S-11 1 v450580_s11.htm S-11

As filed with the Securities and Exchange Commission on October 28, 2016.

Registration Statement No. 333-        

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



 

FORM S-11
FOR REGISTRATION
UNDER
THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES



 

Sachem Capital Corp.

(Exact name of registrant as specified in its governing instruments)



 

   
New York   6798   81-3467779
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

23 Laurel Street
Branford, CT 06405
(203) 433-4736

(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)



 

John L. Villano, CPA
Jeffrey C. Villano
Co-Chief Executive Officers
Sachem Capital Corp.
23 Laurel Street
Branford, CT 06405
(203) 433-4736

(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)



 

Please send all copies of communications to:

 
Joel J. Goldschmidt, Esq.
Morse, Zelnick, Rose, & Lander, LLP
825 Third Avenue
New York, NY 10022
Tel: (212) 838-8040
Fax: (212) 208-6809
  Brad L. Shiffman, Esq.
Blank Rome LLP
The Chrysler Building
405 Lexington Avenue
New York, NY 10174-0208
Tel: (212) 885-5000
Fax: (212) 885-5001


 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

     
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller
reporting company)
  Smaller Reporting Company x

 


 
 

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CALCULATION OF REGISTRATION FEE

   
Title of Each Class of
Securities to be Registered
  Proposed
Maximum
Aggregate
Offering
Price(1)
  Amount of
Registration
Fee(2)
Common Shares, par value $0.001 per share(2)(3)   $ 17,250,000     $ 1,999.28  
Representative’s Warrants(4)   $     $  
Common Shares underlying the Representative’s Warrants(5)   $ 937,500     $ 108.66  
Total   $ 18,187,500     $ 2,107.94  

(1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) of the Securities Act of 1933, as amended.
(2) Pursuant to Rule 416, the securities being registered hereunder include such indeterminate number of additional securities as may be issued after the date hereof as a result of stock splits, stock dividends or similar transactions.
(3) Includes common shares the underwriters have the option to purchase to cover over-allotments, if any.
(4) No fee pursuant to Rule 457(g) under the Securities Act of 1933, as amended.
(5) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act of 1933, as amended. The proposed maximum aggregate offering price of the shares underlying the representative’s warrants is $937,500, which is equal to 125% of $750,000 (5% of $15,000,000).


 

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


 
 

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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is deemed effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

   
PRELIMINARY PROSPECTUS   SUBJECT TO COMPLETION   DATED OCTOBER 28, 2016

     Common Shares

[GRAPHIC MISSING] 

Sachem Capital Corp.

This is a firm commitment initial public offering of      common shares of Sachem Capital Corp. No public market currently exists for our common shares. We anticipate that the initial public offering price of our common shares will be between $     and $     per share.

We intend to apply to list our common shares for trading on the NASDAQ Capital Market under the symbol “SACH.” We cannot assure you that our application will be approved.

We are organized and plan to conduct our operations to qualify as a real estate investment trust, or REIT, for federal income tax purposes and intend to elect to be taxed as a REIT beginning with the tax year in which this offering is consummated. In order to enhance our ability to meet the ownership requirements that apply to REITs, our certificate of incorporation, as amended, generally limits ownership by any single shareholder, taking into account capital shares actually owned and deemed to be owned under the rules of ownership attribution by such shareholder, to no more than     % by value or number of shares, whichever is more restrictive, of our outstanding capital stock. Our certificate of incorporation, as amended, also imposes certain restrictions on transferability. See “Description of Capital Shares” and “Certain Provisions of New York Law and of Our Certificate of Incorporation and Bylaws” for a more detailed discussion of these restrictions.

Investing in our common shares involves a high degree of risk. See “Risk Factors” beginning on page 14 of this prospectus for a discussion of information that should be considered with an investment in our common shares.

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

   
  Per Share   Total
Public offering price   $          $       
Underwriting discounts and commissions(1)   $          $       
Proceeds to Sachem Capital (before expenses)   $          $       
(1) Does not include a non-accountable expense allowance equal to 1% of the gross proceeds of this offering payable to Joseph Gunnar & Co., the representative of the underwriters. See “Underwriting” for a description of the compensation payable to the underwriters.

We have granted a 45-day option to the representative of the underwriters to purchase up to an additional      common shares to cover overallotments, if any.

The underwriters expect to deliver the shares to purchasers in the offering on or about            , 2016.

Joseph Gunnar & Co.

           , 2016


 
 

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SUMMARY     1  
RISK FACTORS     14  
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS     36  
USE OF PROCEEDS     37  
DIVIDENDS AND DISTRIBUTION POLICY     38  
DILUTION     39  
CAPITALIZATION     40  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     41  
BUSINESS     51  
CORPORATE STRUCTURE — REIT STATUS     63  
MANAGEMENT     64  
EXECUTIVE COMPENSATION     67  
PRINCIPAL SHAREHOLDERS     71  
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS     72  
DESCRIPTION OF CAPITAL SHARES     73  
CERTAIN PROVISIONS OF NEW YORK LAW AND OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS     78  
SHARES ELIGIBLE FOR FUTURE SALE     81  
U.S. FEDERAL INCOME TAX CONSIDERATIONS     82  
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES     100  
UNDERWRITING     103  
LEGAL MATTERS     111  
EXPERTS     111  
WHERE YOU CAN FIND ADDITIONAL INFORMATION     111  
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS     F-1  
INDEX TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS     F-1  

You should rely only on the information contained in this prospectus or in any free writing prospectus that we may specifically authorize to be delivered or made available to you. We have not, and the underwriters have not, authorized anyone to provide you with any information other than that contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus may only be used where it is legal to offer and sell our securities. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our securities. Our business, financial condition, results of operations and prospects may have changed since that date. We are not, and the underwriters are not, making an offer of these securities in any jurisdiction where the offer is not permitted.

For investors outside the United States: We have not and the underwriters have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of securities and the distribution of this prospectus outside the United States.

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SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our securities, you should carefully read this entire prospectus, including our financial statements and the related notes and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in each case included elsewhere in this prospectus.

Prior to the date of this offering our business operated as a Connecticut limited liability company under the name Sachem Capital Partners, LLC (“SCP”). In anticipation of this offering, SCP and Sachem Capital Corp. (“Sachem Capital”) have entered into an Exchange Agreement pursuant to which SCP will transfer all of its assets and liabilities to Sachem Capital in exchange for 6,283,237 Sachem Capital common shares, which it will then distribute to its members, pro rata in accordance with their capital account balances, in full liquidation of their membership interests. We expect to consummate the exchange on or prior to the date of this prospectus. Except as otherwise specifically noted, all information in this prospectus assumes the consummation of the exchange described above.

All references in this prospectus to “us,” “we,” or “our,” are references to Sachem Capital and its predecessor, SCP, unless specified otherwise.

Our Company

We are a Connecticut-based real estate finance company that specializes in originating, underwriting, funding, servicing and managing a portfolio of short-term (i.e., three years or less) loans secured by first mortgage liens on real property located primarily in Connecticut. Each loan is also personally guaranteed by the principal(s) of the borrower, which guaranty is typically collaterally secured by a pledge of the guarantor’s interest in the borrower. Our typical borrower is a small real estate investor who will use the proceeds to fund its acquisition, renovation, rehabilitation, development and/or improvement of residential or commercial properties located primarily in Connecticut held for investment or sale. The property may or may not be income producing. We do not lend to owner-occupants. Our loans are referred to in the real estate finance industry as “hard money loans.”

We believe that upon completion of this offering we will meet all of the requirements to qualify as a real estate investment trust (“REIT”) for federal income tax purposes and we intend to elect to be taxed as a REIT beginning with the year in which this offering is consummated.

Since commencing operations in 2010, SCP has made over 365 loans, not including renewals or extensions of existing loans. At June 30, 2016, (i) SCP’s loan portfolio included 193 loans with an aggregate loan amount of approximately $30.4 million with the principal amount of individual loans ranging from $20,000 to $1.7 million, (ii) the average original principal amount of the loans in SCP’s portfolio was $162,124 and the median loan amount was $110,000 and (iii) over 85% of the loans had a principal amount of $250,000 or less. At December 31, 2015, (i) SCP’s loan portfolio included 185 loans with an aggregate loan amount of approximately $27.5 million with the principal amount of individual loans ranging from $20,000 to $1.7 million, (ii) the average original principal amount of the loans in SCP’s portfolio was $147,000 and the median loan amount was $113,700 and (iii) over 62% of the loans had a principal amount of $250,000 or less. At June 30, 2016 and December 31, 2015 unfunded commitments for future advances under construction loans totaled $950,658 and $1,264,512, respectively.

Our loans typically have a maximum initial term of three years and bear interest at a fixed rate of 9% to 12% per year and a default rate for non-payment of 18%. In addition, we usually receive origination fees, or “points,” ranging from 2% to 5% of the original principal amount of the loan as well as other fees relating to underwriting, funding and managing the loan. When we renew or extend a loan we generally receive additional “points” and other fees. Interest is always payable monthly in arrears. As a matter of policy, we do not make any loans if the original principal amount of the loan exceeds 65% of the value of the property securing the loan (referred to as the “loan-to-value ratio”). In the case of construction loans, the loan-to-value ratio is based on the post-construction value of the property. In the case of loans having a principal amount in excess of $500,000, we require a formal appraisal by a licensed appraiser. In the case of smaller loans, we

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rely on readily available market data, including tax assessment rolls, recent sales transactions and brokers to evaluate the strength of the collateral. Finally, we will adopt a policy, to take effect at the time this offering becomes effective, that will limit the maximum amount of any loan we fund to a single borrower or a group of affiliated borrowers to 10% of the aggregate amount of our loan portfolio after taking into account the loan under consideration.

Our principal executive officers are experienced in hard money lending under various economic and market conditions. Our founders and co-chief executive officers, Jeffrey C. Villano and John L. Villano, spend a significant portion of their time on business development as well as on underwriting, structuring and servicing each loan in our portfolio. A principal source of new transactions has been repeat business from existing and former customers and their referral of new business. We also receive leads for new business from banks, brokers, attorneys and web-based advertising.

Our Competitive Strengths

We believe our competitive advantages include the following:

Experienced management team.  Our senior executive officers have successfully originated and serviced our portfolio of short-term, real estate mortgage loans generating attractive annual returns under varying economic and real estate market conditions.
Long-standing relationships.  At June 30, 2016, 20% of SCP’s loan portfolio consisted of loans to borrowers with whom it has a long-term relationship, including JJV, LLC, the manager of SCP, which accounts for 4.5% of our loan portfolio. Existing borrowers also provide new leads that could result in new lending opportunities.
Knowledge of the market.  We have intimate knowledge of the Connecticut real estate market, which enhances our ability to identify attractive opportunities and helps distinguish us from many of our competitors.
Disciplined lending.  We utilize rigorous underwriting and loan closing procedures that include numerous checks and balances to evaluate the risks and merits of each potential transaction.
Vertically-integrated loan origination platform.  We manage and control the loan process from origination through closing with our own personnel or independent third parties, including legal counsel and appraisers, with whom we have long relationships.
Structuring flexibility.  As a small, non-bank, neighborhood-focused real estate lender, we can move quickly and have much more flexibility than traditional lenders to structure loans to suit the needs of our clients.
No legacy issues.  Unlike many of our competitors, we are not burdened by distressed legacy real estate assets.

Market Opportunity

We believe there is a significant market opportunity for a well-capitalized “hard money” lender to originate attractively priced loans to small-scale real estate developers with strong equity positions (i.e., good collateral), particularly in Connecticut where real estate values in many neighborhoods are stable and substandard properties are being improved, rehabilitated and renovated. We also believe these developers would prefer to borrow from us rather than other lending sources because of our flexibility in structuring loans to suit their needs, our lending criteria, which places greater emphasis on the value of the collateral rather than the property cash flow or credit of the borrower, and our ability to close quickly.

Our Objectives and Strategy

Our primary objective is to grow our loan portfolio while protecting and preserving capital in a manner that provides for attractive risk-adjusted returns to our shareholders over the long term principally through dividends. We intend to achieve this objective by continuing to focus on selectively originating, managing and servicing a portfolio of first mortgage real estate loans designed to generate attractive risk-adjusted returns across a variety of market conditions and economic cycles. We believe that our ability to react quickly to the

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needs of borrowers, our flexibility in terms of structuring loans to meet the needs of borrowers, our intimate knowledge of the Connecticut real estate market, our expertise in “hard money” lending and our focus on newly originated first mortgage loans, should enable us to achieve this objective. Nevertheless, we will remain flexible in order to take advantage of other real estate opportunities that may arise from time to time, whether they relate to the mortgage market or to direct or indirect investments in real estate.

Our strategy to achieve our objective includes the following:

capitalize on opportunities created by the long-term structural changes in the real estate lending market and the continuing lack of liquidity in the commercial and investment real estate markets;
take advantage of the prevailing economic environment as well as economic, political and social trends that may impact real estate lending currently and in the future as well as the outlook for real estate in general and particular asset classes;
remain flexible in order to capitalize on changing sets of investment opportunities that may be present in the various points of an economic cycle; and
operate so as to qualify as a REIT and for an exemption from registration under the Investment Company Act.

Leverage Policies/Financing Strategy

We use a combination of equity capital and the proceeds of debt financing to fund our operations. We do not have any formal policy limiting the amount of debt we may incur. At June 30, 2016, debt proceeds represented 21.8% of our total capital. However, in order to grow the business and satisfy the REIT requirement that we dividend at least 90% of net profits, we expect to increase our level of debt over time to approximately 50% of capital.

Under the terms of the Bankwell Credit Agreement (described below), we may not incur any additional indebtedness without Bankwell’s consent. Depending on various factors we may, in the future, decide to take on additional debt to expand our mortgage loan origination activities in order to increase the potential returns to our shareholders. Although we have no pre-set guidelines in terms of leverage ratio, the amount of leverage we will deploy will depend on our assessment of a variety of factors, which may include the liquidity of the real estate market in which most of our collateral is located, employment rates, general economic conditions, the cost of funds relative to the yield curve, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, our opinion of the creditworthiness of our borrowers, the value of the collateral underlying our portfolio, and our outlook for interest rates and property values. We intend to use leverage for the sole purpose of financing our portfolio and not for the purpose of speculating on changes in interest rates.

SCP commenced operations in December 2010 with no capital. By January 2011, it had raised $443,000 of initial capital, of which $70,000 was contributed by an affiliate of Jeffrey Villano. At June 30, 2016, members’ equity was $26.1 million. Through June 30, 2016, JJV, LLC (“JJV”), the managing member of SCP, whose principals are Jeffrey Villano and John Villano, Sachem Capital’s co-chief executive officers, has contributed an aggregate of $794,000 to SCP’s capital. In addition, the Villano brothers, individually and through other affiliates, contributed a total of an additional $1,926,000 of capital to SCP. JJV’s initial capital contribution of $35,000 was made in August 2011.

We currently have a $15.0 million line of credit with Bankwell Bank, a Connecticut banking corporation (“Bankwell”), that we can draw upon, from time to time, to fund loans (the “Bankwell Credit Line”). As of June 30, 2016, the outstanding balance on the Bankwell Credit Line was $7.275 million. Borrowings under the Bankwell Credit Line bear interest at a rate equal to the greater of (i) a variable rate equal to the sum of the prime rate of interest as in effect from time to time (3.50% as of October 1, 2016) plus 3.0% or (ii) 6.25% per annum. The Bankwell Credit Line expires and the outstanding indebtedness thereunder will become due and payable in full on March 15, 2018. Assuming we are not then in default under the terms of the Commercial Revolving Loan and Security Agreement (the “Bankwell Credit Agreement”) with Bankwell, we have the option to repay the outstanding balance, together with all accrued interest thereon in 36 equal monthly installments beginning April 15, 2019.

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Loan Origination and Underwriting Process

The primary focus of our business will be on originating, funding and servicing short-term (i.e., three years or less) loans secured by first mortgage liens on real estate. We will be responsible for each stage of the lending process, including: (1) sourcing deals from brokers, attorneys, bankers and other third party referral sources as well as from real estate owners, operators, developers and investors and through web-based advertising; (2) performing due diligence with respect to underwriting the loans; (3) undertaking risk management with respect to each loan and our aggregate portfolio; (4) executing the closing of the loan; and (5) managing the loan post-closing. After identifying a particular lending opportunity, we will perform financial, operational, credit and legal due diligence of the borrower and its principals and evaluate the strength of the collateral to assess the risks of the investment. We will analyze the opportunity and conduct follow-up due diligence as part of the underwriting process. The key factors in the underwriter process will be the loan-to-value ratio, the location of the property and transactional documentation. We will also evaluate the impact of each loan transaction on our existing loan portfolio. In particular, we will need to evaluate whether the new loan would cause our portfolio to be too heavily concentrated with, or cause too much risk exposure to, any one borrower, class of real estate, neighborhood, or other issues. If we determine that a proposed investment presents excessive concentration risk, we will forego the opportunity. As a REIT, we will also need to determine the impact of each loan transaction on our ability to maintain our REIT qualification. Unlike SCP, which relied on JJV, its manager, to perform all of these tasks, we will rely exclusively on our own employees. However, in either case the people who are actually doing the work are the same — John and Jeffrey Villano.

Summary Risk Factors

An investment in our common shares involves various risks. You should consider carefully the risks discussed under the heading “Risk Factors”, many of which are listed below, beginning on page 14 of this prospectus before purchasing our common shares. If any of these risks occur, our business, financial condition, liquidity, results of operations, prospects and ability to make distributions to our shareholders could be materially and adversely affected. In that case, the trading price of our common shares could decline, and you may lose some or all of your investment.

Our loan origination activities, revenues and profits are limited by available funds.
We operate in a highly competitive market and competition may limit our ability to originate loans with favorable terms and interest rates.
We may change our investment, leverage, financing and operating strategies, policies or procedures without shareholder consent.
Management has broad authority to make lending decisions.
Our future success depends on the continued efforts of our senior executives and our ability to attract and retain qualified personnel.
If we overestimate the value the collateral securing the loan, we may experience losses.
Terrorist attacks and other acts of violence or war may adversely impact the real estate industry and, hence, our business.
Security breaches and interruptions could expose us to liability.
Difficult conditions in the markets for mortgages and mortgage-related assets as well as the broader financial markets have resulted in a significant contraction in liquidity for mortgages and mortgage-related assets.
Short-term loans may involve a greater risk of loss than traditional mortgage loans.
We may be subject to “lender liability” claims.
An increase in the rate of prepayment rates may have an adverse impact on the value of our portfolio as well as our revenue and income.

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Our loan portfolio is illiquid.
At June 30, 2016, approximately 95.4% of the aggregate outstanding principal balance of our loan portfolio is secured by properties located in Connecticut. The geographic concentration of our loan portfolio may make our revenues and the values of the mortgages and real estate securing our portfolio vulnerable to adverse changes in local and regional economic conditions.
A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could impair our investments and harm our operations.
Our due diligence may not reveal all of a borrower’s liabilities or other risks.
Loans to investors have greater risks than loans to homeowners.
In the event of a default we may not be able to enforce our rights.
We do not require borrowers to fund an interest reserve.
Interest rate fluctuations could reduce our income.
Liability relating to environmental matters may adversely impact the value of properties securing our loans.
Defaults on our loans may cause declines in revenues and net income.
Our revenues and the value of our portfolio may be negatively affected by casualty events occurring on properties securing our loans.
Borrower concentration could lead to significant losses.
Our existing credit facility has numerous covenants, which could restrict our growth or lead to a default.
Our access to additional funding may be limited.
We have no formal corporate policy and none of our governance documents limit our ability to borrow money. Our use of leverage may adversely affect the return on our assets and may reduce cash available for distribution to our shareholders, as well as increase losses when economic conditions are unfavorable.
Our management has no experience managing a REIT and limited experience managing a portfolio of assets in the manner necessary to maintain an exemption under the Investment Company Act.
Complying with REIT requirements may hinder our ability to maximize profits, which would reduce the amount of cash available to be distributed to our shareholders.
If we fail to qualify or remain qualified as a REIT we would be subject us to U.S. federal income tax and applicable state and local taxes.
REIT distribution requirements could adversely affect our ability to execute our business plan and may require us to incur debt or sell assets to make such distributions.
Even if we qualify as a REIT, we may face tax liabilities that reduce our cash flow.
Our qualification as a REIT may depend on the accuracy of legal opinions or advice rendered or given and the inaccuracy of any such opinions, advice or statements may adversely affect our REIT qualification and result in significant corporate-level tax.
We may choose to make distributions in our common shares, in which case you may be required to pay income taxes in excess of the cash dividends you receive.
Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular corporations, which could adversely affect the value of our common shares.
Liquidation of our assets may jeopardize our REIT qualification.

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The ownership limitation in our certificate of incorporation, as amended, may not prevent five or fewer shareholders from acquiring control and may inhibit market activity in our common shares and restrict our business combination opportunities.
The tax on prohibited transactions may limit our ability to engage in various transactions that may be beneficial to us or our shareholders.
We may be subject to adverse legislative or regulatory tax changes that could adversely impact the market price of our common shares.
We may not generate sufficient cash to satisfy the REIT distribution requirements.
We could be materially and adversely affected if we cannot qualify for an exemption from the Investment Company Act.
After this offering we will still be effectively controlled by John L. Villano CPA and Jeffrey C. Villano, our founders, senior executive officers and two largest shareholders.
We expect to incur additional operating costs after this offering is consummated.
There has never been and may never be an active trading market for our shares.
The market for our common share could be extremely volatile.
We may subject to the “penny stock” rules”.
We are an emerging growth company and, as such, are exempt from complying with certain disclosure requirements and other standards applicable to public companies.

Our Organizational Structure

We were organized as a New York corporation in January 2016 under the name HML Capital Corp. Prior to the date of this prospectus, we will change our name to Sachem Capital Corp. and also enter into an Exchange Agreement with SCP, pursuant to which Sachem Capital will acquire all of SCP’s assets and assume all of SCP’s liabilities in exchange for 6,283,237 of its common shares and the assumption of SCP’s obligations under the Bankwell Credit Line. Immediately thereafter, SCP will distribute those shares to its members in full liquidation of their membership interests in SCP, pro rata in accordance with the members’ positive capital account balances. The closings of the transactions contemplated by the Exchange Agreement and the liquidation of SCP, will occur simultaneously with or immediately before this offering. For accounting purposes, the consummation of the exchange transaction will be treated as a recapitalization of SCP.

The pre-offering capitalization of Sachem Capital was based on discussions with the representative and took into account (i) SCP’s historical financial performance, including revenues, net profits, cash flow from operations and distributions to members, (ii) our prospects (taking into account, among other things, any anticipated changes as a result of the change in SCP’s status from a limited liability company to a regular C corporation and our operation as a REIT for income tax purposes) and (iii) the market value of comparable public companies. The parties agreed to value Sachem Capital at an amount equal to approximately 164% of SCP’s members’ equity at June 30, 2016, which was then divided by the proposed initial public offering price to arrive at the pre-offering capitalization of Sachem Capital. A portion of these shares were allocated to the founders of Sachem Capital and the balance to the members of SCP. The result is that each member of SCP is expected to receive Sachem Capital common shares having a value of approximately $1.206 for each $1.00 in their capital account.

