the DRP and the Master Fund’s distribution reinvestment plan, as applicable). Any taxable income, including any net capital gains that the Trust and the Master Fund do not distribute in a timely manner, would be subject to U.S. federal income tax at regular corporate rates.

 

Furthermore, the Trust and the Master Fund would be subject to a 4% U.S. federal excise tax if the actual amount that they distribute to their shareholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. From time-to-time, the Trust and the Master Fund may generate taxable income greater than its net income for U.S. GAAP, due to among other things, amortization of capitalized purchase premiums, fair value adjustments and reserves. In addition, the Trust’s and the Master Fund’s taxable income may be greater than its cash flow available for distribution as a result of, among other things, the Master Fund’s investments in assets that generate taxable income in advance of the corresponding cash flow from the assets.

 

If the Trust and the Master Fund do not have other funds available in the situations described in the preceding paragraphs, they could be required to borrow funds on unfavorable terms, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable them to distribute enough of their taxable income to satisfy the RIC distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase the Trust’s and the Master Fund’s costs or reduce their equity.

 

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Because of the distribution requirement, it is unlikely that the Trust and the Master Fund will be able to fund all future capital needs, including capital needs in connection with the Master Fund’s investments, from cash retained from operations. As a result, to fund future capital needs, the Trust and the Master Fund likely will have to rely on third-party sources of capital, including both debt and equity financing, which may not be available on favorable terms or at all. The Master Fund’s access to third-party sources of capital will depend upon a number of factors, including its current and potential future earnings and cash distributions.

 

The Trust may also make distributions in the form of taxable stock dividends, in which case a Shareholder may sell Shares to pay tax on such distributions, and may receive less in cash than the amount of the dividend that is taxable.

 

The Trust may make taxable distributions that are payable in cash and common stock. The IRS has issued private letter rulings to other RICs treating certain distributions that are paid partly in cash and partly in stock as taxable distributions that would satisfy the RIC annual distribution requirement and qualify for the dividends paid deduction for federal income tax purposes. Those rulings may be relied upon only by taxpayers to whom they were issued, but the Trust could request a similar ruling from the IRS. Accordingly, it is unclear whether and to what extent we will be able to make taxable distributions payable in cash and common stock. If the Trust made a taxable dividend payable in cash and common stock, taxable stockholders receiving such distributions will be required to include the full amount of the dividend, which is treated as ordinary income to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, a Shareholder may be required to pay income tax with respect to such distributions in excess of the cash distributions received. If a U.S. Shareholder sells the common stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount recorded in earnings with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. Shareholders, the Trust may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock.

 

Even if the Trust and the Master Fund qualify for taxation as a RIC under Subchapter M of the Code for U.S. federal income tax purposes, they may be subject to other tax liabilities that reduce their cash flow and their ability to make distributions.

 

Even if the Trust and the Master Fund qualify for taxation as a RIC under Subchapter M of the Code for U.S. federal income tax purposes, they may be subject to certain U.S. federal, state and local taxes on their income and assets, including taxes on any undistributed income or property. Any of these taxes would decrease cash available for distribution. For instance:

 

·To the extent that the Trust and the Master Fund satisfy the distribution requirement but distribute less than 100% of their RIC “investment company taxable income,” they would be subject to U.S. federal corporate income tax on the undistributed income.

 

·The Trust and the Master Fund will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions they pay in any calendar year are less than the sum of (i) 98% of their ordinary taxable income (taking into account certain deferrals and elections) for the calendar year, (ii) 98.2% of their capital gain net income (adjusted for certain ordinary losses) for the one-year period ending on October 31 of the calendar year and (iii) any ordinary income and capital gains for previous years that were not distributed during those years.

 

·The Trust and the Master Fund may be subject to state or local income, property and transfer taxes, such as mortgage recording taxes.

 

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Complying with RIC requirements may cause the Master Fund to forego otherwise attractive opportunities or liquidate otherwise attractive investments.

 

To qualify as a RIC under Subchapter M of the Code for U.S. federal income tax purposes, the Trust and the Master Fund must continually satisfy tests concerning, among other things, the sources of their income, the nature and diversification of their assets, and the amounts they distribute. Because the Trust invests substantially all of its assets in the Master Fund, the Trust will generally qualify as a RIC if the Master Fund qualifies as a RIC. As discussed above, the Trust and the Master Fund may be required to make distributions at disadvantageous times or when the Trust and the Master Fund do not have funds readily available for distribution. Additionally, the Master Fund may be unable to pursue investments that would be otherwise attractive to it in order to satisfy the requirements for qualifying as a RIC.

 

The Master Fund must also ensure that at the end of each quarter of each tax year, (a) at least 50% of the value of each of the Master Fund’s total assets is represented by cash and cash equivalents, securities of other RICs, U.S. government securities and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the value of the Master Fund’s total assets and not greater than 10% of the outstanding voting securities of such issuer and (b) not more than 25% of the value of the Master Fund’s total assets is invested (x) in securities (other than U.S. government securities or securities of other RICs) of any one issuer or of two or more issuers that the Master Fund controls and that are engaged in the same, similar or related trades or businesses or (y) in the securities of one or more “qualified publicly-traded partnerships.”

 

If the Master Fund fails to comply with these requirements at the end of any calendar quarter, the Master Fund must correct such failure within 30 days after the end of the calendar quarter to avoid losing its RIC status and suffering adverse tax consequences, unless certain relief provisions apply. As a result, compliance with the RIC requirements may hinder the Master Fund’s ability to operate solely on the basis of profit maximization and may require the Master Fund to liquidate investments from its portfolio, or refrain from making, otherwise attractive investments. These actions could have the effect of reducing the Master Fund’s income and amounts available for distribution.

 

RIC and REIT distribution requirements could adversely affect the Trust’s, the Master Fund’s and the REIT Subsidiary’s ability to execute their business plan.

 

The Trust and the Master Fund generally must distribute annually at least 90% of their “investment company taxable income,” determined without regard to any deduction for dividends paid, and their net tax-exempt interest income in order to continue to qualify as a RIC. Similarly, the REIT Subsidiary generally must distribute annually at least 90% of its “REIT taxable income,” determined without regard to any deduction for dividends paid and excluding net capital gain, in order to continue to qualify as a REIT. Each of the Trust, the Master Fund and the REIT Subsidiary intend to make distributions to their shareholders to comply with the RIC requirements of the Code and the REIT requirements of the Code, as applicable, and to avoid corporate income tax and the 4% U.S. federal excise tax. The Trust, the Master Fund and the REIT Subsidiary may be required to make distributions to shareholders at times when it would be more advantageous to reinvest cash in the Master Fund’s or the REIT Subsidiary’s business or when the Master Fund or the REIT Subsidiary does not have funds readily available for distribution. Thus, compliance with the RIC and REIT requirements may hinder the Master Fund’s and the REIT Subsidiary’s ability to operate solely on the basis of maximizing profits.

 

The Trust, the Master Fund and the REIT Subsidiary may have difficulty paying their required distributions if the Master Fund or the REIT Subsidiary, as applicable, recognizes income before or without receiving cash representing such income.

 

The Master Fund and the REIT Subsidiary may acquire mortgage backed securities or debt instruments in the secondary market for less than their face amount. The amount of the discount at which such securities are acquired generally will be treated as “market discount” for U.S. federal income tax purposes. Market discount generally accrues on the basis of the constant yield to maturity of the debt instrument based generally on the assumption that all future payments on the debt instrument will be made. Accrued market discount is reported as income when, and to the extent that, any payment of principal of the debt instrument is made. Under the recently enacted Tax Cuts and Jobs Act (H.R. 1, the “TCJA”), the Master Fund and the REIT Subsidiary may be required to recognize certain amounts in income no later than the time such amounts are reflected on their applicable financial statements. Although the precise application of this rule is unclear at this time, the application of this rule may require the accrual of market discount earlier than would be the case under the otherwise applicable tax rules. If the Master Fund or the REIT Subsidiary collects less on a debt instrument than its purchase price plus the market discount it previously reported as income, the Master Fund or the REIT Subsidiary, as applicable, may not be able to benefit from any offsetting loss deduction in a subsequent taxable year. Further, the Master Fund and/or the REIT Subsidiary may elect to amortize market discount and include such amounts in its taxable income in the current year, instead of upon disposition, as an election not to do so would limit its ability to deduct interest expenses for tax purposes.

 

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Similarly, some of the CMBS that the Master Fund or the REIT Subsidiary purchases may have been issued with OID. The Master Fund or the REIT Subsidiary, as applicable, will be required to report such OID based on a constant yield method and income will accrue based on the assumption that all future projected payments due on such mortgage backed securities will be made. Under the TCJA, for taxable years beginning after December 31, 2018, the Master Fund and the REIT Subsidiary generally will be required to recognize OID in income no later than the time such amounts are reflected on their applicable financial statements. Although the precise application of this rule is unclear at this time, the application of this rule may require the accrual of OID earlier than would be the case under the otherwise applicable tax rules. If such mortgage backed securities turn out not to be fully collectible, an offsetting loss deduction generally will become available only in the later year in which uncollectability is provable. In the event that any debt instruments or CMBS acquired by the Master Fund or the REIT Subsidiary are delinquent as to mandatory principal and interest payments, or in the event a borrower with respect to a particular debt instrument acquired by the Master Fund or the REIT Subsidiary encounters financial difficulty rendering it unable to pay stated interest as due, the Master Fund or the REIT Subsidiary, as applicable, may nonetheless be required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubts as to its ultimate collectability. Similarly, the Master Fund or the REIT Subsidiary may be required to accrue interest income with respect to subordinate CMBS at their stated rate regardless of whether corresponding cash payments are received or are ultimately collectible. In each case, while the Master Fund or the REIT Subsidiary would in general ultimately have an offsetting loss deduction available when such interest was determined to be uncollectible, the loss would likely be treated as a capital loss, and the utility of that loss would therefore depend on the Master Fund or the REIT Subsidiary, as applicable, having capital gain in that later year or thereafter.

 

The Master Fund and the REIT Subsidiary may also have to include in income other amounts not yet received in cash, such as deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock.

 

Because any OID or other amounts accrued will be included in investment company taxable income for the year of the accrual, the Master Fund may be required to make a distribution in order to satisfy the annual distribution requirement, even though it will not have received the corresponding cash amount. As a result, it may have difficulty meeting the annual distribution requirement necessary to qualify for and maintain RIC tax treatment under the Code. Similarly, if the REIT Subsidiary accrues OID or other amounts before or without receiving cash, the REIT Subsidiary may have difficulty meeting its annual distribution requirement necessary to qualify for and maintain REIT treatment under the Code. Additionally, because investments in OID are included in the pre-incentive fee net investment income, such income may exceed the quarterly hurdle rate which may result in the payment of an incentive fee, subject to a “catch-up” feature, to the Advisor without a corresponding receipt of cash income.

 

The Master Fund and/or the REIT Subsidiary may have to sell some of its investments at times and/or at prices it would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If the Master Fund or the REIT Subsidiary is not able to obtain cash from other sources, it may fail to qualify for RIC or REIT tax treatment, as applicable, and thus become subject to corporate-level U.S. federal income tax.

 

Under certain circumstances, the Master Fund may elect to receive a consent dividend from the REIT Subsidiary in order to allow the REIT Subsidiary to meet the annual REIT distribution requirements or avoid paying corporate tax on any undistributed net income. If the REIT Subsidiary makes a consent dividend, the REIT Subsidiary and the Master Fund generally will be treated for U.S. federal income tax purposes as if the REIT Subsidiary distributed cash to the Master Fund and the Master Fund immediately recontributed the cash to the REIT Subsidiary as a contribution to capital. A consent dividend would result in the recognition of income by the Master Fund as if an actual distribution were made, but without any distribution of cash.

 

If the Master Fund fails to qualify for or maintain RIC tax treatment or the REIT Subsidiary fails to qualify or maintain REIT Treatment for any reason and is subject to corporate income tax, the resulting corporate taxes could substantially reduce the Master Fund’s and/or the REIT Subsidiary’s net assets, the amount of income available for distribution to the Trust, and the amount of the Trust’s distributions. In addition, if the Master Fund is unable to qualify as a RIC or to make sufficient distributions to the Trust to satisfy its minimum distribution requirements, the Trust will fail to qualify as a RIC and would become subject to corporate-level U.S. federal income taxes.

 

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The Trust, the Master Fund and the REIT Subsidiary may recognize substantial amounts of investment company taxable income or REIT taxable income, as applicable, which they would be required to distribute to their shareholders, in a year in which they are not profitable under U.S. GAAP principles or other economic measures.

 

The Trust, the Master Fund and the REIT Subsidiary may recognize substantial amounts of investment company taxable income or REIT taxable income, as applicable, in years in which they are not profitable under U.S. GAAP or other economic measures as a result of the differences between U.S. GAAP and tax accounting methods. For instance, certain of assets may be marked-to-market for U.S. GAAP purposes but not for tax purposes, which could result in losses for U.S. GAAP purposes that are not recognized in computing investment company taxable income or REIT taxable income. Additionally, the Trust, the Master Fund and the REIT Subsidiary may deduct our capital losses only to the extent of our capital gains in computing our REIT taxable income for a given taxable year. Consequently, we could recognize substantial amounts of REIT taxable income and would be required to distribute such income to you, in a year in which we are not profitable under U.S. GAAP or other economic measures.

 

Liquidation of assets may jeopardize the Trust’s and the Master Fund’s ability to qualify as a RIC and the REIT Subsidiary’s ability to qualify as a REIT.

 

To continue to qualify as a RIC or a REIT, as applicable, the Trust, the Master Fund and the REIT Subsidiary must comply with requirements regarding their assets and their sources of income. If the Master Fund or the REIT Subsidiary is compelled to liquidate its investments to satisfy obligations to its lenders, the Trust, the Master Fund and the REIT Subsidiary may be unable to comply with these requirements, ultimately jeopardizing their qualification as a RIC or REIT, as applicable, or the REIT Subsidiary may be subject to a 100% prohibited transaction tax on any resulting gain if it sells assets that are treated as dealer property or inventory.

 

Certain financing activities may subject the REIT Subsidiary to U.S. federal income tax and increase the tax liability of Shareholders.

 

The REIT Subsidiary may enter into transactions that could result in it or a portion of its assets being treated as a “taxable mortgage pool” for U.S. federal income tax purposes. Specifically, the REIT Subsidiary may securitize commercial real estate loans that it acquires and such securitizations, to the extent structured as other than a real estate mortgage investment conduit (a “REMIC”), would likely result in the REIT Subsidiary owning interests in a taxable mortgage pool. The REIT Subsidiary would likely enter into such transactions through a “qualified REIT subsidiary” and will be precluded from selling to outside investors equity interests in such “qualified REIT subsidiary” or from selling any debt securities issued by such “qualified REIT subsidiary” that might be considered equity for U.S. federal income tax purposes.

