FRANKLIN PARENT, LLC
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 2, 2018 (UNAUDITED), DECEMBER 31, 2017
(UNAUDITED), AND 2016 (AUDITED)
FRANKLIN PARENT, LLC AND SUBSIDIARY
Table of Contents | February 2, 2018 (unaudited), December 31, 2017 (unaudited), and 2016 (audited) |
Independent Accountant’s Compilation Report
To the Members
Franklin Parent, LLC and Subsidiary
Sandy Springs, Georgia
Management is responsible for the accompanying consolidated financial statements of Franklin Parent, LLC and Subsidiary, which comprise the consolidated balance sheet as of February 2, 2018, and the related consolidated statements of operations, members’ equity (deficit), and cash flows for the period then ended, and the related notes to the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. We have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. We did not audit or review the financial statements, nor were we required to perform any procedures to verify the accuracy or the completeness of the information provided by management, and we do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements.
The December 31, 2017, consolidated financial statements were compiled by us. We did not audit or review those consolidated financial statements and, accordingly, express no opinion or other form of assurance on them.
The December 31, 2016, consolidated financial statements were audited by us, and we expressed an unmodified opinion on them in our report dated February 18, 2017. We have not performed any auditing procedures since that date.
Memphis, Tennessee
February 13, 2019
FRANKLIN PARENT, LLC AND SUBSIDIARY
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Consolidated Balance Sheets | February 2, 2018 (unaudited) and December 31, 2017 (unaudited) |
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ASSETS |
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| | 2018 | | 2017 |
Current assets | | | | | | |
Cash and cash equivalents | | $ | 62,439 | | $ | 31,171 |
Accounts receivable | | | 8,140 | | | 11,147 |
Prepaid insurance | | | 3,097 | | | - |
Due from related party | | | 5,184 | | | 5,631 |
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Total current assets | | | 78,860 | | | 47,949 |
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Real estate facilities, net | | | 5,413,732 | | | 5,438,619 |
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Total assets | | $ | 5,492,592 | | $ | 5,486,568 |
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LIABILITIES AND MEMBERS' (DEFICIT) |
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Current liabilities | | | | | | |
Accounts payable | | $ | 9,365 | | $ | 3,675 |
Accrued property taxes | | | 4,771 | | | - |
Due to related party | | | 2,717 | | | 2,717 |
Due to management company | | | 15,132 | | | 11,929 |
Prepaid rents | | | 27,601 | | | 26,993 |
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Total current liabilities | | | 59,586 | | | 45,314 |
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Notes payable | | | | | | |
Construction note | | | 5,096,589 | | | 5,062,069 |
Mezzanine note | | | 667,959 | | | 667,870 |
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Total liabilities | | | 5,824,134 | | | 5,775,253 |
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Members' equity (deficit) | | | (331,542) | | | (288,685) |
Total liabilities and members' equity (deficit) | | $ | 5,492,592 | | $ | 5,486,568 |
See independent accountant’s compilation report and accompanying notes to the consolidated financial statements.
FRANKLIN PARENT, LLC AND SUBSIDIARY
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| For the period from January 1, 2018 to February 2, 2018 |
| (unaudited) and for the years ended |
Consolidated Statements of Operations | December 31, 2017 (unaudited), and 2016 (audited) |
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| | 2018 | | 2017 | | 2016 |
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Revenues | | | | | |
Self-storage facilities | | $ | 54,355 | | $ | 488,973 | | $ | 114,701 |
Ancillary operations | | | 306 | | | 36,034 | | | 12,361 |
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Total revenues | | | 54,661 | | | 525,007 | | | 127,062 |
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Operating expenses | | | | | | | | | |
Self-storage cost of operations | | | 26,976 | | | 216,588 | | | 112,359 |
Depreciation | | | 24,887 | | | 298,639 | | | 174,206 |
General and administrative | | | 11,046 | | | 123,711 | | | 66,897 |
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Total operating expenses | | | 62,909 | | | 638,938 | | | 353,462 |
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Operating loss | | | (8,248) | | | (113,931) | | | (226,400) |
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Interest expense | | | 34,609 | | | 401,377 | | | 219,198 |
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Net loss | | $ | (42,857) | | $ | (515,308) | | $ | (445,598) |
See independent accountant’s compilation report and accompanying notes to the consolidated financial statements.