JJV, whose members include various members of the Villano family, in the liquidation of SCP will receive         common shares, or approximately   % of the common shares to be issued in the exchange. In addition, the Villano brothers, individually and through their affiliates, will receive an additional         common shares, or   % of the common shares issued in the exchange. In addition, Jeffrey Villano and John Villano, were each issued 1,085,000 common shares of Sachem Capital upon its formation. Accordingly, after giving effect to the exchange but immediately prior to this offering, in total, Jeffrey and John Villano, collectively, will beneficially own         common shares (or   %) of Sachem Capital’s common shares.

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As a consequence of the exchange and the consummation of this offering, we expect various changes to our operations, some of which could adversely impact our financial performance. First, in terms of management, our business will no longer be managed by a separate, although related, entity. Rather, Jeffrey and John Villano, our co-founders, who are also the managing members of JJV and who effectively managed our entire operations, will become full-time employees of Sachem Capital ( i.e., co-chief executive officers) and will continue to manage our business in that capacity. We have entered into employment agreements with each of Jeffrey and John Villano, which set forth the terms of their employment, including their duties and obligations to us, restrictions on engaging in business activities unrelated to our business, specifying their compensation, including salaries and fringe benefits, and their rights upon termination of employment. The Villanos have agreed to terminate all of their other business activities and devote 100% of their time and efforts to our business. Second, from a governance standpoint, the Villanos will no longer have absolute control over our operations as the managers. Rather, we will be governed by a board of directors initially consisting of five members, of which a majority, in accordance with NASDAQ listing requirements and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), will be “independent” as such term is defined in Section 10A of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). In addition, we will establish committees made up mostly or entirely of independent directors to oversee certain aspects of our administration and operations and adopt various policies and procedures that encourage good governance and that are designed to prevent self-dealing and other forms of corporate misconduct. Finally, in terms of our operations, we expect an overall increase in our operating expenses due to increases in rent, professional fees, insurance and other expenses relating to our status as a publicly-held, reporting company as well as a REIT. However, the management fees that were payable to JJV will be eliminated and, in lieu thereof, we will pay salary and other forms of compensation to the Villanos.

REIT Qualification

We believe that upon consummation of this offering, we will qualify as a REIT and that it is in the best interests of our shareholders that we operate as a REIT. We intend to elect to be taxed as a REIT for the year in which this offering is consummated or as soon as practicable thereafter. As a REIT, we will be required to distribute at least 90% of our taxable income to our shareholders on an annual basis. We cannot assure you that we will qualify as a REIT or that, even if we do qualify initially, we will be able to maintain REIT status for any particular period of time. We also intend to operate our business in a manner that will permit us to maintain an exemption from registration under the Investment Company Act.

Our qualification as a REIT depends on our ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Internal Revenue Code of 1986, as amended (the “Code”), relating to, among other things, the sources of our gross income, the composition and values of our assets, our compliance with the distributions requirements applicable to REITs and the diversity of ownership of our outstanding common shares. Given that our founders and senior executive officers, John L. Villano and Jeffrey C. Villano, own a significant portion of our outstanding capital shares, we cannot assure you that we will be able to maintain that qualification.

So long as we qualify as a REIT, we, generally, will not be subject to U.S. federal income tax on our taxable income that we distribute currently to our shareholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which we lose our REIT qualification. Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income or property.

Distribution Policy

U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. We intend to pay regular quarterly dividends in an amount necessary to maintain our qualification as a REIT. However, any distributions we make to our shareholders, the amount of such dividend and whether such dividend is payable in cash, common shares or other property, or a combination thereof, will be at the discretion of our board of directors and will depend on, among other things, our actual results of operations

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and liquidity. These results and our ability to pay distributions will be affected by various factors, including the net interest and other income from our portfolio, our operating expenses and other expenditures. For more information, see “Distribution Policy.”

In addition, in order to comply with certain REIT qualification requirements, we will, before the end of any REIT taxable year in which we have accumulated earnings and profits attributable to a non-REIT year, declare a dividend to our shareholders to distribute such accumulated earnings and profits (a “Purging Distribution”). As of January 1, 2016 we had no accumulated earnings and profits.

Restrictions Relating to our Common Shares

Our certificate of incorporation, as amended, includes several provisions that are designed to ensure that we satisfy various Code-imposed requirements applicable to REITS including the following:

Shareholders will be prohibited from beneficially or constructively owning, applying certain attribution rules under the Code, more than     % by value or number of shares, whichever is more restrictive, of our outstanding capital shares. This restriction will not apply to John L. Villano and Jeffrey C. Villano, our founders and our senior executive officers, who, immediately after the consummation of this offering, will own     % and     %, respectively, of our outstanding common shares. In addition, our board of directors may, in its sole discretion, waive the ownership limit with respect to a particular shareholder if it is presented with evidence satisfactory to it that such ownership will not then or in the future jeopardize our qualification as a REIT.
Shareholders will not be allowed to transfer their shares of our capital stock if, as a result of such transfer, we would have fewer than 100 shareholders.
Any ownership or purported transfer of our capital shares in violation of the foregoing restrictions will result in the shares so owned or transferred being automatically transferred to a charitable trust for the benefit of a charitable beneficiary, and the purported owner or transferee acquiring no rights in those shares. If a transfer to a charitable trust would be ineffective for any reason to prevent a violation of the restriction, the transfer resulting in the violation will be void from the time of the purported transfer.

The foregoing limitations and restrictions could delay or prevent a transaction or a change in control of us that might involve a premium price for our capital shares or otherwise be in the best interests of our shareholders.

Investment Company Act Exemption

We intend to conduct our operations so that we are not required to register as an investment company under the Investment Company Act. Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis. We will rely on the exception set forth in Section 3(c)(5)(C) of the Investment Company Act that excludes from the definition of investment company “[a]ny person who is not engaged in the business of issuing redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates, and who is primarily engaged in one or more of the following businesses†o (C) purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” The SEC generally requires that, for the exception provided by Section 3(c)(5)(C) to be available, at least 55% of an entity’s assets be comprised of mortgages and other liens on and interests in real estate, also known as “qualifying interests,” and at least another 25% of the entity’s assets must be comprised of additional qualifying interests or real estate-type interests (with no more than 20% of the entity’s assets comprised of miscellaneous assets). At the present time, we qualify for the exemption under this section and our current intention is to continue to focus on originating short term loans secured by first mortgages on real property. However, if, in the future, we do acquire non-real estate assets without the acquisition of substantial real estate assets, we may qualify as an “investment company” and be required to register as such under the Investment Company Act, which could have a material adverse effect on us.

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Emerging Growth Company

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As an emerging growth company we can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We intend to avail ourselves of these exemptions. Once adopted, we are obligated to abide by our decision until we no longer qualify as an emerging growth company, which will occur upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of this offering; (ii) the first fiscal year after our annual gross revenue are $1.0 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.

Corporate Information

Our principal executive offices are located at 23 Laurel Street, Branford, Connecticut 06405 and our telephone number is (203) 433-4736. The URL for our website is www.sachemcapitalpartners.com. The information contained on or connected to our website is not incorporated by reference into, and you must not consider the information to be a part of, this prospectus.

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The Offering

Securities Offered:    
         common shares
Initial public offering price per share:    
    $    
Over-allotment Option:    
    We have granted the representative a 45-day option to purchase up to      common shares to cover over-allotments.
Shares Outstanding After This
Offering:
   
         common shares (or       common shares if the representative’s over-allotment option is exercised in full). There are no other shares of our capital stock outstanding.
Proposed NASDAQ Trading Symbol:    
    SACH
Use of Proceeds:    
    We estimate that the net proceeds from this offering will be approximately $     (or approximately $     if the representative’s over-allotment option is exercised in full), after deducting underwriting discounts and commissions and our estimated offering expenses payable by us. We intend to use the net proceeds from this offering (i) to increase the size of our loan portfolio; (ii) capital expenditures; and (iii) for working capital and other general corporate purposes. Actual allocation of the proceeds of the offering will ultimately be determined by management based on its assessment of the long-term prospects of the business and real estate markets and individual evaluation of investment opportunities. Pending the application of any portion of the net proceeds, we will invest such funds in interest bearing accounts and short-term, interest bearing securities that are consistent with our intention to qualify as a REIT and maintain our exemption from registration under the Investment Company Act. These investments are expected to provide lower returns than those we will seek to achieve from our loan portfolio.
Ownership Limitations and Restrictions:    
    Except as noted below, our certificate of incorporation, as amended, restricts any shareholder from owning, actually, beneficially or constructively, more than     % of the shares of our outstanding capital stock, by value or number of shares, whichever is more restrictive. John L. Villano CPA and Jeffrey C. Villano, our founders and co-chief executive officers, will be exempt from this restriction. Following this offering, we expect that John L. Villano and Jeffrey C. Villano will beneficially own     % and     %, respectively, of our outstanding common shares. In addition, our board of directors may, in its sole discretion, waive the ownership limit with respect to a particular shareholder if it is presented with evidence satisfactory to it that such ownership will not then or in the future jeopardize our qualification as a REIT. See “Description of Capital Shares — Restrictions on Ownership and Transfer” in this prospectus.
Risk Factors:    
    An investment in our common shares involves risks, and prospective investors should carefully consider the matters discussed under “Risk Factors” beginning on page 14 of this prospectus.

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Unless we indicate otherwise, all information in this prospectus:

assumes that we will have 8,533,237 common shares issued and outstanding immediately prior to this offering, including 6,283,237 common shares that we will issue pursuant to the Exchange Agreement with SCP;
excludes common shares issuable upon exercise of options and warrants outstanding as of the date of this prospectus;
excludes      common shares issuable upon exercise of the representative’s warrants; and
assumes no exercise of the over-allotment option by the representative.

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Summary Financial Information

The following tables set forth, for the periods and at the dates indicated, summary financial data of SCP. The data is derived primarily from SCP’s historical financial statements included elsewhere in this prospectus. The statements of operations data for the years ended December 31, 2015 and 2014 and the balance sheet data at December 31, 2015 and 2014 are derived from SCP’s audited financial statements and the statements of operations data for the six months ended June 30, 2016 and the six months ended June 30, 2015 and the balance sheet data at June 30, 2016 are derived from SCP’s unaudited financial statements. The unaudited financial statements include, in the opinion of management, all adjustments that management considers necessary for the fair presentation of the financial information set forth in those statements. Historical results are not indicative of the results to be expected in the future and results of interim periods are not necessarily indicative of results for the entire year.

In addition, the table sets forth certain pro forma and pro forma, as adjusted information for Sachem Capital. The pro forma information gives effect to the following events as if they occurred on the first day of the period presented: (i) the issuance of 8,533,237 common shares prior to the consummation of this offering, including 6,283,237 common shares that will be issued to SCP pursuant to the Exchange Agreement in exchange for all of the assets and liabilities of SCP; (ii) the elimination of the management fees payable to JJV in its capacity as the manager of SCP; (iii) the direct payment of salaries to John Villano and Jeffrey Villano; (iv) the direct payment of origination fees to us rather than to JJV; and (v) the normalization of various other operating expenses, such as rent. The pro forma, as adjusted data gives effect to the pro forma adjustments as well as the sale of         common shares at an initial public offering price per share of $      and the receipt of $        of net proceeds therefrom as set forth in this prospectus. For accounting purposes, the consummation of the exchange transaction will be treated as a recapitalization of SCP.

You should read the following selected financial data in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the accompanying notes thereto appearing elsewhere in this prospectus.

Statement of Operations Data (actual):

       
  Six Months Ended
June 30,
  Years Ended
December 31,
     2016   2015   2015   2014
     (unaudited)   (audited)
Interest income from loans   $ 1,735,200     $ 915,894     $ 2,477,876     $ 1,418,814  
Total revenue   $ 1,973,691     $ 1,032,152     $ 2,786,724     $ 1,559,407  
Total operating costs and expenses   $ 421,340     $ 165,374     $ 479,821     $ 89,595  
Net income   $ 1,552,351     $ 866,778     $ 2,306,903     $ 1,469,812  

Balance Sheet Data (actual):

   
  As at
June 30,
2016
  As at
December 31,
2015
     (unaudited)   (audited)
Cash   $ 1,472,602     $ 1,834,082  
Mortgages receivable   $ 30,395,476     $ 27,532,867  
Total assets   $ 34,092,045     $ 30,795,486  
Line of credit   $ 7,275,000     $ 6,000,000  
Total liabilities   $ 8,036,753     $ 6,565,969  
Members’ equity   $ 26,055,292     $ 24,229,517  

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Other Operational Data (actual):

       
  As at June 30,   As at December 31,
     2016   2015   2015   2014
     (unaudited)   (audited)
Residential mortgages   $ 21,258,849     $ 15,475,268     $ 18,820,509     $ 10,482,448  
Commercial mortgages     6,263,296       3,235,311       5,712,566       3,369,620  
Land mortgages     2,337,813       1,687,449       2,619,792       649,951  
Mixed use     535,518       367,000       380,000       347,000  
Total mortgages receivable   $ 30,395,476     $ 20,765,028     $ 27,532,867     $ 14,849,019  

Pro forma and pro forma, as adjusted Statement of Operations Data:

   
  Six Months
Ended
June 30,
2016
  Year
Ended
December 31,
2015
Interest income from loans   $ 1,735,200     $ 2,477,876  
Total revenue   $ 2,229,613     $ 2,891,002  
Total operating costs and expenses   $ 607,823     $ 947,414  
Net income   $ 1,621,790     $ 1,943,588  
Pro forma net income per common share – basic and diluted   $ 0.19     $ 0.23  
Pro forma weighted average number of common shares outstanding – basic and
diluted
    8,533,237       8,533,237  
Pro forma, as adjusted net income per common share – basic and diluted                  
Pro forma, as adjusted weighted average number of common shares outstanding – basic and diluted                  

Pro forma and pro forma as adjusted balance sheet information:

   
  June 30, 2016
     Pro Forma   Pro Forma, As
Adjusted
Cash   $ 1,746,845     $       
Mortgages receivable, net   $ 30,395,476     $  
Total assets   $ 34,366,288     $  
Line of credit   $ 7,275,000     $  
Total liabilities   $ 8,604,872     $  
Shareholders’ equity   $ 25,761,416     $  

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RISK FACTORS

Investing in our common shares involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common shares. If any of the following risks occur, our business, financial condition, liquidity and/or results of operations could be materially and adversely affected. In that case, the trading price of our common shares could decline, and you may lose some or all of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Cautionary Statement Regarding Forward-Looking Statements.”

Risks Related to Our Business

Our loan origination activities, revenues and profits are limited by available funds. If we do not increase our working capital, we will not be able to grow our business.

As a real estate finance company, our revenue and net income is limited to interest received or accrued on our loan portfolio. Our ability to originate real estate loans is limited by the funds at our disposal. At June 30, 2016, we had cash of approximately $1.47 million and $7.725 million of additional borrowing availability under the Bankwell Credit Line. We intend to use these amounts as well as a majority of the net proceeds from this offering and the proceeds from the repayment of loans outstanding, to originate new real estate loans. However, we cannot assure you that these funds will be sufficient to enable us to fully capitalize on the increase demand for real estate loans that we usually fund.

We operate in a highly competitive market and competition may limit our ability to originate loans with favorable interest rates.

We operate in a highly competitive market and we believe these conditions will persist for the foreseeable future as the financial services industry continues to consolidate, producing larger, better capitalized and more geographically diverse companies with broad product and service offerings. Our existing and potential future competitors includes other “hard money” lenders, mortgage REITs, specialty finance companies, savings and loan associations, banks, mortgage banks, insurance companies, mutual funds, pension funds, private equity funds, hedge funds, institutional investors, investment banking firms, non-bank financial institutions, governmental bodies, family offices and high net worth individuals. We may also compete with companies that partner with and/or receive government financing. Many of our competitors are substantially larger and have considerably greater financial, technical, marketing and other resources than we do. In addition, larger and more established competitors may enjoy significant competitive advantages, including enhanced operating efficiencies, more extensive referral networks, greater and more favorable access to investment capital and more desirable lending opportunities. Several of these competitors, including mortgage REITs, have recently raised or are expected to raise, significant amounts of capital, which enables them to make larger loans or a greater number of loans. Some competitors may also have a lower cost of funds and access to funding sources that may not be available to us, such as funding from various governmental agencies or under various governmental programs for which we are not eligible. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of possible loan transactions or to offer more favorable financing terms than we would. Finally, as a REIT and because we operate in a manner so as to be exempt from the requirements of the Investment Company Act, we may face further restrictions to which some of our competitors may not be subject. For example, we may find that the pool of potential qualified borrowers available to us is limited. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations.

We may change our investment, leverage, financing and operating strategies, policies or procedures without shareholder consent, which may adversely affect the market value of our common shares and our ability to make distributions to shareholders.

Currently, we have no policies in place that limit or restrict our ability to borrow money or raise capital by issuing debt securities. Similarly, we have only a limited number of policies regarding underwriting criteria, loan metrics and operations in general. We may amend or revise our existing policies or adopt new ones, whether the policies relate to growth strategy, operations, indebtedness, capitalization, financing

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alternatives and underwriting criteria and guidelines, or approve transactions that deviate from our existing policies at any time, without a vote of, or notice to, our shareholders. For example, we may decide that in order to compete effectively, we should relax our underwriting guidelines and make riskier loans, which could result in a higher default rate on our portfolio. We may also decide to expand our business focus to other targeted asset classes, such as participation interests in mortgage loans, mezzanine loans and subordinate interests in mortgage loans. We could also decide to adopt investment strategies that include securitizing our portfolio, hedging transactions and swaps. We may even decide to broaden our business to include acquisitions of real estate assets, which we may or may not operate. Finally, as the market evolves, we may determine that the residential and commercial real estate markets do not offer the potential for attractive risk-adjusted returns for an investment strategy that is consistent with our intention to elect and qualify to be taxed as a REIT and to operate in a manner to remain exempt from registration under the Investment Company Act. If we believe it would be advisable for us to be a more active seller of loans and securities, we may determine that we should conduct such business through a taxable REIT subsidiary or that we should cease to maintain our REIT qualification. These changes may increase our exposure to interest rate risk, default risk, financing risk and real estate market fluctuations, which could adversely affect our business, operations and financial conditions as well as the market price of our common shares.

Management has broad authority to make lending decisions. If management fails to generate attractive risk-adjusted loans on a consistent basis, our revenue and income could be materially and adversely affected and the market price of a share of our common shares is likely to decrease.

Our senior executives have unrestricted authority to originate, structure and fund loans subject to whatever policies our board of directors have adopted. Thus, management could authorize transactions that may be costly and/or risky, which could result in returns that are substantially below expectations or that result in losses, which would materially and adversely affect our business operations and results. Further, management’s decisions may not fully reflect the best interests of our shareholders. Our board of directors may periodically review our underwriting guidelines but will not, and will not be required to, review all of our proposed loans. In conducting periodic reviews, our board of directors will rely primarily on information provided to them by management.

Our future success depends on the continued efforts of our senior executive officers and our ability to attract and retain additional qualified management, marketing, technical, and sales executives and personnel.

Our future success depends to a significant extent on the continued efforts of our founders and co-chief executive officers, Jeffrey C. Villano and John L. Villano. They generate most, if not all, of our loan applications, supervise all aspects of the underwriting and due diligence process in connection with each loan, structure each loan and have absolute authority (subject only to the maximum amount of the loan) as to whether or not to approve the loan. We do not maintain key person life insurance for either of the Villanos. If either one of them is unable or unwilling to continue to serve as an executive officer on a full-time basis, our business and operations may be adversely affected.

As our business grows we will also need to recruit, train and retain additional managerial and administrative personnel as we begin to deploy the net proceeds and grow our business. This includes experienced real estate finance professionals, sales and marketing people, finance and accounting personnel, information technology professionals as well as administrative and clerical staff to support them. In addition, to manage our anticipated development and expansion, we must implement and upgrade our managerial, operational and financial systems and expand our facilities. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The loss of any of our key executives, or the failure to attract, integrate, motivate, and retain additional key personnel could have a material adverse effect on our business. We compete for such personnel against numerous companies, including larger, more established companies with significantly greater financial resources than we possess. This may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. In addition, our expanded operations could lead to significant incremental operating costs and may divert financial resources from other projects. We cannot assure you that we will be successful in attracting, training, managing or retaining the personnel we need to manage our growth, and the failure to do so could

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have a material adverse effect on our business, prospects, financial condition, and results of operations. If we cannot effectively manage our expected development and expansion, our expenses may increase more than expected, our ability to increase our revenue and profits could be jeopardized and we may not be able to implement our overall business strategy.

Terrorist attacks and other acts of violence or war may adversely impact the real estate industry generally and our business, financial condition and results of operations.

Over the last few years there have been a number of high profile and successful terror attacks around the world including in the United States. In addition, over the last several months there have been a number of violent attacks on law enforcement officers in various cities in the United States. Any future terrorist attacks or a prolonged period of civil unrest, the anticipation of any such attacks, and the consequences of any military or other response by the United States and its allies may have an adverse impact on the U.S. financial markets and the economy in general. We cannot predict the severity of the effect that any such future events would have on the U.S. financial markets, including the real estate capital markets, the economy or our business. Terrorist attacks and prolonged periods of civil unrest could also adversely affect the credit quality of some of our loan portfolio, which could have an adverse impact on our financial condition, results of operations and the market price of our common shares.

The enactment of the Terrorism Risk Insurance Act of 2002, or the TRIA, and the subsequent enactment of the Terrorism Risk Insurance Program Reauthorization Act of 2007, which extended TRIA through the end of 2020, requires insurers to make terrorism insurance available under their property and casualty insurance policies in order to receive federal compensation under TRIA for insured losses. However, this legislation does not regulate the pricing of such insurance. The absence of affordable insurance coverage may adversely affect the general real estate lending market, lending volume and the market’s overall liquidity and may reduce the number of suitable financing opportunities available to us and the pace at which we are able to make loans. If property owners are unable to obtain affordable insurance coverage, the value of their properties could decline and in the event of an uninsured loss, we could lose all or a portion of our investment.

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

In the ordinary course of our business, we may acquire and store sensitive data on our network, such as our proprietary business information and personally identifiable information of our prospective and current borrowers. The secure processing and maintenance of this information is critical to our business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption to our operations and the services we provide to customers or damage our reputation, which could materially and adversely affect us.

Risks Related to Our Portfolio

If we overestimate the value the collateral securing the loan, we may experience losses.