 

The REIT Subsidiary, the Trust and the Master Fund (to the extent not wholly owned by the Trust) would be taxed at the highest U.S. federal corporate income tax rate on any “excess inclusion income” arising from a taxable mortgage pool that is allocable to the percentage of its shares held in record name by “disqualified organizations,” which are generally certain cooperatives, governmental entities and tax-exempt organizations that are exempt from tax on unrelated business taxable income. To the extent that common stock owned by “disqualified organizations” is held in record name by a broker/dealer or other nominee, the broker/dealer or other nominee would be liable for the U.S. federal corporate income tax on the portion of the REIT Subsidiary’s excess inclusion income allocable to the common stock held by the broker/dealer or other nominee on behalf of the disqualified organizations. Because this tax would be imposed on the REIT Subsidiary, The Trust, the Master Fund and all other investors in the Master Fund and/or the REIT Subsidiary, including investors that are not disqualified organizations, will bear a portion of the tax cost associated with the classification of the REIT Subsidiary or a portion of the REIT Subsidiary’s assets as a taxable mortgage pool.

 

In addition, if the REIT Subsidiary realizes excess inclusion income and allocates it to the Master Fund, this income cannot be offset by net operating losses of the Master Fund, the Trust or Shareholders and would be treated as excess inclusion income to the Master Fund and the Trust.

 

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The Master Fund’s or Trust’s qualification as a RIC and the REIT Subsidiary’s qualification as a REIT and their exemptions from U.S. federal income tax with respect to certain assets may be dependent on the accuracy of legal opinions or advice rendered or given or statements by the issuers of assets that the Master Fund and/or the REIT Subsidiary acquire, and the inaccuracy of any such opinions, advice or statements may adversely affect the Master Fund’s or Trust’s qualification as a RIC or the REIT Subsidiary’s qualification as a REIT and result in significant corporate-level tax.

 

When purchasing securities, the Advisor may rely on opinions or advice of counsel for the issuer of such securities, or statements made in related offering documents, for purposes of determining whether such securities represent debt or equity securities for U.S. federal income tax purposes, and also to what extent those securities constitute qualifying assets for purposes of the RIC and REIT asset tests and produce income which qualifies under the RIC and REIT gross income tests. In addition, when purchasing the equity tranche of a securitization, the Advisor may rely on opinions or advice of counsel regarding the qualification of the securitization for exemption from U.S. corporate income tax and the qualification of interests in such securitization as debt for U.S. federal income tax purposes. The inaccuracy of any such opinions, advice or statements may adversely affect the Master Fund’s or Trust’s qualification as a RIC or the REIT Subsidiary’s qualification as a REIT and result in significant corporate-level tax.

 

The Master Fund is exposed to the risks associated with the REIT Subsidiary and the REIT Subsidiary’s investments.

 

Ownership of and investment through a REIT Subsidiary by a closed-end management investment company is a unique investment strategy. By investing in the REIT Subsidiary, the Master Fund is indirectly exposed to risks associated with the REIT Subsidiary’s investments. The REIT Subsidiary may invest in real estate/CRE through wholly owned special purpose vehicles. Because the REIT Subsidiary is not registered under the 1940 Act, the Master Fund, as an investor in the REIT Subsidiary, will not have the protections afforded to investors in registered investment companies. Changes in the laws of the United States, under which the Master Fund and the REIT Subsidiary are organized, including the regulations under the Code, could result in the inability of the Master Fund and/or the REIT Subsidiary to operate as described herein, and could negatively affect the Master Fund and it shareholders. For example, on August 31, 2011, the SEC published a concept release (Release No. 29778, File No. S7-34-11, Companies Engaged in the Business of Acquiring Mortgages and Mortgage Related Instruments), pursuant to which it is reviewing whether certain companies that invest in mortgage-backed securities and rely on the exclusion from registration under Section 3(c)(5)(C) of the 1940 Act, such as the REIT Subsidiary, should continue to be allowed to rely on such an exclusion from registration. If the SEC takes action with respect to this exclusion, these changes could mean that the REIT Subsidiary may no longer rely on the Section 3(c)(5)(C) exclusion, and would have to rely on Section 3(c)(1) or 3(c)(7), which could adversely affect the Master Fund’s ability to achieve its investment objectives.

 

Differences between the statutory and regulatory regimes applicable to a management investment company and a REIT present additional challenges and risks with regard to the REIT Subsidiary’s qualification as a REIT under the Code, which could result in the REIT Subsidiary and the Master Fund having additional tax liability, and reduce the Master Fund’s current income.

 

The REIT Subsidiary will be operated as a separate company and will observe its own corporate formalities (i.e., it will maintain its own separate books & records, and execute agreements in its own name and on its own behalf). Accordingly, creditors and other claimants generally may only look to the REIT Subsidiary and its assets for settlement of their claims against the REIT Subsidiary, and will not have general recourse against the Master Fund. The REIT Subsidiary is responsible for its own legal costs in defending against any such claims, but those legal costs may diminish its returns, and thus ultimately diminish returns to Master Fund Shareholders.

 

Additionally, there is no guarantee that creditors and other claimants against the REIT Subsidiary will not try to reach the assets of the Master Fund or that such creditors and other claimants will not be successful in such attempts. The Master Fund intends to dispute any such claims, but to the extent it does so it may incur legal costs that will diminish its returns to shareholders.

 

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The REIT Subsidiary may not be able to satisfy requirements related to the ownership of its outstanding capital stock, which could cause the REIT Subsidiary to fail to qualify as a REIT.

 

In order to qualify as a REIT, not more than 50% in value of the REIT Subsidiary’s shares of stock may be owned, directly or indirectly, through the application of certain attribution rules under the Code, by any five or fewer individuals, as defined in the Code to include specified entities, during the last half of any taxable year other than the REIT Subsidiary’s first taxable year (the “50% Test”). For purposes of the 50% Test, the REIT Subsidiary will “look through” to the beneficial owners of the Master Fund Shares and the Shares. Accordingly, if five or fewer individuals or certain specified entities during the last half of any calendar year own, directly or indirectly, more than 50% of the REIT Subsidiary’s shares through the Master Fund or the Trust, then the REIT Subsidiary’s qualification as a REIT could be jeopardized. The REIT Subsidiary’s charter does not contain typical REIT ownership restrictions and therefore does not ensure that the REIT Subsidiary will satisfy the 50% Test. The Advisor intends to monitor all purchases and transfers of the REIT Subsidiary’s shares, the Master Fund Shares and Shares by regularly reviewing, among other things, ownership filings required by the federal securities laws to monitor the beneficial ownership of the REIT Subsidiary’s shares to ensure that the REIT Subsidiary will meet and will continue to meet the 50% Test. However, the Advisor may not have the information necessary for it to ascertain with certainty whether or not the REIT Subsidiary satisfies the 50% Test and may not be able to prevent the REIT Subsidiary from failing the 50% Test.

 

If the REIT Subsidiary fails to satisfy requirements related to the ownership of its outstanding capital stock, the REIT Subsidiary would fail to qualify as a REIT and the REIT Subsidiary would be required to pay U.S. federal income tax on its taxable income, and distributions to its shareholders would not be deductible by it in determining its taxable income.

 

Complying with REIT requirements may force the REIT Subsidiary to pay consent dividends, borrow funds to make distributions to their shareholders or otherwise depend on external sources of capital to fund such distributions.

 

To qualify for and maintain its qualification as a REIT, the REIT Subsidiary must distribute on a timely basis with respect to each tax year dividends of an amount at least equal to least 90% of its “REIT taxable income,” determined without regard to any deduction for dividends paid and excluding net capital gain, in order to continue to qualify as a REIT. To the extent that the REIT Subsidiary satisfies the 90% distribution requirement, but distributes less than 100% of its taxable income, it will be subject to U.S. federal corporate income tax on our undistributed income. In addition, it will incur a 4% nondeductible excise tax on the amount, if any, by which its distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws. The REIT Subsidiary intends to distribute its net taxable income to its stockholders in a manner intended to satisfy the 90% distribution requirement and to avoid both corporate income tax and the 4% nondeductible excise tax.

 

From time-to-time, the REIT Subsidiary may generate taxable income greater than its net income for U.S. GAAP, due to among other things, amortization of capitalized purchase premiums, fair value adjustments and reserves. In addition, the REIT Subsidiary’s taxable income may be greater than its cash flow available for distribution as a result of, among other things, the REIT Subsidiary’s investments in assets that generate taxable income in advance of the corresponding cash flow from the assets.

 

If the REIT Subsidiary does not have other funds available in the situations described in the preceding paragraphs, it could be required to borrow funds on unfavorable terms, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable it to distribute enough of its taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% nondeductible excise tax in a particular year. These alternatives could increase the REIT Subsidiary’s costs or reduce its equity.

 

In addition, under certain circumstances, the Master Fund may elect to receive a consent dividend from the REIT Subsidiary in order to allow the REIT Subsidiary to meet the annual REIT distribution requirements or avoid paying corporate tax on any undistributed net income. If the REIT Subsidiary makes a consent dividend, the REIT Subsidiary and the Master Fund generally will be treated for U.S. federal income tax purposes as if the REIT Subsidiary distributed cash to the Master Fund and the Master Fund immediately recontributed the cash to the REIT Subsidiary as a contribution to capital. A consent dividend would result in the recognition of income by the Master Fund as if an actual distribution were made, but without any distribution of cash.

 

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Because of the distribution requirement, it is unlikely that the REIT Subsidiary will be able to fund all future capital needs, including capital needs in connection with the REIT Subsidiary’s investments, from cash retained from operations. As a result, to fund future capital needs, the REIT Subsidiary likely will have to rely on third-party sources of capital, including both debt and equity financing, which may not be available on favorable terms or at all. The REIT Subsidiary’s access to third-party sources of capital will depend upon a number of factors, including its current and potential future earnings and cash distributions.

 

The REIT Subsidiary’s failure to qualify as a REIT would subject the REIT Subsidiary, as applicable, to U.S. federal income tax and applicable state and local taxes, which would reduce the amount of cash available for distribution to the Master Fund.

 

The Advisor believes that the REIT Subsidiary has been organized in a manner that will enable it to qualify as a REIT for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2018 provided that the REIT Subsidiary satisfies the 50% Test. In addition, the Advisor believes that the intended manner of operation of the REIT Subsidiary will enable it to continue to meet the requirements for qualification and taxation as a REIT provided that it satisfies the 50% Test. The Advisor has not requested and does not intend to request a ruling from the IRS that the REIT Subsidiary qualifies as a REIT. The U.S. federal income tax laws governing REITs are complex, and judicial and administrative interpretations of the U.S. federal income tax laws governing REIT qualification are limited. To qualify as a REIT, the REIT Subsidiary must meet, on an ongoing basis, various tests regarding the nature of its assets and income, the ownership of its outstanding shares, and the amount of its distributions. The REIT Subsidiary’s ability to satisfy the asset tests depends on the Advisor’s analysis of the characterization and fair market values of the REIT Subsidiary’s assets, some of which are not susceptible to a precise determination, and for which the Advisor may not obtain independent appraisals. Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for the REIT Subsidiary to qualify as a REIT. Thus, while the Advisor intends to operate the REIT Subsidiary so that it will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in the REIT Subsidiary’s circumstances, no assurance can be given that the REIT Subsidiary will so qualify for any particular year. These considerations also might restrict the types of assets that the REIT Subsidiary can acquire in the future.

 

If the REIT Subsidiary fails to qualify as a REIT in any taxable year, and does not qualify for certain statutory relief provisions, the REIT Subsidiary would be required to pay U.S. federal income tax on its taxable income, and distributions to its shareholders would not be deductible by it in determining its taxable income. In such a case, the REIT Subsidiary might need to borrow money or sell assets in order to pay its taxes. The REIT Subsidiary’s payment of income tax would decrease the amount of its income available for investment or distribution to its shareholders. Furthermore, if the REIT Subsidiary fails to maintain its qualification as a REIT, it no longer would be required to distribute substantially all of its net taxable income to its shareholders. In addition, unless the REIT Subsidiary was eligible for certain statutory relief provisions, it could not re-elect to qualify as a REIT until the fifth calendar year following the year in which it failed to qualify.

 

Complying with REIT requirements may force the REIT Subsidiary to liquidate or forego otherwise attractive investments, which could reduce returns on its assets and adversely affect returns to Shareholders.

 

To qualify as a REIT, the REIT Subsidiary generally must ensure that at the end of each calendar quarter at least 75% of the value of its total assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and CMBS. The remainder of the REIT Subsidiary’s investment in securities (other than government securities and qualifying real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of the REIT Subsidiary’s assets (other than government securities and qualifying real estate assets) can consist of the securities of any one issuer, no more than 20% of the value of the REIT Subsidiary’s total securities can be represented by stock and securities of one or more “taxable REIT Subsidiaries” or TRSs and no more than 25% of the value of the REIT Subsidiary’s total securities can be represented by debt instruments issued by publicly offered REITs that are not otherwise secured by real property. See “U.S. Federal Income Tax Considerations — Taxation of the REIT Subsidiary —Asset Tests.” If the REIT Subsidiary fails to comply with these requirements at the end of any quarter, it must correct the failure within 30 days after the end of such calendar quarter or qualify for certain statutory relief provisions to avoid losing its REIT qualification and suffering adverse tax consequences. As a result, the REIT Subsidiary may be required to liquidate from its portfolio otherwise attractive investments. These actions could have the effect of reducing the REIT Subsidiary’s income and amounts available for distribution to the Master Fund. In addition, if the REIT Subsidiary is compelled to liquidate its investments to repay obligations to its lenders, the REIT Subsidiary may be unable to comply with these requirements, ultimately jeopardizing its qualification as a REIT. Furthermore, the REIT Subsidiary may be required to make distributions to the Master Fund at disadvantageous times or when it does not have funds readily available for distribution, and may be unable to pursue investments that would be otherwise advantageous to it in order to satisfy the source of income or asset diversification requirements for qualifying as a REIT.

 

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The interest apportionment rules may affect the REIT Subsidiary’s ability to comply with the REIT asset and gross income tests.

 

The interest apportionment rules under Treasury Regulation Section 1.856-5(c) provide that, if a mortgage is secured by both real property and other property, a REIT generally is required to apportion its annual interest income to the real property security based on a fraction, the numerator of which is the value of the real property securing the loan, determined when the REIT commits to acquire the loan, and the denominator of which is the highest “principal amount” of the loan during the year. IRS Revenue Procedure 2014-51 interpret the “principal amount” of the loan to be the face amount of the loan, despite the Code’s requirement that taxpayers treat any market discount, which is the difference between the purchase price of the loan and its face amount, for all purposes (other than certain withholding and information reporting purposes) as interest rather than principal. Notwithstanding the foregoing, if a mortgage is secured by both real property and personal property and the fair market value of the personal property does not exceed 15% of the fair market value of all real and personal property securing the mortgage, the mortgage is treated as secured solely by real property for the purposes of these rules.

