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As filed with the Securities and Exchange Commission on August 26, 2021

 

Registration No. 333-

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM S-11

 

REGISTRATION STATEMENT

 

FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933

OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

 

 

 

Presidio Property Trust, Inc.

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

 

 

 

4995 Murphy Canyon Road, Suite 300

San Diego, CA 92123

(760) 471-8536

(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)

 

Jack K. Heilbron

Presidio Property Trust, Inc.

Chief Executive Officer and President

4995 Murphy Canyon Road, Suite 300

San Diego, CA 92123

(760) 471-8536

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

Copies to:

 

Stuart Neuhauser, Esq.

Jonathan Deblinger, Esq.

Joshua N. Englard, Esq.

Ellenoff Grossman & Schole LLP

1345 Avenue of the Americas, 11th Floor

New York, NY 10105

Telephone: (212) 370-1300

Fax: (212) 370-7889

 

 

 

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: ☒

 

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. ☐

 

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. ☐

 

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. ☐

 

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

 

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

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of
Securities to be Registered (1)
 

Proposed

Maximum

Aggregate

Offering Price(2)

    Amount of
Registration Fee(2)(3)
 
2,000,000 shares of Series A Common Stock, $0.01 par value per share, issuable upon exercise of outstanding common stock warrants   $ 11,000,000     $ 1,200.10  
80,000 shares of Series A Common Stock, $0.01 par value per share, issuable upon exercise of outstanding placement agent warrants   $

500,000

   

$

54.55

 
Total   $

11,500,000

    $

1,254.65

 

 

(1) The shares of our common stock being registered hereunder are being registered for sale by the selling security holders named in the prospectus. Under Rule 416 of the Securities Act of 1933, as amended, the shares being registered include such indeterminate number of shares of common stock as may be issuable with respect to the shares being registered in this registration statement as a result of any stock splits, stock dividends or other similar event.
   
(2) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes the offering price of additional shares that the Underwriters have the option to purchase.
   
(3) The proposed maximum offering price per share is based on the exercise price of the warrants in accordance with Rule 457(g).

 

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 this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said section 8(a), may determine.

 

 

 

 
 

 

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

 

PRELIMINARY PROSPECTUS

 

SUBJECT TO COMPLETION, DATED AUGUST 26, 2021

 

SQFT20201119_S11IMG001.GIF

 

Presidio Property Trust, Inc.

 

2,080,000 Shares of Series A Common Stock

 

 

 

This prospectus relates to the resale by the selling stockholders of up to an aggregate of 2,080,000 shares (the “Shares”) of Series A Common Stock, par value $0.01 per share (the “Series A Common Stock”), of Presidio Property Trust, Inc., a Maryland corporation (“Presidio,” “we,” “us” or the “Company”) including (i) shares of Series A Common Stock issuable upon exercise of warrants (the “Common Stock Warrants”) to purchase up to 2,000,000 shares of Series A Common Stock at an exercise price of $5.50 per share issued to an institutional investor and (ii) shares of Series A Common Stock issuable upon exercise of warrants (the “Placement Agent Warrants,” and together with the Common Stock Warrants, the “Warrants”) to purchase up to 80,000 shares of Series A Common Stock at an exercise price of $6.25 which were issued to A.G.P./Alliance Global Partners (the “Placement Agent”) and its designees, the placement agent of the Private Placement (as defined herein). The Shares offered for sale by such selling stockholders were initially issued by us in a private placement (the “Private Placement”), pursuant to (i) the securities purchase agreement, between us and a selling stockholder (the “Securities Purchase Agreement”) and (ii) the placement agency agreement, between us and the Placement Agent, each dated as of July 12, 2021 (the “Placement Agency Agreement”).

 

We are not offering for sale any of the Shares in the registration statement of which this prospectus is part. We will not receive any proceeds from the sale of the Shares by the selling stockholders, but will incur expenses. We will, however, receive the proceeds of any Warrants exercised for cash in the future. Such net proceeds will be up to approximately $11,500,000, based on the Warrants’ exercise prices. See “Use of Proceeds” in this prospectus. The selling stockholders from time to time may offer and sell the shares held by them directly or through underwriters, agents or broker-dealers on terms to be determined at the time of sale, as described in more detail in this prospectus. Each selling stockholder may also sell shares under Rule 144 under the Securities Act of 1933, as amended, to the extent available pursuant to the restrictions thereunder, rather than under this prospectus. For additional information on the methods of sale that may be used by the selling stockholders, see the section entitled “Plan of Distribution” on page 104. For a list of the selling stockholders, see the section entitled “Selling Stockholders” on page 103.

 

We may amend or supplement this prospectus from time to time by filing amendments or supplements as required. You should read the entire prospectus and any amendments or supplements carefully before you make your investment decision.

 

Our Series A Common Stock is traded on The Nasdaq Capital Market (“Nasdaq”) under the symbol “SQFT” and our 9.375% Series D Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value per share (the “Series D Preferred Stock”) is traded on Nasdaq under the symbol “SQFTP”. On August 25, 2021, the last reported sale price of our Series A Common Stock was $3.80 per share and the last reported sale price of our Series D Preferred Stock was $25.0001 per share.

 

We are an internally managed, diversified real estate investment trust (“REIT”) as defined under the Internal Revenue Code of 1986, as amended (the “Code”). Shares of our stock are subject to limitations on ownership and transfer that are intended to assist us in qualifying as a REIT, among other purposes. Our charter generally prohibits any person or entity from actually, beneficially or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock or more than 9.8% in value of the aggregate outstanding shares of all classes and series of our capital stock. See the section entitled “Description of Capital StockRestrictions on Ownership and Transfer” included in this prospectus.

 

Investing in our securities involves a high degree of risk. SeeRisk Factorsbeginning on page 11 of this prospectus to read about factors that you should consider before investing in our securities.

 

 

 

Neither the Securities and Exchange Commission nor any other regulatorY BODY HAS approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Anyrepresentation to the contrary is a criminal offense.

 

The date of this prospectus is        , 2021.

 

 
 

 

TABLE OF CONTENTS

 

    Page
PROSPECTUS SUMMARY   1
RISK FACTORS   11
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS   35
USE OF PROCEEDS   36
DISTRIBUTION POLICY   36
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   39
BUSINESS AND PROPERTY   54
MANAGEMENT   68
EXECUTIVE AND DIRECTOR COMPENSATION    75
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS   88
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES   88
PRINCIPAL STOCKHOLDERS   91
DESCRIPTION OF CAPITAL STOCK   93
SELLING STOCKHOLDERS   103
PLAN OF DISTRIBUTION   104
CERTAIN PROVISIONS OF MARYLAND LAW AND OUR CHARTER AND BYLAWS   106
U.S. FEDERAL INCOME TAX CONSIDERATIONS   112
ERISA CONSIDERATIONS   133
LEGAL MATTERS   136
EXPERTS   136
WHERE YOU CAN FIND MORE INFORMATION   136

 

We have not authorized any person to provide any information or represent anything about us other than what is contained in this prospectus. None of the information on our website referred to in this prospectus is incorporated by reference herein. We do not take any responsibility for, and can provide no assurance as to the reliability of, any information that others may provide to you. We are not making an offer to sell or soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. No action is being taken in any jurisdiction outside the United States to permit a public offering of the Shares or possession or distribution of this prospectus in any such jurisdiction. Any person who comes into possession of this prospectus in jurisdictions outside the United States is required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus to that jurisdiction. You should assume that the information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our Series A Common Stock. Our business, financial condition, results of operations, cash flows and prospects may have changed since that date.

 

- i -
 

 

INDUSTRY AND MARKET DATA

 

We use market data and industry forecasts throughout this prospectus and, in particular, in the section entitled “Business and Property.” Unless otherwise indicated, statements in this prospectus concerning our industry and the markets in which we operate, including our general expectations, competitive position, business opportunity and market size, growth and share, are based on information obtained from industry publications, government publications and third-party forecasts. The forecasts and projections are based upon industry surveys and the preparers’ experience in the industry. There can be no assurance that any of the projections will be achieved. We believe that the surveys and market research performed by others are reliable, but we have not independently verified this information. Accordingly, the accuracy and completeness of the information are not guaranteed.

 

- ii -
 

 

PROSPECTUS SUMMARY

 

This summary highlights some of the information in this prospectus. It does not contain all of the information that you should consider before investing in our securities. You should read carefully the more detailed information set forth in this prospectus, including the information under the heading “Risk Factors,” the historical financial statements, including the related notes, appearing elsewhere in this prospectus, and any free writing prospectus provided or approved by us prior to investing in our securities. Except where the context suggests otherwise, the terms “our company,” “we,” “us” and “our” refer to Presidio Property Trust, Inc., a Maryland corporation, together with its consolidated subsidiaries.

 

Our Company

 

We are an internally managed, diversified real estate investment trust (“REIT”). We invest in a multi-tenant portfolio of commercial real estate assets comprised of office, industrial, and retail properties and model homes leased back to the homebuilder located primarily in the western United States. As of June 30, 2021, the Company owned or had an equity interest in:

 

  Seven office buildings and one industrial property (“Office/Industrial Properties”), which total approximately 724,000 rentable square feet;
  Three retail shopping centers (“Retail Properties”), which total approximately 111,000 rentable square feet; and
  92 model home residential properties (“Model Homes” or “Model Home Properties”), totaling approximately 276,000 square feet, leased back on a triple-net basis to homebuilders that are owned by six affiliated limited partnerships and one wholly-owned corporation, all of which we control.

 

We own five commercial properties located in Colorado, four in North Dakota, and two in Southern California. Our model home properties are located in four states. Our commercial property tenant base is highly diversified and consists of approximately 147 individual commercial tenants with an average remaining lease term of approximately 2.3 years as of June 30, 2021. As of June 30, 2021, two commercial tenants represented more than 5.0% of our annualized base rent, while our ten largest tenants represented approximately 33.69% of our annualized base rent. In addition, our commercial property tenant base has limited exposure to any single industry.

 

In addition, we also own interests, through our subsidiaries and affiliated limited partnerships, in model homes primarily located in Texas and Florida. As of June 30, 2021, there were 92 such model homes. We purchase model homes from established residential home builders and lease them back to the same home builders on a triple-net basis.

 

Our main objective is to maximize long-term stockholder value through the acquisition, management, leasing and selective redevelopment of high-quality office and industrial properties. We focus on regionally dominant markets across the United States which we believe have attractive growth dynamics driven in part by important economic factors such as strong office-using employment growth; net in-migration of a highly educated workforce; a large student population; the stability provided by healthcare systems, government or other large institutional employer presence; low rates of unemployment; and lower cost of living versus gateway markets. We seek to maximize returns through investments in markets with limited supply, high barriers to entry, and stable and growing employment drivers. Our model home portfolio supports the objective of maximizing stockholder value by focusing on purchasing new single-family model homes and leasing them back to experienced homebuilders. We operate the model home portfolio in markets where we can diversify by geography, builder size, and model home purchase price.

 

Our co-founder, Chairman, President and Chief Executive Officer is Jack K. Heilbron, a 40-year veteran in real estate investing, including eight years with Excel Realty Trust, Inc. (“Excel REIT”), previously an NYSE-listed retail REIT, and one of its predecessor companies, The Investors Realty Trust (“IRT”), prior to founding our company. Together with our former Chief Financial Officer and Treasurer, Kenneth W. Elsberry, Mr. Heilbron founded both our company and Clover Income and Growth REIT, Inc. (“Clover REIT”), a private REIT focused on retail mixed-use properties. During Mr. Heilbron’s tenure at Excel REIT, IRT and Clover REIT, Mr. Heilbron oversaw the investment of substantial real estate assets and saw Clover REIT liquidate at a substantial gain to investors. Our model home division is led by Larry G. Dubose, a pioneer in the industry who has over 30 years of experience acquiring, financing, managing, and operating model home sale-leaseback transactions with builders throughout the nation. Our senior management team also includes Gary M. Katz, Adam Sragovicz, and Ed Bentzen, each of whom has approximately 20 years or more of diverse experience in various aspects of real estate, including both commercial and residential, management, acquisitions, finance and dispositions in privately-held and publicly traded companies. We believe this industry experience and depth of relationships provides us with a significant advantage in sourcing, evaluating, underwriting and managing our investments.

 

1
 

 

Our Current Portfolio

 

Our commercial portfolio currently consists of 11 properties located in Southern California, Colorado, and North Dakota, and 92 model home properties located in four states, with the majority located in Texas and Florida. This geographical clustering enables us to minimize operating costs and leverage efficiencies by managing a number of properties utilizing minimal overhead and staff.

 

Commercial Portfolio

 

As of June 30, 2021, our commercial real estate portfolio consisted of the following properties:

 

Property Location ($ in 000s)   Sq. Ft.    

Date

Acquired

   

Year

Property

Constructed

   

  Purchase

Price (1)  

      Occupancy    

Percent

Ownership

   

Mortgage

Outstanding

 
Office/Industrial Properties:                                                        
Genesis Plaza, San Diego, CA (2)     57,807       08/10       1989       10,000       74.7 %     76.4 %     6,223  
Dakota Center, Fargo, ND     119,434       05/11       1982       9,575       72.3 %     100 %     9,789  
Grand Pacific Center, Bismarck, ND     93,058       04/14       1976       5,350       71.2 %     100 %     3,680  
Arapahoe Service Center II, Centennial, CO     79,023       12/14       2000       11,850       100 %     100 %     7,852  
West Fargo Industrial, West Fargo, ND     150,030       08/15       1998/2005       7,900       87.6 %     100 %     4,206  
300 N.P., West Fargo, ND     34,517       08/15       1922       3,850       69.9 %     100 %     2,253  
One Park Centre, Westminster, CO     69,174       08/15       1983       9,150       82.5 %     100 %     6,331  
Shea Center II, Highlands Ranch, CO     121,301       12/15       2000       25,325       83.2 %     100 %     17,621  
Total Office/Industrial Properties     724,334                     $ 83,000       83.2 %           $ 57,955  
                                                         
Retail Properties:                                                        
World Plaza, San Bernardino, CA (3)     55,810       09/07       1974       7,650       100 %     100 %      
Union Town Center, Colorado Springs, CO     44,042       12/14       2003       11,212       96.8 %     100 %     8,245  
Research Parkway, Colorado Springs, CO     10,700       08/15       2003       2,850       88.8 %     100 %     1,733  
Total Retail Properties     110,552                     $ 21,712       97.7 %             9,978  
Total Commercial Properties     834,896                     $ 104,712       85.1 %             67,933  

 

  (1)

Prior to January 1, 2009, “Purchase Price” includes our acquisition related costs and expenses for the purchase of the property. After January 1, 2009, acquisition related costs and expenses were expensed when incurred.

  (2) Genesis Plaza is owned by two tenants-in-common, each of which 57% and 43%, respectively, and we beneficially own an aggregate of 76.4%.
  (3) This property is held for sale as of June 30, 2021.

 

2
 

 

For additional information about annual base rent for our commercial properties, please see “Annualized Base Rent Per Square Foot for Last Three Years” in our “Business and Property” section.

 

Model Home Portfolio

 

Our model home division utilizes newly-built single family model homes as an investment vehicle. Our model home division purchases model homes from, and leases them back to, homebuilders as commercial tenants on a triple-net basis. These triple-net investments in which the commercial homebuilders bear the expenses of operations, maintenance, real estate taxes and insurance (in addition to defraying monthly mortgage payments), alleviate significant cost and risk normally associated with holding single family homes for speculative sale or for lease to residential tenants.

 

The following table shows a list of our Model Home properties by geographic region as of June 30, 2021:

 

        Aggregate    

Approximate

%

   

Current

Base

   

Approximate

of Aggregate

 
Geographic Region  

No. of

Properties

   

Square

Feet

   

of Square

Feet

   

Annual

Rent

   

% Annual

Rent

 
Southwest     85       254,901       92.4 %   $ 2,409,576       90.0 %
Southeast     3       8,201       3.0 %   $ 86,904       3.3 %
Midwest     2       6,153       2.2 %   $ 80,844       3.0 %
Northeast     2       6,602       2.4 %   $ 99,276       3.7 %
Total     92       275,857       100 %   $ 2,676,600       100 %

 

3
 

 

Our Investment Approach

 

Our Commercial Property Investment Approach

 

We acquire high-quality commercial properties in overlooked and/or underserved markets, where we believe we can create long-term stockholder value. Our potential commercial investments are extensively reviewed based on several characteristics, including:

 

  Market Research. We invest in properties within regionally dominant markets that we believe to be overlooked. We analyze potential markets for the key indicators that we feel will provide us higher risk adjusted returns. These indicators may include a net in-migration of highly educated workers, business friendly governmental policies, large university populations, accessible healthcare systems and available housing. We believe this quantitative approach will result in property acquisitions in markets with substantially higher demand for high quality commercial real estate.
  Real Estate Enhancement. We typically acquire properties where we believe market demand is such that values can be significantly enhanced through repositioning strategies, such as upgrading common areas and tenant spaces, re-tenanting and leasing vacant space. We expect that these strategies will increase rent and occupancy while enhancing long-term value.
  Portfolio Management. We believe our target markets have benefited from substantial economic growth, which provides us with opportunities to achieve long-term value and ultimately sell properties and recycle capital into properties offering a higher risk-adjusted return. We have achieved substantial returns in the past from the operation, repositioning, and sale of properties. We continue to actively manage our properties to maximize the opportunity to recycle capital.

 

Our Model Home Property Investment Approach

 

Model homes are single-family homes constructed by builders for the purpose of showcasing floor plans, elevations, optional features, and workmanship when marketing the development where the homes are located. Each model home is designed to be held for a minimum lease term (usually three years), after which the model home is listed for sale at the estimated fair market value. Our model home business operates independently in Houston, Texas, with minimal time commitment by senior management. We seek to purchase model homes, at a 5% to 10% discount, that have a likelihood of appreciation within the expected three-year term of the lease, and anticipate unlevered pro forma returns over 8% during our holding period and expected lease term. Our model home leaseback agreements are triple-net, requiring the homebuilder/tenant to pay all operating expenses. We seek model homes in a variety of locations, a variety of price ranges, and from a variety of builders and developers to diversify the risk from economic conditions that may adversely affect a particular development or location.

 

During the six months ended June 30, 2021, we acquired 6 model homes for approximately $2.9 million. The purchase price was paid through cash payments of approximately $0.9 million and mortgage notes of approximately $2.0 million. During the year ended December 31, 2020, we sold 46 model homes for approximately $18.1 million and recognized a gain of approximately $1.6 million. During the year ended December 31, 2019, we sold 41 model homes for approximately $14.6 million and recognized a gain of approximately $1.2 million. We believe that our model home business provides incentives to builders by allowing them to redeploy capital, use sales proceeds to pay down lines of credit, accelerate their internal rate of return calculations, improve margins and inventory turnover, and provides diversification of their risk.

 

Our Growth Strategy

 

Our principal business objective is to provide attractive risk-adjusted returns to our stockholders through a combination of (i) sustainable and increasing rental income and cash flow that generates reliable, increasing dividends and (ii) potential long-term appreciation in the value of our properties and securities. Our primary strategy to achieve our business objective is to invest in, own and manage a diverse multi-tenant portfolio of high-quality commercial properties in promising regionally dominant markets, which we believe will drive higher tenant retention and occupancy.

 

Our Commercial Property Growth Strategy

 

We intend to grow our commercial portfolio by acquiring high-quality properties in our target markets. We may selectively invest in industrial, office, retail, triple net and other properties where we believe we can achieve higher risk-adjusted returns for our stockholders. We expect that our extensive broker and seller relationships will benefit our acquisition activities and help set us apart from competing buyers. In addition, we continue to actively manage our portfolio of commercial properties and continue to redeploy capital through the opportunistic sale of certain commercial properties.

 

4
 

 

We typically purchase properties at what we believe to be a discount to the replacement value of the property. We seek to enhance the value of these properties through active asset management where we believe we can increase occupancy and rent. We typically achieve this growth through value-added investments in these properties, such as common area renovations, enhancement of amenities, improved mechanical systems, and other value-enhancing investments. We generally will not invest in ground-up development as we believe our target markets’ rental rates are below those needed to justify new construction.

 

Our Model Home Growth Strategy

 

We intend to purchase model homes that are in the “move-up market” and in the first-time homebuyer market. The purchase of model homes will be from builders that have sufficient assets to fulfill their lease obligations and with model homes that offer a good opportunity for appreciation upon their sale. Sales proceeds from model homes will typically be reinvested to acquire new model homes.