FRANKLIN PARENT, LLC AND SUBSIDIARY
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| For the period from January 1, 2018 to February 2, 2018 |
| (unaudited) and for the years ended |
Consolidated Statements of Members’ Equity (Deficit) | December 31, 2017 (unaudited), and 2016 (audited) |
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| | Class A | | Class B | | | |
| | Units | | Amount | | Units | | Amount | | Total |
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Members' equity at December 31, 2015 | | | 501 | | $ | 672,221 | | | 499 | | $ | - | | $ | 672,221 |
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Net loss | | | - | | | (227,255) | | | - | | | (218,343) | | | (445,598) |
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Members' equity (deficit) at December 31, 2016 | | | 501 | | | 444,966 | | | 499 | | | (218,343) | | | 226,623 |
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Net loss | | | - | | | (258,169) | | | - | | | (257,139) | | | (515,308) |
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Members' equity (deficit) at December 31, 2017 | | | 501 | | | 186,797 | | | 499 | | | (475,482) | | | (288,685) |
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Net loss | | | - | | | (21,471) | | | - | | | (21,386) | | | (42,857) |
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Members' equity (deficit) at February 2, 2018 | | | 501 | | $ | 165,326 | | | 499 | | $ | (496,868) | | $ | (331,542) |
See independent accountant’s compilation report and accompanying notes to the consolidated financial statements.
FRANKLIN PARENT, LLC AND SUBSIDIARY
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| For the period from January 1, 2018 to February 2, 2018 |
| (unaudited) and for the years ended |
Consolidated Statements of Cash Flows | December 31, 2017 (unaudited), and 2016 (audited) |
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| | 2018 | | 2017 | | 2016 |
Operating activities: | | | | | | | | | |
Net loss | | $ | (42,857) | | $ | (515,308) | | $ | (445,598) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | | |
Depreciation | | | 24,887 | | | 298,639 | | | 174,206 |
Amortization of loan costs | | | 799 | | | 9,196 | | | 5,046 |
Interest expense capitalized to note payable | | | 33,810 | | | 147,447 | | | 214,152 |
Change in operating assets and liabilities: | | | | | | | | | |
Accounts receivable | | | 3,007 | | | (5,228) | | | (5,919) |
Prepaid insurance | | | (3,097) | | | - | | | - |
Due from related party | | | 447 | | | - | | | (5,631) |
Accounts payable | | | 5,690 | | | (1,645) | | | 5,320 |
Accrued property taxes | | | 4,771 | | | - | | | - |
Due to related party | | | - | | | - | | | (307) |
Due to management company | | | 3,203 | | | 2,729 | | | 9,200 |
Prepaid rents | | | 608 | | | 3,968 | | | 23,025 |
Net cash provided by (used in) operating activities | | | 31,268 | | | (60,202) | | | (26,506) |
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Investing activities: | | | | | | | | | |
Construction of real estate facilities | | | - | | | - | | | (2,857,881) |
Net cash used in investing activities | | | - | | | - | | | (2,857,881) |
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Financing activities: | | | | | | | | | |
Proceeds from issuance of notes payable | | | - | | | 2,252 | | | 2,510,173 |
Net cash provided by financing activities | | | - | | | 2,252 | | | 2,510,173 |
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Net increase (decrease) in cash and cash equivalents | | | 31,268 | | | (57,950) | | | (374,214) |
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Cash and cash equivalents, beginning of year | | | 31,171 | | | 89,121 | | | 463,335 |
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Cash and cash equivalents, end of year | | $ | 62,439 | | $ | 31,171 | | $ | 89,121 |
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Supplemental Disclosure of Cash Flow Information |
Cash paid for interest | | $ | - | | $ | 244,734 | | $ | - |
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Supplemental Disclosure of Noncash Investing and Financing Activities |
Interest capitalized to real estate facilities funded by note payable | | $ | - | | $ | - | | $ | 114,435 |
See independent accountant’s compilation report and accompanying notes to the consolidated financial statements.
Table of Contents
FRANKLIN PARENT, LLC AND SUBSIDIARY
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| February 2, 2018 (unaudited) |
Notes to the Consolidated Financial Statements | December 31, 2017 (unaudited), and 2016 (audited) |
Note 1 – Organization and Business Activity
Franklin Parent, LLC (the "Company"), a Georgia limited liability company, was formed on June 17, 2015. The Company operates 727 self-storage units in Marietta, Georgia through its wholly-owned subsidiary Franklin Owner, LLC. Franklin Owner, LLC was established to acquire, develop, and construct a self-storage facility for the purpose of obtaining rental income and long-term appreciation. The self-storage facility offers space for lease, generally on a month-to-month basis, for personal and business use and ancillary activities, such as merchandise sales and tenant reinsurance, to tenants at the self-storage facility.
