UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
| [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2018
Or
| [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to _________
Commission File Number: 000-55760
| THE PARKING REIT, INC. |
| (Exact name of registrant as specified in its charter) |
| MARYLAND | | 47-3945882 |
| (State or Other Jurisdiction of | | (I.R.S. Employer |
| Incorporation or Organization) | | Identification No.) |
8880 W. SUNSET RD SUITE 240, LAS VEGAS, NV 89148
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (702) 534-5577
Securities registered pursuant to Section 12(b) of the Act:
| None | | None |
| (Title of each class) | | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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 [ ] (Do not check if a smaller reporting company) | Smaller reporting company [ X ] Emerging growth company [ X ] |
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 13(a) of the Exchange
Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter.
There is no established market for the Registrant's shares of common stock. On May 29, 2018, the board of directors of the Registrant approved an estimated net asset value per share of the Registrant's common stock of $24.61. There were approximately 6,017,565 shares of common stock held by non-affiliates at June 30, 2018, the last business day of the registrant's most recently completed second fiscal quarter.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
| Class | | | Number of Shares Outstanding As of March 5, 2019 |
| Common Stock, $0.0001 Par Value | | | 6,540,818 |
| | | | Page |
| SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS | |
| PART I | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| PART II | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| PART III | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| PART IV | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Special Note Regarding Forward-Looking Statements
Certain statements included in this annual report on Form 10-K (this "Annual Report") that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements. Forward-looking statements are typically identified by the use of terms such as "may," "should," "expect," "could," "intend," "plan," "anticipate," "estimate," "believe," "continue," "predict," "potential" or the negative of such terms and other comparable terminology.
The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs, which involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:
| · | the fact that the Company has a limited operating history, as property operations began in 2016; |
| · | the fact that the Company has experienced net losses since inception and may continue to experience additional losses; |
| · | the performance of properties the Company has acquired or may acquire or loans the Company has made or may make that are secured by real property; |
| · | changes in economic conditions generally and the real estate and debt markets specifically; |
| · | legislative or regulatory changes, including changes to the laws governing the taxation of real estate investment trusts ("REITs"); |
| · | potential damage and costs arising from natural disasters, terrorism and other extraordinary events, including extraordinary events affecting parking facilities included in the Company's portfolio; |
| · | risks inherent in the real estate business, including ability to secure leases or parking management contracts at favorable terms, tenant defaults, potential liability relating to environmental matters and the lack of liquidity of real estate investments; |
| · | competitive factors that may limit the Company's ability to make investments or attract and retain tenants; |
| · | the Company's ability to generate sufficient cash flows to pay distributions to the Company's stockholders; |
| · | the Company's reliance on the Advisor and its employees to manage the Company's business; |
| · | the Company's ability to complete effectively an internalization of management transaction |
| · | the Company's failure to obtain status as a REIT and maintain it in the future; |
| · | the Company's ability to successfully integrate pending transactions and implement an operating strategy; |
| · | the Company's ability to list shares of common stock on a national securities exchange or complete another liquidity event; |
| · | the availability of capital and debt financing generally, and any failure to obtain debt financing at favorable terms or a failure to satisfy the conditions, covenants and requirements of that debt; |
| · | changes in interest rates; |
| · | changes to generally accepted accounting principles, or GAAP; and |
| · | potential adverse impacts from changes to the U.S. tax laws. |
Any of the assumptions underlying the forward-looking statements included herein could be inaccurate, and undue reliance should not be placed upon any forward-looking statements included herein. All forward-looking statements are made as of the date of this Annual Report, and the risk that actual results will differ materially from the expectations expressed herein will increase with the passage of time. Except as otherwise required by the federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements made after the date of this Annual Report, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this Annual Report, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Annual Report will be achieved.
This Annual Report may include market data and forecasts with respect to the REIT industry. Although the Company is responsible for all of the disclosure contained in this Annual Report, in some cases the Company relies on and refers to market data and certain industry forecasts that were obtained from third party surveys, market research, consultant surveys, publicly available information and industry publications and surveys that the Company believes to be reliable.
General
The Parking REIT, Inc., formerly known as MVP REIT II, Inc. (the "Company," "we," "us" or "our"), is a Maryland corporation formed on May 4, 2015 and has elected to be taxed, and has operated in a manner that will allow the Company to qualify as a real estate investment trust ("REIT") for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2017; therefore, it is the Company's intention to make a REIT election for the year ended December 31, 2018.
The Company was formed to focus primarily on investments in parking facilities, including parking lots, parking garages and other parking structures throughout the United States. To a lesser extent, the Company may invest in parking properties that contain other sources of rental income, potentially including office, retail, storage, residential, billboards or cell towers.
The Company is the sole general partner of MVP REIT II Operating Partnership, LP, a Delaware limited partnership (the "Operating Partnership"). The Company owns substantially all of its assets and conducts substantially all of its operations through the Operating Partnership. The Company's wholly owned subsidiary, MVP REIT II Holdings, LLC, is the sole limited partner of the Operating Partnership. The operating agreement provides that the Operating Partnership is operated in a manner that enables the Company to (1) satisfy the requirements to qualify and maintain qualification as a REIT for federal income tax purposes, (2) avoid any federal income or excise tax liability and (3) ensure that the Operating Partnership is not classified as a "publicly traded partnership" for purposes of Section 7704 of the Internal Revenue Code of 1986, as amended (the "Code"), which classification could result in the Operating Partnership being taxed as a corporation.
The Company utilizes an Umbrella Partnership Real Estate Investment Trust ("UPREIT") structure to enable the Company to acquire real property in exchange for limited partnership interests in the Operating Partnership from owners who desire to defer taxable gain that would otherwise normally be recognized by them upon the disposition of their real property or transfer of their real property to the Company in exchange for shares of the Company's common stock or cash.
As part of the Company's initial capitalization, 8,000 shares of common stock were sold for $200,000 to an affiliate of the Advisor. The Company's advisor is MVP Realty Advisors, LLC, dba The Parking REIT Advisors (the "Advisor"), a Nevada limited liability company, which is owned 60% by Vestin Realty Mortgage II, Inc. ("VRM II") and 40% by Vestin Realty Mortgage I, Inc. ("VRM I"). The Advisor is responsible for managing the Company's affairs on a day-to-day basis and for identifying and making investments on the Company's behalf pursuant to a second amended and restated advisory agreement among the Company, the Operating Partnership and the Advisor (the "Amended and Restated Advisory Agreement"), which became effective upon consummation of the Merger (as such term is defined below). VRM II and VRM I are Maryland corporations that trade on the OTC pink sheets and were managed by Vestin Mortgage, LLC, an affiliate of the Advisor, prior to being internalized in January 2018.
On September 21, 2018, the Company entered into a Third Amended and Restated Advisory Agreement with the Advisor. The Third Amended Advisory Agreement will become effective and replace the existing advisory agreement upon the listing of the shares of our common stock on any national exchange, unless the Company completes an internalization transaction before listing, in which case, the Company expects that the advisory agreement will be terminated as part of the internalization transaction. For more information, please see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" below. The Third Amended and Restated Advisory Agreement is filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on September 26, 2018.
Merger of MVP REIT with Merger Sub, LLC
On May 26, 2017, the Company, MVP REIT, Inc., a Maryland corporation ("MVP I"), MVP Merger Sub, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company ("Merger Sub"), and the Advisor entered into an agreement and plan of merger (the "Merger Agreement"), pursuant to which MVP I would merge with and into Merger Sub (the "Merger"). On December 15, 2017, the Merger was consummated. Following the Merger, the Company contributed 100% of its equity interests in Merger Sub to the Operating Partnership.
At the effective time of the Merger, each share of MVP I common stock, par value $0.001 per share that was issued and outstanding immediately prior to the Merger (the "MVP I Common Stock"), was converted into the right to receive 0.365 shares of Company common stock. A total of approximately 3.9 million shares of Company common stock were issued to former MVP I stockholders, and former MVP I stockholders, immediately following the Merger, owned approximately 59.7% of the Company's common stock. The Company was subsequently renamed "The Parking REIT, Inc.".
Investment Objectives
The Company's primary investment objectives are to:
| · | realize growth in the value of the Company's investments; and |
| · | generate current income. |
The Company cannot assure stockholders that the Company will attain these objectives or that the value of the Company's assets will not decrease. Furthermore, within the investment objectives and policies, the Advisor has substantial discretion with respect to the selection of specific investments and the purchase and sale of the Company's assets. The Company's board of directors will review investment policies at least annually to determine whether the investment policies continue to be in the best interests of stockholders.
Investment Strategy
The Company's investment strategy focuses, and will continue to focus, primarily on acquiring, owning and leasing parking facilities, including parking lots, parking garages and other parking structures throughout the United States. To a lesser extent, the Company may invest in parking properties that contain other source of rental income, potentially including office, retail, storage, residential, billboards or cell towers.
Parking Facilities
The Company believes parking facilities possess attractive characteristics not found in other commercial real estate investments, including the following:
| · | during the recent recession, parking revenues remained resilient; |
| · | historically, a large and fragmented industry, which presents unique opportunities for consolidation and growth; |
| · | opportunity to own land in central business districts with air rights that in the future may be sold for redevelopment; |
| · | net lease structure that generates stable revenues and presents opportunities to participate in property revenues above a certain threshold; |
| · | generally, parking leases can be terminated upon sale of the real estate to a third party; |
| · | generally, parking facilities can be leased to any number of parking operators, which gives the property owner flexibility and potential pricing power; |
| · | if a tenant in a facility terminates a lease, replacement operators can generally be found quickly, minimizing any dark period; |
| · | generally, no leasing commissions; |
| · | generally, no tenant improvement requirements; |
| · | trend toward automation, which helps to reduce cash theft and operating costs, improving the Company's net operating income; |
| · | relatively low capital expenditures compared to other real estate assets; |
| · | in light of the relatively low up-front costs to purchase parking properties, an enhanced opportunity for geographic diversification; and |
| · | generally, favorable supply and demand fundamentals, which may create favorable pricing pressure. |
The Company intends to focus primarily on investing in income-producing parking lots and garages with air rights in central business districts. The Company generally seeks geographically-targeted investments that present key demand drivers, which are expected to generate steady cash flows and provide greater predictability during periods of economic uncertainty. Such targeted investments include, but are not limited to, parking facilities near one or more of the following demand drivers:
| · | Government buildings and courthouses |
Other Real Property Investments
The Company may also invest in parking properties that generate additional income from sources other than parking, potentially including office, retail, storage, residential, billboards or cell towers. The Company may enter into various leases for these properties. The terms and conditions of any lease the Company enters into with the Company's tenants may vary substantially. However, the Company expects that leases will be the type customarily used between landlords and tenants in the geographic area where the property is located.
Investment Criteria
The Company will focus on acquiring properties that meet the following criteria:
| · | properties that generate current cash flow; |
| · | properties that are located in populated metropolitan areas; and |
| · | although the Company may acquire properties that require renovation, the Company will only do so if the Company anticipates the properties will produce income within 12 months of the Company's acquisition. |
The foregoing criteria are guidelines, and the Advisor and the Company's board of directors may vary from these guidelines to acquire properties which they believe represent value opportunities.
The Company's board of directors has delegated to the Advisor the authority to make certain decisions regarding investments consistent with the investment guidelines and borrowing policies approved by the Company's board of directors and subject to the limitations in the charter, the Amended and Restated Advisory Agreement, and the direction and oversight of the Company's board of directors. There is no limitation on the number, size or type of properties that the Company may acquire or on the percentage of net offering proceeds that may be invested in any particular property type or single property. The number and mix of properties will depend upon real estate market conditions and other circumstances existing at the time of acquisition. Moreover, depending upon real estate market conditions, economic changes and other developments, the Company's board of directors may change the targeted investment focus or supplement that focus to include other targeted investments from time to time without stockholder consent.
