PART II AND III 2 a19-7271_3partiiandiii.htm PART II AND III

 

Filed Pursuant to Rule 253(g)(2)

File No. 024-10840

 

OFFERING CIRCULAR

 

C:\Users\mgcb\AppData\Local\Microsoft\Windows\Temporary Internet Files\Content.Outlook\6MICG6BH\icon.jpg 

 

MogulREIT I, LLC

 

Sponsored by

RM Sponsor, LLC

 

Up to $33,170,054 in Common Shares

 

The United States Securities and Exchange Commission does not pass upon the merits of or give its approval to any securities offered or the terms of the offering, nor does it pass upon the accuracy or completeness of any offering circular or other solicitation materials.  These securities are offered pursuant to an exemption from registration with the Commission; however, the Commission has not made an independent determination that the securities offered are exempt from registration.

 

The use of projections or forecasts in this offering is prohibited.  No one is permitted to make any oral or written predictions about the cash benefits or tax consequences you will receive from your investment in our common shares. 

 

 

 

 

 

 

 

 

 

    

Per Share

    

Total (2)

Public Offering Price(1)

 

$

10.00

 

$

 33,170,054

Underwriting Discounts and Commissions(3)

 

$

0.12

 

$

 398,041

Underwriting Discounts and Commissions Funded by Sponsor(3)

 

$

(0.12)

 

$

398,041

Proceeds to the Company from this Offering to the Public (Before Expenses)

 

$

10.00

 

$

 33,170,054

Proceeds to the Company from the Private Placement to our Sponsor (Before Expenses)

 

$

10.00

 

$

2,500

Total Proceeds to the Company (Before Expenses)

 

$

10.00

 

$

 33,170,054


(1)

The offering price per share will equal the greater of (i) $10.00 per share or (ii) our net asset value, or NAV, per share (calculated as our NAV divided by the number of our common shares outstanding as of the end of the prior fiscal quarter) and will be adjusted at the beginning of every fiscal quarter (or as soon as commercially reasonable thereafter).  Our NAV per share is $9.70, as of September 30, 2018.  Investors will pay the most recent publicly announced offering price as of the date of their subscription.

(2)

On August 12, 2016, we qualified up to $50,000,000 in shares of our common stock for issuance. During the 12-month period between February 14, 2018 and February 14, 2019 we have sold 1,682,946 shares, for total gross offering proceeds of approximately $16,829,946. Accordingly, as of February 14, 2019, the total maximum amount of shares available for issuance is $33,170,054.

(3)

Neither we nor investors in this offering will pay upfront selling commissions in connection with the purchase of our common shares. Instead, Realty Mogul, Co. will fund our sponsor, RM Sponsor, LLC, or Sponsor, in order to pay these upfront selling commissions to the applicable broker-dealer executing the sale.  Our Sponsor will pay upfront selling commissions in an amount up to 1.2% of the gross offering proceeds.  Additionally, we will reimburse our Manager for actually incurred, third-party organization and offering costs, which are not expected to exceed $1,450,000.  See “Management Compensation” for a description of additional fees and expenses that we will pay our Manager. Additionally, see “Plan of Distribution” for additional items of compensation received by the broker-dealers involved in this offering.

 

Generally, no sale may be made to you in this offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth.  Different rules apply to accredited investors and non-natural persons.  Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(C) of Regulation A.  For general information on investing, we encourage you to refer to www.investor.gov.

 

We include a copy of Rule 251(d)(2)(i)(C) of Regulation A as an appendix to this offering circular and on the Realty Mogul website. 

 

This Offering Circular follows the Form S-11 disclosure format.

 

The date of this offering circular is March 28, 2019.

 

 

 

 


 

 

The mailing address of our principal executive offices is:

 

MogulREIT I, LLC

10780 Santa Monica Blvd.

Suite 140

Los Angeles, CA 90025

Attn: Investor Relations

 

Our telephone number is (877) 781-7153 and our website address is www.realtymogul.com.

 

Investing in our common shares is speculative and involves substantial risks.  You should purchase these securities only if you can afford a complete loss of your investment.  You should carefully review the “Risk Factors” section of this offering circular, beginning on page 27, which contains a detailed discussion of the material risks that you should consider before you invest in our common shares.  These risks include the following:

 

·

We have limited operating history.

·

Our ability to implement our investment strategy is dependent, in part, upon our ability to successfully conduct this offering through the Realty Mogul Platform, which makes an investment in us more speculative.

·

This is a blind pool offering as we have not identified all of the investments we intend to acquire. As such, you will not have the opportunity to evaluate our future investments before we make them, which makes your investment more speculative.

·

There are conflicts of interest between us, our Manager and its affiliates.

·

Our Sponsor sponsors, and our Manager advises, MogulREIT II, Inc., a real estate program substantially similar to us, and we expect that they will sponsor and advise additional companies that may compete with us, and neither our Sponsor nor our Manager has an exclusive management arrangement with us.

·

Failure to maintain our qualification as a REIT would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our shareholders.

·

We may allocate the net proceeds from this offering to investments with which you may not agree.

 

MogulREIT I, LLC is a Delaware limited liability company formed to invest in and manage a diversified portfolio of commercial real estate investments, including loans and equity in commercial real estate ventures.  The use of the terms “MogulREIT I”, the “Company”, “we”, “us”, or “our” in this offering circular refer to MogulREIT I, LLC, unless the context indicates otherwise.  We intend to hold: (1) at least 55% of the total value of our assets in commercial mortgage-related instruments that are closely tied to one or more underlying commercial real estate projects, such as mortgage loans, subordinated mortgage loans, mezzanine debt and participations (also referred to as B-Notes) that meet certain criteria set by the staff of the SEC; and (2) at least 80% of the total value of our assets in the types of assets described above plus in “real estate-related assets” that are related to one or more underlying commercial real estate projects, these “real estate-related assets” may include assets such as equity or preferred equity interests in companies whose primary business is to own and operate one or more specified commercial real estate projects, or interests in publicly traded REITs.  We elected to be taxed, and currently qualify, as a real estate investment trust, or REIT, for U.S. federal income tax purposes beginning with our taxable year ended December 31, 2016.

 

We are externally managed by RM Adviser, LLC, or our Manager, which is an affiliate of our Sponsor. Our Manager does not have a liquidity track record as contemplated in Financial Industry Regulatory Authority, Inc., or FINRA, Rule 2310(b)(3)(D). Our Manager and our Sponsor are each wholly-owned subsidiaries of Realty Mogul, Co.

 

This follow-on offering follows the termination of our initial public offering in which we offered $50,000,000 in our common shares including shares sold pursuant to our distribution reinvestment plan, which represent limited liability company interests in the Company.  We commenced our initial public offering on August 15, 2016 and terminated our initial public offering on [_____], 2019.  

 

We are continuing to offer in this follow-on up to $50,000,000 in our common shares, including shares sold pursuant to our distribution reinvestment plan, which represent limited liability company interests in the Company.  The offering price per share will equal the greater of (i) $10.00 per share or (ii) our NAV per share (calculated as our NAV divided by the number of our common shares outstanding as of the end of the prior fiscal quarter) and has and will continue


 

to be adjusted at the beginning of every fiscal quarter (or as soon as commercially reasonable thereafter). Investors will pay the most recent publicly announced offering price as of the date of their subscription. Our website, www.realtymogul.com, will identify the current offering price per share as well as our NAV per share.  See “Description of Our Common Shares ─ Distribution Reinvestment Plan” for additional information.

 

We expect to offer our common shares until the earlier of [_______], 2021, which is two years from the qualification date of this offering, or the date on which the maximum offering amount has been raised; provided, however, that our Manager may terminate this offering at any time or extend the offering. If we decide to extend the offering beyond two years from the date of this offering circular, we will provide that information in an offering circular supplement; however, in no event will we extend this offering beyond 180 days after the third anniversary of the initial qualification date.

 

For investments made online through the Realty Mogul Platform, the minimum investment in our common shares for initial purchases is 100 shares, or $1,000 based on the current per share price, and the minimum investment for subsequent purchases is 100 shares, or $1,000 based on the current per share price. For IRAs, other tax deferred accounts, and investments made through select registered investment advisor, or RIA, custodial platforms, the minimum investment in our common shares for initial purchases is 500 shares, or $5,000 based on the current per share price, and the minimum investment amount for subsequent purchases is 100 shares, or $1,000 based on the current per share price.  In our Manager’s discretion, we may in the future increase or decrease the minimum investment amount for all new purchasers.  We will disclose any new minimum investment amount on the Realty Mogul Platform at least two days in advance of that new minimum amount taking effect.  Factors that our Manager may consider in modifying the minimum investment amount include, but are not limited to, our need for additional capital, the success of our prior capital-raising efforts, and the amount of money raised from our investors who invest the minimum amount versus the amount of money we have raised from investors contributing greater amounts.  Any change to the minimum investment amount will apply to all new purchasers.

 

We intend to distribute our shares to the public exclusively online through the Realty Mogul Platform and select registered investment advisers, or RIA partners. The Realty Mogul Platform is an online investment platform (www.realtymogul.com) that allows qualified investors to invest in real estate-related equity or debt opportunities that may have been historically difficult to access for some investors. Through the use of the Realty Mogul Platform, investors can browse and screen real estate investments, view details of an investment and commit to invest online. The Realty Mogul Platform is operated by our affiliate, RM Technologies, LLC, which is a wholly-owned subsidiary of Realty Mogul, Co. and an affiliate of our Sponsor and of our Manager.

 

All sales of our common shares through the Realty Mogul Platform will be executed through North Capital Private Securities Corp. (“NCPS”), a  registered broker-dealer that is member firm of FINRA.  Our Sponsor has entered into a Selling and Distribution Agreement with NCPS. Pursuant to the Selling and Distribution Agreement, our Sponsor will pay up to a 1.20% commission on the proceeds from the sale of any shares that the broker executed. These commissions will not be paid by, or charged to, either the Company or its investors.  All sales of our common shares are executed through NCPS.  Certain employees of Realty Mogul, Co. are also registered representatives sponsored by NCPS. NCPS’s  activity on our behalf is conducted largely by such registered representatives, and a portion of the sales commission received by NCPS is paid to those registered representatives.  Other than those registered representatives, no other affiliate of Realty Mogul, Co. acts as a broker or dealer in connection with this offering. 

 

Initially, our common shares will not trade on a stock exchange or other trading market.  This means that it may be difficult to sell your shares.  We have, however, adopted a share repurchase program designed to provide our shareholders with limited liquidity on a quarterly basis for their investment in our shares.  See “Description of Our Common Shares—Quarterly Share Repurchase Program” for more details.

 


 

SUITABILITY STANDARDS

 

We will consider your answers to a number of questions soliciting information regarding your investing experience, investment horizon, current investment portfolio, investment objectives, risk tolerance and liquidity needs.  If you do not have investing experience or are in need of liquidity from your investments, we will elicit further information from you to determine whether an investment in our shares is suitable for you.  While we do not have any specific minimum standards that must be satisfied before we accept you as a shareholder (other than the qualified purchaser requirements discussed elsewhere in this offering statement), we will evaluate the totality of your responses to these questions to determine whether, in our sole discretion, an investment in our shares is reasonable.  We have implemented these suitability standards due to the volatility associated with investing in real estate, the difficulty of reselling shares of our common shares and the long-term nature of an investment in our shares.  The Company will ensure adherence to these suitability standards by NCPS by (i) implementing automated procedures to identify investors that appear to require further assessment due to responses that indicate, for instance, that such investors lack investing experience or have greater liquidity needs, and (ii) requiring that their registered representatives review those investors’ applications and document if an exception is warranted.  The suitability standards will not apply to resales of our shares.

 

 


 

TABLE OF CONTENTS

 

 

 

 

IMPORTANT INFORMATION ABOUT THIS OFFERING CIRCULAR 

    

ii

 

 

 

STATE LAW EXEMPTION AND PURCHASE RESTRICTIONS 

 

iii

 

 

 

QUESTIONS AND ANSWERS ABOUT THIS OFFERING 

 

1

 

 

 

OFFERING SUMMARY 

 

13

 

 

 

RISK FACTORS 

 

27

 

 

 

STATEMENTS REGARDING FORWARD-LOOKING INFORMATION 

 

54

 

 

 

INDUSTRY DATA 

 

56

 

 

 

ESTIMATED USE OF PROCEEDS 

 

57

 

 

 

MANAGEMENT 

 

58

 

 

 

MANAGEMENT COMPENSATION 

 

65

 

 

 

PRINCIPAL SHAREHOLDERS 

 

69

 

 

 

CONFLICTS OF INTEREST 

 

70

 

 

 

INVESTMENT OBJECTIVES AND STRATEGY 

 

74

 

 

 

PLAN OF OPERATION 

 

87

 

 

 

DESCRIPTION OF OUR COMMON SHARES 

 

111

 

 

 

U.S. FEDERAL INCOME TAX CONSIDERATIONS 

 

127

 

 

 

ERISA CONSIDERATIONS 

 

151

 

 

 

PLAN OF DISTRIBUTION 

 

154

 

 

 

HOW TO SUBSCRIBE 

 

158

 

 

 

LEGAL MATTERS 

 

160

 

 

 

EXPERTS 

 

161

 

 

 

ADDITIONAL INFORMATION 

 

162

 

 

 

INDEX TO FINANCIAL STATEMENTS OF MOGULREIT I, LLC 

 

F-1

 

 

 

APPENDIX A - PRIOR PERFORMANCE TABLES 

 

A-1

 

 

 

APPENDIX B - RULE 251(d)(2)(i)(C) 

 

B-1

 

 

 

 

 

i


 

IMPORTANT INFORMATION ABOUT THIS OFFERING CIRCULAR

 

Please carefully read the information in this offering circular and any accompanying offering circular supplements, which we refer to collectively as the offering circular.  You should rely only on the information contained in this offering circular.  We have not authorized anyone to provide you with different information.  This offering circular may only be used where it is legal to sell these securities.  You should not assume that the information contained in this offering circular is accurate as of any date later than the date hereof or such other dates as are stated herein or as of the respective dates of any documents or other information incorporated herein by reference.

 

This offering circular is part of an offering statement that we filed with the Securities and Exchange Commission, or SEC, using a continuous offering process.  Periodically, as we update our quarterly NAV per share amount or have other material developments, we will provide an offering circular supplement that may add, update or change information contained in this offering circular.  Any statement that we make in this offering circular will be modified or superseded by any inconsistent statement made by us in a subsequent offering circular supplement.  The offering statement we filed with the SEC includes exhibits that provide more detailed descriptions of the matters discussed in this offering circular.  You should read this offering circular and the related exhibits filed with the SEC and any offering circular supplement, together with additional information contained in our annual reports, semi-annual reports and other reports and information statements that we will file periodically with the SEC.  See the section entitled “Additional Information” below for more details.

 

The offering statement and all supplements and reports that we have filed or will file in the future can be read at the SEC website, www.sec.gov.  Also, a copy of our offering circular and all supplements will be posted on the Realty Mogul Platform website, www.realtymogul.com.  The contents of the Realty Mogul Platform website (other than the offering circular and supplements thereto) are not incorporated by reference in or otherwise a part of this offering circular.

 

Our Manager and those selling shares on our behalf in this offering will be permitted to make a determination that the purchasers of shares in this offering are “qualified purchasers” in reliance on the information and representations provided by the shareholder regarding the shareholder’s financial situation.  Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(C) of Regulation A.  For general information on investing, we encourage you to refer to www.investor.gov.

 

We include a copy of Rule 251(d)(2)(i)(C) of Regulation A as an appendix to this offering circular and on the Realty Mogul website. 

ii


 

STATE LAW EXEMPTION AND PURCHASE RESTRICTIONS

 

Our common shares are being offered and sold only to “qualified purchasers” (as defined in Regulation A under the Securities Act).  As a Tier 2 offering pursuant to Regulation A under the Securities Act, this offering will be exempt from state blue sky review, subject to meeting certain state notice filing requirements and complying with certain anti-fraud provisions, to the registration that our common shares offered hereby are offered and sold only to “qualified purchasers” or at a time when our common shares are listed on a national securities exchange.  “Qualified purchasers” include: (i) “accredited investors” as defined under Rule 501(a) of Regulation D and (ii) all other investors so long as their investment in our common shares does not represent more than 10% of the greater of their annual income or net worth (for natural persons), or 10% of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons).  Accordingly, we reserve the right to reject any investor’s subscription in whole or in part for any reason, including if we determine in our sole and absolute discretion that such investor is not a “qualified purchaser” for purposes of Regulation A.

 

To determine whether a natural person is an “accredited investor” for purposes of satisfying one of the tests in the “qualified purchaser” definition, the person must have:

 

1.

an individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person; or

 

2.

earned income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.

 

If the investor is not a natural person, different standards apply.  See Rule 501 of Regulation D for more details.

 

For purposes of determining whether a potential investor is a “qualified purchaser,” annual income and net worth should be calculated as provided in the “accredited investor” definition under Rule 501 of Regulation D.  In particular, net worth in all cases should be calculated excluding the value of an investor’s home.

 

We intend to offer and sell our common shares in this offering to qualified purchasers in every state of the United States. However, we intend to offer approximately 800,000 shares for sale in Texas and approximately 150,000  shares for sale in Washington.

 

 

iii


 

QUESTIONS AND ANSWERS ABOUT THIS OFFERING

 

The following questions and answers about this offering highlight material information regarding us and this offering, including in some cases information that is not otherwise addressed in the “Offering Summary” section of this offering circular.  You should read this entire offering circular, including the section entitled “Risk Factors,” before deciding to purchase our common shares.

 

Questions about MogulREIT I, LLC and Real Estate Investment Trusts

 

Q:          What is MogulREIT I, LLC?

 

A:          We are a Delaware limited liability company formed to invest in and manage a diversified portfolio of commercial real estate investments, including loans, equity in commercial real estate ventures and other real estate-related assets.  The use of the terms “MogulREIT I”, the “Company”, “we”, “us” or “our” in this offering circular refer to MogulREIT I, LLC, unless the context indicates otherwise.

 

Q:          What is a real estate investment trust, or REIT?

 

A:          In general, a REIT is an entity that:

 

·

Owns or finances income-producing real estate;

 

·

Allows investors to invest in portfolios of properties through the purchase of shares in the entity;

 

·

Qualifies as a “real estate investment trust” for U.S. federal income tax purposes and is therefore generally not subject to federal corporate income taxes on its net income that is distributed, which substantially eliminates the “double taxation” treatment (i.e., taxation at both the corporate and shareholder levels) that generally results from investments in a corporation; and

 

·

Pays distributions to investors of at least 90% of its annual REIT taxable income.

 

In this offering circular, we refer to an entity that qualifies to be taxed as a real estate investment trust for U.S. federal income tax purposes as a REIT.  We elected to be taxed, and currently qualify, as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2016.

 

Q:          Why should I invest in commercial real estate investments?

 

A:          Potential to generate income — A key feature of commercial real estate investment is the significant proportion of total return accruing from rental income over the long term.  Rental income can allow an investor to hold a commercial real estate investment through market cycles without having to liquidate the investment to generate cash flow.

 

Asset class diversification with potential to reduce volatility of a portfolio — Adding real estate to your investment mix may increase your diversification.  According to studies published by the National Council of Real Estate Investment Fiduciaries, real estate has a low or negative correlation to other major asset classes and over time has exhibited less volatility in total returns.

 

Potential to hedge against inflation — Real estate has the potential to hedge against inflation because property values and rents have historically been positively correlated with growth in inflation.  Appreciation in property values can be as significant a part of a commercial real estate investment as cash flow from rental income.  Rents are typically tied to inflation, and a property’s value is tied to its rental income.  So as inflation drives up rent, the value of the underlying property typically increases as well.  Inflation also generally makes new construction more expensive because the cost of building materials rises.  Less new construction could also lead to an increase in the value of existing properties.

 

1


 

Q:          Who might benefit from investing in the Company’s shares?

 

A:          An investment in our shares may be beneficial for you if you seek to diversify your personal portfolio with a commercial real estate investment vehicle focused primarily on commercial real estate loans, investments in commercial real estate entities and other select real estate-related assets, seek to receive current income, seek to preserve capital and are able to hold your investment for a time period consistent with our liquidity strategy.  On the other hand, we caution persons who require immediate liquidity or guaranteed income, or who seek a short-term investment, that an investment in our shares will not meet those needs.

 

Q:          Are there any risks involved in buying the Company’s shares?

 

A:          Investing in our common shares involves a high degree of risk.  If we are unable to effectively manage the impact of these risks, we may not meet our investment objectives, and therefore, you should purchase these securities only if you can afford a complete loss of your investment.  See “Risk Factors” for a description of the risks relating to this offering and an investment in our shares.

 

Questions about the Company’s Investment Strategy

 

Q:          What will you invest in?

 

A:          We intend to invest in the following types of assets: mortgage loans; subordinated mortgage loans; mezzanine debt, participations (also referred to as B-Notes), equity interests or preferred equity interests in companies whose primary business is to own and operate one or more specified commercial real estate projects.

 

Q:          Will you use leverage?

 

A:          We may use leverage of up to 80% of cost (before deducting depreciation or other non-cash reserves) or fair market value of our assets. Based on our expected asset mix, this could result in portfolio-wide leverage of 0-25% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our total assets. During the period when we are acquiring our initial portfolio, portfolio-wide leverage may be higher.  Please see “Investment Objectives and Strategy” for more details.

 

Q:          What will you do with the proceeds from this offering?

 

A:          We expect to use substantially all of the net proceeds from this offering (after paying or reimbursing organization and offering expenses) to invest in and manage a diverse portfolio of commercial real estate investments, including loans and equity in commercial real estate ventures and other select real estate-related assets.  We expect that any expenses or fees payable to our Manager for its services in connection with managing our daily affairs will be paid from cash flow from operations.  If such fees and expenses are not paid from cash flow, they will reduce the cash available for investment and distribution and will directly impact our NAV.  See “Management Compensation” for more details regarding the fees that will be paid to our Manager and its affiliates.

 

We may not be able to promptly invest the net proceeds of this offering in commercial real estate loans, equity in commercial real estate ventures and other select real estate-related assets.  Additionally, from time to time, we will have excess cash that we need to manage, pending its distribution to our shareholders or investment by us in accordance with our investment strategy.

 

Questions about Service Providers

 

Q:          Who will choose which investments you make?

 

A:          We are externally managed by RM Adviser, LLC, or our Manager. A majority of the investment committee of our Manager will approve each of our investments.  Jilliene Helman, our Manager’s Chief Executive Officer and Eric Levy, our Manager’s Portfolio Manager make up our Manager’s investment committee.

 

2


 

Q:          Who is Realty Mogul, Co.?

 

A:          Realty Mogul, Co. is the parent company of each of our Sponsor, our Manager, Realty Mogul Commercial Capital, Co., and RM Technologies, LLC.

 

Q:          Who is RM Technologies, LLC?

 

A.          RM Technologies, LLC operates an online investment platform, www.realtymogul.com, which is referred to as the Realty Mogul Platform in this offering circular. With the exception of offering our shares online through select RIA partners, our shares will be offered exclusively through the Realty Mogul Platform.

 

Q:          What is the Realty Mogul Platform?

 

A:          The Realty Mogul Platform is an online investment platform for commercial real estate, often times referred to as an investment marketplace. The Realty Mogul Platform is operated by one of our affiliates, RM Technologies, LLC. With the exception of offering our shares online through select RIA partners, we will offer our common shares pursuant to this offering exclusively on the Realty Mogul Platform. Additionally, the Realty Mogul Platform gives qualified investors the ability to:

 

·

browse investment offerings based on investment preferences including location, asset type, and risk and return profile;

 

·

transact entirely online, including digital legal documentation, funds transfer, and ownership recordation;

 

·

manage and track investments easily through an online dashboard; and

 

·

receive automated distributions and/or interest payments, and regular financial reporting.

 

Q:          Who services your loans?

 

A:          Realty Mogul Commercial Capital, Co., which in its loan servicing capacity may be referred to as “RM Lender” in this offering circular, will act as the servicer for our loans.  RM Lender may decide to enter into a Servicing Agreement with an unaffiliated third party to service and administer our loans.

 

Q:          What services will the Manager perform?

 

A:          Our Manager performs the following services: investment advisory and acquisition services (including performing due diligence on our investments), offering services, asset management services, accounting and other administrative services, shareholder services, financing services, and disposition services.  Please see “Management — Responsibilities of our Manager” for more details.

 

Q:          What competitive advantages do you achieve through your relationship with Realty Mogul, Co.?

 

A:          Our Manager will use the personnel and resources of its affiliates to select our investments and manage our day-to-day operations.  Realty Mogul, Co.’s corporate, investment and operating platforms are well established, allowing us to realize economies of scale and other benefits including the following:

 

·

Vertical Integration — Because the Company will be acquiring assets that are in large part originated and serviced by affiliates of Realty Mogul, Co., the Company is able to take advantage of the vertical integration and synergies brought about by this relationship.  Realty Mogul, Co. or Realty Mogul Commercial Capital, Co., each of which may be referred to as an RM Originator in this offering circular, have professionals, processes and infrastructure in place to originate debt and source equity investment opportunities, and they anticipate being able to provide high-quality investment opportunities to the Company.  Moreover, the availability of qualified executive and managerial talent at Realty Mogul, Co. and its affiliates directly benefits the Company and permits significant visibility into the assets being acquired and held by the Company from very early in their origination process.

 

3


 

·

Experienced Management Team — Realty Mogul, Co. and its affiliates have a highly experienced team of real estate debt and equity finance professionals, led by Jilliene Helman, its Chief Executive Officer.  Many of the senior executives and loan origination professionals at Realty Mogul, Co. have significant experience and credibility in the commercial real estate sector and have been in leadership roles at financial services institutions for many years.  Collectively, these professionals have approximately 100 years of combined direct experience in the commercial real estate business, and have managed more than $12 billion of originations and more than $34 billion in underwritings in commercial real estate loans and equity investments.  In addition, our Manager advises another REIT with similar investment objectives, MogulREIT II, Inc., which was qualified by the SEC on August 23, 2017.  The Company benefits from the knowledge and industry contacts, experience and judgment that these professionals have accumulated over numerous real estate cycles.  Please see “Management —Executive Officers of our Manager” for biographical information regarding these individuals. 

 

·

Real Estate Credit ExperienceThe credit team of Realty Mogul, Co. and its affiliates has substantial experience in reviewing and underwriting commercial real estate investments.  The team has adopted approaches used by real estate finance industry leaders in its analysis of real estate capital structures and financial strategies, and these approaches will be brought to bear for the Company’s benefit.

 

·

Market Knowledge and Industry Relationships — Through their active and broad participation in the real estate industry, Realty Mogul, Co.’s affiliates benefit from market information that enables them to identify attractive commercial real estate debt and equity investment opportunities and to make informed decisions with regard to the relative valuation of financial assets and capital allocation.  We believe that these extensive industry relationships with a wide variety of commercial real estate owners and operators, brokers and other intermediaries and third party commercial real estate debt and equity originators will provide us with a competitive advantage in sourcing attractive investment opportunities to meet our investment objectives.