 

Our Pipeline

 

Our pipeline is comprised of several properties under various stages of review, with individual projected purchase prices ranging from approximately $5 million to $25 million. The pipeline is composed of triple-net, industrial, general office, needs-based retail, and medical office properties. In August 2021, we announced the acquisition of a newly-built franchised Kiddie Academy located in Houston, Texas.

 

Our Competitive Strengths

 

We believe that our management team’s extensive public REIT and general real estate experience distinguishes us from many other public and private real estate companies. Specifically, our competitive strengths include, among others:

 

  Experienced Senior Management Team. Our senior management team has over 75 combined years of experience with public-reporting companies, including real estate experience with a number of other publicly traded companies and institutional investors. We are the third REIT to be co-founded by our CEO, providing us with core real estate experience in addition to substantial public market experience. We have operated as a publicly-reporting company since 2009.
     
  Investment Focus. We believe that our focus on attractive regionally dominant markets provides higher risk-adjusted returns than other public REITs and institutional investors which are focused on gateway markets and major metropolitan areas, as our target markets provide less competition resulting in higher initial returns and greater opportunities to enhance value through institutional quality asset management.
     
  Nimble Management Execution. Our principal focus is on acquiring commercial properties offering immediate yield, combined with identifiable value-creation opportunities. We operate in niche geographies, targeting acquisitions valued at between $10 million and $30 million in order to limit competition from larger, better capitalized buyers focused on core markets. We continue to identify and execute these types and sizes of transactions efficiently, which we believe provides us an advantage over other institutional investors, including larger REITs that focus on larger properties or portfolios in more competitively marketed investment transactions.
     
  Extensive Broker and Seller Relationships. Our senior management team has developed extensive broker and seller relationships, which remain vital to our acquisition efforts. Of our 12 acquisitions since 2014, nine of these transactions were procured either off-market or through brokers with whom we have a historical relationship. We expect these relationships, as well as our ability to establish such relationships in new markets, to provide valuable access to an acquisition pipeline.

 

5
 

 

Risks Factor Summary

 

Our business is subject to many significant risks. You should read and carefully consider the matters discussed below and in the “Risk Factors” section beginning on page 11 of this prospectus prior to deciding whether to invest in our securities. If any of the following risks occur, our business, financial condition, results of operations, cash flows, cash available for distribution, ability to service our debt obligations and prospects could be materially and adversely affected. In that case, the market price of our Series A Common Stock could decline and you may lose some or all of your investment. Some of these risks include:

 

  The current outbreak of the novel coronavirus (COVID-19), and the resulting volatility it has created, has disrupted our business and we expect that the COVID-19 pandemic, may significantly and adversely impact our business, financial condition and results of operations going forward, and that other potential pandemics or outbreaks, could materially adversely affect our business, financial condition, results of operations and cash flows in the future. Further, the spread of the COVID-19 outbreak has caused severe disruptions in the U.S. and global economy and financial markets, and could potentially create widespread business continuity issues of an unknown magnitude and duration. To date our business has not been significantly impacted by the COVID-19 pandemic. While several of our tenants have reported financial challenges, suffered because of the COVID-19 pandemic, only 13 of our tenants have requested rent abatements or reductions from us. The impact of the COVID-19 pandemic on our business is still uncertain and will be largely dependent on future developments;
     
  We face numerous risks associated with the real estate industry that could adversely affect our results of operations through decreased revenues or increased costs;
     
  Disruptions in the financial markets and uncertain economic conditions could adversely affect the value of our real estate investments;
     
  Our inability to sell a property at the time and on the terms we desire could limit our ability to realize a gain on our investments and pay distributions to our stockholders;
     
  We may acquire properties in joint ventures, partnerships or through limited liability companies, which could limit our ability to control or liquidate such holdings;
     
  We may acquire properties “as is,” which increases the risk that we will have to remedy defects or costs without recourse to the seller;
     
  Our model home business is substantially dependent on the supply and/or demand for single family homes;
     
 

A significant percentage of our properties are concentrated in a small number of states, which exposes our business to the effects of certain regional events and occurrences;

     
  We currently are dependent on internal cash from our operations, financing and proceeds from property sales to fund future property acquisitions, meet our operational costs and pay dividends to our stockholders;
     
  We depend on key personnel, and the loss of such persons could impair our ability to achieve our business objectives;
     
  We may change our investment and business policies without stockholder consent, and such changes could increase our exposure to operational risks;
     
  Provisions of Maryland law may limit the ability of a third party to acquire control of us by requiring our Board of Directors or stockholders to approve proposals to acquire our company or effect a change in control;
     
  Our management faces certain conflicts of interest with respect to their other positions and/or interests outside of our company, which could hinder our ability to implement our business strategy and to generate returns to our stockholders;

 

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  We have significant outstanding indebtedness, which requires that we generate sufficient cash flow to satisfy the payment and other obligations under the terms of our debt and exposes us to the risk of default under the terms of our debt;
     
  Failure to qualify as a REIT could adversely affect our operations and our ability to pay distributions;
     
  As a REIT, we may be subject to tax liabilities that reduce our cash flow;
     
  The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions that would be treated as sales for U.S. federal income tax purposes;
     
  Our management team may invest or spend the proceeds received from the exercise of the outstanding Warrants in ways with which you may not agree or in ways which may not yield a significant return;
     
  Our cash available for distributions may not be sufficient to pay distributions on the Series A Common Stock at expected levels, and we cannot assure you of our ability to pay distributions in the future. We may use borrowed funds or funds from other sources to pay distributions, which may adversely impact our operations; and
     
  A future issuance of stock could dilute the value of our Series A Common Stock.

 

Our REIT Status

 

We elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2001. To continue to be taxed as a REIT, we must satisfy numerous organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders, as defined in the Code and calculated on an annual basis. As a REIT, we are generally not subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify for taxation as a REIT in any year, our income will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify. Even though we qualify as a REIT for federal income tax purposes, we may still be subject to state and local taxes on our income and property and to federal income and excise taxes on our undistributed income. For more information, please see “U.S. Federal Income Tax Considerations.”

 

Distribution Policy

 

We plan to distribute at least 90% of our annual REIT taxable income to our stockholders in order to maintain our status as a REIT.

 

We intend to declare quarterly distributions. To be able to pay such dividends, our goal is to generate cash distributions from operating cash flow and proceeds from the sale of properties. During 2020, 2019 and 2018, we declared distributions on our Series A Common Stock of approximately $1.0 million each year. During the six months ended June 30, 2021, the Company paid two cash dividends to the holders of shares of Series A Common Stock of approximately $1.0 million or $0.101 per share and approximately $1.0 million or $0.102 per share. Additionally, pursuant to the terms of our Series D Preferred Stock, since the date of issuance of shares of Series D Preferred Stock through June 30, 2021, we have declared a dividend of approximately $96,000, which was paid on July 15, 2021. However, we cannot provide any assurance as to the amount or timing of future distributions. For example, our distributions were suspended for the periods from the third quarter of 2017 through the third quarter of 2018 and from the second quarter of 2019 through the third quarter of 2020.

 

To the extent that we make distributions in excess of our earnings and profits, as computed for federal income tax purposes, these distributions will represent a return of capital, rather than a dividend, for federal income tax purposes. Distributions that are treated as a return of capital for federal income tax purposes generally will not be taxable as a dividend to a U.S. stockholder, but will reduce the stockholder’s basis in its shares (but not below zero) and therefore can result in the stockholder having a higher gain upon a subsequent sale of such shares. Return of capital distributions in excess of a stockholder’s basis generally will be treated as gain from the sale of such shares for federal income tax purposes.

 

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We provide each of our stockholders a statement detailing distributions paid during the preceding year and their characterization as ordinary income, capital gain or return of capital. During the year ended December 31, 2020, all dividends were non-taxable as they were considered return of capital to the stockholders. During the year ended December 31, 2019, all dividends were taxable as they were considered capital gain to the stockholders.

 

Organizational Structure

 

The following chart summarizes our current ownership structure:

 

SQFT20201119_S11IMG002.JPG

 

Corporate Information

 

We were incorporated in the State of California on September 28, 1999 under the name NetREIT, and in June 2010, we reincorporated as a Maryland corporation. In October 2017, we changed our name to “Presidio Property Trust, Inc.” Our executive offices are located at 4995 Murphy Canyon Road, Suite 300, San Diego, California 92123. Our telephone number is (760) 471-8536. We maintain an internet website at www.presidiopt.com. Information on, or accessible through, our website is not a part of, and is not incorporated into, this prospectus or the registration statement of which it forms a part.

 

Outstanding Warrants Issued in the Private Placement

 

The Shares offered in this prospectus relate to the resale by selling stockholders of an aggregate of up to 2,080,000 shares of Series A Common Stock issuable upon the exercise of outstanding warrants, which were issued in the Private Placement on July 14, 2021. In conjunction with a public offering, in the Private Placement, we sold warrants to purchase up to 2,080,000 shares of our Series A Common Stock. The outstanding warrants include:

 

  Common Stock Warrants to purchase up to 2,000,000 shares of Series A Common Stock at an exercise price of $5.50 per share, which were issued to an institutional investor pursuant to the Securities Purchase Agreement; and
     
  Placement Agent Warrants to purchase up to 80,000 shares of Series A Common Stock at an exercise price of $6.25 per share, which were issued to the Placement Agent and its designees as part of the compensation for the Placement Agent’s services in connection with the Private Placement.

 

All of the Warrants were issued pursuant to the exemption from the registration requirements in Section 4(a)(2) of the Securities Act of 1933, as amended. We are filing the registration statement on Form S-11, of which this prospectus is a part, to enable the holders of the Warrants to resell the underlying shares of Series A Common Stock after exercising the warrants for cash, in accordance with our obligations under the Securities Purchase Agreement and the Placement Agency Agreement.

 

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THE OFFERING

 

Securities offered by the selling stockholders herein:   2,080,000 shares of Series A Common Stock issuable upon exercise of the outstanding Warrants
     
Series A Common stock outstanding before this offering:   11,508,363 shares
     
Series A Common Stock outstanding after this offering:   13,588,363 shares (assuming the exercise of all the outstanding Warrants)
     
Use of Proceeds:   We will not receive any proceeds from the sale of the Series A Common Stock by the selling stockholders. We will, however, receive the proceeds of any Warrants exercised for cash in the future. Such net proceeds will be up to approximately $11,500,000, based on the Warrants’ exercise prices. See “Use of Proceeds” in this prospectus.
     
The Offering Price:   The selling stockholders may sell all or a portion of their Shares through public or private transactions at prevailing market prices or at privately negotiated prices.
     
The Nasdaq Capital Market Symbol of our Series A Common Stock:   SQFT
     
Risk Factors:   An investment in our company is highly speculative and involves a significant degree of risk. See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our securities.

 

Summary Historical Financial Data

 

The following financial data should be read in conjunction with the financial statements and the related notes included elsewhere in this prospectus.

 

The following table sets forth summary financial and operating data for our company for the prior two fiscal years and for each of the six-month periods ended June 30, 2021 and 2020. The historical balance sheet information as of December 31, 2020 and 2019 and the combined statements of operations information for the years ended December 31, 2020 and 2019 have been derived from the historical audited combined financial statements included elsewhere in this prospectus. The unaudited historical balance sheet data information as of June 30, 2021 and the combined statements of operations for each of the three months and six months ended June 30, 2021 and 2020 have been derived from the unaudited historical financial statements included elsewhere in this prospectus.

 

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The information presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Certain Relationships and Related Party Transactions” and our financial statements and related notes, which are included elsewhere in this prospectus.

 

Presidio Property Trust, Inc. Historical Financial Data

 

    For the Three Months Ended June 30,     For the Six Months Ended June 30,     For the Years Ended December 31  
    2021     2020     2021     2020     2020     2019  
Revenues:                                    
Rental income   $ 4,553,798     $ 5,879,526     $ 10,031,021     $ 12,665,211     $ 23,444,119     $ 27,467,410  
Fees and other income     292,785       241,878       484,316       485,344       907,673       1,173,701  
Total revenue     4,846,583       6,121,404       10,515,337       13,150,555       24,351,792       28,641,111  
Costs and expenses:                                                
Rental operating costs     1,485,815       1,999,834       3,324,738       4,380,926       8,818,283       10,410,574  
General and administrative     1,344,770       1,278,971       2,882,036       2,630,316       5,751,754       5,268,315  
Depreciation and amortization     1,368,209       1,622,230       2,797,143       3,196,756       6,274,321       7,364,688  
Impairment of real estate assets           845,674       300,000       845,674       1,730,851        
Total costs and expenses     4,198,794       5,746,709       9,303,917       11,053,672       22,575,209       23,043,577  
Other income (expense):                                                
Interest expense-Series B preferred stock                                   (2,226,101 )
Interest expense-mortgage notes     (1,207,036 )     (1,477,628 )     (2,512,057 )     (3,165,404 )     (6,097,834 )     (7,337,423 )
Interest expense - note payable           (795,728 )     (279,373 )     (1,661,798 )     (2,715,233 )     (1,086,122 )
Interest and other income (expense), net     (20,657 )     8,400       (53,443 )     1,405       (20,636 )     141,306  
Gain on sales of real estate, net     2,594,341       334,096       1,433,014       324,261       1,245,460       6,319,272  
Gain on extinguishment of government debt                 10,000             451,785        
Deferred offering costs                             (530,639 )      
Acquisition costs                                   (24,269 )
Income tax expense     (238,701 )     (51,369 )     (288,899 )     (135,000 )     (370,884 )     (611,263 )
Total other income (expense), net     1,127,947       (1,982,229 )     (1,690,758 )     (4,636,536 )     (8,037,981 )     (4,824,600 )
Net income (loss)     1,775,736       (1,607,534 )     (479,338 )     (2,539,653 )     (6,261,398 )     772,934  
Less: Loss attributable to noncontrolling interests     (925,697 )     (315,282 )     (1,332,305 )     (490,293 )     (1,412,507 )     (1,383,140 )
Net income (loss) attributable to Presidio Property Trust, Inc. stockholders   $ 850,039     $ (1,922,816 )   $ (1,811,643 )   $ (3,029,946 )   $ (7,673,905 )   $ (610,206 )
Less: Preferred Stock Series D dividends     (95,836 )           (95,836 )                  
Net income (loss) attributable to Presidio Property Trust, Inc. common stockholders   $ 754,203     $ (1,922,816 )   $ (1,907,479 )   $ (3,029,946 )   $ (7,673,905 )   $ (610,206 )
                                                 
Net income (loss) per share attributable to Presidio Property Trust, Inc. common stockholders:                                                
Basic & Diluted   $ 0.08     $ (0.22 )   $ (0.20 )   $ (0.34 )   $ (0.85 )   $ (0.07 )
Diluted   $ 0.08     $ (0.22 )   $ (0.20 )   $ (0.34 )   $ (0.85 )   $ (0.07 )
                                                 
Weighted average number of common shares outstanding - basic & diluted     9,508,363       8,897,037       9,508,363       8,889,436       9,023,914       8,862,958  

 

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RISK FACTORS

 

Investing in our securities 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 securities. Any of the following circumstances could have a material adverse impact on our business, financial condition, liquidity, results of operations, cash available for distribution, ability to service our debt obligations and/or business prospects, which could cause you to lose some or all of your investment in our securities. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitledCautionary Note Regarding Forward-Looking Statements.

 

Risks Related to Our Business, Properties and Operations

 

The current outbreak of the novel coronavirus (COVID-19), and the resulting volatility it has created, has disrupted our business and we expect that the COVID-19 pandemic, may significantly and adversely impact our business, financial condition and results of operations going forward, and that other potential pandemics or outbreaks, could materially adversely affect our business, financial condition, results of operations and cash flows in the future. Further, the spread of the COVID-19 outbreak has caused severe disruptions in the U.S. and global economy and financial markets, and could potentially create widespread business continuity issues of an unknown magnitude and duration. To date our business has not been significantly impacted by the COVID-19 pandemic. While several of our tenants have reported financial challenges, suffered because of the COVID-19 pandemic, only 13 of our tenants have requested rent abatements or reductions from us. The impact of the COVID-19 pandemic on our business is still uncertain and will be largely dependent on future developments.

 

The COVID-19 pandemic has had, and in the future will likely continue to have, repercussions across regional and global economies and financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States (including the states and cities that comprise the San Diego, California; Denver and Colorado Springs, Colorado; Fargo and Bismarck, North Dakota; and other metro regions where we own and operate properties) have instituted quarantines, “shelter in place” mandates, and rules and restrictions on travel and the types of businesses that may continue to operate. While some of these restrictions have been lifted, new variants of the coronavirus and/or the continued spread of the virus could cause government authorities to extend, reinstitute and/or adopt new restrictions. As a result, the COVID-19 pandemic is negatively impacting almost every industry, both inside and outside these metro regions, directly or indirectly and has created business continuity issues. For instance, a number of our commercial tenants temporarily closed their offices or stores and requested temporary rent deferral or rent abatement during the pandemic. In addition, jurisdictions where we own and operate properties have implemented, or may implement, rent freezes, eviction freezes, or other similar restrictions. The full extent of the impacts on our business over the long term are largely uncertain and dependent on a number of factors beyond our control.

 

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As a result of the effects of the COVID-19 pandemic, we have been impacted by and may further be impacted by one or more of the following:

 

  a decrease in real estate rental revenue (our primary source of operating cash flow), as a result of temporary rent deferrals, rent abatement and/or rent reductions, rent freezes or declines impacting new and renewal rental rates on properties, longer lease-up periods for both anticipated and unanticipated vacancies (in part, due to “shelter-in-place” mandates), lower revenue recognized as a result of waiving late fees, as well as our tenants’ ability and willingness to pay rent, and our ability to continue to collect rents, on a timely basis or at all;
     
  a complete or partial closure of one or more of our properties resulting from government or tenant action (as of June 30, 2021, many of our commercial properties were reopened, however certain tenants were still operating on a limited basis pursuant to local government orders);
     
  reductions in demand for commercial space and the inability to provide physical tours of our commercial spaces may result in our inability to renew leases, re-lease space as leases expire, or lease vacant space, particularly without concessions, or a decline in rental rates on new leases;
     
  the inability of one or more major tenants to pay rent, or the bankruptcy or insolvency of one or more major tenants, may be increased due to a downturn in its business or a weakening of its financial condition as a result of shelter-in-place orders, phased re-opening of its business, or other pandemic related causes;
     
  the inability to decrease certain fixed expenses at our properties despite decreased operations at such properties;
     
  the inability of our third-party service providers to adequately perform their property management and/or leasing activities at our properties due to decreased on-site staff;
     
  the effect of existing and future orders by governmental authorities in any of our markets, which might require homebuilders to cease operations for an uncertain or indefinite period of time, which could significantly affect new home orders and deliveries, and negatively impact their home sales revenue and ability to perform on their lease obligations to the Company in such markets;
     
  difficulty accessing capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deterioration in credit and financing conditions, which may affect our access to capital and our commercial tenants’ ability to fund their business operations and meet their obligations to us;
     
  the financial impact of the COVID-19 pandemic could negatively impact our future compliance with financial covenants of debt agreements;
     
  a decline in the market value of real estate may result in the carrying value of certain real estate assets exceeding their fair value, which may require us to recognize an impairment to those assets;
     
  future delays in the supply of products or services may negatively impact our ability to complete the renovations and lease-up of our buildings on schedule or for their original estimated cost;
     
  a general decline in business activity and demand for real estate transactions could adversely affect our ability or desire to grow or change the complexion of our portfolio of properties;
     
  our insurance may not cover loss of revenue or other expenses resulting from the pandemic and related shelter-in-place rules;
     
  unanticipated costs and operating expenses and decreased anticipated revenue related to compliance with regulations, such as additional expenses related to staff working remotely, requirements to provide employees with additional mandatory paid time off and increased expenses related to sanitation measures performed at each of our properties, as well as additional expenses incurred to protect the welfare of our employees, such as expanded access to health services;

 

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  the potential for one or more members of our senior management team to become sick with COVID-19 and the loss of such services could adversely affect our business;
     
  the increased vulnerability to cyber-attacks or cyber intrusions while employees are working remotely has the potential to disrupt our operations or cause material harm to our financial condition;
     
  the effects of fiscal stimulus programs in response to COVID-19 are unpredictable and may cause inflation in excess of the rent increase under our leases and volatility in the markets for equity and debt securities; and
     
  complying with REIT requirements during a period of reduced cash flow could cause us to liquidate otherwise attractive investments or borrow funds on unfavorable conditions.

