CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus includes “forward-looking statements”, as such term is used within the meaning of the Private Securities Litigation
Reform Act of 1995. These “forward-looking statements” are not based on historical fact and involve assessments of certain
risks, developments, and uncertainties in our business looking to the future. Such forward-looking statements can be identified by the
use of terminology such as “may”, “will”, “should”, “expect”, “anticipate”,
“estimate”, “intend”, “continue”, or “believe”, or the negatives or other variations
of these terms or comparable terminology. Forward-looking statements may include projections, forecasts, or estimates of future performance
and developments. Forward-looking statements contained in this prospectus are based upon assumptions and assessments that we believe
to be reasonable as of the date of this prospectus. Whether those assumptions and assessments will be realized will be determined by
future factors, developments, and events, which are difficult to predict and may be beyond our control. Actual results, factors, developments,
and events may differ materially from those we assumed and assessed. Risks, uncertainties, contingencies, and developments, including
those identified in the “Risk Factors” section of this prospectus, could cause our future operating results to differ
materially from those set forth in any forward-looking statement. There can be no assurance that any such forward-looking statement,
projection, forecast or estimate contained can be realized or that actual returns, results, or business prospects will not differ materially
from those set forth in any forward-looking statement. Given these uncertainties, readers are cautioned not to place undue reliance on
such forward-looking statements. We disclaim any obligation to update any such factors or to publicly announce the results of any revisions
to any of the forward-looking statements contained herein to reflect future results, events or developments.
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.
SUMMARY
This
summary contains basic information about us and this offering. Because it is a summary, it does not contain all of the information that
you should consider before investing. Before you decide to invest in our Units, you should read this entire prospectus carefully, including
the section entitled “Risk Factors”.
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 December 31, 2021, we owned or had an equity interest in:
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office
buildings and industrial buildings (“Office/Industrial Properties”) which total approximately 757,578 rentable square feet, |
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retail
shopping centers (“Retail Properties”) which total approximately 121,052 rentable square feet, and |
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92
model homes owned by five affiliated limited partnerships and one corporation (“Model Home Properties”). |
We
own five commercial properties located in Colorado, four in North Dakota, two in Southern California and one in Texas. Our model home
properties are located in four states. Our commercial property tenant base is highly diversified and consists approximately 139 individual
commercial tenants with an average remaining lease term of approximately 3.1 years as of December 31, 2021. As of December 31, 2021,
three commercial tenants represented more than 5.0% of our annualized base rent, one of which represented 8.0% of our annualized based
rent, while our ten largest tenants represented approximately 36.8% 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 December 31, 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 senior
management team also includes Gary M. Katz, Steve Hightower, 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.
Our
Portfolio
We
own five commercial properties located in Colorado, four in North Dakota, two in Southern California, one in Texas and one in Maryland.
Our model home properties are located in four states, with the majority of properties in Texas. 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 December 31, 2021, our commercial portfolio had a net book value of approximately $104 million, and consisted of the following properties:
($
in000’s) Property Location | |
Sq.,
Ft. | | |
Date
Acquired | |
Year
Property Constructed | |
Purchase
Price (1) | | |
Occupancy | | |
Percent
Ownership | | |
Mortgage
On property | |
Office/Industrial Properties: | |
| | | |
| |
| |
| | | |
| | | |
| | | |
| | |
Genesis Plaza, San Diego, CA (2) | |
| 57,807 | | |
08/10 | |
1989 | |
| 10,000 | | |
| 85.6 | % | |
| 76.4 | % | |
| 6,169 | |
Dakota Center, Fargo, ND | |
| 119,538 | | |
05/11 | |
1982 | |
| 9,575 | | |
| 73.5 | % | |
| 100.0 | % | |
| 9,677 | |
Grand Pacific Center, Bismarck, ND (3) | |
| 93,000 | | |
03/14 | |
1976 | |
| 5,350 | | |
| 56.6 | % | |
| 100.0 | % | |
| 3,620 | |
Arapahoe Center, Colorado Springs, CO | |
| 79,023 | | |
12/14 | |
2000 | |
| 11,850 | | |
| 100.0 | % | |
| 100.0 | % | |
| 7,771 | |
West Fargo Industrial, West Fargo, ND | |
| 150,030 | | |
08/15 | |
1998/2005 | |
| 7,900 | | |
| 90.8 | % | |
| 100.0 | % | |
| 4,148 | |
300 N.P., West Fargo, ND | |
| 34,517 | | |
08/15 | |
1922 | |
| 3,850 | | |
| 64.8 | % | |
| 100.0 | % | |
| 2,233 | |
One Park Centre, Westminster CO | |
| 69,174 | | |
08/15 | |
1983 | |
| 9,150 | | |
| 80.5 | % | |
| 100.0 | % | |
| 6,277 | |
Shea Center II, Highlands Ranch, CO | |
| 122,737 | | |
12/15 | |
2000 | |
| 25,325 | | |
| 91.6 | % | |
| 100.0 | % | |
| 17,495 | |
Baltimore, Baltimore, MD | |
| 31,752 | | |
12/21 | |
2006 | |
| 8,892 | | |
| 100.0 | % | |
| 100.0 | % | |
| — | |
Total Office/Industrial Properties | |
| 757,578 | | |
| |
| |
$ | 91,892 | | |
| 82.8 | % | |
| | | |
$ | 57,390 | |
| |
| | | |
| |
| |
| | | |
| | | |
| | | |
| | |
Retail Properties: | |
| | | |
| |
| |
| | | |
| | | |
| | | |
| | |
World Plaza, San Bernardino, CA (4) | |
| 55,810 | | |
09/07 | |
1974 | |
| 7,650 | | |
| 100.0 | % | |
| 100.0 | % | |
| — | |
Union Town Center, Colorado Springs, CO | |
| 44,042 | | |
12/14 | |
2003 | |
| 11,212 | | |
| 87.4 | % | |
| 100.0 | % | |
| 8,174 | |
Research Parkway, Colorado Springs, CO | |
| 10,700 | | |
08/15 | |
2003 | |
| 2,850 | | |
| 100.0 | % | |
| 100.0 | % | |
| 1,705 | |
Mandolin, Houston, TX | |
| 10,500 | | |
08/21 | |
2021 | |
| 4,892 | | |
| 100.0 | % | |
| 61.3 | % | |
| — | |
Total Retail Properties | |
| 121,052 | | |
| |
| |
$ | 26,604 | | |
| 95.4 | % | |
| | | |
$ | 9,879 | |
| |
| | | |
| |
| |
| | | |
| | | |
| | | |
| | |
| |
| 878,630 | | |
| |
| |
$ | 118,496 | | |
| 84.6 | % | |
| | | |
$ | 67,269 | |
(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 until ASU 2017-01 was adopted by the Company in
2017. Since then, acquisition related costs for real estate acquisitions that do not meet
the definition of a business, are capitalized.” |
(2) |
Genesis
Plaza is owned by two tenants-in-common, each of which own 57% and 43%, respectively, and we beneficially own an aggregate of 76.4%,
based on our ownership percentages of each tenant-in-common. |
(3) |
Property
was listed as held for sale during the February 2022. |
(4) |
Property
held for sale as of December 31, 2021. |
The
following tables show a list of commercial properties owned by us grouped by state and geographic region as of December 31, 2021:
State | |
No. of Properties | | |
Aggregate Square Feet | | |
Approximate % of Square Feet | | |
Current Base Annual Rent | | |
Approximate % of Aggregate Annual Rent | |
California | |
| 2 | | |
| 113,617 | | |
| 12.9 | % | |
$ | 1,805,085 | | |
| 15.6 | % |
Colorado | |
| 5 | | |
| 325,676 | | |
| 37.1 | % | |
| 5,603,269 | | |
| 48.5 | % |
Maryland | |
| 1 | | |
| 31,752 | | |
| 3.6 | % | |
| 682,668 | | |
| 5.9 | % |
North Dakota | |
| 4 | | |
| 397,085 | | |
| 45.2 | % | |
| 3,151,646 | | |
| 27.3 | % |
Texas | |
| 1 | | |
| 10,500 | | |
| 1.2 | % | |
| 322,875 | | |
| 2.8 | % |
Total | |
| 13 | | |
| 878,630 | | |
| 100 | % | |
$ | 11,565,543 | | |
| 100 | % |
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 December 31, 2021, our model home portfolio had a net book value of approximately $34 million, and is summarized as follows:
Geographic Region | |
No. of Properties | | |
Aggregate Square Feet | | |
Approximate % of Square Feet | | |
Current Base Annual Rent | | |
Approximate % of Aggregate Annual Rent | |
Southwest | |
| 88 | | |
| 266,228 | | |
| 95.6 | % | |
$ | 2,501,580 | | |
| 94.0 | % |
Southeast | |
| 1 | | |
| 2,381 | | |
| 0.9 | % | |
| 22,524 | | |
| 0.8 | % |
Midwest | |
| 1 | | |
| 3,663 | | |
| 1.3 | % | |
| 57,420 | | |
| 2.2 | % |
Northeast | |
| 2 | | |
| 6,153 | | |
| 2.2 | % | |
| 80,844 | | |
| 3.0 | % |
Total | |
| 92 | | |
| 278,425 | | |
| 100 | % | |
$ | 2,662,368 | | |
| 100 | % |
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:
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Market
Research. We invest in properties within regionally dominant markets that we believe to be overlooked. We extensively 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, extensive healthcare
systems and available housing. We believe this extensive research will result in property acquisitions in markets with substantially
higher demand for high quality commercial real estate. |
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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. |
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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.
Since 2015, we have been selectively selling retail properties and redeploying the capital into other commercial properties. We have
achieved substantial returns in the past from the operation, repositioning, and sale of properties. We seek to continue to actively
manage our properties in the future to maximize the opportunity to recycle capital. |
Our
Model Home Property Investment Approach
Model
homes are single-family dwellings constructed by builders for the purpose of showing each of the builder’s floor plans, elevations,
optional features, and workmanship in the marketing of the development in which the home is located. Each model home is designed to be
held through the end of a minimum lease term after which the Model Home Property is listed for sale at the estimated fair market value.
We seek to purchase model homes, typically at a discount from fair market value, that have a likelihood of appreciation within the expected
three-year term of the lease. Our model home leaseback agreements are triple-net, requiring the homebuilder/commercial 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, price point or location.
During
the year ended December 31, 2021, we disposed of 44 model homes for approximately $20.7 million and recognized a gain of approximately
$3.2 million and 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.
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.
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.
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:
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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. |
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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. |
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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. |
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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 13 acquisitions since 2014, 10 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. |
Sponsorship
of Special Purpose Acquisition Company
On
January 7, 2022, we announced our sponsorship, through our wholly-owned subsidiary, Murphy Canyon Acquisition Sponsor, LLC (the “Sponsor”),
of a special purpose acquisition company (“SPAC”) initial public offering. The registration statement and prospectus relating
to the initial public offering (“IPO”) of the SPAC, Murphy Canyon Acquisition Corp. (“Murphy Canyon”), was declared
effective by the Securities and Exchange Commission (the “SEC”) on February 2, 2022 and SPAC units, consisting of one share
of Class A common stock, par value $0.0001 per share, of Murphy Canyon and one redeemable warrant, with each whole warrant entitling
the holder thereof to purchase one share of common stock at a price of $11.50 per share, began trading on the Nasdaq Global Market on
February 3, 2022. The common stock and warrants commenced trading separately on March 28, 2022 on the Nasdaq Global Market under the
symbols “MURF” and “MURFW,” respectively, with the units remaining trading under the symbol “MURFU”.
The
Murphy Canyon IPO closed on February 7, 2022, raising gross proceeds for Murphy Canyon of $132,250,000, including the exercise in full
by the underwriters of their over-allotment option. In connection with the IPO, we purchased, through the Sponsor, 754,000 placement
units (the “placement units”) at a price of $10.00 per unit, for an aggregate purchase price of $7,540,000. The Sponsor has
agreed to transfer an aggregate of 45,000 placement units (15,000 each) to each of Murphy Canyon’s independent directors. The common
stock and warrants commenced trading separately on March 28, 2022 on the Nasdaq Global Market under the symbols “MURF” and
“MURFW,” respectively, with the units remaining trading under the symbol “MURFU”.
Immediately
following the IPO, Murphy Canyon began to evaluate acquisition candidates in the real estate industry, including construction, homebuilding,
real estate owners and operators, arrangers of financing, insurance, and other services for real estate, and adjacent businesses and
technologies targeting the real estate space with an aggregate combined enterprise value of approximately $300 million to $1.2 billion.
Murphy Canyon’s goal is to complete its initial business combination (“IBC”) within one year of its IPO. We expect
Murphy Canyon to operate as a separately managed, publicly traded entity following the completion of the IBC, or “De-SPAC”.
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 20 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 common stock could decline and you may lose some or all of your investment. Some of these risks
include:
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Our
management will have broad discretion over the use of the net proceeds from this offering, you may not agree with how we use the
proceeds and the proceeds may not be invested successfully;
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Your
interest in our company may be diluted as a result of this Rights Offering; |
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The
Warrants may not have any value and holders of the warrants will have no rights as a common stockholder until such holders exercise
their Warrants and acquire shares of our common stock; |
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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 other potential pandemics or outbreaks could materially adversely affect our business, financial condition, results
of operations and cash flows in the future; |
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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; |
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We
face numerous risks associated with the real estate industry that could adversely affect our results of operations through decreased
revenues or increased costs; |
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Disruptions
in the financial markets and uncertain economic conditions could adversely affect the value of our real estate investments; |
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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; |
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We
may acquire properties in joint ventures, partnerships or through limited liability companies, which could limit our ability to control
or liquidate such holdings; |
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We
may acquire properties “as is,” which increases the risk that we will have to remedy defects or costs without recourse
to the seller; |
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Our
model home business is substantially dependent on the supply and/or demand for single family homes; |
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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; |
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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; |
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We
depend on key personnel, and the loss of such persons could impair our ability to achieve our business objectives; |
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We
may change our investment and business policies without stockholder consent, and such changes could increase our exposure to operational
risks; |
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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; |
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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; |
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Failure
to qualify as a REIT could adversely affect our operations and our ability to pay distributions; |
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As
a REIT, we may be subject to tax liabilities that reduce our cash flow; |
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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; |
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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; |
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Our
cash available for distributions may not be sufficient to pay distributions on the 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; |
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A
future issuance of stock could dilute the value of our common stock; |
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Our
sponsorship of the SPAC requires significant capital deployment, entails certain risks and may not be successful, which would likely
have a material adverse effect on our future expansion, revenues, and profits; |
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Certain
of our officers and directors also serve as officers and directors of the SPAC, which could give rise to conflicts of interest; |
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Inflation
may materially and adversely affect our income, cash flow, results of operations, financial condition, liquidity, the ability to
service our debt obligations, the market price of our securities and our ability to pay dividends and other distributions
to our stockholders; |
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Our
management will have broad discretion over the use of the net proceeds from this offering, you may not agree with how we use the
proceeds and the proceeds may not be invested successfully; and
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Your
interest in our company may be diluted as a result of this Rights Offering if you do not fully exercise your Subscription Rights
or if we sell shares that are otherwise unsubscribed. |
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. However, we cannot provide any assurance as to the amount or timing of future distributions.
Our goal is to generate cash distributions from operating cash flow and proceeds from the sale of properties. During the year ended December
31, 2021, we paid four cash dividends to the holders of shares of common stock totaling approximately $4.5 or $0.41 per share.
During the year ended December 31, 2020, we paid a cash dividend totaling approximately $1.0 million or $0.10 per share. During 2018
and 2019, we declared distributions of approximately $1.1 million each year.
Holders
of shares of the Series D Preferred Stock are entitled to receive cumulative cash dividends at a rate of 9.375% per annum of the $25.00
per share liquidation preference (equivalent to $2.34375 per annum per share). Dividends will be payable monthly on the 15th day of each
month (each, a “dividend payment date”), provided that if any dividend payment date is not a business day, then the dividend
that would otherwise have been payable on that dividend payment date may be paid on the next succeeding business day without adjustment
in the amount of the dividend. Pursuant to the terms of our Series D Preferred Stock, since the date of issuance of shares of Series
D Preferred Stock through December 31, 2021, we had declared a dividend of approximately $1.2 million.
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.
We
provide each of our stockholders a statement detailing the distributions paid during the preceding year and their characterization as
ordinary income, capital gain or return of capital. During the year ended December 31, 2021, all dividends to holders of our common stock
were non-taxable as they were considered return of capital to the stockholders. During the year ended December 31, 2020, all dividends
to holders of common stock were taxable as they were considered capital gain to the stockholders.
Organizational
Structure
The
following chart summarizes our current ownership structure:
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.
OFFERING
SUMMARY
Securities
Offered |
|
We
are distributing to you, at no charge, one non-transferable Subscription Right to purchase one Unit for every share of
our common stock and July 2021 Warrant that you owned on the Record Date. Each Unit consists of shares of our common stock
and Warrants. The Units will separate upon the closing of the Rights Offering and
the common stock and Warrants will be issued separately, however, they may only be purchased as a Unit, and the Unit will not trade
as a separate security. |
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Size
of Offering |
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Units. |
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Subscription
Price |
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$
per Unit. |
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Warrants |
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Each
Warrant entitles the holder to purchase one share of our common stock at an exercise price of $ per share, subject to adjustment, from
the date of issuance through its expiration five years from the date of issuance. The Warrants will be exercisable for cash, or, solely
during any period when a registration statement for the exercise of the Warrants is not in effect, on a cashless basis, at any time and
from time to time after the date of issuance. |
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Record
Date |
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5:00
p.m., Eastern Time, on , 2022. |
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Expiration
of the Rights Offering |
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5:00
p.m., Eastern Time, on , 2022. We may extend the Rights Offering without notice to you. See “Extension, Amendment and Termination.” |
Basic
Subscription Right |
|
Your
Basic Subscription Right will entitle you to purchase one Unit at the Subscription Price. You may exercise your Basic Subscription Right
for some or all of your Subscription Rights, or you may choose not to exercise your Subscription Rights. If you choose to exercise your
Subscription Rights, there is no minimum number of Units you must purchase. We are distributing Basic Subscription Rights to purchase
an aggregate of Units, but are only selling Units in the Rights Offering. In the event that the Rights Offering is over-subscribed,
rights holders will be entitled to their pro rata portion of the Units. |
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Over-Subscription
Privilege |
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If
you exercise your Basic Subscription Rights in full, you may also choose to exercise an over-subscription privilege to purchase a portion
of any Units that are not purchased by our other stockholders or July 2021 warrantholders through the exercise of their Basic Subscription
Rights, subject to proration and stock ownership limitations described elsewhere in this prospectus. The subscription agent will promptly
return any excess payments by mail, without interest or deduction, after expiration of the subscription period. |
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Payment
Adjustments |
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If
you send a payment that is insufficient to purchase the number of Units requested, or if the number of Units requested is not specified
in the Rights Certificate, the payment received will be applied to exercise Subscription Rights to the extent of the payment. If the
payment exceeds the amount necessary for the full exercise of your Subscription Rights, including any Over-Subscription Privilege exercised
and permitted, the excess will be promptly returned to you in cash. You will not receive interest or a deduction on any payments refunded
to you under the Rights Offering. |
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Delivery
of Shares and Warrants |
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As
soon as practicable after the expiration of the Rights Offering, and within five business days thereof, we expect to close on subscriptions
and for the Subscription Agent to arrange for the issuance of the shares of common stock and Warrants purchased pursuant to the Rights
Offering. All shares and Warrants that are purchased in the Rights Offering will be issued in book-entry, or uncertificated, form meaning
that you will receive a direct registration, or DRS, account statement from our transfer agent reflecting ownership of these securities
if you are a holder of record. If you hold your shares and/or July 2021 Warrant in the name of a bank, broker, dealer, or other nominee,
DTC will credit your account with your nominee with the securities you purchased in the Rights Offering. |
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Non-transferability
of Subscription Rights |
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The
Subscription Rights may not be sold, transferred, assigned or given away to anyone. The Subscription Rights will not be listed for trading
on any stock exchange or market. |
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Transferability
of Warrants |
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The
Warrants will be separately transferable following their issuance until their expiration. |
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No
Board Recommendation |
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Our
board of directors is not making a recommendation regarding your exercise of the Subscription Rights. You are urged to make your decision
to invest based on your own assessment of our business and financial condition, our prospects for the future, the terms of the Rights
Offering, the information in this prospectus and other information relevant to your circumstances. Please see “Risk Factors”
for a discussion of some of the risks involved in investing in our securities. |
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No
Revocation |
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All
exercises of Subscription Rights are irrevocable, even if you later learn of information that you consider to be unfavorable to the exercise
of your Subscription Rights. |
Use
of Proceeds |
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Assuming
the exercise of Subscription Rights to purchase all Units of the Rights Offering, after deducting fees and expenses and excluding
any proceeds received upon exercise of any Warrants, we estimate the net proceeds of the Rights Offering will be approximately $
million. We intend to use the net proceeds from the exercise of Subscription Rights for general corporate and working capital purposes,
including potential acquisitions of additional properties, as described herein. See “Use of Proceeds.” |
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Material
U.S. Federal Income
Tax
Consequences |
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For
U.S. federal income tax purposes, we do not believe you should recognize income or loss upon receipt or exercise of a Subscription
Right. You should consult your own tax advisor as to the tax consequences of the Rights Offering in light of your particular circumstances.
See “U.S. Federal Income Tax Considerations.” |
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Extension,
Amendment and Termination |
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Although
we do not presently intend to do so, we may extend the Rights Offering for additional time in our sole discretion for any reason
for up to an additional 45 days. For example, we may decide that changes in the market price of our common stock requires an extension,
or we may decide that the degree of stockholder and/or July 2021 warrantholder participation in the Rights Offering is less than
the level we desire. In the event that we decide to extend the Rights Offering as noted above and you have already exercised your
Subscription Rights, your subscription payment will remain with the Subscription Agent until such time as the Rights Offering closes
or is terminated. We also reserve the right to amend or modify the terms of the Rights Offering, as appropriate. Our board of directors
may for any reason terminate the Rights Offering at any time before the expiration of the Rights Offering. In the event that the
Rights Offering is cancelled, all subscription payments received by the Subscription Agent will be promptly returned, without interest
or deduction. |
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Placement
Period |
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If
the Rights Offering is not fully subscribed following expiration of the Rights Offering, the dealer-manager has agreed to use its
commercially reasonable efforts to place any unsubscribed Units at the Subscription Price for an additional period of up to 45 days.
The number of Units that may be sold by us during this period will depend upon the number of Units that are subscribed for pursuant
to the exercise of Subscription Rights by our stockholders and July 2021 warrantholders. No assurance can be given that any unsubscribed
Units will be sold during this period. |
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Subscription
Agent |
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We
retained Direct Transfer, LLC, to serve as the subscription agent. The subscription agent will hold funds received in payment for
Units in a segregated account pending completion of the Rights Offering. The subscription agent will hold this money until the Rights
Offering is completed or is withdrawn and canceled. If the Rights Offering is canceled for any reason, all subscription payments
received by the subscription agent will be promptly returned, without interest or penalty. |
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Information
Agent |
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You
should direct any questions or requests for assistance concerning the method of subscribing for Units or for additional copies of
this prospectus to the information agent, [ ], toll free at [ ], or by mail at [ ]. |
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Questions |
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If
you have any questions about the Rights Offering, please contact the Information Agent, [ ], toll free at [ ],
or by mail at [ ]. |
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Market
for Common Stock |
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Our
common stock is listed on Nasdaq under the symbol “SQFT.” |
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Market
for Warrants |
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The
Warrants are not listed on a national exchange. |
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Dealer-Manager
and Placement Agent |
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The
Benchmark Company LLC will act as dealer-manager for the Rights Offering and placement agent for any unsubscribed Units. |
QUESTIONS
AND ANSWERS RELATING TO THE RIGHTS OFFERING
The
following are examples of what we anticipate will be common questions about this Rights Offering. The answers are based on selected information
included elsewhere in this prospectus. The following questions and answers do not contain all of the information that may be important
to you and may not address all of the questions that you may have about the Rights Offering. This prospectus contains more detailed descriptions
of the terms and conditions of the Rights Offering and provides additional information about us and our business, including potential
risks related to the Rights Offering, the Units offered hereby, and our business. We urge you to read this entire prospectus.
Why
are we conducting the Rights Offering?
We
are conducting the Rights Offering to raise additional capital for general corporate purposes and to fund ongoing operations and expansion
of our business.
What
is a Unit?
Each
Unit consists of one share of our Series A common stock, which we refer to herein as “common stock” and warrants (each, a
“Warrant”), at a subscription price of $ per Unit. No fractional Units will be issued. Each
Warrant entitles you to purchase one share of common stock at an exercise price of $ per share,
from the date of issuance through its expiration five years after the date of issuance. The shares of common stock and Warrants that
comprise each Unit are immediately separable and will be issued separately in this Rights Offering, however, they may only be purchased
as a Unit, and the Units will not trade as a separate security.
What
is the Rights Offering?
We
are distributing, at no charge, to holders of our common stock as of the Record Date, non-transferable Subscription Rights to purchase
Units at a price of $ per Unit. The Subscription Rights will not be tradable. Each Unit consists
of one share of our common stock and Warrants. See “Are there risks in exercising my
Subscription Rights?” below. Each Warrant will be exercisable for one share of our common stock. Upon expiration of the Rights
Offering, the common stock and Warrants will immediately separate. There is no public trading market for the Warrants and we do not intend
that they will be listed for trading on Nasdaq or any other securities exchange or market. The common stock comprising the Units and
the common stock to be issued upon exercise of the Warrants, like our existing shares of common stock, will be traded on the Nasdaq Capital
Market under the symbol “SQFT.” You will receive one Subscription Right for every share of common stock that you owned
as of 5:00 p.m., Eastern Time, on the Record Date. Each Subscription Right entitles the record holder to a Basic Subscription Right and
an Over-Subscription Privilege. The Subscription Rights will expire if they are not exercised by 5:00 p.m., Eastern Time, on
, 2022, unless we extend or earlier terminate the Rights Offering.
What
are the Basic Subscription Rights?
For
every share you owned as of the Record Date, you will receive one Basic Subscription Right, which gives you the opportunity to purchase
one Unit, consisting of one share of our common stock and Warrants, for a price of $ per Unit.
For example, if you owned 100 shares of common stock as of the Record Date, you will receive 100 Subscription Rights and will have the
right to purchase 100 shares of our common stock and Warrants to purchase shares of our common stock for $
per Unit (or a total payment of $ ). You may exercise all or a portion of your Basic
Subscription Rights or you may choose not to exercise any Basic Subscription Rights at all.
If
you are a record holder of our common stock, the number of shares you may purchase pursuant to your Basic Subscription Rights is indicated
on the enclosed Rights Certificate. If you hold your shares of common stock in the name of a broker, dealer, bank or other
nominee who uses the services of the Depository Trust Company, or DTC, you will not receive a Rights Certificate. Instead, DTC will issue
one Subscription Right to your nominee record holder for each share of our common stock that you beneficially own as of the Record Date.
If you are not contacted by your nominee, you should contact your nominee as soon as possible.
What
is the Over-Subscription Privilege?
If
you exercise your Basic Subscription Rights in full, you may also choose to exercise your Over-Subscription Privilege to purchase a portion
of any Units that are not purchased by other stockholders or July 2021 warrantholders and remain available under the Rights Offering.
You should indicate on your Rights Certificate, or the form provided by your nominee if your shares are held in the name of a nominee,
how many additional Units you would like to purchase pursuant to your Over-Subscription Privilege, which we refer to as your Over-Subscription
Request.
Subject
to stock ownership limitations, if enough Units are available, we will seek to honor your Over-Subscription Request in full. If Over-
Subscription Requests exceed the number of Units available, however, we will allocate the available Units pro-rata among the stockholders
and July 2021 warrantholders exercising the Over-Subscription Privilege in proportion to the product (rounded down to the nearest whole
number so that the aggregate number of Units does not exceed the aggregate number offered) obtained by multiplying the number of Units
such stockholder or warrantholder subscribed for pursuant to the Over-Subscription Privilege by a fraction (A) the numerator of which
is the number of unsubscribed Units and (B) the denominator of which is the total number of Units sought to be subscribed for pursuant
to the Over-Subscription Privilege by all holders participating in such over-subscription. See “The Rights Offering- Limitation
on the Purchase of Units” for a description of certain stock ownership limitations.
To
properly exercise your Over-Subscription Privilege, you must deliver to the Subscription Agent the subscription payment related to your
Over-Subscription Privilege before the Rights Offering expires. Because we will not know the total number of unsubscribed Units before
the expiration of the Rights Offering, if you wish to maximize the number of Units you purchase pursuant to your Over-Subscription Privilege,
you will need to deliver payment in an amount equal to the aggregate Subscription Price for the maximum number of Units available, assuming
that no Subscription Rights holder other than you has purchased any Units pursuant to such stockholder’s Basic Subscription
Right and Over-Subscription Privilege. See “The Rights Offering- The Subscription Rights-Over-Subscription Privilege.” To
the extent you properly exercise your Over-Subscription Privilege for an amount of Units that exceeds the number of unsubscribed Units
available to you, any excess subscription payments will be promptly returned to you after the expiration of the Rights Offering, without
interest or deduction.
Direct
Transfer, LLC, our Subscription Agent for the Rights Offering, will determine the allocation of Over-Subscription Requests based on the
formula described above, and will notify Subscription Rights holders of the number of Units allocated to each holder exercising the Over-Subscription
Privilege as promptly as may be practicable after the allocations are completed.
May
the Subscription Rights that I exercise be reduced for any reason?
Yes.
While we are distributing to holders of our common stock one Subscription Right for every share of common stock owned on the Record Date,
we are only seeking to raise $ million dollars in gross proceeds in this Rights Offering.
As a result, based on shares of common stock outstanding as of
, 2022, we would grant Subscription Rights to acquire Units but will only accept subscriptions
for ,000 Units. Accordingly, enough Units may not be available to honor your subscription
in full. If exercises of Basic Subscription Rights exceed the number of Units available in the Rights Offering, we will allocate the
available Units pro-rata among the record holders exercising the Basic Subscription Rights in proportion to the number of shares of our
common stock each of those record holders owned on the Record Date, relative to the number of shares owned on the Record Date by all
record holders exercising the Basic Subscription Right. If this pro-rata allocation results in any record holders receiving a greater
number of Units than the record holder subscribed for pursuant to the exercise of the Basic Subscription Rights, then such record holder
will be allocated only that number of Units for which the record holder subscribed, and the remaining Units will be allocated among all
other record holders exercising their Basic Subscription Rights on the same pro rata basis described above. The proration process will
be repeated until all Units have been allocated. Please also see the discussion under “The Rights Offering-The Subscription Rights-Over-Subscription
Privilege” and “The Rights Offering-Limitation on the Purchase of Units” for a description potential proration as to
the Over-Subscription Privilege and certain stock ownership limitations.
If
for any reason the amount of Units allocated to you is less than you have subscribed for, then the excess funds held by the Subscription
Agent on your behalf will be promptly returned to you, without interest, after the Rights Offering has expired and all prorating calculations
and reductions contemplated by the terms of the Rights Offering have been effected, and we will have no further obligations to you.
What
are the terms of the Warrants?
Each
Warrant entitles the holder to purchase one share of our common stock at an exercise price of $
per share from the date of issuance through its expiration five years from the date of issuance. The Warrants will be exercisable for
cash, or, solely during any period when a registration statement for the exercise of the Warrants is not in effect, on a cashless basis.
Are
the common stock or Warrants listed?
There
is no public trading market for the Warrants and we do not intend that they will be listed for trading on Nasdaq or any other securities
exchange or market. The Warrants will be issued in registered form under a warrant agent agreement with Direct Transfer, LLC, as warrant
agent.
Will
fractional shares be issued upon exercise of Subscription Rights or the exercise of Warrants?
No.
We will not issue fractional shares of common stock in the Rights Offering. We will only distribute Subscription Rights to acquire whole
Units, rounded down to the nearest whole number of underlying shares of common stock giving rise to such Subscription Rights.
Any excess subscription payments received by the Subscription Agent will be promptly returned after expiration of the Rights Offering,
without interest or deduction.
Additionally,
no fractional shares of common stock will be issued as a result of the exercise of Warrants. Instead, for any such fractional share that
would otherwise have been issuable upon exercise of Warrants, the Company will round up such fraction to the next whole share.
What
effect will the Rights Offering have on our outstanding common stock?
Assuming
no other transactions by us involving our capital stock prior to the expiration of the Rights Offering, and if the Rights Offering is
fully subscribed, upon consummation of the Rights Offering we will have shares of common stock issued and outstanding
and Warrants to purchase an additional shares of our common stock issued and outstanding, based
on shares of our common stock outstanding as of ,
2022. The exact number of shares of common stock and Warrants that we will issue in this offering will depend on the number of Units
that are subscribed for in the Rights Offering.
How
was the Subscription Price determined?
In
determining the Subscription Price, the directors considered, among other things, the following factors:
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the
current and historical trading prices of our common stock; |
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the
price at which stockholders might be willing to participate in the Rights Offering; |
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the
value of the Warrant being issued as a component of the Unit; |
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our
need for additional capital and liquidity; |
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the
cost of capital from other sources; and |
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comparable
precedent transactions, including the percentage of shares offered, the terms of the subscription rights being offered, the subscription
price and the discount that the subscription price represented to the immediately prevailing closing prices for those offerings. |
In
conjunction with the review of these factors, the board of directors also reviewed our history and prospects, including our past and
present earnings and cash requirements, our prospects for the future, the outlook for our industry and our current financial condition.
The board of directors also believed that the Subscription Price should be designed to provide an incentive to our current stockholders
to participate in the Rights Offering and exercise their Basic Subscription Right and their Over-Subscription Privilege.
The
Subscription Price does not necessarily bear any relationship to any established criteria for value. You should not consider the Subscription
Price as an indication of actual value of our company or our common stock. The market price of our common stock may decline during or
after the Rights Offering. You should obtain a current price quote for our common stock and perform an independent assessment of our
common stock and Warrants before exercising your Subscription Rights and make your own assessment of our business and financial condition,
our prospects for the future, the terms of the Rights Offering, the information in this prospectus and the other considerations relevant
to your circumstances. Once made, all exercises of Subscription Rights are irrevocable. In addition, there is no established trading
market for the common stock or the Warrants to be issued pursuant to this offering, and the common stock and the Warrants may not be
widely distributed.
Am
I required to exercise all of the Basic Subscription Rights I receive in the Rights Offering?
No.
You may exercise any number of your Basic Subscription Rights, or you may choose not to exercise any Basic Subscription Rights. If you
do not exercise any Basic Subscription Rights, the number of shares of our common stock you own will not change. However, if you choose
to not exercise your Basic Subscription Rights in full and other holders of Subscription Rights do exercise, your proportionate ownership
interest in our company will decrease. If you do not exercise your Basic Subscription Rights in full, you will not be entitled to exercise
your Over-Subscription Privilege.
How
soon must I act to exercise my Subscription Rights?
If
you received a Rights Certificate and elect to exercise any or all of your Subscription Rights, the Subscription Agent must receive your
completed and signed Rights Certificate and payment for both your Basic Subscription Rights and any Over-Subscription Privilege you elect
to exercise before the Rights Offering expires on , 2022, at 5:00 p.m., Eastern Time, unless we extend
or earlier terminate the Rights Offering. If you hold your shares of common stock in the name of a broker, dealer, bank
or other nominee, your nominee may establish a deadline before the expiration of the Rights Offering by which you must provide it with
your instructions to exercise your Subscription Rights, along with the required subscription payment.
May
I transfer my Subscription Rights?
No.
The Subscription Rights may be exercised only by the common stockholders to whom they are distributed, and they may not be sold, transferred,
assigned or given away to anyone else, other than by operation of law. As a result, Rights Certificates may be completed only by the
stockholder who receives the certificate. We do not intend to apply for the listing of the Subscription Rights on any securities exchange
or recognized trading market.
Will
our directors and executive officers participate in the Rights Offering?
To
the extent they hold common stock as of the Record Date, our directors and executive officers will be entitled to participate in the
Rights Offering on the same terms and conditions applicable to other Rights holders.
Are
we requiring a minimum subscription to complete the Rights Offering?
There
is no aggregate minimum we must receive to complete the Rights Offering.
Has
the board of directors made a recommendation to stockholders regarding the Rights Offering?
No.
Our board of directors is making no recommendation regarding your exercise of the Subscription Rights. Rights holders who exercise Subscription
Rights will incur investment risk on new money invested. We cannot predict the price at which our shares of common stock will trade after
the Rights Offering. On , 2022, the last reported sale price of our common stock on Nasdaq was $__________ per share. You should make
your decision based on your assessment of our business and financial condition, our prospects for the future, the terms of the Rights
Offering, the information contained in this prospectus and other considerations relevant to your circumstances. See “Risk Factors”
for discussion of some of the risks involved in investing in our securities.
How
do I exercise my Subscription Rights?
If
you are a common stockholder of record (meaning you hold your shares of our common stock in your name and not through a broker, dealer,
bank or other nominee) and you wish to participate in the Rights Offering, you must deliver a properly completed and signed Rights Certificate,
together with payment of the Subscription Price for both your Basic Subscription Rights and any Over-Subscription Privilege you elect
to exercise, to the Subscription Agent before 5:00 p.m., Eastern Time, on , 2022. If you are exercising your Subscription Rights through
your broker, dealer, bank or other nominee, you should promptly contact your broker, dealer, bank or other nominee and submit your subscription
documents and payment for the Units subscribed for in accordance with the instructions and within the time period provided by your broker,
dealer, bank or other nominee.
What
if my shares are held in “street name”?
If
you hold your shares of our common stock in the name of a broker, dealer, bank or other nominee, then your broker, dealer, bank or other
nominee is the record holder of the shares you beneficially own. The record holder must exercise the Subscription Rights on your behalf.
Therefore, you will need to have your record holder act for you.
If
you wish to participate in this Rights Offering and purchase Units, please promptly contact the record holder of your shares. We will
ask the record holder of your shares, who may be your broker, dealer, bank or other nominee, to notify you of this Rights Offering.
What
form of payment is required?
You
must timely pay the full Subscription Price for the full number of Units you wish to acquire pursuant to the exercise of Subscription
Rights by delivering to the Subscription Agent a:
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personal
check drawn on a U.S. bank; |
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certified
check drawn on a U.S. bank; |
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U.S.
Postal money order; or |
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wire
transfer. |
If
you send payment by personal uncertified check, payment will not be deemed to have been delivered to the Subscription Agent until the
check has cleared. As such, any payments made by personal check should be delivered to the Subscription Agent no fewer than three business
days prior to the expiration date.
If
you send a payment that is insufficient to purchase the number of Units you requested, or if the number of Units you requested is not
specified in the forms, the payment received will be applied to exercise your Subscription Rights to the fullest extent possible based
on the amount of the payment received.
Will
I receive interest on any funds I deposit with the Subscription Agent?
No.
You will not be entitled to any interest on any funds that are deposited with the Subscription Agent pending completion or cancellation
of the Rights Offering. If the Rights Offering is cancelled for any reason, the Subscription Agent will promptly return this money to
subscribers, without interest or penalty.
When
will I receive my new shares of common stock and Warrants?
As
soon as practicable after the expiration of the Rights Offering, and within five business days thereof, we expect to close on subscriptions
and for the Subscription Agent to arrange for the issuance of the shares of common stock and Warrants purchased in the Rights Offering.
At closing, all prorating calculations and reductions contemplated by the terms of the Rights Offering will have been effected and payment
to us for the subscribed-for Units will have cleared. All shares and Warrants that you purchase in the Rights Offering will be issued
in book-entry, or uncertificated, form meaning that you will receive a direct registration, or DRS, account statement from our transfer
agent reflecting ownership of these securities if you are a holder of record. If you hold your common stock in the name of a broker,
dealer, bank or other nominee, DTC will credit your account with your nominee with the securities you purchase in the Rights Offering.
Direct Transfer, LLC is acting as the warrant agent in this offering.
After
I send in my payment and Rights Certificate to the Subscription Agent, may I cancel my exercise of Subscription Rights?
No.
Exercises of Subscription Rights are irrevocable, even if you later learn information that you consider to be unfavorable to the exercise
of your Subscription Rights. You should not exercise your Subscription Rights unless you are certain that you wish to purchase Units
at the Subscription Price.
How
much will our company receive from the Rights Offering?
Assuming
that all Units are sold in the Rights Offering, we estimate that the net proceeds from the Rights Offering will be approximately $ million,
based on the Subscription Price of $ per Unit, after deducting fees and expenses payable to the dealer-manager, and after deducting other
estimated expenses payable by us and excluding any proceeds received upon exercise of any Warrants. If all Warrants included in the Units
are exercised for cash at the exercise price of $ per share, we will receive an additional $ million. We intend to use the net proceeds
for general corporate purposes and to fund ongoing operations and expansion of our business. See “Use of Proceeds.”
Are
there risks in exercising my Subscription Rights?
Yes.
The exercise of your Subscription Rights involves risks. Exercising your Subscription Rights involves the purchase of shares of our common
stock and Warrants to purchase common stock and you should consider this investment as carefully as you would consider any other investment.
In addition, we do not intend for our Warrants to be listed on Nasdaq and a market for the Warrants does not exist. See “Risk Factors”
for discussion of additional risks involved in investing in our securities.
Can
the board of directors terminate, extend or amend the Rights Offering?
Yes.
Our board of directors may decide to terminate the Rights Offering at any time and for any reason before the expiration of the Rights
Offering. We also have the right to extend the Rights Offering for additional periods in our sole discretion for up to an additional
45 days. We do not presently intend to extend the Rights Offering. We will notify stockholders and the public if the Rights Offering
is terminated or extended by issuing a press release announcing the extension no later than 9:00 a.m., Eastern Time, on the next business
day after the most recently announced expiration date of the Rights Offering. In the event that we decide to extend the Rights Offering
and you have already exercised your Subscription Rights, your subscription payment will remain with the Subscription Agent until such
time as the Rights Offering closes or is terminated.
Our
board of directors also reserves the right to amend or modify the terms of the Rights Offering in its sole discretion. If we should make
any fundamental changes to the terms of the Rights Offering set forth in this prospectus, we will file a post-effective amendment to
the registration statement in which this prospectus is included, offer potential purchasers who have subscribed for rights the opportunity
to cancel such subscriptions and issue a refund of any money advanced by such stockholder and recirculate an updated prospectus after
the post-effective amendment is declared effective by the SEC. In addition, upon such event, we may extend the Expiration Date of the
Rights Offering to allow holders of rights ample time to make new investment decisions and for us to recirculate updated documentation.
Promptly following any such occurrence, we will issue a press release announcing any changes with respect to the Rights Offering and
the new expiration date. The terms of the Rights Offering cannot be modified or amended after the Expiration Date of the Rights Offering.
Although we do not presently intend to do so, we may choose to amend or modify the terms of the Rights Offering for any reason, including,
without limitation, in order to increase participation in the Rights Offering. Such amendments or modifications which are not fundamental
changes to the terms of the Rights Offering, may include a change in the subscription price, a reduction to the exercise price of the
Warrants, or an increase to the number of Warrant issuable upon exercise of a subscription right, although no such change is presently
contemplated.
If
the Rights Offering is not completed or is terminated, will my subscription payment be refunded to me?
Yes.
The Subscription Agent will hold all funds it receives in a segregated bank account until completion of the Rights Offering. If we do
not complete the Rights Offering, all subscription payments received by the Subscription Agent will be promptly returned after the termination
or expiration of the Rights Offering, without interest or deduction. If you own shares in “street name,” it may take longer
for you to receive your subscription payment because the Subscription Agent will return payments through the record holder of your shares.
How
do I exercise my Rights if I live outside the United States?
The
Subscription Agent will hold Rights Certificates for stockholders having addresses outside the United States. To exercise Subscription
Rights, foreign stockholders must notify the Subscription Agent and timely follow other procedures described in the section entitled
“The Rights Offering – Foreign Stockholders.”
What
fees or charges apply if I purchase shares in the Rights Offering?
We
are not charging any fee or sales commission to issue Subscription Rights to you or to issue shares of common stock or Warrants to you
if you exercise your Subscription Rights. If you exercise your Subscription Rights through a broker, dealer, bank or other nominee, you
are responsible for paying any fees your broker, dealer, bank or other nominee may charge you.
What
are the U.S. federal income tax consequences of receiving and/or exercising my Subscription Rights?
For
U.S. federal income tax purposes, we do not believe you should recognize income or loss in connection with the receipt or exercise of
Subscription Rights in the Rights Offering, but the receipt and exercise of the Subscription Rights is unclear in certain respects. You
should consult your tax advisor as to your tax consequences resulting from the receipt and exercise of Subscription Rights, including
the receipt, ownership and disposition of our common stock, Warrants, and common stock received upon the exercise of Warrants. For further
information, see “U.S Federal Income Tax Considerations.”
To
whom should I send my forms and payment?
If
your shares are held in the name of a broker, dealer, bank or other nominee, then you should send your subscription documents and subscription
payment to that broker, dealer, bank or other nominee. If you are the record holder, then you should send your subscription documents,
Rights Certificate, and subscription payment to the Subscription Agent by hand delivery, first class mail or courier service to:
By
Registered Certified or Express Mail |
By
Overnight Courier |
Direct
Transfer, LLC |
Direct
Transfer, LLC |
One
Glenwood Avenue, Suite 1001
Raleigh,
NC, 27603 |
One
Glenwood Avenue, Suite 1001
Raleigh,
NC, 27603 |
You
or, if applicable, your nominee are solely responsible for completing delivery to the Subscription Agent of your subscription documents,
Rights Certificate and payment. You should allow sufficient time for delivery of your subscription materials to the Subscription Agent
and clearance of payment before the expiration of the Rights Offering at 5:00 p.m. Eastern Time on , 2022.
Whom
should I contact if I have other questions?
If
you have other questions or need assistance, please contact the Information Agent: _________, toll free at __________, or by mail at
_________________.
Who
is the dealer-manager?
The
Benchmark Company LLC is acting as the dealer-manager for the Rights Offering. Under the terms and subject to the conditions contained
in the dealer-manager agreement, the dealer-manager will use its best efforts to solicit the exercise of Subscription Rights. We have
agreed to pay the dealer-manager certain fees for acting as dealer-manager and to reimburse the dealer-manager for certain out-of-pocket
expenses incurred in connection with this offering. The dealer-manager is not underwriting or placing any of the Subscription Rights
or the shares of our common stock or Warrants being issued in the Rights Offering and is not making any recommendation with respect to
such Subscription Rights (including with respect to the exercise or expiration of such Subscription Rights), shares of common stock or
Warrants.
RISK
FACTORS
An
investment in our securities involves a high degree of risk. 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 securities could decline and you may lose some or all of your investment.
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 entitled “Cautionary Note Regarding Forward-Looking Statements.”
Risks
Related to the Rights Offering
Our
management will have broad discretion over the use of the net proceeds from this offering, you may not agree with how we use the proceeds
and the proceeds may not be invested successfully.
Our
management will have broad discretion as to the use of the net proceeds from this offering and could use them for purposes other than
those contemplated at the time of commencement of this offering. Accordingly, you will be relying on the judgment of our management regarding
the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds
are being used appropriately. It is possible that, pending their use, we may invest the net proceeds in a way that does not yield a favorable,
or any, return for us. The failure of our management to use such funds effectively could have a material adverse effect on our business,
financial condition, operating results and cash flows.
Your
interest in us may be diluted as a result of this Rights Offering.
Holders
of our common stock and July 2021 Warrants who do not fully exercise their Subscription Rights should expect that they will, at the completion
of this offering, own a smaller proportional interest in us on a fully-diluted basis than would otherwise be the case had they fully
exercised their Subscription Rights. Further, the shares issuable upon the exercise of the Warrants to be issued pursuant to the Rights
Offering will dilute the ownership interest of stockholders and July 2021 warrantholders not participating in this offering or holders
of Warrants who have not exercised them.
Further,
if you purchase Units in this offering at the Subscription Price, you may suffer immediate and substantial dilution in the net tangible
book value of our common stock. See “Dilution” in this prospectus for a more detailed discussion of the dilution which may
incur in connection with this offering.
Completion
of the Rights Offering is not subject to us raising a minimum offering amount.
Completion
of the Rights Offering is not subject to us raising a minimum offering amount and, therefore, proceeds may be insufficient to meet our
objectives, thereby increasing the risk to investors in this offering, including investing in a company that continues to require capital.
See “Use of Proceeds.”
This
Rights Offering may cause the trading price of our common stock to decrease.
The
Subscription Price, together with the number of shares of common stock issuable upon exercise of the Warrants we propose to issue and
ultimately will issue if this Rights Offering is completed, may result in an immediate decrease in the market price of our common stock.
This decrease may continue after the completion of this Rights Offering. If that occurs, you may have committed to buy shares of our
common stock at a price greater than the prevailing market price. We cannot predict the effect, if any, that the availability of shares
for future sale represented by the Warrants issued in connection with the Rights Offering will have on the market price of our common
stock from time to time. Further, if a substantial number of Subscription Rights are exercised and the holders of the shares received
upon exercise of those Subscription Rights or the related Warrants choose to sell some or all of the shares underlying the Subscription
Rights or the related Warrants, the resulting sales could depress the market price of our common stock.
Holders
of the Warrants will have no rights as a common stockholder until such holders exercise their Warrants and acquire our common stock.
Until
holders of the Warrants acquire shares of our common stock upon exercise of the Warrants, holders of such securities will have no rights
with respect to the shares of our common stock underlying such Warrants. Upon exercise of the Warrants, the holders thereof will be entitled
to exercise the rights of a common stockholder only as to matters for which the record date occurs after the exercise date.
If
we terminate the Rights Offering for any reason, we will have no obligation other than to promptly return subscription monies.
We
may decide, in our sole discretion and for any reason, to cancel or terminate the Rights Offering at any time prior to the expiration
date. If this offering is cancelled or terminated, we will have no obligation with respect to Subscription Rights that have been exercised
except to promptly return, without interest or deduction, all subscription payments deposited with the Subscription Agent. If we terminate
this offering and you have not exercised any Subscription Rights, such Subscription Rights will expire and be worthless.
The
Subscription Price determined for this offering is not an indication of the fair value of our common stock.
In
determining the Subscription Price, our board of directors considered a number of factors, including, but not limited to, our need to
raise capital in the near term to continue our operations, the current and historical trading prices of our common stock, a price that
would increase the likelihood of participation in the Rights Offering, the cost of capital from other sources, the value of the Warrants
being issued as components of the Unit, and comparable precedent transactions. The Subscription Price does not necessarily bear any relationship
to any established criteria for value. No valuation consultant or investment banker has opined upon the fairness or adequacy of the Subscription
Price. You should not consider the Subscription Price as an indication of our value or the value of our common stock.
If
you do not act on a timely basis and follow subscription instructions, your exercise of Subscription Rights may be rejected.
Holders
of Subscription Rights who desire to purchase shares of our common stock and Warrants in this offering must act on a timely basis to
ensure that all required forms and payments are actually received by the Subscription Agent prior to 5:00 p.m., New York City time, on
the expiration date, unless extended. If you are a beneficial owner of shares of common stock and/or July 2021 Warrants and you wish
to exercise your Subscription Rights, you must act promptly to ensure that your broker, dealer, bank, trustee or other nominee acts for
you and that all required forms and payments are actually received by your broker, dealer, bank, trustee or other nominee in sufficient
time to deliver such forms and payments to the Subscription Agent to exercise the Subscription Rights granted in this offering that you
beneficially own prior to 5:00 p.m., New York City time on the expiration date, as may be extended. We will not be responsible if your
broker, dealer, bank, trustee or other nominee fails to ensure that all required forms and payments are received by the Subscription
Agent prior to 5:00 p.m., New York City time, on the expiration date.
If
you fail to complete and sign the required subscription forms, send an incorrect payment amount, or otherwise fail to follow the subscription
procedures that apply to your exercise in this Rights Offering, the Subscription Agent may, depending on the circumstances, reject your
subscription or accept it only to the extent of the payment received. Neither we nor the Subscription Agent undertakes to contact you
concerning an incomplete or incorrect subscription form or payment, nor are we under any obligation to correct such forms or payment.
We have the sole discretion to determine whether a subscription exercise properly follows the subscription procedures.
You
may not receive all of the Units for which you subscribe.
While
we are distributing to holders of our common stock and July 2021 Warrants one Subscription Right for every share of common stock and
July 2021 Warrant owned on the Record Date, we are only seeking to raise $ million
dollars in gross proceeds in this Rights Offering. As a result, based on shares of common
stock outstanding as of and July 2021 Warrants
outstanding as of , 2022, we would grant Subscription Rights to acquire
Units but will only accept subscriptions for Units. Accordingly, enough Units
may not be available to honor your subscription in full. If excess Units are available after the exercise of Basic Subscription Rights,
holders who fully exercise their Basic Subscription Rights will be entitled to subscribe for an additional number of Units. Over-Subscription
Privileges will be allocated pro rata among Rights holders who over-subscribed, based on the number of over-subscription Units to which
they have subscribed. We cannot guarantee that you will receive any or the entire number of Units for which you subscribed. If for any
reason the amount of Units allocated to you is less than you have subscribed for, then the excess funds held by the Subscription Agent
on your behalf will be promptly returned to you, without interest, after the Rights Offering has expired and all prorating calculations
and reductions contemplated by the terms of the Rights Offering have been effected, and we will have no further obligations to you.
Unless
we otherwise agree in writing, a person or entity, together with related persons or entities, may not exercise Subscription Rights (including
Over-Subscription Privileges) to purchase Units that, when aggregated with their existing ownership, would result in such person or entity,
together with any related persons or entities, owning in excess of 19.99% of our issued and outstanding shares of common stock following
the closing of the transactions contemplated by this Rights Offering. If the amount of shares allocated to you is less than your subscription
request, then the excess funds held by the Subscription Agent on your behalf will be promptly returned to you, without interest, after
the Rights Offering has expired and all prorating calculations and reductions contemplated by the terms of the Rights Offering have been
effected, and we will have no further obligations to you. In addition, our charter restricts ownership by a 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. See “Description of Capital Stock—Restrictions
on Ownership and Transfer.”
If
you make payment of the Subscription Price by personal check, your check may not clear in sufficient time to enable you to purchase shares
in this Rights Offering.
Any
personal check used to pay for shares and Warrants to be issued in this Rights Offering must clear prior to the expiration date of this
Rights Offering, and the clearing process may require five or more business days. If you choose to exercise your Subscription Rights,
in whole or in part, and to pay for shares and Warrants by personal check and your check has not cleared prior to the expiration date
of this Rights Offering, you will not have satisfied the conditions to exercise your Subscription Rights and will not receive the shares
and Warrants you wish to purchase.
The
receipt of Subscription Rights may be treated as a taxable distribution to you.
We
believe the distribution of the Subscription Rights in this Rights Offering should be a non-taxable distribution to holders of shares
of common stock and July 2021 Warrants under Section 305(a) of the Internal Revenue Code of 1986, as amended, or the Code. Please see
the discussion on the “U.S. Federal Income Tax Considerations” below. This position is not binding on the IRS, or the courts,
however. If this Rights Offering is deemed to be part of a “disproportionate distribution” under Section 305 of the Code,
your receipt of Subscription Rights in this offering may be treated as the receipt of a taxable distribution to you equal to the fair
market value of the Subscription Rights. Any such distribution would be treated as dividend income to the extent of our current and accumulated
earnings and profits, if any, with any excess being treated as a return of capital to the extent thereof and then as capital gain. Each
holder of shares of common stock and/or July 2021 Warrants is urged to consult his, her or its tax advisor with respect to the particular
tax consequences of this Rights Offering.
Exercising
the Subscription Rights limits your ability to engage in certain hedging transactions that could provide you with financial benefits.
By
exercising the Subscription Rights, you are representing to us that you have not entered into any short sale or similar transaction with
respect to our common stock since the Record Date for the Rights Offering. In addition, the Subscription Rights provide that, upon exercise
of the Subscription Right, you agree not to enter into any short sale or similar transaction with respect to our common stock for so
long as you continue to hold Warrants issued in connection with the exercise of the Subscription Right. These requirements prevent you
from pursuing certain investment strategies that could provide you greater financial benefits than you might have realized if the Subscription
Rights did not contain these requirements.
The
Subscription Rights are not transferable, and there is no market for the Subscription Rights.
You
may not sell, transfer, assign or give away your Subscription Rights. Because the Subscription Rights are non-transferable, there is
no market or other means for you to directly realize any value associated with the Subscription Rights. You must exercise the Subscription
Rights to realize any potential value from your Subscription Rights.
Absence
of a public trading market for the Warrants may limit your ability to resell the Warrants.
There
is no established trading market for the Warrants to be issued pursuant to this offering, and we do not intend that they will be listed
for trading on Nasdaq or any other securities exchange or market, and the Warrants may not be widely distributed. Purchasers of the Warrants
may be unable to resell the Warrants or sell them only at an unfavorable price for an extended period of time, if at all.
The
market price of our common stock may never exceed the exercise price of the Warrants issued in connection with this offering.
The
Warrants being issued in connection with this offering become exercisable upon issuance and will expire five years from the date of issuance.
The market price of our common stock may never exceed the exercise price of the Warrants prior to their date of expiration. Any Warrants
not exercised by their date of expiration will expire worthless and we will be under no further obligation to the Warrant holder.
The
Warrants contain features that may reduce your economic benefit from owning them.
The
Warrants contain features that prohibit you from engaging in certain investment strategies. For so long as you continue to hold Warrants,
you will not be permitted to enter into any short sale or similar transaction with respect to our common stock. This could prevent you
from pursuing investment strategies that could provide you greater financial benefits from owning the Warrants.
The
dealer-manager is not underwriting this offering, but may act as a placement agent of the Units underlying the Subscription Rights.
If
the Rights Offering is not fully subscribed following expiration of the Rights Offering, The Benchmark Company LLC, as the dealer-manager
for this Rights Offering, has agreed to use its commercially reasonable efforts to place any unsubscribed Units at the Subscription Price
for an additional period of up to 45 days. The number of Units that may be sold by us during this period will depend upon the number
of Units that are subscribed for pursuant to the exercise of Subscription Rights by our stockholders and July 2021 warrantholders. No
assurance can be given that any unsubscribed Units will be sold during this period. The Benchmark Company LLC is not an underwriter of
the Subscription Rights or the Units issuable upon exercise of the Basic Subscription Rights or Over-Subscription Privilege. Under our
agreement with the dealer-manager, The Benchmark Company LLC is providing marketing assistance and advice to us in connection with this
Rights Offering. Its services to us in this connection cannot be construed as any assurance that this Rights Offering will be successful.
Since
the Warrants are executory contracts, they may have no value in a bankruptcy or reorganization proceeding.
In
the event a bankruptcy or reorganization proceeding is commenced by or against us, a bankruptcy court may hold that any unexercised Warrants
are executory contracts that are subject to rejection by us with the approval of the bankruptcy court. As a result, holders of the Warrants
may, even if we have sufficient funds, not be entitled to receive any consideration for their Warrants or may receive an amount less
than they would be entitled to if they had exercised their Warrants prior to the commencement of any such bankruptcy or reorganization
proceeding.
We
may amend or modify the terms of the Rights Offering at any time prior to the expiration of the Rights Offering in our sole discretion.
Our
board of directors reserves the right to amend or modify the terms of the Rights Offering in its sole discretion. If we should make any
fundamental changes to the terms of the Rights Offering set forth in this prospectus, we will file a post-effective amendment to the
registration statement in which this prospectus is included, offer potential purchasers who have subscribed for rights the opportunity
to cancel such subscriptions and issue a refund of any money advanced by such stockholder and recirculate an updated prospectus after
the post-effective amendment is declared effective by the SEC. In addition, upon such event, we may extend the Expiration Date of the
Rights Offering to allow holders of rights ample time to make new investment decisions and for us to recirculate updated documentation.
Promptly following any such occurrence, we will issue a press release announcing any changes with respect to the Rights Offering and
the new expiration date. The terms of the Rights Offering cannot be modified or amended after the Expiration Date of the Rights Offering.
Although we do not presently intend to do so, we may choose to amend or modify the terms of the Rights Offering for any reason, including,
without limitation, in order to increase participation in the Rights Offering. Such amendments or modifications, which are not fundamental
changes to the terms of the Rights Offering, may include a change in the subscription price, a reduction to the exercise price of the
Warrants, or an increase to the number of Warrant issuable upon exercise of a subscription right, although no such change is presently
contemplated. We may also terminate the Rights Offering
Risks
Related to our Business, Properties and Operations
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:
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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; |
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fluctuations
in interest rates, including anticipated interest rate increases in 2022, 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; |
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the
inability of tenants to pay rent; |
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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; |
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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; |
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weather
conditions that may increase or decrease energy costs and other weather-related expenses; |
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oversupply
of commercial space or a reduction in demand for real estate in the markets in which our properties are located; |
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changes
in, or increased costs of compliance with, laws and/or governmental regulations, including those governing usage, zoning, the environment
and taxes; and |
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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 the following risk factors. Any or all of these factors could materially
adversely affect our results of operations through decreased revenues or increased costs.
Inflation
may materially and adversely affect our income, cash flow, results of operations, financial condition, liquidity, the ability to service
our debt obligations, the market price of our securities and our ability to pay dividends and other distributions to our stockholders.
Increased
inflation could have a pronounced negative impact on our property operating expenses and general and administrative expenses, as these
costs could increase at a rate higher than our rents. While our tenants are generally obligated to pay property-level expenses relating
to the properties they lease from us (e.g., maintenance, insurance and property taxes), we incur other expenses, such as general and
administrative expense, interest expense relating to our debt (some of which bears interest at floating rates) and carrying costs for
vacant properties. These expenses would increase in an inflationary environment, and such increases may exceed any increase in revenue
we receive under our leases. Inflation could also have an adverse effect on consumer spending which could impact our tenants’ revenues
and, in turn, our percentage rents, where applicable, and the willingness and ability of tenants to enter into or renew leases and/or
honor their obligations under existing leases. Additionally, increased inflation may have an adverse impact on our tenants if increases
in their operating expenses exceed increases in their revenue, which may adversely affect the tenants’ ability to pay rent owed
to us and meet other lease obligations, such as paying property taxes and insurance and maintenance costs.
Recent
inflationary pressures could result in higher interest rates, which would have a negative impact on our business.
Rising
inflation and elevated U.S. budget deficits and overall debt levels, including as a result of federal pandemic relief and stimulus legislation
and/or economic or market and supply chain conditions, can put upward pressure on interest rates and could be among the factors that
could lead to higher interest rates in the future. Higher interest rates could adversely affect our overall business, income, and our
ability to pay dividends, including by reducing the fair value of many of our assets and adversely affecting our ability to obtain financing
on favorable terms or at all, and negatively impacting the value of properties and the ability of prospective buyers to obtain financing
for properties we intend to sell. This may affect our earnings results, reduce our ability to sell our assets, or reduce our liquidity.
Furthermore, our business and financial results may be harmed by our inability to accurately anticipate developments associated with
changes in, or the outlook for, interest rates.
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. Concerns over economic recession, the COVID-19
pandemic, interest rate increases, policy priorities of the U.S. presidential administration, trade wars, labor shortages, or inflation
may contribute to increased volatility and diminished expectations for the economy and markets. Additionally, concern over geopolitical
issues may also contribute to prolonged market volatility and instability. For example, the conflict between Russia and Ukraine has led
to disruption, instability and volatility in global markets and industries. The U.S. government and other governments in jurisdictions
have imposed severe economic sanctions and export controls against Russia and Russian interests, have removed Russia from the SWIFT system,
and have threatened additional sanctions and controls. The impact of these measures, as well as potential responses to them by Russia,
is unknown. 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 would 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.
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.
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) 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.
As
a result of the effects of the COVID-19 pandemic, we have been and may continue to be impacted by one or more of the following:
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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; |
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a
complete or partial closure of one or more of our properties resulting from government or tenant action (since Q1, 2021, all of our
commercial properties were reopened); |
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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; |
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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; |
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the
inability to decrease certain fixed expenses at our properties despite decreased operations at such properties; |
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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; |
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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 us in such markets; |
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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; |
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the
financial impact of the COVID-19 pandemic could negatively impact our future compliance with financial covenants of debt agreements; |
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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; |
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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; |
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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; |
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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; |
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our
insurance may not cover loss of revenue or other expenses resulting from the pandemic and related shelter-in-place rules; |
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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; |
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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; |
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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 |
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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.
Our
portfolio of marketable securities, including covered call options, is subject to market, interest and credit risk that may reduce its
value.
We
maintain a portfolio of marketable securities. As of December 31, 2021, we owned common shares of 19 different publicly traded REITs
and an immaterial amount of covered call options in 10 of those same REITs. The gross fair market value on our publicly traded REIT securities
was $1,522,137, with covered call options totaling $2,254. As of December 31, 2021, the net fair value of our publicly traded REIT securities
was $1,514,483 based on the December 31, 2021 closing prices. Changes in the value of our portfolio of marketable securities could
adversely affect our earnings. In particular, the value of our investments may decline due to increases in interest rates, downgrades
of the securities included in our portfolio, instability in the global financial markets that reduces the liquidity of securities included
in our portfolio, declines in the value of collateral underlying the securities included in our portfolio and other factors. In addition,
the COVID-19 pandemic, geopolitical instability and rising inflation have and may continue to adversely affect the financial markets.
Each of these events may cause us to record charges to reduce the carrying value of our investment portfolio or sell investments for
less than our acquisition cost. Although we attempt to mitigate these risks through diversification of our investments and continuous
monitoring of our portfolio’s overall risk profile, the value of our investments may nevertheless decline.
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 December 31, 2021, we received 8.0% 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.
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.
We
may be adversely affected by trends in office real estate.
In
2021, approximately 59% of our net operating income was 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 properties “as 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.
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 California, Colorado, Maryland, North Dakota and Texas. Our model home portfolio consists
of properties currently located in four states, although a significant concentration of our model homes are located in Texas. As of December
31, 2021, approximately 96% 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.
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.
Even
if this offering is fully subscribed, 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. Additionally, we consummated
a preferred stock financing in June 2021 and in July 2021 completed a public offering of common stock and concurrent private placement
of warrants. 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.
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 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 out of funds legally available therefor, 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 common 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, Adam Sragovicz,
our Chief Financial Officer, and Gary Katz, our Chief Investment Officer, 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.
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 most of 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, 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, including due to our sponsorship of the Murphy Canyon SPAC,
our stockholders’ investment return may be reduced.
We
are not registered as an investment company under the Investment Company Act of 1940, based on exceptions we believe are available to
us. Our investment in the Murphy Canyon SPAC discussed above could give rise to a determination that we are an investment company subject
to registration under the Investment Company Act. We intend to conduct our operations so that we will not be deemed to be an investment
company. The SPAC IPO registration statement and related prospectus includes an exception permitting us to transfer our ownership in
the founder shares at any time to the extent that we determine, in good faith, that such transfer is necessary to ensure that we comply
with the Investment Company Act.
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 us 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 common stock, including:
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“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 |
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“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 our directors. |
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 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 common stock might
receive a premium for their shares over the then current market price of our 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:
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actual
receipt of an improper benefit or profit in money, property or services; or |
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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. |
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 us, 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 interests 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.
In
early 2022, the United States Federal Reserve indicated its intention of raising interest rates multiple times over the course of the
year and beyond. An increase in the federal funds effective rate could cause an increase in rates related to lending for commercial real
estate, which could have a material adverse effect on our business, including our ability to pay distributions. Further, the midterm
elections in 2022 could cause a change in control of the legislative branch of the 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.
