As filed with the Securities and Exchange Commission on May 4, 2022

Registration No. 333-

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM S-11

REGISTRATION STATEMENT

 

FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933

OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

 

 

 

Presidio Property Trust, Inc.

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

 

 

 

4995 Murphy Canyon Road, Suite 300

San Diego, CA 92123

(760) 471-8536

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

 

Jack K. Heilbron

Presidio Property Trust, Inc.

Chief Executive Officer and President

4995 Murphy Canyon Road, Suite 300

San Diego, CA 92123

(760) 471-8536

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

 

 

 

Copies to:

 

Darrin Ocasio

Avital Perlman

Sichenzia Ross Ference LLP

1185 Avenue of the Americas

New York, NY 10112

(212) 930-9700

 

Spencer G. Feldman

Olshan Frome Wolosky LLP
1325 Avenue of the Americas, 15th Floor
New York, New York 10019
(212) 451-2300

 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

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

 

 

 

 

 

 

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

 

PRELIMINARY PROSPECTUS

 

SUBJECT TO COMPLETION, DATED MAY 4, 2022

 

 

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

 

This prospectus relates to our distribution to holders of our common stock and the holders of warrants issued in July 2021 (the “July 2021 Warrants”), at no charge, non-transferable subscription rights referred to herein as “Subscription Rights” to purchase units. Each unit, which we refer to as a Unit, consists of one share of our Series A common stock, which we refer to as the common stock, and Series B Warrants, which we refer to as the 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 its expiration five years from the date of issuance. We refer to the offering that is the subject of this prospectus as the Rights Offering. In the Rights Offering, you will receive one subscription right for every share of common stock and/or July 2021 Warrant owned at 5:00 p.m., Eastern Time, on           , 2022, the record date of the Rights Offering, or the Record Date. The common stock and the Warrants comprising the Units will separate upon the expiration of the Rights Offering and will be issued separately but may only be purchased as a Unit, and the Units will not trade as a separate security. The Subscription Rights will not be tradable.

 

Each subscription right will entitle you to purchase one Unit, which we refer to as the Basic Subscription Right, at a subscription price per Unit of $ , which we refer to as the Subscription Price. If you exercise your Basic Subscription Rights in full, and any portion of the Units remain available under the Rights Offering, you will be entitled to an over-subscription privilege to purchase a portion of the unsubscribed Units at the Subscription Price, subject to proration and ownership limitations, which we refer to as the Over-Subscription Privilege. Each subscription right consists of a Basic Subscription Right and an Over-Subscription Privilege, which we refer to as the Subscription Right.

 

The Subscription Rights will expire if they are not exercised by 5:00 p.m., Eastern Time, on        , 2022, unless the Rights Offering is extended or earlier terminated by us. 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. We may extend the Rights Offering for an additional period of 45 days in our sole discretion. Once made, all exercises of Subscription Rights are irrevocable. 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.

 

 

 

 

We have not entered into any standby purchase agreement or other similar arrangement in connection with the Rights Offering. The Rights Offering is being conducted on a best-efforts basis and there is no minimum amount of proceeds necessary to be received in order for us to close the Rights Offering. We have engaged The Benchmark Company LLC to act as dealer-manager in the Rights Offering and placement agent for any unsubscribed Units. The Benchmark Company LLC will act as administrative agent for the Rights Offering.

 

Investing in our securities involves a high degree of risk. See “Risk Factors” beginning on page 20 of this prospectus. You should carefully consider these risk factors, as well as the information contained in this prospectus, before you invest.

 

Our stock transfer agent, Direct Transfer, LLC, will serve as the Subscription Agent and will serve as Information Agent for the Rights Offering. The Subscription Agent will hold the funds we receive from subscribers until we complete, abandon or terminate the Rights Offering. If you want to participate in this Rights Offering and you are the record holder of shares and/or July 2021 Warrants, we recommend that you submit your subscription documents to the Subscription Agent well before the deadline. If you want to participate in this Rights Offering and you hold shares of our common stock and/or July 2021 Warrants through your broker, dealer, bank or other nominee, you should promptly contact your broker, dealer, bank or other nominee and submit your subscription documents in accordance with the instructions and within the time period provided by your broker, dealer, bank or other nominee. For a detailed discussion, see “The Rights Offering - The Subscription Rights.”