Concentration
The Company had fifteen parking tenants as of December 31, 2018 and fourteen parking tenants as of December 31, 2017. One tenant, SP Plus Corporation (Nasdaq: SP) ("SP+"), represented 57.6% of the Company's base parking rental revenue for the year ended December 31, 2018.
SP+ is one of the largest providers of parking management in the United States. As of December 31, 2018, SP+ managed approximately 3,100 locations in North America.
Below is a table that summarizes parking rent by tenant for the years ended December 31, 2018 and 2017:
| | | For the Year Ended December 31, |
| Parking Tenant | | 2018 | | 2017 |
| SP + | | 57.6% | | 54.5% |
| iPark Services*** | | 13.3% | | 12.9% |
| ABM * | | 4.5% | | 2.2% |
| ISOM Mgmt | | 4.2% | | 1.0% |
| Premier Parking*** | | 3.7% | | 7.8% |
| Interstate Parking | | 2.7% | | 6.2% |
| 342 N. Rampart | | 2.7% | | -- |
| Denison | | 2.5% | | 0.2% |
| Lanier | | 2.4% | | 4.2% |
| St. Louis Parking | | 2.2% | | 4.1% |
| BEST PARK | | 1.5% | | 0.1% |
| Riverside Parking | | 1.0% | | 2.2% |
| PCAM, LLC | | 0.6% | | 0.1% |
| TNSH, LLC | | 0.8% | | -- |
| Denver School | | 0.2% | | <0.1% |
| Secure | | 0.1% | | <0.1% |
| Miller Parking ** | | -- | | 4.5% |
* Through February 28, 2017, MVP San Jose 88 Garage, LLC was subject to a parking management agreement with ABM and received revenue of $110,000. Starting on March 1, 2017, this property was leased to Lanier Parking Solutions.
** Revenue for Miller parking represents a settlement received by MVP Detroit Center Garage, LLC of approximately $408,000 for the operations of the garage through January 2017, at which time SP+ assumed operations under a longer-term lease agreement.
*** During June 2018 Premier Parking acquired iPark Services. Subsequent to the acquisition Premier and iPark continue to operate under their original company names.
In addition, the Company had concentrations in various cities based on parking rental revenue for the years ended December 2018 and 2017, as well as concentrations in various cities based on the real estate the Company owned as of December 31, 2018 and 2017. The below tables summarize this information by city.
| City Concentration for Parking Rental Revenue |
| | | For the Year Ended December 31, |
| | | 2018 | | 2017 |
| Detroit | | 18.2% | | 39.6% |
| Houston | | 13.3% | | 12.9% |
| Cincinnati | | 9.2% | | 4.0% |
| Fort Worth | | 8.1% | | 0.7% |
| Indianapolis | | 6.5% | | 0.6% |
| St. Louis | | 5.4% | | 6.2% |
| Cleveland | | 5.3% | | 11.7% |
| Minneapolis | | 4.3% | | 0.4% |
| Lubbock | | 4.2% | | 1.0% |
| Nashville | | 3.5% | | 7.7% |
| Milwaukee | | 3.7% | | 0.3% |
| St Paul | | 2.7% | | 6.2% |
| New Orleans | | 2.7% | | -- |
| Honolulu | | 2.6% | | -- |
| San Jose | | 2.4% | | 5.4% |
| Bridgeport | | 2.3% | | 0.2% |
| Memphis | | 1.6% | | 0.1% |
| Louisville | | 1.0% | | 2.2% |
| Ft. Lauderdale | | 0.6% | | 0.1% |
| Denver | | 0.8% | | 0.1% |
| Kansas City | | 0.6% | | 0.1% |
| Wildwood | | 0.4% | | <0.1% |
| Canton | | 0.3% | | 0.5% |
| Clarksburg | | 0.3% | | <0.1% |
| Real Estate Investment Concentration by City |
| | | As of December 31, |
| | | 2018 | | 2017 |
| Detroit | | 17.6% | | 18.8% |
| Houston | | 11.9% | | 12.7% |
| Fort Worth | | 8.8% | | 9.4% |
| Cincinnati | | 8.7% | | 9.1% |
| Honolulu | | 6.7% | | -- |
| Cleveland | | 6.2% | | 5.6% |
| Indianapolis | | 5.8% | | 6.2% |
| Minneapolis | | 4.4% | | 5.6% |
| St Louis | | 4.4% | | 7.0% |
| Milwaukee | | 3.8% | | 4.0% |
| Nashville | | 3.7% | | 4.0% |
| Lubbock | | 3.5% | | 3.7% |
| St Paul | | 2.7% | | 2.9% |
| Bridgeport | | 2.6% | | 2.8% |
| New Orleans | | 2.6% | | -- |
| Memphis | | 1.5% | | 1.7% |
| San Jose | | 1.2% | | 1.3% |
| Fort Lauderdale | | 1.1% | | 1.2% |
| Denver | | 1.0% | | 1.1% |
| Louisville | | 1.0% | | 1.1% |
| Wildwood | | 0.4% | | 0.5% |
| Clarksburg | | 0.2% | | 0.2% |
| Canton | | 0.2% | | 0.2% |
| Kansas City | | -- | | 0.9% |
Economic Dependency
Under various agreements, the Company has engaged or will engage the Advisor and its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, as well as other administrative responsibilities for the Company, including accounting services and investor relations. As a result of these relationships, the Company is dependent upon the Advisor and its affiliates, including VRM I and VRM II. In the event that these companies are unable to provide the Company with the respective services, the Company may be required to find alternative providers of these services.
Competition
The Company is unaware of any REITs in the United States that invest predominantly in parking facilities; nevertheless, the Company has significant competition with respect to the acquisition of real property. Competitors include other REITs, owners and managers of parking facilities, private investment funds, hedge funds and other investors, many of which have significantly greater resources. The Company may not be able to compete successfully for investments. In addition, the number of entities and the amount of funds competing for suitable investments may increase. If the Company pays higher prices for investments the returns will be lower, and the value of assets may not increase or may decrease significantly below the amount paid for such assets.
Any parking facilities acquired or invested in by the Company will face intense competition, which may adversely affect rental and fee income. The Company believes that competition in parking facility operations is intense. The relatively low cost of entry has led to a strongly competitive, fragmented market consisting of competitors ranging from single facility operators to large regional and national multi-facility operators, including several public companies. In addition, any parking facilities acquired may compete with building owners that provide on-site paid parking. Many of the competitors have more experience in owning and operating parking facilities. Moreover, some of the competitors will have greater capital resources, greater cash reserves, less demanding rules governing distributions to stockholders and a greater ability to borrow funds. Competition for investments may reduce the number of suitable investment opportunities available, may increase acquisition costs and may reduce demand for parking facilities, all of which may adversely affect operating results.
In addition, the Company may compete against VRM I and VRM II, both of which are managed by affiliates of the Company's Sponsor and the Advisor, for the acquisition of investments. The Company believes this potential conflict is mitigated, in part, by the Company's focus on parking facilities as its core investments, while the investment strategy of VRM I and VRM II focuses on acquiring office buildings and other commercial real estate and loans secured by commercial real estate. In this regard, the Company notes that the Advisor has agreed to waive certain fees and expenses it otherwise would be entitled under the Amended and Restated Advisory Agreement.
The Company is organized and conducts operations to qualify as a REIT under Sections 856 to 860 of the Code and to comply with the provisions of the Code with respect thereto. A REIT is generally not subject to federal income tax on that portion of its REIT taxable income, which is distributed to its stockholders, provided that at least 90% of such taxable income is distributed and provided that certain other requirements are met. Our REIT taxable income may substantially exceed or be less than our net income as determined based on GAAP because differences in GAAP and taxable net income consist primarily of allowances for loan losses or doubtful account, write-downs on real estate held for sale, amortization of deferred financing cost, capital gains and losses, and deferred income.
The Company elected to be treated as a REIT effective January 1, 2017 and believes that it has been organized and has operated during 2018 in such a manner to meet the qualifications to continue to be treated as a REIT for federal and state income tax purposes.
If the Company does not qualify as a REIT for the tax year ended December 31, 2018, it will file as a C corporation and deferred tax assets and liabilities will be established for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for the deferred tax assets is provided if the Company believes that it is more likely than not that it will not realize the tax benefit of deferred tax assets based on the available evidence at the time the determination is made. For the tax year ended December 31, 2018, the Company believes that it is more likely than not that it will not realize the benefits of its deferred tax assets, and thus a valuation allowance should be recorded against its net deferred tax assets.
The Company uses a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolutions of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more likely than not of being realized upon ultimate settlement. The Company believes that its income tax filing positions and deductions would be sustained upon examination; thus, the Company has not recorded any uncertain tax positions as of December 31, 2018.
A full valuation allowance for deferred tax assets was provided since the Company believes that it is more likely than not that it will not realize the benefits of its deferred tax assets. A change in circumstances may cause the Company to change its judgment about whether deferred tax assets should be recorded, and further whether any such assets would more likely than not be realized. The Company would generally report any change in the valuation allowance through its income statement in the period in which such changes in circumstances occur. Because the Company is a REIT, it will generally not be subject to corporate level federal income taxes on earnings distributed to our stockholders and therefore may not realize any benefit from deferred tax assets arising during 2018 or any prior period. The Company intends to distribute at least 100% of its taxable income annually and intends to do so for the tax year ending December 31, 2018 and future periods. The Company has placed a full valuation allowance on all of its deferred tax assets, and thus no asset is recorded on the Company's balance sheet.
Regulations
The Company's investments are subject to various federal, state, local and foreign laws, ordinances and regulations, including, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity. The Company intends to obtain all permits and approvals necessary under current law to operate the Company's investments.
Review of the Company's Policies
The Company's board of directors, including the independent directors, has reviewed the policies described in this Annual Report and determined that they are in the best interest of the Company's stockholders because: (1) they increase the likelihood that the Company will be able implement and execute the Company's business strategies; (2) the Company's executive officers, directors and affiliates of the Advisor have expertise with the type of real estate investments the Company seeks; and (3) borrowings should enable the Company to purchase assets and earn rental income more quickly, thereby increasing the likelihood of generating income for the Company's stockholders and preserving stockholder capital.
Employees
As of March 5, 2019, the Company did not have any employees. Rather, the Company relies on employees of the Advisor and its affiliates, subject to the supervision of the Company's board of directors, to manage the Company's day-to-day activities, implement the Company's investment strategy and provide management, acquisition, advisory and administrative services.
Available Information
The Company is subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, as a result, files the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information with the SEC from time to time. The SEC maintains a website (http://www.sec.gov) that contains the Company's annual, quarterly and current reports, proxy and information statements and other information the Company files electronically with the SEC from time to time. Access to these filings is free of charge and can be accessed on the Company's website, www.theparkingreit.com. The information on, or accessible through, the Company's website is not incorporated into and does not constitute a part of this Annual Report or any other report or document the Company files with or furnishes to the SEC from time to time.
Risks Related to an Investment in the Company
Shares of our common stock are illiquid. No public market currently exists for our shares, and our charter does not require us to liquidate our assets or list our shares on an exchange by any specified date, or at all. It will be difficult for stockholders to sell shares, and if stockholders are able to sell shares, it will likely be at a substantial discount.