Loan decisions are typically made based on the value of the collateral securing the loan rather than the credit of the borrower or the cash flow from the property. We cannot assure you that our assessments will always be accurate or the circumstances relating to the collateral or, for that matter, the borrower, will not change during the loan term, which could lead to losses and write-offs. Losses and write-offs could materially and adversely affect our business, operations and financial condition and the market price of our common shares. Despite its conservative underwriting policy, specifically that the loan-to-value ratio may not exceed 65%, since its inception in December 2010, SCP has foreclosed on one property and acquired eight other properties from five different borrowers who were in default of their obligations to SCP. The foreclosed property was sold for a small loss and one of the other properties was sold at breakeven. Two properties were sold for less than their respective carrying values but the borrowers’ obligations are guaranteed by a third

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party. The other five properties are being held for sale. We cannot assure you that we will be able to avoid foreclosures in the future and that such foreclosures will not have a significant adverse impact on our financial performance and cash flows.

Difficult conditions in the markets for mortgages and mortgage-related assets as well as the broader financial markets have resulted in a significant contraction in liquidity for mortgages and mortgage-related assets, which may adversely affect the value of the assets that we intend to originate.

Our results of operations will be materially affected by conditions in the markets for mortgages and mortgage-related assets as well as the broader financial markets and the economy generally. In recent years, significant adverse changes in financial market conditions have resulted in a decline in real estate values, jeopardizing the performance and viability of many real estate loans. As a result, many traditional mortgage lenders suffered severe losses and several have even failed. This situation has negatively affected both the terms and availability of financing for small non-bank real estate finance companies. This could have an adverse impact on our financial condition, business operations and the price of our common shares.

Short-term loans may involve a greater risk of loss than traditional mortgage loans.

Borrowers usually use the proceeds of a long-term mortgage loan or sale to repay a short-term loan. We may therefore depend on a borrower’s ability to obtain permanent financing or sell the property to repay our loan, which could depend on market conditions and other factors. Short-term loans are also 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 a default, we bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage collateral and the principal amount and unpaid interest of the interim loan. To the extent we suffer such losses with respect to our interim loans, our enterprise value and the price of our common shares may be adversely affected.

We may be subject to “lender liability” claims. Our financial condition could be materially and adversely impacted if we were to be found liable and required to pay damages.

In recent years, a number of judicial decisions have upheld the right of borrowers to sue lenders on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders. We cannot assure you that such claims will not arise or that we will not be subject to significant liability if a claim of this type did arise.

An increase in the rate of prepayment of outstanding loans may have an adverse impact on the value of our portfolio as well as our revenue and income.

The value of our loan portfolio may be affected by prepayment rates and a significant increase in the rate of prepayments could have an adverse impact on our operating results. Recently, SCP has experienced an increase in the rate of prepayments, an indication that banks may be more willing to lend as general economic conditions seem to be improving. Prepayment rates cannot be predicted with certainty and no strategy can completely insulate us from prepayment or other such risks. We do not charge a penalty or premium if a loan is paid off before its maturity date. In periods of declining interest rates, prepayment rates on mortgage and other real estate-related loans generally increase. Repayment proceeds are either invested in new loans or used to pay down bank debt. If we cannot reinvest the proceeds of repayments quickly in new loans with interest rates comparable to the rates on the loans being repaid, our revenue and profits will decline. Although, we also receive origination fees for new loans, we cannot assure that these fees will offset any reduction in the interest rate on the new loan.

The lack of liquidity in our portfolio may adversely affect our business.

The illiquidity of our loan portfolio may make it difficult for us to sell such assets if the need or desire arises. As a result, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the outstanding loan balance.

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The geographic concentration of our loan portfolio may make our revenues and the values of the mortgages and real estate securing our portfolio vulnerable to adverse changes in local or regional economic conditions.

Under our current business model, we have one asset class — mortgage loans that we originate, underwrite, fund, service and manage — and we have no current plans to diversify. Moreover, most of SCP’s loans — approximately 95.4% of the aggregate outstanding principal balance at June 30, 2016 — were secured by properties located in Connecticut. This lack of geographical diversification makes our mortgage portfolio more sensitive to local and regional economic conditions. A significant decline in the local or regional economy where the properties are located could result in a greater risk of default compared with the default rate for loans secured by properties in other geographic locations. This could result in a reduction of our revenues and provision for loan loss allowances, which might not be as acute if our loan portfolio were more geographically diverse. Therefore, our loan portfolio is subject to greater risk than other real estate finance companies that have a more diversified asset base and broader geographic footprint. To the extent that our portfolio is concentrated in one region and/or one type of asset, downturns relating generally to such region or type of asset may result in defaults on a number of our assets within a short time period, which may reduce our net income and the market price of our common shares.

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

A prolonged economic slowdown, a recession or declining real estate values could impair the performance of our assets and harm our financial condition and results of operations, increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. Thus, we believe the risks associated with our business will be more severe during periods of economic slowdown or recession because these periods are likely to be accompanied by declining real estate values. Declining real estate values are likely to have one or more of the following adverse consequences:

reduce the level of new mortgage and other real estate-related loan originations since borrowers often use appreciation in the value of their existing properties to support the purchase or investment in additional properties;
make it more difficult for existing borrowers to remain current on their payment obligations; and
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 below the amount of our 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 originate new loans, which would materially and adversely affect our results of operations, financial condition, liquidity and the market price of our common shares.

Our due diligence may not reveal all of a borrower’s liabilities and other risks.

Before making a loan to a borrower, we assess the strength and skills of such entity’s management and other factors that we believe are material to the performance of the loan. In making the assessment and otherwise conducting customary due diligence, we rely on the resources available to us and, in some cases, services provided by third parties. This process is particularly important and subjective with respect to newly organized entities because there may be little or no information publicly available about the entities. There can be no assurance that our due diligence processes will uncover all relevant facts or that the borrower’s circumstances will not change after the loan is funded. In either case, this could adversely impact the performance of the loan and our operating results.

Our loans are typically made to entities to enable them to acquire, develop or renovate residential or commercial property, which may involve a greater risk of loss than loans to individual owners of residential real estate.

We make loans to corporations, partnerships, limited liability companies and individuals in connection with their acquisition, renovation, rehabilitation, development and/or improvement of residential or commercial real estate held for resale or investment. In many instances, the property is under-utilized, poorly

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managed, or located in a recovering neighborhood. Thus, these loans may have a higher degree of risk than loans to individual property owners with respect to their primary residence or to owners of commercial operating properties because of a variety of factors. For instance, our borrowers usually do not have the need to occupy the property, or an emotional attachment to the property as borrowers of owner-occupied residential properties may have, and therefore they don’t always have the same incentive to avoid foreclosure. Similarly, the properties we loan against may have little or no cash flow. If the neighborhood in which the asset is located fails to recover according to the borrower’s projections, or if the borrower fails to improve the quality of the property’s performance and/or the value of the property, the borrower may not receive a sufficient return on the property to satisfy the loan, and we bear the risk that we may not recover some or all of our principal. Finally, there are difficulties associated with collecting debts from entities that may be judgment proof. While we try to mitigate these risks in various ways, including by getting personal guarantees from the principals of the borrower, we cannot assure you that these lending and credit enhancement strategies will be successful.

Our inability to promptly foreclose on defaulted loans could increase our costs and/or losses.

While we have certain rights with respect to the real estate collateral underlying our loans, and rights against the borrower and guarantor(s), in the event of a default there are a variety of factors that may inhibit our ability to enforce our rights to collect the loan, whether through a non-payment action against the borrower, a foreclosure proceeding against the underlying property or a collection or enforcement proceeding against the guarantor. These factors include, without limitation, state foreclosure timelines and deferrals associated therewith (including with respect to litigation); unauthorized occupants living in the property; federal, state or local legislative action or initiatives designed to provide residential property owners with assistance in avoiding foreclosures and that serve to delay the foreclosure process; government programs that require specific procedures to be followed to explore the refinancing of a residential mortgage loan prior to the commencement of a foreclosure proceeding; and continued declines in real estate values and sustained high levels of unemployment that increase the number of foreclosures and place additional pressure on the already overburdened judicial and administrative systems. In short, 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 addition, in the event of the bankruptcy of the borrower or guarantor, we may not have full recourse to the assets of the borrower, or the assets of the borrower or the guarantor may not be sufficient to satisfy the debt.

None of our loans are funded with interest reserves and our borrowers may be unable to pay the interest accruing on the loans when due, which could have a material adverse impact on our financial condition.

Our loans are not funded with an interest reserve. Thus, we rely on the borrowers to make interest payments as and when due from other sources of cash. Given the fact that many of the properties securing our loans are not income producing or even cash producing and most of the borrowers are entities with no assets other than the single property that is the subject of the loan, some of our borrowers have considerable difficulty servicing our loans and the risk of a non-payment of default is considerable. We depend on the borrower’s ability to refinance the loan at maturity or sell the property for repayment. If the borrower is unable to repay the loan, together with all the accrued interest, at maturity, our operating results and cash flows would be materially and adversely affected.

Interest rate fluctuations could reduce our ability to generate income and may cause losses.

Our primary interest rate exposure relates to the yield on our loan portfolio and the financing cost of our debt. Our operating results depend, in part, on differences between the interest income generated by our loan portfolio net of credit losses and our financing costs. This exposure is exacerbated by the fact that the interest rates on our loans are fixed throughout the term of the loan, which is generally three years, while the interest rate on our debt is variable and changes every time there is a change in the prime rate. Changes in interest rates will affect our revenue and net income in one or more of the following ways:

our operating expenses may increase;
our ability to originate loans may be adversely impacted;

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to the extent we use our credit line or other forms of debt financing to originate loans, our borrowing costs would rise, reducing the “spread” between our cost of funds and the yield on our outstanding mortgage loans, which tend to be fixed rate obligations;
a rise in interest rates may discourage potential borrowers from refinancing existing loans or defer plans to renovate or improve their properties;
increase borrower default rates;
negatively impact property values making our existing loans riskier and new loans that we originate smaller;
rising interest rates could also result in reduced turnover of properties which may reduce the demand for new mortgage loans.

In December 2015, the United States Federal Reserve Board raised interest rates for the first time since the onset of the recession in 2008. The increase was 25 basis points or 0.25%. It also announced that it would continue to gradually increase interest rates until such time as it believes interest rates reach a level that it believes fosters maximum employment and price stability. As interest rates rise, we believe our investors will expect a concomitant increase in yield on their investment. If rates increase gradually, we believe we will be able to pass along these increases to our borrowers and thus satisfy the expectations of our investors. However, if rates increase rapidly or the periodic increases are significant, we may not be able to increase our lending rate quickly enough to satisfy the expectations of the investment community. This could lead to a decrease in the market price of our common shares.

Liability relating to environmental matters may adversely impact the value of properties securing our loans.

Under various U.S. federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. The presence of hazardous substances may adversely affect an owner’s ability to sell real estate or borrow using real estate as collateral. To the extent that an owner of a property underlying one of our debt instruments becomes liable for removal costs, the ability of the owner to make payments to us may be reduced, which in turn may adversely affect the value of the relevant mortgage asset held by us and our ability to make distributions to our shareholders. If we acquire any properties by foreclosure or otherwise, the presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs, thus harming our financial condition. The discovery of material environmental liabilities attached to such properties could have a material adverse effect on our results of operations and financial condition and the market price of our common shares.

Defaults on our loans may cause declines in revenues and net income. The impact of defaults may be exacerbated by the fact that we do not carry loan loss reserves.

Defaults by borrowers could result in one or more of the following adverse consequences:

a decrease in interest income, profitability and cash flow;
the establishment of or an increase in loan loss reserves;
write-offs and losses;
default under our credit facility; and
an increase in legal and enforcement costs, as we seek to protect our rights and recover the amounts owed.

As a result, we will have less cash available for paying our other operating expenses and for making distributions to our shareholders. This would have a material adverse effect on the market price of our common shares.

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Based on experience and periodic evaluation of its loan portfolio, at each of June 30, 2016 and December 31, 2015, SCP did not have a loan loss reserve. A loss with respect to all or a portion of a loan in our portfolio in excess of our reserve will have an immediate and adverse impact on our net income. The valuation process of our loan portfolio requires us to make certain estimates and judgments, which are particularly difficult to determine during a period in which the availability of real estate credit is limited and real estate transactions have decreased. These estimates and judgments are based on a number of factors, including projected cash flows from the collateral securing our mortgage loans, if any, loan structure, including the availability of reserves and recourse guarantees, likelihood of repayment in full at the maturity of a loan, the relative strength or weakness of the refinancing market and expected market discount rates for varying property types. If our estimates and judgments are not correct, our results of operations and financial condition could be severely impacted.

Our revenues and the value of our portfolio may be negatively affected by casualty events occurring on properties securing our loans.

We require our borrowers to obtain, for our benefit, all risk property insurance covering the property and any improvements to the property collateralizing our loan in an amount intended to be sufficient to provide for the cost of replacement in the event of casualty. However, the amount of insurance coverage maintained for any property may not be sufficient to pay the full replacement cost following a casualty event. Furthermore, there are certain types of losses, such as those arising from earthquakes, floods, hurricanes and terrorist attacks, that may be uninsurable or that may not be economically feasible to insure. Changes in zoning, building codes and ordinances, environmental considerations and other factors may make it impossible for our borrowers to use insurance proceeds to replace damaged or destroyed improvements at a property. If any of these or similar events occur, the amount of coverage may not be sufficient to replace a damaged or destroyed property and/or to repay in full the amount due on loans collateralized by such property. As a result, our returns and the value of our investment may be reduced.

Borrower concentration could lead to significant losses, which could have a material adverse impact on our operating results and financial condition.

As of June 30, 2016, one borrower accounted for 5% of SCP’s loan portfolio. At December 31, 2015, two borrowers each accounted for more than 5% of SCP’s loan portfolio, one of whom was JJV. No other borrower or group of affiliated borrowers accounted for more than 5% of SCP’s loan portfolio at either of those dates. Concentration of loans to a limited number of borrowers or a group of affiliated borrowers poses a significant risk, as a default by a borrower on one loan or by one borrower in a group of affiliates is likely to result in a default by the borrower on other loans or by other borrowers in the group. We will attempt to mitigate this risk by adopting a policy that the total amount of loans outstanding to any single borrower or group of affiliated borrowers may not exceed more than 10% of our loan portfolio after taking into account the loan under consideration. In addition, we will also adopt a policy precluding loans to related parties unless such loans are on terms no less favorable to us than similar loans to unrelated third parties taking into account all of our underwriting criteria and that such loan has been approved by a majority of our independent directors.

Risks Related to Financing Transactions

Our existing credit line has numerous covenants with which we must comply. If we are unable to comply with these covenants, the outstanding amount of the loan could become due and payable and we may have to sell off a portion of our loan portfolio to pay off the debt.

The Bankwell Credit Line contains various covenants and restrictions that are typical for these kinds of credit facilities, including limiting the amount that we can borrow relative to the value of the underlying collateral, maintaining various financial ratios and limitations on the terms of loans we make to our customers. Under the terms of the Bankwell Credit Line, the amount outstanding at any one time may not exceed the lesser of (i) $15 million and (ii) our Eligible Note Receivables (as defined in the Line of Credit Agreement). In addition, each “Advance” is further limited to the lesser of (i) 50% – 75%, depending on the loan-to-value ratio, of the principal amount of the particular Eligible Note Receivable being funded and (ii) $250,000. As of June 30, 2016, we estimate that loans having an aggregate principal amount of approximately $     million,

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representing approximately   % of SCP’s mortgage receivables as of that date, satisfied all of the eligibility criteria under the Bankwell Agreement. As of June 30, 2016, the total amount outstanding under the Bankwell Credit Line was $7.275 million leaving us with sufficient borrowing capacity to draw down the full amount of the credit line if we so choose. However, given the nature of our business, we cannot assure you that we will always be able to borrow the maximum allowed under the terms of the Bankwell Credit Line.

These limitations include the following:

prohibiting any liens on any of the collateral securing the Bankwell Credit Line, which is essentially all of our assets;
prohibiting us from merging, consolidating or disposing of any asset;
prohibiting us from incurring any other indebtedness to a third party;
prohibiting us from forming or transacting business with any subsidiary or affiliate other than to make loans to our borrowers;
prohibiting us from allowing any litigation in excess of $50,000 against any of our assets unless we are fully insured against such loss;
prohibiting us from issuing or redeeming any equity interest, distributing any equity interest, pay any indebtedness owed to an equity holder, suffer any change in ownership that would result in JJV, Jeffrey Villano and John Villano owning collectively less than 50% of the membership interests in SCP;
prohibiting us from declaring or paying any dividends except in certain limited circumstances;
prohibiting us from purchasing any securities issued by or otherwise invest in any public or private entity;
suffer any change in our executive management; and
change the form or nature of SCP’s or JJV’s ownership structure

Loan covenants include the following:

punctually pay amounts due;
pay on demand any charges customarily incurred or levied by Bankwell;
pay any and all taxes, assessments or other charges assessed against us or any of our assets;
pay all insurance premiums;
maintain our principal deposit and disbursement accounts with Bankwell;
perfect Bankwell’s lien on the assets;
comply with all applicable laws, ordinances, rules and regulations of any governmental authority; or
change the nature of our business.

Finally, we must comply with the following financial covenants:

continuously maintain a fixed charge ratio of at least 1.35:1.00 at the end of each fiscal year;
continuously maintain a tangible net worth of not less than $15 million at the end of each fiscal quarter;
John Villano’s minimal capital investment in SCP may not be less than $195,000;
Jeffrey Villano’s minimal capital investment in SCP, directly and indirectly through affiliates, may not be less than $1,750,000; and
JJV’s minimal capital investment in SCP may not be less than $575,000.

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If we fail to meet or satisfy any of these covenants, we would be in default under our agreement with Bankwell, and Bankwell could elect to declare outstanding amounts due and payable, terminate its commitments to us, require us to post additional collateral and/or enforce their interests against existing collateral. Acceleration of our debt to Bankwell could also make it difficult for us to satisfy the qualification requirements necessary to maintain our status as a REIT, significantly reduce our liquidity or require us to sell our assets to repay amounts due and outstanding. This would significantly harm our business, financial condition, results of operations and ability to make distributions and could result in the foreclosure of our assets which secure our obligations, which could cause the value of our capital shares to decline. A default could also significantly limit our financing alternatives such that we would be unable to pursue our leverage strategy, which could adversely affect our returns.

If we default and Bankwell accelerates the loan we would have to repay the debt immediately from our working capital (i.e., proceeds from loan repayments), proceeds from the sale of all or a portion of our loan portfolio or debt or equity securities, or refinance with another lender. We cannot assure you that we would be able to replace the Bankwell Credit Line on similar terms or on any terms. If we have to sell a portion of our loan portfolio, the amount we realize may be less than the face amount of the loans sold, resulting in a loss. If we sell a portion of our portfolio or use proceeds from loan repayments to pay the Bankwell debt, our opportunities to grow our business will be negatively impacted.

Our access to financing may be limited and, thus, our ability to maximize our returns may be adversely affected.

Our ability to grow and compete may also depend on our ability to borrow money to leverage our loan portfolio and to build and manage the cost of expanding our infrastructure to manage and service a larger loan portfolio. The Bankwell Credit Agreement prohibits us from incurring any additional indebtedness without Bankwell’s consent. Even if Bankwell does consent, we cannot assure you that a subsequent financing source would agree to any conditions that Bankwell may impose and insist upon.

In general, the amount, type and cost of any financing that we obtain from another financial institution will have a direct impact on our revenue and expenses and, therefore, can positively or negatively affect our financial results. The percentage of leverage we employ will vary depending on our assessment of a variety of factors, which may include the anticipated liquidity and price volatility of our existing portfolio, the potential for losses and extension risk in our portfolio, the gap between the size and duration of our assets and liabilities, the availability and cost of financing, our opinion as to the creditworthiness of our financing counterparties, the health of the U.S. economy and commercial mortgage markets, our outlook for the level, slope, and volatility of interest rates, the credit quality of our borrowers and the collateral underlying our assets.

Our access to financing will depend upon a number of factors, over which we have little or no control, including:

general market conditions;
the market’s view of the quality of our assets;
the market’s perception of our growth potential;
our eligibility to participate in and access capital from programs established by the governmental agencies;
our current and potential future earnings and cash distributions; and
the market price of our common shares.

Continuing weakness in the capital and credit markets could adversely affect our ability to secure financing on favorable terms or at all. In addition, if regulatory capital requirements imposed on lenders change, they may be required to limit, or increase the cost of, financing they provide to us. In general, this could potentially increase our financing costs and reduce our liquidity or require us to sell loans at an inopportune time or price.

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We cannot assure you that we will always have access to structured financing arrangements when needed. If structured financing arrangements are not available to us we may have to rely on equity issuances, which may be dilutive to our shareholders, or on less efficient forms of debt financing that require a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities, cash distributions to our shareholders and other purposes. We cannot assure you that we will have access to such equity or debt capital on favorable terms (including, without limitation, cost and term) at the desired times, or at all, which may cause us to curtail our lending activities and/or dispose of loans in our portfolio, which could negatively affect our results of operations.

We have no formal corporate policy and none of our governance documents limit our ability to borrow money. Our use of leverage may adversely affect the return on our assets and may reduce cash available for distribution to our shareholders, as well as increase losses when economic conditions are unfavorable.

Although our agreement with Bankwell restricts our ability to incur additional indebtedness, we do not have a formal corporate policy limiting the amount of debt we may incur and none of our governing documents contain any limitation on the amount of leverage we may use. Thus, we may significantly increase the amount of our indebtness and the leverage we utilize at any time without approval of our shareholders. In addition, we may leverage individual assets at substantially higher levels. Incurring substantial debt could subject us to many risks that, if realized, would materially and adversely affect us, including the risk that:

our cash flow from operations may be insufficient to make required payments of principal and interest on our outstanding indebtedness or we may fail to comply with all of the other covenants contained in the debt, which is likely to result in (i) acceleration of such debt (and any other debt containing a cross-default or cross-acceleration provision) that we may be unable to repay from internal funds or to refinance on favorable terms, or at all, (ii) our inability to borrow unused amounts under our financing arrangements, even if we are current in payments on borrowings under those arrangements and/or (iii) the loss of some or all of our assets pledged or liened to secure our indebtedness to foreclosure or sale;
our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that yields will increase with higher financing costs;
we may be required to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations, future business opportunities, shareholder distributions or other purposes; and
we may not able to refinance debt that matures prior to the asset it was used to finance on favorable terms, or at all.

Risks Related to REIT Status and Investment Company Act Exemption

We have no experience operating as a REIT or managing a portfolio of assets in the manner necessary to maintain an exemption under the Investment Company Act, which may hinder our ability to achieve our business objectives or result in the loss of our qualification as a REIT.

We have no experience converting to a REIT and none of our executive officers have any experience managing a loan portfolio under a set of complex laws, rules and regulations or operating a business in compliance with a set of technical limitations and restrictions as those applicable to REITS. Similarly, we have no experience operating under or avoiding being subject to the Investment Company Act. As a result, we are subject to all of the customary business risks and uncertainties associated with any new business, including the risk that we will not achieve our objectives and, as a result, the value of our common shares could decline substantially. The rules and regulations applicable to REITs under the Code are highly technical and complex and the failure to comply with these rules and regulations in a timely manner could prevent us from qualifying as a REIT or could force us to pay unexpected taxes and penalties. In addition, we will be required to develop and implement or invest in substantial control systems and procedures in order for us to maintain our qualification as a public REIT. As a result, we cannot assure you that we will be able to successfully operate as a REIT or comply with rules and regulations applicable to REITs, which would substantially reduce our earnings and may reduce the market value of our common shares. In addition, in

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order to maintain our exemption from registration under the Investment Company Act, the assets in our portfolio will be subject to certain restrictions, which will limit our operations meaningfully.