 

Our board of directors reserves the right to terminate the Rights Offering for any reason any time before the expiration of the Rights Offering. If we terminate the Rights Offering, all subscription payments received will be promptly returned, without interest or deduction. We expect the Rights Offering to expire on or about , 2022, subject to our right to extend the Rights Offering as described above, and that we would close on subscriptions within five business days of such date.

 

Our common stock is listed on The Nasdaq Capital Market, or Nasdaq, under the symbol “SQFT”. On , 2022, the last reported sale price of our common stock was $ per share. There is no public trading market for the Units or Warrants and we do not intend to list them for trading on Nasdaq or any other securities exchange or market. The Subscription Rights are non-transferable and will not be listed for trading on Nasdaq or any other securities exchange or market. You are urged to obtain a current price quote for our common stock before exercising your Subscription Rights.

 

    Per Unit     Total(2)  
Subscription price   $       $          
Dealer-Manager fees and expenses(1)   $       $    
Proceeds to us, before expenses   $       $    

 

(1) In connection with this Rights Offering, we have agreed to pay to The Benchmark Company, LLC a dealer-manager fee equal to 7.0% of the gross proceeds received by us from exercises of the Subscription Rights. We agreed to reimburse out-of-pocket expenses of the dealer-manager in the Rights Offering up to $107,500. In addition, if the gross proceeds of the Rights Offering are greater than $10 million but less than $20 million, we shall 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 million, we shall pay the dealer-manager a cash management fee equal to 2% of the gross proceeds of the Rights Offering. See “Plan of Distribution.” For any unsubscribed Units placed by the dealer-manager 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.
   
(2) Assumes the Rights Offering is fully subscribed but excludes proceeds from the exercise of Warrants included within the Units.

 

Our board of directors is making no recommendation regarding your exercise of the Subscription Rights. You should carefully consider whether to exercise your Subscription Rights before the expiration date. You may not revoke or revise any exercises of Subscription Rights once made.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

Dealer-Manager

 

The Benchmark Company LLC

The date of this Prospectus is          , 2022

 

 

 

 

TABLE OF CONTENTS

 

  Page
ABOUT THIS PROSPECTUS 1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 1
INDUSTRY AND MARKET DATA 1
SUMMARY 2
OFFERING SUMMARY 10
QUESTIONS AND ANSWERS RELATING TO THE RIGHTS OFFERING 13
RISK FACTORS 20
USE OF PROCEEDS 44
DILUTION 45
THE RIGHTS OFFERING 46
DISTRIBUTION POLICY 53
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 54
BUSINESS AND PROPERTY 66
MANAGEMENT 82
EXECUTIVE AND DIRECTOR COMPENSATION 89
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 100
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES 101
PRINCIPAL STOCKHOLDERS 103
DESCRIPTION OF CAPITAL STOCK 104
CERTAIN PROVISIONS OF MARYLAND LAW AND OUR CHARTER AND BYLAWS 115
U.S. FEDERAL INCOME TAX CONSIDERATIONS 120
ERISA CONSIDERATIONS 144
PLAN OF DISTRIBUTION 147
LEGAL MATTERS 149
EXPERTS 149
WHERE YOU CAN FIND MORE INFORMATION 149
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1

 

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ABOUT THIS PROSPECTUS

 

This prospectus is part of a registration statement that we have filed with the Securities and Exchange Commission (the “SEC”). The exhibits to the registration statement contain the full text of certain contracts and other important documents we have summarized in this prospectus. Since these summaries may not contain all the information that you may find important in deciding whether to purchase our securities, you should review the full text of these documents. The registration statement and the exhibits can be obtained from the SEC as indicated under the section entitled “Where You Can Find More Information.”

