redoakv_1k
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-K
ANNUAL REPORT PURSUANT TO REGULATION A OF THE SECURITIES ACT OF
1933
For the fiscal year ended: December 31, 2020
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Red Oak Capital Fund V, LLC
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(Exact name of issuer as specified in its charter)
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Delaware
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85-0855800
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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625 Kenmoor Avenue SE, Suite 200
Grand Rapids, Michigan 49546
(Full mailing address of principal executive offices)
(616) 734-6099
(Issuer’s telephone number, including area code)
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION AND
FIGURES
This Annual Report on Form 1-K, or the Annual
Report, of Red Oak Capital Fund V, LLC, a Delaware limited
liability company, contains certain forward-looking statements that
are subject to various risks and uncertainties. Forward-looking
statements are generally identifiable by use of forward-looking
terminology such as “may,” “will,”
“should,” “potential,”
“intend,” “expect,” “outlook,”
“seek,” “anticipate,”
“estimate,” “approximately,”
“believe,” “could,” “project,”
“predict,” or other similar words or expressions.
Forward-looking statements are based on certain assumptions,
discuss future expectations, describe future plans and strategies,
contain financial and operating projections or state other
forward-looking information. Our ability to predict results or the
actual effect of future events, actions, plans or strategies is
inherently uncertain. Although we believe that the expectations
reflected in our forward-looking statements are based on reasonable
assumptions, our actual results and performance could differ
materially from those set forth or anticipated in our
forward-looking statements. Factors that could have a material
adverse effect on our forward-looking statements and upon our
business, results of operations, financial condition, funds derived
from operations, cash available for distribution, cash flows,
liquidity and prospects include, but are not limited to, the
factors referenced in our offering circular dated August 13, 2020,
filed pursuant to Rule 253(g)(2), under the caption “RISK
FACTORS” and which are incorporated herein by
reference (https://www.sec.gov/Archives/edgar/data/0001817069/000165495420009098/redoak_253g2.htm).
When
considering forward-looking statements, you should keep in mind the
risk factors and other cautionary statements in this report.
Readers are cautioned not to place undue reliance on any of these
forward-looking statements, which reflect our views as of the date
of this report. The matters summarized below and elsewhere in this
report could cause our actual results and performance to differ
materially from those set forth or anticipated in forward-looking
statements. Accordingly, we cannot guarantee future results or
performance. Furthermore, except as required by law, we are under
no duty to, and we do not intend to, update any of our
forward-looking statements after the date of this report, whether
as a result of new information, future events or
otherwise.
All
figures provided herein are approximate.
Item 1. Business
General
Unless the context otherwise requires or indicates, references in
this Annual Report on Form 1-K to “us,”
“we,” “our” or “our Company”
refer to Red Oak Capital Fund V, LLC, a Delaware limited liability
company.
Red
Oak Capital Fund V, LLC, a Delaware limited liability company, was
formed on March 23, 2020. We acquire and manage commercial real
estate loans and securities and other real estate-related debt
instruments. We implement an investment strategy that preserves and
protects our capital while producing attractive risk-adjusted
returns generated from current income on our portfolio. We actively
participate in the servicing and operational oversight of our
assets through our manager, Red Oak Capital GP, LLC, or our
Manager, rather than subrogate those responsibilities to a third
party.
The
Company does not act as a land or real estate developer and
currently has no intent to invest in, acquire, own, hold, lease,
operate, manage, maintain, redevelop, sell or otherwise use any
undeveloped real property or developed real property, unless such
actions are necessary or prudent based upon borrower default in
accordance with the terms of the debt instruments held by the
Company.
We filed an offering statement on Form 1-A, or the
Offering Statement, with the United States Securities and Exchange
Commission, or the SEC, on July 29, 2020, which offering statement
was qualified by the SEC on August 13, 2020. Pursuant to the
Offering Statement, we are offering a maximum of $50,000,000 in the
aggregate of the Company’s 7.5% A Bonds and 8.0% A R-Bonds, or the Bonds. The
purchase price per Bond is $1,000, with a minimum purchase amount
of $10,000. Assuming that the maximum amount of Bonds is purchased
and issued, we anticipate that the net proceeds, without taking
into account any sales of A R-Bonds, will be approximately
$44,525,000, if we sell the maximum offering amount. Proceeds from
the sale of the Bonds will be used to invest in collateralized
senior commercial mortgage notes, or property loans, and pay or
reimburse selling commissions and other fees and expenses
associated with the offering of the Bonds. As of December 31,
2020,
the Offering issued
$13,429,000 and $796,000 of A Bonds and A R-Bonds,
respectively. We
intend to continue to sell the Bonds through December 31, 2021, or
the date upon which our Manager determines to terminate the
offering, in its sole discretion.
As
of December 31, 2020, the Company had not deployed any capital into
senior secured loans.
On
March 19, 2021, the Company executed a Commercial Loan Agreement as
the lender providing a $1,730,000 senior secured loan (the
“Willow Run Loan”) to Willow Run, L.L.C., a Kentucky
limited liability company. Descriptions of the Willow Run Loan are
incorporated by reference herein to that Current Report on Form 1-U
dated March 25, 2021, located at:
https://www.sec.gov/Archives/edgar/data/0001817069/000165495421003284/roc_1u.htm.
On March 26, 2021, the Company executed a
Commercial Loan Agreement as the lender providing a
$ 6,775,000
senior secured loan (the “Benning Loan”) to 4559
Benning Rd SE LLC, a District of Columbia limited liability
company. Descriptions of the Benning Loan are incorporated by
reference herein to that Current Report on Form 1-U dated April 1,
2021, located at:
https://www.sec.gov/Archives/edgar/data/0001817069/000165495421003786/redoakv_1u.htm.
We
are managed by our Manager, which is wholly controlled by Red Oak
Capital Group, LLC, a Delaware limited liability company, or our
Sponsor, a Grand Rapids, Michigan based commercial real estate
finance company specializing in the acquisition, processing,
underwriting, operational management and servicing of commercial
real estate debt instruments. We benefit from our Sponsor’s
significant experience in the marketing and origination of project
transactions in which to properly and efficiently evaluate suitable
investments for our Company.