There is no current public market for our shares, and our charter does not require us to liquidate our assets or list our shares on an exchange by any specified date, or at all. Our charter limits stockholders' ability to transfer or sell shares unless the prospective stockholder meets the applicable suitability and minimum purchase standards. Our charter also prohibits the ownership of more than 9.8% in value of the aggregate of our outstanding capital stock or more than 9.8% in value or number, whichever is more restrictive, of the aggregate of our outstanding common stock unless exempted prospectively or retroactively by our board of directors. These restrictions may inhibit large investors from desiring to purchase stockholders' shares. Moreover, our share repurchase program includes numerous restrictions that limit stockholders' ability to sell shares to us, and our board of directors may amend, suspend or terminate our share repurchase program without stockholder approval upon 30 days' written prior notice. It will be difficult for stockholders to sell shares promptly or at all. If stockholders are able to sell shares, stockholders will likely have to sell them at a substantial discount to their purchase price. It is also likely that stockholders' shares would not be accepted as the primary collateral for a loan.
In addition, if we are successful in listing our shares of common stock on a national securities exchange, we cannot assure stockholders that the market price of our common stock will not fluctuate or decline significantly after listing, including as a result of factors unrelated to our operating performance or prospects. From time to time our board of directors evaluates actions that could provide liquidity for our stockholders. However, our ability to achieve liquidity for our stockholders is subject to market conditions and legal requirements, and there can be no assurance that we will affect a liquidity event. If we do not successfully implement a liquidity event, our shares of common stock may continue to be illiquid and stockholders may, for an indefinite period of time, be unable to convert their investments to cash easily and could suffer losses on their investments.
We have a limited operating history which makes our future performance difficult to predict.
We were formed on May 4, 2015 and merged with MVP REIT, Inc., which was formed on April 3, 2012, on December 15, 2017. Accordingly, we have a limited operating history. Stockholders should not assume that our performance will be similar to the past performance of other real estate investment programs sponsored by an affiliate of the Advisor. Our lack of an operating history increases the risk and uncertainty that stockholders face in making an investment in our shares.
We have experienced net losses in the past, and we may experience additional net losses in the future.
Historically, we have experienced net losses (calculated in accordance with GAAP), and we may not be profitable or realize growth in the value of our investments. Many of our losses can be attributed to start-up costs, depreciation and amortization, as well as acquisition expenses incurred in connection with purchasing properties or making other investments. For a further discussion of our operational history and the factors affecting our net losses, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Annual Report and our accompanying consolidated financial statements and notes thereto.
Our cash distributions are not guaranteed and may fluctuate.
The Company's board of directors unanimously authorized a suspension of our cash distributions and stock dividends to holders of our common stock, effective as of March 22, 2018. Our board is focused on preserving capital in order to maintain sufficient liquidity to continue to operate the business and maintain compliance with debt covenants, including minimum liquidity covenants and to seek to enhance our value for stockholders through potential future acquisitions. We expect that cash retained by the suspension of cash distributions will allow us to continue to pursue investment opportunities while also preparing for a possible liquidity event in the future. Our board will continue to evaluate our performance and expects to assess our distribution policy quarterly. There can be no assurance that we will resume payment of distributions to common stockholders at any time in the future, that any acquisitions will be completed on an attractive basis, or at all, or that any liquidity event will occur or when such event may occur.
We have paid, and may continue to pay, our distributions from sources other than cash flow from operations, which has reduced the funds available for the acquisition of properties and may reduce our stockholders' overall return.
As of December 31, 2018, we have paid all of our cash distributions from sources other than cash flow from operations, including proceeds from issuance of our common and preferred shares. Our organization documents permit us to pay distributions from any source, including offering proceeds, borrowings or sales of assets. We have not placed a cap on the use of offering or other proceeds to fund distributions. Our long-term objective is to fund the payment of regular distributions to our stockholders from cash flow from our operations. However, we may not generate sufficient cash flow from operations to fund distributions. Therefore, if distributions resume, we may need to continue to utilize proceeds from the sale of securities or incur indebtedness to pay distributions. We can give no assurance that we will be able to pay distributions solely from our funds from operations in the future. If we pay distributions from sources other than our cash flow from operations, we will have fewer funds available for investments and stockholders' overall return may be reduced.
Because we have paid, and may continue to pay, our cash distributions from sources other than cash flow from operations, such distributions may not reflect the current performance of our real property investments or our current operating cash flows and may constitute a return of capital.
Our long-term objective is to fund the payment of monthly distributions to our stockholders entirely from our funds from operations. However, our organizational documents permit us to pay distribution from any source, including offering proceeds, borrowings or sales of assets. Historically, we have utilized offering proceeds to make cash distributions. Because the amount we pay out in distributions may exceed our cash flow from operations, the amount of distributions paid at any given time may not reflect the current performance of our real property investments or our current cash flow from operations. To the extent distributions exceed cash flow from operations, distributions may be treated as a return of capital (rather than a return on capital) and could reduce a stockholder's basis in our common stock. A reduction in a stockholder's basis in our common stock could result in the stockholder recognizing more gain upon the disposition of his or her shares, which in turn could result in greater taxable income to such stockholder. In addition, in the event that we are unable to consistently fund monthly distributions to stockholders entirely from our cash flow from operations, the value of a stockholder's shares upon any future listing of our common stock, the sale of our assets or any other liquidity event may be reduced.
We depend on the Advisor to manage our affairs. The loss of key personnel by the Advisor or a disruption in our relationship with the Advisor could have a material adverse effect upon our ability to conduct and manage our business.
We have engaged the Advisor to manage our operations and our portfolio of real property investments. Our ability to achieve our investment objectives and to pay distributions is dependent upon the performance of the Advisor and its affiliates as well as the Advisor's real estate, finance and securities professionals in the identification and acquisition of investments, the determination of any financing arrangements, the management of our assets and operation of our day-to-day activities. The loss of services of one or more members of the Advisor's key personnel, the Advisor's inability to attract and retain highly qualified personnel or a disruption in our relationship with the Advisor, could adversely affect our business, diminish our investment opportunities and weaken our relationships with lenders, business partners, parking facility operators and managers and other industry personnel, which could materially and adversely affect our business, financial condition, results of operations and ability to make distributions to stockholders and the value of our common stock.
Legal matters involving affiliates of our Advisor could adversely affect our relationship with our Advisor and distract our officers from attending to the Company's business, either of which could have a material adverse effect on the Company.
The pendency of any investigations or legal proceedings involving any of our current officers or other key personnel could harm the reputation of the Company and may distract our management from attending to the Company's business. The adverse publicity arising out of the pendency of such investigations or proceedings could impair our ability to raise additional capital or purse liquidity transactions. The loss of key personnel or circumstances causing such personnel to otherwise become unavailable to manage our business, would result in the loss of experience, skill, resources, relationships and contacts of individuals that we believe are important to our investment and operating strategies.
In February 2018, the audit committee (the "Audit Committee") of our board of directors engaged independent legal counsel to conduct an internal investigation arising from the Audit Committee's receipt of verbal allegations from a former employee of the Advisor, regarding possible wrongdoing by our then Chairman and Chief Executive Officer, relating to potentially inaccurate disclosures by MVP American Securities ("AMS"), a firm that was previously a registered broker dealer and indirectly owned by our Chief Executive Officer, to the Financial Industry Regulatory Authority, Inc. ("FINRA") in connection with a FINRA investigation to determine if there have been violations of the federal securities laws or the rules of FINRA and other self-regulatory organizations by AMS in connection with our initial public offering and the initial public offering of MVP REIT, Inc. The Advisor's former employee also alleged possible wrongdoing relating to potential inaccuracies in personal financial statements of Mr. Shustek that were provided to one or more of the Company's lenders in connection with mortgage loans or guarantees where Mr. Shustek is a personal non-recourse carve-out guarantor. The allegations of possible wrongdoing did not involve the Company's financial statements or accounting procedures. The Audit Committee commenced the internal investigation and engaged independent legal counsel promptly upon becoming aware of the allegations.
On April 27, 2018, the Audit Committee concluded its internal investigation and reported to our board of directors on the matters raised by the Advisor's employee as well as certain recommendations made by the Audit Committee. Based upon the information made available to it, the Audit Committee determined that Mr. Shustek did not exercise proper judgment and appropriate oversight in connection with the initial submission of underwriting compensation information to FINRA and the CEO's personal financial statements to the Company's lenders, which resulted in the submission of inaccurate information to FINRA and the Company's lenders. As part of its analysis, the Audit Committee also took into consideration the fact that (i) AMS had corrected the information provided to FINRA regarding underwriting compensation before the Advisor's employee made the report to the Audit Committee and (ii) Mr. Shustek provided corrected updated personal financial statements to the Company's lenders upon being made aware of the inaccuracies in the previously submitted personal financial statements. On February 28, 2019, FINRA notified Mr. Shustek that the Department of Enforcement staff has determined, based on the information in its possession, that it would not recommend the commencement of disciplinary action against Mr. Shustek at this time.
Stockholders should not rely on the estimated NAV per share as being an accurate measure of the current value of our shares of common stock.
Our board of directors, including all of our independent directors, approves and establishes at least annually an estimated per share NAV of our common stock, which is based on an estimated market value of our assets less the estimated market value of our liabilities, divided by the number of shares of our common stock outstanding. The objective of our board of directors in determining the estimated NAV per share was to arrive at a value, based on the most recent data available, that it believed was reasonable based on methodologies that it deemed appropriate. However, the market for real estate can fluctuate quickly and substantially and the value of our assets is expected to change in the future and may decrease. In addition, as with any valuation method, the methods used to determine the estimated NAV per share were based upon a number of assumptions, estimates and judgments that may not be accurate or complete.
Our assets have been valued based upon appraisal standards and the values of our assets using these methods are not required to reflect market value under those standards and will not necessarily result in a reflection of fair value under generally accepted accounting principles. Further, different parties using different property-specific and general real estate and capital market assumptions, estimates, judgments and standards could derive a different estimated NAV per share, which could be significantly different from the estimated NAV per share determined by our board of directors. The estimated NAV per share is not a representation or indication that, among other things: a stockholder would be able to realize the estimated NAV per share if he or she attempts to sell shares; a stockholder would ultimately realize distributions per share equal to the estimated NAV per share upon liquidation of assets and settlement of our liabilities or upon a sale of our company; shares of our common stock, if listed, would trade at the estimated NAV per share on a national securities exchange; a third party would offer the estimated NAV per share in an arms-length transaction to purchase all or substantially all of our shares of common stock; or the methodologies used to determine the estimated NAV per share would be acceptable to FINRA, the Employee Retirement Income Security Act of 1974, as amended, or ERISA, or other regulatory authorities (including state regulators), with respect to their respective requirements. Further, the estimated NAV per share was calculated as of a specific time and the value of our shares will fluctuate over time as a result of, among other things, future acquisitions or dispositions of assets, developments related to individual assets and changes in the real estate and capital markets.
Moreover, we issued shares of our common stock under our distribution reinvestment plan and purchase shares of our common stock under our share repurchase plan based on the estimated NAV per share. Stockholders may pay more than realizable value when they purchase shares under our distribution reinvestment plan or receive less than realizable value for their investment when selling their shares under our share repurchase plan.
A stockholder's ability to have his or her common shares repurchased is limited under our share repurchase program, and if a stockholder is able to have his or her common shares repurchased, it may be at a price that is less than the price the stockholder paid for the common shares and the then-current market value of the common shares.
On May 29, 2018, our board of directors suspended our share repurchase program, or SRP, other than for repurchases in connection with a shareholder's death. Our board may in the future reinstate the SRP, although there is no assurance as to if or when this will happen. Even if we reinstate our SRP, our SRP contains significant restrictions and limitations. For example, stockholders must generally hold their shares for a minimum of two years before they can participate in our SRP. Further, we presently intend to limit the number of shares to be repurchased during any calendar quarter to not more than 5% of the weighted average of the number of shares of our common stock outstanding on December 31st of the prior calendar year. Repurchases will be funded solely from the net proceeds from the sale of shares under the Company's distribution reinvestment plan ("DRIP") in the prior calendar year. Our board of directors may also limit the amounts available for repurchase at any time in its sole discretion. In addition, our board of directors may, in its sole discretion, amend, suspend or terminate the SRP at any time upon 30 days' prior notice. Therefore, a stockholder may not have the opportunity to make a repurchase request prior to any potential termination of our SRP.