 

You should rely only on the information contained in this prospectus or in any prospectus supplement or free-writing prospectus or any amendment thereto. Neither we nor the dealer-manager has authorized anyone to provide you with additional or different information from that contained in this prospectus. The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus regardless of the time of delivery of this prospectus or any exercise of the rights. Our business, financial condition, results of operations and prospects may have changed since those dates. You should read carefully the entirety of this prospectus and any applicable prospectus supplement, before making an investment decision.

 

The distribution of this prospectus and the Rights Offering and the sale of our securities in certain jurisdictions may be restricted by law. This prospectus does not constitute an offer of, or a solicitation of an offer to buy any of our securities in any jurisdiction in which such offer or solicitation is not permitted. No action is being taken in any jurisdiction outside the United States to permit an offering of our securities or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to those jurisdictions.

 

References in this prospectus to “SQFT”, “the Company”, “we”, “us”, “our” or “its”, unless the context otherwise requires, refer to Presidio Property Trust, Inc., a Maryland corporation, together with its consolidated subsidiaries. References in this prospectus to common stock, unless the context otherwise requires, refer to our Series A common stock.

 

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.

 

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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:

 

  office buildings and industrial buildings (“Office/Industrial Properties”) which total approximately 757,578 rentable square feet,
     
  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”).

 

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.

 

 

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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  

 

 

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(1)

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

 

 

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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 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.

 

 

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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:

 

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

 

 

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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:

 

 

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;

 

  Your interest in our company may be diluted as a result of this Rights Offering;
     
  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;
     
  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;
     
  We face numerous risks associated with the real estate industry that could adversely affect our results of operations through decreased revenues or increased costs;
     
  Disruptions in the financial markets and uncertain economic conditions could adversely affect the value of our real estate investments;
     
  Our inability to sell a property at the time and on the terms we desire could limit our ability to realize a gain on our investments and pay distributions to our stockholders;
     
  We may acquire properties in joint ventures, partnerships or through limited liability companies, which could limit our ability to control or liquidate such holdings;
     
  We may acquire properties “as is,” which increases the risk that we will have to remedy defects or costs without recourse to the seller;
     
  Our model home business is substantially dependent on the supply and/or demand for single family homes;
     
  A significant percentage of our properties are concentrated in a small number of states, which exposes our business to the effects of certain regional events and occurrences;
     
  We currently are dependent on internal cash from our operations, financing and proceeds from property sales to fund future property acquisitions, meet our operational costs and pay dividends to our stockholders;
     
  We depend on key personnel, and the loss of such persons could impair our ability to achieve our business objectives;
     
  We may change our investment and business policies without stockholder consent, and such changes could increase our exposure to operational risks;
     
  Provisions of Maryland law may limit the ability of a third party to acquire control of us by requiring our Board of Directors or stockholders to approve proposals to acquire our company or effect a change in control;
     
  Our management faces certain conflicts of interest with respect to their other positions and/or interests outside of our company, which could hinder our ability to implement our business strategy and to generate returns to our stockholders;
     
  We have significant outstanding indebtedness, which requires that we generate sufficient cash flow to satisfy the payment and other obligations under the terms of our debt and exposes us to the risk of default under the terms of our debt;
     
  Failure to qualify as a REIT could adversely affect our operations and our ability to pay distributions;
     
  As a REIT, we may be subject to tax liabilities that reduce our cash flow;
     
  The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions that would be treated as sales for U.S. federal income tax purposes;
     
  Our management team may invest or spend the proceeds received from the exercise of the outstanding Warrants in ways with which you may not agree or in ways which may not yield a significant return;

 

 

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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;
     
  A future issuance of stock could dilute the value of our common stock;
     
  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;
     
  Certain of our officers and directors also serve as officers and directors of the SPAC, which could give rise to conflicts of interest;
     
  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;
     
 

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

 

  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.

 

 

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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.
     
Size of Offering          Units.
     
Subscription Price   $      per Unit.
     
     
Warrants   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.
     
Record Date   5:00 p.m., Eastern Time, on        , 2022.
     
Expiration of the Rights Offering   5:00 p.m., Eastern Time, on       , 2022. We may extend the Rights Offering without notice to you. See “Extension, Amendment and Termination.”

 

 

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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.
     
Over-Subscription Privilege   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.
     
Payment Adjustments   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.
     