We
do not have any employees. We rely on the employees of our Sponsor,
as the sole member of our Manager, and its affiliates for the
day-to-day operation of our business.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
General
We commenced active operations upon the first
closing of our offering of Bonds on September 23, 2020. Through
December 31, 2020, we have received approximately
$13,000,000 in net
proceeds from our offering of Bonds
and have not yet invested in any first mortgage loans. We intend to continue to
sell the Bonds through December 31, 2021, or the date upon which
our Manager determines to terminate the offering, in its sole
discretion.
We
intend to make reserve allocations as necessary to (i) aid our
objective of preserving capital for our investors by supporting the
maintenance and viability of assets we acquire in the future and
(ii) meet the necessary covenants of the Bonds. If reserves and any
other available income become insufficient to meet our covenants
and cover our operating expenses and liabilities, it may be
necessary to obtain additional funds by borrowing, restructuring
property loans or liquidating our investment in one or more assets.
There is no assurance that such funds will be available, or if
available, that the terms will be acceptable to us. Additionally,
our ability to borrow additional funds will be limited by the
restrictions placed on our and our subsidiaries' borrowing
activities by our indenture.
Results of Operations – For the Period Ended December 31,
2020
We
operate on a calendar year. Set forth below is a discussion of our
operating results for the period ended December 31,
2020.
As
of December 31, 2020, the Company had not deployed any capital into
senior secured loans.
For
the period ending December 31, 2019, our total revenues from
operations amounted to $5 from interest income. Operating costs for
the same period, including organization fees of $284,500 and bond
interest expense of $137,145 amounted to $484,203. Net loss for the
period amounted to $484,198.
As of the issuance date of this report, the
Company has approximately $12,200,000 remaining net proceeds from
the issuance of the bonds. We
are working diligently through our expanding pipeline of potential
senior secured loans in order to deploy our cash on hand as well as
the proceeds from future closings of our Bonds offering, which will
be held on or about the 20th of each month through December 31,
2021 or the date upon which our Manager determines to terminate the
offering, in its sole discretion.
Results of Operations – Period from January 1, 2019 through
December 31, 2019
We
had not commenced operations as of December 31, 2019.
Liquidity and Capital Resources
As of December 31, 2020, we had sold $13,429,000 and $796,000 of A Bonds and A R-Bonds,
respectively, pursuant to our
offering of Bonds. Our principal demands for cash will continue to
be for acquisition costs, including the purchase price or principal
amount of any property loans, securities or other assets we
acquire, the payment of our operating and administrative expenses,
and all continuing debt service obligations, including our debt
service on the Bonds. Generally, we will fund additional
acquisitions from the net proceeds of the Bonds offering. We intend
to acquire additional assets with cash and/or
debt.
The
Company had cash on hand of $12,280,743 and bond service reserves
of $533,439. The bond service reserves required pursuant to the
Indenture related to the Bonds, which requires 3.75% of the gross
proceeds from the Offering to be placed into a reserve account held
by the bond trustee for the purpose of paying our bond service
obligations through September 23, 2021.
We
expect to use debt financing in addition to our Bonds as a source
of capital. We have a limit of 25% of the aggregate Bond principal
raised on the amount of additional debt that can be employed in the
operations of the business.
We
anticipate that adequate cash will be generated from operations to
fund our operating and administrative expenses, and all continuing
debt service obligations, including the debt service obligations of
the Bonds. However, our ability to finance our operations is
subject to some uncertainties. Our ability to generate working
capital is dependent upon the performance of the mortgagor related
to each of our assets and the economic and business environments of
the various markets in which our underlying collateral properties
are located. Our ability to liquidate our assets is partially
dependent upon the state of real estate markets and the ability of
mortgagors to obtain financing at reasonable commercial rates. In
general, we intend to pay debt service from cash flow obtained from
operations. If cash flow from operations is insufficient then we
may exercise the option to partially leverage the asset to increase
liquidity. If we have not generated sufficient cash flow from our
operations and other sources, such as from borrowings, we may use
funds out of our Bond Service Reserve. Moreover, our Manager may
change this policy, in its sole discretion, at any time to
facilitate meeting its cash flow obligations.
Potential
future sources of capital include secured or unsecured financings
from banks or other lenders, establishing additional lines of
credit, proceeds from the sale of assets and undistributed cash
flow, subject to the limitations previously described. Note that,
currently, we have not identified any additional source of
financing, other than the proceeds from our Bonds offering, and
there is no assurance that such sources of financing will be
available on favorable terms or at all.
Trend Information
In the third quarter of 2020, we had sold $884,000
of A Bonds. In the fourth quarter of 2020, we had sold $ 12,545,000
and $ 796,000 of A Bonds and A R-Bonds,
respectively. The
sale of the Bonds has been growing from the third quarter of 2020
to the fourth quarter of 2020, and we expect the average closings
to decrease in first quarter 2021 through December 31, 2021 or the
termination of the Offering, whichever occurs first. As Bonds are
sold, we intend to use the net proceeds from the Offering to
continue to issue senior secured loans on commercial real estate
and thereby increase cash flows.
In
the third and fourth quarter of 2020, we closed on zero secured
loans. Since we have not deployed any capital into senior secured
loans, we anticipate the deployment of capital to increase into the
first and second quarter of 2021. As we issue additional senior
secured loans on commercial real estate, the Company’s cash
flows increase.
As
a result of the global outbreak of a new strain of coronavirus,
COVID-19, economic uncertainties have arisen that continue to have
an adverse impact on economic and market conditions. The global
impact of the outbreak has been rapidly evolving, and the outbreak
presents material uncertainty and risk with respect to our future
financial results and capital raising efforts. We are unable to
quantify the impact COVID-19 may have on us at this time. Although
we have not experienced a significant increase in the number of
late payments or defaulting borrowers as of the date of this
report, we may experience adverse effects in the performance of our
existing loans as a result of COVID-19 which may materially alter
our ability to pay our debt service obligations and
fees.