 

The financial aspects of the COVID-19 pandemic are difficult to predict and may not directly correlate to the severity of outbreaks at a particular place or time. For example, there has been significant inflation in the price of lumber, largely as a result of supply shortages specific to the lumber industry resulting from the pandemic, that may affect construction and renovation costs in our industry. Similarly, despite general economic concerns resulting from the COVID-19 pandemic, there has been home price inflation in many markets, which may affect our ability to purchase Model Homes at prices we consider to be reasonable.

 

The significance, extent and duration of the impact of COVID-19 remains largely uncertain and dependent on future developments that cannot be accurately predicted at this time, such as the continued severity, duration, transmission rate and geographic spread of COVID-19, the extent and effectiveness of the containment measures taken, and the response of the overall economy, the financial markets and the population.

 

The rapid development and volatility of this situation precludes us from making any prediction as to the ultimate adverse impact of COVID-19. As a result, we cannot provide an estimate of the overall impact of the COVID-19 pandemic on our business or when, or if, we (or our tenants) will be able to resume fully normal operations. Nevertheless, COVID-19 presents material uncertainty and risk with respect to our business, financial performance and condition, operating results and cash flows.

 

We face numerous risks associated with the real estate industry that could adversely affect our results of operations through decreased revenues or increased costs.

 

As a real estate company, we are subject to various changes in real estate conditions, and any negative trends in such real estate conditions may adversely affect our results of operations through decreased revenues or increased costs. These conditions include:

 

  changes in national, regional and local economic conditions, which may be negatively impacted by concerns about inflation, deflation, government deficits, high unemployment rates, decreased consumer confidence and liquidity concerns, particularly in markets in which we have a high concentration of properties;
     
  fluctuations in interest rates, which could adversely affect our ability to obtain financing on favorable terms or at all, and negatively impact the value of properties and the ability of prospective buyers to obtain financing for properties we intend to sell;
     
  the inability of tenants to pay rent;
     
  the existence and quality of the competition, such as the attractiveness of our properties as compared to our competitors’ properties based on considerations such as location, rental rates, amenities and safety record;
     
  competition from other real estate investors with significant capital, including other real estate operating companies, publicly traded REITs and institutional investment funds;

 

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  increased operating costs, including increased real property taxes, maintenance, insurance and utilities costs;
     
  weather conditions that may increase or decrease energy costs and other weather-related expenses;
     
  oversupply of commercial space or a reduction in demand for real estate in the markets in which our properties are located;
     
  changes in, or increased costs of compliance with, laws and/or governmental regulations, including those governing usage, zoning, the environment and taxes; and
     
  civil unrest, acts of war, terrorist attacks and natural disasters, including earthquakes, wind and hail damage and floods, which may result in uninsured and underinsured losses.

 

Moreover, other factors may adversely affect our results of operations, including potential liability under environmental and other laws and other unforeseen events, many of which are discussed elsewhere in this prospectus. Any or all of these factors could materially adversely affect our results of operations through decreased revenues or increased costs.

 

Conditions in the financial markets could affect our ability to obtain financing on reasonable terms and have other adverse effects on our operations.

 

The financial markets could tighten with respect to secured real estate financing. Lenders with whom we typically deal may increase their credit spreads resulting in an increase in borrowing costs. Higher costs of mortgage financing may result in lower yields from our real estate investments, which may reduce our cash flow available for distribution to our stockholders. Reduced cash flow could also diminish our ability to purchase additional properties and thus decrease our diversification of real estate ownership.

 

Disruptions in the financial markets and uncertain economic conditions could adversely affect the value of our real estate investments.

 

Disruptions in the financial markets could adversely affect the value of our real estate investments. Such conditions could impact commercial real estate fundamentals and result in lower occupancy, lower rental rates, and declining values in our real estate portfolio and in the collateral securing our loan investments. As a result, the value of our property investments could decrease below the amounts paid for such investments, the value of collateral securing our loans could decrease below the outstanding principal amounts of such loans, and revenues from our properties could decrease due to fewer and/or delinquent tenants or lower rental rates. These factors may significantly harm our revenues, results of operations, financial condition, business prospects and our ability to make distributions to our stockholders.

 

A decrease in real estate values could negatively affect our ability to refinance our existing mortgage obligations or obtain larger mortgages.

 

A decrease in real estate values would decrease the principal amount of secured loans we can obtain on a specific property and our ability to refinance our existing mortgage loans, or obtain larger mortgage loans. In some circumstances, a decrease in the value of an existing property which secures a mortgage loan may require us to prepay or post additional security for that mortgage loan. This would occur where the lender’s initial appraised value of the property decreases below the value required to maintain a loan-to-value ratio specified in the mortgage loan agreement. Thus, any sustained period of depressed real estate prices would likely adversely affect our ability to finance our real estate investments.

 

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We may be adversely affected by unfavorable economic changes in the geographic areas where our properties are located.

 

Adverse economic conditions in areas where properties securing or otherwise underlying our investments are located (including business layoffs or downsizing, industry slowdowns, changing demographics and other factors) and local real estate conditions (such as oversupply or reduced demand) may have an adverse effect on the value of our real estate portfolio. The deterioration of any of these local conditions could hinder our ability to profitably operate a property and adversely affect the price and terms of a sale or other disposition of the property.

 

Competition for properties may limit the opportunities available to us and increase our acquisition costs, which could have a material adverse effect on our growth prospects and negatively impact our profitability.

 

The market for property acquisitions continues to be competitive, which may reduce suitable investment opportunities available to us and increase acquisition purchase prices. Competition for properties offering higher rates of returns may intensify if real estate investments become more attractive relative to other investments. In acquiring real properties, we may experience considerable competition from a field of other investors, including other REITs, private equity investors, institutional investment funds, and real estate investment programs. Many of these competitors are larger than we are and have access to greater financial resources and better access to lower costs of capital. 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 investments. This competition may limit our ability to take advantage of attractive investment opportunities that are consistent with our objectives. Our inability to acquire desirable properties on favorable terms could adversely affect our growth prospects, financial condition, our profitability and our ability to pay dividends.

 

Our inability to sell a property at the time and on the terms we desire could limit our ability to realize a gain on our investments and pay distributions to our stockholders.

 

Generally, we seek to sell, exchange or otherwise dispose of our properties when we determine such action to be in our best interests. Many factors beyond our control affect the real estate market and could affect our ability to sell properties for the price, on the terms or within the time frame that we desire. These factors include general economic conditions, the availability of financing, interest rates, supply and demand, and tax considerations. Because real estate investments are relatively illiquid, we have a limited ability to vary our portfolio in response to changes in economic or other conditions. Therefore, our inability to sell properties at the time and on the terms we want could reduce our cash flow, affect our ability to service or reduce our debt obligations, and limit our ability to make distributions to our stockholders.

 

Lease default or termination by one of our major tenants could adversely impact our operations and our ability to pay dividends.

 

The success of our real estate investments depend on the financial stability of our tenants. A default or termination by a significant tenant (or a series of tenants) on its lease payments could cause us to lose the revenue associated with such lease and seek an alternative source of revenue to meet mortgage payments and prevent a foreclosure, if the property is subject to a mortgage. In the event of a significant tenant default or bankruptcy, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment. Additionally, we may be unable to lease the property for the rent previously received or sell the property without incurring a loss. These events could cause us to reduce the amount of distributions to our stockholders.

 

Our reliance on a key tenant for a significant portion of our annualized based rent exposes us to increased risk of tenant bankruptcies that could adversely affect our income and cash flow.

 

As of June 30, 2021, we received 8.32% of our combined annualized base rents from one tenant, Halliburton Energy Services, Inc. No other tenant represented more than 6% of our total annualized base rent.

 

If Halliburton Energy Services, Inc. experiences financial difficulties or files for bankruptcy protection, our operating results could be adversely affected. Bankruptcy filings by tenants or lease guarantors generally delay our efforts to collect pre-bankruptcy receivables and could ultimately preclude full collection of these sums. If a tenant rejects a lease, we would have only a general unsecured claim for damages, which may be collectible only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims.

 

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A property that becomes vacant could be difficult to sell or re-lease and could have a material adverse effect on our operations.

 

We expect portions of our properties to periodically become vacant by reason of lease expirations, terminations, or tenant defaults. If a tenant vacates a property, we may be unable to re-lease the property without incurring additional expenditures, or at all. If the vacancy continues for a long period of time, if the rental rates upon such re-lease are significantly lower than expected, or if our reserves for these purposes prove inadequate, we will experience a reduction in net income and may be required to reduce or eliminate distributions to our stockholders. In addition, because a property’s market value depends principally upon the value of the leases associated with that property, the resale value of a property with high or prolonged vacancies could suffer, which could further reduce our returns.

 

We may incur substantial costs in improving our properties.

 

In order to re-lease or sell a property, substantial renovations or remodeling could be required. For instance, we expect that some of our properties will be designed for use by a particular tenant or business. Upon default or termination of the lease by such a tenant, the property might not be marketable without substantial capital improvements. The cost of construction in connection with any renovations and the time it takes to complete such renovations may be affected by factors beyond our control, including material and labor shortages, general contractor and/or subcontractor defaults and delays, permitting issues, weather conditions, and changes in federal, state and local laws. If we experience cost overruns resulting from delays or other causes in any construction project, we may have to seek additional debt financing. Further, delays in construction will cause a delay in our receipt of revenues from that property and could adversely affect our ability to meet our debt service obligations.

 

Uninsured and/or underinsured losses may adversely affect returns to our stockholders.

 

Our policy is to obtain insurance coverage for each of our properties covering loss from liability, fire, and casualty in the amounts and under the terms we deem sufficient to insure our losses. Under tenant leases on our commercial properties, we require our tenants to obtain insurance to cover casualty losses and general liability in amounts and under terms customarily obtained for similar properties in the area. However, in certain areas, insurance to cover some losses, generally losses of a catastrophic nature such as earthquakes, floods, wind, hail, terrorism and wars, is either unavailable or cannot be obtained at a reasonable cost. Consequently, we may not have adequate coverage for such losses. If any of our properties incurs a casualty loss that is not fully insured, we could lose some or all of our investment in the property. In addition, other than any working capital reserve or other reserves we may establish, we likely would have no source of funding to repair or reconstruct any uninsured or underinsured property.

 

Since we are not required to maintain specific levels of cash reserves, we may have difficulty in the event of increased or unanticipated expenses.

 

We do not currently have, nor do we anticipate that we will establish in the future, a permanent reserve for maintenance and repairs, lease commissions, or tenant improvements of real estate properties. To the extent that existing expenses increase or unanticipated expenses arise and accumulated reserves are insufficient to meet such expenses, we would be required to obtain additional funds through borrowing or the sale of property. There can be no guarantee that such additional funds will be available on favorable terms, or at all.

 

We may have to extend credit to buyers of our properties and a default by such buyers could have a material adverse effect on our operations and our ability to pay dividends.

 

In order to sell a property, we may lend the buyer all or a portion of the purchase price. When we provide financing to a buyer, we bear the risk that the buyer may default or that we may not receive full payment for the property sold. Even in the absence of a buyer default, the distribution of the proceeds of the sale to our stockholders, or the reinvestment of the proceeds in other property, will be delayed until the promissory note or collateral we may accept upon a sale is actually paid, sold, refinanced or otherwise disposed.

 

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We may be adversely affected by trends in office real estate.

 

In 2020, approximately 59% of our net operating income is from our office properties. Work from home, flexible work schedules, open workplaces, videoconferencing, and teleconferencing are becoming more common, particularly as a result of the COVID-19 pandemic. These practices may enable businesses to reduce their office space requirements. There is also an increasing trend among some businesses to utilize shared office spaces and co-working spaces. A continuation of the movement towards these practices could, over time, erode the overall demand for office space and, in turn, place downward pressure on occupancy, rental rates and property valuations.

 

We may acquire properties in joint ventures, partnerships or through limited liability companies, which could limit our ability to control or liquidate such holdings.

 

We may hold properties indirectly with others as co-owners (a co-tenancy interest) or indirectly through an intermediary entity such as a joint venture, partnership or limited liability company. Also, we may on occasion purchase an interest in a long-term leasehold estate or we may enter into a sale-leaseback financing transaction (see risk factor titled “In a sale-leaseback transaction, we are at risk that our seller/lessee will default, which could impair our operations and limit our ability to pay dividends.”). Such ownership structures allow us to hold a more valuable property with a smaller investment, but may reduce our ability to control such properties. In addition, if our co-owner in such arrangements experiences financial difficulties or is otherwise unable or unwilling to fulfill its obligations, we may be forced to find a new co-owner on less favorable terms or lose our interest in such property if no co-owner can be found.

 

As a general partner or member in DownREIT entities, we could be responsible for all liabilities of such entities.

 

We own three of our properties indirectly through limited liability companies and limited partnerships under a DownREIT structure. In a DownREIT structure, as well as some joint ventures or other investments we may make, we may utilize a limited liability company or a limited partnership as the holder of our real estate investment. We currently own a portion of these interests as a member, general partner and/or limited partner and in the future may acquire all or a greater interest in such entity. As a sole member or general partner, we are or would be potentially liable for all of the liabilities of the entities, even if we do not have rights of management or control over its operations. Therefore, our liability could far exceed the amount or value of investment we initially made, or then had, in such entities.

 

Our ability to operate a property may be limited by contract, which could prevent us from obtaining the maximum value from such properties.

 

Some of our properties will likely be contiguous to other parcels of real property, for example, comprising part of the same shopping center development. In some cases, there could exist significant covenants, conditions and restrictions, known as CC&Rs, relating to such property and any improvements or easements related to that property. The CC&Rs would restrict our operation of that property and could adversely affect the value of such property, either of which could adversely affect our operating costs and reduce the amount of funds that we have available to pay dividends.

 

We may acquire propertiesas is,which increases the risk that we will have to remedy defects or costs without recourse to the seller.

 

We may acquire real estate properties “as is,” with only limited representations and warranties from the seller regarding matters affecting the condition, use and ownership of the property. If defects in the property or other matters adversely affecting the property are discovered post-closing, we may not be able to pursue a claim for any or all damages against the seller. Therefore, we could lose some or all of our invested capital in the property as well as rental income. Such a situation could negatively affect our financial condition and results of operations.

 

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In a sale-leaseback transaction, we are at risk that our seller/lessee will default, which could impair our operations and limit our ability to pay dividends.

 

In our model homes business we frequently lease model home properties back to the seller or homebuilder for a certain period of time. Our ability to meet any mortgage payments is subject to the seller/lessee’s ability to pay its rent and other lease obligations, such as triple net expenses, on a timely basis. A default by the seller/lessee or other premature termination of its leaseback agreement with us and our subsequent inability to release the property could cause us to suffer losses and adversely affect our financial condition and ability to pay dividends.

 

Our model home business is substantially dependent on the supply and/or demand for single family homes.

 

Any significant decrease in the supply and/or demand for single family homes could have an adverse effect on our business. Reductions in the number of model home properties built by homebuilders due to fewer planned unit developments, rising construction costs or other factors affecting supply could reduce the number of acquisition opportunities available to us. The level of demand for single family homes may be impacted by a variety of factors including changes in population density, the health of local, regional and national economies, mortgage rates, and the demand and use of model homes in newly developed communities by homebuilders and developers.

 

We may be unable to acquire and/or manage additional model homes at competitive prices or at all.

 

Model homes generally have a short life before becoming residential homes and there are a limited number of model homes at any given time. In addition, as each model home is unique, we need to expend resources to complete our due diligence and underwriting process on many individual model homes, thereby increasing our acquisition costs and possibly reducing the amount that we are able to pay for a particular property. Accordingly, our plan to grow our model home business by acquiring additional model homes to lease back to home builders may not succeed.

 

There are a limited number of model homes and competition to buy these properties may be significant.

 

We plan to acquire model homes to lease back to home builders when we identify attractive opportunities and have financing available to complete such acquisitions. We may face competition for acquisition opportunities from other investors. We may be unable to acquire a desired property because of competition from other well capitalized real estate investors, including private investment funds and others. Competition from other real estate investors may also significantly increase the purchase price we must pay to acquire properties.

 

A significant percentage of our properties are concentrated in a small number of states, which exposes our business to the effects of certain regional events and occurrences.

 

Our commercial properties are currently located in Southern California, Colorado and North Dakota. Our model home portfolio consists of properties currently located in four states, although a significant concentration of our model homes are located in one state. As of June 30, 2021, approximately 92% of our model homes were located in Texas. This concentration of properties in a limited number of markets may expose us to risks of adverse economic developments that are greater than if our portfolio were more geographically diverse. These economic developments include regional economic downturns and potentially higher local property, sales and income taxes in the geographic markets in which we are concentrated. In addition, our properties are subject to the effects of adverse acts of nature, such as winter storms, hurricanes, hailstorms, strong winds, earthquakes and tornadoes, which may cause damage, such as flooding, to our properties. Additionally, we cannot assure you that the amount of casualty insurance we maintain would entirely cover damages caused by any such event, or in the case of our model homes portfolio or commercial triple net leases, that the insurance maintained by our tenants would entirely cover damages caused by any such event.

 

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As a result of our geographic concentration of properties, we will face a greater risk of a negative impact on our revenues in the event these areas are more severely impacted by adverse economic and competitive conditions and extreme weather than other areas in the United States.

 

We may be required under applicable accounting principles and standards to make impairment charges against one or more of our properties.

 

Under current accounting standards, requirements, and principles, we are required to periodically evaluate our real estate investments for impairment based on a number of indicators. Impairment indicators include real estate markets, leasing rates, occupancy levels, mortgage loan status, and other factors which affect the value of a particular property. For example, a tenant’s default under a lease, the upcoming termination of a long-term lease, the pending maturity of a mortgage loan secured by a property, and the unavailability of replacement financing are all impairment indicators. The presence of any of these indicators may require us to make a material impairment charge against the property so affected. If we determine an impairment has occurred, we are required to make an adjustment to the net carrying value of the property which could have a material adverse effect on our results of operations and financial condition for the period in which the impairment charge is recorded.

 

Discovery of toxic mold on our properties may adversely affect our results of operation.

 

Litigation and concern about indoor exposure to certain types of toxic molds have been increasing as the public becomes more aware that exposure to mold can cause a variety of health effects and symptoms, including allergic reactions. Toxic molds can be found almost anywhere; when excessive moisture accumulates in buildings or on building materials, mold growth will often occur, particularly if the moisture remains undiscovered or unaddressed. We attempt to acquire properties where there is no toxic mold or where there has not been any proceeding or litigation with respect to the presence of toxic mold. However, we cannot provide assurances that toxic mold will not exist on any of our properties or will not subsequently develop. The presence of toxic mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property. In addition, the presence of toxic mold could expose us to liability from our tenants, employees of our tenants, and others if property damage or health concerns arise.

 

Our long-term growth may depend on obtaining additional equity capital.

 

Historically, we relied on cash from the sale of our equity securities to fund the implementation of our business plan, including property acquisitions and building our staff and internal management and administrative capabilities. We terminated our Series A Common Stock private placement on December 31, 2011 and closed on a preferred stock financing in August 2014, which financing was repaid in September 2020. Additionally, we consummated a preferred stock financing in June 2021 and in July 2021, in conjunction with the Private Placement in which the Warrants were issued to the selling stockholders, we completed a public offering of warrants and common stock. Our continued ability to fund real estate investments, our operations, and payment of dividends to our stockholders will likely be dependent upon our obtaining additional capital through the additional sales of our equity and/or debt securities. Without additional capital, we may not be able to grow our asset base to a size that is sufficient to support our planned growth, current operations, or to pay dividends to our stockholders at rates or at the levels required to maintain our REIT status (see risk factor titled “We may be forced to borrow funds on a short-term basis, to sell assets or to issue securities to meet the REIT minimum distribution or other requirements or for working capital purposes.”). There is no assurance as to when and under what terms we could successfully obtain additional funding through the sale of our equity and/or debt securities. Our access to additional equity or debt capital depends on a number of factors, including general market conditions, the market’s perception of our growth potential, our expected future earnings, and our debt levels. If we are unable to obtain such additional equity capital, it could have an adverse impact on our growth aspects and the market price of our outstanding securities.

 

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We currently are dependent on internal cash from our operations, financing and proceeds from property sales to fund future property acquisitions, meet our operational costs and pay dividends to our stockholders.

 

To the extent the cash we receive from our real estate investments and re-financing of existing properties is not sufficient to pay our costs of operations, our acquisition of additional properties, or our payment of dividends to our stockholders, we would be required to seek capital through additional measures. We may incur additional debt or issue additional preferred and common stock for various purposes, including, without limitation, to fund future acquisitions and operational needs. Other measures of generating or preserving capital could include decreasing our operational costs through reductions in personnel or facilities, reducing or suspending our acquisition of real estate, and reducing or suspending dividends to our stockholders.