 

·

Lead Generation — Potential sponsors and borrowers of real estate opportunities frequently come directly to the Realty Mogul Platform to seek financing for their projects.  As a result of this deal flow, which in many cases is unsolicited, the Company will have access to numerous potential opportunities at a relatively low cost.

 

·

Related Party Loans and Warehousing of Assets — If we do not have sufficient funds to acquire a loan or other investment, or have sufficient funds to acquire only a portion of a loan or other investment, then, in order to cover the shortfall, we may obtain a related party loan from an RM Originator or its affiliates on commercially reasonable terms.  Alternatively, an RM Originator or its affiliates may close and fund each loan or other investment prior to it being acquired by us.  This ability to “warehouse” investments allows us the flexibility to deploy our offering proceeds as funds are raised.  Our LLC Agreement expressly authorizes us to acquire investments from affiliates.  Such acquisitions of investments may require the approval of an Independent Representative, except for ordinary course investments described in the following question and answer.  See “Conflicts of Interest – Certain Conflict Resolution Measures” for a discussion of the Independent Representative.  Our LLC Agreement also authorizes us to enter into related party loans.  Unsecured related party loans that, in the aggregate, do not exceed $20 million and do not carry an interest rate that exceeds the then current applicable prime rate with respect to such loans, can be entered into without the approval of an Independent Representative.  All other related party loans would require prior approval from an Independent Representative.  See “Plan of Operation — Related Party Loans and Warehousing of Assets”.

 

In addition to the above, Realty Mogul’s core values of accountability, execution, investor protection, organizational excellence and user experience are a fundamental part of the culture at Realty Mogul, Co. and its affiliates.  These values inform the outlook, approach, and behavior of the Realty Mogul entities and their professionals, and are among the qualities our Manager will seek in considering its investment opportunities.  In each transaction considered by our Manager, the character and experience of the governing sponsor is closely examined, with an emphasis on ensuring that the operator has a solid reputation, track record, and the requisite skill and knowledge to manage the project in a professional manner.

 

4


 

Q:          What transactions would require the approval of an Independent Representative?

 

A:          Certain related party loans and certain purchases of warehoused assets from an RM Originator or other affiliate will require the approval of an Independent Representative.  We may acquire a loan from an RM Originator without the approval of an Independent Representative only if the loan is not in default and an RM Originator originated the loan and sells it to us at the par value of the loan (less an amount equal to the amount of any principal payments already paid with respect to that loan and plus an amount to account for intra-period interest as described below), either (i) prior to the time any payments of principal have been (or were required to have been) made or (ii) after no more than two principal payments have been made if (a) all such principal payments were timely made and (b)  our Manager reasonably believes, based on the facts then known to it, that there is not likely to have been any material adverse changes to the value of the loan.  To the extent that any interest payments have been previously made to the RM Originator on such loans, the RM Originator may retain such interest payments and the RM Originator may increase the purchase price of the loan to the Company to cover any intra-period interest payments that would otherwise be owed to the RM Originator.  By way of example only, if the loan that the RM Originator is selling to the Company has monthly interest payments of $100 that are due and payable at the end of the month, and the loan is sold to the Company at the mid-point of the month, the RM Originator may increase the purchase price by $50 to cover the portion of interest owed for the period that the RM Originator held the loan.

 

Questions about Expenses

 

Q:          Will I be charged upfront selling commissions?

 

A:          No.  Investors will not pay upfront selling commissions as part of the price per common share purchased in this offering.

 

Q:          Will any upfront selling commissions be paid?

 

A:          Our Sponsor has entered into a Selling and Distribution Agreement with NCPS.  Pursuant to each Selling and Distribution Agreement, our Sponsor will pay up to a 1.20% commission on the proceeds from the sale of any shares that the broker executed.  All sales of our common shares are executed through NCPS.  Certain employees of Realty Mogul, Co. are also registered representatives sponsored by NCPS. NCPS’s activity on our behalf is conducted largely by those employees.  Other than those registered representatives, no other affiliate of Realty Mogul, Co. acts as a broker or dealer in connection with this offering. 

 

Q:          Who will pay your organization, offering and ongoing reporting and operating costs?

 

A:          Our Manager or its affiliates will pay on our behalf all third-party organization and offering costs.  See “Estimated Use of Proceeds” for more information about the types of costs that may be incurred.  We will reimburse our Manager, without interest, for these third-party organization and offering costs incurred both before and after the date of this offering circular.  With respect to offering costs, on a monthly or quarterly basis, the Company expects to reimburse our Manager for offering costs actually incurred at a rate equal to the aggregate proceeds raised in this offering as of the end of the prior quarter divided by the maximum offering amount of $50,000,000 (excluding any reimbursements made in previous quarters).    

 

We will reimburse our Manager for the ongoing, out-of-pocket expenses that our Manager will pay on our behalf, including license fees, auditing fees, fees associated with SEC reporting requirements, increases in insurance costs, tax return preparation fees, taxes and filing fees, administration fees, fees for the services of an independent representative, and third-party costs associated with the aforementioned expenses.  These expenses do not include our Manager’s or Realty Mogul, Co.’s overhead, employee costs, utilities or technology costs.  The aforementioned expense reimbursements that we will pay to our Manager may be originally incurred by Realty Mogul, Co. in the performance of services by its employees under the shared services agreement between our Manager and Realty Mogul, Co.  See “Management—Shared Services Agreement.”

 

Q:          What fees will you pay to the Manager or any of its affiliates?

 

A:          We will pay our Manager a monthly asset management fee at an annualized rate of 1.00% payable in arrears, which will be based on the average investment value of the assets. For purposes of this fee, “average investment value” means, for any period, the average of the aggregate book value of all of our assets, before reserves for depreciation, amortization, bad debts, or other similar non-cash reserves. We will also pay the applicable RM Lender a special servicing fee for any non-performing debt investment at an annualized rate of 1.00%, which will

5


 

be based on the original value of such non-performing debt investment, and will cover the increased administrative costs to RM Lender to handle the non-performing asset. The payment of the special servicing fee shall be in addition to any third party special servicing expenses incurred by the Company, which may include special fees associated with recovery efforts by RM Lender. Our Manager will determine, in its sole discretion, whether an asset is non-performing. In addition, for loans serviced by one of our affiliates, we will pay the applicable RM Lender a servicing fee equal to 0.50% calculated as an annual percentage of the principal balance of the asset plus accrued interest. We will also pay an up-front set-up fee for servicing the loan. In the event that we terminate a servicing arrangement with an RM Lender, we may be required to pay separation fees.

 

The payment by us of fees and expenses will reduce the cash available for investment and distribution and will directly impact our NAV. See “Management Compensation” for more details regarding the fees that will be paid to our Manager and its affiliates.

 

Questions about Distributions

 

Q:          How often will I receive distributions?

 

A:          Our Manager has declared and paid, and we expect that our Manager will continue to declare and pay, distributions monthly in arrears; however, our Manager may declare other periodic distributions as circumstances dictate.  Any distributions we make are at the discretion of our Manager, and are based on, among other factors, our present and reasonably projected future cash flow.  Our Manager sets the rate of distributions at a level that is reasonably consistent and sustainable over time, which is fully dependent on the yields generated by our assets.  In addition, our Manager’s discretion as to the payment of distributions is limited by the REIT distribution requirements, which generally require that we make aggregate annual distributions to our shareholders of at least 90% of our REIT taxable income, computed without regard to the dividends paid deduction and excluding net capital gain.  Moreover, even if we make the required minimum distributions under the REIT rules, we are subject to federal income and excise taxes on our undistributed taxable income and gains.  As a result, our Manager intends to make additional distributions, beyond the minimum REIT distribution, to avoid these taxes.  See “Description of Our Common Shares — Distributions” and “U.S. Federal Income Tax Considerations.”

 

Any distributions that we make directly impacts our NAV by reducing the amount of our assets.  Our goal is to generate returns in the form of income through monthly distributions and capital growth through increases in our NAV per share.  Over the course of your investment, your distributions plus the change in NAV per share (either positive or negative), less any applicable share repurchase fees, will produce your total return.

 

Q:          What will be the source of distributions?

 

A:          We have paid, and may continue to pay, distributions from sources other than cash flow from operations, including from the proceeds of this offering and the private placement to our Sponsor, and we have no limit on the amounts we may pay from such sources.

 

Q:          Will the distributions I receive be taxable as ordinary income?

 

A:          REIT distributions, including distributions that are reinvested pursuant to our distribution reinvestment plan, may be treated as ordinary income, capital gains, and return of capital for tax purposes, each of which may be taxed at a different rate for different investors:

 

·

The majority of recurring REIT distributions will be taxed at your ordinary income rate if they are from current or accumulated earnings and profits, but you may be entitled to a deduction under section 199A of the Internal Revenue Code.  See the section of this offering circular entitled “U.S. Federal Income Tax Considerations.”

·

The portion of your distribution in excess of current and accumulated earnings and profits will be considered a return of capital for U.S. federal income tax purposes and will not result in current tax, but will lower the tax basis of your investment until it is reduced to, but not below, zero. Any return of capital in excess of your tax basis will be treated as sales proceeds from the sale of our common shares and will be taxed accordingly.

6


 

·

Distributions that are designated as capital gain will generally be taxable at the long-term capital gains rate.

 

Because each investor’s tax considerations are different, we recommend that you consult with your tax advisor.  You also should review the section of this offering circular entitled “U.S. Federal Income Tax Considerations,” including for a discussion of the special rules applicable to distributions in the repurchase of shares and liquidating distributions.

 

Q:          Will I be able to reinvest my cash distributions in additional shares?

 

A:          Yes. If you elect to participate in our distribution reinvestment plan, all distributions will be automatically reinvested. See “Description of Common Shares – Distribution Reinvestment Plan.”

 

 

Questions about Share Repurchases

 

Q:          Will I have the opportunity to redeem my common shares?

 

A:          Yes.  While you should view your investment in our shares as a long-term investment with limited liquidity, we have adopted a share repurchase program whereby shareholders may require that we repurchase up to 25% of their shares quarterly while this offering is ongoing. We also may make repurchases upon the death of a shareholder (referred to as “exception repurchases”; all other repurchases are referred to as “ordinary repurchases”). For ordinary repurchases, the amount we will pay to repurchase your shares will depend upon how long a shareholder requesting redemption has held his or her shares (the “Effective Repurchase Rate”), as follows:

 

Exception repurchases are not subject to any discount associated with the amount of time shares were held and will be repurchased at 100% of the applicable price per share. For all other repurchases, we will repurchase the shares at the lower of the price the shareholder paid for his or her shares or the most recent NAV, multiplied by the Effective Repurchase Rate. The repurchase rates at which we will repurchase shares are presented in the table below.

 

 

 

Effective

 

Share Repurchase Anniversary (Year)

 

Repurchase Rate (1)

 

Less than 1 year

 

(Lock-up) 0

%

1 year until 2 years

 

98

%

2 years until 3 years

 

99

%

3 or more years

 

100

%

Death (Exception Repurchases)

 

100

%

 

Any fee charged to the Company by a third party in connection with a repurchase will be deducted from the total repurchase price. For purposes of determining the time period a shareholder has held each share, the time period begins as of the date the shareholder acquired the share.

 

In the event that a shareholder requests repurchase of 100% of the shares owned by the shareholder on the date of presentment, we will waive the one-year holding period requirement for any shares presented that were acquired through our distribution reinvestment plan and such shareholder will be deemed to have withdrawn from the distribution reinvestment plan.

 

There is no regular trading market for our shares. We do not expect that a regular trading market will develop unless we list our shares on a national securities exchange, and we currently do not intend to list our shares. Further, following the conclusion of this offering, our Manager may in its sole discretion, amend, suspend, or terminate the share repurchase program at any time. Reasons we may amend, suspend or terminate the share repurchase program include (i) to protect our operations and our remaining shareholders, (ii) to prevent an undue burden on our liquidity, (iii) to preserve our status as a REIT, (iv) following any material decrease in our NAV, or (v) for any other reason. See “Description of Our Common Shares—Quarterly Share Repurchase Program” for more details.

 

7


 

Q:          Will there be any limits on my ability to redeem my shares?

 

A:          Yes.  In the initial twelve months of this offering, we intend to limit the number of shares to be repurchased during a quarter to 1.25% of the weighted average number of common shares outstanding since the commencement of the offering.  After this offering has been ongoing for twelve months and while it is still ongoing, we intend to limit the number of shares to be repurchased during any calendar year to 5.0% of the weighted average number of common shares outstanding during the prior calendar year (or 1.25% per quarter, with excess capacity carried over to later quarters in the calendar year).  While we designed our share repurchase program to allow shareholders to request share repurchases on a quarterly basis (subject to the six month holding period), we need to impose limitations on the total amount of net repurchases per quarter in order to maintain sufficient sources of liquidity to satisfy share repurchase requests without impacting our ability to invest in commercial real estate assets and maximize investor returns.  In the event that we do not have sufficient funds available to repurchase all of the common shares for which share repurchase requests have been submitted in any quarter, such pending requests will be honored on a pro rata basis.  For investors who hold common shares with more than one record date, share repurchase requests will be applied to such common shares in the order in which they were purchased, on a first in first out basis.  See “Description of Our Common Shares — Quarterly Share Repurchase Program” for more details.

 

Questions about the Offering

 

Q:          What kind of offering is this?

 

A:          We are offering through the Realty Mogul Platform, www.realtymogul.com, a maximum of $50,000,000 of our common shares to the public on a “best efforts” basis at the greater of then current NAV or $10.00 per share.

 

Q:          How is an investment in the Company’s common shares different from investing in shares of a traditional non-exchange traded REIT?

 

A:          We neither charge nor pay any broker-dealer distribution fees, saving investors approximately 70% to 90% in upfront expenses as compared to a traditional non-exchange traded REIT.  Traditional non-exchange traded REITs use a highly manpower-intensive method with hundreds to thousands of sales brokers calling on investors to sell their offerings.  On average, these traditional non-exchange traded REITs charge upfront sales commissions of 6.8% of invested capital to compensate their sales brokers.  Realty Mogul, Co. uses a low-cost online platform, the Realty Mogul Platform, which we intend to leverage in conducting this offering. Additionally, traditional non-exchange traded REITs have incurred organization and offering expenses of up to 15% of the amount raised in the offering.  Assuming we raise the maximum amount of $50,000,000 in this offering, our organization and offering expenses are expected to be approximately 3% of gross proceeds.

 

Q:          How is an investment in the Company’s common shares different from investing in shares of other online REITs?

 

A:          We have a different investment strategy compared to other online REITs.  See “Investment Objectives and Strategy — Investment Strategy” for additional detail on our investment strategy.  For example, we will not invest in raw land as a standalone investment or in the new construction of any building.  Additionally, we have a uniquely qualified management team, which will manage our originations, credit and underwriting, and asset management functions.  See “Management — Executive Officers of Our Manager” for additional detail on our management team’s experience.

 

Q:          How is an investment in the Company’s common shares different from investing in shares of other real estate investment opportunities offered on the Realty Mogul Platform?

 

A:          Currently, the Realty Mogul Platform offers individual real property-related investments as private placements to accredited investors only. The Realty Mogul Platform allows accredited investors to review due diligence materials for individual transactions and invest in one transaction at a time. Investing in the Company is different since investment decisions are made by our Manager and you are investing in a diversified portfolio and not a specific transaction or property. Additionally, the Company is accessible to both accredited and non-accredited investors and offers a lower investment minimum than some of the transactions offered on the Realty Mogul

8


 

Platform. The Manager of the Company charges a 1.00% asset management fee for managing the Company and its investments.  The other investment opportunities offered through the Realty Mogul Platform may charge fees that are higher or lower than the Company’s fee.  Finally, the Company is set up as a “blind pool” REIT, which means that we are not committed to acquiring any particular investments with the net proceeds of this offering.  Investing in the Company can lead to greater diversification because the Company intends to invest its assets in multiple real estate opportunities.  However, unlike other investment opportunities on the Realty Mogul Platform, a purchaser of our common shares may not know what investments the Company will make with its assets at the time the investor purchases our common shares. Although our Manager currently manages another REIT with similar investment objectives, MogulREIT II, Inc., MogulREIT II, Inc.’s portfolio primarily consists of preferred equity and joint venture equity investments in multifamily properties, and its investment strategy differs from the Company’s investment strategy.

 

Q:          What is the purchase price for the Company’s common shares?

 

A:          The offering price per share will equal the greater of (i) $10.00 per share or (ii) our NAV per share (calculated as our NAV divided by the number of our common shares outstanding as of the end of the prior fiscal quarter) and will be adjusted at the beginning of every fiscal quarter (or as soon as commercially reasonable thereafter). Investors will pay the most recent publicly announced offering price as of the date of their subscription. Our website, www.realtymogul.com, will identify the current offering price per share as well as our NAV per share. We will use commercially reasonable efforts to monitor whether a material event occurs in between quarterly updates of NAV that we reasonably believe would cause our NAV per share to change by 5% or more from the last disclosed NAV per share. While this offering is ongoing, if we reasonably believe that such a material event has occurred, we will calculate and disclose the updated NAV per share and the reason for the change in an offering circular supplement as promptly as reasonably practicable, and will update the NAV per share information provided on our website. We will also use that updated NAV per share to determine whether to change the offering price for new shares for the remainder of that fiscal quarter. See “Description of Our Common Shares — Quarterly NAV Share Price Adjustments” for more details. Common shares sold pursuant to our distribution reinvestment plan will be sold at different prices, and no sales commissions will be paid with respect to shares purchased pursuant to the distribution reinvestment plan. See “Description of Our Common Shares ─ Distribution Reinvestment Plan” for additional information.

 

Q:          How does a “best efforts” offering work?

 

A:          When common shares are offered to the public on a “best efforts” basis, we are only required to use our best efforts to sell our common shares.  Neither our Sponsor, Manager, broker-dealers nor any other party has a firm commitment or obligation to purchase any of our common shares.

 

Q:          Who can buy shares?

 

A:          Generally, you may purchase shares if you are a “qualified purchaser” (as defined in Regulation A under the Securities Act).  “Qualified purchasers” include:

 

·

“accredited investors” under Rule 501(a) of Regulation D; and

 

·

all other investors so long as their investment in our common shares does not represent more than 10% of the greater of their annual income or net worth (for natural persons), or 10% of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons).

 

For purposes of determining whether a potential investor is a “qualified purchaser”, annual income and net worth should be calculated as provided in the “accredited investor” definition under Rule 501 of Regulation D.  In particular, net worth in all cases should be calculated excluding the value of an investor’s home.  We reserve the right to reject any investor’s subscription in whole or in part for any reason, including if we determine in our sole and absolute discretion that such investor is not a “qualified purchaser” for purposes of Regulation A.  Please refer to the section above entitled “State Law Exemption and Purchase Restrictions” for more information.

 

9


 

Q:          How do I buy shares?

 

A:          You may purchase our common shares in this offering by creating a new account, or logging into your existing account, at the Realty Mogul Platform.  You will need to fill out a subscription agreement like the one attached as an exhibit to this offering circular and make arrangements to pay for the shares at the time you subscribe.

 

Q:          Is there any minimum investment required?

 

A:          Yes.  For investments made online through the Realty Mogul Platform, you must initially purchase at least 100 common shares in this offering, or $1,000 based on the current per share price, and at least 100 common shares, or $1,000 based on the current per share price for subsequent investments. For IRAs, other tax deferred accounts, and investments made through select RIA custodial platforms, you must initially purchase at least 500 common shares in this offering, or $5,000 based on the current per share price, and at least 100 common shares, or $1,000 based on the current per share price, for subsequent investments.  In our Manager’s discretion, we may in the future increase or decrease the minimum investment amount for all new purchasers.  We will disclose the new minimum investment amount on the Realty Mogul Platform at least two days in advance of that new minimum amount taking effect.  Factors that our Manager may consider in modifying the minimum investment amount include, but are not limited to, our need for additional capital, the success of our prior capital-raising efforts, and the amount of money raised from our investors who invest the minimum amount versus the amount of money we have raised from investors contributing greater amounts.  Any change to the minimum investment amount will apply to all new purchasers.

 

Q:          May I make an investment through my IRA or other tax-deferred retirement account?

 

A:          Yes. You are able to make an investment through your individual retirement account (“IRA”) or other tax deferred account. When making investment decisions, you should consider, at a minimum, (i) whether the investment is in accordance with the documents and instruments governing your IRA or other deferred tax account; (ii) whether the investment is consistent with the fiduciary and other obligations associated with your IRA or other tax deferred account; (iii) whether the investment will generate an unacceptable amount of unrelated business taxable income (“UBTI”) for your IRA or other tax deferred account; (iv) whether you will be able to comply with the requirements under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Internal Revenue Code that you value the assets of the IRA or other tax deferred account annually; and (v) whether the investment would constitute a prohibited transaction under applicable law.

 

Q:Are there special considerations that apply to employee benefit plans subject to ERISA or other retirement plans that are investing in shares?

 

A:          Yes. The section of the offering circular entitled “ERISA Considerations” describes the effect the purchase of shares will have on individual retirement accounts and retirement plans subject to ERISA, and/or the Internal Revenue Code. ERISA is a federal law that regulates the operation of certain tax-advantaged retirement plans. Any retirement plan trustee or individual considering purchasing shares for a retirement plan or an individual retirement account should carefully read that section of the offering circular.

 

We may make some investments that generate UBTI or, in certain circumstances, can result in a tax being imposed on us. Although we do not expect the amount of such income to be significant, there can be no assurance in this regard.

 

Q:          Is there a maximum investment?

 

A:          Yes.  You cannot own more than 9.8% of our outstanding shares at any time.  Additionally, if you do not qualify as an accredited investor, you may invest no more than the greater of (i) 10% of your income, but no more than $20,000 in any twelve-month period or (ii) 10% of your net worth, as calculated under Rule 501 of Regulation D, but no more than $100,000 in any twelve-month period.  If you want to invest more than the limitations set forth in the preceding sentence, you must qualify as an “accredited investor” as defined in Rule 501 of Regulation D.

 

10


 

Q:         How long will this offering last?

 

A:          We expect to offer our common shares until the earlier of [_______], 2021, which is two years from the qualification date of this offering, or the date on which the maximum offering amount has been raised; provided, however, that our Manager may terminate this offering at any time or extend the offering. If we decide to extend the offering beyond two years from the date of this offering circular, we will provide that information in an offering circular supplement; however, in no event will we extend this offering beyond 180 days after the third anniversary of the initial qualification date.

 

Q:         Who can help answer my questions about the offering?

 

A:          If you have more questions about the offering, or if you would like additional copies of this offering circular, you should contact us by email at MogulReitI@realtymogul.com or by mail at:

 

MogulREIT I, LLC

10780 Santa Monica Blvd.

Suite 140

Los Angeles, CA 90025

Attn: Investor Relations

 

Questions About Your Performance

 

Q:          Will I be notified of how my investment is doing?

 

A:          Yes. Initially, we will provide you with periodic updates on the performance of your investment in us, including:

 

·

an annual report;

 

·

a semi-annual report;

 

·

current event reports for specified material events within four business days of their occurrence;

 

·

supplements to the offering circular, if we have material information to disclose to you; and

 

·

other reports that we may file or furnish to the SEC from time to time.

 

We will provide this information to you by posting such information on the SEC’s website at www.sec.gov, on the Realty Mogul Platform at www.realtymogul.com, or via e-mail.

 

After the conclusion of our offering, we may be eligible to suspend or terminate these public filings.  If we are eligible, and if we elect to suspend or terminate these filings, you will not receive the updates listed above.

 

Q:          When will I get my detailed tax information?

 

A:          Your Form 1099-DIV tax information, if required, will be provided in electronic form by January 31 of the year following each taxable year.

 

Q:          How will the Company’s NAV per share be calculated?

 

A:At the end of each fiscal quarter (or as soon as commercially reasonable thereafter), our affiliates’ internal accountants will calculate our NAV per share. The NAV per share calculation will reflect the total value of our assets minus the total value of our liabilities, divided by the number of shares outstanding as of the determination date. Our commercial real estate assets and investments will constitute a significant component of our total assets. We will take estimated values of each of our commercial real estate assets and investments, including related liabilities, based upon performance, outstanding principal balance, market default rates, discount rates, loss severity rates, and, if our Manager deems it necessary, individual appraisal reports of the underlying real estate assets provided periodically by an independent valuation expert. The independent valuation expert will not be

11


 

responsible for, or prepare, our quarterly NAV per share.  However, we may hire a third party to calculate, or assist with calculating, the NAV calculation.  See “Description of our Common Shares—Valuation Policies” for more details about our NAV and how it will be calculated.

 

Q:          How exact will the calculation of the quarterly NAV per share be?

 

A:          Our goal is to provide a reasonable estimate of the value of our common shares as of the end of each fiscal quarter.  Our assets will consist principally of commercial real estate loans and other real estate investments.  The valuation of the real estate investments by our affiliates’ internal accountants (with the input of our independent valuation expert, as needed) is subject to a number of subjective judgments and assumptions that may not prove to be accurate.  The use of different judgments or assumptions would likely result in different estimates of the value of our real estate investments.  Moreover, although we evaluate and provide our NAV per share on a quarterly basis, our NAV per share may fluctuate daily, so that the NAV per share in effect for any fiscal quarter may not reflect the amount that might be paid for your shares in a market transaction.  Further, our published NAV per share may not fully reflect certain material events to the extent that they are not known or their financial impact on our portfolio is not immediately quantifiable.  As discussed above, any material event that would cause our NAV per share to change by more than 5% would require a recalculation.  Any resulting potential disparity in our NAV per share may be in favor of either shareholders who have their shares repurchased, or shareholders who buy new shares, or existing shareholders.  See “Description of our Common Shares—Valuation Policies.”

 

 

12


 

OFFERING SUMMARY

 

This offering summary highlights material information regarding our business and this offering.  Because it is a summary, it may not contain all of the information that is important to you.  To understand this offering fully, you should read the entire offering circular carefully, including the “Risk Factors” section, before making a decision to invest in our common shares.

 

Overview

 

Realty Mogul, Co., our parent company, is a real estate investment marketplace leader.  Since Realty Mogul, Co. launched the Realty Mogul Platform in 2013, it has originated, underwritten, and financed over $2 billion in real estate value through debt and equity investments in approximately $400 million in real estate properties across approximately 289 debt and equity transactions.  Over the past six years, Realty Mogul, Co. has raised capital for debt and equity commercial real estate offerings and invested that capital in multifamily, retail, office, self-storage, and industrial real estate opportunities. 

