Item 1.01 Entry into a Material Definitive Agreement.
Preferred Equity Investment Agreement
On November 22, 2022, Broad Street Operating Partnership, LP (the “Operating Partnership”), the operating partnership of Broad Street Realty, Inc. (the “Company”), and Broad Street Eagles JV LLC, a newly formed subsidiary of the Operating Partnership (the “Eagles Sub-OP”), entered into a Preferred Equity Investment Agreement (the “Investment Agreement”) with CF Flyer PE Investor LLC (the “Fortress Member”), an affiliate of Fortress Investment Group LLC (“Fortress”), pursuant to which the Fortress Member invested $80.0 million in the Eagles Sub-OP in exchange for a preferred membership interest (such interest, the “Preferred Interest” and such investment, the “Preferred Equity Investment”). The terms, rights, obligations and preferences of the Preferred Interest are set forth in the Operating Agreement (as defined below). The Company’s board of directors (the “Board”) unanimously approved the Investment Agreement, the Preferred Equity Investment and the related agreements and transactions contemplated thereby. The closing under the Investment Agreement occurred on November 23, 2022.
In connection with the Preferred Equity Investment, (i) the Fortress Member was admitted as a member of the Eagles Sub-OP, (ii) the Operating Partnership, the Fortress Member and the Independent Manager (as defined in the Operating Agreement) entered into an Amended and Restated Limited Liability Company Agreement of the Eagles Sub-OP (the “Operating Agreement”), (iii) the Operating Partnership contributed to the Eagles Sub-OP its subsidiaries that, directly or indirectly, own the properties known as Brookhill Azalea Shopping Center, Vista Shops, Hollinswood Shopping Center, Avondale Shops, Greenwood Village Shopping Center and Lamar Station Plaza East, (iv) the Company’s subsidiary, Broad Street BIG First OP LLC (the “Basis Sub-OP”), redeemed 100% of the preferred membership interests in the Basis Sub-OP held by a subsidiary of Basis Management Group, LLC for $8.5 million (“Basis Redemption”), (v) the previously announced LSP Merger (as defined below) was consummated, (vi) the previously announced Midtown Row Acquisition (as defined below) was consummated, (vii) the previously announced acquisition of a land parcel adjacent to Lamar Station Plaza for a purchase price of $2.3 million was completed by a subsidiary of the Eagles Sub-OP, (viii) the Company’s term loans and credit facility with MVB Bank, Inc. (the “MVB Loans”) were paid in full, (ix) the loan secured by the property known as Lamar Station Plaza East was paid in full and (x) the Company exercised its option to extend the maturity date of the senior secured term loan (the “Basis Term Loan”) with Big Real Estate Finance I, LLC to January 1, 2024. The proceeds from the Preferred Equity Investment were used to fund all or a portion of the foregoing transactions, to pay transaction costs and for working capital.
The Investment Agreement contains customary representations and warranties made by the Operating Partnership and the Fortress Member, and certain of the Operating Partnership’s representations and warranties are qualified by information included in schedules to the Investment Agreement.
In connection with the Preferred Equity Investment, the Company, the Operating Partnership and the Eagles Sub-OP, as applicable, entered into the following agreements, which are described below (such documents, the “Transaction Documents”):
•the Operating Agreement;
•Governance Agreement, dated November 22, 2022, by and between the Company, the Fortress Member and the other parties named therein (the “Governance Agreement”);
•Warrant to Purchase Common Stock, dated November 22, 2022, by and between the Company and the Fortress Member (the “Fortress Warrant”);
•Cash Flow Pledge Agreement, dated November 22, 2022, by the Operating Partnership in favor of the Fortress Member (the “Cash Flow Pledge”);
•Guaranty of Recourse Obligations, dated November 22, 2022, by the Company for the benefit of the Fortress Member (the “Company Guaranty”); and
•Registration Rights Agreement, dated November 22, 2022, by and between the Company and the Fortress Member (the “Registration Rights Agreement”).
The foregoing description of the Investment Agreement does not purport to be complete and is qualified in its entirety by reference to the Investment Agreement, which is filed as Exhibit 10.1 hereto and incorporated herein by reference.