Item 3. Directors and Officers
The following table sets forth information on our board of managers
and executive officers of our Sponsor. We are managed by our
Manager, which is owned and controlled by our Sponsor.
Consequently, we do not have our own separate board of managers or
executive officers.
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Name
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Age
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Position with our Company
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Director/Officer Since
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Gary
Bechtel
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63
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Chief
Executive Officer*
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August
2020
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Jason
Anderson
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35
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Chief
Financial Officer*
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November
2019
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Joseph
Elias
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41
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Chief
Operations Officer*
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November
2019
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Kevin
P. Kennedy
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55
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Chief
Sales and Distribution Officer*
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November
2019
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Raymond
T. Davis
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54
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Chief
Business Development Officer*
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November
2019
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*Member
of the board of managers of the sole manager of our Sponsor, which
controls our Manager, which controls our company.
Set
forth below is biographical information for our Sponsor’s
executive officers.
Gary Bechtel, Chief Executive Officer
and a member of the board of managers for the manager of our
Sponsor. Gary previously served as President of Money360 and was
responsible for developing and executing Money360’s expansion
strategy. Gary also served on Money360’s Credit Committee and
Board of Directors. Prior to joining the Money360, he was Chief
Lending/Originations Officer of CU Business Partners, LLC, the
nation’s largest credit union service organization (CUSO).
Previously, Gary held management or production positions with Grubb
& Ellis Company, Meridian Capital, Johnson Capital, FINOVA
Realty Capital, Pacific Southwest Realty Services and Hometown
Commercial Capital. Gary began his career with the Alison Company
and over the past thirty-four years has been involved in all
aspects of the commercial real estate finance industry, as a lender
and as an intermediary, including the origination, underwriting,
structuring, placement and closing of over $10B in commercial debt
transactions, utilizing various debt structures which have included
permanent, bridge, equity, mezzanine and construction on
transactions of $1M to $250M. These transactions were placed with a
variety of capital sources that included life companies, commercial
banks, credit unions and equity and mezzanine funds, on property
types that included office, retail, industrial, multifamily,
hospitality, self storage and manufactured housing. He is or has
been a member of the Mortgage Bankers Association of America,
California Mortgage Bankers Association, National Association of
Industrial and Office Properties, and International Council of
Shopping Centers. Gary has spoken at numerous industry events and
written articles and has been regularly quoted in a number of
regional and national publications.
Jason Anderson is Chief Financial
Officer and a member of the board of managers for the manager of
our Sponsor. He focuses on the creation and development of
operational and accounting expertise. Jason has more than 12 years in the
financial services industry. Under his tenure as a Shareholder,
Director and Executive Committee Member at Strait Capital from 2009
to 2017, assets under administration increased from $40 million to
nearly $4 billion. His expertise lies in architecting and
delivering a full-fledge institutional operating platform for hedge
funds, private equity groups, and family offices. Jason launched
over 100 alternative investment vehicles while at Strait Capital.
Jason has also served as Director of Anderson Capital Consulting
LLC since 2017. He began his career as a hedge fund analyst
specializing in distressed securities, mergers and acquisitions,
and capital arbitrage strategies. While a university student, he
was hand-picked to serve as an analyst for the $1+ Billion SMU
Endowment Fund. Jason graduated Magna Cum Laude with a Bachelor of
Business Administration in Finance and a Bachelor of Science in
Economics with Business Honors and Department Distinction from
Southern Methodist University. Jason has earned the Chartered
Financial Analyst (CFA) designation.
Joseph Elias is a founding partner,
Chief Operations Officer and a member of the board of managers for
the manager of our Sponsor. He is responsible for platform
development and enhancement. Previously, Joe cofounded Loquidity in
2014, a commercial real estate crowdfunding platform where he
served as COO, in which capacity he served until 2018. Joe
possesses more than 14 years of executive technology operations
experience with Fortune 50 companies and 17 years of experience in
real estate finance and development. He has spent his career
leading corporate transformation and achieving significant
operational efficiencies by successfully integrating new
technologies. This expertise combined with an entrepreneurial
spirit, inspired him to develop innovative scalable solutions to
transform the real estate investing landscape through the ROCX
Platform. Prior to that, Joe served as a senior director at Comcast
from 2003 to 2014, managing a $1 billion portfolio program. He and
his team worked to implement new technology realizing an estimated
$300 million in cost savings. Prior to Comcast, he was a project
manager at General Motors. Joe operated multiple successful family
businesses, managing millions of dollars’ worth of real
estate assets in major Midwestern markets. Joe earned his Bachelor
of Science in Management Information Systems from Wayne State
University and holds an MBA from the Ross School of Business at the
University of Michigan.
Kevin P. Kennedy is a
founding partner, Chief Sales and Distribution Officer and a member
of the board of managers for the manager of our Sponsor. He is
responsible for capital acquisition, platform distribution and
broker dealer relationships. Kevin has 25 years of experience in
investment management. Most recently, he was with BlackRock
Investment Management Corporation from 1990 to 2016, where he
served as Managing Director and Divisional Sales Director prior to
leaving. His team was responsible for selling and marketing
BlackRock’s active, passive and alternative investments.
Prior to BlackRock, Kevin was a Director and Vice President for
Merrill Lynch Investment Managers covering the Midwest region. He
began his career with Merrill Lynch in 1990 as a trading liaison.
He was instrumental in helping both firms raise billions in sales,
increase revenue, new offerings, platform enhancements and sales
team development. Kevin holds a Series 7, 24, 63, 65 and 66
securities licenses. He received his Bachelor of Arts degree from
Duquesne University, in Pittsburg, PA. He completed his
Certified Investment Management Analyst certification (CIMA)
designation from Wharton Executive Education-University of
Pennsylvania in 2007.
Raymond T. Davis is Chief Business
Development Officer for the manager of our Sponsor. Ray is
responsible for the company’s long-term business strategy,
including supporting our lending product development, and leading
capital strategy, which includes concurrently developing strategic
offerings with investment partners amongst the independent broker
dealer community, family offices and pension funds. Ray has more
than 20 years of management experience. Since 2014, Ray has focused
is operational and strategic skills on implementing policy, process
and operational enhancements for various investment funds and
vehicles distributed in the independent broker dealer community.