 

Reducing or suspending our property acquisition program would prevent us from fully implementing our business plan and reaching our investment objectives. Reducing or suspending the payment of dividends to our stockholders would decrease our stockholders’ return on their investment and possibly prevent us from satisfying the minimum distribution or other requirements of the REIT provisions (see risk factor titled “We may be forced to borrow funds on a short-term basis, to sell assets or to issue securities to meet the REIT minimum distribution requirement or for working capital purposes.”). Any of these measures would likely have a substantial adverse effect on our financial condition, the value of our Series A Common Stock, and our ability to raise additional capital.

 

There can be no assurance that distributions will be paid, maintained or increased over time.

 

There are many factors that can affect the availability and timing of cash distributions to our stockholders. Distributions are expected to be based upon our funds from operations, or FFO, financial condition, cash flows and liquidity, debt service requirements and capital or other expenditure requirements for our properties, and any distributions will be authorized at the sole discretion of our Board of Directors, and their form, timing and amount, if any, will be affected by many factors, such as our ability to acquire profitable real estate investments and successfully manage our real estate properties and our operating expenses. Other factors may be beyond our control. We can therefore provide no assurance that we will be able to pay or maintain distributions or that distributions will increase over time. For example, our distributions were suspended for the periods from the third quarter of 2017 through the third quarter of 2018 and for the final three quarters of 2019 through the third quarter of 2020. If we do not have sufficient cash available for distributions, we may need to fund the shortage out of working capital or borrow to provide funds for such distributions, which would reduce the amount of proceeds available for real estate investments and increase our future interest costs. Our inability to pay distributions, or to pay distributions at expected levels, could result in a decrease in the per share trading price of our Series A Common Stock or Series D Preferred Stock.

 

If we are unable to find suitable investments, we may not be able to achieve our investment objectives or continue to pay distributions.

 

Our ability to achieve our investment objectives and to pay distributions on a regular basis is dependent upon our acquisition of suitable property investments and obtaining satisfactory financing arrangements. We cannot be sure that our management will be successful in finding suitable properties on financially attractive terms. If our management is unable to find such investments, we will hold the proceeds available for investment in an interest-bearing account or invest the proceeds in short-term, investment-grade investments. Holding such short-term investments will prevent us from making the long-term investments necessary to generate operating income to pay distributions. As a result, we will need to raise additional capital to continue to pay distributions until such time as suitable property investments become available (see risk factor titled “We may be forced to borrow funds on a short-term basis, to sell assets or to issue securities to meet the REIT minimum distribution or other requirements or for working capital purposes.”). In the event that we are unable to do so, our ability to pay distributions to our stockholders will be adversely affected.

 

We depend on key personnel, and the loss of such persons could impair our ability to achieve our business objectives.

 

Our success substantially depends upon the continued contributions of certain key personnel in evaluating and securing investments, selecting tenants and arranging financing. Our key personnel include Jack K. Heilbron, our Chief Executive Officer and President, and Larry G. Dubose, CFO of our Company and of NetREIT Dubose, and CEO of Dubose Advisors and NetREIT Advisors, each of whom would be difficult to replace. If either of these individuals or any of the other members of our management team were to leave, the implementation of our investment strategies could be delayed or hindered, and our operating results could suffer.

 

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We also believe that our future success depends, in large part, upon our ability to hire and retain skilled and experienced managerial and operational personnel. Competition for skilled and experienced professionals has intensified, and we cannot assure our stockholders that we will be successful in attracting and retaining such personnel.

 

We rely on third-party property managers to manage our properties and brokers or agents to lease our properties.

 

We rely on various third-party property managers to manage most of our properties and local brokers or agents to lease vacant space. These third-party property managers have significant decision-making authority with respect to the management of our properties. Although we are significantly engaged with our third-party property managers, our ability to direct and control how our properties are managed on a day-to-day basis may be limited. Major issues encountered by our property managers, broker or leasing agents could adversely impact the operation and profitability of our properties and, consequently, our financial condition, results of operations, cash flows, cash available for distributions and our ability to service our debt obligations.

 

We may change our investment and business policies without stockholder consent, and such changes could increase our exposure to operational risks.

 

Our Board of Directors may change our investment and business policies, including our policies with respect to investments, acquisitions, growth, operations, indebtedness, capitalization and distributions, at any time without the consent of our stockholders. Although our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interests of our company and stockholders, a change in such policies could result in our making investments different from, and possibly riskier than, investments made in the past. A change in our investment policies may, among other things, increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could materially affect our ability to achieve our investment objectives.

 

If we are deemed to be an investment company under the Investment Company Act, our stockholdersinvestment return may be reduced.

 

We are not registered as an investment company under the Investment Company Act of 1940, as amended (“Investment Company Act”), based on exceptions we believe are available to us. If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things, limitations on capital structure, restrictions on specified investments, prohibitions on transactions with affiliates, and compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses.

 

Provisions of Maryland law may limit the ability of a third party to acquire control of us by requiring our Board of Directors or stockholders to approve proposals to acquire our company or effect a change in control.

 

Certain provisions of the Maryland General Corporation Law (“MGCL”) may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of their shares of Series A Common Stock, including:

 

  “business combination” provisions that, subject to certain exceptions and limitations, prohibit certain business combinations between a Maryland corporation and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding shares of stock) or an affiliate of any interested stockholder for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes two super-majority stockholder voting requirements on these combinations, unless, among other conditions, our common stockholders receive a minimum price, as defined in the MGCL, for their shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its shares of stock; and
     
  “control share” provisions that provide that, subject to certain exceptions, holders of “control shares” (defined as voting shares that, when aggregated with all other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding shares owned by the acquirer, by our officers or by our employees who are also directors of our company.

 

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By resolution, our Board of Directors has exempted business combinations between us and any other person, provided that the business combination is first approved by our Board of Directors (including a majority of our directors who are not affiliates or associates of such person). We cannot assure you that our Board of Directors will not amend or repeal this resolution in the future. In addition, pursuant to a provision in our bylaws we have opted out of the control share provisions of the MGCL.

 

In addition, the “unsolicited takeover” provisions of Title 3, Subtitle 8 of the MGCL permit our Board of Directors, without stockholder approval and regardless of what is provided in our charter or bylaws, to implement certain takeover defenses, including adopting a classified board or increasing the vote required to remove a director. Such takeover defenses may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then-current market price.

 

Our Board of Directors may approve the issuance of stock, including preferred stock, with terms that may discourage a third party from acquiring us.

 

Other than as set forth therein, our charter permits our Board of Directors, without any action by our stockholders, to authorize the issuance of stock in one or more classes or series. Our Board of Directors may also classify or reclassify any unissued preferred stock and set or change the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption of any such stock, which rights may be superior to those of our Series A Common Stock. Thus, our Board of Directors could authorize the issuance of shares of a class or series of stock with terms and conditions which could have the effect of discouraging a takeover or other transaction in which holders of some or a majority of our outstanding Series A Common Stock might receive a premium for their shares over the then current market price of our Series A Common Stock.

 

Our rights and the rights of our stockholders to take action against our directors and officers are limited.

 

Our charter eliminates the liability of our directors and officers to us and our stockholders for money damages to the maximum extent permitted under Maryland law. Under current Maryland law and our charter, our directors and officers will not have any liability to us or our stockholders for money damages other than liability resulting from:

 

  actual receipt of an improper benefit or profit in money, property or services; or
     
  active and deliberate dishonesty by the director or officer that was established by a final judgment and is material to the cause of action adjudicated.

 

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Our charter authorizes us and our bylaws obligate us to indemnify each of our directors or officers who is or is threatened to be made a party to, or witness in, a proceeding by reason of his or her service in those or certain other capacities, to the maximum extent permitted by Maryland law, from and against any claim or liability to which such person may become subject or which such person may incur by reason of his or her status as a present or former director or officer of us or serving in such other capacities. In addition, we may be obligated to pay or reimburse the expenses incurred by our present and former directors and officers without requiring a preliminary determination of their ultimate entitlement to indemnification. As a result, we and our stockholders may have more limited rights to recover money damages from our directors and officers than might otherwise exist absent these provisions in our charter and bylaws or that might exist with other companies, which could limit your recourse in the event of actions that are not in our or your best interests.

 

Our management faces certain conflicts of interest with respect to their other positions and/or interests outside of our company, which could hinder our ability to implement our business strategy and to generate returns to our stockholders.

 

We rely on our management, including Mr. Heilbron, our Chief Executive Officer and President, for implementation of our investment policies and our day-to-day operations. Although the majority of his business time is spent working for our company, Mr. Heilbron engages in other investment and business activities in which we have no economic interest. His responsibilities to these other entities could result in action or inaction that is detrimental to our business, which could harm the implementation of our business strategy. He may face conflicts of interest in allocating his time among us and his other business ventures and in meeting his obligations to us and those other entities. His determinations in these situations may be more favorable to other entities than to us.

 

Possible future transactions with our management or their affiliates could create a conflict of interest, which could result in actions that are not in the long-term best interest of our stockholders.

 

Under prescribed circumstances, we may enter into transactions with affiliates of our management, including the borrowing and lending of funds, the purchase and sale of properties and joint investments. Currently, our policy is not to enter into any transaction involving sales or purchases of properties or joint investments with management or their affiliates, or to borrow from or lend money to such persons. However, our policies in each of these regards may change in the future.

 

We face system security risks as we depend on automated processes and the Internet.

 

We are increasingly dependent on automated information technology processes. While we attempt to mitigate this risk through offsite backup procedures and contracted data centers that include, in some cases, redundant operations, we could be severely impacted by a catastrophic occurrence, such as a natural disaster or a terrorist attack.

 

In addition, an increasing portion of our business operations are conducted over the Internet, putting us at risk from cybersecurity attacks, including attempts to make unauthorized transfers of funds, gain unauthorized access to our confidential data or information technology systems, viruses, ransomware, and other electronic security breaches. Such cyber-attacks may involve more sophisticated security threats that could impact day-to-day operations. While we employ a number of measures to prevent, detect and mitigate these threats, there is no guarantee such efforts will be successful at preventing a cyber-attack. Cybersecurity incidents could compromise confidential information of our tenants, employees and vendors and cause system failures and disruptions of operations.

 

Risks related to cyber-attacks, cyber intrusions and other security breaches.

 

We face risks associated with security breaches, whether through cyber-attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. In addition, the risk of cyber-attack or cyber intrusion has increased and become more costly to monitor and manage with more of our employees and the employees of our vendors, customers or other business partners working remotely as a result of the ongoing pandemic. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations (including managing our building systems). We make efforts to maintain the security and integrity of our IT networks and systems and have implemented various measures to manage the risk of a security breach or disruption. However, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. A security breach or other significant disruption involving our IT networks and related systems could result in unauthorized access to proprietary, confidential, sensitive or otherwise valuable information, significantly disrupt our business operations, cause damage to our reputation and subject us to additional unforeseen costs and require significant time and resources to remedy. Any or all of the foregoing could have a material adverse effect on our results of operations, financial condition and cash flows.

 

Current legislative uncertainty and discourse could cause significant economic impact on markets, including the availability and access to capital markets and other funding sources, adverse changes in real estate values and increased interest rates. Such impacts could have a material adverse effect on our business, financial condition, results from operation and growth prospects.

 

Following the election cycle in November 2020, the Democratic party gained control of the executive branch of government and the legislative branch of government. Changes in federal policy and at regulatory agencies occur over time through policy and personnel changes following elections. These changes could result in sweeping reform in many laws and regulations, including without limitation, those relating to taxes, small business aid and recovery from the COVID-19 pandemic. In addition, political discourse continues to be abrasive and an inability of the legislative and executive branches to engage in bipartisan politics may lead to instability on legislative, economic and social matters. These factors could have significant economic impacts on the markets, including without limitation, the stability, availability and access to capital markets and other funding sources, reduced real estate values and increases to interest rates. Such impacts could have a material adverse effect on our business, financial condition, results from operation and growth prospects.

 

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Risks Related to Our Indebtedness

 

We have significant outstanding indebtedness, which requires that we generate sufficient cash flow to satisfy the payment and other obligations under the terms of our debt and exposes us to the risk of default under the terms of our debt.

 

Our total gross indebtedness as of June 30, 2021 was approximately $90 million. We may incur additional debt for various purposes, including, without limitation, to fund future acquisitions and operational needs.

 

The terms of our outstanding indebtedness provide for significant principal and interest payments. Our ability to meet these and other ongoing payment obligations of our debt depends on our ability to generate significant cash flow in the future. Our ability to generate cash flow, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors, as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that capital will be available to us, in amounts sufficient to enable us to meet our payment obligations under our loan agreements and to fund our other liquidity needs. If we are not able to generate sufficient cash flow to service these obligations, we may need to refinance or restructure our debt, sell unencumbered assets subject to defeasance or yield maintenance costs (which we may be limited in doing in light of the relatively illiquid nature of our properties), reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may not be able to meet these payment obligations, which could materially and adversely affect our liquidity. Our outstanding indebtedness, and the limitations imposed on us by the agreements that govern our outstanding indebtedness, could have significant adverse consequences, including the following:

 

  make it more difficult for us to satisfy our obligations;
     
  limit our ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements, or to carry out other aspects of our business plan;
     
  limit our ability to refinance our indebtedness at maturity or impose refinancing terms that may be less favorable than the terms of the original indebtedness;
     
  require us to dedicate a substantial portion of our cash flow from operations to payments on obligations under our outstanding indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures and other general corporate requirements, or adversely affect our ability to meet REIT distribution requirements imposed by the Code;
     
  cause us to violate restrictive covenants in the documents that govern our indebtedness, which would entitle our lenders to charge default rates of interest and/or accelerate our debt obligations;
     
  cause us to default on our obligations, causing lenders or mortgagees to foreclose on properties that secure our loans and receive an assignment of our rents and leases;
     
  force us to dispose of one or more of our properties, possibly on unfavorable terms or in violation of certain covenants to which we may be subject;

 

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  limit our ability to make material acquisitions or take advantage of business opportunities that may arise and limit our flexibility in planning for, or reacting to, changes in our business and industry, thereby limiting our ability to compete effectively or operate successfully; and
     
  cause us to not have sufficient cash flow to pay dividends to our stockholders or place restrictions on the payment of dividends to our stockholders.

 

If any one of these events was to occur, our business, results of operations and financial condition would be materially adversely affected.

 

Mortgage indebtedness and other borrowings increase our operational risks.

 

Loans obtained to fund property acquisitions will generally be secured by mortgages on our properties. The more we borrow, the higher our fixed debt payment obligations will be and the greater the risk that we will not be able to timely meet these payment obligations. At June 30, 2021, excluding our model home properties, we had a total of approximately $67.9 million of secured financing on our properties. If we are unable to make our debt payments as required, due to a decrease in rental or other revenues or an increase in our other costs, a lender could charge us a default rate of interest and/or foreclose on the property or properties securing its debt. This could cause an adverse effect on our results of operations and/or cause us to lose part or all of our investment, adversely affecting our financial condition by lowering the value of our real estate portfolio.

 

Lenders often require restrictive covenants relating to our operations, which adversely affects our flexibility and may affect our ability to achieve our investment objectives.

 

Some of our mortgage loans impose restrictions that affect our distribution and operating policies, our ability to incur additional debt and our ability to resell interests in properties. A number of loan documents contain covenants requiring us to maintain cash reserves or letters of credit under certain circumstances and limiting our ability to further mortgage the property, discontinue certain insurance coverage, replace the property manager, or terminate certain operating or lease agreements related to the property. Such restrictions may limit our ability to achieve our investment objectives.

 

Financing arrangements involving balloon payment obligations may adversely affect our ability to pay distributions.

 

Some of our mortgage loans require us to make a lump-sum or “balloon” payment at maturity. We may finance more properties that we acquire in this manner. Our ability to make a balloon payment at maturity could be uncertain and may depend upon our ability to obtain additional financing, to refinance the debt or to sell the property. When the balloon payment is due, we may not be able to refinance debt on favorable terms or sell the property at a price that would cover the balloon payment. The effect of a refinancing or sale could affect the rate of return to stockholders and the value of our Series A Common Stock.

 

In addition, making a balloon payment may leave us with insufficient cash to pay the distributions that are required to maintain our qualification as a REIT. At June 30, 2021, excluding our model homes business, we have no mortgages that require a balloon payment in 2021. The model homes division pays off the balance of its mortgages using proceeds from the sale of the underlying homes. Any deficiency in the sale proceeds would have to be paid from existing cash, reducing the amount available for distributions and operations.

 

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Risks Related to our Status as a REIT and Related Federal Income Tax Matters

 

Failure to qualify as a REIT could adversely affect our operations and our ability to pay distributions.

 

We elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2001. We believe that we have been organized and have operated in a manner that has allowed us to qualify for taxation as a REIT for federal income tax purposes commencing with such taxable year, and we expect to operate in a manner that will allow us to continue to qualify as a REIT for federal income tax purposes. However, the federal income tax laws governing REITs are extremely complex, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Qualifying as a REIT requires us to meet various tests regarding the nature of our assets and our income, the ownership of our outstanding stock, and the amount of our distributions on an ongoing basis. While we intend to continue to operate so that we will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, including the tax treatment of certain investments and dispositions, and the possibility of future changes in our circumstances, no assurance can be given that we will qualify for any particular year. If we lose our REIT qualification, we would be subject to federal corporate income taxation on our taxable income, and we could also be subject to increased state and local taxes. Additionally, we would not be allowed a deduction for distributions paid to stockholders. Moreover, unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified. The income tax consequences could be substantial and would reduce our cash available for distribution to stockholders and investments in additional real estate. We could also be required to borrow funds or liquidate some investments in order to pay the applicable tax. If we fail to qualify as a REIT, we would not be required to make distributions to our stockholders.

 

As a REIT, we may be subject to tax liabilities that reduce our cash flow.

 

Even if we continue to qualify as a REIT for federal income tax purposes, we may be subject to federal, state and local taxes on our income or property, including the following:

 

  To continue to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gains) to our stockholders. If we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income (determined without regard to the dividends paid deduction and including net capital gains), we will be subject to corporate income tax on the undistributed income;
     
  We will be subject to a 4% nondeductible excise tax on the amount, if any, by which the distributions that we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income, and 100% of our undistributed income from prior years;
     
  If we have net income from the sale of foreclosure property that we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate;
     
  If we sell a property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, our gain will be subject to the 100% “prohibited transaction” tax;
     
  We may be subject to state and local taxes on our income or property, either directly or indirectly because of the taxation of entities through which we indirectly own our assets; and
     
  Our subsidiaries that are “taxable REIT subsidiaries” will generally be required to pay federal corporate income tax on their earnings.

 

Our ownership of taxable REIT subsidiaries is subject to certain restrictions, and we will be required to pay a 100% penalty tax on certain income or deductions if our transactions with our taxable REIT subsidiaries are not conducted on arms length terms.

 

We own and may acquire direct or indirect interests in one or more entities that have elected or will elect, together with us, to be treated as our taxable REIT subsidiaries. A taxable REIT subsidiary is a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) other than a REIT in which a REIT directly or indirectly holds stock, and that has made a joint election with such REIT to be treated as a taxable REIT subsidiary. If a taxable REIT subsidiary owns more than 35% of the total voting power or value of the outstanding securities of another corporation, such other corporation will also be treated as a taxable REIT subsidiary. Other than some activities relating to lodging and health care facilities, a taxable REIT subsidiary may generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT. A taxable REIT subsidiary is subject to U.S. federal income tax as a regular C corporation. In addition, a 100% excise tax will be imposed on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm’s length basis.

 

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A REIT’s ownership of securities of a taxable REIT subsidiary is not subject to the 5% or 10% asset tests applicable to REITs. Not more than 25% of the value of our total assets could be represented by securities, including securities of taxable REIT subsidiaries, other than those securities includable in the 75% asset test. Further, for taxable years beginning after December 31, 2017, not more than 20% of the value of our total assets may be represented by securities of taxable REIT subsidiaries. We anticipate that the aggregate value of the stock and other securities of any taxable REIT subsidiaries that we own will be less than 20% of the value of our total assets, and we will monitor the value of these investments to ensure compliance with applicable asset test limitations. In addition, we intend to structure our transactions with any taxable REIT subsidiaries that we own to ensure that they are entered into on arm’s length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with these limitations or avoid application of the 100% excise tax discussed above.

 

We may be forced to borrow funds on a short-term basis, to sell assets or to issue securities to meet the REIT minimum distribution or other requirements or for working capital purposes.