Operating Agreement
Management Rights
The Operating Partnership serves as the managing member of the Eagles Sub-OP. The approval of the Fortress Member, however, is required for certain Major Actions (as defined in the Operating Agreement), including, but not limited to: (i) the adoption and approval of annual corporate and property budgets; (ii) the amendment, renewal, termination or modification of Material Contracts (as defined in the Operating Agreement), leases over 5,000 square feet and certain loan documents; (iii) the liquidation, dissolution, or winding-up of the Eagles Sub-OP, the Company or any of its subsidiaries; (iv) taking actions of bankruptcy or failing to defend an involuntary bankruptcy action of the Eagles Sub-OP, the Company or any of its subsidiaries; (v) effecting any reorganization or recapitalization of the Eagles Sub-OP, the Company or any of its subsidiaries; (vi) declaring or paying distributions on any equity security of the Eagles Sub-OP, the Company or any of its subsidiaries, subject to certain exceptions; (vii) issuing any equity securities
in the Eagles Sub-OP, the Company or any of its subsidiaries, subject to certain exceptions; (viii) conducting a merger or consolidation of the Eagles Sub-OP, the Company or the Operating Partnership or selling substantially of the assets of the Company and its subsidiaries or the Eagles Sub-OP and its subsidiaries; (ix) amending, terminating or otherwise modifying the loans secured by the properties indirectly owned by the Eagles Sub-OP, subject to certain exceptions; (x) incurring additional indebtedness or making prepayments on indebtedness, subject to certain exceptions; (xi) acquiring any property outside the ordinary course of business of the Company; and (xii) selling any property below the minimum release price for such property.
In the event of a Trigger Event (as defined in the Operating Agreement and as described below), the Fortress Member has the right, among others, to remove the Operating Partnership as the managing member of the Eagles Sub-OP and to serve as the managing member until the Fortress Member is paid an amount (the “Redemption Amount”) equal to the sum of: (i) all outstanding loans advanced to the Eagles Sub-OP by the Fortress Member in accordance with the terms of the Operating Agreement, together with all accrued and unpaid return on such loans; (ii) the unredeemed balance of the Preferred Equity Investment; (iii) an amount equal to the greater of (x) all accrued and unpaid Preferred Return and (y) a 1.40x minimum multiple on the amount of all loans and capital contributions made by the Fortress Member to the Eagles Sub-OP in accordance with the terms of the Operating Agreement, which minimum multiple shall be reduced to 1.30x upon the consummation of a Qualified Public Offering (as defined below); and (iv) all other payments, fees, costs and expenses due or payable to the Fortress Member under the Operating Agreement, including a $10.0 million exit fee unless the Redemption Amount is paid upon or following the completion of a Qualified Public Offering.
Preferred Return
Pursuant to the Operating Agreement, the Fortress Member is entitled to monthly distributions, a portion of which will be paid in cash (the “Current Preferred Return”) and a portion of which will accrue on and be added to the Preferred Equity Investment each month (the “Capitalized Preferred Return” and, together with the Current Preferred Return, the “Preferred Return”). The initial Preferred Return is 12% per annum, comprised of a 5% Current Preferred Return and a 7% Capitalized Preferred Return; provided that, until the Portfolio Excluded Properties (as defined below) are contributed to the Eagles Sub-OP, the Capitalized Preferred Return is increased by 4.75%. The Capitalized Preferred Return increases each year by 1%. Commencing on November 22, 2027, the Preferred Return will be 19% per annum, all payable in cash, and will increase an additional 3% each year thereafter.
Upon the occurrence of a Trigger Event, a Delaware Law Payment Grace Period (as defined in the Operating Agreement) or if a Qualified Public Offering has not occurred on or prior to November 22, 2027, the entire Preferred Return shall accrue at the then-applicable Preferred Return plus 4% and shall be payable monthly in cash.
Excluded Properties
As of November 23, 2022, the Eagles Sub-OP indirectly owned the following eight properties: (i) Brookhill Azalea Shopping Center, (ii) Vista Shops, (iii) Hollinswood Shopping Center, (iv) Avondale Shops, (v) Greenwood Village Shopping Center, (vi) Lamar Station Plaza, (vii) Lamar Station Plaza East and (viii) Midtown Row.
The subsidiaries of the Operating Partnership that indirectly own the following nine properties were not contributed to the Eagles Sub-OP in connection with the closing of the Preferred Equity Investment but will be contributed to the Eagles Sub-OP on or prior to the applicable outside date: (i) Highlandtown, (ii) Spotswood, (iii) Cromwell Field and (iv) the six properties securing the Basis Term Loan (Crestview Square, Coral Hills Shopping Center, Dekalb Plaza, Midtown Row Building 10, West Broad Commons Shopping Center and Williamsburg Shopping Center (the “Portfolio Excluded Properties” and, collectively with Highlandtown, Spotswood and Cromwell Field, the “Excluded Properties”). The outside dates for Cromwell Field, Highlandtown, the Basis Excluded Properties and Spotswood are December 31, 2022, May 6, 2023, June 30, 2023 and July 6, 2023, respectively. On or prior to the applicable outside date, (i) the property-owning entity for the applicable Excluded Property must be contributed to the Eagles Sub-OP, (ii) the current mortgage loan for the applicable Excluded Properties must be paid off and released and, in the case of Highlandtown and Spotswood, the preferred equity must be redeemed and (iii) the property owner must enter into one or more new mortgage loans secured by the applicable Excluded Property.