Ray has served both private companies and registered alternative
investment funds in various senior roles. Ray attended Wayne State
University.
Director and Executive Compensation
Our
company does not have executives. It is operated by our Manager. We
will not reimburse our Manager for any portion of the salaries and
benefits to be paid to its executive officers.
Item 4. Security Ownership of Management and Certain Security
Holders
The
table below sets forth, as of the issuance date of this report,
certain information regarding the beneficial ownership of our
outstanding membership units for (1) each person who is expected to
be the beneficial owner of 10% or more of our outstanding
membership units and (2) each of our named executive officers, if
together such group would be expected to be the beneficial owners
of 10% or more of our outstanding membership units. Each person
named in the table has sole voting and investment power with
respect to all of the membership units shown as beneficially owned
by such person. The SEC has defined “beneficial
ownership” of a security to mean the possession, directly or
indirectly, of voting power and/or investment power over such
security.
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Title of Class
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Name and Address of Beneficial Owner
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Amount and Nature of Beneficial Ownership Acquirable
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Percent of Class
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|
LLC
Interests
|
|
Gary
Bechtel*
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N/A
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20.00%
|
|
|
|
|
|
|
|
|
|
LLC
Interests
|
|
Joseph
Elias*
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N/A
|
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20.00%
|
|
|
|
|
|
|
|
|
|
LLC
Interests
|
|
Kevin
Kennedy*
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N/A
|
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20.00%
|
|
|
|
|
|
|
|
|
|
LLC
Interests
|
|
Raymond
Davis*
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N/A
|
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20.00%
|
|
|
|
|
|
|
|
|
|
LLC
Interests
|
|
Jason
Anderson*
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N/A
|
|
20.00%
|
|
|
|
|
|
|
|
|
|
LLC
Interests
|
|
All
Executives and Managers*
|
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N/A
|
|
100.00%
|
_________________
*625 Kenmoor Avenue SE, Suite
200, Grand Rapids, Michigan 49546
Item 5. Interest of Management and Others in Certain
Transaction
For further details, please see Note 4, Related
Party Transactions in Item 7, Financial
Statements.
Item 6. Other Information
Item 7. Financial Statements
RED OAK CAPITAL FUND V,
LLC
FINANCIAL
STATEMENTS
AND
INDEPENDENT AUDITORS REPORT
FOR
THE PERIOD MARCH 23, 2020 (DATE OF FORMATION)
THROUGH DECEMBER 31, 2020
Red Oak Capital Fund V, LLC
Contents
|
Independent Auditor's Report
|
8
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Financial Statements
|
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|
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Balance Sheet
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9
|
|
|
|
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Statement of Operations
|
10
|
|
|
|
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Statement of Changes in Member's Capital
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11
|
|
|
|
|
Statement of Cash Flows
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12
|
|
|
|
|
Notes to Financial Statements
|
13-18
|
INDEPENDENT AUDITOR’S REPORT
To the Managing Member
Red Oak Capital Fund V, LLC
We have audited the accompanying financial statements of Red Oak
Capital Fund V, LLC (a Delaware limited liability corporation),
which comprise the balance sheet as of December 31, 2020, and the
related statements of operations, changes in member’s
capital, and cash flows for the period from March 23, 2020 (date of
formation) to December 31, 2020, and the related notes to the
financial statements.
Management’s Responsibility for the Financial
Statements
Management is responsible for the preparation and fair presentation
of these financial statements in accordance with accounting
principles generally accepted in the United States of America; this
includes the design, implementation, and maintenance of internal
control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit in accordance
with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of
the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of
the financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s
internal control. Accordingly, we express no such opinion. An audit
also includes evaluating the appropriateness of accounting policies
used and the reasonableness of significant accounting estimates
made by management, as well as evaluating the overall presentation
of the financial statements.
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Red Oak
Capital Fund V, LLC as of December 31, 2020, and the results of its
operations, changes in member’s capital, and cash flows for
the period from March 23, 2020 (date of formation) to December 31,
2020, in accordance with accounting principles generally accepted
in the United States of America.
/s/ UHY LLP
Farmington Hills, Michigan
April 30, 2021
Red Oak Capital Fund V, LLC
Balance Sheet
December 31, 2020
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
Cash
and cash equivalents
|
$12,280,743
|
|
Restricted
cash - bond service reserve
|
533,439
|
|
Total
current assets
|
12,814,182
|
|
|
|
|
Total
assets
|
$12,814,182
|
|
|
|
|
Liabilities and Member's Deficit
|
|
|
|
|
|
Current
liabilities:
|
|
|
Bond
interest payable
|
$115,958
|
|
Prepaid
bond interest
|
129,217
|
|
Bond
proceeds received in advance
|
30,000
|
|
Other
current liabilities
|
895
|
|
Total
current liabilities:
|
276,070
|
|
|
|
|
Long-term
liabilities:
|
|
|
Series
A Bonds payable, net
|
12,247,775
|
|
Series
A R-bonds payable, net
|
774,435
|
|
Total
long-term liabilities:
|
13,022,210
|
|
|
|
|
Total
liabilities
|
13,298,280
|
|
|
|
|
Member's
deficit:
|
(484,098)
|
|
|
|
|
Total
liabilities and member's deficit
|
$12,814,182
|
Red Oak Capital Fund V, LLC
Statement of Operations
For the period March 23, 2020 (Date of Formation) through December
31, 2020
|
Revenue:
|
|
|
Interest
income
|
$5
|
|
Total
revenue
|
$5
|
|
|
|
|
Expenses:
|
|
|
Bond
interest expense
|
137,145
|
|
Management
fees
|
27,880
|
|
Organization
fees
|
284,500
|
|
General