 

To qualify as a REIT, we must continually satisfy tests concerning, among other things, the nature and diversification of our assets, the sources of our income and the amounts we distribute to our stockholders. In order to maintain our REIT status or avoid the payment of income and excise taxes, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements, even if the then-prevailing market conditions are not favorable for these borrowings. To qualify as a REIT, in general, we must distribute to our stockholders at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gains) each year. We have and intend to continue to make distributions to our stockholders. However, our ability to make distributions may be adversely affected by the risk factors described elsewhere in this prospectus. In the event of a decline in our operating results and financial performance or in the value of our asset portfolio, we may not have cash sufficient for distribution. Therefore, to preserve our REIT status or avoid taxation, we may need to borrow funds, sell assets or issue additional securities, even if the then-prevailing market conditions are not favorable. Moreover, we may be required to liquidate or forgo otherwise attractive investments in order to satisfy the REIT asset and income tests or to qualify under certain statutory relief provisions. If we are compelled to liquidate our investments to meet any of these asset, income or distribution tests, or to repay obligations to our lenders, we may be unable to comply with one or more of the requirements applicable to REITs or may be subject to a 100% tax on any resulting gain if such sales constitute prohibited transactions.

 

In addition, we require a minimum amount of cash to fund our daily operations. Due to the REIT distribution requirements, we may be forced to make distributions when we otherwise would use the cash to fund our working capital needs. Therefore, we may be forced to borrow funds, to sell assets or to issue additional securities at certain times for our working capital needs.

 

The tax imposed on REITs engaging inprohibited transactionsmay limit our ability to engage in transactions that would be treated as sales for U.S. federal income tax purposes.

 

A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of our business unless a sale or disposition qualifies under certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the Internal Revenue Service (“IRS”) would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors.

 

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Legislative or other actions affecting REITs could have a negative effect on our investors or us.

 

The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT, the federal income tax consequences of such qualification, or the federal income tax consequences of an investment in us. Also, the law relating to the tax treatment of other entities, or an investment in other entities, could change, making an investment in such other entities more attractive relative to an investment in a REIT.

 

The stock ownership limit imposed by the Code for REITs and our charter may discourage a takeover that could otherwise result in a premium price for our stockholders.

 

In order for us to maintain our qualification as a REIT, no more than 50% in value of our outstanding stock may be beneficially owned, directly or indirectly, by five or fewer individuals (including certain types of entities) at any time during the last half of each taxable year. To ensure that we do not fail to qualify as a REIT under this test, our charter restricts ownership by one person or entity to no more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock or more than 9.8% in value of the aggregate outstanding shares of all classes and series of our capital stock. This restriction may have the effect of delaying, deferring or preventing a change in control, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.

 

Dividends payable by REITs generally are taxed at the higher ordinary income rate, which could reduce the net cash received by stockholders and may be detrimental to our ability to raise additional funds through any future sale of our common stock.

 

Income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates is generally subject to tax at reduced rates. However, dividends payable by REITs to its stockholders generally are not eligible for the reduced rates for qualified dividends and are taxed at ordinary income rates (but, U.S. stockholders that are individuals, trusts and estates generally may deduct 20% of ordinary dividends from a REIT for taxable years beginning after December 31, 2017 and before January 1, 2026). Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, to the extent that the reduced rates continue to apply to regular corporate qualified dividends, investors that are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs, including the per share trading price of our common stock, and could be detrimental to our ability to raise additional funds through the future sale of our common stock.

 

Tax-exempt stockholders will be taxed on our distributions to the extent such distributions are unrelated business taxable income.

 

Generally, neither ordinary nor capital gain distributions should constitute unrelated business taxable income (“UBTI”) to tax-exempt entities, such as employee pension benefit trusts and individual retirement accounts. Our payment of distributions to a tax-exempt stockholder will constitute UBTI, however, if the tax-exempt stockholder has incurred debt to acquire its shares. Therefore, tax-exempt stockholders are not assured all dividends received will be tax-free.

 

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Risks Related to Legal and Regulatory Requirements

 

Costs of complying with governmental laws and regulations may reduce our net income and the cash available for distributions to our stockholders.

 

Our properties are subject to various local, state and federal regulatory requirements, including those addressing zoning, environmental and land use, access for disabled persons, and air and water quality. These laws and regulations may impose restrictions on the manner in which our properties may be used or business may be operated, and compliance with these standards may require us to make unexpected expenditures, some of which could be substantial. Additionally, we could be subject to liability in the form of fines, penalties or damages for noncompliance, and any enforcement actions could reduce the value of a property. Any material expenditures, penalties, or decrease in property value would adversely affect our operating income and our ability to pay dividends to our stockholders.

 

The costs of complying with environmental regulatory requirements, of remediating any contaminated property, or of defending against claims of environmental liability could adversely affect our operating results.

 

Under various federal, state and local environmental laws, ordinances and regulations, an owner or operator of real property is responsible for the cost of removal or remediation of hazardous or toxic substances on its property. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated.

 

For instance, federal regulations require us to identify and warn, via signs and labels, of potential hazards posed by workplace exposure to installed asbestos-containing materials (“ACMs”), and potential ACMs on our properties. Federal, state, and local laws and regulations also govern the removal, encapsulation, disturbance, handling and disposal of ACMs and potential ACMs, when such materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a property. There are or may be ACMs at certain of our properties. As a result, we may face liability for a release of ACMs and may be subject to personal injury lawsuits by workers and others exposed to ACMs at our properties. Additionally, the value of any of our properties containing ACMs and potential ACMs may be decreased.

 

Although we have not been notified by any governmental authority and are not otherwise aware of any material noncompliance, liability or claim relating to hazardous substances in connection with our properties, we may be found noncompliant in the future. Environmental laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of any hazardous substances. Therefore, we may be liable for the costs of removing or remediating contamination of which we had no knowledge. Additionally, future laws or regulations could impose an unanticipated material environmental liability on any of the properties that we purchase.

 

The presence of contamination, or our failure to properly remediate contamination of our properties, may adversely affect the ability of our tenants to operate the contaminated property, may subject us to liability to third parties, and may inhibit our ability to sell or rent such property or borrow money using such property as collateral. Any of these occurrences would adversely affect our operating income.

 

Compliance with the Americans with Disabilities Act may require us to make unintended expenditures that could adversely impact our results of operations.

 

Our properties are generally required to comply with the Americans with Disabilities Act of 1990, or the ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities. Compliance with ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants. The parties to whom we lease properties are obligated by law to comply with the ADA provisions, and we believe that these parties may be obligated to cover costs associated with compliance. If required changes to our properties involve greater expenditures than anticipated, or if the changes must be made on a more accelerated basis than anticipated, our tenants may to be able to cover the costs and we could be required to expend our own funds to comply with the provisions of the ADA. Any funds used for ADA compliance will reduce our net income and the amount of cash available for distributions to our stockholders.

 

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Our property taxes could increase due to property tax rate changes, reassessments or changes in property tax laws, which would adversely impact our cash flows.

 

We are required to pay property taxes for our properties, which could increase as property tax rates increase or as our properties are assessed or reassessed by taxing authorities. In California, under current law, reassessment occurs primarily as a result of a “change in ownership”. A potential reassessment may take a considerable amount of time, during which the property taxing authorities make a determination of the occurrence of a “change of ownership”, as well as the actual reassessed value. In addition, from time to time, there have been proposals to base property taxes on commercial properties on their current market value, without any limit based on purchase price. If any similar proposal were adopted, the property taxes we pay could increase substantially. In California, pursuant to an existing state law commonly referred to as Proposition 13, properties are reassessed to market value only at the time of change in ownership or completion of construction, and thereafter, annual property reassessments are limited to 2% of previously assessed values. As a result, Proposition 13 generally results in significant below-market assessed values over time. From time to time, including recently, lawmakers and political coalitions have initiated efforts to repeal or amend Proposition 13 to eliminate its application to commercial and industrial properties. If successful, a repeal of Proposition 13 could substantially increase the assessed values and property taxes for our properties in California.

 

Our ability to attract and retain qualified members of our Board of Directors may be impacted due to new state laws, including recently enacted quotas related to gender and underrepresented communities .

 

In September 2019, California enacted SB 826 requiring public companies headquartered in California with outstanding shares listed on a major United States stock exchange to maintain minimum female representation on their boards of directors as follows: by the end of 2019, at least one woman on its board; by the end of 2021, public company boards with five members will be required to have at least two female directors, and public company boards with six or more members will be required to have at least three female directors. In September 2020, California enacted AB 979, which will require every public company with securities listed on a major U.S. stock exchange and that has its principal executive office in California, as listed on its Annual Report on Form 10-K to have at least one director from an underrepresented community on its board of directors by the end of the 2021 calendar year and upwards of three directors from an underrepresented community on its board of directors by the end of the 2022 calendar year. Failure to achieve designated minimum levels in a timely manner exposes such companies to costly financial penalties and reputational harm. We cannot assure that we will be able to recruit, attract and/or retain qualified members of the board and meet quotas related to gender and underrepresented communities as a result of the California legislations (should they not be repealed before the compliance deadlines), which may cause certain investors to divest their holdings in our stock and expose us to penalties and/or reputational harm.

 

Risks Related to this Offering and an Investment in Our Company Generally

 

We could be prevented from paying cash dividends on the Series A Common Stock due to prescribed legal requirements.

 

Holders of shares of Series A Common Stock will not receive dividends on such shares unless authorized by our Board of Directors and declared by us. Furthermore, no dividends on Series A Common Stock shall be authorized by our Board of Directors or paid, declared or set aside for payment by us at any time when the authorization, payment, declaration or setting aside for payment would be unlawful under Maryland law or any other applicable law. Under Maryland law, cash dividends on stock may only be paid if, after giving effect to the dividends, our total assets exceed our total liabilities and we are able to pay our indebtedness as it becomes due in the ordinary course of business. Unless we operate profitably, our ability to pay cash dividends on the Series A Common Stock may be negatively impacted. Our business may not generate sufficient cash flow from operations to enable us to pay dividends on the Series A Common Stock when payable. Further, even if we meet the applicable solvency tests under Maryland law to pay cash dividends on the Series A Common Stock described above, we may not have sufficient cash to pay dividends on the Series A Common Stock. Additionally, provisions of the Series D Preferred Stock provide that, subject to certain exceptions, including dividends on the Series D Preferred Stock having been paid or set aside, we are restricted from paying dividends on our Series A Common Stock.

 

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Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or, if that court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division, will be the sole and exclusive forum for certain actions, which could limit our stockholdersability to obtain a favorable judicial forum for disputes with the Company.

 

Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or, if that court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division, will be the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf, (b) any action asserting a claim of breach of any duty owed by any of our directors, officers or other employees to us or to our stockholders, (c) any action asserting a claim against us or any of our directors, officers or other employees arising pursuant to any provision of the MGCL or our charter or bylaws or (d) any action asserting a claim against us or any of our directors, officers or other employees that is governed by the internal affairs doctrine. This forum selection provision in our bylaws may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or any our directors, officers or other employees.

 

If the Series A Common Stock is delisted from Nasdaq, the ability to transfer or sell shares of the Series A Common Stock may be limited and the market value of the Series A Common Stock will likely be materially adversely affected.

 

Our Series A Common Stock does not contain provisions that are intended to protect investors if our Series A Common Stock is delisted from Nasdaq. If the Series A Common Stock is delisted from Nasdaq, investors’ ability to transfer or sell shares of the Series A Common Stock will be limited and the market value of the Series A Common Stock will likely be materially adversely affected.

 

Market interest rates may have an effect on the value of the Series A Common Stock.

 

One of the factors that will influence the price of the Series A Common Stock will be the distribution yield on the Series A Common Stock (as a percentage of the market price of the Series A Common Stock) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of the Series A Common Stock to expect a higher distribution yield (and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution payments). Thus, higher market interest rates could cause the market price of the Series A Common Stock to decrease and reduce the amount of funds that are available and may be used to make distributions.

 

In the event of a liquidation, you may not receive the full amount of your investment.

 

In the event of our liquidation, the proceeds will be used first to repay indebtedness and then to pay holders of shares of any class or series of our stock ranking senior to the Series A Common Stock as to liquidation, including our Series D Preferred Stock, in an amount of each holder’s liquidation preference and accrued and unpaid distributions through the date of payment, prior to any payment being made to holders of our Series A Common Stock. In the event we have insufficient funds to make payments in full to holders of the shares of the Series A Common Stock and any other class or series of our stock ranking on parity with the Series A Common Stock as to liquidation, such funds will be distributed ratably among such holders and such holders may not realize the full amount of their investment.

 

The market price of the Series A Common Stock could be substantially affected by various factors.

 

The market price of the Series A Common Stock could be subject to wide fluctuations in response to numerous factors. The price of the Series A Common Stock that will prevail in the market after this offering may be higher or lower than the offering price depending on many factors, some of which are beyond our control and may not be directly related to our operating performance.

 

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These factors include, but are not limited to, the following:

 

  prevailing interest rates, increases in which may have an adverse effect on the market price of the Series A Common Stock;
     
  trading prices of similar securities;
     
  our history of timely dividend payments;
     
  the annual yield from dividends on the Series A Common Stock as compared to yields on other financial instruments;
     
  general economic and financial market conditions;
     
  government action or regulation;
     
  the financial condition, performance and prospects of us and our competitors;
     
  changes in financial estimates or recommendations by securities analysts with respect to us or our competitors in our industry;
     
  actual or anticipated variations in quarterly operating results of us and our competitors;
     
  actual or anticipated variations in our quarterly results of operations or distributions, including as a result of the recent COVID-19 pandemic and its impact on our business, financial condition, results of operations and cash flows;
     
  changes in our FFO, earnings estimates or recommendations by securities analysts;
     
  publication of research reports about us or the real estate industry generally;
     
  the extent of investor interest;
     
  publication of research reports about us or the real estate industry;
     
  increases in market interest rates that lead purchasers of our shares to demand a higher yield;
     
  changes in market valuations of similar companies;
     
  strategic decisions by us or our competitors, such as acquisitions, divestments, spin-offs, joint ventures, strategic investments or changes in business strategy;
     
  the reputation of REITs generally and the reputation of REITs with portfolios similar to ours;
     
  the attractiveness of the securities of REITs in comparison to securities issued by other entities (including securities issued by other real estate companies);
     
  adverse market reaction to any additional debt that we incur or acquisitions that we make in the future;

 

  additions or departures of key management personnel;
     
  future issuances by us of our common stock, other equity securities or debt securities;
     
  actions by institutional or activist stockholders;

 

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  speculation in the press or investment community;
     
  the realization of any of the other risk factors presented in this prospectus; and
     
  general market and economic conditions.

 

As a result of these and other factors, investors who purchase the Series A Common Stock in this offering may experience a decrease, which could be substantial and rapid, in the market price of the Series A Common Stock, including decreases unrelated to our operating performance or prospects.

 

If a substantial number of shares become available for sale and are sold in a short period of time, the market price of our Series A Common Stock could decline.

 

A large volume of sales of shares of our Series A Common Stock could further decrease the prevailing market price of such shares and could impair our ability to raise additional capital through the sale of equity securities in the future. Even if sales of a substantial number of shares of our Series A Common Stock are not effectuated, the perception of the possibility of these sales could depress the market price for such shares and have a negative effect on our ability to raise capital in the future.

 

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Upon completion of this offering, we will have 11,508,363 shares of Series A Common Stock outstanding (excluding shares of Common Stock issuable upon exercise of the Warrants). If our stockholders sell substantial amounts of our Series A Common Stock in the public market following this offering, the market price of our Series A Common Stock could decrease significantly. The perception in the public market that our stockholders might sell shares of Series A Common Stock could also depress our market price. A decline in the price of shares of our Series A Common Stock might impede our ability to raise capital through the issuance of additional shares of our Series A Common Stock or other equity securities and could result in a decline in the value of the shares of our Series A Common Stock purchased in this offering.

 

Broad market fluctuations could negatively impact the market price of our Series A Common Stock.

 

Stock market price and volume fluctuations could affect the market price of many companies in industries similar or related to ours and that have been unrelated to these companies’ operating performance. These fluctuations could reduce the market price of our Series A Common Stock. Furthermore, our results of operations and prospects may be below the expectations of public market analysts and investors or may be lower than those of companies with comparable market capitalizations. Either of these factors could lead to a material decline in the market price of our Series A Common Stock.

 

The market price of our Series A Common Stock could be adversely affected by our level of cash distributions.

 

The market’s perception of our growth potential and our current and potential future cash distributions, whether from operations, sales or refinancings, as well as the real estate market value of the underlying assets, may cause our Series A Common Stock to trade at prices that differ from our net asset value per share. If we retain operating cash flow for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our Series A Common Stock. Our failure to meet the market’s expectations with regard to future earnings and cash distributions likely would adversely affect the market price of our Series A Common Stock.

 

Our historical performance may not be indicative of our future results or an investment in our securities.

 

We have presented in this prospectus under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Prospectus Summary—Summary Historical Financial Data” certain information relating to the summary consolidated financial data of our company and our properties. When considering this information, you should bear in mind that our historical results are not indicative of the future results that you should expect from us or any investment in our securities.

 

Future offerings of debt, which would be senior to our Series A Common Stock upon liquidation, and any preferred equity securities that have been or may be issued and be senior to our Series A Common Stock for purposes of dividend distributions or upon liquidation, may adversely affect the market price of our Series A Common Stock.

 

In the future, we may seek additional capital and commence offerings of debt or preferred equity securities, including medium-term notes, senior or subordinated notes and preferred stock. Upon liquidation, holders of our debt securities and shares of preferred stock, including our Series D Preferred Stock, and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our Series A Common Stock. Future shares of preferred stock, if issued, could have a preference on liquidating distributions or dividend payments that could limit our ability to pay a dividend or make another distribution to the holders of our Series A Common Stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, and consequently, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our Series A Common Stock and diluting their stock holdings in us.

 

Future issuances of stock could dilute the value of our Series A Common Stock.

 

We may sell additional shares of Series A Common Stock, or securities convertible into or exchangeable for such shares, in subsequent public or private offerings. Upon completion of this offering, there will be 11,508,363 shares of our Series A Common Stock (excluding shares of Series A Common Stock Common Stock issuable upon exercise of the Warrants. Those shares outstanding do not include the potential issuance, as of the date of this prospectus, of approximately 607,000 shares of our Series A Common Stock that will be available for future issuance under our 2017 Incentive Award Plan as of the completion of this offering. Future issuance of any new shares could cause further dilution in the value of our outstanding shares of Series A Common Stock. We cannot predict the size of future issuances of our Series A Common Stock, or securities convertible into or exchangeable for such shares, or the effect, if any, that future issuances and sales of shares of our Series A Common Stock will have on the market price of our Series A Common Stock. Sales of substantial amounts of our Series A Common Stock, or the perception that such sales could occur, may adversely affect prevailing market prices of our Series A Common Stock.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains “forward-looking statements” within the meaning of the federal securities laws that involve risks and uncertainties, many of which are beyond our control. Our actual results could differ materially and adversely from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in this prospectus, including in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business and Property” and “Certain Relationships and Related Transactions.” Forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, financial condition, liquidity, capital resources, cash flows, results of operations and other financial and operating information. Forward-looking statements included in this prospectus include, but are not limited to, statements regarding purchases and sales of properties, plans for financing and refinancing our properties, the adequacy of our capital resources, changes to the markets in which we operate, our business plans and strategies, and our payment of dividends. When used in this prospectus, the words “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “should,” “project,” “plan,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. Important factors that may cause actual results to differ from projections include, but are not limited to:

 

  the potential adverse effects of the COVID-19 pandemic and ensuing economic turmoil on our financial condition, results of operations, cash flows and performance, particularly our ability to collect rent, on the financial condition, results of operations, cash flows and performance of our tenants, and on the global economy and financial markets
     
  adverse economic conditions in the real estate market and overall financial market fluctuations (including, without limitation, as a result of the current COVID-19 pandemic);
     
  inherent risks associated with real estate investments and with the real estate industry;
     
  significant competition may decrease or prevent increases in our properties’ occupancy and rental rates and may reduce the value of our properties;
     
  a decrease in demand for commercial space and/or an increase in operating costs;
     
  failure by any major tenant (or a substantial number of tenants) to make rental payments to us because of a deterioration of its financial condition, an early termination of its lease, a non-renewal of its lease, or a renewal of its lease on terms less favorable to us;
     
  challenging economic conditions facing us and our tenants may have a material adverse effect on our financial condition and results of operations;
     
  our failure to generate sufficient cash to service or retire our debt obligations in a timely manner;
     
  our inability to borrow or raise sufficient capital to maintain or expand our real estate investment portfolio;

 

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  adverse changes in the real estate financing markets, including potential increases in interest rates and/or borrowing costs;
     
  potential losses, including from adverse weather conditions, natural disasters and title claims, may not be covered by insurance;
     
  inability to complete acquisitions or dispositions and, even if these transactions are completed, failure to successfully operate acquired properties or sell properties without incurring significant defeasance costs;
     
  our reliance on third-party property managers to manage a substantial number of our properties and brokers and/or agents to lease our properties;
     
  decrease in supply and/or demand for single family homes, inability to acquire additional model homes, and increased competition to buy such properties;
     
  failure to continue to qualify as a REIT;
     
  adverse results of any legal proceedings;
     
  changes in laws, rules and regulations affecting our business; and
     
  additional factors discussed under the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business and Property.”