 

The Advisor expects that all or most of the mortgage loans that the REIT Subsidiary will acquire will be secured by real property with a value in excess of the principal amount of the loan. Accordingly, it is not contemplated that the REIT Subsidiary will regularly invest in mortgage loans to which the interest apportionment rules described above would apply. Nevertheless, if the REIT Subsidiary were to acquire a loan with a principal amount in excess of the value of the real property securing the loan, determined when the REIT commits to acquire the loan, the interest apportionment rules could apply to certain mortgage loans in our portfolio, which could adversely impact the REIT Subsidiary’s ability to satisfy the 75% REIT gross income test. Furthermore, the REIT Subsidiary may modify the terms of any CRE debt and mortgage loans held by the REIT Subsidiary (for example, to avoid taking title to a property in the event of a default on the loan). Under the Treasury Regulations, if the terms of a loan are modified in a manner constituting a “significant modification,” such modification triggers a deemed exchange of the original loan for the modified loan. Unless the modification satisfies certain safe harbors, the REIT Subsidiary will be required to redetermine the value of the real property securing the loan at the time the loan was significantly modified. As a result, if the REIT Subsidiary significantly modifies a loan and the fair market value of the real property securing such loan has decreased, the interest apportionment rules could apply and cause the REIT Subsidiary to fail the 75% REIT gross income test. If the REIT Subsidiary does not satisfy this test, the REIT Subsidiary could potentially lose its REIT qualification or be required to pay a penalty to the IRS.

 

In addition, the Code provides that a regular or a residual interest in a REMIC is generally treated as a real estate asset for the purposes of the REIT asset tests, and any amount includible in the REIT Subsidiary’s gross income with respect to such an interest is generally treated as interest on an obligation secured by a mortgage on real property for the purposes of the REIT gross income tests. If, however, less than 95% of the assets of a REMIC in which the REIT Subsidiary holds an interest consist of real estate assets (determined as if the REIT Subsidiary held such assets), the REIT Subsidiary will be treated as holding its proportionate share of the assets of the REMIC for the purpose of the REIT asset tests and receiving directly its proportionate share of the income of the REMIC for the purpose of determining the amount of income from the REMIC that is treated as interest on an obligation secured by a mortgage on real property.

 

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The REIT Subsidiary’s ownership of and relationship with any TRS which it may form or acquire will be limited, and a failure to comply with the limits would jeopardize the REIT Subsidiary’s REIT qualification and its transactions with its TRSs may result in the application of a 100% excise tax if such transactions are not conducted on arm’s-length terms.

 

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn income that would not be qualifying income if earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. Overall, no more than 20% of the value of a REIT’s assets may consist of stock and securities of one or more TRSs. A domestic TRS will pay U.S. federal, state and local income tax at regular corporate rates on any income that it earns. In addition, the TRS rules impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.

 

Any domestic TRS that the REIT Subsidiary may form would pay U.S. federal, state and local income tax on its taxable income, and its after tax net income would be available for distribution to us but would not be required to be distributed to us by such domestic TRS. The Advisor anticipates that the aggregate value of the TRS stock and securities owned by the REIT Subsidiary will be less than 20% of the value of the REIT Subsidiary’s total assets (including the TRS stock and securities). Furthermore, the Advisor will monitor the value of the REIT Subsidiary’s investments in TRSs to ensure compliance with the rule that no more than 20% of the value of its assets may consist of TRS stock and securities (which is applied at the end of each calendar quarter). In addition, the Advisor will scrutinize all of the REIT Subsidiary’s transactions with TRSs to ensure that they are entered into on arm’s-length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that the REIT Subsidiary will be able to comply with the TRS limitations or to avoid application of the 100% excise tax discussed above.

 

The tax on prohibited transactions will limit the REIT Subsidiary’s ability to engage in transactions, including certain methods of securitizing mortgage loans, which would be treated as prohibited transactions for U.S. federal income tax purposes.

 

Net income that the REIT Subsidiary derives from a prohibited transaction is subject to a 100% tax. The term “prohibited transaction” generally includes a sale or other disposition of property (including mortgage loans, but other than foreclosure property, as discussed below) that is held primarily for sale to customers in the ordinary course of a trade or business by the REIT Subsidiary or by a borrower that has issued a shared appreciation mortgage or similar debt instrument to the REIT Subsidiary. The REIT Subsidiary might be subject to this tax if it were to dispose of or securitize loans in a manner that was treated as a prohibited transaction for U.S. federal income tax purposes. The REIT Subsidiary intends to conduct its operations so that no asset that it owns (or is treated as owning) will be treated as, or as having been, held for sale to customers, and that a sale of any such asset will not be treated as having been in the ordinary course of its business. As a result, the REIT Subsidiary may choose not to engage in certain sales of loans at the REIT level, and may limit the structures it utilizes for securitization transactions, even though the sales or structures might otherwise be beneficial to the REIT Subsidiary.

 

However, whether property is held as inventory or “primarily for sale to customers in the ordinary course of a trade or business” depends on the particular facts and circumstances. If the REIT Subsidiary were to sell a mortgage loan to a third party, depending on the circumstances of the sale, it is possible that the sale could be treated as a prohibited transaction. As a result, no assurance can be given that any particular asset in which the REIT Subsidiary holds a direct or indirect interest, including any securities or loans that it may dispose of, will not be treated as property held as inventory or primarily for sale to customers. The Code provides certain safe harbors under which disposition of assets are not treated as prohibited transactions. However, there can be no assurance that any disposition of the REIT Subsidiary’s assets would comply with these safe-harbor provisions.

 

The REIT Subsidiary could fail to qualify as a REIT if the IRS successfully challenges the REIT Subsidiary’s treatment of its mezzanine loans and repurchase agreements.

 

Although it is expected that most mezzanine loans will be held through the Master Fund, it is possible that the REIT Subsidiary may also invest in mezzanine loans. IRS Revenue Procedure 2003-65 provides a safe harbor pursuant to which a mezzanine loan, if it meets each of the requirements contained therein, will be treated by the IRS as a real estate asset for purposes of the REIT asset tests and interest derived from it will be treated as qualifying mortgage interest for purposes of the 75% REIT income test. Although Revenue Procedure 2003-65 provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law.

 

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In addition, the REIT Subsidiary may enter into repurchase agreements with counterparties to achieve the desired amount of leverage for the assets in which the REIT Subsidiary intends to invest. Under such repurchase agreements, the REIT Subsidiary generally sells assets to its counterparty to the agreement and receives cash from the counterparty. The counterparty is obligated to resell the assets back to the REIT Subsidiary at the end of the term of the transaction. The Advisor believes that for U.S. federal income tax purposes the REIT Subsidiary will be treated as the owner of the assets that are the subject of repurchase agreements and that the repurchase agreements will be treated as secured lending transactions notwithstanding that such agreements may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could successfully assert that the REIT Subsidiary did not own these assets during the term of the repurchase agreements, in which case the REIT Subsidiary could fail to qualify as a REIT.

 

If the IRS disagrees with the application of these provisions to the REIT Subsidiary’s assets or transactions, the REIT Subsidiary’s qualification as a REIT could be jeopardized. Even if the IRS were to disagree with one or more of the Advisor’s interpretations and the REIT Subsidiary were treated as having failed to satisfy one of the REIT qualification requirements, the REIT Subsidiary could maintain its REIT qualification if its failure was excused under certain statutory savings provisions. However, there can be no guarantee that the REIT Subsidiary would be entitled to benefit from those statutory savings provisions if it failed to satisfy one of the REIT qualification requirements, and even if it were entitled to benefit from those statutory savings provisions, the REIT Subsidiary could be required to pay a penalty tax.

 

Complying with REIT requirements may limit the REIT Subsidiary’s ability to hedge effectively.

 

The REIT provisions of the Code may limit the REIT Subsidiary’s ability to hedge its assets and operations. Under these provisions, any income that the REIT Subsidiary generates from transactions intended to hedge its interest rate and currency risks will generally be excluded from gross income for purposes of the 75% and 95% gross income tests if (i) the instrument (A) hedges interest rate risk or foreign currency exposure, in each case, on liabilities used to carry or acquire real estate assets, (B) hedges risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% gross income tests, or (C) hedges an instrument described in clause (A) or (B) for a period following the extinguishment of the liability or the disposition of the asset that was previously hedged by the hedged instrument, and (ii) such instrument is properly identified under applicable regulations promulgated by the U.S. Department of the Treasury (or the Treasury Regulations). In addition, any income from other hedges would generally constitute non-qualifying income for purposes of both the 75% and 95% gross income tests. See “U.S. Federal Income Tax Considerations — Taxation of the REIT Subsidiary — Gross Income Tests — Hedging Transactions.” As a result of these rules, the REIT Subsidiary may have to limit its use of hedging techniques that might otherwise be advantageous or implement those hedges through a TRS, which could increase the cost of its hedging activities or result in greater risks associated with interest rate or other changes than the REIT Subsidiary would otherwise incur.

 

Even if the REIT Subsidiary qualifies as a REIT, it may face tax liabilities that reduce its cash flow.

 

Even if the REIT Subsidiary qualifies as a REIT, it may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, franchise, property and transfer taxes, including mortgage recording taxes. See “U.S. Federal Income Tax Considerations — Taxation of the REIT Subsidiary — Taxation of REITs in General.” In addition, any domestic TRSs the REIT Subsidiary owns will be subject to U.S. federal, state, and local corporate taxes. In order to meet the REIT qualification requirements, or to avoid the imposition of a 100% tax that applies to certain gains derived by a REIT from sales of inventory or property held primarily for sale to customers in the ordinary course of business, the REIT Subsidiary may hold some of its assets through taxable subsidiary corporations, including domestic TRSs. Any taxes paid by such subsidiary corporations would decrease the cash available for distribution to the Master Fund and the Trust.

 

Qualifying as a RIC or a REIT involves highly technical and complex provisions of the Code.

 

The Trust and the Master Fund’s qualification as a RIC and the REIT Subsidiary’s qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist.

 

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Even a technical or inadvertent violation could jeopardize the Trust and/or the Master Fund’s qualification as a RIC and the REIT Subsidiary’s qualification as a REIT. The Trust and the Master Fund’s qualification as a RIC and the REIT Subsidiary’s qualification as a REIT will depend on satisfaction of certain asset, income, organizational, distribution, (and, in the case of the REIT Subsidiary, shareholder ownership) and other requirements on a continuing basis. In addition, the ability to satisfy the requirements to qualify as a RIC or a REIT depends in part on the actions of third parties over which the Advisor has no control or only limited influence, including in cases where the Master Fund and/or the REIT Subsidiary own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.

 

The Trust, the Master Fund and the REIT Subsidiary may be subject to adverse legislative or regulatory tax changes that could reduce the value of Shares.

 

At any time, the U.S. federal income tax laws or regulations governing RICs or REITs or the administrative interpretations of those laws or regulations may be amended, possibly with retroactive effect. The Advisor cannot predict when or if any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective, and any such law, regulation or interpretation may take effect retroactively. The Trust, the Master Fund, the REIT Subsidiary and Shareholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.

 

Most recently, the TCJA was signed into law on December 22, 2017. The TCJA makes significant changes to U.S. federal income tax laws applicable to businesses and their owners, including, among other things, significant changes to the taxation of business entities and their owners. Certain key provisions of the TCJA that could impact the Trust, the Master Fund, the REIT Subsidiary and Shareholders include:

 

·temporarily reducing individual U.S. federal income tax rates on ordinary income; the highest individual U.S. federal income tax rate will be reduced from 39.6% to 37% (through taxable years ending in 2025);

 

·reducing the maximum corporate income tax rate from 35% to 21%;

 

·limiting the deduction for net operating losses to 80% of taxable income (in the case of the REIT Subsidiary, calculated prior to the application of the dividends paid deduction);

 

·amending the limitation on the deduction of net interest expense for all businesses, other than certain electing businesses, including real estate businesses (which could adversely affect any TRS that we form);

 

·accelerating the accrual for U.S. federal income tax purposes of certain items of income to the extent that such items of income would otherwise be recognized for U.S. federal income tax purposes later than they would be reported on financial statements; and

 

·eliminating the corporate alternative minimum tax.

 

 Investors are urged to consult with their tax advisor regarding tax legislative, regulatory or administrative developments and proposals and their potential effect on an investment in Shares.

 

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MANAGEMENT OF THE TRUST AND THE MASTER FUND

 

General

 

Pursuant to the Trust’s declaration of trust and bylaws, the Board has overall responsibility for monitoring and overseeing the Trust’s management and operations. The Board consists of four members, three of whom are considered Independent Trustees. The trustees who are not Independent Trustees are referred to herein as Interested Trustees.

 

The same individuals serve on the Board and the Master Fund Board. Similarly, the Master Fund Board, pursuant to the Master Fund’s declaration of trust and bylaws, has overall responsibility for monitoring and overseeing the Master Fund’s operations. The trustees are subject to removal or replacement in accordance with Delaware law and the Trust’s and the Master Fund’s respective declaration of trusts and bylaws. The trustees serving on the Board and the Master Fund Board were elected by the organizational shareholders of the Trust and the Master Fund, respectively. Any vacancy on the Board or the Master Fund Board for any cause other than an increase in the number of trustees may be filled by a majority of the remaining trustees, even if such majority is less than a quorum. Any vacancy on the Board or the Master Fund Board created by an increase in the number of trustees may be filled by a majority vote of the entire Board or the Master Fund Board, respectively. References within this section to the “Board” or the “Board of Trustees” refer to the Board of Trustees of the Trust and/or the Master Fund, as appropriate.

 

The Board, including a majority of the Independent Trustees, oversees and monitors the Trust’s investment performance and, beginning with the second anniversary of the effective date of the Trust Advisory Agreement, will annually review the compensation the Trust pays to the Advisor to determine that the provisions of the Trust Advisory Agreement are carried out. The Master Fund Board, including a majority of the Independent Trustees, also oversees and monitors the Master Fund’s performance and, beginning prior to the second anniversary of the effective date of the Master Fund Advisory Agreement, will annually review the compensation the Master Fund pays to the Advisor to determine that the provisions of the Master Fund Advisory Agreement are carried out. For a description, including a discussion regarding the basis of the Board’s and Master Fund’s approval of the Trust Advisory Agreement and the Master Fund Advisory Agreement, respectively, please see “Management and Incentive Fees — Approval of the Advisory Agreement.” The Board has held six (6) meetings for the fiscal year ended December 31. 2017.