and administrative
|
34,678
|
|
Total
expenses
|
484,203
|
|
|
|
|
Net income (loss)
|
$(484,198)
|
Red Oak Capital Fund V, LLC
Statement of Changes in Member's Capital
For the period March 23, 2020 (Date of Formation) through December
31, 2020
|
|
|
|
|
|
|
Member's capital, March 23, 2020
|
$-
|
|
|
|
|
Capital contributions
|
100
|
|
|
|
|
Net income (loss)
|
(484,198)
|
|
|
|
|
Member's deficit, December 31, 2020
|
$(484,098)
|
Red Oak Capital Fund V, LLC
Statement of Cash Flows
For the period March 23, 2020 (Date of Formation) through December
31, 2020
|
Cash flows from operating activities:
|
|
|
Net
income (loss)
|
$(484,198)
|
|
|
|
|
Adjustments
to reconcile net income (loss)
|
|
|
to
net cash provided by (used in) operating activities:
|
|
|
Amortization
of debt issuance costs
|
21,187
|
|
Change
in other operating assets and liabilities:
|
|
|
Net
change in bond interest payable
|
115,958
|
|
Net
change in prepaid bond interest
|
129,217
|
|
Net
change in bond proceeds received in advance
|
30,000
|
|
Net
change in other current liabilities
|
895
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
(186,941)
|
|
|
|
|
Cash flows from financing activities:
|
|
|
Member
contributions
|
100
|
|
Proceeds
from Series A Bonds
|
13,429,000
|
|
Proceeds
from Series A R-Bonds
|
796,000
|
|
Payment
of debt issuance costs
|
(1,223,977)
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
13,001,123
|
|
|
|
|
Net change in cash, cash equivalents, and restricted
cash
|
12,814,182
|
|
|
|
|
Cash,
cash equivalents, and restricted cash at beginning of
period
|
-
|
|
|
|
|
Cash, cash equivalents, and restricted cash at end of
period
|
$12,814,182
|
Red Oak Capital Fund V, LLC
Notes to Financial Statements
For the period March 23, 2020 (Date of Formation) through December
31, 2020
1. Organization
Red Oak
Capital Fund V, LLC, (the “Company”) is a Delaware
limited liability company formed to originate senior loans
collateralized by commercial real estate in the United States of
America. The Company’s plan is to originate, acquire, and
manage commercial real estate loans and securities and other
commercial real estate-related debt instruments. Red Oak Capital
GP, LLC is the Managing Member and owns 100% of the member
interests in the Company.
The
Company formed on March 23, 2020 and commenced operations on
September 23, 2020. The Company is raising a maximum of $50 million
of Series A Bonds and Series A R-bonds (collectively the
“Bonds”) pursuant to an exemption from registration
under Regulation A of the Securities Act of 1933, as amended. The
Company’s term is indefinite.
The
Company’s operations may be affected by the ongoing outbreak
of the coronavirus (COVID-19) which was declared a pandemic by the
World Health Organization in March 2020. Possible effects of the
pandemic may include, but are not limited to, delay of payments
from borrowers, an increase in extension risk, higher rate of
defaults, and delaying loan closing periods due to third parties
experiencing quarantines or social distancing within the labor
workforce. The ultimate disruption which may be caused by the
outbreak is uncertain; however, it may result in a material adverse
impact on the Company’s financial position, operations and
cash flows.
2. Significant
accounting policies
Basis
of presentation
The
financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the
United States ("GAAP") and all values are stated in United States
dollars.
Use
of estimates
The
preparation of the financial statements requires the Managing
Member to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. In particular,
the COVID-19 pandemic and the resulting adverse impacts to global
economic conditions, as well as our operations, may affect future
estimates. The Managing Member believes the estimates utilized in
preparing the Company’s financial statements are reasonable
and prudent; however, actual results could differ from these
estimates and such differences could be material to the Company's
financial statements.
Fair
value – hierarchy of fair value
In
accordance with FASB ASC 820-10, Fair Value Measurements and
Disclosures, the Company discloses the fair value of its
assets and liabilities in a hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to valuations based upon unadjusted
quoted prices in active markets for identical assets and
liabilities and the lowest priority to valuations based upon
unobservable inputs that are significant to the valuation. FASB ASC
820-10-35-39 to 55 provides three levels of the fair value
hierarchy as follows:
Level One - Inputs use quoted
prices in active markets for identical assets or liabilities of
which the Company has the ability to access.
Level Two - Inputs use other
inputs that are observable, either directly or indirectly. These
Level 2 inputs include quoted prices for similar assets and
liabilities in active markets, and other inputs such as interest
rates and yield curves that are observable at commonly quoted
intervals.
Level Three - Inputs are
unobservable inputs, including inputs that are available in
situations where there is little, if any, market activity for the
related asset.
Red Oak Capital Fund V, LLC
Notes to Financial Statements
For the period March 23, 2020 (Date of Formation) through December
31, 2020
2. Significant
accounting policies (continued)
In
instances whereby inputs used to measure fair value fall into
different levels of the fair value hierarchy, fair value
measurements in their entirety are categorized based on the lowest
level input that is significant to the valuation. The
Company’s assessment of the significance of particular inputs
to these fair value measurements requires judgement and considers
factors specific to each asset or liability.
Cash
and cash equivalents
Cash
represents cash deposits held at financial institutions. Cash
equivalents may include short-term highly liquid investments of
sufficient credit quality that are readily convertible to known
amounts of cash and have original maturities of three months or
less. Cash equivalents are carried at cost, plus accrued interest,
which approximates fair value. Cash equivalents are held to meet
short-term liquidity requirements, rather than for investment
purposes. Restricted cash represents cash held in escrow for the
benefit of the Company’s bondholders for the payment of the
debt service obligation.
Cash
and cash equivalents are held at major financial institutions and
are subject to credit risk to the extent those balances exceed
applicable Federal Deposit Insurance Corporation or Securities
Investor Protection Corporation limitations.