Delivery of Shares 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 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.
     
Non-transferability of Subscription Rights   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.
     
Transferability of Warrants   The Warrants will be separately transferable following their issuance until their expiration.
     
No Board Recommendation   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.
     
No Revocation   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.

 

 

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Use of Proceeds   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.”
     

Material U.S. Federal Income

Tax Consequences

  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.”
   
Extension, Amendment and Termination   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.
   
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.
     
Subscription Agent   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.
   
Information Agent   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 [  ].
   
Questions   If you have any questions about the Rights Offering, please contact the Information Agent, [  ], toll free at [  ], or by mail at [  ].
   
Market for Common Stock   Our common stock is listed on Nasdaq under the symbol “SQFT.”
   
Market for Warrants   The Warrants are not listed on a national exchange.
   
Dealer-Manager and Placement Agent   The Benchmark Company LLC will act as dealer-manager for the Rights Offering and placement agent for any unsubscribed Units.

 

 

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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.

 

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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.

 

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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:

 

  the current and historical trading prices of our common stock;
     
  the price at which stockholders might be willing to participate in the Rights Offering;
     
  the value of the Warrant being issued as a component of the Unit;
     
  our need for additional capital and liquidity;
     
  the cost of capital from other sources; and
     
  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.

 

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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.

 

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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:

 

  personal check drawn on a U.S. bank;
     
  certified check drawn on a U.S. bank;
     
  U.S. Postal money order; or
     
  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.”

 

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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.”

 

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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.

 

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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 entitledCautionary 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.

 

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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.

 

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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.

 

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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

 

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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:

 

  changes in national, regional and local economic conditions, which may be negatively impacted by concerns about inflation, deflation, government deficits, high unemployment rates, decreased consumer confidence and liquidity concerns, particularly in markets in which we have a high concentration of properties;
     
  fluctuations in interest rates, 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;
     
  the inability of tenants to pay rent;
     
  the existence and quality of the competition, such as the attractiveness of our properties as compared to our competitors’ properties based on considerations such as location, rental rates, amenities and safety record;
     
  competition from other real estate investors with significant capital, including other real estate operating companies, publicly traded REITs and institutional investment funds;
     
  increased operating costs, including increased real property taxes, maintenance, insurance and utilities costs;
     
  weather conditions that may increase or decrease energy costs and other weather-related expenses;
     
  oversupply of commercial space or a reduction in demand for real estate in the markets in which our properties are located;
     
  changes in, or increased costs of compliance with, laws and/or governmental regulations, including those governing usage, zoning, the environment and taxes; and
     
  civil unrest, acts of war, terrorist attacks and natural disasters, including earthquakes, wind and hail damage and floods, which may result in uninsured and underinsured losses.

 

Moreover, other factors may adversely affect our results of operations, including potential liability under environmental and other laws and other unforeseen events, many of which are discussed elsewhere in 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.

 

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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.

 

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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 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:

 

  a decrease in real estate rental revenue (our primary source of operating cash flow), as a result of temporary rent deferrals, rent abatement and/or rent reductions, rent freezes or declines impacting new and renewal rental rates on properties, longer lease-up periods for both anticipated and unanticipated vacancies (in part, due to “shelter-in-place” mandates), lower revenue recognized as a result of waiving late fees, as well as our tenants’ ability and willingness to pay rent, and our ability to continue to collect rents, on a timely basis or at all;
     
  a complete or partial closure of one or more of our properties resulting from government or tenant action (since Q1, 2021, all of our commercial properties were reopened);
     
  reductions in demand for commercial space and the inability to provide physical tours of our commercial spaces may result in our inability to renew leases, re-lease space as leases expire, or lease vacant space, particularly without concessions, or a decline in rental rates on new leases;
     
  the inability of one or more major tenants to pay rent, or the bankruptcy or insolvency of one or more major tenants, may be increased due to a downturn in its business or a weakening of its financial condition as a result of shelter-in-place orders, phased re-opening of its business, or other pandemic related causes;
     
  the inability to decrease certain fixed expenses at our properties despite decreased operations at such properties;
     