 

We are an externally-managed real estate investment trust, or REIT, that will invest in commercial real estate related assets with the objective of providing attractive risk-adjusted returns to our investors over the long-term, through both distributions and capital appreciation.  We intend to achieve this objective by making investments structured to comply with the REIT federal income tax requirements and to maintain our exclusion from registration under the Investment Company Act of 1940, as amended.

 

We are managed by RM Adviser, LLC, a SEC registered investment adviser and wholly-owned subsidiary of Realty Mogul, Co. RM Adviser, LLC will have access to Realty Mogul, Co.’s deep team of real estate and finance professionals and will leverage their collective experience in originating, underwriting, and servicing billions of dollars in real estate related assets over the course of their careers.

 

Our purpose is to provide investors an opportunity to invest in a REIT without paying the high upfront fees and selling commissions typical in non-traded REITs, thereby investing a higher percentage of your investment in real property to increase the Company’s total return.

 

MogulREIT I, LLC is a Delaware limited liability company formed to invest in and manage a diversified portfolio of commercial real estate investments, including loans, equity in commercial real estate ventures and other real estate-related assets.  We intend to operate in a manner that will allow us to maintain our qualification as a REIT for U.S. federal income tax purposes.  Among other requirements, REITs are required to distribute to shareholders at least 90% of their annual REIT taxable income (computed without regard to the dividends paid deduction and excluding net capital gain).

 

Our office is located at 10780 Santa Monica Blvd., Suite 140, Los Angeles, CA 90025.  Our telephone number is (877) 781-7153. Information regarding the Company is also available on our web site at www.realtymogul.com.

 

Investment Strategy 

 

Our investment strategy involves investing in assets with varying levels of risk, based in part on where such investments fall in the “capital stack” of real estate transactions.

 

13


 

Picture 9

 

We intend to use substantially all of the proceeds of this offering to invest in and manage a diversified portfolio of commercial real estate investments, including loans and equity in commercial real estate ventures.  We intend to hold: (1) at least 55% of the total value of our assets in commercial mortgage-related instruments that are closely tied to one or more underlying commercial real estate projects, such as senior mortgage loans, subordinated mortgage loans, mezzanine debt and participations (also referred to as B-Notes) that meet certain criteria outlined by the staff of the SEC; and (2) at least 80% of the total value of our assets in the types of assets described above, plus in “real estate-related assets” that are related to one or more underlying commercial real estate projects.  These real estate-related assets may include assets, such as equity or preferred equity interests in companies whose primary business is to own and operate one or more specified commercial real estate projects, interests in publicly traded REITs, and other commercial real estate-related assets.

 

We will seek to create and maintain a portfolio of investments that generate a low volatility income stream of attractive and consistent cash distributions.  Our focus on investing in debt instruments will emphasize the payment of current returns to investors and preservation of invested capital.  We also intend to diversify our portfolio by investing in equity instruments (up to 45% of the total value of our assets), primarily in real estate-related companies as described above, subject to certain limitations related to our qualification as a REIT and to maintaining our exclusion under the Investment Company Act.  Our focus on investing in equity instruments will be to seek investments that will produce returns to investors through rental income and capital appreciation.  The investment objective for the Company is to achieve attractive, risk-adjusted returns that exceed alternative real estate investment offerings.

 

Our Manager, through its affiliates, intends to structure, underwrite and originate many of the products in which we invest as this provides for the best opportunity to control our borrower and partner relationships and optimize the terms of our investments.  Our affiliates’ underwriting process, which our management team has successfully developed over their extensive real estate careers in a variety of market conditions and implemented at Realty Mogul, Co., will involve comprehensive financial, structural, operational and legal due diligence of our borrowers and partners in order to optimize pricing and structuring and mitigate risk.  We believe the current and future market environment provides a wide range of opportunities to generate compelling investments with strong risk-return profiles for our shareholders.

 

Investment Objectives

 

Our primary investment objectives are:

 

·

to pay attractive and consistent cash distributions on a monthly basis by rigorously evaluating numerous investment opportunities to find those that can support the distribution target;

14


 

 

·

to create a portfolio of diversified investments; and

 

·

to preserve, protect, increase and return your capital contribution.

 

We will also seek to realize growth in the value of our investments by timing their sale to maximize value.

 

We cannot assure you that we will attain these objectives or that the value of our assets will not decrease.  Furthermore, within our investment objectives and policies, our Manager will have substantial discretion with respect to the selection of specific investments and the purchase and sale of our assets.

 

Market Opportunities

 

We believe that the near and intermediate-term market for investment in commercial real estate loans, commercial real estate-related debt securities, commercial real estate-related equity securities, and other real estate-related assets is compelling from a risk-return perspective.  Given the prospect of low growth for the economy, we favor a strategy that targets senior and mezzanine debt to maximize current income, with significant subordinate capital and downside structural protections, and equity securities to share the upside of asset appreciation with our shareholders.  Our flexible approach to investing in any U.S. geography and in any of the major commercial real estate property types, including apartment buildings, self-storage facilities, retail centers and office buildings, allows us to quickly take advantage of opportunities created by market changes.  We believe that our investment strategy, combined with the experience and expertise of our Manager’s management team, will provide opportunities to invest in assets with attractive returns and strong structural features.

 

Our Manager

 

RM Adviser, LLC, our Manager, manages our day-to-day operations.  Our Manager is a wholly-owned subsidiary of Realty Mogul, Co.  A team of real estate and debt finance professionals, acting through our Manager, will make all the decisions regarding the selection, negotiation, financing and disposition of our investments, subject to the limitations in our LLC Agreement. A majority of the investment committee of our Manager will approve each of our investments.  Jilliene Helman, our Manager’s Chief Executive Officer and Eric Levy, our Manager’s Portfolio Manager make up our Manager’s investment committee. Our Manager will also provide asset management, marketing, investor relations and other administrative services on our behalf with the goal of maximizing our operating cash flow and preserving our invested capital.  Realty Mogul, Co. is able to exercise significant control over our business.

 

About RM Technologies, LLC

 

We are also an affiliate of RM Technologies, LLC, the operator of an online financial platform focused on real estate, which may be found on the website: www.realtymogul.com, and is referred to as the Realty Mogul Platform in this offering circular.  RM Technologies, LLC is a wholly-owned subsidiary of Realty Mogul, Co.

 

Jilliene Helman is the Chief Executive Officer of Realty Mogul, Co.  Ms. Helman is responsible for overseeing the day-to-day operations of Realty Mogul, Co. and its affiliates, including RM Technologies, LLC.

 

15


 

Our Structure

 

The chart below shows the relationship among various Realty Mogul, Co. affiliates and the Company as of the date of this offering circular.

 Picture 6

 

 

 

Our Manager and its affiliates will receive fees and expense reimbursements for services relating to this offering, and the investment and management of our assets. As described below, we will pay our Manager an asset management fee and we will reimburse our Manager for certain expenses. We also may pay to an RM Lender certain loan servicing fees, as described below. The remainder of the fees described below will be paid by the borrower that receives a loan from us or the special purpose entity that issues equity to us.

 

No portion of the fees detailed below will be allocated to any individual in his or her capacity as an executive officer of our Manager.

 

 

 

 

 

 

Form of Compensation and Recipient

    

Determination of Amount

    

Estimated Amount

 

 

 

 

 

Organization and Offering Stage

 

 

 

 

 

Organization and Offering Expenses — Manager

 

Our Manager has paid and may continue to pay organization and offering expenses on our behalf. We will reimburse our Manager for actually incurred third-party organization and offering costs it incurs on our behalf, the amount of which will depend on the offering proceeds we raise. See “Estimated Use of Proceeds” for more details. We expect total organization and offering expenses to be no more than $1,500,000.

 

$ 300,000 - $1,500,000

 

 

 

 

 

16


 

 

 

 

 

 

Form of Compensation and Recipient

    

Determination of Amount

    

Estimated Amount

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition and Operation Stage

 

 

 

 

 

 

 

Asset Management Fee — Manager

 

Monthly asset management fee equal to an annualized rate of 1.00% payable in arrears, which will be based on the average investment value of the assets. For purposes of this fee, “average investment value” means, for any period, the average of the aggregate book value of all of our assets, before reserves for depreciation, amortization, bad debts, or other similar non- cash reserves.

 

Actual amounts are dependent upon the offering proceeds we raise (and any leverage we employ) and the results of our operations.

 

Since we intend to use leverage only on certain assets, the actual fee may vary depending on the concentration of assets in our portfolio.

 

 

 

 

 

Servicing Fee — RM Lender (Debt Assets)

 

With respect to any loans we make or acquire, may pay a servicing fee of 0.50% of the principal balance and accrued interest of each loan to RM Lender for the servicing and administration of certain loans and investments held by us. RM Lender may decide to enter into a Servicing Agreement with an unaffiliated third party to service and administer the loans held by us, and will pay for any expenses incurred in connection with standard subservicing thereunder out of the servicing fee paid to it by us. The Servicing Agreement will define the terms of the loan servicing arrangement as well as the amount of the servicing fee that is paid by RM Lender to the unaffiliated third party. The servicing fee is calculated as an annual percentage of the principal balance of the debt asset plus accrued interest, and is deducted at the time that payments on the asset are made. The fee is deducted in proportion to the split between accrued and current payments. Servicing fees payable by us may be waived at RM Lender’s sole discretion.

 

Actual amounts are dependent upon the principal amount of the loans. We cannot determine these amounts at the present time.

 

 

 

 

 

17


 

 

 

 

 

 

Form of Compensation and Recipient

    

Determination of Amount

    

Estimated Amount

Special Servicing Fee —RM Lender (Debt Assets)

 

We may pay a special servicing fee to RM Lender equal to an annualized rate of 1.00% of the original value of a non-performing asset serviced by such RM Lender. Whether a debt asset is deemed to be non-performing is in the sole discretion of our Manager.

The payment of the special servicing fee shall be in addition to any third party special servicing expenses incurred by us, which may include special fees associated with recovery efforts by RM Lender.

 

 

Actual amounts are dependent upon the occurrence of a debt investment becoming non-performing and the original value of such asset. We cannot determine these amounts at the present time.

 

 

 

 

 

Other Operating Expenses — Manager

 

We will reimburse our Manager for out-of-pocket expenses incurred on our behalf, including license fees, auditing fees, fees associated with SEC reporting requirements, insurance costs, tax return preparation fees, taxes and filing fees, administration fees, fees for the services of an independent representative, and third-party costs associated with the aforementioned expenses.  These expenses do not include our Manager’s or Realty Mogul, Co.’s overhead, employee costs, utilities or technology costs.

 

The aforementioned expense reimbursements that we will pay to our Manager may be originally incurred by Realty Mogul, Co. in the performance of services by its employees under the shared services agreement between our Manager and Realty Mogul, Co.  See “Management—Shared Services Agreement.”

 

Actual amounts are dependent upon our operations. We cannot determine these amounts at the present time.

 

In addition to the fees set forth above, our form of loan servicing agreements between the Company and RM Lender contemplate the payment of a recovery fee. The recovery fee may be payable to RM Lender in connection with (i) the sale of, or receipt of any condemnation or insurance proceeds with respect to a specially serviced loan or real estate owned property or (ii) the curing of any event of default under the serviced loan through restructure or work-out of the serviced loan. The recovery fee will be an amount equal to: (a) with respect to clause (i) of the preceding sentence, 1.0% of all liquidation, condemnation and insurance proceeds received with respect to the serviced loan and (b) with respect to clause (ii) of the preceding sentence, 1.0% of all principal and interest received (x) in connection with any full, partial or discounted payoff made pursuant to such restructuring or work-out and (y) from and after the date that the borrower has made three timely consecutive monthly payments under the terms of the serviced loan, as amended.

 

 

 

 

 

18


 

Related Fees Paid by Affiliated and Unaffiliated Third Parties

 

From time to time, when one of the affiliates of our Manager, RMCC, originates a commercial real estate loan or preferred equity investment that is sold to us, the borrower of the transaction may pay fees to RMCC.  A portion of this fee may be paid to personnel affiliated with our Manager for their roles in sourcing the investment opportunity. The fees are paid to RMCC by the borrower entity and not by us. We will not be entitled to this fee. The actual amount of origination fees, extension fees and exit fees that will be paid are dependent upon the total transaction amount funded. We cannot determine these amounts at the present time.             

 

For senior debt, mezzanine debt or preferred equity investments:

·

Origination fee of 1.0%-3.0% of the financing amount

·

Extension fee of 1.0%-2.0% of the financing amount in the event that the maturity or redemption date for such asset is extended.

·

Exit fee of 1.0%-2.0% of the financing amount upon maturity of the transaction

 

Similarly, from time to time, a special purpose entity in which we invest may pay an affiliate of our Manager or our Manager one or more of the fees set forth below. A portion of these fees may be paid to personnel affiliated with our Manager for their roles in arranging the investment opportunity. The following fees will be paid by the particular special purpose entity and not by us. We will not be entitled to any of these fees. The actual amounts of the following fees are dependent upon the total invested equity, transaction sizes and distributable cash. We cannot determine these amounts at the present time. These fees may reduce the amount of funds that are invested in the underlying real estate or the amount of funds available to pay distributions to us, thereby reducing our returns in that particular investment:

 

For joint venture equity investments:

·

Acquisition fee up to 3% of the total transaction value.

·

Financing coordination fee and credit guarantee fee up to 1.0% of the financing in the event that an affiliate of our Manager or our Manager provides services in connection with arranging the debt or provides a credit guarantee in connection with the financing. 

·

Asset management fee in the amount of 1.5% of our pro-rata share of the gross revenues of the particular property in the event that an affiliate of our Manager or our Manager provides property-level asset management services overseeing and managing the property manager. Affiliates of our Manager or our Manager will be reimbursed for property-level expenses that it pays or incurs on our behalf, including salaries, bonuses and benefits from persons who also serve as one of our Manager’s executive officers. We anticipate that our Manager or its affiliates will subcontract the performance of its property-level management services to third parties and pay all or a portion of its property-level management fee to the third parties with which it contracts for these services.

·

Promoted interest in an undetermined amount of the entity’s distributable cash, after all other partners or members have been paid an agreed upon (6.0% or higher) cumulative, non-compounded preferred return.

 

Additionally, Realty Mogul, Co. will provide funding to our Sponsor to pay a sales commission of up to 1.20% to NCPS for their services in connection with the sale of our shares. Such sales commissions will not be paid by us or our investors. A portion of the sales commission will be paid to employees of Realty Mogul, Co., who are serving as registered representatives of NCPS in connection with the sale of our shares. The actual amount of sales commissions that will be paid is dependent upon the offering proceeds we raise. The total broker sales commissions, assuming the maximum amount of this offering is raised and up to a 1.20% commission is paid on each executed sale, will be $398,041.

 

Our Manager also provides any offering, investment and management services to other affiliated entities, and may provide investment advice to persons or entities through the investment calculator. See “Conflicts of Interest — Investment Calculator.”

 

 

19


 

Summary of Risk Factors

 

Investing in our common shares is speculative and involves substantial risks.  You should purchase these securities only if you can afford a complete loss of your investment.  You should carefully review the “Risk Factors” section of this offering circular, beginning on page  27, which contains a detailed discussion of the material risks that you should consider before you invest in our common shares.  These risks include the following:

 

·

We depend on our Manager to select our investments and conduct our operations.  We will pay fees and expenses to our Manager and its affiliates that were determined as between related parties, and therefore we do not have the benefit of arm’s length negotiations of the type normally conducted between unrelated parties.  These fees increase your risk of loss.  In addition, we can offer no assurance that our Manager will remain our investment manager.

 

·

Many of the loans and other investments in which we will invest will be originated by our affiliates, Realty Mogul, Co. or Realty Mogul Commercial Capital, Co., each of which, in their loan originating capacity, may be referred to as an RM Originator in this offering circular. Many of the loans and other investments in which we invest will be serviced by Realty Mogul, Co. or Realty Mogul Commercial Capital, Co., each of which, in their loan servicing capacity, may be referred to as an RM Lender in this offering circular.  We may purchase investments directly from an RM Originator, and we will pay the applicable loan servicer a 0.50% annual servicing fee with respect to our investments.  The RM Originators may also receive origination fees and/or other fees with respect to investments in which we invest, as well as a set-up fee associated with each loan. While these fees will not be paid by the Company or its investors, they may indirectly have the effect of lowering the return our investors would receive in the absence of these fees.

 

·

We have limited operating history and an investment in our shares is speculative.  There is no assurance that we will achieve our investment objectives.

 

·

This is a “blind pool” offering as we have not identified all the investments we intend to acquire.  Depending on our progress in funding investments at the time of your purchase, you may not be able to evaluate the economic merit of any of our investments.  You will have to rely entirely on the ability of our Manager to select suitable and successful investment opportunities.

 

·

Our Manager’s executive officers, and key real estate and debt finance professionals, are also officers, directors, managers and/or key professionals of Realty Mogul, Co. and its affiliates.  As a result, they will face conflicts of interest, including time constraints, allocation of investment opportunities and other conflicts created by our Manager’s compensation arrangements with us and other affiliates of Realty Mogul, Co.

 

·

Our Sponsor and Manager may sponsor or advise other companies that compete with us, and neither our Sponsor nor our Manager has an exclusive management arrangement with us.

 

·

By purchasing shares in this offering, you are bound by the arbitration provisions contained in our subscription agreement which limits your ability to bring class action lawsuits or seek remedy on a class basis.

 

·

This offering is being made pursuant to recently adopted rules and regulations under Regulation A of the Securities Act of 1933, as amended, or the Securities Act.  The legal and compliance requirements of these rules and regulations, including ongoing reporting requirements related thereto, are relatively untested.

 

·

If we raise substantially less than the maximum offering amount, we may not be able to acquire a diverse portfolio of investments and the value of your shares may vary more widely with the performance of specific assets. 

 

·

Because our Sponsor has only invested $2,500 in the Company, our Sponsor has little exposure to the loss in the value of our shares, which may increase your risk of loss. 

 

·

If we internalize our management functions, your interest in us could be diluted and we could incur other significant costs associated with being self-managed.

20


 

 

·

Our Manager may change our targeted investments and asset allocation without shareholder consent, which could result in investments that are different from, and possibly riskier than, those described in this offering circular.

 

·

Although our distribution policy is not to use the proceeds of this offering to make distributions, our LLC Agreement permits us to pay distributions from any source, including offering proceeds, borrowings or sales of assets.  We have not established a limit on the amount of proceeds we may use to fund distributions.  If we pay distributions from sources other than our cash flow from operations, we will have less funds available for investments and your overall return may be reduced.  In any event, we intend to make annual distributions as required to comply with REIT distribution requirements and avoid U.S. federal income and excise taxes on retained income.  We have not established a minimum distribution payment level. The amount of our distributions may fluctuate and may be adversely affected by a number of factors, including the risk factors in this offering circular.

 

·

Our affiliates’ internal accountants calculate our NAV on a quarterly basis using valuation methodologies that involve subjective judgments and estimates.  As a result, our NAV may not accurately reflect the actual prices at which our commercial real estate assets and investments, including related liabilities, could be liquidated on any given day.

 

·

While we believe our NAV calculation methodologies are consistent with standard industry principles, there is no established practice among non-traded REITs for calculating NAV in order to establish a per share purchase and repurchase price. As a result, other non-traded REITs may use different methodologies or assumptions to determine NAV.  In the event that we are required to adjust our calculation methodologies or assumptions, the value of your investments, and consequently your returns, may be adversely affected.

 

·

Our LLC Agreement does not require our Manager to seek shareholder approval to liquidate our assets by a specified date, nor does our LLC Agreement require our Manager to list our shares for trading by a specified date.  No public market currently exists for our shares.  Until our shares are listed, if ever, you may not have the opportunity to sell your shares.  If you are able to sell your shares, you may have to sell them at a substantial loss.

 

·

We elected to be taxed, and currently qualify, as a REIT for U.S. federal income tax purposes.  Our compliance with REIT requirements may subject your investment to certain risks and may force us to forgo potentially attractive opportunities.

 

·

If we fail to maintain our qualification as a REIT for U.S. federal income tax purposes and no relief provisions apply, we would be subject to entity-level federal income tax and, as a result, our cash available for distribution to our shareholders and the value of our shares could materially decrease.

 

·

We will attempt to manage our portfolio so that we are not required to register as an investment company, such as a mutual fund.  This may result in us not making potentially profitable investments, or in us disposing of investments at times that we otherwise would prefer to hold those investments.

 

·

Our intended investments in commercial real estate loans and other select real estate-related assets will be subject to risks relating to the volatility in the value of the underlying real estate, default on underlying income streams, fluctuations in interest rates, and other risks associated with debt and real estate investments generally.  These investments are only suitable for sophisticated investors with a high-risk investment profile.  Our investment strategy involves leverage.  These investments may not be suitable for investors with lower risk tolerances.

 

·

Our Manager, its principals and/or its other affiliates may continue to originate and offer other real estate investment opportunities, including additional blind pool debt and equity offerings similar to this offering, through the Realty Mogul Platform, and may make investments in real estate assets for their own respective accounts, whether or not competitive with our business.

 

·

Investments that do not meet certain minimum thresholds may not be made available to us.

21


 

 

·

The terms of our LLC Agreement (including our Manager’s rights and obligations and the compensation payable to our Manager and its affiliates) were not negotiated at arm’s length.

 

·

We pay our Manager substantial management fees regardless of performance of our portfolio. Our Manager’s entitlement to substantial nonperformance-based compensation might reduce its incentive to devote its time and effort to seeking investments that provide attractive risk-adjusted returns for our portfolio, which could hurt both our ability to make distributions to our shareholders and the value of our common shares.

 

·

Our shareholders may only remove our Manager for “cause” following the affirmative vote of shareholders holding two-thirds of the outstanding common shares.  Unsatisfactory financial performance does not constitute “cause” under our LLC Agreement.

 

·

At some future date, we may seek shareholder approval to internalize our management by acquiring assets and employing the key real estate and debt finance professionals performing services to us on behalf of our Manager for consideration that would be negotiated at that time.  The payment of such consideration could result in dilution to your interest in us and could reduce the net income per share and funds from operations per share attributable to your investment.  Additionally, in an internalization transaction, our Manager’s real estate and debt finance professionals that become our employees may receive more compensation than they previously received from our Manager or its affiliates.  These possibilities may provide incentives to these individuals to pursue an internalization transaction, even if an alternative strategy might otherwise be in our shareholder’s best interests.

 

·

Our Manager may, without shareholder consent unless otherwise required by law, determine that we should merge or consolidate through a roll-up or other similar transaction involving other entities, including entities affiliated with our Manager, into or with such other entities. Similarly, our Manager may, without shareholder consent unless otherwise required by law, determine that we should list our shares on a national securities exchange.

 

·

Affiliates of our Sponsor and our Manager are engaged in selling investment opportunities to individuals and institutions outside of the Company, some of which may compete with the Company. There may be a conflict of interest in this arrangement because, among other things, the economic return to the entities or their respective personnel may be greater in selling opportunities to these competitive interests rather than to the Company.

 

·

The compensation arrangements for our Manager, its personnel and our affiliates may provide them an incentive to increase leverage in the Company or its investments, which may increase risk and volatility in the Company’s performance.

 

·

We rely on the exemption for insignificant participation by benefit plan investors under ERISA. If at any time 25% or more of the value of any class of equity interest is held by benefit plan investors, we must repurchase certain benefits plan investors’ common shares or we will lose the exemption.

 

Distributions

 

Our Manager has declared and paid, and we expect our Manager will continue to declare and pay, distributions monthly in arrears; however, our Manager may declare other periodic distributions as circumstances dictate. As of January 1, 2019, our Manager has declared and paid 27 months of consecutive 8% annualized distributions based on the current NAV.

 

Any distributions we make are at the discretion of our Manager, and are based on, among other factors, our present and reasonably projected future cash flow.  Distributions are paid and will continue to be paid to shareholders as of the record dates selected by our Manager.  In addition, our Manager’s discretion as to the payment of distributions is be limited by the REIT distribution requirements, which generally require that we make aggregate annual distributions to our shareholders of at least 90% of our REIT taxable income, computed without regard to the dividends paid deduction and excluding net capital gain.  Moreover, even if we make the required minimum distributions under the REIT rules, we are subject to federal income and excise taxes on our undistributed taxable income and gains.  As a result, our Manager also

22


 

intends to make such additional distributions, beyond the minimum REIT distribution, to avoid such taxes.  See “Description of Our Common Shares — Distributions” and “U.S. Federal Income Tax Considerations.”

 

Any cash distributions that we make directly impact our NAV by reducing the amount of our assets.  Our goal is to generate returns in the form of income through monthly distributions and capital growth through increases in our NAV per share.  Over the course of your investment, your distributions plus the change in NAV per share (either positive or negative), less any applicable share repurchase fees, will produce your total return.

 

Our distributions, including distributions that are reinvested pursuant to our distribution reinvestment plan, constitute a return of capital to the extent that they exceed our current and accumulated earnings and profits as determined for U.S. federal income tax purposes.  To the extent that a distribution is treated as a return of capital for U.S. federal income tax purposes, it will reduce a holder’s adjusted tax basis in the holder’s shares, and to the extent that it exceeds the holder’s adjusted tax basis will be treated as gain resulting from a sale or exchange of such shares. Distributions reinvested pursuant to our distribution reinvestment plan will be considered a new purchase of shares as of the distribution date.

 

Effective January 1, 2019, we will calculate distributions daily for shareholders of record as of the close of business on each day of the period commencing on January 1, 2019 and ending on January 31, 2019 (the “Distribution Period”). The distribution will be payable to the shareholders of record as of the close of business on each day of the Distribution Period. The Manager expects that the distributions will be paid on or before February 15, 2019.  

 

Borrowing Policy

 

We may use leverage of up to 80% of cost (before deducting depreciation or other non-cash reserves) or fair market value of our assets. Based on our expected asset mix, this could result in portfolio-wide leverage of 0-25% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our total assets. During the period when we are acquiring our initial portfolio, portfolio-wide leverage may be higher. See “Investment Objectives and Strategy” for more details regarding our leverage policy.

 

Valuation Policies

 

At the end of each fiscal quarter (or as soon as commercially reasonable thereafter), our affiliates’ internal accountants will calculate our NAV per share. The NAV per share calculation will reflect the total value of our assets minus the total value of our liabilities, divided by the number of shares outstanding as of the determination date. Our commercial real estate assets and investments constitute a significant component of our total assets. We will take estimated values of each of our commercial real estate assets and investments, including related liabilities, based upon performance, outstanding principal balance, market default rates, discount rates, loss severity rates, and, if our Manager deems it necessary, individual appraisal reports of the underlying real estate assets provided periodically by an independent valuation expert.