 

The Advisor

 

The Advisor serves as the investment adviser of the Trust and Master Fund. Organized as a Delaware limited liability company, the Advisor is registered as an investment adviser with the SEC. Pursuant to the Trust Advisory Agreement and the Master Fund Advisory Agreement, the Advisor is responsible for overseeing the management of the Trust’s and Master Fund’s activities and has full investment discretion. The Advisor makes all determinations with respect to the investment of the Trust’s and Master Fund’s assets, including investment strategies, investment goals, asset allocation, asset management, leverage limitations, reporting requirements and other guidelines in addition to the general monitoring of the Trust’s and Master Fund’s portfolios, subject to the oversight of the Board and the Master Fund Board. The Advisor also provides certain other administrative services, including marketing, investor relations and certain accounting services and maintenance of books and records on behalf of the Trust and the Master Fund pursuant to the Trust Advisory Agreement and the Master Fund Advisory Agreement, respectively. The Advisor will also furnish the Trust and Master Fund with office facilities and equipment, provide clerical services to the Trust and the Master Fund, perform the calculation and publication of the Master Fund’s NAV, and oversee the preparation and filing of the Master Fund’s tax returns, the payment of the Master Fund’s expenses and the performance oversight of various third party service providers.

 

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Board of Trustees and Executive Officers

 

Board Leadership Structure

 

Among other things, the Board sets broad policies for the Trust and Master Fund and appoints their respective officers. The role of the Board, and of any individual trustee, is one of oversight and not of management of the Trust’s and Master Fund’s day-to-day affairs. Each trustee will serve until his or her successor is duly elected and qualified.

 

Kevin P. Traenkle serves as chairman of the Board and is an Interested Trustee by virtue of his relationship with the Advisor. The Board believes that Kevin P. Traenkle, as the Trust’s and Master Fund’s Chief Executive Officer, is the trustee with the most knowledge of the Trust’s and Master Fund’s business strategy and is best situated to serve as chairman of the Board. Dianne P. Hurley currently serves as the lead Independent Trustee. The Independent Trustees are expected to meet separately in executive session as often as necessary to exercise their oversight responsibilities. The Board believes that its leadership structure is the optimal structure for the Trust and Master Fund at this time given the Trust’s and Master Fund’s current size and complexity. The Board, which reviews its leadership structure periodically, further believes that its structure is presently appropriate to enable it to exercise its oversight of the Trust and Master Fund.

 

Board Role in Risk Oversight

 

Through its direct oversight role, and indirectly through its committees, the Board performs a risk oversight function for the Trust and Master Fund consisting of, among other things, the following activities: (i) at regular and special Board meetings, and on an ad hoc basis as needed, receiving and reviewing reports related to the Trust’s and Master Fund’s performance and operations; (ii) reviewing and approving, as applicable, the Trust’s and Master Fund’s compliance policies and procedures; (iii) meeting with members of the Advisor’s portfolio management teams to review investment strategies, techniques and the processes used to manage related risks; (iv) meeting with, or reviewing reports prepared by the representatives of key service providers, including the Advisor, the Distributor, the transfer agent, the custodian and the independent registered public accounting firm, to review and discuss the Trust’s and Master Fund’s activities and to provide direction with respect thereto; and (v) engaging the services of the Trust’s and Master Fund’s chief compliance officer to test the compliance procedures of the Trust and its service providers. However, not all risks that may affect the Trust and Master Fund can be identified or processes and controls developed to eliminate or mitigate their occurrence or effects, and some risks are beyond the control of the Trust, the Master Fund and their respective service providers.

 

Trustees

 

Information regarding the members of the Board is set forth below. The trustees have been divided into two groups — Interested Trustees and Independent Trustees. The address for each trustee is c/o NorthStar Real Estate Capital Income Fund, c/o Colony NorthStar, Inc., at 590 Madison Avenue, 34th Floor, New York, New York 10022. As set forth in each of the Trust’s and Master Fund’s declaration of trust and bylaws, a trustee’s term of office shall continue until his or her death, resignation or removal.

 

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Name (Age)   Position Held   Trustee
Since
  Principal Occupation Past 5
Years
  Number
of
Portfolios
in Fund
Complex
Overseen
 by
Trustee
  Trusteeships Held By
Trustees During Past 5
Years
                     
Interested Trustee                    
Kevin P. Traenkle (47)   Chairman of the Board, CEO, and President   2017   Chairman, CEO and President of the Trust, the Master Fund, the Feeder Funds, NorthStar Real Estate Income Trust, Inc. (“NorthStar Income”) and NorthStar Real Estate Income II, Inc. (“NorthStar Income II”); Executive Vice President and Chief Investment Officer of Colony NorthStar; Executive Vice President and Chief Investment Officer of Colony Capital, Inc. (“Colony”) (2009 – 2017); Executive Director of Colony (2015 – 2017); Principal of Colony Capital, LLC (“CCLLC”) (2005 – 2017); Vice President of Acquisitions of CCLLC (2002 – 2005)   5   Chairman of the Trust, the Master Fund, the Feeder Funds and CLNS Credit.
Independent Trustees                    
Daniel J. Altobello (76)   Trustee   2016   CEO and President of Caterair International Corporation (1989 – 1995); Executive Vice President of Marriott Corporation (1979 – 1989); President of Marriott Airport Operations Group (1979 – 1989).   5   Trustee of the Master Fund, the Trust and the Feeder Funds; Director of NorthStar Healthcare; Chairman of Altobello Family LP; Director of Arlington Asset Investment Corp.; Director of DiamondRock Hospitality Co.; Director of Mesa Air Group, Inc.; Trustee of Loyola Foundation, Inc.
Dianne P. Hurley (55)   Lead Independent
Trustee
  2016   CAO of A&E Real Estate; Startup consultant to asset management firms including Stonecourt Capital, Imperial Companies and RedBird Capital Partners (2015 – 2017); Managing Director of SG Partners (2011–2014); COO, Global Distribution of Credit Suisse Asset Management (2009 – 2011); Chief Accounting Officer, TPG-Axon (2004 – 2009).   5   Trustee of the Master Fund, the Trust and the Feeder Funds; Director of NorthStar/ RXR; Director of Griffin-American Healthcare REIT IV, Inc.; Director of NorthStar Realty Europe Corp.
Gregory A. Samay (59)   Trustee   2016   Previously Chief Investment Officer (previously an Investment Officer) of Fairfax County Retirement Systems (2011 – 2016); Executive Director and Chief Investment Officer of Arlington County Employees’ Retirement System (2005 – 2010).   5   Trustee of the Master Fund, the Trust and the Feeder Funds; Director of NorthStar Healthcare.

 

Trustee Qualifications

 

The Board believes that, collectively, the trustees have balanced and diverse experience, qualifications, attributes and skills, which allow the Board to operate effectively in governing the Trust and the Master Fund and protecting the interests of the Trust’s and the Master Fund’s Shareholders. Below is a brief biography of each trustee, including descriptions of the various experiences, qualifications, attributes and/or skills with respect to each trustee considered by the Board with respect to trustee qualifications.

 

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Interested Trustee

 

Kevin P. Traenkle.   Mr. Traenkle has been Chairman and an Interested Trustee of the Board of Trustees, Chief Executive Officer and President of the Trust and the Master Fund since December 15, 2017, and a member of the Advisor’s investment committee since January 2017. Mr. Traenkle serves as Chairman, Chief Executive Officer and President of CLNS Credit since January 2018 and its predecessors, NorthStar Income and NorthStar Income II, from December 15, 2017 to January 2018. Mr. Traenkle has served as the Executive Vice President and Chief Investment Officer of Colony NorthStar since January 2017, the same position he has held since June 2009 at the preceding company, Colony Capital, Inc. (“Colony”). Mr. Traenkle served as an Executive Director of Colony from April 2015 to January 2017. Mr. Traenkle also served as a Principal of Colony Capital, LLC (“CCLLC”), where he was involved in many facets of the firm’s activities including: distressed debt initiatives, investment and divestment decisions, business development and global client relations. Prior to becoming a Principal at CCLLC in January 2005, Mr. Traenkle served as a Vice President of Acquisitions at CCLLC and was responsible for the identification, evaluation, consummation, and management of investments. Before rejoining the Colony business in 2002, Mr. Traenkle worked for a private equity investment firm, where he was responsible for real estate-related investment and management activities. Prior to joining the Colony business in 1993, Mr. Traenkle worked for an investment bank, First Albany Corporation, in its Municipal Finance department. Mr. Traenkle received a B.S. in Mechanical Engineering in 1992 from Rensselaer Polytechnic Institute in Troy, New York.

 

The Board believes that Mr. Traenkle’s extensive commercial real estate and capital markets expertise through various market cycles and changing market conditions, combined with his former position as Executive Vice President and Chief Investment Officer of Colony, and currently his service as Executive Vice President and Chief Investment Officer of Colony NorthStar, as well as his role as the Trust’s Chairman of the Board, Chief Executive Officer and President, support his appointment to the Trust’s Board.

 

Independent Trustees

 

Daniel J. Altobello.   Mr. Altobello has been an Independent Trustee of the Trust, the Master Fund and the T-Class Feeder Fund since March 3, 2016. He has been an Independent Trustee of the ADV-Class Feeder Fund since May 10, 2017 and the C-Class Feeder Fund since November 9, 2017. Mr. Altobello has also been an independent director of NorthStar Healthcare since June 2011. As Chairman of Altobello Family LP since October 2000, he has extensive private investment experience in public securities, gas and oil, mutual funds and private equity ventures. From September 1995 until October 2000, Mr. Altobello was the Chairman of Onex Food Service, Inc., a subsidiary of private equity investor Onex Corp., where he was responsible for board meetings and special client relations. From December 1989 to September 1995, Mr. Altobello served as Chairman, President and Chief Executive Officer of Caterair International Corporation, an in-flight food service provider that was acquired by Onex Food Service, Inc. in September 1995. From November 1979 to December 1989, he held various managerial positions with the food service management and in-flight catering divisions of Marriott Corporation (NYSE: MAR), including Executive Vice President of Marriott Corporation and President of Marriott Airport Operations Group. Mr. Altobello began his management career at Georgetown University as Vice President of Administration Services. He is a member of the boards of directors of Arlington Asset Investment Corp. (NYSE: AI), a principal investment firm that invests in mortgage-related and other assets, DiamondRock Hospitality Company (NYSE: DRH), a lodging focused real estate company and Mesa Air Group, Inc., a regional airline. Mr.. Altobello also served on the advisory board of Hidden Creek Partners until February 2013 and is a trustee of Loyola Foundation, Inc. He holds a Bachelor of Arts in English from Georgetown University in Washington, D. C. and Master of Business Administration from Loyola University in Baltimore, Maryland.

 

The Board believes that Mr. Altobello’s notable business and leadership experience in the area of corporate governance as a result of his tenure on numerous boards of directors support his election to the Trust’s Board.

 

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Dianne P. Hurley.   Ms. Hurley has been an Independent Trustee of the Trust, the Master Fund and the T-Class Feeder Fund since March 3, 2016. She has been an Independent Trustee of the ADV-Class Feeder Fund since May 10, 2017 and the C-Class Feeder Fund since November 9, 2017. Ms. Hurley has also served as an independent director of NorthStar/RXR since February 2015, as an independent director of Griffin-American Healthcare REIT IV, Inc. since February 2016 and as an independent director of NorthStar Realty Europe since August 2016. Ms. Hurley is the Chief Administrative Officer of A&E Real Estate, an owner/operator of multifamily properties in New York City Metropolitan area, where she has worked on all aspects related to the firm’s management since March 2017. Prior, from September 2016 to March 2017, Ms. Hurley was the startup Chief Operating Officer of Stonecourt Capital, a middle-market growth private equity firm. From August 2015 to September 2016, she consulted as the Chief Operating Officer of Imperial Companies, a startup real estate private investment firm, and from January to June of 2015 she was the startup Chief Administrative Officer of RedBird Capital Partners, a growth private equity firm. Previously, Ms. Hurley served from November 2011 to January 2015 as Managing Director of SG Partners, an executive search firm, where her responsibilities included business development and execution of private equity, hedge fund and real estate recruiting efforts. From September 2009 to November 2011, she served as the Chief Operating Officer, Global Distribution, of Credit Suisse Asset Management, where she was responsible for overall management of the sales business, strategic initiatives, financial and client reporting, and regulatory and compliance oversight. From 2004 to September 2009, Ms. Hurley served as the founding Chief Administrative Officer of TPG-Axon Capital, where she was responsible for investor relations, fundraising, human capital management, compliance policy implementation, joint venture real estate investments and corporate real estate. Earlier in her career Ms. Hurley worked in real estate and corporate finance at Edison Schools Inc. and in the real estate department at Goldman Sachs. Ms. Hurley holds a Bachelor of Arts from Harvard University in Cambridge, Massachusetts and a Master of Business Administration from Yale School of Management, New Haven, Connecticut.

 

The Board believes that Ms. Hurley’s significant real estate and real estate finance experience, as well as regulatory and oversight compliance experience supports her appointment to the Trust’s Board.

 

Gregory A. Samay.   Mr. Samay has been an Independent Trustee of the Trust, the Master Fund and the T-Class Feeder Fund since March 3, 2016. He has been an Independent Trustee of the ADV-Class Feeder Fund since May 10, 2017 and the C-Class Feeder Fund since November 9, 2017. Mr. Samay has also been an independent director of NorthStar Healthcare since June 2011. Mr. Samay previously served as Chief Investment Officer (previously an Investment Officer) of Fairfax County Retirement Systems consisting of three public pension systems with a combined $6 billion of assets from July 2013 (having previously served as an Investment Officer since July 2011) to July 2016. Mr. Samay served as Executive Director and Chief Investment Officer for Arlington County Employees’ Retirement System, a $1.3 billion public pension plan, from August 2005 to September 2010. Mr. Samay served as Assistant Treasurer for YUM! Brands, Inc. (NYSE: YUM), a quick service restaurant company, from 2003 to 2005. From 1998 to 2002, he served as Vice President and Treasurer of Charles E. Smith Residential Realty, Inc., a publicly traded REIT that merged with Archstone Communities of Denver in 2001 to form Archstone-Smith Trust, a publicly-traded REIT until acquired by Tishman Speyer and Lehman Brothers Holdings Inc. in October 2007. Mr. Samay served as Senior Manager, Capital Markets and Investments, for MCI Corporate from 1996 to 1998. From 1987 to 1996, he held various positions, progressing from Senior Financial Advisor-Corporate Treasury to Assistant Treasurer-Corporate Treasury, for COMSAT Corporation, a global telecommunications company. Mr. Samay holds a Bachelor of Science in Engineering from Pennsylvania State University in University Park, Pennsylvania, and a Master of Business Administration from the Darden School of Business, University of Virginia in Charlottesville, Virginia.

 

The Board believes that Mr. Samay’s experience directing investments for a large pension fund and serving in various capacities for public REITs supports his election to the Trust’s Board.

 

Executive Officers

 

The following persons serve as the Trust’s and the Master Fund’s executive officers in the following capacities:

 

Name   Age   Positions Held
Kevin P. Traenkle   47   Chairman of the Board, Chief Executive Officer and President
Frank V. Saracino   51   Chief Financial Officer and Treasurer
Robert C. Gatenio   40   Chief Operating Officer
Sandra M. Forman   51   General Counsel, Chief Compliance Officer and Secretary

 

The address for each executive officer is c/o NorthStar Real Estate Capital Income Fund, c/o Colony NorthStar, Inc., at 590 Madison Avenue, 34th Floor, New York, New York 10022.