On February 2, 2018, Jernigan Capital Operating Company, LLC, Class B member of the Company, purchased 501 Class A units from RRB Franklin, LLC increasing its membership interest in the Company from 49.9% to 100%.
Note 2 – Summary of Significant Accounting Policies
Basis of Accounting
The consolidated financial statements are presented on an accrual basis in accordance with U.S. generally accepted accounting principles (“GAAP”) as defined in the Financial Accounting Standards Board Accounting Standards Codification (the “Codification”).
Principles of Consolidation
The consolidated financial statements include the accounts of Franklin Parent, LLC and Franklin Owner, LLC. All significant intercompany accounts and transactions have been eliminated in these consolidated financial statements.
Cash Equivalents
All highly liquid investments purchased with an initial maturity of less than three months are considered cash equivalents.
Real Estate Facilities
Real estate facilities are recorded at cost. All costs incurred to develop, construct, renovate, and improve facilities, including interest and property taxes incurred during the construction period are capitalized. No provision for depreciation is made on construction in progress until the relevant assets are completed and put into use. Transaction costs associated with acquisitions or dispositions of real estate, as well as repairs and maintenance costs, are expensed as incurred. Buildings and improvements are depreciated on a straight-line basis over estimated useful lives ranging generally between 5 to 39 years.
Revenue and Expense Recognition
Revenues from self-storage facilities, which is primarily composed of rental income earned pursuant to month-to-month leases for storage space, as well as associated late charges and administrative fees, are recognized as earned. Promotional discounts reduce rental income over the promotional period, which is generally one month. Ancillary revenues and interest and other income are recognized when earned.
The Company accrues for property tax expense based upon actual amounts billed and, in some circumstances, estimates when bills or assessments have not been received from the taxing authorities. Cost of operations, general and administrative expense, interest expense, as well as advertising expenditures are expensed as incurred.
Table of Contents
FRANKLIN PARENT, LLC AND SUBSIDIARY
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| February 2, 2018 (unaudited) |
Notes to the Consolidated Financial Statements | December 31, 2017 (unaudited), and 2016 (audited) |
As a limited liability company, the Company is not a taxpaying entity for federal income tax purposes. Accordingly, the Company’s taxable income or loss is allocated to its members in accordance with their respective percentage ownership. Therefore, no provision or liability for income taxes has been included in the accompanying consolidated financial statements.
Based on the evaluation of the Company’s tax positions, management believes that all positions taken would more likely than not be upheld under examination. Therefore, no provision for the effects of uncertain tax positions has been recorded for the period ended February 2, 2018 or the years ended December 31, 2017 and 2016. The Company identifies its major tax jurisdictions as U.S. federal and Georgia state jurisdictions. The Company is not currently under tax examination.
| Use of Estimates in the Preparation of Financial Statements |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Management has evaluated subsequent events through February 13, 2019, the date the consolidated financial statements were available to be issued.
Note 3 – Real Estate Facilities
Real estate facilities consisted of the following at February 2, 2018 and December 31, 2017:
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| | 2018 | | 2017 |
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Land | | $ | 720,249 | | $ | 720,249 |
Buildings | | | 4,333,705 | | | 4,333,705 |
Furniture and fixtures | | | 853,443 | | | 853,443 |
Equipment | | | 4,067 | | | 4,067 |
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Total real estate facilities | | | 5,911,464 | | | 5,911,464 |
Accumulated depreciation | | | (497,732) | | | (472,845) |
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Real estate facilities, net | | $ | 5,413,732 | | $ | 5,438,619 |
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Depreciation expense for the period | | $ | 24,887 | | $ | 298,639 |
On June 25, 2015, Franklin Owner, LLC purchased 3.719 acres for the development and construction of a self-storage facility in Marietta, Georgia. The 727-unit facility was completed and put in service on May 24, 2016. During the year ended December 31, 2016, the Company capitalized $114,435 in interest cost incurred on funds used to construct real estate facilities.
Table of Contents
FRANKLIN PARENT, LLC AND SUBSIDIARY
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| February 2, 2018 (unaudited) |
Notes to the Consolidated Financial Statements | December 31, 2017 (unaudited), and 2016 (audited) |
Note 4 – Long—Term Debt
Construction Note
On June 25, 2015, Franklin Owner, LLC entered into a promissory note with Jernigan Capital Operating Company, LLC, Class B member of Franklin Parent, LLC, in the amount not to exceed $5,377,778. The note requires monthly installments of interest at 6.9% per annum through maturity on July 1, 2021, at which time any outstanding balance will be due and payable in full. The face value of the note was reduced by $53,778 in debt issuance costs, resulting in an effective interest rate on the note of approximately 7.1%.