 

The forward-looking statements contained in this prospectus are based on historical performance and management’s current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to the factors, risks and uncertainties described above, changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors described in “Risk Factors,” many of which are beyond our control. We believe that these factors include those described in “Risk Factors” or in our periodic filings with the SEC. Should one or more of these risks or uncertainties materialize or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this prospectus speaks only as of the date on which we make it. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.

 

USE OF PROCEEDS

 

We will not receive any proceeds from the sale of the Series A Common Stock by the selling stockholders. We will, however, receive the proceeds of any Warrants exercised for cash in the future.

 

The holders of the Warrants are not obligated to exercise the Warrants, and we cannot predict whether the holders of the Warrants will choose to exercise the Warrants. If the Warrants are exercised in full, we would receive gross proceeds of approximately $11,500,000. We currently intend to use such proceeds, if any, for general corporate and working capital purposes, including to potentially acquire additional properties.

 

DISTRIBUTION POLICY

 

We intend to operate in a manner that will allow us to continue to qualify as a REIT for federal income tax purposes. U.S. federal income tax law requires that a REIT distribute annually at least 90% of its net taxable income, excluding net capital gains, and that it pay regular U.S. federal corporate income tax on any undistributed net taxable income, including net capital gains. In addition, a REIT is required to pay a 4% nondeductible excise tax on the amount, if any, by which the distributions that it makes in a calendar year are less than the sum of 85% of its ordinary income, 95% of its capital gain net income and 100% of its undistributed income from prior years. For more information, please see “U.S. Federal Income Tax Considerations.”

 

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We have paid distributions to our stockholders at least quarterly since the first quarter we commenced operations on April 1, 1999 through the second quarter of 2017 and declared distributions in the fourth quarter of 2018 and the first quarter of 2019, which were paid in the first quarter of 2019 and third quarter of 2019, respectively. Additionally, in accordance with the terms of our Series D Preferred Stock, we have declared monthly dividends to holders of shares of our Series D Preferred Stock. To satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income and excise tax, we generally intend to continue making regular quarterly distributions to holders of our common stock. Although we anticipate making quarterly distributions to our stockholders over time, our Board of Directors has the sole discretion to determine the timing, form (including cash and shares of our common stock at the election of each of our stockholders) and amount of any distributions to our stockholders. As such, we cannot provide any assurance as to the amount or timing of future distributions.

 

To the extent that we make distributions in excess of our earnings and profits, as computed for federal income tax purposes, these distributions will represent a return of capital, rather than a dividend, for federal income tax purposes. Distributions that are treated as a return of capital for federal income tax purposes generally will not be taxable as a dividend to a U.S. stockholder, but will reduce the stockholder’s basis in its shares (but not below zero) and therefore can result in the stockholder having a higher gain upon a subsequent sale of such shares. Return of capital distributions in excess of a stockholder’s basis generally will be treated as gain from the sale of such shares for federal income tax purposes.

 

To the extent that in respect of any calendar year, cash available for distribution is less than our taxable income, we could be required to fund distributions from working capital, sell assets or borrow funds to make cash distributions or make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. In addition, we could be required to utilize the net proceeds of this offering to fund our quarterly distributions, which would reduce the amount of cash that we have available for investing and other purposes. For more information, see “U.S. Federal Income Tax Considerations—Taxation of Our Company—Annual Distribution Requirements.”

 

Our charter allows us to issue preferred stock that could have a preference over our common stock with respect to distributions. We may issue additional preferred stock for various purposes, including, without limitation, to fund future acquisition and development activities and operational needs. The distribution preference on any issued preferred stock could limit our ability to make distributions to the holders of our common stock.

 

Distributions made by us will be authorized and determined by our Board of Directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including restrictions under applicable law and other factors described below. We cannot assure you that our distributions will be made or sustained or that our Board of Directors will not change our distribution policy in the future. Any distributions that we pay in the future will depend upon our actual results of operations, economic conditions, debt service requirements, capital expenditures and other factors that could differ materially from our current expectations. Our actual results of operations will be affected by a number of factors, including our revenue, operating expenses, interest expense and unanticipated expenditures. For more information regarding risk factors that could materially adversely affect our actual results of operations, see “Risk Factors.”

 

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The following is a summary of distributions declared per share of our Series A Common Stock for the three months ended June 30, 2021 and for the years ended December 31, 2020, 2019 and 2018:

 

    2021     2020     2019     2018  
Quarter Ended   Distributions Declared     Distributions Declared     Distributions Declared     Distributions Declared  
March 31   $ 0.101     $     $     $  
June 30     0.102             0.12        
September 30     0.103                    
December 31           0.1             0.12  
Total   $ 0.306     $ 0.1     $ 0.12     $ 0.12  

 

During the six months ended June 30, 2021, the Company paid two cash dividends to the holders of shares of Series A Common Stock of approximately $1.0 million or $0.101 per share and approximately $1.0 million or $0.102 per share. Additionally, pursuant to the terms of our Series D Preferred Stock, since the date of issuance of shares of Series D Preferred Stock through June 30, 2021, we have declared a dividend of approximately $96,000, which was paid on July 15, 2021. The Company declared a $0.10 cash dividend which was paid on November 30, 2020 of approximately $1.0 million. During each of the years ended December 31, 2019 and December 31, 2018, respectively, we declared a cash distribution of approximately $1.1 million, or $0.12 per share. As we reported a net taxable gain for the year ended December 31, 2019, the cash distributions paid were reported as a distribution of taxable earnings and a return of capital. During the year ended December 31, 2020, all dividends were non-taxable as they were considered return of capital to the stockholders.

 

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this prospectus. In addition to historical data, this discussion contains forward-looking statements about our business, results of operations, cash flows, financial condition and prospects based on current expectations that involve risks, uncertainties and assumptions. SeeCautionary Note Regarding Forward-Looking Statements.Our actual results may differ materially from those in this discussion as a result of various factors, including, but not limited to, those discussed underRisk Factorsin this prospectus.

 

Overview

 

We operate as an internally managed diversified real estate investment trust, or REIT, with primary holdings in office, industrial, retail, and triple-net leased model home properties. In October 2017, we changed our name from “NetREIT, Inc.” to “Presidio Property Trust, Inc.” The Company acquires, owns and manages a geographically diversified portfolio of real estate assets including office, industrial, retail and model home residential properties leased to homebuilders located in the United States. As of June 30, 2021, the Company owned or had an equity interest in:

 

  Seven office buildings and One industrial property (“Office/Industrial Properties”), which totals approximately 724,000 rentable square feet ;
     
  Three retail shopping centers (“Retail Properties”), which total approximately 111,000 rentable square feet; and
     
  92 model home residential properties (“Model Homes” or “Model Home Properties”), totaling approximately 276,000 square feet, leased back on a triple-net basis to homebuilders that are owned by six affiliated limited partnerships and one wholly-owned corporation, all of which we control.

 

We own five commercial properties located in Colorado, four in North Dakota, and two in Southern California. Our model home properties are located in four states. While geographical clustering of real estate enables us to reduce our operating costs through economies of scale by servicing a number of properties with less staff, it makes us susceptible to changing market conditions in these discrete geographic areas, including those that have developed as a result of COVID-19. We do not develop properties but acquire properties that are stabilized or that we anticipate will be stabilized within two or three years of acquisition. We consider a property to be stabilized once it has achieved an 80% occupancy rate for a full year as of January 1 of such year or has been operating for three years.

 

Most of our office and retail properties are leased to a variety of tenants ranging from small businesses to large public companies, many of which are not investment grade. We have in the past entered into, and intend in the future to enter into, purchase agreements for real estate having net leases that require the tenant to pay all of the operating expense or pay increases in operating expenses over specific base years. Most of our office leases are for terms of three to five years with annual rental increases. Our model homes are typically leased back for two to three years to the home builder on a triple-net lease. Under a triple-net lease, the tenant is required to pay all operating, maintenance and insurance costs and real estate taxes with respect to the leased property.

 

We seek to diversify our portfolio by commercial real estate segments, including office, industrial, retail and model home properties to reduce the adverse effect of a single under-performing segment and/or tenant. We further mitigate risk at the tenant level through our credit review process, which varies by tenant class. For example, our commercial and industrial tenants tend to be corporations or individual owned businesses. In these cases, we typically obtain financial records, including financial statements and tax returns (depending on the circumstance), and run credit reports for any prospective tenant to support our decision to enter into a rental arrangement. We also typically obtain security deposits from these commercial tenants. Our Model Home commercial tenants are well-known homebuilders with established credit histories. These tenants are subjected to financial review and analysis prior to us entering into a sales-leaseback transaction.

 

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Outlook

 

On March 11, 2020, the World Health Organization declared COVID-19, a respiratory illness caused by the novel coronavirus, a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The COVID-19 pandemic caused state and local governments within our areas of business operations to institute quarantines, “shelter-in-place” mandates, including rules and restrictions on travel and the types of businesses that may continue to operate. While certain areas have re-opened, others have seen an increase in the number of cases reported, prompting local governments to consider enforce further restrictions. We continue to monitor our operations and government recommendations. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law to provide widespread emergency relief for the economy and to provide aid to corporations.

 

The CARES Act includes several significant provisions related to taxes, refundable payroll tax credits and deferment of social security payments. We utilized certain relief options offered under the CARES Act and continue to evaluate the relief options for us and our tenants available under the CARES Act, as well as other emergency relief initiatives and stimulus packages instituted by the federal government. A number of the relief options contain restrictions on future business activities, which require careful evaluation and consideration, such as restrictions on the ability to repurchase shares and pay dividends. We will continue to assess these options, and any subsequent legislation or other relief packages, including the accompanying restrictions on our business, as the effects of the pandemic continue to evolve.

 

The effects of the COVID-19 pandemic did not significantly impact our operating results during the first and second quarters of 2021. We continue to monitor and communicate with our tenants to assess their needs and ability to pay rent. We have negotiated lease amendments with certain tenants who have demonstrated financial distress caused by the COVID-19 pandemic, which have included or may include rent deferral, temporary rent abatement, or reduced rental rates and/or lease extension periods, however no new negotiations were initiated during the first and second quarters of 2021. While these amendments have affected our short-term cash flows, we do not believe they represent a change in the valuation of our assets for the properties affected and have not significantly affected our results of operations. Given the longevity of this pandemic and the potential for other variants of the coronavirus, such as the delta variant, the COVID-19 outbreak may materially affect our financial condition and results of operations going forward, including, but not limited to, real estate rental revenues, credit losses, leasing activity, and potentially the valuation of our real estate assets. We do not expect additional rent deferrals, abatements, and credit losses from our commercial tenants during the remainder of 2021 which may have a material impact on our real estate rental revenue and cash collections. While we do expect that the effects of the COVID-19 pandemic will impact our ability to lease up available commercial space, our business operations and activities in many regions may be subject to future quarantines, “shelter-in-place” rules, and various other restrictions for the foreseeable future. Due to the uncertainty of the future impacts of the COVID-19 pandemic, the extent of the financial impact cannot be reasonably estimated at this time. We are currently focused on growing our portfolio with the recent capital raised from the sale of our 9.375% Series D Cumulative Redeemable Perpetual Preferred Stock in June 2021 and our Series A Common Stock in July 2021.

 

Significant Transactions during the six months ended June 30, 2021 and 2020

 

During the six months ended June 30, 2021, the Company disposed of the following properties:

 

  Waterman Plaza, which was sold on January 28, 2021 for approximately $3.5 million and the Company recognized a loss of approximately $0.2 million.
     
  Garden Gateway, which was sold on February 19, 2021 for approximately $11.2 million and the Company recognized a loss of approximately $1.4 million.
     
  Highland Court, which was sold on May 20, 2021 for approximately $10.23 million and the Company recognized a loss of approximately $1.6 million.
     
  Executive Office Park, which was sold on May 21, 2021, 2021 for approximately $8.13 million and the Company recognized a gain of approximately $2.5 million.

 

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During the six months ended June 30, 2021, the Company acquire d 6 model homes for approximately $2.9 million. The purchase price was paid through cash payments of approximately $0.9 million and mortgage notes of approximately $2.0 million.

 

During the six months ended June 30, 2021, the Company disposed of 32 model homes for approximately $15.1 million and recognized a gain of approximately $2.3 million.

 

During the six months ended June 30, 2020, the Company disposed of the following properties:

 

  Centennial Tech Center, which was sold on February 5, 2020 for approximately $15.0 million and the Company recognized a loss of approximately $0.9 million.
     
  Union Terrace, which was sold on March 13, 2020 for approximately $11.3 million and the Company recognized a gain of approximately $0.69 million

 

During the six months ended June 30, 2020, the Company acquired 17 model homes for approximately $6.3 million. The purchase price was paid through cash payments of approximately $1.9 million and mortgage notes of approximately $4.4 million.

 

During the six months ended June 30, 2020, the Company disposed of 21 model homes for approximately $8.0 million and recognized a gain of approximately $0.6 million.

 

Significant Transactions during the years ended December 31, 2020 and 2019

 

Acquisitions

 

  We acquired 28 Model Home Properties and leased them back to the homebuilders under triple net leases during the year ended December 31, 2020. The purchase price for the properties was $10.2 million. The purchase price consisted of cash payments of $3.1 million and mortgage notes of $7.1 million.
     
  We acquired 33 Model Home Properties and leased them back to the homebuilders under triple net leases during the year ended December 31, 2019. The purchase price for the properties was $13.0 million. The purchase price consisted of cash payments of $3.9 million and mortgage notes of $9.1 million.

 

Dispositions

 

We review our portfolio of investment properties for value appreciation potential on an ongoing basis and dispose of any properties that no longer satisfy our requirements in this regard, taking into account tax and other considerations. The proceeds from any such property sale, after repayment of any associated mortgage, are available for investing in properties that we believe will have a greater likelihood of future price appreciation.

 

During year ended December 31, 2020 we disposed of the following properties:

 

  Centennial Tech Center, which was sold on February 5, 2020 for approximately $15.0 million, and we recognized a loss of approximately $913,000.
     
  Union Terrace, which was sold on March 13, 2020 for approximately $11.3 million, and we recognized a gain of approximately $688,000.
     
  One of four Executive Office Park buildings, which was sold on December 2, 2020 for approximately $2.3 million, and we recognized a loss of approximately $75,000.
     
  During the year ended December 31, 2020, we disposed of 46 model homes for approximately $18.1 million and recognized a gain of approximately $1.6 million.

 

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During year ended December 31, 2019 we disposed of the following properties:

 

  Morena Office Center, which was sold on January 15, 2019 for approximately $5.6 million, and we recognized a gain of approximately $700,000.
     
  Nightingale land, which was sold on May 8, 2019 for approximately $875,000, and we recognized a loss of approximately $93,000.
     
  On July 1, 2019, NetREIT Genesis, LLC sold a 43% tenants-in-common interest in Genesis Plaza (“TIC Interest”) for $5.6 million to a newly formed entity, NetREIT Genesis II, LLC, in which NetREIT Casa Grande LP is the sole member. NetREIT Casa Grande LP owned and sold Morena Office Center on January 15, 2020. The sale of the TIC Interest was structured as a 1031 exchange and included $2.9 million in cash and assumption of debt. The Company remains a guarantor of the debt and NetREIT Genesis, LLC and NetREIT Genesis II, LLC are jointly and severally liable for the debt securing Genesis Plaza, the financial terms and conditions of which remain materially unchanged.
     
  The Presidio office building, which was sold on July 31, 2019 for approximately $12.3 million, and we recognized a gain of approximately $4.5 million.
     
  During the year ended December 31, 2019, we disposed of 41 model homes for approximately $14.6 million and recognized a gain of approximately $1.2 million.

 

Credit Market Environment

 

According to the National Association of Real Estate Investment Trusts (Nareit) 2021 Midyear Outlook for REITs, REITs have largely been resilient through the crisis and their ongoing recovery. The year-to-date total return of the FTSE Nareit All Equity REITs index at the end of May was 18.1% and the index is 4.3% above its pre-pandemic high. Capital markets are open and they are observing growth oriented M&A transactions that reflect confidence in business models and the sector outlooks. Operationally, REIT earnings are recovering quickly, with aggregate FFO now at 85% of its pre-pandemic level. Nareit believes that REITs are well positioned to take advantage of a growing economy because they entered the crisis with historically strong balance sheets and access to credit and liquidity. Nevertheless, uncertainties remain. Most critically, how the future of office use will evolve as firms return to the office and experiment with hybrid and work from home arrangements.

 

Our ability to execute our business strategies, and in particular to make new investments, is highly dependent upon our ability to procure external financing. Our principal sources of external financing include the issuance of our equity securities and mortgages secured by properties. The market for mortgages has remained strong, and interest rates remain relatively low compared to historical rates, decreasing approximately 1.5% during 2020 for refinanced mortgages. We continue to obtain mortgages from the commercial mortgage-backed securities (“CMBS”) market, life insurance companies and regional banks. Although these lenders are currently optimistic about the outlook of the credit markets, the potential impact of new regulations and market volatility remain a concern. Even though we have been successful in procuring equity financing and secured mortgages financing, we cannot be assured that we will be successful at doing so in the future.

 

Managements Evaluation of Results of Operations

 

Our management team’s evaluation of operating results includes an assessment of our ability to generate cash flow necessary to pay operating expenses, general and administrative expenses, debt service and to fund distributions to our stockholders. As a result, management’s assessment of operating results gives less emphasis to the effects of unrealized gains and losses and other non-cash charges, such as depreciation and amortization and impairment charges, which may cause fluctuations in net income for comparable periods but have no impact on cash flows. Management’s evaluation of our potential for generating cash flow includes assessments of our recently acquired properties, our non-stabilized properties, long-term sustainability of our real estate portfolio, our future operating cash flow from anticipated acquisitions, and the proceeds from the sales of our real estate assets.

 

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In addition, our management team evaluates the results of the operations of our portfolio and individual properties with a primary focus on increasing and enhancing the value, quality and quantity of properties in our real estate holdings. Management focuses its efforts on improving underperforming assets through re-leasing efforts, including negotiation of lease renewals and rental rates. Properties are regularly evaluated for potential added value appreciation and cashflow and, if lacking such potential, are sold with the equity reinvested in new acquisitions or otherwise allocated in a manner we believe is accretive to our stockholders. Our ability to increase assets under management is affected by our ability to raise borrowings and/or capital, coupled with our ability to identify appropriate investments.

 

The discussions of our results of operations in this prospectus are largely based on our consolidated results of operations for the six months ended June 30, 2020 and the year ended December 31, 2020. Although the COVID-19 pandemic did not significantly impact our operating results for the six months ended June 30, 2021, we expect that the effects of the COVID-19 pandemic may significantly adversely affect our business, financial condition, results of operations and cash flows in future periods, including but not limited to, real estate rental revenues, credit losses, and leasing activity, depending on the duration and magnitude of the COVID-19 pandemic and ensuing economic turmoil, as well as numerous factors, many of which are outside of our control, as discussed under “Risk Factors.”

 

Our results of operations for the six months ended June 30, 2021 are not indicative of those expected in future periods, as we expect that rental income, interest expense, rental operating expense, general and depreciation and amortization will increase in future periods as a result of the assets acquired from the proceeds of this offering, subject to numerous factors, including those outlined in the section “Risk Factors”.

 

Critical Accounting Policies

 

As a company primarily involved in owning income generating real estate assets, management considers the following accounting policies critical as they reflect our more significant judgments and estimates used in the preparation of our financial statements and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.