Complying with REIT requirements may hinder our ability to maximize profits, which would reduce the amount of cash available to be distributed to our shareholders. This could have an adverse impact on the price of our shares.

In order to maintain our qualification as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning among other things, the composition of our assets, our sources of income, the amounts we distribute to our shareholders and the ownership of our capital shares. Specifically, we must ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of such issuer. In addition, no more than 5% of the value of our assets can consist of the securities of any one issuer, other than a qualified REIT security. If we fail to comply with these requirements, we must dispose of the portion of our assets in excess of such amounts within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering adverse tax consequences. In such event, we may be forced to sell non-qualifying assets at less than their fair market value. As a result of these requirements, our operating costs may increase to ensure compliance. For example, as a REIT, we may depend to a much greater extent than we currently do on communications and information systems. We may have to upgrade our existing systems in order to monitor a larger portfolio of loans, to track our revenue to make sure we do not inadvertently fail the revenue requirements for a REIT and to make sure that we distribute the requisite amount of our income to shareholders. In addition, we expect our operating expenses to increase as a result of our conversion to a REIT, becoming a publicly-held reporting company and anticipated growth and we cannot assure you that we will be able to sustain our profitability at our historical levels. In addition, we may also be required to make distributions to shareholders at times when we do not have funds readily available for distribution or are otherwise not optional for us. Accordingly, compliance with REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

Our failure to qualify or to remain qualified as a REIT would subject us to U.S. federal income tax and applicable state and local taxes, which would reduce the amount of cash available for distribution to our shareholders.

We intend to operate in a manner that will enable us to qualify as a REIT for U.S. federal income tax purposes commencing with our taxable year in which this offering is consummated. While we believe that we will qualify as a REIT after this offering is consummated, we have not requested and do not intend to request a ruling from the Internal Revenue Service (the “IRS”), that we do or will qualify as a REIT. The U.S. federal income tax laws and the Treasury Regulations promulgated thereunder governing REITs are complex. In addition, judicial and administrative interpretations of the U.S. federal income tax laws governing REIT qualification are limited. To qualify as a REIT, we must meet, on an ongoing basis, various tests regarding the nature of our assets and our income, the ownership of our outstanding shares, and the amount of our distributions. Our ability to satisfy the asset tests depends on our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset requirements also depends on our ability to successfully manage the composition of our income and assets on an ongoing basis. Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a REIT. Thus, while we intend to operate so that we will continue to qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given that we will so qualify for any particular year. These considerations also might restrict the types of assets that we can acquire in the future.

If we fail to qualify as a REIT in any taxable year, and we do not qualify for certain statutory relief provisions, we would be required to pay U.S. federal income tax on our taxable income, and distributions to our shareholders would not be deductible by us in determining our taxable income. In such a case, we might need to borrow money or sell assets in order to pay our taxes. Our payment of income tax would decrease the amount of our income available for distribution to our shareholders. Furthermore, if we fail to maintain our

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qualification as a REIT, we no longer would be required to distribute substantially all of our taxable income to our shareholders. In addition, unless we were eligible for certain statutory relief provisions, we could not re-elect to qualify as a REIT until the fifth calendar year following the year in which we failed to qualify.

REIT distribution requirements could adversely affect our ability to execute our business plan and may require us to incur debt or sell assets to make such distributions.

In order to qualify as a REIT, we must distribute to our shareholders, each calendar year, at least 90% of our REIT taxable income (including certain items of non-cash income), determined without regard to the deduction for dividends paid and excluding net capital gain. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our taxable income, we are subject to U.S. federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws. We intend to distribute our net income to our shareholders in a manner that will satisfy the REIT 90% distribution requirement and to avoid the 4% nondeductible excise tax.

Our taxable income may substantially exceed our net income as determined by U.S. GAAP and differences in timing between the recognition of taxable income and the actual receipt of cash may occur. For example, we may be required to accrue interest and discount income on mortgage loans before we receive any payments of interest or principal on such assets. We may be required under the terms of the indebtedness that we incur, to use cash received from interest payments to make principal payment on that indebtedness, with the effect that we will recognize income but will not have a corresponding amount of cash available for distribution to our shareholders.

As a result of the foregoing, we may generate less cash flow than taxable income in a particular year and find it difficult or impossible to meet the REIT distribution requirements in certain circumstances. In such circumstances, we may be required to: (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt, (iv) make a taxable distribution of our shares as part of a distribution in which shareholders may elect to receive shares or (subject to a limit measured as a percentage of the total distribution) cash or (v) use cash reserves, in order to comply with the REIT distribution requirements and to avoid corporate income tax and the 4% nondeductible excise tax. Thus, compliance with the REIT distribution requirements may hinder our ability to grow, which could adversely affect the value of our common shares.

Even if we qualify as a REIT, we may face tax liabilities that reduce our cash flow.

As a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, franchise, property and transfer taxes, including mortgage recording taxes. In addition, in order to meet the REIT qualification requirements, or to avoid the imposition of a 100% tax that applies to certain gains derived by a REIT from sales of inventory or property held primarily for sale to customers in the ordinary course of business, we may create “taxable REIT subsidiaries” to hold some of our assets. Any taxes paid by such subsidiary corporations would decrease the cash available for distribution to our shareholders.

Our qualification as a REIT may depend on the accuracy of legal opinions or advice rendered or given and the inaccuracy of any such opinions, advice or statements may adversely affect our REIT qualification and result in significant corporate-level tax.

In determining whether we qualify as a REIT, we may rely on opinions or advice of counsel as to whether certain types of assets that we hold or acquire are deemed REIT real estate assets for purposes of the REIT asset tests and produce income which qualifies under the 75% REIT gross income test. The inaccuracy of any such opinions, advice or statements may adversely affect our REIT qualification and result in significant corporate-level tax.

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We may choose to make distributions in our common shares, in which case you may be required to pay income taxes in excess of the cash dividends you receive.

We may distribute taxable dividends that are payable in cash and/or common shares at the election of each shareholder. Shareholders receiving such dividends will be required to include the full amount of the dividend as ordinary income. As a result, shareholders may be required to pay income taxes with respect to such dividends in excess of the cash portion of the dividend. Accordingly, shareholders receiving a distribution of shares may be required to sell those shares or may be required to sell other assets they own at a time that may be disadvantageous in order to satisfy any tax imposed on the distribution they receive from us. If a shareholder sells the common shares that he or she receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of a share of our common shares at the time of the sale. Furthermore, with respect to certain non-U.S. shareholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in shares, by withholding or disposing of some of the common shares in the distribution and using the proceeds of such disposition to satisfy the withholding tax imposed. In addition, if a significant number of our shareholders determine to sell their common shares in order to pay taxes owed on dividends, such sale may adversely impact the market price of our common shares.

Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular corporations, which could adversely affect the value of our common shares.

Dividends payable by REITs are not eligible for the reduced rates generally applicable to dividends but are taxed at the same rate as ordinary income. Although the reduced U.S. federal income tax rate applicable to dividend income from regular corporate dividends does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends. This could have an adverse impact on the market price of our common shares.

Liquidation of our assets may jeopardize our REIT qualification.

To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our assets to repay obligations to our lenders, we may be unable to comply with these requirements, thereby jeopardizing our qualification as a REIT. In addition, we may be subject to a 100% tax on any gain realized from the sale of assets that are treated as inventory or property held primarily for sale to customers in the ordinary course of business.

The ownership restrictions set forth in our certificate of incorporation, as amended, may not prevent five or fewer shareholders from owning 50% or more of our outstanding shares of capital shares causing us to lose our status as a REIT. This loss of status may inhibit market activity in our common shares and restrict our business combination opportunities.

In order for us to qualify as a REIT, not more than 50% in value of our outstanding capital shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each taxable year, and at least 100 persons must beneficially own shares of our capital stock during at least 335 days of a taxable year of 12 months, or during a proportionate portion of a shorter taxable year. To help insure that we meet the tests, our certificate of incorporation, as amended, restricts the acquisition and ownership of our capital shares. The ownership limitation is fixed at     % of our outstanding capital shares, by value or number of shares, whichever is more restrictive. Our founders and co-chief executive officers, Jeffrey C. Villano and John L. Villano, are exempt from this restriction. Immediately after this offering is consummated, Jeffrey C. Villano and John L. Villano will own     % and     %, respectively, of our outstanding common shares. In addition, our board of directors may grant such an exemption to such limitations in its sole discretion, subject to such conditions, representations and undertakings as it may determine. These ownership limits could delay or prevent a transaction or a change in control of our company that might involve a premium price for our common shares or otherwise be in the best interest of our shareholders.

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The tax on prohibited transactions may limit our ability to engage in transactions that may be beneficial to us and/or our shareholders.

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including mortgage loans, held as inventory or primarily for sale to customers in the ordinary course of business. We might be subject to this tax if we were to sell or securitize loans in a manner that was treated as a sale of the loans as inventory for U.S. federal income tax purposes. Although at the present time we have no plans to sell any of our loans, in the future we may need to sell all or a portion of our portfolio in order to raise funds, reduce our exposure to certain risks or for other reasons. In such event, in order to avoid the prohibited transactions tax, we may be required to structure the sales in ways that may be less beneficial than we would if we were not a REIT.

We may be subject to adverse legislative or regulatory tax changes that could adversely impact the market price of our common shares.

At any time, the U.S. federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be changed, possibly with retroactive effect. We cannot predict if or when any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective or whether any such law, regulation or interpretation may take effect retroactively. We and our shareholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.

We may be unable to generate sufficient cash flows from our operations to make distributions to our shareholders at any time in the future.

As a REIT, we are required to distribute to our shareholders at least 90% of our taxable income each year. We intend to satisfy this requirement through quarterly distributions of all or substantially all of our REIT taxable income in such year, subject to certain adjustments. Our ability to make distributions may be adversely affected by a number of factors, including the risk factors described in this prospectus. If we make distributions from the proceeds of this offering, which would generally be considered to be a return of capital for tax purposes, our future earnings and cash available for distribution may be reduced from what they otherwise would have been. All distributions will be made at the discretion of our board of directors and will depend on various factors, including our earnings, our financial condition, our liquidity, our debt covenants, maintenance of our REIT qualification, applicable provisions of the New York Business Corporation Law (the “BCL”), and other factors as our board of directors may deem relevant from time to time. We believe that a change in any one of the following factors could adversely affect our results of operations and impair our ability to pay distributions to our shareholders:

how we deploy the net proceeds of this offering;
our ability to make loans at favorable interest rates;
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 prove accurate, as actual results may vary from estimates.

A change in any of these factors could affect our ability to make distributions. As a result, we cannot assure you that we will be able to make distributions to our shareholders at any time in the future or that the level of any distributions we do make to our shareholders will achieve a market yield or increase or even be maintained over time, any of which could materially and adversely affect us.

In addition, distributions that we make to our shareholders will generally be taxable to our shareholders as ordinary income. However, a portion of our distributions may be designated by us as long-term capital gains to the extent that they are attributable to capital gain income recognized by us or may constitute a return of capital to the extent that they exceed our earnings and profits as determined for tax purposes. A return of capital is not taxable, but has the effect of reducing the basis of a shareholder’s investment in our common shares.

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We could be materially and adversely affected if we are deemed to be an investment company under the Investment Company Act.

We intend to conduct our business in a manner that will qualify for the exception from the Investment Company Act set forth in Section 3(c)(5)(C) of the Investment Company Act. The SEC generally requires that, for the exception provided by Section 3(c)(5)(C) to be available, at least 55% of an entity’s assets be comprised of mortgages and other liens on and interests in real estate, also known as “qualifying interests,” and at least another 25% of the entity’s assets must be comprised of additional qualifying interests or real estate-type interests (with no more than 20% of the entity’s assets comprised of miscellaneous assets). Any significant acquisition by us of non-real estate assets without the acquisition of substantial real estate assets could cause us to meet the definitions of an “investment company.” If we are deemed to be an investment company, we could be required to dispose of non-real estate assets or a portion thereof, potentially at a loss, in order to qualify for the 3(c)(5)(C) exception. We may also be required to register as an investment company if we are unable to dispose of the disqualifying assets, which could have a material adverse effect on us.

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;
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 net asset value, the amount of funds available for investment and our ability to pay distributions to our shareholders could be materially adversely affected.

Risks Related to Our Common Shares and This Offering

After this offering, management will continue to significantly influence and have effective control over all matters submitted to shareholders for approval and may act in a manner that conflicts with the interests of other shareholders.

Immediately after this offering is consummated, John L. Villano and Jeffrey C. Villano, our founders and co-chief executive officers, will beneficially own     % and     % of our common shares. Thus, Messrs. Villano will have effective control over all corporate actions, including the election of directors and all other matters requiring shareholder approval, whether pursuant to the BCL or our certificate of incorporation, as amended. This concentration of ownership, particularly in light of the ownership limitations imposed on other shareholders, could have an adverse impact on the market price of our common shares.

Our financial statements may be materially affected if our estimates prove to be inaccurate.

Financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) require the use of estimates, judgments and assumptions that affect the reported amounts. Different estimates, judgments and assumptions reasonably could be used that would have a material effect on the financial statements, and changes in these estimates, judgments and assumptions are likely to occur from period to period in the future. Significant areas of accounting requiring the application of management’s judgment include, but are not limited to, assessing the adequacy of the allowance for loan losses. These estimates,

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judgments and assumptions are inherently uncertain, and, if they prove to be wrong, then we face the risk that charges to income will be required. For example, currently, we do not carry any loan loss reserves. However, a decline in economic condition could negatively impact the credit quality of our loan portfolio and require us to establish loan loss reserves, which could have an adverse impact on our net income. In addition, because we have limited operating history as a REIT and limited experience in making these estimates, judgments and assumptions, the risk of future charges to income may be greater than if we had more experience in these areas. Any such charges could significantly harm our business, financial condition, results of operations and the price of our securities.

We will incur increased costs associated with, and our management will need to devote substantial time and effort to, compliance with public company reporting and other requirements.

We expect our operating expenses to increase significantly once this offering is completed. As a publicly-held reporting company and a REIT, we expect to incur significant legal, accounting and other expenses, such as exchange listing fees, filing, printing and mailing expenses, transfer agent fees, and others, that we did not incur as a private company. For example, we will be required to, among other things, file annual, quarterly and current reports with respect to our business and operating results. In addition, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the NASDAQ Capital Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Furthermore, as a corporation we will incur various costs and expenses that SCP did not incur as a limited liability company, such as director fees, directors’ and officers’ insurance and state and local franchise taxes. In addition, in lieu of paying a management fees to our manager, JJV, we will incur significant compensation and other employee-related costs for services rendered by our senior executive officers. Finally, certain operating expenses that were paid by JJV, such as rent, will be paid by us directly.

After this offering is consummated, our management and other personnel will have to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations are likely to cause our operating costs and expenses to increase and will make certain activities more time-consuming and costly. We may need to hire additional accounting and finance personnel with appropriate public company experience and technical accounting knowledge, and it may be difficult to recruit and maintain such personnel. We cannot yet predict or estimate the costs we may incur in the future with respect to these compliance initiatives or the timing of such costs. In addition, these rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

There has never been, and there may never be, an active and orderly trading market for our common shares.

On or about the effective date of the registration statement of which this prospectus is a part, our common shares will begin to trade on the NASDAQ Capital Market. This will be the first time investors can buy and sell our common shares on either a stock exchange or through an over-the-counter electronic quotation system. Nevertheless, an active trading market for our common shares may never develop or be sustained. As a result, investors in our common shares must be able to bear the economic risk of holding those shares for an indefinite period of time. In addition, we cannot assure that we will, in the future, continue to meet the listing standards of the NASDAQ Capital Market or those of any other national securities exchange, in which case our common shares may be “delisted.” In that event, our common shares will be quoted on an-over-the-counter quotation system. In those venues, you may find it difficult to obtain accurate quotations as to the market value of your common shares and it may be difficult to find buyers to purchase your common shares and relatively few market makers to support its price. As a result of these and other factors, you may be unable to resell your common shares at or above the price for which you purchased them, or at all. Further, an inactive market may also impair our ability to raise capital by selling additional equity in the future, and may impair our ability to enter into strategic partnerships or acquire companies or products by using our common shares as consideration.

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The price for our common shares may be influenced by numerous factors, many of which are beyond our control, resulting in extreme volatility.

The trading price of our common shares is likely to be highly volatile, and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this prospectus, these factors include:

our operating results and financial condition;
additions or departures of key personnel;
changes in laws or regulations applicable to our business;
our dependence on third parties;
failure to meet or exceed any financial guidance or expectations that we may provide to the public;
actual or anticipated variations in quarterly operating results;
failure to meet or exceed the estimates and projections of the investment community;
overall performance of the equity markets and other factors that may be unrelated to our operating performance or the operating performance of our competitors, including changes in market valuations of similar companies;
announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;
our ability to maintain an adequate rate of growth and manage such growth;
issuances of debt or equity securities;
sales of our common shares by our shareholders in the future, or the perception that such sales could occur;
trading volume of our common shares;
ineffectiveness of our internal control over financial reporting or disclosure controls and procedures;
national, regional and/or local political and economic conditions;
effects of natural or man-made catastrophic events; and
other events or factors, many of which are beyond our control.

In addition, the stock market in general, and the stocks of real estate related companies, including REITs in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common shares, regardless of our actual operating performance. The realization of any of the above risks or any of a broad range of other risks, including those described in these “Risk Factors,” could have a dramatic and material adverse impact on the market price of our common shares.

FINRA sales practice requirements may limit your ability to buy and sell our common shares.

The Financial Industry Regulatory Authority, or FINRA, has adopted rules requiring that, in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative or low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA has indicated its belief that there is a high probability that speculative or low-priced securities will not be suitable for at least some customers. Because these FINRA requirements are applicable to our common shares, they may make it more difficult for broker-dealers to recommend that at least some of their customers buy our common shares, which may limit the ability of our shareholders to buy and sell our common shares and could have an adverse effect on the market for and price of our common shares.

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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and any trading volume could decline.

Any trading market for our common shares that may develop will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on us or our business. If no securities or industry analysts commence coverage of us, the trading price for our common shares could be negatively affected. If securities or industry analysts initiate coverage, and one or more of those analysts downgrade our common shares or publish inaccurate or unfavorable research about our business, the price of our common shares would likely decline. If one or more of these analysts cease to cover us or fail to publish reports on us regularly, demand for our common shares could decrease, which might cause a decline in the price and trading volume of our common shares.

We have a substantial number of shares of authorized but unissued capital stock, and if we issue additional shares of our capital stock in the future, our existing shareholders will be diluted.

Our certificate of incorporation, as amended, authorizes the issuance of up to 50,000,000 common shares and up to 5,000,000 preferred shares with the rights, preferences and privileges that our board of directors may determine from time to time. Immediately after the consummation of this offering, we will have no preferred shares outstanding and      common shares issued and outstanding, which represents     % of our total authorized common shares. In addition to capital raising activities, which we expect to continue to pursue in order to raise the funding we will need in order to continue our operations, other possible business and financial uses for our authorized capital stock include, without limitation, future stock splits, acquiring other companies, businesses or products in exchange for shares of our capital stock, issuing shares of our capital stock to partners or other collaborators in connection with strategic alliances, attracting and retaining employees by the issuance of additional securities under our equity compensation plans, or other transactions and corporate purposes that our board of directors deems are in our best interests. Additionally, shares of our capital stock could be used for anti-takeover purposes or to delay or prevent changes in control to our management. Any future issuances of shares of our capital stock may not be made on favorable terms or at all, they may not enhance shareholder value, they may have rights, preferences and privileges that are superior to those of our common shares, and they may have an adverse effect on our business or the trading price of our common shares. The issuance of any additional common shares will reduce the book value per share and may contribute to a reduction in the market price of the outstanding common shares. Additionally, any such issuance will reduce the proportionate ownership and voting power of all of our current shareholders.

Investors in this offering will experience immediate and substantial dilution in net tangible book value.

The public offering price will be substantially higher than the pro forma net tangible book value per share of our outstanding common shares. As a result, based upon the assumptions set forth in “Dilution,” investors purchasing common shares in this offering will incur immediate dilution of $      per share, based on the public offering price of $     per common share. See “Dilution” for a more complete description of how the value of your investment in our common shares will be diluted upon the completion of this offering.

We have not determined a specific use for a portion of the net proceeds from this offering, and we may use these proceeds in ways with which you may not agree.

While we currently intend to use the net proceeds received from this offering primarily to fund new loans, our management will have considerable discretion in the application of the proceeds received in connection with this offering. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our profitability or increase the price of our common shares. The net proceeds from this offering may also be placed in investments that do not produce income or lose value.

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are

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permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;
not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;
not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;
reduced disclosure obligations regarding executive compensation; and
exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

We have taken advantage of reduced reporting burdens in this prospectus. In particular, in this prospectus, we have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We have elected to avail ourselves of the extended transition period for adopting new or revised accounting standards available to emerging growth companies under the JOBS Act and will, therefore, not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies, which could make our common stock less attractive to investors.

The JOBS Act provides that an emerging growth company can take advantage of exemption from various reporting requirements applicable to other public companies and an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of these accounting standards until they would otherwise apply to private companies. We intend to avail ourselves of these exemptions and the extended transition periods for adopting new or revised accounting standards and therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, our financial statements may not be comparable to companies that comply with public company effective dates. We intend to avail ourselves of these options. Once adopted, we must continue to report on that basis until we no longer qualify as an emerging growth company. We cannot predict whether investors will find our stock less attractive as a result of this election. If some investors find our common stock less attractive as a result of this election, there may be a less active trading market for our common stock and our stock price may be more volatile.

As a publicly-held, reporting company, we expect to incur significantly increased costs and that management will have had to devote substantial time to reporting and other compliance matters. We expect these costs and expenses to further increase after we are no longer an “emerging growth company.”

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we will be required to furnish a report by our management on our internal control over financial reporting with our second annual report to be filed with the SEC in 2016. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial

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reporting is effective as required by Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

Risks Related to Our Organization and Structure

Certain provisions of New York law could inhibit changes in control.

Various provisions of the BCL may have the effect of deterring a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide the holders of our common shares with the opportunity to realize a premium over the then-prevailing market price of our common shares. For example, we are subject to the “business combination” provisions of the BCL that, subject to limitations, prohibit certain business combinations (including a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities) between us and an “interested shareholder” (defined generally as any person who beneficially owns 20% or more of our then outstanding voting capital shares or an affiliate thereof for five years after the most recent date on which the shareholder becomes an interested shareholder. After the five-year prohibition, any business combination between us and an interested shareholder generally must be recommended by our board of directors and approved by the affirmative vote of a majority of the votes entitled to be cast by holders of our voting capital shares other than shares held by the interested shareholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested shareholder. These provisions do not apply if holders of our common shares receive a minimum price, as defined under New York law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested shareholder for its common shares. They also do not apply to business combinations that are approved or exempted by a board of directors prior to the time that the interested shareholder becomes an interested shareholder.