As a result of these limitations, the repurchase price a stockholder may receive upon any such repurchase may not be indicative of the price our stockholders would receive if our common shares were actively traded or if we were liquidated, and a stockholder should not assume that he or she will be able to sell all or any portion of his or her common shares back to us pursuant to our SRP, if we elect to resume the SRP, or to third parties at a price that reflects the then current market value of the common shares or at all.
We disclose funds from operations ("FFO"), a non- GAAP financial measure, in communications with investors, including documents filed with the SEC; however, FFO is not equivalent to our net income or loss as determined under GAAP, and our computation of FFO may not be comparable to other REITs.
One of our objectives is to provide cash distributions to our stockholders from cash generated by our operations determined under GAAP. Cash generated from operations is not equivalent to our net income from continuing operations as determined under GAAP. One non- GAAP supplemental performance measure that we consider due to the certain unique operating characteristics of real estate companies is known as FFO. The National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, promulgated this measure, which it believes more accurately reflects the operating performance of a REIT. As defined by NAREIT, FFO means net income computed in accordance with GAAP, excluding gains or losses from sales of property, plus depreciation and amortization on real property and after adjustments for unconsolidated partnerships and joint ventures in which we hold an interest. In addition, NAREIT has recently clarified its computation of FFO, which includes adding back real estate impairment charges for all periods presented; however, under GAAP, impairment charges reduce net income. While impairment charges are added back in the calculation of FFO, we caution that due to the fact that impairments to the value of any property are typically based on estimated future undiscounted cash flows compared to current carrying value, declines in the undiscounted cash flows which led to the impairment charges reflect declines in property operating performance which may be permanent.
The calculation of FFO may vary from entity to entity since capitalization and expense policies tend to vary from entity to entity. Items that are capitalized do not impact FFO, whereas items that are expensed reduce FFO. Consequently, our presentation of FFO may not be comparable to other similarly titled measures presented by other REITs. FFO does not represent cash flows from operations as defined by GAAP, it is not indicative of cash available to fund all cash flow needs nor is it indicative of liquidity, including our ability to pay distributions, and should not be considered as an alternative to net income, as determined in accordance with GAAP, for purposes of evaluating our operating performance. Management uses the calculation of FFO for multiple reasons. We use FFO to compare our operating performance to that of other REITs. Additionally, we compute FFO as part of our acquisition process to determine whether a proposed investment will satisfy our investment objectives.
The historical cost accounting rules used for real estate assets require, among other things, straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical cost accounting for depreciation may be less informative than FFO. We believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization, provides a more complete understanding of our operating performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses and interest costs.
However, FFO should not be construed to be equivalent to or a substitute for the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non- GAAP FFO measures and the adjustments to GAAP in calculating FFO. Furthermore, FFO is not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations calculated in accordance with GAAP, or indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders.
FFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. The exclusion of impairments limits the usefulness of FFO as a historical operating performance measure since an impairment indicates that the property's operating performance may have been permanently affected. FFO is not a useful measure in evaluating NAV because impairments are considered in determining NAV but not in determining FFO.
We will face risks associated with security breaches through cyber-attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology networks and related systems.
We will 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 information technology, or IT, networks and related systems. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems will be essential to the operation of our business and our ability to perform day-to-day operations, and, in some cases, may be critical to the operations of certain of our tenants. There can be no assurance that our efforts to maintain the security and integrity of these types of IT networks and related systems 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 adversely impact our financial condition, results of operations, cash flow and our ability to satisfy our debt service obligations and to pay distributions to our stockholders.
Risks Related to Our Investments
We may acquire properties in parts of the United States where we do not have extensive experience.
We intend to explore acquisitions of properties throughout the United States. We may not possess familiarity with the dynamics and prevailing conditions of any geographic market we enter, which could adversely affect our ability to successfully expand into or operate within those markets. For example, markets may have different insurance practices, reimbursement rates and local real estate, zoning and development regulations than those with which we are familiar. We may find ourselves more dependent on third parties in new markets because our distance could hinder our ability to directly and efficiently identify suitable investments or manage properties in distant markets. We may not be successful in identifying suitable properties or other assets which meet our acquisition or development criteria or in consummating acquisitions or investments on satisfactory terms or at all for a number of reasons, including, among other things, unsatisfactory results of our due diligence investigations, failure to obtain financing on acceptable terms for the acquisition or development and our misjudgment of the value of the opportunities. We may also be unable to successfully integrate the operations of acquired properties, maintain consistent standards, controls, policies and procedures or realize the anticipated benefits of the acquisitions within the anticipated timeframe or at all. If we are unsuccessful in expanding into new markets, it could adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.
Our revenues will be significantly influenced by demand for parking facilities generally, and a decrease in such demand would likely have a greater adverse effect on our revenues than if we owned a more diversified real estate portfolio.
We have decided that the focus for our portfolio of investments and acquisitions will be parking facilities. A decrease in the demand for parking facilities, or other developments adversely affecting such sectors of the property market would likely have a more pronounced effect on our financial performance than if we owned a more diversified real estate portfolio. If adverse economic conditions reduce discretionary spending, business travel or other economic activity that fuels demand for parking services, our revenues could be reduced. In addition, our parking facilities tend to be concentrated in urban areas. Users of our parking facilities include workers who commute by car to their places of employment in these urban centers. The return on our investments could be materially adversely affected to the extent that economic conditions result in the elimination of jobs or the migration of jobs from the urban centers where our parking facilities are situated to other locations. Increased office vacancies in urban areas, movement toward home office alternatives or lower consumer spending could reduce consumer demand for parking, which could adversely impact our revenues and financial condition. Moreover, changing lifestyles and technology innovations also may decrease the need for parking spaces, thereby decreasing the demand for parking facilities. The need for parking spaces, for example, may decrease as the public increases its use of livery service companies and ride sharing companies or elects to take public transit for their transportation needs. Future technology innovations, such as driverless vehicles, also may decrease the need for parking spaces. It is also possible that cities could enact new or additional measures such as higher tolls, increased taxes and vehicle occupancy requirements in certain circumstances, to encourage car-pooling and the use of mass transit, all of which could adversely impact the demand for parking. Weather conditions, such as hurricanes, snow, flooding or severe weather storms, and other natural disasters and acts of terrorism could also disrupt our parking operations and further reduce the demand for parking. These and other developments affecting the demand for parking could have a material, adverse effect on the value of our properties as well as our revenues and our distributions to stockholders.
Any parking facilities we acquire or invest in will face intense competition, which may adversely affect rental and fee income.
We believe that competition in parking facility operations is intense. The relatively low cost of entry has led to a strongly competitive, highly fragmented market consisting of competitors ranging from single facility operators to large regional and national multi-facility operators, including several public companies. In addition, any parking facilities we acquire may compete with building owners that provide on-site paid parking. Many of the competitors have more experience than we do in owning and operating parking facilities. Moreover, some of our competitors will have greater capital resources, greater cash reserves, less demanding rules governing distributions to stockholders and a greater ability to borrow funds. Competition for investments may reduce the number of suitable investment opportunities available to us, may increase acquisition costs and may reduce demand for parking facilities, all of which may adversely affect our operating results. Additionally, an economic slowdown in a particular market could have a negative effect on our parking fee revenues.
If competitors build new facilities that compete with our facilities or offer space at rates below the rates we charge, our lessees may lose potential or existing customers and may be pressured to discount their rates to retain business, thereby causing them to reduce rents paid to us. As a result, our ability to make distributions to stockholders may be impaired. In addition, increased competition for customers may require us to make capital improvements to facilities that we would not otherwise make, which could reduce cash available for distribution to our stockholders.
Our leases expose us to certain risks.
We net lease our parking facilities to lessees that will either offer parking services to the public or provide parking to their employees. We rely upon the lessee to manage and conduct the daily operations of the facilities. In addition, under a net lease arrangement, the lessee is generally responsible for taxes and fees at a leased location. The loss or renewal on less favorable terms of a substantial number of leases, or a breach, default or other failure to perform by a lessee under a lease, could have a material adverse effect on our business, financial condition and results of operations. A material reduction in the rental income associated with the leases (or an increase in anticipated expenses to the extent we are responsible for such expenses) also could have a material adverse effect on our business, financial condition and results of operations.
Our investments in real estate will be subject to the risks typically associated with real estate.
We invest directly in real estate. We will not know whether the values of properties that we own directly will remain at the levels existing on the dates of acquisition. If the values of properties we own drop, our risk will increase because of the lower value of the real estate. In this manner, real estate values could impact the value of our real estate investments. Therefore, our investments will be subject to the risks typically associated with real estate.
A small number of our parking tenants account for a significant percentage of our total rental revenues, and the failure of any of these tenants to meet their obligations to us could materially and adversely affect our business, financial condition and results of operations.
The successful performance of our investments is materially dependent on the financial stability of our parking tenants. We had 15 parking tenants as of December 31, 2018. Approximately 70.9% of our parking rental revenues for the year ended December 31, 2018 were generated by only two of those tenants, SP+ (57.6%) and iPark Services (13.3%). The inability of any of our significant lessees or parking managers to pay rent or fees, as applicable, or a decision by a significant lessee or parking manager to terminate a lease or management agreement prior to, or at the conclusion of, their term or any other loss of a significant lessee or parking manager (including due to a bankruptcy or insolvency) could materially and adversely affect our business, financial condition and results of operations if a suitable replacement lessee or manager is not secured in a timely manner. In the event of a payment default by one or more of our significant parking tenants, including SP+ and iPark Services, we may experience delays in enforcing our rights and may incur substantial costs in protecting our investments and re-leasing our parking facilities. Further, we cannot assure stockholders that we will be able to re-lease the parking facilities for the rent previously received, or at all, or that lease terminations will not cause us to sell the facilities at a loss. The result of any of the foregoing risks could materially and adversely affect our business, financial condition, results of operations.
Uninsured losses or premiums for insurance coverage relating to real property may adversely affect stockholder returns.
Our real properties may incur casualty losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders sometimes require property owners to purchase specific coverage against terrorism as a condition for providing mortgage loans. These policies may not be available at a reasonable cost, if at all, which could inhibit our ability to finance or refinance real property we may hold. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. Changes in the cost or availability of insurance could expose us to uninsured casualty losses. In the event that any of our real property incurs a casualty loss which is not fully covered by insurance, the value of our assets will be reduced by any such uninsured loss. In addition, we cannot assure stockholders that funding will be available to us for repair or reconstruction of damaged real property in the future.
Our costs of complying with governmental laws and regulations related to environmental protection and human health and safety may be high.
All real property investments and the operations conducted in connection with such investments are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Some of these laws and regulations may impose joint and several liabilities on customers, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal.
Under various federal, state and local environmental laws, a current or previous owner or operator of real property may be liable for the cost of removing or remediating hazardous or toxic substances on such real property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such real property as collateral for future borrowings. For example, the presence of significant mold or other airborne contaminants at any of our real property investments could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants or to increase ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants or others if property damage or personal injury occurs.