We
will lose our entire investment in Murphy Canyon if it does not complete its IBC and our officers may have a conflict of interest in
determining whether a particular business combination target is appropriate for Murphy Canyon.
We
purchased, through the Sponsor, founder shares in Murphy Canyon for an aggregate purchase price of $25,000. In connection with Murphy
Canyon’s IPO, we purchased, through the Sponsor, 754,000 private placement units at a price of $10.00 per unit, for an aggregate
purchase price of $7,540,000. We currently own approximately 23.49% of Murphy Canyon’s outstanding shares. The founder shares and
private placement units will be worthless if Murphy Canyon does not complete an IBC. In addition, the Sponsor may provide loans to Murphy
Canyon. The interests of our officers and directors who also serve as officers and directors of Murphy Canyon may influence their motivation
in identifying and selecting a target business combination, completing an initial business combination and influencing the operation
of the business following Murphy Canyon’s IBC.
Our
officers, including our Chairman, Chief Executive Officer and President, Mr. Heilbron, will allocate some of their time to Murphy Canyon,
thereby causing potential conflicts of interest in their determination as to how much time to devote to our affairs. This potential conflict
of interest could have a negative impact on our operations.
Mr.
Heilbron, our Chairman, Chief Executive Officer and President, Mr. Sragovicz, our Chief Financial Officer, and Mr. Bentzen, our Chief
Accounting Officer, also serve in these positions for Murphy Canyon, and Mr. Heilbron and Mr. Sragovicz additionally serve as directors
of Murphy Canyon. These officers may not commit their full time to our affairs, which may result in a conflict of interest in allocating
their time between our operations and Murphy Canyon’s operations. These officers are engaged in Murphy Canyon and are not obligated
to contribute any specific number of hours per week to our affairs. While we do not believe that the time devoted to the SPAC will undermine
their ability to fulfill their duties to us, if the business affairs of Murphy Canyon require them to devote substantial amounts of time
to such affairs, it could limit their ability to devote time to our affairs which may have a negative impact on our operations.
A
conflict of interest may arise if we seek to acquire an entity that is also a target for an initial business combination with Murphy
Canyon.
Murphy
Canyon is also seeking to acquire a company engaged in the real estate business, and is not formally constrained in any way from pursuing
acquisitions or business combinations that could be suitable transactions for us. We do not believe it is likely that Murphy Canyon will
compete against us for suitable acquisition targets based upon Murphy Canyon’s current business model. Nevertheless, it is possible
that a potential transaction could arise that would be suitable for both us and Murphy Canyon, giving rise to a conflict of interest.
If such a circumstance were to occur, we anticipate that the board of directors would recuse any conflicted members of our management
from taking any role in the consideration of such a transaction and, to the extent necessary, retain appropriately qualified, non-conflicted
personnel to advise us.
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 December 31, 2021 was approximately $88.9 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:
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it more difficult for us to satisfy our obligations; |
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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; |
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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; |
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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; |
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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; |
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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; |
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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 |
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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 December
31, 2021, excluding our model home properties, we had a total of approximately $92.7 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 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 December 31, 2021, excluding our model homes business, we have one mortgage that requires a balloon payment in 2022. 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.
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:
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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. |
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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. |
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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. |
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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. |
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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. |
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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 arm’s 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.
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 herein. 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 in “prohibited transactions” may 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.
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.
Risks
Related to our Common Stock
We
could be prevented from paying cash dividends on the common stock due to prescribed legal requirements.
Holders
of shares of common stock will not receive dividends on such shares unless authorized by our Board of Directors and declared by us. Furthermore,
no dividends on 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 common stock may be negatively impacted. Our business may not generate sufficient cash flow
from operations to enable us to pay dividends on the common stock when payable. Further, even if we meet the applicable solvency tests
under Maryland law to pay cash dividends on the common stock described above, we may not have sufficient cash to pay dividends on the
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 common stock.
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.
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 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.
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.
USE
OF PROCEEDS
Assuming
that all Units are subscribed for in the Rights Offering, we estimate that the net proceeds from the Rights Offering will be approximately
$ million, after deducting expenses relating to this offering payable by us estimated at approximately $ million, including the dealer-manager
and cash management fees and out-of-pocket expenses, and excluding any proceeds received upon exercise of any Warrants.
We
intend to use the net proceeds for general corporate and working capital purposes, including potential acquisitions of additional properties.
DILUTION
Purchasers
of Units in the Rights Offering will experience an immediate dilution of the net tangible book value per share of our common stock. Our
net tangible book value as of December 31, 2021 was approximately $49.1 million or $4.24 per share of our common stock (based upon 11.6
million shares of our common stock outstanding as of that date). Net tangible book value per share is equal to our total tangible assets
less our total liabilities, divided by the number of shares of our outstanding common stock.
Dilution
per share of common stock equals the difference between the amount paid by purchasers of Units in the Rights Offering (ascribing no value
to the Warrants contained in the Units) and the net tangible book value per share of our common stock immediately after the Rights Offering.
Based
on the sale by us in this Rights Offering of a maximum of Units at the Subscription Price of $ per Unit (assuming no exercise of the
Warrants), and after deducting estimated offering expenses and dealer-manager fees and expenses payable by us, our pro forma net tangible
book value as of December 31, 2021 would have been approximately $ million, or $ per share. This represents an immediate increase in
pro forma net tangible book value to existing stockholders of $ per share and an immediate dilution to purchasers in the Rights Offering
of $ per share. The following table illustrates this per-share dilution:
Subscription Price | |
$ | | |
Net tangible book value per share as of December 31, 2021 | |
$ | 4.24 | |
Increase in net tangible book value per share attributable to Rights Offering | |
$ | | |
Pro forma net tangible book value per share as of December 31, 2021, after giving effect to Rights Offering | |
$ | | |
Dilution in net tangible book value per share to purchasers in the Rights Offering | |
$ | | |
The
information above is as of December 31, 2021 and excludes:
● 2,000,000 shares of common stock issuable upon the exercise of common stock warrants;
● 80,000 shares of common stock issuable upon the exercise of placement agent warrants;
● 14,450,069 shares of common
stock issuable upon the exercise of Series A warrants; and 295,471 shares of common stock reserved for future issuance under our
equity incentive plans.
THE
RIGHTS OFFERING
The
Subscription Rights
We
are distributing to the record holders of our common stock and July 2021 Warrants, at no charge, non-transferable Subscription Rights
to purchase one Unit at a Subscription Price of $ per Unit. Each Basic Subscription Right will entitle you to purchase one
share of our common stock and Warrants. Each Warrant will be exercisable for one share of our common stock at an exercise price of $
per share from the date of issuance through the expiration five years from the date of issuance. Each record holder of our common stock
and July 2021 Warrants will receive one Subscription Right for every share of our common stock and each July 2021 Warrant owned
by such record holder as of the Record Date. Each Subscription Right entitles the record holder to a Basic Subscription Right and an
Over-Subscription Privilege.
Basic
Subscription Rights
Your
Basic Subscription Rights will entitle you to purchase Units, each comprised of one share of our common stock and Warrants. For example,
if you owned 100 shares of common stock as of the Record Date, you will receive 100 Subscription Rights and will have the right
to purchase 100 shares of our common stock and Warrants to purchase shares of our common stock for $ per Unit, or a total payment of
$ . You may exercise all or a portion of your Basic Subscription Rights, or you may choose not to exercise any of your Basic Subscription
Rights. If you do not exercise your Basic Subscription Rights in full, you will not be entitled to exercise your Over-Subscription Privilege.
Additionally,
sufficient Units may not be available to honor your Basic Subscription Right in full. While we are distributing one Subscription Right
for every share of common stock and each July 2021 Warrant owned or deemed owned on the record date, we are only seeking to raise $ million
in gross proceeds in this Rights Offering. As a result, based on shares of common stock outstanding as of , 2022 and July 2021 Warrants
outstanding as of , 2022, we would grant Subscription Rights to acquire Units but will only accept subscriptions for Units.
If
exercises of Basic Subscription Rights exceed the number of Units available in the Rights Offering, we will allocate the available Units
pro-rata among the record holders exercising the Basic Subscription Rights in proportion to the number of shares of our common stock
and/or July 2021 Warrants each of those record holders owned or were deemed to own on the Record Date, relative to the number of shares
and July 2021 Warrants owned or deemed owned on the record date by all record holders exercising the Basic Subscription Right. If this
pro-rata allocation results in any record holders receiving a greater number of Units than the record holder subscribed for pursuant
to the exercise of the Basic Subscription Rights, then such record holder will be allocated only that number of Units for which the record
holder subscribed, and the remaining Units will be allocated among all other record holders exercising their Basic Subscription Rights
on the same pro rata basis described above. The proration process will be repeated until all shares have been allocated.
If
for any reason the amount of Units allocated to you is less than you have subscribed for, then the excess funds held by the Subscription
Agent on your behalf will be promptly returned to you, without interest, after the Rights Offering has expired and all prorating calculations
and reductions contemplated by the terms of the Rights Offering have been effected, and we will have no further obligations to you.
Over-Subscription
Privilege
If
you exercise your Basic Subscription Rights in full, you may also choose to exercise your Over-Subscription Privilege. To properly exercise
your Over-Subscription Privilege, you must deliver the subscription payment related to your Over-Subscription Privilege before the Rights
Offering expires. Subject to proration and the limitations described in this prospectus, we will seek to honor the Over-Subscription
Requests in full. If Over-Subscription Requests exceed the number of Units available, however, we will allocate the available Units pro
rata among the common stockholders and holders of July 2021 Warrants as of the Record Date exercising the Over-Subscription Privilege
in proportion to the product (rounded down to the nearest whole number so that the aggregate number of Units does not exceed the aggregate
number offered) obtained by multiplying the number of Units such stockholder or warrantholder subscribed for pursuant to the Over-Subscription
Privilege by a fraction (A) the numerator of which is the number of unsubscribed Units and (B) the denominator of which is the total
number of Units sought to be subscribed for pursuant to the Over-Subscription Privilege by all holders participating in such over-subscription
.
Direct
Transfer, LLC, the Subscription Agent for the Rights Offering, will determine the over-subscription allocation based on the formula described
above, and will notify Subscription Rights holders of the number of Units allocated to each holder exercising the Over-Subscription Privilege
as promptly as may be practicable after the allocations are completed.
To
the extent the aggregate subscription payment of the actual number of unsubscribed Units available to you pursuant to the Over-Subscription
Privilege is less than the amount you actually paid in connection with the exercise of the Over-Subscription Privilege, you will be allocated
only the number of unsubscribed Units available to you, and any excess subscription payments will be promptly returned to you, without
interest or deduction, after expiration of the Rights Offering.
We
can provide no assurances that you will be entitled to purchase the number of Units issuable upon the exercise of your Over- Subscription
Privilege in full at the expiration of the Rights Offering. We will not be able to satisfy any requests for Units pursuant to the Over-Subscription
Privilege if all of our stockholders and holders of July 2021 Warrants exercise their Basic Subscription Rights in full, and we will
only honor an Over-Subscription Privilege to the extent sufficient Units are available following the exercise of Basic Subscription Rights.
Limitation
on the Purchase of Units
You
may only purchase the number of Units purchasable upon exercise of the number of Basic Subscription Rights distributed to you in the
Rights Offering, plus the Over-Subscription Privilege, if any. Accordingly, the number of Units that you may purchase in the Rights Offering
is limited by the number of shares of our common stock and/or July 2021 Warrants you held on the Record Date and by the extent to which
other stockholders and holders of July 2021 Warrants exercise their Basic Subscription Rights and Over-Subscription Privileges, all of
which we cannot determine prior to completion of the Rights Offering. However, due to stock exchange restrictions, we will not issue
Units in the Rights Offering to the extent that a holder would beneficially own, together with any other person with whom such holder’s
securities may be aggregated under applicable law, more than 19.99% of our outstanding shares of common stock. In addition, our charter
restricts ownership by a 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.
See “Description of Capital Stock—Restrictions on Ownership and Transfer.”
Subscription
Price
The
Subscription Price is $ per Unit. The Subscription Price does not necessarily bear any relationship to our past or expected future results
of operations, cash flows, current financial condition, or any other established criteria for value. No change will be made to the Subscription
Price by reason of changes in the trading price of our common stock or other factor prior to the expiration of this Rights Offering.
Determination
of Subscription Price
In
the determining the Subscription Price, the board of directors considered a variety of factors including those listed below:
|
● |
our
need to raise capital in the near term to continue our operations; |
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● |
the
current and historical trading prices of our common stock; |
|
|
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● |
a
price that would increase the likelihood of participation in the Rights Offering; |
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● |
the
cost of capital from other sources; |
|
|
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● |
the
value of the common stock being issued as a component of the Unit; |
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● |
the
value of the Warrant being issued as a component of the Unit; and |
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● |
comparable
precedent transactions, including the percentage of shares offered, the terms of the subscription rights being offered, the subscription
price and the discount that the subscription price represents to the immediately prevailing closing prices for these offerings. |
The
Subscription Price does not necessarily bear any relationship to any established criteria for value. No valuation consultant or investment
banker has opined upon the fairness or adequacy of the Subscription Price. You should not consider the Subscription Price as an indication
of actual value of our company or our common stock. The market price of our common stock may decline during or after the Rights Offering.
We cannot predict the price at which our shares of common stock will trade after the Rights Offering. You should obtain a current price
quote for our common stock and perform an independent assessment of our Warrants before exercising your Subscription Rights and make
your own assessment of our business and financial condition, our prospects for the future, and the terms of this Rights Offering. Once
made, all exercises of Subscription Rights are irrevocable.
No
Short-Sales
By
exercising the Subscription Rights, you are representing to us that you have not entered into any short sale or similar transaction with
respect to our common stock since the Record Date for the Rights Offering. In addition, the Subscription Rights provide that, upon exercise
of the Subscription Right, you represent that you have not since the Record Date and, for so long as you continue to hold Preferred Stock
or Warrants issued in connection with the exercise of the Subscription Right, agree not to enter into any short sale or similar transaction
with respect to our common stock. These requirements prevent you from pursuing certain investment strategies that could provide you greater
financial benefits than you might have realized if the Subscription Rights did not contain these requirements.
No
Recombination
The
common stock and Warrants comprising the Units will separate upon the exercise of the Subscription Rights, and the Units will not trade
as a separate security. Holders may not recombine shares of common stock and Warrants to receive a Unit.
Non-Transferability
of Subscription Rights
The
Subscription Rights are non-transferable (other than by operation of law) and, therefore, you may not sell, transfer, assign or give
away your Subscription Rights to anyone. The Subscription Rights will not be listed for trading on any stock exchange or market.
Expiration
Date; Extension
The
subscription period, during which you may exercise your Subscription Rights, expires at 5:00 p.m., Eastern Time, on , 2022, which is
the expiration of the Rights Offering. If you do not exercise your Subscription Rights before that time, your Subscription Rights will
expire and will no longer be exercisable. We will not be required to issue shares to you if the Subscription Agent receives your Rights
Certificate or your subscription payment after that time. We have the option to extend the Rights Offering for an additional period of
45 days in our sole discretion, although we do not presently intend to do so. We may extend the Rights Offering by giving oral or written
notice to the Subscription Agent before the Rights Offering expires. If we elect to extend the Rights Offering, we will issue a press
release announcing the extension no later than 9:00 a.m., Eastern Time, on the next business day after the most recently announced expiration
date of the Rights Offering.
If
you hold your shares of common stock and/July 2021 Warrants in the name of a broker, dealer, bank or other nominee, the nominee will
exercise the Subscription Rights on your behalf in accordance with your instructions. Please note that the nominee may establish a deadline
that may be before 5:00 p.m., Eastern Time, on , 2022, which is the expiration date that we have established for the Rights Offering.
Placement
Period
If
the Rights Offering is not fully subscribed following expiration of the Rights Offering, the dealer-manager has agreed to use its commercially
reasonable efforts to place any unsubscribed Units at the Subscription Price for an additional period of up to 45 days. The number of
Units that may be sold by us during this period will depend upon the number of Units that are subscribed for pursuant to the exercise
of Subscription Rights by our stockholders and July 2021 warrantholders. No assurance can be given that any unsubscribed Units will be
sold during this period.
Termination
We
may terminate the Rights Offering at any time and for any reason prior to the expiration of the Rights Offering. If we terminate the
Rights Offering, we will issue a press release notifying stockholders and the public of the termination no later than 9:00 a.m., Eastern
Time, on the next business day after the most recently announced expiration date of the Rights Offering.
Return
of Funds upon Completion or Termination
The
Subscription Agent will hold funds received in payment for shares in a segregated account pending completion of the Rights Offering.
The Subscription Agent will hold this money until the Rights Offering is completed or is terminated. To the extent you properly exercise
your Over-Subscription Privilege for an amount of Units that exceeds the number of unsubscribed Units available to you, any excess subscription
payments will be promptly returned to you after the expiration of the Rights Offering, without interest or deduction. If the Rights Offering
is terminated for any reason, all subscription payments received by the Subscription Agent will be promptly returned, without interest
or deduction.
Shares
of Our Common Stock and Warrants Outstanding After the Rights Offering
Assuming
no other transactions by us involving our capital stock prior to the expiration of the Rights Offering, and if the Rights Offering is
fully subscribed, upon consummation of the Rights Offering we will have shares of common stock outstanding and Warrants to purchase additional
shares of our common stock issued and outstanding, based on shares of our common stock outstanding as of , 2022. The exact number of
shares of common stock and Warrants that we will issue in this offering will depend on the number of Units that are subscribed for in
the Rights Offering. In addition to the foregoing, as of , 2022 there were (i) shares of our common stock issuable upon the exercise
of stock options, with a weighted-average exercise price of $ per share and (ii) shares of our common stock issuable upon the exercise
of outstanding warrants, with a weighted-average exercise price of $ per share.
Methods
for Exercising Subscription Rights
The
exercise of Subscription Rights is irrevocable and may not be cancelled or modified. You may exercise your Subscription Rights as follows:
Subscription
by Record Holders
If,
as of the Record Date, you are a holder of record of common stock and/or July 2021 Warrants, the number of Units you may purchase pursuant
to your Subscription Rights is indicated on the enclosed Rights Certificate. You may exercise your Subscription Rights by properly completing
and executing the Rights Certificate and forwarding it, together with your full payment, to the Subscription Agent at the address given
below under “Subscription Agent,” to be received before 5:00 p.m., Eastern Time, on , 2022.
Subscription
by Beneficial Owners
If,
as of the Record Date, you are a beneficial owner of shares of our common stock and/or July 2021 Warrants that are registered in the
name of a broker, dealer, bank or other nominee, you will not receive a Rights Certificate. Instead, we will issue one Subscription Right
to such nominee record holder for all shares of our common stock and/or July 2021 Warrants held by such nominee at the Record Date. If
you are not contacted by your nominee, you should promptly contact your nominee in order to subscribe for shares in the Rights Offering
and follow the instructions provided by your nominee.
To
properly exercise your Over-Subscription Privilege, you must deliver the subscription payment related to your Over-Subscription Privilege
before the Rights Offering expires. Because we will not know the total number of unsubscribed Units before the Rights Offering expires,
if you wish to maximize the number of shares you purchase pursuant to your Over-Subscription Privilege, you will need to deliver payment
in an amount equal to the aggregate subscription payment for the maximum number of Units that you wish to purchase.
Payment
Method
Payments
must be made in full in U.S. currency by personal check and payable to “[ ]., as Subscription Agent for PRESIDIO PROPERTY TRUST,
INC.” You must timely pay the full subscription payment, including payment for the Over- Subscription Privilege, for the full number
of shares of our common stock you wish to acquire pursuant to the exercise of Subscription Rights by delivering a personal check drawn
against a U.S. bank payable to “[ ], as Subscription Agent for PRESIDIO PROPERTY TRUST, Inc.” and delivered to one of the
below addresses for purposes of accepting subscriptions in this Rights Offering at:
By
Registered Certified or Express Mail |
|
Overnight
Courier |
|
|
Direct
Transfer, LLC |
|
Direct
Transfer, LLC |
One
Glenwood Avenue, Suite 1001
Raleigh,
NC, 27603 |
|
One
Glenwood Avenue, Suite 1001
Raleigh,
NC, 27603 |
If
you elect to exercise your Subscription Rights, you should consider sending your check drawn on a U.S. bank as promptly as possible to
ensure that the Subscription Agent receives your funds before the Rights Offering expires. If you send a personal check, payment will
not be deemed to have been received by the Subscription Agent until the check has cleared. The clearinghouse may require five or more
business days to clear a personal check. Accordingly, holders who wish to pay the Subscription Price by means of a personal check should
make payment sufficiently in advance of the expiration of the Rights Offering to ensure that the payment is received and clears by that
date.
You
should read the instruction letter accompanying the Rights Certificate carefully and strictly follow it. DO NOT SEND RIGHTS CERTIFICATES
OR PAYMENTS DIRECTLY TO US. We will not consider your subscription received until the Subscription Agent has received delivery of
a properly completed and duly executed Rights Certificate and payment of the full subscription payment.
The
method of delivery of Rights Certificates and payment of the subscription payment to the Subscription Agent will be at the risk of the
holders of Subscription Rights. If sent by mail, we recommend that you send those certificates and payments by registered mail, properly
insured, with return receipt requested, or by overnight courier, and that you allow a sufficient number of days to ensure delivery to
the Subscription Agent and clearance of payment before the Rights Offering expires.
Missing
or Incomplete Subscription Forms or Payment
If
you fail to complete and sign the Rights Certificate or otherwise fail to follow the subscription procedures that apply to the exercise
of your Subscription Rights before the Rights Offering expires, the Subscription Agent will reject your subscription or accept it to
the extent of the payment received. Neither we nor our Subscription Agent undertakes any responsibility or action to contact you concerning
an incomplete or incorrect subscription form, nor are we under any obligation to correct such forms. We have the sole discretion to determine
whether a subscription exercise properly complies with the subscription procedures.
If
you send a payment that is insufficient to purchase the number of shares you requested, or if the number of shares you requested is not
specified in the forms, the payment received will be applied to exercise your Subscription Rights to the fullest extent possible based
on the amount of the payment received. Any excess subscription payments received by the Subscription Agent will be promptly returned,
without interest or deduction, following the expiration of the Rights Offering.
Issuance
of Common Stock and Warrants
The
shares of common Stock and Warrants that are purchased in the Rights Offering as part of the Units will be issued in book-entry, or uncertificated,
form meaning that you will receive a DRS account statement from our transfer agent reflecting ownership of these securities if you are
a holder of record. If you hold your shares of common stock and/or July 2021 Warrants, in the name of a bank, broker, dealer, or other
nominee, DTC will credit your account with your nominee with the securities you purchased in the Rights Offering.
Subscription
Agent
The
Subscription Agent for the Rights Offering is Direct Transfer, LLC. The address to which Rights Certificates and payments should be mailed
or delivered by overnight courier is provided below. If sent by mail, we recommend that you send documents and payments by registered
mail, properly insured, with return receipt requested, and that you allow a sufficient number of days to ensure delivery to the Subscription
Agent and clearance or payment before the Rights Offering expires. Do not send or deliver these materials to us.
By
Registered Certified or Express Mail |
|
Overnight
Courier |
|
|
Direct
Transfer, LLC |
|
Direct
Transfer, LLC |
One
Glenwood Avenue, Suite 1001
Raleigh,
NC, 27603 |
|
One
Glenwood Avenue, Suite 1001
Raleigh,
NC, 27603 |
Information
Agent
The
information agent for the Rights Offering is [ ]. We will pay all fees and expenses of the information agent related to the Rights Offering
and have also agreed to indemnify the information agent from certain liabilities that it may incur in connection with the Rights Offering.
The information agent can be contacted at the following address and telephone number:
[
]
Warrant
Agent
The
warrant agent for the Warrants is Direct Transfer, LLC.
No
Fractional Shares
We
will not issue fractional shares of common stock in the Rights Offering. We will only distribute Subscription Rights to acquire whole
Units, rounded down to the nearest whole number of underlying shares of common stock giving rise to such Subscription Rights.
Any excess subscription payments received by the Subscription Agent will be promptly returned after expiration of the Rights Offering,
without interest or deduction. Similarly, no fractional shares of common stock will be issued in connection with the exercise of a Warrant.
Instead, for any such fractional share that would have otherwise been issued upon exercise of Warrants, the Company will round up such
fraction to the next whole share.
Notice
to Brokers and Nominees
If
you are a broker, dealer, bank or other nominee holder that holds shares of our common stock and/or July 2021 Warrants for the account
of others on the Record Date, you should notify the beneficial owners for whom you are the nominee of the Rights Offering as soon as
possible to learn their intentions with respect to exercising their Subscription Rights. If a beneficial owner of our common stock and/or
July 2021 Warrants so instructs, you should complete the Rights Certificate and submit it to the Subscription Agent with the proper subscription
payment by the expiration date. You may exercise the number of Subscription Rights to which all beneficial owners in the aggregate otherwise
would have been entitled had they been direct holders of our common stock or July 2021 Warrants on the Record Date, provided that you,
as a nominee record holder, make a proper showing to the Subscription Agent by submitting the form entitled “Nominee Holder Certification,”
which is provided with your Rights Offering materials. If you did not receive this form, you should contact our Subscription Agent to
request a copy.
Validity
of Subscriptions
We
will resolve all questions regarding the validity and form of the exercise of your Subscription Rights, including time of receipt and
eligibility to participate in the Rights Offering. Our determination will be final and binding. Once made, subscriptions are irrevocable;
we will not accept any alternative, conditional, or contingent subscriptions. We reserve the absolute right to reject any subscriptions
not properly submitted or the acceptance of which would be unlawful. You must resolve any irregularities in connection with your subscriptions
before the expiration date of the Rights Offering, unless we waive them in our sole discretion. Neither we nor the Subscription Agent
is under any duty to notify you or your representative of defects in your subscriptions. A subscription will be considered accepted,
subject to our right to withdraw or terminate the Rights Offering, only when the Subscription Agent receives a properly completed and
duly executed Rights Certificate and any other required documents and the full subscription payment including final clearance of any
personal check. Our interpretations of the terms and conditions of the Rights Offering will be final and binding.
Stockholder
Rights
Holders
of Warrants issued in connection with the Rights Offering will not have rights as holders of our common stock until such Warrants are
exercised and the shares of common stock underlying the Warrants are issued to the holder.
Foreign
Stockholders
We
will not mail this prospectus or Rights Certificates to stockholders or holders of July 2021 Warrants with addresses that are outside
the United States or that have an army post office or foreign post office address. The Subscription Agent will hold these Rights Certificates
for their account. To exercise Subscription Rights, our foreign stockholders and foreign holders of July 2021 Warrants must notify the
Subscription Agent prior to 5:00 p.m., Eastern Time, on , 2022, the third business day prior to the expiration date, of your exercise
of Subscription Rights and provide evidence satisfactory to us, such as a legal opinion from local counsel, that the exercise of such
Subscription Rights does not violate the laws of the jurisdiction in which such stockholder resides and payment by a U.S. bank in U.S.
dollars before the expiration of the offer. If no notice is received by such time or the evidence presented is not satisfactory to us,
the Subscription Rights represented thereby will expire.
No
Revocation or Change
Once
you submit the Rights Certificate or have instructed your nominee of your subscription request, you are not allowed to revoke or change
the exercise or request a refund of monies paid. All exercises of Subscription Rights are irrevocable, even if you learn information
about us that you consider to be unfavorable. You should not exercise your Subscription Rights unless you are certain that you wish to
purchase shares at the Subscription Price.
U.S.
Federal Income Tax Treatment of Rights Distribution
For
U.S. federal income tax purposes, we do not believe holders of shares of our common stock or July 2021 Warrants should recognize income
or loss upon receipt or exercise of a Subscription Right. See “U.S. Federal Income Tax Considerations.”
No
Recommendation to Rights Holders
Our
board of directors is not making a recommendation regarding your exercise of the Subscription Rights. Stockholders who exercise Subscription
Rights risk investment loss on money invested. We cannot predict the price at which our shares of common stock will trade after the Rights
Offering. You should make your investment decision based on your assessment of our business and financial condition, our prospects for
the future and the terms of this Rights Offering. Please see “Risk Factors” for a discussion of some of the risks involved
in investing in our common stock.
Fees
and Expenses
We
will pay all fees charged by the Subscription Agent and the Information Agent. We will also pay the fees and expenses charged by The
Benchmark Company LLC, as dealer-manager for the Rights Offering and placement agent for any unsubscribed Units. [The Benchmark Company
LLC has informed us that it will re-allow __% of its dealer-manager fee to each broker-dealer whose clients purchase Units in this offering
pursuant to the exercise of their Subscription Rights.] See “Plan of Distribution.” You are responsible for paying any other
commissions, fees, taxes or other expenses incurred in connection with the exercise of your Subscription Rights.
Listing
The
Subscription Rights may not be sold, transferred, assigned or given away to anyone, and will not be listed for trading on any stock exchange
or market. The shares of our common stock issuable upon the exercise of the Warrants to be issued in the Rights Offering are traded on
Nasdaq under the symbol “SQFT.” There is no public trading market for the Warrants and we do not intend that they will be
listed for trading on Nasdaq or any other securities exchange or market.
Important
Do
not send Rights Certificates directly to us. You are responsible for choosing the payment and delivery method for your Rights Certificate
and you bear the risks associated with such delivery. If you choose to deliver your Rights Certificate and payment by mail, we recommend
that you use registered mail, properly insured, with return receipt requested. We also recommend that you allow a sufficient number of
days to ensure delivery to the Subscription Agent and clearance of payment prior to the expiration time.
Distribution
Arrangements
The
Benchmark Company LLC will act as the dealer-manager for the Rights Offering. The dealer-manager will provide marketing assistance and
advice to us in connection with the Rights Offering and will use its best efforts to solicit the exercise of Subscription Rights and
participation in the Over-Subscription Privilege. The dealer-manager is not underwriting or placing any of the Subscription Rights or
the shares of our common Stock or Warrants to be issued in the Rights Offering and do not make any recommendation with respect to such
Subscription Rights (including with respect to the exercise or expiration of such Subscription Rights), shares or Warrants. We have agreed
to pay the dealer-manager certain fees and to reimburse the dealer-manager for certain out-of-pocket expenses incurred in connection
with this offering. See “Plan of Distribution.”
Other
Matters
We
are not making the Rights Offering in any state or other jurisdiction in which it is unlawful to do so, nor are we distributing or accepting
any offers to purchase any units from subscription rights holders who are residents of those states or other jurisdictions or who are
otherwise prohibited by federal or state laws or regulations from accepting or exercising the subscription rights. We may delay the commencement
of the Rights Offering in those states or other jurisdictions, or change the terms of the Rights Offering, in whole or in part, in order
to comply with the securities laws or other legal requirements of those states or other jurisdictions. Subject to state securities laws
and regulations, we also have the discretion to delay allocation and distribution of any shares you may elect to purchase by exercise
of your subscription privileges in order to comply with state securities laws. We may decline to make modifications to the terms of the
Rights Offering requested by those states or other jurisdictions, in which case, if you are a resident in those states or jurisdictions
or if you are otherwise prohibited by federal or state laws or regulations from accepting or exercising the subscription rights, you
will not be eligible to participate in the Rights Offering. However, we are not currently aware of any states or jurisdictions that would
preclude participation in the Rights Offering.
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.”
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 2021, we declared distributions on our common stock of approximately $4.4
million. During 2020, 2019 and 2018, we declared distributions on our common stock of approximately $1.0 million each year. Additionally,
pursuant to the terms of our Series D Preferred Stock, since the date of issuance of shares of Series D Preferred Stock through December
31, 2021, we have declared a dividend of approximately $1.2 million. 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.
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.” The following is a summary of distributions declared per share of our common stock and for our Series D Preferred
Stock for the years ended December 31, 2021 and 2020. The Company intends to continue to pay dividends to our common stockholders on
a quarterly basis, and on a monthly basis for holders of Series D Preferred Stock going forward, but there can be no guarantee the Board
of Directors will approve any future dividends.
Month | |
2021 | | |
2020 | |
| |
Cash Dividend | | |
Cash Dividend | |
March 31 | |
$ | 0.101 | | |
$ | — | |
June 30 | |
| 0.102 | | |
| — | |
September 30 | |
| 0.103 | | |
| — | |
December 31 | |
| 0.104 | | |
| 0.100 | |
Total | |
$ | 0.410 | | |
$ | 0.10 | |
Series
D Preferred Stock
Month | |
2021 | | |
2020 | |
| |
Distributions Declared | | |
Distributions Declared | |
January | |
$ | — | | |
$ | — | |
February | |
| — | | |
| — | |
March | |
| — | | |
| — | |
April | |
| — | | |
| — | |
May | |
| — | | |
| — | |
June | |
| 0.10417 | | |
| — | |
July | |
| 0.19531 | | |
| — | |
August | |
| 0.19531 | | |
| — | |
September | |
| 0.19531 | | |
| — | |
October | |
| 0.19531 | | |
| — | |
November | |
| 0.19531 | | |
| — | |
December 31 | |
| 0.19531 | | |
| — | |
Total | |
$ | 1.27603 | | |
| — | |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
The
following discussion relates to our financial statements and should be read in conjunction with the financial statements and notes thereto
appearing elsewhere in this prospectus. Statements contained in this “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” that are not historical facts may be forward-looking statements. Such statements are subject to certain
risks and uncertainties, which could cause actual results to materially differ from those projected. Some of the information presented
is forward-looking in nature, including information concerning projected future occupancy rates, rental rate increases, project development
timing and investment amounts. Although the information is based on our current expectations, actual results could vary from expectations
stated in this prospectus. Numerous factors will affect our actual results, some of which are beyond our control. These include the timing
and strength of national and regional economic growth, the strength of commercial and residential markets, competitive market conditions,
and fluctuations in availability and cost of construction materials and labor resulting from the effects of worldwide demand, future
interest rate levels and capital market conditions. You are cautioned not to place undue reliance on this information, which speaks only
as of the date of this prospectus. We assume no obligation to update publicly any forward-looking information, whether as a result of
new information, future events or otherwise, except to the extent we are required to do so in connection with our ongoing requirements
under federal securities laws to disclose material information. For a discussion of important risks related to our business, and an investment
in our securities, including risks that could cause actual results and events to differ materially from results and events referred to
in the forward-looking information. See “Risk Factors” on page 20 for material risks.
OVERVIEW
The
Company operates as an internally managed diversified real estate investment trust, or REIT. The Company invests 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 December 31, 2021, including properties held for sale, the Company owned or had
an equity interest in:
|
● |
Eight
office buildings and one industrial building (“Office/Industrial Properties”) which total approximately 757,578 rentable
square feet, |
|
● |
Four
retail shopping centers (“Retail Properties”) which total approximately 121,052 rentable square feet, and |
|
● |
92
model homes owned by five affiliated limited partnerships and one corporation (“Model Home Properties”). |
Presidio
Property Trust’s office, industrial and retail properties are located California, Colorado, Maryland, North Dakota and Texas. Our
Model Home Properties are located in four states, primarily in Texas. We 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 calendar year, or has been operating for three years. Our geographical clustering of assets enables us to reduce our
operating costs through economies of scale by servicing a number of properties with less staff, but it also makes us more susceptible
to changing market conditions in these discrete geographic areas.
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 (NNN Leases) or pay increases in operating
expenses over specific base years. Most of our office leases are for terms of 3 to 5 years with annual rental increases. Our model homes
are typically leased for 2 to 3 years to the homebuilder 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 to reduce the adverse effect of a single under-performing segment,
geographic market and/or tenant. We further supplement this 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 business partners are substantial homebuilders with established credit histories. These tenants
are subjected to financial review and analysis prior to us entering into a sales-leaseback transaction. Our ownership of the underlying
property provides a further means to avoiding significant credit losses.
SIGNIFICANT
TRANSACTIONS IN 2021 and 2020
Acquisitions
during the year ended December 31, 2021
|
● |
On
August 17, 2021, the Company, through its 61.3% owned subsidiaries NetREIT Palm Self Storage, LP and NetREIT Highland LLC, acquired
a single story newly constructed 10,500 square foot building in Houston, Texas for a purchase price of approximately $4.9 million,
in connection with a like-kind exchange transaction pursued under Section 1031 of the Code. The building is 100% occupied under a
15-year triple net lease. |
|
● |
On
December 22, 2021, the Company purchased a 31,752 square foot building in Baltimore, Maryland for a purchase price of approximately
$8.9 million. The building is 100% occupied under a five year triple net lease to Johns Hopkins’ University’s Bloomberg
School of Public Health. |
|
● |
We
acquired 18 Model Home Properties and leased them back to the homebuilders under triple net leases during the year ended December
31, 2021. The purchase price for the properties was $8.4 million. The purchase price consisted of cash payments of $2.7 million and
mortgage notes of $5.7 million. |
Acquisitions
during the year ended December 31, 2020
|
● |
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. |
Dispositions
during the year ended December 31, 2021
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 or repayment of secured or unsecured indebtedness, are available for investing in properties
that we believe will have a greater likelihood of future price appreciation.
During
year ended December 31, 2021 we 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 $10.2 million and the Company recognized a loss of approximately $1.6 million. |
|
● |
Executive
Office Park, which was sold on May 21, 2021, for approximately $8.1 million and the Company recognized a gain of approximately $2.5
million. |
|
● |
During
the year ended December 31, 2021, we disposed of 44 model homes for approximately $20.7 million and recognized a gain of approximately
$3.2 million. |
Dispositions
during the year ended December 31, 2020
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 the Company recognized a loss of approximately
$913,000. |
|
● |
Union
Terrace, which was sold on March 13, 2020 for approximately $11.3 million and the Company 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 the Company 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. |
Sponsorship
of Special Purpose Acquisition Company
On
January 7, 2022, we announced our sponsorship, through our wholly-owned subsidiary, Murphy Canyon Acquisition Sponsor, LLC (the “Sponsor”),
of a special purpose acquisition company (“SPAC”) initial public offering. The SPAC raised $132,250,000 in capital investment
to acquire businesses in the real estate industry, including construction, homebuilding, real estate owners and operators, arrangers
of financing, insurance, and other services for real estate, and adjacent businesses and technologies targeting the real estate space,
which we may refer to as “Proptech” businesses. We, through our wholly-owned subsidiary, owned approximately 19% of the issued
and outstanding stock in the entity upon the initial public offering being declared effective and consummated (excluding the private
placement units described below), and that following the completion of its initial business combination that the SPAC will operate as
a separately managed, publicly traded entity. The SPAC offered $132,250,000 units, with each unit consisting of one share of common stock
and three-quarters of one redeemable warrant.
The
Sponsor purchased an aggregate of 828,750 units (the “placement units”) of the SPAC at a price of $10.00 per unit, for an
aggregate purchase price of $8,287,500. The placement units were sold in a private placement that closed simultaneously with the closing
of the SPAC initial public offering. The Sponsor has agreed to transfer an aggregate of 45,000 placement units (15,000 each) to each
of Murphy Canyon’s independent directors.
The
SPAC’s ability to complete a business combination may be extended in additional increments of three months up to a total of six
(6) additional months from the closing date of the offering, subject to the payment into the Trust Account by the Sponsor (or its designees
or affiliates) of the sum of $1,322,500, representing the sum of $0.10 per share of Common Stock sold to Public Stockholders, and which
extension payments, if any, shall be added to the Trust Account. The Company has committed to provide additional funds if need to make
such a deposit for the extension.
ECONOMIC
ENVIRONMENT
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 enforcing 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 fiscal year 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 common
stock in July 2021. For more information, see the disclosures in the “Risk Factors” section included elsewhere in this prospectus.
We
have taken steps to best protect the health and safety of our employees globally. Our daily execution has evolved largely into a virtual
model, but we believe we have been successful in maintaining our ability to effectively communicate with and service our tenants during
the pandemic period.
It
is impossible to project U.S. economic growth, but economic conditions could have a material effect on our business, financial condition
and results of operations.
According
to Nareit’s, the National Association of Real Estate Investment Trusts, 2022 Outlook for the Economy, published on its website
in December 2021, Commercial Real Estate and REITs, the coming year is likely to see significant further improvement in overall economic
conditions, with rising GDP, job growth, and higher incomes, in a supportive financial market environment where inflation pressures gradually
subside and long-term interest rates remain well below their historical norms. The emergence of the new Omicron variant of COVID-19 in
late November 2021 serves as a reminder that the threat of new waves of infection looms over all aspects of the global economy. Increasing
vaccination rates and natural immunity due to prior infection may help contain these risks. Nareit does not expect commercial real estate
markets or the rest of the economy to go back completely to the way they were before the pandemic. Overall, the year ahead is likely
to build on the recovery that is already underway in the macroeconomy and in commercial real estate markets. REITs are likely to perform
well in this growth environment.
Three
obstacles are challenging the outlook over the near-term: ongoing high levels of COVID-19 infections, production and supply chain bottlenecks,
and an elevated inflation rate. First, the pandemic continues to hold back many types of economic activity that involve face-to-face
interactions, including employees’ return to the office, business travel, and many forms of entertainment. Second, the supply chain
issues are well known, and have restricted auto production and availability of many types of goods. Finally, the consumer price index
has risen 6.2% over the past 12 months, well above the Federal Reserve’s target, raising the possibility of higher interest rates
to slow the economy to prevent it from overheating. Labor shortages, especially in a few sectors like hotels and restaurants, have limited
some businesses’ ability to reopen fully. Most of the inflation pressures have resulted, however, from shortages of key components
due to production and supply chain disruptions, and there is little evidence to date that inflation is being driven by higher labor costs.
There
has been, in fact, significant progress on the return-to-office. In May 2020, 46 million employees reported that they were working from
home due to the pandemic. There has been a steady flow over the past 18 months of millions of workers returning to the office, although
this trend was briefly interrupted by the surge in cases of COVID-19 in November-December 2020 and again by the Delta variant last summer
(see Nareit’s chart 1.4: Return to Office). Nearly two-thirds of employees who had reported they were working from home in May
2020 had returned to the office by November 2021, although the pace of return has varied month-to-month according to the rate of vaccinations
and infections.
These
trends show that workers are coming back, but the pace at which they return to the office still depends on the pandemic. Recent new leases
signed by major technology companies indicates that offices are an essential part of their business model. As COVID-19 cases decline,
Nareit expects workers will continue to come back.
CREDIT
MARKET ENVIRONMENT
As
noted in Nareit’s “REITs & Inflation Outlook 2022: What to Know” article published on its website in December 2021,
inflationary pressure to the macroeconomy from the effects of supply chain interruptions will likely lead to moderate inflation levels
over the next year, rising above the Federal Reserve’s target of 2.5% but likely well below historically high levels seen in the
1970s and early 1980s. Same store net operating income (SSNOI) from Nareit’s T-Tracker gives a conservative estimate of REIT growth
during different periods of inflation. SSNOI doesn’t include growth from acquisitions and the data exclude some of the highest
growth property sectors of the last decade—lodging/resorts, timber, infrastructure, data centers, and specialty. Annual SSNOI growth
outpaced annual inflation in 63% of quarters from 1996Q1 to 2021Q3. There are no periods of high inflation in this time period, and the
average inflation is under the Federal Reserve target at 2.2%. REIT operating income is consistently higher during periods of higher
inflation, SSNOI growth averaged 2.5% during low inflation periods compared to 3.0% in periods of moderate inflation. While past performance
is not always predictive of the future, Nareit see that in the current environment REIT operating income is more than keeping pace with
price level increases. In the two most recent quarters when consumer price index jumped over 5%, SSNOI outpaced the uptick in annualized
inflation by 23 basis points in 2021Q2 and 187 basis points in Q3.
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. 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.
Rising
inflation and elevated U.S. budget deficits and overall debt levels, including as a result of federal pandemic relief and stimulus legislation
and/or economic or market and supply chain conditions, can put upward pressure on interest rates and could be among the factors that
could lead to higher interest rates in the future. Higher interest rates could adversely affect our overall business, income, and our
ability to pay dividends, including by reducing the fair value of many of our assets and adversely affecting our ability to obtain financing
on favorable terms or at all, and negatively impacting the value of properties and the ability of prospective buyers to obtain financing
for properties we intend to sell. This may affect our earnings results, reduce our ability to sell our assets, or reduce our liquidity.
Furthermore, our business and financial results may be harmed by our inability to accurately anticipate developments associated with
changes in, or the outlook for, interest rates.
MANAGEMENT
EVALUATION OF RESULTS OF OPERATIONS
Management’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.
In
addition, management 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 cash flow 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
Our
results of operations for the years ended December 31, 2021 and 2020 are not indicative of those expected in future periods. Management
does not expect that the level of commercial property sales experienced over the last 24 months to continue in the near future. Additionally,
with the recent equity raised in June and July 2021, management is working to increase the number of commercial properties in the portfolio
with new acquisitions. However, elevated real estate prices in both commercial and residential real estate and compressing capitalization
rates have made it challenging to acquire properties that fit our portfolio needs. Management will continue to evaluate potential acquisitions
in an effort to increase our portfolio of commercial real estate.
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.
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 or to be 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.
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.
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.
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 December 31, 2021 and 2020.
When
available, we utilize quoted market prices from independent third-party sources to determine fair value and classify such items in Level
1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding
quoted market price, observable inputs might not be relevant and could require us to make a significant adjustment to derive a fair value
measurement. Additionally, in an inactive market, a market price quoted from an independent third-party may rely more on models with
inputs based on information available only to that independent third-party. When we determine the market for a financial instrument owned
by us to be illiquid or when market transactions for similar instruments do not appear orderly, we use several valuation sources (including
internal valuations, discounted cash flow analysis and quoted market prices) and establish a fair value by assigning weights to the various
valuation sources. As of December 31, 2021 and December 31, 2020, our marketable securities presented on the balance sheet were measured
using Level 1 market prices. There were no financial liabilities measured at fair value as of December 31, 2021 and 2020.
Additionally,
when determining the fair value of a liability in circumstances in which a quoted price in an active market for an identical liability
is not available, we measure fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded
as an asset or quoted prices for similar liabilities when traded as assets or (ii) another valuation technique that is consistent with
the principles of fair value measurement, such as the income approach or the market approach. Changes in assumptions or estimation methodologies
can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.
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.
Earnings
per share (“EPS”). The EPS on Common stock has been computed pursuant to the guidance
in FASB ASC Topic 260, Earnings Per Share. The guidance requires the classification of the Company’s unvested restricted stock,
which contain rights to receive non-forfeitable dividends, as participating securities requiring the two-class method of computing net
income per share of common stock. In accordance with the two-class method, earnings per share have been computed by dividing the net
income less net income attributable to unvested restricted shares by the weighted average number of shares of common stock outstanding
less unvested restricted shares. Diluted earnings per share is computed by dividing net income by the weighted average shares of common
stock and potentially dilutive securities outstanding in accordance with the treasury stock method.
RESULTS
FROM OPERATIONS FOR THE YEARS ENDED December 31, 2021 AND 2020
Our
results from operations for 2021 and 2020 are not indicative of those expected in future periods as we expect that rental income, interest
expense, rental operating expense, general and administrative expenses, and depreciation and amortization will significantly change in
future periods as a result of the assets sold over the last two years.
Revenues.
Total revenue was approximately $19.23 million for the year ended December 31, 2021, compared to approximately $24.35 million
for the same period in 2020, a decrease of approximately $5.12 million or 21%. The decrease in rental income reported in 2021 compared
to 2020 is directly related to the sale of four commercial properties during 2021 and three commercial properties during 2020, and the
net decrease in model home property (26) during the year ended December 31, 2021.
Rental
Operating Costs. Rental operating costs were approximately $6.18 million for the year ended December 31, 2021 compared to approximately
$8.82 million for the same period in 2020, a decrease of approximately $2.64 million or 30%. Rental operating costs as a percentage of
total revenue was 32.2% and 36.2% for the years ended December 31, 2021 and 2020, respectively. The decrease in rental operating costs
as a percentage of total revenue for the years ended December 31, 2021 compared to 2020 is due to the mix of properties held to include
a higher percentage of triple net properties and model homes period over period, which have significantly lower operating costs.
General
and Administrative. General and administrative (“G&A”) expenses were approximately $6.23 million for the year
ended December 31, 2021, compared to approximately $5.75 million for the same period in 2020, representing an increase of approximately
$0.47 million or 8%. As a percentage of total revenue, our general and administrative costs was approximately 32.4% and 23.6% for the
years ended December 31, 2021 and 2020, respectively. The increase in G&A expense for the years ended December 31, 2021 compared
to 2020 is mainly due to the increase in stock compensation which increased approximately $0.5 million. In connection with the Company
becoming publicly traded in October 2020, the Company plans to continue rewarding its employee through stock-based compensation at a
greater rate than historically. The increase was slightly offset by the decreased payroll related costs, temporally reduced by the Employee
Retention Credit (“ERC”) received during the second quarter of 2021.
Depreciation
and Amortization. Depreciation and amortization expenses were approximately $5.40 million for the year ended December 31, 2021,
compared to approximately $6.27 million for the same period in 2020, representing a decrease of approximately $0.88 million or 14%. The
decrease in depreciation costs is associated with the properties sold in 2021 and 2020.
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 approximately
$1.73 million on the Waterman Plaza property and 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. The Company recognized a non-cash impairment of $0.3 million, related to the potential
sale or our Highland Court property, and $0.3 million non-cash impairment related to 300 N.P. during the year ended December 31, 2021.
Interest
Expense-mortgage notes. Interest expense, including amortization of deferred finance charges was approximately $4.54 million
for the year ended December 31, 2021 compared to approximately $6.10 million for the same period in 2020, a decrease of approximately
$1.56 million, or 26%. 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 4.25% and 4.18% as of
December 31, 2021 and 2020, respectively.
Interest
Expense-note payable. On September 17, 2019, the Company executed a Promissory Note pursuant to which Polar, extended a loan
in the principal amount of approximately $14.0 million to the Company. 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 approximately $1.4 million, totaled approximately $0.3 and $2.7 million for the year ended December 31, 2021 and 2020, respectively.
The Polar Note was paid in full during March 2021.
Gain
on Sale of Real Estate Assets. For the year ended December 31, 2021, the change 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 2021 and 2020 above for further detail.
Gain
on Extinguishment of Government Debt. On April 30, 2020, the Company received a Paycheck Protection Program (“PPP”)
loan of approximately $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. The gain on extinguishment of government debt totaled $10,000 and $451,785 for the years end December 31, 2021 and 2020,
respectively.
Deferred
Offering Costs. For the year ended December 31, 2020, the Company recorded approximately $0.5 million in legal, accounting and
filing related expenses upon completion of our initial public offering.
Income
Tax Expense / Credit. For the year ended December 31, 2021, the Company recorded an income tax credit of approximately $48,000
related to estimated refunds from federal and state taxes for capital gains from the sale of model homes held by the taxable REIT subsidiary
compared to an income tax expense of approximately $371,000, for the year ended December 31, 2020.
Income
allocated to non-controlling interests. Income allocated to non-controlling interests for the year ended December 31, 2021 and
2020 totaled approximately $2.16 million, and $1.41 million.
Geographic
Diversification Tables
The
following table shows a list of commercial properties owned by the Company grouped by state and geographic region as of December 31,
2021:
State | |
No. of Properties | | |
Aggregate Square Feet | | |
Approximate % of Square Feet | | |
Current
Base Annual Rent | | |
Approximate % of Aggregate Annual Rent | |
California | |
| 2 | | |
| 113,617 | | |
| 12.9 | % | |
$ | 1,805,085 | | |
| 15.6 | % |
Colorado | |
| 5 | | |
| 325,676 | | |
| 37.1 | % | |
| 5,603,269 | | |
| 48.5 | % |
Maryland | |
| 1 | | |
| 31,752 | | |
| 3.6 | % | |
| 682,668 | | |
| 5.9 | % |
North Dakota | |
| 4 | | |
| 397,085 | | |
| 45.2 | % | |
| 3,151,646 | | |
| 27.3 | % |
Texas | |
| 1 | | |
| 10,500 | | |
| 1.2 | % | |
| 322,875 | | |
| 2.8 | % |
Total | |
| 13 | | |
| 878,630 | | |
| 100 | % | |
$ | 11,565,543 | | |
| 100 | % |
The
following table shows a list of our Model Home properties by geographic region as of December 31, 2021:
Geographic Region | |
No. of Properties | | |
Aggregate Square Feet | | |
Approximate % of Square Feet | | |
Current Base Annual Rent | | |
Approximate % of Aggregate Annual Rent | |
Southwest | |
| 88 | | |
| 266,228 | | |
| 95.6 | % | |
$ | 2,501,580 | | |
| 94.0 | % |
Southeast | |
| 1 | | |
| 2,381 | | |
| 0.9 | % | |
| 22,524 | | |
| 0.8 | % |
Midwest | |
| 1 | | |
| 3,663 | | |
| 1.3 | % | |
| 57,420 | | |
| 2.2 | % |
Northeast | |
| 2 | | |
| 6,153 | | |
| 2.2 | % | |
| 80,844 | | |
| 3.0 | % |
Total | |
| 92 | | |
| 278,425 | | |
| 100 | % | |
$ | 2,662,368 | | |
| 100 | % |
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 common stock in July 2021. Our cash and restricted cash at December 31, 2021 was $14.7 million,
which included our available liquidity of cash and cash equivalents. 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 2022, total approximately $12.2 million, of which $8.6 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. On March 11, 2022, the Company completed the sale our property World Plaza, located in San Bernardino,
CA, for $10 million to an unrelated third party. This property was not encumbered by any debt and net cash proceeds will be used for
future cash needs.
On
September 17, 2021, the Board of Directors authorized a stock repurchase program of up to $10 million outstanding shares of our common
stock. During September 2021, the Company was able to purchase 18,133 shares at an average price of $3.73692 per share, plus commission
of $0.035 per share, for a total cost of $68,396. During December 2021, the Company was able to purchase 11,588 shares at an average
price of $3.6097 per share, plus commission of $0.035 per share, for a total cost of $42,234.78. These shares will be treated as unissued
in accordance with Maryland law and shown as a reduction of stockholders’ equity at cost. While we will continue to pursue value
creating investments, the Board believes there is significant embedded value in our assets that is yet to be realized by the market.
Therefore, returning capital to stockholders through a repurchase program is an attractive use of capital currently.
There
can be no assurance that the Company will refinance loans, take out 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.
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, privately place securities or sell securities to the public we may not
be able to acquire additional properties to meet our long-term objectives.
Cash,
Cash Equivalents and Restricted Cash
At
December 31, 2021, and December 31, 2020, we had approximately $14.7 million and $11.5 million in cash equivalents, respectively, including
$4.7 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 $1.7 million of our cash and restricted cash balance is intended
for capital expenditures on existing properties (including deposits held in reserve accounts by our lenders) over the next 12 months
of 2022. We intend to use the remainder of our existing cash and cash equivalents for asset/property acquisitions, reduction of principal
debt, general corporate purposes, common stock repurchases (if market conditions are met),or dividends to our stockholders and sponsorship
of Murphy Canyon Acquisition Corp.
Secured
Debt
As
of December 31, 2021, all our commercial properties had fixed-rate mortgage notes payable in the aggregate principal amount of $67.3
million, collateralized by a total of 10 commercial properties with loan terms at issuance ranging from 5 to 22 years. The weighted-average
interest rate on these mortgage notes payable as of December 31, 2021 was approximately 4.5%, and our debt to estimated market value
for our commercial properties was approximately 51.9%. The debt to estimated market value includes the $7.2 million related party loans
on our Mandolin and McElderry properties in Houston, TX and Baltimore, MD, respectively, which are eliminated in consolidation.
As
of December 31, 2021, the Company had 84 fixed-rate mortgage notes payable related to model homes in the aggregate principal amount of
$22.2 million, excluding loans eliminated through consolidation, collateralized by a total of 84 Model Homes. These loans generally have
a term at issuance of three to five years. As of December 31, 2021, the average loan balance per home outstanding and the weighted-average
interest rate on these mortgage loans are approximately $264,000 and 3.4%, respectively. Our debt to estimated market value on these
properties is approximately 56.1%, including loan eliminated through consolidation. The Company has guaranteed approximately 15% 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 years ended December 31, 2021 and December 31, 2020
Operating
Activities: Net cash provided by operating activities for the years ended December 31, 2021 and 2020 decreased by $1.3 million to
approximately $2.4 million from $3.7 million. The change in net cash provided 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 year ended December 31, 2021 decreased $3.5 million to approximately
$24.2 million compared to $27.7 million for the same period in 2020. During the year ended December 31, 2021, the Company received gross
proceeds from the sale of four office buildings for approximately $35.4 million, and sales of 42 Model Homes for approximately $20.7
million, which was offset by the purchase of two commercial properties for approximately $13.6 million and 17 Model Homes for approximately
$8.1 million. 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
We
currently project that we could spend up to $1.7 million (including 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, 2021 was $23.4 million compared to $30.2
million for the same period in 2020.The decrease of $6.8 million in net cash used in financing activities is primarily due to
the following activities for the year ended December 31, 2021:
|
● |
Net
increase in dividends of $3.5 million paid to holders of our common stock and $1.0 million paid to holders of our Series D Preferred
Stock; and |
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Distributions
to noncontrolling interest increased approximately $5.2 million related to sale of model home properties. |
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|
● |
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 |
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|
|
|
● |
The
issuance of our Series D Preferred Stock with net proceeds of approximately $20.5 million and net Common Stock proceeds of approximately
$8.9 million. |
|
|
|
|
● |
Net
proceeds from the issuance of mortgage notes payable on model homes. |
Off-Balance
Sheet Arrangements
On
July 12, 2021, the Company entered into a securities purchase agreement with a single U.S. institutional investor for the purchase and
sale of 1,000,000 shares of its common stock, Common Stock Warrants to purchase up to 2,000,000 shares of common stock and Pre-Funded
Warrants to purchase up to 1,000,000 shares of common stock. Each share of common stock and accompanying Common Stock Warrants were sold
together at a combined offering price of $5.00, and each share of common stock and accompanying Pre-Funded Warrant were sold together
at a combined offering price of $4.99. The Pre-Funded Warrants were exercised in full during August 2021 at a nominal exercise price
of $0.01 per share. The Common Stock Warrants have an exercise price of $5.50 per share, were exercisable upon issuance and will expire
five years from the date of issuance.
In
connection with this additional offering, we agreed to issue the Placement Agent Warrants to purchase up to 80,000 shares of common stock,
representing 4.0% of the common stock and shares of common stock issuable upon exercise of the Pre-Funded Warrants. The Placement Agent
Warrants were issued in August 2021, post exercise of the Pre-Funded Warrants with an exercise price of $6.25 and will expire five years
from the date of issuance.
Common
Stock Warrants:
If
all the potential Common Stock Warrants outstanding at December 31, 2021, were exercised at the price of $5.00 per share, gross proceeds
to us would be $10 million and we would as a result issue an additional 2,000,000 shares of common stock.
Placement
Agent Warrants:
If
all the potential Placement Agent Warrants outstanding at December 31, 2021, were exercised at the price of $6.25 per share, gross proceeds
to us would be $0.5 million and we would as a result issue an additional 80,000 shares of common stock.
BUSINESS
AND PROPERTY
You
should read the following discussion in conjunction with the sections of this prospectus entitled “Risk Factors,”
“Cautionary Note Regarding Forward-Looking Statements,” and “Management’s 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 entitled “Risk
Factors” and 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 December 31, 2021, we owned or had an equity interest in:
|
● |
Eight
office buildings and one industrial building (“Office/Industrial Properties”) which total approximately 757,578 rentable
square feet, |
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|
● |
Four
retail shopping centers (“Retail Properties”) which total approximately 121,052 rentable square feet, and |
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92
model homes owned by five affiliated limited partnerships and one corporation (“Model Home Properties”). |
We
own five commercial properties located in Colorado, four in North Dakota, two in Southern California and one in Texas. Our model home
properties are located in four states. Our commercial property tenant base is highly diversified and consists approximately 139 individual
commercial tenants with an average remaining lease term of approximately 3.1 years as of December 31, 2021. As of December 31, 2021,
three commercial tenants represented more than 5.0% of our annualized base rent, one of which represented 8.0% of our annualized based
rent, while our ten largest tenants represented approximately 36.8% 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 December 31, 2021, there were 85 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 senior
management team also includes Gary M. Katz, Steve Hightower, 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.
Our
Portfolio
We
own five commercial properties located in Colorado, four in North Dakota, two in Southern California, one in Texas and one in Maryland.
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 December 31, 2021, our commercial portfolio had a net book value of approximately $104 million, and consisted of the following properties:
($
in000’s) Property Location | |
Sq.,
Ft. | | |
Date
Acquired | | |
Year
Property Constructed | | |
Purchase
Price (1) | | |
Occupancy | | |
Percent
Ownership | | |
Mortgage
On property | |
Office/Industrial Properties: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Genesis Plaza, San Diego, CA (2) | |
| 57,807 | | |
| 08 | /10 | |
| 1989 | | |
| 10,000 | | |
| 85.6 | % | |
| 76.4 | % | |
| 6,169 | |
Dakota Center, Fargo, ND | |
| 119,538 | | |
| 05 | /11 | |
| 1982 | | |
| 9,575 | | |
| 73.5 | % | |
| 100.0 | % | |
| 9,677 | |
Grand Pacific Center, Bismarck, ND (3) | |
| 93,000 | | |
| 03 | /14 | |
| 1976 | | |
| 5,350 | | |
| 56.6 | % | |
| 100.0 | % | |
| 3,620 | |
Arapahoe Center, Colorado Springs, CO | |
| 79,023 | | |
| 12 | /14 | |
| 2000 | | |
| 11,850 | | |
| 100.0 | % | |
| 100.0 | % | |
| 7,771 | |
West Fargo Industrial, West Fargo, ND | |
| 150,030 | | |
| 08 | /15 | |
| 1998 | /2005 | |
| 7,900 | | |
| 90.8 | % | |
| 100.0 | % | |
| 4,148 | |
300 N.P., West Fargo, ND | |
| 34,517 | | |
| 08 | /15 | |
| 1922 | | |
| 3,850 | | |
| 64.8 | % | |
| 100.0 | % | |
| 2,233 | |
One Park Centre, Westminster CO | |
| 69,174 | | |
| 08 | /15 | |
| 1983 | | |
| 9,150 | | |
| 80.5 | % | |
| 100.0 | % | |
| 6,277 | |
Shea Center II, Highlands Ranch, CO | |
| 122,737 | | |
| 12 | /15 | |
| 2000 | | |
| 25,325 | | |
| 91.6 | % | |
| 100.0 | % | |
| 17,495 | |
Baltimore, Baltimore, MD | |
| 31,752 | | |
| 12 | /21 | |
| 2006 | | |
| 8,892 | | |
| 100.0 | % | |
| 100.0 | % | |
| — | |
Total Office/Industrial Properties | |
| 757,578 | | |
| | | |
| | | |
$ | 91,892 | | |
| 82.8 | % | |
| | | |
$ | 57,390 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Retail Properties: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
World Plaza, San Bernardino, CA (4) | |
| 55,810 | | |
| 09 | /07 | |
| 1974 | | |
| 7,650 | | |
| 100.0 | % | |
| 100.0 | % | |
| — | |
Union Town Center, Colorado Springs, CO | |
| 44,042 | | |
| 12 | /14 | |
| 2003 | | |
| 11,212 | | |
| 87.4 | % | |
| 100.0 | % | |
| 8,174 | |
Research Parkway, Colorado Springs, CO | |
| 10,700 | | |
| 08 | /15 | |
| 2003 | | |
| 2,850 | | |
| 100.0 | % | |
| 100.0 | % | |
| 1,705 | |
Mandolin, Houston, TX | |
| 10,500 | | |
| 08 | /21 | |
| 2021 | | |
| 4,892 | | |
| 100.0 | % | |
| 61.3 | % | |
| — | |
Total Retail Properties | |
| 121,052 | | |
| | | |
| | | |
$ | 26,604 | | |
| 95.4 | % | |
| | | |
$ | 9,879 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| 878,630 | | |
| | | |
| | | |
$ | 118,496 | | |
| 84.6 | % | |
| | | |
$ | 67,269 | |
(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 own 57% and 43%, respectively, and we beneficially own an aggregate of 76.4%,
based on our ownership percentages of each tenant-in-common. |
(3) |
Property
was listed as held for sale during the February 2022. |
(4) |
Property
held for sale as of December 31, 2021. |
The
following tables show a list of commercial properties owned by us grouped by state and geographic region as of December 31, 2021:
State | |
No. of Properties | | |
Aggregate Square Feet | | |
Approximate % of Square Feet | | |
Current Base Annual Rent | | |
Approximate % of Aggregate Annual Rent | |
California | |
| 2 | | |
| 113,617 | | |
| 12.9 | % | |
$ | 1,805,085 | | |
| 15.6 | % |
Colorado | |
| 5 | | |
| 325,676 | | |
| 37.1 | % | |
| 5,603,269 | | |
| 48.5 | % |
Maryland | |
| 1 | | |
| 31,752 | | |
| 3.6 | % | |
| 682,668 | | |
| 5.9 | % |
North Dakota | |
| 4 | | |
| 397,085 | | |
| 45.2 | % | |
| 3,151,646 | | |
| 27.3 | % |
Texas | |
| 1 | | |
| 10,500 | | |
| 1.2 | % | |
| 322,875 | | |
| 2.8 | % |
Total | |
| 13 | | |
| 878,630 | | |
| 100 | % | |
$ | 11,565,543 | | |
| 100 | % |
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 December 31, 2021, our model home portfolio had a net book value of approximately $34 million, and is summarized as follows:
Geographic Region | |
No. of Properties | | |
Aggregate Square Feet | | |
Approximate % of Square Feet | | |
Current Base Annual Rent | | |
Approximate % of Aggregate Annual Rent | |
Southwest | |
| 88 | | |
| 266,228 | | |
| 95.6 | % | |
$ | 2,501,580 | | |
| 94.0 | % |
Southeast | |
| 1 | | |
| 2,381 | | |
| 0.9 | % | |
| 22,524 | | |
| 0.8 | % |
Midwest | |
| 1 | | |
| 3,663 | | |
| 1.3 | % | |
| 57,420 | | |
| 2.2 | % |
Northeast | |
| 2 | | |
| 6,153 | | |
| 2.2 | % | |
| 80,844 | | |
| 3.0 | % |
Total | |
| 92 | | |
| 278,425 | | |
| 100 | % | |
$ | 2,662,368 | | |
| 100 | % |
Description
of Our Commercial Properties
California
Properties
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Genesis
Plaza is a four-story office building located in the Kearny Mesa submarket of San Diego. The property is situated on Interstate
15 with excellent visibility and signage opportunity for tenants. Additionally, the property is one of the few in Kearny Mesa to
provide underground parking. Genesis Plaza’s rent roll includes several national and regional tenants. We renovated the common
areas to improve its desirability to today’s tenants. |
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World
Plaza is a retail/office project located in San Bernardino in Southern California’s Inland Empire region. The property
is situated at a major intersection with a high traffic count. We initially acquired the leasehold interest, then several years later
unified the ownership by acquiring the underlying land, which increased the overall value. As of December 31, 2021, this property
is available for sale. |
Colorado
Properties
|
● |
Arapahoe
Service Center II is a one-story flex/office property located in Denver’s Southeast submarket, a location popular with
technology firms. Although the property was fully leased upon acquisition, the property had entered into foreclosure and we purchased
it from the lender. We subsequently negotiated a lease buy-out from one of the tenants and expanded the adjacent tenant, resulting
in additional revenue from the buy-out fee and a long-term lease extension while retaining 100% occupancy. |
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One
Park Centre is a four-story office building located in Westminster, a suburb north of Denver. Similar to many of our acquisitions,
when we acquired this property it had strong in-place cash flow with several leases at below-market rent. To add further value, we
are renovating the common areas to create a more modern environment desired by today’s tenants. The property’s location
caters to local businesses preferring to locate near employee housing rather than commuting to Denver’s other employment centers.