Our authorized but unissued common and preferred shares may prevent a change in our control.

Our certificate of incorporation, as amended, authorizes us to issue additional authorized but unissued common or preferred shares. After this offering is completed, we will have      authorized but unissued common shares (     if the over-allotment option is exercised in full) and 5,000,000 authorized but unissued preferred shares, all of which are available for issuance at the discretion of our board of directors. As a result, our board of directors may establish a series of common or preferred shares that could delay or prevent a transaction or a change in control that might involve a premium price for our common shares or otherwise be in the best interest of our shareholders.

Our rights and the rights of our shareholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interests.

Our certificate of incorporation, as amended, limits the liability of our present and former directors to us and our shareholders for money damages to any breach of duty in such capacity, if a judgment or other final adjudication adverse to a present or former officer or director establishes that his or her acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled or that his or her acts violated Section 719 of the BCL. Section 719 of the BCL limits director liability to the following four instances:

declarations of dividends in violation of the BCL;
a purchase or redemption by a corporation of its own shares in violation of the BCL;
distributions of assets to shareholders following dissolution of the corporation without paying or providing for all known liabilities; and
making any loans to directors in violation of the BCL.

Our certificate of incorporation, as amended, and bylaws authorizes us to indemnify our directors and officers for actions taken by them in those capacities to the maximum extent permitted by the BCL. In

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addition, we may be obligated to pay or reimburse the defense costs incurred by our present and former directors and officers without requiring a preliminary determination of their ultimate entitlement to indemnification.

Our bylaws contain provisions that make removal of our directors difficult, which could make it difficult for our shareholders to effect changes to our management.

Our bylaws provide that a director may be removed by either the board of directors or by shareholders for cause. Vacancies may be filled only by a majority of the remaining directors in office, even if less than a quorum, unless the vacancy occurred as a result of shareholder action, in which case the vacancy must be filled by a vote of shareholders at a special meeting of shareholders duly called for that purpose. These requirements make it more difficult to change our management by removing and replacing directors and may prevent a change in control of our company that is in the best interests of our shareholders.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. The words “anticipate,” “estimate,” “expect,” “project,” “plan,” “seek,” “intend,” “believe,” “may,” “might,” “will,” “should,” “could,” “likely,” “continue,” “design,” and the negative of such terms and other words and terms of similar expressions are intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We disclaim any duty to update any of these forward-looking statements after the date of this prospectus to confirm these statements in relationship to actual results or revised expectations.

All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this prospectus. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties.

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USE OF PROCEEDS

We estimate that the net proceeds from the issuance and sale of our common shares in this offering, assuming the shares are sold at the midpoint of the range, will be approximately $     (or approximately $     if the representative exercises its over-allotment option in full), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purpose of this offering is to raise additional funds so we can increase our loan portfolio. As a real estate finance company whose primary source of income is interest generated from our loan portfolio, the only way for us to increase our revenue is to increase the size of our loan portfolio.

The table below sets forth our expected use of the net proceeds from this offering represents our intentions based upon our current plans and business conditions.

   
  Amount   Percentage
Funding loans                      
Capital expenditures                  
Working capital and general corporate purposes                  

Funding loans.  Approximately $     of the net proceeds of this offering will be used to fund new loans and grow our loan portfolio.

Capital expenditures.  In order to accommodate the growth in our business as a result of the successful completion of this offering as well as to comply with the various reporting and other requirements applicable to REITs and publicly held reporting requirements, we will need to implement and upgrade various systems including     . We estimate the cost of this implementation and upgrade to be $     over the next 12 months.

Working capital.  As a result of our conversion to REIT status and the consummation of this offering we expect that our general and administrative expenses, such as compensation and other employee-related expenses, insurance, rent, legal and accounting, will increase on account of our various reporting and compliance obligations and our expanded operations.

We may also use the net proceeds to pay down, on a temporary basis, the outstanding balance on the Bankwell Credit Line.

Pending the application of any portion of the net proceeds, we may invest such funds in interest bearing accounts and short-term, interest bearing securities that are consistent with our intention to qualify as a REIT and maintain our exemption from registration under the Investment Company Act. These investments are expected to provide lower returns than those we will seek to achieve from our loan portfolio.

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DIVIDENDS AND DISTRIBUTION POLICY

The holders of our common shares are entitled to receive dividends as may be declared from time to time by our board of directors. Payments of future dividends are within the discretion of our board of directors and depend on, among other factors, our retained earnings, capital requirements, operations and financial condition.

As a newly formed corporation, we have no dividend payment history. However, as a limited liability company, we distributed approximately 90% of our net profits each year to our members. In addition, as a REIT, we will be required, before the end of any REIT taxable year in which we have accumulated earnings and profits attributable to a non-REIT year, to declare a dividend to our shareholders to distribute such accumulated earnings and profits (a “Purging Distribution”). As of June 30, 2016, we did not have any accumulated earnings and profits attributable to a non-REIT year. Accordingly, we are not required to make a Purging Distribution.

From and after the effective date of our REIT election, we intend to pay regular quarterly distributions to holders of our common shares in an amount not less than 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gains). U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. We intend to make distributions to our shareholders to comply with the REIT requirements of the Code.

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DILUTION

If you invest in our common shares in this offering, your interest will be immediately and substantially diluted to the extent of the difference between the public offering price per share and the pro forma, as adjusted net tangible book value per share after giving effect to this offering. The pro forma data gives effect to the following as if they occurred on January 1, 2016: (i) the issuance of 8,533,237 common shares, prior to the consummation of this offering, including 6,283,237 common shares that will be issued to SCP in exchange for all of the assets and liabilities of SCP pursuant to the Exchange Agreement; (ii) the elimination of the management fees payable to JJV in its capacity as the manager of SCP; (iii) the direct payment of salaries and other forms of compensation to John Villano and Jeffrey Villano; (iv) the direct payment of origination fees to us rather than to JJV; and (v) normalizing various other operating expenses, such as rent. Pro forma, as adjusted net tangible book value gives effect to the foregoing pro forma adjustments as well as to the sale of      common shares at the initial public offering price of $     per share and the receipt by us of approximately $     of net proceeds therefrom. Our pro forma net tangible book value at June 30, 2016 was $     million, or $     per pro forma share outstanding. After giving effect to the sale of      shares in this offering at an assumed initial offering price of $     per share, and after deducting underwriting discounts and commissions and other estimated offering expenses payable by us, our pro forma as adjusted net tangible book value at June 30, 2016 would have been approximately $    , or $     per share. This represents an immediate increase in net tangible book value of approximately $     per share to our existing shareholders, and an immediate dilution of $     per share to investors purchasing common shares in this offering.

Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of our common shares in this offering and the net tangible book value per share of our common shares immediately after this offering.

The following table illustrates the per share dilution to investors purchasing shares in the offering:

   
Public offering price per share            $       
Pro forma net tangible book value per share outstanding as at June 30, 2016   $                
Increase in historical and pro forma net tangible book value per share outstanding attributable to new investors                  
Pro forma as adjusted net tangible book value per share outstanding after this offering                  
Dilution per share to new investors                  

The information above assumes the representative does not exercise the over-allotment option. If the representative exercises the over-allotment option in full, our pro forma, as adjusted tangible net book value at June 30, 2016 would have been $    , reflecting an immediate dilution of $     per share to investors purchasing common shares in this offering.

The following table summarizes, as of June 30, 2016, differences between our existing shareholders and investors who purchased common shares in this offering with respect to the number of shares purchased, the total consideration paid and the average price per share paid.

         
  Shares Purchased   Total Consideration   Average
Price
Per Share
     Number   Percent   Amount   Percent
Founders, executive officers and directors                  $              $       
Other existing shareholders(1)                     $              $  
New investors(2)              0     $                   $  
Total              100.0 %    $            100.0 %       

(1) Does not include any shares underlying unexercised warrants and options.
(2) Based on an assumed initial public offering price of $     per share.

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The information above assumes the representative does not exercise its overallotment option. If the representative exercises its over-allotment option in full, the investors in this offering will purchase      common shares for an aggregate gross purchase price of $     million ($     after deducting underwriting discounts and commissions and other estimated offering expenses payable by us), representing approximately     % of the total consideration for % of the total number of issued outstanding common shares and the dilution to new investors will be $     per share, or     %.

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2016:

on an actual basis;
on a pro forma basis to give effect to the following as if they occurred on January 1, 2016: (i) the issuance of 8,533,237 common shares prior to the consummation of this offering, including 6,283,237 common shares that will be issued to SCP pursuant to the Exchange Agreement in exchange for all of the assets and liabilities of SCP; (ii) the elimination of the management fees payable to JJV in its capacity as the manager of SCP; (iii) the direct payment of salaries and other forms of compensation to John Villano and Jeffrey Villano; (iv) the direct payment of origination fees to us rather than to JJV; and (v) normalizing various other operating expenses, such as rent; and
on a pro forma, as adjusted, basis giving effect to the foregoing pro forma adjustments as well as issuance and sale of      common at an initial public offering price of $     per share and the receipt of $     of net proceeds therefrom after deducting the estimated underwriting commissions and discounts and other offering expenses, as set forth in this prospectus.

You should read this table together with the information contained in this prospectus, including “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included elsewhere in this prospectus.

     
  As at June 30, 2016
     (Actual)   (Pro Forma)   (Pro Forma,
As Adjusted)
Line of credit   $ 7,275,000     $ 7,275,000     $            
Members’ equity     26,055,092              
Shareholders’ equity:
                          
Preferred shares, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding   $     $     $  
Common shares, $0.001 par value, 50,000,000 shares authorized; 8,533,237 shares issued and outstanding pro forma and      shares issued and outstanding, pro forma, as adjusted           8,533           
Additional paid in capital           25,752,883           
Retained earnings                     
Total shareholders’ equity           25,761,416                   
Total capitalization   $ 33,330,092     $ 33,036,416     $            

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and notes thereto contained elsewhere in this prospectus. This discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements.

Overview

We are a Connecticut-based real estate finance company that specializes in originating, underwriting, funding, servicing and managing a portfolio of short-term (i.e., three years or less) loans secured by first mortgage liens on real property located primarily in Connecticut. Each loan is also personally guaranteed by the principal(s) of the borrower, which guaranty is typically collaterally secured by a pledge of the guarantor’s interest in the borrower. Our typical borrower is a small real estate investor who will use the proceeds to fund its acquisition, renovation, rehabilitation, development and/or improvement of residential or commercial properties located primarily in Connecticut held for investment or sale. The property may or may not be income producing. We do not lend to owner-occupants. Our loans are referred to in the real estate finance industry as “hard money loans.”

We believe that upon completion of this offering we will meet all of the requirements to qualify as a real estate investment trust (“REIT”) for federal income tax purposes and we intend to elect to be taxed as a REIT beginning with the year in which this offering is consummated.

Since commencing operations in 2010, SCP has made over 365 loans, not including renewals or extensions of existing loans. At June 30, 2016, (i) SCP’s loan portfolio included 193 loans with an aggregate loan amount of approximately $30.4 million with the principal amount of individual loans ranging from $20,000 to $1.7 million, (ii) the average original principal amount of the loans in the portfolio was $162,124 and the median loan amount was $110,000 and (iii) over 85% of the loans had a principal amount of $250,000 or less. At December 31, 2015, SCP’s loan portfolio included 185 loans with an aggregate loan amount of approximately $27.5 million and with the principal amount of individual loans ranging from $20,000 to $1.7 million, (ii) the average original principal amount of the loans in the portfolio was $147,000 and the median loan amount was $113,700 and (iii) over 62% of the loans had a principal amount of $250,000 or less. At June 30, 2016 and December 31, 2015 unfunded commitments for future advances under construction loans totaled $950,658 and $1,264,512, respectively. Similarly, SCP’s revenues and net income have been growing. For the six months ended June 30, 2016 revenues and net income were approximately $2.0 million and $1.6 million, respectively. For the years ended December 31, 2015 and 2014 revenues were $2.8 million and $1.6 million, respectively, and net income was $2.3 million and $1.5 million, respectively. While we cannot assure that we will be able to sustain these growth rates indefinitely, we do believe the business will continue to grow over the next few years. We expect most of the growth will be attributable to our further expansion into the Connecticut real estate market and our expansion throughout New England and into various Mid-Atlantic states, particularly portions of New York and New Jersey.

Our loans typically have a maximum initial term of three years and bear interest at a fixed rate of 9% to 12% per year and a default rate for non-payment of 18%. In addition, we usually receive origination fees, or “points,” ranging from 2% to 5% of the original principal amount of the loan as well as other fees relating to underwriting, funding and managing the loan. When we renew or extend a loan we generally receive additional “points” and other fees. Interest is always payable monthly in arrears. As a matter of policy, we do not make any loans if the loan-to value ratio exceeds 65%. In the case of construction loans, the loan-to-value ratio is based on the post-construction value of the property. In the case of loans having a principal amount in excess of $500,000, we require a formal appraisal by a licensed appraiser. In the case of smaller loans, we rely on readily available market data, including tax assessment rolls, recent sales transactions and brokers to evaluate the strength of the collateral. Finally, we will adopt a policy, to take effect at the time this offering becomes effective, that will limit the maximum amount of any loan we fund to a single borrower or a group of affiliated borrowers to 10% of the aggregate amount of our loan portfolio after taking into account the loan under consideration.

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As a “hard money” real estate lender, our revenue consists primarily of interest earned on our loan portfolio and our net income is basically the spread between the interest we earn and our cost of funds. Since our capital structure is more heavily weighted to equity rather than debt (approximately 78.2% vs 21.8% of our total capitalization at June 30, 2016) our cost of funds is relatively low (6.50%.) As of June 30, 2016, the annual yield on SCP’s loan portfolio was 11.9% per annum. The yield has been increasing steadily over the past few years as older loans with lower interest rates come due and are either being repaid or refinanced at higher rates. Cost of capital is 0% for equity and 6.5% for debt as of June 30, 2016, providing a spread of 11.9% to 5.4% our blended cost of capital as of June 30, 2016. The yield reflected above does not include other amounts collected from borrowers and retained by SCP such as origination fees and late payment fees. While we expect interest rates to increase in the near term, we believe we will be able to match these increases by increasing our rates on new loans. In order to grow our business, we will have to increase our loan portfolio and that will require additional capital, including the proceeds from this offering. We may also incur additional debt. We have not adopted any policy that limits the amount of debt we may incur. Thus, our operating income in the future will depend on how much debt we incur and the spread between our cost of funds and the yield on our loan portfolio. If interest rates increase as expected, we do not believe this will have a material adverse impact on our business as we believe we will be able to increase the rates on our loans to offset the increase in our cost of funds and to satisfy investor demand for yield. However, if interest rates rise quickly, we may not be able to match the increases to our borrowing costs with increases in our loans at the same pace, which could adversely impact our income. In addition, rapidly rising interest rates could have an unsettling effect on real estate values, which could compromise some of our collateral.

Our primary objective is to grow our loan portfolio while protecting and preserving capital in a manner that provides for attractive risk-adjusted returns to our shareholders over the long term principally through dividends. We intend to achieve this objective by continuing to focus on selectively originating, managing and servicing a portfolio of first mortgage real estate loans and carefully manage our loan portfolio in a manner designed to generate attractive risk-adjusted returns across a variety of market conditions and economic cycles. We believe that the demand for commercial real estate loans that have a principal amount of less than $500,000, in Connecticut and neighboring states is significant and growing and that traditional lenders, including banks and other financial institutions that usually serve this market are unable to satisfy this demand. This demand/supply imbalance has created an opportunity for “hard money” real estate lenders like us to selectively originate high-quality first mortgage loans on attractive terms and these conditions should persist for a number of years.

We have built our business on a foundation of intimate knowledge of the Connecticut real estate market, our ability to respond quickly to customer needs and demands and a disciplined underwriting and due diligence culture that focuses primarily on the value of the underlying collateral and that is designed to protect and preserve capital. We believe that our flexibility in terms of meeting the needs of borrowers without compromising our standards on credit risk, our expertise, our intimate knowledge of the real estate market in Connecticut and the surrounding states and our focus on newly originated first mortgage loans has defined our success until now and should enable us to continue to achieve our objectives.

Our principal executive officers are experienced in hard money lending under various economic and market conditions. Our founders and co-chief executive officers, Jeffrey C. Villano and John L. Villano, spend a significant portion of their time on business development as well as on underwriting, structuring and servicing each loan in our portfolio. A principal source of new transactions has been repeat business from existing and former customers and their referral of new business. We also receive leads for new business from banks, brokers, attorneys and web-based advertising. We rely on our own employees, independent legal counsel, and other independent professionals to verify title and ownership, to file liens and to consummate the transactions.

Sources of Capital

We use a combination of equity capital and the proceeds of debt financing to fund our operations. We do not have any formal policy limiting the amount of debt we may incur. However, under the terms of the Bankwell Credit Agreement, we may not incur any additional indebtedness without Bankwell’s consent. Depending on various factors we may, in the future, decide to take on additional debt to expand our mortgage loan origination activities in order to increase the potential returns to our shareholders. Although we have no

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pre-set guidelines in terms of leverage ratio, the amount of leverage we will deploy will depend on our assessment of a variety of factors, which may include the liquidity of the real estate market in which most of our collateral is located, employment rates, general economic conditions, the cost of funds relative to the yield curve, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, our opinion regarding the creditworthiness of our borrowers, the value of the collateral underlying our portfolio, and our outlook for interest rates and property values. At June 30, 2016, debt proceeds represented 21.8% of our total capital. However, in order to grow the business and satisfy the requirement to pay out 90% of net profits, we expect to increase our level of debt over time to approximately 50% of capital. We intend to use leverage for the sole purpose of financing our portfolio and not for the purpose of speculating on changes in interest rates.

SCP commenced operations in December 2010 with no capital. By January 2011, it had raised $443,000 of initial capital, of which $70,000 was contributed by an affiliate of Jeffrey Villano. At June 30, 2016, members’ equity was $26.1 million. Through June 30, 2016, JJV, LLC (“JJV”), the managing member of SCP, whose principals are Jeffrey Villano and John Villano, Sachem Capital’s co-chief executive officers, total capital contribution to SCP was an aggregate of $794,000. In addition, the Villano brothers, individually and through affiliates, contributed a total of an additional $1,926,000 of capital to SCP. JJV’s initial capital contribution of $35,000 was made in August 2011. The principal purpose of this offering is to raise additional equity capital to expand our real estate lending business.

Another source of capital for us is our $15.0 million Bankwell Credit Line. Borrowings under the Bankwell Credit Line bear interest at a rate equal to the greater of (i) a variable rate equal to the sum of the prime rate of interest as in effect from time to time (3.50% as of October 1, 2016) plus 3.0% or (ii) 6.25% per annum. The Bankwell Credit Line expires and the outstanding indebtedness thereunder will become due and payable in full on March 15, 2018. Assuming we are not then in default under the terms of the Bankwell Credit Agreement, we have the option to repay the outstanding balance, together with all accrued interest thereon in 36 equal monthly installments beginning April 15, 2019. The Bankwell Credit Line is secured by assignment of mortgages and other collateral and is jointly and severally guaranteed by JJV, Jeffrey C. Villano and John L. Villano, our founders and co-chief executive officers. However, each of their respective liability under the guaranty is capped at $1 million.

The basic eligibility requirements for an advance under the Bankwell Credit Line are as follows:

the initial term of the note may not exceed 36 months and the original maturity date may not be extended for more than 36 months;
the collateral securing the mortgage may not be the borrower’s primary residence;
mortgage loans to any single borrower or to multiple borrowers that have the same guarantor cannot exceed $450,000 in the aggregate;
minimum credit scores for the borrower and guarantors of loans in excess of $100,000 of (i) 625 for loans with a loan-to-value ratio of 50% or less or (ii) 660 for loans with a loan-to-value ratio of more than 50% but less than 75%;
maximum amount of any advance against an eligible note receivable is $250,000;
payments on the underlying loan may not be more than 60 days past due; and
receipt of certain information relating to the property including an appraisal (if the amount of the underlying loan exceeds $325,000) or other relevant data regarding value (if the amount of the underlying loan is less than $325,000).

The Bankwell Credit Line contains various covenants and restrictions that are typical for these kinds of credit facilities, including limiting the amount that we can borrow relative to the value of the underlying collateral, maintaining various financial ratios and limitations on the terms of loans we make to our customers. Under the terms of the Bankwell Credit Line, the amount outstanding at any one time may not exceed the lesser of (i) $15.0 million and (ii) our Eligible Note Receivables (as defined in the Bankwell Credit Agreement). In addition, each “Advance” is further limited to the lesser of (i) 50%-75%, depending on the

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loan-to-value ratio, of the principal amount of the particular Eligible Note Receivable being funded and (ii) $250,000. As of June 30, 2016, we estimate that loans having an aggregate principal amount of $25.3 million, representing approximately 87% of SCP’s mortgage receivables, satisfied all of the eligibility requirements set forth in the Bankwell Agreement. As of June 30, 2016, the total amount outstanding under the Bankwell Credit Line was $7.275 million leaving us with sufficient borrowing capacity to draw the entire $15 million facility if we so choose. Given the nature of our business, we cannot assure you that we will always be able to borrow the maximum allowed under the terms of the Bankwell Credit Line.

In addition, the Bankwell Credit Line includes the following restrictions, limitations and prohibitions:

prohibiting any liens on any of the collateral securing the Bankwell Credit Line, which is essentially all of our assets;
prohibiting us from merging, consolidating or disposing of any asset;
prohibiting us from incurring any other indebtedness to a third party;
prohibiting us from forming or transacting business with any subsidiary or affiliate other than to make loans to our borrowers;
prohibiting us from allowing any litigation in excess of $50,000 against any of our assets unless we are fully insured against such loss;
prohibiting us from issuing or redeeming any equity interest, distributing any equity interest, pay any indebtedness owed to an equity holder, suffer any change in ownership that would result in JJV, Jeffrey Villano and John Villano collectively owning less than 50% of the membership interests in SCP;
prohibiting us from declaring or paying any dividends except in certain limited circumstances;
prohibiting us from purchasing any securities issued by or otherwise invest in any public or private entity;
suffer any change in our executive management; and
change the form or nature of SCP’s or JJV’s ownership structure

Loan covenants include the following:

punctually pay amounts due;
pay on demand any charges customarily incurred or levied by Bankwell;
pay any and all taxes, assessments or other charges assessed against us or any of our assets;
pay all insurance premiums;
maintain our principal deposit and disbursement accounts with Bankwell;
perfect Bankwell’s lien on the assets;
comply with all applicable laws, ordinances, rules and regulations of any governmental authority; or
change the nature of our business.