Environmental laws also may impose restrictions on the manner in which real property may be used or businesses may be operated. Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. Additionally, operations of our parking facilities and other tenant operations, the existing condition of land when we buy it, operations in the vicinity of our real property, such as the presence of underground storage tanks, oil leaks and other vehicle discharge, or activities of unrelated third parties may affect our real property. There are also various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply, and which may subject us to liability in the form of fines or damages for noncompliance. In connection with the acquisition and ownership of real property, we may be exposed to such costs in connection with such regulations. The cost of defending against environmental claims, of any damages or fines we must pay, of compliance with environmental regulatory requirements or of remediating any contaminated real property could materially adversely affect our business, lower the value of our assets or results of operations and, consequently, lower the amounts available for distribution to our stockholders.
Real property is an illiquid investment, and we may be unable to adjust our portfolio in response to changes in economic or other conditions or sell a property if or when we decide to do so.
Real property is an illiquid investment. We may be unable to adjust our portfolio in response to changes in economic or other conditions. In addition, the real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any real property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a real property. Also, we may acquire real properties that are subject to contractual "lock-out" provisions that could restrict our ability to dispose of the real property for a period of time.
We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure stockholders that we will have funds available to correct such defects or to make such improvements.
In acquiring a real property, we may agree to restrictions that prohibit the sale of that real property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that real property. Our real properties may also be subject to resale restrictions. All these provisions would restrict our ability to sell a property, which could reduce the amount of cash available for distribution to our stockholders.
Declines in the market values of our investments may adversely affect periodic reported results of operations and credit availability, which may reduce earnings and, in turn, cash available for distribution to our stockholders.
Some of our assets will be classified for accounting purposes as "available-for-sale." These investments are carried at estimated fair value, and temporary changes in the market values of those assets will be directly charged or credited to stockholders' equity without impacting net income on the income statement. Moreover, if we determine that a decline in the estimated fair value of an available-for-sale security falls below its amortized value and is not temporary, we will recognize a loss on that security on the income statement, which will reduce our earnings in the period recognized.
A decline in the market value of our assets may adversely affect us particularly in instances where we have borrowed money based on the market value of those assets. If the market value of those assets declines, the lender may require us to post additional collateral to support the loan. If we were unable to post the additional collateral, we may have to sell assets at a time when we might not otherwise choose to do so. A reduction in credit available may reduce our earnings and, in turn, cash available for distribution to stockholders.
Further, credit facility providers may require us to maintain a certain amount of cash reserves or to set aside unlevered assets sufficient to maintain a specified liquidity position, which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on equity. In the event that we are unable to meet these contractual obligations, our financial condition could deteriorate rapidly.
Market values of our investments may decline for a number of reasons, such as changes in prevailing market rates, increases in defaults, increases in voluntary prepayments for those investments that we have that are subject to prepayment risk, widening of credit spreads and downgrades of ratings of the securities by ratings agencies.
Risks Related to Our Financing Strategy
We may not be able to access financing sources on attractive terms or at all, which could adversely affect our ability to execute our business plan.
We have and intend to continue to finance our assets with outside capital. We may also periodically use short-term financing to complete planned development projects, perform renovations to our properties, make stockholder distributions or share redemptions in periods of fluctuating income from our properties.
Our access to sources of financing will depend upon a number of factors, over which we have little or no control, including:
| · | general market conditions; |
| · | a financing source's view of the quality of our assets; |
| · | a financing source's perception of our financial condition and growth potential; and |
| · | our current and potential future earnings and cash distributions. |
We do not know whether any sources of capital will be available to us in the future on terms that are acceptable to us, if at all. If we cannot obtain sufficient capital on acceptable terms, our businesses and our ability to operate could be materially adversely impacted.
We have broad authority to incur debt, and high debt levels could hinder our ability to make distributions, expose us to the risk of default under our debt obligations and decrease the value of a stockholder's investment.
We have incurred, and expect to continue to incur, significant indebtedness to finance our assets and operations. High debt levels and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:
| · | our cash flows may be insufficient to meet our required principal, interest charges and debt service payments; |
| · | we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to meet operational needs or to capitalize upon emerging acquisitions; |
| · | we may be unable to refinance our debt at maturity or the refinancing terms may be less favorable than the terms of our original debt; |
| · | we may be required to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations, investment acquisition opportunities, stockholder distributions or other purposes; |
| · | we may be forced 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 under our debt agreements; |
| · | we may default on our obligations, in which case the lenders or mortgagees may have the right to foreclose on any properties that secure the loans or collect rents and other income from our properties; |
| · | we may violate restrictive covenants in our loan documents, which may entitle the lenders to accelerate our debt obligations or reduce our ability to pay, or prohibit us from paying, distributions to our stockholders; |
| · | our default under any loan with cross default provisions could result in a default on other outstanding debt; and |
| · | our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that investment yields will outpace increases in financing costs. For example, in a weakening economic environment, we would generally expect credit quality to decline, resulting in a higher likelihood that the lenders would require partial repayment from us, which could be substantial. Posting additional collateral to support any credit facilities could significantly reduce our liquidity and limit our ability to leverage our assets. In the event we do not have sufficient liquidity to meet such requirements, lending institutions can accelerate our indebtedness, which could have a material adverse effect on our business and operations. |
If any one of these events were to occur, our financial condition, results of operations and cash flows and ability to operate could be materially adversely affected. Furthermore, foreclosures could create taxable income without accompanying cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code and limit the amount of cash we have available to distribute, which could result in a decline in the value of a stockholder's investment.
Lenders have required and may continue to require us to enter into restrictive covenants relating to our operations, which could limit our flexibility to achieve our investment objectives and our ability to make distributions to our stockholders.
When providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage a property, discontinue insurance coverage, or replace the Advisor or members of our management team. In addition, loan documents may limit our ability to replace a property's property manager or terminate certain operating or lease agreements related to a property. For example, our existing credit agreement contains customary affirmative and negative covenants (which are in some cases subject to certain exceptions), including, but not limited to, restrictions on the ability to incur additional indebtedness, create liens, make certain investments, make certain dividends and related distributions, prepay certain debt, engage in affiliate transactions, enter into, or undertake, certain liquidations, mergers, consolidations or acquisitions, and dispose of assets or subsidiaries. These or other limitations may adversely affect our flexibility and our ability to achieve our investment objectives and could result in us being limited in the amount of distributions we would be permitted to make on our common stock.
If we breach covenants under our loan agreements, we could be held in default under such loans, which could accelerate our repayment date and materially adversely affect our financial condition, results of operations and cash flows.
In addition to customary representations, warranties, covenants, and indemnities, our existing loan agreements require us and/or our subsidiaries to comply with covenants involving, among other matters, limitations on incurrence of indebtedness, debt cancellation, property cash flow allocation and liens on properties. We may enter into additional loan agreements that also may contain covenants, including those requiring us to comply with various financial covenants.
Our failure to comply with covenants in any of our loan agreements will likely constitute an event of default and, if not cured or waived, may result in:
| · | acceleration of all of our debt under such loan agreement (and any other debt containing a cross-default or cross-acceleration provision) that we may be unable to repay from internal funds or to refinance on favorable terms, or at all; |
| · | our inability to borrow any unused amounts under such loan agreement, even if we are current in payments on borrowings under such loan agreement; and/or |
| · | the loss of some or all of our assets to foreclosure or sale. |
Further, our loan agreements may contain cross default provisions, which could result in a default on our other outstanding debt.
Any such event of default, termination of commitments, acceleration of payments, or foreclosure of our assets could have a material adverse effect on our financial condition, results of operations and cash flows and ability to continue to operate and make distributions to our stockholders. A default also could limit significantly our financing alternatives, which could cause us to curtail our investment activities and/or dispose of assets. A default could also make it difficult for us to satisfy the qualification requirements necessary to maintain our status as a REIT for U.S. federal income tax purposes. It is also possible that we could become involved in litigation related to matters concerning the loan, and such litigation could result in significant costs to us.
Instability in the debt markets and other factors may make it more difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire and the amount of cash distributions we can make to our stockholders.
If mortgage debt is unavailable on reasonable terms as a result of increased interest rates or other factors, we may not be able to finance the initial purchase of properties. In addition, if we place mortgage debt on properties, we run the risk of being unable to refinance such debt when the loans come due, or of being unable to refinance on favorable terms. If interest rates are higher when we refinance debt, our income could be reduced. We may be unable to refinance debt at appropriate times, which may require us to sell properties on terms that are not advantageous to us or could result in the foreclosure of such properties. For example, some of our loans are packed into commercial mortgage-backed securities, which place restrictions on our ability to restructure such loans without the consent of holders of the commercial mortgage-backed securities. Obtaining such consents may be time-consuming or may not be possible at all and could delay or prevent us from restructuring one or more loans. If any of these events occur, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to stockholders and may hinder our ability to raise more capital by issuing securities or by borrowing more money.
Interest rates have begun to increase, which could increase the amount of our debt payments and negatively impact our operating results.
Interest we pay on our debt obligations will reduce cash available for distributions. If we incur variable rate debt, increases in interest rates would increase our interest costs and increase the cost of refinancing existing debt and issuing new debt, which could limit our growth prospects, reduce our cash flows and our ability to make distributions to stockholders. If we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments at times which may not permit realization of the maximum return on such investments. The effect of prolonged interest rate increases could materially adversely impact our ability to make acquisitions and develop properties.
Failure to hedge effectively against interest rate changes may materially adversely affect our business, financial condition, results of operations and ability to make distributions to our stockholders.
We currently have, and may incur in the future, debt that bears interest at variable rates. An increase in interest rates would increase our interest costs to the extent we have not effectively hedged against such increase, which could adversely affect our cash flows and results of operations. Subject to our qualification and maintaining our qualification as a REIT for U.S. federal income tax purposes and our exemption from registration under the Investment Company Act of 1940, as amended (the "Investment Company Act"), we may manage and mitigate our exposure to interest rate risk attributable to variable-rate debt by using interest rate swap arrangements, interest rate cap agreements and other derivatives. The goal of any interest rate management strategy that we may adopt is to minimize or eliminate the effects of interest rate changes on the value of our assets, to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a favorable spread between the yield on our assets and the cost of financing such assets. However, these derivatives themselves expose us to various risks, including the risk that: (i) counterparties may fail to honor their obligations under these arrangements; (ii) the credit quality of the counterparties owing money under these arrangements may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transactions; (iii) the duration of the hedging transactions may not match the duration of the related liability; (iv) these arrangements may not be effective in reducing our exposure to interest rate changes; and (v) these arrangements may actually result in higher interest rates than we would otherwise have. Moreover, no hedging activity can completely insulate us from the risks associated with changes in interest rates. Failure to hedge effectively against interest rate changes may materially adversely affect our business, financial condition, results of operations and ability to make distributions to our stockholders.
Certain loans are and may be secured by mortgages on our properties and if we default under our loans, we may lose properties through foreclosure.
We have obtained, and intend to continue to obtain, loans that are secured by mortgages on our properties, and we may obtain additional loans evidenced by promissory notes secured by mortgages on our properties. As a general policy, we will seek to obtain mortgages securing indebtedness which encumber only the particular property to which the indebtedness relates, but recourse on these loans may include all of our assets. If recourse on any loan incurred by us to acquire or refinance any particular property includes all of our assets, the equity in other properties could be reduced or eliminated through foreclosure on that loan. If a loan is secured by a mortgage on a single property, we could lose that property through foreclosure if we default on that loan. We may also give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgage contains cross collateralization or cross default provisions, a default on a single property could affect multiple properties. In addition, for tax purposes, a foreclosure on any of our properties that is subject to a nonrecourse mortgage loan would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code. Further, if we default under a loan, it is possible that we could become involved in litigation related to matters concerning the loan, and such litigation could result in significant costs to us which could affect distributions to stockholders or lower our working capital reserves or our overall value.