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|
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|
● |
Research
Parkway is a multi-tenant retail shop building consisting of 10,700 square feet and can accommodate five tenants. This property
is located in the upscale Briargate community in Colorado Springs, Colorado, and is immediately adjacent to the Union Town Center
retail property, which we acquired in a separate transaction. |
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|
● |
Shea
Center II is a four-story, Class “A” office building located in Denver’s Highlands Ranch community. This location
just south of Highway 470 west of Denver with new walkable amenities across the street is attractive to tenants living in upscale
Highlands Ranch and other nearby suburbs. The long-term occupancy is stable with a large Fortune 500 tenant leasing an entire floor
on a long-term lease. |
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|
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|
● |
Union
Town Center is located in the upscale Briargate area of Colorado Springs and is anchored by a major national grocer (which owns
its own building), with the tenant base consisting mostly of convenience and food uses, which are typically less impacted by online
retailing. The center was previously owned by out-of-town private investors who focused on maintaining cash flow, and most of the
leases were below-market at the time of acquisition. We have been able to maintain high occupancy while renewing existing leases
at increased rents. |
North
Dakota Properties
|
● |
Dakota
Center is a six-story office building located in the heart of the dynamic Downtown Fargo submarket. We were attracted to Fargo
because of its strong economic drivers, including proximity to three universities, economic diversity, low unemployment, and limited
competition. In May 2011, we acquired the property for $9.6 million and at a going-in cap rate of 14%. At the time of acquisition,
78% of the property was leased to a major national bank under a lease expiring in December 2012. The bank occupied only a small portion
of the property and subleased other portions to multiple tenants. We invested $2.9 million in constructing tenant improvements and
renovating the common areas and parking lot. Upon expiration of the lease, we were able to secure new leases with five former subtenants,
including the national bank, resulting in 100% occupancy through 2017. In 2016, upon stabilization of the rent roll, the cap rate
compressed from 14% to 8% and the property appraised in excess of $16 million, an increase in value of approximately 28% over our
purchase price. |
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|
● |
Grand
Pacific Center is a six-story office building located in Downtown Bismarck. Based on the region’s strong economic drivers
and our prior success repositioning Dakota Center in Fargo, this property was acquired with the intent to perform a similar common
area renovation, which is expected to result in higher market rents and solidify Grand Pacific Center as the foremost office building
in the submarket. We also increased potential cash flow by structuring new leases to require the tenants to pay a portion of operating
expense increases. |
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|
● |
West
Fargo is a multi-tenant industrial campus located in West Fargo consisting of the three projects. The campus is located in an
established industrial area near the major east-west thoroughfares of Interstate 94 and Main Avenue. This asset met our acquisition
criteria due to its strong in-place cash flow plus potential for upside by raising rents to market. |
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Main
Avenue consists of two buildings. This project accommodates mid-sized tenants requiring loading docks and ample truck access. |
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|
● |
10th
Street is a multi-tenant industrial park that can accommodate approximately 11 tenants and consists of three buildings. The property
is situated in an industrial area near Interstate 94 in West Fargo, North Dakota, and consists of 53,000 square feet. |
|
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13th
Street is a multi-tenant industrial park that can accommodate approximately six tenants and consists of two buildings. This project
caters to small tenants. The property is situated in an industrial area near Interstate 94 in West Fargo, North Dakota, and consists
of 15,000 square feet. |
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|
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300
N.P. is a historic mixed-use building located in Downtown Fargo of which we own the multi-tenant office portion of this property.
Originally constructed in 1923 for a farm equipment manufacturer, the building was renovated in 2004 as an office/residential condominium.
We acquired the property due to its strong in-place cash flow at below-market rents with further upside achievable by leasing vacant
space. |
Texas
Properties
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● |
Mandolin
- located in Houston, Texas, is a single-tenant, 10,500 sqft building constructed in 2021 and is fully leased on a long-term,
triple-net basis to a franchisee of a national child education provider. The property is located in a growing submarket with strong
demographics and significant daytime population. The property features an extensive outdoor play area. |
Maryland
Properties
|
● |
McElderry
- located in Baltimore, Maryland, is a single-tenant, 31,752 sqft building constructed in 2006 and is fully leased on a long-term,
triple-net basis to a Johns Hopkins University. |
Description
of Our Model Home Operations
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.
NetREIT
Dubose Model Home REIT, Inc. (“NetREIT Dubose”) is engaged in the business of acquiring model homes from third
party homebuilders in sale-leaseback transactions whereby a homebuilder sells the Model Home to NetREIT Dubose and leases back the Model
Home under a triple net lease (“NNN”) for use in marketing its residential development. Our Model Home business
was started in March 2010 through the acquisition of certain assets and rights from Dubose Model Homes USA. Subsequent to its
formation, NetREIT Dubose raised $10.6 million pursuant to a private placement of its common stock (the private placement terminated
on December 31, 2013). As of December 31, 2021, NetREIT Dubose had sold all of its properties and distributed all available cash to its
shareholders, including the Company.
We
operate six limited partnerships in connection with NetREIT Dubose: Dubose Model Home Investors #202, LP (“DMHI #202”),
Dubose Model Home Investors #203, LP (“DMHI #203”), Dubose Model Home Investors #204, LP (“DMHI
#204”), Dubose Model Home Investors #205, LP (“DMHI #205”), Dubose Model Home Investors #206,
LP (“DMHI #206”) and NetREIT Dubose Model Home REIT, LP. The limited partnerships typically raise private equity
to invest in Model Home Properties and lease them back to the homebuilders. As of December 31, 2021 the Company owned:
|
● |
10.3%
of DMHI #202, which raised $2.9 million, and was formed to raise up to $5.0 million through the sale of partnership units. |
|
|
|
|
● |
2.3%
of DMHI #203, which raised $4.4 million, and was formed to raise up to $5.0 million through the sale of partnership units. |
|
|
|
|
● |
3.6%
of DMHI #204, which raised $2.8 million, and was formed to raise up to $5.0 million through the sale of partnership units. |
|
|
|
|
● |
4.0%
of DMHI #205, which has raised $2.5 million, and was formed in 2019 to raise up to $5.0 million through the sale of partnership units. |
|
|
|
|
● |
8.5%
of DMHI #206, which has raised $1.2 million, and was formed in 2020 to raise up to $5.0 million through the sale of partnership units.
This partnership continues to raise capital through the sale of additional limited partnership units. |
|
|
|
|
● |
NetREIT
Dubose, which owns 100% of NetREIT Dubose Model Home REIT, LP. |
|
|
|
|
● |
100%
of NetREIT Model Homes, Inc. |
We
provide management services to our limited partnerships through our wholly-owned subsidiaries, NetREIT Advisors, LLC (“NetREIT
Advisors”) and Dubose Advisors LLC (“Dubose Advisors”), which we refer to collectively as the Advisors. For their services,
each of the Advisors receives ongoing management fees, acquisition fees and has the right to receive certain other fees when a partnership
sells or otherwise disposes of a model home. NetREIT Advisors manages NetREIT Dubose and NetREIT Model Homes, Inc. and Dubose Advisors
manages DMHI #202, DMHI #203, DMHI #204, DMHI #205 and DMHI #206.
Top
Ten Tenants Physical Occupancy Table
The
following table sets forth certain information with respect to our top ten tenants, each of which has a single lease with us, as of December
31, 2021.
As of December 31, 2021 Tenant | |
Number of Leases | | |
Annualized
Base Rent | | |
% of Total Annualized
Base Rent | |
Halliburton Energy Services, Inc. | |
1 | | |
| 922,084 | | |
| 8.0 | % |
Johns Hopkins University | |
1 | | |
| 682,668 | | |
| 5.9 | % |
Finastra USA Corporation | |
1 | | |
| 607,020 | | |
| 5.3 | % |
Rachas, Inc. (1) | |
1 | | |
| 449,182 | | |
| 3.9 | % |
L&T Care LLC | |
1 | | |
| 322,875 | | |
| 2.8 | % |
Wells Fargo Bank, N.A. (2) | |
1 | | |
| 282,960 | | |
| 2.5 | % |
Nova Financial & Investment Corporation | |
1 | | |
| 257,324 | | |
| 2.2 | % |
Republic Indemnity of America | |
1 | | |
| 255,170 | | |
| 2.2 | % |
Meissner Jacquet Real Estate Management Group, Inc. | |
1 | | |
| 240,240 | | |
| 2.1 | % |
Fredrikson & Byron P.A. | |
1 | | |
| 234,999 | | |
| 2.0 | % |
| |
| | |
$ | 4,254,522 | | |
| 36.8 | % |
(1) |
This
tenant occupies space in the World Plaza, which was classified as held for sale as of December 31, 2021. |
(2) |
This
tenant occupies space in the Grand Pacific Center, which was classified as held for sale in February 2022. |
Commercial
properties:
Expiration Year | |
Number of Leases Expiring | | |
Square Footage | | |
Annual Rental From Lease | | |
Percent of Total | |
2022 | |
| 37 | | |
| 207,284 | | |
$ | 3,362,188 | | |
| 29.3 | % |
2023 | |
| 34 | | |
| 123,637 | | |
| 1,990,408 | | |
| 17.4 | % |
2024 | |
| 23 | | |
| 69,953 | | |
| 1,136,825 | | |
| 9.9 | % |
2025 | |
| 15 | | |
| 66,865 | | |
| 1,210,653 | | |
| 10.6 | % |
2026 | |
| 18 | | |
| 148,317 | | |
| 2,218,671 | | |
| 19.4 | % |
Thereafter | |
| 12 | | |
| 99,210 | | |
| 1,540,799 | | |
| 13.4 | % |
Totals | |
| 139 | | |
| 715,266 | | |
$ | 11,459,544 | | |
| 100 | % |
Model
home properties:
Expiration Year (1) | |
Number of Leases Expiring | | |
Square Footage | | |
Annual Rental From Lease | | |
Percent of Total | |
2022 | |
| 75 | | |
| 224,479 | | |
$ | 2,121,864 | | |
| 79.7 | % |
2023 | |
| 17 | | |
| 53,946 | | |
| 540,504 | | |
| 20.3 | % |
| |
| 92 | | |
| 278,425 | | |
$ | 2,662,368 | | |
| 100.0 | % |
(1) |
These
leases are subject to extensions by the home builder depending on sales of the total development. All model homes are sold at the
end of the lease period. |
Physical
Occupancy Table for Last Three Years
The
following table presents the percentage occupancy for each of our properties, excluding our Model Home Properties, as of December 31
for each of the last five years.
| |
Date | |
Percentage Occupancy as of the Year Ended December 31, | |
| |
Acquired | |
2017 | | |
2018 | | |
2019 | | |
2020 | | |
2021 | |
Office/ Industrial Properties: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Garden Gateway Plaza (2) | |
| 03 | /07 | |
| 64.8 | % | |
| 68.1 | % | |
| 76.4 | % | |
| 76.4 | % | |
| N/A | |
Executive Office Park (2) | |
| 07 | /08 | |
| 90.4 | % | |
| 99.9 | % | |
| 100.0 | % | |
| 97.7 | % | |
| N/A | |
Genesis Plaza | |
| 08 | /10 | |
| 92.3 | % | |
| 58.3 | % | |
| 78.5 | % | |
| 74.7 | % | |
| 85.6 | % |
Dakota Center | |
| 05 | /11 | |
| 100.0 | % | |
| 98.2 | % | |
| 86.0 | % | |
| 86.0 | % | |
| 73.5 | % |
Grand Pacific Center (3) | |
| 03 | /14 | |
| 77.0 | % | |
| 72.6 | % | |
| 71.8 | % | |
| 74.2 | % | |
| 56.6 | % |
Arapahoe Center | |
| 12 | /14 | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % |
West Fargo Industrial | |
| 08 | /15 | |
| 87.1 | % | |
| 75.9 | % | |
| 77.1 | % | |
| 82.0 | % | |
| 90.8 | % |
300 N.P. | |
| 08 | /15 | |
| 98.4 | % | |
| 82.3 | % | |
| 73.0 | % | |
| 72.8 | % | |
| 64.8 | % |
Highland Court (2)(4) | |
| 08 | /15 | |
| 89.3 | % | |
| 78.5 | % | |
| 70.1 | % | |
| 64.5 | % | |
| N/A | |
One Park Centre | |
| 08 | /15 | |
| 87.7 | % | |
| 72.7 | % | |
| 79.1 | % | |
| 84.8 | % | |
| 80.5 | % |
Shea Center II | |
| 12 | /15 | |
| 92.8 | % | |
| 88.2 | % | |
| 90.9 | % | |
| 91.2 | % | |
| 91.6 | % |
Baltimore | |
| 12 | /21 | |
| N/A | | |
| N/A | | |
| N/A | | |
| N/A | | |
| 100.0 | % |
Retail Properties: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
World Plaza (1) | |
| 09 | /07 | |
| 34.6 | % | |
| 22.6 | % | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % |
Waterman Plaza (2) | |
| 08 | /08 | |
| 100.0 | % | |
| 100.0 | % | |
| 90.7 | % | |
| 85.9 | % | |
| N/A | |
Union Town Center | |
| 12 | /14 | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % | |
| 87.4 | % |
Research Parkway | |
| 08 | /15 | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % |
Mandolin (4) | |
| 08 | /21 | |
| N/A | | |
| N/A | | |
| N/A | | |
| N/A | | |
| 100.0 | % |
(1) |
Property
held for sale as of December 31, 2021. |
(2) |
Property
was sold during the year ended December 31, 2021. |
(3) |
Property
was listed as held for sale in February 2022. |
(4) |
A
portion of the proceeds from the sale of Highland Court were used in like-kind exchange transactions pursued under Section 1031 of
the Code for the acquisition of our Mandolin property. Mandolin is owned by NetREIT Palm Self-Storage LP, through its wholly owned
subsidiary NetREIT Highland LLC, and the Company is the sole general partner and owns 61.3% of NetREIT Palm Self-Storage LP. |
Annualized
Base Rent Per Square Foot for Last Three Years
The
following table presents the average effective annual rent per square foot for each of our properties, excluding our Model Home Properties,
as of December 31, 2021.
| |
Annualized Base Rent per Square Foot (1) For the Years Ended December 31 | | |
| | |
| |
| |
2019 | | |
2020 | | |
2021 | | |
Annualized Base Rent (2) | | |
Net Rentable Square Feet | |
Office/ Industrial Properties: | |
| | | |
| | | |
| | | |
| | | |
| | |
Garden Gateway Plaza (3) | |
$ | 12.62 | | |
$ | 13.45 | | |
| N/A | | |
| N/A | | |
| 115,052 | |
Executive Office Park (3) | |
$ | 13.29 | | |
$ | 13.65 | | |
| N/A | | |
| N/A | | |
| 49,864 | |
Genesis Plaza | |
$ | 28.15 | | |
$ | 22.97 | | |
$ | 25.71 | | |
$ | 1,272,733 | | |
| 57,807 | |
Dakota Center | |
$ | 12.87 | | |
$ | 13.24 | | |
$ | 13.22 | | |
$ | 1,163,982 | | |
| 119,434 | |
Grand Pacific Center (4) | |
$ | 13.97 | | |
$ | 13.71 | | |
$ | 13.79 | | |
$ | 726,256 | | |
| 93,058 | |
Arapahoe Center | |
$ | 14.69 | | |
$ | 15.18 | | |
$ | 11.87 | | |
$ | 938,090 | | |
| 79,023 | |
West Fargo Industrial | |
$ | 6.65 | | |
$ | 6.77 | | |
$ | 6.81 | | |
$ | 926,827 | | |
| 150,030 | |
300 N.P. | |
$ | 13.67 | | |
$ | 14.86 | | |
$ | 14.89 | | |
$ | 332,831 | | |
| 34,517 | |
Highland Court (3)(5) | |
$ | 19.33 | | |
$ | 22.33 | | |
| N/A | | |
| N/A | | |
| 93,536 | |
One Park Centre | |
$ | 19.51 | | |
$ | 21.85 | | |
$ | 23.42 | | |
$ | 1,304,809 | | |
| 69,174 | |
Shea Center II | |
$ | 18.47 | | |
$ | 19.24 | | |
$ | 20.37 | | |
$ | 2,291,285 | | |
| 121,301 | |
Baltimore | |
| N/A | | |
| N/A | | |
$ | 21.50 | | |
$ | 682,668 | | |
| 31,752 | |
Retail Properties: | |
| | | |
| | | |
| | | |
| | | |
| | |
World Plaza (3) | |
$ | 13.63 | | |
$ | 9.93 | | |
$ | 14.28 | | |
$ | 796,896 | | |
| 55,810 | |
Waterman Plaza (3) | |
$ | 16.30 | | |
$ | 12.42 | | |
| N/A | | |
| N/A | | |
| 21,170 | |
Union Town Center | |
$ | 25.63 | | |
$ | 23.73 | | |
$ | 23.86 | | |
$ | 919,087 | | |
| 44,042 | |
Research Parkway | |
$ | 22.58 | | |
$ | 29.09 | | |
$ | 22.69 | | |
$ | 242,750 | | |
| 10,700 | |
Mandolin (5) | |
| N/A | | |
| N/A | | |
$ | 30.75 | | |
$ | 322,875 | | |
| 10,500 | |
(1) |
Annualized
Base Rent (defined as cash rent including abatements) divided by the percentage occupied divided by rentable square feet. |
(2) |
Annualized
Base Rent is based upon actual rents due as of December 31, 2021. |
(3) |
Property
was sold during the year ended December 31, 2021. |
(4) |
Property
was listed as held for sale in February 2022. |
(5) |
A
portion of the proceeds from the sale of Highland Court were used in like-kind exchange transactions pursued under Section 1031 of
the Code for the acquisition of our Mandolin property. Mandolin is owned by NetREIT Palm Self-Storage LP, through its wholly owned
subsidiary NetREIT Highland LLC, and the Company is the sole general partner and owns 61.3% of NetREIT Palm Self-Storage LP. |
(6) |
Property
held for sale as of December 31, 2021. |
Use
of Leverage
We
use mortgage loans secured by our individual properties in order to maximize the return for our stockholders. Typically these loans are
for terms ranging from five to ten years. Currently, the majority of our mortgage loans are structured as non-recourse to us with limited
exceptions that would cause a recourse event only upon occurrence of certain fraud, misconduct, environmental, or bankruptcy events.
Non-recourse financing limits our exposure to the amount of equity invested in each property pledged as collateral thereby protecting
the equity in our other assets. We can provide no assurance that the non-recourse financing will be available to us in the future on
terms that are acceptable to us, or at all and there may be circumstances where lenders have recourse to our other assets. To a lesser
extent, we use recourse financing. At December 31, 2021, $25.9 million of our total debt of $89.4 million was recourse to us of which
$22.2 million relates to the model homes properties.
We
have used both fixed and variable interest rate debt to finance our properties. Wherever possible, we prefer to obtain fixed rate mortgage
financing as it provides better cost predictability. As of December 31, 2021, none of our mortgage loans include variable interest rate
provisions.
In
2022, we have $8.6 million of principal payments on mortgage notes payable related to the model home properties, including payments related
to mortgage notes payable that mature in 2022. We plan to refinance a significant portion of the mortgage notes payable or sell the model
home properties to repay the mortgage notes payable. We have $3.6 million of principal payments on mortgage notes payable relating to
commercial properties in 2022, including $2.2 million related to one commercial property maturing in 2022. We plan to sell properties
and extend the maturity date of the mortgage notes payable, pay down balances form cash on hand, or refinance a significant portion of
the mortgage notes payable. See Part 15. Exhibits, Financial Statement Schedules — Note 13. Subsequent Events for additional information.
On
September 17, 2019 we executed a Promissory Note pursuant to which Polar Multi-Strategy Master Fund (“Polar”), issued a loan
in the principal amount of $14.0 million to us (“Polar Note”). The Polar Note accrued interest at a fixed rate of 8% per
annum and required monthly interest-only payments. On September 1, 2020, we extended the maturity of the Polar Note from October 1, 2020
to March 31, 2021 (“Maturity”), at which time the entire outstanding principal balance of $7.7 million as of December 31,
2020 and accrued and unpaid interest would be due and payable. On September 30, 2020, we paid a renewal fee of 4% on the unpaid principal
balance, which was amortized through the maturity date. We used the proceeds of the Polar Note to redeem all of the outstanding shares
of our Series B Preferred Stock. During March 2021, prior to Maturity, the Polar Note was paid in full, from available cash on hand.
See Part 15. Exhibits, Financial Statement Schedules - Note. 13 Subsequent Events for additional information.
Our
short-term liquidity needs include satisfying the debt service requirements of our existing mortgages. If our cash flow from operating
activities is not sufficient to fund our short-term liquidity needs, we will fund a portion of these needs from additional borrowings
of secured or unsecured indebtedness, from real estate sales, from sales of equity or debt securities, or we will reduce the rate of
distribution to the stockholders.
Our
mortgage obligations consist of the following:
Mortgage
notes payable consist of the following:
| |
Principal as of | | |
| | |
| | |
| |
| |
December 31, | | |
December 31, | | |
Loan | | |
Interest | | |
| |
Mortgage note property | |
2021 | | |
2020 | | |
Type | | |
Rate (1) | | |
Maturity | |
Waterman Plaza (2) | |
$ | — | | |
$ | 3,207,952 | | |
| Variable | | |
| — | | |
| — | |
|
World Plaza (3) (4) | |
| — | | |
| 5,802,568 | | |
| Variable | | |
| — | | |
| — | |
|
Garden Gateway Plaza (2) | |
| — | | |
| 5,861,523 | | |
| Fixed | | |
| — | | |
| — | |
|
300 N.P. (8) | |
| 2,232,923 | | |
| 2,273,478 | | |
| Fixed | | |
| 4.95 | % | |
| 6/11/2022 | |
Highland Court (2) | |
| — | | |
| 6,274,815 | | |
| Fixed | | |
| 3.82 | % | |
| — | |
Dakota Center | |
| 9,677,108 | | |
| 9,900,279 | | |
| Fixed | | |
| 4.74 | % | |
| 7/6/2024 | |
Research Parkway | |
| 1,705,438 | | |
| 1,760,432 | | |
| Fixed | | |
| 3.94 | % | |
| 1/5/2025 | |
Arapahoe Service Center | |
| 7,770,887 | | |
| 7,932,255 | | |
| Fixed | | |
| 4.34 | % | |
| 1/5/2025 | |
Union Town Center | |
| 8,173,568 | | |
| 8,315,550 | | |
| Fixed | | |
| 4.28 | % | |
| 1/5/2025 | |
One Park Centre | |
| 6,276,849 | | |
| 6,385,166 | | |
| Fixed | | |
| 4.77 | % | |
| 9/5/2025 | |
Genesis Plaza | |
| 6,168,604 | | |
| 6,276,273 | | |
| Fixed | | |
| 4.71 | % | |
| 9/6/2025 | |
Shea Center II | |
| 17,494,527 | | |
| 17,727,500 | | |
| Fixed | | |
| 4.92 | % | |
| 1/5/2026 | |
Executive Office Park (2) | |
| — | | |
| 2,985,998 | | |
| Fixed | | |
| 4.83 | % | |
| 6/1/2027 | |
West Fargo Industrial | |
| 4,148,405 | | |
| 4,262,718 | | |
| Fixed | | |
| 3.27 | % | |
| 8/5/2029 | |
Grand Pacific Center (5) (7) | |
| 3,619,695 | | |
| 3,738,142 | | |
| Fixed | | |
| 4.02 | % | |
| 8/1/2037 | |
Subtotal, Presidio Property Trust, Inc. Properties | |
$ | 67,268,004 | | |
$ | 92,704,649 | | |
| | | |
| | | |
| | |
Model Home mortgage notes (3) | |
| 22,154,128 | | |
| 28,083,356 | | |
| Fixed | | |
| (6 | ) | |
| 2022 - 2024 | |
|
Mortgage Notes Payable | |
$ | 89,422,132 | | |
$ | 120,788,005 | | |
| | | |
| | | |
| | |
Unamortized loan costs | |
| (562,300 | ) | |
| (758,309 | ) | |
| | | |
| | | |
| | |
Mortgage Notes Payable, net | |
$ | 88,859,832 | | |
$ | 120,029,696 | | |
| | | |
| | | |
| | |
(1) |
Interest
rates as of December 31, 2021. |
(2) |
Waterman
Plaza and Garden Gateway Plaza were sold during the first quarter of 2021, while Highland Court and Executive Office Park were sold
in the second quarter of 2021. |
(3) |
Properties
held for sale as of December 31, 2021. Five model homes were included as held for sale. |
(4) |
During
June 2021, this loan was paid in full with cash from the sale of other properties and excess cash on hand. |
(5) |
Interest
rate is subject to reset on September 1, 2023. |
(6) |
Each
Model Home has a stand-alone mortgage note at interest rates ranging from 2.5% to 4.33% at December 31, 2021. |
(7) |
Property
was listed as held for sale in February 2022. |
(8) |
The
mortgage note payable for 300 N.P. is an amortizing loan with a balloon payment of $2.2 million due at maturity, on June 11, 2022,
and is no longer subject to defeasance or yield maintenance. The Company expects to pay this note in full at or before maturity with
proceeds from property sales, property financing and other available cash on hand. |
The
Company is in compliance with all material conditions and covenants of its mortgage notes payable.
Scheduled
principal payments of mortgage notes payable were as follows as of December 31, 2021:
| |
Commercial | | |
Model | | |
| |
| |
Properties | | |
Homes | | |
Total Principal | |
Years ending December 31: | |
Notes Payable | | |
Notes Payable | | |
Payments | |
2022 | |
| 3,577,700 | | |
| 8,633,455 | | |
$ | 12,211,155 | |
2023 | |
| 1,406,466 | | |
| 4,376,107 | | |
| 5,782,573 | |
2024 | |
| 10,379,660 | | |
| 9,144,566 | | |
| 19,524,226 | |
2025 | |
| 28,782,401 | | |
| — | | |
| 28,782,401 | |
2025 | |
| 16,644,046 | | |
| — | | |
| 16,644,046 | |
Thereafter | |
| 6,477,731 | | |
| — | | |
| 6,477,731 | |
Total | |
$ | 67,268,004 | | |
$ | 22,154,128 | | |
$ | 89,422,132 | |
Property
Management
We,
through our wholly-owned subsidiary, NTR Property Management, Inc., are the primary property manager for all of our properties. We subcontract
with third-party property management companies in all markets except Denver to render on-site management services.
Securities
of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers
Although
our primary objective is to maximize long-term stockholder value through the acquisition, management, leasing and selective redevelopment
of high-quality commercial properties, we may also invest in common and preferred equity securities and debt securities of other REITs.
We may acquire securities of other REITs where management believes that yields on such investments would exceed the risk-adjusted return
on our target properties, consistent with our REIT qualification requirements. We believe that such a securities portfolio may provide
us with an attractive opportunity for liquidity and additional income potential and serves as a proxy for real estate when suitable acquisitions
are not available. We may purchase securities on margin when the interest and dividend yields exceed our cost of capital, and we may
use derivative instruments to mitigate interest rate risk. Under normal market conditions, we seek to limit the market value of the portfolio
from time to time to approximately 10% of the greater of the total value of our assets or the total market value of our stock. There
are no limitations on the amount or percentage of our total assets that may be invested in any one issuer. We do not intend that our
investments in securities will require us to register as an investment company under the Investment Company Act, and we would intend
to divest such securities before any such registration would be required.
Investments
in Other Securities
Other
than as described above, we do not intend to invest in any additional securities such as bonds, preferred stocks or common stock, other
than short-term, investment-grade securities as part of a money market fund or for short-term cash management purposes.
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 extensively 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, extensive healthcare
systems and available housing. We believe this extensive research 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.
Since 2015, we have been selectively selling retail properties and redeploying the capital into other commercial properties. We have
achieved substantial returns in the past from the operation, repositioning, and sale of properties. We seek to continue to actively
manage our properties in the future to maximize the opportunity to recycle capital. |
Our
Model Home Property Investment Approach
Model
homes are single-family dwellings constructed by builders for the purpose of showing each of the builder’s floor plans, elevations,
optional features, and workmanship in the marketing of the development in which the home is located. Each model home is designed to be
held through the end of a minimum lease term after which the Model Home Property is listed for sale at the estimated fair market value.
We seek to purchase model homes, typically at a discount from fair market value, that have a likelihood of appreciation within the expected
three-year term of the lease. Our model home leaseback agreements are triple-net, requiring the homebuilder/commercial 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, price point or location.
During
the year ended December 31, 2021, we disposed of 39 model homes for approximately $19.0 million and recognized a gain of approximately
$2.9 million and 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.
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 common stock. Our primary strategies to achieve our business objectives are to invest in, own and manage
a diverse multi-tenant portfolio of high-quality commercial properties in attractive regionally dominant markets, which we believe will
drive high tenant retention and occupancy.
We
intend to grow our commercial portfolio by acquiring high-quality properties in our target markets. In addition to our commercial properties,
we may also selectively invest in other properties such as model homes and other property types where we believe we can achieve high
risk-adjusted returns for our stockholders. We also expect that our extensive broker and seller relationships will benefit our acquisition
activities and help set us apart from competing buyers. In addition, we intend to actively manage our existing portfolio of commercial
properties and model homes and continue to redeploy capital through the opportunistic sale of non-core assets (including retail properties)
into additional commercial properties.
Our
Commercial Property Growth Strategy
We
typically purchase commercial 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 purchases of
model homes are expected to be from homebuilders that have sufficient assets and resources to fulfill their obligations under the lease
and with model homes that offer a good opportunity for appreciation upon the sale of the model home. Sales proceeds from model homes
will typically be reinvested and used to acquire new model homes.
Share
Repurchase Program
On
September 17, 2021, the Board of Directors authorized a stock repurchase program of up to $10 million of outstanding shares of
our common stock. Purchases under the repurchase program may be made in the open market, through block trades, and other negotiated transactions.
We expect to execute the share repurchase program primarily in open market transactions, subject to market conditions. There is no fixed
termination date for the repurchase program, and the program may be suspended, discontinued, or accelerated at any time. During September
2021, we purchased 18,133 shares at an average price of $3.73692 per share, plus commission of $0.035 per share, for a total cost of
$68,396. During December 2021, we purchased 11,588 shares at an average price of $3.6097 per share, plus commission of $0.035 per share,
for a total cost of $42,234.78.
At-the-Market
Offering
On
November 8, 2021, we entered into an At-the-Market Offering Agreement (the “Sales Agreement”) with The Benchmark Company,
LLC (the “Manager”) pursuant to which the Manager will act as our sales agent with respect to the issuance and sale of up
to $4,399,000 of our common stock from time to time in an at-the-market public offering. Sales of our common stock, if any, through the
Manager, will be by any method that is deemed to be an “at-the-market” equity offering as defined in Rule 415 under the Securities
Act of 1933, as amended, including sales made directly on or through the Nasdaq Capital Market or any other existing trading market for
the common stock in the U.S. or to or through a market maker. The Manager may also sell the common stock in privately negotiated transactions,
subject to our prior approval. The price per share will be at prevailing market prices. We will pay the Manager a commission equal to
3.5% of the gross proceeds from the sale of the common stock pursuant to the Sales Agreement.
Sponsorship
of Special Purpose Acquisition Company
On
January 7, 2022, we announced our sponsorship, through our wholly-owned subsidiary, Murphy Canyon Acquisition Sponsor, LLC (the “Sponsor”),
of a special purpose acquisition company (“SPAC”) initial public offering. The registration statement and prospectus relating
to the initial public offering (“IPO”) of the SPAC, Murphy Canyon Acquisition Corp. (“Murphy Canyon”), was declared
effective by the SEC on February 2, 2022 and SPAC units, consisting of one share of Class A common stock, par value $0.0001 per share,
of Murphy Canyon and one redeemable warrant, with each whole warrant entitling the holder thereof to purchase one share of common stock
at a price of $11.50 per share, began trading on the Nasdaq Global Market on February 3, 2022. On March 28, 2022, the common stock and
warrants comprising the units began trading separately on the Nasdaq Global Market under the symbols “MURF” and “MURFW,”
respectively, with the units remaining trading under the symbol “MURFU”. The Murphy Canyon IPO closed on February 7, 2022,
raising gross proceeds for Murphy Canyon of $132,250,000, including the exercise in full by the underwriters of their over-allotment
option. In connection with the IPO, we purchased, through the Sponsor, 754,000 placement units (the “placement units”) at
a price of $10.00 per unit, for an aggregate purchase price of $7,540,000. The Sponsor has agreed to transfer an aggregate of 45,000
placement units (15,000 each) to each of Murphy Canyon’s independent directors.
Immediately
following the IPO, Murphy Canyon began to evaluate acquisition candidates in the real estate industry, including construction, homebuilding,
real estate owners and operators, arrangers of financing, insurance, and other services for real estate, and adjacent businesses and
technologies targeting the real estate space with an aggregate combined enterprise value of approximately $300 million to $1.2 billion.
Murphy Canyon’s goal is to complete its initial business combination (“IBC”) within one year of its IPO. We expect
Murphy Canyon to operate as a separately managed, publicly traded entity following the completion of the IBC, or “De-SPAC”.
Warrant
Dividend
We
set a record date of January 14, 2022, with respect to the distribution of five-year listed warrants (the “Series A Warrants”).
The Series A Warrants and the shares of common stock issuable upon the exercise of the Series A Warrants were registered on a registration
statement that was filed with the SEC and was declared effective January 21, 2022. The Series A Warrants commenced trading on the Nasdaq
Capital Market under the symbol “SQFTW” on January 24, 2022 and were distributed on that date to persons who held shares
of common stock and existing outstanding warrants as of the January 14, 2022 record date, or who acquired shares of common stock in the
market following the record date, and who continued to hold such shares at the close of trading on January 21, 2022. The Series A Warrants
give the holder the right to purchase one share of common stock at $7.00 per share, for a period of five years. Should warrantholders
not exercise the Series A Warrants during that holding period, the Series A Warrants will automatically convert to 1/10 of a share
of common stock at expiration, rounded down to the nearest number of whole shares.
Preferred
Stock Series D
On
June 15, 2021, we completed an offering of 800,000 shares of our 9.375% Series D Cumulative Redeemable Perpetual Preferred Stock (“Series
D Preferred Stock”) for cash consideration of $25.00 per share to a syndicate of underwriters led by The Benchmark Company, LLC,
as representative, resulting in approximately $18.1 million in net proceeds, after deducting the underwriting discounts and commissions
and the offering expenses. We granted the underwriters a 45-day option to purchase up to an additional 120,000 shares of Series D Preferred
Stock to cover over-allotments, which they exercised on June 17, 2021, resulting in approximately $2.7 million in net proceeds, after
deducting the underwriting discounts and commissions and the offering expenses. In total, we issued 920,000 shares of Series D Preferred
Stock with net proceeds of approximately $20.5 million, after deducting the underwriting discounts and commissions and the offering expenses.
Holders
of shares of the Series D Preferred Stock are entitled to receive cumulative cash dividends at a rate of 9.375% per annum of the $25.00
per share liquidation preference (equivalent to $2.34375 per annum per share). Dividends are payable monthly on the 15th day of each
month (each, a “dividend payment date”), provided that if any dividend payment date is not a business day, then the dividend
that would otherwise have been payable on that dividend payment date may be paid on the next succeeding business day without adjustment
in the amount of the dividend. Holders of shares of the Series D Preferred Stock will generally have no voting rights. However, if we
do not pay dividends on the Series D Preferred Stock for eighteen or more monthly dividend periods (whether or not consecutive), the
holders of the Series D Preferred Stock (voting separately as a class with the holders of all other classes or series of our preferred
stock it may issue upon which like voting rights have been conferred and are exercisable and which are entitled to vote as a class with
the Series D Preferred Stock in the election referred to below) will be entitled to vote for the election of two additional directors
to serve on our Board of Directors until we pay, or declare and set apart funds for the payment of, all dividends that we owe on the
Series D Preferred Stock, subject to certain limitations. In addition, the affirmative vote of the holders of at least two-thirds of
the outstanding shares of Series D Preferred Stock (voting together as a class with all other series of parity preferred stock we may
issue upon which like voting rights have been conferred and are exercisable) is required at any time for us to (i) authorize or issue
any class or series of its stock ranking senior to the Series D Preferred Stock with respect to the payment of dividends or the distribution
of assets on liquidation, dissolution or winding up or (ii) to amend any provision of our charter so as to materially and adversely affect
any rights of the Series D Preferred Stock or to take certain other actions.
In
the event of our voluntary or involuntary liquidation, dissolution or winding up, the holders of shares of Series D Preferred Stock will
be entitled to be paid out of the assets we have legally available for distribution to our stockholders, subject to the preferential
rights of the holders of any class or series of stock we may issue ranking senior to the Series D Preferred Stock with respect to the
distribution of assets upon liquidation, dissolution or winding up, a liquidation preference of $25.00 per share, plus any accumulated
and unpaid dividends to, but not including, the date of payment, before any distribution of assets is made to holders of our common stock
or any other class or series of our stock we may issue that ranks junior to the Series D Preferred Stock as to liquidation rights. Commencing
on or after June 15, 2026, we may redeem, at our option, the Series D Preferred Stock, in whole or in part, at a cash redemption price
equal to $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the redemption date. Prior to June 15, 2026,
upon a Change of Control (as defined in the Articles Supplementary classifying and designating the Series D Preferred Stock), we may
redeem, at our option, the Series D Preferred Stock, in whole or part, at a cash redemption price of $25.00 per share, plus any accumulated
and unpaid dividends to, but not including the redemption date. The Series D Preferred Stock has no stated maturity, will not be subject
to any sinking fund or other mandatory redemption, and will not be convertible into or exchangeable for any of our other securities.
Competition
We
compete with a number of other real estate investors, many of whom own similar properties in the same geographical markets. Competitors
include other REITs, pension funds, insurance companies, investment funds and companies, partnerships and developers. Many of these competitors
have substantially greater financial resources than we do and may be able to accept more risk than we can prudently manage, including
risks with respect to the creditworthiness of a tenant or the geographic location of its investments. In addition, many of these competitors
have capital structures that allow them to make investments at higher prices than what we can prudently offer while still generating
a return to their investors that is commensurate with the return we are seeking to provide our investors. If our competitors offer space
at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose potential tenants
and we may be pressured to reduce our rental rates below those we currently charge or to offer more substantial rent abatements, tenant
improvements, early termination rights or below-market renewal options in order to retain tenants when our tenants’ leases expire.
The concentration of our properties in Southern California, Colorado and North Dakota makes us susceptible to local market conditions
in these areas.
To
be successful, we must be able to continue to respond quickly and effectively to changes in local and regional economic conditions by
adjusting rental rates of our properties as appropriate. If we are unable to respond quickly and effectively, our financial condition,
results of operations, cash flow, and ability to satisfy our debt service obligations and pay dividends may be adversely affected.
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. However, we cannot provide any assurance as to the amount or timing of future distributions.
Our goal is to generate cash distributions from operating cash flow and proceeds from the sale of properties. During the year ended December
31, 2021, we paid four cash dividends to the holders of shares of common stock totaling approximately $4.5 or $0..41 per share. During
the year ended December 31, 2020, we paid a cash dividend totaling approximately $1.0 million or $0.10 per share. During 2018 and 2019,
we declared distributions of approximately $1.1 million each year.
Holders
of shares of the Series D Preferred Stock are entitled to receive cumulative cash dividends at a rate of 9.375% per annum of the $25.00
per share liquidation preference (equivalent to $2.34375 per annum per share). Dividends will be payable monthly on the 15th day of each
month (each, a “dividend payment date”), provided that if any dividend payment date is not a business day, then the dividend
that would otherwise have been payable on that dividend payment date may be paid on the next succeeding business day without adjustment
in the amount of the dividend. Pursuant to the terms of our Series D Preferred Stock, since the date of issuance of shares of Series
D Preferred Stock through December 31, 2021, we had declared a dividend of approximately $1.2 million.
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.
We
provide each of our stockholders a statement detailing the distributions paid during the preceding year and their characterization as
ordinary income, capital gain or return of capital. During the year ended December 31, 2021, all dividends to holders of our common stock
were non-taxable as they were considered return of capital to the stockholders. During the year ended December 31, 2020, all dividends
to holders of common stock were taxable as they were considered capital gain to the stockholders.
Dividend
Reinvestment Plan
We
have adopted a distribution reinvestment plan that allowed stockholders to have dividends or other distributions otherwise distributable
to them invested in additional shares of our common stock. We registered 3,000,000 of common stock pursuant to the dividend reinvestment
plan. The purchase price per share is 95% of the price we were formerly selling our shares for $10.00 per share. No sales commission
or dealer manager fee will be paid on shares sold through the dividend reinvestment plan. We may amend, suspend or terminate the dividend
reinvestment plan at any time. Any such amendment, suspension or termination will be effective upon a designated dividend record date
and notice of such amendment, suspension or termination will be sent to all participants at least 30 days prior to such record date.
The dividend reinvestment plan became effective on January 23, 2012, was suspended on December 7, 2019 and adopted on October 6, 2020
in connection with our IPO, updated to reflect a change in transfer agent and registrar. No dividend reinvestments were made for the
year ended December 31, 2020. As of December 31, 2020, approximately $17.4 million or 1,834,147 shares of common stock have been issued
under the dividend reinvestment plan to date. No shares were issued under the DRIP during the year ended December 31, 2021.
Corporate
Structure
We
were incorporated in the State of California on September 28, 1999, and in August 2010, we reincorporated as a Maryland corporation.
In October 2017, we changed our name from “NetREIT, Inc.” to “Presidio Property Trust, Inc.” We have approximately
12.4 million shares of common stock outstanding, inclusive of restricted stock from the employee share-based incentive plan, with
approximately 5,000 stockholders. Through Presidio Property Trust, Inc., its subsidiaries and its partnerships, we own 15 properties
in fee interest and have partial interests in two properties through our investments in limited partnerships and limited liability companies
in which we serve as the general partner and member, respectively. Each of the limited partnerships and limited liability companies is
referred to as a “DownREIT.” In each DownREIT, we have the right, through put and call options, to require our co-investors
to exchange their interests for shares of our common stock at a stated price after a defined period (generally five years from the date
they first invested in the entity’s real property), the occurrence of a specified event or a combination thereof. Our model homes
business is conducted through our wholly-owned subsidiary, NetREIT Model Homes, Inc., NetREIT Dubose Model Home REIT, Inc., and six limited
partnerships, DMHI #202, DMHI #203, DMHI #204, DMHI #205, DMHI #206 and NetREIT Dubose Model Home REIT, LP.
Offices
and Employees
Our
executive offices are situated in approximately 9,224 square feet of space located at 4995 Murphy Canyon Road, San Diego, CA 92123.
We
have a total of 18 full-time employees.
Regulation
Our
management continually reviews our investment activity and monitors the proportion of our portfolio that is placed in various investments
in order to prevent us from coming within the application of the Investment Company Act. If at any time the character of our investments
could cause us to be deemed an investment company for purposes of the Investment Company Act, we would be required to comply with the
operating restrictions of the Investment Company Act, which are generally inconsistent with our normal operations. As such, we work to
ensure that we are not deemed to be an “investment company.”
Various
environmental laws govern certain aspects of the ongoing operation of our properties. Such environmental laws include those regulating
the existence of asbestos-containing materials in buildings, management of surfaces with lead-based paint (and notices to residents about
the lead-based paint) and waste-management activities. Our failure to comply with such requirements could subject us to government enforcement
action and/or claims for damages by a private party.
To
date, we have not experienced a material effect on our capital expenditures, earnings, or competitive position as a result of a lack
of compliance with federal, state and local environmental protection regulations. All of our proposed acquisitions are inspected prior
to such acquisition. These inspections are conducted by qualified environmental consultants, and we review in detail their reports prior
to our acquisition of any property. Nevertheless, it is possible that our environmental assessments will not reveal all environmental
liabilities, or that some material environmental liabilities exist of which we are unaware. In some cases, we may be required to abandon
otherwise economically attractive acquisitions because the costs of removal or control of hazardous materials are considered to be prohibitive
or we are unwilling to accept the potential risks involved. We do not believe we will be required to engage in any large-scale abatement
at any of our current properties. We believe that through professional environmental inspections and testing for asbestos, lead paint
and other hazardous materials, coupled with a relatively conservative posture toward accepting known environmental risk, we minimize
our exposure to potential liability associated with environmental hazards.
We
are unaware of any environmental hazards at any of our current properties that, individually or in the aggregate, may have a material
adverse impact on our operations or financial position. We have not been notified by any governmental authority, and we are not otherwise
aware of any material non-compliance, liability, or claim relating to environmental liabilities in connection with any of our properties.
We do not believe that the cost of continued compliance with applicable environmental laws and regulations will have a material adverse
effect on us, our financial condition or our results of operations. Future environmental laws, regulations, or ordinances, however, may
require additional remediation of existing conditions that are not currently actionable. Also, if more stringent requirements are imposed
on us in the future, the costs of compliance could have a material adverse effect on us and our financial condition.
Legal
Proceedings
We
are subject to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of these matters
cannot be predicted with certainty, management believes the final outcome of such matters will not have a material adverse effect on
our financial position, results of operation or liquidity.
MANAGEMENT
Our
Directors, Executive Officers and Key Employees
The
following sets forth certain information with respect to our executive officers, key employees and directors as of the date of this prospectus:
Name |
|
Age |
|
Position |
Executive
Officers |
|
|
|
|
Jack
K. Heilbron |
|
72 |
|
Chief
Executive Officer and President, Chairman of the Board |
Adam
Sragovicz |
|
52
|
|
Chief
Financial Officer |
|
|
|
|
|
Key
Employees |
|
|
|
|
Gary
M. Katz |
|
58 |
|
Senior
Vice President, Asset Management |
Ed
Bentzen |
|
45 |
|
Chief
Accounting Officer |
|
|
|
|
|
Non-Executive
Directors |
|
|
|
|
Jennifer
A. Barnes |
|
42 |
|
Independent
Director |
David
T. Bruen |
|
77 |
|
Lead
Independent Director |
James
R. Durfey |
|
71 |
|
Independent
Director |
Sumner
J. Rollings |
|
73 |
|
Independent
Director |
Larry
G. Dubose |
|
72 |
|
Director,
employee of our model home division |
Set
forth below is information concerning our executive officers, key employees and directors identified above. Our Board of Directors currently
consists of six directors, all of whom except for Mr. Dubose, are expected to be subject to re-election at our next annual meeting of
stockholders. Our executive officers were appointed by the Board of Directors to serve in their current roles. Each executive officer
is appointed for such term as may be prescribed by the Board of Directors and until a successor has been chosen and qualified or until
such officer’s death, resignation or removal.
Executive
Officers
Jack
K. Heilbron
Mr.
Heilbron has served as a director and our Chief Executive Officer and President since our inception. Mr. Heilbron also has served as
Chairman, CEO and President of NetREIT Dubose Model Home REIT, Inc. (“NetREIT Dubose”) since its inception, and has served
as CEO, President and/or Managing Member of NetREIT Advisors, LLC, Dubose Advisors, LLC, NTR Property Management, Inc., Murphy Canyon
Acquisition Corp. and Murphy Canyon Acquisition Sponsor, LLC since their inceptions, all of which are Company affiliated entities. Mr.
Heilbron was a founding officer, director, and stockholder of the former CI Holding Group, Inc. and of its subsidiary corporations (Centurion
Counsel, Inc., Bishop Crown Investment Research Inc., PIM Financial Securities Inc., Centurion Institutional Services Inc. and CHG Properties,
Inc.) and currently serves as Chairman and CEO of Centurion Counsel, Inc., a licensed investment advisor. He also served as a director
of the Centurion Counsel Funds, an investment company registered under the Investment Company Act of 1940, from 2001 until 2005. From
1994 until its dissolution in 1999, Mr. Heilbron served as the Chairman and/or director of Clover Income and Growth REIT. Mr. Heilbron
graduated with a B.S. degree in Business Administration from California Polytechnic College, San Luis Obispo, California. Based on his
experience as a director and his experience with other REITs, the Nominating and Corporate Governance Committee determined that Mr. Heilbron
is qualified to serve on the Board of Directors.
Larry
G. Dubose
Mr.
Dubose has served as a director since 2005 and was our Chair of the Audit Committee until 2010. In connection with our entering into
a management agreement with Dubose Model Homes, USA, Mr. Dubose became an employee of our Company in 2010 and served as Chief Financial
Officer, Treasurer, and a director of NetREIT Dubose since its inception until 2022. He also served as Chief Executive Officer and/or
President of NetREIT Advisors, LLC, one of our wholly-owned subsidiaries, since its inception until 2022. As
previously disclosed, Mr. Dubose resigned from his executive positions with us in 2022 and will not stand for re-election our next annual
meeting, due to his other professional commitments and demands on his time. However, he will continue to remain an employee of our model
home division. From 2008 to 2010, Mr. Dubose was President of Dubose Model Homes, USA, a residential real estate investment company
headquartered in Houston, Texas that he founded in 1985, a position he also held until 2004. Prior to forming that company, Mr. Dubose
served as Vice President and CFO of a full service real estate brokerage company in Houston for six years. From 1973 to 1976, he served
as a staff accountant with PricewaterhouseCoopers f/k/a Price Waterhouse. Mr. Dubose graduated with a B.A. degree in Accounting from
Lamar University in 1973. Although not active at present, Mr. Dubose is a Certified Public Accountant in the State of Texas. He also
holds a real estate brokerage license. Based on his experience in real estate and his extensive financial background, the Nominating
and Corporate Governance Committee determined that Mr. Dubose is qualified to serve on the Board of Directors.
Adam
Sragovicz
Mr.
Sragovicz is our Chief Financial Officer, a position he has held since January 2018. He has also served as the Chief Financial Officer,
Treasurer and director of Murphy Canyon Acquisition Corp., a SPAC sponsored by the Company, since its inception in 2021. He previously
served as our Senior Vice President, Finance since May 2017, and from time to time as our Chief Accounting Officer for brief, interim
periods. Before joining us, Mr. Sragovicz served as Treasurer of Encore Capital Group from 2011 to 2017, where he was responsible for
global capital raising, foreign exchange risk management and cash management. Mr. Sragovicz has also held capital markets, finance, and
treasury management positions with KPMG, Union Bank of California / MUFG and Bank of America Merrill Lynch. Mr. Sragovicz is the Director
of the Yale Alumni Schools Committee in San Diego and previously sat on the board of Congregation Adat Yeshurun. Mr. Sragovicz is a graduate
of Yale University with a Bachelor of Arts degree in Soviet and Eastern European Studies, with a concentration in Economics.
Gary
M. Katz
Mr.
Katz joined us as Senior Vice President, Asset Management in 2010. He was appointed Chief Investment
Officer effective as of December 16, 2021. He has worked in the commercial real estate industry for over 30 years and has held
positions with Legacy Partners, Lincoln Property Company, Kemper Real Estate Management Company, Bedford Properties, and Meyer Investment
Properties. Prior to joining us, Mr. Katz served in senior acquisition, leasing, asset management, and development roles for Westcore
Properties from 2001 to 2009 and was responsible for real estate transactions throughout the western United States. Mr. Katz is actively
involved with NAIOP, a commercial real estate education and advocacy organization. He was a member of the NAIOP Corporate (National)
Board, formerly served as president of the San Diego Chapter and currently serves on the Board of Directors and as Treasurer of the San
Diego Chapter. He also sits on the San Diego Charitable Real Estate Foundation’s Board of Directors. Mr. Katz holds a Bachelor
of Arts degree in Economics from University of California San Diego.
Key
Employees
Ed
Bentzen
Mr.
Bentzen joined the Company as Chief Accounting Officer in March 2021. Prior to joining the Company, Mr. Bentzen served as Chief Financial
Officer and Chief Operations Officer for Crystal View Capital Management in 2020, as a Chief Financial Officer / Finance consultant for
various clients (including real estate development companies) from 2018 to 2020, and as Chief Financial Officer for The Parking REIT
(formerly MVP REIT and MVP REIT II) from 2016 to 2018. Prior to these roles, Mr. Bentzen held senior and/or accounting roles at Western
Funding, Inc., Vestin Group, Inc., and a local CPA firm in Las Vegas, Nevada. In addition, Mr. Bentzen worked as a Senior Internal Auditor
at Ameristar Casinos, Inc. (formerly Nasdaq: ASCA). He holds a Bachelor of Science degree in Hotel Administration, with an emphasis in
Gaming, and a Master of Science degree in Accountancy, from University of Nevada, Las Vegas, and is licensed as a Certified Internal
Auditor (inactive).
Non-Executive
Directors
Jennifer
A. Barnes
Mrs.
Barnes has served as a director and as a member of the Audit Committee since February 2020. Effective December 31, 2020, Mrs. Barnes
joined the Nominating and Corporate Governance Committee as a member. Mrs. Barnes currently serves as CEO of Optima Office, Inc., an
accounting and HR services company that she founded in October 2018. From September 2012 to September 2018, she served as CEO of Pro
Back Office, LLC, a company that she co-founded. Mrs. Barnes has also held a number of Controller and Director of Accounting positions
at privately held for-profit and non-profit companies. She currently serves on the boards of the San Diego Chapter of Junior Achievement,
the Better Business Bureau of the Pacific Southwest as the Treasurer of the Foundation Board and is also the Treasurer for Tech Coast
Angels. Mrs. Barnes received a Bachelor of Science in Finance and Marketing from the University of Arizona and an Executive MBA from
San Diego State University. She also completed the Becker CPA courses. Based on her extensive experience in accounting and personnel
matters, the Nominating and Corporate Governance Committee determined that Mrs. Barnes is qualified to serve on the Board of Directors.
David
T. Bruen
Mr.
Bruen has served as our Lead Independent Director since May 2020 and Chair of our Audit Committee since February 2020. Mr. Bruen joined
our Board of Directors in 2008 and has served as a member of the Audit Committee since 2010 until his appointment as Chair in 2020. Mr.
Bruen retired in 2008 from San Diego National Bank after six years as a senior commercial lending officer. During the previous 17 years,
Mr. Bruen was in commercial lending for mid-size businesses in San Diego County for First Interstate Bank, Wells Fargo Bank, Mellon 1st
Business Bank, and San Diego National Bank. He is a Life Member of the Holiday Bowl Committee and has been a member of the Presidents
Association for Palomar College, Financial Executives International, the San Diego MIT Enterprise Forum, and the Association for Corporate
Growth. Mr. Bruen is a graduate of San Diego State University and has an M.B.A. from the University of Southern California. Based on
his experience with banks, his educational background, and his achievements in the community, the Nominating and Corporate Governance
Committee determined that Mr. Bruen is qualified to serve on the Board of Directors.
James
R. Durfey
Mr.
Durfey has served as a director, as a member of the Compensation Committee, and as a member of the Nominating and Corporate Governance
Committee since December 2019. Effective December 31, 2020, Mr. Durfey was appointed to serve as Chair of the Nominating and Corporate
Governance Committee. Mr. Durfey retired in 2017 from American Assets Trust, Inc. (NYSE: AAT), a publicly traded REIT, where he served
as Vice President, Office Properties, since 2004. During his tenure at AAT, Mr. Durfey supervised property management and leasing of
Class A office buildings, assisted in the acquisition and/or development of office buildings, and worked with AAT’s board in developing
corporate investment strategies. From 1996 to 2004, Mr. Durfey was Vice President of Trammell Crow Company and General Manager of the
Century Plaza Towers and the ABC Entertainment Center. From 1980 to 1996, Mr. Durfey held various senior roles at Homart Development
Company, which was the commercial real estate subsidiary of Sears, Roebuck and Company. Mr. Durfey received his Bachelor of Science degree
in Business Management from Indiana University and is a licensed real estate broker in California. Based on his extensive experience
in various facets of commercial real estate and with a publicly traded REIT, the Nominating and Corporate Governance Committee determined
that Mr. Durfey is qualified to serve on the Board of Directors.
Sumner
J. Rollings
Mr.
Rollings has served as a director since 2001, is a member of the Audit Committee, and in December 2020 was appointed Chair of the Compensation
Committee. He also previously served as Chair of the Nominating and Corporate Governance Committee. From 2001 to 2014, Mr. Rollings owned
and operated the Wagon Wheel Restaurant as the Chief Executive Officer of Rolling Wheel Restaurant, Inc., in Escondido, California. From
1999 to 2001, Mr. Rollings served as sales executive for Joseph Webb Foods of Vista, California and from 1985 to 1999, as sales executive
for Alliant Food Service Sales. Mr. Rollings also served as a director of the Centurion Counsel Funds, an investment company registered
under the Investment Company Act of 1940, from March 2001 until 2005. Based on his experience owning and operating a business and having
served as a director on another board, the Nominating and Corporate Governance Committee determined that Mr. Rollings is qualified to
serve on the Board of Directors.
Board
of Directors
Our
business and affairs are managed under the direction of our Board of Directors. Our Board of Directors currently consists of six directors,
and a majority of the members of our Board of Directors are independent, as required by the applicable rules of Nasdaq. The directors
have limited discretion to increase or decrease the size of the Board of Directors.
Board
Independence
Our
Board of Directors has determined that each of our current directors and nominees, except for Messrs. Heilbron and Dubose, has no relationship
which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and is “independent”
within the meaning of the listing standards of Nasdaq (“Nasdaq Rules”) and our director independence standards. Messrs. Heilbron
and Dubose are Named Executive Officers (as defined herein) of the Company. The Board of Directors established and employed the following
categorical standards (which are at least as restrictive as “independent” standards of the Nasdaq Rules) in determining whether
a relationship is material and thus would disqualify such director from being independent:
|
● |
The
director is, or has been within the last three years, our employee or an employee of any of our subsidiaries; |
|
|
|
|
● |
An
immediate family member of the director is, or has been within the last three years, our executive officer or an executive officer
of any of our subsidiaries; |
|
|
|
|
● |
The
director (or an immediate family member of the director) received during any 12-month period within the last three years, more than
$120,000 in direct compensation from us and/or any of our subsidiaries, other than director and committee fees and pension or other
forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service); |
|
|
|
|
● |
The
director was affiliated with or employed within the last three years by our present or former external auditor or an immediate family
member of the director was affiliated with or employed in a professional capacity by our present or former external auditor and worked
on our audit within the last three years; |
|
|
|
|
● |
The
director (or an immediate family member of the director) is, or has been within the last three years, employed as an executive officer
of another company where any of our executives serve or served on that company’s compensation committee; |
|
|
|
|
● |
The
director, or an immediate family member of the director, is currently a controlling stockholder, partner or executive officer of
another company that made payments to, or received payments from us or any of our subsidiaries for property or services in an amount
which, in any of the last three fiscal years, exceeds the greater of $200,000, or 5% of such other company’s consolidated gross
revenues; or |
|
|
|
|
● |
The
director (or an immediate family member of the director) was, within the last three years, an officer, director or trustee of a charitable
organization where our (or an affiliated charitable foundation’s) annual discretionary charitable contributions to the charitable
organization exceeded the greater of $200,000 or 5% of that organization’s consolidated gross revenues. |
An
“affiliate” includes any person beneficially owning in excess of 10% of the voting power of, or a general partner or managing
member of, a company.
Committees
of the Board of Directors
The
Board of Directors has adopted a charter for the Audit Committee, the Compensation Committee, and the Nominating and Corporate Governance
Committee. The Board of Directors may, from time to time, establish certain other committees to facilitate our management. The committee
charters are posted on our website at www.presidiopt.com and will be provided without charge upon request to the Corporate Secretary,
Presidio Property Trust, Inc., 4995 Murphy Canyon Road, Suite 300, San Diego, CA 92123. The information contained on our website is not
incorporated by reference into and does not form a part of this prospectus or the registration statement of which it forms a part. The
table below indicates the members and Chair of each committee.
| |
Audit | | |
Compensation | | |
Nominating
and Corporate Governance | |
Jennifer
A. Barnes | |
| x* | | |
| | | |
| x | |
David
T. Bruen | |
| Chair* | | |
| | | |
| | |
James
R. Durfey | |
| | | |
| x | | |
| Chair | |
Sumner
J. Rollings | |
| x | | |
| Chair | | |
| | |
Nominating
and Corporate Governance Committee
Through
the beginning of December 2020, the Nominating and Corporate Governance Committee was comprised of Ms. Ong (Chair), Ms. Bullard, and
Mr. Durfey, each of whom was or is “independent” within the meaning of the Nasdaq Rules and our director independence standards.
Effective December 31, 2020, Mr. Durfey assumed the position of Chair, Ms. Barnes was appointed to serve, and Ms. Ong and Ms. Bullard
stepped down from their roles on the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee
met three times during 2021. The Nominating and Corporate Governance Committee’s principal responsibilities include:
|
● |
Reviewing
the purpose, structure and membership of the committees of the Board of Directors; |
|
|
|
|
● |
Reviewing
the succession planning for our executive management; |
|
|
|
|
● |
Assisting
the Board of Directors in developing and implementing our corporate governance guidelines; |
|
|
|
|
● |
Considering
questions of possible conflicts of interest of the Board of Directors, as such questions arise; |
|
|
|
|
● |
Determining
the size, needs and composition of the Board of Directors and its committees; |
|
|
|
|
● |
Monitoring
a process to evaluate and assess the effectiveness of the Board of Directors; and |
|
|
|
|
● |
Recommending
nominees to the full Board of Directors. |
Compensation
Committee
In
2021, the Compensation Committee was comprised of Mr. Rollings (“Chair”) and Mr. Durfey, each whom was or is “independent”
within the meaning of the Nasdaq Rules and our director independence standards. The Compensation Committee met three times during 2021.
The Compensation Committee’s principal responsibilities include:
|
● |
reviewing
and approving the corporate goals and objectives with respect to the compensation of our Chief Executive Officer and evaluating our
Chief Executive Officer’s performance in light of these goals and objectives and, based upon this evaluation (either alone
or, if directed by the Board of Directors, in conjunction with a majority of the independent directors on the Board of Directors),
setting our Chief Executive Officer’s compensation (our Chief Executive Officer may not be present during voting deliberations
on his compensation); |
|
|
|
|
● |
reviewing
and setting or recommending to the Board of Directors the compensation of our executive officers other than the Chief Executive Officer; |
|
|
|
|
● |
reviewing
and providing oversight of our compensation philosophy and composition of our peer company community used for market comparisons; |
|
|
|
|
● |
reviewing
and approving or recommending to the Board of Directors our incentive compensation and equity-based plans and arrangements; |
|
|
|
|
● |
performing
a periodic evaluation of the Compensation Committee’s performance in fulfilling its duties and responsibilities under the Compensation
Committee charter; |
|
|
|
|
● |
reviewing
and recommending to the Board of Directors the compensation of our non-executive directors; |
|
|
|
|
● |
to
the extent that we are required to include a Compensation Discussion and Analysis (“CD&A”) in our Annual Report on
Form 10-K or annual proxy statement, reviewing and discussing with management our CD&A and considering whether to recommend to
our Board of Directors that our CD&A be included in the appropriate filing; |
|
|
|
|
● |
preparing
the annual Compensation Committee Report; |
|
|
|
|
● |
reporting
regularly to the Board of Directors regarding the activities of the Compensation Committee; and |
|
|
|
|
● |
annually
reviewing and reassessing our Compensation Committee charter and submitting any recommended changes to the Board of Directors for
its approval. |
The
Compensation Committee may also delegate any or all of its responsibilities to a subcommittee of the Compensation Committee and/or delegate
the authority to grant stock or other equity rights to one or more officers of our company in a manner that is in accordance with applicable
law.
Audit
Committee
The
Audit Committee is comprised of Mr. Bruen (Chair), Mrs. Barnes and Mr. Rollings, each of whom is “independent” within the
meaning of the Nasdaq Rules, our director independence standards and the audit committee requirements of the SEC. The Board of Directors
has determined that Mr. Bruen and Mrs. Barnes each qualify as an “audit committee financial expert,” as defined by the SEC
and that each member of the Audit Committee is “financially literate” under the Nasdaq Rules. The Audit Committee met five
times during 2021.
The
Audit Committee’s main function is to oversee our accounting and financial reporting processes and the audits of our financial
statements. The Audit Committee also shares responsibility for performing risk assessment. The Audit Committee is responsible for discussing
with management the guidelines, policies and processes relied upon and used by management to assess and manage our exposure to risk.
The
Audit Committee ensures that procedures have been established for the receipt, retention and treatment of complaints from our employees
on accounting, internal accounting controls or auditing matters, as well as for the confidential, anonymous submissions by our employees
of concerns regarding questionable accounting or auditing matters or other potentially material risks.
The
Audit Committee’s principal responsibilities include:
|
● |
Assisting
the Board of Directors in fulfilling its responsibility for oversight of the quality and integrity of our accounting, auditing and
reporting practices; |
|
|
|
|
● |
Reviewing
and monitoring compliance with our code of ethics and conduct; |
|
|
|
|
● |
The
ultimate authority over the appointment, retention, compensation, oversight and evaluation of the work of our independent registered
public accounting firm; |
|
|
|
|
● |
Preparing
the report that the SEC requires in our annual proxy statement; and |
|
|
|
|
● |
The
selection, approval and engagement of our independent registered public accounting firm, including approving any special assignments
given to the independent accounting firm and reviewing: |
|
|
|
|
● |
The
independence of the independent registered public accounting firm; |
|
|
|
|
● |
Any
audit and non-audit services to be performed by the independent registered public accounting firm; |
|
|
|
|
● |
Our
guidelines and policies with respect to risk assessment and risk management; and |
|
|
|
|
● |
Our
compliance with legal and regulatory requirements. |
The
Audit Committee responsibilities are more fully described in its charter, which is available on our website at www.PresidioPT.com.
In
determining whether to appoint or reappoint the independent registered public accounting firm as our independent auditor, the Audit Committee
takes into consideration a number of factors, including audit fees, the expertise of the lead audit partner with respect to real estate
and, specifically REITs, the length of time the firm has been engaged by us, the quality of the Audit Committee’s ongoing discussions
with its independent registered public accounting firm and an assessment of the professional qualifications, external data relating to
audit quality and performance, including recent Public Company Accounting Oversight Board reports relating to our independent registered
public accounting firm and past performance of the firm’s lead audit partner responsible for our audit. The Audit Committee has
also been involved in the selection of the lead audit partner.
Board
of Directors Leadership Structure and Role in Risk Oversight
We
believe the chosen Board of Directors leadership structure is the most appropriate for our size and business. Since our inception, Mr.
Heilbron has served as both Chairman of the Board and Chief Executive Officer. We also have a Lead Independent Director, currently, Mr.
Bruen, Chair of the Audit Committee. As Lead Independent Director, Mr. Bruen is able to monitor and address any compliance issues, improprieties,
or ethical considerations, including anonymous submissions by company employees.
The
Board of Directors believes the combined role of Chairman and Chief Executive Officer, together with a Lead Independent Director, is
in our best interest because it provides the appropriate balance between strategic development and independent oversight of management.
Code
of Ethics and Conduct
The
Board of Directors has adopted a Code of Ethics and Conduct (“Ethics Code”) for us that applies to all of our directors,
officers and employees, including our Chief Executive Officer and Chief Financial Officer. The Ethics Code is posted under the “Company”
section of our web site at www.presidiopt.com. To the extent required by applicable SEC rules, we intend to post any future amendments
to or waivers from the Ethics Code promptly following the date of such amendment or waiver on our website at www.presidiopt.com.
Information on, or accessible through, our website is not part of, and is not incorporated into, this prospectus or the registration
statement of which it forms a part.