 

As with any methodology used to estimate value, the methodology that will be employed by our affiliates internal accountants is based upon a number of estimates and assumptions about future events that may not be accurate or complete. Further, different parties using different assumptions and estimates could derive a different NAV per share, which could be significantly different from our calculated NAV per share. Our NAV will fluctuate over time and does not represent: (i) the price at which our shares would trade on a national securities exchange, (ii) the amount per share a shareholder would obtain if he, she or it tried to sell his, her or its shares or (iii) the amount per share shareholders would receive if we liquidated our assets and distributed the proceeds after paying all our expenses and liabilities.

 

In addition, for any given quarter, our published NAV per share may not fully reflect certain material events, to the extent that the financial impact of such events on our portfolio is not immediately quantifiable. We will use commercially reasonable efforts to monitor whether a material event occurs in between quarterly updates of NAV that we reasonably believe would cause our NAV per share to change by 5% or more from the last disclosed NAV.  While this offering is ongoing, if we reasonably believe that such a material event has occurred, we will calculate and disclose the updated NAV per share and the reason for the change in an offering circular supplement as promptly as reasonably practicable, and will update the NAV per share information provided on our website.

 

23


 

Quarterly NAV Share Price Adjustments

 

The offering price per share will equal the greater of (i) $10.00 per share or (ii) our NAV per share (calculated as our NAV divided by the number of our common shares outstanding as of the end of the prior fiscal quarter) and will be adjusted at the beginning of every fiscal quarter (or as soon as commercially reasonable thereafter). Common shares sold pursuant to our distribution reinvestment plan will be sold at different prices, and no sales commissions will be paid with respect to shares purchased pursuant to the distribution reinvestment plan. See “Description of Our Common Shares ─ Distribution Reinvestment Plan” for additional information. While this offering is ongoing, we will file with the SEC on a quarterly basis an offering circular supplement disclosing the quarterly determination of our NAV per share and the offering price per share that will be applicable for the following three month period, which we refer to as the pricing supplement. Additionally, we will identify the current offering price per share as well as our NAV per share on our website, www.realtymogul.com. Our website will also contain this offering circular, including any supplements and amendments. As long as this offering continues, we will disclose, on a quarterly basis in an offering circular supplement filed with the SEC, the principal valuation components of our NAV. We will use commercially reasonable efforts to monitor whether a material event occurs in between quarterly updates of NAV that we reasonably believe would cause our NAV per share to change by 5% or more from the last disclosed NAV per share. While this offering is ongoing, if we reasonably believe that such a material event has occurred, we will calculate and disclose the updated NAV per share and the reason for the change in an offering circular supplement as promptly as reasonably practicable, and will update the NAV per share information provided on our website. We will also use that updated NAV per share to determine whether to change the offering price for new shares of the remainder of the fiscal quarter. Any subscriptions that we receive prior to our announcement of a new offering price per share will be executed at the price per share in effect on the date the subscription is received. Thus, even if settlement occurs following the announcement of a new offering price per share, the purchase price for the shares will be the price in effect at the time the subscription was received.

 

Quarterly Share Repurchase Program

 

While you should view your investment as long-term, we have adopted a share repurchase program, whereby shareholders may request that we repurchase up to 25% of their shares quarterly while this offering is ongoing. We may make repurchases upon the death of a shareholder (referred to as “exception repurchases”; all other repurchases are referred to as “ordinary repurchases”).  For ordinary repurchases, the Effective Repurchase Rate will depend upon how long a shareholder requesting redemption has held his or her shares. Exception repurchases are not subject to any discount associated with the amount of time the shares were held and will be repurchased at 100% of the most recently announced NAV per share. For all other repurchases, we will repurchase the shares at the lower of the price the shareholder paid for his or her shares or the most recently announced NAV per share, multiplied by the Effective Repurchase Rate. The repurchase rates at which we will repurchase shares are presented in the table below.

 

 

 

Effective

 

Share Repurchase Anniversary (Year)

 

Repurchase Rate (1)

 

Less than 1 year

 

(Lock-up) 0

%

1 year until 2 years

 

98

%

2 years until 3 years

 

99

%

3 or more years

 

100

%

Death (Exception Repurchases)

 

100

%

 

Please refer to the section entitled “Description of Our Common Shares—Quarterly Share Repurchase Program” for more information.

 

Liquidity Event

 

While we expect to seek a liquidity transaction in the future, there can be no assurance that a suitable transaction will be available or that market conditions for a transaction will be favorable at any time.  Our Manager has the discretion to consider and execute a liquidity transaction at any time if it determines such event to be in our best interests.  A liquidity transaction could consist of a sale or a roll-off to scheduled maturity of our assets, a sale or merger of the Company, a consolidation transaction with other companies managed by our Manager or its affiliates, a listing of our common shares on a national securities exchange or a similar transaction. If we intend to list our common shares on a national securities exchange, we may convert to a corporation to facilitate such listing without shareholder consent except as required by law.    

 

24


 

Voting Rights

 

Our common shareholders will have voting rights only with respect to certain matters, primarily relating to amendments to our LLC Agreement that would adversely change the rights of the common shares, and removal of our Manager for “cause”.  Each outstanding common share entitles the holder to one vote on all matters submitted to a vote of common shareholders.  Our shareholders do not elect or vote on our Manager and, unlike the holders of common shares in a corporation, have only limited voting rights on matters affecting our business, and therefore limited ability to influence decisions regarding our business.  For additional information, see “Description of Our Common Shares—Voting Rights.”

 

Other Governance Matters

 

Other than the limited shareholder voting rights described above, our LLC Agreement vests most other decisions relating to our assets and to the business of the Company, including decisions relating to acquisitions and dispositions, the engagement of asset managers, the issuance of securities in the Company including additional common shares, mergers, roll-up transactions, conversion to a corporation, listing on a national securities exchange, and other decisions relating to our business, in our Manager.  See “Management” for more information about the rights and responsibilities of our Manager.

 

Investment Company Act Considerations

 

We intend to conduct our operations so that neither we nor any subsidiaries we may establish will be required to register as an investment company under the Investment Company Act of 1940, as amended, or the Investment Company Act. A person will generally be deemed to be an “investment company” for purposes of the Investment Company Act if, absent an available exception or exemption, it (i) is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or (ii) owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis.

 

We intend to rely on an exclusion from the definition of investment company provided by either Section 3(c)(5)(C) or Section 3(c)(6) of the Investment Company Act. Section 3(c)(5)(C) of the Investment Company Act, as interpreted by the staff of the Securities and Exchange Commission, or the SEC, requires us to invest at least 55% of our assets in “mortgages and other liens on and interests in real estate,” or Qualifying Real Estate Assets, and at least 80% of our assets in Qualifying Real Estate Assets plus real estate-related assets.

 

We intend to invest in and manage a diversified portfolio of commercial real estate investments.  We expect to use a significant majority of the net proceeds from this offering to invest and hold at least 55% of our total assets in commercial real estate loans (including senior mortgage loans, subordinated mortgage loans, mezzanine debt and participations (also referred to as B-Notes) that meet certain criteria outlined by the staff of the SEC), each of which are Qualifying Real Estate Assets.  In addition, we intend to hold at least 80% of our total assets in a combination of Qualifying Real Estate Assets and real estate-related assets. These real estate-related assets may include assets such as equity interests in companies that own commercial real estate or preferred equity in commercial real estate and, in certain cases when we have excess cash, interests in publicly traded REITs.  We will monitor our holdings under the 55% test and the 80% test in an effort to comply with Section 3(c)(5)(C) and related guidance.

 

Based on these holdings, we believe that we will not be considered an investment company for purposes of Section 3(c)(5)(C) of the Investment Company Act. Consequently, we expect to be able to conduct our operations such that we will not be required to register as an investment company under the Investment Company Act.

 

Section 3(c)(6) of the Investment Company Act excludes from the definition of “investment company” any company primarily engaged, directly or through majority-owned subsidiaries, in a business, among others, described in Section 3(c)(5)(C) of the Investment Company Act.  The SEC has indicated that Section 3(c)(6) requires a company to hold at least 55% of its assets in, and derive 55% of its income from, a Section 3(c)(5)(C) business.  The staff of the SEC has issued little additional interpretive guidance with respect to Section 3(c)(6).

 

To the extent we choose to hold our real estate investments through subsidiaries, we may rely on Section 3(c)(6) of the Investment Company Act rather than Section 3(c)(5)(C).  In such a case, we intend that more than 55% of our assets would be held in, and more than 55% of our income would be derived from, a combination of our

25


 

interests in our majority-owned subsidiaries and Qualifying Real Estate Assets.  Our majority-owned subsidiaries would rely on Section 3(c)(5)(C), described above.  Based on these holdings, we believe that we would not be considered an investment company for purposes of Section 3(c)(6) of the Investment Company Act.  Consequently, we expect we would be able to conduct our operations such that we would not be required to register as an investment company under the Investment Company Act.

 

If the staff of the SEC were to disagree with our approach to our compliance with Section 3(c)(6), we would need to adjust our investment strategy.  Any such adjustment in our strategy could have a material adverse effect on us.

 

Under the Investment Company Act, a majority-owned subsidiary of a person is defined as a company 50% or more of the outstanding voting securities of which are owned by such person, or by another company which is a majority-owned subsidiary of such person.  For purposes of Section 3(c)(6), we intend to treat companies in which we own at least a majority of the outstanding voting securities as majority-owned subsidiaries.  The determination of whether an entity is a majority-owned subsidiary of the Company will be made by us.  We have not asked the staff of the SEC for concurrence with our analysis, and it is possible that the staff of the SEC could disagree with any of our determinations.  If the staff of the SEC were to disagree with our treatment of one or more companies as majority-owned subsidiaries, we would need to adjust our investment strategy.  Any such adjustment in our strategy could have a material adverse effect on us.

 

The assets we and any subsidiaries may acquire are limited by the provisions of the Investment Company Act, the rules and regulations promulgated under the Investment Company Act, and interpretative guidance from the SEC and its staff.  These limitations may adversely affect our performance.  In addition, to the extent the staff of the SEC provides different or more specific guidance regarding any of the matters bearing upon such exclusions, we may be required to adjust our strategy accordingly.  Any additional guidance from the SEC or its staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen.  The loss of our exclusion from regulation pursuant to the Investment Company Act could require us to restructure our operations, sell certain of our assets, or abstain from the purchase of certain assets, which could have an adverse effect on our financial condition and results of operations.  See “Risk Factors—Risks Related to Compliance and Regulations—We may not be successful in availing ourselves of the Investment Company Act exclusion, and even if we are successful, the exclusion would impose limits on our operations, which could adversely affect our operations.

 

26


 

RISK FACTORS

 

An investment in our common shares involves substantial risks.  You should carefully consider the following risk factors in addition to the other information contained in this offering circular before purchasing shares.  The occurrence of any of the following risks might cause you to lose a significant part of your investment.  The risks and uncertainties discussed below are not the only ones we face, but do represent those risks and uncertainties that we believe are most significant to our business, operating results, prospects and financial condition.  Some statements in this offering circular, including statements in the following risk factors, constitute forward-looking statements.  Please refer to the section entitled “Statements Regarding Forward-Looking Information.”

 

Risks Related to an Investment in MogulREIT I, LLC

 

We have limited operating history.

 

As of January 1, 2019,  we have a  limited two-year operating history.  While we will provide you with information on a regular basis regarding our real estate investments after they are acquired, we will not provide you with a significant amount of information, if any, for you to evaluate our future investments prior to our making them. Since we currently have not identified all of the investments we intend to purchase, this offering is considered to be a “blind pool” offering. You will not be able to evaluate the economic merit of our future investments until after such investments have been made. As a result, an investment in our shares is speculative.

 

Because no public trading market for your shares currently exists, it will be difficult for you to sell your shares and, if you are able to sell your shares, you will likely sell them at a substantial discount to the public offering price.

 

Our LLC Agreement does not require our Manager to seek shareholder approval to liquidate our assets by a specified date, nor does our LLC Agreement require our Manager to list our shares for trading on a national securities exchange by a specified date.  There is no public market for our shares.  While we and our affiliates may explore developing a secondary trading market for our common shares, it is possible that we will not be able to, or will decide not to, develop such a market.  Our LLC Agreement prohibits the ownership of more than 9.8% in value or number of our shares, whichever is more restrictive, or more than 9.8% in value or number of our common shares, whichever is more restrictive, unless exempted by our Manager, which may inhibit large investors from purchasing your shares. Following the conclusion of this offering, in its sole discretion, including to protect our operations and our remaining shareholders, to prevent an undue burden on our liquidity or to preserve our status as a REIT, our Manager could amend, suspend or terminate our share repurchase program without notice. Further, the share repurchase program includes numerous restrictions that would limit your ability to sell your shares. We describe these restrictions in more detail under “Description of Our Common Shares — Quarterly Share Repurchase Program”.  Therefore, it will be difficult for you to sell your shares promptly or at all.  If you are able to sell your shares, you would likely have to sell them at a substantial discount to their public offering price.  It is also likely that your shares would not be accepted as the primary collateral for a loan.  Because of the illiquid nature of our shares, you should purchase our shares only as a long-term investment and be prepared to hold them for an indefinite period of time.

 

If we are unable to find suitable investments, or are delayed in finding suitable investments we may not be able to achieve our investment objectives or pay distributions in a timely manner, or at all.

 

Our ability to achieve our investment objectives and to pay distributions depends upon the performance of our Manager in the acquisition of our investments and the ability of our Manager to identify loan origination opportunities and equity investments for us. In some cases, we may also depend upon the performance of third-party loan servicers to service our loan investments. Except for investments that may be described in supplements to this offering circular prior to the date you subscribe for our shares, you will have no opportunity to evaluate the economic merits or the terms of our investments before making a decision to invest in the Company. You must rely entirely on the management abilities of our Manager and the loan servicers our Manager may select.

 

To the extent that our Manager’s real estate and debt finance professionals face competing demands upon their time in instances when we have capital ready for investment, we may face delays in execution.  Further, because we are raising a “blind pool” whereby we are not committed to investing in any particular assets, it may be difficult for us to invest the net offering proceeds promptly and on attractive terms.

 

27


 

We cannot assure you that our Manager will be successful in obtaining suitable investments on financially attractive terms or that, if our Manager makes investments on our behalf, our objectives will be achieved. If we would continue to be unsuccessful in locating suitable investments, we may ultimately decide to liquidate. In the event we are unable to timely locate suitable investments, we may be unable or limited in our ability to pay distributions, and we may not be able to meet our investment objectives.

 

We may allocate the net proceeds from this offering to investments with which you may not agree.

 

We will have significant flexibility in investing the net proceeds of this offering.  You will be unable to evaluate the manner in which the net proceeds of this offering will be invested or the economic merit of our expected investments and, as a result, we may use the net proceeds from this offering to invest in investments with which you may not agree. The failure of our management to apply these proceeds effectively or find investments that meet our investment criteria in sufficient time or on acceptable terms could result in unfavorable returns and could cause the value of our common shares to decline.

 

If we pay distributions from sources other than our cash flow from operations, we will have fewer funds available for investments and your overall return will be reduced.

 

As of December 1, 2018, cumulative since inception, our distributions, including shares issued pursuant to the distribution reinvestment plan, were fully funded by cash flow from operations.  Although our distribution policy is to use our cash flow from operations to make distributions, our LLC Agreement permits us to pay distributions from any source, including offering proceeds, borrowings, or sales of assets. We have not placed a cap on the use of proceeds to fund distributions. Until the proceeds from this offering are fully invested and from time to time during the operational stage, we may not generate sufficient cash flow from operations to fund distributions.  If we pay distributions from sources other than our cash flow from operations, we will have fewer funds available for investments, and your overall return may be reduced.

 

There is a risk that you may not receive distributions or that distributions may not grow over time.

 

We have made, and intend to continue to make distributions, on a monthly basis out of assets legally available therefor to our shareholders in amounts such that all or substantially all of our REIT taxable income in each year, subject to certain adjustments, is distributed.  We have not established a minimum distribution payment level and the amount of our distributions will fluctuate.  Our ability to pay distributions may be adversely affected by a number of factors, including the risk factors described in this offering circular.  All distributions will be made at the discretion of our Manager and will depend on our earnings, our financial condition, maintenance of our REIT status and other factors as our Manager may deem relevant from time to time. Among the factors that could adversely affect our results of operations and impair our ability to pay distributions to our shareholders are:

 

·

the profitability of the investment of the net proceeds of this offering;

·

our ability to make profitable investments;

·

margin calls or other expenses that reduce our cash flow;

·

defaults in our asset portfolio or decreases in the value of our portfolio; and

·

the fact that anticipated operating expense levels may not be accurate, as actual results may vary from estimates.

 

A change in any one of these factors could affect our ability to make distributions. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions.

 

We may not be able to make distributions in the future or our Manager may change our distribution policy in the future. In addition, some of our distributions may include a return of capital. To the extent that we decide to pay distributions in excess of our current and accumulated tax earnings and profits, such distributions would generally be considered a return of capital for federal income tax purposes. A return of capital reduces the basis of a shareholder’s investment in our common shares to the extent of such basis, and is treated as capital gain thereafter.

 

28


 

Future disruptions in the financial markets or deteriorating economic conditions could adversely impact the commercial real estate market as well as the market for debt and equity-related investments generally, which could hinder our ability to implement our business strategy and generate returns to you.

 

Our portfolio of real estate related investments may be significantly impacted by economic conditions. (see “— Risks Related to Our Shares and Investments”).  The value of the collateral securing or underlying any investment we make could decrease below our investment or outstanding principal amount of such investment.  In addition, revenues on the properties and other assets underlying any investments we may make could decrease, making it more difficult for borrowers or operators to meet their payment obligations to us.  Each of these factors would increase the likelihood of default and foreclosure, which would likely have a negative impact on the value of our investment.

 

More generally, the risks arising from the financial market and economic conditions are applicable to all of the investments we may make.  The risks apply to commercial mortgage, mezzanine or bridge loans and any equity or preferred equity investments we may make. They also apply to the debt and equity securities of companies that have investment objectives similar to ours.

 

Future disruptions in the financial markets or deteriorating economic conditions may also impact the market for our investments and the volatility of our investments.  The returns available to investors in our targeted investments are determined, in part, by: (i) the supply and demand for such investments and (ii) the existence of a market for such investments, which includes the ability to sell or finance such investments.  During periods of volatility, the number of investors participating in the market may change at an accelerated pace.  If either demand or liquidity increases, the cost of our targeted investments may increase. As a result, we may have fewer funds available to make distributions to investors.

 

All of the factors described above could adversely impact our ability to implement our business strategy and make distributions to our investors and could decrease the value of an investment in us.

 

This is a blind pool offering as we have not identified all of the investments we intend to make. As such, you will not have the opportunity to evaluate our future investments before we make them, which makes your investment more speculative.

 

This is a blind pool offering as we have not identified all of the investments we intend to make. As such, you will not be able to evaluate the merits of any specific future investments that we may make.  We will seek to invest substantially all of the offering proceeds available for investment, after the payment of fees and expenses, in commercial real estate loans, commercial real estate and other real estate-related assets.  Except as noted above, because you will be unable to evaluate the economic merit of assets before we invest in them, you will have to rely entirely on the ability of our Manager to select suitable and successful investment opportunities. Furthermore, our Manager will have broad discretion in implementing policies regarding mortgagor creditworthiness and you will not have the opportunity to evaluate potential borrowers. These factors increase the risk that your investment may not generate returns comparable to our competitors.

 

You may be more likely to sustain a loss on your investment because our Sponsor does not have as strong an economic incentive to avoid losses as do sponsors who have made significant equity investments in their companies.

 

Our Sponsor has invested $2,500 in us through the purchase of 250 of our common shares at $10.00 per share.  Therefore, our Sponsor has little exposure to loss in the value of our shares.  Without this exposure, our investors may be at a greater risk of loss because our Sponsor does not have as much to lose from a decrease in the value of our shares as do those sponsors who make more significant equity investments in their companies.

 

Because we are limited in the amount of funds we can raise, we will be limited in the number and type of investments we make and the value of your investment in us will fluctuate with the performance of the specific assets we acquire.

 

This offering is being made on a “best efforts” basis and we may begin to invest net proceeds from this offering immediately after the commencement of this offering. Further, under Regulation A, we are only allowed to sell up to $50,000,000 of our common shares in this follow-on offering less the amount sold in the initial offering during the twelve-month period prior to the commencement of the follow-on offering.  We expect the size of the commercial real estate loans and equity investments that we will make will average about $1.0 million to $5.0 million per asset.  As a result, the amount of proceeds we raise in this offering may be substantially less than the amount we would need to achieve a diversified portfolio of investments, even if we are successful in raising the maximum offering amount.  If we are unable to raise

29


 

substantial funds, we will make fewer investments resulting in less diversification in terms of the type, number and size of investments that we make.  In that case, the likelihood that any single asset’s performance would adversely affect our profitability will increase.  Your investment in our shares will be subject to greater risk to the extent that we lack a diversified portfolio of investments.  Further, we will have certain fixed operating expenses, including certain filings with the SEC, regardless of whether we are able to raise substantial funds in this offering. Our inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, reducing our net income and limiting our ability to make distributions.

 

Our investments may be concentrated and will be subject to risk of default.

 

While we intend to diversify our portfolio of investments in the manner described in this offering circular, we are not required to observe specific diversification criteria.  We have not established and do not plan to establish any investment criteria to limit our exposure to these risks for future investments.  To the extent that our portfolio is concentrated in any one geographic region or type of security, downturns relating generally to such region or type of security may result in defaults on a number of our investments within a short time period, which may reduce our net income and the value of our shares and, accordingly, may reduce our ability to pay distributions to you.

 

Any adverse changes in Realty Mogul, Co.’s financial health or our relationship with Realty Mogul, Co. or its affiliates could hinder our operating performance and the return on your investment.

 

At this early stage in its development, Realty Mogul, Co. has funded substantially all of its operations with proceeds from private financings.  To meet its financing requirements in the future, it may raise funds through equity offerings, debt financings or strategic alliances.  Raising additional funds may involve agreements or covenants that restrict Realty Mogul, Co.’s business activities and options.  Additional funding may not be available to it on favorable terms, or at all.  If Realty Mogul, Co. is unable to obtain additional funds, it may be forced to reduce or terminate its operations.  Any inability for Realty Mogul, Co. to fund its operations could have a substantial and deleterious effect on our business and operations.

 

We have engaged our Manager to manage our operations and our portfolio of commercial real estate investments, including loans and equity in commercial real estate ventures and other real estate-related assets. Our Manager’s employees are also personnel of Realty Mogul, Co. and perform services through a shared services agreement between our Manager and Realty Mogul, Co.  Our ability to achieve our investment objectives and to pay distributions is dependent upon the performance of our Manager and its affiliates as well as Realty Mogul, Co.’s real estate and debt finance professionals in the identification and acquisition of investments, the management of our assets, and operation of our day-to-day activities. Any adverse changes in Realty Mogul, Co.’s financial condition or our relationship with Realty Mogul, Co. could hinder our Manager’s ability to successfully manage our operations and our portfolio of investments.

 

We are dependent on our Manager and Realty Mogul, Co.’s key personnel for our success.

 

Our future depends, in part, on our Manager’s continued contributions and on the continued contributions of its executive officers, members of its investment committee, and Realty Mogul, Co.’s key personnel, each of whom would be difficult to replace. In particular, Jilliene Helman of Realty Mogul, Co. is critical to the management of our business and operations and the development of our strategic direction. Jilliene Helman, our Manager’s Chief Executive Officer and Eric Levy, our Manager’s Portfolio Manager make up our Manager’s investment committee. The loss of the services of Jilliene Helman or other executive officers or key personnel and the process to replace any key personnel would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.

 

In addition, we can offer no assurance that our Manager will remain our investment manager.  If our Manager does not remain our investment manager, and no suitable replacement is found to manage us, we may not be able to execute our business plan.  Moreover, our Manager is not obligated to dedicate any of Realty Mogul, Co.’s key personnel exclusively to us nor is it obligated to dedicate any specific portion of its time to our business, and none of Realty Mogul, Co.’s key personnel are contractually dedicated to us.

 

30


 

Our ability to implement our investment strategy is dependent, in part, upon our ability to successfully conduct this offering through the Realty Mogul Platform, which makes an investment in us more speculative.

 

We will conduct this offering through the Realty Mogul Platform, which is operated by RM Technologies, LLC, an affiliate of Realty Mogul, Co.  Realty Mogul, Co. has sponsored other real estate investment opportunities under other formats prior to this offering, including MogulREIT II, Inc.  The success of this offering, and our ability to implement our business strategy, is dependent upon our ability to sell our shares to investors through the Realty Mogul Platform.  If we are not successful in selling our shares through the Realty Mogul Platform, our ability to raise proceeds through this offering will be limited and we may not have adequate capital to implement our investment strategy.  Additionally, given the different regulatory regime and advertising restrictions placed on this type of offering from offerings accomplished on the Realty Mogul Platform in the past, it is crucial to the success of this offering that this offering be properly segregated from the other offerings on the Realty Mogul Platform.  If we are unsuccessful in implementing this investment strategy, you could lose all or a part of your investment.

 

If we do not successfully implement a liquidity transaction, you may have to hold your investment for an indefinite period.

 

Although we presently intend to complete a transaction providing liquidity to shareholders in the future, our LLC Agreement does not require our Manager to pursue such a liquidity transaction.  Market conditions and other factors could cause us to delay the listing of our shares on a national securities exchange, delay developing a secondary trading market, or delay the commencement of a liquidation or other type of liquidity transaction, such as a merger or sale of assets.  If our Manager does determine to pursue a liquidity transaction, we would be under no obligation to conclude the process within a set time. If we adopt a plan of liquidation, the timing of the sale of assets will depend on real estate and financial markets, economic conditions in areas in which properties are located, and federal income tax effects on shareholders, that may prevail in the future. We cannot guarantee that we will be able to liquidate all assets.  After we adopt a plan of liquidation, we would likely remain in existence until all our investments are liquidated. If we do not pursue a liquidity transaction, or delay such a transaction due to market conditions, your shares may continue to be illiquid and you may, for an indefinite period of time, be unable to convert your investment to cash easily and could suffer losses on your investment.

 

We may change our targeted investments without shareholder consent.

 

Our Manager may change our targeted investments and asset allocation at any time without the consent of our shareholders, which could result in our making investments that are different from, and possibly riskier than, the investments described in this offering circular.  A change in our targeted investments may increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could adversely affect the value of our common shares and our ability to make distributions to you.  Furthermore, a change in our asset allocation could result in our making investments in asset categories different from those described in this offering circular.

 

We have limited operating capital, assets and revenue from operations.

 

We have limited operating capital and for the foreseeable future will be dependent upon our ability to finance our operations from the sale of equity or other financing alternatives.  There can be no assurance that we will be able to successfully raise operating capital.  The failure to successfully raise operating capital, and the failure to attract qualified real estate companies and sufficient investor purchase commitments, could result in our bankruptcy or other event which would have a material adverse effect on us and the value of our shares.  We have limited assets and financial resources, so such adverse event could put your investment dollars at significant risk.