Risks Related to Conflicts of Interest
Our executive officers and the Advisor's key real estate, finance and securities professionals will face conflicts of interest caused by our compensation arrangements with the Advisor and its affiliates, which could result in actions that are not in the long-term best interests of our company.
Our executive officers are also officers, directors, managers and/or key professionals of the Advisor and other affiliated entities. The Advisor and other affiliated entities receive substantial fees from us. These fees could influence the advice given to us by the key personnel of the Advisor and its affiliates. Among other matters, these compensation arrangements could affect their judgment with respect to:
| · | the continuation, renewal or enforcement of our agreements with the Advisor and other affiliated entities, including the Amended and Restated Advisory Agreement; |
| · | real property sales, since the asset management fees payable to the Advisor will decrease; |
| · | borrowings to acquire investments, which borrowings may increase the asset management fees payable to the Advisor; |
| · | determining the compensation paid to employees for services provided to the Company, which could be influenced in part by whether the Advisor is reimbursed by the Company for the related salaries and benefits; and |
| · | if the Company seeks to internalize management functions, which internalization could result in the Company retaining some of the Advisor's and its affiliates' key officers and employees for compensation that is greater than that which they currently earn or which could require additional payments to affiliates of the Advisor to purchase the assets and operations of the Advisor and its affiliates. |
In the course of our investing activities, we will pay an asset management fee to the Advisor and will reimburse the Advisor for expenses it incurs, regardless of the performance of our investment portfolio. As a result, investors in our common stock will invest on a "gross" basis and receive distributions on a "net" basis after expenses, resulting in, among other things, a lower rate of return than one might achieve through direct investments. Because we will pay an asset management fee and reimburse expenses regardless of how our portfolio performs, our Advisor's interests may be less aligned with our stockholders' interests than if we were internally managed and our management team was compensated largely based on performance.
Additionally, the payment of certain fees may influence the Advisor to recommend transactions with respect to the sale of a property or properties that may not be in our best interest at the time. Investments with higher net operating income growth potential are generally riskier or more speculative. In evaluating investments and other management strategies, the opportunity to earn fees may lead the Advisor to place undue emphasis on criteria relating to its compensation at the expense of other criteria, such as the preservation of capital, to achieve higher short-term compensation. Considerations relating to our affiliates' compensation from us and other affiliates could result in decisions that are not in the best interests of our stockholders, which could hurt our ability to pay distributions to stockholders or result in a decline in the value of their investment.
In addition, the fees being paid to the Advisor and other affiliates for services they provide for us were not determined of an arm's length basis. As a result, the fees have been determined without the benefit of arm's length negotiations of the type normally conducted between unrelated parties and may be in excess of amounts that we would otherwise pay to third parties for such services.
The Advisor may have conflicting obligations if we enter into joint ventures or engage in other transactions with its affiliates. As a result, in any such transaction we may not have the benefit of arm's-length negotiations of the type normally conducted between unrelated parties.
We have co-invested in property together with one or more of our affiliates, including with the owners of the Advisor, VRM I and VRM II. We may make additional co-investments in real estate with our affiliates or through a joint venture with their affiliates. In these circumstances, the Advisor will have a conflict of interest when fulfilling its obligation to us. In any such transaction, we would not have the benefit of arm's-length negotiations of the type normally conducted between unrelated parties.
Our executive officers and the Advisor's key real estate, finance and securities professionals face conflicts of interest related to their positions and interests in our affiliates, which could hinder our ability to implement our business strategy and to generate returns to stockholders.
Our executive officers and the Advisor's key real estate, finance and securities professionals are also executive officers, directors, managers and key professionals of other affiliated entities. Our Advisor also may from time to time sponsor other real estate programs with investment objectives that are similar to us. As a result, they owe duties to each of these entities, their members and limited partners and these investors, which duties may from time to time conflict with the duties that they owe to us. Their loyalties to these other entities and investors could result in action or inaction that is detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. Conflicts with our business and interests are most likely to arise from involvement in activities related to (a) allocation of new investments and management time and services between us and the other entities, (b) the timing and terms of the investment in or sale of an asset, (c) development of our properties by affiliates of the Advisor, (d) investments with affiliates of the Advisor, (e) compensation to the Advisor and its affiliates, and (f) our relationship generally with the Advisor. The loyalties of these individuals to other entities and investors could result in action or inaction that is detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. If we do not successfully implement our business strategy, we may be unable to generate the cash needed to make distributions to stockholders and to maintain or increase the value of our assets.
Further, our directors and officers, the Advisor, and any of their respective affiliates, employees and agents are not prohibited from engaging, directly or indirectly, in any business or from possessing interests in any other business venture or ventures, including businesses and ventures involved in the acquisition or sale of real estate investments or that otherwise compete with us.
We may purchase real property and other real estate-related assets from third parties who have existing or previous business relationships with affiliates of the Advisor, and, as a result, in any such transaction, we may not have the benefit of arm's-length negotiations of the type normally conducted between unrelated parties.
We may purchase real property and other real estate-related assets from third parties that have existing or previous business relationships with affiliates of the Advisor. The officers, directors or employees of the Advisor and its affiliates may have a conflict in representing our interests in these transactions on the one hand and the interests of such affiliates in preserving or furthering their respective relationships on the other hand. In any such transaction, we will not have the benefit of arm's-length negotiations of the type normally conducted between unrelated parties, and the purchase price or fees paid by us may be in excess of amounts that we would otherwise pay to third parties.
A stockholder's interest in us could be diluted and we could incur other significant costs associated with being self-managed if we internalize our management functions.
In connection with a potential listing of our shares on a national securities exchange, our board of directors is considering internalization of our management functions. Internalization would likely be accomplished through an acquisition of the Advisor's assets and hiring the personnel that the Advisor utilizes to perform services for us. An internalization transaction could result in significant payments to affiliates of the Advisor, including in the form of our equity securities, which would dilute our stockholders' interest in us. We are not required to seek a stockholder vote to become self-managed. If we internalize management, we would no longer bear the costs of the various fees and expenses we expect to pay to the Advisor under the Amended and Restated Advisory Agreement. However, our direct expenses would continue to include increased general and administrative costs. We would also employ personnel and would be subject to potential liabilities commonly faced by employers, such as workers disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances as well as incur the compensation and benefits costs of our officers and other employees and consultants. We may issue equity awards to officers, employees and consultants, which awards would decrease our net income and FFO and may further dilute a stockholder's investment.
In connection with any potential internalization transaction, we anticipate that our independent board members will review and analyze the estimated costs of internalization and the anticipated and perceived benefits and savings associated with internalizing management, and compare them against the estimated costs of continuing to be externally-managed. The costs of internalization and cost savings estimates, however, will be based upon certain assumptions, including regarding future growth, and may prove to be incorrect. If the costs of internalization and the expenses we assume as a result of an internalization are higher than the expenses we avoid paying to the Advisor, our income per share would be lower as a result of the internalization than it otherwise would have been, potentially decreasing the amount of cash available to distribute to our stockholders and the value of our shares.
If we internalize our management functions, we could have difficulty integrating these functions as a stand-alone entity. Currently, the Advisor and its affiliates perform asset management and general and administrative functions on our behalf, including accounting and financial reporting. These personnel have substantial know-how and experience. We may fail to properly identify the appropriate mix of personnel needed to operate as a stand-alone entity. Certain key employees may decline our offers of employment and remain employees of the Advisor or its affiliates. An inability to manage an internalization transaction effectively could thus result in our incurring excess costs and suffering deficiencies in our disclosure controls and procedures or our internal control over financial reporting. Such deficiencies could cause us to incur additional costs, and our management's attention could be diverted from most effectively managing our investments.
Internalization transactions involving the acquisition of advisors affiliated with entity sponsors have also, in some cases, been the subject of litigation. Even if these claims are without merit, we could be forced to spend significant amounts of money defending claims which would reduce the amount of cash available for us to acquire assets and to pay distributions.
Our UPREIT structure may result in potential conflicts of interest with limited partners in our Operating Partnership whose interests may not be aligned with those of our stockholders.
Limited partners of our Operating Partnership may receive the right to vote on certain amendments to the Operating Partnership agreement, as well as on certain other matters. Persons holding such voting rights may exercise them in a manner that conflicts with the interests of our stockholders. As general partner of our Operating Partnership, we are obligated to act in a manner that is in the best interest of all partners of our Operating Partnership. Circumstances may arise in the future when the interests of limited partners in our Operating Partnership may conflict with the interests of our stockholders. These conflicts may be resolved in a manner stockholders do not believe are in their best interest.
Risks Related to Our Corporate Structure
Certain provisions of Maryland law could inhibit changes in control.
Certain provisions of the Maryland General Corporation Law (the "MGCL") may have the effect of deterring a third party from making a proposal to acquire us or of inhibiting a change in control under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-prevailing market price of our common stock. Under the MGCL, certain "business combinations" (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and an interested stockholder (as defined in the statute) or an affiliate of such an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. Thereafter, any such business combination must be recommended by the board of directors of such corporation and approved by the affirmative vote of at least (1) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and (2) two-thirds of the votes entitled to be cast by holders of shares of voting stock of the corporation other than shares held by the interested stockholder with whom (or with whose affiliate) the business combination is to be effected or held by an affiliate or associate of the interested stockholder, unless, among other conditions, the corporation's 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. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by a board of directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our board of directors has by resolution exempted any business combination between us and any other person.
The MGCL provides that holders of "control shares" of our company (defined as shares of voting stock that, if aggregated with all other shares of capital stock owned or controlled by the acquirer, would entitle the acquirer 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 issued and outstanding "control shares") have no voting rights except to the extent approved at a special meeting of stockholders by the affirmative vote of at least two-thirds of all of the votes entitled to be cast on the matter, excluding all interested shares. Our bylaws currently contain a provision exempting any and all acquisitions by any person of shares of our stock from this statute.
The "unsolicited takeover" provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement takeover defenses if we have a class of equity securities registered under the Exchange Act and at least three independent directors (which we will have upon the completion of this offering). These provisions may have the effect of inhibiting a third party from acquiring us or of delaying, deferring or preventing a change in control of our company under the circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-current market price. Our charter contains a provision whereby we have elected to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our board of directors. See "Certain Provisions of Maryland Law and of our Charter and Bylaws—Business Combinations" and "Certain Provisions of Maryland Law and of our Charter and Bylaws—Control Share Acquisitions."
Our charter contains provisions that make removal of our directors difficult, which makes it more difficult for our stockholders to effect changes to our management and may prevent a change in control of our company that is in the best interests of our stockholders.
Our charter provides that a director may be removed only for cause and only by the affirmative vote of at least two-thirds of all the votes of stockholders entitled to be cast generally in the election of directors. Vacancies on our board of directors may be filled only by a majority of the remaining directors, even if the remaining directors do not constitute a quorum, and any individual elected to fill such a vacancy will serve for the remainder of the full term of the directorship in which the vacancy occurred and until his or her successor is duly elected and qualifies. These requirements make it more difficult for our stockholders to effect changes to our management by removing and replacing directors and may prevent a change in control of our company that is otherwise in the best interests of our stockholders.
Our rights and the rights of our stockholders to take action against our directors and officers are limited.
As permitted by Maryland law, our charter limits the liability of our directors and officers to us and our stockholders for money damages to the maximum extent permitted by Maryland law. Therefore, our directors and officers will be subject to monetary liability resulting only 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 as being material to the cause of action adjudicated. |
As a result, we and our stockholders have rights against our directors and officers that are more limited than might otherwise exist. Accordingly, in the event that actions taken by any of our directors or officers impede the performance of our company, stockholders and our ability to recover damages from such director or officer will be limited. In addition, our charter and our bylaws require us to indemnify our directors and officers for actions taken by them in those and certain other capacities to the maximum extent permitted by Maryland law.