Corporate
Governance Guidelines
Our
Board of Directors has adopted corporate governance guidelines to serve as a flexible framework within which our Board of Directors and
its committees operate. These guidelines cover a number of areas including the size and composition of our Board of Directors, Board
of Directors membership criteria and director qualifications, director responsibilities, Board of Directors agenda, roles of the Chairman
of the Board and Chief Executive Officer, meetings of independent directors, committee responsibilities and assignments, Board of Directors
member access to management and independent advisors, director compensation, director orientation and continuing education and management
succession planning. Our Nominating and Corporate Governance Committee will review our corporate governance guidelines from time to time
as it deems appropriate and, if necessary, recommend changes to our Board of Directors. Our corporate governance guidelines are available
on our website at www.presidiopt.com. Information on, or accessible through, our website is not part of, and is not incorporated
into, this prospectus or the registration statement of which it forms a part.
Limitation
of Liabilities and Indemnification of Directors and Officers
For
a discussion of our indemnification arrangements for our directors and officers, see “Certain Relationships and Related Party Transactions—Indemnification
of Our Directors and Officers in Our Charter and Bylaws” and “Certain Relationships and Related Party Transactions—Indemnification
Agreements.”
Executive
and Director Compensation
For
a discussion of our director compensation arrangements, see “Executive and Director Compensation—Director Compensation.”
EXECUTIVE
AND DIRECTOR COMPENSATION
Overview
of Compensation Program
The
Compensation Committee is responsible for establishing, implementing and continually monitoring adherence with our compensation philosophy.
The Compensation Committee ensures that the total compensation paid is fair, reasonable, and competitive. The following narrative explains
our compensation philosophy, objectives, policies, and practices with respect to our named executive officers to whom we refer to collectively
as our “Named Executive Officers,” as determined in accordance with applicable SEC rules. The Compensation Committee currently
does not utilize compensation consultants for executive or director compensation.
Compensation
Objectives, Philosophy and Risk Assessment
The
Compensation Committee believes that the most effective executive compensation program is one that is designed to reward the achievement
of specific annual, long-term and strategic goals by us and that aligns executives’ interests with those of the stockholders by
rewarding performance above established goals with the ultimate objective of improving stockholder value. Together with the Chief Executive
Officer, the Compensation Committee evaluates both performance and compensation to ensure that we maintain our ability to attract and
retain employees in key positions with superior ability, experience and leadership capability and that compensation provided to key employees
remains competitive relative to the compensation paid to similarly situated executives of our peer companies. To that end, the Compensation
Committee believes that executive compensation packages provided to our employees, including our Named Executive Officers, should include
both cash and share-based compensation that rewards performance measured against established goals.
The
Compensation Committee believes that measures such as growth in assets and number of properties, rental income, and FFO play an important
part in setting compensation; however, the Compensation Committee also recognizes that often outside forces beyond the control of management,
such as economic conditions, capital market conditions, changing retail and real estate markets, and other factors, may contribute to
less favorable near-term results. The Compensation Committee also strives to assess whether management is making appropriate strategic
decisions that will allow us to succeed over the long term and build long-term stockholder value. These may include ensuring that we
have the appropriate leasing and acquisition pipelines to ensure a future stream of recurring and increasing revenues, assessing our
risks associated with real estate markets and tenant credit, managing our debt maturities, and determining whether our staffing and general
and administrative expense is appropriate given our projected operating requirements.
We
believe that our compensation programs do not encourage unnecessary or excessive risk taking that could have a material adverse effect
on our Company. In establishing and reviewing our compensation program, the Compensation Committee considers whether the program encourages
unnecessary or excessive risk taking and has concluded that it does not. Base salaries are fixed in amount and thus do not encourage
risk taking. In addition, the annual bonus program appropriately balances risk and the desire to focus on goals important to our success
without putting undue emphasis on any particular performance measure or encouraging unnecessary or excessive risk taking. Furthermore,
a significant portion of the compensation provided to our Named Executive Officers may be in the form of equity awards that are important
to help further align executives’ interests with those of our stockholders. These awards do not encourage unnecessary or excessive
risk taking since the ultimate value of the awards is tied to the value of our stock, and grants are subject to vesting or retention
schedules to help ensure that executives have significant value tied to our long-term stock performance.
Say
on Pay
In
reviewing our compensation objectives and practices for 2021, the Compensation Committee and the named executive officers were aware
of the results of the 2019 “say-on-pay” vote to approve our executive compensation practices, and the “say-on-pay frequency”
vote to review such compensation every three years, which we viewed as generally supportive of our compensation philosophy and practices.
We included the “say-on-pay” proposal in the proxy statement for the 2019 annual meeting held on May 23, 2019, which was
re-convened on July 24, 2019. The “say-on-pay” proposal was approved at the annual meeting in which approximately 84% of
the votes cast on such proposal voted to approve our executive compensation practices. Stockholders also approved the “say-on-pay”
frequency proposal in which approximately 61% of the votes cast voted for a three-year frequency. The next “say-on-pay” vote
will occur at the 2022 annual meeting of stockholders and the next “say-on- pay frequency” vote will take place in
2025.
Role
of Executive Officers in Compensation Decisions
The
Compensation Committee makes direct compensation decisions with respect to the compensation of Mr. Heilbron, our Chairman, President
and Chief Executive Officer, and establishes the general parameters within which it establishes the compensation for our other named
executive officers and senior management team. The Compensation Committee may also review equity awards to other officers and employees.
Our Chief Executive Officer is not present for any deliberations or decisions on his own compensation.
The
Chief Executive Officer reviews the performance of our other named executive officers and senior management team annually and makes recommendations
with respect to salary adjustments, bonuses and equity award amounts for such individuals. The Compensation Committee may choose to exercise
its discretion in modifying any recommended adjustment or award.
Total
Compensation
Total
annual compensation consists of base salary, cash incentives, and long-term equity incentive compensation in the form of restricted stock.
In setting the total annual compensation for our Named Executive Officers, information on the performance of each Named Executive Officer
for the prior year and market data covering peer group salaries are utilized. This evaluation is comprised of both a quantitative assessment
as well as a qualitative assessment. The target levels for the total annual compensation of our Named Executive Officers and senior management
team are less than the average of the peer group, primarily due to our size and status as a nontraded REIT. We believe that this approach
contemplates both the quantitative and qualitative elements of each position and rewards performance. In addition, this approach allows
our skilled and talented executives to guide and lead our business and supports a “pay for performance” culture.
Annual
Cash Compensation
Base
Salary
Each
of our named executive officers receives a base salary to compensate him for services performed during the year. When determining the
base salary for each of our named executive officers, the market levels of similar positions (discounted for size) at the peer group
companies, the performance of the named executive officer, the experience of the named executive officer in his position, and the other
components of compensation and total compensation are generally considered. The named executive officers are eligible for annual increases
in their base salaries.
Annual
Non-Equity Compensation
A
significant portion of each named executive officer’s compensation is in the form of an annual cash bonus. For 2021, named executive
officers could elect to receive all or a portion of their annual cash bonus in the form of stock that immediately vested equal to approximately
two times cash. The annual bonuses are primarily based upon quantifiable company and executive performance objectives. This practice
is consistent with our compensation objective of supporting a performance-based environment. An annual determination is made as to the
appropriate weight between company-wide and executive specific goals based upon an assessment of the appropriate balance. Each year,
the Compensation Committee sets for the Chief Executive Officer a threshold and target bonus that may be awarded to him if the threshold
goals are achieved. No specific target bonus was established for Mr. Dubose for 2021 and his bonus was determined at the discretion of
the Chief Executive Officer.
The
Compensation Committee awarded Mr. Heilbron a $75,000 cash bonus (of which Mr. Heilbron elected to accept $25,000 in cash and the balance
in the form of equity, equal to approximately two times cash, or $100,000 in stock, which were paid in 2022) for his 2021 performance.
In addition, Mr. Heilbron was granted 35,000 shares of stock on January 4, 2021.
Long-Term
Incentive Compensation
We
grant long-term equity incentive awards to our named executive officers as part of our overall compensation package. These awards are
consistent with our policies of fostering a performance-based environment and aligning the interests of our senior management with the
financial interests of our stockholders. When determining the amount of long-term equity incentive awards to be granted, the following
factors are considered: our business performance, using metrics such as MFFO and performance of real estate assets (including, but not
limited to, occupancy, same-store property net operating income growth and leasing spreads); the individual responsibilities and performance
of each executive, such as how he performed relative to his delineated goals; strategic accomplishment, such as identifying strategic
direction for us, and market factors, such as navigating the current economic climate and the strength of the balance sheet and debt
maturities.
We
compensate our named executive officers through grants of shares. These shares vested equally over a three-year period for more recent
grants (and over a ten-year period for certain grants made earlier) for all officers. The aggregate value of the long-term incentive
compensation granted is based upon established goals including an assessment of MFFO as compared to budgeted or targeted goals; the identification
of strategic initiatives, their execution and the anticipated long-term benefits to stockholders. Distributions are paid on the entire
grant, regardless of vesting.
Equity
compensation is awarded to our Chief Executive Officer by the Compensation Committee and to other named executive officers based primarily
on the strategic initiatives and performance during the applicable fiscal year. The stock awards granted to our named executive officers
during 2021 are reflected in the Outstanding Equity Awards at Fiscal Year End table below. On January 4, 2021, Mr. Heilbron was granted
35,000 shares of stock; Mr. Dubose was granted 25,974 shares of stock; Mr. Sragovicz was granted 19,480 shares of stock; and Mr. Katz
was granted 19,480 shares of stock. All such stock granted vests in equal installments over three years. On
January 3, 2022, Mr. Heilbron was granted 127,779 shares of stock; Mr. Dubose was granted 31,525 shares of stock; Mr. Sragovicz was granted
86,539 shares of stock; and Mr. Katz was granted 93,895 shares of stock. All such stock granted vests in equal installments over three
years.
Perquisites
and Other Personal Benefits
We
provide our Named Executive Officers with perquisites and other personal benefits, including payment of premiums for an additional life
insurance policy, and for Mr. Heilbron, an auto allowance and payment of country club dues, that we believe are reasonable and consistent
with our overall compensation program to better enable us to attract and retain superior employees for key positions. The Compensation
Committee periodically reviews the levels of perquisites and other personal benefits provided to the Named Executive Officers.
We
maintain a 401(k) retirement savings plan for all employees on the same basis, which provides matching contributions at the rate of 100%
of the employee’s contributions up to 4% of their salary. In 2020, employees could contribute up to $19,500 of their salary and
a catch-up contribution of up to $6,500 for employees aged 50 and older, subject to annual limits under the Code. Named executive officers
are also eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group life, disability and accidental
death and dismemberment insurance, in each case, on the same basis as other employees.
Summary
Compensation Table
The
following table sets forth information concerning the compensation earned by our named executive officers for the fiscal years ended
December 31, 2021 and 2020.
Name and Principal Position | |
Year | | |
Salary | | |
Stock Awards (1) | | |
Non-equity
Incentive Plan Compensation (2) | | |
All Other Compensation (3) | | |
Total | |
Jack K. Heilbron | |
| 2021 | | |
$ | 371,531 | | |
$ | 235,462 | | |
| 25,000 | | |
$ | 117,601 | | |
$ | 749,594 | |
Chairman of the Board, President and CEO | |
| 2020 | | |
$ | 375,137 | | |
$ | 218,662 | | |
| — | | |
$ | 87,837 | | |
$ | 681,636 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Larry G. Dubose* | |
| 2021 | | |
$ | 86,539 | | |
$ | 198,185 | | |
| — | | |
$ | 44,726 | | |
$ | 329,450 | |
Former President, NetREIT Advisors, LLC and Dubose Advisors, LLC; former CFO, NetREIT Dubose Model Home REIT, Inc.; and Director | |
| 2020 | | |
$ | 150,000 | | |
$ | 165,912 | | |
$ | 15,000 | | |
$ | 34,678 | | |
$ | 365,590 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Adam Sragovicz | |
| 2021 | | |
$ | 262,895 | | |
$ | 106,428 | | |
| 14,000 | | |
$ | 43,350 | | |
$ | 426,673 | |
Chief Financial Officer | |
| 2020 | | |
$ | 265,447 | | |
$ | 81,748 | | |
$ | 50,000 | | |
$ | 28,864 | | |
$ | 426,059 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Gary M. Katz** | |
| 2021 | | |
$ | 262,895 | | |
$ | 184,348 | | |
| — | | |
$ | 46,017 | | |
$ | 493,260 | |
Chief Investment Officer and former SVP, Asset Management | |
| 2020 | | |
$ | 265,447 | | |
$ | 131,782 | | |
| — | | |
$ | 24,825 | | |
$ | 422,054 | |
*
Mr. Dubose resigned from these positions with NetREIT Advisors, LLC and Dubose Advisors, LLC in 2022 and will not stand for re-election
at the Annual Meeting. However, he will continue to remain an employee of our model home division.
**
Gary M. Katz was appointed Chief Investment Officer effective as of December 16, 2021.
1) |
The
amounts shown represent the aggregate grant date fair value of awards granted during each fiscal year shown, computed in accordance
with FASB ASC Topic 718. This does not represent the compensation expense recognized for the fiscal years shown for financial statement
reporting purposes. The value of non-vested shares granted in 2020 was calculated based on the offering price of the shares in the
most recent private placement offering, adjusted for stock dividends since granted and assumed selling costs, as well as with periodic
adjustments based on comparable market valuations, which management believes approximated fair market value as of the date of grant
(well before the shares of the Company’s stock started publicly trading in October 2020). The value of the shares granted in
2021 were based on the closing price of the common stock on the date of grant. The value of stock received in lieu of approximately
two times cash bonus is reported based on the closing price of the Company’s stock on date of issuance. |
|
|
(2) |
Bonuses
shown for 2021 were paid as follows: The cash component of bonuses were paid in January 2022 (unless there was an election to defer
payment); each named executive officer elected to accept all or a portion of his cash bonus earned in the form of stock equivalent
to approximately two times cash and such stock, which vested immediately, was issued in January 2022 and is shown as part of the
amount in the Stock Awards column. Bonuses shown for 2020 were paid as follows: The cash component of bonuses were paid in December
2020 and/or January 2021 (unless there was an election to defer payment); each named executive officer elected to accept all or a
portion of his cash bonus earned in the form of stock equivalent to approximately two times cash and such stock, which vested immediately,
was issued in January 2021 and is shown as part of the amount in the Stock Awards column. |
|
|
(3) |
The
following table sets forth the components of All Other Compensation included above (and excludes unlimited paid time off, which is
only available to our executives): |
Name | |
Year | | |
Distributions Received on Stock | | |
Matching Contributions to 401(k) Plan | | |
Group Term Life Insurance
Payments | | |
Auto Allowance | | |
Country Club | | |
Medical Premiums | | |
Total of Other Compensation | |
Jack K. Heilbron | |
| 2021 | | |
$ | 40,359 | | |
$ | 11,600 | | |
$ | 17,468 | | |
| 11,529 | | |
| 17,257 | | |
$ | 19,388 | | |
$ | 117,601 | |
| |
| 2020 | | |
$ | 4,071 | | |
$ | 19,605 | | |
$ | 17,104 | | |
$ | 7,148 | | |
$ | 20,536 | | |
$ | 19,373 | | |
$ | 87,837 | |
Larry G. Dubose | |
| 2021 | | |
$ | 26,495 | | |
$ | 5,160 | | |
$ | 1,071 | | |
| 12,000 | | |
| — | | |
$ | 12,000 | | |
$ | 44,726 | |
| |
| 2020 | | |
$ | 1,592 | | |
$ | 8,060 | | |
$ | 1,026 | | |
$ | 12,000 | | |
| — | | |
$ | 12,000 | | |
$ | 34,678 | |
Adam Sragovicz | |
| 2021 | | |
$ | 17,407 | | |
$ | 11,600 | | |
$ | 2,343 | | |
| — | | |
| — | | |
$ | 12,000 | | |
$ | 43,350 | |
| |
| 2020 | | |
$ | 1,648 | | |
$ | 13,518 | | |
$ | 1,698 | | |
| — | | |
| — | | |
$ | 12,000 | | |
$ | 28,864 | |
Gary M. Katz | |
| 2021 | | |
$ | 20,725 | | |
$ | 10,936 | | |
$ | 2,356 | | |
| — | | |
| — | | |
$ | 12,000 | | |
$ | 46,017 | |
| |
| 2020 | | |
$ | 509 | | |
$ | 10,618 | | |
$ | 1,698 | | |
| — | | |
| — | | |
$ | 12,000 | | |
$ | 24,825 | |
Employment
Agreement
On
October 18, 2017, we entered into a new employment agreement with Mr. Heilbron, which superseded his January 19, 2011 employment agreement.
Pursuant to his employment agreement, Mr. Heilbron’s initial annual base salary was $333,900, subject to increase in the discretion
of the Board or the Compensation Committee. Mr. Heilbron is also eligible to earn an annual bonus pursuant to our bonus plan for senior
executives based on the achievement of targets and other objectives established by the Board or the Compensation Committee for each fiscal
year. The employment agreement provides that Mr. Heilbron’s target annual bonus is up to 100% of his base salary. Mr. Heilbron
is eligible to participate in all other incentive plans, savings and retirement plans, welfare benefit plans, practices, policies and
programs, in each case, that are generally applicable to our senior executives. We also provide to Mr. Heilbron: (a) a supplemental life
insurance policy on Mr. Heilbron’s life on terms and conditions agreed to between us and Mr. Heilbron, (b) use of an automobile
at our expense, selected by our agreement with Mr. Heilbron, and (c) club dues for membership at a country club of Mr. Heilbron’s
choosing.
Mr.
Heilbron’s employment agreement provides that if his employment is terminated by us without “cause” or by Mr. Heilbron
for “good reason” (each as defined in the employment agreement), then, subject to his execution and non-revocation of a release
of claims, he will be entitled to receive the following payments
|
● |
a
lump-sum cash payment in an amount equal to the average of the annual bonuses received by Mr. Heilbron during the immediately preceding
two years, payable within 10 days following the release effective date; |
|
|
|
|
● |
for
up to 12 months following Mr. Heilbron’s termination of employment, healthcare benefits for Mr. Heilbron and his eligible dependents
which are substantially the same and at the same cost as the benefits provided to our currently active employees; and |
|
|
|
|
● |
100%
of the outstanding and unvested restricted stock and other equity awards granted to Mr. Heilbron under our equity incentive plans
(other than performance-based vesting awards, if any) will become immediately vested and exercisable in full, effective as of the
date of termination. |
The
employment agreement contains confidentiality covenants by Mr. Heilbron which apply indefinitely and non-competition covenants by Mr.
Heilbron which apply during the term of his employment. The foregoing severance provisions under Mr. Heilbron’s employment agreement
are substantially the same as the severance benefits to which he was entitled under his previous employment agreement.
Outstanding
Equity Awards at Fiscal Year End
The
following table shows information regarding restricted stock awards held by our named executive officers on the last day of our fiscal
year ended December 31, 2021.
| |
| Stock Awards | |
Name | |
| Grant Date | |
| Number of Shares or Units that have not Vested (4) | | |
| Market Value of Shares or Units that have not Vested (5) | | |
| Equity Incentive Plan Awards: Number of Unearned Shares, Units or other Rights that have not Vested | | |
| Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or other Rights that have not Vested | |
Jack K. Heilbron | |
| 1/02/2013 | (1) | |
| 582 | | |
$ | 2,188 | | |
| — | | |
| — | |
| |
| 1/02/2014 | (1) | |
| 1,163 | | |
$ | 4,373 | | |
| — | | |
| — | |
| |
| 1/02/2015 | (1) | |
| 2,442 | | |
$ | 9,182 | | |
| — | | |
| — | |
| |
| 1/04/2016 | (1) | |
| 3,256 | | |
$ | 12,243 | | |
| — | | |
| — | |
| |
| 1/03/2017 | (1) | |
| 4,000 | | |
$ | 15,040 | | |
| — | | |
| — | |
| |
| 1/01/2018 | (1) | |
| 7,721 | | |
$ | 29,031 | | |
| — | | |
| — | |
| |
| 1/02/2020 | (2) | |
| 5,834 | | |
$ | 21,936 | | |
| — | | |
| — | |
| |
| 01/04/2021 | (2) | |
| 23,450 | | |
$ | 88,172 | | |
| — | | |
| — | |
| |
| 01/21/2021 | (3) | |
| 22,728 | | |
$ | 85,457 | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Larry G. Dubose | |
| 1/02/2013 | (1) | |
| 436 | | |
$ | 1,639 | | |
| — | | |
| — | |
| |
| 1/02/2014 | (1) | |
| 698 | | |
$ | 2,624 | | |
| — | | |
| — | |
| |
| 1/04/2016 | (1) | |
| 1,744 | | |
$ | 6,557 | | |
| — | | |
| — | |
| |
| 1/03/2017 | (1) | |
| 2,188 | | |
$ | 8,227 | | |
| — | | |
| — | |
| |
| 1/02/2020 | (2) | |
| 3,425 | | |
$ | 12,878 | | |
| — | | |
| — | |
| |
| 01/04/2021 | (2) | |
| 17,403 | | |
$ | 65,435 | | |
| — | | |
| — | |
| |
| 01/21/2021 | (3) | |
| 22,728 | | |
$ | 85,457 | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Adam Sragovicz | |
| 1/02/2020 | (2) | |
| 2,547 | | |
$ | 9,577 | | |
| — | | |
| — | |
| |
| 01/04/2021 | (2) | |
| 13,052 | | |
$ | 49,076 | | |
| — | | |
| — | |
| |
| 01/21/2021 | (3) | |
| 6,494 | | |
$ | 24,417 | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Gary M. Katz | |
| 1/01/2020 | (2) | |
| 1,274 | | |
$ | 4,790 | | |
| — | | |
| — | |
| |
| 01/04/2021 | (2) | |
| 13,052 | | |
$ | 49,076 | | |
| — | | |
| — | |
| |
| 01/21/2021 | (3) | |
| 25,974 | | |
$ | 97,662 | | |
| — | | |
| — | |
(1)
Represents an award of shares of stock, of which 1/10th of the stock award will vest on December 31 of the year in which the award is
granted and an additional 1/10th of the stock award will vest on each anniversary of such date thereafter, subject to the named executive
officer’s continued employment.
(2)
Represents an award of shares of stock, of which 1/3rd of the stock award will vest on December 31 of the year in which the award is
granted and an additional 1/3rd of the stock award will vest on each anniversary of such date thereafter, subject to the named
executive officer’s continued employment.
(3)
Represents a stock grant in lieu of cash bonus earned in the form of two times stock, which was restricted for one year. These
shares will be unrestricted on January 22, 2022.
(4)
Represents the number of unvested shares of stock as of December 31, 2021.
(5)
Market value has been calculated by multiplying the closing market price of our common stock at January 6, 2022 of $3.76 per share
by the outstanding share of stock awards for each Named Executive Officer.
Director
Compensation
We
compensate the directors with cash compensation and awards of stock. We do not have a written policy regarding director compensation.
Our Compensation Committee meets at least annually to review, and determine and approve, as appropriate, director compensation for the
next fiscal year, including cash and equity compensation, reimbursement for travel and related expenses, and similar matters. The Compensation
Committee may also meet during the year, as appropriate, to discuss compensation matters such as grants of stock to our directors in
connection with their services as chairs of Board of Directors committees, and related matters. If a director is also an employee of
our Company, such director is not paid separate compensation for services rendered as a director.
For
the fiscal year ending December 31, 2021, the Company paid director compensation as follows:
Name (1) | |
Fees earned or Paid in Cash (2) | | |
Fees earned or Paid in Stock
(2) | | |
Annual Stock Awards (3) | | |
All Other Compensation (4) | | |
Total | |
| |
| | |
| | |
| | |
| | |
| |
Jennifer A. Barnes | |
$ | 25,000 | | |
$ | 29,162 | | |
$ | 33,523 | | |
$ | 5,482 | | |
$ | 93,167 | |
David T. Bruen | |
$ | 30,000 | | |
$ | 25,076 | | |
$ | 34,969 | | |
$ | 6,275 | | |
$ | 96,320 | |
James R. Durfey | |
$ | 10,000 | | |
$ | 57,196 | | |
$ | 33,523 | | |
$ | 7,603 | | |
$ | 108,322 | |
Sumner J. Rollings | |
$ | 18,000 | | |
$ | 41,173 | | |
$ | 33,523 | | |
$ | 6,583 | | |
$ | 99,279 | |
(1)
Messrs. Heilbron and Dubose are not included in this table as they are employees and do not receive compensation for their services as
a director. Compensation paid for the services they provide to us as a director or consultant are reflected in the Summary Compensation
Table.
(2)
Each non-employee director received a cash stipend of $8,000 to $10,000 for each Board of Directors meeting attended in the first three
fiscal quarters in 2021; the cash stipend was restored to $10,000 from $8,000 for the second fiscal quarter of 2021. Amounts do not include
reasonable out-of-pocket expenses (i.e., airfare, hotel, car rental, etc.) incurred by directors for which we reimburse in connection
with attendance at Board of Directors and committee meetings. No such expenses were incurred by any non-employee director in 2021. Directors
also had the option to take all or a portion of the fee in common stock at two times the
cash fee amount, with the number of shares determined using market prices. These stock grants will vest on the one year anniversary of
their grant dates.
(3)
The amounts shown represent the aggregate grant date fair value of awards made during 2021, computed in accordance with FASB ASC Topic
718. For a discussion of the valuation assumptions used to determine the fair value of these awards, see Note 11 to the Financial Statements
for the year ended December 31, 2021 included in our Form 10-K for such year. The stock awards vest annually in equal installments over
a three-year period.
(4)
Amount represents distributions received in 2021 from unvested shares of our common stock held by each non-employee director.
As
of December 31, 2021, our current non-employee directors held the following shares of unvested restricted stock:
Name | |
Shares | |
Jennifer A. Barnes | |
| 14,424 | |
David T. Bruen | |
| 13,414 | |
James R. Durfey | |
| 22,364 | |
Sumner J. Rollings | |
| 17,679 | |
Equity
Plans
2017
Incentive Award Plan
Effective
as of October 18, 2017, we adopted the 2017 Incentive Award Plan, under which we may grant cash and equity incentive awards to eligible
service providers in order to motivate, attract and retain the talent for which we compete.
Eligibility
and Administration. Our employees, consultants and directors (including employees, consultants and directors of our subsidiaries)
are eligible to receive awards under the 2017 Incentive Award Plan. Approximately 19 employees,
no consultants and four non-employee directors are eligible to participate in the 2017 Incentive Award Plan.
The 2017 Incentive Award Plan will be administered by the Board with respect to awards to non-employee directors and by the Compensation
Committee with respect to other participants, each of which may delegate its duties and responsibilities to committees of our directors
and/or officers (referred to collectively as the “plan administrator”), subject to certain limitations that may be imposed
under the Code, Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and/or stock exchange
rules, as applicable. The plan administrator will have the authority to administer the 2017 Incentive Award Plan, including the authority
to select award recipients, determine the nature and amount of each award, and determine the terms and conditions of each award. The
plan administrator will also have the authority to make all determinations and interpretations under, prescribe all forms for use with,
and adopt rules for the administration of, the 2017 Incentive Award Plan, subject to its express terms and conditions.
Size
of Share Reserve; Limitations on Awards. The total number of shares reserved for issuance pursuant to awards under the 2017 Incentive
Award Plan is 1,100,000 shares, which may be issued as shares of our Series A or our Series C Common Stock, as determined by the plan
administrator, provided that, since the date on which the Series A Common Stock became publicly listed, we have and intend to issue only
shares of Series A Common Stock under the 2017 Incentive Award Plan. Shares that are potentially deliverable under an award that expires
or is canceled, forfeited, settled for cash or otherwise terminated without delivery of such shares will, to the extent of such expiration,
cancellation, forfeiture, cash settlement or termination, again be available for new grants under the 2017 Incentive Award Plan, and
shares withheld by us in payment of the exercise price or taxes relating to any award will again be available for new grants under the
2017 Incentive Award Plan. However, the following shares may not be used again for grant under the 2017 Incentive Award Plan: (a) previously
owned shares tendered by a participant to satisfy exercise price or tax withholding obligations associated with an award; and (b) shares
purchased on the open market with the cash proceeds from the exercise of options. The total number of shares reserved for issuance under
the 2017 Incentive Award Plan will not be adjusted for the reverse stock split.
To
the extent permitted under applicable securities exchange rules without stockholder approval, awards granted under the 2017 Incentive
Award Plan in connection with the assumption, replacement, conversion or adjustment of outstanding equity awards in the context of a
corporate acquisition or merger will not reduce the shares authorized for grant under the 2017 Incentive Award Plan.
The
maximum number of shares of our common stock that may be subject to one or more awards granted to any one participant pursuant to the
2017 Incentive Award Plan during any calendar year is 1,100,000 shares and the maximum amount that may be paid under a cash award pursuant
to the 2017 Incentive Award Plan to any one participant during any calendar year period is $5,000,000. The individual award limit under
the 2017 Incentive Award Plan will not be adjusted for the reverse stock split.
The
plan administrator may establish compensation for our non-employee directors in accordance with the 2017 Incentive Award Plan, including
the terms, conditions and amounts of all such compensation. However, subject to certain exceptions, the sum of any cash compensation
and the value of awards granted to a non-employee director as compensation for services as a non-employee director during any calendar
year may not exceed $500,000, increased to $800,000 for the non-employee director’s initial year of service.
Awards.
The 2017 Incentive Award Plan provides for the grant of stock options, restricted stock, performance bonuses, dividend equivalents, stock
payments, restricted stock units (“RSUs”), performance shares, other incentive awards and stock appreciation rights (“SARs”).
All awards under the 2017 Incentive Award Plan will be set forth in award agreements, which will detail all terms and conditions of the
awards, including any applicable vesting and payment terms and post-termination exercise limitations. Awards will be settled in shares
of our common stock or cash, as determined by the plan administrator.
Stock
Options. Stock options provide for the purchase of shares of our common stock in the future at an exercise price set on the grant
date. The exercise price of a stock option may not be less than 100% of the fair market value of the underlying share on the date of
grant, except with respect to certain substitute options granted in connection with a corporate transaction. The term of a stock option
may not be longer than ten years. Vesting conditions determined by the plan administrator may apply to stock options and may include
continued service, performance and/or other conditions.
Restricted
Stock Units. RSUs are contractual promises to deliver shares of our common stock (or the fair market value of such shares in cash)
in the future, which may also remain forfeitable unless and until specified vesting conditions are met. RSUs generally may not be sold
or transferred until vesting conditions are removed or expire. The shares underlying RSUs will not be issued until the RSUs have vested,
and recipients of RSUs generally will have no voting or dividend rights prior to the time the RSUs are settled in shares, unless the
RSU includes a dividend equivalent right (in which case the holder may be entitled to dividend equivalent payments under certain circumstances).
Delivery of the shares underlying the RSUs may be deferred under the terms of the award or at the election of the participant, if the
plan administrator permits such a deferral. On the settlement date or dates, we will issue to the participant one unrestricted, fully
transferable share of our common stock (or the fair market value of one such share in cash) for each vested and nonforfeited RSU.
Restricted
Stock. Restricted stock is an award of nontransferable shares of our common stock that remain forfeitable unless and until specified
vesting conditions are met. Vesting conditions applicable to restricted stock may be based on continuing service, the attainment of performance
goals and/or such other conditions as the plan administrator may determine. In general, restricted stock may not be sold or otherwise
transferred until all restrictions are removed or expire.
Stock
Appreciation Rights. SARs entitle their holder, upon exercise, to receive an amount equal to the appreciation of the shares subject
to the award between the grant date and the exercise date. The exercise price of a SAR may not be less than 100% of the fair market value
of the underlying share on the date of grant (except with respect to certain substitute SARs granted in connection with a corporate transaction)
and the term of a SAR may not be longer than ten years. Vesting conditions determined by the plan administrator may apply to SARs and
may include continued service, performance and/or other conditions. SARs under the 2017 Incentive Award Plan will be settled in cash
or shares of common stock, or in a combination of both, as determined by the administrator.
Performance
Shares. Performance shares are contractual rights to receive a range of shares of our common stock in the future based on the attainment
of specified performance goals, in addition to other conditions which may apply to these awards. Conditions applicable to performance
shares may be based on continuing service, the attainment of performance goals and/or such other conditions as the plan administrator
may determine.
Stock
Payments. Stock payments are awards of fully vested shares of our common stock that may, but need not, be made in lieu of base salary,
bonus, fees or other cash compensation otherwise payable to any individual who is eligible to receive awards.
Other
Incentive Awards. Other incentive awards are awards other than those enumerated in this summary that are denominated in, linked to
or derived from shares of our common stock or value metrics related to our shares, and may remain forfeitable unless and until specified
conditions are met. Other incentive awards may be linked to any one or more specific performance criteria determined by the plan administrator.
Dividend
Equivalents. Dividend equivalents represent the right to receive the equivalent value of dividends paid on shares of our common stock
and may be granted alone or in tandem with awards other than stock options or SARs. Dividend equivalents are credited as of dividend
payments dates during the period between a specified date and the date such award terminates or expires, as determined by the plan administrator.
Performance
Bonus Awards. Performance bonus awards are cash bonus awards that are granted subject to vesting and/or payment based on the attainment
of specified performance goals.
Certain
Transactions. The plan administrator has broad discretion to take action under the 2017 Incentive Award Plan, as well as make adjustments
to the terms and conditions of existing and future awards, to prevent the dilution or enlargement of intended benefits and facilitate
necessary or desirable changes in the event of certain transactions and events affecting our common stock, such as stock dividends, stock
splits, mergers, acquisitions, consolidations and other corporate transactions. In addition, in the event of certain non-reciprocal transactions
with our stockholders known as “equity restructurings,” the plan administrator will make equitable adjustments to the 2017
Incentive Award Plan and outstanding awards. In the event of a “change in control,” to the extent that the surviving entity
declines to assume or substitute outstanding awards or it is otherwise determined that awards will not be assumed or substituted, the
plan administrator shall cause the awards to become fully vested and exercisable in connection with the transaction.
Claw-Back
Provisions, Transferability, and Participant Payments. All awards will be subject to the provisions of any claw-back policy implemented
by us to the extent set forth in such claw-back policy and/or in the applicable award agreement. With limited exceptions for estate planning,
domestic relations orders, certain beneficiary designations and the laws of descent and distribution, awards under the 2017 Incentive
Award Plan are generally non-transferable prior to vesting, and are exercisable only by the participant, unless otherwise provided by
the plan administrator. With regard to tax withholding, exercise price and purchase price obligations arising in connection with awards
under the 2017 Incentive Award Plan, the plan administrator may, in its discretion, accept cash or check, shares of our common stock
that meet specified conditions, a “market sell order” or such other consideration as it deems suitable.
Plan
Amendment and Termination. The Board may amend or terminate the 2017 Incentive Award Plan at any time, subject to certain exceptions.
In addition, no amendment, suspension or termination of the 2017 Incentive Award Plan may, without the consent of the affected participant,
impair any rights or obligations under any previously-granted award, unless the award itself otherwise expressly so provides. If not
earlier terminated by the Board, the 2017 Incentive Award Plan will terminate in October 2027.
Additional
REIT Restrictions. The 2017 Incentive Award Plan provides that no participant will be granted, become vested in the right to receive
or acquire or be permitted to acquire, or will have any right to acquire, shares under an award if such acquisition would be prohibited
by the restrictions on ownership and transfer of our stock contained in our charter or would impair our status as a REIT.
Securities
Laws. The 2017 Incentive Award Plan is intended to conform to all provisions of the Securities Act of 1933, as amended (the “Securities
Act”), and the Exchange Act and any and all regulations and rules promulgated by the SEC thereunder, including, without limitation,
Rule 16b-3. The 2017 Incentive Award Plan will be administered, and awards will be granted and may be exercised, only in such a manner
as to conform to such laws, rules and regulations.
Federal
Income Tax Consequences. The material federal income tax consequences of the 2017 Incentive Award Plan under current federal income
tax law are summarized in the following discussion, which deals with the general tax principles applicable to the 2017 Incentive Award
Plan. The following discussion is based upon laws, regulations, rulings and decisions now in effect, all of which are subject to change.
Foreign, state and local tax laws, and employment, estate and gift tax considerations are not discussed due to the fact that they may
vary depending on individual circumstances and from locality to locality.
Stock
Options and SARs. A 2017 Incentive Award Plan participant generally will not recognize taxable income and we generally will not be
entitled to a tax deduction upon the grant of a stock option or SAR. Only non-qualified stock options may be granted under the 2017 Incentive
Award Plan. Upon exercising an option when the fair market value of our stock is higher than the exercise price of the option, a 2017
Incentive Award Plan participant generally will recognize taxable income at ordinary income tax rates equal to the excess of the fair
market value of the stock on the date of exercise over the purchase price, and we (or our subsidiaries, if any) generally will be entitled
to a corresponding tax deduction for compensation expense, in the amount equal to the amount by which the fair market value of the shares
purchased exceeds the purchase price for the shares. Upon a subsequent sale or other disposition of the option shares, the participant
will recognize a short-term or long-term capital gain or loss in the amount of the difference between the sales price of the shares and
the participant’s tax basis in the shares.
Upon
exercising or settling an SAR, a 2017 Incentive Award Plan participant will recognize taxable income at ordinary income tax rates, and
we should be entitled to a corresponding tax deduction for compensation expense, in the amount paid or value of the shares issued upon
exercise or settlement. Payments in shares will be valued at the fair market value of the shares at the time of the payment, and upon
the subsequent disposition of the shares the participant will recognize a short-term or long-term capital gain or loss in the amount
of the difference between the sales price of the shares and the participant’s tax basis in the shares.
Restricted
Stock and RSUs. A 2017 Incentive Award Plan participant generally will not recognize taxable income at ordinary income tax rates
and we generally will not be entitled to a tax deduction upon the grant of restricted stock or RSUs. Upon the termination of restrictions
on restricted stock or the payment of RSUs, the participant will recognize taxable income at ordinary income tax rates, and we should
be entitled to a corresponding tax deduction for compensation expense, in the amount paid to the participant or the amount by which the
then fair market value of the shares received by the participant exceeds the amount, if any, paid for them. Upon the subsequent disposition
of any shares, the participant will recognize a short-term or long-term capital gain or loss in the amount of the difference between
the sales price of the shares and the participant’s tax basis in the shares. However, a 2017 Incentive Award Plan participant granted
restricted stock that is subject to forfeiture or repurchase through a vesting schedule such that it is subject to a “risk of forfeiture”
(as defined in Section 83 of the Code) may, subject to our consent, make an election under Section 83(b) of the Code to recognize taxable
income at ordinary income tax rates, at the time of the grant, in an amount equal to the fair market value of the shares of common stock
on the date of grant, less the amount paid, if any, for such shares. We will be entitled to a corresponding tax deduction for compensation,
in the amount recognized as taxable income by the participant. If a timely Section 83(b) election is made, the participant will not recognize
any additional ordinary income on the termination of restrictions on restricted stock, and we will not be entitled to any additional
tax deduction.
Other
Stock or Cash Based Awards. A 2017 Incentive Award Plan participant will not recognize taxable income and we will not be entitled
to a tax deduction upon the grant of other stock or cash based awards until cash or shares are paid or distributed to the participant.
At that time, any cash payments or the fair market value of shares that the participant receives will be taxable to the participant at
ordinary income tax rates and we should be entitled to a corresponding tax deduction for compensation expense. Payments in shares will
be valued at the fair market value of the shares at the time of the payment, and upon the subsequent disposition of the shares, the participant
will recognize a short-term or long-term capital gain or loss in the amount of the difference between the sales price of the shares and
the participant’s tax basis in the shares.
1999
Flexible Incentive Plan
We
established the 1999 Flexible Incentive Plan (the “1999 Plan”) for the purpose of attracting and retaining employees. No
additional awards have been granted under the 1999 Plan since October 2017.
Share
Reserve. The 1999 Plan provided that the maximum number of shares to be issued under the 1999 Plan would be an amount equal to 10%
of the Company’s issued and outstanding common stock at such time; the aggregate number of common stock that may be issued under
the 2017 Incentive Award Plan is 1,100,000 shares. At December 31, 2021, approximately 256,929 restricted shares of common stock had
been issued under the 1999 Plan and approximately 513,380 shares of Restricted Stock (as defined in the 2017 Incentive Award Plan) had
been issued under such Plan.
Awards.
The 1999 Plan provides that our administrator may grant or issue stock options, restricted stock, performance awards, dividend equivalents,
stock appreciation rights, phantom stock awards or any combination thereof. The administrator considers each award grant subjectively,
considering factors such as the individual performance of the recipient and the anticipated contribution of the recipient to the attainment
of our long-term goals. Each award is set forth in a separate agreement with the person receiving the award and indicates the type, terms
and conditions of the award. To date, only restricted stock has been issued under the 1999 Plan.
Restricted
stock may be granted to participants and made subject to such restrictions as may be determined by the administrator. Typically, restricted
stock may be repurchased by us at the original purchase price or, if no cash consideration was paid for such stock, forfeited for no
consideration if the conditions or restrictions are not met, and the restricted stock may not be sold or otherwise transferred to third
parties until restrictions are removed or expire. Recipients of restricted stock, unlike recipients of options, may have voting rights
and may receive dividends, if any, prior to when the restrictions lapse.
Administration.
Our Board of Directors administers the 1999 Plan. Subject to the terms and conditions of the 1999 Plan, the administrator has the authority
to select the persons to whom awards are to be made, to determine the type or types of awards to be granted to each person, determine
the number of awards to grant, determine the number of shares to be subject to such awards, and the terms and conditions of such awards,
and make all other determinations and decisions and to take all other actions necessary or advisable for the administration of the 1999
Plan. The plan administrator is also authorized to prescribe, amend and rescind rules relating to administration of the 1999 Plan, subject
to certain restrictions.
Eligibility.
Awards under the 1999 Plan may be granted to individuals who are then our employees, consultants and members of our Board of Directors
and our subsidiaries. Approximately 19 employees, no consultants and four non-employee directors
are eligible to participate in the 1999 Plan.
Corporate
Transactions. In the event of a corporate transaction where the acquirer does not assume awards granted under the 1999 Plan, awards
issued under the 1999 Plan will be subject to accelerated vesting such that 100% of the awards will become vested and exercisable or
payable. Under the 1999 Plan, a corporate transaction is generally defined as any recapitalization, merger, consolidation or conversion
involving our company or any exchange of securities involving the common stock, provided that a primary issuance of shares of common
stock shall not be deemed to be a corporate transaction.
Amendment
and Termination of the 1999 Plan. Our Board of Directors may terminate, amend or modify the 1999 Plan.
Securities
Laws. The 1999 Plan is intended to conform to all provisions of the Securities Act and the Exchange Act and any and all regulations
and rules promulgated by the SEC thereunder, including, without limitation, Rule 16b-3. The 1999 Plan will be administered, and awards
will be granted and may be exercised, only in such a manner as to conform to such laws, rules and regulations.
Federal
Income Tax Consequences. The material federal income tax consequences of the 1999 Plan under current federal income tax law are summarized
in the following discussion, which deals with the general tax principles applicable to the 1999 Plan. The following discussion is based
upon laws, regulations, rulings and decisions now in effect, all of which are subject to change. Foreign, state and local tax laws, and
employment, estate and gift tax considerations are not discussed due to the fact that they may vary depending on individual circumstances
and from locality to locality.
A
1999 Plan participant generally will not recognize taxable income at ordinary income tax rates and we generally will not be entitled
to a tax deduction upon the grant of restricted stock. Upon the termination of restrictions on restricted stock, the participant will
recognize taxable income at ordinary income tax rates, and we should be entitled to a corresponding tax deduction for compensation expense,
in the amount paid to the participant or the amount by which the then fair market value of the shares received by the participant exceeds
the amount, if any, paid for them. Upon the subsequent disposition of any shares, the participant will recognize a short-term or long-term
capital gain or loss in the amount of the difference between the sales price of the shares and the participant’s tax basis in the
shares. However, a 1999 Plan participant granted restricted stock that is subject to forfeiture or repurchase through a vesting schedule
such that it is subject to a “risk of forfeiture” (as defined in Section 83 of the Code) may make an election under Section
83(b) of the Code to recognize taxable income at ordinary income tax rates, at the time of the grant, in an amount equal to the fair
market value of the shares of common stock on the date of grant, less the amount paid, if any, for such shares. We will be entitled to
a corresponding tax deduction for compensation, in the amount recognized as taxable income by the participant. If a timely Section 83(b)
election is made, the participant will not recognize any additional ordinary income on the termination of restrictions on restricted
stock, and we will not be entitled to any additional tax deduction.
The
following table summarizes information about our equity compensation plans as of December 31, 2021.
Plan category | |
Number of securities to be issued upon exercise of outstanding options, warrants and rights | | |
Weighted-average exercise price of outstanding options, warrants and rights | | |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| |
| (a) | | |
| (b) | | |
| (c) | |
Equity compensation plans approved by security holders | |
| — | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | |
Equity compensation plans not approved by security holders | |
| — | | |
| — | | |
| 1,280,527 | (1) |
| |
| | | |
| | | |
| | |
Total | |
| — | | |
| — | | |
| 1,280,527 | |
|
(1) |
Of
these securities: (i) 586,620 shares of common stock remain available for future issuance under the 2017 Incentive Award Plan, and
(ii) 693,907 shares of common stock remain available for future issuance under the 1999 Plan. |
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In
the last two fiscal years, there have been no transactions in which the Company was or is to be a party in which the amount involved
exceeds $120,000 and in which any director, executive officer, holder of more than 5% of the Company’s common stock or any member
of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest except as set forth below.
Our
Audit Committee reviews and approves all related party transactions that management has determined are required to be disclosed in the
audited financial statements.
In
November 2021, our subsidiary Murphy Canyon Acquisition Sponsor, LLC (the “Sponsor”), purchased 4,312,500 founder shares
of Murphy Canyon Acquisition Corp. for an aggregate purchase price of $25,000, or approximately $0.006 per share. On January 26, 2022,
the Sponsor surrendered and forfeited 1,006,250 founder shares for no consideration, following which the Sponsor held 3,306,250 Founder
Shares at approximately $0.008 per share.
In
February 7, 2022, the Sponsor purchased 754,000 units (the “Private Placement Units”) from Murphy Canyon Acquisition Corp.,
at a price of $10.00 per Private Placement Unit.
In
2021 and 2022, the Sponsor loaned $300,000 to Murphy Canyon Acquisition Corp., which was repaid on February 7, 2022. These loans were
non-interest bearing and unsecured.
Indemnification
of Our Directors and Officers in Our Charter and Bylaws
Our
charter authorizes us to obligate ourselves, and our bylaws obligate us, to the maximum extent permitted by Maryland law in effect from
time to time, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to:
|
● |
any
present or former director or officer who is made or threatened to be made a party to, or witness in, a proceeding by reason of his
or her service in that capacity; or |
|
|
|
|
● |
any
individual who, while a director or officer of our company and at our request, serves or has served as a director, officer, partner,
trustee, member or manager of another corporation, real estate investment trust, limited liability company, partnership, joint venture,
trust, employee benefit plan or any other enterprise and who is made or threatened to be made a party to, or witness in, the proceeding
by reason of his or her service in that capacity. |
Our
charter and bylaws also permit us to indemnify and advance expenses to any individual who served any of our predecessors in any of the
capacities described above and any employee or agent of us or any of our predecessors. For more information about indemnification under
Maryland law and our governing documents, see “Certain Provisions of Maryland Law and Our Charter and Bylaws—Limitation of
Liability and Indemnification of Directors and Officers.”
Indemnification
Agreements
We
have entered into indemnification agreements with each of our Named Executive Officers and directors whereby we agree to indemnify such
executive officers and directors to the fullest extent permitted by Maryland law against all expenses and liabilities. These indemnification
agreements also provide that upon an application for indemnity by an executive officer or director to a court of appropriate jurisdiction,
such court may order us to indemnify such executive officer or director. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors or executive officers, we have been informed that in the opinion of the SEC such indemnification
is against public policy and is therefore unenforceable.
POLICIES
WITH RESPECT TO CERTAIN ACTIVITIES
The
following is a discussion of certain of our investment, financing and leverage and other policies. These policies may be amended and
revised from time to time at the discretion of our Board of Directors without notice to or a vote of our stockholders.
Investment
Policies
Investment
in Real Estate or Interests in Real Estate
Our
investment objectives are to increase cash flow from operations, achieve sustainable long-term growth and maximize stockholder value
to allow for stable dividends and stock appreciation. We have not established a specific policy regarding the relative priority of these
investment objectives. For a discussion of our properties and our acquisition and other strategic objectives, see “Business and
Property.”
We
intend to continue to acquire high-quality commercial properties in overlooked and/or underserved markets, where we believe we can create
long-term stockholder value. Future investment activities will be focused on our target markets, but will not be limited to any specific
geographic area, product type or to a specified percentage of our assets. While we may diversify in terms of property locations, size
and market or submarket, we do not have any limit on the amount or percentage of our assets that may be invested in any one property
or any one geographic area. We intend to engage in such future investment or development activities in a manner that is consistent with
our qualification as a REIT for U.S. federal income tax purposes. We do not have a specific policy to acquire assets primarily for capital
gain or primarily for income. In addition, we may purchase or lease income-producing commercial and other types of properties for long-term
investment, expand and improve the properties we presently own or other acquired properties, or sell such properties, in whole or in
part, when circumstances warrant.
We
participate with third parties in property ownership, through limited liability partnerships or other types of co-ownership, and we may
engage in such activities in the future if we determine that doing so would be the most effective means of owning or acquiring properties.
We do not expect, however, to enter into limited liability partnership or other partnership arrangement to make an investment that would
not otherwise meet our investment policies. We also may acquire real estate or interests in real estate in exchange for the issuance
of common stock, preferred stock or options to purchase stock.
Equity
investments in acquired properties may be subject to existing mortgage financing and other indebtedness or to new indebtedness which
may be incurred in connection with acquiring or refinancing these investments. Principal and interest on our debt will have a priority
over any dividends with respect to our common stock. Investments are also subject to our policy not to be required to register as an
investment company under the Investment Company Act.
Securities
of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers
Subject
to the asset tests and gross income tests necessary for REIT qualification, we may invest in securities of other REITs, other entities
engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities.
We do not currently have any policy limiting the types of entities in which we may invest or the proportion of assets to be so invested,
whether through acquisition of an entity’s common stock, limited liability or partnership interests, interests in another REIT
or entry into a joint venture. As of March 31, 2021, our investment in marketable securities totaled approximately $20,000, and we also
held interests in two joint ventures. Our investment in marketable securities as of December 31, 2020 was approximately $83,000. We have
no current plans to make additional investments in entities that are not engaged in real estate activities. Our investment objectives
are to maximize the cash flow of our investments, acquire investments with growth potential and provide cash distributions and long-term
capital appreciation to our stockholders through increases in the value of our company.
Investment
in Other Securities
Other
than as described above, we do not intend to invest in any additional securities such as real estate mortgages, bonds, preferred stock
or common stock.
Financing
and Leverage Policies
We
expect to employ leverage in our capital structure in amounts determined from time to time by our Board of Directors. Although our Board
of Directors has not adopted a policy that limits the total amount of indebtedness that we may incur, it will consider a number of factors
in evaluating our level of indebtedness from time to time, as well as the amount of such indebtedness that will be either fixed or variable
rate. Our charter and bylaws that will be in effect following this offering will not limit the amount or percentage of indebtedness that
we may incur nor will they restrict the form in which our indebtedness will be taken (including recourse or non-recourse debt, cross
collateralized debt, etc.). Our Board of Directors may from time to time modify our debt policy in light of the then-current economic
conditions, relative costs of debt and equity capital, market values of our properties, general market conditions for debt and equity
securities, fluctuations in the market price of our common stock, growth and acquisition opportunities and other factors.
To
the extent our Board of Directors determines to obtain additional capital, we may, without stockholder approval, issue debt or equity
securities, retain earnings (subject to the REIT distribution requirements for U.S. federal income tax purposes) or pursue a combination
of these methods.
Lending
Policies
Except
with respect to related party transactions, we do not have a policy limiting our ability to make loans to other persons. We may consider
offering purchase money financing in connection with the sale of properties in which the provision of that financing will increase the
value to be received by us for the property sold. We may also make loans to joint ventures in which we participate. However, we do not
intend to engage in significant lending activities. Any loan that we make will be consistent with our qualification as a REIT for U.S.
federal income tax purposes.
Policies
with Respect to Issuing and Underwriting Securities
We
have authority to, and may, offer common stock, preferred stock or options to purchase stock in exchange for property. Our charter authorizes
our Board of Directors to classify and reclassify any unissued shares of our preferred stock into other classes or series of stock, including
one or more classes or series of stock that have priority over our common stock with respect to dividends or upon liquidation, or have
voting rights and other rights that differ from the rights of the common stock, and authorizes us to issue the newly classified shares
in any manner and on such terms and for such consideration, it deems appropriate, including in exchange for property. These actions may
be taken without the approval of holders of our common stock unless such approval is required by applicable law, the terms of any other
class or series of our stock or the rules of any stock exchange or automated quotation system on which any of our stock is listed or
traded. See “Description of Capital Stock.” We have not engaged in trading, underwriting or agency distribution or sale of
securities of other issuers and do not intend to do so.
Reporting
Policies
We
intend to make available to our stockholders our annual reports, including our audited financial statements. We are subject to the information
reporting requirements of the Exchange Act. Pursuant to those requirements, we are required to file annual and periodic reports, proxy
statements and other information, including audited financial statements, with the SEC.
Policies
with Respect to Conflicts of Interest
We
have adopted certain policies designed to eliminate or minimize certain potential conflicts of interest. Specifically, we adopted the
Ethics Code that generally prohibits conflicts of interest between us and our personnel and directors. Our Ethics Code generally limits
our employees and officers from competing with our company or taking for themselves opportunities that are discovered through use of
property or information of or position with our company. Waivers of our Ethics Code may be granted by an executive officer for personnel
and by the Board of Directors or a committee of the Board for Directors for officers. However, we cannot assure you these policies or
provisions of law will always succeed in eliminating the influence of such conflicts. If they are not successful, decisions could be
made that might fail to reflect fully the interests of all stockholders.
Interested
Director and Officer Transactions
Pursuant
to the MGCL, a contract or other transaction between us and a director, or between us and any other corporation or other entity in which
any of our directors is a director or has a material financial interest, is not void or voidable solely on the grounds of such common
directorship or interest, the presence of such director at the meeting at which the contract or transaction is authorized, approved or
ratified or the counting of the director’s vote in favor thereof, if:
|
● |
the
fact of the common directorship or interest is disclosed or known to our Board of Directors or a committee of our Board, and our
Board or committee authorizes, approves or ratifies the contract or transaction by the affirmative vote of a majority of disinterested
directors, even if the disinterested directors constitute less than a quorum; or |
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the
fact of the common directorship or interest is disclosed or known to our stockholders entitled to vote thereon, and the contract
or transaction is authorized, approved or ratified by a majority of the votes cast by the stockholders entitled to vote other than
the votes of shares owned of record or beneficially by the interested director or corporation or other entity; or |
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● |
the
contract or transaction is fair and reasonable to us. |
We
have adopted a policy requiring all contracts and transactions between us or any of our subsidiaries, on the one hand, and any of our
directors or executive officers or any entity in which such director or executive officer is a director or has a material financial interest,
on the other hand, to be approved by the affirmative vote of a majority of the disinterested directors, even if less than a quorum. Where
appropriate, in the judgment of the disinterested directors, our Board of Directors may obtain a fairness opinion or engage independent
counsel to represent the interests of non-affiliated security holders, although our Board of Directors will have no obligation to do
so.
PRINCIPAL
STOCKHOLDERS
The
following table sets forth certain information as of the date of this prospectus relating to the beneficial ownership of shares of our
common stock by (1) each of our Named Executive Officer named in the Summary Compensation Table, (2) each of our directors and (3) all
of our current executive officers and directors as a group. We are not aware of any persons who beneficially own more than 5% of our
outstanding shares of common stock. The table also reflects the beneficial ownership of shares of our common stock assuming completion
of the sale of all of the shares in this offering. Beneficial ownership is determined in accordance with the rules of the SEC and includes
voting or investment power with respect to the securities. Except as indicated in footnotes to this table, we believe that the stockholders
named in this table have sole voting and investment power with respect to all shares of common stock shown to be beneficially owned by
them based on information provided to us by these stockholders. The address of each person is c/o Presidio Property Trust, Inc., 4995
Murphy Canyon Road, Suite 300, San Diego, CA 92123 unless otherwise indicated herein.
Name of Beneficial Owner | |
Number of Shares of Common Stock | | |
% of Total Outstanding Shares (1) | |
Jennifer A. Barnes | |
| 27,552 | (2) | |
| * | |
David T. Bruen | |
| 46,836 | (3) | |
| * | |
Larry G. Dubose | |
| 144,574 | (4) | |
| 1.2 | % |
James R. Durfey | |
| 47,492 | (5) | |
| * | |
Jack K. Heilbron | |
| 306,217 | (6) | |
| 2.5 | % |
Gary M. Katz | |
| 158,958 | (7) | |
| 1.3 | % |
Sumner J. Rollings | |
| 62,813 | (8) | |
| * | |
Adam Sragovicz | |
| 132,170 | (9) | |
| 1.1 | % |
All current directors and executive officers as a group (8 people) | |
| 926,612 | | |
| 7.5 | % |
5% or greater stockholders | |
| | | |
| | |
Armistice Capital, LLC, Steven Boyd, 510 Madison Avenue, 7th Floor, New York, New York 10022 (10) | |
| 1,320,552 | (11) | |
| 10.68 | % |
|
(1) |
Based
on 12,364,289 shares of common stock of the Company issued and outstanding as of April [ ], 2022. |
|
|
|
|
(2) |
Includes
22,541 shares are unvested stock that are scheduled to become fully vested by December 31, 2024. |
|
|
|
|
(3) |
Includes
21,346 shares of unvested stock that are scheduled to become fully vested by December 31, 2024. |
|
|
|
|
(4) |
Includes
36,402 shares of unvested stock that are scheduled to become fully vested by December 31, 2026. |
|
|
|
|
(5) |
Includes
30,481 shares are unvested stock that are scheduled to become fully vested by December 31, 2024. |
|
|
|
|
(6) |
Of
these shares: (i) 10,655 shares are held by Puppy Toes, Inc. and its subsidiaries (including Centurion Counsel, Inc.), of which Mr.
Heilbron is the controlling shareholder, (ii) 10,007 shares are held by Mr. Heilbron’s spouse, (iii) 600 shares are held by
or FBO Mr. Heilbron’s grandchildren and (iv) includes 149,956 shares are unvested stock that are scheduled to become fully
vested by December 31, 2027. |
|
|
|
|
(7) |
Includes
86,153 shares of unvested stock that are scheduled to become fully vested by December 31, 2024. |
|
|
|
|
(8) |
Of
these shares: (i) 2,677 shares are held by Mr. Rollings’ spouse, and (ii) includes 25,796 shares are unvested stock that are
scheduled to become fully vested by December 31, 2024. |
|
|
|
|
(9) |
Includes
87,426 shares of unvested stock that are scheduled to become fully vested by December 31, 2024. |
|
|
|
|
(10) |
Based
solely on a Schedule 13G filed with the SEC on February 15, 2022. The Schedule 13G was filed by Armistice Capital, LLC and Steven
Boyd (collectively, “Armistice”). According to the Schedule 13G, as of February 15, 2022, Armistice Capital, LLC and
Steven Boyd have shared voting power and shared dispositive power with regard to 1,320,552 shares of common stock. |
|
|
|
|
(11) |
Does
not include 2,000,000 warrants with a 19.99% beneficial ownership blocker. |
DESCRIPTION
OF CAPITAL STOCK
The
following summary of the terms of our stock does not purport to be complete and is subject to and qualified in its entirety by reference
to our charter and to our second amended and restated bylaws, copies of which are filed as exhibits to the registration statement of
which this prospectus is a part, and to the MGCL. See “Where You Can Find More Information.”
General
Our
charter authorizes us to issue up to 110,001,000 shares of stock, consisting of (i) 109,001,000 shares of common stock, $0.01 par value
per share, of which 100,000,000 are classified as shares of Series A Common Stock, 1,000 are classified as shares of Series B Common
Stock and 9,000,000 are classified as shares of Series C Common Stock, and (ii) 1,000,000 shares of preferred stock, $0.01 par value
per share, of which 920,000 are classified as shares of Series D Preferred Stock. As of the date of this prospectus, there are approximately
_________ shares of Series A Common Stock issued and outstanding, 920,000 shares of Series D Preferred Stock issued and outstanding and
no shares of any other class or series of stock issued and outstanding. Under Maryland law, a stockholder generally is not liable for
a corporation’s debts or obligations solely as a result of his, her or its status as a stockholder.
Common
Stock
All
outstanding shares of our Series A Common Stock are duly authorized, validly issued, fully paid and nonassessable. Subject to the restrictions
on ownership and transfer of our stock discussed below under the caption “—Restrictions on Ownership and Transfer”
and the voting rights of holders of outstanding shares of any other class or series of our stock, holders of our common stock are entitled
to one vote for each share held of record on all matters on which stockholders are entitled to vote generally, including the election
or removal of directors, and, except as provided with respect to any other class or series of our stock, the holders of shares of our
common stock possess exclusive voting power. Directors are elected by a plurality of the votes cast at the meeting in which directors
are being elected. Under our charter, voting for the election of directors will be cumulative if, prior to commencement of the voting,
a stockholder gives us notice of his, her or its intention to cumulate votes. If any stockholder gives such a notice, then every stockholder
will be entitled to such rights, in which case, each stockholder may cumulate his, her or its total votes and cast all of his, her or
its votes for any one or a combination of director nominees. In cumulative voting, the total votes entitled to be cast by a stockholder
equals the number of director nominees multiplied by the number of shares of common stock that such stockholder is entitled to vote.
Holders
of our common stock are entitled to receive dividends or other distributions as and when authorized by our Board of Directors and declared
by us out of assets legally available for the payment of dividends. Upon our liquidation, dissolution or winding up and after payment
in full of all amounts required to be paid to creditors and to the holders of outstanding shares of any other class or series of our
stock having liquidation preferences senior to our common stock, if any, the holders of our common stock will be entitled to share ratably
in our remaining assets legally available for distribution. Holders of our common stock do not have preemptive, subscription, redemption
or conversion rights. There are no sinking fund provisions applicable to the common stock. Holders of our Series A Common Stock generally
have no appraisal rights under the MGCL as long as the shares are listed on a national securities exchange. All shares of our common
stock have equal dividend and liquidation rights. The rights, powers, preferences and privileges of holders of our common stock are subject
to those of the holders of any shares of our preferred stock or any other class or series of stock that we may authorize and issue in
the future and to the restrictions on ownership and transfer of our stock described below under the caption “—Restrictions
on Ownership and Transfer.”
Under
the MGCL, a Maryland corporation generally cannot amend its charter, consolidate, merge, convert, sell all or substantially all of its
assets, engage in a share exchange or dissolve unless the action is advised by its Board of Directors and approved by the affirmative
vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter unless a lesser percentage (but
not less than a majority of the votes entitled to be cast on the matter) is set forth in the corporation’s charter. As permitted
by Maryland law, our charter provides that a merger, consolidation, share exchange, dissolution or sale of substantially all of our assets
may be approved by the affirmative vote of stockholders entitled to cast a majority of all of the votes entitled to be cast on the matter.
In addition, because many of our operating assets are held by our subsidiaries, these subsidiaries may be able to merge or sell all or
substantially all of their assets without the approval of our stockholders.
Series
D Preferred Stock
Listing
Our
Series D Preferred Stock is listed on The Nasdaq Capital Market under the symbol “SQFTP”.
No
Maturity, Sinking Fund or Mandatory Redemption
Our
Series D Preferred Stock has no stated maturity and will not be subject to any sinking fund or mandatory redemption. Shares of the Series
D Preferred Stock will remain outstanding indefinitely unless we decide to redeem or otherwise repurchase them. We are not required to
set aside funds to redeem the Series D Preferred Stock.
Ranking
Our
Series D Preferred Stock ranks, with respect to rights to the payment of dividends and the distribution of assets upon our liquidation,
dissolution or winding up:
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senior
to all classes or series of our common stock and to all other equity securities issued by us other than equity securities referred
to in the next two bullet points below; |
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on a parity with all equity
securities issued by us with terms specifically providing that those equity securities rank on a parity with the Series D Preferred
Stock with respect to rights to the payment of dividends and the distribution of assets upon our liquidation, dissolution or winding
up; |
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junior to all equity securities
issued by us with terms specifically providing for ranking senior to the Series D Preferred Stock with respect to rights to the payment
of dividends and the distribution of assets upon our liquidation, dissolution or winding up (please see the section entitled “Voting
Rights” below); and |
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effectively junior to all
our existing and future indebtedness (including indebtedness convertible into our common stock or preferred stock) and to any indebtedness
and other liabilities of (as well as any preferred equity interests held by others in) our existing subsidiaries. |
Dividends
Holders
of shares of the Series D Preferred Stock are entitled to receive, when, as and if authorized by the Board of Directors and declared
by us, out of funds of the Company legally available for the payment of dividends, cumulative cash dividends at the rate of 9.375% of
the $25.00 per share liquidation preference per annum (equivalent to $2.34375 per annum per share). Dividends on the Series D Preferred
Stock are payable monthly on the 15th day of each month; provided that if any dividend payment date is not a business day, as defined
in the Articles Supplementary establishing the terms of our Series D Preferred Stock, or the Articles Supplementary, then the dividend
that would otherwise have been payable on that dividend payment date may be paid on the next succeeding business day and no interest,
additional dividends or other sums will accrue on the amount so payable for the period from and after that dividend payment date to that
next succeeding business day. Any dividend payable on the Series D Preferred Stock, including dividends payable for any partial dividend
period, will be computed on the basis of a 360-day year consisting of twelve 30-day months. Dividends will be payable to holders of record
as they appear in our stock records for the Series D Preferred Stock at the close of business on the applicable record date, which shall
be the last day of the calendar month, whether or not a business day, immediately preceding the month in which the applicable dividend
payment date falls. As a result, holders of shares of Series D Preferred Stock will not be entitled to receive dividends on a dividend
payment date if such shares were not issued and outstanding on the applicable dividend record date.
No
dividends on shares of Series D Preferred Stock shall be authorized by our Board of Directors or paid or set apart for payment by us
at any time when the terms and provisions of any agreement of ours, including any agreement relating to our indebtedness, prohibit the
authorization, payment or setting apart for payment thereof or provide that the authorization, payment or setting apart for payment thereof
would constitute a breach of the agreement or a default under the agreement, or if the authorization, payment or setting apart for payment
shall be restricted or prohibited by law.
Notwithstanding
the foregoing, dividends on the Series D Preferred Stock will accrue whether or not we have earnings, whether or not there are funds
legally available for the payment of those dividends and whether or not those dividends are authorized by our Board of Directors. No
interest, or sum in lieu of interest, will be payable in respect of any dividend payment or payments on the Series D Preferred Stock
that may be in arrears, and holders of the Series D Preferred Stock will not be entitled to any dividends in excess of full cumulative
dividends described above. Any dividend payment made on the Series D Preferred Stock shall first be credited against the earliest accumulated
but unpaid dividend due with respect to those shares.
Future
distributions on our common stock and preferred stock, including the Series D Preferred Stock will be at the discretion of our Board
of Directors and will depend on, among other things, our results of operations, cash flow from operations, financial condition and capital
requirements, any debt service requirements, applicable law and any other factors our Board of Directors deems relevant. Accordingly,
we cannot guarantee that we will be able to make cash distributions on our preferred stock or what the actual distributions will be for
any future period.