Finally, we must comply with the following financial covenants:

continuously maintain a fixed charge ratio of at least 1.35:1.00 at the end of each fiscal year;
continuously maintain a tangible net worth of not less than $15 million at the end of each fiscal quarter;
John Villano’s minimal capital investment in SCP may not be less than $195,000;
Jeffrey Villano’s minimal capital investment in SCP, directly and indirectly through affiliates, may not be less than $1,750,000; and

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JJV’s minimal capital investment in SCP may not be less than $575,000.

The term fixed charge ratio means, with respect to each fiscal year, the ratio of (A) the sum of (i) EBITDA (i.e., net income before provision for payment of interest, federal income taxes plus depreciation and amortization, as determined under GAAP) and (ii) capital contributions minus the sum of (iii) income taxes paid in cash, (iv) unfinanced capital expenditures and (v) dividends, distributions and draws paid to members to (B) the sum of (i) interest expense accrued for such period and paid in cash at any time by the borrower and the current portion of long term indebtedness (including capital leases) paid. The term tangible net worth mean the borrower’s net worth less the total of all assets that are classified as “intangible” under GAAP.

Corporate Reorganization and REIT Qualification

Prior to consummating this offering we will change our entity status from a limited liability company to a C corporation. To effect this change, we have entered into an Exchange Agreement with SCP pursuant to which SCP will transfer all of its assets and liabilities to us in exchange for 6,283,237 of its common shares and the assumption of SCP’s obligations under the Bankwell Credit Line. SCP will then distribute the common shares to its members, pro rata in accordance with their capital account balances in full liquidation of their membership interests. We expect to consummate the exchange on or prior to the date of this prospectus.

Immediately thereafter, SCP will distribute those shares to its members in full liquidation of their membership interests in SCP, pro rata in accordance with the members’ positive capital account balances.

For accounting purposes, the consummation of the exchange transaction will be treated as a recapitalization of SCP.

The pre-offering capitalization of Sachem Capital was based on discussions with the representative and took into account (i) SCP’s historical financial performance, including revenues, net profits, cash flow from operations and distributions to members, (ii) our prospects (taking into account, among other things, any anticipated changes as a result of the change in SCP’s status from an LLC to a regular C corporation and our operation as a REIT for income tax purposes) and (iii) the market value of comparable public companies. The parties agreed to value Sachem Capital at an amount equal to approximately 164% of SCP’s members’ equity at June 30, 2016, which was then divided by the proposed initial public offering price to arrive at the pre-offering capitalization of Sachem Capital. A portion of these shares were allocated to the founders of Sachem Capital and the balance to the members of SCP Capital. The result is that each member of SCP is expected to receive Sachem Capital common shares having a value of approximately $1.206 for each $1.00 in its capital account.

JJV, whose members include various members of the Villano family, in the liquidation of SCP will receive        common shares, or approximately   % of the common shares to be issued in the exchange. In addition, the Villano brothers, individually and through their affiliates, will receive an additional        common shares, or   % of the common shares issued in the exchange. In addition, Jeffrey Villano and John Villano, were each issued 1,085,000 common shares of Sachem Capital upon its formation. Accordingly, after giving effect to the exchange but immediately prior to this offering, in total, Jeffrey and John Villano, collectively, will beneficially own         common shares (or   %) of Sachem Capital’s common shares.

We believe that upon completion of this offering we will meet all of the requirements to qualify as a REIT for federal income tax purposes and intend to elect to be taxed as a REIT beginning with our tax year in which this offering is consummated or as soon as practicable thereafter. As a REIT, we are entitled to claim deductions for distributions of taxable income to our shareholders thereby eliminating any corporate tax on such taxable income. Any taxable income not distributed to shareholders is subject to tax at the regular corporate tax rates and may also be subject to a 4% exercise tax to the extent it exceeds 10% of our total taxable income. In order to maintain our qualification as a REIT, we are required to distribute each year at least 90% of our taxable income. As a REIT, we may also be subject to federal excise taxes and state taxes.

We expect our operating expenses to increase significantly once this offering is completed. The additional operating expenses are attributable to a number of factors including our conversion from a limited liability company to a regular C corporation, operating as a REIT, our status as a publicly-held reporting company and growth in our operations. As a corporation we will incur various costs and expenses that we did not have as a

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limited liability company, such as director fees, directors’ and officers’ insurance and state and local franchise taxes. In addition, in lieu of paying a management fees to our manager, JJV, we will incur significant compensation and other employee-related costs for services rendered by our senior executive officers. Moreover, because of various laws, rules and regulations that prohibit or severely limit our ability to enter into agreements with related parties, certain operating expenses, such as rent, will increase as well. Finally, we anticipate increases in professional fees, filing fees, printing and mailing costs, exchange listing fees, transfer agent fees and other miscellaneous costs related to our compliance with various laws, rules and regulations applicable to REITs and a publicly-held reporting company. For example, we will be required to, among other things, file annual, quarterly and current reports with respect to our business and operating results. Also, as a public reporting company, we must establish and maintain effective disclosure and financial controls. As a result, we may need to hire additional accounting and finance personnel with appropriate public company experience and technical accounting knowledge, which will also increase our operating expenses.

Emerging Growth Company Status

We are an “emerging growth company”, as defined in the JOBS Act, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As an emerging growth company we can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We intend to avail ourselves of these options. Once adopted, we must continue to report on that basis until we no longer qualify as an emerging growth company.

We will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of this offering; (ii) the first fiscal year after our annual gross revenue are $1.0 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If, as a result of our decision to reduce future disclosure, investors find our common shares less attractive, there may be a less active trading market for our common shares and the price of our common shares may be more volatile.

Critical Accounting Policies and Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our use of estimates on (a) a preset number of assumptions that consider past experience, (b) future projections and (c) general financial market conditions. Actual amounts could differ from those estimates.

We recognize revenues in accordance with ASC 605, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. ASC 605 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, we recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery of the product has occurred or services have been rendered, (iii) the sales price charged is fixed or determinable and (iv) collectability is reasonably assured. Accordingly, interest income from commercial loans is recognized, as earned, over the loan period and origination fee revenue on commercial loans is amortized over the term of the respective note.

As an “emerging growth company,” we intend to avail ourselves of the of the reduced disclosure requirements and extended transition periods for adopting new or revised accounting standards that would otherwise apply to us as a public reporting company. Once adopted, we must continue to report on that basis

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until we no longer qualify as an emerging growth company. As a result, our financial statements may not be comparable to those of other public reporting companies that either are not emerging growth companies or that are emerging growth companies but have opted not to avail themselves of these provisions of the JOBS Act and investors may deem our securities a less attractive investment relative to those other companies, which could adversely affect our stock price.

Results of operations

Sachem Capital was formed in January 2016 and, prior to the consummation of the transaction contemplated by the Exchange Agreement and this offering, will not have engaged in any business activity. Therefore, it has no historical financial data. The results of operations discussed below are those of SCP, which, pursuant to the Exchange Agreement, will transfer all of its assets and liabilities to Sachem Capital in exchange for 6,283,237 common shares of Sachem Capital. SCP will distribute those common shares to its members, in accordance with their capital account balances, in liquidation. For accounting purposes, the consummation of the exchange transaction will be treated as a recapitalization of SCP.

Six months ended June 30, 2016 and 2015

Total revenue

Total revenue for the six months ended June 30, 2016 was approximately $1,974,000 compared to approximately $1,032,000 for the six months ended June 30, 2015, an increase of $942,000, or 91.3%. The increase in revenue represents an increase in lending operations. For the first half of 2016, approximately $1,735,000 of our revenue represents interest income from loans, $95,000 represented origination fees and $101,000 represented late fees. In comparison, in the corresponding 2015 period interest income from loans was $916,000, origination fees were $58,500 and late fees were $28,500. We believe the increase in late fees is a continuation of a trend that began in the second half of 2015 and reflects our decision to strictly enforce our right to collect late fees unless a borrower can demonstrate hardship . However, we do not believe that this reflects any inherent financial weakness with our borrowers as we have not experienced any concomitant rise in default rates. We further believe late payments will revert to their historical levels in 2017.

Operating costs and expenses

Total operating costs and expenses for the six months ended June 30, 2016 were approximately $421,300 compared to approximately $165,400 for the six months ended June 30, 2015, an increase of $256,000 or 154.7%. The increase was due almost entirely to increases in interest expense, professional fees, and compensation to manager. For the first half of 2016, interest and amortization of deferred financing costs were approximately $222,000 and compensation to manager was $152,500. In comparison, for the first half of 2015, the corresponding amounts were $70,000 and $77,000. The increase in interest and amortization of deferred financing costs is directly attributable to higher levels of debt in 2016. The average daily amount outstanding under the Bankwell Credit Line in the first half of 2016 was $5,998,100 compared to $1,797,800 in the first half of 2015. The increase in compensation to manager in the first half of 2016 over the first half of 2015 is directly related to the increase in our revenue, which is directly related to the increase in the size of our loan portfolio, which, in turn, grew as a result of increases in our equity capital and debt.

Net income

Net income for the six months ended June 30, 2016 was approximately $1,552,350 compared to approximately $866,800 for the six months ended June 30, 2015 resulting from the increase in our lending activities, partially offset by the increase in operating costs and expenses.

Years ended December 31, 2015 and 2014

Total revenue

Total revenue for the year ended December 31, 2015 was approximately $2,787,000 compared to approximately $1,559,000 for the year ended December 31, 2014, an increase of $1,228,000, or 78.8%. The increase in revenue represents an increase in lending operations. In 2015, approximately $2,478,000 of our revenue represents interest income on secured, real estate loans that we offer to small businesses compared to approximately $1,419,000 in 2014, and approximately $108,000 represents origination fees on such loans compared to approximately $68,000 in 2014. The loans are secured by collateral consisting of real estate and are personally guaranteed by the principals of the borrower.

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Operating costs and expenses

Total operating costs and expenses for the year ended December 31, 2015 were approximately $480,000 compared to approximately $90,000 for the year ended December 31, 2014, an increase of $390,000 or 433%. The principal contributors to operating costs and expenses were interest and amortization of deferred financing costs and compensation to manager. For the year ended December 31, 2015, interest and debt service amortization costs were approximately $221,700 and compensation to manager was $210,400. In comparison, for the year ended December 31, 2014, the corresponding amounts were $13,300 and $76,000, respectively. The increase in interest and amortization of deferred financing costs is directly attributable to higher levels of debt in 2015. The average daily amount outstanding under the Bankwell Credit Line in 2015 was $3,096,271 compared to $5,000,000 in 2014. The increase in compensation to manager in 2015 over 2014 is directly related to the increase in revenue, which, in turn, is directly related to the increase in the size of our loan portfolio.

Net income

Net income for the year ended December 31, 2015 was approximately $2,300,000 compared to approximately $1,470,000 for the year ended December 31, 2014 resulting from the increase in our lending activities, partially offset by the increase in operating costs and expenses.

Liquidity and Capital Resources

Net cash provided by operating activities for the six months ended June 30, 2016 was approximately $1.6 million compared to $920,000 for the corresponding 2015 period. For the years ended December 31, 2015 and 2014 net cash provided by operating activities was $2.4 million and $1.5 million, respectively.

Net cash used for investing activities for the six months ended June 30, 2016 was $3,346,000 compared to $5,494,000 for the corresponding 2015 period. Proceeds from sale of real estate owned in the 2016 period was $229,000 compared to $422,000 in the 2015 period. The 2016 period also included $561,000 of cash used to acquire and improve real estate relating to non-performing loans. We had no such expenditures in 2015. Finally, in the 2016 period, principal disbursements for mortgage receivable were $9.1 million and principal collections were $6.35 million. In the comparable 2015 period, the corresponding amounts were $8.83 million and $2.9 million, respectively. We believe that the increased rate of prepayments of outstanding loans may be a result of increasing lending activity by traditional lenders, such as banks, which could be an indicator of improving economic conditions in general. If this trend continues it may signal increased competition for our business. For the years ended December 31, 2015 and 2014, net cash used for investing activities was $13.2 million and $5.2 million, respectively, which, together with member contributions, relates to the increase in our loan portfolio from $14.8 million at December 31, 2014 to $27.5 million at December 31, 2015.

Cash flows from financing activities basically reflects the difference between proceeds from borrowings under the Bankwell Credit Line and member contributions, on the one hand, and repayments of the amounts outstanding on the Bankwell Credit Line and distributions to members, on the other hand. Net cash provided by financing activities for the six months ended June 30, 2016 was $1.36 million compared to $686,000 for the corresponding 2015 period. For the 2016 period, the principal elements were $4.175 million of proceeds from the Bankwell Credit Line, $2.9 million of payments to Bankwell, approximately $2.5 million of member contributions and approximately $2.24 million of distributions to members. In addition, we incurred approximately $65,000 of financing costs and $125,000 of cost related to this offering. For the 2015 period, the principal elements were (i) $2.85 million of proceeds from Bankwell, (ii) $4.5 million of payments to Bankwell, (iii) approximately $2.7 million of member contributions and (iv) approximately $316,000 distributions to members. For the years ended December 31, 2015 and 2014, net cash provided by financing activities was $6.8 million and $8.6 million, respectively. For 2015, the principal elements were $6.0 million of proceeds from the Bankwell Credit Line, $5.0 million of repayments to Bankwell, approximately $7.2 million member contributions and approximately $1.4 million of distributions to members. For 2014, the principal elements were $5.0 million of proceeds from the Bankwell Credit Line, approximately $4.3 million member contributions and approximately $637,000 of distributions to members.

We project anticipated cash requirements for our operating needs as well as cash flows generated from operating activities available to meet these needs. Our short-term cash requirements primarily include funding of loans and payments for usual and customary operating and administrative expenses, such as employee

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compensation, rent, sales and marketing expenses and dividends. Based on this analysis, we believe that our current cash balances, the amount available to us under the Bankwell Credit Line and our anticipated cash flows from operations will be sufficient to fund the operations for the next 12 months.

Our long-term cash needs will include principal payments on outstanding indebtedness and funding of new mortgage loans. Funding for long-term cash needs will come from our cash on hand after this offering is completed, operating cash flows, and unused capacity of the Bankwell Credit Line or any replacement thereof.

From and after the effective date of our REIT election, we intend to pay regular quarterly distributions to holders of our common shares in an amount not less than 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gains).

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons that are likely to affect liquidity or the availability of our requirements for capital resources.

Contractual Obligations

We had no contractual obligations as of June 30, 2016. However, both SCP and JJV have contractual obligations that we will assume in connection with the transactions contemplated by the Exchange Agreement. In the case of SCP, these obligations include unfunded amounts of any outstanding construction loans and unfunded commitments for loans. In JJV’s case, the contractual obligations consist of operating leases for equipment and software licenses that it uses in connection with the services it provides to SCP as its manager.

         
  Total   Less than
1 year
  1 – 3 years   3 – 5 years   More than
5 years
Operating lease obligations   $ 24,716     $ 8,016     $ 16,700     $     $  
Unfunded portions of outstanding construction loans     950,658                          
Unfunded loan commitments     255,000                          
Total contractual obligations   $ 1,230,374     $ 8,016     $ 16,700     $     $  

At June 30, 2016, we owed approximately $351,000 to JJV of which approximately $44,000 represented management fees due to JJV and approximately $307,000 represented expenses paid by JJV for and on behalf of SCP for services rendered to SCP in connection with originating, underwriting, closing and servicing loans on behalf of SCP. All amounts due to JJV by SCP as of the date immediately preceding the date of this offering will be paid by SCP from its cash on hand. From and after this offering, JJV will no longer be entitled to any management fee or other fee for services rendered to SCP and may not pay any expenses for or on our behalf unless specifically authorized by our board of directors, which majority must also include a majority of the “independent” directors.

Recent Technical Accounting Pronouncements

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”. Under the ASU, an entity presents debt issuance costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. The ASU is effective for public entities for fiscal years beginning after December 15, 2015, and interim periods therein. For private companies and not-for-profit organizations, the ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.

In May 2015, the FASB issued ASU 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent) (a consensus of the Emerging Task Force)”. The ASU provides reporting for entities with an option to measure the fair value of certain investments using net asset value instead of fair value. The ASU is effective for public entities for fiscal years beginning after December 15, 2015, and interim periods therein. For all other entities, the ASU is

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effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.

In August 2015, the FASB issued ASU 2015-15, “Interest — Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of Credit Arrangements — Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting”. The ASU incorporates the SEC staff’s announcement that clarifies the exclusion of line-of-credit arrangements from the scope of ASU 2015-03. Therefore, debt issuance costs related to line-of-credit arrangements can be deferred and presented as an asset that is subsequently amortized over the time of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The ASU should be adopted concurrent with adoption of ASU 2015-03. Early adoption is permitted. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”. The ASU simplifies the presentation of deferred income taxes by requiring deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. This Update will align the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards (IFRS). For public business entities, the ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. The ASU intends to provide users of financial statements with more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2018, and for interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted for certain provisions. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326) Measurement of Credit Losses of Financial Instruments”. The ASU aligns the accounting and economics of lending by requiring banks and other lending institutions to immediately record the full amount of credit losses that are expected in their loan portfolios, providing investors with better information about those losses on a timelier basis. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2019. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2020. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this guidance is not expected to have a material impact on our financial statements.

Management does not believe that any other recently issued, but not yet effected, accounting standards if currently adopted would have a material effect on our consolidated financial statements.

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BUSINESS

General

We are a Connecticut-based real estate finance company that specializes in originating, underwriting, funding, servicing and managing a portfolio of short-term (i.e., three years or less) loans secured by first mortgage liens on real property located primarily in Connecticut. Each loan is also personally guaranteed by the principal(s) of the borrower, which guaranty is typically collaterally secured by a pledge of the guarantor’s interest in the borrower. Our typical borrower is a small real estate investor who will use the proceeds to fund its acquisition, renovation, rehabilitation, development and/or improvement of residential or commercial properties located primarily in Connecticut held for investment or sale. The property may or may not be income producing. We do not lend to owner-occupants. Our loans are referred to in the real estate finance industry as “hard money loans.”

Our loans typically have a maximum initial term of three years and bear interest at a fixed rate of 9% to 12% per year and a default rate for non-payment of 18%. In addition, we usually receive origination fees, or “points,” ranging from 2% to 5% of the original principal amount of the loan as well as other fees relating to underwriting, funding and managing the loan. When we renew or extend a loan we generally receive additional “points” and other fees. Interest is always payable monthly in arrears. As a matter of policy, we do not make any loans if the loan-to-value ratio exceeds 65%. In the case of construction loans, the loan-to-value ratio is based on the post-construction value of the property. In the case of loans having a principal amount in excess of $500,000, we require a formal appraisal by a licensed appraiser. In the case of smaller loans, we rely on readily available market data, including tax assessment rolls, recent sales transactions and brokers to evaluate the strength of the collateral. Finally, we will adopt a policy, to take effect at the time this offering becomes effective, that will limit the maximum amount of any loan we fund to a single borrower or a group of affiliated borrowers to 10% of the aggregate amount of our loan portfolio after taking into account the loan under consideration.

Our principal executive officers are experienced in hard money lending under various economic and market conditions. Our founders and co-chief executive officers, Jeffrey C. Villano and John L. Villano, spend a significant portion of their time on business development as well as on underwriting, structuring and servicing each loan in our portfolio. A principal source of new transactions has been repeat business from existing and former customers and their referral of new business. We also receive leads for new business from banks, brokers, attorneys and web-based advertising. We rely on our own employees, independent legal counsel, and other independent professionals to verify title and ownership, to file liens and to consummate the transactions.

Our primary objective is to grow our loan portfolio while protecting and preserving capital in a manner that provides for attractive risk-adjusted returns to our shareholders over the long term through dividends. We intend to achieve this objective by continuing to selectively originate loans and carefully manage our loan portfolio in a manner designed to generate attractive risk-adjusted returns across a variety of market conditions and economic cycles. We believe that the demand for relatively small real estate loans in Connecticut and neighboring states is significant and growing and that traditional lenders, including banks and other financial institutions that usually serve this market are unable to satisfy this demand. This demand/supply imbalance has created an opportunity for “hard money” real estate lenders like us to selectively originate high-quality first mortgage loans on attractive terms and these conditions should persist for a number of years. We have built our business on a foundation of intimate knowledge of the Connecticut real estate market, our ability to respond quickly to customer needs and demands and a disciplined underwriting and due diligence culture that focuses primarily on the value of the underlying collateral and that is designed to protect and preserve capital. We believe that our flexibility in terms of meeting the needs of borrowers without compromising our standards on credit risk, our expertise, our intimate knowledge of the real estate market in Connecticut and various other states and our focus on newly originated first mortgage loans has defined our success until now and should enable us to continue to achieve our objectives.

We were originally organized as a Connecticut limited liability company. In anticipation of this offering, we will convert to a New York C corporation with the intent of qualifying as a REIT. As a REIT, we will be required to distribute at least 90% of our taxable income to our shareholders each year in order to maintain

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that status. To the extent we distribute less than 100% of our taxable income to our shareholders (but more than 90%) we will maintain our REIT status but the undistributed portion will be subject to regular corporate income taxes. As a REIT, we may also be subject to federal excise taxes and minimum state taxes. We also intend to operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act.

The Market Opportunity

Real estate investment is a capital-intensive business that relies heavily on debt capital to acquire, develop, improve, construct, renovate and maintain properties. We believe there is a significant market opportunity for a well-capitalized “hard money” real estate finance company to originate attractively priced loans with strong credit fundamentals. We further believe that the demand for relatively small real estate loans (i.e., loans having an original principal amount of less than $500,000) to acquire, develop, renovate, rehabilitate or improve residential or commercial real estate held for investment in Connecticut and certain other states (e.g., New York and Massachusetts), where real estate values in many neighborhoods are either stable or increasing and substandard properties are being improved, rehabilitated and renovated, presents a compelling opportunity to generate attractive returns for an established, well-financed, non-bank lender like us. We have competed successfully in the Connecticut market since December 2010 notwithstanding the fact that many traditional lenders, such as banks and other institutional lenders, also service this market. We believe our primary competitive advantage is our ability to approve and fund loans quickly and efficiently and our flexibility to structure loans to meet the particular needs of the borrower. In this environment, characterized by a supply-demand imbalance for financing and stable asset values, we believe we are well positioned to capitalize and profit from these industry dynamics.

Our Business and Growth Strategies

Our primary objective is to grow our loan portfolio while protecting and preserving capital in a manner that provides for attractive risk-adjusted returns to our shareholders over the long term principally through dividends. We intend to achieve this objective by continuing to focus exclusively on selectively originating, servicing and managing a portfolio of short-term (i.e., three years or less) loans secured by first mortgages on real estate located primarily in Connecticut as well as Massachusetts, Rhode Island, New Jersey and New York that are designed to generate attractive risk-adjusted returns across a variety of market conditions and economic cycles. We believe that our ability to react quickly to the needs of borrowers, our flexibility in terms of structuring loans to meet the needs of borrowers, our intimate knowledge of the real estate markets that we serve, our expertise in “hard money” lending and our focus on newly originated first mortgage loans, should enable us to achieve this objective. Nevertheless, we will remain flexible in order to take advantage of other real estate related opportunities that may arise from time to time, whether they relate to the mortgage market or to direct or indirect investments in real estate.