Our bylaws designate the Circuit Court for Baltimore City, Maryland as the exclusive forum for certain actions and proceedings that may be initiated by our stockholders against us or any of our directors, officers or other employees.
Our bylaws provides that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or, if that court does not have jurisdiction, the U.S. District Court for the District of Maryland, Baltimore Division, will be the sole and exclusive forum for (a) any Internal Corporate Claim, as such term is defined in the MGCL, (b) any derivative action or proceeding brought on our behalf, (c) any action asserting a claim of breach of any duty owed by any of our directors, officers or other employees to us or to our stockholders, (d) any action asserting a claim against us or any of our directors, officers or other employees arising pursuant to any provision of the MGCL or our charter or bylaws or (e) any action asserting a claim against us or any of our directors, officers or other employees that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our stock will be deemed to have notice of and consented to the provisions of our charter and bylaws, including the exclusive forum provisions in our bylaws. This choice of forum provisions may limit a stockholder's ability to bring a claim in a judicial forum that the stockholder believes is favorable for such disputes and may discourage lawsuits against us and any of our directors, officers or other employees. We believe that requiring these claims to be filed in a single court in Maryland is advisable because (i) litigating these claims in a single court avoids unnecessarily redundant, inconvenient, costly and time-consuming litigation in multiple forums and (ii) Maryland courts are authoritative on matters of Maryland law and Maryland judges have more experience in dealing with issues of Maryland corporate law than judges in any other state.
Our charter limits the number of shares a person may own, which may discourage a takeover that could otherwise result in a premium price to our stockholders.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary or appropriate to preserve our qualification as a REIT. To help us comply with the REIT ownership requirements of the Code, among other purposes, our charter generally prohibits a person from beneficially or constructively owning more than 9.8% in value of the aggregate of our outstanding shares of capital stock or more than 9.8% in value or number of shares, whichever is more restrictive, of the aggregate of our outstanding common stock, unless exempted, prospectively or retroactively, by our board of directors. This limit can generally be waived and adjusted by our board of directors prospectively or retroactively. The ownership limit may have the effect of precluding a change in control of us by a third party, even if such change in control would be in the interest of the stockholders (and even if such change in control would not reasonably jeopardize our REIT status). This restriction may have the effect of delaying, deferring or preventing a change in control of us, 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. In addition, these provisions may also decrease a stockholder's ability to sell their shares of our common stock.
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of our stockholders or discourage a third party from acquiring us in a manner that could result in a premium price to our stockholders.
Our board of directors may classify or reclassify any unissued shares of common stock or preferred stock into other classes or series of stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of repurchase of any such classes or series of stock. Thus, our board of directors could authorize the issuance of shares of a class or series of preferred stock with priority as to distributions and amounts payable upon liquidation over the rights of our stockholders. Such preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, 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 to our stockholders. However, the issuance of preferred stock must be approved by a majority of our independent directors not otherwise interested in the transaction, who will have access, at our expense, to our legal counsel or to independent legal counsel.
We are not and do not plan to be registered as an investment company under the Investment Company Act, and therefore we will not be subject to the requirements imposed and stockholder protections provided by the Investment Company Act; maintaining an exemption from registration may limit or otherwise affect our investment choices.
None of us, our Operating Partnership, or any of our subsidiaries is registered or intends to register as an investment company under the Investment Company Act. Our Operating Partnership's and subsidiaries' investments in real estate will represent the substantial majority of our total asset mix. In order for us not to be subject to regulation under the Investment Company Act, we engage, through our Operating Partnership and our wholly and majority-owned subsidiaries, primarily in the business of buying real estate. These investments must be made within a year after our public offering ends.
If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things:
| · | limitations on capital structure; |
| · | restrictions on specified investments; |
| · | prohibitions on transactions with affiliates; and |
| · | compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses. |
Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. We are organized as a holding company that conducts its businesses primarily through our Operating Partnership and its subsidiaries. We believe none of us, our Operating Partnership or our subsidiaries will be considered an investment company under Section 3(a)(1)(A) of the Investment Company Act because none of us, our Operating Partnership or our subsidiaries will engage primarily or hold ourselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through our Operating Partnership's wholly owned or majority-owned subsidiaries, we and our Operating Partnership will be primarily engaged in the non-investment company businesses of these subsidiaries, namely the business of purchasing or otherwise acquiring real property.
Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer's total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which we refer to herein as the 40% test. Excluded from the term "investment securities," among other things, are (i) U.S. government securities and (ii) securities issued by majority-owned subsidiaries that are (a) not themselves investment companies and (b) not relying on the exception from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act relating to private investment companies. We believe that we, our Operating Partnership and the subsidiaries of our Operating Partnership will each comply with the 40% test as we have invested in real property, rather than in securities, through our wholly and majority-owned subsidiaries. As our subsidiaries will be investing either solely or primarily in real property, they would be outside of the definition of "investment company" under Section 3(a)(1)(C) of the Investment Company Act. We are organized as a holding company that conducts its businesses primarily through our Operating Partnership, which in turn is a holding company conducting its business of investing in real property through wholly-owned or majority-owned subsidiaries. We have monitored and will continue to monitor our holdings to ensure continuing and ongoing compliance with the 40% test.
Even if the value of investment securities held by one of our subsidiaries were to exceed 40% of the value of its total assets, we expect that subsidiary to be able to rely on the exception from the definition of an investment company under Section 3(c)(5)(C) of the Investment Company Act, which is available for entities "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." Section 3(c)(5)(C), as interpreted by the SEC staff, requires each of our subsidiaries relying on this exception to invest at least 55% of its portfolio in "mortgage and other liens on and interests in real estate," which we refer to herein as qualifying real estate assets, and maintain at least 80% of its assets in qualifying real estate assets or other real estate-related assets. The remaining 20% of the portfolio can consist of miscellaneous assets.
For purposes of the exclusions provided by Sections 3(c)(5)(C), we will classify our investments based in large measure on no-action letters issued by the SEC staff and other SEC interpretive guidance and, in the absence of SEC guidance, on our view of what constitutes a qualifying real estate asset and a real estate related asset. Although we intend to monitor our portfolio periodically and prior to each investment acquisition and disposition, there can be no assurance that we will be able to maintain this exclusion for each of these subsidiaries. It is not certain whether or to what extent the SEC or its staff in the future may modify its interpretive guidance to narrow the ability of issuers to rely on the exemption from registration provided by Section 3(c)(5)(C). Any such future guidance may affect our ability to rely on this exception.
Although we intend to monitor our portfolio periodically and prior to each investment acquisition and disposition, there can be no assurance that we, our Operating Partnership or our subsidiaries will be able to maintain this exemption from registration for us and each of our subsidiaries. If the SEC or its staff does not agree with our determinations, we may be required to adjust our activities or those of our subsidiaries.
In the event that we, or our Operating Partnership, were to acquire assets that could make either entity fall within the definition of investment company under Section 3(a)(1)(C) of the Investment Company Act, we believe that we would still qualify for the exception from the definition of "investment company" provided by Section 3(c)(6). Although the SEC or its staff has issued little interpretive guidance with respect to Section 3(c)(6), we believe that we and our Operating Partnership may rely on Section 3(c)(6) if 55% of the assets of our Operating Partnership consist of, and at least 55% of the income of our Operating Partnership is derived from, qualifying real estate assets owned by wholly owned or majority-owned subsidiaries of our Operating Partnership.
Qualification for this exemption will limit our ability to make certain investments. To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon such tests and/or exceptions, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen.
Further, if we, our Operating Partnership or our subsidiaries are required to register as investment companies under the Investment Company Act, our investment options may be limited by various limitations, such as those mentioned above, and we or our subsidiaries would be subjected to a complex regulatory scheme, the costs of compliance with which can be high.
We are an "emerging growth company" under the federal securities laws and will be subject to reduced public company reporting requirements.
In April 2012, President Obama signed into law the Jumpstart Our Business Startups Act, or the JOBS Act. We are an "emerging growth company," as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies."
We could remain an "emerging growth company" for up to five years, or until the earliest of (1) the last day of the first fiscal year in which our annual gross revenues equals or exceeds $1 billion, (2) December 31 of the fiscal year that we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter and we have been publicly reporting for at least 12 months or (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.
Under the JOBS Act, emerging growth companies are not required to (1) provide an auditor's attestation report on management's assessment of the effectiveness of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (2) comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor's report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (3) comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the SEC determines otherwise, (4) provide certain disclosure regarding executive compensation required of larger public companies or (5) hold stockholder advisory votes on executive compensation. Certain of these exemptions are inapplicable to us because of our structure as an externally managed REIT, and we have not made a decision as to whether to take advantage of any or all of the JOBS Act exemptions that applicable to us.
In addition, the JOBS Act provides that an "emerging growth company" can take advantage of an extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies. In other words, an "emerging growth company" can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intend to take advantage of such extended transition period. Since we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates. If we were to subsequently elect to instead comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.
Stockholders will have limited control over changes in our policies and operations, which increases the uncertainty and risks a stockholder may face.
Our board of directors determines our major policies, including our policies regarding investment strategies and approach, growth, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders. Under the Maryland General Corporation Law (the "MGCL") and our charter, our stockholders have a right to vote only on limited matters. Our board of directors' broad discretion in setting policies and our stockholders' inability to exert control over those policies increase the uncertainty and risks a stockholder may face.
Stockholders' interest in us could be diluted if we issue additional shares, which could reduce the overall value of their investment.
Stockholders do not have preemptive rights to any shares issued by us in the future and generally have no appraisal rights. Our charter currently has authorized 100,000,000 shares of capital stock. Of the total number of shares of capital stock authorized, 98,999,000 shares are classified as common stock, par value $0.0001 per share; and 1,000,000 shares are classified as preferred stock, par value $0.0001 per share, within which (i) 97,000 shares are classified and designated as Series 1 Convertible Redeemable Preferred Stock, and (ii) 50,000 shares are classified and designated as Series A Convertible Redeemable Preferred Stock, and 1,000 shares are classified as convertible stock, par value $0.0001 per share. Subject to any limitations set forth under Maryland law, a majority of our board of directors may amend our charter from time to time to increase or decrease the aggregate number of authorized shares of stock or the number of authorized shares of stock of any class or series, or classify or reclassify any unissued shares into other classes or series of stock without the necessity of obtaining stockholder approval. All of such shares may be issued in the discretion of our board of directors. A stockholder's interest in us may be diluted in the event that we (1) sell additional shares in the future, (2) sell securities that are convertible into shares of our common stock, (3) issue shares of our common stock in a private offering of securities to institutional investors, (4) issue shares of our common stock to the Advisor, its successors or assigns, in payment of an outstanding fee obligation as set forth under our Amended and Restated Advisory Agreement or (5) issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of our operating partnership. Because of these and other reasons described in this "Risk Factors" section, stockholders should not expect to be able to own a significant percentage of our shares. In addition, depending on the terms and pricing of any additional offerings and the value of our investments, stockholders also may experience dilution in the book value and fair mark value of, and the amount of distributions paid on, their shares.
Our charter also authorizes our board of directors, without stockholder approval, to designate and issue any classes or series of preferred stock (including equity or debt securities convertible into preferred stock) and to set or change the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions and qualifications or terms or conditions of redemption of each class or series of shares so issued. Because our board of directors has the power to establish the preferences and rights of each class or series of preferred stock, it may afford the holders of any series or class of preferred stock preferences, powers, and rights senior to the rights of holders of common stock or preferred stock.