 

Real Estate Assets and Lease Intangibles

 

Land, buildings and improvements are recorded at cost, including tenant improvements and lease acquisition costs (including leasing commissions, space planning fees, and legal fees). We capitalize any expenditure that replaces, improves, or otherwise extends the economic life of an asset, while ordinary repairs and maintenance are expensed as incurred. We allocate the purchase price of acquired properties between the acquired tangible assets and liabilities (consisting of land, building, tenant improvements, land purchase options, and long-term debt) and identified intangible assets and liabilities (including the value of above-market and below-market leases, the value of in-place leases, unamortized lease origination costs and tenant relationships), based in each case on their respective fair values.

 

We allocate the purchase price to tangible assets of an acquired property based on the estimated fair values of those tangible assets assuming the building was vacant. Estimates of fair value for land, building and building improvements are based on many factors including, but not limited to, comparisons to other properties sold in the same geographic area and independent third-party valuations. We also consider information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair values of the tangible and intangible assets and liabilities acquired.

 

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The value allocated to acquired lease intangibles is based on management’s evaluation of the specific characteristics of each tenant’s lease. Characteristics considered by management in allocating these values include the nature and extent of the existing business relationships with the tenant, growth prospects for developing new business with the tenant, the remaining term of the lease and the tenant’s credit quality, among other factors.

 

The value allocable to the above-market or below-market market component of an acquired in-place lease is determined based upon the present value (using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of rents that would be paid using fair market rates over the remaining term of the lease.

 

The value of in-place leases and unamortized lease origination costs are amortized to expense over the remaining term of the respective leases, which range from less than a year to ten years. The amount allocated to acquire in-place leases is determined based on management’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. The amount allocated to unamortized lease origination costs is determined by what we would have paid to a third party to secure a new tenant reduced by the expired term of the respective lease.

 

Real Estate Held for Sale and Discontinued Operations

 

Real estate sold during the current period is classified as “real estate held for sale” for all prior periods presented in the accompanying condensed consolidated financial statements. Mortgage notes payable related to the real estate sold during the current period is classified as “notes payable related to real estate held for sale” for all prior periods presented in the accompanying condensed consolidated financial statements. Additionally, we record the operating results related to real estate that has been disposed of as discontinued operations for all periods presented if the operations have been eliminated and represent a strategic shift and we will not have any significant continuing involvement in the operations of the property following the sale.

 

Impairment of Real Estate Assets

 

We review the carrying value of each property to determine if circumstances that indicate impairment in the carrying value of the investment exist or that depreciation periods should be modified. If circumstances support the possibility of impairment, we prepare a projection of the undiscounted future cash flows, without interest charges, of the specific property and determine if the investment in such property is recoverable. If impairment is indicated, the carrying value of the property is written down to its estimated fair value based on our best estimate of the property’s discounted future cash flows.

 

Goodwill and Intangible Assets

 

Intangible assets, including goodwill and lease intangibles, are comprised of finite-lived and indefinite-lived assets. Lease intangibles represents the allocation of a portion of the purchase price of a property acquisition representing the estimated value of in-place leases, unamortized lease origination costs, tenant relationships and land purchase options.

 

Intangible assets that are not deemed to have an indefinite useful life are amortized over their estimated useful lives. Indefinite-lived assets are not amortized.

 

We test for impairment of goodwill and other definite and indefinite lived assets at least annually, and more frequently as circumstances warrant. Impairment is recognized only if the carrying amount of the intangible asset is considered to be unrecoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the estimated fair value of the asset.

 

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Sales of Real Estate Assets

 

Generally, our sales of real estate would be considered a sale of a nonfinancial asset as defined by ASC 610-20. If we determine we do not have a controlling financial interest in the entity that holds the asset and the arrangement meets the criteria to be accounted for as a contract, we would derecognize the asset and recognize a gain or loss on the sale of the real estate when control of the underlying asset transfers to the buyer.

 

Gains relating to transactions which do not meet the criteria for full accrual method of accounting are deferred and recognized when the full accrual method of accounting criteria are met or by using the installment or deposit methods of profit recognition, as appropriate in the circumstances.

 

Revenue Recognition

 

We recognize minimum rent, including rental abatements, lease incentives and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related leases when collectability is reasonably assured and record amounts expected to be received in later years as deferred rent receivable. If the lease provides for tenant improvements, we determine whether the tenant improvements, for accounting purposes, are owned by the tenant or by us. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that the tenant can take in the form of cash or a credit against its rent) that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:

 

  whether the lease stipulates how a tenant improvement allowance may be spent;
     
  whether the amount of a tenant improvement allowance is in excess of market rates;
     
  whether the tenant or landlord retains legal title to the improvements at the end of the lease term;
     
  whether the tenant improvements are unique to the tenant or general-purpose in nature; and
     
  whether the tenant improvements are expected to have any residual value at the end of the lease.

 

We record property operating expense reimbursements due from tenants for common area maintenance, real estate taxes, and other recoverable costs in the period the related expenses are incurred.

 

We make estimates of the collectability of our tenant receivables related to base rents, including deferred rent receivable, expense reimbursements and other revenue or income. We specifically analyze accounts receivable, deferred rent receivable, historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, management makes estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. When a tenant is in bankruptcy, we will record a bad debt reserve for the tenant’s receivable balance and generally will not recognize subsequent rental revenue until cash is received or until the tenant is no longer in bankruptcy and has the ability to make rental payments.

 

Sales of real estate are recognized generally upon the transfer of control, which usually occurs when the real estate is legally sold. The application of these criteria can be complex and required us to make assumptions. We believe the relevant criteria were met for all real estate sold during the periods presented.

 

Income Taxes

 

We have elected to be taxed as a REIT under Sections 856 through 860 of the Code, for federal income tax purposes. To maintain our qualification as a REIT, we are required to distribute at least 90% of our REIT taxable income to our stockholders and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we maintain our qualification for taxation as a REIT, we are generally not subject to corporate level income tax on the earnings distributed currently to our stockholders that we derive from our REIT qualifying activities. If we fail to maintain our qualification as a REIT in any taxable year, and are unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal income tax at regular corporate rates including any applicable alternative minimum tax. We are subject to certain state and local income taxes.

 

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We, together with one of our entities, have elected to treat such subsidiaries as taxable REIT subsidiaries (a “TRS”) for federal income tax purposes. Certain activities that we undertake must be conducted by a TRS, such as non-customary services for our tenants and holding assets that we cannot hold directly. A TRS is subject to federal and state income taxes.

 

Fair Value Measurements

 

Certain assets and liabilities are required to be carried at fair value, or if long-lived assets are deemed to be impaired, to be adjusted to reflect this condition. The guidance requires disclosure of fair values calculated under each level of inputs within the following hierarchy:

 

Level 1—Quoted prices in active markets for identical assets or liabilities at the measurement date.

 

Level 2—Inputs other than quoted process that are observable for the asset or liability, either directly or indirectly.

 

Level 3—Unobservable inputs for the asset or liability.

 

Fair value is defined as the price at which an asset or liability is exchanged between market participants in an orderly transaction at the reporting date. Our cash equivalents, mortgage notes receivable, accounts receivable and payables and accrued liabilities all approximate fair value due to their short-term nature. Management believes that the recorded and fair values of notes payable are approximately the same as of June 30, 2021 and December 31, 2020 and 2019.

 

Depreciation and Amortization

 

The Company records depreciation and amortization expense using the straight-line method over the useful lives of the respective assets. The cost of buildings are depreciated over estimated useful lives of 39 years, the costs of improvements are amortized over the shorter of the estimated life of the asset or term of the tenant lease (which range from 1 to 10 years), the costs associated with acquired tenant intangibles over the remaining lease term and the cost of furniture, fixtures and equipment are depreciated over 4 to 5 years.

 

Results of Operations for the Three Months Ended June 30, 2021 and 2020

 

Our results of operations for the three months ended June 30, 2021 and 2020 are not indicative of those expected in future periods as we expect that rental income, interest expense, rental operating expense and depreciation and amortization will fluctuate in future periods as a result of anticipated dispositions and growth through future acquisitions of real estate related investments. Although the COVID-19 pandemic did not significantly impact our operating results for the three months ended June 30, 2021, we expect that the effects of the COVID-19 pandemic may significantly adversely affect our business, financial condition, results of operations and cash flows going forward, including but not limited to, real estate rental revenues, credit losses, and leasing activity, in ways that may vary widely depending on the duration and magnitude of the COVID-19 pandemic and ensuing economic turmoil, as well as numerous factors, many of which are outside of our control, as discussed under “Risk Factors.”

 

Revenues. Total revenues were $4.8 million for the three months ended June 30, 2021 compared to $6.1 million for the same period in 2020, a decrease of approximately $1.3 million or 21%, which is primarily due to a net decrease in rental income due to us no longer owning six properties during the three months ended June 30, 2021, four of which were owned for a portion of the three months ended June 30, 2021 and two of which were owned for a portion of the three months ended June 30, 2020. The decrease in rental income is also attributed to COVID-19 related tenant workouts, which included rent abatements and deferrals that are being recognized over the remaining lease term.

 

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Rental Operating Costs. Rental operating costs decreased by $0.5 million to $1.5 million for the three months ended June 30, 2021, compared to $2.0 million for the same period in 2020. Rental operating costs as a percentage of total revenue also decreased to 30.7% as compared to 32.7% for the three months ended June 30, 2021 and 2020, respectively. The overall decrease in rental operating costs for the three months ended June 30, 2021 as compared to 2020 is due to us no longer owning six properties during the three months ended June 30, 2021, four of which were owned for a portion of the three months ended June 30, 2021 and two of which were owned for a portion of the three months ended June 30, 2020, as well as the mix of properties held to include a higher percentage of model homes period over period, which have significantly lower operating costs.

 

General and Administrative Expenses. General & Administrative (“G&A”) expenses for the three months ended June 30, 2021 and 2020 totaled approximately $1.3 million and $1.3 million, respectively. These expenses increased by approximately $66,000 for the three months ended June 30, 2021 compared to the same period in 2020 G&A expenses as a percentage of total revenue was 27.7% and 20.9% for three months ended June 30, 2021 and 2020, respectively. The increase in percentage is primarily due to us no longer owning six properties during the three months ended June 30, 2021, two of which were owned for a portion of the three months ended June 30, 2020 and two of which were owned for a portion of the three months ended June 30, 2020, while G&A remained relatively flat.

 

Depreciation and Amortization. Depreciation and amortization expense was $1.4 million for the three months ended June 30, 2021, compared to $1.6 million for the same period in 2020, representing a decrease of $0.3 million or 18%. The decrease in depreciation and amortization expense in 2021 compared to the same period in 2020 is due to us no longer owning six properties during the three months ended June 30, 2021, four of which were owned for a portion of the three months ended June 30, 2021 and two of which were owned for a portion of the three months ended June 30, 2020.

 

Asset Impairments. We review the carrying value of each of our real estate properties quarterly to determine if circumstances indicate an impairment in the carrying value of these investments exists. The Company did not recognize an impairment during the three months ended June 30, 2021. Management considered the impact of COVID-19 on all other remaining assets as of June 30, 2021 and determined that there were no other indicators of impairment had occurred as of that date.

 

Interest Expense - mortgage notes. Interest expense, including amortization of deferred finance charges was $1.2 million for the three months ended June 30, 2021 compared to $1.5 million for the same period in 2020, a decrease of $0.3 million or 20%. The decrease in mortgage interest expense relates to the decreased number of commercial properties owned in 2021 compared to 2020 and the related mortgage debt. The weighted average interest rate on our outstanding debt was 4.2% and 4.6% as of June 30, 2021 and 2020, respectively.

 

Interest expense - note payable. On September 17, 2019, the Company executed a Promissory Note pursuant to which Polar Multi-Strategy Master Fund (“Polar”), extended a loan in the principal amount of $14.0 million to the Company (the “Polar Note”). The Polar Note bore interest at a fixed rate of 8% per annum and required monthly interest-only payments. Interest expense, including amortization of the deferred offering costs and Original Issue Discount of $1.4 million, totaled $0 and $0.9 million for the three months ended June 30, 2021 and 2020, respectively. The Polar Note was paid in full during March 2021.

 

Loss on Sale of Real Estate Assets, net. The change in gain or loss on the sale of real estate assets is dependent on the mix of properties sold and the market conditions at the time of the sale. See “Significant Transactions in 2021 and 2020” above for further detail.

 

Income allocated to non-controlling interests. Income allocated to non-controlling interests for the three months ended June 30, 2021 and 2020 totaled approximately $0.9 million and $0.3 million.

 

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Results of Operations for the Six Months Ended June 30, 2021 and 2020

 

Revenues. Total revenues were $10.5 million for the six months ended June 30, 2021 compared to $13.2 million for the same period in 2020, a decrease of approximately $2.6 million or 20%, which is primarily due to a net decrease in rental income related to the sale of two properties during the six months ended June 30, 2020 and four properties during the six months ended June 30, 2021 The decrease in rental income is also attributed to COVID-19 related tenant workouts, which included rent abatements and deferrals that are being recognized over the remaining lease term.

 

Rental Operating Costs. Rental operating costs decreased by $1.1 million to $3.3 million for the six months ended June 30, 2021, compared to$4.4 million for the same period in 2020. Rental operating costs as a percentage of total revenue also decreased to 31.6% as compared to 33.3% for the six months ended June 30, 2021 and 2020, respectively. The overall decrease in rental operating costs for the three months ended June 30, 2021 as compared to 2020 is due to the sale of two properties during the six months ended June 30, 2020 and four properties during the six months ended June 30, 2021, as well as the mix of properties held to include a higher percentage of model homes period over period, which have significantly lower operating costs.

 

General and Administrative Expenses. General & Administrative (“G&A”) expenses for the six months ended June 30, 2021 and 2020 totaled approximately $2.9 million and $2.6 million, respectively. These expenses decreased by approximately $0.3 million for the six months ended June 30, 2021 compared to the same period in 2020, primarily due to decreased payroll related costs, temporally reduced by the Employee Retention Credit (“ERC”) received during the six months ended June 30, 2021. G&A expenses as a percentage of total revenue was 27.4% and 20.0% for six months ended June 30, 2021 and 2020, respectively.

 

Depreciation and Amortization. Depreciation and amortization expense was $2.8 million for the six months ended June 30, 2021, compared to $3.2 million for the same period in 2020, representing a decrease of $0.4 million or 13%. The decrease in depreciation and amortization expense in 2021 compared to the same period in 2020 is due to the sale of two properties during the six months ended June 30, 2020 and four properties during the six months ended June 30, 2021.

 

Asset Impairments. We review the carrying value of each of our real estate properties quarterly to determine if circumstances indicate an impairment in the carrying value of these investments exists. The Company recognize impairment of $0.3 million, related to the potential sale or our Highland Court property, in the Condensed Consolidated Statements of Operations during the six months ended June 30, 2021. Management considered the impact of COVID-19 on all other remaining assets as of June 30, 2021 and determined that there were no other indicators of impairment had occurred as of that date.

 

Interest Expense - mortgage notes. Interest expense, including amortization of deferred finance charges was $2.5 million for the six months ended June 30, 2021 compared to $3.2 million for the same period in 2020, a decrease of $0.7 million or 22%. The decrease in mortgage interest expense relates to the decreased number of commercial properties owned in 2021 compared to 2020 and the related mortgage debt. The weighted average interest rate on our outstanding debt was 4.2% and 4.6% as of June 30, 2021 and 2020, respectively.

 

Interest expense - note payable. On September 17, 2019, the Company executed a Promissory Note pursuant to which Polar Multi-Strategy Master Fund (“Polar”), extended a loan in the principal amount of $14.0 million to the Company (the “Polar Note”). The Polar Note bore interest at a fixed rate of 8% per annum and required monthly interest-only payments. Interest expense, including amortization of the deferred offering costs and Original Issue Discount of $1.4 million, totaled $- and $0.9 million for the six months ended June 30, 2021 and 2020, respectively. The Polar Note was paid in full during March 2021.

 

Loss on Sale of Real Estate Assets, net. The change in gain or loss on the sale of real estate assets is dependent on the mix of properties sold and the market conditions at the time of the sale. See “Significant Transactions in 2021 and 2020” above for further detail.

 

Income allocated to non-controlling interests. Income allocated to non-controlling interests for the six months ended June 30, 2021 and 2020 totaled approximately $0.9 million and $0.2 million.

 

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Results of Operations for the Years Ended December 31, 2020 and 2019

 

Revenues. Total revenue was $24.4 million for the year ended December 31, 2020, compared to $28.6 million for the same period in 2019, a decrease of $4.3 million or 15%. The decrease in rental income reported in 2020 compared to 2019 is directly related to the sale of two properties during the first quarter of 2020 and two properties in 2019. The decrease in rental income is also attributable to the decrease in occupancy to 84.1% as of December 31, 2020 compared to 84.5% for the same period in 2019.

 

Rental Operating Costs. Rental operating costs were $8.8 million for the year ended December 31, 2020 compared to $10.4 million for the same period in 2019, a decrease of $1.6 million or 15%. Rental operating costs as a percentage of total revenue was 36.2% and 36.3% for the years ended December 31, 2020 and 2019, respectively. The decrease in rental operating costs as a percentage of total revenue for the years ended December 31, 2020 compared to 2019 is due to the mix of properties held to include a higher percentage of model homes period over period, which have significantly lower operating costs.

 

General and Administrative. General and administrative (“G&A”) expenses were $5.8 million for the year ended December 31, 2020, compared to $5.3 million for the same period in 2019, representing an increase of approximately $0.5 million or 9%. As a percentage of total revenue, our general and administrative costs was 23.6% and 18.4% for the years ended December 31, 2020 and 2019, respectively. The increase in G&A expense for the years ended December 31, 2020 compared to 2019 is due to the timing of vesting of non-cash stock compensation expense primarily for stock granted to new employees and officers, as well as due to the decrease in revenue related to early 2019 and early 2020 property sales.

 

Depreciation and Amortization. Depreciation and amortization expenses were $6.3 million for the year ended December 31, 2020, compared to $7.4 million for the same period in 2019, representing a decrease of $1.1 million or 15%. The decrease in depreciation costs is associated with the properties sold in 2020 and 2019.

 

Asset Impairments. We review the carrying value of each of our real estate properties annually to determine if circumstances indicate an impairment in the carrying value of these investments exists. During 2020, we recognized a non-cash impairment charge of $1.3 million on the Waterman Plaza property and $0.4 million on Highland Court. This impairment charges reflect management’s revised estimate of the fair market value based on sales comparable of like property in the same geographical area as well as an evaluation of future cash flows or an executed purchase sale agreement. There were no impairment charges during 2019.

 

Interest Expense-Series B Preferred Stock. The Series B preferred stock issued in August 2014 included a mandatory redemption and therefore, is treated as a liability for financial reporting purposes. The dividends paid and the amortization of the deferred offering costs are considered interest expense for reporting purposes under generally accepted accounting principles (“GAAP”). Dividends paid totaled $1.9 million for the year ended December 31, 2019. The decrease is primarily due to the redemption of all the outstanding Series B preferred stock on September 17, 2019. The amortization of the deferred offering costs was approximately $0.1 million for the year ended December 31, 2019, and was included in interest expense-Series B preferred stock in the accompanying financial statements. The deferred offering costs were fully amortized and all of the outstanding Series B preferred stock was redeemed and no longer outstanding as of and for the year ended December 31, 2019. There was no such interest expense in 2020.

 

Interest Expense-mortgage notes. Interest expense related to the mortgage notes, including amortization of deferred finance charges, decreased by approximately $1.2 million, or 16%, to approximately $6.1 million for the year ended December 31, 2020 compared to $7.3 million for the same period in 2019. The decrease in interest expense relates to the decreased number of commercial properties owned in 2020 compared to 2019 and the related decrease in debt. The weighted average interest rate on our outstanding mortgage debt decreased to 3.9% at December 31, 2020 from 4.6% at December 31, 2019.

 

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Interest Expense-note payable. On September 17, 2019 the Company executed a Promissory Note pursuant to which Polar Multi-Strategy Master Fund (“Polar”), executed a loan in the principal amount of $14.0 million to the Company (the “Polar Note”). The Polar Note bears interest at a fixed rate of 8% per annum and requires monthly interest-only payments. The final payment due at maturity, March 31, 2021 upon extension of the Polar Note in September 2020, includes payment of the outstanding principal and accrued and unpaid interest. The Company used the proceeds of the Polar Note to redeem all of the outstanding shares of the 14% Series B Preferred Stock. For the year ended December 31, 2020, interest expense related to the Polar Note was approximately $2.7 million, which includes accretion of original issue discount (“OID”) of approximately $1.0 million and amortization of deferred financing cost of approximately $0.9 million. As of December 31, 2020, the Polar Note payable was $7.5 million, net of unamortized deferred financing cost of $0.2 million.