 

The market in which we participate is competitive and, if we do not compete effectively, our operating results could be harmed.

 

The real estate lending market is competitive and rapidly changing. We expect competition to persist and intensify in the future, which could harm our operating results.

 

Our principal competitors include major banking institutions, private equity funds, real estate investment trusts, insurance companies, private investment funds, hedge funds, specialty finance companies, as well as online lending platforms that compete with the Realty Mogul Platform. Competition could result in the failure of the Realty Mogul Platform to achieve or maintain more widespread market acceptance, which could harm our business.  In addition, in the

31


 

future, we and the Realty Mogul Platform may experience new competition from more established internet companies possessing large, existing customer bases, substantial financial resources and established distribution channels.  If any of these companies or any major financial institution decided to enter the online lending business, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our operating results could be harmed.

 

Many of our competitors listed above have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their platforms and distribution channels. We may not be able to compete successfully with those competitors for investments.  In addition, the number of entities and the amount of funds competing for suitable investments may increase.  If we pay higher prices for investments, our returns will be lower and the value of our assets may not increase or may decrease significantly below the amount we paid for such assets.  If such events occur, you may experience a lower return on your investment.

 

Many of our competitors have longer operating histories, more extensive customer bases, greater brand recognition and broader customer relationships than we have.  These competitors may be better able to develop new products, to respond quickly to new technologies and to undertake more extensive marketing campaigns.  The online real estate investing industry is driven by constant innovation. If we or the Realty Mogul Platform are unable to compete with such companies and meet the need for innovation, the demand for the Realty Mogul Platform could stagnate or substantially decline.

 

We rely on third-party banks and on third-party computer hardware and software. If we are unable to continue utilizing these services, our business and ability to service the corresponding project loans may be adversely affected.

 

We and the Realty Mogul Platform rely on third-party and FDIC-insured depository institutions to process our transactions, including payments of corresponding loans and distributions to our shareholders. Under the Automated Clearing House, or ACH, rules, if we experience a high rate of reversed transactions, known as “chargebacks”, we may be subject to sanctions and potentially disqualified from using the system to process payments. We also rely on computer hardware purchased and software licensed from third parties to operate the Realty Mogul Platform. This purchased or licensed hardware and software may be physically located off-site, as is often the case with “cloud services.” This purchased or licensed hardware and software may not continue to be available on commercially reasonable terms, or at all.  If the Realty Mogul Platform cannot continue to obtain such services elsewhere, or if it cannot transition to another processor quickly, our ability to process payments will suffer and your ability to receive distributions will be delayed or impaired.

 

Any significant disruption in service on the Realty Mogul Platform or in its computer or communications systems could reduce its attractiveness and result in a loss of users.

 

We will conduct this offering through the Realty Mogul Platform, which is operated by RM Technologies, LLC, an affiliate of Realty Mogul, Co.  The success of this offering depends on our ability to sell shares through the Realty Mogul Platform.  If a catastrophic event resulted in a Realty Mogul Platform outage and physical data loss, the Realty Mogul Platform’s ability to perform its obligations would be materially and adversely affected.  The satisfactory performance, reliability, and availability of RM Technologies, LLC’s technology and its underlying hosting services infrastructure are critical to RM Technologies, LLC’s operations, level of customer service, reputation and ability to attract new users and retain existing users.  RM Technologies, LLC’s hosting services infrastructure is provided by a third party hosting provider, or the Hosting Provider.  RM Technologies, LLC also maintains a backup system at a separate location that is owned and operated by a third party.  There is no guarantee that access to the Realty Mogul Platform will be uninterrupted, error-free or secure.  RM Technologies, LLC’s operations depend on the Hosting Provider’s ability to protect its and RM Technologies, LLC’s systems in its facilities against damage or interruption from natural disasters, power or telecommunications failures, air quality, temperature, humidity and other environmental concerns, computer viruses or other attempts to harm our systems, criminal acts and similar events.  If RM Technologies, LLC’s arrangement with the Hosting Provider is terminated, or there is a lapse of service or damage to its facilities, the Realty Mogul Platform could experience interruptions in its service as well as delays and additional expense in arranging new facilities.  Any interruptions or delays in RM Technologies, LLC’s service, whether as a result of an error by the Hosting Provider or other third-party error, RM Technologies, LLC’s own error, natural disasters or security breaches, whether accidental or willful, could harm our ability to perform any services for corresponding project investments or maintain accurate accounts, and could harm RM Technologies, LLC’s relationships with its users and RM Technologies, LLC’s reputation.  Additionally, in the event of damage or interruption, RM Technologies, LLC’s insurance policies may not adequately compensate RM

32


 

Technologies, LLC for any losses that we may incur.  RM Technologies, LLC’s disaster recovery plan has not been tested under actual disaster conditions, and it may not have sufficient capacity to recover all data and services in the event of an outage at a facility operated by the Hosting Provider.  Any of these factors could prevent us from processing or posting payments on the corresponding investments, damage RM Technologies, LLC’s, Realty Mogul, Co.’s and our brand and reputation, divert Realty Mogul, Co.’s employees’ attention, and cause users to abandon the Realty Mogul Platform.

 

Our Manager’s due diligence of potential investments may not reveal all of the liabilities associated with such investments and may not reveal other weaknesses in such investments, which could lead to investment losses.

 

Before making an investment, our Manager assesses the strengths and weaknesses of the originator or issuer of the asset as well as other factors and characteristics that are material to the performance of the investment.  In making the assessment and otherwise conducting customary due diligence, our Manager relies on resources available to it and, in some cases, an investigation by third parties.  This process is particularly important with respect to newly formed originators or issuers with unrated and other subordinated tranches of CMBS and CDOs because there may be little or no information publicly available about these entities and investments.  There can be no assurance that our Manager’s due diligence process will uncover all relevant facts or that any investment will be successful.

 

Future offerings of debt securities, which would rank senior to our common shares upon our liquidation, and future offerings of equity securities, which would dilute our existing shareholders and may be senior to our common shares for the purposes of dividend and liquidating distributions, may cause the value of our common shares to decline.

 

In the future, we may raise capital through the issuance of debt or equity securities. Upon liquidation, holders of our debt securities and preferred shares, if any, and lenders with respect to other borrowings will be entitled to our available assets prior to the holders of our common shares. Additional equity offerings may dilute the holdings of our existing shareholders or cause the value of our common shares to decline, or both. Our preferred shares, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability to pay distributions to the holders of our common shares. Sales of substantial amounts of our common shares, or the perception that these sales could occur, could have a material adverse effect on the price of our common shares. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings, if any. Thus, holders of our common shares will bear the risk of our future offerings reducing the value of our common shares and diluting the value of their shareholdings in us.

 

We have the authority to enter into unsecured related party loans that, in the aggregate, do not exceed $20 million and do not carry an interest rate that exceeds the then current applicable prime rate without the approval of an Independent Representative.  If we choose to raise debt capital and there is an economic slowdown or recession that would force us to liquidate, this debt would be paid back prior to distributions on our equity.  Further, if we incur debt, we may choose to pay back such debt rather than offering share repurchases to our shareholders.  If we prioritize paying debt over offering share repurchases, fewer, if any, funds would be available for share repurchases and your investment would be less liquid.

 

Risks Related to the Investment Platform

 

The Realty Mogul Platform may not operate as we anticipate.

 

With the exception of offering our shares online through select RIA partners, we intend to distribute our shares to the public exclusively through the Realty Mogul Platform. We also expect that the Realty Mogul Platform will be a source of investment leads for the Company. Potential sponsors and borrowers of real estate opportunities come directly to the Realty Mogul Platform to seek financing for their projects. We anticipate that we will be able to use the Realty Mogul Platform to sell our shares, and that sponsors and borrowers of real estate opportunities will continue to seek financing for their projects through the Realty Mogul Platform. If the Realty Mogul Platform experiences technical challenges that inhibit our ability to sell shares through the platform or if sponsors and borrowers do not continue to seek financing through the Realty Mogul Platform, we may need to implement more manpower-intensive strategies to sell our shares or source investments, which could lead to an increase in expenses and a corresponding decrease in the value of our common shares.

 

33


 

If the security of our investors’ confidential information stored in RM Technologies, LLC’s systems is breached or otherwise subjected to unauthorized access, your secure information may be stolen.

 

The Realty Mogul Platform may store investors’ bank information and other personally-identifiable sensitive data.  The Realty Mogul Platform is hosted in data centers that are compliant with payment card industry security standards and the website uses daily security monitoring services provided by McAfee SECURE certification and Incapsula.  However, any accidental or willful security breach or other unauthorized access could cause your secure information to be stolen and used for criminal purposes, and you would be subject to increased risk of fraud or identity theft.  Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, the Realty Mogul Platform and its third-party hosting facilities may be unable to anticipate these techniques or to implement adequate preventative measures.  In addition, many states have enacted laws requiring companies to notify individuals of data security breaches involving their personal data.  These mandatory disclosures regarding a security breach are costly to implement and often lead to widespread negative publicity, which may cause our investors and real estate companies to lose confidence in the effectiveness of our data security measures.  Any security breach, whether actual or perceived, would harm our reputation, could result in a loss of investors, and the value of your investment in us could be adversely affected.

 

If Realty Mogul, Co. or RM Technologies, LLC were to enter bankruptcy proceedings, the operation of the Realty Mogul Platform and the activities with respect to our operations and business would be interrupted and subscription proceeds held in a segregated account may be subject to the bankruptcy.

 

The success of this offering depends on our ability to sell shares through the Realty Mogul Platform.  If Realty Mogul, Co. or RM Technologies, LLC were to enter bankruptcy proceedings or were to cease operations, we would be required to find other ways to meet obligations regarding our operations and business.  Pursuing such alternatives could harm our operations and business by resulting in delays in the disbursement of distributions or the filing of reports or requiring us to pay significant fees to another company that we engage to perform services for us.

 

Risks Related to Compliance and Regulation

 

We are offering our common shares pursuant to recent amendments to Regulation A promulgated pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we cannot be certain if the reduced disclosure requirements applicable to Tier 2 issuers will make our common shares less attractive to investors as compared to a traditional initial public offering.

 

As a Tier 2 issuer, we are subject to scaled disclosure and reporting requirements, which may make our common shares less attractive to investors who are accustomed to traditional initial public offering, which have enhanced disclosure and more frequent financial reporting.  In addition, given the relative lack of regulatory precedence regarding the recent amendments to Regulation A, there is a significant amount of regulatory uncertainty in regards to how the SEC or the individual state securities regulators will regulate both the offer and sale of our securities, as well as any ongoing compliance that we may be subject to.  If our scaled disclosure and reporting requirements, or regulatory uncertainty regarding Regulation A, reduces the attractiveness of our common shares, we may be unable to raise the necessary funds to commence operations, or to develop a diversified portfolio of real estate investments, which could severely affect the value of our common shares.

 

Our use of Form 1-A and our reliance on Regulation A for this offering may make it more difficult to raise capital as and when we need it, as compared to if we were conducting a traditional initial public offering on Form S-11.

 

Because of the exemptions from various reporting requirements provided to us under Regulation A and because we are only permitted to raise up to $50,000,000 of our common shares in this follow-on offering less the amount sold in the initial offering during the twelve-month period prior to the commencement of the follow-on offering, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it.  Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry.  If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.

 

34


 

There may be deficiencies with our internal controls that require improvements, and if we are unable to adequately evaluate internal controls, we may be subject to sanctions.

 

As a Tier 2 issuer, we will not need to provide a report on the effectiveness of our internal controls over financial reporting, and we will be exempt from the auditor attestation requirements concerning any such report as long as we are a Tier 2 issuer. We conducted an evaluation of our internal controls and believe we have the necessary framework in place. However, internal controls have inherent limitations. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by our internal controls.  However, we believe that our internal controls are effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, or GAAP.

 

Non-compliance with laws and regulations may impair our ability to arrange, service or otherwise manage our loans and other assets.

 

Failure to comply with the laws and regulatory requirements applicable to our business may, among other things, limit our, or a collection agency’s, ability to collect all or part of the payments on our investments.  In addition, our non-compliance could subject us to damages, revocation of required licenses or other authorities, class action lawsuits, administrative enforcement actions, and civil and criminal liability, which may harm our business.

 

Some states, including California, require nonfinancial companies, such as Realty Mogul, Co. or Realty Mogul Commercial Capital, Co., each of which may be referred to as an RM Originator in this offering circular, that will work with our Manager to originate loans and other real estate investments, to obtain a real estate or other license in order to make commercial loans on a regular basis.  Realty Mogul, Co. has a California Finance Lenders Law License with California’s Department of Business Oversight and a California Bureau of Real Estate License that satisfy the requirements in California, and Realty Mogul Commercial Capital, Co. is in the process of applying for the same licenses.  Realty Mogul, Co. and Realty Mogul Commercial Capital, Co. do not intend to finance loans in states where such licenses are required until they obtain any required licenses.  Realty Mogul, Co. or Realty Mogul Commercial Capital, Co. may, in the future, affiliate themselves with third parties such as financial institutions in order to be able to arrange loans in jurisdictions where they might otherwise be restricted.

 

We are required to obtain various state licenses in order to purchase mortgage loans in the secondary market and there is no assurance we will be able to obtain or maintain those licenses.

 

In the future, we may purchase secondary mortgages.  To the extent we do so, we will be required to apply for the appropriate licenses to make such purchases. While we are not required to obtain licenses to purchase mortgage-backed securities, we would be required to obtain various state licenses to purchase mortgage loans in the secondary market.  If we apply for these licenses at a later date, we expect the application process could take several months.  There is no assurance that we would be able to obtain all of the licenses that we desire or that we would not experience significant delays in seeking the licenses.  Furthermore, we would be subject to various information and other requirements to maintain the licenses, and there is no assurance that we would satisfy those requirements.  Our failure to obtain or maintain licenses could restrict our investment options and could harm our business.

 

We may not be successful in availing ourselves of the Investment Company Act exclusion, and even if we are successful, the exclusion would impose limits on our operations, which could adversely affect our operations. 

 

We intend to conduct our operations so that neither we nor any subsidiaries we establish will be required to register as an investment company under the Investment Company Act.  We anticipate that we will hold real estate and real estate-related assets described below, although in certain cases we may hold them through wholly-owned or majority-owned subsidiaries.

 

We intend to conduct our operations so that we and any subsidiaries we create will not be required to register as investment companies under the Investment Company Act of 1940, as amended, or the Investment Company Act. A person will generally be deemed to be an “investment company” for purposes of the Investment Company Act if, absent an available exception or exemption, it (i) is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or (ii) owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis.

35


 

 

We intend to rely on an exclusion from the definition of investment company provided by either Section 3(c)(5)(C) or Section 3(c)(6) of the Investment Company Act. Section 3(c)(5)(C) of the Investment Company Act, as interpreted by the staff of the SEC, requires us to invest at least 55% of our assets in “mortgages and other liens on and interests in real estate,” or Qualifying Real Estate Assets, and at least 80% of our assets in Qualifying Real Estate Assets plus real estate-related assets.

 

We expect to use a significant majority of the net proceeds from this offering to invest and hold at least 55% of our total assets in commercial mortgage-related instruments that are closely tied to one or more underlying commercial real estate projects, such as commercial real estate loans, including senior mortgage loans, subordinated mortgage loans, mezzanine debt and participations (also referred to as B-Notes) that meet certain criteria outlined by the staff of the SEC, each of which are Qualifying Real Estate Assets.  In addition, we intend to hold at least 80% of our total assets in a combination of Qualifying Real Estate Assets and real estate-related assets that are related to one or more underlying commercial real estate projects. These real estate-related assets may include assets such as equity or preferred equity interests in companies whose primary business is to own and operate one or more specified commercial real estate projects; debt securities whose projects are tied to a pool of commercial real estate projects, such as CMBSs and CDOs; and, in certain cases when we have excess cash, interests in publicly traded REITs.

 

To classify the assets held by us or any of our subsidiaries as Qualifying Real Estate Assets or real estate-related assets, we will rely on no-action letters and other guidance published by the staff of the SEC regarding those kinds of assets, as well as upon our analyses (in consultation with outside counsel) of guidance published with respect to other types of assets.  There can be no assurance that the laws and regulations governing the Investment Company Act status of companies similar to ours, or the guidance from the SEC or its staff regarding the treatment of assets as Qualifying Real Estate Assets or real estate-related assets, will not change in a manner that adversely affects our operations.  In fact, in August 2011, the SEC published a concept release in which it asked for comments on this exclusion from regulation.  To the extent that the staff of the SEC provides more specific guidance regarding any of the matters bearing upon our exclusion from the need to register or exclusion under the Investment Company Act, we may be required to adjust our strategy accordingly.  Any additional guidance from the staff of the SEC could further inhibit our ability to pursue the strategies that we have chosen.

 

To the extent we choose to hold our real estate investments through subsidiaries, we may rely on Section 3(c)(6) of the Investment Company Act rather than Section 3(c)(5)(C).  Section 3(c)(6) of the Investment Company Act excludes from the definition of “investment company” any company primarily engaged, directly or through majority-owned subsidiaries, in a business, among others, described in Section 3(c)(5)(C) of the Investment Company Act.  The SEC has indicated that Section 3(c)(6) requires a company to hold at least 55% of its assets in, and derive 55% of its income from, a Section 3(c)(5)(C) business.  The staff of the SEC has issued little additional interpretive guidance with respect to Section 3(c)(6).

 

In the event we choose to rely on Section 3(c)(6), we intend that more than 55% of our assets would be held in, and more than 55% of our income would be derived from, a combination of our interests in our majority-owned subsidiaries and Qualifying Real Estate Assets.  Our majority-owned subsidiaries would rely on Section 3(c)(5)(C), described above.  Based on these holdings, we believe that we would not be considered an investment company for purposes of Section 3(c)(6) of the Investment Company Act.  Consequently, we expect we would be able to conduct our operations such that we would not be required to register as an investment company under the Investment Company Act.

 

If the staff of the SEC were to disagree with our approach to our compliance with Section 3(c)(6), we would need to adjust our investment strategy.  Any such adjustment in our strategy could have a material adverse effect on us.

 

In connection with our Section 3(c)(6) analysis, the determination of whether an entity is a majority-owned subsidiary of the Company will be made by us.  Under the Investment Company Act, a majority-owned subsidiary of a person is defined as a company 50% or more of the outstanding voting securities of which are owned by such person, or by another company which is a majority-owned subsidiary of such person.  The Investment Company Act further defines voting security as any security presently entitling the owner or holder thereof to vote for the election of directors of a company.  We have not asked the staff of the SEC for confirmation of our analysis, of our treatment of such interests as voting securities, or of whether the Controlled Subsidiaries, or any other of our subsidiaries, may be treated in the manner in which we intend, and it is possible that the staff of the SEC could disagree with any of our determinations.  If the staff

36


 

of the SEC were to disagree with our treatment of one or more companies as majority-owned subsidiaries, we would need to adjust our investment strategy.  Any such adjustment in our strategy could have a material adverse effect on us.

 

Although we will monitor our holdings and income in an effort to comply with Section 3(c)(5)(C) and/or Section 3(c)(6) and related guidance, there can be no assurance that we will be able to remain in compliance or to maintain our exclusion from registration.  Any of the foregoing could require us to adjust our strategy, which could limit our ability to make certain investments or require us to sell assets in a manner, at a price or at a time that we otherwise would not have chosen.  This could negatively affect the value of our common shares, the sustainability of our business model and our ability to make distributions.

 

Registration under the Investment Company Act would require us to comply with a variety of substantive requirements that impose, among other things:

 

·

limitations on capital structure;

 

·

restrictions on specified investments;

 

·

restrictions on leverage or senior securities;

 

·

restrictions on unsecured borrowings;

 

·

prohibitions on transactions with affiliates; and

 

·

compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses.

 

If we were required to register as an investment company but failed to do so, we could be prohibited from engaging in our business, and criminal and civil actions could be brought against us.

 

Registration with the SEC as an investment company would be costly, would subject us to a host of complex regulations and would divert attention from the conduct of our business, which could materially and adversely affect us.  In addition, if we purchase or sell any real estate assets to avoid becoming an investment company under the Investment Company Act, our NAV, the amount of funds available for investment and our ability to pay distributions to our shareholders could be materially adversely affected.

 

We are not subject to the banking regulations of any state or federal regulatory agency.

 

We are not subject to the periodic examinations to which commercial banks and other thrift institutions are subject.  Consequently, our financing decisions and our decisions regarding establishing loan loss reserves are not subject to periodic review by any governmental agency.  Moreover, we are not subject to regulatory oversight relating to our capital, asset quality, management or compliance with laws.

 

Recent legislative and regulatory initiatives have imposed restrictions and requirements on financial institutions that could have an adverse effect on our business.

 

The financial industry is becoming more highly regulated.  There has been, and may continue to be, a related increase in regulatory investigations of the trading and other investment activities of alternative investment funds.  Such investigations may impose additional expenses on us, may require the attention of senior management of our Manager and may result in fines if we are deemed to have violated any regulations.

 

As internet commerce develops, federal and state governments may adopt new laws to regulate internet commerce, which may negatively affect our business.

 

As internet commerce continues to evolve, increasing regulation by federal and state governments becomes more likely.  Our business and the Realty Mogul Platform’s business could be negatively affected by the application of existing laws and regulations or the enactment of new laws applicable to lending.  The cost to comply with such laws or regulations could be significant and would increase our operating expenses, and we may be required to pass along those costs to our

37


 

borrowers in the form of increased fees, which could negatively impact our ability to make loans or other real estate investments.  In addition, federal and state governmental or regulatory agencies may decide to impose taxes on services provided over the internet.  These taxes could discourage the use of the internet as a means of commercial financing, which would adversely affect the viability of the Realty Mogul Platform.

 

Laws intended to prohibit money laundering may require us to disclose investor information to regulatory authorities.

 

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the PATRIOT Act, requires that financial institutions establish and maintain compliance programs to guard against money laundering activities, and requires the Secretary of the U.S. Department of Treasury to prescribe regulations in connection with anti-money laundering policies of financial institutions.  The Financial Crimes Enforcement Network, or FinCEN, an agency of the Department of Treasury, has announced that it is likely that such regulations would subject certain pooled investment vehicles to enact anti-money laundering policies.  It is possible that there could be promulgated legislation or regulations that would require us or our service providers to share information with governmental authorities with respect to prospective investors in connection with the establishment of anti-money laundering procedures.  Such legislation and/or regulations could require us to implement additional restrictions on the transfer of our common shares to comply with such legislation and/or regulations.  We reserve the right to request such information as is necessary to verify the identity of prospective shareholders and the source of the payment of subscription monies, or as is necessary to comply with any customer identification programs required by FinCEN and/or the SEC.  In the event of delay or failure by a prospective shareholder to produce any information required for verification purposes, an application for, or transfer of, our common shares may be refused.  We will not have the ability to reject a transfer of our common shares where all necessary information is provided and any other applicable transfer requirements, including those imposed under the transfer provisions of our LLC Agreement, are satisfied.

 

We are relying on the exemption for insignificant participation by benefit plan investors under ERISA.

 

The Plan Assets Regulation (as defined below) provides that the assets of an entity will not be deemed to be the assets of an employee benefit plan if equity participation in the entity by benefit plan investors, including employee benefit plans, is not “significant.” The Plan Assets Regulation provides that equity participation in the entity by benefit plan investors is “significant” if at any time 25% or more of the value of any class of equity interest is held by benefit plan investors. Because we are relying on this exemption, we will not accept investments from benefit plan investors  equal to or over 25% of the value of any class of equity interest. If repurchases of shares cause us to go equal or exceed 25%, we may repurchase shares of benefit plan investors without their consent until we are under the 25% limit. See the section of this Offering Circular captioned “ERISA Considerations” for additional information regarding the Plan Assets Regulation.

.

 

Risks Related to Conflicts of Interest

 

There are conflicts of interest between us, our Manager and its affiliates.

 

Our executive officers are principals in our Manager and its parent company, Realty Mogul, Co. and/or their respective affiliates, which provide asset management and other services to our Manager and us.  Prevailing market rates are determined by management based on industry standards and expectations of what management would be able to negotiate with a third party on an arm’s length basis.  All of the agreements and arrangements between such parties, including those relating to compensation, are not the result of arm’s length negotiations.  Some of the conflicts inherent in the Company’s transactions with our Manager and its affiliates, and the limitations on such parties adopted to address these conflicts of interest, as described below.  However, to the extent that such parties take actions that are more favorable to other entities than us, these actions could have a negative impact on our financial performance and, consequently, on distributions to shareholders and the value of our common shares.

 

The interests of our Manager, its principals and its other affiliates may conflict with your interests.

 

Our LLC Agreement provides our Manager with broad powers and authority which may result in one or more conflicts of interest between your interests and those of our Manager, its principals and its other affiliates.  This risk is increased by our Manager being controlled by Jilliene Helman, who is a principal of Realty Mogul, Co. and who

38


 

participates, or expects to participate, directly or indirectly in other offerings by Realty Mogul, Co. and its affiliates.  Potential conflicts of interest include, but are not limited to, the following:

 

·

our Manager, its principals and/or its other affiliates may continue to originate and offer other real estate investment opportunities, including additional blind pool debt and equity offerings similar to this offering, through the Realty Mogul Platform, and may make investments in real estate assets for their own respective accounts, whether or not competitive with our business;

 

·

affiliates of our Manager may compete with us with respect to certain investments which we may want to acquire, and as a result we may either not be presented with the opportunity or have to compete with the affiliates to acquire these investments. Our Manager and our officers may choose to allocate favorable investments to its affiliates instead of to us. The ability of our Manager, its officers and individuals providing services to our Manager to engage in other business activities may reduce the time our Manager spends managing us;

 

·

during turbulent conditions in the mortgage industry, distress in the credit markets or other times when we will need focused support and assistance from our Manager, other entities for which our Manager also acts as an investment manager will likewise require greater focus and attention, placing our Manager’s resources in high demand. In such situations, we may not receive the necessary support and assistance we require or would otherwise receive if we were internally managed or if our Manager did not act as a manager for other entities;

 

·

we pay our Manager substantial management fees regardless of the performance of our portfolio. Our Manager’s entitlement to substantial nonperformance-based compensation might reduce its incentive to devote its time and effort to seeking investments that provide attractive risk-adjusted returns for our portfolio. This in turn could hurt both our ability to make distributions to our shareholders and the value of our common shares;

 

·

our Manager is entitled to a one percent asset management fee, which is payable on all assets in our portfolio, including any investments acquired through debt financing.  As a result, our Manager may have an incentive to seek debt financing in order to increase assets under management and earn the increased asset management fee;

 

·

an affiliate of Realty Mogul, Co. may earn origination or acquisition fees for the real estate-related investments acquired by MogulREIT I, LLC;

 

·

our Manager, its principals and/or its other affiliates will not be required to disgorge any profits or fees or other compensation they may receive from any other business they own separately from us, and you will not be entitled to receive or share in any of the profits, return fees or compensation from any other business owned and operated by our Manager, its principals and/or its other affiliates for their own benefit;

 

·

we may engage our Manager or affiliates of our Manager to perform services that may or may not be at prevailing market rates.  Contractual rates are determined by our Manager and affiliates based on industry standards and expectations of what our Manager would be able to negotiate with a third party on an arm’s length basis and are intended to approximate prevailing market rates, but there can be no assurances that the contracts are in fact consistent with the prevailing market rates or terms; and

 

·

our Manager, its principals and/or its other affiliates are not required to devote all of their time and efforts to our affairs.