Our strategy to achieve our objective includes the following:

capitalize on opportunities created by the long-term structural changes in the real estate lending market and the continuing lack of liquidity in the real estate market;
take advantage of the prevailing economic environment as well as economic, political and social trends that may impact real estate lending currently and in the future as well as the outlook for real estate in general and particular asset classes;
remain flexible in order to capitalize on changing sets of investment opportunities that may be present in the various points of an economic cycle; and
operate so as to qualify as a REIT and for an exemption from registration under the Investment Company Act.

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Our Competitive Strengths

We believe our competitive strengths include:

Experienced management team.  Our management team has successfully originated and serviced a portfolio of real estate mortgage loans generating attractive annual returns under varying economic and real estate market conditions. We expect that the experience of our management team will provide us with the ability to effectively deploy our capital in a manner that we believe will provide for attractive risk-adjusted returns but with a focus on capital preservation and protection.
Long-standing relationships.   At June 30, 2016, 20% of SCP’s loan portfolio consisted of loans to borrowers with whom it has a long-term relationship, including JJV, which accounts for 4.5% of our loan portfolios. Customers are also a referral source for new borrowers. So long as these borrowers remain active real estate investors they provide us with an advantage in securing new business and help us maintain a pipeline to attractive new opportunities that may not be available to many of our competitors or to the general market.
Knowledge of the market.  Our intimate knowledge of the Connecticut real estate market enhances our ability to identify attractive opportunities and helps distinguish us from many of our competitors.
Disciplined lending.  We seek to maximize our risk-adjusted returns, and preserve and protect capital, through our disciplined and credit-based approach. We utilize rigorous underwriting and loan closing procedures that include numerous checks and balances to evaluate the risks and merits of each potential transaction. We seek to protect and preserve capital by carefully evaluating the condition of the property, the location of the property, the value of the property and other forms of collateral.
Vertically-integrated loan origination platform.  We manage and control the loan process from origination through closing with our own personnel or independent legal counsel and, in the case of larger loans (i.e., loans with an original principal amount in excess of $500,000) independent appraisers, with whom we have long-standing relationships, who together constitute a team highly experienced in credit evaluation, underwriting and loan structuring. We also believe that our procedures and experience allows us to quickly and efficiently execute opportunities we deem desirable.
Structuring flexibility.  As a relatively small, non-bank real estate lender, we can move quickly and have much more flexibility than traditional lenders to structure loans to suit the needs of our clients. Our ability to customize financing structures to meet borrowers’ needs is one of our key business strengths.
No legacy issues.  Unlike many of our competitors, we are not burdened by distressed legacy real estate assets. We do not have a legacy portfolio of lower-return or problem loans that could potentially dilute the attractive returns we believe are available in the current liquidity-challenged environment and/or distract and monopolize our management team’s time and attention. We do not have any adverse credit exposure to, and we do not anticipate that our performance will be negatively impacted by, previously purchased assets.
History of successful operations.  SCP commenced operations in December 2010 with three investors and limited equity capital. At June 30, 2016, it had approximately 160 investors and equity capital of $26.1 million, including capital invested by our founders and their respective affiliates. In addition, its loan portfolio grew to $30.4 million at that date. Over the last six years, SCP’s revenues, net income, cash flows and distributions to investors have steadily increased, SCP has closed on almost 400 loans and obtained a $15 million line of credit to support its lending operations. Since its inception in December 2010, SCP acquired one property through a foreclosure action and eight other properties by “deed in lieu of foreclosure” — i.e., the borrower, in default of its obligations under the terms of the loan, transferred title to the mortgaged property to SCP. The foreclosed property was sold for a small loss and one of the other properties was sold at breakeven. Two properties were sold for less than their respective carrying values but the borrowers’ obligations are guaranteed by a third party and SCP intends to assert its rights under the guaranty. The other five properties are being held for sale.

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Our Real Estate Lending Activities

Our real estate lending activities involve originating, underwriting, funding, servicing and managing short-term loans (i.e., loans with an initial term of three years or less), secured by first mortgage liens on real estate property held for investment purposes located primarily in Connecticut. Generally, borrowers use the proceeds from our loans for one of three purposes: (i) to acquire and/or renovate existing residential (single-, two- or three-family) real estate properties; (ii) to acquire vacant real estate and construct residential real properties; and (iii) to purchase and hold income producing properties. Our mortgage loans are structured to fit the needs and business plans of the borrowers. Revenue is generated primarily from the interest borrowers pay on our loans and, to a lesser extent, loan fee income generated on the origination and extension of loans.

At June 30, 2016, our current loan portfolio included loans ranging in size from $20,000 to $1.7 million. A majority of the loans have an original principal amount of less than $250,000, with the average loan size being $162,124 and a median loan size of $110,000. The table below gives a breakdown of our loan portfolio by loan size as of June 30, 2016:

   
Amount   Number of
Loans
  Aggregate
Principal Amount
Less than $100,000     89     $ 5,669,846  
$100,001 to $250,000     75       11,693,917  
$250,001 to $500,000     22       7,368,048  
$500,001 to $1,000,000     6       4,113,665  
Over $1,000,000     1     $ 1,550,000  
Total     193     $ 30,395,476  

Most of our loans were funded in full at their closing. However, in the case of a construction loan, where all or a portion of the loan proceeds are to be used to fund the costs of renovating or constructing improvements on the property, only a portion of the loan may be funded at closing. At June 30, 2016, our loan portfolio included construction loans under which we had a total funding commitment of approximately $5,140,000, the aggregate amount outstanding was approximately $4,189,000 and our unfunded commitment was approximately $951,000. Advances under construction loans are funded against requests supported by all required documentation (including lien waivers) as and when needed to pay contractors and other costs of construction.

In general, our strategy is to service and manage the loans we originate until they are paid. However, there have been a few instances where we have sold loans at par. Over 95% of the aggregate outstanding principal balance of our loan portfolio is secured by properties located in Connecticut at June 30, 2016. The remaining principal balance of our loan portfolio is secured by properties located in Massachusetts, New York and Rhode Island. We are considering expanding our geographic footprint to include Vermont and New Hampshire. Most of the properties we finance are residential investment, or commercial. However, in all instances the properties are held only for investment by the borrowers and may or may not generate cash flow.

The typical terms of our loans are as follows:

Principal amount.  Currently, we do not have any policy regarding minimum or maximum loan amounts. However, before we consummate this offering, we plan to adopt a policy that will limit the amount of any loan to 10% of our total loan portfolio after taking into account the loan in questions. At June 30, 2016, our loan portfolio included loans ranging in size from $20,000 to $1.7 million. Approximately, 85% of the loans had an original principal amount of $250,000 or less. Approximately 96% had an original principal amount of $500,000 or less. The average loan size was $162,124 and median loan size was $110,000.

Loan-to-Value Ratio.   Up to 65%. Under the Bankwell Credit Agreement the portion of an Eligible Note Receivable that can be financed depends on the loan-to-value ratio. The higher the loan-to-value ratio, the lower the financing percentage. If the loan-to-value ratio is 65%, the maximum amount of the loan that can be financed under the Bankwell Credit Line is 60% (subject to the overall cap of $250,000). If the loan-to-value ratio is less than 50%, up to 75% of the loan amount would be financeable.

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Interest rate.  A fixed rate between 9% to 12% per annum with a default rate of 18%.

Origination.  Ranges from 2% for loans of one year or less to 5% for three-year loans. In the case of three-year loans, a portion of the origination is credited back to the borrower in the event the loan balance is paid off early. In addition, if the term of the loan is extended, additional points are payable upon the extension.

Term.  Generally, one to three years with early termination in the event of a sale of the property. We may agree to extend the maturity date so long as the borrower is in compliance with all loan covenants, financial and non-financial, and the loan otherwise satisfies our then existing underwriting criteria. As a matter of policy, we will only extend the maturity for one year at a time, although there is no limit on the number of times the same loan can be extended. However, under the Bankwell Credit Agreement, a loan whose maturity date has been extended for more than three years from the original maturity date loses its status as an Eligible Note Receivable.

Prepayments.  Borrower may prepay the loan at any time beginning three months after the funding date, without premium or penalty.

Covenants.  To timely pay all taxes, insurance, assessments, and similar charges with respect to the property; to maintain hazard insurance; to maintain and protect the property.

Events of default.  Include: (i) failure to make payment when due; or (ii) breach of a covenant.

Payment terms.   Interest only is payable monthly in arrears. Principal is due in a “balloon” payment at the maturity date.

Escrow.  Generally, none required.

Reserves.  Generally, none required.

Security.  The loan is evidenced by a promissory note, which is secured by a first mortgage lien on real property owned by the borrower. In addition, each loan is guaranteed by the principals of the borrower, which guaranty may be collaterally secured by a pledge of the guarantor’s interest in the borrower or other real estate owned by the guarantor.

Fees and Expenses.   Borrowers pay an application fee, an inspection fee, wire fee, bounced check fee and, in the case of construction loans, check requisition fee for each draw from the loan. Finally, as is typical in real estate finance transactions, the borrower pays all expenses relating to obtaining the loan including the cost of a property appraisal, the cost of an environmental assessment report, if any, the cost of credit report and all title, recording fees and legal fees.

Operating Data

SCP’s lending activities increased each year since it commenced operations. We believe this trend will continue for the foreseeable future to grow given the stability of the real estate market in Connecticut and other states in which we make loans and our reputation among real estate investors as a reliable and reasonable financing source.

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Our Loan Portfolio

The following table highlights certain information regarding our real estate lending activities for the periods indicated:

       
  Six Months Ended
June 30,
  Year Ended
December 31,
     2016   2015   2015   2014
Loans originated   $ 9,108,259     $ 8,835,028     $ 19,412,438     $ 8,864,700  
Loans repaid   $ 6,353,148     $ 2,919,019     $ 5,812,116     $ 3,714,059  
Mortgage lending revenues   $ 1,973,691     $ 1,032,152     $ 2,786,724     $ 1,559,407  
Mortgage lending expenses   $ 421,340     $ 165,374     $ 479,821     $ 59,595  
Number of loans outstanding     193       148       185       107  
Principal amount of loans earning interest   $ 30,395,476     $ 20,765,028     $ 27,532,867     $ 14,849,019  
Average outstanding loan balance   $ 157,490     $ 140,304     $ 148,826     $ 138,775  
Weighted average contractual interest rate(2)     11.91 %      11.80 %      11.76 %      11.66 % 
Weighted average term to maturity (in months)(1)     20       24       23       22  

(1) Without giving effect to extension options.
(2) Does not include “points” paid in connection with origination of loans.

Historically, most of our loans are paid prior to their maturity dates. For example, of the loans that were repaid in full during the first half of 2016, 82% were repaid prior to maturity. Similarly, for 2015 and 2014 82% and 78%, respectively, of the loans repaid during those years were paid prior to maturity.

As a real estate finance company, we deal with a variety of default situations, including breaches of covenants, such as the obligation of the borrower to maintain adequate liability insurance on the mortgaged property, to pay the taxes on the property and to make timely payments to us. However, since its inception in December 2010, SCP acquired one property through a foreclosure action and eight other properties by “deed in lieu of foreclosure” — i.e., the borrower, in default of its obligations under the terms of the loan transferred title to the mortgaged property to SCP. The foreclosed property was sold for a small loss and one of the other properties was sold at breakeven. Two properties were sold for less than their respective carrying values but the borrowers’ obligations are guaranteed by a third party. SCP intends to assert its rights under the guaranty. The other five properties are being held for sale. Until mid-2015, we did not have an aggressive stance regarding delinquent payments. However, as our business and portfolio grew, we realized late payments were adversely impacting our performance. In addition, late payments were adversely impacting our ability to comply with the covenants under our agreement with Bankwell. As a result, we decided to be more aggressive in asserting our right to collect late payment fees. As a consequence, our revenue from late payment fees increased initially but the number of loans technically in arrears has decreased. Notwithstanding our aggressive stance, we realized that certain borrowers may have difficulty staying current on their obligations. Thus, if a borrower can demonstrate true “hardship”, we will not enforce our rights immediately and give the borrower an opportunity to cure its default. We do not have any specific definitive criteria as to what constitutes hardship or the period of time we will forbear. Some of the factors we will consider include the nature of the default (i.e., whether nonpayment of amounts due or breach of a covenant or agreement), the reason or reasons for the default, our cash flow requirements, the nature and length of our relationship with the borrower, whether or not the borrower has a history of non-payment and the loan-to-value ratio at the time of the default.

At June 30, 2016 the two largest borrowers, or groups of affiliated borrowers, accounted for 5.6% and 4.5% of SCP’s loan portfolio. At December 31, 2015 the same two borrowers accounted for 5.6% and 5.5% of SCP’s loan portfolio. The smaller of the two borrowers in both periods is JJV, SCP’s manager.

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The following table sets forth information regarding the types of properties securing our mortgage loans outstanding at June 30, 2016, December 31, 2015 and 2014, and the interest earned in each category: [To be updated]

     
  As of
June 30,
2016
  As of
December 31,
2015
  As of
December 31,
2014
Developer – Residential Mortgages   $ 21,258,849     $ 15,475,268     $ 10,482,448  
Developer – Commercial Mortgages     6,263,296       3,235,311       3,369,620  
Land Mortgages     2,337,813       1,687,449       649,951  
Mixed Use     535,518       367,000       347,000  
Total Mortgages Receivable   $ 30,395,476     $ 20,765,028     $ 14,849,019  

                 
  For the Six Months Ended
June 30, 2016
  For the Year Ended
December 31, 2015
  For the Year Ended
December 31, 2014
     # of
Loans
  Interest
earned
  %   # of
Loans
  Interest
earned
  %   # of
Loans
  Interest
Earned
  %
Residential     151     $ 1,356,926       72.8       134     $ 1,794,785       72.4       76     $ 1,005,939       70.9  
Commercial     28       251,604       19.0       34       455,393       18.4       21       313,558       22.1  
Land Mortgages     9       81,555       6.0       12       160,795       6.5       7       66,684       4.7  
Mixed Use     5       45,115       2.2       5       66,903       2.7       3       32,633       2.3  
Total     193     $ 1,735,200       100.0       185     $ 2,477,876       100.0       107     $ 1,418,814       100.0  

At June 30, 2016, 184 loans, which accounted for 95.4% of the aggregate outstanding principal balance of our loan portfolio, were secured by properties located in Connecticut; 6 loans, which accounted for 3.25% of the aggregate outstanding principal balance of our loan portfolio, were secured by properties located in Massachusetts; 2 loans, which accounted for 1.05% of the aggregate outstanding principal balance of our loan portfolio, were secured by properties located in New York; and 1 loan, which accounted for 0.3%, was secured by a property located in Rhode Island.

Our Origination Process and Underwriting Criteria

Our principal executive officers are experienced in hard money lending under various economic and market conditions. Our founders and co-chief executive officers, Jeffrey C. Villano and John L. Villano, spend a significant portion of their time on business development as well as on underwriting, structuring and servicing each loan in our portfolio. A principal source of new transactions has been repeat business from existing and former customers and their referral of new business. We also receive leads for new business from banks, brokers, attorneys and web-based advertising.

When underwriting a loan, the primary focus of our analysis is the value of a property. Prior to making a final decision on a loan application we conduct extensive due diligence of the property as well as the borrower and its principals. In terms of the property, we only require a third party appraisal and a third party assessment report if the original principal amount of the loan exceeds $500,000. In all other cases, we rely on readily available market data such as tax assessments and recent sales. We also order title, lien and judgment searches. In most cases, we will also make an on-site visit to evaluate not only the property but the neighborhood in which it is located. Finally, we analyze and assess selected financial and operational data provided by the borrower relating to its operation and maintenance of the property. In terms of the borrower and its principals, we usually obtain third party credit reports from one of the major credit reporting services as well as selected personal financial information provided by the borrower and its principals. We analyze all this information carefully prior to making a final determination. Ultimately, our decision is based primarily on our conclusions regarding the value of the property, which takes into account factors such as the neighborhood in which the property is located, the current use and potential alternative use of the property, current and potential net income from the property, the local market, sales information of comparable properties, existing zoning regulations, the creditworthiness of the borrower and its principles and their experience in real estate ownership, construction, development and management. In conducting due diligence, we rely, in part, on third party professionals and experts including appraisers, engineers, title insurers and attorneys.

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Before a loan commitment is issued, the loan must be reviewed and approved by our co-chief executive officers. Our loan commitments are generally issued subject to receipt by us of title documentation and title report, in a form satisfactory to us, for the underlying property. We also require a personal guarantee from the principal or principals of the borrower.

Our Current Financing Strategies

We use a combination of equity capital and the proceeds of debt financing to fund our operations. We do not have any policy limiting the amount of debt we may incur. However, under the terms of the Bankwell Credit Agreement, we may not incur any additional indebtedness without Bankwell’s consent. Depending on various factors we may, in the future, decide to take on additional debt to expand our mortgage loan origination activities in order to increase the potential returns to our shareholders. Although we have no pre-set guidelines in terms of leverage ratio, the amount of leverage we will deploy will depend on our assessment of a variety of factors, which may include the liquidity of the real estate market in which most of our collateral is located, employment rates, general economic conditions, the cost of funds relative to the yield curve, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, our opinion of the creditworthiness of our borrowers, the value of the collateral underlying our portfolio, and our outlook for interest rates and property values. At June 30, 2016, debt proceeds represented 21.8% of our total capital. However, in order to grow the business and satisfy the requirement to pay out 90% of net profits, we expect to increase our level of debt over time to approximately 50% of capital. We intend to use leverage for the sole purpose of financing our portfolio and not for the purpose of speculating on changes in interest rates.

At June 30, 2016, SCP’s members’ equity was $26.1 million, including approximately $2.8 million from JJV and the Villanos, directly and indirectly through their respective affiliates, taking into account initial and additional capital contributions. The principal purpose of this offering is to raise additional equity capital to expand our real estate lending business.

Another source of capital for us is our $15.0 million Bankwell Credit Line. Borrowings under the Bankwell Credit Line bear interest at a rate equal to the greater of (i) a variable rate equal to the sum of the prime rate of interest as in effect from time to time (3.50% as of October 1, 2016) plus 3.0% or (ii) 6.25% per annum. The Bankwell Credit Line expires and the outstanding indebtedness thereunder will become due and payable in full on March 15, 2018. Assuming we are not then in default under the terms of the Bankwell Credit Agreement, we have the option to repay the outstanding balance, together with all accrued interest thereon in 36 equal monthly installments beginning April 15, 2019. The Bankwell Credit Line is secured by assignment of mortgages and other collateral and is jointly and severally guaranteed by JJV, Jeffrey C. Villano and John L. Villano, our founders and co-chief executive officers. However, each of their respective liability under the guaranty is capped at $1 million.

The Bankwell Credit Line contains various covenants and restrictions that are typical for these kinds of credit facilities, including limiting the amount that we can borrow relative to the value of the underlying collateral, maintaining various financial ratios and limitations on the terms of loans we make to our customers. Under the terms of the Bankwell Credit Line, the amount outstanding at any one time may not exceed the lesser of (i) $15.0 million and (ii) our Eligible Note Receivables (as defined in the Bankwell Credit Agreement). In addition, each “Advance” is further limited to the lesser of (i) 50% – 75%, depending on the loan-to-value ratio, of the principal amount of the particular Eligible Note Receivable being funded and (ii) $250,000. As of June 30, 2016, we estimate that loans having an aggregate principal amount of $25.3 million, representing approximately 87% of SCP’s mortgage receivables, satisfied all of the eligibility requirements set forth in the Bankwell Agreement. As of June 30, 2016, the total amount outstanding under the Bankwell Credit Line was $5.0 million leaving us with sufficient borrowing capacity to draw the entire $15 million facility if we so choose. Given the nature of our business, we cannot assure you that we will always be able to borrow the maximum allowed under the terms of the Bankwell Credit Line.

Advances under the Bankwell Credit Line are required to be used exclusively to fund Eligible Notes Receiveable. The basic eligibility requirements for an advance are as follows:

the initial term of the note may not exceed 36 months and the original maturity date may not be extended for more than 36 months;

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the collateral securing the mortgage may not be the borrower’s primary residence;
mortgage loans to any single borrower or to multiple borrowers that have the same guarantor cannot exceed $450,000 in the aggregate;
minimum credit scores for the borrower and guarantors of loans in excess of $100,000 of (i) 625 for loans with a loan-to-value ratio of 50% or less or (ii) 660 for loans with a loan-to-value ratio of more than 50% but less than 75%;
maximum amount of any advance against an eligible note receivable is $250,000;
payments on the underlying loan may not be more than 60 days past due; and
receipt of certain information relating to the property including an appraisal (if the amount of the underlying loan exceeds $325,000) or other relevant data regarding value (if the amount of the underlying loan is less than $325,000).

In addition, the Bankwell Credit Line includes the following restrictions, limitations and prohibitions:

prohibiting any liens on any of the collateral securing the Bankwell Credit Line, which is essentially all of our assets;
prohibiting us from merging, consolidating or disposing of any asset;
prohibiting us from incurring any other indebtedness to a third party;
prohibiting us from forming or transacting business with any subsidiary or affiliate other than to make loans to our borrowers;
prohibiting us from allowing any litigation in excess of $50,000 against any of our assets unless we are fully insured against such loss;
prohibiting us from issuing or redeeming any equity interest, distributing any equity interest, pay any indebtedness owed to an equity holder, suffer any change in ownership that would result in JJV, Jeffrey Villano and John Villano collectively owning less than 50% of the membership interests in SCP;
prohibiting us from declaring or paying any dividends except in certain limited circumstances;
prohibiting us from purchasing any securities issued by or otherwise invest in any public or private entity;
suffer any change in our executive management; and
change the form or nature of SCP’s or JJV’s ownership structure

Loan covenants include the following:

punctually pay amounts due;
pay on demand any charges customarily incurred or levied by Bankwell;
pay any and all taxes, assessments or other charges assessed against us or any of our assets;
pay all insurance premiums;
maintain our principal deposit and disbursement accounts with Bankwell;
perfect Bankwell’s lien on the assets;
comply with all applicable laws, ordinances, rules and regulations of any governmental authority; or
change the nature of our business.

Finally, we must comply with the following financial covenants:

continuously maintain a fixed charge ratio of at least 1.35:1.00 at the end of each fiscal year;

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continuously maintain a tangible net worth of not less than $15 million at the end of each fiscal quarter;
John Villano’s minimal capital investment in SCP may not be less than $195,000;
Jeffrey Villano’s minimal capital investment in SCP, directly and indirectly through affiliates, may not be less than $1,750,000 and
JJV’s minimal capital investment in SCP may not be less than $575,000.