 

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Information about Executive Officers Who are Not Trustees

 

Frank V. Saracino.   Mr. Saracino has served as the Chief Financial Officer of the Trust, the Master Fund and the Feeder Funds since their respective inception dates. Mr. Saracino has also served as a Director of the REIT Subsidiary since February 2017. He has served as Chief Financial Officer of NorthStar/Townsend Fund since inception. In addition, Mr. Saracino has served as Chief Financial Officer and Treasurer of each of NorthStar Healthcare and NorthStar/RXR since August 2015. He previously served as Chief Financial Officer and Treasurer of NorthStar Income and NorthStar Income II from August 2015 through January 2018. Prior to joining NorthStar Asset Management Group, Inc. (“NSAM”) from July 2012 to December 2014, Mr. Saracino was with Prospect Capital Corporation, or Prospect, where he concentrated on portfolio management, strategic and growth initiatives and other management functions. In addition, during his tenure at Prospect, Mr. Saracino served as Chief Financial Officer, Chief Compliance Officer, Treasurer and Secretary of each of Priority Income Fund, Inc. and Pathway Energy Infrastructure Fund, Inc., and their respective investment advisers, and served as a Managing Director of Prospect Administration, LLC. Previously, Mr. Saracino was a Managing Director at Macquarie Group, and Head of Finance from August 2008 to June 2012 for its Americas non-traded businesses which included private equity, asset management, lease financing, private wealth, and investment banking. From 2004 to 2008, he served first as Controller and then as Chief Accounting Officer of eSpeed, Inc. (now BGC Partners, Inc.), a publicly-traded subsidiary of Cantor Fitzgerald. Prior to that, Mr. Saracino worked as an investment banker at Deutsche Bank advising clients in the telecom industry. Mr. Saracino started his career in public accounting at Coopers & Lybrand (now PricewaterhouseCoopers) where he earned a CPA and subsequently worked in internal auditing for The Dun & Bradstreet Corporation. He holds a Bachelor of Science degree from Syracuse University.

 

Robert C. Gatenio.   Mr. Gatenio has served as the Chief Operating Officer of the Trust, the Master Fund and the Feeder Funds since January 2018 and on the Investment Committee of the Advisor since January 2017. Mr. Gatenio has served as the Managing Director & Co-Head of US Investment Management of Colony NorthStar, positions he has held since June 2014 at the preceding company, NSAM. Mr. Gatenio is primarily responsible for Colony NorthStar’s investments in CRE securities, private equity real estate secondaries, and NorthStar Healthcare investments. Mr. Gatenio has previously served as Managing Director of NorthStar Realty Finance (“NorthStar Realty”) from 2010 to June 2014, as well as successive management positions since joining NorthStar Realty in 2006. Mr. Gatenio continues to serve as Vice Chairman of the Board at NorthStar Healthcare. Since his engagement at NorthStar Realty, Mr. Gatenio has overseen the acquisition of over $4 billion in commercial real estate securities, $3 billion in private equity real estate secondaries and has had a leading role in building the healthcare platform across the Managed Companies, which currently include a diversified portfolio of equity and debt healthcare real estate investments in excess of $9 billion. Prior to joining NorthStar Realty, Mr. Gatenio was with Goldman Sachs, in its Commercial Mortgage origination and distribution group, and previous to that with Goldman Sachs Asset Management, with its Fixed Income Portfolio Management Team. Mr. Gatenio holds a Bachelor of Science in Finance from Syracuse University and a Master of Business Administration from Fordham University Business School..

 

Sandra M. Forman.   Ms. Forman has served as the Trust’s and the Master Fund’s Chief Compliance Officer since October 2015, the T-Class Feeder Fund’s Chief Compliance Officer since December 2015 and General Counsel and Secretary of the Trust, the T-Class Feeder Fund and the Master Fund since October 2016. She has also served as the ADV-Class Feeder Fund and the C-Class Feeder Fund’s General Counsel, Chief Compliance Officer and Secretary since inception. Ms. Forman has served as Chief Compliance Officer and Secretary of NorthStar/Townsend Fund since inception and as General Counsel since May 2017. Ms. Forman has also served as Senior Vice President and Deputy General Counsel at Colony NorthStar since January 2017 and as Chief Compliance Officer of the Advisor and CNI TCEF Advisors, LLC, the advisor of Northstar/Townsend since February 2017. Previously, Ms. Forman served as Associate General Counsel and Assistant Secretary of the Master Fund from October 2015 to October 2016 and of the Trust and the T-Class Feeder Fund from December 2015 to October 2016. Ms. Forman served as Senior Counsel and Chief Compliance Officer, Registered Funds for NSAM from October 2015 to January 10, 2017. Prior to joining NSAM, Ms. Forman was Senior Counsel at Proskauer Rose LLP from July 2014 to October 2015, where she represented investment companies, including registered closed-end funds and business development companies, and REITs regarding legal, corporate governance and compliance issues. In addition, from August 2004 to June 2014, she served as General Counsel, Chief Compliance Officer and Director of Human Resources and from January 2009 to June 2014 as Secretary of Harris & Harris Group, Inc., a publicly traded business development company. From January 2012 to June 2014, she served as General Counsel, Chief Compliance Officer and Secretary of H&H Ventures Management, Inc., a wholly owned subsidiary of Harris & Harris Group, Inc. Ms. Forman began her legal career in the Investment Management Group at Skadden, Arps, Slate, Meagher & Flom LLP. She holds a Bachelor of Arts from New York University in New York, New York, and a Juris Doctor from the University of California Los Angeles in Los Angeles, California.

 

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Trustee Independence

 

The Board annually determines each trustee’s independence. The Board does not consider a trustee independent unless the Board has determined that he or she has no material business relationship with the Advisor, the Trust or the Master Fund. The Trust and the Master Fund monitor the relationships of their trustees through a questionnaire each trustee completes no less frequently than annually and updates periodically as information provided in the most recent questionnaire changes.

 

The Board has determined that each of the trustees is independent and has no relationship with the Trust or the Master Fund, except as a trustee and shareholder, with the exception of Kevin P. Traenkle, as a result of his relationship with Colony NorthStar and the Advisor.

 

Board Committees

 

In addition to serving on the Board, trustees may also serve on the audit committee. The Board has designated a chairman of the audit committee. Subject to applicable law, the Board may establish additional committees, change the membership of any committee, fill all vacancies and designate alternate members to replace any absent or disqualified member of any committee, or to dissolve any committee as it deems necessary and in the Trust’s and Master Fund’s best interests.

 

Audit Committee

 

The audit committee operates pursuant to a written charter adopted by the Board and is responsible for selecting, engaging and discharging the Trust’s and Master Fund’s independent registered public accounting firms, reviewing the plans, scope and results of the audit engagement with the Trust’s and Master Fund’s independent registered public accounting firms, approving professional services provided by the Trust’s and Master Fund’s independent registered public accounting firms (including compensation therefor), reviewing the independence of the Trust’s and Master Fund’s independent registered public accounting firms and reviewing the adequacy of the Trust’s and Master Fund’s internal control over financial reporting.

 

The audit committee also serves as the valuation committee of the Board. In this role, the audit committee establishes guidelines and makes recommendations to the Board regarding the valuation of the Trust’s and the Master Fund’s investments. The audit committee is responsible for aiding the Board in fair value pricing of debt and equity securities that are not publicly traded or for which current market values are not readily available. The Board and audit committee may utilize the services of an independent valuation firm to help them determine the fair value of these securities. On a quarterly basis, or more frequently if necessary, the Board’s audit committee also reviews and the Board ratifies the valuation determinations made with respect to the Trust’s and Master Fund’s investments during the preceding period and evaluates whether such determinations were made in a manner consistent with the Trust’s and Master Fund’s valuation policies and procedures. The audit committee has held two (2) meetings for the fiscal year ended December 31, 2017.

 

The members of the audit committee are Daniel J. Altobello, Dianne P. Hurley and Gregory A. Samay, each of whom is an Independent Trustee. Dianne P. Hurley serves as the chairperson of the audit committee. The Board has determined that Dianne P. Hurley is an “audit committee financial expert” as defined under SEC rules.

 

Nominating and Corporate Governance Committee

 

The Trust does not have a nominating and corporate governance committee. A majority of the Independent Trustees of the Board recommends candidates for election as trustees. The Trust does not currently have a charter or written policy with regard to the nomination process or Shareholder recommendations. The absence of such a policy does not mean, however, that a shareholder recommendation would not be considered.

 

The Independent Trustees will consider qualified trustee nominees recommended by the Shareholders when such recommendations are submitted in accordance with the Master Fund’s bylaws and any applicable law, rule or regulation regarding trustee nominations. When submitting a nomination for consideration, a Shareholder must submit the nomination to the secretary of the Board and provide certain information that would be required under applicable SEC rules, including the following minimum information for each trustee nominee: full name, age, business and residential address; number of Shares owned, if any; and all other information relating to such trustee nominee that is required to be disclosed in solicitations of proxies for election of trustees in an election contest, or is otherwise required, in each case pursuant to Regulation 14A (or any successor provision) under the Exchange Act, including such trustee nominee’s written consent to stand for election if nominated by the Board and to serve if elected by the Shareholders.

 

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Compensation of Trustees

 

Trustees who do not also serve in an executive officer capacity for the Trust, the Feeder Funds, the Master Fund or the Advisor are entitled to receive from the Master Fund an annual fixed fee of $65,000 (to be prorated for a partial term), an additional fee per Board meeting attended of $2,000, an additional fee per committee meeting attended of $1,000 and our audit committee chairperson will receive an additional $10,000 annual retainer (to be prorated for a partial term). These trustees are Daniel J. Altobello, Dianne P. Hurley and Gregory A. Samay. Dianne P. Hurley serves as the lead Independent Trustee/audit committee chairperson.

 

The Master Fund will also reimburse each of the trustees for all reasonable and authorized business expenses in accordance with the Master Fund’s policies as in effect from time to time, including reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each in-person Board meeting and each committee meeting not held concurrently with a Board meeting.

 

The Master Fund does not pay compensation to trustees who also serve in an executive officer capacity for the Trust, the Feeder Funds, the Master Fund or the Advisor.

 

Compensation of Executive Officers

 

Executive officers will not receive any direct compensation from the Trust. The Trust currently does not have any employees and does not expect to have any employees. Services necessary for the Trust’s business are provided by individuals who are contracted by the Advisor to work on the Trust’s behalf, pursuant to the terms of the Trust Advisory Agreement. The day-to-day investment operations and administration of the portfolio are managed by the Advisor. In addition, the Trust reimburses the Advisor for the allocable portion (subject to review by the Board or Master Fund Board, as appropriate) of the compensation overhead of administrative personnel paid by the Advisor, to the extent such personnel members are not controlling persons of the Advisor or any of its affiliates, subject to the limitations included in the Trust Advisory Agreement and the Master Fund Advisory Agreement.

 

The Trust Advisory Agreement provides that the Advisor and its officers, trustees, controlling persons and any other person or entity affiliated with it, as applicable, acting as the Trust’s agent shall not be entitled to indemnification (including reasonable attorneys’ fees and amounts reasonably paid in settlement) for any liability or loss suffered by the Advisor or such other person, and the Advisor and/or such other person, as applicable, shall not be held harmless for any loss or liability suffered by the Trust unless all of the following conditions are met: (i) the Advisor has determined, in good faith, that the course of conduct which caused the loss or liability was in the Trust’s best interests, (ii) the Advisor and/or such other person, as applicable, was acting on behalf of or performing services for the Trust, (iii) the liability or loss suffered was not the result of willful misfeasance, bad faith or gross negligence by the Advisor or its affiliates, as applicable, acting as the Trust’s agent, and (iv) the indemnification or agreement to hold the Advisor and/or such other person, as applicable, harmless is only recoverable out of the Trust’s net assets and not from Shareholders.

 

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Trustee Beneficial Ownership of Shares

 

The following table shows the dollar range of Shares beneficially owned by each trustee as of December 31, 2017.

 

Name of Trustee

 

Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen by Trustee in Family of Investment Companies(1)

Interested Trustee    
Kevin P. Traenkle   None
Independent Trustee    
Daniel J. Altobello   $10,001 – $50,000
Dianne P. Hurley   None
Gregory A. Samay   None

 

 

 

(1)Dollar ranges are as follows: None, $1 – $10,000, $10,001 – $50,000, $50,001 – $100,000, $100,001 – $500,000, $500,001 – $1,000,000, or over $1,000,000.

 

All trustees and executive officers of the Trust as a group had no beneficial ownership of the Shares as of December 31, 2017, except that Mr. Altobello owns less than 5% of the Shares.

 

Shareholder Communications

 

Shareholders may send communications to the Board. Shareholders should send communications intended for the Board by addressing the communication directly to the Board (or individual trustees) and/or otherwise clearly indicating in the salutation that the communication is for the Board (or individual trustees) and by sending the communication to the Trust’s offices at, c/o Colony NorthStar, Inc., at 590 Madison Avenue, 34th Floor, New York, New York 10022. Other Shareholder communications received by the Trust not directly addressed and sent to the Board will be reviewed and generally responded to by the Advisor, and will be forwarded to the Board only at the Advisor’s discretion based on the matters contained therein.

 

Control Persons and Principal Holders of Securities

 

A control person generally is a person who beneficially owns more than 25% of the voting securities of a company. Colony NorthStar FV has provided 100% of the initial capitalization of the Trust and therefore may be deemed to be a control person of the Trust because such entity owns more than 25% of the outstanding Shares as of the date of this prospectus.

 

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Portfolio Management

 

The Advisor

 

CNI RECF Advisors, LLC, a recently formed investment adviser that is registered with the SEC under the Advisers Act, serves as the Trust’s and Master Fund’s investment adviser pursuant to the terms of the Trust Advisory Agreement and Master Fund Advisory Agreement, respectively. The Advisor is an affiliate of Colony NorthStar, a publicly-traded, diversified CRE investment and asset management company. The principal office of the Advisor is located at, c/o Colony NorthStar, Inc., CNI RECF Advisors, LLC, 515 South Flower Street, 44th Floor, Los Angeles, CA 90071. For more information on the services provided by the Advisor to the Master Fund, see “Management of the Trust and the Master Fund.”