This promissory note is secured by real estate facilities, assignment of leases and rents, guaranty of recourse obligations and completion guaranty executed by RRB Development, LLC and James A. Berry, jointly and severally, environmental compliance and indemnification agreement, and assignment of construction documents.
As of February 2, 2018 and December 31, 2017, the value of the loan was recorded as follows:
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| | | 2018 | | | 2017 |
Principal amount | | $ | 5,130,958 | | $ | 5,097,148 |
Loan costs | | | (34,369) | | | (35,079) |
Construction note, net of loan costs | | $ | 5,096,589 | | $ | 5,062,069 |
Mezzanine Note
On June 25, 2015, Franklin Parent, LLC entered into a promissory note with Jernigan Capital Operating Company, LLC, Class B member of Franklin Parent, LLC, in the amount of $672,222. The note requires monthly installments of interest at 6.9% per annum through maturity on July 1, 2021, at which time any outstanding balance will be due and payable in full. The face value of the note was reduced by $6,722 in debt issuance costs, resulting in an effective interest rate on the note of approximately 7.1%.
This promissory note is secured by first priority security interest and assignment of 100% member interests in Franklin Owner, LLC, assignment of leases and rents, guaranty of recourse obligations and completion guaranty executed by RRB Development, LLC and James A. Berry, jointly and severally, environmental compliance and indemnification agreement, and assignment of construction documents.
As of February 2, 2018 and December 31, 2017, the value of the loan was recorded as follows:
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| | | 2018 | | | 2017 |
Principal amount | | $ | 672,222 | | $ | 672,222 |
Loan costs | | | (4,263) | | | (4,352) |
Mezzanine note, net of loan costs | | $ | 667,959 | | $ | 667,870 |
Table of Contents
FRANKLIN PARENT, LLC AND SUBSIDIARY
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| February 2, 2018 (unaudited) |
Notes to the Consolidated Financial Statements | December 31, 2017 (unaudited), and 2016 (audited) |
Note 5 – Members’ Equity
As of February 2, 2018, December 31, 2017, and 2016, a total of 1,000 units of membership were held by members of Franklin Parent, LLC, with the Class A member holding 501 units and the Class B member holding 499 units. Class A membership units retain all voting rights while both Class A membership units and Class B membership units have interests in profits and losses and cash flows of the Company.
Cash flows are to be distributed to members with the following priority:
| 1) | | To the Class A member in an amount equal to 6.9% (“Class A Return”) of the Class A member’s equity investment; |
| 2) | | Any remaining cash flows shall be distributed 49.9% to the Class B member and 50.1% to the Class A member. |
Capital proceeds from the sale or any refinancing of Franklin Parent, LLC, Franklin Owner, LLC, or real estate facilities shall be distributed to the members with the following priority:
| 1) | | The amount of any current Class A Return for the immediately preceding period shall be distributed to the Class A member; |
| 2) | | The amount of any accrued, but unpaid Class A Return for prior periods shall be distributed to the Class A member; |
| 3) | | The amount of any unreturned Class A equity investment shall be distributed to the Class A member; and |
| 4) | | Any remaining amount shall be distributed 49.9% to the Class B member and 50.1% to the Class A member. |
On February 2, 2018, Jernigan Capital Operating Company, LLC, Class B member of the Company, purchased 501 Class A units from RRB Franklin, LLC increasing its membership interest in the Company from 49.9% to 100%.
Note 6 – Management Agreement
The Company is managed by CubeSmart Asset Management, LLC, an unaffiliated entity, for a fee equal to the greater of 5% of gross revenues or $2,000 per month. Management fees incurred were $2,506 and $26,797 for the period ended February 2, 2018 and the year ended December 31, 2017, respectively.
Note 7 – Related Party Transactions
On June 25, 2015, Franklin Parent, LLC and Franklin Owner, LLC entered into promissory notes with Jernigan Capital Operating Company, LLC, Class B member of Franklin Parent, LLC, in the amounts of $5,377,778 and $672,222, respectively (see Note 4). During the period ended February 2, 2018, and the years ended December 31, 2017 and 2016, the Company incurred interest on these notes totaling $33,810, $392,181, and $328,587, respectively, of which, $33,810, $147,447, and $328,587, respectively, were added to the balance of the outstanding notes.
During the year ended December 31, 2016, the Company paid development fees to RRB Development, LLC, a company related by common ownership, of $155,530. These fees were capitalized as costs to construct the real estate facilities.