The
Company follows ASU 2016-18, “Restricted Cash”, which
clarifies the presentation requirements of restricted cash within
the statement of cash flows. The changes in restricted cash and
restricted cash equivalents during the period should be included in
the beginning and ending cash and cash equivalents balance
reconciliation on the statement of cash flows. The following table
provides a reconciliation of cash, cash equivalents, and restricted
cash reported within the balance that sum to the total of the same
such amounts shown in the statement of cash flows as of December
31, 2020:
|
Cash and cash
equivalents
|
$12,280,743
|
|
Restricted cash
– bond service reserve
|
533,439
|
|
Total cash, cash
equivalents, and restricted cash shown in the statement of cash
flows
|
$12,814,182
|
Mortgage
loans receivable
Mortgage loans
receivable are classified as held-for-investment based on the
Company’s intention and ability to hold the loans until
maturity. The loans are stated at the amount of unpaid principal
adjusted for any impairment or allowance for loan losses. The
Company’s mortgage loans receivable are expected to consist
of senior secured private company loans collateralized by the
borrower’s underlying commercial real estate assets. The
repayment of the loans will be dependent upon the borrower’s
ability to obtain a permanent financing solution or to sell the
commercial real estate asset. The Company’s mortgage loans
receivable will have heightened credit risk stemming from several
factors, including the concentration of loans to a limited number
of borrowers, the likelihood of construction projects running over
budget, and the inability of the borrower to sell the underlying
commercial real estate asset.
Nonaccrual
loans
Interest income is
recognized to the extent paid or if the analysis performed on the
related receivables supports the collectability of the interest
receivable. A loan is placed on nonaccrual when the future
collectability of interest and principal is not expected, unless,
in the determination of the Managing Member, the principal and
interest on the loan are well collateralized and in the process of
collection. When classified as nonaccrual, accrued interest
receivable on the loan is reversed and the future accrual of
interest is suspended. Payments of contractual interest are
recognized as income only to the extent that full recovery of the
principal balance of the loan is reasonably certain.
Red Oak Capital Fund V, LLC
Notes to Financial Statements
For the period March 23, 2020 (Date of Formation) through December
31, 2020
2. Significant
accounting policies (continued)
Impairment
and allowance for loan losses
Mortgage loans
receivable are considered “impaired” when, based on
observable information, it is probable the Company will be unable
to collect the total amount outstanding under the contractual terms
of the loan agreement. The Managing Member assesses mortgage loans
receivable for impairment on an individual loan basis and
determines the extent to which a specific valuation allowance is
necessary by comparing the loan’s remaining balance to either
the fair value of the collateral, less the estimated cost to sell,
or the present value of expected cash flows, discounted at the
loan’s base interest rate.
An
allowance for loan losses on mortgage loans receivable is
established through a provision for loan losses charged against
income and includes specific reserves for impaired loans. Loans
deemed to be uncollectible are charged against the allowance when
the Managing Member believes that the collectability of the
principal is unlikely and subsequent recoveries, if any, are
credited to the allowance. The Managing Member’s periodic
evaluation of the adequacy of the allowance is based on an
assessment of the current loan portfolio, including known inherent
risks, adverse situations that may affect the borrowers’
ability to repay, the estimated value of any underlying collateral,
and current economic conditions.
Revenue
Recognition and accounts receivable
Interest income on
mortgage loans receivable is recognized over time using the
interest method. Interest is accrued when earned in accordance with
the terms of the loan agreement.
Loan
origination income is amortized over the life of the mortgage loan
receivable using the interest method and is reflected as a direct
deduction from the related mortgage loans receivable in the
accompanying balance sheet.
Bonds
payable
Company-issued
bonds will be held as a liability upon the effective date of
closing. The bond interest will be expensed on an accrual basis.
The contingent interest associated with the bonds will be
recognized on an accrual basis at the end of each reporting period
assuming a hypothetical liquidation of the Company’s mortgage
loans receivable at fair value.
Income
taxes
As a
limited liability company, the Company itself is not subject to
United States federal income taxes. The sole member is individually
liable for income taxes, if any, on its share of the Company's net
taxable income. Accordingly, no provision or credit for income
taxes is recorded in the accompanying financial statements. The
Company anticipates paying distributions to its member in amounts
adequate to meet its tax obligation.
The
Company applies the authoritative guidance for uncertainty in
income taxes included in Financial Accounting Standards Board
(“FASB”) ASC 740, “Income Taxes”, as
amended by Accounting Standards Update 2009-06,
“Implementation Guidance on Accounting for Uncertainty in
Taxes and Disclosures Amendments for Nonpublic Entities.”
This guidance requires the Company to recognize a tax benefit or
liability from an uncertain position only if it is more likely than
not that the position is sustainable, based on its technical merits
and consideration of the relevant taxing authority’s widely
understood administrative practices and precedents. If this
threshold is met, the Company would measure the tax benefit or
liability as the largest amount that is greater than 50% likely of
being realized upon ultimate settlement.
As of
December 31, 2020, the Company had not recorded any benefit or
liability for unrecognized taxes.
Red Oak Capital Fund V, LLC
Notes to Financial Statements
For the period March 23, 2020 (Date of Formation) through December
31, 2020
2. Significant
accounting policies (continued)
The
Company files United States federal income tax returns as well as
various state returns. With few exceptions, the Company’s tax
returns and the amount of allocable income or loss are subject to
examination by taxing authorities for three years subsequent to the
Company’s commencement of operations. If such examinations
result in changes to income or loss, the tax liability of the
members could be changed accordingly. There are currently no
examinations being conducted of the Company by the Internal Revenue
Service or any other taxing authority.
The
Company accrues all interest and penalties under relevant tax law
as incurred. As of December 31, 2020, no amount of interest and
penalties related to uncertain tax positions was recognized in the
statement of operations.
Extended
Transition Period
Under
Section 107 of the Jumpstart Our Business Startups Act of 2012, the
Company is permitted to use the extended transition period provided
in Section 7(a)(2)(B) of the Securities Act of 1933, as amended
(the “Securities Act”) for complying with new or
revised accounting standards. This permits the Company to delay the
adoption of certain accounting standards until those standards
would otherwise apply to private companies. The Company has elected
to use the extended transition period provided in Section
7(a)(2)(B) of the Securities Act for complying with new or revised
accounting standards that have different effective dates for public
and private companies until the earlier of the date the Company (i)
is no longer an emerging growth company or (ii) affirmatively and
irrevocably opts out of the extended transition period provided in
the Section 7(a)(2)(B). By electing to extend the transition period
for complying with new or revised accounting standards, these
consolidated financial statements may not be comparable to
companies that adopt accounting standard updates upon the public
business entity effective dates.