Unless
full cumulative dividends on all shares of Series D Preferred Stock have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment thereof has been or contemporaneously is set apart for payment for all past dividend periods, no
dividends (other than in shares of common stock or in shares of any class or series of preferred stock that we may issue ranking junior
to the Series D Preferred Stock as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding
up) shall be declared and paid or declared and set apart for payment upon shares of our common stock or preferred stock that we may issue
ranking junior to, or on a parity with, the Series D Preferred Stock as to the payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up. Nor shall any other distribution be declared and made upon shares of our common stock or preferred
stock that we may issue ranking junior to, or on a parity with, the Series D Preferred Stock as to the payment of dividends or the distribution
of assets upon liquidation, dissolution or winding up. Also, any shares of our common stock or preferred stock that we may issue ranking
junior to or on a parity with the Series D Preferred Stock as to the payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up shall not be redeemed, purchased or otherwise acquired for any consideration (or any moneys paid to or made
available for a sinking fund for the redemption of any such shares) by us (except (x) by conversion into or exchange for our other stock
that we may issue ranking junior to the Series D Preferred Stock as to the payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up and (y) for transfers, redemptions or purchases made pursuant to the ownership and transfer restrictions contained
in our charter).
When
dividends are not paid in full (or a sum sufficient for such full payment is not so set apart) upon the Series D Preferred Stock and
the shares of any other series of preferred stock that we may issue ranking on a parity as to the payment of dividends with the Series
D Preferred Stock, all dividends declared upon the Series D Preferred Stock and any other class or series of preferred stock that we
may issue ranking on a parity as to the payment of dividends with the Series D Preferred Stock shall be declared pro rata so that the
amount of dividends declared per share of Series D Preferred Stock and such other class or series of preferred stock that we may issue
shall in all cases bear to each other the same ratio that accrued dividends per share on the Series D Preferred Stock and such other
series of preferred stock that we may issue (which shall not include any accrual in respect of unpaid dividends for prior dividend periods
if such preferred stock does not have a cumulative dividend) bear to each other. No interest, or sum of money in lieu of interest, shall
be payable in respect of any dividend payment or payments on the Series D Preferred Stock that may be in arrears.
Liquidation
Preference
In
the event of our voluntary or involuntary liquidation, dissolution or winding up, the holders of shares of Series D Preferred Stock will
be entitled to be paid out of the assets we have legally available for distribution to our stockholders, subject to the preferential
rights of the holders of any class or series of our stock we may issue ranking senior to the Series D Preferred Stock with respect to
the distribution of assets upon liquidation, dissolution or winding up, a liquidation preference of $25.00 per share, plus an amount
equal to any accumulated and unpaid dividends to, but not including, the date of payment, before any distribution of assets is made to
holders of our common stock or any other class or series of our stock we may issue that ranks junior to the Series D Preferred Stock
as to liquidation rights.
In
the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, our available assets are insufficient
to pay the amount of the liquidating distributions on all outstanding shares of Series D Preferred Stock and the corresponding amounts
payable on all shares of other classes or series of our stock that we may issue ranking on a parity with the Series D Preferred Stock
in the distribution of assets, then the holders of the Series D Preferred Stock and all other such classes or series of stock shall share
ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively
entitled.
We
will use commercially reasonable efforts to provide written notice of any such liquidation, dissolution or winding up no fewer than 10
days prior to the payment date. After payment of the full amount of the liquidating distributions to which they are entitled, the holders
of Series D Preferred Stock will have no right or claim to any of our remaining assets. The consolidation or merger of us with or into
any other corporation, trust or entity or of any other entity with or into us, or the sale, lease, transfer or conveyance of all or substantially
all of our property or business, shall not be deemed a liquidation, dissolution or winding up of us (although such events may give rise
to the special optional redemption to the extent described below).
Redemption
The
Series D Preferred Stock is not redeemable by us prior to June 15, 2026, except under circumstances intended to preserve our status as
a REIT for federal and/or state income tax purposes and except as described below under “-Special Optional Redemption.”
Optional
Redemption
On
and after June 15, 2026, we may, at our option, upon not less than 10 days’ written notice, redeem the Series D Preferred Stock,
in whole or in part, at any time or from time to time, for cash at a redemption price equal to $25.00 per share, plus any accumulated
and unpaid dividends thereon to, but not including, the date fixed for redemption.
Special
Optional Redemption
Upon
the occurrence of a Change of Control, we may, at our option, upon not less than 10 days’ written notice, redeem the Series D Preferred
Stock, in whole or in part, within 120 days after the first date on which such Change of Control occurred, for cash at a redemption price
of $25.00 per share, plus any accumulated and unpaid dividends thereon to, but not including, the redemption date.
A
“Change of Control” is deemed to occur when, after the original issuance date of the Series D Preferred Stock, the following
have occurred and are continuing:
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the acquisition by any
person, including any syndicate or group deemed to be a “person” under Section 13(d)(3) of the Exchange Act, of beneficial
ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of purchases, mergers or
other acquisition transactions of our stock entitling that person to exercise more than 50% of the total voting power of all our
stock entitled to vote generally in the election of our directors (except that such person will be deemed to have beneficial ownership
of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon
the occurrence of a subsequent condition); and |
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following the closing of
any transaction referred to above, neither we nor the acquiring or surviving entity has a class of common securities (or American
Depositary Receipts representing such securities) listed on the NYSE, the NYSE American or Nasdaq, or listed or quoted on an exchange
or quotation system that is a successor to the NYSE, the NYSE American or Nasdaq. |
Redemption
Procedures.
In
the event we elect to redeem Series D Preferred Stock, the notice of redemption will be mailed to each holder of record of Series D Preferred
Stock called for redemption at such holder’s address as it appears on our stock transfer records, not less than 10 days prior to
the redemption date, and will state the following:
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the number of shares of
Series D Preferred Stock to be redeemed; |
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the place or places where
certificates (if any) for the Series D Preferred Stock are to be surrendered for payment of the redemption price; |
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that dividends on the shares
to be redeemed will cease to accumulate on the redemption date; |
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whether such redemption
is being made pursuant to the provisions described above under “-Optional Redemption” or “-Special Optional
Redemption”; and |
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if applicable, that such
redemption is being made in connection with a Change of Control and, in that case, a brief description of the transaction or transactions
constituting such Change of Control. |
If
less than all of the Series D Preferred Stock held by any holder are to be redeemed, the notice mailed to such holder shall also specify
the number of shares of Series D Preferred Stock held by such holder to be redeemed. No failure to give such notice or any defect thereto
or in the mailing thereof shall affect the validity of the proceedings for the redemption of any shares of Series D Preferred Stock except
as to the holder to whom notice was defective or not given.
Holders
of Series D Preferred Stock to be redeemed shall surrender the Series D Preferred Stock at the place designated in the notice of redemption
and shall be entitled to the redemption price and any accumulated and unpaid dividends payable upon the redemption following the surrender.
If notice of redemption of any shares of Series D Preferred Stock has been given and if we have irrevocably set apart the funds necessary
for redemption in trust for the benefit of the holders of the shares of Series D Preferred Stock so called for redemption, then from
and after the redemption date (unless default shall be made by us in providing for the payment of the redemption price plus accumulated
and unpaid dividends, if any), dividends will cease to accrue on those shares of Series D Preferred Stock, those shares of Series D Preferred
Stock shall no longer be deemed outstanding and all rights of the holders of those shares will terminate, except the right to receive
the redemption price plus accumulated and unpaid dividends, if any, payable upon redemption. If any redemption date is not a business
day, then the redemption price and accumulated and unpaid dividends, if any, payable upon redemption may be paid on the next business
day and no interest, additional dividends or other sums will accrue on the amount payable for the period from and after that redemption
date to that next business day. If less than all of the outstanding Series D Preferred Stock is to be redeemed, the Series D Preferred
Stock to be redeemed shall be selected pro rata (as nearly as may be practicable without creating fractional shares) or by any other
equitable method we determine that will not result in the automatic transfer of any shares of Series D Preferred Stock to a charitable
trust pursuant to the ownership and transfer restrictions contained in our charter.
In
connection with any redemption of Series D Preferred Stock, we shall pay, in cash, any accumulated and unpaid dividends to, but not including,
the redemption date, unless a redemption date falls after a dividend record date and prior to the corresponding dividend payment date,
in which case each holder of Series D Preferred Stock at the close of business on such dividend record date shall be entitled to the
dividend payable on such shares on the corresponding dividend payment date notwithstanding the redemption of such shares before such
dividend payment date. Except as provided above, we will make no payment or allowance for unpaid dividends, whether or not in arrears,
on shares of the Series D Preferred Stock to be redeemed.
No
shares of Series D Preferred Stock shall be redeemed unless full cumulative dividends on all shares of Series D Preferred Stock have
been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof has been or contemporaneously
is set apart for payment for all past dividend periods unless all outstanding shares of Series D Preferred Stock are simultaneously redeemed.
We shall not otherwise purchase or acquire directly or indirectly any shares of Series D Preferred Stock (except by exchanging it for
our stock ranking junior to the Series D Preferred Stock as to the payment of dividends and distribution of assets upon liquidation,
dissolution or winding up); provided, however, that the foregoing shall not prevent the purchase by us of shares transferred to a charitable
trust pursuant to the ownership and transfer restrictions contained in our charter or the purchase or acquisition by us of shares of
Series D Preferred Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of Series
D Preferred Stock.
Subject
to applicable law, we may purchase shares of Series D Preferred Stock in the open market, by tender or by private agreement. Any shares
of Series D Preferred Stock that have been redeemed or otherwise acquired by us, will, after such redemption or acquisition, have the
status of authorized but unissued shares of Series D Preferred Stock, until such shares are reclassified and designated by the Board
of Directors in accordance with the provisions of our charter.
Voting
Rights
Holders
of the Series D Preferred Stock do not have any voting rights, except as set forth below.
On
each matter on which holders of Series D Preferred Stock are entitled to vote, each share of Series D Preferred Stock will entitle the
holder thereof to one vote. In instances described below where holders of Series D Preferred Stock vote with holders of any other class
or series of our preferred stock as a single class on any matter, the Series D Preferred Stock and the shares of each such other class
or series will have one vote for each $25.00 of liquidation preference (excluding accumulated dividends) represented by their respective
shares.
Whenever
dividends on any shares of Series D Preferred Stock are in arrears for eighteen or more monthly dividend periods, whether or not consecutive,
the number of directors constituting our Board of Directors will be automatically increased by two (if not already increased by two by
reason of the election of directors by the holders of any other class or series of our preferred stock we may issue upon which like voting
rights have been conferred and are exercisable and with which the Series D Preferred Stock is entitled to vote as a class with respect
to the election of those two directors) and the holders of Series D Preferred Stock (voting separately as a class with all other classes
or series of preferred stock we may issue upon which like voting rights have been conferred and are exercisable and which are entitled
to vote as a class with the Series D Preferred Stock in the election of those two directors) will be entitled to vote for the election
of those two additional directors (the “preferred stock directors”) at a special meeting called by us at the request of the
holders of record of at least 25% of the outstanding shares of Series D Preferred Stock or by the holders of any other class or series
of preferred stock upon which like voting rights have been conferred and are exercisable and which are entitled to vote as a class with
the Series D Preferred Stock in the election of those two preferred stock directors (unless the request is received less than 90 days
before the date fixed for the next annual or special meeting of stockholders, in which case, such vote will be held at the earlier of
the next annual or special meeting of stockholders), and at each subsequent annual meeting until all dividends accumulated on the Series
D Preferred Stock for all past dividend periods and the then current dividend period have been fully paid or declared and a sum sufficient
for the payment thereof set apart for payment. In that case, the right of holders of the Series D Preferred Stock to elect any directors
will cease and, unless there are other classes or series of our preferred stock upon which like voting rights have been conferred and
are exercisable, any preferred stock directors elected by holders of the Series D Preferred Stock shall immediately resign and the number
of directors constituting the Board of Directors shall be reduced accordingly. In no event shall the holders of Series D Preferred Stock
be entitled under these voting rights to elect a preferred stock director that would cause us to fail to satisfy a requirement relating
to director independence of any national securities exchange or quotation system on which any class or series of our stock is listed
or quoted. For the avoidance of doubt, in no event shall the total number of preferred stock directors elected by holders of the Series
D Preferred Stock (voting separately as a class with all other classes or series of preferred stock we may issue upon which like voting
rights have been conferred and are exercisable and which are entitled to vote as a class with the Series D Preferred Stock in the election
of such directors) under these voting rights exceed two.
If
a special meeting is not called by us within 30 days after request from the holders of Series D Preferred Stock as described above, then
the holders of record of at least 25% of the outstanding Series D Preferred Stock may designate a holder to call the meeting at our expense
and such meeting may be called by the holder so designated upon notice similar to that required for annual meetings of stockholders and
shall be held at the place designated by the holder calling such meeting.
If,
at any time when the voting rights conferred upon the Series D Preferred Stock are exercisable, any vacancy in the office of a preferred
stock director shall occur, then such vacancy may be filled only by a written consent of the remaining preferred stock director, or if
none remains in office, by vote of the holders of record of the outstanding Series D Preferred Stock and any other classes or series
of preferred stock upon which like voting rights have been conferred and are exercisable and which are entitled to vote as a class with
the Series D Preferred Stock in the election of the preferred stock directors. Any preferred stock director elected or appointed may
be removed only by the affirmative vote of holders of the outstanding Series D Preferred Stock and any other classes or series of preferred
stock upon which like voting rights have been conferred and are exercisable and which classes or series of preferred stock are entitled
to vote as a class with the Series D Preferred Stock in the election of the preferred stock directors, such removal to be effected by
the affirmative vote of a majority of the votes entitled to be cast by the holders of the outstanding Series D Preferred Stock and any
such other classes or series of preferred stock, and may not be removed by the holders of the common stock.
So
long as any shares of Series D Preferred Stock remain outstanding, we will not, without the affirmative vote or consent of the holders
of at least two-thirds of the votes entitled to be cast by the holders of the Series D Preferred Stock outstanding at the time, given
in person or by proxy, either in writing or at a meeting (voting together as a class with all other classes or series of parity preferred
stock that we may issue upon which like voting rights have been conferred and are exercisable), (a) authorize or create, or increase
the number of authorized or issued shares of any class or series of stock ranking senior to the Series D Preferred Stock with respect
to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up or reclassify any of our authorized
stock into such shares, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase
any such shares; or (b) unless redeeming all Series D Preferred Stock in connection with such action, amend, alter or repeal any provision
of our charter, including by way of a merger, consolidation or otherwise, so as to materially and adversely affect any right, preference,
privilege or voting power of the Series D Preferred Stock (each, an “Event”); provided, however, with respect to the occurrence
of any Event set forth in clause (b), so long as the Series D Preferred Stock remains outstanding with the terms thereof materially unchanged,
taking into account that, upon an occurrence of an Event, we may not be the surviving entity, the occurrence of any such Event will not
be deemed to materially and adversely affect the rights, preferences, privileges or voting power of the Series D Preferred Stock and,
provided further, that any increase in the number of the authorized shares of preferred stock, including the Series D Preferred Stock,
or the creation or issuance of any additional shares of Series D Preferred Stock or other class or series of the preferred stock that
we may issue, or any increase in the number of authorized shares of such class or series, in each case ranking on a parity with or junior
to the Series D Preferred Stock with respect to payment of dividends or the distribution of assets upon liquidation, dissolution or winding
up, will not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.
Notwithstanding
the above, if any Event set forth above materially and adversely affects any right, preference, privilege or voting power of the Series
D Preferred Stock but not all series of parity Preferred Stock that the Corporation may issue upon which like voting rights have been
conferred and are exercisable, the affirmative vote or consent of the holders of at least two-thirds of the shares of the Series D Preferred
Stock and all such other similarly affected series, outstanding at the time (voting together as a class), given in person or by proxy,
either in writing or at a meeting, shall be required in lieu of the vote or consent that would otherwise be required as described the
above.
The
foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be
required shall be effected, all outstanding shares of Series D Preferred Stock shall have been redeemed or called for redemption upon
proper notice and sufficient funds shall have been deposited in trust to effect such redemption.
Except
as expressly stated in the charter, the Series D Preferred Stock do not have any relative, participating, optional or other special voting
rights or powers and the consent of the holders thereof shall not be required for the taking of any corporate action.
Information
Rights
During
any period in which we are not subject to Section 13 or 15(d) of the Exchange Act and any shares of Series D Preferred Stock are outstanding,
we will use our best efforts to (i) make available on our corporate investor webpage, copies of the Annual Reports on Form 10-K and Quarterly
Reports on Form 10-Q that we would have been required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act if we
were subject thereto (other than any exhibits that would have been required) and (ii) promptly, upon request, supply copies of such reports
to any holders of Series D Preferred Stock. We will use our best efforts to post to our website, mail or otherwise provide the information
to the holders of the Series D Preferred Stock within 15 days after the respective dates by which a periodic report on Form 10-K or Form
10-Q, as the case may be, in respect of such information would have been required to be filed with the SEC, if we were subject to Section
13 or 15(d) of the Exchange Act, in each case, based on the dates on which we would be required to file such periodic reports if we were
a “non-accelerated filer” within the meaning of the Exchange Act.
No
Conversion Rights
The
Series D Preferred Stock is not convertible into our common stock or any other security.
No
Preemptive Rights
No
holders of the Series D Preferred Stock will, as holders of Series D Preferred Stock, have any preemptive rights to purchase or subscribe
for our common stock or any other security.
Ownership
and Transfer Restrictions
The
Series D Preferred Stock is subject to the ownership and transfer restrictions in our charter. See “Description of Capital Stock-Restrictions
on Ownership and Transfer.”
Change
of Control
Provisions
in our charter, including the Articles Supplementary establishing the terms of the Series D Preferred Stock, and bylaws may make it difficult
and expensive for a third party to pursue a tender offer, change in control or takeover attempt, which is opposed by management and the
Board of Directors.
Warrants
Included in Units Issuable in the Rights Offering
The
Warrants to be issued as a part of this Rights Offering will be designated as our “Series B” warrants. These Warrants will
be separately transferable following their issuance and through their expiration five years from the date of issuance. Each Warrant will
entitle the holder to purchase one share of our common stock at an exercise price of $ per share from the date of issuance through its
expiration. There is no public trading market for the Warrants and we do not intend that they will be listed for trading on Nasdaq or
any other securities exchange or market. The common stock underlying the Warrants, upon issuance, will also be traded on Nasdaq under
the symbol “SQFT.”
All
Warrants that are purchased in the Rights Offering as part of the Units will be issued in book-entry, or uncertificated, form meaning
that you will receive a DRS account statement from our transfer agent reflecting ownership of Warrants if you are a holder of record.
The Subscription Agent will arrange for the issuance of the Warrants as soon as practicable after the closing, which will occur as soon
as practicable after the Rights Offering has expired but which may occur up to five business days thereafter. At closing, all prorating
calculations and reductions contemplated by the terms of the Rights Offering will have been effected and payment to us for the subscribed-for
Units will have cleared. If you hold your shares of common stock in the name of a bank, broker, dealer, or other nominee, DTC will credit
your account with your nominee with the Warrants you purchased in the Rights Offering.
Exercisability
Each
Warrant will be exercisable at any time and will expire five years from the date of issuance. The Warrants will be exercisable, at the
option of each holder, in whole or in part by delivering to us a duly executed exercise notice and payment in full for the number of
shares of our common stock purchased upon such exercise, except in the case of a cashless exercise as discussed below. The number of
shares of common stock issuable upon exercise of the Warrants is subject to adjustment in certain circumstances, including a stock split
of, stock dividend on, or a subdivision, combination or recapitalization of the common stock. If we effect a merger, consolidation, sale
of substantially all of our assets, or other similar transaction, then, upon any subsequent exercise of a Warrants, the Warrant holder
will have the right to receive any shares of the acquiring corporation or other consideration it would have been entitled to receive
if it had been a holder of the number of shares of common stock then issuable upon exercise in full of the Warrant.
Cashless
Exercise
If
at any time there is no effective registration statement registering, or the prospectus contained therein is not available for issuance
of, the shares issuable upon exercise of the Warrant, the holder may exercise the warrant on a cashless basis. When exercised on a cashless
basis, a portion of the Warrant is cancelled in payment of the purchase price payable in respect of the number of shares of our common
stock purchasable upon such exercise.
Exercise
Price
Each
Warrant represents the right to purchase one share of common stock at an exercise price of $ per share. In addition, the exercise price
per share is subject to adjustment for stock dividends, distributions, subdivisions, combinations, or reclassifications, and for certain
dilutive issuances. Subject to limited exceptions, a holder of Warrants will not have the right to exercise any portion of the Warrant
to the extent that, after giving effect to the exercise, the holder, together with its affiliates, and any other person acting as a group
together with the holder or any of its affiliates, would beneficially own in excess of (i) the Common Stock Ownership Limit (as defined
and determined in accordance with our charter) or (ii) Capital Stock (as defined in the charter) in excess of the Aggregate Stock Ownership
Limit (as defined and determined in accordance with the charter, or otherwise cause the Company to fail to qualify as a REIT (as defined
in the charter), unless our Board of Directors has, in its sole discretion, granted the holder a waiver from the stock ownership limitations
set forth in the charter.
Transferability
Subject
to applicable laws and restrictions, a holder may transfer a Warrant upon surrender of the Warrant to us with a completed and signed
assignment in the form attached to the Warrant. The transferring holder will be responsible for any tax that liability that may arise
as a result of the transfer.
No
Market
There
is no public trading market for the Warrants and we do not intend that they will be listed for trading on Nasdaq or any other securities
exchange or market.
Rights
as Stockholder
Except
as set forth in the Warrant, the holder of a Warrant, solely in such holder’s capacity as a holder of a Warrant, will not be entitled
to vote, to receive dividends, or to any of the other rights of our stockholders.
Amendments
and Waivers
The
provisions of each Warrant may be modified or amended or the provisions thereof waived with the written consent of us and the holder.
The
Warrants will be issued pursuant to a warrant agent agreement by and between us and Direct Transfer, LLC, the warrant agent.
Power
to Reclassify and Issue Stock
Our
charter authorizes our Board of Directors to classify and reclassify any unissued shares of our preferred stock into other classes or
series of stock, including one or more classes or series of stock that have priority over our common stock with respect to dividends
or upon liquidation, or have voting rights and other rights that differ from the rights of the common stock, and authorizes us to issue
the newly classified shares. Before authorizing the issuance of shares of any new class or series, our Board of Directors must set, subject
to the provisions in our charter relating to the restrictions on ownership and transfer of our stock, the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions
of redemption for each class or series of stock. These actions may be taken without the approval of holders of our common stock unless
such approval is required by applicable law, the terms of any other class or series of our stock or the rules of any stock exchange or
automated quotation system on which any of our stock is listed or traded.
We
believe that the power of our Board of Directors to authorize us to issue additional authorized but unissued shares of common stock or
preferred stock and to classify or reclassify unissued shares of preferred stock and thereafter to authorize us to issue such classified
or reclassified shares of stock will provide us with increased flexibility in structuring possible future financings and acquisitions
and in meeting other needs that might arise.
Restrictions
on Ownership and Transfer
In
order for us to qualify as a REIT for U.S. federal income tax purposes, our stock must be beneficially owned by 100 or more persons during
at least 335 days of a taxable year of 12 months (other than the first year for which an election to be a REIT has been made) or during
a proportionate part of a shorter taxable year. Also, not more than 50% of the value of the outstanding shares of our stock may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities such as private foundations)
during the last half of a taxable year (other than the first year for which an election to be a REIT has been made).
Our
charter contains restrictions on the ownership and transfer of our stock that are intended to, among other purposes, assist us in complying
with these requirements and qualifying as a REIT. Subject to the exceptions described below, no person or entity may beneficially own,
or be deemed to own by virtue of the applicable constructive ownership provisions of the Code, more than 9.8% (in value or by number
of shares, whichever is more restrictive) of our aggregate outstanding shares of common stock, which we refer to as the “common
stock ownership limit,” or 9.8% in value of our aggregate outstanding shares of stock, which we refer to as the “aggregate
stock ownership limit.” We refer to the common stock ownership limit and the aggregate stock ownership limit, collectively, as
the “ownership limit.”
The
constructive ownership rules under the Code are complex and may cause stock owned actually or constructively by a group of related individuals
and/or entities to be owned constructively by one individual or entity. As a result, the acquisition of less than 9.8% of our aggregate
outstanding shares of common stock or 9.8% of our aggregate outstanding shares of stock, or the acquisition of an interest in an entity
that owns our stock, could, nevertheless, cause the acquirer or another individual or entity to own our stock in excess of the ownership
limit.
Our
Board of Directors may, upon receipt of such representations and undertakings reasonably necessary to make such a determination, and
in its sole discretion, prospectively or retroactively, establish a different limit on ownership, or an excepted holder limit, for a
particular stockholder if the stockholder’s ownership in excess of the ownership limit would not result in our being “closely
held” under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable
year) or otherwise failing to qualify as a REIT. As a condition of granting a waiver of the ownership limit or creating an excepted holder
limit, our Board of Directors may, but is not required to, require an opinion of counsel or a ruling from the IRS, in either case in
form and substance satisfactory to our Board of Directors in its sole discretion, as it may deem necessary or advisable to determine
or ensure our status as a REIT and may impose such other conditions or restrictions as it deems appropriate.
Our
Board of Directors may increase the ownership limit from time to time.
Our
charter also prohibits:
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any person from beneficially
or constructively owning shares of our stock that would result in our being “closely held” under Section 856(h) of the
Code (without regard to whether the ownership interest is held during the last half of a taxable year) or otherwise cause us to fail
to qualify as a REIT; and |
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subject to certain exceptions
relating to transactions through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation
system, any person from transferring shares of our stock if the transfer would result in shares of our stock being beneficially owned
by fewer than 100 persons. |
Any
person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of our stock that will or may violate
the ownership limit or any of the other restrictions on ownership and transfer of our stock, and any person who is the intended transferee
of shares of our stock that are transferred to a trust for the benefit of one or more charitable beneficiaries described below, must
give immediate written notice of such an event or, in the case of a proposed or attempted transfer, give at least 15 days’ prior
written notice to us and provide us with such other information as we may request in order to determine the effect of the transfer on
our status as a REIT. The provisions of our charter relating to the restrictions on ownership and transfer of our stock will not apply
if the Board of Directors determines that it is no longer in our best interests to continue to qualify as a REIT and, upon receipt of
a recommendation to that effect from the Board of Directors, the holders of shares of common stock, by a vote of a majority of the votes
entitled to be cast on the matter, determine that we shall revoke or otherwise terminate our REIT election. The holders of shares of
common stock, upon receipt of a recommendation from the Board of Directors, may also determine that compliance with any of the restrictions
set forth above is no longer required in order for us to qualify as a REIT and cause us to amend the charter to remove any such restriction
or limitation.
Any
attempted transfer of our stock that, if effective, would result in our stock being beneficially owned by fewer than 100 persons will
be null and void. Any attempted transfer of our stock that, if effective, would result in a violation of the ownership limit (or other
limit established by our charter or our Board of Directors), our being “closely held” under Section 856(h) of the Code (without
regard to whether the ownership interest is held during the last half of a taxable year) or our otherwise failing to qualify as a REIT
will cause the number of shares causing the violation (rounded to the nearest whole share) to be transferred automatically to a trust
for the benefit of a charitable beneficiary, and the proposed transferee will not acquire any rights in the shares. The automatic transfer
will be effective as of the close of business on the business day before the date of the attempted transfer or other event that resulted
in a transfer to the trust. If the transfer to the trust as described above would not be effective, for any reason, to prevent a violation
of the applicable restrictions on ownership and transfer of our stock, then the attempted transfer that, if effective, would have resulted
in a violation of the ownership limit (or other limit established by our charter or our Board of Directors), our being “closely
held” under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable
year) or our otherwise failing to qualify as a REIT will be null and void.
Shares
of our stock held in the trust will be issued and outstanding shares. The proposed transferee will not benefit economically from ownership
of any shares of our stock held in the trust and will have no rights to dividends or other distributions and no rights to vote or other
rights attributable to the shares of our stock held in the trust. The trustee of the trust will exercise all voting rights and receive
all dividends and other distributions with respect to shares held in the trust for the exclusive benefit of the charitable beneficiary
of the trust. Any dividend or other distribution paid before we discover that the shares have been transferred to a trustee as described
above must be repaid by the recipient to the trustee upon demand and any dividend or other distribution authorized but unpaid must be
paid when due to the trustee. Subject to Maryland law, effective as of the date that the shares have been transferred to the trustee,
the trustee will have the authority, at the trustee’s sole discretion, (i) to rescind as void any vote cast by a proposed transferee
before our discovery that the shares have been transferred to the trustee and (ii) to recast the vote in accordance with the desires
of the trustee acting for the benefit of the charitable beneficiary. However, if we have already taken irreversible corporate action,
then the trustee may not rescind or recast the vote.
Within
20 days of receiving notice from us of a transfer of shares to the trust, the trustee must sell the shares to a person, designated by
the trustee who would be permitted to own the shares without violating the ownership limit or the other restrictions on ownership and
transfer of our stock in our charter. Upon such sale of the shares, the interest of the charitable beneficiary in the shares transferred
to the trust will terminate and the trustee must distribute to the proposed transferee an amount equal to the lesser of:
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the price paid by the proposed
transferee for the shares (or, if the proposed transferee did not give value in connection with the transfer or other event that
resulted in the transfer to the trust (e.g., a gift, devise or other such transaction), the market price (as such term is defined
in the charter) of the shares on the day of the event that resulted in the transfer of such shares to the trust); and |
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the price per share received
by the trustee from the sale or other disposition of the shares held in the trust. |
Any
net proceeds in excess of the amount payable to the proposed transferee must be immediately paid to the charitable beneficiary. If the
shares are sold by the proposed transferee before we discover that they have been transferred to the trust, the shares will be deemed
to have been sold on behalf of the trust and the proposed transferee must pay to the trustee, upon demand, the amount, if any, that the
proposed transferee received in excess of the amount that the proposed transferee would have received had the shares been sold by the
trustee.
Shares
of our stock held in the trust will be deemed to be offered for sale to us, or our designee, at a price per share equal to the lesser
of:
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the price per share in
the transaction that resulted in the transfer to the trust (or, in the case of a devise or gift, the market price at the time of
such devise or gift); and |
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the market price on the
date we accept, or our designee accepts, such offer. |
We
may accept the offer until the trustee has otherwise sold the shares of our stock held in the trust. Upon a sale to us, the interest
of the charitable beneficiary in the shares sold will terminate and the trustee must distribute the net proceeds of the sale to the proposed
transferee and distribute any dividends or other distributions held by the trustee with respect to the shares to the charitable beneficiary.
Every
person who beneficially owns of more than 5% (or such lower percentage as required by the Code or the regulations promulgated thereunder)
of our stock, within 30 days after the end of each taxable year, must give us written notice stating the person’s name and address,
the number of shares of each class and series of our stock that the person beneficially owns and a description of the manner in which
the shares are held. Each such owner also must provide us with any additional information that we request in order to determine the effect,
if any, of the person’s beneficial ownership on our status as a REIT and to ensure compliance with the aggregate stock ownership
limit. In addition, any person or entity that is a beneficial owner or constructive owner of shares of our stock and any person or entity
(including the stockholder of record) who is holding shares of our stock for a beneficial owner or constructive owner must disclose to
us in writing such information as we may request, in good faith, in order to determine our status as a REIT or to comply, or determine
our compliance, with the requirements of any governmental or taxing authority and to ensure compliance with the aggregate stock ownership
limit.
If
our Board of Directors authorizes any of our shares to be represented by certificates, the certificates will bear a legend referring
to the restrictions described above.
These
restrictions on ownership and transfer of our stock could delay, defer or prevent a transaction or a change of control of us that might
involve a premium price for our common stock or otherwise be in the best interests of our stockholders.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common and preferred stock is Direct Transfer, LLC.
CERTAIN
PROVISIONS OF MARYLAND LAW AND OUR CHARTER AND BYLAWS
The
following summary of certain provisions of Maryland law and of our charter and bylaws does not purport to be complete and is subject
to and qualified in its entirety by reference to our charter and to our second amended and restated bylaws, copies of which are filed
as exhibits to the registration statement of which this prospectus is a part, and to the MGCL. See “Where You Can Find More Information.”
Election
and Removal of Directors
Our
charter and bylaws provide that the number of our directors may be established by a majority of our entire Board of Directors but may
not be fewer than six nor more than eleven, unless approved by stockholders entitled to cast a majority of all the votes entitled to
be cast on the matter. Directors are elected by a plurality of all the votes cast in the election of directors. Under our charter, voting
for the election of directors will be cumulative if, prior to commencement of the voting, a stockholder gives us notice of his, her or
its intention to cumulate votes. If any stockholder gives such a notice, then every stockholder will be entitled to such rights, in which
case, each stockholder may cumulate his, her or its total votes and cast all of his, her or its votes for any one or a combination of
director nominees. In cumulative voting, the total votes entitled to be cast by a stockholder equals the number of director nominees
multiplied by the number of shares of common stock that such stockholder is entitled to vote.
Our
charter provides that any vacancy on our Board of Directors may be filled by the affirmative vote of a majority of the Board of Directors,
even if the remaining directors do not constitute a quorum of the Board of Directors, and any vacancy created by the removal of a director
may be filled only by the vote of the holders of a majority of our shares of common stock. Any director elected to fill a vacancy will
serve until the next annual meeting of the stockholders and until his or her successor is elected and qualifies.
Our
charter provides that any director or the entire Board of Directors may be removed at any time, with or without cause, by the affirmative
vote of the holders of a majority of our shares of common stock, except that, no director may be removed when the votes cast against
the removal would be sufficient to elect the director if voted cumulatively in accordance with our charter.
Amendment
to Charter and Bylaws
Except
as described herein and as provided in the MGCL, amendments to our charter must be advised by our Board of Directors and approved by
the affirmative vote of our stockholders entitled to cast a majority of all of the votes entitled to be cast on the matter.
Our
bylaws may be amended by our Board of Directors or by the affirmative vote of our stockholders entitled to cast a majority of all of
the votes entitled to be cast on the matter by stockholders entitled to vote generally in the election of directors. Our Board of Directors
may not amend provisions of bylaws that would change any rights with respect to any outstanding class of common stock by reducing the
amount payable thereon upon our liquidation, or diminishing or eliminating any voting rights pertaining thereto, unless such amendment
was also approved by two-thirds of the outstanding shares of such class. In addition, our Board of Directors may adopt a bylaw or an
amendment to a bylaw changing the authorized number of directors only for the purpose of fixing our exact number of directors. Any change
to the bylaws made by the stockholders may not be altered by the directors prior to the next annual meeting of stockholders.
Business
Combinations
Under
the MGCL, certain “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of
an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested
stockholder. These business combinations include a merger, consolidation, share exchange, and, in circumstances specified in the statute,
an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
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any person who beneficially
owns 10% or more of the voting power of the corporation’s outstanding voting stock; or |
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an affiliate or associate
of the corporation 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 the then outstanding stock of the corporation. |
A
person is not an interested stockholder under the MGCL if the corporation’s Board of Directors approved in advance the transaction
by which the person otherwise would have become an interested stockholder. In approving the transaction, the Board of Directors may provide
that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the Board of
Directors.
After
the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be
recommended by the corporation’s Board of Directors and approved by the affirmative vote of at least:
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80% of the votes entitled
to be cast by holders of outstanding shares of voting stock of the corporation; and |
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two-thirds of the votes
entitled to be cast by holders of outstanding shares of voting stock of the corporation other than shares held by the interested
stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of
the interested stockholder. |
These
super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under
the MGCL, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder
for its shares.
The
MGCL permits various exemptions from its provisions, including business combinations that are exempted by the Board of Directors before
the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our Board of Directors has by resolution
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). Consequently, the five-year
prohibition and the supermajority vote requirements will not apply to a business combination between us and any other person if the Board
of Directors has first approved the combination. As a result, any person described in the preceding sentence may be able to enter into
business combinations with us that may not be in the best interests of our stockholders, without compliance with the supermajority vote
requirements and other provisions of the statute. We cannot assure you that our Board of Directors will not amend or repeal this resolution
in the future.
Control
Share Acquisitions
The
MGCL provides that a holder of control shares of a Maryland corporation acquired in a control share acquisition has no voting rights
with respect to the control shares except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter.
Shares owned by the acquirer, by officers or by employees who are directors of the corporation are excluded from shares entitled to vote
on the matter. Control shares are voting shares of stock that, if aggregated with all other shares of stock owned by the acquirer or
in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power:
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one-tenth or more but less
than one-third; |
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one-third or more but less
than a majority; or |
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a majority or more of all
voting power. |
Control
shares do not include shares the acquirer is then entitled to vote as a result of having previously obtained stockholder approval. A
control share acquisition means the acquisition of control shares, subject to certain exceptions.
A
person who has made or proposes to make a control share acquisition may compel the Board of Directors of the corporation to call a special
meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling
of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to pay the expenses of the meeting.
If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.
If
voting rights are not approved at the meeting or if the acquirer does not deliver an acquiring person statement as required by the statute,
then the corporation may, subject to certain limitations and conditions, redeem for fair value any or all of the control shares, except
those for which voting rights have previously been approved. Fair value is determined, without regard to the absence of voting rights
for the control shares, as of the date of the last control share acquisition by the acquirer or, if a meeting of stockholders is held
at which the voting rights of the shares are considered and not approved, as of the date of the meeting. If voting rights for control
shares are approved at a stockholders meeting and the acquirer becomes entitled to exercise or direct the exercise of a majority of the
voting power, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of appraisal
rights may not be less than the highest price per share paid by the acquirer in the control share acquisition.
The
control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation
is a party to the transaction or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation.
Our
bylaws contain a provision exempting from the control share acquisition statute any acquisition by any person of shares of our stock.
Subtitle
8
Subtitle
8 of Title 3 of the MGCL permits a Maryland corporation with a class of equity securities registered under the Exchange Act and at least
three independent directors to elect, by provision in its charter or bylaws or a resolution of its Board of Directors and notwithstanding
any contrary provision in the charter or bylaws, to be subject to any or all of five provisions, including:
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a classified Board of Directors; |
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a two-thirds vote requirement
for removing a director; |
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a requirement that the
number of directors be fixed only by vote of the Board of Directors; |
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a requirement that a vacancy
on the Board of Directors be filled only by a vote of the remaining directors in office and for the remainder of the full term of
the class of directors in which the vacancy occurred and until a successor is elected and qualifies; and |
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a majority requirement
for the calling of a stockholder-requested special meeting of stockholders. |
We
have not elected to be subject to any of the provisions of Subtitle 8, including the provisions that would permit us to classify our
Board of Directors or increase the vote required to remove a director without stockholder approval. Through provisions in our charter
and bylaws unrelated to Subtitle 8, we (1) vest in our Board of Directors the exclusive power to fix the number of directors and (2)
require, unless called by our Chairman, our Chief Executive Officer, our President or our Board of Directors, the request of stockholders
entitled to cast not less than a majority of all the votes entitled to be cast at the meeting to call a special meeting of stockholders.
Special
Meetings of Stockholders
Pursuant
to our bylaws, our Chairman, our Chief Executive Officer, our President or our Board of Directors may call a special meeting of our stockholders.
Subject to the provisions of our bylaws, a special meeting of our stockholders to act on any matter that may properly be considered by
our stockholders will also be called by our secretary upon the written request of stockholders entitled to cast a majority of all the
votes entitled to be cast at the meeting on such matter, accompanied by the information required by our bylaws. Our secretary will inform
the requesting stockholders of the reasonably estimated cost of preparing and delivering the notice of meeting (including our proxy materials),
and the requesting stockholder must pay such estimated cost before our secretary may prepare and deliver the notice of the special meeting.
Stockholder
Action by Written Consent
The
MGCL generally provides that, unless the charter of the corporation authorizes stockholder action by less than unanimous consent, stockholder
action may be taken by consent in lieu of a meeting only if it is given by all stockholders entitled to vote on the matter. Our charter
and our bylaws provide that stockholder action may be taken without a meeting if a consent, setting forth the action so taken, is given
by stockholders entitled to cast not less than the minimum number of votes that would be necessary to authorize or take the action at
a stockholders meeting.
Advance
Notice of Director Nomination and New Business
Our
bylaws provide that nominations of individuals for election as directors and proposals of business to be considered by stockholders at
any annual meeting may be made only (1) pursuant to our notice of the meeting, (2) by or at the direction of our Board of Directors or
(3) by any stockholder who was a stockholder of record at the record date set by the Board of Directors for determining stockholders
entitled to vote at the meeting, at the time of giving the notice required by our bylaws and at the time of the meeting, who is entitled
to vote at the meeting in the election of each individual so nominated or on such other proposed business and who has complied with the
advance notice procedures of our bylaws. Stockholders generally must provide notice to our secretary not earlier than the 150th day or
later than the close of business on the 120th day before the first anniversary of the date the proxy statement for the preceding year’s
annual meeting.
Only
the business specified in the notice of the meeting may be brought before a special meeting of our stockholders. Nominations of individuals
for election as directors at a special meeting of stockholders may be made only (1) by or at the direction of our Board of Directors,
(2) by a stockholder that has requested that a special meeting be called for the purpose of electing directors in compliance with our
bylaws or (3) if the special meeting has been called in accordance with our bylaws for the purpose of electing directors, by a stockholder
who is a stockholder of record at the record date set by the Board of Directors for determining stockholders entitled to vote at the
meeting, at the time of giving the notice required by our bylaws and at the time of the special meeting, who is entitled to vote at the
meeting in the election of each individual so nominated and who has complied with the advance notice procedures of our bylaws. Stockholders
generally must provide notice to our secretary not earlier than the 120th day before such special meeting and not later than the later
of the close of business on the 90th day before the special meeting or the tenth day after the first public announcement of the date
of the special meeting and the nominees of our Board of Directors to be elected at the meeting.
A
stockholder’s notice must contain certain information specified by our bylaws.
Effect
of Certain Provisions of Maryland Law and our Charter and Bylaws
The
restrictions on ownership and transfer of our stock discussed under the caption “Description of Capital Stock—Restrictions
on Ownership and Transfer” prevent any person from acquiring more than 9.8% (in value or by number of shares, whichever is more
restrictive) of our outstanding shares of common stock or 9.8% in value of our outstanding shares of stock without the approval of our
Board of Directors. These provisions as well as the business combination provisions of the MGCL may delay, defer or prevent a change
in control of us.
Further,
our Board of Directors has the power to classify and reclassify any unissued shares of our preferred stock into other classes or series
of stock, and to authorize us to issue the newly classified shares, as discussed under the captions “Description of Capital Stock—Common
Stock” and “—Power to Reclassify and Issue Stock,” and could authorize the issuance of shares of a class or series
of stock, including a class or series of preferred stock, that could have the effect of delaying, deferring or preventing a change in
control of us. These actions may be taken without the approval of holders of our common stock unless such approval is required by applicable
law, the terms of any other class or series of our stock or the rules of any stock exchange or automated quotation system on which any
of our stock is listed or traded. We believe that the power of our Board of Directors to classify or reclassify unissued shares of our
preferred stock and thereafter to cause us to issue such shares of stock will provide us with increased flexibility in structuring possible
future financings and acquisitions and in meeting other needs which might arise.
Our
charter and bylaws also provide that the number of directors may be established only by a majority of our entire Board of Directors,
which prevents our stockholders from increasing the number of our directors and filling any vacancies created by such increase with their
own nominees. The provisions of our bylaws discussed above under the captions “-Special Meetings of Stockholders” and “-Advance
Notice of Director Nomination and New Business” require stockholders seeking to call a special meeting, nominate an individual
for election as a director or propose other business at an annual or special meeting to comply with certain notice and information requirements.
We believe that these provisions will help to assure the continuity and stability of our business strategies and policies as determined
by our Board of Directors and promote good corporate governance by providing us with clear procedures for calling special meetings, information
about a stockholder proponent’s interest in us and adequate time to consider stockholder nominees and other business proposals.
However, these provisions, alone or in combination, could make it more difficult for our stockholders to remove incumbent directors or
fill vacancies on our Board of Directors with their own nominees and could delay, defer or prevent a change in control, including a proxy
contest or tender offer that might involve a premium price for our common stockholders or otherwise be in the best interest of our stockholders.
Exclusive
Forum
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.
Limitation
of Liability and Indemnification of Directors and Officers
Maryland
law permits us to include a provision in our charter limiting the liability of our directors and officers to us and our stockholders
for money damages, except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services
or (b) active and deliberate dishonesty that is established by a final judgment and which is material to the cause of action. Our charter
contains a provision that eliminates our directors’ and officers’ liability to the maximum extent permitted by Maryland law.
The
MGCL requires us (unless our charter provides otherwise, which our charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service
in that capacity. The MGCL permits us to indemnify our present and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or threatened
to be made a party by reason of their service in those or certain other capacities unless it is established that:
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the act or omission of
the director or officer was material to the matter giving rise to the proceeding and (a) was committed in bad faith or (b) was the
result of active and deliberate dishonesty; |
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the director or officer
actually received an improper personal benefit in money, property or services; or |
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in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. |
Under
the MGCL, we may not indemnify a director or officer in a suit by us or in our right in which the director or officer was adjudged liable
to us or in a suit in which the director or officer was adjudged liable on the basis that personal benefit was improperly received. A
court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even
though the director or officer did not meet the prescribed standard of conduct or was adjudged liable on the basis that personal benefit
was improperly received. However, indemnification for an adverse judgment in a suit by us or in our right, or for a judgment of liability
on the basis that personal benefit was improperly received, is limited to expenses.
In
addition, the MGCL permits us to advance reasonable expenses to a director or officer upon our receipt of (a) a written affirmation by
the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification
and (b) a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed if it is ultimately determined
that the standard of conduct was not met.
Our
charter authorizes us to obligate ourselves, and our bylaws obligate us, to the maximum extent permitted by Maryland law in effect from
time to time, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to:
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any present or former director
or officer who is made or threatened to be made a party to, or witness in, a proceeding by reason of his or her service in that capacity;
or |
|
● |
any individual who, while
a director or officer of our company and at our request, serves or has served as a director, officer, partner, trustee, member or
manager of another corporation, real estate investment trust, limited liability company, partnership, joint venture, trust, employee
benefit plan or any other enterprise and who is made or threatened to be made a party to, or witness in, the proceeding by reason
of his or her service in that capacity. |
Our
charter and bylaws also permit us to indemnify and advance expenses to any individual who served any of our predecessors in any of the
capacities described above and any employee or agent of us or any of our predecessors.
Indemnification
Agreements
We
have entered into an indemnification agreement with each of our directors and executive officers as described in “Certain Relationships
and Related Party Transactions-Indemnification Agreements.” Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors or executive officers, we have been informed that in the opinion of the SEC such indemnification is
against public policy and is therefore unenforceable.
U.S.
FEDERAL INCOME TAX CONSIDERATIONS
The
following is a general summary of certain material U.S. federal income tax considerations regarding our election to be taxed as a real
estate investment trust (“REIT”) and of the receipt and exercise (or sale or expiration)
of the Subscription Rights acquired through the Rights Offering, the ownership and disposition of Warrants received upon exercise of
the Subscription Rights and the ownership and disposition of the shares of common stock received upon the exercise of the Warrants.
For purposes of this discussion, references to “we,” “our” and “us” mean only Presidio Property Trust,
Inc. and do not include any of its subsidiaries, except as otherwise indicated. This summary is for general information only and is not
tax advice. It may not include every provision that could affect federal taxation. The information in this summary is based on:
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current,
temporary and proposed Treasury regulations promulgated under the Code (the “Treasury Regulations”); |
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● |
the
legislative history of the Code; |
|
● |
administrative
interpretations and practices of the IRS; and |
in
each case, as of the date of this prospectus. In addition, the administrative interpretations and practices of the IRS include its
practices and policies as expressed in private letter rulings that are not binding on the IRS except with respect to the particular
taxpayers who requested and received those rulings. The sections of the Code and the corresponding Treasury Regulations that relate
to qualification and taxation as a REIT, and to the tax consequences of the distribution or exercise of the Subscription Rights or
the sale or other disposition of Warrants or common stock acquired pursuant to those rights. are highly technical and complex.
The following discussion sets forth certain material aspects of the sections of the Code that govern the U.S. federal income tax
treatment of a REIT and its stockholders and the distribution or exercise of Subscription Rights or the sale or other disposition of
Warrants or common stock acquired pursuant to those rights. This summary is qualified in its entirety by the applicable Code
provisions, Treasury Regulations promulgated under the Code, and administrative and judicial interpretations thereof. Future
legislation, Treasury Regulations, administrative interpretations and practices and/or court decisions may adversely affect the tax
considerations contained in this discussion. Any such change could apply retroactively to transactions preceding the date of the
change. We have not requested, and do not plan to request, any rulings from the IRS that we qualify as a REIT or that address the
tax consequences of the distribution of the Subscription Rights, the exercise of those rights, the exercise or disposition of the
Warrants forming a part of those rights, or purchasing, owning or disposing of our common stock acquired by exercise of those
rights., and the statements in this prospectus are not binding on the IRS or any court. Thus, we can provide no assurance that the
tax considerations contained in this discussion will not be challenged by the IRS or will be sustained by a court if challenged by
the IRS. This summary does not discuss any state, local or non-U.S. tax consequences, or any tax consequences arising under any U.S.
federal tax laws other than U.S. federal income tax laws, associated with the purchase, ownership or disposition of our common
stock, or our election to be taxed as a REIT.
You
are urged to consult your tax advisor regarding the tax consequences to you of:
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● |
the
purchase, ownership or disposition of our common stock, including the U.S. federal, state, local, non-U.S. and other tax consequences; |
|
● |
our
election to be taxed as a REIT for U.S. federal income tax purposes;
the distribution and
exercise of the Subscription Rights and the disposition of Warrants or common stock acquired
pursuant to those rights, |
|
● |
potential
changes in applicable tax laws, and |
|
● |
sunsetting
of certain existing provisions of the Code, including certain tax rates which are to revert to prior rates under the Code. |
Qualification
and Taxation of Our Company as a REIT
General.
We elected to be taxed as a REIT under Sections 856 through 860 of the Code 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 under the
Code commencing with such taxable year, and we intend to continue to be organized and operate in this manner. However, qualification
and taxation as a REIT depend upon our ability to meet the various qualification tests imposed under the Code, including through actual
operating results, asset composition, distribution levels and diversity of stock ownership. Accordingly, no assurance can be given that
we have been organized and have operated, or will continue to be organized and operate, in a manner so as to qualify or remain qualified
as a REIT. See “—Failure to Qualify” for potential tax consequences if we fail to qualify as a REIT.
Sichenzia
Ross Ference LLP (“SRF”) has acted as our tax counsel in connection with this offering. SRF will render an opinion to us to
the effect that, for the years we have elected to be taxed as a REIT for federal income tax purposes, commencing with our taxable year
ended December 31, 2001, we have been organized and have operated in conformity with the requirements for qualification and taxation
as a REIT under the Code, and our proposed method of operation will enable us to continue to meet the requirements for qualification
and taxation as a REIT under the Code. It must be emphasized that this opinion will be based on various assumptions and representations
as to factual matters, including representations made by us in a factual certificate provided by one or more of our officers. In addition,
this opinion will be based upon our factual representations set forth in this prospectus. Moreover, our qualification and taxation as
a REIT depend upon our ability to meet the various qualification tests imposed under the Code, which are discussed below, including through
actual operating results, asset composition, distribution levels and diversity of stock ownership, the results of which have not been
and will not be reviewed by SRF. Accordingly, no assurance can be given that our actual results of operation for any particular taxable
year have satisfied or will satisfy those requirements. Further, the anticipated U.S. federal income tax treatment described herein may
be changed, perhaps retroactively, by legislative, administrative or judicial action at any time. SRF has no obligation to update its
opinion subsequent to the date of such opinion.
Provided
we qualify for taxation as a REIT, we generally will not be required to pay U.S. federal corporate income taxes on our REIT taxable income
that is currently distributed to our stockholders. This treatment substantially eliminates the “double taxation” that ordinarily
results from investment in a C corporation. A C corporation is a corporation that generally is required to pay tax at the corporate level.
Double taxation means taxation once at the corporate level when income is earned and once again at the stockholder level when the income
is distributed. We will, however, be required to pay U.S. federal income tax as follows:
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First,
we will be required to pay regular U.S. federal corporate income tax on any undistributed REIT taxable income, including undistributed
net capital gains. |
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Second,
if we have (1) net income from the sale or other disposition of “foreclosure property” held primarily for sale to customers
in the ordinary course of business or (2) other nonqualifying income from foreclosure property, we will be required to pay tax at
the highest corporate rate on this income. To the extent that income from foreclosure property is otherwise qualifying income for
purposes of the 75% gross income test, this tax is not applicable. Subject to certain other requirements, foreclosure property generally
is defined as property we acquired through foreclosure or after a default on a loan secured by the property or a lease of the property. |
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Third,
we will be required to pay a 100% tax on any net income from prohibited transactions. Prohibited transactions are, in general, sales
or other taxable dispositions of property, other than foreclosure property, held as inventory or primarily for sale to customers
in the ordinary course of business. |
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● |
Fourth,
if we fail to satisfy the 75% gross income test or the 95% gross income test, as described below, but have otherwise maintained our
qualification as a REIT because certain other requirements are met, we will be required to pay a tax equal to (1) the greater of
(A) the amount by which we fail to satisfy the 75% gross income test and (B) the amount by which we fail to satisfy the 95% gross
income test, multiplied by (2) a fraction intended to reflect our profitability. |
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Fifth,
if we fail to satisfy any of the asset tests (other than a de minimis failure of the 5% or 10% asset tests), as described
below, due to reasonable cause and not due to willful neglect, and we nonetheless maintain our REIT qualification because of specified
cure provisions, we will be required to pay a tax equal to the greater of $50,000 or the highest corporate tax rate multiplied by
the net income generated by the nonqualifying assets that caused us to fail such test. |
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● |
Sixth,
if we fail to satisfy any provision of the Code that would result in our failure to qualify as a REIT (other than a violation of
the gross income tests or certain violations of the asset tests, as described below) and the violation is due to reasonable cause
and not due to willful neglect, we may retain our REIT qualification but we will be required to pay a penalty of $50,000 for each
such failure. |
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Seventh,
we will be required to pay a 4% excise tax to the extent we fail to distribute during each calendar year at least the sum of (1)
85% of our ordinary income for the year, (2) 95% of our capital gain net income for the year, and (3) any undistributed taxable income
from prior periods. |
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Eighth,
if we acquire any asset from a corporation that is or has been a C corporation in a transaction in which our tax basis in the asset
is less than the fair market value of the asset, in each case determined as of the date on which we acquired the asset, and we subsequently
recognize gain on the disposition of the asset during a period that is generally five years beginning on the date on which we acquired
the asset, then we generally will be required to pay tax at the highest regular corporate tax rate on this gain to the extent of
the excess of (1) the fair market value of the asset over (2) our adjusted tax basis in the asset, in each case determined as of
the date on which we acquired the asset. The results described in this paragraph with respect to the recognition of gain assume that
the C corporation will refrain from making an election to receive different treatment under applicable Treasury Regulations on its
tax return for the year in which we acquire the asset from the C corporation. Under applicable Treasury Regulations, any gain from
the sale of property we acquired in an exchange under Section 1031 (a like-kind exchange) or Section 1033 (an involuntary conversion)
of the Code generally is excluded from the application of this built-in gains tax. |
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Tenth,
we will be required to pay a 100% tax on any “redetermined rents,” “redetermined deductions,” “excess
interest” or “redetermined TRS service income,” as described below under “ —Penalty Tax.” In
general, redetermined rents are rents from real property that are overstated as a result of services furnished to any of our tenants
by a taxable REIT subsidiary of ours. Redetermined deductions and excess interest generally represent amounts that are deducted by
a taxable REIT subsidiary of ours for amounts paid to us that are in excess of the amounts that would have been deducted based on
arm’s length negotiations. Redetermined TRS service income generally represents income of a taxable REIT subsidiary that is
understated as a result of services provided to us or on our behalf. |
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Eleventh,
we may elect to retain and pay income tax on our net capital gain. In that case, a stockholder would include its proportionate share
of our undistributed net capital gain (to the extent we make a timely designation of such gain to the stockholder) in its income,
would be deemed to have paid the tax that we paid on such gain, and would be allowed a credit for its proportionate share of the
tax deemed to have been paid, and an adjustment would be made to increase the tax basis of the stockholder in our common stock. |
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Twelfth,
if we fail to comply with the requirement to send annual letters to our stockholders requesting information regarding the actual
ownership of our stock, and the failure is not due to reasonable cause or due to willful neglect, we will be subject to a $25,000
penalty, or if the failure is intentional, a $50,000 penalty. |
We
and our subsidiaries may be subject to a variety of taxes other than U.S. federal income tax, including payroll taxes and state and local
income, property and other taxes on our assets and operations.
Requirements
for Qualification as a REIT. The Code defines a REIT as a corporation, trust or association:
|
(1) |
that
is managed by one or more trustees or directors; |
|
(2) |
that
issues transferable shares or transferable certificates to evidence its beneficial ownership; |
|
(3) |
that
would be taxable as a domestic corporation, but for Sections 856 through 860 of the Code; |
|
(4) |
that
is not a financial institution or an insurance company within the meaning of certain provisions of the Code; |
|
(5) |
that
is beneficially owned by 100 or more persons; |
|
(6) |
not
more than 50% in value of the outstanding stock of which is owned, actually or constructively, by five or fewer individuals, including
certain specified entities, during the last half of each taxable year; and |
|
(7) |
that
meets other tests, described below, regarding the nature of its income and assets and the amount of its distributions. |
The
Code provides that conditions (1) to (4), inclusive, must be met during the entire taxable year and that condition (5) must be met during
at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. For purposes
of condition (6), the term “individual” includes a supplemental unemployment compensation benefit plan, a private foundation
or a portion of a trust permanently set aside or used exclusively for charitable purposes, but generally does not include a qualified
pension plan or profit-sharing trust.
We
believe that we have been organized and have operated in a manner that has allowed us, and will continue to allow us, and we believe
we will issue sufficient shares of our common stock with sufficient diversity of ownership pursuant to this offering of our common stock
to allow us, to satisfy conditions (1) through (7) inclusive, during the relevant time periods. In addition, our charter provides for
restrictions regarding ownership and transfer of our shares that are intended to assist us in continuing to satisfy the share ownership
requirements described in conditions (5) and (6) above. A description of the share ownership and transfer restrictions relating to our
common stock is contained in the discussion in this prospectus under the heading “Description of Capital Stock—Restrictions
on Ownership and Transfer.” These restrictions, however, do not ensure that we have previously satisfied, and may not ensure that
we will, in all cases, be able to continue to satisfy, the share ownership requirements described in conditions (5) and (6) above. If
we fail to satisfy these share ownership requirements, except as provided in the next sentence, our status as a REIT will terminate.
If, however, we comply with the rules contained in applicable Treasury Regulations that require us to ascertain the actual ownership
of our shares and we do not know, or would not have known through the exercise of reasonable diligence, that we failed to meet the requirement
described in condition (6) above, we will be treated as having met this requirement. See “—Failure to Qualify.”
In
addition, we may not maintain our status as a REIT unless our taxable year is the calendar year. We have and will continue to have a
calendar taxable year.
Ownership
of Interests in Partnerships, Limited Liability Companies and Qualified REIT Subsidiaries. In the case of a REIT that is a partner
in a partnership or a member in a limited liability company treated as a partnership for U.S. federal income tax purposes, Treasury Regulations
provide that the REIT will be deemed to own its proportionate share of the assets of the partnership or limited liability company, as
the case may be, based on its interest in partnership capital, subject to special rules relating to the 10% asset test described below.
Also, the REIT will be deemed to be entitled to its proportionate share of the income of that entity. The assets and gross income of
the partnership or limited liability company retain the same character in the hands of the REIT for purposes of Section 856 of the Code,
including satisfying the gross income tests and the asset tests. Thus, our pro rata share of the assets and items of income of any partnership
or limited liability company treated as a partnership for U.S. federal income tax purposes, including such partnership’s or limited
liability company’s share of these items of any partnership or limited liability company treated as a partnership or disregarded
entity for U.S. federal income tax purposes in which it owns an interest, would be treated as our assets and items of income for purposes
of applying the requirements described in this discussion, including the gross income and asset tests described below. For purposes of
the REIT qualification tests, the treatment of our ownership of partnerships or limited liability companies treated as disregarded entities
for U.S. federal income tax purposes is generally the same as described below with respect to qualified REIT subsidiaries. A brief summary
of the rules governing the U.S. federal income taxation of partnerships and limited liability companies is set forth below in “—Tax
Aspects of the Subsidiary Partnerships and Limited Liability Companies.”
We
have control of certain subsidiary partnerships and limited liability companies and intend to operate them in a manner consistent with
the requirements for our qualification as a REIT. If we are or become a limited partner or non-managing member in any partnership or
limited liability company and such entity takes or expects to take actions that could jeopardize our status as a REIT or require us to
pay tax, we may be forced to dispose of our interest in such entity. In addition, it is possible that a partnership or limited liability
company could take an action which could cause us to fail a gross income or asset test, and that we would not become aware of such action
in time to dispose of our interest in the partnership or limited liability company or take other corrective action on a timely basis.
In that case, we could fail to qualify as a REIT unless we were entitled to relief, as described below.
We
may from time to time own and operate certain properties through wholly-owned subsidiaries that we intend to be treated as “qualified
REIT subsidiaries” under the Code. A corporation will qualify as our qualified REIT subsidiary if we own 100% of the corporation’s
outstanding stock and do not elect with the subsidiary to treat it as a “taxable REIT subsidiary,” as described below. A
qualified REIT subsidiary is not treated as a separate corporation, and all assets, liabilities and items of income, gain, loss, deduction
and credit of a qualified REIT subsidiary are treated as assets, liabilities and items of income, gain, loss, deduction and credit of
the parent REIT for all purposes under the Code, including all REIT qualification tests. Thus, in applying the U.S. federal tax requirements
described in this discussion, any qualified REIT subsidiaries we own are ignored, and all assets, liabilities and items of income, gain,
loss, deduction and credit of such corporations are treated as our assets, liabilities and items of income, gain, loss, deduction and
credit. A qualified REIT subsidiary is not subject to U.S. federal income tax, and our ownership of the stock of a qualified REIT subsidiary
will not violate the restrictions on ownership of securities, as described below under “—Asset Tests.”
Ownership
of Interests in Taxable REIT Subsidiaries. We own an interest in an entity that has elected, together with us, to be treated
as our taxable REIT subsidiary, and we may acquire securities in additional taxable REIT subsidiaries in the future. 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. A REIT’s ownership
of securities of a taxable REIT subsidiary is not subject to the 5% or 10% asset test described below. See “—Asset Tests.”
Income
Tests. We must satisfy two gross income requirements annually to maintain our qualification as a REIT. First, in each taxable
year we must derive directly or indirectly at least 75% of our gross income (excluding gross income from prohibited transactions, certain
hedging transactions and certain foreign currency gains) from investments relating to real property or mortgages on real property, including
“rents from real property,” dividends from other REITs and, in certain circumstances, interest, or certain types of temporary
investments. Second, in each taxable year we must derive at least 95% of our gross income (excluding gross income from prohibited transactions,
certain hedging transactions and certain foreign currency gains) from the real property investments described above or dividends, interest
and gain from the sale or disposition of stock or securities, or from any combination of the foregoing. For these purposes, the term
“interest” generally does not include any amount received or accrued, directly or indirectly, if the determination of all
or some of the amount depends in any way on the income or profits of any person. However, an amount received or accrued generally will
not be excluded from the term “interest” solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
Rents
we receive from a tenant will qualify as “rents from real property” for the purpose of satisfying the gross income requirements
for a REIT described above only if all of the following conditions are met:
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The
amount of rent is not based in whole or in part on the income or profits of any person. However, an amount we receive or accrue generally
will not be excluded from the term “rents from real property” solely because it is based on a fixed percentage or percentages
of receipts or sales; |
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Neither
we nor an actual or constructive owner of 10% or more of our capital stock actually or constructively owns 10% or more of the interests
in the assets or net profits of a non-corporate tenant, or, if the tenant is a corporation, 10% or more of the total combined voting
power of all classes of stock entitled to vote or 10% or more of the total value of all classes of stock of the tenant. Rents we
receive from such a tenant that is a taxable REIT subsidiary of ours, however, will not be excluded from the definition of “rents
from real property” as a result of this condition if at least 90% of the space at the property to which the rents relate is
leased to third parties, and the rents paid by the taxable REIT subsidiary are substantially comparable to rents paid by our other
tenants for comparable space. Whether rents paid by a taxable REIT subsidiary are substantially comparable to rents paid by other
tenants is determined at the time the lease with the taxable REIT subsidiary is entered into, extended, and modified, if such modification
increases the rents due under such lease. Notwithstanding the foregoing, however, if a lease with a “controlled taxable REIT
subsidiary” is modified and such modification results in an increase in the rents payable by such taxable REIT subsidiary,
any such increase will not qualify as “rents from real property.” For purposes of this rule, a “controlled taxable
REIT subsidiary” is a taxable REIT subsidiary in which the parent REIT owns stock possessing more than 50% of the voting power
or more than 50% of the total value of the outstanding stock of such taxable REIT subsidiary; |
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Rent
attributable to personal property, leased in connection with a lease of real property, is not greater than 15% of the total rent
received under the lease. If this condition is not met, then the portion of the rent attributable to personal property will not qualify
as “rents from real property.” To the extent that rent attributable to personal property, leased in connection with a
lease of real property, exceeds 15% of the total rent received under the lease, we may transfer a portion of such personal property
to a taxable REIT subsidiary; and |
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We
generally may not operate or manage the property or furnish or render services to our tenants, subject to a 1% de minimis
exception and except as provided below. We may, however, perform services that are “usually or customarily rendered”
in connection with the rental of space for occupancy only and are not otherwise considered “rendered to the occupant”
of the property. Examples of these services include the provision of light, heat, or other utilities, trash removal and general maintenance
of common areas. In addition, we may employ an independent contractor from whom we derive no revenue to provide customary services
to our tenants, or a taxable REIT subsidiary (which may be wholly or partially owned by us) to provide both customary and non-customary
services to our tenants without causing the rent we receive from those tenants to fail to qualify as “rents from real property.”
|
We
generally do not intend to take actions we believe will cause us to fail to satisfy the rental conditions described above. However, we
may intentionally fail to satisfy some of these conditions to the extent we determine, based on the advice of our tax counsel, that the
failure will not jeopardize our tax status as a REIT. In addition, with respect to the limitation on the rental of personal property,
we generally have not obtained appraisals of the real property and personal property leased to tenants. Accordingly, there can be no
assurance that the IRS will not disagree with our determinations of value.
Income
we receive that is attributable to the rental of parking spaces at the properties generally will constitute rents from real property
for purposes of the gross income tests if certain services provided with respect to the parking spaces are performed by independent contractors
from whom we derive no revenue, either directly or indirectly, or by a taxable REIT subsidiary, and certain other conditions are met.
We believe that the income we receive that is attributable to parking spaces will meet these tests and, accordingly, will constitute
rents from real property for purposes of the gross income tests.
From
time to time, we may enter into hedging transactions with respect to one or more of our assets or liabilities. Our hedging activities
may include entering into interest rate swaps, caps, and floors, options to purchase these items, and futures and forward contracts.
