Item 8.01. Other Events
During December 2017, Transcontinental
Realty Investors, Inc., a Nevada corporation (“
TCI
” or the “
Registrant
”), and a subsidiary
entered into an arrangement with a wholly owned indirect subsidiary of Macquarie Group (“
Macquarie
”), named
a Contribution Agreement (the “
Contribution Agreement
”), under which TCI, subject to certain prerequisites,
agreed to sell and convey interests in certain completed multifamily projects and projects under development to a newly formed
Victory Abode Apartments, LLC (“
VAbode
”), which would be equally owned and controlled by subsidiaries of TCI
and Macquarie. See Current Report on Form 8-K for event of June 14, 2018, as filed with the Securities and Exchange Commission
(the “
SEC
”).
During the period of November
16-19, 2018, TCI and Macquarie completed the establishment of VAbode, which is held jointly by indirect subsidiaries of each of
TCI and Macquarie in equal parts (49% of the right to participate in profits and 50% of the capital and voting rights each), to
hold ownership of 53 residential multifamily real estate properties [23 stabilized multifamily properties owned by subsidiaries
of TCI, 18 stabilized multifamily properties owned by Southern Properties Capital LTD (“
SPC
”), 10 stabilized
multifamily properties under construction, which is essentially complete, owned by SPC, and 2 multifamily properties under development,
owned by SPC]. At the time of transfer of the 53 properties to VAbode, VAbode also assumed all liabilities (including Mortgage
Notes) related to the 53 properties. VAbode will actively participate in the future development and/or acquisition of additional
multifamily assets in the future.
The completion of the agreement
was subject to the approval of certain regulatory authorities and that of lenders. On September 28, 2018, TCI received HUD approval
in connection with the transaction; on November 16, 2018, subsidiaries of TCI and Macquarie executed the agreement, and the transfer
of properties was completed on November 19, 2018.
In consideration of the
transfer of the properties to VAbode, the TCI subsidiary [Abode JVP, LLC] has a 50% ownership and voting interest in VAbode. Similarly,
in exchange for the payment to TCI of approximately $233,000,000 by Macquarie, its subsidiary [Summerset Intermediate Holdings
II, LLC] received a 50% ownership and voting interest in VAbode.
The 2% (Class B shares) right to
participate in profits is held by Daniel J. Moos, President and Chief Executive Officer of TCI, and the 49% right to
participate in profits held by each of the TCI subsidiary and Macquarie subsidiary control everything, as the 2% profits
interest in VAbode held by Mr. Moos entitles Mr. Moos to 2% participation in profits generated after November 19, 2018,
without any capital rights and with no voting power.
Not part of the overall
transaction but at the same time, TCI transferred all of its rights in two stabilized multifamily properties to SPC [which is wholly
owned by TCI] which, due to their geographical location, is inconsistent with VAbode’s business strategy, and Macquarie had
passed on inclusion of such properties in VAbode.
VAbode will be managed
by a single “Manager,” who initially is Daniel J. Moos. The Manager is responsible for the day-to-day management of
VAbode’s affairs. Day-to-day management governs all of VAbode’s current affairs, but several major decisions are subject
to the indirect subsidiaries of TCI and Macquarie’s mutual or joint approval, including:
• any
capital event that includes a sale, financing or refinancing of a real estate property or rights to a real estate property, but
not including entering into financing agreements to finance regular operations in the ordinary course of business;
• changing
the distributions’ outline, which are set forth under the VAbode Agreement;
• making
and releasing liens and limitations in connection with financing, not including in connection with an ordinary process to finance
regular operations;
• approving
or changing the annual budget;
• purchasing
new real estate properties;
• entering
into any transaction valued at over $250,000 (USD) or for a period of over one year;
• sale
of holdings in VAbode, including by way of a lien, transfer or assignment;
• upgrades
and renovations not required by a Lender or not included in the budget for an existing property;
• entering
into insurance and/or indemnification policies, the sum of which exceeds $250,000 (USD) or reducing coverage of existing insurance
policies;
• any
decision in connection with VAbode’s tax structure that may affect VAbode;
• initiating
any legal proceeding not covered by the insurance;
• filing
an application for bankruptcy;
• replacing
and/or appointing VAbode’s accountants;
• authorizing
engagements with legal advisors, professional consultants, etc.;
• restructurings
and mergers.
The arrangements also include
provision for a “Mezzanine” owner’s loan in the amount of approximately $226,000,000 (USD), to be issued in equal
parts (by Macquarie or one of its subsidiaries and TCI or one of its subsidiaries, including SPC). While the loans may be separate
loans, the loans will have mirror terms, and Daniel J. Moos is entitled to up to 2% of the interest payments of the Loan. The Mezzanine
loans are to have a term of 60 months. There are several other provisions of the arrangement between TCI and Macquarie.