 

Investment Committee of the Advisor

 

The Advisor’s investment committee is responsible for approving any potential investments. The committee consists of Messrs. Saltzman, Hedstrom, Traenkle, Gatenio and Patel. All investments require the approval of Mr. Traenkle, with investments in excess of $25 million requiring the further approval of Mr. Saltzman. See “Management of the Trust and the Master Fund — Board of Trustees and Executive Officers” for biographical information pertaining to Mr.  Traenkle and Mr. Gatenio. Below is biographical information pertaining to the other members of the Advisor’s investment committee:

 

Richard B. Saltzman.   Mr. Saltzman is the President and Chief Executive Officer and a member of the Board of Directors of Colony NorthStar, having previously held the positions of President and Chief Executive Officer and a member of the Board of Directors of Colony, the predecessor to Colony NorthStar. In addition, he is Chairman of the Board of Directors of CLNS Credit (NYSE: CLNC) as well as Chairman of the Board of Directors of NorthStar Realty Europe (NYSE: NRE), companies that are externally managed by Colony NorthStar. Prior to joining the Colony business in 2003, Mr. Saltzman spent 24 years in the investment banking business primarily specializing in real estate-related businesses and investments. Most recently, he was a Managing Director and Vice Chairman of Merrill Lynch’s investment banking division. As a member of the investment banking operating committee, he oversaw the firm’s global real estate, hospitality and restaurant businesses. Previously, he also served as Chief Operating Officer of Investment Banking and had responsibility for Merrill Lynch’s Global Leveraged Finance business. Mr. Saltzman was also responsible for various real estate-related principal investments, including the Zell/Merrill Lynch series of funds which acquired more than $3.0 billion of commercial real estate assets and where he was a member of the investment committee. Mr. Saltzman also serves on the Board of Directors of Kimco Realty Corporation (NYSE: KIM). Previously, he served on the Board of Trustees of Colony Starwood Homes (NYSE: SFR) from January 2016 to June 2017. He was also previously a member of the Board of Governors of the National Association of Real Estate Investment Trusts (NAREIT), on the board of directors of the Real Estate Roundtable and a member of the Board of Trustees of the Urban Land Institute, Treasurer of the Pension Real Estate Association, a Director of the Association of Foreign Investors in Real Estate and a past Chairman of the Real Estate Capital Policy Advisory Committee of the National Realty Committee. Mr. Saltzman received his Bachelor of Arts from Swarthmore College in 1977 and a Master of Science in Industrial Administration from Carnegie Mellon University in 1979.

 

Mark M. Hedstrom.   Mr. Hedstrom has served as the Executive Vice President and Chief Operating Officer of Colony NorthStar since January 2017. Mr. Hedstrom previously served as Executive Director and Chief Operating Officer of Colony from April 2015 to January 2017. Prior to becoming the Executive Director and Chief Operating Officer of Colony, Mr. Hedstrom served as Vice President of Colony Financial, Inc. and as Principal and Chief Financial Officer of CCLLC, where he was responsible for all of CCLLC’s financial and treasury functions and had primary responsibility for CCLLC’s risk management and investor reporting. Prior to joining the Colony business in 1993, Mr. Hedstrom served in senior financial roles with The Koll Company and Castle Pines Land Company and served as a Senior Manager of Ernst & Young. Mr. Hedstrom is a Certified Public Accountant (license inactive) and received a B.S. in Accounting from the University of Colorado in 1980.

 

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Sujan S. Patel.   Mr. Patel has served as the Managing Director and Co-Head of U.S. Investment Management at Colony NorthStar since January 2017. He also serves as the Chief Financial Officer of CLNS Credit since January 2018. He is responsible for overseeing the sourcing, structuring and execution of Colony NorthStar’s opportunistic equity, debt and strategic investments across all asset types and geographies. Mr. Patel was Managing Director and Co-Head of Investments at NSAM where he was directly involved in or oversaw over $21 billion of closed transactions. Prior to joining NSAM in 2007, Mr. Patel was with Thayer Lodging Group, a lodging dedicated private equity firm, focusing on all aspects of sourcing, acquiring, financing and disposing of over $2 billion of hotel investments. Mr. Patel began his career at Morgan Stanley in their investment banking division based in New York. He currently serves on the Advisory Board of the NYU Schack Institute of Real Estate and is a member of the Board of Advisors of the Graaskamp Center for Real Estate at the Wisconsin School of Business. Mr. Patel also sits on the Major Decision Committee of Island Hospitality Management and on the Board of SteelWave, a San Francisco Bay Area-based full-service commercial real estate management and operating company. In addition, Mr. Patel is involved in several real estate industry organizations including being a Member of the ULI Global Exchange Council and is a frequent speaker at industry conferences and seminars. Mr. Patel was named by the Commercial Observer in March 2014 as a member of its “Power 100” list honoring top commercial real estate professionals. Mr. Patel received a Bachelor of Arts in Engineering Sciences modified with Economics from Dartmouth College.

 

The Advisor will rely upon Colony NorthStar’s and its affiliates’ investment professionals including the members of the investment committee and other professionals. See “Management of the Trust and the Master Fund — Board of Trustees and Executive Officers.” In addition, Colony NorthStar may retain additional investment personnel following the date on which the Trust commences operations, based upon its needs.

 

The compensation of the members of the investment committee is paid by the Advisor or its affiliates, and includes an annual base salary and may include a discretionary annual bonus. In addition, certain investment committee members indirectly hold equity interests in Colony NorthStar or its affiliates and may receive distributions in profits in respect of those interests.

 

None of the investment committee members is a direct beneficial owner of Shares.

 

Portfolio Managers

 

Other Accounts Managed by the Portfolio Managers

 

The portfolio managers primarily responsible for the day-to-day portfolio management of the Master Fund also manage other registered investment companies, other pooled investment vehicles and other accounts, as indicated below. The following table identifies, as of December 31, 2017: (i) the number of other registered investment companies, other pooled investment vehicles and other accounts managed by each portfolio manager; (ii) the total assets of such companies, vehicles and accounts; and (iii) the number and total assets of such companies, vehicles and accounts that are subject to an advisory fee based on performance.

 

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   Number of
Accounts
   Assets of
Accounts
   Number of
Accounts
Subject to a
Performance
Fee
   Assets Subject to
a Performance
Fee
 
       (in thousands)       (in thousands) 
Richard B. Saltzman                    
Registered Investment Companies   6   $61,292    1   $31,001 
Pooled Investment Vehicles Other Than
Registered Investment Companies
   48   $15,267,278    48   $15,267,278 
Other Accounts   1   $2,300,000    1   $2,300,000 
                     
Mark M. Hedstrom                    
Registered Investment Companies   6   $61,292    1   $31,001 
Pooled Investment Vehicles Other Than
Registered Investment Companies
   48   $15,267,278    48   $15,267,278 
Other Accounts   1   $2,300,000    1   $2,300,000 
                     
Kevin P. Traenkle                    
Registered Investment Companies   6   $61,292    1   $31,001 
Pooled Investment Vehicles Other Than
Registered Investment Companies
   48   $15,267,278    48   $15,267,278 
Other Accounts   1   $2,300,000    1   $2,300,000 
                     
Robert C. Gatenio                    
Registered Investment Companies   6   $61,292    1   $31,001 
Pooled Investment Vehicles Other Than
Registered Investment Companies
   48   $15,267,278    48   $15,267,278 
Other Accounts   1   $2,300,000    1   $2,300,000 
                     
Sujan S. Patel                    
Registered Investment Companies   6   $61,292    1   $31,001 
Pooled Investment Vehicles Other Than
Registered Investment Companies
   48   $15,267,278    48   $15,267,278 
Other Accounts   1   $2,300,000    1   $2,300,000 

 

Compensation of Portfolio Managers

 

The Advisor’s investment personnel are not employed by the Trust or the Master Fund and receive no direct compensation from the Trust or the Master Fund in connection with their investment management activities.

 

Securities Ownership of Portfolio Managers

 

The following table shows the dollar range of equity securities in the Trust beneficially owned by each member of the Advisor’s investment committee as of December 31, 2017.

 

Name of Investment Committee Member   Dollar Range of
Equity Securities
in the Trust(1)
     
Richard B. Saltzman   None
Mark M. Hedstrom   None
Kevin P. Traenkle   None
Robert C. Gatenio   None
     
Sujan S. Patel   None

 

 

(1)Dollar ranges are as follows: None, $1 – $10,000, $10,001 – $50,000, $50,001 – $100,000, $100,001 – $500,000, $500,001 – $1,000,000 or over $1,000,000.

 

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TRUST AND MASTER FUND EXPENSES

 

The Advisor bears all of its own costs incurred in providing investment advisory services to the Trust and the Master Fund. The Administrator bears all of its own costs incurred in providing the services contemplated by the Administration, Bookkeeping and Pricing Services Agreement.

 

As described below, however, the Master Fund bears all other expenses incurred in the business of the Master Fund, including amounts that the Master Fund reimburses to the Advisor for certain administrative services that the Advisor provides or arranges at its expense to be provided to the Master Fund pursuant to the Master Fund Advisory Agreement. Similarly, the Trust directly bears all expenses incurred in its operation, including amounts that the Trust reimburses to the Advisor and pays to the Administrator for services provided under the Trust Advisory Agreement and the Administration, Bookkeeping and Pricing Services Agreement, respectively, and the Trust indirectly bears its pro rata portion of all expenses incurred by the Master Fund based on its ownership of Master Fund Shares, including amounts that the Master Fund reimburses to the Advisor for administrative services provided under the Master Fund Advisory Agreement, amounts paid to the Administrator for administrative services provided under the Administration, Bookkeeping and Pricing Services Agreement, organization and offering costs incurred by the Master Fund and amounts payable to third-party service providers engaged by the Advisor on behalf of the Master Fund. The services provided pursuant to the Trust Advisory Agreement and the Master Fund Advisory Agreement include providing office space and other support services, maintaining and preserving certain records, preparing and filing various materials with state and U.S. federal regulators, providing fund accounting, legal services, investor relations and other administrative services and arranging for payment of the Trust’s and the Master Fund’s expenses.

 

Expenses borne directly and, through its investment in the Master Fund, indirectly by the Trust include:

 

·corporate and organization expenses relating to offerings of Shares and Master Fund Shares, as applicable;

 

·the cost of calculating the NAV of Shares and Master Fund Shares, including the cost of any third-party pricing or valuation services;

 

·the cost of effecting sales and repurchases of Shares, Master Fund Shares and other securities;

 

·the Management Fee and Incentive Fee;

 

·investment related expenses (e.g., expenses that, in the Advisor’s discretion, are related to the investment of the Master Fund’s assets, whether or not such investments are consummated), including (as applicable), but not limited to, brokerage commissions, interest expenses, dividends on securities sold but not yet purchased, investment-related travel and lodging expenses and research-related expenses and other due diligence expenses;

 

·professional fees relating to investments, including expenses of consultants, investment bankers, attorneys, accountants and other experts;

 

·fees and expenses relating to software tools, programs or other technology (including risk management software, fees to risk management services providers, third-party software licensing, implementation, data management and recovery services and custom development costs);

 

·research and market data (including news and quotation equipment and services, and any computer hardware and connectivity hardware (e.g., telephone and fiber optic lines) incorporated into the cost of obtaining such research and market data);

 

·all costs and charges for equipment or services used in communicating information regarding the Master Fund’s transactions among the Advisor and any custodian or other agent engaged by the Master Fund;

 

·transfer agent and custodial fees;

 

·all costs associated with the provision of information technology services;

 

·fees and expenses associated with marketing efforts;

 

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·federal and any state registration or notification fees;

 

·federal, state and local taxes;

 

·fees and expenses of the Independent Trustees;

 

·the costs of preparing, printing and mailing reports, notices and other communications, including proxy statements, shareholder reports and notices or similar materials, to Shareholders and the Master Fund Shareholders;

 

·fidelity bond, Trustees and officers/errors and omissions liability insurance and other insurance premiums;

 

·direct costs such as printing, mailing, long distance telephone and staff;

 

·routine non-compensation overhead costs, including rent, office supplies, utilities and capital equipment incurred by the Advisor in performing administrative services for the Trust and Master Fund;

 

·legal expenses (including those expenses associated with preparing the Trust’s and the Master Fund’s public filings, attending and preparing for Board and Master Fund Board meetings, as applicable, and generally serving as counsel to the Trust and the Master Fund);

 

·compliance expenses for the Trust and the Master Fund, including the cost of third-party service providers and any compliance program audit programs;

 

·external accounting expenses (including fees and disbursements and expenses related to the annual audit of the Trust and the Master Fund and the preparation of the Trust’s and the Master Fund’s tax information);

 

·costs associated with reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws, including compliance with the Sarbanes-Oxley Act of 2002;

 

·costs associated with the Trust’s and the Master Fund’s chief compliance officer and chief financial officer;

 

·all other expenses incurred by the Trust, the Master Fund or the Advisor in connection with administering the Trust’s and the Master Fund’s respective businesses, including expenses incurred by the Advisor in performing administrative services for the Trust or the Master Fund, the allocable portion (subject to review by the Board or Master Fund Board, as appropriate) of the compensation overhead of administrative personnel paid by the Advisor, to the extent such personnel members are not controlling persons of the Advisor or any of its affiliates, and the cost of any third-party service providers engaged to assist the Advisor with the provision of administrative services, subject to the limitations included in the Trust Advisory Agreement and the Master Fund Advisory Agreement; and

 

·any expenses incurred outside of the ordinary course of business, including, without limitation, costs incurred in connection with any claim, litigation, arbitration, mediation, government investigation or similar proceeding and indemnification expenses as provided for in the Trust’s and the Master Fund’s respective organizational documents.

 

Except as otherwise described in this prospectus, the Advisor will be reimbursed and the Administrator will be paid by the Master Fund or the Trust, as applicable, for any of the above expenses that they pay on behalf of the Master Fund or the Trust, including administrative expenses they incur on such entity’s behalf.

 

Organization and Offering Costs

 

The Advisor and its affiliates have incurred organization and offering costs, on the Trust’s behalf, of approximately $11,000 and $2,000,000, respectively, as of December 31, 2017. The Advisor and its affiliates are entitled to receive reimbursement for costs paid on behalf of the Trust. The Trust records organization and offering costs each period based upon an allocation determined by the Advisor based on its expectation of total organization and offering costs to be reimbursed. As of December 31, 2017, organization and offering costs of approximately $11,000 and $55,000, respectively, have been allocated to the Trust.

 

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Organization costs include, among other things, the cost of organizing as a Delaware statutory trust, including the cost of legal services and other fees pertaining to the Trust’s organization. These costs are expensed as incurred. The Trust’s offering costs include, among other things, legal, accounting, printing and other expenses pertaining to this offering. The offering costs incurred directly by the Trust are accounted for as a deferred charge and are amortized over 12 months on a straight-line basis.

 

The Trust will reimburse the offering expenses incurred by the Advisor and its affiliates on the Trust’s behalf. However, the Advisor has agreed to limit the amount of “Organization and Offering Expenses” incurred by the Trust to 1.0% of the aggregate proceeds raised in this offering, exclusive of the Sales Load. Any reimbursements of organization and offering expenses by the Trust will not exceed actual expenses incurred by the Advisor and its affiliates, and the Advisor is responsible for the payment of the Trust’s cumulative organization and offering expenses to the extent they exceed 1.0% of the aggregate proceeds raised in this offering, exclusive of the Sales Load.