Qualified Public Offering
Under the Operating Agreement, a “Qualified Public Offering” is defined as an underwritten public offering of shares of the Company’s common stock (“Common Stock”) listed on the New York Stock Exchange, the NYSE American, the Nasdaq Global Market or the Nasdaq Global Select Market with gross proceeds to the Company of not less than $150.0 million from shares issued to unaffiliated third parties, with a minimum of 35% of such shares issued to institutional investors and subject to certain other conditions. If the Company has not completed a Qualified Public Offering by November 22, 2025, the Fortress Member has the right to (i) require the Company and its subsidiaries to pursue the feasibility of “going private” (including ceasing to report with the SEC), (ii) require the Company and its subsidiaries to decrease expenses in accordance with the Operating Agreement, and (iii) cause the Company to commence and pursue a process for the Eagles Sub-OP to sell properties to achieve a Total Yield (as defined in the Operating Agreement) (A) with respect to all properties, directly or indirectly, owned by the Sub-OP (the “Portfolio”) of at least (x) 8.5% by May 22, 2026, (y) 9.0% by November 22, 2026, and (z) 9.5% by May 22, 2027, and (B) with respect to the Portfolio excluding Midtown Row (as defined below), at least (x) 9.25% by May 22, 2026, (y) 9.75% by November 22, 2026, and (z) 10.25% by May 22, 2027.
Trigger Events
Under the Operating Agreement, Trigger Events include, but are not limited to, the following: (i) fraud, gross negligence, willful misconduct, criminal acts or intentional misappropriation of funds with respect to a property by the Company or any of its subsidiaries; (ii) a Bankruptcy Event (as defined in the Operating Agreement) with respect to the Company or any of its subsidiaries, except for an involuntary bankruptcy that is dismissed within 90 days of commencement; (iii) a material breach of certain provisions of the Operating Agreement; (iv) monetary defaults or material non-monetary defaults under the mortgage loans secured by properties in the Portfolio or the Excluded Properties or the Fortress Mezzanine Loan (as defined below); (v) failure to meet the minimum Total Yield requirements under the Operating Agreement; (vi) failure to pay the Current Preferred Return (subject to a limited cure period) or failure to make distributions as required by the Operating Agreement; (vii) the occurrence of a Change of Control (as defined in the Operating Agreement); (viii) failure to contribute the Excluded Properties and consummate the related transactions by the applicable outside date; (ix) Michael Jacoby, the Company’s chief executive officer and chairman of its board of directors, (A) ceasing to be employed as the chief executive officer of the Company, (B) not being activity involved in the management of the Company or (C) failing to hold an aggregate of at least 3,802,594 shares of Common Stock and OP Units (as defined below), in each case subject to the Company’s right to appoint a replacement chief executive officer reasonably acceptable to the Fortress Member within 90 days; and (x) material breaches or material defaults of the Company, the Operating Partnership or their subsidiaries under the Investment Agreement, the Cash Flow Pledge or the Governance Agreement.
Upon the occurrence of a Trigger Event, the Fortress Member has the right to cause the Eagles Sub-OP to redeem the Preferred Interest by payment to the Fortress Member of the full amount of the Redemption Amount upon not less than 90 days prior written notice to the Eagles Sub-OP, unless the Trigger Event is in connection with a Bankruptcy Event, in which case the redemption must occur as of the date of such Trigger Event.
In addition, in the event of a Trigger Event or if a Qualified Public Offering has not occurred by November 22, 2027, the Fortress Member can exercise the following rights, among others: (i) remove the Operating Partnership as the managing member of the Eagles Sub-OP; (ii) cause the Eagles Sub-OP to sell one or more properties until the entire Preferred Interest has been redeemed for the Redemption Amount; (iii) cause the Eagles Sub-OP to use certain reserve accounts to pay the Fortress Member the full Redemption Amount; and (iv) terminate all property management and other service agreements with affiliates of the Company.