 

Gain on Sale of Real Estate Assets. For the year ended December 31, 2020, the decrease in gain on sale relates to the mix and type of properties sold. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Significant Transactions in 2020 and 2019 above for further detail.

 

Gain on Extinguishment of Government Debt. On April 30, 2020, the Company received a Paycheck Protection Program (“PPP”) loan of $0.5 million from the Small Business Administration (“SBA”) which provided additional economic relief during the COVID-19 pandemic. The PPP loan, less $10,000 related to the Economic Injury Disaster Loan (“EIDL”) received on April 22, 2020, was forgiven by the SBA as of December 31, 2020 and was fully forgiven in January 2021 upon repeal of the EIDL holdback requirements. No similar government assistance was received in fiscal 2019.

 

Deferred Offering Costs. For the year ended December 31, 2020, the Company recorded $0.5 million in legal, accounting and filing related expenses upon completion of our initial public offering. No such similar costs were recorded during the year ended December 31, 2019.

 

Income Tax Expense. For the year ended December 31, 2020, the income tax expense decreased by $0.2 million to $0.4 million for the year ended December 31, 2020 compared to $0.6 million for the year ended December 31, 2019. The decreased income tax expense in 2020 is primarily due federal and state taxes for capital gains from the sale of model homes held by the taxable REIT subsidiary, which has decreased from prior year.

 

Income allocated to non-controlling interests. Income allocated to non-controlling interests for the year ended December 31, 2020 and 2019 totaled $1.4 million.

 

Liquidity and Capital Resources

 

Overview

 

Our anticipated future sources of liquidity may include existing cash and cash equivalents, cash flows from operations, refinancing of existing mortgages, future real estate sales, new borrowings, financial aid from government programs instituted as a result of COVID-19, and the sale of equity or debt securities. Management believes that the number of recent real estate sales and resulting cash generated may not be indicative of our future strategic plans. We intend to grow our portfolio with the recent capital raised from the sale of our Series D Preferred Stock in June 2021 and our Series A Common Stock in July 2021. Our cash and restricted cash at June 30, 2021 was approximately $29.3 million. Our future capital needs include paying down existing borrowings, maintaining our existing properties, funding tenant improvements, paying lease commissions (to the extent they are not covered by lender-held reserve deposits), and the payment of dividends to our stockholders. We also are actively seeking investments that are likely to produce income and achieve long-term gains in order to pay dividends to our stockholders, and may seek a revolving line of credit to provide short-term liquidity. To ensure that we can effectively execute these objectives, we routinely review our liquidity requirements and continually evaluate all potential sources of liquidity.

 

Our short-term liquidity needs include paying our current operating costs, satisfying the debt service requirements of our existing mortgages, completing tenant improvements, paying leasing commissions, and funding dividends to stockholders. Future principal payments due on our mortgage notes payables, during the last six months of 2021, total approximately $2.6 million, of which $2.0 million is related to model home properties. Management expects certain model home and commercial properties will be sold, and that the underlying mortgage notes will be paid off with sales proceeds, while other mortgage notes will be refinanced as the Company has done in the past. Additional principal payments will be made with cash flows from ongoing operations.

 

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There can be no assurance that any such re-financing or additional financing or capital will be available to the Company on acceptable terms, if at all. If events or circumstances occur such that the Company does not obtain additional funding, it will most likely be required to reduce its plans or certain discretionary spending, which could have a material adverse effect on the Company’s ability to achieve its intended business objectives. We believe that cash on hand, cash flow from our existing portfolio, distributions from joint ventures in Model Home Partnerships and property sales during 2021 will be sufficient to fund our operating costs, planned capital expenditures and required dividends for at least the next twelve months. If our cash flow from operating activities is not sufficient to fund our short-term liquidity needs, we plan to fund a portion of these needs from additional borrowings of secured or unsecured indebtedness, from real estate sales, issuance of debt instruments, additional investors, or we may reduce the rate of dividends to the stockholders.

 

During the six months ended June 30, 2021, the Company paid two cash dividends to the holders of shares of Series A Common Stock of approximately $1.0 million or $0.101 per share and approximately $1.0 million or $0.102 per share. Additionally, pursuant to the terms of our Series D Preferred Stock, since the date of issuance of shares of Series D Preferred Stock through June 30, 2021, we have declared a dividend of approximately $96,000, which was paid on July 15, 2021. The Company intends to continue to pay dividends to our common stockholders on a quarterly basis, and on a monthly basis for the Series D Preferred stockholders going forward, but there can be no guarantee the Board of Directors will approve any future dividends.

 

Our long-term liquidity needs include proceeds necessary to grow and maintain our portfolio of investments. We believe that the potential financing capital available to us in the future is sufficient to fund our long-term liquidity needs. We are continually reviewing our existing portfolio to determine which properties have met our short- and long-term goals and reinvesting the proceeds in properties with better potential to increase performance. We expect to obtain additional cash in connection with refinancing of maturing mortgages and assumption of existing debt collateralized by some or all of our real property in the future to meet our long-term liquidity needs. If we are unable to arrange a line of credit, borrow on properties, issue debt instruments, privately place securities or sell securities to the public we may not be able to acquire additional properties to meet our long-term objectives. In addition, the ongoing COVID-19 pandemic may adversely impact our future operating cash flows due to the inability of some of our tenants to pay their rent on time or at all and the overall weakening of economic conditions that the pandemic may cause. The COVID-19 pandemic may also make financing more difficult to obtain for us and for prospective buyers of our properties, resulting in difficulty in selling assets within our expected timeframe, or a decline in our expected sales price.

 

Cash, Cash Equivalents and Restricted Cash

 

At June 30, 2021 and December 31, 2020, we had approximately $29.3 million and $11.5 million in cash equivalents, respectively, including $4.1 million and $4.2 million of restricted cash, respectively. Our cash equivalents and restricted cash consist of invested cash, cash in our operating accounts and cash held in bank accounts at third party institutions. During 2021 and 2020, we did not experience any loss or lack of access to our cash or cash equivalents. Approximately $1.9 million of our cash balance is intended for capital expenditures on existing properties (net of deposits held in reserve accounts by our lenders) over the last half of 2021. We intend to use the remainder of our existing cash and cash equivalents for reduction of principal debt, general corporate purposes or dividends to our stockholders. As of June 30, 2021, restricted cash also included approximately $0.9 million in cash held in escrow that relates to a delayed like-kind exchange transaction pursued under Section 1031 of the Internal Revenue Code 1986, as amended (the “Internal Revenue Code”).

 

Secured Debt

 

As of June 30, 2021, all our commercial properties had fixed-rate mortgage notes payable in the aggregate principal amount of $67.9 million, collateralized by a total of 10 commercial properties with loan terms at issuance ranging from 3 to 22 years. The weighted-average interest rate on these mortgage notes payable as of June 30, 2021 was approximately 4.54%, and our debt to estimated market value for our commercial properties was approximately 57.5%.

 

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As of June 30, 2021, the Company had 88 fixed-rate mortgage notes payable related to model homes in the aggregate principal amount of $22.8 million, collateralized by a total of 88 Model Homes. These loans generally have a term at issuance of three to five years. As of June 30, 2021, the average loan balance per home outstanding and the weighted-average interest rate on these mortgage loans are approximately $259,000 and 3.3%, respectively. Our debt to estimated market value on these properties is approximately 58.7%. The Company has guaranteed between 25% - 100% of these mortgage loans. We have been able to refinance maturing mortgages to extend maturity dates and we have not experienced any notable difficulties financing our acquisitions.

 

Cash Flows for the Six Months Ended June 30, 2021 and 2020

 

Operating Activities: Net cash used by operating activities for the six months ended June 30, 2021 increased by approximately $1.2 million to approximately $1.0 million, as compared to cash provided by operating activities of $0.2 million for the six months ended June 30, 2020. The increase in net cash used in operating activities is mainly due to changes in net income, which fluctuates based on timing of receipt and payment, as well as an increase in non-cash addbacks such as straight-line rent.

 

Investing Activities: Net cash provided by investing activities for the six months ended June 30, 2021 was approximately $41.1 million compared to approximately $20.6 million during the same period in 2020. The change from each period was primarily related to the mix of gross proceeds from the sale of office buildings and Model Homes sold in each period.

 

We currently project that we could spend up to $1.9 million (net of deposits held in reserve accounts by lenders) on capital improvements, tenant improvements and leasing costs for properties within our portfolio over the last half of 2021. Capital expenditures may fluctuate in any given period subject to the nature, extent, and timing of improvements required to the properties. We may spend more on capital expenditures in the future due to rising construction costs. Tenant improvements and leasing costs may also fluctuate in any given year depending upon factors such as the property, the term of the lease, the type of lease, the involvement of external leasing agents and overall market conditions.

 

Financing Activities: Net cash used in financing activities during the six months ended June 30, 2021 was $22.3 million compared to $22.5 million for the same period in 2020 and was primarily due to the following activities for the six months ended June 30, 2021:

 

  Net increase in dividends paid to stockholders of $2.0 million; and
     
  Net increase in repayment of the Polar Note, the fully payment of mortgage note on the World Plaza property and full payment of the four mortgage notes related to the properties sold during 2021; offset by
     
  Net increase in proceeds from mortgage notes of $0.8 million; and
     
  The issuance of our Series D Preferred Stock with net proceeds of approximately $20.5 million.

 

Cash Flows for the Years Ended December 31, 2020 and 2019

 

Operating Activities: Net cash provided by operating activities for the years ended December 31, 2020 and 2019 decreased by $0.1 million to approximately $3.7 million from $3.8 million. The decrease in net cash provided by operating activities is primarily due to a decrease in working capital of $0.1 million year over year.

 

Investing Activities: Net cash provided by investing activities for the year ended December 31, 2020 increased $15.7 million to approximately $27.7 million compared to $12.0 million for the same period in 2019. During the year ended December 31, 2020, the Company received gross proceeds from the sale of three office buildings for approximately $46.7 million, and sales of 46 Model Homes for approximately $18.1 million, which was offset by the purchase of 28 Model Homes for approximately $10.2 million. During the year ended December 31, 2019, the Company received gross proceeds from the sale of two office buildings for approximately $17.9 million, sale of land for $875,000 and sales of 41 Model Homes for approximately $14.6 million, which was offset by the purchase of 33 Model Homes for approximately $13.0 million and capital expenditures of approximately $6.4 million primarily related to tenant improvements for the new Chuze Fitness tenant at World Plaza.

 

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We currently project that we could spend up to $1.8 million (net of deposits held in reserve accounts by lenders) on capital improvements, tenant improvements and leasing costs for properties within our portfolio on an annual basis. Capital expenditures may fluctuate in any given period subject to the nature, extent, and timing of improvements required to the properties. We may spend more on capital expenditures in the future due to rising construction costs and the anticipated increase in property acquisitions. Tenant improvements and leasing costs may also fluctuate in any given year depending upon factors such as the property, the term of the lease, the type of lease, the involvement of external leasing agents and overall market conditions.

 

Financing Activities: Net cash used in financing activities during the year ended December 31, 2020 was $30.2 million compared to $15.2 million for the same period in 2019. The increase of $15.0 million in net cash used in financing activities is primarily due to the following activities for the year ended December 31, 2020:

 

  Increase in mortgage notes payable of $13.6 million;
     
  Increased distributions to noncontrolling interests of $2.7 million;
     
  Net increase in corporate debt repayments of $1.3 million; offset by
     
  An increase in proceeds from the sale of common stock of $2.0 million; and
     
  A decrease in dividend cash payments of $1.2 million.

 

Off-Balance Sheet Arrangements

 

For the periods presented, we do not have any off-balance sheet arrangements or obligations, including contingent obligations.

 

Inflation

 

Leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index (typically subject to ceilings), or increases in the clients’ sales volumes. We expect that inflation will cause these lease provisions to result in rent increases over time. During times when inflation is greater than increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation.

 

However, our use of net lease agreements tends to reduce our exposure to rising property expenses due to inflation because the client is responsible for property expenses. Inflation and increased costs may have an adverse impact on our clients if increases in their operating expenses exceed increases in revenue.

 

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BUSINESS AND PROPERTY

 

You should read the following discussion in conjunction with the sections of this prospectus entitledRisk Factors,” “Cautionary Note Regarding Forward-Looking Statements,andManagements Discussion and Analysis of Financial Condition and Results of Operations.This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitledRisk Factorsand elsewhere in this prospectus.

 

Overview

 

We are an internally managed, diversified real estate investment trust (“REIT”). We invest in a multi-tenant portfolio of commercial real estate assets comprised of office, industrial, and retail properties and model homes leased back to the homebuilder located primarily in the western United States. As of June 30, 2021, the Company owned or had an equity interest in:

 

  Seven office buildings and One industrial property (“Office/Industrial Properties”), which totals approximately 724,000 rentable square feet;
     
  Three retail shopping centers (“Retail Properties”), which total approximately 111,000 rentable square feet; and
     
  92 model home residential properties (“Model Homes” or “Model Home Properties”), totaling approximately 276,000 square feet, leased back on a triple-net basis to homebuilders that are owned by six affiliated limited partnerships and one wholly-owned corporation, all of which we control.

 

We own five commercial properties located in Colorado, four in North Dakota, and two in Southern California. Our model home properties are located in four states. Our commercial property tenant base is highly diversified and consists of approximately 147 individual commercial tenants with an average remaining lease term of approximately 2.3 years as of June 30, 2021. As of June 30, 2021, two commercial tenants represented more than 5.0% of our annualized base rent, while our ten largest tenants represented approximately 33.69% of our annualized base rent. In addition, our commercial property tenant base has limited exposure to any single industry.

 

In addition, we also own interests, through our subsidiaries and affiliated limited partnerships, in model homes primarily located in Texas and Florida. As of June 30, 2021, there were 92 such model homes. We purchase model homes from established residential home builders and lease them back to the same home builders on a triple-net basis.

 

Our main objective is to maximize long-term stockholder value through the acquisition, management, leasing and selective redevelopment of high-quality office and industrial properties. We focus on regionally dominant markets across the United States which we believe have attractive growth dynamics driven in part by important economic factors such as strong office-using employment growth; net in-migration of a highly educated workforce; a large student population; the stability provided by healthcare systems, government or other large institutional employer presence; low rates of unemployment; and lower cost of living versus gateway markets. We seek to maximize returns through investments in markets with limited supply, high barriers to entry, and stable and growing employment drivers. Our model home portfolio supports the objective of maximizing stockholder value by focusing on purchasing new single-family model homes and leasing them back to experienced homebuilders. We operate the model home portfolio in markets where we can diversify by geography, builder size, and model home purchase price.

 

Our co-founder, Chairman, President and Chief Executive Officer is Jack K. Heilbron, a 40-year veteran in real estate investing, including eight years with Excel Realty Trust, Inc. (“Excel REIT”), previously an NYSE-listed retail REIT, and one of its predecessor companies, The Investors Realty Trust (“IRT”), prior to founding our company. Together with our former Chief Financial Officer and Treasurer, Kenneth W. Elsberry, Mr. Heilbron founded both our company and Clover Income and Growth REIT, Inc. (“Clover REIT”), a private REIT focused on retail mixed-use properties. During Mr. Heilbron’s tenure at Excel REIT, IRT and Clover REIT, Mr. Heilbron oversaw the investment of substantial real estate assets and saw Clover REIT liquidate at a substantial gain to investors. Our model home division is led by Larry G. Dubose, a pioneer in the industry who has over 30 years of experience acquiring, financing, managing, and operating model home sale-leaseback transactions with builders throughout the nation. Our senior management team also includes Gary M. Katz, Adam Sragovicz and Ed Bentzen, each of whom has approximately 20 years or more of diverse experience in various aspects of real estate, including both commercial and residential, management, acquisitions, finance and dispositions in privately-held and publicly traded companies. We believe this industry experience and depth of relationships provides us with a significant advantage in sourcing, evaluating, underwriting and managing our investments.

 

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Our Portfolio

 

We own five commercial properties located in Colorado, four in North Dakota, and two in Southern California. Our model home properties are located in four states. While geographical clustering of real estate enables us to reduce our operating costs through economies of scale by servicing a number of properties with less staff, it makes us susceptible to changing market conditions in these discrete geographic areas, including those that have developed as a result of COVID-19. We do not develop properties but acquire properties that are stabilized or that we anticipate will be stabilized within two or three years of acquisition. We consider a property to be stabilized once it has achieved an 80% occupancy rate for a full year as of January 1 of such year or has been operating for three years.

 

Our policy is to obtain insurance coverage for each of our properties covering loss from liability, fire, and casualty in the amounts and under the terms we deem sufficient to insure our losses. Under tenant leases on our commercial and retail properties, we require our tenants to obtain insurance to cover casualty losses and general liability in amounts and under terms customarily obtained for similar properties in the area.

 

Commercial Portfolio

 

As of June 30, 2021, our commercial portfolio had a net book value of approximately $91.3 million, and consisted of the following properties:

 

Property Location ($ in 000s)   Sq. Ft.       Date Acquired     Year Property Constructed     Purchase Price (1)      Occupancy       Percent Ownership     Mortgage Outstanding  
Office/Industrial Properties:                                                        
Genesis Plaza, San Diego, CA (2)     57,807       08/10       1989       10,000       74.7 %     76.4 %     6,223  
Dakota Center, Fargo, ND     119,434       05/11       1982       9,575       72.3 %     100 %     9,789  
Grand Pacific Center, Bismarck, ND     93,058       04/14       1976       5,350       71.2 %     100 %     3,680  
Arapahoe Service Center II, Centennial, CO     79,023       12/14       2000       11,850       100 %     100 %     7,852  
West Fargo Industrial, West Fargo, ND     150,030       08/15       1998/2005     7,900       87.6 %     100 %     4,206  
300 N.P., West Fargo, ND     34,517       08/15       1922       3,850       69.9 %     100 %     2,253  
One Park Centre, Westminster, CO     69,174       08/15       1983       9,150       82.5 %     100 %     6,331  
Shea Center II, Highlands Ranch, CO     121,301       12/15       2000       25,325       83.2 %     100 %     17,621  
Total Office/Industrial Properties     724,334                     $ 83,000       83.2 %           $ 57,955  
                                                         
Retail Properties:                                                        
World Plaza, San Bernardino, CA (3)     55,810       09/07       1974       7,650       100 %     100 %      
Union Town Center, Colorado Springs, CO     44,042       12/14       2003       11,212       96.8 %     100 %     8,245  
Research Parkway, Colorado Springs, CO     10,700       08/15       2003       2,850       88.8 %     100 %     1,733  
Total Retail Properties     110,552                     $ 21,712       97.7 %             9,978  
Total Commercial Properties     834,896                     $ 104,712       85.1 %             67,933  

 

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  (1)

Prior to January 1, 2009, “Purchase Price” includes our acquisition related costs and expenses for the purchase of the property. After January 1, 2009, acquisition related costs and expenses were expensed when incurred.

  (2)

Genesis Plaza is owned by two tenants-in-common, each of which 57% and 43%, respectively, and we beneficially own an aggregate of 76.4%.

  (3) This property is held for sale as of June 30, 2021.

 

The following tables show a list of commercial properties owned by the Company grouped by state and geographic region as of Jun 30, 2021:

 

          Aggregate     Approximate %     Current Base    

Approximate %

of Aggregate

 
    No. of     Square     of Square     Annual     Annual  
State   Properties     Feet     Feet     Rent     Rent  
California     2       113,617       11.6 %   $ 1,908,225       17.2 %
Colorado     5       467,640       47.8 %     5,869,031       53.0 %
North Dakota     4       397,039       40.6 %     3,304,503       29.8 %
Total     11       978,296       100.0 %   $ 11,081,759       100.0 %

 

Model Home Portfolio

 

Our model home division utilizes a newly-built single family model home as an investment vehicle. This division purchases model homes and leases them back to the homebuilders as commercial tenants. These triple-net investments alleviate a significant amount of the risk normally associated with holding single family homes for speculative sale or for lease to residential tenants.

 

As of June 30, 2021, our model home portfolio had a net book value of approximately $33.1 million, and is summarized as follows:

 

Region   No. of Properties     Aggregate Square Feet     Approximate % of Aggregate Square Feet     Current Annual Base Rent     Approximate % of Aggregate Annual Rent     Purchase Price     Current Mortgage Balance  
Southwest     85       254,901       92.4 %   $ 2,409,576       90.0 %   $ 31,787,624     $ 20.917.963  
Southeast     3       8,201       3.0 %     86,904       3.3 %     736,700       546.548  
Midwest     2       6,153       2.2 %     80,844       3.0 %     898,250       616.156  
Northeast     2       6,602       2.4 %     99,276