 

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Management and Incentive Fees

 

The Trust does not incur a separate management fee or incentive fee under the Trust Advisory Agreement for so long as the Trust has a policy to invest all or substantially all of its assets in the Master Fund, but the Trust and its Shareholders are indirectly subject to the Management Fee and Incentive Fee paid to the Advisor by the Master Fund. Pursuant to the Master Fund Advisory Agreement, and in consideration of the advisory services provided by the Advisor to the Master Fund, the Advisor is entitled to a fee consisting of two components — the management fee and the incentive fee.

 

Management Fee

 

The Management Fee is calculated and payable quarterly in arrears at the annual rate of 1.25% of the Master Fund’s average daily net assets during such period. The Management Fee may or may not be taken in whole or in part at the discretion of the Advisor. All or any part of the Management Fee not taken as to any quarter will be deferred without interest and may be taken in any such other quarter prior to the occurrence of a liquidity event as the Advisor may determine. The Management Fee for any partial quarter will be appropriately prorated. For the fiscal years ended December 31, 2017 and December 31, 2016, the Master Fund paid the Advisor $82,257 and $63,614, respectively, under the Master Fund Advisory Agreement.

 

Incentive Fee

 

The Incentive Fee will be calculated and payable quarterly in arrears based upon the Master Fund’s “pre-incentive fee net investment income” for the immediately preceding quarter, and is subject to a hurdle rate, measured quarterly and expressed as a rate of return on the value to the Master Fund’s adjusted capital, at the beginning of the most recently completed quarter, equal to 1.50% per quarter, subject to a “catch-up” feature. For this purpose, “pre-incentive fee net investment income” means interest income, dividend income and any other income accrued during the calendar quarter, minus the Master Fund’s operating expenses for the quarter (including the Management Fee, expenses reimbursed to the Advisor under the Master Fund Advisory Agreement and any interest expense and distributions paid on any issued and outstanding preferred shares, but excluding the offering and organization expenses and the Incentive Fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as OID, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that the Master Fund has not yet received and may never receive in cash. While we may make incentive fee payments on income accruals that we may not collect in the future and with respect to which we do not have a formal “claw back” right against the Advisor per se, the amount of accrued income written off in any period will reduce our pre-incentive fee net investment income in the period in which such write-off was taken and thereby may reduce such period’s incentive fee payment. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. “Adjusted capital” means the cumulative gross proceeds received by the Master Fund from the sale of Master Fund shares (including pursuant to the Master Fund’s distribution reinvestment plan), reduced by distributions to investors that represent a return of capital and amounts paid in connection with repurchases of Master Fund Shares pursuant to the Master Fund’s share repurchase program.

 

The calculation of the Incentive Fee for each quarter is as follows:

 

·No Incentive Fee is payable in any calendar quarter in which the Master Fund’s pre-incentive fee net investment income does not exceed the quarterly hurdle rate of 1.50%;

 

·100% of the Master Fund’s pre-incentive fee net investment income, if any, that exceeds the quarterly hurdle rate but is less than or equal to 1.715% in any calendar quarter is payable to the Advisor. This portion of the Master Fund’s pre-incentive fee net investment income which exceeds the quarterly hurdle rate but is less than or equal to 1.715% is referred to as the “catch-up.” The “catch-up” provision is intended to provide the Advisor with an incentive fee of 12.5% on all of the Master Fund’s pre-incentive fee net investment income when the Master Fund’s pre-incentive fee net investment income reaches 1.715% in any calendar quarter; and

 

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·12.5% of the Master Fund’s pre-incentive fee net investment income, if any, that exceeds 1.715% in any calendar quarter is payable to the Advisor once the quarterly hurdle rate is reached and the catch-up is achieved (12.5% of all the Master Fund’s pre-incentive fee net investment income thereafter is allocated to the Advisor).

 

There is no accumulation of amounts on the hurdle rate from quarter to quarter and accordingly there is no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle and there is no delay of payment if prior quarters are below the quarterly hurdle.

 

Example 1: Master Fund’s Incentive Fee on Income for Each Calendar Quarter

 

Scenario 1

 

Assumptions

 

Investment income (including interest, dividends, fees, etc.) = 2.00%

 

Quarterly hurdle rate = 1.50%

 

Base management fee(1) = 0.3125%

 

Other expenses (legal, accounting, custodian, transfer agent, etc.)(2) = 0.3875%

 

Pre-incentive fee net investment income (investment income – (base management fee + other expenses) = 1.30%

 

Pre-incentive fee net investment income does not exceed the quarterly hurdle rate, therefore there is no incentive fee on income payable.

 

Scenario 2

 

Assumptions

 

Investment income (including interest, dividends, fees, etc.) = 2.40%

 

Quarterly hurdle rate = 1.50%

 

Base management fee(1) = 0.3125%

 

Other expenses (legal, accounting, custodian, transfer agent, etc.)(2) = 0.3875%

 

Pre-incentive fee net investment income (investment income – (base management fee + other expenses) = 1.7%

 

Incentive fee on income = 100% × pre-incentive fee net investment income (subject to “catch-up”)(3)

 

= 100% × (1.7% – 1.50%)

 

= 0.20%

 

Pre-incentive fee net investment income exceeds the quarterly hurdle rate, but does not fully satisfy the “catch-up” provision, therefore the incentive fee on income is 0.20%.

 

Scenario 3

 

Assumptions

 

Investment income (including interest, dividends, fees, etc.) = 3.2%

 

Quarterly hurdle rate = 1.50%

 

Base management fee(1) = 0.3125%

 

Other expenses (legal, accounting, custodian, transfer agent, etc.)(2) = 0.3875%

 

Pre-incentive fee net investment income (investment income – (base management fee + other expenses) = 2.5%

 

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Catch up = 100% × pre-incentive fee net investment income (subject to “catch-up”)(3)

 

Incentive fee on income = 100% × “catch-up” + (12.5% × (pre-incentive fee net investment income – 1.715%))

 

Catch up = 1.715% – 1.50%

 

= 0.215%

 

Incentive fee on income = (100% × 0.215%) + (12.5% × (2.5% – 1.715%))

 

= 0.215% + (12.5% × 0.785%)

 

= 0.215% + 0.098125%

 

= 0.313%

 

Pre-incentive fee net investment income exceeds the quarterly hurdle rate and fully satisfies the “catch-up” provision, therefore the incentive fee on income is 0.313%.

 

 

(1)Represents 1.25% annualized base management fee on average daily net assets. Examples assume assets are equal to adjusted capital.

 

(2)Excludes organization and offering expenses.

 

(3)The “catch-up” provision is intended to provide the Advisor with an incentive fee of 12.5% on all pre-incentive fee net investment income when net investment income exceeds 1.715% in any calendar quarter.

 

The following is a graphical representation of the calculation of the income-related portion of the incentive fee:

 

Quarterly Incentive Fee on
Master Fund’s Pre-Incentive Fee Net Investment Income
(expressed as a percentage of average adjusted capital)

 

 

  

Percentage of Pre-Incentive Fee Net Investment Income Allocated to Quarterly Incentive Fee

 

These calculations will be appropriately prorated for any period of less than three months.

 

The fees that are payable under the Master Fund Advisory Agreement for any partial period will be appropriately prorated.

 

The Advisor may elect to defer or waive all or a portion of the fees that would otherwise be paid to it in its sole discretion. Any portion of a fee not taken as to any month, quarter or year will be deferred without interest and may be taken in any such other month prior to or upon the occurrence of a liquidity transaction as the Advisor may determine in its sole discretion.

 

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Approval of the Advisory Agreement

 

The Trust Advisory Agreement was approved by the Board on March 3, 2016 and became effective as of May 6, 2016 upon the effectiveness of the Registration Statement File No. 333-207678, as amended, previously filed by the Registrant on Form N-2 on April 15, 2016. An amendment to the Trust Advisory Agreement was approved by the Board on February 23, 2017. On February 22, 2018, the Board approved the renewal of the Trust Advisory Agreement. A discussion regarding the basis for the Board’s approval of the continuation of the Trust’s Advisory Agreement will be available in the Trust’s upcoming semi-annual report to Shareholders for the period ended June 30, 2018. The approval was made in accordance with, and on the basis of an evaluation satisfactory to the Board as required by, Section 15(c) of the 1940 Act and applicable rules and regulations thereunder, including a consideration of, among other factors, (i) the nature, quality and extent of the advisory and other services to be provided under the agreement, (ii) the investment performance of the personnel who manage investment portfolios with objectives similar to the Trust’s, (iii) comparative data with respect to advisory fees or similar expenses paid by other investment companies with similar investment objectives and (iv) information about the services to be performed and the personnel performing such services under the agreement.

 

Unless earlier terminated, as described below, the Trust Advisory Agreement will remain in effect from year-to-year if approved annually by the Board or by the affirmative vote of the holders of a majority of the Trust’s outstanding securities, including in either case, approval by a majority of the Trust’s Trustees who are not interested persons, as defined by the 1940 Act (i.e., the Independent Trustees). Mutual written consent and an affirmative vote of a majority of the Board or the holders of a majority of the Trust’s outstanding voting securities and, in either case, the vote of a majority of the Trust’s Independent Trustees, are also necessary in order to make material amendments to the Trust Advisory Agreement.

 

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DETERMINATION OF NET ASSET VALUE

 

The Trust determines the NAV of Shares daily during the Offering Period and intends to determine the NAV of the Shares quarterly thereafter, based on the value of its interest in the Master Fund using the NAV of Master Fund Shares provided by the Master Fund. The Trust calculates NAV per Share by subtracting liabilities (including accrued expenses or distributions) from the total assets of the Trust (the value of its securities, including its Master Fund Shares, plus cash or other assets, including interest and distributions accrued but not yet received) and dividing the result by the total number of outstanding Shares. The Trust utilizes the NAV of the Master Fund Shares as determined by the Master Fund in accordance with the methodology described below in determining the NAV of the Shares.

 

The Master Fund calculates NAV per Share by subtracting liabilities (including accrued expenses or distributions) from the total assets of the Master Fund (the value of investments, plus cash or other assets, including interest and distributions accrued but not yet received) and dividing the result by the total number of outstanding Master Fund Shares. The Master Fund’s assets and liabilities are valued in accordance with the principles set forth below.

 

The Valuation Committee, consisting of personnel from the Advisor whose membership on the Valuation Committee was approved by the Master Fund Board, values the Master Fund’s assets in good faith pursuant to the Master Fund’s valuation policies and procedures that were developed by the Valuation Committee and approved by the Master Fund Board. Portfolio securities and other assets for which market quotes are readily available are valued at market value. In circumstances where market quotes are not readily available, the Master Fund Board has adopted policies and procedures for determining the fair value of such securities and other assets, and has delegated the responsibility for applying the valuation methods to the Valuation Committee. On a quarterly basis, or more frequently if necessary, the Master Fund’s audit committee reviews and the Master Fund Board ratifies the valuation determinations made with respect to the Master Fund’s investments during the preceding period and evaluates whether such determinations were made in a manner consistent with the Master Fund’s valuation policies and procedures.

 

Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the Financial Accounting Standards Board, clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

The Advisor provides the Master Fund Board with periodic reports on a quarterly basis, or more frequently if necessary, describing the valuation process applicable to that period. To the extent deemed necessary by the Advisor, the Valuation Committee may review certain securities valued by the Advisor in accordance with the Trust’s valuation policies.

 

When determining the fair value of an asset, the Valuation Committee seeks to determine the price that would be received from the sale of the asset in an orderly transaction between market participants at the measurement date, in accordance with ASC Topic 820. Fair value determinations are based upon all available inputs that the Valuation Committee deems relevant, which may include indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts for the investment, and valuations prepared by independent valuation firms. However, determination of fair value involves subjective judgments and estimates. Accordingly, the notes to the Master Fund’s consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on the Master Fund’s consolidated financial statements.

 

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There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each investment while employing a valuation process that is consistently followed. Determinations of fair value involve subjective judgments and estimates.

 

The Master Fund expects that its portfolio will primarily consist of investments that are not actively traded in the market and for which quotations may not be available. For the purposes of calculating NAV, the Valuation Committee uses the following valuation methods:

 

Investments where a market price is readily available:

 

Generally, the value of any equity interests in public companies for which market quotations are readily available will be based upon the most recent closing public market price. Securities that carry certain restrictions on sale will typically be valued at a discount from the public market value of the security. Loans or investments traded over the counter and not listed on an exchange are valued at a price obtained from third-party pricing services, including, where appropriate, multiple broker dealers, as determined by the Valuation Committee.

 

Investments where a market price is not readily available:

 

For investments for which no active secondary market exists and, therefore, no bid and ask prices can be readily obtained, the Master Fund will value such investments at fair value as determined in good faith by the Master Fund Board, with assistance from the Valuation Committee, in accordance with the Master Fund’s valuation policy.

 

In making its determination of fair value, the Valuation Committee may retain and rely upon valuations obtained from independent valuation firms; provided that the Valuation Committee shall not be required to determine fair value in accordance with the valuation provided by any single source, and the Valuation Committee shall retain the discretion to use any relevant data, including information obtained from any independent third-party valuation or pricing service, that the Valuation Committee deems to be reliable in determining fair value under the circumstances.

 

In addition to the foregoing, an independent valuation firm will evaluate certain investments for which a market price is not readily available. Finally, unless the NAV and other aspects of such investments exceed certain thresholds, an independent valuation firm would not undertake such an evaluation.

 

Below is a description of factors that may be considered when valuing the Master Fund’s CRE investments, where a market price is not readily available:

 

·the size and scope of the CRE investment and its specific strengths and weaknesses;

 

·rental income, related rental income, expense amounts and expense growth rates;

 

·discount rates and capitalization rates;

 

·an analysis of recent comparable sales transactions;

 

·bona fide third party purchase offers and sale negotiations;

 

·prevailing interest rates for like securities;

 

·expected volatility in future interest rates;

 

·leverage;

 

·call features, put features and other relevant terms of the debt;

 

·the borrower’s ability to adequately service its debt;

 

·the fair value of the CRE investment in relation to the face amount of its outstanding debt;

 

·the quality of collateral securing the Master Fund’s CRE debt investments;

 

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·industry multiples including but not limited to earnings before interest, tax, depreciation and amortization, or EBITDA, cash flows, net income, revenues or, in some cases, book value or liquidation value; and

 

·other factors deemed applicable.

 

All of these factors may be subject to adjustments based upon the particular circumstances of an investment or the Master Fund’s actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners, or acquisition, recapitalization and restructuring expenses or other related or non-recurring items. The choice of analyses and the weight assigned to such factors may vary across investments and may change within an investment if events occur that warrant such a change.

 

While the Master Fund’s valuation policy is intended to result in a calculation of the Master Fund’s NAV that fairly reflects investment values as of the time of pricing, the Master Fund cannot ensure that fair values determined by the Valuation Committee would accurately reflect the price that the Master Fund could obtain for an investment if it were to dispose of that investment as of the time of pricing (for instance, in a forced or distressed sale). The prices used by the Master Fund may differ from the value that would be realized if the investments were sold. The Master Fund periodically benchmarks the bid and ask prices received from independent valuation firms and/or dealers, as applicable, and valuations received from the independent valuation firms against the actual prices at which it purchases and sells its investments. The Master Fund believes that these prices will be reliable indicators of fair value.