Income from a hedging transaction, including gain from the sale or disposition of such a transaction, that is clearly identified as a
hedging transaction as specified in the Code will not constitute gross income under, and thus will be exempt from, the 75% and 95% gross
income tests. The term “hedging transaction,” as used above, generally means (A) any transaction we enter into in the normal
course of our business primarily to manage risk of (1) interest rate changes or fluctuations with respect to borrowings made or to be
made by us to acquire or carry real estate assets, or (2) currency fluctuations with respect to an item of qualifying income under the
75% or 95% gross income test or any property which generates such income and (B) new transactions entered into to hedge the income or
loss from prior hedging transactions, where the property or indebtedness which was the subject of the prior hedging transaction was extinguished
or disposed of. To the extent that we do not properly identify such transactions as hedges or we hedge with other types of financial
instruments, the income from those transactions will not be treated as qualifying income for purposes of the gross income tests. We intend
to structure any hedging transactions in a manner that does not jeopardize our status as a REIT.
To
the extent our taxable REIT subsidiaries pay dividends or interest, our allocable share of such dividend or interest income will qualify
under the 95%, but not the 75%, gross income test (except to the extent the interest is paid on a loan that is adequately secured by
real property).
We
will monitor the amount of the dividend and other income from our taxable REIT subsidiaries and will take actions intended to keep this
income, and any other nonqualifying income, within the limitations of the gross income tests. Although we expect these actions will be
sufficient to prevent a violation of the gross income tests, we cannot guarantee that such actions will in all cases prevent such a violation.
If
we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for the
year if we are entitled to relief under certain provisions of the Code. We generally may make use of the relief provisions if:
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● |
following
our identification of the failure to meet the 75% or 95% gross income tests for any taxable year, we file a schedule with the IRS
setting forth each item of our gross income for purposes of the 75% or 95% gross income tests for such taxable year in accordance
with Treasury Regulations to be issued; and |
|
● |
our
failure to meet these tests was due to reasonable cause and not due to willful neglect. |
It
is not possible, however, to state whether in all circumstances we would be entitled to the benefit of these relief provisions. For example,
if we fail to satisfy the gross income tests because nonqualifying income that we intentionally accrue or receive exceeds the limits
on nonqualifying income, the IRS could conclude that our failure to satisfy the tests was not due to reasonable cause. If these relief
provisions do not apply to a particular set of circumstances, we will not qualify as a REIT. See “—Failure to Qualify”
for potential tax consequences if we fail to qualify as a REIT. As discussed above in “—Taxation of Our Company—General,”
even if these relief provisions apply, and we retain our status as a REIT, a tax would be imposed with respect to our nonqualifying income.
We may not always be able to comply with the gross income tests for REIT qualification despite periodic monitoring of our income.
Prohibited
Transaction Income. Any gain that we realize on the sale of property held as inventory or otherwise held primarily for sale to
customers in the ordinary course of business, either directly or through any qualified REIT subsidiaries, subsidiary partnerships or
limited liability companies, will be treated as income from a prohibited transaction that is subject to a 100% penalty tax, unless certain
safe harbor exceptions apply. This prohibited transaction income may also adversely affect our ability to satisfy the gross income tests
for qualification as a REIT. Under existing law, whether property is held as inventory or primarily for sale to customers in the ordinary
course of a trade or business is a question of fact that depends on all the facts and circumstances surrounding the particular transaction.
We do not intend, and we do not intend to permit our qualified REIT subsidiaries or subsidiary partnerships or limited liability companies,
to enter into any sales that are prohibited transactions. However, the IRS may successfully contend that some or all of the sales made
by us, our qualified REIT subsidiaries or our subsidiary partnerships or limited liability companies are prohibited transactions. We
would be required to pay the 100% penalty tax on our allocable share of the gains resulting from any such sales. The 100% penalty tax
will not apply to gains from the sale of assets that are held through a taxable REIT subsidiary, but such income will be subject to regular
U.S. federal corporate income tax.
Penalty
Tax. Any redetermined rents, redetermined deductions, excess interest or redetermined TRS service income we generate will be
subject to a 100% penalty tax. In general, redetermined rents are rents from real property that are overstated as a result of any services
furnished to any of our tenants by a taxable REIT subsidiary of ours, redetermined deductions and excess interest represent any amounts
that are deducted by a taxable REIT subsidiary of ours for amounts paid to us that are in excess of the amounts that would have been
deducted based on arm’s length negotiations, and redetermined TRS service income is income of a taxable REIT subsidiary that is
understated as a result of services provided to us or on our behalf. Rents we receive will not constitute redetermined rents if they
qualify for certain safe harbor provisions contained in the Code.
We
do not believe we have been, and do not expect to be, subject to this penalty tax, although any rental or service arrangements we enter
into from time to time may not satisfy the safe-harbor provisions described above. These determinations are inherently factual, and the
IRS has broad discretion to assert that amounts paid between related parties should be reallocated to clearly reflect their respective
incomes. If the IRS successfully made such an assertion, we would be required to pay a 100% penalty tax on any overstated rents paid
to us, or any excess deductions or understated income of our taxable REIT subsidiaries.
Asset
Tests. At the close of each calendar quarter of our taxable year, we must also satisfy certain tests relating to the nature and
diversification of our assets. First, at least 75% of the value of our total assets must be represented by real estate assets, cash,
cash items and U.S. government securities. For purposes of this test, the term “real estate assets” generally means real
property (including interests in real property and interests in mortgages on real property and, to a limited extent, personal property),
shares (or transferable certificates of beneficial interest) in other REITs, any stock or debt instrument attributable to the investment
of the proceeds of a stock offering or a public offering of debt with a term of at least five years (but only for the one-year period
beginning on the date the REIT receives such proceeds), debt instruments of publicly offered REITs, and personal property leased in connection
with a lease of real property for which the rent attributable to personal property is not greater than 15% of the total rent received
under the lease.
Second,
not more than 25% of the value of our total assets may be represented by securities (including securities of taxable REIT subsidiaries),
other than those securities includable in the 75% asset test.
Third,
of the investments included in the 25% asset class, and except for certain investments in other REITs, our qualified REIT subsidiaries
and taxable REIT subsidiaries, the value of any one issuer’s securities may not exceed 5% of the value of our total assets, and
we may not own more than 10% of the total vote or value of the outstanding securities of any one issuer except, in the case of the 10%
value test, securities satisfying the “straight debt” safe-harbor or securities issued by a partnership that itself would
satisfy the 75% income test if it were a REIT. Certain types of securities we may own are disregarded as securities solely for purposes
of the 10% value test, including, but not limited to, any loan to an individual or an estate, any obligation to pay rents from real property
and any security issued by a REIT. In addition, solely for purposes of the 10% value test, the determination of our interest in the assets
of a partnership or limited liability company in which we own an interest will be based on our proportionate interest in any securities
issued by the partnership or limited liability company, excluding for this purpose certain securities described in the Code. From time
to time we may own securities (including debt securities) of issuers that do not qualify as a REIT, a qualified REIT subsidiary or a
taxable REIT subsidiary. We intend that our ownership of any such securities will be structured in a manner that allows us to comply
with the asset tests described above.
Fourth,
not more than 20% of the value of our total assets may be represented by the securities of one or more taxable REIT subsidiaries. We
own an interest in an entity that has elected, together with us, to be treated as our taxable REIT subsidiary, and we may acquire securities
in additional taxable REIT subsidiaries in the future. So long as each of these companies qualifies as a taxable REIT subsidiary of ours,
we will not be subject to the 5% asset test, the 10% voting securities limitation or the 10% value limitation with respect to our ownership
of the securities of such companies. We believe that the aggregate value of our taxable REIT subsidiaries has not exceeded, and in the
future will not exceed, 20% of the aggregate value of our gross assets. We generally do not obtain independent appraisals to support
these conclusions. In addition, there can be no assurance that the IRS will not disagree with our determinations of value.
Fifth,
not more than 25% of the value of our total assets may be represented by debt instruments of publicly offered REITs to the extent those
debt instruments would not be real estate assets but for the inclusion of debt instruments of publicly offered REITs in the meaning of
real estate assets, as described above (e.g., a debt instrument issued by a publicly offered REIT that is not secured by a mortgage on
real property).
The
asset tests must be satisfied at the close of each calendar quarter of our taxable year in which we (directly or through any qualified
REIT subsidiary, partnership or limited liability company) acquire securities in the applicable issuer, and also at the close of each
calendar quarter in which we increase our ownership of securities of such issuer (including as a result of an increase in our interest
in any partnership or limited liability company that owns such securities). For example, our indirect ownership of securities of each
issuer may increase as a result of our capital contributions to, or the redemption of other partners’ or members’ interests
in, a partnership or limited liability company in which we have an ownership interest. Also, after initially meeting the asset tests
at the close of any quarter, we will not lose our status as a REIT for failure to satisfy the asset tests at the end of a later quarter
solely by reason of changes in asset values. If we fail to satisfy an asset test because we acquire securities or other property during
a quarter (including as a result of an increase in our interest in any partnership or limited liability company), we may cure this failure
by disposing of sufficient nonqualifying assets within 30 days after the close of that quarter. We believe that we have maintained, and
we intend to maintain, adequate records of the value of our assets to ensure compliance with the asset tests. If we fail to cure any
noncompliance with the asset tests within the 30-day cure period, we would cease to qualify as a REIT unless we are eligible for certain
relief provisions discussed below.
Certain
relief provisions may be available to us if we discover a failure to satisfy the asset tests described above after the 30-day cure period.
Under these provisions, we will be deemed to have met the 5% and 10% asset tests if the value of our nonqualifying assets (i) does not
exceed the lesser of (a) 1% of the total value of our assets at the end of the applicable quarter or (b) $10,000,000, and (ii) we dispose
of the nonqualifying assets or otherwise satisfy such tests within (a) nine months after the last day of the quarter in which the failure
to satisfy the asset tests is discovered or (b) the period of time prescribed by Treasury Regulations to be issued. For violations of
any of the asset tests due to reasonable cause and not due to willful neglect and that are, in the case of the 5% and 10% asset tests,
in excess of the de minimis exception described above, we may avoid disqualification as a REIT after the 30-day cure period by
taking steps including (i) the disposition of sufficient nonqualifying assets, or the taking of other actions, which allow us to meet
the asset tests within (a) nine months after the last day of the quarter in which the failure to satisfy the asset tests is discovered
or (b) the period of time prescribed by Treasury Regulations to be issued, (ii) paying a tax equal to the greater of (a) $50,000 or (b)
the highest corporate tax rate multiplied by the net income generated by the nonqualifying assets, and (iii) disclosing certain information
to the IRS.
Although
we believe we have satisfied the asset tests described above and plan to take steps to ensure that we satisfy such tests for any quarter
with respect to which retesting is to occur, there can be no assurance that we will always be successful, or will not require a reduction
in our overall interest in an issuer (including in a taxable REIT subsidiary). If we fail to cure any noncompliance with the asset tests
in a timely manner, and the relief provisions described above are not available, we would cease to qualify as a REIT.
Annual
Distribution Requirements. To maintain our qualification as a REIT, we are required to distribute dividends, other than capital
gain dividends, to our stockholders in an amount at least equal to the sum of:
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90%
of our REIT taxable income; and |
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90%
of our after-tax net income, if any, from foreclosure property; minus |
|
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the
excess of the sum of certain items of non-cash income over 5% of our REIT taxable income. |
For
these purposes, our REIT taxable income is computed without regard to the dividends paid deduction and our net capital gain. In addition,
for purposes of this test, non-cash income generally means income attributable to leveled stepped rents, original issue discount, cancellation
of indebtedness, or a like-kind exchange that is later determined to be taxable.
In
addition, our REIT taxable income will be reduced by any taxes we are required to pay on any gain we recognize from the disposition of
any asset we acquired from a corporation that is or has been a C corporation in a transaction in which our tax basis in the asset is
less than the fair market value of the asset, in each case determined as of the date on which we acquired the asset, within a period
that is generally five years following our acquisition of such asset, as described above under “—General.”
Under
the 2017 Tax Legislation, for taxable years beginning after December 31, 2017, our deduction for net business interest expense will generally
be limited to 30% of our taxable income, as adjusted for certain items of income, gain, deduction or loss. Any business interest deduction
that is disallowed due to this limitation may be carried forward to future taxable years. If we are subject to this interest expense
limitation, our REIT taxable income for a taxable year may be increased. Taxpayers that conduct certain real estate businesses may elect
not to have this interest expense limitation apply to them, provided that they use an alternative depreciation system to depreciate certain
property. We believe that we will be eligible to make this election. If we make this election, although we would not be subject to the
interest expense limitation described above, our depreciation deductions may be reduced and, as a result, our REIT taxable income for
a taxable year may be increased.
We
generally must pay, or be treated as paying, the distributions described above in the taxable year to which they relate. At our election,
a distribution will be treated as paid in a taxable year if it is declared before we timely file our tax return for such year and paid
on or before the first regular dividend payment after such declaration, provided such payment is made during the 12-month period following
the close of such year. These distributions are treated as received by our stockholders in the year in which they are paid. This is so
even though these distributions relate to the prior year for purposes of the 90% distribution requirement. In order to be taken into
account for purposes of our distribution requirement, except as provided below, the amount distributed must not be preferential—i.e.,
every stockholder of the class of stock to which a distribution is made must be treated the same as every other stockholder of that class,
and no class of stock may be treated other than according to its dividend rights as a class. This preferential limitation will not apply
to distributions made by us, provided we qualify as a “publicly offered REIT.” We believe that we are, and expect we will
continue to be, a publicly offered REIT. To the extent that we do not distribute all of our net capital gain, or distribute at least
90%, but less than 100%, of our REIT taxable income, as adjusted, we will be required to pay tax on the undistributed amount at regular
corporate tax rates.
We
believe that we have made, and we intend to continue to make, timely distributions sufficient to satisfy these annual distribution requirements
and to minimize our corporate tax obligations. However, from time to time, we may not have sufficient cash or other liquid assets to
meet these distribution requirements due to timing differences between the actual receipt of income and actual payment of deductible
expenses, and the inclusion of income and deduction of expenses in determining our taxable income. In addition, we may decide to retain
our cash, rather than distribute it, in order to repay debt or for other reasons. If these timing differences occur, we may borrow funds
to pay dividends or pay dividends in the form of taxable stock distributions in order to meet the distribution requirements, while preserving
our cash.
Under
some circumstances, we may be able to rectify an inadvertent failure to meet the 90% distribution requirement for a year by paying “deficiency
dividends” to our stockholders in a later year, which may be included in our deduction for dividends paid for the earlier year.
In that case, we may be able to avoid being taxed on amounts distributed as deficiency dividends, subject to the 4% excise tax described
below. However, we will be required to pay interest to the IRS based upon the amount of any deduction claimed for deficiency dividends.
While the payment of a deficiency dividend will apply to a prior year for purposes of our REIT distribution requirements, it will be
treated as an additional distribution to our stockholders in the year such dividend is paid. In addition, if a dividend we have paid
is treated as a preferential dividend, in lieu of treating the dividend as not counting toward satisfying the 90% distribution requirement,
the IRS may provide a remedy to cure such failure if the IRS determines that such failure is (or is of a type that is) inadvertent or
due to reasonable cause and not due to willful neglect.
Furthermore,
we will be required to pay a 4% excise tax to the extent we fail to distribute during each calendar year at least the sum of 85% of our
ordinary income for such year, 95% of our capital gain net income for the year and any undistributed taxable income from prior periods.
Any ordinary income and net capital gain on which corporate income tax is imposed for any year is treated as an amount distributed during
that year for purposes of calculating this excise tax.
For
purposes of the 90% distribution requirement and excise tax described above, dividends declared during the last three months of the taxable
year, payable to stockholders of record on a specified date during such period and paid during January of the following year, will be
treated as paid by us and received by our stockholders on December 31 of the year in which they are declared.
Like-Kind
Exchanges. We may dispose of real property that is not held primarily for sale in transactions intended to qualify as like-kind
exchanges under the Code. Such like-kind exchanges are intended to result in the deferral of gain for U.S. federal income tax purposes.
The failure of any such transaction to qualify as a like-kind exchange could require us to pay U.S. federal income tax, possibly including
the 100% prohibited transaction tax, depending on the facts and circumstances surrounding the particular transaction.
Tax
Liabilities and Attributes Inherited in Connection with Acquisitions. From time to time, we may acquire other corporations or
entities and, in connection with such acquisitions, we may succeed to the historical tax attributes and liabilities of such corporations
or entities. For example, if we acquire a C corporation and subsequently dispose of its assets within five years of the acquisition,
we could be required to pay the built-in gain tax described above under “—General.” In addition, in order to qualify
as a REIT, at the end of any taxable year, we must not have any earnings and profits accumulated in a non-REIT year. As a result, if
we acquire a C corporation, we must distribute the corporation’s earnings and profits accumulated prior to the acquisition before
the end of the taxable year in which we acquire the corporation. We also could be required to pay the acquired entity’s unpaid
taxes even though such liabilities arose prior to the time we acquired the entity.
Moreover,
we may from time to time acquire other REITs through a merger or acquisition. If any such REIT failed to qualify as a REIT for any of
its taxable years, such REIT would be liable for (and we, as the surviving corporation in the merger or acquisition, would be obligated
to pay) U.S. federal income tax on its taxable income at regular rates, and if the merger or acquisition is a transaction in which our
tax basis in the assets of such REIT is less than the fair market value of the assets determined at the time of the merger or acquisition,
we would be subject to tax on the built-in gain on each asset of such REIT as described above if we were to dispose of the asset in a
taxable transaction during the five-year period following the merger or acquisition. Moreover, even if such REIT qualified as a REIT
at all relevant times, we would similarly be liable for other unpaid taxes (if any) of such REIT (such as the 100% tax on gains from
any sales treated as “prohibited transactions” as described above under “—Prohibited Transaction Income”).
Furthermore,
after our acquisition of another corporation or entity, the asset and income tests will apply to all of our assets, including the assets
we acquire from such corporation or entity, and to all of our income, including the income derived from the assets we acquire from such
corporation or entity. As a result, the nature of the assets that we acquire from such corporation or entity and the income we derive
from those assets may have an effect on our tax status as a REIT.
Failure
to Qualify. If we discover a violation of a provision of the Code that would result in our failure to qualify as a REIT, certain
specified cure provisions may be available to us. Except with respect to violations of the gross income tests and asset tests (for which
the cure provisions are described above), and provided the violation is due to reasonable cause and not due to willful neglect, these
cure provisions generally impose a $50,000 penalty for each violation in lieu of a loss of REIT status. If we fail to satisfy the requirements
for taxation as a REIT in any taxable year, and the relief provisions do not apply, we will be required to pay tax on our taxable income
at regular corporate rates. Distributions to stockholders in any year in which we fail to qualify as a REIT will not be deductible by
us. As a result, we anticipate that our failure to qualify as a REIT would reduce the cash available for distribution by us to our stockholders.
In addition, if we fail to qualify as a REIT, we will not be required to distribute any amounts to our stockholders, and all distributions
to stockholders will be taxable as regular corporate dividends to the extent of our current and accumulated earnings and profits. In
such event, corporate distributees may be eligible for the dividends-received deduction. In addition, non-corporate stockholders, including
individuals, may be eligible for the preferential tax rates on qualified dividend income. Under the 2017 Tax Legislation, non-corporate
stockholders, including individuals, generally may deduct 20% of dividends from a REIT, other than capital gain dividends and dividends
treated as qualified dividend income, for taxable years beginning after December 31, 2017 and before January 1, 2026. If we fail to qualify
as a REIT, such stockholders may not claim this deduction with respect to dividends paid by us. Unless entitled to relief under specific
statutory provisions, we would also be ineligible to elect to be treated as a REIT for the four taxable years following the year for
which we lose our qualification. It is not possible to state whether in all circumstances we would be entitled to this statutory relief.
Tax
Aspects of the Subsidiary Partnerships and Limited Liability Companies
General.
We hold investments indirectly through subsidiary partnerships and limited liability companies that we believe are and will continue
to be treated as partnerships or disregarded entities for U.S. federal income tax purposes. In general, entities that are treated as
partnerships or disregarded entities for U.S. federal income tax purposes are “pass-through” entities which are not required
to pay U.S. federal income tax. Rather, partners or members of such entities are allocated their shares of the items of income, gain,
loss, deduction and credit of the partnership or limited liability company, and are potentially required to pay tax on this income, without
regard to whether they receive a distribution from the partnership or limited liability company. We will include in our income our share
of these partnership and limited liability company items for purposes of the various gross income tests, the computation of our REIT
taxable income, and the REIT distribution requirements. Moreover, for purposes of the asset tests, we will include our pro rata share
of assets held by our subsidiary partnerships and limited liability companies based on our capital interests in each such entity. See
“—Taxation of Our Company.”
Entity
Classification. Our interests in our subsidiary partnerships and limited liability companies involve special tax considerations,
including the possibility that the IRS might challenge the status of these entities as partnerships or disregarded entities. For example,
an entity that would otherwise be treated as a partnership for U.S. federal income tax purposes may nonetheless be taxable as a corporation
if it is a “publicly traded partnership” and certain other requirements are met. A partnership or limited liability company
would be treated as a publicly traded partnership if its interests are traded on an established securities market or are readily tradable
on a secondary market or a substantial equivalent thereof, within the meaning of applicable Treasury Regulations. We do not anticipate
that any subsidiary partnership or limited liability company will be treated as a publicly traded partnership that is taxable as a corporation.
However, if any such entity were treated as a corporation, it would be required to pay an entity-level tax on its income. In this situation,
the character of our assets and items of gross income would change and could prevent us from satisfying the REIT asset tests and possibly
the REIT income tests. See “—Taxation of Our Company—Asset Tests” and “—Income Tests.” This,
in turn, could prevent us from qualifying as a REIT. See “—Failure to Qualify” for a discussion of the effect of our
failure to meet these tests. In addition, a change in the tax status of a subsidiary partnership or limited liability company to a corporation
might be treated as a taxable event. If so, we might incur a tax liability without any related cash payment. We believe each of the subsidiary
partnerships and limited liability companies are and will continue to be treated as partnerships or disregarded entities for U.S. federal
income tax purposes.
Allocations
of Income, Gain, Loss and Deduction. A partnership agreement (or, in the case of a limited liability company treated as a partnership
for U.S. federal income tax purposes, the limited liability company agreement) generally will determine the allocation of income and
loss among partners. These allocations, however, will be disregarded for tax purposes if they do not comply with the provisions of Section
704(b) of the Code and the Treasury Regulations thereunder. Generally, Section 704(b) of the Code and the Treasury Regulations thereunder
require that partnership allocations respect the economic arrangement of the partners. If an allocation of partnership income or loss
does not comply with the requirements of Section 704 (b) of the Code and the Treasury Regulations thereunder, the item subject to the
allocation will be reallocated in accordance with the partners’ interests in the partnership. This reallocation will be determined
by taking into account all of the facts and circumstances relating to the economic arrangement of the partners with respect to such item.
The allocations of taxable income and loss of our subsidiaries that are treated as partnerships for U.S. federal income tax purposes
are intended to comply with the requirements of Section 704(b) of the Code and the Treasury Regulations thereunder.
Tax
Allocations with Respect to the Properties. Under Section 704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership (including a limited liability company treated as a partnership
for U.S. federal income tax purposes) in exchange for an interest in the partnership, must be allocated in a manner so that the contributing
partner is charged with the unrealized gain or benefits from the unrealized loss associated with the property at the time of the contribution.
The amount of the unrealized gain or unrealized loss generally is equal to the difference between the fair market value or book value
and the adjusted tax basis of the contributed property at the time of contribution (this difference is referred to as a book-tax difference),
as adjusted from time to time. These allocations are solely for U.S. federal income tax purposes and do not affect the book capital accounts
or other economic or legal arrangements among the partners.
If
a subsidiary of ours that is treated as a partnership for U.S. federal income tax purposes acquires interests in property in exchange
for interests in such partnership, the tax basis of these property interests generally will carry over to such partnership, notwithstanding
their different book (i.e., fair market) value. Treasury Regulations issued under Section 704(c) of the Code provide partnerships
(including limited liability companies treated as partnerships for U.S. federal income tax purposes) with a choice of several methods
of accounting for book-tax differences. Depending on the method chosen in connection with any particular contribution, the carryover
basis of each of the contributed interests in the properties in the hands of the partnership (1) could cause us to be allocated lower
amounts of depreciation deductions for tax purposes than would be allocated to us if any of the contributed properties were to have a
tax basis equal to its respective fair market value at the time of the contribution and (2) could cause us to be allocated taxable gain
in the event of a sale of such contributed interests or properties in excess of the economic or book income allocated to us as a result
of such sale, with a corresponding benefit to the other partners in the partnership. An allocation described in clause (2) above might
cause us or the other partners to recognize taxable income in excess of cash proceeds in the event of a sale or other disposition of
property, which might adversely affect our ability to comply with the REIT distribution requirements. See “—Taxation of Our
Company—Requirements for Qualification as a REIT” and “—Annual Distribution Requirements.”
Any
property acquired by the partnership in a taxable transaction will initially have a tax basis equal to its fair market value, and Section
704(c) of the Code generally will not apply.
Partnership
Audit Rules. The Bipartisan Budget Act of 2015 changes the rules applicable to U.S. federal income tax audits of partnerships.
Under the new rules (which are generally effective for taxable years beginning after December 31, 2017), among other changes and subject
to certain exceptions, any audit adjustment to items of income, gain, loss, deduction, or credit of a partnership (and any partner’s
distributive share thereof) is determined, and taxes, interest, or penalties attributable thereto are assessed and collected, at the
partnership level. Although it is uncertain how certain aspects of these rules will be implemented, it is possible that they could result
in partnerships in which we directly or indirectly invest being required to pay additional taxes, interest and penalties as a result
of an audit adjustment, and we, as a direct or indirect partner of these partnerships, could be required to bear the economic burden
of those taxes, interest, and penalties even though we, as a REIT, may not otherwise have been required to pay additional corporate-level
taxes as a result of the related audit adjustment. Proposed Regulations were issued in December 2017 and may be found at the following
link: Federal Register :: Centralized Partnership Audit Regime: Rules for Election Under Sections 6226 and 6227, Including Rules for
Tiered Partnership Structures, and Administrative and Procedural Provisions. Investors are urged to consult their tax advisors with respect
to these audit procedures and their potential impact on their investment in our common stock.
Material
U.S. Federal Income Tax Consequences of the Distribution of the Subscription Rights.
The
following discussion is a summary of the material U.S. federal income tax consequences to you of the receipt of our Subscription Rights,
the exercise of those rights, the exercise or disposition of the Warrants forming a part of those rights, and of purchasing, owning and
disposing of our common stock or Warrants acquired by exercise of those rights. This discussion is limited to holders who hold our common
stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment). This
discussion does not address all U.S. federal income tax consequences relevant to a holder’s particular circumstances. In addition,
except where specifically noted, it does not address consequences relevant to holders subject to special rules, including, without limitation:
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U.S.
expatriates and former citizens or long-term residents of the United States; |
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persons
subject to the alternative minimum tax; |
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U.S.
holders (as defined below) whose functional currency is not the U.S. dollar; |
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persons
holding our common stock as part of a hedge, straddle or other risk reduction strategy or as part of a conversion transaction or
other integrated investment; |
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banks,
insurance companies, and other financial institutions; |
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REITs
or regulated investment companies; |
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brokers,
dealers or traders in securities; |
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“controlled
foreign corporations,” “passive foreign investment companies,” and corporations that accumulate earnings to avoid
U.S. federal income tax; |
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S
corporations, partnerships or other entities or arrangements treated as partnerships for U.S. federal income tax purposes (and investors
therein); |
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tax-exempt
organizations or governmental organizations; |
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persons
subject to special tax accounting rules as a result of any item of gross income with respect to our common stock being taken into
account in an applicable financial statement; |
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persons
deemed to sell our common stock under the constructive sale provisions of the Code; and |
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persons
who hold or receive our common stock pursuant to the exercise of any employee stock option or otherwise as compensation. |
THIS
DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED AS TAX ADVICE. INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT
TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES OF THE DISTRIBUTION
OR EXERCISE OF THE SUBSCRIPTION RIGHTS OR THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK OR WARRANTS ARISING UNDER OTHER
U.S. FEDERAL TAX LAWS (INCLUDING ESTATE AND GIFT TAX LAWS), UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION OR UNDER
ANY APPLICABLE TAX TREATY.
For
purposes of this discussion, a “U.S. holder” is a beneficial owner of our common stock that, for U.S. federal income tax
purposes, is or is treated as:
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an
individual who is a citizen or resident of the United States; |
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a
corporation created or organized under the laws of the United States, any state thereof, or the District of Columbia; |
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an
estate, the income of which is subject to U.S. federal income tax regardless of its source; or |
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a
trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more “United States persons”
(within the meaning of Section 7701(a)(30) of the Code) or (2) has a valid election in effect to be treated as a United States person
for U.S. federal income tax purposes. |
For
purposes of this discussion, a “non-U.S. holder” is a beneficial owner of shares of our common stock, our Subscription Rights,
and Warrants acquired upon exercise of Subscription Rights or shares of our common stock acquired upon exercise of Warrants, as the case
may be, that is neither a U.S. holder nor an entity treated as a partnership for U.S. federal income tax purposes.
If
an entity treated as a partnership for U.S. federal income tax purposes holds our common stock, the tax treatment of a partner in the
partnership will depend on the status of the partner, the activities of the partnership and certain determinations made at the partner
level. Accordingly, partnerships holding our common stock and the partners in such partnerships should consult their tax advisors regarding
the U.S. federal income tax consequences to them.
Subscription
Rights – U.S. Holders
The
following is a discussion of the tax consequences to U.S. Holders of the distribution and exercise of the Subscription Rights and the
exercise or disposition of the Warrants forming a part of those rights.
Receipt
of Subscription Rights
Although
the authorities governing transactions such as this Rights Offering are complex and do not speak directly to the consequences of certain
aspects of this Rights Offering, including the inclusion of the right to purchase Warrants in the Subscription Rights and the effect
of the Over-Subscription Privilege and of certain warrant holders not receiving Subscription Rights, we do not believe that a U.S. holder’s
receipt of Subscription Rights pursuant in the Rights Offering should be treated as a taxable distribution with respect to its existing
shares of common stock for U.S. federal income tax purposes. However, the authority for our position is not conclusive and there can
be assurance that the IRS will agree with our position or, if it challenges our position, that our position will be sustained.
Section
305(a) of the Code generally provides that the receipt by a stockholder (which for purposes of Section 305 includes a warrant holder)
of a right to acquire stock or warrants is not included in the taxable income of the stockholder. However, the general non-recognition
rule in Section 305(a) is subject to exceptions described in Section 305(b) of the Code, including an exception for “disproportionate
distributions.” A disproportionate distribution is generally a distribution or a series of distributions (including deemed distributions)
that has the effect of the receipt of cash or other property by some stockholders and an increase in the proportionate interest of other
stockholders in a corporation’s assets or earnings and profits. Under IRS regulations, in determining whether a disproportionate
distribution has occurred, distributions of cash or property, or of stock (including warrants), that are made within 36 months of the
distribution in question are taken into account. During the last 36 months we have distributed cash dividends to shareholders of our
common stock (warrant holders have not been entitled to receive dividends on their warrants).
The
manner in which the Section 305 rules apply to the Rights Offering is not clear. The distribution of the Subscription Rights (including
the Warrants and the Over-Subscription Privilege) presumably does not, standing alone, cause a disproportionate distribution since, standing
alone, it does not cause some shareholders to receive cash or other property while other shareholders receive an increase in their proportionate
interest in our common stock. Nonetheless, Treasury Regulations state that, for a disproportionate distribution to exist (presumably
taking into account distributions within 36 months), there is no requirement that both a receipt of cash or property by some shareholders
and an increase in proportionate interests of other shareholders occur in the form of a distribution as long as the result of a distribution
or distributions of stock is that some shareholders’ proportionate interests increase and other shareholders in fact receive cash
or property. The application of this Treasury Regulation to the circumstances of our Rights Offering is uncertain. While some of our
shareholders may not exercise their Subscription Rights, with the result that (after such failure) there will be an increase in the proportionate
interest in our company by shareholders who do exercise their subscription rights, this increase does not result from the distribution
itself, but from actions taken by the shareholders (all of whom have received dividends in the past) following the distribution. Also,
some shareholders may purchase Over-Subscription Rights with the result that, upon the exercise of such rights, they receive an increase
in their proportionate shares in our company; again, this increase in proportionate interest does not result from the distribution itself
but from the actions of shareholders purchasing the Over-Subscription Rights. Warrant holders who participate in the Rights Offering
will see an increase in their proportionate interests in our company, but no holders will receive cash as part of this distribution and
warrant holders have never been entitled to receive cash dividends on their warrants. And while existing warrant holders, whether or
not they receive Subscription Rights, will under antidilution clauses in their warrants see an adjustment in the number of shares that
they may purchase upon exercise of those warrants -- a so-called deemed distribution – this deemed distribution should be
viewed as a distribution of additional shares, not of cash.
While
the tax consequences of the Rights Offering under the Treasury Regulations are not clear, we believe that the offering does not result
in an increase in the proportionate interests of some shareholders in our company while other shareholders receive cash or other property,
within the meaning of the Code or Treasury Regulations (and taking into account distributions within 36 months), because, taking into
account their rights as shareholders, it does not result in some shareholders being treated differently from other shareholders: all
shareholders entitled to receive cash dividends have received them in the past, no cash is being distributed as part of the Rights Offering,
and all shareholders entitled to receive Subscription Rights will receive them in the Rights Offering. Accordingly, we believe that the
distribution is described in Section 305(a) and is not included in the income of the distributees, and we will take that position.
Our
position regarding the non-taxable treatment of the Subscription Rights distribution is not binding on the IRS, or the courts. If this
position is finally determined by the IRS or a court to be incorrect, whether because, contrary to our expectations, distributions of
cash or property (other than stock or rights to acquire stock) are made with respect to our common stock, or because the issuance of
the Subscription Rights is a “disproportionate distribution”, or otherwise, the fair market value of the Subscription Rights
would be taxable to U.S. holders of our common stock as a dividend to the extent of the U.S. holder’s pro rata share of our current
and accumulated earnings and profits, if any, with any excess being treated as a return of capital to the extent thereof and then as
capital gain.
The
following discussion is based upon the treatment of the Subscription Right issuance as a non-taxable distribution with respect to a U.S.
holder’s existing shares of common stock for U.S. federal income tax purposes.
Tax
Basis in the Subscription Rights
If
the fair market value of the Subscription Rights a U.S. holder receives is less than 15% of the fair market value of the U.S. holder’s
existing shares of common stock with respect to which the Subscription Rights are distributed on the date the U.S. holder receives the
Subscription Rights, Section 307(b) of the Code provides that the Subscription Rights will be allocated a zero tax basis for U.S. federal
income tax purposes, unless the U.S. holder elects to allocate the tax basis in the holder’s existing shares of common stock between
the existing shares of common stock and the Subscription Rights in proportion to the relative fair market values of the existing shares
of common stock and the Subscription Rights determined on the date of receipt of the Subscription Rights. If a U.S. holder chooses to
allocate tax basis between the holder’s existing common shares and the Subscription Rights, the U.S. holder must make this election
on a statement included with the holder’s timely filed U.S. federal income tax return (including extensions) for the taxable year
in which the U.S. holder receives the Subscription Rights. Such an election is irrevocable.
However,
if the fair market value of the Subscription Rights a U.S. holder receives is 15% or more of the fair market value of the holder’s
existing shares of common stock on the date the U.S. holder receives the Subscription Rights, then the U.S. holder must allocate tax
basis in the existing shares of common stock between those shares or warrants and the Subscription Rights the U.S. holder receives in
proportion to their fair market values determined on the date the U.S. holder receives the Subscription Rights. Please refer to the discussion
below regarding the U.S. tax treatment of a U.S. holder that, at the time of the receipt of the Subscription Right, no longer holds the
common stock with respect to which the Subscription Right was distributed.
The
fair market value of the Subscription Rights on the date that the Subscription Rights are distributed is uncertain and we have not obtained,
and do not intend to obtain, an appraisal of the fair market value of the Subscription Rights on that date. In determining the fair market
value of the Subscription Rights, U.S. holders should consider all relevant facts and circumstances, including without limitation any
difference between the Subscription Price of the Subscription Rights and the trading price of our shares of common stock on the date
that the Subscription Rights are distributed, the exercise price of the Warrants, and the length of the period during which the Subscription
Rights may be exercised.
Exercise
of the Subscription Rights
A
U.S. holder will not recognize gain or loss upon the exercise of a Subscription Right received in the Rights Offering. A U.S. holder’s
adjusted tax basis, if any, in the Subscription Right plus the Subscription Price should be allocated between the share of common stock
and the Warrants acquired upon exercise of the Subscription Right. The tax basis in the common stock upon which the Subscription Rights
were issued which is allocated to the Subscription Rights under the prior section, entitled “—Tax Basis in the Subscription
Rights”, should be further allocated between the shares of common stock and the Warrants acquired upon exercise of the Subscription
Right in proportion to their relative fair market values on the date the Subscription Rights were distributed. The Subscription Price
should be allocated between the shares of common stock and the Warrant acquired upon exercise of the Subscription Right in proportion
to their relative fair market values on the exercise date. These allocations will establish the U.S. holder’s initial tax basis
for U.S. federal income tax purposes in the shares of common stock and Warrants received upon exercise of such U.S. holder’s Subscription
Right. The holding period of a share of common stock or a Warrant acquired upon exercise of a Subscription Right in the Rights Offering
will begin on the date of exercise.
If,
at the time of the receipt or exercise of the Subscription Right, the U.S. holder no longer holds the common stock with respect to which
the Subscription Right was distributed, then certain aspects of the tax treatment of the receipt and exercise of the Subscription Right
are unclear, including (1) the allocation of the tax basis between the shares of our common stock previously sold and the Subscription
Right, (2) the impact of such allocation on the amount and timing of gain or loss recognized with respect to the shares of our common
stock previously sold, and (3) the impact of such allocation on the tax basis of the Warrants acquired upon exercise of the Subscription
Right. If a U.S. holder exercises a Subscription Right received in the Rights Offering after disposing of shares of our common stock
with respect to which the Subscription Right is received, the U.S. holder should consult its own tax advisor.
Expiration
of the Subscription Rights
If
a U.S. holder allows Subscription Rights received in the Rights Offering to expire, the U.S. holder should not recognize any gain or
loss for U.S. federal income tax purposes, and the U.S. holder should re-allocate any portion of the tax basis in its existing common
shares previously allocated to the Subscription Rights that have expired to such U.S. holder’s existing common shares.
Sale
or Other Disposition, Exercise or Expiration of Warrants
Upon
the sale or other taxable disposition of a Warrant (other than by exercise) received upon exercise of a Subscription Right, a U.S. holder
will generally recognize capital gain or loss equal to the difference between the amount realized on the sale or other taxable disposition
and the U.S. holder’s adjusted tax basis in the Warrant. A U.S. Holder’s adjusted tax basis in a Warrant will generally equal
its initial tax basis (discussed above under “—Exercise of Subscription Rights”), as adjusted for any constructive
dividends on the Warrant described below. This capital gain or loss will be long-term capital gain or loss if the U.S. holder’s
holding period in such Warrant is more than one year at the time of the sale or other taxable disposition. The deductibility of capital
losses is subject to certain limitations.
A
U.S. holder will not be required to recognize income, gain or loss upon exercise of a Warrant received upon exercise of a Subscription
Right. A U.S. holder’s tax basis in a share of our common stock received upon exercise of the Warrants for cash will be equal to
the sum of (1) the U.S. holder’s tax basis in the Warrants exchanged therefor and (2) the exercise price of such Warrants. A U.S.
holder’s holding period in the shares of our common stock received upon exercise will commence on the day after such U.S. holder
exercises the Warrants.
In
certain circumstances, the Warrants will be exercisable on a cashless basis. The U.S. federal income tax treatment of an exercise of
a Warrant on a cashless basis is not clear, and could differ from the consequences described above. It is possible that a cashless exercise
could be a taxable event. U.S. holders are urged to consult their tax advisors as to the consequences of an exercise of a Warrant on
a cashless basis, including with respect to whether the exercise is a taxable event, and their holding period and tax basis in the common
stock received.
If
a Warrant expires without being exercised, a U.S. holder will recognize a capital loss in an amount equal to such holder’s adjusted
tax basis in the Warrant. Such loss will be long-term capital loss if, at the time of the expiration, the U.S. holder’s holding
period in such Warrant is more than one year. The deductibility of capital losses is subject to certain limitations.
Constructive
Dividends on Warrants
If
at any time during the period in which a U.S. holder holds Warrants received upon exercise of a Subscription Right, we pay a taxable
dividend to our stockholders and, in accordance with the anti-dilution provisions of the Warrants, the exercise price of the Warrants
were decreased, that decrease would be deemed to be the payment of a taxable dividend to a U.S. holder of the Warrants to the extent
of our earnings and profits, notwithstanding the fact that such holder will not receive a cash payment. If the exercise price is adjusted
in certain other circumstances (or in certain circumstances, there is a failure to make appropriate adjustments), or there is an adjustment
to the number of common shares that will be issued on exercise of the Warrants, such adjustments may also result in the deemed payment
of a taxable dividend to a U.S. holder. U.S. holders should consult their tax advisors regarding the proper treatment of any adjustments
to the exercise price of the Warrants. We are currently required to report the amount of any deemed distributions to the IRS, as well
as either on our website or to holders not exempt from reporting.
Subscription
Rights – Non-U.S. Holders
The
following is a discussion of the tax consequences to Non-U.S. Holders of the distribution and exercise or other disposition of the Subscription
Rights and the exercise or disposition of the Warrants forming a part of those Rights.
Receipt,
Exercise and Expiration of the Subscription Rights
The
discussion assumes that the receipt of Subscription Rights will be treated as a nontaxable distribution. See “—Tax
Considerations Applicable to U.S. Holders—Receipt of Subscription Rights” above. In such case, non-U.S. holders will not
be subject to U.S. federal income tax (or any withholding thereof) on the receipt, exercise or expiration of the Subscription Rights.
Exercise
of Warrants
A
non-U.S. holder will not be subject to U.S. federal income tax on the cash exercise of Warrants into shares of our common stock. As discussed
above in “Subscription Rights – U.S. Holders — Sale or Other Disposition, Exercise or Expiration of Warrants,”
the U.S. federal income tax treatment of an exercise of a Warrant on a cashless basis is not clear. Non-U.S. holders are urged to consult
their tax advisors as to the consequences of an exercise of a Warrant on a cashless basis, including with respect to whether the exercise
is a taxable event, and their holding period and tax basis in the common stock received.
Constructive
Dividends on Warrants
If
at any time during the period in which a non-U.S. holder holds Warrants we were to pay a taxable dividend to our stockholders and, in
accordance with the anti-dilution provisions of the Warrants, the exercise price of the Warrants were decreased, that decrease would
be deemed to be the payment of a taxable dividend to a non-U.S. holder to the extent of our earnings and profits, notwithstanding the
fact that such holder will not receive a cash payment. If the exercise price is adjusted in certain other circumstances (or in certain
circumstances, there is a failure to make appropriate adjustments), or there is an adjustment to the number of common shares that will
be issued on exercise of the Warrants, such adjustments may also result in the deemed payment of a taxable dividend to a non-U.S. holder.
Any resulting withholding tax attributable to deemed dividends may be collected from other amounts payable or distributable to the non-U.S.
holder. Non-U.S. holders should consult their tax advisors regarding the proper treatment of any adjustments to the Warrants.
Sale
or Other Disposition of the Warrants
Subject
to the discussions below on backup withholding and foreign accounts, a non-U.S. holder will not be subject to U.S. federal income tax
on any gain realized upon the sale or other taxable disposition of our Warrants unless:
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the
gain is effectively connected with the non-U.S. holder’s conduct of a trade or business within the United States (and, if required
by an applicable income tax treaty, the non-U.S. holder maintains a permanent establishment in the United States to which such gain
is attributable); |
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the
non-U.S. holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the
disposition and certain other requirements are met; or |
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our
Warrants or Subscription Rights constitutes a U.S. real property interest, or USRPI, by reason of our status as a U.S. real property
holding corporation, or USRPHC, for U.S. federal income tax purposes. |
Gain
described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular graduated
rates. A Non-U.S. holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified
by an applicable income tax treaty) on such effectively connected gain, as adjusted for certain items.
Gain
described in the second bullet point above will be subject to U.S. federal income tax at a rate of 30% (or such lower rate specified
by an applicable income tax treaty) on any gain derived from the disposition, which may be offset by U.S. source capital losses of the
non-U.S. holder (even though the individual is not considered a resident of the United States), provided the non-U.S. holder has timely
filed U.S. federal income tax returns with respect to such losses.
With
respect to the third bullet point above, we believe we are not currently and do not anticipate becoming a USRPHC because we are a domestically-controlled
REIT (more than 50% owned by U.S. persons). However, there can be no assurance we will not become a USRPHC in the future.
Non-U.S.
holders should consult their tax advisors regarding potentially applicable income tax treaties that may provide for different rules.
Taxation
of U.S. Holders of Our Common Stock
Distributions
Generally. Distributions out of our current or accumulated earnings and profits will be treated as dividends and, other than
with respect to capital gain dividends and certain amounts which have previously been subject to corporate level tax, as discussed below,
will be taxable to our taxable U.S. holders as ordinary income when actually or constructively received. See “—Tax Rates”
below. As long as we qualify as a REIT, these distributions will not be eligible for the dividends-received deduction in the case of
U.S. holders that are corporations or, except to the extent described in “—Tax Rates” below, the preferential rates
on qualified dividend income applicable to non-corporate U.S. holders, including individuals. Under the 2017 Tax Legislation, non-corporate
U.S. holders, including individuals, generally may deduct 20% of dividends from a REIT, other than capital gain dividends and dividends
treated as qualified dividend income, for taxable years beginning after December 31, 2017 and before January 1, 2026. For purposes of
determining whether distributions to holders of our capital stock are out of our current or accumulated earnings and profits, our earnings
and profits will be allocated first to our outstanding preferred stock, if any, and then to our outstanding common stock.
To
the extent that we make distributions on our common stock in excess of our current and accumulated earnings and profits allocable to
such stock, these distributions will be treated first as a tax-free return of capital to a U.S. holder. This treatment will reduce the
U.S. holder’s adjusted tax basis in such shares of stock by the amount of the distribution, but not below zero. Distributions in
excess of our current and accumulated earnings and profits and in excess of a U.S. holder’s adjusted tax basis in its shares will
be taxable as capital gain. Such gain will be taxable as long-term capital gain if the shares have been held for more than one year.
Dividends we declare in October, November, or December of any year and which are payable to a holder of record on a specified date in
any of these months will be treated as both paid by us and received by the holder on December 31 of that year, provided we actually pay
the dividend on or before January 31 of the following year. U.S. holders may not include in their own income tax returns any of our net
operating losses or capital losses.
U.S.
holders that receive taxable stock distributions, including distributions partially payable in our common stock and partially payable
in cash, would be required to include the full amount of the distribution (i.e., the cash and the stock portion) as a dividend
(subject to limited exceptions) to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes,
as described above. The amount of any distribution payable in our common stock generally is equal to the amount of cash that could have
been received instead of the common stock. Depending on the circumstances of a U.S. holder, the tax on the distribution may exceed the
amount of the distribution received in cash, in which case such U.S. holder would have to pay the tax using cash from other sources.
If a U.S. holder sells the common stock it received in connection with a taxable stock distribution in order to pay this tax and the
proceeds of such sale are less than the amount required to be included in income with respect to the stock portion of the distribution,
such U.S. holder could have a capital loss with respect to the stock sale that could not be used to offset such income. A U.S. holder
that receives common stock pursuant to such distribution generally has a tax basis in such common stock equal to the amount of cash that
could have been received instead of such common stock as described above, and has a holding period in such common stock that begins on
the day immediately following the payment date for the distribution.
Capital
Gain Dividends. Dividends that we properly designate as capital gain dividends will be taxable to our taxable U.S. holders as
a gain from the sale or disposition of a capital asset held for more than one year, to the extent that such gain does not exceed our
actual net capital gain for the taxable year and may not exceed our dividends paid for the taxable year, including dividends paid the
following year that are treated as paid in the current year. U.S. holders that are corporations may, however, be required to treat up
to 20% of certain capital gain dividends as ordinary income. If we properly designate any portion of a dividend as a capital gain dividend,
then, except as otherwise required by law, we presently intend to allocate a portion of the total capital gain dividends paid or made
available to holders of all classes of our capital stock for the year to the holders of each class of our capital stock in proportion
to the amount that our total dividends, as determined for U.S. federal income tax purposes, paid or made available to the holders of
each such class of our capital stock for the year bears to the total dividends, as determined for U.S. federal income tax purposes, paid
or made available to holders of all classes of our capital stock for the year. In addition, except as otherwise required by law, we will
make a similar allocation with respect to any undistributed long-term capital gains which are to be included in our stockholders’
long-term capital gains, based on the allocation of the capital gain amount which would have resulted if those undistributed long-term
capital gains had been distributed as “capital gain dividends” by us to our stockholders.
Retention
of Net Capital Gains. We may elect to retain, rather than distribute as a capital gain dividend, all or a portion of our net
capital gains. If we make this election, we would pay tax on our retained net capital gains. In addition, to the extent we so elect,
our earnings and profits (determined for U.S. federal income tax purposes) would be adjusted accordingly, and a U.S. holder generally
would:
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include
its pro rata share of our undistributed net capital gains in computing its long-term capital gains in its return for its taxable
year in which the last day of our taxable year falls, subject to certain limitations as to the amount that is includable; |
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be
deemed to have paid its share of the capital gains tax imposed on us on the designated amounts included in the U.S. holder’s
income as long-term capital gain; |
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receive
a credit or refund for the amount of tax deemed paid by it; |
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increase
the adjusted tax basis of its common stock by the difference between the amount of includable gains and the tax deemed to have been
paid by it; and |
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in
the case of a U.S. holder that is a corporation, appropriately adjust its earnings and profits for the retained capital gains in
accordance with Treasury Regulations to be promulgated by the IRS. |
Passive
Activity Losses and Investment Interest Limitations. Distributions we make and gain arising from the sale or exchange by a U.S.
holder of our common stock will not be treated as passive activity income. As a result, U.S. holders generally will not be able to apply
any “passive losses” against this income or gain. A U.S. holder generally may elect to treat capital gain dividends, capital
gains from the disposition of our common stock and income designated as qualified dividend income, as described in “—Tax
Rates” below, as investment income for purposes of computing the investment interest limitation, but in such case, the holder will
be taxed at ordinary income rates on such amount. Other distributions made by us, to the extent they do not constitute a return of capital,
generally will be treated as investment income for purposes of computing the investment interest limitation.
Participation
in the Dividend Reinvestment Plan. U.S. holders who elect to participate in the Dividend Reinvestment Plan generally will be
treated as having received a distribution equal to the fair market value of the common stock acquired (without reduction for any withholding
taxes). The distribution will be taxed to such U.S. holder as described above in this discussion. In addition, there is a risk that some
or all of the 5% discount from the price per share paid for the common stock so acquired will be taxable as income to such U.S. holder.
A U.S. holder’s tax basis in the common stock so acquired will equal the fair market value of the common stock on the date of acquisition,
and the holding period for such common stock will begin on the day following the date of such acquisition. Participants in the Dividend
Reinvestment Plan should consult their tax advisers concerning the particular tax consequences to them of participating in the Dividend
Reinvestment Plan.
Dispositions
of Our Common Stock. If a U.S. holder sells or disposes of shares of our common stock, it will recognize gain or loss for U.S.
federal income tax purposes in an amount equal to the difference between the amount of cash and the fair market value of any property
received on the sale or other disposition and the holder’s adjusted tax basis in the shares. This gain or loss, except as provided
below, will be long-term capital gain or loss if the holder has held such common stock for more than one year. However, if a U.S. holder
recognizes a loss upon the sale or other disposition of common stock that it has held for nine months or less, after applying certain
holding period rules, the loss recognized will be treated as a long-term capital loss to the extent the U.S. holder received distributions
from us which were required to be treated as long-term capital gains.
Tax
Rates. The maximum tax rate for non-corporate taxpayers for (1) long-term capital gains, including certain “capital gain
dividends,” generally is 20% (although depending on the characteristics of the assets which produced these gains and on designations
which we may make, certain capital gain dividends may be taxed at a 25% rate) and (2) “qualified dividend income” generally
is 20%. In general, dividends payable by REITs are not eligible for the reduced tax rate on qualified dividend income, except to the
extent that certain holding period requirements have been met and the REIT’s dividends are attributable to dividends received from
taxable corporations (such as its taxable REIT subsidiaries) or to income that was subject to tax at the corporate/REIT level (for example,
if the REIT distributed taxable income that it retained and paid tax on in the prior taxable year). Capital gain dividends will only
be eligible for the rates described above to the extent that they are properly designated by the REIT as “capital gain dividends.”
In addition, U.S. holders that are corporations may be required to treat up to 20% of some capital gain dividends as ordinary income.
In addition, investment income, including REIT dividends are subject to the 3.8% net investment income tax in addition to capital gains
tax.
Taxation
of Non-U.S. Holders of Our Common Stock
The
following discussion addresses the rules governing U.S. federal income taxation of the acquisition, ownership and disposition of our
common stock by non-U.S. holders. These rules are complex, and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of U.S. federal income taxation and does not address other federal, state,
local or non-U.S. tax consequences that may be relevant to a non-U.S. holder in light of its particular circumstances. We urge non-U.S.
holders to consult their tax advisors to determine the impact of U.S. federal, state, local and non-U.S. income and other tax laws and
any applicable tax treaty on the purchase, ownership and disposition of shares of our common stock, including any reporting requirements.
Distributions
Generally. Distributions (including any taxable stock distributions) that are neither attributable to gains from sales or exchanges
by us of United States real property interests, or USRPIs, nor designated by us as capital gain dividends (except as described below)
will be treated as dividends of ordinary income to the extent that they are made out of our current or accumulated earnings and profits.
Such distributions ordinarily will be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified
by an applicable income tax treaty, unless the distributions are treated as effectively connected with the conduct by the non-U.S. holder
of a trade or business within the United States (and, if required by an applicable income tax treaty, the non-U.S. holder maintains a
permanent establishment in the United States to which such dividends are attributable). Under certain treaties, however, lower withholding
rates generally applicable to dividends do not apply to dividends from a REIT. Certain certification and disclosure requirements must
be satisfied for a non-U.S. holder to be exempt from withholding under the effectively connected income exemption. Dividends that are
treated as effectively connected with a U.S. trade or business generally will not be subject to withholding but will be subject to U.S.
federal income tax on a net basis at the regular graduated rates, in the same manner as dividends paid to U.S. holders are subject to
U.S. federal income tax. Any such dividends received by a non-U.S. holder that is a corporation may also be subject to an additional
branch profits tax at a 30% rate (applicable after deducting U.S. federal income taxes paid on such effectively connected income) or
such lower rate as may be specified by an applicable income tax treaty.
Except
as otherwise provided below, we expect to withhold U.S. federal income tax at the rate of 30% on any distributions made to a non-U.S.
holder unless:
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(1) |
a
lower treaty rate applies and the non-U.S. holder furnishes an IRS Form W-8BEN or W-8BEN-E (or other applicable documentation) evidencing
eligibility for that reduced treaty rate; or |
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(2) |
the
non-U.S. holder furnishes an IRS Form W-8ECI (or other applicable documentation) claiming that the distribution is income effectively
connected with the non-U.S. holder’s trade or business. |
Distributions
in excess of our current and accumulated earnings and profits will not be taxable to a non-U.S. holder to the extent that such distributions
do not exceed the adjusted tax basis of the holder’s common stock, but rather will reduce the adjusted tax basis of such stock.
To the extent that such distributions exceed the non-U.S. holder’s adjusted tax basis in such common stock, they generally will
give rise to gain from the sale or exchange of such stock, the tax treatment of which is described below. However, recent legislation
may cause such excess distributions to be treated as dividend income for certain non-U.S. holders. For withholding purposes, we expect
to treat all distributions as made out of our current or accumulated earnings and profits. However, amounts withheld may be refundable
if it is subsequently determined that the distribution was, in fact, in excess of our current and accumulated earnings and profits, provided
that certain conditions are met.
Capital
Gain Dividends and Distributions Attributable to a Sale or Exchange of United States Real Property Interests. Distributions to
a non-U.S. holder that we properly designate as capital gain dividends, other than those arising from the disposition of a USRPI, generally
should not be subject to U.S. federal income taxation, unless:
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(1) |
the
investment in our common stock is treated as effectively connected with the conduct by the non-U.S. holder of a trade or business
within the United States (and, if required by an applicable income tax treaty, the non-U.S. holder maintains a permanent establishment
in the United States to which such dividends are attributable), in which case the non-U.S. holder will be subject to the same treatment
as U.S. holders with respect to such gain, except that a non-U.S. holder that is a corporation may also be subject to a branch profits
tax of up to 30%, as discussed above; or |
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(2) |
the
non-U.S. holder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year
and certain other conditions are met, in which case the non-U.S. holder will be subject to U.S. federal income tax at a rate of 30%
on the non-U.S. holder’s capital gains (or such lower rate specified by an applicable income tax treaty), which may be offset
by U.S. source capital losses of such non-U.S. holder (even though the individual is not considered a resident of the United States),
provided the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses. |
Pursuant
to the Foreign Investment in Real Property Tax Act, which is referred to as “FIRPTA,” distributions to a non-U.S. holder
that are attributable to gain from sales or exchanges by us of USRPIs, whether or not designated as capital gain dividends, will cause
the non-U.S. holder to be treated as recognizing such gain as income effectively connected with a U.S. trade or business. Non-U.S. holders
generally would be taxed at the regular graduated rates applicable to U.S. holders, subject to any applicable alternative minimum tax
and a special alternative minimum tax in the case of nonresident alien individuals. We also will be required to withhold and to remit
to the IRS 21% (or 20% to the extent provided in applicable Treasury Regulations) of any distribution to non-U.S. holders attributable
to gain from sales or exchanges by us of USRPIs. Distributions subject to FIRPTA may also be subject to a 30% branch profits tax in the
hands of a non-U.S. holder that is a corporation. The amount withheld is creditable against the non-U.S. holder’s U.S. federal
income tax liability. However, any distribution with respect to any class of stock that is “regularly traded,” as defined
by applicable Treasury Regulations, on an established securities market located in the United States is not subject to FIRPTA, and therefore,
not subject to the 21% U.S. withholding tax described above, if the non-U.S. holder did not own more than 10% of such class of stock
at any time during the one-year period ending on the date of the distribution. Instead, such distributions generally will be treated
as ordinary dividend distributions and subject to withholding in the manner described above with respect to ordinary dividends. In addition,
distributions to certain non-U.S. publicly traded stockholders that meet certain record-keeping and other requirements (“qualified
shareholders”) are exempt from FIRPTA, except to the extent owners of such qualified shareholders that are not also qualified shareholders
own, actually or constructively, more than 10% of our capital stock. Furthermore, distributions to “qualified foreign pension funds”
or entities all of the interests of which are held by “qualified foreign pension funds” are exempt from FIRPTA. Non-U.S.
holders should consult their tax advisors regarding the application of these rules.
Retention
of Net Capital Gains. Although the law is not clear on the matter, it appears that amounts we designate as retained net capital
gains in respect of our common stock should be treated with respect to non-U.S. holders as actual distributions of capital gain dividends.
Under this approach, the non-U.S. holders may be able to offset as a credit against their U.S. federal income tax liability their proportionate
share of the tax paid by us on such retained net capital gains and to receive from the IRS a refund to the extent their proportionate
share of such tax paid by us exceeds their actual U.S. federal income tax liability. If we were to designate any portion of our net capital
gain as retained net capital gain, non-U.S. holders should consult their tax advisors regarding the taxation of such retained net capital
gain.
Participation
in the Dividend Reinvestment Plan. Non-U.S. holders who elect to participate in the Dividend Reinvestment Plan will generally
have the tax consequences described above under “—Taxation of Taxable U.S. Holders of Our Common Stock – Participation
in the Dividend Reinvestment Plan,” except that the tax consequences of the resulting distribution will be as described above under
this section entitled “—Taxation of Non-U.S. Holders of Our Common Stock.”
Sale
of Our Common Stock. Gain realized by a non-U.S. holder upon the sale, exchange or other taxable disposition of our common stock
generally will not be subject to U.S. federal income tax unless such stock constitutes a USRPI. In general, stock of a domestic corporation
that constitutes a “United States real property holding corporation,” or USRPHC, will constitute a USRPI. We believe that
we are a USRPHC. Our common stock will not, however, constitute a USRPI so long as we are a “domestically controlled qualified
investment entity.” A “domestically controlled qualified investment entity” includes a REIT in which at all times during
a five-year testing period less than 50% in value of its stock is held directly or indirectly by non-United States persons, subject to
certain rules. For purposes of determining whether a REIT is a “domestically controlled qualified investment entity,” a person
who at all applicable times holds less than 5% of a class of stock that is “regularly traded” is treated as a United States
person unless the REIT has actual knowledge that such person is not a United States person. We believe, but cannot guarantee, that we
are a “domestically controlled qualified investment entity.” Because our common stock will be publicly traded upon completion
of this offering of our common stock (and, we anticipate, will continue to be publicly traded), no assurance can be given that we will
continue to be a “domestically controlled qualified investment entity.”
Even
if we do not qualify as a “domestically controlled qualified investment entity” at the time a non-U.S. holder sells our common
stock, gain realized from the sale or other taxable disposition by a non-U.S. holder of such common stock would not be subject to U.S.
federal income tax under FIRPTA as a sale of a USRPI if:
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our
common stock is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market
such as Nasdaq; and |
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(2) |
such
non-U.S. holder owned, actually and constructively, 10% or less of our common stock throughout the shorter of the five-year period
ending on the date of the sale or other taxable disposition or the non-U.S. holder’s holding period. |
In
addition, dispositions of our common stock by qualified shareholders are exempt from FIRPTA, except to the extent owners of such qualified
shareholders that are not also qualified shareholders own, actually or constructively, more than 10% of our capital stock. Furthermore,
dispositions of our common stock by “qualified foreign pension funds” or entities all of the interests of which are held
by “qualified foreign pension funds” are exempt from FIRPTA. Non-U.S. holders should consult their tax advisors regarding
the application of these rules.
Notwithstanding
the foregoing, gain from the sale, exchange or other taxable disposition of our common stock not otherwise subject to FIRPTA will be
taxable to a non-U.S. holder if either (a) the investment in our common stock is treated as effectively connected with the conduct by
the non-U.S. holder of a trade or business within the United States (and, if required by an applicable income tax treaty, the non-U.S.
holder maintains a permanent establishment in the United States to which such gain is attributable), in which case the non-U.S. holder
will be subject to the same treatment as U.S. holders with respect to such gain, except that a non-U.S. holder that is a corporation
may also be subject to the 30% branch profits tax (or such lower rate as may be specified by an applicable income tax treaty) on such
gain, as adjusted for certain items, or (b) the non-U.S. holder is a nonresident alien individual who is present in the United States
for 183 days or more during the taxable year and certain other conditions are met, in which case the non-U.S. holder will be subject
to a 30% tax on the non-U.S. holder’s capital gains (or such lower rate specified by an applicable income tax treaty), which may
be offset by U.S. source capital losses of the non-U.S. holder (even though the individual is not considered a resident of the United
States), provided the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses. In addition, even
if we are a domestically controlled qualified investment entity, upon disposition of our common stock, a non-U.S. holder may be treated
as having gain from the sale or other taxable disposition of a USRPI if the non-U.S. holder (1) disposes of such stock within a 30-day
period preceding the ex-dividend date of a distribution, any portion of which, but for the disposition, would have been treated as gain
from the sale or exchange of a USRPI and (2) acquires, or enters into a contract or option to acquire, or is deemed to acquire, other
shares of that stock during the 61-day period beginning with the first day of the 30-day period described in clause (1), unless such
stock is “regularly traded” and the non-U.S. holder did not own more than 10% of the stock at any time during the one-year
period ending on the date of the distribution described in clause (1).
If
gain on the sale, exchange or other taxable disposition of our common stock were subject to taxation under FIRPTA, the non-U.S. holder
would be required to file a U.S. federal income tax return and would be subject to regular U.S. federal income tax with respect to such
gain in the same manner as a taxable U.S. holder (subject to any applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals). In addition, if the sale, exchange or other taxable disposition of our common stock
were subject to taxation under FIRPTA, and if shares of our common stock were not “regularly traded” on an established securities
market, the purchaser of such common stock generally would be required to withhold and remit to the IRS 15% of the purchase price.
Information
Reporting and Backup Withholding
U.S.
Holders. A U.S. holder may be subject to information reporting and backup withholding when such holder receives payments on our
common stock or proceeds from the sale or other taxable disposition of our stock or Warrants. Certain U.S. holders are exempt from backup
withholding, including corporations and certain tax-exempt organizations. A U.S. holder will be subject to backup withholding if such
holder is not otherwise exempt and:
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the
holder fails to furnish the holder’s taxpayer identification number, which for an individual is ordinarily his or her social
security number; |
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the
holder furnishes an incorrect taxpayer identification number; |
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the
applicable withholding agent is notified by the IRS that the holder previously failed to properly report payments of interest or
dividends; or |
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the
holder fails to certify under penalties of perjury that the holder has furnished a correct taxpayer identification number and that
the IRS has not notified the holder that the holder is subject to backup withholding. |
Backup
withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit
against a U.S. holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS. U.S.
holders should consult their tax advisors regarding their qualification for an exemption from backup withholding and the procedures for
obtaining such an exemption.
Non-U.S.
Holders. Payments of dividends on our common stock generally will not be subject to backup withholding, provided the applicable
withholding agent does not have actual knowledge or reason to know the holder is a United States person and the holder either certifies
its non-U.S. status, such as by furnishing a valid IRS Form W-8BEN, W-8BEN-E or W-8ECI, or otherwise establishes an exemption. However,
information returns are required to be filed with the IRS in connection with any dividends on our common stock paid to the non-U.S. holder,
regardless of whether any tax was actually withheld. In addition, proceeds of the sale or other taxable disposition of such stock within
the United States or conducted through certain U.S.-related brokers generally will not be subject to backup withholding or information
reporting, if the applicable withholding agent receives the certification described above and does not have actual knowledge or reason
to know that such holder is a United States person, or the holder otherwise establishes an exemption. Proceeds of a disposition of such
stock conducted through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding or information reporting.
Copies
of information returns that are filed with the IRS may also be made available under the provisions of an applicable treaty or agreement
to the tax authorities of the country in which the non-U.S. holder resides or is established.
Backup
withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit
against a non-U.S. holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
Medicare
Contribution Tax on Unearned Income
Certain
U.S. holders that are individuals, estates or trusts are required to pay an additional 3.8% tax on, among other things, dividends on
stock and capital gains from the sale or other disposition of stock or stock rights. U.S. holders should consult their tax advisors regarding
the effect, if any, of these rules on their ownership and disposition of our common stock and Warrants.
Additional
Withholding Tax on Payments Made to Foreign Accounts
Withholding
taxes may be imposed under Sections 1471 to 1474 of the Code (such sections commonly referred to as the Foreign Account Tax Compliance
Act, or FATCA) on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically,
a 30% withholding tax may be imposed on dividends on our common stock paid to a “foreign financial institution” or a “non-financial
foreign entity” (each as defined in the Code), unless (1) the foreign financial institution undertakes certain diligence and reporting
obligations, (2) the non-financial foreign entity either certifies it does not have any “substantial United States owners”
(as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (3) the foreign financial
institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial
institution and is subject to the diligence and reporting requirements in clause (1) above, it must enter into an agreement with the
U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified
United States persons” or “United States owned foreign entities” (each as defined in the Code), annually report certain
information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other
account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States
governing FATCA may be subject to different rules.