 

We may have an incentive to make investments because of the fees that such investments could generate for our affiliates.

 

An RM Originator may be entitled to receive a 1-3% origination fee for originating commercial loans on our behalf, and a portion of that fee may be paid by the RM Originator to its personnel for their role in sourcing the investment opportunity.  NCPS may be entitled to receive a 2-4% finders’ fee for sourcing an equity investment on our behalf, subject to a minimum fee of $50,000 per transaction.  Certain employees of Realty Mogul, Co. who are also registered

39


 

representatives of NCPS may be entitled to receive a portion of such finders’ fees, and one or more affiliates of the Manager may indirectly receive a portion of such finders’ fees in the form of expense reimbursements, licensing fees, or other permitted payments from NCPS.  We will not pay either of these fees, but our Manager may be incentivized to prioritize loans originated by an RM Originator over loans originated by an unaffiliated third party. Further, while our Manager will attempt to make investments that allow us to maintain our qualification as a REIT and maintain our exclusion under the Investment Company Act, our Manager has some latitude on the types of investments that it may approve.  Within these constraints, our Manager may have an incentive to prioritize equity investments over debt investments because our affiliates could earn more total compensation from an equity investment than from a debt investment. This incentive could lead to our Manager approving equity investments that it would not otherwise approve or to overweighting equity investments in our portfolio.

 

We have agreed to limit remedies available to us and our shareholders for actions by our Manager.

 

In our LLC Agreement, we have agreed to limit the liability of our Manager and to indemnify our Manager against certain liabilities.  These provisions are detrimental to shareholders because they restrict the remedies available to them for actions that might constitute breaches of duty and could reduce shareholder returns.  By purchasing our common shares, you will be treated as having consented to the provisions set forth in our LLC Agreement.  In addition, we may choose not to enforce, or to enforce less vigorously, our rights under our LLC Agreement because of our desire to maintain our ongoing relationship with our Manager.

 

By purchasing shares in this offering, you are bound by the arbitration provisions contained in our subscription agreement which limits your ability to bring class action lawsuits or seek remedy on a class basis. 

 

By purchasing shares in this offering, you agree to be bound by the arbitration provisions contained in Section 14 of our subscription agreement. Such arbitration provision provides that either party may elect and require that any “Claim” (as defined in the subscription agreement) be submitted to binding arbitration and, among other things, limits the ability of investors to bring class action lawsuits or similarly seek remedy on a class basis. While not mandatory, in the event that we elect to invoke the arbitration clause of Section 14, your right to seek redress in court would be severely limited. In addition, arbitration rules generally limit discovery, which could impede your ability to bring or sustain claims, and the ability to collect attorneys' fees or other damages may be limited in the arbitration. Nevertheless, it is not certain that all arbitration provisions will be enforceable. If any portion of the arbitration provisions is deemed invalid or unenforceable, the remaining arbitration provisions shall nevertheless remain in force. See the form of subscription agreement, Section 14 – Arbitration, attached hereto at Exhibit 4.1 to this offering circular.

 

If Realty Mogul, Co. establishes additional REITs and other Realty Mogul Platform investment opportunities in the future, there may be conflicts of interests among the various REIT offerings.

 

Realty Mogul, Co., our Sponsor and our Manager, wholly owned subsidiaries of Realty Mogul, Co., currently sponsor and manage, respectively, MogulREIT II, Inc. whose offering circular was filed with the SEC on June 28, 2017 and qualified on August 23, 2017. In addition, our Sponsor and our Manager may sponsor and manage additional REIT offerings in the future, and continue to offer investment opportunities through the Realty Mogul Platform, including offerings that will acquire or invest in commercial real estate loans and other real estate-related assets.  These additional REITs may have investment criteria that compete with us.  Except under any policies that may be adopted by our Manager or Sponsor, no REIT (including us) or Realty Mogul Platform investment opportunity will have any duty, responsibility or obligation to refrain from:

 

·

engaging in the same or similar activities or lines of business as any other REIT or Realty Mogul Platform investment opportunity;

 

·

doing business with any potential or actual tenant, lender, purchaser, supplier, customer or competitor of any REIT or Realty Mogul Platform investment opportunity;

 

·

engaging in, or refraining from, any other activities whatsoever relating to any of the potential or actual tenants, lenders, purchasers, suppliers or customers of any REIT or Realty Mogul Platform investment opportunity;

 

40


 

·

establishing material commercial relationships with another REIT or Realty Mogul Platform investment opportunity; or

 

·

making operational and financial decisions that could be considered to be detrimental to another REIT or Realty Mogul Platform investment opportunity.

 

In addition, any decisions by our Sponsor or Manager to renew, extend, modify or terminate an agreement or arrangement, or enter into similar agreements or arrangements in the future, may benefit one REIT more than another REIT or limit or impair the ability of any REIT to pursue business opportunities.  In addition, third parties may require as a condition to their arrangements or agreements with or related to any one particular REIT that such arrangements or agreements include or not include another REIT, as the case may be.  Any of these decisions may benefit one REIT more than another REIT.

 

The conflicts of interest policy we have adopted may not adequately address all of the conflicts of interest that may arise with respect to our activities and is subject to change or suspension.

 

In order to avoid any actual or perceived conflicts of interest among the REITs and with our Manager’s officers and affiliates, we have adopted a conflicts of interest policy to specifically address some of the conflicts relating to our activities.  There is no assurance that this policy will be adequate to address all of the conflicts that may arise or will address such conflicts in a manner that is favorable to us.  Our Manager may modify, suspend or rescind our conflicts of interest policy, including any resolution implementing the provisions of the conflicts of interest policy, in each case, without a vote of our shareholders.

 

Risks Related to Our Shares and Investments

 

Investing in our shares may involve a high degree of risk.

 

The investments we make in accordance with our investment objectives may result in a high amount of risk when compared to alternative investment options and volatility or loss of principal. Our investments may be highly speculative and aggressive, are subject to credit risk, interest rate, and market value risks, among others, and therefore an investment in our shares may not be suitable for someone with lower risk tolerance.

 

We may not realize income or gains from our investments.

 

We invest to generate both current income and capital appreciation. The investments we invest in may, however, not appreciate in value and, in fact, may decline in value, and the debt securities we invest in may default on interest or principal payments. Accordingly, we may not be able to realize income or gains from our investments. Any gains that we do realize may not be sufficient to offset any other losses we experience. Any income that we realize may not be sufficient to offset our expenses.

 

Our commercial real estate loans, investments in commercial real estate and other real estate-related assets will be subject to the risks typically associated with real estate.

 

Our commercial real estate loans and other real estate-related assets will generally be directly or indirectly secured by a lien on real property that, upon the occurrence of a default on the loan, could result in our acquiring ownership of the property.  We will not know whether the values of the properties ultimately securing our loans will remain at the levels existing on the dates of origination of those loans.  If the values of the mortgaged properties drop, our risk will increase because of the lower value of the security associated with such loans.  In this manner, real estate values could impact the values of our loan investments.  Our investments in commercial real estate-related debt securities and commercial real estate investments (including investments in real property) may be similarly affected by real estate property values.  Therefore, our investments will be subject to the risks typically associated with real estate.

 

The value of real estate may be adversely affected by a number of risks, including:

 

·

natural disasters such as hurricanes, earthquakes and floods;

 

41


 

·

acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001;

 

·

adverse changes in national and local economic and real estate conditions;

 

·

an oversupply of (or a reduction in demand for) space in the areas where particular properties are located and the attractiveness of particular properties to prospective tenants;

 

·

changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance therewith and the potential for liability under applicable laws;

 

·

costs of remediation and liabilities associated with environmental conditions affecting properties; and

 

·

the potential for uninsured or underinsured property losses.

 

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 expenditures associated with properties (such as operating expenses and capital expenditures) cannot be reduced when there is a reduction in income from the properties.  These factors may have a material adverse effect on the ability of our borrowers to pay their loans, as well as on the value that we can realize from assets we own or acquire.

 

In addition, our equity investments in commercial real estate will be subject to all of the risks associated with real estate described above.

 

The commercial real estate loans we invest in could be subject to delinquency, foreclosure and loss, which could result in losses to us.

 

Commercial real estate loans are secured by multifamily or commercial property and are subject to risks of delinquency and foreclosure.  The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower.  If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired.  Net operating income of an income-producing property can be affected by, among other things: tenant mix, success of tenant businesses, property management decisions, property location and condition, competition from comparable types of properties, changes in laws that increase operating expenses or limit rents that may be charged, any need to address environmental contamination at the property, the occurrence of any uninsured casualty at the property, changes in national, regional or local economic conditions and/or specific industry segments, declines in regional or local real estate values, declines in regional or local rental or occupancy rates, increases in interest rates, real estate tax rates and other operating expenses, changes in governmental rules, regulations and fiscal policies, including environmental legislation, natural disasters, terrorism, social unrest and civil disturbances.

 

In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our cash flow from operations.  We expect that many of the commercial real estate loans that we invest in will be fully or substantially non-recourse.  In the event of a default by a borrower on a non-recourse loan, we will only have recourse to the underlying asset (including any escrowed funds and reserves) collateralizing the loan.  If a borrower defaults on one of our commercial real estate loans and the underlying asset collateralizing the commercial real estate loan is insufficient to satisfy the outstanding balance of the commercial real estate loan, we may suffer a loss of principal or interest.  In addition, even if we have recourse to a borrower’s assets, we may not have full recourse to such assets in the event of a borrower bankruptcy.

 

Foreclosure of a mortgage loan can be an expensive and lengthy process that could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan.  In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the mortgaged property at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law.  The resulting time delay could reduce the value of our investment in the defaulted mortgage loans, impede

42


 

our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us on the mortgage loan.

 

Our investments in subordinated commercial real estate loans may be subject to losses.

 

We intend to acquire subordinated commercial real estate loans or loan participations.  In the event a borrower defaults on a subordinated loan and lacks sufficient assets to satisfy our loan, we may suffer a loss of principal or interest.  In the event a borrower declares bankruptcy, we may not have full recourse to the assets of the borrower, or the assets of the borrower may not be sufficient to satisfy the loan.  If a borrower defaults on our loan or on debt senior to our loan, or in the event of a borrower bankruptcy, our loan will be satisfied only after the senior debt is paid in full.  Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies through “standstill periods”, and control decisions made in bankruptcy proceedings relating to borrowers.

 

The mezzanine loans in which we may invest involve greater risks of loss than senior loans secured by the same properties.

 

We may invest in mezzanine loans that take the form of subordinated loans secured by a pledge of the ownership interests of either the entity owning the real property or an entity that owns (directly or indirectly) the interest in the entity owning the real property.  These types of investments may involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property because in the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, the assets of the entity may not be sufficient to satisfy our mezzanine loan.  If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt.  As a result, we may not recover some or all of our investment.  In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the real property and increasing the risk of loss of principal.

 

Risks of cost overruns and non-completion of the construction or renovation of the properties underlying loans we make or acquire may materially adversely affect our investments.

 

The renovation, refurbishment or expansion by a borrower under a mortgaged or leveraged property involves risks of cost overruns and non-completion.  Costs of construction or improvements to bring a property up to standards established for the market position intended for that property may exceed original estimates, possibly making a project uneconomical.  Other risks may include environmental risks and construction, rehabilitation and subsequent leasing of the property not being completed on schedule.  If such construction or renovation is not completed in a timely manner, or if it costs more than expected, the borrower may experience a prolonged impairment of net operating income and may not be able to make payments on our investment.

 

Investments in non-conforming or non-investment grade rated loans involve greater risk of loss.

 

Some of our investments may not conform to conventional loan standards applied by traditional lenders and either may not be rated or may be rated as non-investment grade by the rating agencies.  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, the borrowers’ credit history, the properties’ underlying cash flow or other factors.  As a result, these investments may have a higher risk of default and loss than investment grade rated assets.  Any loss we incur may be significant and may reduce distributions to our shareholders and adversely affect the value of our common shares.

 

We have and may continue to invest in equity interests of other companies which may limit the control that our Manager has over the investments.

 

We have and may continue to take equity stakes in companies that own real estate or other real estate-related assets, subject to certain limitations related to our qualification as a REIT and to maintaining our exclusion under the Investment Company Act.  In such situations, our Manager’s ability to control these equity investments may depend on our relative ownership stake in such investments.  We may be a minority investor in some circumstances and our Manager’s ability to control the underlying assets of the entity may be limited.  In addition, the entity and its other shareholders may have economic or business interests or goals that are inconsistent with our own, or may be in a position to take action

43


 

contrary to our investment objective which could cause a material adverse effect on you and could cause the value of our stock to decline.

 

The real estate-related equity securities in which we have and may continue to invest are subject to specific risks relating to the particular issuer of the securities and may be subject to the general risks of investing in subordinated real estate securities.

 

We have and may continue to invest in equity securities of real estate companies, subject to certain limitations related to our qualification as a REIT and to maintaining our exclusion under the Investment Company Act, which involves a higher degree of risk than debt securities due to a variety of factors, including that such investments may be subordinate to creditors and are not secured by the issuer’s property.  Our investments in real estate-related equity securities will involve special risks relating to the particular issuer of the equity securities, including the financial condition and business outlook of the issuer.  Issuers of real estate-related equity securities generally invest in real estate or real estate-related assets and are subject to the inherent risks associated with real estate, including risks relating to rising interest rates.

 

Investments that are not United States government insured involve a greater risk of loss.

 

We have and may continue to acquire uninsured loans and assets as part of our investment strategy.  Such loans and assets may include mortgage loans, mezzanine loans and bridge loans.  While holding such interests, we are subject to risks of borrower defaults, bankruptcies, fraud, losses and special hazard losses that are not covered by standard hazard insurance.  In the event of any default under loans, we bear the risk of loss of principal and nonpayment of interest and fees to the extent of any deficiency between the value of the collateral and the principal amount of the loan.  To the extent we suffer such losses with respect to our investments in such loans, the value of the Company and the value of our common shares may be adversely affected.

 

Adjustable rate mortgage loans may entail greater risks of default to lenders than fixed rate mortgage loans.

 

Adjustable rate mortgage loans may contribute to higher delinquency rates.  Borrowers with adjustable rate mortgage loans may be exposed to increased monthly payments if the related mortgage interest rate adjusts upward from the initial fixed rate or a low introductory rate, as applicable, in effect during the initial period of the mortgage loan to the rate computed in accordance with the applicable index and margin.  This increase in borrowers’ monthly payments, together with any increase in prevailing market interest rates, after the initial fixed rate period, may result in significantly increased monthly payments for borrowers with adjustable rate mortgage loans, which may make it more difficult for the borrowers to repay the loan or could increase the risk of default of their obligations under the loan.

 

Changes in interest rates and/or credit spreads could negatively affect the value of our investments, which could result in reduced earnings or losses and negatively affect the cash available for distribution to our shareholders.

 

We have and may continue to invest in fixed-rate debt investments with fixed distribution amounts.  Under a normal yield curve, an investment in these instruments will decline in value if long-term interest rates increase or if credit spreads widen.  We have and may also continue to invest in floating-rate debt investments, for which decreases in interest rates or narrowing of credit spreads will have a negative effect on value and interest income.  Even though a loan or other debt investment may be performing in accordance with its loan agreement and the underlying collateral has not changed, the economic value of the loan may be negatively impacted by the incremental interest foregone from the changes in interest rates or credit spreads.  Declines in market value may ultimately reduce earnings or result in losses to us, which may negatively affect cash available for distribution to our shareholders.

 

Prepayments can adversely affect the yields on our investments.

 

Prepayments on debt instruments, where permitted under the debt documents, are outside of our control and may adversely affect the yield and cash flow of our investments.  A borrower’s election to prepay its obligations under a debt instrument may be influenced by changes in current interest rates and a variety of economic, geographic and other factors that cannot be accurately forecasted, and consequently, such prepayment rates cannot be predicted with certainty.  If we are unable to invest the proceeds of such prepayments received, the yield on our portfolio will decline.  In addition, we may acquire assets at a discount or premium and if the asset does not repay when expected, our anticipated yield may be impacted.  Under certain interest rate and prepayment scenarios we may fail to recoup fully our cost of acquisition of certain investments.

44


 

 

Commercial real estate equity investments will be subject to risks inherent in ownership of real estate.

 

Real estate cash flows and values are affected by a number of factors, including competition from other available properties and our ability to provide adequate property maintenance and insurance and to control operating costs.  Real estate cash flows and values are also affected by such factors as government regulations (including zoning, usage and tax laws), interest rate levels, the availability of financing, property tax rates, utility expenses, potential liability under environmental and other laws and changes in environmental and other laws.  Commercial real estate equity investments that we make will be subject to such risks.

 

Many of our investments are illiquid and we may not be able to vary our portfolio in response to changes in economic and other conditions.

 

The illiquidity of our target investments may make it difficult for us to sell such investments if the need or desire arises.  The senior mortgage loans, subordinated loans, mezzanine loans, participations and other loans and investments we may purchase will be particularly illiquid investments due to their short life and the greater difficulty of recoupment in the event of a borrower’s default.  In addition, some of the commercial real estate-related debt securities that we may purchase may be traded in private, unregistered transactions and may therefore be subject to restrictions on resale or otherwise have no established trading market.  As a result, we expect many of our investments will be illiquid, and if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments and our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited, which could adversely affect our results of operations and financial condition.

 

Declines in the market values of our investments may adversely affect periodic reported results of operations and credit availability, which may reduce earnings and, in turn, cash available for distribution to our shareholders.

 

Some of our assets will be classified for accounting purposes as “available-for-sale.”  These investments are carried at estimated fair value and temporary changes in the market values of those assets will be directly charged or credited to shareholders’ equity without impacting net income on the income statement.  Moreover, if we determine that a decline in the estimated fair value of an available-for-sale security falls below its amortized value and is not temporary, we will recognize a loss on that security on the income statement, which will reduce our earnings in the period recognized.

 

A decline in the market value of our assets may adversely affect us particularly in instances where we have borrowed money based on the market value of those assets.  If the market value of those assets declines, the lender may require us to post additional collateral to support the loan.  If we were unable to post the additional collateral, we may have to sell assets at a time when we might not otherwise choose to do so.  A reduction in credit available may reduce our earnings and, in turn, cash available for distribution to shareholders.

 

Further, credit facility providers may require us to maintain a certain amount of cash reserves or to set aside unlevered assets sufficient to maintain a specified liquidity position, which would allow us to satisfy our collateral obligations.  As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on equity.  In the event that we are unable to meet these contractual obligations, our financial condition could deteriorate rapidly.

 

Market values of our investments may decline for a number of reasons, such as changes in prevailing market rates, increases in defaults, increases in voluntary prepayments for those investments that we have that are subject to prepayment risk, widening of credit spreads and downgrades of ratings of the securities by ratings agencies.

 

Some of our portfolio investments will be carried at estimated fair value as determined by us and there may be uncertainty as to the value of these investments.

 

Some of our portfolio investments will be in the form of securities that are recorded at fair value but that have limited liquidity or are not publicly traded.  The fair value of securities and other investments that have limited liquidity or are not publicly traded may not be readily determinable.  We estimate the fair value of these investments on a quarterly basis.  Because such valuations are inherently uncertain, may fluctuate over short periods of time and may be based on numerous estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed.  The value of our common shares could be adversely affected if our

45


 

determinations regarding the fair value of these investments are materially higher than the values that we ultimately realize upon their disposal.

 

If we overestimate the value or income-producing ability or incorrectly price the risks of our investments, we may experience losses.

 

Analysis of the value or income-producing ability of a commercial property is highly subjective and may be subject to error.  Our Manager will value our potential investments based on yields and risks, taking into account estimated future losses on the commercial real estate loans and the mortgaged property included in the securitization’s pools or select commercial real estate equity investments, and the estimated impact of these losses on expected future cash flows and returns.  In the event that we underestimate the risks relative to the price we pay for a particular investment, we may experience losses with respect to such investment.

 

A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could harm our operations.

 

Many of our investments may be susceptible to economic slowdowns or recessions, which could lead to financial losses in our investments and a decrease in revenues, net income 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 commercial real estate.  Declining real estate values will likely reduce our ability to acquire new real estate assets, 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 able to pay principal and interest on our loans if the real estate economy weakens.  Further, declining real estate values significantly increase the likelihood that we will incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our cost on the loan.  Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans in our portfolio as well as our ability to sell and securitize loans, which would significantly harm our revenues, results of operations, financial condition, business prospects and our ability to make distributions to you.

 

Terrorist attacks and other acts of violence or war may affect the value of our common shares and underlying investments.

 

Terrorist attacks may harm the value of our underlying investments and our common shares. We cannot assure you that there will not be further terrorist attacks against the United States or U.S. businesses. These attacks or armed conflicts may directly impact the property underlying our investments.  More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economies. These and other types of adverse economic conditions could harm the value of the property underlying our investments or the securities markets in general which could harm our investment returns and may adversely affect our ability to make distributions.

 

Insurance may not cover all losses on the properties that underlie our investments.

 

We have and may continue to purchase mortgages on properties that have comprehensive insurance covering the mortgaged property, including liability, fire and extended coverage.  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.  For example, some properties may not have terrorism 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.  Under such circumstances, the insurance proceeds, if any, might not be adequate to restore the economic value of the property, which might impair our security and decrease the value of the property.

 

With respect to mortgaged properties, options and other purchase rights may adversely affect the value of our investments.

 

A borrower under certain mortgage loans may give its tenants or another person a right of first refusal or an option to purchase all or a portion of the related mortgaged property.  These rights may impede the lender’s ability to sell the related mortgaged property at foreclosure or may adversely affect the value or marketability of the property.

 

46


 

The leases on the properties underlying our investments may not be renewed on favorable terms.

 

The properties underlying our investments could be negatively impacted by the deteriorating economic conditions and weaker rental markets.  Upon expiration or earlier termination of leases on these 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.  In addition, the poor economic conditions may reduce a tenants’ ability to make rent payments under their leases.  Any of these situations may result in extended periods where there is a significant decline in revenues or no revenues generated by these properties.  Additionally, if market rental rates are reduced, property-level cash flows would likely be negatively affected as existing leases renew at lower rates.  If the leases for these properties cannot be renewed for all or substantially all of the space at these properties, or if the rental rates upon such renewal or reletting are significantly lower than expected, the value of our investments may be adversely affected.

 

Properties that have vacancies for a significant period of time could be difficult to sell, which could diminish the return on investment.

 

A property may incur vacancies either by the continued default of a tenant under its lease, the expiration of a tenant lease or early termination of a lease by a tenant.  If vacancies continue for a long period of time, the property may generate lower than expected revenues, resulting in less cash available for distributions.  In addition, because a property’s market value depends principally upon the value of the property’s leases, the resale value of a property with prolonged vacancies could decline, which could further diminish the return on investment.

 

A borrower’s form of entity may cause special risks or hinder our recovery.

 

Since most of the borrowers for our commercial real estate loan investments are legal entities rather than individuals, our risk of loss may be greater than those of mortgage loans made to individuals.  Unlike individuals involved in bankruptcies, most of the entities generally do not have personal assets and creditworthiness at stake.  The terms of the mortgage loans generally require that the borrowers covenant to be single-purpose entities, although in some instances the borrowers are not required to observe all covenants and conditions that typically are required in order for them to be viewed under standard rating agency criteria as “single-purpose entities.”  Borrowers’ organizational documents or the terms of the mortgage loans may limit their activities to the ownership of only the related mortgaged property or properties and limit the borrowers’ ability to incur additional indebtedness.  These provisions are designed to mitigate the possibility that the borrowers’ financial condition would be adversely impacted by factors unrelated to the mortgaged property and the mortgage loan in the pool.

 

The bankruptcy of a borrower, or a general partner or managing member of a borrower, may impair the ability of the lender to enforce its rights and remedies under the related mortgage.  Borrowers that are not single-purpose entities structured to limit the possibility of becoming insolvent or bankrupt, may be more likely to become insolvent or the subject of a voluntary or involuntary bankruptcy proceeding because the borrowers may be (i) operating entities with a business distinct from the operation of the mortgaged property with the associated liabilities and risks of operating an ongoing business or (ii) individuals that have personal liabilities unrelated to the property.

 

Hedging against interest rate exposure may adversely affect our earnings, limit our gains or result in losses, which could adversely affect cash available for distribution to our shareholders.

 

We may enter into interest rate swap agreements or pursue other interest rate hedging strategies.  Our hedging activity will vary in scope based on the level of interest rates, the type of portfolio investments held, and other changing market conditions.  Interest rate hedging may fail to protect or could adversely affect us because, among other things:

 

·

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

 

·

available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;

 

·

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

 

·

our hedging opportunities may be limited by the treatment of income from hedging transactions under the rules determining REIT qualification;

47


 

 

·

the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction;

 

·

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

 

·

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

 

Any hedging activity we engage in may adversely affect our earnings, which could adversely affect cash available for distribution to our shareholders.  Therefore, while we may enter into such transactions to seek to reduce interest rate risks, unanticipated changes in interest rates may result in poorer overall investment performance than if we 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, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged.  Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss.

 

Our use of certain hedging techniques may expose us to counterparty risks.

 

If a swap counterparty under an interest rate swap agreement that we intend to enter into as part of our hedging strategy cannot perform under the terms of the interest rate swap, we may not receive payments due under that agreement, and thus, we may lose any unrealized gain associated with the interest rate swap.  The hedged liability could cease to be hedged by the interest rate swap.  Additionally, we may also risk the loss of any collateral we have pledged to secure our obligations under the interest rate swap if the counterparty becomes insolvent or files for bankruptcy.  Similarly, if an interest rate cap counterparty fails to perform under the terms of the interest rate cap agreement, in addition to not receiving payments due under that agreement that would off-set our interest expense, we could also incur a loss for all remaining unamortized premium paid for that security.

 

Complying with REIT requirements may limit our ability to hedge effectively.