  the inability of our third-party service providers to adequately perform their property management and/or leasing activities at our properties due to decreased on-site staff;
     
  the effect of existing and future orders by governmental authorities in any of our markets, which might require homebuilders to cease operations for an uncertain or indefinite period of time, which could significantly affect new home orders and deliveries, and negatively impact their home sales revenue and ability to perform on their lease obligations to us in such markets;
     
  difficulty accessing capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deterioration in credit and financing conditions, which may affect our access to capital and our commercial tenants’ ability to fund their business operations and meet their obligations to us;
     
  the financial impact of the COVID-19 pandemic could negatively impact our future compliance with financial covenants of debt agreements;
     
  a decline in the market value of real estate may result in the carrying value of certain real estate assets exceeding their fair value, which may require us to recognize an impairment to those assets;
     
  future delays in the supply of products or services may negatively impact our ability to complete the renovations and lease-up of our buildings on schedule or for their original estimated cost;
     
  future delays in the supply of products or services may negatively impact our ability to complete the renovations and lease-up of our buildings on schedule or for their original estimated cost;
     
  a general decline in business activity and demand for real estate transactions could adversely affect our ability or desire to grow or change the complexion of our portfolio of properties;

 

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

 

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

 

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

 

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

 

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.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of 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.

 

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

 

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

 

We may incur substantial costs in improving our properties.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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.

 

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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.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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.

 

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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.

 

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Even if this offering is fully subscribed, ourlong-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.

 

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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 stockholdersinvestment 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.

 

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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 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:

 

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

 

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

 

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

 

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

 

We rely on our management, including Mr. Heilbron, our Chief Executive Officer and President, for implementation of our investment policies and our day-to-day operations. Although the majority of his business time is spent working for 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.

 

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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.

 

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Risks Related to our Indebtedness

 

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

 

Our total gross indebtedness as of 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:

 

  make it more difficult for us to satisfy our obligations;
     
  limit our ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements, or to carry out other aspects of our business plan;
     
  limit our ability to refinance our indebtedness at maturity or impose refinancing terms that may be less favorable than the terms of the original indebtedness;
     
  require us to dedicate a substantial portion of our cash flow from operations to payments on obligations under our outstanding indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures and other general corporate requirements, or adversely affect our ability to meet REIT distribution requirements imposed by the Code;
     
  cause us to violate restrictive covenants in the documents that govern our indebtedness, which would entitle our lenders to charge default rates of interest and/or accelerate our debt obligations;
     
  cause us to default on our obligations, causing lenders or mortgagees to foreclose on properties that secure our loans and receive an assignment of our rents and leases;
     
  force us to dispose of one or more of our properties, possibly on unfavorable terms or in violation of certain covenants to which we may be subject;
     
  limit our ability to make material acquisitions or take advantage of business opportunities that may arise and limit our flexibility in planning for, or reacting to, changes in our business and industry, thereby limiting our ability to compete effectively or operate successfully; and
     
  cause us to not have sufficient cash flow to pay dividends to our stockholders or place restrictions on the payment of dividends to our stockholders.

 

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

 

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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.

 

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

 

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

 

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

 

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

 

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

 

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.

 

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

 

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

 

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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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 .

 

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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;
   
  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 common stock being issued as a component of the Unit;
   
  the value of the Warrant being issued as a component of the Unit; and
   
  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.

 

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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.

 

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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

 

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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

 

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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.

 

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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.

 

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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        

 

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MANAGEMENTS 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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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

 

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

 

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

 

Real Estate Held for Sale and Discontinued Operations. Real estate sold 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:

 

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  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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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
     
  Distributions to noncontrolling interest increased approximately $5.2 million related to sale of model home properties.
     
  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
     
  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.

 

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BUSINESS AND PROPERTY

 

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

 

Overview

 

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

 

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.

 

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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.

 

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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

 

  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.
     
  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.

 

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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.
     
  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.
     
  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.
     
  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.
     
  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.
     
  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.
     
  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.

 

  Main Avenue consists of two buildings. This project accommodates mid-sized tenants requiring loading docks and ample truck access.
     
  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.
     
  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

 

  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.

 

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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