Mandatory Redemption and Conversion upon Qualified Public Offering
Upon the closing of a Qualified Public Offering, unless earlier redeemed, the Eagles Sub-OP must redeem the entire Preferred Interest by payment in cash to the Fortress Member of the full Redemption Amount, provided that (i) the Eagles Sub-OP may elect, in its discretion, not to redeem $37.5 million of the Preferred Equity Investment and (ii) $25.0 million of the Preferred Equity Investment (less the amount of the Fortress Mezzanine Loan converted into Common Stock in connection with such Qualified Public Offering, if any) will be converted to shares of Common Stock at a price of $2.00 per share, subject to certain adjustments.
Voluntary Redemption
The Operating Partnership may cause the Eagles Sub-OP to redeem the Preferred Interest in whole (but not in part), by payment in cash to the Fortress Member of the full Redemption Amount, as long as the Fortress Mezzanine Loan is repaid in full before or concurrently with such redemption.
The foregoing description of the Operating Agreement does not purport to be complete and is qualified in its entirety by reference to the Operating Agreement, which is filed as Exhibit 10.2 hereto and incorporated herein by reference.
Governance Agreement
Pursuant to the Governance Agreement, so long as (i) the Preferred Equity Investment outstanding, in whole or in part, or (ii) the Fortress Member or its affiliates hold five percent (5%) or more of the issued and outstanding Common Stock (assuming all securities held by the Fortress Member or its affiliates that are convertible or exchangeable into shares of Common Stock have been so converted or exchanged) (the “Governance Rights Period”), at each annual or special meeting of the stockholders of the Company, the Company must nominate, and use reasonable efforts to solicit proxies for, a person identified by the Fortress Member (the “Fortress Director”) to serve on the Board. During the Governance Rights Period, any vacancy in the Fortress Director’s seat on the Board must be filled by the Board with a new Fortress Director identified by the Fortress Member. Furthermore, Mr. Jacoby and Thomas M. Yockey, a director of the Company, agreed to vote in favor of each Fortress Director nominated to serve on the Board.
In addition, upon the request of the Fortress Member, the Company must appoint the Fortress Director to each committee of the Board as the Fortress Member may request, subject to certain exceptions and applicable independence and other requirements of the SEC or any national securities exchange or over-the-counter market on which the Common Stock is traded or quoted.
In connection with the closing of the Preferred Equity Investment, the Board appointed Noah Shore to serve as the initial Fortress Director. See Item 5.02 below for further details regarding the appointment of Mr. Shore.
During the Governance Rights Period, the Fortress Member is also entitled to designate an individual to attend meetings of the Board or any committee thereof, in each case as a non-voting observer and subject to certain exceptions.
The foregoing description of the Governance Agreement does not purport to be complete and is qualified in its entirety by reference to the Governance Agreement, which is filed as Exhibit 10.3 hereto and incorporated herein by reference.
Fortress Warrant
The Fortress Warrant provides the Fortress Member the right to purchase 2,560,000 shares of Common Stock at an exercise price of $0.01 per share, subject to certain adjustments. The Fortress Warrant may be exercised on a cashless basis and will automatically be deemed exercised in full on a cashless basis upon the occurrence of a Qualified Public Offering.
If at any time the Company grants, issues or sells any convertible securities or other rights to purchase stock, warrants, securities or other property pro rata to holders of shares of Common Stock, the Fortress Member will be entitled to acquire, on the same terms as granted to holders of shares of Common Stock, the aggregate number of convertible securities or other rights to purchase stock, warrants, securities or other property that the Fortress Member would have otherwise been entitled to acquire had the Fortress Member held the number of shares of Common Stock acquirable upon complete exercise of the Fortress Warrant on the record date for such grant by the Company.
In the event of a Reorganization Event (as defined in the Fortress Warrant), as a result of which the Common Stock would be converted into, or exchanged for stock, other securities, other property or assets, the right to receive shares of Common Stock upon exercise of the Fortress Warrant will be changed to a right to receive the kind and amount of shares of stock, other securities or other property or assets that a holder of one share of Common Stock was entitled to receive in connection with such Reorganization Event.
The foregoing description of the Fortress Warrant does not purport to be complete and is qualified in its entirety by reference to the Fortress Warrant, which is filed as Exhibit 10.4 hereto and incorporated herein by reference.
Cash Flow Pledge
Pursuant to the Cash Flow Pledge, the Operating Partnership pledged to the Eagles Sub-OP, and agreed to contribute to the Eagles Sub-OP, all distributions that the Operating Partnership receives from its subsidiaries that, directly or indirectly, own the Excluded Properties, after taking into account amounts payable by such entities on account of mortgages secured by the Excluded Properties.