 

The REIT provisions of the Internal Revenue Code of 1986, as amended, or the Code, may limit our ability to hedge our assets, operations and liabilities.  Under these provisions, any income that we generate from transactions intended to hedge our interest rate, inflation and/or currency risks will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the instrument hedges (1) interest rate risk on liabilities incurred to carry or acquire real estate or (2) risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the REIT 75% or 95% gross income tests, and such instrument is properly identified under applicable Department of Treasury regulations.  Income from hedging transactions that do not meet these requirements will generally constitute nonqualifying income for purposes of both the REIT 75% and 95% gross income tests.  As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous, or implement the hedges through a taxable REIT subsidiary, or TRS.  This could increase the cost of our hedging activities because our TRS would be subject to tax on income or gains resulting from hedges entered into by it or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear.  In addition, losses in our TRSs will generally not provide any tax benefit, except for being carried forward for use against future taxable income in the TRSs.  Any limitation on hedging could result in greater risks associated with interest rate or other changes than we would otherwise incur.

 

We may elect not to qualify for hedge accounting treatment.

 

If we choose to use derivative and hedge transactions and instruments in the future, we will record them in accordance with Accounting Standards Codification 815. If we elect not to qualify for hedge accounting treatment, our operating results may be more volatile or suffer because losses on the derivatives that we enter into may not be offset by a change in the fair value of the related hedged transaction, depending on other accounting policy elections we make.

 

We are exposed to environmental liabilities with respect to properties to which we take title.

 

In the course of our business, we may take title to real estate, and, if we do take title, we could be subject to environmental liabilities with respect to these properties.  In such a circumstance, we may be held liable to a governmental entity or to third parties for property damage, personal injury, and investigation and clean-up costs incurred by these parties

48


 

in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases, at a property.  The costs associated with investigation or remediation activities could be substantial.  If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

 

Our strategy involves leverage, which may cause substantial loss.

 

We may use leverage of up to 80% of cost (before deducting depreciation or other non-cash reserves) or fair value of our assets. We expect our portfolio-wide leverage to be between 0-25% of the greater of cost (before deducting depreciation or other non-cash reserves) and fair value of our total assets. We will incur this leverage by borrowing against a portion of the market value of our total assets. By incurring this leverage, we could enhance our returns. Nevertheless, this leverage, which is fundamental to our investment strategy, also creates significant risks.

 

Because of our leverage, we may incur substantial losses if our borrowing costs increase. Our borrowing costs may increase for any of the follow reasons:

 

·

short-term interest rate increases;

·

the market value of our securities decreases;

·

interest rate volatility increases; or

·

the availability of financing in the market decreases.

 

We may enter into financing facilities that contain covenants that restrict our operations and inhibit our ability to grow our business and increase revenues.    

 

We may enter into financing facilities that contain restrictions, covenants, and representations and warranties that, among other things, could require us to satisfy specified financial, asset quality, loan eligibility and loan performance tests. If we fail to meet or satisfy any of these covenants or representations and warranties, we would be in default under these agreements and our lenders could elect to declare all amounts outstanding under the agreements to be immediately due and payable, enforce their respective interests against collateral pledged under such agreements and restrict our ability to make additional borrowings. We also may enter into financing agreements that contain cross-default provisions, such that if a default occurs under any one agreement, the lenders under our other agreements could also declare a default. Covenants and restrictions in future financing facilities may restrict our ability to, among other things:

 

·

incur or guarantee additional debt;

·

make certain investments or acquisitions;

·

make distributions on common shares;

·

repurchase common shares pursuant to our share repurchase program;

·

engage in mergers or consolidations;

·

finance mortgage loans with certain attributes;

·

reduce liquidity below certain levels;

·

grant liens;

·

incur operating losses for more than a specified period;

·

enter into transactions with affiliates; and

·

hold mortgage loans for longer than established time periods.

 

Such restrictions could interfere with our ability to obtain financing, including the financing needed to maintain our qualification as a REIT, or to engage in other business activities, which may significantly harm our business, financial condition, liquidity and results of operations. A default and resulting repayment acceleration could significantly reduce our liquidity, which could require us to sell our assets to repay amounts due and outstanding. This could also significantly harm our business, financial condition, results of operations, and our ability to make distributions. A default could also significantly limit our financing alternatives such that we could be unable to pursue our leverage strategy, which could curtail our investment returns.

 

49


 

If the counterparty to a repurchase transaction defaulted on its obligation to resell the underlying security back to us at the end of the transaction term, or if the value of the underlying security declined as of the end of that term or if we defaulted on our obligations under a repurchase agreement, we would lose money on a repurchase transaction.    

 

If we engage in a repurchase transaction, we would generally sell securities to the transaction counterparty and receive cash from the counterparty. Under these circumstances, the counterparty would be obligated to resell the securities back to us at the end of the term of the transaction, which is typically 30 to 90 days. Because the cash we received from the counterparty when we initially sold the securities to the counterparty was less than the value of those securities (this difference is referred to as the haircut), if the counterparty defaulted on its obligation to resell the securities back to us we would incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the securities).

 

We would also lose money on a repurchase transaction if the value of the underlying securities declined as of the end of the transaction term, as we would have to repurchase the securities for their initial value but would receive securities worth less than that amount. Any losses we would incur on our repurchase transactions could adversely affect our earnings, and thus our cash available for distribution to you. If we defaulted on one of our obligations under a repurchase transaction, the counterparty could terminate the transaction and cease entering into any other repurchase transactions with us. In that case, we may need to establish a replacement repurchase facility with another repurchase dealer.  There is no assurance we would be able to establish a suitable replacement facility.

 

Our rights under a repurchase agreement would be subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our lenders under a repurchase agreement.

 

In the event of our insolvency or bankruptcy, certain repurchase agreements, if any, may qualify for special treatment under the U.S. Bankruptcy Code, the effect of which, among other things, would be to allow the lender under the applicable repurchase agreement to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to foreclose on the collateral agreement without delay.  In the event of the insolvency or bankruptcy of a lender during the term of a repurchase agreement, the lender may be permitted, under applicable insolvency laws, to repudiate the contract, and our claim against the lender for damages may be treated simply as an unsecured creditor.  In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance Act, our ability to exercise our rights to recover our securities under a repurchase agreement or to be compensated for any damages resulting from the lender’s insolvency may be further limited by those statutes. These claims would be subject to significant delay and, if and when received, may be substantially less than the damages we actually incur.

 

Retirement Plan Risks

 

If you fail to meet the fiduciary and other standards under ERISA or the Internal Revenue Code as a result of an investment in our common shares, you could be subject to civil penalties and criminal penalties (if the failure is willful).

 

If the fiduciary of an employee benefit plan subject to ERISA (such as a profit sharing, 401(k), or pension plan) or any other retirement plan or account (such as an IRA or Keogh plan) fails to meet the applicable fiduciary and other standards under ERISA or Section 4975 of the Internal Revenue Code as a result of an investment in our stock, the fiduciary could be subject to civil (and criminal, if the failure is willful) penalties. 

 

There are special considerations that apply to such plans and accounts subject to ERISA and Section 4975 of the Internal Revenue Code whose assets are being invested in our common shares. If you are investing the assets of such a plan or account (including assets of an insurance company general account or entity whose assets are considered plan assets under ERISA) in our common shares, in addition to meeting the fiduciary obligations noted in the preceding paragraph, you should satisfy yourself that:

 

·

your investment is made in accordance with the documents and instruments governing your plan or account, including your plan or account's investment policy, as well as applicable law;

·

your investment satisfies the prudence and diversification requirements of Section 404(a)(1)(B) and 404(a)(1)(C) of ERISA and other applicable provisions of ERISA and/or the Internal Revenue Code;

50


 

·

your investment in our shares, for which no trading market exists or is expected to develop, is consistent with, and will not impair the liquidity of the plan or account, including liquidity needed to satisfy minimum and other distribution requirements and tax withholding requirements that may be applicable;

·

your investment will not produce unacceptable unrelated business taxable income, referred to as UBTI, for the plan or account;

·

you will be able to value the assets of the plan annually (or more frequently, if required) in accordance with ERISA requirements and applicable provisions of the plan or  account;

·

your investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code; and

·

our assets will not be treated as “plan assets” of the plan or account under ERISA and Department of Labor regulations.

With respect to the annual (or more frequent) valuation requirements under ERISA and the Internal Revenue Code, we expect to provide an estimated NAV for our common shares quarterly.  See “Description of our Common Shares—Valuation Policies.”  You should ensure that this frequency and approach to valuation is acceptable to the trustee or custodian of any plan or account before any investment in our shares is made by such plan or account.  The estimated value we report is not likely to reflect the proceeds you would receive upon our liquidation or upon the sale of your common shares.  Accordingly, we can make no assurances that such estimated value will satisfy the applicable annual valuation requirements under ERISA and the Internal Revenue Code.  The Department of Labor or the Internal Revenue Service may determine that a plan fiduciary or an IRA custodian is required to take further steps to determine the value of our common shares.  In the absence of an appropriate determination of value, a plan fiduciary or an IRA custodian may be subject to damages, penalties, or other sanctions.

 

Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA and the Internal Revenue Code may result in the imposition of civil (and if willful, and criminal) penalties and could subject the fiduciary to equitable remedies. In addition, if an investment in our common stock constitutes a non-exempt prohibited transaction under ERISA or the Internal Revenue Code, the fiduciary that authorized or directed the investment may be subject to the imposition of excise taxes with respect to the amount invested, and for IRAs, the tax-exempt status of the IRA may be lost and all of the assets of the IRA may be deemed distributed and subject to tax.  For a discussion of the considerations associated with an investment in our shares by a qualified employee benefit plan or IRA, see “ERISA Considerations.”  ERISA plan fiduciaries and IRA owners and custodians should consult with counsel before making an investment in our common shares.

 

Significant investment by benefit plan investors (as defined by ERISA) could result in treatment of our assets as benefit plan assets.

 

U.S. Department of Labor Regulation Section 2510.3-101, as modified by ERISA Section 3(42), which we refer  to as the “Plan Assets Regulation,” describes what constitutes the assets of an entity whose underlying assets are considered to include “plan assets” of such plans, accounts, and arrangements (each of which we refer to as a “benefit plan”) with respect to the benefit plan’s investment in an entity for purposes of the fiduciary responsibility provisions of Title I of ERISA and Section 4975 of the Internal Revenue Code.  Under the Plan Assets Regulation, if a benefit plan invests in an “equity interest” of an entity that is neither a “publicly offered security” nor a security issued by an investment company registered under the Investment Company Act, the benefit plan’s assets are deemed to include both the equity interest itself and an undivided interest in each of the entity’s underlying assets, unless it is established that the entity is an “operating company” or the equity participation by “benefit plan investors” (as defined in Section 3(42) of ERISA) is not “significant.”

 

Under the Plan Assets Regulation, equity participation in an entity by benefit plan investors is “significant” on any date if, immediately after the most recent acquisition of any equity interest in the entity, 25% or more of the value of any class of equity interest in the entity is held by benefit plan investors.  We refer to this as the “25% limitation.”  For purposes of making determinations under the 25% limitation, (i) the value of any equity interests held by a person (other than a benefit plan investor) that has discretionary authority or control with respect to the assets, any person who provides investment advice for a fee (direct or indirect) with respect to such assets, or any affiliate of such a person, is disregarded, and (ii) an entity that holds plan assets shall be considered to be a benefit plan investor only to the extent of its equity interests held by other benefit plan investors.  The definition of a “benefit plan investor” generally excludes governmental, church, and foreign benefit plans, but for purposes of calculating the 25% limitation includes IRAs.

51


 

 

We do not expect our common shares to be considered a “publicly offered security” for purposes of the Plan Assets Regulation.  Additionally, we will not be registered under the Investment Company Act, and we may not qualify as an “operating company” for purposes of the Plan Assets Regulation.  Therefore, if participation in us through the acquisition of any class of equity interest by benefit plan investors is “significant” within the meaning of the Plan Assets Regulation, our assets could be deemed to be the assets of benefit plans investing in our securities unless we are otherwise able to meet one of the other exemptions under ERISA.  See “ERISA Considerations.” 

 

If our assets were deemed to be “plan assets” under ERISA, among other things:

 

(i)

the prudence and other fiduciary responsibility standards of ERISA would apply to investments we make;

(ii)

certain transactions in which we might seek to engage could constitute “prohibited transactions” under ERISA and the Internal Revenue Code, which, absent an exemption, could restrict us from acquiring an otherwise desirable investment or from entering into an otherwise favorable transaction;

(iii)

our assets could be subject to ERISA’s reporting and disclosure requirements;

(iv)

the fiduciary causing the benefit plan to make an investment in our securities could be deemed to have delegated its responsibility to manage the assets of the benefit plan; and

(v)

the indicia of ownership of our assets would have to be maintained within the jurisdiction of the district courts of the United States unless certain regulatory exceptions were applicable.

 

We cannot guarantee that we will be able to limit equity participation in our securities by benefit plan investors to less than 25% of the total value of each class of our equity securities or that we could qualify under one of the “operating company” exemptions.  Accordingly, our assets may be deemed “plan assets” under ERISA, which could severely restrict our operations or subject us to fines if we fail to comply with the above-noted requirements.

 

If you invest in our shares through an IRA or other retirement plan, you may be limited in your ability to withdraw required minimum distributions.

 

If you establish a plan or account through which you invest in our common shares, federal law may require you to withdraw required minimum distributions from such plan in the future.  Our shares will be highly illiquid, and our share redemption program only offers limited liquidity.  See “Description of Our Common Shares — Quarterly Share Repurchase Program.”  If you require liquidity, you may generally sell your shares, but such sale may be at a price less than the price at which you initially purchased your common shares.  If you fail to withdraw required minimum distributions from your plan or account, you may be subject to certain taxes and tax penalties.

 

Specific rules apply to foreign, governmental and church plans.

 

As a general rule, certain employee benefit plans, including foreign pension plans, governmental plans established or maintained in the United States (as defined in Section 3(32) of ERISA), and certain church plans (as defined in Section 3(33) of ERISA), are not subject to ERISA and are not “benefit plan investors” within the meaning of the Plan Assets Regulation.  Any such plan that is qualified and exempt from taxation under Sections 401(a) and 501(a) of the Internal Revenue Code may nonetheless be subject to the prohibited transaction rules set forth in Section 503 of the Internal Revenue Code and, under certain circumstances in the case of church plans, Section 4975 of the Internal Revenue Code.  Also, some foreign plans and governmental plans may be subject to foreign, state, or local laws which are, to a material extent, similar to the provisions of ERISA or Section 4975 of the Internal Revenue Code.  Each fiduciary of a plan subject to any such similar law should make its own determination as to the need for and the availability of any exemption relief.

 

The U.S. Department of Labor has issued a final regulation expanding the definitional scope of “investment advice” under ERISA, which may have a negative impact on our ability to raise capital.

 

The U.S. Department of Labor (“DOL”) has issued a final regulation revising the definition of “fiduciary” and the scope of “investment advice” under ERISA, which may have a negative impact on our ability to raise capital.  On April 8, 2016, the DOL issued a final regulation that substantially expands the range of activities that would be considered to be fiduciary investment advice under ERISA and the Internal Revenue Code, which may make it more difficult to qualify for a prohibited transaction exemption.

 

52


 

On March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit issued a decision vacating the final regulation in its entirety, including the expanded definition of “investment advice fiduciary” and the associated exemptions. It is unclear what impact this decision will have on the final regulations – the DOL could, among other things, ask for a rehearing en banc to the full Fifth Circuit, seek review by the U.S. Supreme Court, or further revise or withdraw the final regulation.  In response to the Fifth Circuit’s decision, a DOL spokesperson has informally indicated that the DOL will not enforce final regulations at this time pending further review.  If the DOL does not seek a rehearing, the Fifth Circuit is expected to enter a mandate vacating the final regulations on May 7, 2018. The effect of final regulations and the accompanying exemptions are complex and may be subject to further revision or withdrawal. Fiduciaries of benefit plans and the beneficial owners of IRAs are urged to consult with their own advisors regarding the impact of the final regulations on investing in our common stock.

 

 

 

53


 

STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

 

We make statements in this offering circular that are forward-looking statements within the meaning of the federal securities laws.  The words “believe,” “estimate,” “expect,” “anticipate,” “intend,” “plan,” “seek,” “may,” “continue,” “could,” “might,” “potential,” “predict,” “should,” “will,” “would,” and similar expressions or statements regarding future periods or the negative of these terms are intended to identify forward-looking statements.  These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any predictions of future results, performance or achievements that we express or imply in this offering circular or in the information incorporated by reference into this offering circular.

 

The forward-looking statements included in this offering circular are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties.  Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control.  Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements.  Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:

 

·

our ability to effectively deploy the proceeds raised in our offering of common shares pursuant to Regulation A promulgated under the Securities Act;

 

·

our ability to attract and retain members to the Realty Mogul Platform;

 

·

risks associated with breaches of our data security;

 

·

changes in economic conditions generally and the real estate and securities markets specifically;

 

·

expected rates of return provided to investors;

 

·

the ability of RM Originators and RM Lender to source, originate and service our loans and other assets, and the quality and performance of these assets;

 

·

our ability to hire and retain competent individuals who will provide services to us and appropriately staff our operations;

 

·

legislative or regulatory changes impacting our business or our assets (including changes to the laws and regulations governing the taxation of REITs and our ability to offer our common shares to the public pursuant to Regulation A and related exemption from state securities law registration requirements for “covered securities,” as defined in Section 18 of the Securities Act;

 

·

changes in business conditions and the market value of our assets, including changes in interest rates, prepayment risk, operator or borrower defaults or bankruptcy, and generally the increased risk of loss if our investments fail to perform as expected;

 

·

our ability to implement effective conflicts of interest policies and procedures among the various real estate investment opportunities sponsored by Realty Mogul, Co.;

 

·

our ability to access sources of liquidity when we have the need to fund share repurchases of common shares in excess of the proceeds from the sales of our common shares in our continuous offering and the consequential risk that we may not have the resources to satisfy share repurchase requests;

 

·

our failure to maintain our status as a REIT;

 

·

our compliance with applicable local, state and federal laws, including the Investment Advisers Act of 1940, as amended, or the Advisers Act, the Investment Company Act and other laws; and

54


 

 

·

changes to U.S. generally accepted accounting principles, or GAAP.

 

Any of the assumptions underlying forward-looking statements could be inaccurate.  You are cautioned not to place undue reliance on any forward-looking statements included in this offering circular.  All forward-looking statements are made as of the date of this offering circular and the risk that actual results will differ materially from the expectations expressed in this offering circular will increase with the passage of time.  Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this offering circular, whether as a result of new information, future events, changed circumstances or any other reason.  In light of the significant uncertainties inherent in the forward-looking statements included in this offering circular, including, without limitation, the risks described under “Risk Factors,” the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this offering circular will be achieved.

 

55


 

INDUSTRY DATA

 

This offering circular contains statistical data, estimates and forecasts that are based on independent industry publications, such as those published by Boxwood Means, LLC, Morningstar or other publicly available information, as well as information based on internal sources.  Although we believe that the third-party sources referred to in this offering circular are reliable, we have not independently verified the information provided by these third parties.  While we are not aware of any misstatements regarding any third-party information presented in this offering circular, their estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed under “Risk Factors” and elsewhere in this offering circular.

 

 

56


 

ESTIMATED USE OF PROCEEDS

 

The table below sets forth our estimated use of proceeds from this offering and the private placement described below, assuming we sell in this offering $50,000,000 in shares, the maximum offering amount. Our common shares will be offered at $10.00, which, as previously disclosed, equals the greater of $10.00 per share or our most recent NAV per share.  The price per share will be adjusted every fiscal quarter (or as soon as commercially reasonable thereafter) and will equal the greater of (i) $10.00 per share or (ii) our NAV per share.  Our Sponsor previously acquired 250 common shares at a price equal to the initial public offering price in connection with our formation, for net proceeds to us of $2,500.

 

We expect to use substantially all of the net proceeds from this offering (after paying or reimbursing organization and offering expenses) to invest in and manage a diversified portfolio of commercial real estate investments, including loans and equity in commercial real estate ventures.  We expect that any expenses or fees payable to our Manager for its services in connection with managing our daily affairs will be paid from cash flow from operations.  If such fees and expenses are not paid from cash flow (or not waived) they will reduce the cash available for investment and distribution and will directly impact our NAV.  See “Management Compensation” for more details regarding the fees that will be paid to our Manager and its affiliates.  Many of the amounts set forth in the table below represent our Manager’s best estimate since they cannot be precisely calculated at this time.

 

We may not be able to promptly invest the net proceeds of this offering in commercial real estate loans and other investments in commercial real estate.  Additionally, from time to time, we will have excess cash that we need to manage, pending its distribution to our shareholders or investment by us in accordance with our investment strategy. 

 

If we are unable to raise substantial funds during our offering, we will make fewer investments resulting in less diversification in terms of the type, number and size of investments we make and the value of an investment in us will fluctuate more significantly with the performance of the specific assets we acquire. Our inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, reducing our net income and cash flow and limiting our ability to make distributions to our shareholders.

 

 

 

 

 

 

    

Maximum

 

 

Offering

 

 

Amount (1)

Gross Offering Proceeds

 

$

 33,170,054

Less:

 

 

  

Organization and Offering Expenses(2)(3)

 

$

 995,102

Net Proceeds from this Offering

 

$

 32,174,952

Net Proceeds from the Private Placement

 

$

2,500

Estimated Amount Available for Investments

 

$

 32,177,452


(1)

This is a “best efforts” offering.

(2)

Neither we nor investors in this offering will pay upfront selling commissions in connection with the purchase of our common shares. Instead, Realty Mogul, Co. will fund our Sponsor in order to pay these upfront selling commissions to the broker-dealer executing the sale. The estimated total dollar amount of such selling commissions reflects the fact that the Sponsor will pay upfront selling commissions in an amount up to 1.2% of the gross offering proceeds. Additionally, we will reimburse our Manager for actually incurred, third-party offering costs, which are not expected to exceed $1,450,000, and third-party organization costs, which are not expected to exceed $50,000. Please see “Management Compensation” for a description of additional fees and expenses that we will pay our Manager.

(3)

Amount reflected is an estimate.  Includes all expenses to be paid by us in connection with the formation of the Company and the qualification of the offering, and the marketing and distribution of shares, including, without limitation, expenses for printing, engraving and amending offering statements or supplementing offering circulars, mailing and distributing costs, telephones, internet and other telecommunications costs, all advertising and marketing expenses, charges of experts and fees, expenses and taxes related to the filing, registration and qualification of the sale of shares under federal and state laws, including taxes and fees and accountants’ and attorneys’ fees.  See “Plan of Distribution.”

 

 

57


 

MANAGEMENT

 

Our Manager

 

We operate under the direction of our Manager, RM Adviser, LLC, which is responsible for directing the management of our business and affairs, managing our day-to-day affairs, and implementing our investment strategy.  A majority of the investment committee of our Manager will approve each of our investments. Jilliene Helman, our Manager’s Chief Executive Officer and Eric Levy, our Manager’s Portfolio Manager make up our Manager’s investment committee. Our Manager and its officers are not required to devote all of their time to our business and are only required to devote such time to our affairs as their duties require.

 

We will follow the investment and borrowing policies set forth in this offering circular unless they are modified by our Manager.  Our Manager may establish further written policies on investments and borrowings and will monitor our administrative procedures, investment operations and performance to ensure that the policies are fulfilled.  Our Manager may change our investment objectives at any time without approval of our shareholders.

 

Our Manager performs its duties and responsibilities pursuant to our LLC Agreement.  We have agreed to limit the liability of our Manager and to indemnify our Manager against certain liabilities. Our Manager is a wholly-owned subsidiary of Realty Mogul, Co.

 

Our Manager also sponsors an investment calculator available to users of the Realty Mogul Platform.  The investment calculator uses investor inputs to generate recommendations as to the portion of an investment portfolio that should be held in real estate investments and the types of investments available through the Realty Mogul Platform that may be appropriate to the portfolio given the investor’s risk and return profile.

 

Our Manager currently manages another REIT with similar investment objectives, MogulREIT II, Inc., which was filed with the SEC on June 28, 2017 and qualified on August 23, 2017.  MogulREIT II, Inc. has not established a targeted date or time frame for pursuing a liquidity event, although it has disclosed in its offering circular that it expects to seek a liquidity transaction in the future if it determines that such transaction is in its best interests.

 

Responsibilities of our Manager

 

The responsibilities of our Manager include:

 

Investment Advisory and Acquisition Services

 

·

approve and oversee our overall investment strategy, which will consist of elements such as investment selection criteria, diversification strategies and asset disposition strategies;

 

·

serve as our investment and financial manager with respect to investing in and managing a diversified portfolio of commercial real estate investments, including loans and equity in commercial real estate ventures and other real estate-related assets;

 

·

approve and oversee our debt financing strategies;

 

·

approve joint ventures, limited partnerships and other such relationships with third parties;

 

·

approve any potential liquidity transaction;

 

·

obtain market research and economic and statistical data in connection with our investments and investment objectives and policies;

 

·

oversee and conduct the due diligence process related to prospective investments; and

 

·

negotiate and execute approved investments and other transactions.

 

58


 

Offering Services

 

·

the development of this offering, including the determination of its specific terms;

 

·

in conjunction with NCPS, preparation and approval of all marketing materials to be used by us relating to this offering;

 

·

in conjunction with NCPS, the negotiation and coordination of the receipt, collection, processing and acceptance of subscription agreements and other administrative support functions;

 

·

in conjunction with NCPS, creation and implementation of various technologies and electronic communications related to this offering; and

 

·

in conjunction with NCPS, all other services related to this offering.

 

Asset Management Services

 

·

investigate, select, and, on our behalf, engage and conduct business with such persons as our Manager deems necessary to the proper performance of its obligations under our LLC Agreement, including but not limited to consultants, accountants, lenders, technical managers, attorneys, corporate fiduciaries, escrow agents, depositaries, custodians, agents for collection, insurers, insurance agents, developers, construction companies and any and all persons acting in any other capacity deemed by our Manager necessary or desirable for the performance of any of the services under our LLC Agreement;

 

·

monitor applicable markets and obtain reports (which may be prepared by our Manager or its affiliates) where appropriate, concerning the value of our investments;

 

·

monitor and evaluate the performance of our investments, provide daily management services to us and perform and supervise the various management and operational functions related to our investments;

 

·

formulate and oversee the implementation of strategies for the administration, promotion, management, operation, maintenance, improvement, financing and refinancing, marketing, leasing and disposition of investments on an overall portfolio basis; and

 

·

coordinate and manage relationships between us and any joint venture partners.