Under
the applicable Treasury Regulations and administrative guidance, withholding under FATCA generally applies to payments of dividends on
our common stock. Because we may not know the extent to which a distribution is a dividend for U.S. federal income tax purposes at the
time it is made, for purposes of these withholding rules we may treat the entire distribution as a dividend.
Prospective
investors should consult their tax advisors regarding the potential application of withholding under FATCA to their investment in our
common stock.
Other
Tax Consequences
State,
local and non-U.S. income tax laws may differ substantially from the corresponding U.S. federal income tax laws, and this discussion
does not purport to describe any aspect of the tax laws of any state, local or non-U.S. jurisdiction, or any U.S. federal tax other than
the income tax. You should consult your tax advisor regarding the effect of state, local and non-U.S. tax laws with respect to our tax
treatment as a REIT and on an investment in our common stock.
ERISA
CONSIDERATIONS
General
The
following is a summary of certain considerations arising under the U.S. Employee Retirement Income Security Act of 1974, as amended (“ERISA”),
and the prohibited transaction provisions of Section 4975 of the Code that may be relevant to a prospective purchaser that is an “employee
benefit plan” as defined in Section 3(3) of ERISA that is subject to Title I of ERISA, a “plan” subject to Section
4975 of the Code, including without limitation, an individual retirement account, and an entity that is deemed to hold the assets of
any such employee benefit plan or plans (collectively, “Plans”).
Plans
should also consider the entire discussion under the heading “U.S. Federal Income Tax Considerations,” as material contained
in that section is relevant to any decision by a Plan to purchase our common stock.
Employee
Benefit Plans and Other Plans
Each
fiduciary of a Plan that is subject to Title I of ERISA or Section 4975 of the Code (an “ERISA Plan”) should carefully consider
whether an investment in shares of our common stock is consistent with its fiduciary responsibilities under ERISA. Investments by ERISA
Plans are subject to ERISA’s general fiduciary requirements, including, but not limited to, the requirement of investment prudence
and diversification and the requirement that an ERISA Plan’s investments be made in accordance with the document governing the
Plan.
In
determining whether an investment in shares of our common stock is prudent, the appropriate fiduciary of a Plan should consider all of
the facts and circumstances, including whether the investment is reasonably designed, as a part of the Plan’s portfolio for which
the fiduciary has investment responsibility, to meet the objectives of the Plan, taking into consideration the risk of loss and opportunity
for gain or other return from the investment, the diversification, cash flow and funding requirements of the Plan and the liquidity and
current return of the Plan’s portfolio. A fiduciary should also take into account the nature of our business, the length of our
operating history and other matters described in the section entitled “Risk Factors.”
Each
Plan, including IRAs, should consider the fact that we are not acting, or will not act, as a fiduciary to any Plan with respect to the
decision to purchase or hold shares of our common stock. We are not undertaking to provide impartial investment advice or advice based
on any particular investment need, or to give advice in a fiduciary capacity, with respect to the decision to purchase or hold the shares
of our common stock. All communications, correspondence and materials from us with respect to the shares of our common stock are intended
to be general in nature and are not directed at any specific purchaser of the shares of our common stock, and do not constitute advice
regarding the advisability of investment in the shares of our common stock for any specific purchaser. The decision to purchase and hold
the shares of our common stock must be made solely by each prospective Plan purchaser on an arm’s length basis.
Whether
or not our underlying assets were deemed to include “plan assets,” as described below, Section 406 of ERISA and Section 4975
of the Code prohibit certain transactions involving the assets of a Plan and certain persons (referred to as “parties in interest”
or “disqualified persons”) having certain relationships to such Plan, unless a statutory or administrative exemption is applicable
to the transaction. A party in interest or disqualified person who engages in a prohibited transaction may be subject to excise taxes
and other penalties and liabilities under ERISA and the Code and it may result in the disqualification of an IRA. In addition, the fiduciary
of a Plan that engages in such non-exempt prohibited transaction may be subject to penalties and liabilities under ERISA and the Code.
An
investment in shares of our common stock by a Plan with respect to which we are considered a party in interest or a disqualified person
may constitute or result in a direct or indirect prohibited transaction under Section 406 of ERISA and/or Section 4975 of the Code, unless
the investment is acquired and is held in accordance with an applicable statutory, class or individual prohibited transaction exemption.
Included among these statutory exemptions are Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code, which exempt certain transactions
(including, without limitation, a sale and purchase of securities) between a Plan and a party in interest so long as (i) such party in
interest is treated as such solely by reason of providing services to the Plan, (ii) such party in interest is not a fiduciary which
renders investment advice, or has or exercises discretionary authority or control, with respect to the plan assets involved in such transaction,
or an affiliate of any such person and (iii) the Plan neither receives less than nor pays more than “adequate consideration”
(as defined in such Sections) in connection with such transaction. In addition, the United States Department of Labor has issued prohibited
transaction class exemptions (“PTCEs”) that may apply to an investment in shares of our common stock. These class exemptions
include, without limitation, PTCE 84-14 respecting transactions determined by independent qualified professional asset managers, PTCE
90-1, respecting insurance company pooled separate accounts, PTCE 91-38, respecting bank collective investment funds, PTCE 95-60, respecting
life insurance company general accounts and PTCE 96-23, respecting transactions determined by in-house asset managers. Furthermore, newly-issued
class exemptions, such as the “Best Interests Contract Exemption” (PTCE 2016-01) and the “Principal Transaction Exemption”
(PTCE 2016-02) may provide relief for certain transactions involving investment advice fiduciaries. There can be no assurance that all
of the conditions of any such exemptions will be satisfied or that any such exemptions will be available with respect to investments
in shares of our common stock.
Employee
benefit plans that are governmental, church or non-U.S. plans are exempt from ERISA and Section 4975 of the Code but may be subject to
other federal, state, local or non-U.S. laws and regulations that are similar to ERISA or Section 4975 of the Code (“Similar Law”).
The
foregoing discussion is general in nature and is not intended to be all inclusive. Due to the complexity of these rules and the penalties
that may be imposed upon persons involved in non-exempt prohibited transactions, it is particularly important that fiduciaries or other
persons considering investing in shares of our common stock on behalf of, or with the assets of, any Plan, consult with their counsel
regarding the potential applicability of ERISA, Section 4975 of the Code and any Similar Laws to such transactions and whether an exemption
would be applicable.
Purchasers
of the shares of our common stock will be deemed to represent, warrant and agree that (1) if they are, or are acting on behalf of, a
Plan, the acquisition, holding and disposition of such shares will not constitute or result in a non-exempt prohibited transaction under
Section 406 of ERISA or Section 4975 of the Code or similar violation under any applicable Similar Laws, and (2) if they are a governmental,
church, non-U.S. or other plan, the acquisition, holding and disposition of such shares will not constitute or result in a non-exempt
violation of any Similar Law.
Further,
if the purchaser or subsequent transferee is an ERISA Plan, such purchaser or subsequent transferee will be deemed to have represented
and warranted that (i) we have not acted as the Plan’s fiduciary (within the meaning of ERISA or the Code), or has been relied
upon for any advice, with respect to the purchaser or transferee’s decision to make an investment in shares of our common stock,
and we will not at any time be relied upon as the Plan’s fiduciary with respect to any decision to invest in shares of our common
stock, and (ii) the decision to make an investment in shares of our common stock has been made by a duly authorized fiduciary of the
Plan that (A) is independent (as that term is used in 29 C.F.R. 2510.3-21(c)(1)) of us, and there is no financial interest, ownership
interest, or other relationship, agreement or understanding or otherwise that would limit its ability to carry out its fiduciary responsibility
to the Plan; (B) is a U.S. bank, U.S. insurance carrier, investment adviser registered under the U.S. Investment Advisers Act of 1940,
a U.S. broker-dealer registered under the Exchange Act, or an independent fiduciary that holds, or has under management or control, total
assets of at least $50 million (in each case, as specified in 29 C.F.R. 2510.3-21(c)(1)(i)(A)-(E)); (C) is capable of evaluating investment
risks independently, both in general and with regard to particular transactions and investment strategies (including, without limitation,
with respect to the decision to make an investment in shares of our common stock); (D) has been fairly informed that we have not and
will not undertake to provide impartial investment advice, or to give advice in a fiduciary capacity, in connection with the investment
in shares of our common stock; (E) has been fairly informed that we have financial interests in the Plan’s investment in shares
of our common stock, which interests may conflict with the interest of the Plan, as more fully described in this prospectus; (F) is a
fiduciary under ERISA or the Code, or both, with respect to the decision to make an investment in shares of our common stock, and is
responsible for exercising (and has exercised) independent judgment in evaluating whether to invest the assets of such Plan in shares
of our common stock; and (G) is not paying us any fee or other compensation directly for the provision of investment advice (as opposed
to other services) in connection with the investment in shares of our common stock.
Our
Status Under ERISA
In
some circumstances in which a Plan holds an equity interest in an entity, the assets of the entity are deemed to be assets of the Plan.
This is known as the “look-through rule.” Under those circumstances, the obligations and other responsibilities of plan sponsors,
plan fiduciaries and plan administrators, and of parties in interest and disqualified persons, under Title I of ERISA and Section 4975
of the Code, as applicable, may be expanded, and there may be an increase in their potential liability under these and other provisions
of ERISA and the Code (except to the extent (if any) that a favorable statutory or administrative exemption or exception applies). For
example, a prohibited transaction may occur if our assets are deemed to be assets of investing Plans and we engage in a transaction with
a “party in interest” or “disqualified person” with respect to one or more of the investing Plans. Further, if
our assets are deemed to be assets of investing Plans, any person that exercises authority or control with respect to the management
or disposition of our assets is an ERISA Plan fiduciary.
U.S.
Department of Labor Regulation 29 C.F.R. 2510.3-101, as modified by Section 3(42) of ERISA (the “Plan Asset Regulation”)
outlines the circumstances under which a Plan’s interest in an entity will be subject to the look-through rule. The Plan Asset
Regulation applies to the purchase by a Plan of an “equity interest” in an entity, such as stock of a REIT.
However,
the Plan Asset Regulation provides an exception to the look-through rule for equity interests that are “publicly offered securities.”
A “publicly offered security” is a security that is:
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part of a class of securities that is widely held;
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either part of a class of securities that is registered
under section 12(b) or 12(g) of the Exchange Act or sold to a Plan as part of an offering of securities to the public pursuant to
an effective registration statement under the Securities Act, and the class of securities of which this security is a part is registered
under the Exchange Act within 120 days, or longer if allowed by the SEC, after the end of the fiscal year of the issuer during which
this offering of these securities to the public occurred. |
Whether
a security is considered “freely transferable” depends on the facts and circumstances of each case. Under the Plan Asset
Regulation, if the security is part of an offering in which the minimum investment is $10,000 or less, then any restriction on, or prohibition
against, any transfer or assignment of the security for the purposes of preventing a termination or reclassification of the entity for
federal or state tax purposes will not ordinarily prevent the security from being considered freely transferable. Additionally, limitations
or restrictions on the transfer or assignment of a security which are created or imposed by persons other than the issuer of the security
or persons acting for or on behalf of the issuer will ordinarily not prevent the security from being considered freely transferable.
A
class of securities is considered “widely held” if it is a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. A security will not fail to be “widely held” because the number of independent investors
falls below 100 subsequent to the initial public offering as a result of events beyond the issuer’s control.
The
shares of our common stock offered in this prospectus may meet the criteria of the publicly offered securities exception to the look-through
rule. First, the common stock could be considered to be freely transferable, as the minimum investment will be less than $10,000 and
the only restrictions upon its transfer are those generally permitted under the Department of Labor regulations, those required under
federal tax laws to maintain our status as a REIT, resale restrictions under applicable federal securities laws with respect to securities
not purchased pursuant to this prospectus and those owned by our officers, directors and other affiliates, and voluntary restrictions
agreed to by the selling stockholder regarding volume limitations.
Second,
we expect (although we cannot confirm) that our common stock will be held by 100 or more investors, and we expect that at least 100 or
more of these investors will be independent of us and of one another.
Third,
the shares of our common stock will be part of an offering of securities to the public pursuant to an effective registration statement
under the Securities Act and the common stock is registered under the Exchange Act.
In
addition, the Plan Asset Regulation provides exceptions to the look-through rule for equity interests in some types of entities, including
any entity which qualifies as either a “real estate operating company” or a “venture capital operating company.”
We have not endeavored to determine whether we will satisfy the “real estate operating company” or “venture capital
operating company” exception.
Because
of the foregoing, our common stock should not be purchased or held by any person investing “plan assets” of any Plan, unless
such purchase and holding will not constitute a non-exempt prohibited transaction under ERISA and the Code or similar violation of any
applicable Similar Laws.
Representations
The
above discussion is a summary of some of the material considerations under ERISA and Section 4975 of the Code applicable to prospective
investors that are Plans. It is not intended to be a complete discussion of all relevant law nor to be construed as legal advice or a
legal opinion. Prospective investors should consult their own counsel on these matters concerning the impact of ERISA and Section 4975
of the Code or Similar Law, as applicable, and the potential consequences in their specific circumstances of an investment in such shares.
PLAN
OF DISTRIBUTION
Promptly
following the effective date of the registration statement of which this prospectus form is a part, we will distribute the Subscription
Rights, Rights Certificates and copies of this prospectus to the holders of our common stock and July 2021 on the Record Date. Subscription
Rights holders who wish to exercise their Subscription Rights and purchase Units must complete the Subscription Rights Certificate and
return it with payment for the Units to the Subscription Agent at the following address:
By Registered Certified
or Express Mail |
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If
you have any questions, you should contact our Information Agent for the Rights Offering, [ ], toll free at [ ] or by mail at [ ].
Other
than as described in this prospectus, we do not know of any existing agreements between any stockholder, broker, dealer, underwriter
or agent relating to the sale or distribution of the underlying securities.
Dealer-Manager
The
Benchmark Company, LLC will act as dealer-manager for the Rights Offering. In such capacity, the dealer-manager will provide marketing
assistance and financial advice to us in connection with this offering and will solicit the exercise of Subscription Rights and participation
in the Over-Subscription Privilege. The dealer-manager will provide us with updated investor feedback and recommendations on pricing
and structure through to the end of the subscription period. The dealer-manager is not underwriting any of the Subscription Rights or
the shares of our common stock or Warrants being issued in this offering and does not make any recommendation with respect to such Subscription
Rights (including with respect to the exercise or expiration of such Subscription Rights), shares or Warrants, or to otherwise invest
in our company.
In
connection with this Rights Offering, we have agreed to pay the dealer-manager a dealer-manager fee equal to 7.0% of the gross proceeds
received by us from exercises of the Subscription Rights. In addition, if the gross proceeds of the Rights Offering are greater than $10 million but less than $20 million, we will pay the dealer-manager a
cash management fee equal to 1.5% of the gross proceeds of the Rights Offering; and if the gross proceeds of the Rights Offering are
greater than $20.0 million, we will pay the dealer-manager a cash management fee equal to 2% of the gross proceeds of the Rights Offering.
The
dealer-manager will be entitled to the dealer-manager fee and cash management fee with respect to future financings consummated with
investors who the dealer-manager introduced to the Company and with whom the Company has had a conference call or meeting arranged by
the dealer-manager during its engagement for the Rights Offering and such investors consummate a future financing within six months following
the closing of the Rights Offering.
In
addition, The Benchmark Company LLC is acting as placement agent for any unsubscribed Units. For any unsubscribed Units placed by it
during the 45-day placement period following the expiration of the Rights Offering, we have agreed to pay the dealer-manager a placement
fee equal to 7.0% of such sales, in lieu of the dealer-manager fee, together with continuing out-of-pocket expenses and the cash management
fee, with such expenses and fee not to exceed the aggregate amounts that would have been otherwise received by the dealer-manager if
the Rights Offering were to have been fully subscribed.
The
dealer-manager has informed us that it has entered into or intends to enter into Selected Dealer Agreements with other broker-dealers
pursuant to which (i) such other broker-dealers have agreed or will agree to use their commercially reasonable efforts to procure subscriptions
for the Units, [and (ii) the dealer-manager has agreed or will agree to re-allow __% of its dealer-manager fee to each such broker-dealer
whose clients purchase Units in this Rights Offering pursuant to their Subscription Rights.]
We
advanced $25,000 to the dealer-manager as an advance against its anticipated out-of-pocket expenses, or the Advance, upon its engagement
as dealer-manager, and agreed to reimburse the reasonable fees and expenses of the dealer-manager up to $107,500, the full amount of
which shall be the maximum for reimbursement of legal fees (including the Advance). Any portion of the Advance not used for actual out-of-pocket
expenses of the dealer-manager shall be promptly reimbursed to the Company.
The
dealer-manager shall have the right to act as the sole lead or joint-lead investment banker, lead or joint book-runner or lead or joint
placement agent, for every future public and private equity and debt offering, including all equity linked financings during the 12-month
period following completion of the offering, on terms customary to the dealer-manager. The dealer-manager shall also be entitled to an
aggregate additional fee on the same terms as the paragraph above with respect to future financings consummated solely with investors
who have been introduced to the Company by the dealer-manager with whom the Company has had a conference call or meeting arranged by
the dealer-manager, provided that such future financing is consummated within the three month period following the earlier of August
7, 2022, or the closing of the offering.
We
have agreed to indemnify the dealer-manager and its affiliates against, or contribute to losses arising out of, certain liabilities arising
under the Securities Act. The dealer-manager’s participation in this offering is subject to customary conditions contained in the
dealer-manager agreement, including the receipt by the dealer-manager of an opinion of our counsel. The dealer-manager and its affiliates
may provide to us from time to time in the future in the ordinary course of their business certain financial advisory, investment banking
and other services for which they will be entitled to receive fees.
Subject
to certain exceptions, we have agreed not to offer, issue, sell, contract to sell, encumber, grant any option for the sale of or otherwise
dispose of any common stock or other securities convertible into or exercisable or exchangeable for common stock for a period of 90 days
after the expiration of this Rights Offering.
Electronic
Distribution
This
prospectus may be made available in electronic format on websites or via email or through other online services maintained by the dealer-manager.
Other than this prospectus in electronic format, the information on the dealer-manager’s websites and any information contained
in any other websites maintained by the dealer-manager is not part of this prospectus or the registration statement of which this prospectus
forms a part, has not been approved and/or endorsed by us or the dealer-manager, and should not be relied upon by investors.
The
foregoing does not purport to be a complete statement of the terms and conditions of the dealer-manager agreement. A copy of the dealer-manager
agreement is included as an exhibit to the registration statement of which this prospectus forms a part. See “Where You Can Find
More Information.”
Regulation
M Restrictions
The
dealer-manager may be deemed to be an underwriter within the meaning of Section 2(a)(11) of the Securities Act, and any fees received
by it might be deemed to be underwriting discounts or commissions under the Securities Act. As an underwriter, the dealer-manager would
be required to comply with the requirements of the Securities Act and the Exchange Act, including, without limitation, Rule 10b-5 and
Regulation M under the Exchange Act. These rules and regulations may limit the timing of any purchases and sales of securities by the
dealer-manager acting as a principal. Under these rules and regulations, the dealer-manager must not engage in any stabilization activity
in connection with our securities, and must not bid for or purchase any of our securities or attempt to induce any person to purchase
any of our securities, other than as permitted under the Exchange Act.
Price
Stabilization, Short Positions
No
person has been authorized by our company to engage in any form of price stabilization in connection with this Rights Offering.
Management
Purchases
We
expect that one or more of our directors and executive officers may purchase Units in this offering at the Subscription Price, although
none have any commitment to do so. Any such purchases could result in one or more of them beneficially owning a significant interest
in the shares of our common stock.
LEGAL
MATTERS
Certain
legal matters relating to this offering will be passed upon for us by Sichenzia Ross Ference, LLP. Certain matters of Maryland law will
be passed upon for us by Venable LLP, Baltimore, Maryland. Certain legal matters relating to this offering will be passed upon for the
Dealer-Manager by Olshan Frome Wolosky LLP, New York, New York.
EXPERTS
The
consolidated financial statements of Presidio Property Trust, Inc. and Subsidiaries (formerly NetREIT, Inc. and Subsidiaries) as of December
31, 2021 and 2020 and the related financial statement schedule, included elsewhere in this prospectus, have been audited by Baker Tilly,
LLP, (which effective as of November 1, 2020, merged with Squar Milner LLP), independent registered public accounting firm, as stated
in their reports appearing herein. Such financial statements and financial statement schedule have been so included in reliance upon
the reports of such firm given upon their authority as experts in accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We
have filed with the SEC a registration statement on Form S-11, including exhibits, schedules and amendments thereto, under the Securities
Act with respect to the shares of our common stock offered in this prospectus. This prospectus, which constitutes part of the registration
statement, does not contain all of the information set forth in the registration statement. You should refer to the registration statement
and its exhibits and schedules, and amendments filed as a part of the registration statement for additional information. Whenever we
make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete
and you should refer to the exhibits filed as part of the registration statement for copies of the actual contract, agreement or other
document.
You
can read our SEC filings, including the registration statement, over the internet at the SEC’s website at www.sec.gov. We
also make this information available on the investors’ relations section of our website at www.presidiopt.com. Information
on, or accessible through, our website is not part of, and is not incorporated into, this prospectus or the registration statement of
which it forms a part.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
To
the Shareholders and the Board of Directors of Presidio Property Trust, Inc. and Subsidiaries
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Presidio Property Trust, Inc. and Subsidiaries (the Company) as of December
31, 2021 and 2020, the related consolidated statements of operations, equity and cash flows for the years then ended, the related notes
to the consolidated financial statements, and schedule in Item 15 (2), Schedule III – Real Estate and Accumulated Depreciation
and Amortization (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits
we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical
Audit Matters
The
critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated
or required to be communicated to the audit committee and that: (i) relates to accounts or disclosures that are material to the financial
statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters
does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit
matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
REAL
ESTATE ASSETS AND LEASE INTANGIBLES IMPAIRMENT ASSESSMENT
Critical
Audit Matter Description
As
described in Notes 4 and 12, to the financial statements, the Company’s consolidated real estate assets balance (including real
estate properties and lease intangibles) was approximately $138 million at December 31, 2021. Real estate assets and lease intangibles
are tested for impairment at least annually at the individual real estate property level. Management continually monitors events and
changes in circumstances that could indicate that the carrying amounts of its real estate assets may not be recoverable or realized.
When indicators of potential impairment suggest that the carrying value of real estate assets may not be recoverable, management assesses
the recoverability by estimating whether the Company will recover the carrying value of its real estate assets through the undiscounted
future cash flows and the eventual disposition of the investment. In some instances, there may be various potential outcomes for an investment
and its potential future cash flows. In these instances, the undiscounted future cash flows used to assess recoverability are based on
several assumptions and are probability- weighted based on management’s best estimates as of the date of evaluation. These assumptions
include, among others, cash flow projections, discount rates, market capitalization rates, and recent sales data for comparable properties.
The assumptions are generally based on management’s experience and assessment of market participants in its local real estate markets,
and the effects of current market conditions, which are subject to economic and market uncertainties. As disclosed by management, changes
in these assumptions could have a significant impact on either the cash flows or fair value of the real estate assets, the amount of
any impairment charge, or both.
We
identified the real estate asset and lease intangibles impairment assessment of the Company as a critical audit matter. The Company experienced
fluctuations in tenant occupancy and related cash flows from the real estate properties based on rental demand, completion of tenant
improvements, and other economic factors. In turn, auditing management’s judgments regarding forecasts of future revenue and cash
flows, and the resulting fair value of real estate assets compared to their carrying value involved a high degree of judgement and subjectivity.
How
We Addressed the Matter in Our Audit
The
primary procedures we performed to address this critical audit matter included:
|
● |
Testing
management’s process for determining the fair value of real estate assets including testing the completeness and accuracy of
underlying data used in management’s model. |
|
|
|
|
● |
Evaluating
the reasonableness of management’s fair value estimates which are based on Argus models that include rental revenues per executed
lease agreements, occupancy, and expected renewal rates, and on broker opinions of value which utilize historical listing and sale
prices for comparable real estate properties. |
|
|
|
|
● |
Independently
comparing current fair values to trends in fair value of each property over time and for consistency with evidence obtained in other
areas of the audit. |
|
|
|
|
● |
Evaluating
whether the assumptions used were reasonable by considering the past performance of real estate properties, management’s assumptions
about market demand and market leasing rates and lease terms, and whether such assumptions were consistent with evidence obtained
in other areas of the audit. |
|
|
|
|
● |
Obtaining
marketing materials or letters of intent for specific real estate properties deemed by management to qualify for held-for-sale treatment
and comparing estimated sales prices to current property book values. |
/s/
Baker Tilly US, LLP
We
have served as the Company’s auditor since 2009.
Irvine,
California
March
29, 2022
Presidio
Property Trust, Inc. and Subsidiaries
Consolidated
Balance Sheets
| |
December 31, | | |
December 31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
ASSETS | |
| | | |
| | |
Real estate assets and lease intangibles: | |
| | | |
| | |
Land | |
$ | 21,136,379 | | |
$ | 18,827,000 | |
Buildings and improvements | |
| 119,224,375 | | |
| 115,409,423 | |
Tenant improvements | |
| 12,752,518 | | |
| 11,960,018 | |
Lease intangibles | |
| 4,110,139 | | |
| 4,110,139 | |
Real estate assets and lease intangibles held for investment, cost | |
| 157,223,411 | | |
| 150,306,580 | |
Accumulated depreciation and amortization | |
| (30,589,969 | ) | |
| (26,551,789 | ) |
Real estate assets and lease intangibles held for investment, net | |
| 126,633,442 | | |
| 123,754,791 | |
Real estate assets held for sale, net | |
| 11,431,494 | | |
| 42,499,176 | |
Real estate assets, net | |
| 138,064,936 | | |
| 166,253,967 | |
Cash, cash equivalents and restricted cash | |
| 14,702,089 | | |
| 11,540,917 | |
Deferred leasing costs, net | |
| 1,348,234 | | |
| 1,927,951 | |
Goodwill | |
| 2,423,000 | | |
| 2,423,000 | |
Other assets, net | |
| 4,658,504 | | |
| 3,422,781 | |
TOTAL ASSETS | |
$ | 161,196,763 | | |
$ | 185,568,616 | |
LIABILITIES AND EQUITY | |
| | | |
| | |
Liabilities: | |
| | | |
| | |
Mortgage notes payable, net | |
$ | 87,324,319 | | |
$ | 94,664,266 | |
Mortgage notes payable related to properties held for sale, net | |
| 1,535,513 | | |
| 25,365,430 | |
Mortgage notes payable, total net | |
| 88,859,832 | | |
| 120,029,696 | |
Note payable, net | |
| — | | |
| 7,500,086 | |
Accounts payable and accrued liabilities | |
| 4,585,036 | | |
| 5,126,199 | |
Accrued real estate taxes | |
| 1,940,913 | | |
| 2,548,686 | |
Dividends payable preferred stock | |
| 179,685 | | |
| — | |
Lease liability, net | |
| 75,547 | | |
| 102,323 | |
Below-market leases, net | |
| 73,130 | | |
| 139,045 | |
Total liabilities | |
| 95,714,143 | | |
| 135,446,035 | |
Commitments and contingencies (Note 9) | |
| | | |
| | |
Equity: | |
| | | |
| | |
Series D Preferred Stock, $0.01 par value per share; 1,000,000 shares authorized; 920,000 and 0 shares issued and outstanding (liquidation preference $25.00 per share) as of December 31, 2021 and December 31, 2020, respectively | |
| 9,200 | | |
| — | |
Series A Common Stock, $0.01 par value per share, shares authorized: 100,000,000; 11,599,720 shares and 9,508,363 shares were issued and outstanding at December 31, 2021 and December 31, 2020, respectively | |
| 115,997 | | |
| 95,038 | |
Additional paid-in capital | |
| 186,492,012 | | |
| 156,463,146 | |
Dividends and accumulated losses | |
| (130,947,434 | ) | |
| (121,674,505 | ) |
Total stockholders’ equity before noncontrolling interest | |
| 55,669,775 | | |
| 34,883,679 | |
Noncontrolling interest | |
| 9,812,845 | | |
| 15,238,902 | |
Total equity | |
| 65,482,620 | | |
| 50,122,581 | |
TOTAL LIABILITIES AND EQUITY | |
$ | 161,196,763 | | |
$ | 185,568,616 | |
See
Notes to Consolidated Financial Statements
Presidio
Property Trust, Inc. and Subsidiaries
Consolidated
Statements of Operations
| |
For the Year Ended December 31, | |
| |
2021 | | |
2020 | |
Revenues: | |
| | |
| |
Rental income | |
$ | 18,420,257 | | |
$ | 23,444,119 | |
Fees and other income | |
| 810,852 | | |
| 907,673 | |
Total revenue | |
| 19,231,109 | | |
| 24,351,792 | |
Costs and expenses: | |
| | | |
| | |
Rental operating costs | |
| 6,183,189 | | |
| 8,818,283 | |
General and administrative | |
| 6,225,510 | | |
| 5,751,754 | |
Depreciation and amortization | |
| 5,397,498 | | |
| 6,274,321 | |
Impairment of real estate assets | |
| 608,000 | | |
| 1,730,851 | |
Total costs and expenses | |
| 18,414,197 | | |
| 22,575,209 | |
Other income (expense): | |
| | | |
| | |
Interest expense-mortgage notes | |
| (4,542,712 | ) | |
| (6,097,834 | ) |
Interest expense - note payable | |
| (279,373 | ) | |
| (2,715,233 | ) |
Interest and other income (expense), net | |
| (3,417 | ) | |
| (20,636 | ) |
Gain on sales of real estate, net | |
| 2,487,528 | | |
| 1,245,460 | |
Gain on extinguishment of government debt | |
| 10,000 | | |
| 451,785 | |
Deferred offering costs | |
| — | | |
| (530,639 | ) |
Income tax credit (expense) | |
| 47,620 | | |
| (370,884 | ) |
Total other income (expense), net | |
| (2,280,354 | ) | |
| (8,037,981 | ) |
Net loss | |
| (1,463,442 | ) | |
| (6,261,398 | ) |
Less: Income attributable to noncontrolling interests | |
| (2,162,140 | ) | |
| (1,412,507 | ) |
Net loss attributable to Presidio Property Trust, Inc. stockholders | |
$ | (3,625,582 | ) | |
$ | (7,673,905 | ) |
Less: Preferred Stock Series D dividends | |
| (1,173,948 | ) | |
| — | |
Net loss attributable to Presidio Property Trust, Inc. common stockholders | |
$ | (4,799,530 | ) | |
$ | (7,673,905 | ) |
Net loss per share attributable to Presidio Property Trust, Inc. common stockholders: | |
| | | |
| | |
Basic & Diluted | |
$ | (0.46 | ) | |
$ | (0.85 | ) |
Weighted average number of common shares outstanding - basic and diluted | |
| 10,340,975 | | |
| 9,023,914 | |
See
Notes to Consolidated Financial Statements
Presidio
Property Trust, Inc. and Subsidiaries
Consolidated
Statements of Equity
| |
Preferred
Stock Series D | | |
Common
Stock | | |
Additional Paid-in | | |
Dividends and Accumulated | | |
Total Stockholders’ | | |
Non-controlling | | |
Total | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Losses | | |
Equity | | |
Interests | | |
Equity | |
Balance, December 31, 2019 | |
| — | | |
$ | — | | |
| 8,881,842 | | |
$ | 88,818 | | |
$ | 152,129,120 | | |
$ | (113,037,144 | ) | |
$ | 39,180,794 | | |
$ | 17,440,394 | | |
$ | 56,621,188 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (7,673,905 | ) | |
| (7,673,905 | ) | |
| 1,412,507 | | |
| (6,261,398 | ) |
Shares issued, initial public offering | |
| — | | |
| — | | |
| 500,000 | | |
| 5,000 | | |
| 1,999,984 | | |
| — | | |
| 2,004,984 | | |
| — | | |
| 2,004,984 | |
Dividends paid to Series A Common Stockholders | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (963,456 | ) | |
| (963,456 | ) | |
| — | | |
| (963,456 | ) |
Distributions in excess of contributions received | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2,366,009 | ) | |
| (2,366,009 | ) |
Repurchase of common stock | |
| — | | |
| — | | |
| (3,000 | ) | |
| (30 | ) | |
| (17,970 | ) | |
| — | | |
| (18,000 | ) | |
| — | | |
| (18,000 | ) |
Share reconciliation adjustment | |
| — | | |
| — | | |
| (16,080 | ) | |
| (162 | ) | |
| 162 | | |
| — | | |
| — | | |
| — | | |
| — | |
Issuance of stock for Limited Partnership interests | |
| — | | |
| — | | |
| 59,274 | | |
| 594 | | |
| 1,247,396 | | |
| — | | |
| 1,247,990 | | |
| (1,247,990 | ) | |
| — | |
Vesting of restricted Series A Common Stock | |
| — | | |
| — | | |
| 86,327 | | |
| 818 | | |
| 1,104,454 | | |
| — | | |
| 1,105,272 | | |
| — | | |
| 1,105,272 | |
Balance, December 31, 2020 | |
| — | | |
| — | | |
| 9,508,363 | | |
| 95,038 | | |
| 156,463,146 | | |
| (121,674,505 | ) | |
| 34,883,679 | | |
| 15,238,902 | | |
| 50,122,581 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (3,625,582 | ) | |
| (3,625,582 | ) | |
| 2,162,140 | | |
| (1,463,442 | ) |
Dividends paid to Series A Common Stockholders | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (4,473,399 | ) | |
| (4,473,399 | ) | |
| — | | |
| (4,473,399 | ) |
Dividends to Series D Preferred Stockholders | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,173,948 | ) | |
| (1,173,948 | ) | |
| — | | |
| (1,173,948 | ) |
Issuance of Common Stock, net of issuance costs, including warrants exercised
with offering * | |
| — | | |
| — | | |
| 2,000,000 | | |
| 20,000 | | |
| 8,851,879 | | |
| — | | |
| 8,871,879 | | |
| — | | |
| 8,871,879 | |
Issuance of Series D Preferred Stock, net of issuance costs | |
| 920,000 | | |
| 9,200 | | |
| — | | |
| — | | |
| 20,480,603 | | |
| — | | |
| 20,489,803 | | |
| — | | |
| 20,489,803 | |
Distributions in excess of contributions received | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (7,588,197 | ) | |
| (7,588,197 | ) |
Repurchase of Common Stock, at cost | |
| — | | |
| — | | |
| (29,721 | ) | |
| (252 | ) | |
| (110,379 | ) | |
| — | | |
| (110,631 | ) | |
| — | | |
| (110,631 | ) |
Vesting of restricted Series A Common Stock | |
| — | | |
| — | | |
| 121,078 | | |
| 1,211 | | |
| 806,763 | | |
| — | | |
| 807,974 | | |
| — | | |
| 807,974 | |
Balance, December 31, 2021 | |
| 920,000 | | |
$ | 9,200 | | |
| 11,599,720 | | |
$ | 115,997 | | |
$ | 186,492,012 | | |
$ | (130,947,434 | ) | |
$ | 55,669,775 | | |
$ | 9,812,845 | | |
$ | 65,482,620 | |
*
See Additional Offerings & Warrants in Note 1. ORGANIZATION AND BASIS OF PRESENTATION
See
Notes to Consolidated Financial Statements.
Presidio
Property Trust, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
| |
For the Year Ended December 31, | |
| |
2021 | | |
2020 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (1,463,442 | ) | |
$ | (6,261,398 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 5,397,498 | | |
| 6,274,321 | |
Stock compensation | |
| 1,614,228 | | |
| 1,105,272 | |
Bad debt expense | |
| 164,623 | | |
| 77,898 | |
Gain on sale of real estate assets, net | |
| (2,487,528 | ) | |
| (1,245,460 | ) |
Gain on extinguishment of government debt | |
| (10,000 | ) | |
| (451,785 | ) |
Net change in fair value of marketable securities | |
| (39,429 | ) | |
| — | |
Impairment of real estate assets | |
| 608,000 | | |
| 1,730,851 | |
Accretion of original issue discount | |
| — | | |
| 1,013,405 | |
Amortization of financing costs | |
| 479,853 | | |
| 1,287,430 | |
Amortization of above-market leases | |
| 42,064 | | |
| 50,682 | |
Amortization of below-market leases | |
| (60,203 | ) | |
| (170,887 | ) |
Straight-line rent adjustment | |
| (231,577 | ) | |
| 108,998 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Other assets | |
| 190,354 | | |
| 1,957,641 | |
Accounts payable and accrued liabilities | |
| (1,221,725 | ) | |
| (1,344,636 | ) |
Accrued real estate taxes | |
| (607,773 | ) | |
| (438,915 | ) |
Net cash provided by operating activities | |
| 2,374,943 | | |
| 3,693,417 | |
Cash flows from investing activities: | |
| | | |
| | |
Real estate acquisitions | |
| (22,224,826 | ) | |
| (10,161,613 | ) |
Additions to buildings and tenant improvements | |
| (1,597,186 | ) | |
| (2,834,373 | ) |
Investment in marketable securities | |
| (3,819,882 | ) | |
| — | |
Proceeds from sale of marketable securities | |
| 2,380,476 | | |
| — | |
Additions to deferred leasing costs | |
| (117,062 | ) | |
| (175,828 | ) |
Proceeds from sales of real estate, net | |
| 49,583,445 | | |
| 40,849,654 | |
Net cash provided by investing activities | |
| 24,204,965 | | |
| 27,677,840 | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from mortgage notes payable, net of issuance costs | |
| 11,703,440 | | |
| 14,152,838 | |
Proceeds from government debt relief | |
| — | | |
| 451,785 | |
Repayment of mortgage notes payable | |
| (43,069,312 | ) | |
| (36,808,331 | ) |
Repayment of note payable | |
| (7,675,598 | ) | |
| (6,324,401 | ) |
Payment of extension costs, note payable | |
| — | | |
| (351,025 | ) |
Payment of deferred offering costs | |
| (572,458 | ) | |
| (45,016 | ) |
Distributions to noncontrolling interests, net | |
| (7,588,197 | ) | |
| (2,366,009 | ) |
Issuance of stock for Initial Public Offering, net of underwriters fees | |
| — | | |
| 2,050,000 | |
Issuance of Common Stock Series A and warrants, net of offering costs | |
| 8,871,879 | | |
| — | |
Issuance of Preferred Stock Series D, net of offering costs | |
| 20,489,803 | | |
| — | |
Repurchase of common stock | |
| (110,631 | ) | |
| (18,000 | ) |
Dividends paid to Series D preferred stockholders | |
| (994,263 | ) | |
| — | |
Dividends paid to Series A common stockholders | |
| (4,473,399 | ) | |
| (963,456 | ) |
Net cash used in financing activities | |
| (23,418,736 | ) | |
| (30,221,615 | ) |
Net increase in cash equivalents and restricted cash | |
| 3,161,172 | | |
| 1,149,642 | |
Cash, cash equivalents and restricted cash - beginning of period | |
| 11,540,917 | | |
| 10,391,275 | |
Cash, cash equivalents and restricted cash - end of period | |
$ | 14,702,089 | | |
$ | 11,540,917 | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Interest paid-mortgage notes payable | |
$ | 4,320,174 | | |
$ | 5,892,025 | |
Interest paid-notes payable | |
$ | 103,861 | | |
$ | 778,414 | |
Unpaid deferred financing costs | |
$ | 15,449 | | |
$ | 83,659 | |
Non-cash financing activities: | |
| | | |
| | |
Issuance of stock for limited partnership interests | |
$ | — | | |
$ | 1,247,990 | |
Dividends payable - Preferred Stock Series D | |
$ | 179,685 | | |
| — | |
See
Notes to Consolidated Financial Statements
Presidio
Property Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
1.
ORGANIZATION AND BASIS OF PRESENTATION
Organization.
Presidio Property Trust, Inc. (“we”, “our”, “us” or the “Company”) is an internally-managed
real estate investment trust (“REIT”), with holdings in office, industrial, retail and model home properties. We were incorporated
in the State of California on September 28, 1999, and in August 2010, we reincorporated as a Maryland corporation. In October 2017, we
changed our name from “NetREIT, Inc.” to “Presidio Property Trust, Inc.” Through Presidio Property Trust, Inc.,
its subsidiaries, and its partnerships, we own 13 commercial properties in fee interest, two of which we own as a partial interest in
various affiliates, in which we serve as general partner, member and/or manager.
The
Company or one of its affiliates operate the following partnerships during the periods covered by these consolidated financial statements:
|
● |
The
Company is the sole general partner and limited partner in two limited partnerships (NetREIT Palm Self-Storage LP and NetREIT Casa
Grande LP), all with ownership in real estate income producing properties. The Company refers to these entities collectively, as
the “NetREIT Partnerships”. |
|
|
|
|
● |
The
Company is the general partner and/or limited partner in six limited partnerships that purchase model homes and lease them back to
homebuilders (Dubose Model Homes Investors #202, LP, Dubose Model Homes Investors #203, LP, Dubose Model Homes Investors #204, LP,
Dubose Model Homes Investors #205, LP, Dubose Model Homes Investors #206, LP and NetREIT Dubose Model Home REIT, LP). The Company
refers to these entities collectively, as the “Model Home Partnerships”. |
The
Company has determined that the limited partnerships in which it owns less than 100%, should be included in the Company’s consolidated
financial statements as the Company directs their activities and holds a variable interest in these limited partnerships for which the
Company is the primary beneficiary.
Unit-based
information used herein (such as references to square footage or property occupancy rates) is unaudited.
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 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.
We,
together with one of our entities, have elected to treat our subsidiaries as a taxable REIT subsidiary (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. The Company has concluded that there
are no significant uncertain tax positions requiring recognition in its financial statements. Neither the Company nor its subsidiaries
have been assessed any significant interest or penalties for tax positions by any tax jurisdictions.
Reverse
Stock Split. On July 29, 2020, we amended our charter to effect a one-for-two reverse stock split of every outstanding share
of our Series A Common Stock. The financial statements and accompanying footnotes have been retroactively restated to reflect the reverse
stock split.
Initial
Public Offering. On October 6, 2020, we completed an initial public offering (“IPO”), selling 500,000 shares of Series
A Common Stock at $5.00 per share. Proceeds from our IPO were $2.0 million after deducting approximately $0.5 million in underwriting
discounts, commissions and fees and before giving effect to $0.5 million in other expenses relating to the IPO. Incremental costs of
$0.5 million that were directly attributable to issuing new shares were deducted from equity in the Consolidated Statements of Equity,
while costs that were not directly related to issuing new shares of $0.5 million were expensed in deferred offering costs in the Consolidated
Statements of Operations. We utilized the net proceeds of this offering for general corporate and working capital purposes.
Additional
Offerings & Warrants. Our Form S-3 Registration Statement was declared effective by the SEC on April 27, 2021. Under this
registration statement, we may offer and sell from time to time, in one or more series, subject to limitation that may apply (such as
under Rule 415 of the Securities Act of 1933) various securities of the Company for total gross proceeds of up to $200,000,000. On July
12, 2021, we entered into a securities purchase agreement with a single U.S. institutional investor for the purchase and sale of 1,000,000
shares of our Series A Common Stock (“Common Stock”), warrants (“Common Stock Warrants”) to purchase up to 2,000,000
shares of Series A Common Stock and pre-funded warrants (“Pre-Funded Warrants”) to purchase up to 1,000,000 shares of Series
A common stock. The Common Stock, Pre-Funded Warrants and Common Stock issuable upon exercise of the Pre-Funded Warrants were issued
pursuant to a prospectus supplement to the Form S-3 Registration Statement, with the Common Stock Warrants issued in a concurrent private
placement. Each share of Common Stock and accompanying Common Stock Warrants were sold together at a combined offering price of $5.00,
and each share of Common Stock and accompanying Pre-Funded Warrants were sold together at a combined offering price of $4.99. The Pre-Funded
Warrants were exercised in full during August 2021 at a nominal exercise price of $0.01 per share. The Common Stock Warrants have an
exercise price of $5.50 per share, were exercisable upon issuance, and will expire five years from the date of issuance.
In
connection with this additional offering, we agreed to issue the Placement Agent Warrants to purchase up to 80,000 shares (the “Placement
Agent Warrants”) of Series A Common Stock, representing 4.0% of the Series A Common Stock and shares of Series A Common Stock issuable
upon exercise of the Pre-Funded Warrants. The Placement Agent Warrants were issued in August 2021, post exercise of the Pre-Funded Warrants
with an exercise price of $6.25 and will expire five years from the date of issuance. The Company registered for resale Series A Common
Stock issuable upon exercise of Common Stock Warrants and Placement Agent Warrants issued in the July 2021 offering pursuant to a registration
statement on Form S-11 that was declared effective by the SEC on September 14, 2021.
The
Company evaluated the accounting guidance in ASC 480 and ASC 815 regarding the classification of the Pre-Funded Warrant, Common Stock
Warrants, and Placement Agent Warrants as equity or a liability and determined that they should be classified as permanent equity. As
of December 31, 2021, none of the Common Stock Warrants and Placement Agent Warrants have been exercised.
Preferred
Stock Series D. On June 15, 2021, the Company completed its secondary offering of 800,000 shares of our 9.375% Series D Cumulative
Redeemable Perpetual Preferred Stock (“Series D Preferred Stock”) for cash consideration of $25.00 per share to a syndicate
of underwriters led by The Benchmark Company, LLC, as representative, resulting in approximately $18.1 million in net proceeds, after
deducting the underwriting discounts and commissions and the offering expenses paid by the Company. The Company granted the underwriters
a 45-day option to purchase up to an additional 120,000 shares of Series D Preferred Stock to cover over-allotments, which they exercised
on June 17, 2021, resulting in approximately $2.7 million in net proceeds, after deducting the underwriting discounts and commissions
and the offering expenses paid by the Company. In total, the Company issued 920,000 shares of Series D Preferred Stock with net proceeds
of approximately $20.5 million, after deducting the underwriting discounts and commissions and the offering expenses paid by the Company
and deferred offering costs. The Company intends to use these proceeds for general corporate and working capital purposes and to potentially
acquire additional properties.
Repaid
Note. On September 17, 2019, the Company issued a Promissory Note (the “Polar Note”) pursuant to which Polar Multi-Strategy
Master Fund (“Polar”), provided a loan in the principal amount of $14.0 million to the Company. The Polar Note bore interest
at a fixed rate of 8% per annum and required monthly interest-only payments. On September 1, 2020, we extended the maturity of the Polar
Note from October 1, 2020 to March 31, 2021, at which time the entire outstanding principal balance of $8.8 million and accrued and unpaid
interest was to be due and payable. On September 30, 2020, we paid a renewal fee of 4% on the unpaid
principal balance of the Polar Note. The Company used the proceeds of the Polar Note to redeem all the outstanding shares of Series B
Preferred Stock. As of December 31, 2020, the outstanding principal balance of the Polar Note was approximately $7.7 million. During
the first quarter of 2021, prior to maturity, the Polar Note was paid in full primarily from available cash on hand and proceeds of property
sales.
Liquidity.
The Company’s 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. 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. The Company seeks investments that are income producing and help achieve
long-term gains in order to pay dividends to our stockholders and may we 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.
We
have $4.4 million of
mortgage notes payable maturing in 2022 related to the model home properties and $1.4 million of
mortgage notes payable maturing in 2022 related to the commercial properties. Management expects certain model homes and commercial properties
can be sold, and that the underlying mortgage notes will be paid off with sales proceeds while other mortgage notes can be refinanced,
as the Company has historically been able to do in the past. Additional principal payments will be made with cash flows from ongoing
operations.
As
the Company continues its operations, it may re-finance or seek additional financing; however, there can be no assurance that any such
re-financing or additional financing 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 and/or certain discretionary
spending, which could have a material adverse effect on the Company’s ability to achieve its intended business objectives. Management
believes that the combination of working capital on hand and the ability to refinance commercial and model home mortgages will fund operations
through at least the next twelve months from the date of the issuance of these audited financial statements.
Segments.
The Company acquires and operates income producing
properties in three business segments including Office/Industrial Properties, Model Home Properties and Retail Properties. See Note 14.
“Segments”.
Customer
Concentration. Concentration of credit risk with respect to tenant receivables is limited due to the large number of tenants
comprising the Company’s rental revenue. We had one tenant account for 8.0% of total rental income for the year ended December
31, 2021 and one tenant accounted for 6.2% of total rental income for the year ended December 31, 2020.
2.
SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation. The accompanying financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) as contained within the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”).
Principles
of Consolidation. The accompanying consolidated financial statements include the accounts of Presidio Property Trust and its
subsidiaries, NetREIT Advisors, LLC and Dubose Advisors LLC (collectively, the “Advisors”), and NetREIT Dubose Model Home
REIT, Inc. The consolidated financial statements also include the results of the NetREIT Partnerships, the Model Home Partnerships. As
used herein, references to the “Company” include references to Presidio Property Trust, its subsidiaries, and the partnerships.
All significant intercompany balances and transactions have been eliminated in consolidation.
The
Company classifies the noncontrolling interests in the NetREIT Partnerships as part of consolidated net income (loss) in 2021 and 2020
and has included the accumulated amount of noncontrolling interests as part of equity since inception in February 2010. If a change in
ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interest will be remeasured,
with the gain or loss reported in the statement of operations. Management has evaluated the noncontrolling interests and determined that
they do not contain any redemption features.
Use
of Estimates. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of
the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include
the allocation of purchase price paid for property acquisitions between land, building and intangible assets acquired including their
useful lives; valuation of long-lived assets, and the allowance for doubtful accounts, which is based on an evaluation of the tenants’
ability to pay. Actual results may differ from those estimates.
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). The Company capitalizes any expenditure
that replaces, improves, or otherwise extends the economic life of an asset, while ordinary repairs and maintenance are expensed as incurred.
The Company allocates the purchase price of acquired properties between the acquired tangible assets and liabilities (consisting of land,
building, tenant improvements, 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.
The
Company allocates 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.
The Company also considers 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.
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 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 amounts allocated to above or below-market leases are amortized on a straight-line basis as an increase or reduction of rental income
over the remaining non-cancelable term of the respective leases. Amortization of above and below-market rents resulted in a net increase
in rental income of approximately $18,000 and $120,000 for the years ended December
31, 2021 and 2020, respectively.
The
value of in-place leases and unamortized lease origination costs are amortized to expenses over the remaining term of the respective
leases, which range from less than a year to ten years. The amount allocated to acquired 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 the Company would have paid to
a third-party to secure a new tenant reduced by the expired term of the respective lease. The amount allocated to tenant relationships
is the benefit resulting from the likelihood of a tenant renewing its lease. Amortization expense related to these assets was approximately
$0.3 million and $0.4 million for years ended December
31, 2021 and 2020, respectively.
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.
Impairments
of Real Estate Assets. We regularly review for impairment on a property-by-property basis. Impairment is recognized on a property
held for use when the expected undiscounted cash flows for a property are less than the carrying amount at which time the property is
written-down to fair value. The calculation of both discounted and undiscounted cash flows requires management to make estimates of future
cash flows including but not limited to revenues, operating expenses, required maintenance and development expenditures, market conditions,
demand for space by tenants and rental rates over long periods. Since our properties typically have a long life, the assumptions used
to estimate the future recoverability of carrying value requires significant management judgment. Actual results could be significantly
different from the estimates. These estimates have a direct impact on net income because recording an impairment charge results in a
negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions
regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods.
Properties
held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell. Although our strategy
is to hold our properties over the long-term, if our strategy changes or market conditions otherwise dictate an earlier sale date, an
impairment loss may be recognized to reduce the property to fair value and such loss could be material.
During
the year ended December 31, 2020,
the Company determined that an impairment existed in two of its properties (Waterman Plaza and Highland Court) and, as a result, recorded
a non-cash asset impairment charge of approximately $1.3 million and $0.4 million, respectively. During the fourth quarter of 2020, the
Company recorded its Highland Court property (“Highland Court”) as held for sale and subsequently entered into a purchase
and sale agreement (“PSA”) with an unrelated third-party. Highland Court had a book value of approximately $10.5 million
prior to entering into the PSA. The final selling price as agreed upon in the PSA was approximately $10.2 million. As such, the Company
recorded a $0.3 million non-cash impairment in the accompanying condensed consolidated statement of operations at March 31, 2021. The
sale was completed in May 2021. During the three months ended December 31, 2021, the Company recorded an impairment of 300 N.P. totaling
approximately $0.3 million in connection with an updated appraisal.
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. Amortization expense of intangible assets that are not deemed to have an indefinite useful life was approximately
$0.2 million, for each of the years ended December 31, 2021 and 2020 and is included in depreciation and amortization in the accompanying
consolidated statements of operation.
The
Company is required to perform a 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. Based on the review, no impairment was deemed to exist at December 31, 2021 and 2020.
Depreciation
and Amortization. The Company records depreciation and amortization expense using the straight-line method over the useful lives
of the respective assets. The costs 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. Depreciation and amortization expense for the years ended December 31, 2021 and 2020 was approximately $5.4 million
and $6.3 million, respectively, and is included in depreciation and amortization in the accompanying consolidated statements of operations.
Cash,
Cash Equivalents and Restricted Cash. The Company considers all short-term, highly liquid investments that are both readily convertible
to cash and have an original maturity of three months or less at the date of purchase to be cash equivalents. Items classified as cash
equivalents include money market funds. Cash balances in individual banks may exceed the federally insured limit of $250,000 by the Federal
Deposit Insurance Corporation (the “FDIC”). No losses have been experienced related to such accounts. At December 31, 2021,
the Company had approximately $7.3 million in deposits in financial institutions that exceeded the federally insurable limits. Restricted
cash consists of funds held in escrow for Company lenders for properties held as collateral by the lenders. The funds in escrow are for
payment of property taxes, insurance, leasing costs and capital expenditures. As of December 31, 2021, the Company has approximately
$4.7 million of restricted cash.
Accounts
Receivables. The Company periodically evaluates the collectability of amounts due from
tenants and maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required
payments under lease agreements. In addition, the Company maintains an allowance for deferred rent receivable that arises from straight
lining of rents. The Company exercises judgment in establishing these allowances and considers payment history and current credit status
of its tenants in developing these estimates. As of December 31, 2021 and 2020,
the balance of allowance for possible uncollectable tenant receivables included in other assets, net in the accompanying consolidated
balance sheets was approximately $70,000 and $70,000, respectively.
Deferred
Leasing Costs. Costs incurred in connection with successful property leases are capitalized as deferred leasing costs and amortized
to leasing commission expense on a straight-line basis over the terms of the related leases which generally range from one to five years.
Deferred leasing costs consist of third-party leasing commissions. Management re-evaluates the remaining useful lives of leasing
costs as the creditworthiness of the tenants and economic and market conditions change. If management determines the estimated remaining
life of the respective lease has changed, the amortization period is adjusted. At December 31, 2021 and 2020, the Company had net deferred
leasing costs of approximately $1.4 million and $1.9 million, respectively. Total amortization expense for the years ended December 31,
2021 and 2020 was approximately $0.3 million and $0.4 million, respectively.
Deferred
Financing Costs. Costs incurred, including legal fees, origination fees, and administrative fees, in connection with debt financing
are capitalized as deferred financing costs, are amortized using the straight line method, which approximates the effective interest
method, over the contractual term of the respective loans and recorded as an offset to the carrying value of the debt. At December
31, 2021 and 2020, unamortized deferred financing
costs related to mortgage notes payable were approximately $0 and $0.2 million. For the years ended December 31, 2021 and
2020, total amortization expense related to the mortgage notes payable deferred financing
costs was approximately $0.2 million and $0.9 million, respectively. Amortization of deferred financing costs are included in interest
expense in the accompanying consolidated statements of operations.
Deferred
Offering Costs. Deferred offering costs represent legal, accounting and other direct costs related to our offerings. As of December
31, 2021, we have incurred an aggregate of $0.1 million in direct costs related to our offering
of common and preferred stock in connection with the sponsorship, through our wholly-owned subsidiary Murphy Canyon Acquisition
Sponsor, LLC (the “Sponsor”), of a special purpose acquisition company (“SPAC”) initial public offering. These
costs were deferred and recorded as a long-term asset at December 31, 2021. As of
December 31, 2020, we had incurred an aggregate of $0.1 million in direct costs related to our offering of common and preferred stock
in connection with the S-3 filed on December 29, 2020. These costs were deferred and recorded as a long-term asset at December 31, 2020.
Approximately $0.5 million in previously deferred costs were expensed in our Consolidated Statement of Operations upon effectiveness
of our IPO in October 2020.
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. As of December
31, 2021, we have estimated approximately $18.0 million of Federal net operating loss (NOLs) carryforwards
to offset potential future federal tax obligations. We may not generate sufficient taxable income in future periods to be able to realize
fully the tax benefits of our NOL carry-forwards.
We,
together with our subsidiary, NetREIT Dubose, have elected to treat such subsidiary as taxable REIT subsidiary (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.
The
Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. Neither
the Company nor its subsidiaries have been assessed any significant interest or penalties for tax positions by any major tax jurisdictions.
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. Cash equivalents, mortgage notes receivable, tenant receivable and payables and accrued liabilities all approximate fair
value due to their short-term nature. During the year ended December 31, 2021, the Company measured the fair value of two of its real
estate properties on a nonrecurring basis using Level 3 inputs. The Company estimated the fair value for the impaired real estate asset
held for investment based on an estimated sales price, less estimated costs to sell. Management believes that the recorded and fair values
of notes payable are approximately the carrying value as of December 31, 2021 and 2020.
When
available, we utilize quoted market prices from independent third-party sources to determine fair value and classify such items in Level
1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding
quoted market price, observable inputs might not be relevant and could require us to make a significant adjustment to derive a fair value
measurement. Additionally, in an inactive market, a market price quoted from an independent third-party may rely more on models with
inputs based on information available only to that independent third-party. When we determine the market for a financial instrument owned
by us to be illiquid or when market transactions for similar instruments do not appear orderly, we use several valuation sources (including
internal valuations, discounted cash flow analysis and quoted market prices) and establish a fair value by assigning weights to the various
valuation sources. As of December 31, 2021 and 2020,our marketable securities presented on the balance sheet were measured at fair value
using Level 1 market prices and totaled approximately $1.5 million (cost basis of approximately $1.6 million) and $0.1 million (cost
basis of approximately $0.1 million), respectively. There were no financial liabilities measured at fair value as of December 31, 2021
and 2020.
Additionally,
when determining the fair value of a liability in circumstances in which a quoted price in an active market for an identical liability
is not available, we measure fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded
as an asset or quoted prices for similar liabilities when traded as assets or (ii) another valuation technique that is consistent with
the principles of fair value measurement, such as the income approach or the market approach. Changes in assumptions or estimation methodologies
can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.
Sales
of Real Estate Assets. Effective January 1, 2018, we adopted the guidance of ASC 610-20, Other Income - Gains and Losses from
the Derecognition of Nonfinancial Assets (“ASC 610-20”), which applies to sales or transfers to noncustomers of nonfinancial
assets or in substance nonfinancial assets that do not meet the definition of a business. Generally, our sales of real estate would be
considered a sale of a nonfinancial asset as defined by ASC 610-20.
ASC
610-20 refers to the revenue recognition principles under ASU No. 2014-9. Under 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.
Revenue
Recognition and Accounts Receivables. 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.
Income
(Loss) per Common Share. Basic income (loss) per common share (Basic EPS) is computed by dividing net income (loss) available
to common shareholders (Numerator) by the weighted average number of common shares outstanding (Denominator) during the period. Diluted
loss per common share (Diluted EPS) is similar to the computation of Basic EPS except that the
Denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential
common shares had been issued. In addition, in computing the dilutive effect of convertible securities, the Numerator is adjusted to
add back the after-tax amount of interest recognized in the period associated with any convertible debt. The computation of Diluted EPS
does not assume exercise or conversion of securities that would have an anti-dilutive effect on net earnings per share. For the years
ended December 31, 2021 and 2020, the basic
and diluted net loss per share are equivalent at $ (0.46) and $ (0.85) per
share because the Company had incurred a net loss causing any potentially dilutive securities to be anti-dilutive.
Recently
Issued Accounting Pronouncements. In June 2017, the FASB issued ASU No. 2016-13, Financial Instruments – Credit
Losses, amended in February 2020 with ASU No. 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases
(Topic 842). ASU 2016-13 introduces a new model for estimating credit losses for certain types of financial instruments, including
loans receivable, held-to-maturity debt securities, and net investments in direct financing leases, amongst other financial instruments.
ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and expands the disclosure requirements regarding
an entity’s assumptions, models, and methods for estimating the allowance for losses. While ASU 2016-13 was effective for periods
beginning after December 15, 2019, the issuance of ASU 2020-02 has allowed for the delay in adoption for certain smaller public companies
and is now effective for fiscal periods beginning after December 15, 2022. Retrospective adjustments shall be applied through a cumulative-effect
adjustment to retained earnings. The Company is continuing to evaluate the impact of this guidance on its financial statements and does
not believe it will have a material impact on the financial statements.
In
August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU simplifies accounting for convertible instruments
by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported
as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded
conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative
scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS)
calculation in certain areas. The amendments in ASU No. 2020-06 are effective for public business entities that meet the definition of
a SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December
15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning
after December 15, 2020, including interim periods within those fiscal years. The Company is continuing to evaluate the impact of this
guidance on its financial statements and does not believe it will have a material impact on the financial statements.
3.
RECENT REAL ESTATE TRANSACTIONS
Acquisitions
during the year ended December 31, 2021
|
● |
On August 17, 2021, the Company,
through its 61.3% owned subsidiaries NetREIT Palm Self Storage, LP and NetREIT Highland LLC, acquired a single story newly constructed
10,500 square foot building in Houston, Texas for a purchase price of approximately $4.9 million, in connection with a like-kind exchange
transaction pursued under Section 1031 of the Code. The building is 100% occupied under a 15-year triple net lease, and purchased with
all cash. |
|
|
|
|
● |
On December 22, 2021, the Company purchased a 31,752
square foot building in Baltimore, Maryland for a purchase price of approximately $8.9 million. The building is 100% occupied under
a five year triple net lease to Johns Hopkins’ University’s Bloomberg School of Public Health, and purchased with all cash. |
|
|
|
|
● |
We acquired 18 Model Home Properties and leased them
back to the homebuilders under triple net leases during the year ended December 31, 2021. The purchase price for the properties was
$8.4 million. The purchase price consisted of cash payments of $2.7 million and mortgage notes of $5.7 million. |
Acquisitions
during the year ended December 31, 2020
|
● |
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. |
Dispositions
during the year ended December 31, 2021
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 or repayment of secured or unsecured indebtedness, are available for investing in properties
that we believe will have a greater likelihood of future price appreciation.
During
year ended December 31, 2021 we 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 $10.2 million and the Company recognized a loss of approximately $1.6 million. |
|
|
|
|
● |
Executive
Office Park, which was sold on May 21, 2021, for approximately $8.1 million and the Company recognized a gain of approximately $2.5
million. |
|
|
|
|
● |
During
the year ended December 31, 2021, we disposed of 44 model homes for approximately $20.7 million and recognized a gain of approximately
$3.2 million. |
Dispositions
during the year ended December 31, 2020
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 the Company recognized a loss of approximately
$913,000. |
|
|
|
|
● |
Union
Terrace, which was sold on March 13, 2020 for approximately $11.3 million and the Company 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 the Company 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. |
4.
REAL ESTATE ASSETS
The
Company owns a diverse portfolio of real estate assets. The primary types of properties the Company invests in are office, industrial,
retail, and NNN leased model home properties located primarily in Southern California and Colorado, with four properties located in North
Dakota. Our model home properties are located in four states. As of December 31, 2021, the Company owned or had an equity interest in:
|
● |
Eight
office buildings and one industrial buildings (“Office/Industrial Properties”) which total approximately rentable 757,578
square feet; |
|
|
|
|
● |
Four
retail shopping centers (“Retail Properties”) which total approximately 121,052 rentable square feet; |
|
|
|
|
● |
92
homes owned by our affiliated limited partnerships and one corporation (“Model Homes” or “Model Home Properties”)
leased back on a triple-net basis to homebuilders that are owned by six affiliated limited partnerships and one wholly-owned corporation. |
The
Company’s real estate assets consisted of the following as of December 31, 2021 and 2020:
| |
Date | |
| |
Real estate assets, net | |
Property Name | |
Acquired | |
Location | |
2021 | | |
2020 | |
Garden Gateway Plaza (1) | |
March 2007 | |
Colorado Springs, CO | |
$ | — | | |
$ | 11,464,531 | |
World Plaza (2) | |
September 2007 | |
San Bernardino, CA | |
| 9,272,213 | | |
| 9,272,213 | |
Executive Office Park (1) | |
July 2008 | |
Colorado Springs, CO | |
| — | | |
| 5,105,831 | |
Waterman Plaza (1) | |
August 2008 | |
San Bernardino, CA | |
| — | | |
| 3,500,002 | |
Genesis Plaza (3) | |
August 2010 | |
San Diego, CA | |
| 8,310,803 | | |
| 8,651,177 | |
Dakota Center | |
May 2011 | |
Fargo, ND | |
| 8,607,360 | | |
| 8,597,493 | |
Grand Pacific Center (6) | |
March 2014 | |
Bismarck, ND | |
| 5,457,447 | | |
| 5,683,823 | |
Arapahoe Center | |
December 2014 | |
Centennial, CO | |
| 8,821,278 | | |
| 9,233,078 | |
Union Town Center | |
December 2014 | |
Colorado Springs, CO | |
| 9,169,387 | | |
| 9,344,563 | |
West Fargo Industrial | |
August 2015 | |
Fargo, ND | |
| 7,025,325 | | |
| 7,061,122 | |
300 N.P. | |
August 2015 | |
Fargo, ND | |
| 2,929,563 | | |
| 3,279,522 | |
Research Parkway | |
August 2015 | |
Colorado Springs, CO | |
| 2,375,943 | | |
| 2,438,594 | |
One Park Center | |
August 2015 | |
Westminster, CO | |
| 7,992,420 | | |
| 8,586,309 | |
Highland Court (1)(4) | |
August 2015 | |
Centennial, CO | |
| — | | |
| 10,500,001 | |
Shea Center II | |
December 2015 | |
Highlands Ranch, CO | |
| 20,246,645 | | |
| 21,026,112 | |
Mandolin (4) | |
August 2021 | |
Houston, TX | |
| 4,875,696 | | |
| — | |
Baltimore | |
December 2021 | |
Baltimore, MD | |
| 8,891,810 | | |
| — | |
Presidio Property Trust, Inc. properties | |
| |
| |
| 103,975,890 | | |
| 123,744,371 | |
Model Home properties (5) | |
2014 - 2021 | |
AZ, FL, IL, PA, TX, WI | |
| 34,089,046 | | |
| 42,509,596 | |
Total real estate assets and lease intangibles, net | |
| |
| |
$ | 138,064,936 | | |
$ | 166,253,967 | |
(1) |
This
property was sold during the year ended December 31, 2021. |
(2) |
This
property is held for sale as of December 31, 2021. |
(3) |
Genesis
Plaza is owned by two tenants-in-common, each of which own 57% and 43%, respectively, and we beneficially own an aggregate of 76.4%,
based on our ownership percentages of each tenant-in-common. |
(4) |
A
portion of the proceeds from the sale of Highland Court were used in like-kind exchange transactions pursued under Section 1031 of
the Code for the acquisition of our Mandolin property. Mandolin is owned by NetREIT Palm Self-Storage LP, through its wholly owned
subsidiary NetREIT Highland LLC, and the Company is the sole general partner and owns 61.3% of NetREIT Palm Self-Storage LP. |
(5) |
Includes
six Model Homes listed as held for sale as of December 31, 2021. |
(6) |
Property
was listed as held for sale in February 2022. |
The
Company’s commercial properties are leased to tenants under non-cancelable operating leases for which terms and expirations vary.