The foregoing description of the Cash Flow Pledge does not purport to be complete and is qualified in its entirety by reference to the Cash Flow Pledge, which is filed as Exhibit 10.5 hereto and incorporated herein by reference.
Guaranty of Recourse Obligations
Pursuant to the Company Guaranty, the Company guaranteed certain obligations of its subsidiaries under the Transaction Documents for the benefit of the Fortress Member. In addition, Messrs. Jacoby and Yockey guaranteed the full payment of the Redemption Amount in the event of a bankruptcy event of a Broad Street entity without the consent of the Fortress Member or certain other events that interfere with the rights of the Fortress Member under the Transaction Documents.
Registration Rights Agreement
Pursuant to the Registration Rights Agreement, the Company provided the Fortress Member with certain registration rights with respect to the shares of Common Stock issuable upon conversion of the Preferred Interest and/or the Fortress Mezzanine Loan and the exercise of the Fortress Warrant, including, at any time after a Qualified Public Offering, up to three demand registrations and up to three underwritten offerings in any 12-month period, as well as certain piggyback rights. In addition, the Company and the Fortress Member agreed to certain lock-up restrictions in connection with any underwritten offerings.
The foregoing description of the Registration Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the Registration Rights Agreement, which is filed as Exhibit 10.6 hereto and incorporated herein by reference.
Partnership Agreement Amendment
In connection with the Midtown Row Acquisition, on November 22, 2022, the general partner of the Operating Partnership entered into Amendment No. 1 (the “LPA Amendment”) to the Agreement of Limited Partnership of the Operating Partnership (the “Partnership Agreement”) in order to provide for the issuance, and the designation of the terms and conditions, of newly classified Series A preferred units of limited partnership interest in the Operating Partnership (the “Preferred OP Units”).
Under the LPA Amendment, each Preferred OP Unit has a liquidation preference (the “Liquidation Preference”) equal to the sum of (i) $2.00 and (ii) the accrued Capitalized Preferred OP Unit Return (as defined below). Pursuant to the LPA Amendment, the holders of Preferred OP Units are entitled to monthly distributions, a portion of which will be paid in cash (the “Current Preferred OP Unit Return”) and a portion of which will accrue on and be added to the Liquidation Preference each month (the “Capitalized Preferred OP Unit Return” and, together with the Current Preferred OP Unit Return, the “Preferred OP Unit Return”). The initial Preferred OP Unit Return is 12% per annum, comprised of a 5% Current Preferred OP Unit Return and 7% Capitalized Preferred OP Unit Return. The Capitalized Preferred OP Unit Return increases each year by 1%. After November 23, 2027, the Preferred OP Unit Return will be 19% per annum, all payable in cash, and will increase an additional 3% each year thereafter.
Holders of the Preferred OP Units have the right to convert (the “Optional Conversion Right”) each Preferred OP Unit into one Class A common unit of limited partnership interest in the Operating Partnership (a “Common OP Unit” and, together with the Preferred OP Units, “OP Units”), plus a cash payment for each Preferred OP Unit so converted equal to (i) (A) the Liquidation Preference at such time, minus (B) $2.00 and (ii) all accrued and unpaid Preferred OP Unit Return (to the extent not already added to the Liquidation Preference) (the “Conversion Liquidation Payment”).
On the date that the Common Stock is first listed on the New York Stock Exchange, the NYSE American or the Nasdaq Stock Market, each Preferred OP Unit will automatically convert into one Common OP Unit and the right to receive the Conversion Liquidation Payment.
The Operating Partnership has the right to redeem some or all of the Preferred OP Units for cash in an amount per unit equal to the sum of (i) the Liquidation Preference plus (ii) all accrued and unpaid Preferred OP Unit Return (to the extent not already added to the Liquidation Preference).
Holders of the Preferred OP Units have no voting rights except with respect to (i) the issuance of partnership units of the Operating Partnership senior to the Preferred OP Units as to the right to receive distributions and upon liquidation, dissolution or winding up of the Operating Partnership, (ii) the issuance of additional Preferred OP Units and (iii) amendments to the Partnership Agreement that materially and adversely affect the rights or benefits of the holders of the Preferred OP Units.
The foregoing description of the LPA Amendment does not purport to be complete and is qualified in its entirety by reference to the LPA Amendment, which is filed as Exhibit 10.7 hereto and incorporated herein by reference.
MTR Loans
The information under Item 2.03 is incorporated into this Item 1.01 by reference.