 

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CONFLICTS OF INTEREST

 

Affiliates’ Interests in Colony NorthStar and Its Affiliates

 

General

 

The Advisor is an indirect subsidiary of the Trust’s sponsor, Colony NorthStar, a Maryland corporation that provides, through its subsidiaries, asset management and other services to the Managed Companies.

 

Colony NorthStar currently sponsors three other public companies that have raised, are raising or are expected to raise capital through the retail market, NorthStar Healthcare, NorthStar/RXR (as a co-sponsor), NorthStar/Townsend (as a co-sponsor) and the Feeder Funds. NorthStar Healthcare successfully completed its continuous public offering in December 2015 and has invested substantially all of its offering proceeds; however, NorthStar Healthcare may make investments in the future with proceeds from the sale or repayment of existing investments. On February 9, 2015, NorthStar/RXR, a program co-sponsored by Colony NorthStar, had its Registration Statement on Form S-11 for a proposed initial public offering of up to $2.0 billion of common stock declared effective by the SEC. The T-Class Feeder Fund, the ADV-Class Feeder Fund and the C-Class Feeder Fund had their Registration Statements on Form N-2 for a proposed initial public offering of up to, in each case, 20,000,000 common shares declared effective by the SEC on March 23, 2017, November 8, 2017 and January 30, 2018, respectively. As a result, it is expected that NorthStar/RXR, NorthStar/Townsend and the Feeder Funds will be engaged in their respective public offerings for some period of time during which this offering is also ongoing. NorthStar Healthcare is not registered under 1940 Act. In addition, on January 31, 2018, Colony NorthStar, NorthStar Income and NorthStar Income II completed a combination pursuant to a definitive tri-party agreement (the “Combination Agreement”) under which a select portfolio of Colony Northstar assets and liabilities (the “CLNS Contributed Portfolio”) has combined with NorthStar Income and NorthStar Income II in an all-stock combination transaction and created a commercial real estate credit REIT with approximately $5.1 billion in assets under management and $3.3 billion in equity value as of September 30, 2017, which will be named Colony Northstar Credit Real Estate, Inc. (“CLNS Credit”). CLNS Credit is expected to invest in assets similar to those in which the Master Fund will be investing.

 

The Trust’s and the Master Fund’s executive officers and certain of the Trustees may also be officers, directors and managers of Colony NorthStar, NorthStar Securities, CLNS Credit and/or other affiliates of Colony NorthStar, including NorthStar Healthcare, NorthStar/RXR, NorthStar/Townsend, the Feeder Funds and the Master Fund. These persons have legal obligations with respect to those entities that are similar to their obligations to the Trust and the Master Fund. In the future, these persons and other affiliates of Colony NorthStar may organize other debt-related programs and acquire for their own account debt-related investments that may be suitable for the Master Fund. The Trustees are not restricted from engaging for their own account in business activities of the type conducted by the Master Fund. In addition, Colony NorthStar may grant equity interests in the Advisor to certain personnel performing services for the Advisor and NorthStar Securities.

 

Allocation of Affiliates’ Time

 

The Master Fund relies on Colony NorthStar’s key executive officers and employees who act on behalf of the Advisor, including Messrs. Barrack, Saltzman, Tangen, Hedstrom, Traenkle, Gatenio, Patel, Sanders, Redington and Saracino for the day-to-day operation of the Master Fund’s business. Messrs. Barrack, Saltzman, Tangen, Hedstrom, Traenkle, Gatenio, Patel, Sanders and Redington are also executive officers of Colony NorthStar or other affiliates of Colony NorthStar and Messrs. Traenkle and Saracino are executive officers of some or all of the Managed Companies, and are made available to the Advisor pursuant to the Advisor Staffing Agreement. As a result of their interests in other affiliates of Colony NorthStar and/or Managed Companies, their obligations to other investors and the fact that they engage in and they will continue to engage in other business activities on behalf of themselves and others, Messrs. Barrack, Saltzman, Tangen, Hedstrom, Traenkle, Gatenio, Patel, Sanders, Redington and Saracino will face conflicts of interest in allocating their time among the Trust and the Master Fund, the Advisor and other affiliates of Colony NorthStar and other business activities in which they are involved. However, the Trust and the Master Fund believe that the Advisor and its affiliates have sufficient resources and personnel to fully discharge their responsibilities to the Trust, the Master Fund and the Managed Companies and any other affiliates of Colony NorthStar that they advise and manage.

 

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Lack of Separate Representation.    Clifford Chance US LLP has acted as special U.S. federal income tax counsel to the Trust and the Master Fund in connection with this offering and is counsel to the Trust, the Master Fund and the Advisor in connection with this offering and may in the future act as counsel for each such company. Clifford Chance US LLP also currently and may in the future serve as counsel to certain affiliates of the Advisor in matters unrelated to this offering. There is a possibility that in the future the interests of the various parties may become adverse. In the event that a dispute were to arise between the Trust, the Master Fund, NorthStar Securities, the Advisor, or any of its affiliates, separate counsel for such parties would be retained as and when appropriate.

 

Lack of Information Barriers.    There are no information barriers amongst the Advisor and certain of its affiliates, including the Master Fund. If the Advisor or certain of its affiliates were to receive material non-public information about a particular company, or have an interest in investing in a particular company, the Advisor or certain of its affiliates, including the Master Fund, may be prevented from investing in such company. Conversely, if the Advisor or certain of its affiliates were to receive material non-public information about a particular company, or have an interest in investing in a particular company, the Master Fund may be prevented from investing in such company.

 

The risk may affect us more than it does other investment vehicles, as the Advisor and its affiliates generally do not use information barriers that many firms implement to separate persons who make investment decisions from others who might possess material, non-public information that could influence such decisions. The Advisor’s decision not to implement these barriers could prevent their investment professionals from undertaking certain transactions such as advantageous investments or dispositions that would be permissible for them otherwise. In addition, the Advisor could in the future decide to establish information barriers, particularly as its business expands and diversifies.

 

Policies and Procedures for Managing Conflicts; Allocation of Investment Opportunities

 

The Advisor and its affiliates have both subjective and objective procedures and policies in place designed to manage the potential conflicts of interest between the Advisor’s fiduciary obligations to the Master Fund and its similar fiduciary obligations to other clients. For example and as discussed in further detail below, the Advisor has adopted policies and procedures that seek to allocate investment opportunities between the Master Fund and its other clients fairly and equitably over time. Nonetheless, an investment opportunity that is suitable for multiple clients of the Advisor and its affiliates, including the Master Fund, may not be capable of being shared among some or all of such clients due to the limited scale of the opportunity or other factors, including regulatory restrictions imposed on some clients by the 1940 Act. There can be no assurance that the Advisor’s or its affiliates’ efforts to allocate any particular investment opportunity fairly among all clients for whom such opportunity is appropriate will result in an allocation of all or part of such opportunity to the Master Fund. Not all conflicts of interest can be expected to be resolved in the Master Fund’s favor.

 

Allocation of Investment Opportunities by the Advisor.   The principals of the Advisor and its affiliates have managed and will continue to manage investment vehicles with similar or overlapping investment strategies. In order to address these issues, the Advisor has put in place an investment allocation policy to ensure that investment opportunities are allocated between the Master Fund and the Advisor’s and its affiliates’ other clients on a fair and equitable basis. In particular, it is expected that any potential investments sourced by the Advisor will be presented to the Advisor’s investment allocation committee, which will allocate the investment opportunities presented to it among the Master Fund and the other Managed Companies.

 

Allocation of Investment Opportunities by Colony NorthStar.   The Master Fund will rely on the Advisor or its affiliates’ investment professionals to identify suitable investment opportunities for the Master Fund as well as the other Managed Companies. The Master Fund’s investment strategy may be similar to that of, and may overlap with, the investment strategies of the other Managed Companies, managed, advised or sub-advised by the Advisor and its affiliates (which collectively are referred to as “Colony NorthStar” for the purposes of this section). The Master Fund’s investment strategy may also be similar to that of, and may overlap with, the investment strategies of a variety of closed-end and open-end private funds, public traded and non-traded real estate investment trusts, registered investment companies, and other clients (together with any future funds or investment vehicles, the “Clients”) of an affiliate of the Advisor. Therefore, many investment opportunities sourced by Colony NorthStar or one or more of the partners that are suitable for the Master Fund may also be suitable for other Managed Companies and/or Clients.

 

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The Master Fund relies on Colony NorthStar’s investment professionals to identify suitable investment opportunities for the Master Fund as well as the other Managed Companies. The Master Fund’s investment strategy may be similar to that of, and may overlap with, the investment strategies of the other Managed Companies. Therefore, many investment opportunities that are suitable for the Master Fund may also be suitable for other Managed Companies.

 

This investment allocation policy of the Advisor and its affiliates applies to investment opportunities (“Eligible Investments”) that are sourced by partners, officers, directors (or other persons performing similar functions) or employees of the Advisor or its affiliates (“Included Persons”). Unless otherwise determined by the Advisor or its affiliates, this investment allocation policy does not apply to investment opportunities (i) sourced by anyone who is not an Included Person, such as certain companies, funds, joint ventures, strategic partners or vehicles, which are cosponsored, co-branded or subject to a strategic relationship with Colony NorthStar, or representatives thereof, (ii) presented to an Included Person by a person or entity who is not an Included Person if such Included Person is acting in his or her capacity as a fiduciary (such as an officer or director) to a person or entity that is not an Included Person, or (iii) sourced by an Included Person if such Included Person is acting pursuant to a staffing agreement or similar arrangement with a person or entity that is not a Client.

 

When making investment allocation decisions regarding a suitable investment for one or more Clients, the Advisor and its affiliates shall take into account the agreements, documents materials or principles of the Clients and shall consider, without limitation, the following factors:

 

·investment objectives, dedicated mandates, strategy and criteria;

 

·current and future cash requirements of the investment and the Client;

 

·effect of the investment on the diversification of the portfolio, including by geography, size of investment, type of investment and risk of investment;

 

·leverage policy and the availability of financing for the investment by each Client;

 

·anticipated cash flow of the investment to be acquired;

 

·income tax effects of the investment;

 

·the size of the investment;

 

·the amount of funds available for investment;

 

·ramp-up or draw-down periods;

 

·cost of capital;

 

·risk return profiles;

 

·targeted distribution rates;

 

·anticipated future pipeline of suitable investments;

 

·the expected holding period of the investment and the remaining term of the Client, if applicable;

 

·legal, regulatory or tax considerations, including any conditions of an exemptive order;

 

·affiliate and/or related party considerations; and

 

·whether a Client has other sources of investment opportunities besides Included Persons.

 

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A dedicated mandate may cause some Clients to have priority over certain other Clients with respect to certain Eligible Investments.

 

If it is determined that an Eligible Investment is most suitable for a particular Client, the Eligible Investment will be allocated to such Client. If it is determined that an Eligible Investment is equally suitable for two or more Clients, then the Advisor and its affiliates may allocate the Eligible Investments among such Clients on a rotational basis. In general, a rotational allocation methodology means that if a Client has been previously allocated an Eligible Investment as a result of the rotational process, it may be skipped in the rotation until all other Clients for which a particular Eligible Investment is equally suitable have been allocated an Eligible Investment. New Clients will be initially added to the end of the allocation rotation. The Advisor and its affiliates shall determine which Clients shall participate in an Eligible Investment prior to entering into a transaction, except in limited circumstances, such as where pre-allocation would be impracticable.

 

If the Advisor and its affiliates determine that an Eligible Investment is not suitable for any Client, then the Chief Investment Officer of the Advisor and its affiliates has the authority to determine that such Eligible Investment may be pursued by a person or entity that is not a Client, even if such person or entity has a relationship with Colony NorthStar.

 

Co-Investment Opportunities; Transactions Involving Affiliates.    From time to time, investment opportunities may arise that would be appropriate for both the Master Fund as well as other clients of the Advisor and its affiliates. To the extent permitted by the 1940 Act and interpretations of the staff of the SEC, and subject to the allocation policies of the Advisor and its affiliates, as applicable, the Advisor and its affiliates may deem it appropriate for the Master Fund and one or more other investment accounts managed by the Advisor or any of its affiliates to participate in an investment opportunity. However, due to restrictions under the 1940 Act, unless the Master Fund obtains, or can rely upon, an exemptive order from the SEC, the Master Fund generally will only be permitted to co-invest with, among others, certain entities affiliated with or managed by the Advisor or its affiliates where the only term that is negotiated is price and generally in accordance with existing and future guidance from the SEC staff. The fact that a type of transaction had been determined in the past to be appropriate solely for the Master Fund will not prevent a determination that a similar investment is appropriate for both the Master Fund and certain entities affiliated with or managed by the Advisor or its affiliates, in which case the investment opportunity will be allocated among these affiliated entities on a rotating basis (unless an exemptive order is obtained).

 

The Master Fund currently intends to rely on the exemptive application filed by certain entities affiliated with the Advisor, which seeks relief from the SEC to engage in certain types of co-investment transactions with certain affiliated entities. Any of these co-investment opportunities may give rise to conflicts of interest or perceived conflicts of interest among the Master Fund and the other participating accounts. To mitigate these conflicts, the Advisor will seek to execute such transactions for all of the participating investment accounts, including the Master Fund, on a fair and equitable basis and in accordance with their respective allocation policies, taking into account such factors as the relative amounts of capital available for new investments and the investment programs and portfolio positions of the Master Fund, the clients for which participation is appropriate and any other factors deemed appropriate. However, there can be no assurance that the entities affiliated with the Advisor will obtain such exemptive relief or that Master Fund and the Advisor will be able to rely on such exemptive relief.

 

In addition, under the 1940 Act, the Master Fund generally may not purchase securities or other property from (or sell them to) affiliates of the Advisor. This may limit the Master Fund’s ability to invest in companies in which funds and other clients of affiliates of the Advisor have already made significant investments.

 

Receipt of Fees and Other Compensation by the Advisor and its Affiliates

 

The Advisor and its affiliates will, directly or indirectly, receive substantial fees from the Master Fund. These fees could influence the Advisor’s advice to the Master Fund as well as the judgment of the investment committee and management personnel of Colony NorthStar who perform services on behalf of the Advisor, some of whom also serve as executive officers, directors and other key professionals of Colony NorthStar. Among other matters, these compensation arrangements could affect their judgment with respect to:

 

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·the continuation, renewal or enforcement of the Trust’s and the Master Fund’s agreements with the Advisor and its affiliates, including the Trust Advisory Agreement, the Master Fund Advisory Agreement, and the Administration, Bookkeeping and Pricing Services Agreement;

 

·public offerings of equity by the Trust, which will likely entitle the Advisor to increased management fees;

 

·recommendation of more risky or more speculative investments as such investments may increase the Incentive Fee payable to the Advisor; and