 

Accounting and Other Administrative Services

 

·

manage and perform the various administrative functions necessary for our day-to-day operations;

 

·

provide or arrange for administrative services, legal services, office space, office furnishings, personnel and other overhead items necessary and incidental to our business and operations;

 

·

provide financial and operational planning services and portfolio management functions;

 

·

maintain accounting data and any other information concerning our activities as will be required to prepare and to file all periodic financial reports and returns required to be filed with the SEC and any other regulatory agency, including annual financial statements;

 

·

maintain all appropriate Company books and records;

 

·

oversee tax and compliance services and risk management services and coordinate with appropriate third parties, including independent accountants and other consultants, on related tax matters;

 

·

make, change, and revoke such tax elections on behalf of the Company as our Manager deems appropriate, including, without limitation, (i) making an election to be treated as a REIT or to revoke such status and

59


 

(ii) making an election to be classified as an association taxable as a corporation for U.S. federal income tax purposes;

 

·

supervise the performance of such ministerial and administrative functions as may be necessary in connection with our daily operations;

 

·

provide us with all necessary cash management services;

 

·

manage and coordinate with the process of making distributions and payments to shareholders;

 

·

evaluate and obtain adequate insurance coverage based upon risk management determinations;

 

·

provide timely updates related to the overall regulatory environment affecting us, as well as managing compliance with regulatory matters;

 

·

evaluate our corporate governance structure and appropriate policies and procedures related thereto; and

 

·

oversee all reporting, record keeping, internal controls and similar matters in a manner to allow us to comply with applicable law.

 

Shareholder Services

 

·

determine our distribution policy and authorize distributions from time to time;

 

·

approve amounts available for repurchases of our common shares;

 

·

manage communications with our shareholders, including answering phone calls and preparing and sending written and electronic reports and other communications; and

 

·

establish technology infrastructure to assist in providing shareholder support and services.

 

Financing Services

 

·

identify and evaluate potential financing and refinancing sources, engaging a third party broker if necessary;

 

·

negotiate terms of, arrange and execute financing agreements;

 

·

manage relationships between us and our lenders, if any; and

 

·

monitor and oversee the service of our debt facilities and other financings, if any.

 

Disposition Services

 

·

evaluate and approve potential asset dispositions, sales or liquidity transactions; and

 

·

structure and negotiate the terms and conditions of transactions pursuant to which our assets may be sold.

 

Our Manager may hire third parties to assist with the performance of the aforementioned services.

 

Allocation of Investment Opportunities

 

Realty Mogul, Co. expects to continue to offer investment opportunities through the Realty Mogul Platform. As a result, investment opportunities may arise that could be allocated to the Realty Mogul Platform, the Company or another REIT managed by our Manager. Our Manager’s investment committee will advise our Manager with respect to the allocation of investment opportunities in accordance with the following general policies.

 

60


 

Our Manager intends to allocate equity investment opportunities, excluding preferred equity, in amounts under $1,500,000 to the Realty Mogul Platform. Our Manager intends to allocate all other investment opportunities (e.g., debt and preferred equity investments of any amount, and equity investments of $1,500,000 or more) to the Company and any other REITs managed by our Manager based upon the applicability of such investment opportunity to the investment policies (including targeted asset class) of the respective entity, the diversification and current asset concentration of each entity, the amount of capital available to each entity at the time an investment is presented and other similar factors. To the extent that, based on these factors, an investment opportunity is an appropriate investment for the Company and one or more other REITs managed by our Manager, our Manager will allocate such investment opportunity based upon which entity has gone the longest period of time without making an investment. Although we expect our Manager to follow these general allocation policies, our Manager may deviate from these policies if adherence to these policies would cause the applicable entity to become subject to regulation under the Investment Company Act or to fail to meet the requirements for REITs set forth in the Code, or if other factors exist that affect whether the investment would be in the best interest of the respective entity. Investment opportunities that are not allocated to the Company or any other REIT managed by our Manager may be made available to other investors through the Realty Mogul Platform.

 

In the event that the investment committee of our Manager determines that the size of an investment would create undue concentration in our portfolio, the amount of our capital available is limited or that the entire investment would otherwise be unsuitable for us, we may permit a portion of such investment to be sold on the Realty Mogul Platform such that we may acquire the remaining portion. In no event would the Company’s ability to invest in its portion of the investment opportunity be contingent upon the successful sale of the remaining portion on the Realty Mogul Platform.

 

Shared Services Agreement

 

Our Manager has entered into a shared services agreement with Realty Mogul, Co. pursuant which employees of Realty Mogul, Co. will provide certain services to our Manager, including portfolio management, asset valuation, risk management and asset management services as well as administration services addressing legal, compliance, investor relations and information technologies necessary for the performance by our Manager of its duties under our LLC Agreement. Under the shared services agreement, Realty Mogul, Co. will be entitled to receive reimbursement of expenses incurred on behalf of us or our Manager as described in “Management Compensation” and pursuant to our LLC Agreement.  All employees of Realty Mogul, Co. who provide services to the Manager will be subject to the Manager’s policies and procedures, including its Code of Ethics.

 

Executive Officers of our Manager

 

As of the date of this offering circular, the executive officers of our Manager and their positions and offices are as follows:

 

 

 

 

 

 

Name

    

Age*

    

Position

Jilliene Helman

 

32

 

Chief Executive Officer, Chief Financial Officer and Secretary

Eric Levy

 

32

 

Portfolio Manager

William Wenke

 

36

 

General Counsel

 

 

 

 

 


*As of December 10, 2018

 

Jilliene Helman has served as our Chief Executive Officer and Secretary since our inception and our Chief Financial Officer since October 31, 2018. Since May 2012, Ms. Helman has served as the Chief Executive Officer and a director of Realty Mogul, Co., where she is responsible for Realty Mogul, Co.’s strategic direction and operations. In this capacity, she has approved over $400 million of investments with property values worth over $2 billion. From July 2008 to September 2012, Ms. Helman served in a variety of capacities at Union Bank, including as a Management Training Associate; an Assistant Vice President, Sales Development Manager; and Vice President, Corporate Risk Management. Ms. Helman held these positions across the wealth management, finance and risk management departments of Union Bank. Ms. Helman is a Certified Wealth Strategist and holds Series 7, Series 63 and Series 24 licenses. Ms. Helman has a Bachelor of Science in Business Administration degree from Georgetown University.

Eric Levy has served as Portfolio Manager since January 2019. Mr. Levy has served as an Assistant Vice President, Asset Management of Realty Mogul, Co. since October 2017. Mr. Levy is responsible for portfolio and asset management for debt and equity assets held by MogulREIT I and MogulREIT II.  From April 2013 to September 2017,

61


 

Mr. Levy served as Strategic Projects Manager at World Class Capital Group, a national real estate investment firm focused on acquiring, developing and managing real estate with over $1.2 billion in assets under management.  In that role, he led the asset management of over 2.3 million square feet of retail and office properties, oversaw capital improvement plans for over 4.5 million square feet of self-storage facilities, managed portfolio-wide investor reporting and investor relationships, and helped to develop the operational infrastructure of the company.  From August 2010 to March 2013, Mr. Levy served as Senior Paralegal – M&A, Real Estate, Credit at Willkie, Farr & Gallagher, an international law firm. Mr. Levy has more than 8 years of experience in commercial real estate. Mr. Levy has a Bachelor of Arts degree from the University of Wisconsin-Madison.

William Wenke has served as General Counsel since January 2019.  Since February 2018, Mr. Wenke has served as the Vice President, Legal of Realty Mogul, Co., where he is responsible for managing all legal and regulatory matters.  From August 2016 to August 2017, Mr. Wenke was the Associate General Counsel at Westwood Financial, a fully integrated asset management, property management, leasing, brokerage and investment firm.  From October 2013 to October 2015, Mr. Wenke served as Senior Counsel, Compliance and Legal for Blackstone Group subsidiary Invitation Homes, a private equity fund investing in  a real estate portfolio with assets under management in excess of $12.3 billion, where he focused on forming and refining best practices and legal guidelines in preparation for the company’s $1.54 billion initial public offering (“IPO”) (NYSE: INVH). From October 2011 to August 2013, Mr. Wenke was the Assistant Vice President, Legal and Compliance Counsel, and Assistant Secretary of American Homes 4 Rent,  an internally managed single-family homes REIT, where he provided representation for over $3 billion in capital transactions, including an over $700 million IPO (NYSE: AMH), additional offerings, and acquisitions. Earlier in his career, Mr. Wenke practiced as a litigation fellow at the American Civil Liberties Union. Mr. Wenke has a Bachelor of Arts degree from Emory University, a Robert Traurig-Greenberg Master of Laws in Real Property Development from the University of Miami School of Law, and a Juris Doctor from the University of Miami School of Law.

 

Compensation of Executive Officers

 

We do not currently have any employees nor do we currently intend to hire any employees who will be compensated directly by us.  As described above, certain of the executive officers of Realty Mogul, Co. also serve as executive officers of our Manager.  Each of these individuals receives compensation for his or her services, including services performed for us on behalf of our Manager, from Realty Mogul, Co.  As executive officers of our Manager, these individuals will manage our day-to-day affairs, oversee the review, selection and recommendation of investment opportunities, service acquired investments and monitor the performance of these investments to ensure that they are consistent with our investment objectives.  Although we will indirectly bear some of the costs of the compensation paid to these individuals, through fees we pay to our Manager, we do not intend to pay any compensation directly to these individuals.

 

Limited Liability and Indemnification of our Manager and Others

 

Subject to certain limitations, our LLC Agreement limits the liability of our Manager, its officers and directors, our Sponsor and our Sponsor’s shareholder and affiliates, for monetary damages and provides that we will indemnify and pay or reimburse reasonable expenses in advance of final disposition of a proceeding to our Manager, its officers and directors, our Sponsor and our Sponsor’s shareholder and affiliates.

 

Our LLC Agreement provides that to the fullest extent permitted by applicable law our Manager, its officers and directors, our Sponsor and our Sponsor’s shareholder and affiliates will not be liable to us.  In addition, pursuant to our LLC Agreement, we have agreed to indemnify our Manager, its officers and directors, our Sponsor and our Sponsor’s shareholder and affiliates, to the fullest extent permitted by law, against all expenses and liabilities (including judgments, fines, penalties, interest, amounts paid in settlement with the approval of the Company and attorney’s fees and disbursements) arising from the performance of any of their obligations or duties in connection with their service to us or our LLC Agreement, including in connection with any civil, criminal, administrative, investigative or other action, suit or proceeding to which any such person may hereafter be made party by reason of being or having been our Manager, an officer or director of our Manager, our Sponsor or our Sponsor’s shareholder or affiliate.

 

Insofar as the foregoing provisions permit indemnification of directors, officers or persons controlling us for liability arising under the Securities Act, we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

62


 

Term and Removal of our Manager

 

Our LLC Agreement provides that our Manager will serve as our manager for an indefinite term, but that our Manager may be removed by us, or may choose to withdraw as manager, under certain circumstances.

 

Our shareholders may only remove our Manager at any time with 30 days prior written notice for “cause,” following the affirmative vote of two-thirds of our shareholders.  If our Manager is removed for “cause,” the shareholders will have the power to elect a replacement Manager upon the affirmative vote or consent of the holders of a majority of our common shares.  “Cause” is defined as:

 

·

our Manager’s continued breach of any material provision of our LLC Agreement following a period of 30 days after written notice thereof (or 45 days after written notice of such breach if our Manager, under certain circumstances, has taken steps to cure such breach within 30 days of the written notice);

 

·

the commencement of any proceeding relating to the bankruptcy or insolvency of our Manager, including an order for relief in an involuntary bankruptcy case or our Manager authorizing or filing a voluntary bankruptcy petition;

 

·

our Manager committing fraud against us, misappropriating or embezzling our funds, or acting, or failing to act, in a manner constituting bad faith, willful misconduct, gross negligence or reckless disregard in the performance of its duties under our LLC Agreement; provided, however, that if any of these actions is caused by an employee, personnel and/or officer of our Manager or one of its affiliates and our Manager (or such affiliate) takes all necessary and appropriate action against such person and cures the damage caused by such actions within 30 days of our Manager’s actual knowledge of its commission or omission, then our Manager may not be removed; or

 

·

the dissolution of our Manager.

 

Unsatisfactory financial performance of the Company does not constitute “cause” under our LLC Agreement.

 

Our Manager may assign its rights under our LLC Agreement in its entirety or delegate certain of its duties under our LLC Agreement to any of its affiliates, without the approval of our shareholders so long as our Manager remains liable for any such affiliate’s performance, and if such assignment or delegation does not require our approval under the Investment Advisers Act of 1940, as amended, or the Advisers Act.  Our Manager may withdraw as our Manager if we become required to register as an investment company under the Investment Company Act, with such withdrawal deemed to occur immediately before such event.  Our Manager will determine whether any succeeding manager possesses sufficient qualifications to perform the management function.  In the event of the removal or withdrawal of our Manager, our Manager will cooperate with us and take all reasonable steps to assist in making an orderly transition of the management function.

 

Holdings of our Common Shares

 

Our Sponsor has invested $2,500 in us through the purchase of 250 common shares in a private placement at $10.00 per share.

 

Realty Mogul Platform

 

We will conduct this offering on the Realty Mogul Platform.  The Realty Mogul Platform is operated by RM Technologies, LLC, a wholly-owned subsidiary of Realty Mogul, Co.  We will not pay RM Technologies, LLC any sales commissions or other remuneration for hosting this offering on the Realty Mogul Platform.  The Realty Mogul Platform has previously hosted private offerings of investment opportunities originated by the RM Originators under similar arrangements.  The Realty Mogul Platform was formed in 2013 and has a limited operating history.  See “Risk Factors - Risks Related to the Investment Platform.

 

63


 

License Agreement

 

We have entered into a license agreement with Realty Mogul, Co., pursuant to which Realty Mogul, Co. will grant us a non-exclusive, royalty free license to use the name “Realty Mogul”.  Other than this license, we will have no legal right to use the “Realty Mogul” name.  In the event that our Manager ceases to manage us, we would be required to change our name to eliminate the use of “Realty Mogul”.

 

Prior Performance of Our Sponsor

 

Realty Mogul, Co., through the Realty Mogul Platform, is an investment marketplace that connects real estate developers and sponsors with providers of capital. As such, Realty Mogul, Co. and its affiliates historically have not sponsored real estate investment programs. However, in 2017, our Sponsor, RM Sponsor, LLC, a subsidiary of Realty Mogul, Co., sponsored MogulREIT II, Inc., or MogulREIT II, a Maryland corporation that has elected to be taxed as a REIT for the taxable year ended December 31, 2017.

 

MogulREIT II

 

MogulREIT II is a Maryland corporation formed on January 13, 2017 to own and manage a diversified portfolio of preferred equity and joint venture equity investments in multifamily properties located in target markets throughout the United States.  On August 23, 2017, MogulREIT II’s offering of shares of common stock (the “MR II Offering”) was qualified by the SEC, and MogulREIT II commenced operations on September 18, 2017. MogulREIT II is offering up to $50,000,000 in shares of common stock including any shares of common stock that may be sold pursuant to its distribution reinvestment plan. As of December 31, 2017, MogulREIT II had issued approximately 371,106 shares of common stock in its offering for gross offering proceeds of $3,711,057. MogulREIT II expects to continue to offer shares of common stock in its offering until MogulREIT II raises the maximum amount being offered, unless its offering is terminated by MogulREIT II’s board of directors at an earlier time. 

 

MogulREIT II used, and intends to continue using, substantially all of the net proceeds from its offering of common stock to invest in and manage a diversified portfolio of preferred equity and joint venture equity investments in multifamily properties located in target markets throughout the Unites States.

 

As of December 31, 2017, MogulREIT II’s portfolio was comprised of approximately $47,000,000 in real estate investments that, in the opinion of its manager, meet its investment objectives. MogulREIT II intends to make preferred equity and joint venture equity investments in multifamily properties that have demonstrated consistently high occupancy and income levels across market cycles as well as multifamily properties that offer value added opportunities with appropriate risk-adjusted returns and opportunity for value appreciation.  On December 22, 2017, MogulREIT II’s  board of directors authorized a daily cash distribution of $0.0012328767 per share of its common stock to stockholders of record as of the close of business on each day of the period commencing January 1, 2018 and ending on March 31, 2018. The distribution was scheduled to be paid on or about April 13, 2018. The aggregate amount of cash distributed and distributions reinvested related to the distribution period was $18,770.76 and $40,861.54, respectively. MogulREIT II began processing the distributions on April 13, 2018.  MogulREIT II declared, but not paid, distributions of approximately $33,000 for the period January 13, 2017 (inception) through December 31, 2017.  

 

MogulREIT II has not established a targeted date or time frame for pursuing a liquidity transaction, although it has disclosed in its offering circular that it expects to seek a liquidity transaction in the future when its board of directors determines such event to be in the best interests of its stockholders. The timing and method of any liquidity transaction for MogulREIT II was undetermined as of December 31, 2017.

 

 

 

 

 

 

 

 

 

 

64


 

Realty Mogul, Co. and Affiliates Origination (as of Nov 1, 2018)

 

 

 

 

 

 

 

 

 

 

 

Type

 

Total Originations

(mm)

Sold/Repaid in Full

(mm)

Assets

Under

Management (mm)

Common Equity

$176.5

$37.4

$139.2

 

1031 Exchanges

$13.7

$13.7

 

$0.0

 

Preferred Equity

$21.4

$3.0

 

$18.4

Mezzanine Debt

$18.0

$5.2

$16.5

Senior Debt

$163.5

$153.3

$14.0

Total

$393.1

$212.6

$188.1

 

 

 

MANAGEMENT COMPENSATION

 

Our Manager and its affiliates will receive fees and expense reimbursements for services relating to this offering, and the investment and management of our assets. As described below, we will pay our Manager an asset management fee and we will reimburse our Manager for certain expenses. We also may pay to an RM Lender certain loan servicing fees, as described below. The remainder of the fees described below will be paid by the borrower that receives a loan from us or the special purpose entity that issues equity to us.

 

No portion of the fees detailed below will be allocated to any individual in his or her capacity as an executive officer of our Manager.

 

 

 

 

 

 

Form of Compensation and Recipient

    

Determination of Amount

    

Estimated Amount

 

 

 

 

 

Organization and Offering Stage

 

 

 

 

 

Organization and Offering Expenses — Manager

 

Our Manager has paid and may continue to pay organization and offering expenses on our behalf. We will reimburse our Manager for actually incurred third-party organization and offering costs it incurs on our behalf, the amount of which will depend on the offering proceeds we raise. See “Estimated Use of Proceeds” for more details. We expect total organization and offering expenses to be no more than $1,500,000.

 

$ 300,000 - $1,500,000

 

 

 

 

 

65


 

 

 

 

 

 

Form of Compensation and Recipient

    

Determination of Amount

    

Estimated Amount

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition and Operation Stage

 

 

 

 

 

 

 

Asset Management Fee — Manager

 

Monthly asset management fee equal to an annualized rate of 1.00% payable in arrears, which will be based on the average investment value of the assets. For purposes of this fee, “average investment value” means, for any period, the average of the aggregate book value of all of our assets, before reserves for depreciation, amortization, bad debts, or other similar non-cash reserves.

 

Actual amounts are dependent upon the offering proceeds we raise (and any leverage we employ) and the results of our operations.

 

Since we intend to use leverage only on certain assets, the actual fee may vary depending on the concentration of assets in our portfolio.

 

 

 

 

 

Servicing Fee — RM Lender (Debt Assets)

 

With respect to any loans we make or acquire, may pay a servicing fee of 0.50% of the principal balance and accrued interest of each loan to RM Lender for the servicing and administration of certain loans and investments held by us. RM Lender may decide to enter into a Servicing Agreement with an unaffiliated third party to service and administer the loans held by us, and will pay for any expenses incurred in connection with standard subservicing thereunder out of the servicing fee paid to it by us. The Servicing Agreement will define the terms of the loan servicing arrangement as well as the amount of the servicing fee that is paid by RM Lender to the unaffiliated third party. The servicing fee is calculated as an annual percentage of the principal balance of the debt asset plus accrued interest, and is deducted at the time that payments on the asset are made. The fee is deducted in proportion to the split between accrued and current payments. Servicing fees payable by us may be waived at RM Lender’s sole discretion.

 

Actual amounts are dependent upon the principal amount of the loans. We cannot determine these amounts at the present time.

 

 

 

 

 

66


 

 

 

 

 

 

Form of Compensation and Recipient

    

Determination of Amount

    

Estimated Amount

Special Servicing Fee —RM Lender (Debt Assets)

 

We may pay a special servicing fee to RM Lender equal to an annualized rate of 1.00% of the original value of a non-performing asset serviced by such RM Lender. Whether a debt asset is deemed to be non-performing is in the sole discretion of our Manager.

The payment of the special servicing fee shall be in addition to any third party special servicing expenses incurred by us, which may include special fees associated with recovery efforts by RM Lender.

 

 

Actual amounts are dependent upon the occurrence of a debt investment becoming non-performing and the original value of such asset. We cannot determine these amounts at the present time.

 

 

 

 

 

Other Operating Expenses — Manager

 

We will reimburse our Manager for out-of-pocket expenses incurred on our behalf, including license fees, auditing fees, fees associated with SEC reporting requirements, insurance costs, tax return preparation fees, taxes and filing fees, administration fees, fees for the services of an independent representative, and third-party costs associated with the aforementioned expenses.  These expenses do not include our Manager’s or Realty Mogul, Co.’s overhead, employee costs, utilities or technology costs.

 

The aforementioned expense reimbursements that we will pay to our Manager may be originally incurred by Realty Mogul, Co. in the performance of services by its employees under the shared services agreement between our Manager and Realty Mogul, Co.  See “Management—Shared Services Agreement.”

 

Actual amounts are dependent upon our operations. We cannot determine these amounts at the present time.

 

In addition to the fees set forth above, our form of loan servicing agreements between the Company and RM Lender contemplate the payment of a recovery fee. The recovery fee may be payable to the RM Lender in connection with (i) the sale of, or receipt of any condemnation or insurance proceeds with respect to a specially serviced loan or real estate owned property or (ii) the curing of any event of default under the serviced loan through restructure or work-out of the serviced loan. The recovery fee will be an amount equal to: (a) with respect to clause (i) of the preceding sentence, 1.0% of all liquidation, condemnation and insurance proceeds received with respect to the serviced loan and (b) with respect to clause (ii) of the preceding sentence, 1.0% of all principal and interest received (x) in connection with any full, partial or discounted payoff made pursuant to such restructuring or work-out and (y) from and after the date that the borrower has made three timely consecutive monthly payments under the terms of the serviced loan, as amended.

 

 

 

 

 

67


 

Related Fees Paid by Affiliated and Unaffiliated Third Parties

 

From time to time, when one of the affiliates of our Manager, RMCC, originates a commercial real estate loan or preferred equity investment that is sold to us, the borrower of the transaction may pay fees to RMCC.  A portion of this fee may be paid to personnel affiliated with our Manager for their roles in sourcing the investment opportunity. The fees are paid to RMCC by the borrower entity and not by us. We will not be entitled to this fee. The actual amount of origination fees, extension fees and exit fees that will be paid are dependent upon the total transaction amount funded. We cannot determine these amounts at the present time.             

 

For senior debt, mezzanine debt or preferred equity investments:

·

Origination fee of 1.0%-3.0% of the financing amount

·

Extension fee of 1.0%-2.0% of the financing amount in the event that the maturity or redemption date for such asset is extended.

·

Exit fee of 1.0%-2.0% of the financing amount upon maturity of the transaction

 

Similarly, from time to time, a special purpose entity in which we invest may pay an affiliate of our Manager or our Manager one or more of the fees set forth below. A portion of these fees may be paid to personnel affiliated with our Manager for their roles in arranging the investment opportunity. The following fees will be paid by the particular special purpose entity and not by us. We will not be entitled to any of these fees. The actual amounts of the following fees are dependent upon the total invested equity, transaction sizes and distributable cash. We cannot determine these amounts at the present time. These fees may reduce the amount of funds that are invested in the underlying real estate or the amount of funds available to pay distributions to us, thereby reducing our returns in that particular investment:

 

For joint venture equity investments:

·

Acquisition fee up to 3% of the total transaction value.

·

Financing coordination fee and credit guarantee fee up to 1.0% of the financing in the event that an affiliate of our Manager or our Manager provides services in connection with arranging the debt or provides a credit guarantee in connection with the financing. 

·

Asset management fee in the amount of 1.5% of our pro-rata share of the gross revenues of the particular property in the event that an affiliate of our Manager or our Manager provides property-level asset management services overseeing and managing the property manager. Affiliates of our Manager or our Manager will be reimbursed for property-level expenses that it pays or incurs on our behalf, including salaries, bonuses and benefits from persons who also serve as one of our Manager’s executive officers. We anticipate that our Manager or its affiliates will subcontract the performance of its property-level management services to third parties and pay all or a portion of its property-level management fee to the third parties with which it contracts for these services.

 

Promoted interest in an undetermined amount of the entity’s distributable cash, after all other partners or members have been paid an agreed upon (6.0% or higher) cumulative, non-compounded preferred return. Additionally, Realty Mogul, Co. will provide funding to our Sponsor to pay a sales commission of up to 1.20% to NCPS for their services in connection with the sale of our shares. Such sales commissions will not be paid by us or our investors. A portion of the sales commission will be paid to employees of Realty Mogul, Co., who are serving as registered representatives of NCPS in connection with the sale of our shares. The actual amount of sales commissions that will be paid is dependent upon the offering proceeds we raise. The total broker sales commissions, assuming the maximum amount of this offering is raised and up to a 1.20% commission is paid on each executed sale, will be $398,041.

 

Our Manager also provides any offering, investment and management services to other affiliated entities, and may provide investment advice to persons or entities through the investment calculator. See “Conflicts of Interest — Investment Calculator.”

68


 

PRINCIPAL SHAREHOLDERS  

 

The following table sets forth the beneficial ownership of our common shares as of the date of this offering circular for each person or group that holds more than 5% of our common shares, for each executive officer of our Manager and for the executive officers of our Manager as a group.  To our knowledge, each person that beneficially owns our common shares has sole voting and disposition power with regard to such shares.

 

Unless otherwise indicated below, each person or entity has an address in care of our principal executive offices at 10780 Santa Monica Blvd., Suite 140, Los Angeles, CA 90025.

 

 

 

 

 

 

 

 

    

Number of

    

 

 

 

 

Shares

 

 

 

 

 

Beneficially

 

Percent of All

 

Name of Beneficial Owner(1)

 

Owned

 

Shares

 

RM Sponsor, LLC (2)(3)

 

250

 

0.0090

%

Jilliene Helman

 

 —

 

 —

 

All executive officers of our Manager as a group (6 persons)

 

250

 

0.0090

%


(1)

Under SEC rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to dispose of or to direct the disposition of such security.  A person also is deemed to be a beneficial owner of any securities which that person has a right to acquire within 60 days.  Under these rules, more than one person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which he or she has no economic or pecuniary interest.

(2)

As of the date of this offering circular, RM Sponsor, LLC owns 0.0090% of our issued and outstanding common shares.

(3)

All voting and investment decisions with respect to our common shares that are held by RM Sponsor, LLC are controlled by its manager, Jilliene Helman.  Ms. Helman disclaims beneficial ownership of such shares.

 

 

69