The following table shows our sources of capital, including our financing arrangements, and our loan portfolio as of June 30, 2016:

 
Sources of Capital:
Debt:
        
Line of credit   $ 7,275,000  
Total debt   $ 7,275,000  
Capital (equity)     26,055,292  
Total sources of capital   $ 33,330,092  
Assets:
        
Mortgages receivable   $ 30,395,476  
Other assets     3,696,569  
Total assets   $ 34,092,045  

Management

Since its inception, all of SCP’s operations have been managed by JJV for which it paid management fees. SCP had no employees and no offices. All of its corporate documents and records were maintained by JJV in its offices. JJV did not have any employees either. All of JJV’s activities were conducted by Jeffrey Villano and John Villano in their capacity as the managers of JJV. Simultaneously, they also engaged in other business activities. John Villano had his own private accounting practice and Jeffrey Villano owned and managed other properties that had no relationship to SCP.

The management fees payable to JJV in its capacity as the manager of SCP are set forth in the SCP operating agreement and include the following:

(a) 75% of all origination fees and 100% of wire and credit fees paid by a borrower in connection with originating and funding a loan;
(b) if SCP purchases an existing loan from a third party, a fee comparable to the origination fee that SCP would have charged if it had originated such loan;
(c) a listing fee in connection with the sale of any property that SCP acquires pursuant to a foreclosure action;
(d) a monthly servicing fee equal to the sum of (i) one-twelfth of 1% of the total assets of SCP and (ii) one-twelfth of 0.5% to one percent of the total amount of SCP’s loan portfolio; and
(e) reimbursement of any fees paid in connection with the preparation of all tax returns and audit reports on behalf of SCP.

In addition, JJV has the right to sell any mortgages it holds to SCP at 10% over the principal amount thereof. JJV has never exercised this right.

Once the transactions contemplated by the Exchange Agreement are consummated and SCP becomes our wholly-owned subsidiary, JJV will no longer function as the manager of SCP. Rather John Villano and Jeffrey Villano will become our full-time employees and senior executive officers and will continue to manage all of SCP’s activities in that capacity. They have agreed to devote 100% of their time and effort to our business and will discontinue all other business activities, whether or not they conflict with our business.

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Competition

The real estate finance market in Connecticut is highly competitive. Our competitors include traditional lending institutions such as regional and local banks, savings and loan institutions, credit unions and other financial institutions as well as other market participants such as specialty finance companies, REITs, investment banks, insurance companies, hedge funds, private equity funds, family offices and high net worth individuals. In addition, we estimate that, in addition to us, there are approximately five “hard money” lenders of significant size serving the Connecticut real estate market. Many of these competitors enjoy competitive advantages over us, including greater name recognition, established lending relationships with customers, financial resources, and access to capital.

Notwithstanding the intense competition and some of our competitive disadvantages, we believe we have carved a niche for ourselves among small real estate developers, owners and contractors throughout Connecticut and in parts of Massachusetts and New York because we are relatively well-capitalized, our ability to structure each loan to suit the needs of each individual borrower and our ability to act quickly. In addition, we believe we have developed a reputation among these borrowers as offering reasonable terms and providing outstanding customer service. We believe our future success will depend on our ability to maintain and capitalize on our existing relationships with borrowers and brokers and to expand our borrower base by continuing to offer attractive loan products, remain competitive in pricing and terms, and provide superior service.

Sales and Marketing

We do not engage any third parties for sales and marketing. Rather, we rely on our senior executive officers to generate lending opportunities as well as referrals from existing or former borrowers, brokers, and bankers and web-based advertising. A principal source of new transactions has been repeat business from prior customers and their referral of new leads.

Intellectual Property

Our business does not depend on exploiting or leveraging any intellectual property rights. To the extent we own any rights to intellectual property, we rely on a combination of federal, state and common law trademarks, service marks and trade names, copyrights and trade secret protection. We have not registered any trademarks, trade names, service marks or copyrights in the United States Patent and Trademark Office.

Employees

Currently our only employees are Jeffrey Villano and John Villano. However, until this offering is consummated the scope of their duties is limited to various administrative and clerical tasks, some of which relate to this offering. Once this offering is consummated, they will become our full time employees and devote all of their time and efforts to managing and operating our business.

Regulation

Our operations are subject, in certain instances, to supervision and regulation by state and federal governmental authorities and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions. In addition, we may rely on exemptions from various requirements of the Securities Act of 1933, as amended (the “Securities Act”), the Exchange Act, the Investment Company Act and ERISA. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third-parties who we do not control.

Regulatory Reform

The Dodd-Frank Act, which went into effect on July 21, 2010, is intended to make significant structural reforms to the financial services industry. For example, pursuant to the Dodd-Frank Act, various federal agencies have promulgated, or are in the process of promulgating, regulations with respect to various issues that may affect us. Certain regulations have already been adopted and others remain under consideration by various governmental agencies, in some cases past the deadlines set in the Dodd-Frank Act for adoption. At the present time, we do not believe any regulations adopted under the Dodd-Frank Act apply to us. However, it is possible that regulations that will be adopted in the future will apply to us or that existing regulations will apply to us as our business evolves.

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Regulation of Commercial Real Estate Lending Activities

Although most states do not regulate commercial finance, certain states impose limitations on interest rates and other charges and on certain collection practices and creditor remedies, and require licensing of lenders and financiers and adequate disclosure of certain contract terms. We also are required to comply with certain provisions of, among other statutes and regulations, certain provisions of the Equal Credit Opportunity Act that are applicable to commercial loans, The USA PATRIOT Act, regulations promulgated by the Office of Foreign Asset Control and federal and state securities laws and regulations.

Investment Company Act Exemption

Although we reserve the right to modify our business methods at any time, we are not currently required to register as an investment company under the Investment Company Act. However, we cannot assure you that our business strategy will not evolve over time in a manner that could subject us to the registration requirements of the Investment Company Act.

Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. Real estate mortgages are excluded from the term “investment securities.”

We rely on the exception set forth in Section 3(c)(5)(C) of the Investment Company Act which excludes from the definition of investment company “[a]ny person who is not engaged in the business of issuing redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates, and who is primarily engaged in one or more of the following businesses... (C) purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” The SEC generally requires that, for the exception provided by Section 3(c)(5)(C) to be available, at least 55% of an entity’s assets be comprised of mortgages and other liens on and interests in real estate, also known as “qualifying interests,” and at least another 25% of the entity’s assets must be comprised of additional qualifying interests or real estate-type interests (with no more than 20% of the entity’s assets comprised of miscellaneous assets). At the present time, we qualify for the exemption under this section and our current intention is to continue to focus on originating short term loans secured by first mortgages on real property. However, if, in the future, we do acquire non-real estate assets without the acquisition of substantial real estate assets, we may qualify as an “investment company” and be required to register as such under the Investment Company Act, which could have a material adverse effect on us.

If we were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), portfolio composition, including restrictions with respect to diversification and industry concentration, and other matters.

Qualification for exclusion from the definition of an investment company under the Investment Company Act will limit our ability to make certain investments. In addition, complying with the tests for such exclusion could restrict the time at which we can acquire and sell assets.

Real Property

SCP’s business is conducted by JJV from JJV’s offices. We are in the process of trying to locate office lease space for our business. If we cannot find and occupy appropriate office space before this offering is consummated, we will enter into a temporary occupancy agreement with Union News of New Haven, Inc., the owner of the building located at 23 Laurel Street, Branford, Connecticut, to use the space that is currently occupied by JJV. The monthly fee to occupy that space will be $1,500 and we will have the right to terminate at any time with no notice. Union News of New Haven is 20%-owned by Jeffrey Villano and 80%-owned by Shirley Villano, his mother.

Legal Proceedings

We are not currently a party to any material legal proceedings not in the ordinary course of business.

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CORPORATE STRUCTURE — REIT STATUS

Until the offering contemplated by this prospectus, we operated as a Connecticut limited liability company under the name Sachem Capital Partners, LLC. For federal and state income tax purposes, we were taxed as a partnership. Accordingly, we paid no federal or state income taxes at the entity level. Rather each member paid income taxes on his, her or its pro rata share of our taxable income. In addition, we distributed most of our net profits to our members.

Prior to the date of this prospectus, Sachem Capital and SCP have entered into an Exchange Agreement, pursuant to which SCP will transfer all of its assets and liabilities to Sachem Capital in exchange for 6,283,273 common shares of Sachem Capital and the assumption of SCP’s obligations under the Bankwell Credit Line. Immediately thereafter, SCP will distribute those shares to its members in full liquidation of their membership interests in SCP, pro rata in accordance with the members’ positive capital account balances. For accounting purposes, the consummation of the exchange transaction will be treated as a recapitalization of SCP.

The pre-offering capitalization of Sachem Capital was based on discussions with the representative and took into account (i) SCP’s historical financial performance, including revenues, net profits, cash flow from operations and distributions to members, (ii) its prospects (taking into account, among other things, any anticipated changes as a result of the change in SCP’s status from a limited liability company to a regular C corporation and its operation as a REIT for income tax purposes) and (iii) the market value of comparable public companies. The parties agreed to value Sachem Capital at an amount equal to approximately 164% of SCP’s member equity at June 30, 2016, which was then divided by the proposed initial public offering price to arrive at the pre-offering capitalization of Sachem Capital. A portion of these shares were allocated to the founders of Sachem Capital and the balance to the members of SCP. The result is that each member of SCP is expected to receive Sachem Capital common shares having a value of approximately $1.206 for each $1.00 in its capital account.

JJV, whose members include various members of the Villano family, in the liquidation of SCP will receive         common shares, or approximately     % of the common shares to be issued in the exchange. In addition, the Villano brothers, individually and through their affiliates, will receive an additional           common shares, or     % of the common shares issued in the exchange. In addition, Jeffrey Villano and John Villano, were each issued 1,085,000 common shares of Sachem Capital upon its formation. Accordingly, after giving effect to the exchange but immediately prior to the offering, in total, Jeffrey and John Villano, collectively, will beneficially own           common shares (or    %) of Sachem Capital’s common shares.

Following the consummation of the transactions contemplated by the Exchange Agreement and the completion of this offering, we believe that we will meet all of the requirements for qualification as a REIT. Accordingly, we intend to elect to be taxed as a REIT beginning as soon as possible after this offering is consummated. Our qualification as a REIT, and our ability to maintain our status as a REIT, will depend on our ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Code, relating to, among other things, the sources of our gross income, the composition and values of our assets and our compliance with the distribution and ownership requirements that apply to REITs.

So long as we qualify and operate as a REIT, we will not be subject to U.S. federal income tax on our net taxable income that is distributed to our shareholders. If we fail to qualify as a REIT in any taxable year or fail to operate in compliance with the rules that apply to REIT (and do not qualify for certain statutory relief provisions), we will be subject to U.S. federal income tax at regular corporate rates and will be precluded from re-electing to be taxed as a REIT for the subsequent four taxable years following the year during which our REIT election was effectively terminated. Even if we qualify as a REIT, we may incur U.S. federal, state and local income and/or excise taxes under certain circumstances.

In order to comply with certain REIT qualification requirements, we are required to distribute all of our non-REIT accumulated earnings and profits, before the end of our first REIT taxable year. We do not believe that we. have any non-REIT earnings and profits.

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MANAGEMENT

Directors and Executive Officers

As of the date of this prospectus, our executive officers and directors and their respective ages as of the date of this prospectus are as follows:

   
Name   Age   Position
John L. Villano   55   Chairman, Co-Chief Executive Officer, Chief Financial Officer and Secretary
Jeffrey C. Villano   50   President and Co-Chief Executive Officer, Treasurer and Director
Leslie Bernhard(1)(2)   71   Director-Nominee
Arthur Goldberg(1)(3)   77   Director-Nominee
Brian Prinz(4)   64   Director-Nominee

(1) Member of the Audit, Compensation and Nominating and Corporate Governance Committees.
(2) Chairman of the Compensation Committee.
(3) Chairman of the Audit Committee.
(4) Chairman of the Nominating and Corporate Governance Committee.

Under our bylaws, each director holds office until the next annual meeting of shareholders and his successor is duly elected and qualified and officers are elected to serve subject to the discretion of the board of directors.

Set forth below is a brief description of the background and business experience of our executive officers and directors:

John L. Villano, is one of our co-founders and our Chairman, Co-Chief Executive Officer, Chief Financial Officer and Secretary. He is also a founder of SCP and a founder, member and manager of JJV, the manager of SCP since their inception in December 2010. Mr. Villano is a certified public accountant and has also been engaged in the private practice of accounting and auditing for almost 30 years. Upon the effective date of this offering, he will become our full time employee. His responsibilities will include overseeing all aspects of our business operations, including loan origination and servicing, investor relations, brand development and business development. He is also responsible for all of our accounting and financial matters. Mr. Villano is the brother of our other co-founder and co-chief executive officer, Jeffrey C. Villano. Mr. Villano holds a Bachelor’s Degree in Accounting from the University of Rhode Island in 1982. We believe that Mr. Villano’s experience in managing our business for the last 5½ years and his professional background as a certified public accountant make him an important part of our management team and make him a worthy candidate to serve on our board of directors.

Jeffrey C. Villano, is one of our co-founders and our Co-Chief Executive Officer, President and Treasurer. He is also a founder of SCP and a founder, member and manager of JJV, the manager of SCP since their inception in December 2010. Upon the effective date of this offering, he will become our full time employee. His responsibilities will include overseeing all aspects of our business operations, including loan origination and servicing, investor relations, brand development and business development. Mr. Villano is the brother of our other co-founder and co-chief executive officer, John L. Villano. Mr. Villano received an Associate’s Degree from Eastern Connecticut State University in 1985. We believe that Mr. Villano’s knowledge of the Connecticut real estate market and his experience in underwriting, structuring and managing real estate loans in general and his experience managing our business over the last 5½ years make him well-qualified to serve as a member of our board of directors.

Leslie Bernhard will become a member of our board of directors as of the date of this prospectus. She has served as the non-executive chairman of the board of Milestone Scientific Inc. (NYSE: MLSS), a developer and manufacturer of medical and dental devices, since October 2009, and an independent director of Milestone since May 2003. She has also served as an independent director of Universal Power Group, Inc. (OTCMarkets: UPGI), a global supplier of power solutions, since 2007. In 1986 she co-founded AdStar, Inc., an electronic ad intake service to the newspaper industry, and served as its president, chief executive officer

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and executive director until 2012. Ms. Bernhard holds a BS Degree in Education from St. John’s University. We believe that Ms. Bernhard’s experience as an entrepreneur and her service as a director of other public corporations will enable her to make an important contribution to our board of directors.

Arthur Goldberg will become a member of our board of directors as of the date of this prospectus. He has been a private accounting and business consultant since April 2012. From March 2011 through June 2015 he served as a director of Sport Haley Holdings, Inc., a manufacturer and distributor of sportswear and furniture. From January 2008 through March 2013, he served as a member of the board of directors of SED International Holdings, Inc. (OTC: SEDN), a distributor of consumer electronics. From January 2008 through March 2012, he served as the chief financial officer of Clear Skies Solar, Inc., an installer of solar panels. Mr. Goldberg has held senior executive positions, including chief financial officer and chief operating officer, and served as a director at a number of public companies. From January 2008 through June 2008, he served as the chief financial officer of Milestone Scientific, Inc. (NYSE MKT: MLSS), a medical device company. From June 1999 through April 2005, Mr. Goldberg was a partner with Tatum CFO Partners, LLP which provided interim CFO staffing services for public and private companies. From June 1996 through mid-1998 he served in various capacities, including vice chairman, chief financial officer and chief operating officer, at Complete Management, Inc. (AMEX: CMI; NYSE: CMI)), a physician practice management company. Mr. Goldberg is a certified public accountant and holds a B.B.A. degree from the City College of New York, an M.B.A. from the University of Chicago and J.D. and LL.M. degrees from the New York University School of Law. Mr. Goldberg was selected as a director because of his experience as the senior executive, operations and financial officer of a number of public companies and because of his background in law and accounting. We believe that his background and experience will provide our board or directors with a perspective on corporate finance matters. Given his financial experience, the board of directors has also determined that Mr. Goldberg qualifies as the Audit Committee financial expert, pursuant to Item 407(d)(5) of Regulation S-K promulgated by the SEC.

Brian Prinz will become a member of our board of directors as of the date of this prospectus. Since 1976, Mr. Prinz has been employed by Current, Inc., a leading manufacturer of laminated products including sheeting, tubes, rods, spacers and standoffs, as well as electrical grade laminates, a variety of carbon fiber products and other industrial products, which are used in various industries including construction, recreation, energy exploration and defense. He began his career at Current initially as a foreman, then as a production manager, then as vice president of sales and, since 2011, as President and Chief Financial Officer. Mr. Prinz graduated from Bryant College with B.A. in 1976. We believe that his background and experience make him well qualified to serve as a member of our board of directors.

Director Independence

The members of our board of directors are John L. Villano, Jeffrey C. Villano, Leslie Bernhard, Arthur Goldberg and Brian Prinz. The board of directors has determined, in accordance with Nasdaq’s Stock Market Rules, that: (i) Ms. Bernhard and Messrs. Goldberg and Prinz are independent and represent a majority of its members; (ii) Ms. Bernhard and Messrs. Goldberg and Prinz, as the members of the Audit Committee, the Nominating and Corporate Governance and Compensation Committee, are independent for such purposes. In determining director independence, our board of directors applies the independence standards set by Nasdaq. In applying these standards, our board of directors considers all transactions with the independent directors and the impact of such transactions, if any, on any of the independent directors’ ability to continue to serve on our board of directors.

Committees of the Board of Directors

We have three standing committees: an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. Each committee is made up entirely of independent directors as defined under Nasdaq’s Stock Market Rules; to wit, Mr. Goldberg serves as chairman of the Audit Committee and also qualifies as the “audit committee financial expert.”      serves as the chairman of the Compensation Committee.      serves as the chairman of the Nominating and Corporate Governance Committee.

Audit Committee.  The Audit Committee oversees our accounting and financial reporting processes, internal systems of accounting and financial controls, relationships with auditors and audits of financial statements. Specifically, the Audit Committee’s responsibilities include the following:

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selecting, hiring and terminating our independent auditors;
evaluating the qualifications, independence and performance of our independent auditors;
approving the audit and non-audit services to be performed by the independent auditors;
reviewing the design, implementation and adequacy and effectiveness of our internal controls and critical policies;
overseeing and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to our financial statements and other accounting matters;
with management and our independent auditors, reviewing any earnings announcements and other public announcements regarding our results of operations; and
preparing the report that the SEC requires in our annual proxy statement.

The members of the Audit Committee are Arthur Goldberg, who serves as chairman, Leslie Bernhard and     . The board of directors has determined that Arthur Goldberg is qualified as an Audit Committee financial expert pursuant to Item 407(d)(5) of Regulation S-K. Each Audit Committee member is independent, as that term is defined in Section 10A(m)(3) of the Exchange Act and their relevant experience is more fully described above.

Compensation Committee.  The Compensation Committee assists the Board in determining the compensation of our officers and directors. Specific responsibilities include the following:

approving the compensation and benefits of our executive officers;
reviewing the performance objectives and actual performance of our officers; and
administering our stock option and other equity and incentive compensation plans.

The Compensation Committee is comprised entirely of directors who satisfy the standards of independence applicable to compensation committee members established under 162(m) of the Code and Section 16(b) of the Exchange Act.

Nominating and Corporate Governance Committee.  The corporate governance and nominating committee assists the board by identifying and recommending individuals qualified to become members of the board of directors. Specific responsibilities include the following:

evaluating the composition, size and governance of our Board and its committees and making recommendations regarding future planning and the appointment of directors to our committees;
establishing a policy for considering shareholder nominees to our Board;
reviewing our corporate governance principles and making recommendations to the Board regarding possible changes; and
reviewing and monitoring compliance with our code of ethics and insider trading policy.

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EXECUTIVE COMPENSATION

Summary Compensation Information

We have never paid any compensation to our executive officers. However, since its inception SCP has paid management fees to JJV, a limited liability company founded and controlled by John L. Villano and Jeffrey C. Villano. Total amounts paid or accrued to JJV for 2016 (through June 30), 2015 and 2014 in its capacity as the manager of SCP were $152,517, $210,407 and $75,895, respectively. In 2014, JJV waived the portion of the management fee based on our total assets to which it would otherwise have been entitled. At June 30, 2016, the amount due to JJV was $350,905, which will be paid by SCP from its working capital immediately before this offering and the transactions contemplated by the Exchange Agreement are consummated. These amounts do not include loan origination fees that borrowers paid directly to JJV. After this offering is consummated, all loan origination fees will be paid directly to us. Origination fees paid to JJV in the six month ended June 30, 2016 and 2015 were $244,152 and $299,779, respectively, and in 2015 and 2014 were $541,600 and $305,600, respectively.

The management fees payable to JJV in its capacity as the manager of SCP are set forth in the SCP operating agreement and include the following:

(a) 75% of loan origination fees and 100% of credit and wire fees paid by a borrower in connection with originating and funding a loan;
(b) if SCP purchases an existing loan from a third party, a fee comparable to the origination fee that SCP would have charged if it had originated such loan;
(c) a listing fee in connection with the sale of any property that SCP acquires pursuant to a foreclosure action;
(d) a monthly servicing fee equal to the sum of (i) one-twelfth of 1% of the total assets of SCP and (ii) one-twelfth of 0.5% to one percent of the total amount of SCP’s loan portfolio; and
(e) reimbursement of any fees paid in connection with the preparation of all tax returns and audit reports on behalf of SCP.

In addition, JJV has the right to sell any mortgages it holds to SCP at 10% over the principal amount thereof. JJV has never exercised this right.

Upon consummation of the transactions contemplated by the Exchange Agreement, which should occur immediately before the date of this prospectus, JJV will no longer be entitled to receive any of the fees described above. However, any accrued but unpaid management fees as of the date of this prospectus will be paid to JJV before the time of the exchange.

Employment Agreements

In contemplation of this offering, we have entered into employment agreements with each of John Villano and Jeffrey Villano, which will take effect on the effective date of this offering. The material terms of the employment agreements are as follows:

John Villano will serve as our co-chief executive officer, chief financial officer and secretary and Jeffrey Villano will serve as our co-chief executive officer, president and treasurer.
The term of employment is five years commencing on the date of this prospectus unless terminated earlier pursuant to the terms of the agreement. The termination date will be extended one year on each anniversary date of the agreement unless either party to the agreement provides written notice at least 180 days before the next anniversary date that it is electing not to renew the agreement, in which case the agreement will terminate at the end of the fourth year from the next anniversary date.
Base compensation of $260,000 per annum which amount may be increased in the discretion of the compensation committee of the board of directors in its sole and absolute discretion.

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Incentive compensation in such amount as shall be determined by the compensation committee of the board of directors in its sole and absolute discretion, based on our achievement of the financial performance goals set by the Board.
Incentive compensation for certain capital transactions in such amount as shall be determined by the compensation committee of the board of directors in its sole and absolute discretion.
The right to participate in all retirement, pension, deferred compensation, insurance and other benefit plans adopted and maintained by us for the benefit of employees and be entitled to additional compensation in an amount equal to the cost of any such benefit plan or program if he chooses not to participate.