Future minimum rental revenues under existing leases on Office/Industrial and Retail Properties as of December 31, 2021 are expected
to be as follows:
2022 | |
$ | 3,362,188 | |
2023 | |
| 1,990,408 | |
2024 | |
| 1,136,825 | |
2025 | |
| 1,210,653 | |
2026 | |
| 2,218,671 | |
Thereafter | |
| 1,540,799 | |
Totals | |
$ | 11,459,544 | |
The
Company generally rents Model Home Properties to homebuilders under non-cancelable lease agreements with a term of 18 months with an
option to extend in six months increments. Future minimum rental revenues under existing leases on Model Home Properties as of December
31, 2021 are expected to be as follows:
2022 | |
$ | 2,121,864 | |
2023 | |
| 540,504 | |
| |
$ | 2,662,368 | |
5.
LEASE INTANGIBLES
Lease
intangibles consist of the following:
| |
December 31, 2021 | | |
December 31, 2020 | |
| |
Lease Intangibles | | |
Accumulated Amortization | | |
Lease Intangibles, net | | |
Lease Intangibles | | |
Accumulated Amortization | | |
Lease Intangibles, net | |
In-place leases | |
$ | 2,515,264 | | |
$ | (2,353,782 | ) | |
$ | 161,482 | | |
$ | 3,136,587 | | |
$ | (2,757,530 | ) | |
$ | 379,057 | |
Leasing costs | |
| 1,261,390 | | |
| (1,165,701 | ) | |
| 95,689 | | |
| 1,730,656 | | |
| (1,510,559 | ) | |
| 220,097 | |
Above-market leases | |
| 333,485 | | |
| (333,485 | ) | |
| — | | |
| 333,485 | | |
| (291,421 | ) | |
| 42,064 | |
| |
$ | 4,110,139 | | |
$ | (3,852,968 | ) | |
$ | 257,171 | | |
$ | 5,200,728 | | |
$ | (4,559,510 | ) | |
$ | 641,218 | |
As
of December 31, 2021 and 2020, gross lease intangible assets of $0.0 million and $1.1 million, respectively, were included in real estate
assets held for sale. As of December 31, 2021 and 2020, accumulated amortization related to the lease intangible assets of $0.0 million
and $1.1 million, respectively, were included in real estate assets held for sale.
The
net value of acquired intangible liabilities was approximately $73,000 and $139,000 relating to below-market leases as of December 31,
2021 and 2020, respectively.
Aggregate
approximate amortization expense for the Company’s lease intangible assets is as follows:
2022 | |
$ | 202,342 | |
2023 | |
| 17,526 | |
2024 | |
| 17,526 | |
2025 | |
| 15,670 | |
2025 | |
| 4,107 | |
Thereafter | |
| — | |
Total | |
$ | 257,171 | |
The
weighted average amortization period for the intangible assets as of December 31, 2021 was approximately 1.35 years. Lease intangible
assets are amortized over the term of the related lease and included as a reduction of rental income in the Statement of Operations.
6.
OTHER ASSETS
Other
assets consist of the following:
| |
December 31, | | |
December 31, | |
| |
2021 | | |
2020 | |
Deferred rent receivable | |
$ | 1,660,197 | | |
$ | 1,912,048 | |
Prepaid expenses, deposits and other | |
| 473,554 | | |
| 215,946 | |
Investment in marketable securities, at fair value | |
| 1,514,483 | | |
| 83,241 | |
Accounts receivable, net | |
| 401,927 | | |
| 541,885 | |
Right-of-use assets, net | |
| 74,643 | | |
| 102,144 | |
Other intangibles, net | |
| 82,483 | | |
| 142,483 | |
Notes receivable | |
| 316,374 | | |
| 316,374 | |
Deferred offering costs | |
| 134,843 | | |
| 108,660 | |
Total other assets | |
$ | 4,658,504 | | |
$ | 3,422,781 | |
Periodically,
the Company may sell an option in the marketable securities it holds to unrelated third parties for the right to purchase certain securities
held within its investment portfolios (“covered call options”). These option transactions are designed primarily to increase
the total return associated with holding the related securities as earning assets by using fee income generated from these options. These
transactions are not designated as hedging relationships pursuant to accounting guidance ASC 815 and, accordingly, changes in fair values
of these contracts, are reported in other non-interest income. There are several risks associated with transactions in options on securities.
For example, there are significant differences between the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its objectives. A transaction in options or securities may be unsuccessful
to some degree because of market behavior or unexpected events. When we write a covered call option, we forgo, during the option’s
life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium
and the strike price of the call, but retain the risk of loss should the price of the underlying security decline. The writer of an option
has no control over the time when it may be required to fulfill its obligation before the sold option expires, and once an option writer
has received an exercise notice, it must deliver the underlying security in exchange for the strike price.
As
of December 31, 2021, we owned common shares of 19 different publicly traded REITs and an immaterial amount of covered call options in
10 of those same REITs. The gross fair market value on our publicly traded REIT securities was $1,522,137, with covered call options
totaling $2,254. As of December 31, 2021, the net fair value of our publicly traded REIT securities was $1,514,483 based on the December
31, 2021 closing price. As of December 31, 2020, we owned common shares and options of two different publicly traded REITs and a money
market account with a closing market value of approximately $83,000. These shares are presented at fair value as “marketable securities”
on our consolidated balance sheets and the gains and losses resulting from the mark-to-market of these securities are recognized in current
period earnings.
7.
MORTGAGE NOTES PAYABLE
Mortgage
notes payable consisted of the following:
| |
Principal as of | | |
| |
| | |
| |
| |
December 31, | | |
December 31, | | |
Loan | |
Interest | | |
| |
Mortgage note property | |
2021 | | |
2020 | | |
Type | |
Rate (1) | | |
Maturity | |
Waterman Plaza (2) | |
$ | — | | |
$ | 3,207,952 | | |
Variable | |
| — | | |
| — | |
World Plaza (3) (4) | |
| — | | |
| 5,802,568 | | |
Variable | |
| — | | |
| — | |
Garden Gateway Plaza (2) | |
| — | | |
| 5,861,523 | | |
Fixed | |
| — | | |
| — | |
300 N.P. (8) | |
| 2,232,923 | | |
| 2,273,478 | | |
Fixed | |
| 4.95 | % | |
| 6/11/2022 | |
Highland Court (2) | |
| — | | |
| 6,274,815 | | |
Fixed | |
| 3.82 | % | |
| — | |
Dakota Center | |
| 9,677,108 | | |
| 9,900,279 | | |
Fixed | |
| 4.74 | % | |
| 7/6/2024 | |
Research Parkway | |
| 1,705,438 | | |
| 1,760,432 | | |
Fixed | |
| 3.94 | % | |
| 1/5/2025 | |
Arapahoe Service Center | |
| 7,770,887 | | |
| 7,932,255 | | |
Fixed | |
| 4.34 | % | |
| 1/5/2025 | |
Union Town Center | |
| 8,173,568 | | |
| 8,315,550 | | |
Fixed | |
| 4.28 | % | |
| 1/5/2025 | |
One Park Centre | |
| 6,276,849 | | |
| 6,385,166 | | |
Fixed | |
| 4.77 | % | |
| 9/5/2025 | |
Genesis Plaza | |
| 6,168,604 | | |
| 6,276,273 | | |
Fixed | |
| 4.71 | % | |
| 9/6/2025 | |
Shea Center II | |
| 17,494,527 | | |
| 17,727,500 | | |
Fixed | |
| 4.92 | % | |
| 1/5/2026 | |
Executive Office Park (2) | |
| — | | |
| 2,985,998 | | |
Fixed | |
| 4.83 | % | |
| 6/1/2027 | |
West Fargo Industrial | |
| 4,148,405 | | |
| 4,262,718 | | |
Fixed | |
| 3.27 | % | |
| 8/5/2029 | |
Grand Pacific Center (5) (7) | |
| 3,619,695 | | |
| 3,738,142 | | |
Fixed | |
| 4.02 | % | |
| 8/1/2037 | |
Subtotal, Presidio Property Trust, Inc. Properties | |
$ | 67,268,004 | | |
$ | 92,704,649 | | |
| |
| | | |
| | |
Model Home mortgage notes (3) | |
| 22,154,128 | | |
| 28,083,356 | | |
Fixed | |
| (6 | ) | |
| 2022 -2024 | |
Mortgage Notes Payable | |
$ | 89,422,132 | | |
$ | 120,788,005 | | |
| |
| | | |
| | |
Unamortized loan costs | |
| (562,300 | ) | |
| (758,309 | ) | |
| |
| | | |
| | |
Mortgage Notes Payable, net | |
$ | 88,859,832 | | |
$ | 120,029,696 | | |
| |
| | | |
| | |
(1) |
Interest
rates as of December 31, 2021. |
(2) |
Waterman
Plaza and Garden Gateway Plaza were sold during the first quarter of 2021, while Highland Court and Executive Office Park were sold
in the second quarter of 2021. |
(3) |
Properties
held for sale as of December 31, 2021. Five model homes were included as held for sale. |
(4) |
During
June 2021, this loan was paid in full with cash from the sale of other properties and excess cash on hand. |
(5) |
Interest
rate is subject to reset on September 1, 2023. |
(6) |
Each
Model Home has a stand-alone mortgage note at interest rates ranging from 2.5% to 4.33% at December 31, 2021. |
(7) |
Property
was listed as held for sale in February 2022. |
(8) |
The
mortgage note payable for 300 N.P. is an amortizing loan with a balloon payment of $2.2 million due at maturity, on June 11, 2022,
and is no longer subject to defeasance or yield maintenance. The Company expects to pay this note in full at or before maturity with
proceeds from property sales, property financing and other available cash on hand. |
The
Company is in compliance with all material conditions and covenants of its mortgage notes payable.
Scheduled
principal payments of mortgage notes payable are as follows:
Years ending December 31: | |
Commercial
Properties
Notes Payable | | |
Model
Homes
Notes Payable | | |
Total Principal
Payments | |
2022 | |
| 3,577,700 | | |
| 8,633,455 | | |
$ | 12,211,155 | |
2023 | |
| 1,406,466 | | |
| 4,376,107 | | |
| 5,782,573 | |
2024 | |
| 10,379,660 | | |
| 9,144,566 | | |
| 19,524,226 | |
2025 | |
| 28,782,401 | | |
| — | | |
| 28,782,401 | |
2025 | |
| 16,644,046 | | |
| — | | |
| 16,644,046 | |
Thereafter | |
| 6,477,731 | | |
| — | | |
| 6,477,731 | |
Total | |
$ | 67,268,004 | | |
$ | 22,154,128 | | |
$ | 89,422,132 | |
8.
NOTE PAYABLE
On
September 17, 2019, the Company executed a Promissory Note pursuant to which 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. On September 1, 2020, we extended the maturity of the Polar Note from October 1, 2020 to March 31, 2021,
at which time the entire outstanding principal balance of $8.8 million and accrued and unpaid interest was to be due and payable.
On September 30, 2020, we paid the extension or renewal fee, which was 4% of the unpaid principal balance. The principal balance
of the Polar Note as of December 31, 2020, consisted of cash received, less cash repayments from property sales of $6.3 million and Original
Issue Discount (“OID”) of $1.4 million. The OID was recorded on the accompanying condensed consolidated balance sheets as
a direct deduction from the principal of the Polar Note and was recognized as interest expense over the term of the Polar Note commencing
on September 17, 2019 through October 1, 2020. There was no unrecognized OID as of September 30, 2021 or December 31, 2020. The Company
incurred approximately $1.1 million in legal and underwriting costs related to the transaction. These costs were recorded as debt issuance
costs on the accompanying consolidated balance sheets as a direct deduction from the principal of the Polar Note and were amortized over
the term of the Polar Note. During the first quarter of 2021, prior to maturity, the Polar Note was paid in full, primarily from available
cash on hand and proceeds of property sales and all unamortized debt issuance costs were expensed.
On
April 22, 2020, the Company received an Economic Injury Disaster Loan of $10,000 from the Small Business Administration (“SBA”)
to provide economic relief during the COVID-19 pandemic. This loan advance is not required to be repaid, has no stipulations on use,
and has been recorded as fees and other income in the condensed consolidated statements of operations during fiscal 2020. On August 17,
2020, we received an additional Economic Injury Disaster Loan (“EIDL”) of $150,000, for which principal and interest payments
are deferred for twelve months from the date of issuance, and interest accrues at 3.75% per year. The loan matures on August 17, 2050.
We have used the funds for general corporate purposes to alleviate economic injury caused by the COVID-19 pandemic, which economic injury
included abating or deferring rent to certain tenants (primarily retail tenants).
On
April 30, 2020, the Company received a Paycheck Protection Program (“PPP”) loan of $0.5 million from the SBA to provide additional
economic relief during the COVID-19 pandemic. The PPP loan, less the $10,000 related to the EIDL received on April 22, 2020, was forgiven
by the SBA prior to December 31, 2020, and the remaining $10,000 was fully forgiven in January 2021, upon repeal of the EIDL holdback
requirements. On June 5, 2020, the period in which the loan could be utilized was extended to 24 weeks. The unforgiven portion of the
PPP loan was recorded in accounts payable and accrued liabilities on the Consolidated Balance Sheet as of December 31, 2020. During the
quarter ended March 31, 2021, the forgiven amount totaling $10,000 was recorded as a gain on extinguishment of debt in the Consolidated
Statement of Operations. We have used the funds received from the PPP loan to cover payroll related costs.
On
April 1, 2021, our wholly-subsidiary, Dubose Model Homes Investors #203 LP (“DMH 203”), issued an unsecured promissory
note with LGD Investments Ltd (“LGD”) for $330,000 with an interest rate of 4% per annum and a maturity date of April 30,
2022. LGD Investments is owned and controlled by one of our directors at the time, Larry Dubose. During April and May 2021, DMH
203 paid LGD $2,200 in interest related to the promissory note. On June 1, 2021, the Company assumed the promissory note from LGD a face
value for $330,000 with no other changes in the terms of the note. The note payable and note receivable, including interest expense and
interest income related to this promissory note during June 2021 were eliminated through consolidation. There are no future plans to
issue additional promissory notes to LGD.
On
September 3, 2021, we issued promissory notes to our majority owned subsidiary Dubose Model Home Investors 202 LP and Dubose Model Home
Investors 204 LP for the refinancing of four model home properties in Texas and Wisconsin, for $0.9 million with an interest rate of
3.0% per annum and a maturity date of November 15, 2022. These notes payable and note receivable, including interest expense and interest
income related to this promissory note, are eliminated through consolidation on our financial statements.
On
August 17, 2021, we issued a promissory note to our majority owned subsidiary NetREIT Highland for the acquisition of the Mandolin property
in Houston Texas, for $1.56 million with an interest rate of 4.0% per annum and a maturity date of August 17, 2022. This note payable
and note receivable, including interest expense and interest income related to this promissory note, are eliminated through consolidation
on our financial statements.
On
December 20, 2021, we issued a promissory note to our majority owned subsidiary PPT Baltimore for the acquisition of the Baltimore property
in Baltimore, MD, for $5.65 million with an interest rate of 4.5% per annum and a maturity date of December 20, 2022. This note payable
and note receivable, including interest expense and interest income related to this promissory note, are eliminated through consolidation
on our financial statements.
9.
COMMITMENTS AND CONTINGENCIES
The
Company is obligated under certain tenant leases to fund tenant improvements and the expansion of the underlying leased properties.
Litigation.
From time to time, we may become involved in various lawsuits or legal proceedings which arise in the ordinary course of business.
Neither the Company nor any of the Company’s properties are presently subject to any material litigation nor, to the Company’s
knowledge, is there any material threatened litigation.
Environmental
Matters. The Company monitors its properties for the presence of hazardous or toxic substances. While there can be no assurance
that a material environmental liability does not exist, the Company is not currently aware of any environmental
liability with respect to the properties that would have a material effect on the Company’s financial condition, results of operations
and cash flow. Further, the Company is not aware of any environmental liability or any unasserted claim or assessment with respect to
an environmental liability that the Company believes would require additional disclosure or recording of a loss contingency.
Financial
Markets. The Company monitors concerns over
economic recession, the COVID-19 pandemic, interest rate increases, policy priorities of the U.S. presidential administration, trade
wars, labor shortages, or inflation may contribute to increased volatility and diminished expectations for the economy and markets. Additionally,
concern over geopolitical issues may also contribute to prolonged market volatility and instability. For example, the conflict between
Russia and Ukraine could lead to disruption, instability and volatility in global markets and industries. The U.S. government and other
governments in jurisdictions have imposed severe economic sanctions and export controls against Russia and Russian interests, have removed
Russia from the SWIFT system, and have threatened additional sanctions and controls. The impact of these measures, as well as potential
responses to them by Russia, is unknown. We have not currently experienced a direct material impact to our Company or operations; however,
we will continue to monitor the financial markets for events that could impact our commercial real estate properties.
Sponsorship
of Special Purpose Acquisition Company. On January 7, 2022, we announced our sponsorship, through our wholly-owned subsidiary,
Murphy Canyon Acquisition Sponsor, LLC (the “Sponsor”), of a special purpose acquisition company (“SPAC”) initial
public offering. The SPAC raised $132,250,000 in capital investment to acquire businesses in the real estate industry, including construction,
homebuilding, real estate owners and operators, arrangers of financing, insurance, and other services for real estate, and adjacent businesses
and technologies targeting the real estate space, which we may refer to as “Proptech” businesses. We, through our wholly-owned
subsidiary, owned approximately 19% of the issued and outstanding stock in the entity upon the initial public offering being declared
effective and consummated (excluding the private placement units described below), and that following the completion of its initial business
combination that the SPAC will operate as a separately managed, publicly traded entity. The SPAC offered $132,250,000 units, with each
unit consisting of one share of common stock and three-quarters of one redeemable warrant.
The
Sponsor purchased an aggregate of 828,750 units (the “placement units”) of the SPAC at a price of $10.00 per unit, for an
aggregate purchase price of $8,287,500. The placement units were sold in a private placement that closed simultaneously with the closing
of the SPAC initial public offering. The Sponsor has agreed to transfer an aggregate of 45,000 placement units (15,000 each) to each
of Murphy Canyon’s independent directors.
The
SPAC’s ability to complete a business combination may be extended in additional increments of three months up to a total of six
(6) additional months from the closing date of the offering, subject to the payment into the Trust Account by the Sponsor (or its designees
or affiliates) of the sum of $1,322,500, representing the sum of $0.10 per share of Common Stock sold to Public Stockholders, and which
extension payments, if any, shall be added to the Trust Account. The Company has committed to provide additional funds if need to make
such a deposit for the extension.
10.
STOCKHOLDERS’ EQUITY
Preferred
Stock. The Company is authorized to issue up to 1,000,000 shares of Preferred Stock (the “Preferred Stock”). The
Preferred Stock may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares
of any series of the Preferred Stock, to determine the designation of any such series, and to determine or alter the rights granted to
or imposed upon any wholly unissued series of Preferred Stock including the dividend rights, dividend rate, conversion rights, voting
rights, redemption rights (including sinking fund provisions), redemption price, and liquidation preference.
On
June 15, 2021, the Company completed its secondary offering of 800,000 shares of our Series D Preferred Stock for cash consideration
of $25.00 per share to a syndicate of underwriters led by Benchmark, as representative, resulting in approximately $18.1 million in net
proceeds, after deducting the underwriting discounts and commissions and the offering expenses paid by the Company. The Company granted
the underwriters a 45-day option to purchase up to an additional 120,000 shares of Series D Preferred Stock to cover over-allotments,
which they exercised on June 17, 2021, resulting in approximately $2.7 million in net proceeds, after deducting the underwriting discounts
and commissions and the offering expenses paid by the Company. In total, the Company issued 920,000 shares of Series D Preferred Stock
with net proceeds of approximately $20.5 million, after deducting the underwriting discounts and commissions and the offering expenses
paid by the Company and deferred offering costs. The Series D Preferred Stock is listed and trading on The Nasdaq Capital market under
the symbol SQFTP. The Company intends to use these proceeds for general corporate and working capital purposes, including to potentially
acquire additional properties. Below are some of the key terms of the Series D Preferred Stock:
Dividends:
Holders
of shares of the Series D Preferred Stock are entitled to receive cumulative cash dividends at a rate of 9.375% per annum of the $25.00
per share liquidation preference (equivalent to $2.34375 per annum per share). Dividends will be payable monthly on the 15th day of each
month (each, a “Dividend Payment Date”), provided that if any Dividend Payment Date is not a business day, then the dividend
that would otherwise have been payable on that Dividend Payment Date may be paid on the next succeeding business day without adjustment
in the amount of the dividend.
Voting
Rights:
Holders
of shares of the Series D Preferred Stock will generally have no voting rights. However, if the Company does not pay dividends on the
Series D Preferred Stock for eighteen or more monthly dividend periods (whether or not consecutive), the holders of the Series D Preferred
Stock (voting separately as a class with the holders of all other classes or series of the Company’s preferred stock it may issue
upon which like voting rights have been conferred and are exercisable and which are entitled to vote as a class with the Series D Preferred
Stock in the election referred to below) will be entitled to vote for the election of two additional directors to serve on the Company’s
Board of Directors until the Company pays, or declares and sets apart funds for the payment of, all dividends that it owes on the Series
D Preferred Stock, subject to certain limitations.
In
addition, the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series D Preferred Stock (voting together
as a class with all other series of parity preferred stock the Company may issue upon which like voting rights have been conferred and
are exercisable) is required at any time for the Company to (i) authorize or issue any class or series of its stock ranking senior to
the Series D Preferred Stock with respect to the payment of dividends or the distribution of assets on liquidation, dissolution or winding
up or (ii) to amend any provision of the Company charter so as to materially and adversely affect any rights of the Series D Preferred
Stock or to take certain other actions.
Liquidation
Preference:
In
the event of the Company’s voluntary or involuntary liquidation, dissolution or winding up, the holders of shares of Series D Preferred
Stock will be entitled to be paid out of the assets the Company has legally available for distribution to its stockholders, subject to
the preferential rights of the holders of any class or series of its stock the Company may issue ranking senior to the Series D Preferred
Stock with respect to the distribution of assets upon liquidation, dissolution or winding up, a liquidation preference of $25.00 per
share, plus any accumulated and unpaid dividends to, but not including, the date of payment, before any distribution of assets is made
to holders of the Company’s common stock or any other class or series of the Company’s stock it may issue that ranks junior
to the Series D Preferred Stock as to liquidation rights.
In
the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, the Company’s available assets are
insufficient to pay the amount of the liquidating distributions on all outstanding shares of Series D Preferred Stock and the corresponding
amounts payable on all shares of other classes or series of the Company’s stock that it issues ranking on parity with the Series
D Preferred Stock in the distribution of assets, then the holders of the Series D Preferred Stock and all other such classes or series
of stock shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would
otherwise be respectively entitled.
Redemption:
Commencing
on or after June 15, 2026, the Company may redeem, at its option, the Series D Preferred Stock, in whole or in part, at a cash redemption
price equal to $25.00 per share, plus any accumulated and unpaid dividends to, but not including the redemption date. Prior to June 15,
2026, upon a Change of Control (as defined in the Articles Supplementary), the Company may redeem, at its option, the Series D Preferred
Stock, in whole or part, at a cash redemption price of $25.00 per share, plus any accumulated and unpaid dividends to, but not including
the redemption date. The Series D Preferred Stock has no stated maturity, will not be subject to any sinking fund or other mandatory
redemption, and will not be convertible into or exchangeable for any of our other securities.
The
Company evaluated the accounting guidance in ASC 480 regarding the classification of the Series D Preferred Stock as equity or a liability
and determined that it should be classified as permanent equity. On June 24, 2021, the Board of Directors of the Company declared the
first dividend on its Series D Preferred Stock for the initial period from the issue date of June 15, 2021 to June 30, 2021. In accordance
with the terms of the Series D Preferred Stock, the Series D monthly dividend has been approved by the Board of Directors through December
2021 in the amount of $0.10417 per share payable on the 15th of every month to stockholders of record of Series D Preferred Stock as
of the last day of the prior month. Total dividends paid to holders of Series D Preferred Stock as of December 31, 2021 was approximately
$1.0 million.
Common
Stock. The Company is authorized to issue up to 100,000,000 shares of Series A Common Stock, 1,000 shares of Series B Common
Stock, and 9,000,000 shares of Series C Common Stock (collectively, the “Common Stock”) each with $0.01 par value per share.
Each class of Common Stock has identical rights, preferences, terms, and conditions except that the holders of Series B Common Stock
are not entitled to receive any portion of Company assets in the event of the Company’s liquidation. No shares of Series B or Series
C Common Stock have been issued. Each share of Common Stock entitles the holder to one vote. Shares of our Common Stock are not subject
to redemption and do not have any preference, conversion, exchange, or preemptive rights. The articles of incorporation contain a restriction
on ownership of the Common Stock that prevents one person from owning more than 9.8% of the outstanding shares of common stock.
On
July 12, 2021, the Company entered into a securities purchase agreement with a single U.S. institutional investor for the purchase and
sale of 1,000,000 shares of its Series A Common Stock, Common Stock Warrants to purchase up to 2,000,000 shares of Series A Common Stock
and Pre-Funded Warrants to purchase up to 1,000,000 shares of Series A Common Stock. Each share of Common Stock and accompanying Common
Stock Warrants were sold together at a combined offering price of $5.00, and each share of Common Stock and accompanying Pre-Funded Warrants
were sold together at a combined offering price of $4.99. The Pre-Funded Warrants were exercised in full during August 2021 at a nominal
exercise price of $0.01 per share. The Common Stock Warrants have an exercise price of $5.50 per share, were exercisable upon issuance
and will expire five years from the date of issuance.
In
connection with this additional offering, we agreed to issue the Placement Agent Warrants to purchase
up to 80,000 shares of Series A Common Stock, representing 4.0% of the Series A Common Stock and shares of Series A Common Stock issuable
upon exercise of the Pre-Funded Warrant. The Placement Agent Warrants were issued in August 2021, post exercise of the Pre-Funded Warrants
with an exercise price of $6.25 and will expire five years from the date of issuance.
The
Company evaluated the accounting guidance in ASC 480 and ASC 815 regarding the classification of the Pre-Funded Warrant, Common Stock
Warrants, and Placement Agent Warrants as equity or a liability and determined that it should be classified as permanent equity. As of
December 31, 2021,
none of the Common Stock Warrants and Placement Agent Warrants have been exercised.
Stock
Repurchase Program. On September 17, 2021, the Board of Directors authorized a stock repurchase program of up to $10 million
outstanding shares of our Series A Common Stock. During September 2021, the Company was able to purchase 18,133 shares at an average
price of $3.73692 per share, plus commission of $0.035 per share, for a total cost of $68,396. During December 2021, the Company was
able to purchase 11,588 shares at an average price of $3.6097 per share, plus commission of $0.035 per share, for a total cost of $42,235.
These shares will be treated as unissued in accordance with Maryland law and shown as a reduction of stockholders’ equity at cost.
While we will continue to pursue value creating investments, the Board believes there is significant embedded value in our assets that
is yet to be realized by the market. Therefore, returning capital to shareholders through a repurchase program is an attractive use of
capital currently.
Cash
Dividends. For the year ended December 31, 2021,
the Company declared and paid cash dividends of approximately $4.5 million. For the year ended December 31, 2020 the
Company declared and paid $1.1 million. The following is a summary of distributions declared per share of our Series A Common
Stock and for our Series D Preferred Stock for the years ended December 31, 2021 and 2020. The Company intends to continue to pay dividends
to our common stockholders on a quarterly basis, and on a monthly basis to holders of our Series D Preferred Stock going forward, but
there can be no guarantee the Board of Directors will approve any future dividends.
Series
A Common Stock
Month | |
2021 | | |
2020 | |
| |
Cash Dividend | | |
Cash Dividend | |
March 31 | |
$ | 0.101 | | |
$ | — | |
June 30 | |
| 0.102 | | |
| — | |
September 30 | |
| 0.103 | | |
| — | |
December 31 | |
| 0.104 | | |
| 0.100 | |
Total | |
$ | 0.410 | | |
$ | 0.100 | |
Series
D Preferred Stock
Month | |
2021 | | |
2020 | |
| |
Distributions Declared | | |
Distributions Declared | |
January | |
$ | — | | |
$ | — | |
February | |
| — | | |
| — | |
March | |
| — | | |
| — | |
April | |
| — | | |
| — | |
May | |
| — | | |
| — | |
June | |
| 0.10417 | | |
| — | |
July | |
| 0.19531 | | |
| — | |
August | |
| 0.19531 | | |
| — | |
September | |
| 0.19531 | | |
| — | |
October | |
| 0.19531 | | |
| — | |
November | |
| 0.19531 | | |
| — | |
December 31 | |
| 0.19531 | | |
| — | |
Total | |
$ | 1.27603 | | |
| — | |
Partnership
Interests. Through the Company, its subsidiaries,
and its partnerships, we own 13 commercial properties in fee interest, two of which we own partial interests in through our holdings
in various affiliates in which we serve as general partner, member and/or manager. Each of the limited partnerships is referred to as
a “DownREIT.” In each DownREIT, we have the right, through put and call options, to require our co-investors to exchange
their interests for shares of our Common Stock at a stated price after a defined period (generally five years from the date they first
invested in the entity’s real property), the occurrence of a specified event or a combination thereof. The Company is a limited
partner in five partnerships and sole stockholder in one corporation, which entities purchase and leaseback model homes from homebuilders.
Dividend
Reinvestment Plan. The Company adopted a distribution reinvestment plan (the “DRIP”) that allowed stockholders to
have dividends and other distributions otherwise distributable to them invested in additional shares of the Company’s Common Stock.
The Company registered 3,000,000 shares of Common Stock pursuant to the DRIP. The purchase price per share used in the past was 95% of
the price the Company sold its shares, or $19.00 per share. No sales commission or dealer manager fees were paid on shares sold through
the DRIP. The Company may amend, suspend or terminate the DRIP at any time. Any such amendment, suspension or termination is effective
upon a designated dividend record date and notice of such amendment, suspension or termination is sent to all participants at least thirty
(30) days prior to such record date. The DRIP became effective on January 23, 2012, was suspended on December 7, 2018 and adopted on
October 6, 2020 in connection with our IPO, and updated to reflect a change in transfer agent and registrar. As of December 31, 2021,
approximately $17.4 million or approximately 917,074 shares of Common Stock have been issued under the DRIP. No shares were issued under
the DRIP during the years ended December 31, 2021 and 2020.
11.
SHARE-BASED INCENTIVE PLAN
The
Company maintains a restricted stock incentive plan for the purpose of attracting and retaining officers, employees, and non-employee
board members. Share awards generally vest in equal annual installments over a three to ten year period from date of issuance. Non-vested
shares have voting rights and are eligible for any dividends paid to common shares. The Company recognized compensation cost for these
fixed awards over the service vesting period, which represents the requisite service period, using the straight-line method. Prior to
our IPO, the value of non-vested shares was calculated based on the offering price of the shares in the most recent private placement
offering of $20.00, adjusted for stock dividends since granted and assumed selling costs, which management believed approximated fair
market value as of the date of grant. Upon our IPO, the value of non-vested shares granted is typically calculated based on the closing
price of our common stock on the date of the grant.
A
summary of the activity for the Company’s restricted stock was as follows:
Outstanding shares: | |
Common Shares | |
| |
| |
Balance at December 31, 2020 | |
| 126,190 | |
Granted | |
| 320,096 | |
Forfeited | |
| (29,737 | ) |
Vested | |
| (121,078 | ) |
Balance at December 31, 2021 | |
| 295,471 | |
The
non-vested restricted shares outstanding as of December
31, 2021 will vest over the next one to six years.
Share-based
compensation expense for the years ended December 31,
2021 and 2020 was approximately $1.6 million and $1.1
million, respectively. As of December 31, 2021 and December 31, 2020, future unrecognized stock
compensation related to unvested shares totaled approximately $1.6 million and $1.2 million, respectively.
12.
SEGMENTS
The
Company’s reportable segments consist of the three types of commercial real estate properties for which the Company’s decision-makers
internally evaluate operating performance and financial results: Office/Industrial Properties, Model Homes and Retail Properties. The
Company also has certain corporate level activities including accounting, finance, legal administration and management information systems
which are not considered separate operating segments. The accounting policies of the reportable segments are the same as those described
in Note 2. There is no significant intersegment activity.
The
Company evaluates the performance of its segments based upon net operating income (“NOI”), which is a non-GAAP supplemental
financial measure. The Company defines NOI for its segments as operating revenues (rental income, tenant reimbursements and other operating
income) less property and related expenses (property operating expenses, real estate taxes, insurance, asset management fees, impairments
and provision for bad debt) excluding interest expense. NOI excludes certain items that are not considered to be controllable in connection
with the management of an asset such as non-property income and expenses, depreciation and amortization, real estate acquisition fees
and expenses and corporate general and administrative expenses. The Company uses NOI to evaluate the operating performance of the Company’s
real estate investments and to make decisions about resource allocations.
The
following tables reconcile the Company’s segment activity to its results of operations and financial position as of and for the
years ended December 31, 2021 and 2020, respectively.
| |
For the Year Ended December 31, | |
| |
2021 | | |
2020 | |
Office/Industrial Properties: | |
| | | |
| | |
Rental, fees and other income | |
$ | 13,161,268 | | |
$ | 17,128,687 | |
Property and related expenses | |
| (5,769,843 | ) | |
| (7,977,561 | ) |
Net operating income, as defined | |
| 7,391,425 | | |
| 9,151,126 | |
Model Home Properties: | |
| | | |
| | |
Rental, fees and other income | |
| 3,211,149 | | |
| 4,251,980 | |
Property and related expenses | |
| (129,389 | ) | |
| (202,667 | ) |
Net operating income, as defined | |
| 3,081,760 | | |
| 4,049,313 | |
Retail Properties: | |
| | | |
| | |
Rental, fees and other income | |
| 3,023,316 | | |
| 2,971,125 | |
Property and related expenses | |
| (1,056,581 | ) | |
| (2,368,906 | ) |
Net operating (loss) income, as defined | |
| 1,966,735 | | |
| 602,219 | |
Reconciliation to net loss: | |
| | | |
| | |
Total net operating income, as defined, for reportable segments | |
| 12,439,920 | | |
| 13,802,658 | |
General and administrative expenses | |
| (6,225,510 | ) | |
| (5,751,754 | ) |
Depreciation and amortization | |
| (5,397,498 | ) | |
| (6,274,321 | ) |
Interest expense | |
| (4,822,085 | ) | |
| (8,813,067 | ) |
Deferred offering costs | |
| — | | |
| (530,639 | ) |
Gain on extinguishment of government debt | |
| 10,000 | | |
| 451,785 | |
Other income (expense), net | |
| (3,417 | ) | |
| (20,636 | ) |
Income tax expense | |
| 47,620 | | |
| (370,884 | ) |
Gain on sale of real estate | |
| 2,487,528 | | |
| 1,245,460 | |
Net loss | |
$ | (1,463,442 | ) | |
$ | (6,261,398 | ) |
| |
December 31, | | |
December 31, | |
Assets by Reportable Segment: | |
2021 | | |
2020 | |
Office/Industrial Properties: | |
| | | |
| | |
Land, buildings and improvements, net (1) | |
$ | 78,240,086 | | |
$ | 99,120,649 | |
Total assets (2) | |
$ | 76,453,436 | | |
$ | 100,046,782 | |
Model Home Properties: | |
| | | |
| | |
Land, buildings and improvements, net (1) | |
$ | 34,089,046 | | |
$ | 42,509,596 | |
Total assets (2) | |
$ | 31,047,202 | | |
$ | 42,246,022 | |
Retail Properties: | |
| | | |
| | |
Land, buildings and improvements, net (1) | |
$ | 25,693,239 | | |
$ | 24,555,371 | |
Total assets (2) | |
$ | 27,579,469 | | |
$ | 26,108,109 | |
Reconciliation to Total Assets: | |
| | | |
| | |
Total assets for reportable segments | |
$ | 135,080,107 | | |
$ | 168,400,913 | |
Other unallocated assets: | |
| | | |
| | |
Cash, cash equivalents and restricted cash | |
| 6,738,345 | | |
| 2,149,088 | |
Other assets, net | |
| 19,378,311 | | |
| 15,018,615 | |
Total Assets | |
$ | 161,196,763 | | |
$ | 185,568,616 | |
(1) |
Includes
lease intangibles and the land purchase option related to property acquisitions. |
|
|
(2) |
Includes
land, buildings and improvements, current receivables, deferred rent receivables and deferred leasing costs and other related intangible
assets, all shown on a net basis. |
| |
For the Year Ended December 31, | |
Capital Expenditures by Reportable Segment | |
2021 | | |
2020 | |
Office/Industrial Properties: | |
| | | |
| | |
Acquisition of operating properties | |
$ | 8,891,810 | | |
$ | — | |
Capital expenditures and tenant improvements | |
| 1,513,362 | | |
| 2,825,169 | |
Model Home Properties: | |
| | | |
| | |
Acquisition of operating properties | |
| 8,426,750 | | |
| 10,161,613 | |
Retail Properties: | |
| | | |
| | |
Acquisition of operating properties | |
| 4,906,266 | | |
| — | |
Capital expenditures and tenant improvements | |
| 83,824 | | |
| 9,205 | |
Totals: | |
| | | |
| | |
Acquisition of operating properties, net | |
| 22,224,826 | | |
| 10,161,613 | |
Capital expenditures and tenant improvements | |
| 1,597,186 | | |
| 2,834,373 | |
Total real estate investments | |
$ | 23,822,012 | | |
$ | 12,995,986 | |
13.
SUBSEQUENT EVENTS
Sponsorship
of Special Purpose Acquisition Company
On
January 7, 2022, we announced our sponsorship, through our wholly-owned subsidiary, Murphy Canyon Acquisition Sponsor, LLC (the “Sponsor”),
of a special purpose acquisition company (“SPAC”) initial public offering. The registration statement and prospectus relating
to the initial public offering (“IPO”) of the SPAC, Murphy Canyon Acquisition Corp. (“Murphy Canyon”), was declared
effective by the Securities and Exchange Commission (the “SEC”) on February 2, 2022 and SPAC units, consisting of one share
of Class A common stock, par value $0.0001 per share, of Murphy Canyon and one redeemable warrant, with each whole warrant entitling
the holder thereof to purchase one share of common stock at a price of $11.50 per share, began trading on the Nasdaq Global Market on
February 3, 2022. Once the securities comprising the units begin separate trading, the common stock and the warrants are expected to
be traded on the Nasdaq Global Market under the symbols “MURF” and “MURFW,” respectively. The Murphy Canyon IPO
closed on February 7, 2022, raising gross proceeds for Murphy Canyon of $132,250,000, including the exercise in full by the underwriters
of their over-allotment option. In connection with the IPO, we purchased, through the Sponsor, 754,000 placement units (the “placement
units”) at a price of $10.00 per unit, for an aggregate purchase price of $7,540,000. The Sponsor has agreed to transfer an aggregate
of 45,000 placement units (15,000 each) to each of Murphy Canyon’s independent directors.
Immediately
following the IPO, Murphy Canyon began to evaluate acquisition candidates in the real estate industry, including construction, homebuilding,
real estate owners and operators, arrangers of financing, insurance, and other services for real estate, and adjacent businesses and
technologies targeting the real estate space with an aggregate combined enterprise value of approximately $300 million to $1.2 billion.
Murphy Canyon’s goal is to complete its initial business combination (“IBC”) within one year of its IPO. We expect
Murphy Canyon to operate as a separately managed, publicly traded entity following the completion of the IBC, or “De-SPAC”.
The
$7,540,000 to purchase the placement units was funded with the use of our unrestricted cash on hand, which totaled approximately $10
million as of December 31, 2021. The Company is currently evaluating the consolidation treatment for our investment in the SPAC after
the IPO on February 7, 2022. While we have not concluded our review it is possible that we will continue to consolidate Murphy Canyon
into the Company’s financial statements after its IPO. If we ultimately consolidate Murphy Canyon into our financial statements,
they would include approximately $134 million in restricted cash held in trust.
Warrant
Dividend
We
set a record date of January 14, 2022 with respect to the distribution of five-year listed warrants (the “Series A Warrants”).
The Series A Warrants and the shares of common stock issuable upon the exercise of the Series A Warrants were registered on a registration
statement that was filed with the SEC and was declared effective January 21, 2022. The Series A Warrants commenced trading on the Nasdaq
Capital Market under the symbol “SQFTW” on January 24, 2022 and were distributed on that date to persons who held shares
of common stock and existing outstanding warrants as of the January 14, 2022 record date, or who acquired shares of common stock in the
market following the record date, and who continued to hold such shares at the close of trading on January 21, 2022. The Series A Warrants
give the holder the right to purchase one share of common stock at $7.00 per share, for a period of five years. Should warrantholders
not exercise the Series A Warrants during that holding period, the Series A Warrants will automatically convert to 1/10 of a share
of common stock at expiration, rounded down to the nearest number of whole shares.
During
January, February and March 2022, the Company has continued to announce and pay the monthly dividend on its 9.375% Series D Cumulative
Redeemable Perpetual Preferred Stock in the amount of $0.19531 per share for each month, respectively.
On
March 1, 2022, the Company announced that its Board of Directors has declared a cash dividend of $0.105 per share on its Series A Common
Stock for the first quarter of 2022. The dividend will be payable on March 28, 2022, to all stockholders of record as of the close of
business on March 16, 2022.
In
February 2022, the Company listed our property in Bismarck, ND, Grand Pacific Center, for sale at approximately $7.5 million. As of December
31, 2021, Grand Pacific Center had a book value of approximately $5.5 million.
On
March 11, 2022, the Company completed the sale our property World Plaza, located in San Bernardino, CA, for $10 million to an unrelated
third party.
On
March 28, 2022, Larry Dubose notified the Company that he is resigning from his positions with NetREIT Advisors, LLC and Dubose Advisors,
LLC in 2022 and will not stand for re-election at the Annual Meeting, due to his other professional commitments and demands on his time.
However, he will continue to remain an employee of our model home division.
Presidio
Property Trust, Inc. and Subsidiaries
Schedule
III - Real Estate and Accumulated Depreciation and Amortization – as of December 31, 2021
All
amounts are in thousands | |
| | |
Initial
Cost | | |
| | |
Total
Cost | | |
(1) | | |
| | |
| | |
|
| | |
| | |
Property
Name/ Location | |
Encumbrances | | |
Land
Cost | | |
Building
& Improvements | | |
Acquisition
Price | | |
Capitalized
Improvements | | |
Land
Cost | | |
Building
& Improvements | | |
Total
Cost | | |
Accumulated
Depreciation & Amortization | | |
Reserve
for Impairment | | |
NBV
Real Estate | | |
Date
Acquired |
| | |
Year
Built / Renovated | | |
Genesis Plaza,
San Diego, CA | |
$ | 6,169 | | |
$ | 1,400 | | |
$ | 8,600 | | |
$ | 10,000 | | |
$ | 2,661 | | |
$ | 1,400 | | |
$ | 11,261 | | |
$ | 12,661 | | |
$ | 4,350 | | |
$ | — | | |
$ | 8,311 | | |
| 08/10 |
| | |
| 1989 | | |
Dakota Center, Fargo, ND | |
| 9,677 | | |
| 832 | | |
| 8,743 | | |
| 9,575 | | |
| 2,876 | | |
| 832 | | |
| 11,619 | | |
| 12,451 | | |
| 3,844 | | |
| — | | |
| 8,607 | | |
| 05/11 |
| | |
| 1982 | | |
Grand Pacific Center, Bismarck,
ND (3) | |
| 3,620 | | |
| 413 | | |
| 4,926 | | |
| 5,339 | | |
| 2,124 | | |
| 413 | | |
| 7,050 | | |
| 7,463 | | |
| 2,006 | | |
| — | | |
| 5,457 | | |
| 03/14 |
| | |
| 1976 | | |
Arapahoe Center, Centennial,
CO | |
| 7,771 | | |
| 1,420 | | |
| 10,430 | | |
| 11,850 | | |
| 592 | | |
| 1,420 | | |
| 11,022 | | |
| 12,442 | | |
| 3,621 | | |
| — | | |
| 8,821 | | |
| 12/14 |
| | |
| 2000 | | |
West Fargo Industrial, Fargo,
ND | |
| 4,148 | | |
| 1,693 | | |
| 6,207 | | |
| 7,900 | | |
| 351 | | |
| 1,693 | | |
| 6,558 | | |
| 8,251 | | |
| 1,226 | | |
| — | | |
| 7,025 | | |
| 08/15 |
| | |
| 1998/2005 | | |
300 N.P., Fargo, ND | |
| 2,233 | | |
| 135 | | |
| 3,715 | | |
| 3,850 | | |
| 273 | | |
| 135 | | |
| 3,988 | | |
| 4,123 | | |
| 885 | | |
| 308 | | |
| 2,930 | | |
| 08/15 |
| | |
| 1922 | | |
One Park Centre, Westminster,
CO | |
| 6,277 | | |
| 1,206 | | |
| 7,944 | | |
| 9,150 | | |
| 1,398 | | |
| 1,206 | | |
| 9,342 | | |
| 10,548 | | |
| 2,555 | | |
| — | | |
| 7,992 | | |
| 08/15 |
| | |
| 1983 | | |
Shea Center II, Highlands Ranch,
CO | |
| 17,495 | | |
| 2,214 | | |
| 23,747 | | |
| 25,961 | | |
| 2,281 | | |
| 2,214 | | |
| 26,028 | | |
| 28,241 | | |
| 7,995 | | |
| — | | |
| 20,247 | | |
| 12/15 |
| | |
| 2000 | | |
Baltimore, Baltimore, MD | |
| — | | |
| 2,668 | | |
| 6,224 | | |
| 8,892 | | |
| 0 | | |
| 2,668 | | |
| 6,224 | | |
| 8,892 | | |
| — | | |
| | | |
| 8,892 | | |
| 12/20 |
| | |
| 2006 | | |
Total Office/
Industrial properties | |
| 57,389 | | |
| 11,981 | | |
| 80,536 | | |
| 92,517 | | |
| 12,556 | | |
| 11,981 | | |
| 93,092 | | |
| 105,073 | | |
| 26,482 | | |
| 308 | | |
| 78,283 | | |
| |
| | |
| | | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| | |
| | | |
World Plaza , San Bernardino,
CA (2) | |
| — | | |
| 1,698 | | |
| 6,232 | | |
| 7,930 | | |
| 4,289 | | |
| 1,698 | | |
| 10,521 | | |
| 12,219 | | |
| 2,246 | | |
| 700 | | |
| 9,272 | | |
| 09/07 |
| | |
| 1974 | | |
Union Town Center, Colorado
Springs, CO | |
| 8,174 | | |
| 1,750 | | |
| 9,462 | | |
| 11,212 | | |
| 67 | | |
| 1,750 | | |
| 9,529 | | |
| 11,279 | | |
| 2,110 | | |
| — | | |
| 9,169 | | |
| 12/14 |
| | |
| 2003 | | |
Research Parkway, Colorado
Springs, CO | |
| 1,705 | | |
| 408 | | |
| 2,442 | | |
| 2,850 | | |
| (50 | ) | |
| 408 | | |
| 2,392 | | |
| 2,799 | | |
| 424 | | |
| — | | |
| 2,376 | | |
| 08/16 |
| | |
| 2003 | | |
Mandolin, Houston, TX | |
| — | | |
| 1,330 | | |
| 3,562 | | |
| 4,892 | | |
| 15 | | |
| 1,330 | | |
| 3,577 | | |
| 4,906 | | |
| 31 | | |
| — | | |
| 4,876 | | |
| 08/21 |
| | |
| 2021 | | |
Total Retail
properties | |
| 9,879 | | |
| 5,186 | | |
| 21,698 | | |
| 26,884 | | |
| 4,320 | | |
| 5,186 | | |
| 26,018 | | |
| 31,203 | | |
| 4,810 | | |
| 700 | | |
| 25,693 | | |
| |
| | |
| | | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| | |
| | | |
Model Homes-DMH LP #202 | |
| 822 | | |
| 235 | | |
| 1,435 | | |
| 1,670 | | |
| — | | |
| 235 | | |
| 1,435 | | |
| 1,670 | | |
| 141 | | |
| — | | |
| 1,529 | | |
| 2017-2018 |
| | |
| 2017-2018 | | |
Model Homes-DMH LP #203 | |
| 3,273 | | |
| 1,080 | | |
| 4,697 | | |
| 5,777 | | |
| — | | |
| 1,080 | | |
| 4,697 | | |
| 5,777 | | |
| 412 | | |
| — | | |
| 5,365 | | |
| 2016-2019 |
| | |
| 2016-2019 | | |
Model Homes-DMH LP #204 | |
| 2,810 | | |
| 980 | | |
| 4,903 | | |
| 5,883 | | |
| — | | |
| 980 | | |
| 4,903 | | |
| 5,883 | | |
| 361 | | |
| — | | |
| 5,522 | | |
| 2018-2020 |
| | |
| 2018-2020 | | |
Model Homes-DMH LP #205 | |
| 4,207 | | |
| 1,260 | | |
| 5,223 | | |
| 6,482 | | |
| — | | |
| 1,260 | | |
| 5,223 | | |
| 6,482 | | |
| 280 | | |
| — | | |
| 6,202 | | |
| 2019-2020 |
| | |
| 2019-2020 | | |
Model Homes-DMH LP #206 | |
| 2,097 | | |
| 392 | | |
| 2,740 | | |
| 3,132 | | |
| — | | |
| 392 | | |
| 2,740 | | |
| 3,132 | | |
| 75 | | |
| — | | |
| 3,057 | | |
| 2020-2021 |
| | |
| 2020-2021 | | |
Model Homes-NMH Inc. | |
| 8,945 | | |
| 1,881 | | |
| 10,920 | | |
| 12,801 | | |
| — | | |
| 1,881 | | |
| 10,920 | | |
| 12,801 | | |
| 388 | | |
| — | | |
| 12,413 | | |
| 2017-2021 |
| | |
| 2017-2021 | | |
Total Model
Home properties | |
| 22,154 | | |
| 5,828 | | |
| 29,917 | | |
| 35,746 | | |
| — | | |
| 5,828 | | |
| 29,917 | | |
| 35,746 | | |
| 1,657 | | |
| — | | |
| 34,089 | | |
| |
| | |
| | | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| - | | |
| |
| | |
| | | |
CONSOLIDATED
TOTALS: | |
$ | 89,422 | | |
$ | 22,995 | | |
$ | 132,151 | | |
$ | 155,146 | | |
$ | 16,876 | | |
$ | 22,995 | | |
$ | 149,028 | | |
$ | 172,022 | | |
$ | 32,949 | | |
$ | 1,008 | | |
$ | 138,065 | | |
| |
| | |
| | | |
(1) |
Depreciation is computed on a straight-line
basis using useful lives up to 39 years. |
(2) |
Property held for sale as of December 31, 2021. |
(3) |
Property was listed as held for sale in February 2022. |
Presidio
Property Trust, Inc. and Subsidiaries
Schedule
III - Real Estate and Accumulated Depreciation and Amortization (continued) – as of December 31, 2021
| |
For the Year Ended December 31, | |
| |
2021 | | |
2020 | |
Real estate | |
| | | |
| | |
Balance at the beginning of the year | |
$ | 208,641,166 | | |
$ | 244,320,582 | |
Acquisitions | |
| 22,224,826 | | |
| 10,161,613 | |
Improvements | |
| 1,598,105 | | |
| 2,834,367 | |
Impairments | |
| (608,000 | ) | |
| (1,730,851 | ) |
Dispositions of real estate | |
| (60,842,404 | ) | |
| (46,944,545 | ) |
Balance at the end of the year | |
$ | 171,013,693 | | |
$ | 208,641,166 | |
Accumulated depreciation and amortization | |
| | | |
| | |
Balance at the beginning of the year | |
$ | (42,387,199 | ) | |
$ | (44,113,962 | ) |
Depreciation and amortization expense | |
| (5,029,579 | ) | |
| (5,938,958 | ) |
Dispositions of real estate | |
| 14,468,021 | | |
| 7,665,721 | |
Balance at the end of the year | |
$ | (32,948,757 | ) | |
$ | (42,387,199 | ) |
| |
| | | |
| | |
Real estate assets, net | |
$ | 138,064,936 | | |
$ | 166,253,967 | |
Presidio
Property Trust, Inc.
Subscription
Rights to Purchase Up to Units
Consisting
of an Aggregate of Up to Shares of Common Stock
and
Warrants to Purchase Up to Shares of Common Stock
at
a Subscription Price of $ Per Unit and
Up
to Shares of Common Stock Issuable upon the Exercise of
Warrants
Included in the Units
PROSPECTUS
|
Dealer-Manager
|
|
|
|
|
|
The
Benchmark Company, LLC |
|
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
31. |
Other
Expenses of Issuance and Distribution. |
The
following table sets forth the fees and expenses payable by us in connection with the sale of the securities being registered hereunder,
all of which will be borne by us. With the exception of the SEC registration fee, all amounts shown are estimates.
SEC registration fee | |
$ | | |
Dealer-manager fees and expenses | |
$ | | |
Subscription agent fees and expenses | |
$ | | |
Information agent fees and expenses | |
$ | | |
Legal fees and expenses | |
$ | | |
Accounting fees and expenses | |
$ | | |
Printing expenses | |
$ | | |
Miscellaneous | |
$ | | |
| |
| | |
Total | |
$ | | |
Item
32. |
Sales
to Special Parties. |
None.
Item
33. |
Recent
Sales of Unregistered Securities. |
None.
Item
34. |
Indemnification
of Directors and Officers. |
Maryland
law permits us to include a provision in our charter limiting the liability of our directors and officers to us and our stockholders
for money damages, except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services
or (b) active and deliberate dishonesty that is established by a final judgment and which is material to the cause of action. Our charter
contains a provision that eliminates our directors’ and officers’ liability to the maximum extent permitted by Maryland law.
The
MGCL requires us (unless our charter provides otherwise, which our charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service
in that capacity. The MGCL permits us to indemnify our present and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or threatened
to be made a party by reason of their service in those or certain other capacities unless it is established that:
|
● |
the
act or omission of the director or officer was material to the matter giving rise to the proceeding and (a) was committed in bad
faith or (b) was the result of active and deliberate dishonesty; |
|
|
|
|
● |
the
director or officer actually received an improper personal benefit in money, property or services; or |
|
|
|
|
● |
in
the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. |
Under
the MGCL, we may not indemnify a director or officer in a suit by us or in our right in which the director or officer was adjudged liable
to us or in a suit in which the director or officer was adjudged liable on the basis that personal benefit was improperly received. A
court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even
though the director or officer did not meet the prescribed standard of conduct or was adjudged liable on the basis that personal benefit
was improperly received. However, indemnification for an adverse judgment in a suit by us or in our right, or for a judgment of liability
on the basis that personal benefit was improperly received, is limited to expenses.
In
addition, the MGCL permits us to advance reasonable expenses to a director or officer upon our receipt of (a) a written affirmation by
the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification
and (b) a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed if it is ultimately determined
that the standard of conduct was not met.
Our
charter authorizes us to obligate ourselves, and our bylaws obligate us, to the maximum extent permitted by Maryland law in effect from
time to time, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to:
|
● |
any
present or former director or officer who is made or threatened to be made a party to, or witness in, a proceeding by reason of his
or her service in that capacity; or |
|
|
|
|
● |
any
individual who, while a director or officer of our company and at our request, serves or has served as a director, officer, partner,
trustee, member or manager of another corporation, real estate investment trust, limited liability company, partnership, joint venture,
trust, employee benefit plan or any other enterprise and who is made or threatened to be made a party to, or witness in, the proceeding
by reason of his or her service in that capacity. |
Our
charter and bylaws also permit us to indemnify and advance expenses to any individual who served any of our predecessors in any of the
capacities described above and any employee or agent of us or any of our predecessors.
We
have entered into indemnification agreements with each of our executive officers and directors whereby we agree to indemnify such executive
officers and directors to the fullest extent permitted by Maryland law against all expenses and liabilities. These indemnification agreements
also provide that upon an application for indemnity by an executive officer or director to a court of appropriate jurisdiction, such
court may order us to indemnify such executive officer or director. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors or executive officers, we have been informed that in the opinion of the SEC such indemnification is
against public policy and is therefore unenforceable.
Item
35. |
Treatment
of Proceeds from Stock Being Registered. |
None
of the proceeds of this offering will be credited to an account other than the appropriate capital share account.
Item
36. |
Financial
Statements and Exhibits. |
|
(a)
|
Financial
Statements. See page F-1 for an index to the financial statements included in the registration statement. |
|
|
|
|
(b)
|
Exhibits.
The following is a list of exhibits being filed as part of, or incorporated by reference into, this registration statement on Form
S-11: |
Number |
|
Description |
|
1.1* |
|
Form
of Dealer-Manager Agreement |
|
|
|
|
|
3.1 |
|
Articles of Merger filed with the Maryland State Department of Assessments and Taxation and the California Secretary of State on August 4, 2010 (incorporated by reference to Exhibit 3.03 of the Company’s Current Report on Form 8-K filed on August 10, 2010). |
|
|
|
|
|
3.2 |
|
Articles of Amendment and Restatement of the Articles of Incorporation, dated as of July 30, 2010 (incorporated by reference to Exhibit 3.01 of the Company’s Current Report on Form 8-K filed on August 10, 2010). |
|
|
|
|
|
3.3 |
|
Articles Supplementary filed on August 4, 2014 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on August 8, 2014). |
|
|
|
|
|
3.4 |
|
Articles of Amendment effecting the reverse stock split (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on July 31, 2020). |
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3.5 |
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Articles Supplementary classifying and designating the Series C Common Stock (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed on July 31, 2020). |
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3.6 |
|
Articles of Amendment of Presidio Property Trust, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on October 19, 2017). |
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3.7 |
|
Articles Supplementary classifying and designating 805,000 shares of the Series D Preferred Stock (incorporated by reference to the Company’s Form 8-A12B filed on June 9, 2021). |
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3.8 |
|
Articles Supplementary classifying and designating an additional 115,000 shares of the Series D Preferred Stock (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed on June 15, 2021). |
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3.9 |
|
Second Amended and Restated Bylaws of Presidio Property Trust, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed on October 19, 2017). |
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4.1 |
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Form of Series A Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form 10-12B filed on May 6, 2008). |
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4.2 |
|
Form of Common Stock Warrant (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on July 14, 2021). |
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4.3 |
|
Form of Placement Agent Warrant (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on July 14, 2021). |
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4.4 |
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Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.3 of the Company’s Current Report on Form 8-K filed on July 14, 2021). |
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4.5 |
|
Form of Warrant (incorporated by reference to Exhibit 4.5 of the Company’s Registration Statement on Form S-11 filed on November 9, 2021). |
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4.6 |
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Form of Warrant Agent Agreement (incorporated by reference to Exhibit 4.6 of the Company’s Registration Statement on Form S-11 filed on November 9, 2021). |
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4.7* |
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Form
of Warrant to be Issued to Investors in the Offering. |
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4.8* |
|
Form
of Warrant Agency Agreement between the Registrant and Direct Transfer, LLC.
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4.9* |
|
Form
of Non-Transferrable Subscription Rights Certificate to be Issued to Holders of Record in
the Offering.
|
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5.1* |
|
Opinion
of Venable LLP. |
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5.2* |
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Opinion
of Sichenzia Ross Ference LLP. |
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8.1* |
|
Opinion
of Sichenzia Ross Ference LLP regarding certain tax matters. |
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10.1+ |
|
1999 Flexible Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Registration Statement on Form 10-12B filed on May 6, 2008). |
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10.2 |
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Dividend Reinvestment Plan (incorporated by reference to Exhibit 10.2 of the Company’s Registration Statement on Form 10-12B filed on May 6, 2008). |
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10.3 |
|
Promissory Note, dated as of September 17, 2019, by and between Presidio Property Trust, Inc. and Polar Multi-Strategy Master Fund (incorporated by reference to Exhibit 1.1 of the Company’s Current Report on Form 8-K filed on September 23, 2019). |
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10.4 |
|
Agreement, dated as of September 17, 2019, by and between Presidio Property Trust, Inc. and Polar Multi-Strategy Master Fund (incorporated by reference to Exhibit 1.2 of the Company’s Current Report on Form 8-K filed on September 23, 2019). |
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10.5+ |
|
Employment Agreement for Mr. Heilbron, effective as of October 18, 2017 (incorporated by reference to Exhibit 10.2 of the Company’s Annual Report on Form 10-K filed on March 30, 2021). |
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10.7 |
|
Purchase and Sale Agreement and Joint Escrow Instructions among NetREIT Highland, LLC, NetREIT Joshua, LLC, NetREIT Casa Grande, LP, NetREIT Sunrise, LLC, NetREIT, Inc. and Sparky’s Storage 18 (CA) LP, dated as of February 6, 2015; as amended by the First Amendment dated February 25, 2015, and the Second Amendment dated April 2, 2015 (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed on April 15, 2015). |
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10.8 |
|
Form of Restricted Stock Agreement under 1999 Flexible Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Registration Statement on Form 10-12B filed on May 6, 2008). |
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10.9+ |
|
Presidio Property Trust, Inc. 2017 Incentive Award Plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on October 19, 2017). |
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10.10+ |
|
Form of Restricted Stock Agreement under 2017 Incentive Award Plan (incorporated by reference to Exhibit 10.25 of the Company’s Registration Statement on Form S-11/A filed on January 17, 2018). |
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10.11 |
|
Form of Placement Agency Agreement, dated as of July 12, 2021, by and between the Company and the Placement Agent (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on July 14, 2021). |
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10.12 |
|
Form of Securities Purchase Agreement, dated as of July 12, 2021, by and between the Company and the Purchaser (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on July 14, 2021). |
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10.13 |
|
At-The-Market Offering Agreement dated November 8, 2021, by and between Presidio Property Trust, Inc. and The Benchmark Company, LLC (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on November 9, 2021). |
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10.14 |
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Ninth Amendment to Loan Agreement signed August 19, 2021 (incorporated by reference to Exhibit 1.1 of the Company’s Current Report on Form 8-K filed on August 25, 2021). |
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10.15 |
|
Loan Agreement dated February 26, 2016, together with Second Amendment to Loan Agreement dated as of June 29, 2016, Third Amendment to Loan Agreement dated as of April 11, 2017, Joinder and Fourth Amendment to Loan Agreement dated as of February 20, 2018, Fifth Amendment to Loan Agreement dated as of April 11, 2018, Joinder and Sixth Amendment to Loan Agreement dated as of April 11, 2019, Joinder and Seventh Amendment to Loan Agreement dated as May 22, 2020 and Eighth Amendment to Loan Agreement dated as of June 26, 2020 (incorporated by reference to Exhibit 1.2 of the Company’s Current Report on Form 8-K filed on August 25, 2021). |
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10.16 |
|
Form of Indemnification Agreement entered into between the Company and each of its directors and executive officers (incorporated by reference to Exhibit 10.10 of the Company’s Registration Statement on Form S-11 filed on September 18, 2017). |
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10.17* |
|
Form
of Subscription Agent Agreement |
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14 |
|
Code of Ethics (incorporated by reference to Exhibit 14 of the Company’s Annual Report on Form 10-K filed on March 30, 2021). |
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21.1 |
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Subsidiaries
of the Registrant (incorporated by reference to Exhibit 21.1 of the Company’s Annual Report on Form 10-K filed on March 30,
2022). |
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23.1* |
|
Consent
of Venable LLP (included in Exhibit 5.1). |
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23.2* |
|
Consent
of Sichenzia Ross Ference LLP (included in Exhibit 5.2). |
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23.3* |
|
Consent
of Sichenzia Ross Ference LLP regarding certain tax matters (included in Exhibit 8.1). |
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23.4 |
|
Consent of Baker Tilly US, LLP (successor to Squar Milner LLP). |
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24.1 |
|
Power of Attorney (included on the signature page hereto). |
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99.1* |
|
Form
of Instructions as to Use of Subscription Rights Certificates |
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99.2* |
|
Form
of Letter to Stockholders who are Record Holders |
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99.3* |
|
Form
of Letter to Brokers, Dealers, Banks and Other Nominees |
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99.4* |
|
Form
of Broker Letter to Clients Who are Beneficial Holders |
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99.5* |
|
Form
of Beneficial Owner Election Form |
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99.6* |
|
Form
of Nominee Holder Certification |
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99.7* |
|
Form
of Notice of Important Tax Information |
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107 |
|
Filing Fees |
|
*
To be filed by amendment.
(a)
Insofar as indemnification for liabilities arising under the Securities Act of 1933, may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication
of such issue.
(b)
The undersigned registrant hereby further undertakes that:
(1)
For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b)(1) or (4), or 497(h) under the Securities Act shall be deemed to part of this registration statement as of the time it
was declared effective.
(2)
For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Diego, State of California, on May 4, 2022.
|
PRESIDIO
PROPERTY TRUST, INC. |
|
|
|
|
By: |
/s/
Jack K. Heilbron |
|
Name: |
Jack
K. Heilbron |
|
Title: |
Chairman
of the Board, Chief Executive Officer and President |
POWER
OF ATTORNEY
Know
all persons by these presents, that each person whose signature appears below does hereby constitute and appoint Jack K. Heilbron, with
full power of substitution and full power to act without the other, such person’s true and lawful attorney-in-fact and agent to
act for such person in such person’s name, place and stead, in any and all capacities, to sign this registration statement and
any or all amendments, including post-effective amendments to this registration statement, including a prospectus or an amended prospectus
therein and any related registration statement filed pursuant to Rule 462(b) under the Securities Act, and all other documents in connection
therewith, including all exhibits thereto, to be filed with the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done
in order to effectuate the same as fully, to all intents and purposes, as such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this registration statement and power of attorney has been signed by the
following persons in the capacities and on the dates indicated.
SIGNATURE |
|
TITLE |
|
DATE |
|
|
|
|
|
/s/
Jack K. Heilbron |
|
Chairman
of the Board, Chief Executive Officer |
|
May
4, 2022 |
Jack
K. Heilbron |
|
and
President (Principal Executive Officer) |
|
|
|
|
|
|
|
/s/
Larry G. Dubose |
|
Director
|
|
May
4, 2022 |
Larry
G. Dubose |
|
|
|
|
|
|
|
|
|
/s/
Adam Sragovicz |
|
Chief
Financial Officer |
|
May
4, 2022 |
Adam
Sragovicz |
|
(Principal
Financial Officer) |
|
|
|
|
|
|
|
/s/
Ed Bentzen |
|
Chief
Accounting Officer |
|
May
4, 2022 |
Ed
Bentzen |
|
(Principal
Accounting Officer) |
|
|
|
|
|
|
|
/s/
Jennifer A. Barnes |
|
Director |
|
May
4, 2022 |
Jennifer
A. Barnes |
|
|
|
|
|
|
|
|
|
/s/
David T. Bruen |
|
Director |
|
May
4, 2022 |
David
T. Bruen |
|
|
|
|
|
|
|
|
|
/s/
Sumner J. Rollings |
|
Director |
|
May
4, 2022 |
Sumner
J. Rollings |
|
|
|
|
|
|
|
|
|
/s/
James R. Durfey |
|
Director |
|
May
4, 2022 |
James
R. Durfey |
|
|
|
|
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