Recent
Accounting Pronouncements – Not Yet Adopted
In June
2016, the FASB issued Accounting Standards Update 2016-13
(“ASU 2016-13”), Financial Instruments - Credit Losses:
Measurement of Credit Losses of Financial Instruments, which
requires the measurement and recognition of expected credit losses
for financial assets held at amortized cost. ASU 2016-13 requires
financial assets measured at amortized cost basis to be presented
at the net amount expected to be collected. The allowance for
credit losses is a valuation account that is deducted from the
amortized cost basis of the financial assets to present the net
carrying value at the amount expected to be collected on the
financial asset. An entity will be required to disclose information
about how it developed its allowance for credit losses, including
changes in the factors that influenced management’s estimate
of expected credit losses and the reasons for those
changes for
financial assets measured at amortized cost. ASU 2016-13 is
effective for the Company, under the extended transition period
under the JOBS Act, for annual periods beginning after December 15,
2022, including interim periods within those fiscal years. The
Company is still evaluating the impact of adopting ASU 2016-13 on
its financial statements.
3. Related
party transactions
The
Company will pay an annual management fee, calculated and payable
on a quarterly basis, to the Managing Member. The management fee is
based on an annual rate of 1.75% of the gross principal
outstanding. As of December 31, 2020, $27,880 of management fees
have been earned and paid to the Managing Member.
The
Company will pay a disposition fee to the Managing Member. The
disposition fee is calculated as 1.00% of the proceeds received
from the repayment of the principal amount of any of its debt
investments or any other disposition of the underlying real estate.
As of December 31, 2020, no disposition fees have been accrued or
paid.
The
Company will pay organization fees, calculated and payable at every
closing, to the Managing Member. The organizational fee is
calculated as 2.00% of the gross principal outstanding of all
Bonds. As of December 31, 2020, $284,500 of organization fees have
been earned and zero organization fees are payable to the Managing
Member.
4. Member’s
equity
During
2020, the Managing Member, as sole member of the Company, made $100
of capital contributions and received no
distributions.
Red Oak Capital Fund V, LLC
Notes to Financial Statements
For the period March 23, 2020 (Date of Formation) through December
31, 2020
5. Bonds
payable
During
the period ending December 31, 2020, the Company issued
approximately $13.43 and $0.80 million of Series A Bonds and Series
A R-Bonds, respectively. The Bonds are secured by a senior blanket
lien on all assets of the Company. The Company has incurred debt
issuance costs from the Bond offering. The Company capitalizes and
amortizes the costs through the maturity of each Series as
applicable. As of December 31, 2020, there have been approximately
$1.22 million of debt issuance costs incurred by the Company and
$21,187 has been amortized to bond interest expense during the
period.
Bonds
payable as of December 31, 2020 are comprised of the
following:
|
Series
A Bonds payable
|
$13,429,000
|
|
Series
A R-Bonds payable
|
796,000
|
|
Debt
issuance costs
|
(1,202,790)
|
|
Total
bonds payable, net
|
$13,022,210
|
The
Company will execute quarterly interest payments to the Series A
Bondholders and Series A R-Bondholders at a rate of 7.50% and 8.00%
per annum, respectively. For the period ending December 31, 2020,
the Company has accrued $115,958 of bond interest expense payable
to Bondholders. Additionally, certain bondholders prepaid bond
interest for the period from the first date of the quarter prior to
their bond purchase through their bond closing date. This
prepayment entitles these bondholders to a full quarterly interest
payment. At December 31, 2020, $129,217 in bond interest was
prepaid by bondholders.
In
accordance with the Offering Documents and Indenture, a Bond
Service Reserve account was established with the Company’s
trustee, UMB Bank. As it is required, the Company keeps 3.75% of
gross offering proceeds with the trustee for a period of one year
following the first closing date of February 21, 2020. As of
December 31, 2020, the account contained $533,439, reflected as
restricted cash - bond service reserve on the Company’s
balance sheet and can be used to meet the bonds service
obligations.
The
maturity date of Series A Bonds and Series A R-bonds will be
December 31, 2026. Upon the maturity of the Bonds, the bondholders
will receive a Contingent Interest Payment equal to 20% of the
Spread, respectively. The Spread is defined as the difference
between such bond’s pro-rata share of revenue derived from
senior secured private company loans less the interest paid to such
bondholder, withholding for fees at the discretion of the Managing
Member.
The
Series A Bonds and Series A R-bonds will be redeemable beginning
January 1, 2024. Once the Company receives written notice from the
bondholder, it will have 120 days from the date of receipt to
redeem the bonds at a price per bond equal to: (i) $880 plus any
accrued but unpaid interest on the Bond if the notice is received
on or after January 1, 2024 and (ii) $900 plus any accrued but
unpaid interest on the Bond if the notice is received on or after
January 1, 2026.
The
Company’s obligation to redeem bonds in any given year
pursuant to this Optional Redemption is limited to 15% of the
outstanding principal balance of the Series A Bonds and Series A
R-bonds on January 1st of the applicable year. Bond redemptions
pursuant to the Optional Redemption will occur in the order that
notices are received.
Upon
maturity, and subject to the terms and conditions described in the
offering memorandum, the bonds will be automatically renewed at the
same interest rate for an additional five years unless redeemed
upon maturity at the Company or the bondholders’
election.
Red Oak Capital Fund V, LLC
Notes to Financial Statements
For the period March 23, 2020 (Date of Formation) through December
31, 2020
6. Commitments
and contingencies
The
Company has provided general indemnifications to the Managing
Member, any affiliate of the Managing Member and any person acting
on behalf of the Managing Member or that affiliate when they act,
in good faith, in the best interest of the Company. The Company is
unable to develop an estimate of the maximum potential amount of
future payments that could potentially result from any hypothetical
future claim but expects the risk of having to make any payments
under these general business indemnifications to be
remote.
7. Subsequent
events
On
January 25, 2021, in accordance with the offering circular, the
Company executed the first bond interest payment for $245,175 to
the trustee and paying agent, UMB Bank, $115,958 of which was
related to bond interest accrued by the Company.
Since
December 31, 2020, the Company has executed four bond closings
resulting in total gross proceeds of $11,899,000.
On
March 19, 2021, the Company closed a senior secured mortgage loan
at a total interest rate of 11%, and total principal of $1,730,000.
The underlying commercial property is an apartment building located
in the state of Kentucky.
On
March 26, 2021, the Company closed a senior secured mortgage loan
at a total interest rate of 10%, and total principal of $6,775,000.
The underlying commercial property is an apartment building located
in Washington DC.
On
April 21, 2021, the previous sponsor, Red Oak Capital Group, LLC
(“ROCG”), of the Company completed an interest exchange
(the “Exchange”) whereby Red Oak Capital Holdings, LLC
(“ROCH”) acquired all of the equity interests in the
Company’s manager, Red Oak Capital GP, LLC
(“ROGP”), from ROCG (former 90% owner of ROGP) and Mr.
Raymond Davis (former 10% owner of ROGP). As consideration in
the Exchange, each of ROCG and Mr. Davis received non-voting equity
interests in ROCH. Prior to the Exchange, ROCG was
ROGP’s sole manager, and ROCG was managed by a Board of
Managers appointed by Mr. Kevin Kennedy and Mr. Joseph Elias, the
sole equity holders in ROCG. ROCH’s sole manager is Red Oak
Holdings Management, LLC (“ROHM”), and ROHM also holds
all of the voting equity in ROCH. ROHM’s board of
managers is comprised of Mr. Kennedy, Mr. Elias, Mr. Davis, Mr.
Jason Anderson and Mr. Gary Bechtel. The ROHM board members
also collectively own all of the voting equity in ROHM and have the
exclusive right to vote in the election of the ROHM board
members. As a result of the Exchange, Messrs. Kennedy and
Elias no longer have sole control of the Company via their voting
interests in ROCG. However, all of the executive officers
remain the same and the members of the ROHM board of managers are
the same as the members of the ROCG board with the addition of Mr.
Davis.
On
April 30, 2021, the Company closed a senior secured mortgage loan
at a total interest rate of 10%, and total principal of $9,638,000.
The underlying commercial property is an apartment building located
in Washington DC.
The
financial statements were approved by management and available for
issuance on April 30, 2021. Subsequent events have been evaluated
through this date.
Item 8. Exhibits
|
Exhibit Number
|
|
Exhibit Description
|
|
|
|
|
|
|
|
Certificate
of Formation of Red Oak Capital Fund V, LLC*
|
|
|
|
|
|
|
|
Limited
Liability Company Agreement of Red Oak Capital Fund V,
LLC*
|
|
|
|
|
|
|
|
Form of
Indenture*
|
|
|
|
|
|
|
|
Form of
A Bond*
|
|
|
|
|
|
|
|
Form of
A R-Bond*
|
|
|
|
|
|
|
|
Pledge
and Security Agreement*
|
|
|
|
|
|
|
|
Commercial Loan Agreement, dated March 19, 2021, by and
between Willow Run, L.L.C. and Red Oak Capital Fund V,
LLC, incorporated by reference to Exhibit 6.1 of the
Company’s Form 1-U filed on March 25, 2021
|
|
|
|
|
|
|
|
Commercial
Promissory Note, dated March 19, 2021, issued by Willow Run,
L.L.C.in favor of Red Oak Capital Fund V, LLC, incorporated by
reference to Exhibit 6.2 of the Company’s Form 1-U filed on
March 25, 2021
|
|
|
|
|
|
|
|
Commercial Loan Agreement, dated March 26, 2021, by and
between 4559 Benning Rd SE LLC and Red Oak Capital Fund
V, LLC, incorporated by reference to Exhibit 6.1 of the
Company’s Form 1-U filed on April 1, 2021
|
|
|
|
|
|
|
|
Commercial Promissory Note, dated March 26, 2021, issued by 4559
Benning Rd SE LLC in favor of Red Oak Capital Fund V, LLC,
incorporated by reference to Exhibit 6.2 of the Company’s
Form 1-U filed on April 1, 2021
|
|
|
|
|
|
|
|
Warrant
Agreement, dated March 26, 2021, issued by 4559 Benning Rd SE LLC,
incorporated by reference to Exhibit 6.3 of the Company’s
Form 1-U filed on April 1, 2021
|
|
|
|
|
_____________
* Previously filed as an exhibit to the Company’s Offering
Statement on Form 1-A filed on July 8, 2020.
SIGNATURES
Pursuant
to the requirements of Regulation A, the issuer certifies that it
has reasonable grounds to believe that it meets all of the
requirements for filing on Form 1-K and has duly caused this Form
1-K to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grand Rapids of Michigan on April 30 of
2021.
RED OAK CAPITAL FUND V, LLC,
a Delaware limited liability company
By:
Red Oak Capital GP, LLC,
a
Delaware limited liability company
Its:
Sole Member
By:
Red Oak Capital Holdings, LLC,
a
Delaware limited liability company
Its:
Sole Member
By:
Red Oak Holdings Management, LLC,
a
Delaware limited liability company
Its:
Manager
By: /s/
Gary
Bechtel
Name:
Gary Bechtel
Its:
Manager
By: /s/
Joseph
Elias
Name:
Joseph Elias
Its:
Manager
By: /s/
Kevin
Kennedy
Name:
Kevin Kennedy
Its:
Manager
By: /s/
Jason
Anderson
Name:
Jason Anderson
Its:
Manager
By: /s/
Raymond
Davis
Name:
Raymond Davis
Its:
Manager
By: /s/ Gary Bechtel
Name: Gary Bechtel
Its: Chief Executive Officer of the Sole
Member of the Manager
(Principal
Executive Officer)
By: /s/ Jason Anderson
Name: Jason Anderson
Its: Chief Financial
Officer of the Sole Member of the Manager
(Principal
Financial Officer and Principal Accounting Officer)