Under this power, our board of directors has created the Series A preferred stock and the Series 1 preferred stock, each of which ranks senior to our common stock with respect to the payment of dividends and rights upon liquidation, dissolution or winding up. Specifically, payment of any distribution preferences on the Series A preferred stock, Series 1 preferred stock, or any future series of preferred stock would reduce the amount of funds available for the payment of distributions on our common stock. Further, holders of our preferred stock are entitled to receive a preference payment if we liquidate, dissolve, or wind up before any payment is made to the common stockholders, likely reducing the amount common stockholders would otherwise receive upon such an occurrence. Holders of our preferred stock will have the right to require us to convert their shares into shares of our common stock. The conversion of our preferred stock into common stock may further dilute the ownership interest of our common stockholders. Following a Listing Event (as defined below), we also have the right, but not the obligation, to redeem the Series A preferred stock and Series 1 preferred stock and pay the redemption payments in the form of shares of our common stock, which may further dilute the ownership interest of our common stockholders. Although the dollar amounts of such payments are unknown, the number of shares to be issued in connection with such payments may fluctuate based on the price of our common stock. If we elect to redeem any of our preferred stock with cash, the exercise of such rights may reduce the availability of our funds for investment purposes or to pay for distributions on our common stock. A Listing Event is defined in the Articles Supplementary for the Series A preferred stock and Series 1 preferred stock as a liquidity event involving the listing of our shares of common stock on national securities exchange or a merger or other transaction in which our stockholders will receive shares listed on a national securities exchange as consideration in exchange for their shares in us.
Any sales or perceived sales in the public market of shares of our common stock issuable upon the conversion or redemption of our preferred stock could adversely affect prevailing market prices of shares of our common stock. The issuance of common stock upon any conversion or redemption of our preferred stock also may have the effect of reducing our net income per share (or increasing our net loss per share). In addition, if a Listing Event occurs, the existence of our preferred stock may encourage short selling by market participants because the existence of redemption payments could depress the market price of shares of our common stock.
Federal Income Tax Risks
Failure to maintain our status as a REIT could adversely affect our operations and our ability to make distributions.
We qualified as a REIT for federal income tax purposes, commencing with the taxable year ended December 31, 2017. Although we have received an opinion of counsel with respect to our qualification as a REIT, investors should be aware, among other things, that such opinion does not bind the Internal Revenue Service (the "IRS") and was based on certain representations as to factual matters and covenants made by us. Both the validity of such opinion and our qualification as a REIT will depend on our satisfaction of numerous requirements (some on an annual and quarterly basis) established under highly technical and complex provisions of the Code, for which there are only limited judicial or administrative interpretations and involves the determination of various factual matters and circumstances not entirely within our control. Importantly, as of the date hereof we have a limited operating history and both the opinion and any other assessment regarding our qualification as a REIT depends on projections regarding our future activities and we can provide no assurances we would qualify or maintain our qualification as a REIT for federal income tax purposes.
If we were to fail to qualify or maintain our status as a REIT for any taxable year, or if our board of directors determined to revoke our REIT election, we would be subject to U.S. federal income tax on our taxable income at corporate rates. In addition, we would be disqualified from treatment as a REIT for the four taxable years following the year in which we lose our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, absent IRS relief, distributions to stockholders would no longer be deductible in computing our taxable income, and we would no longer be required to make distributions. To the extent that distributions had been made in anticipation of our qualifying as a REIT, we might be required to borrow funds or liquidate some investments in order to pay the applicable corporate income tax.
Lastly, it is possible that future economic, market, legal, tax or other considerations may cause our board of directors to determine that it is no longer in our best interest to continue to be qualified as a REIT and recommend that we revoke our REIT election.
Our leases must be respected as such for U.S. federal income tax purposes in order for us to qualify as a REIT.
In order for us to qualify as a REIT, at least 75% of our gross income each year must consist of real estate-related income, including rents from real property. Income from operation of our parking facilities will not be treated as rents from real property. Accordingly, we will lease our parking facilities to lessees that will operate the facilities. If such leases were recharacterized as management contracts for U.S. federal income tax purposes or otherwise as an arrangement other than a lease, we could fail to qualify as a REIT.
To qualify as a REIT, we must meet annual distribution requirements, which may result in us distributing amounts that may otherwise be used for our operations or having to borrow funds.
To obtain the favorable tax treatment accorded to REITs, we normally will be required each year to distribute dividends to our stockholders equal to at least 90% of our REIT taxable income, determined without regard to the dividends-paid deduction and by excluding net capital gains. We will be subject to U.S. federal income tax on our undistributed taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on acquisitions of properties, and it is possible that we might be required to borrow funds, use proceeds from the issuance of securities, pay taxable dividends of our stock or debt securities or sell assets in order to distribute enough of our taxable income to qualify or maintain our qualification as a REIT and to avoid the payment of U.S. federal income and excise taxes.
From time to time, we may generate taxable income greater than our income for financial reporting purposes, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur, for example, from (i) the effect of non-deductible capital expenditures, (ii) the creation of reserves, (iii) the recognition of original issue discount or (iv) required debt amortization payments. If we do not have other funds available in these situations, it might be necessary to arrange for short-term, or possibly long-term, borrowings, or to pay dividends in the form of our shares or other taxable in-kind distributions of property. We may need to borrow funds at times when the market conditions are unfavorable. Such borrowings could increase our costs and reduce the value of a stockholder's investment. In the event in-kind distributions are made, a stockholder's tax liabilities associated with an investment in our common stock for a given year may exceed the amount of cash we distribute to a stockholder during such year. Distributions in kind shall not be permitted, except for distributions of readily marketable securities, distributions of beneficial interests in a liquidating trust established for the dissolution of the corporation and the liquidation of its assets in accordance with the terms of the charter or distributions in which (a) the board advises each stockholder of the risks associated with direct ownership of the property, (b) the board offers each stockholder the election of receiving such in-kind distributions and (c) in-kind distributions are made only to those stockholders that accept such offer.
Future sales of properties may result in penalty taxes or may be made through taxable REIT subsidiaries ("TRSs"), each of which would diminish the return to stockholders.
It is possible that one or more sales of our properties may be "prohibited transactions" under provisions of the Code. If we are deemed to have engaged in a "prohibited transaction" (i.e., we sell a property held by us primarily for sale in the ordinary course of our trade or business), all income that we derive from such sale would be subject to a 100% tax. The Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% tax. A principal requirement of the safe harbor is that the REIT must hold the applicable property for not less than two years prior to its sale for the production of rental income. It is entirely possible that a future sale of one or more of our properties will not fall within the prohibited transaction safe harbor.
If we acquire a property that we anticipate will not fall within the safe harbor from the 100% penalty tax upon disposition, we may acquire such property through a TRS in order to avoid the possibility that the sale of such property will be a prohibited transaction and subject to the 100% penalty tax. If we already own such a property directly or indirectly through an entity other than a TRS, we may contribute the property to a TRS. Though a sale of such property by a TRS likely would mitigate the risk of incurring a 100% penalty tax, the TRS itself would be subject to regular corporate income tax at the U.S. federal level, and potentially at the state and local levels, on the gain recognized on the sale of the property as well as any income earned while the property is operated by the TRS. Such tax would diminish the amount of proceeds from the sale of such property ultimately distributable to our stockholders. Our ability to use TRSs in the foregoing manner is subject to limitation. Among other things, the value of our securities in TRSs may not exceed 25% (20% for taxable years beginning after December 31, 2017) of the value of our assets and dividends from our TRSs, when aggregated with all other non-real estate income with respect to any one year, generally may not exceed 25% of our gross income with respect to such year. No assurances can be provided that we would be able to successfully avoid the 100% penalty tax through the use of TRSs.
In addition, if we acquire any asset from a subchapter C corporation (i.e., a corporation generally subject to full corporate-level tax) in a merger or other transaction in which we acquire a basis in the asset determined by reference either to the subchapter C corporation's basis in the asset or to another asset, we will pay tax, at the highest U.S. federal corporate income tax rate, on any built-in gain recognized on a taxable disposition of the asset during the 5-year period after its acquisition.
Stockholders may have current tax liability on distributions if they elect to reinvest in our shares.
Our stockholders who elect to participate in the Company's DRIP, and who are subject to U.S. federal income taxation laws, will incur a tax liability on an amount equal to the fair market value on the relevant distribution date of the shares of our common stock purchased with reinvested distributions, even though such stockholders have elected not to receive the cash distributions used to purchase those shares of common stock. As a result, if a stockholder is not a tax-exempt entity, such stockholder may have to use funds from other sources to pay its tax liability on the value of the common stock received.
Dividends payable by REITs generally do not qualify for the reduced tax rates that apply to other corporate dividends.
The maximum U.S. federal income tax rate for dividends payable by corporations to domestic stockholders that are individuals, trusts or estates is generally 20%. Dividends from REITs, however, generally continue to be taxed at the normal ordinary income rate applicable to the individual recipient, rather than the 20% preferential rate. For taxable years prior to 2026, individual stockholders are generally allowed to deduct 20% of the aggregate number of ordinary dividends distributed by us, subject to certain limitations. Nevertheless, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations, which could adversely affect the value of the stock of REITs, including our common stock.
In certain circumstances, we may be subject to federal, state and local taxes as a REIT, which would reduce our cash available for distribution to stockholders.
Even if we qualify and maintain our status as a REIT, we may be subject to U.S. federal income taxes or state taxes. For example, net income from a "prohibited transaction," generally sales of property held primarily for sale to customers in the ordinary course of business, will be subject to a 100% tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain capital gains we earn from the sale or other disposition of our property and pay income tax directly on such gains. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns to claim refunds. We may also be subject to state and local taxes on our income or property, either directly or at the level of the companies through which we indirectly own our assets. Any U.S. federal or state taxes we pay will reduce our cash available for distribution to stockholders.
Distributions to tax-exempt investors may be classified as unrelated business taxable income.
Neither ordinary nor capital gain distributions with respect to our common stock nor gain from the sale of common stock should generally constitute unrelated business taxable income to a tax-exempt investor. However, there are certain exceptions to this rule. In particular:
| · | Part of the income and gain recognized by certain qualified employee pension trusts with respect to our common stock may be treated as unrelated business taxable income if shares of our common stock are predominately held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT share ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as unrelated business taxable income; |
| · | Part of the income and gain recognized by a tax-exempt investor with respect to our common stock would constitute unrelated business taxable income if the investor incurs debt in order to acquire the common stock; and |
| · | Part or all of the income or gain recognized with respect to our common stock by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from federal income taxation under Sections 501(c)(7), (9), (17), or (20) of the Code may be treated as unrelated business taxable income. |
Investments in other REITs and real estate partnerships could subject us to tax risks associated with the tax status of such entities.
We may invest in the securities of other REITs and real estate partnerships. Such investments are subject to the risk that any such REIT or partnership may fail to satisfy the requirements to qualify as a REIT or a partnership, as the case may be, in any given taxable year. In the case of a REIT, such failure would subject such entity to taxation as a corporation, may require such REIT to incur indebtedness to pay its tax liabilities, may reduce its ability to make distributions to us, and may render it ineligible to elect REIT status prior to the fifth taxable year following the year in which it fails to so qualify. In the case of a partnership, such failure could subject such partnership to an entity level tax and reduce the entity's ability to make distributions to us. In addition, such failures could, depending on the circumstances, jeopardize our ability to qualify as a REIT.
Complying with the REIT requirements may impact our ability to maximize profits.
To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of shares of our common stock. We may be required to forego attractive investments or liquidate otherwise attractive investments to comply with such tests. We also may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
Complying with the REIT requirements may force us to liquidate otherwise attractive investments.
To qualify as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate-related assets. The remainder of our investments (other than government securities and qualified real estate-related assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, no more than 5% of the value of our assets (other than government securities and qualified real estate-related assets) can consist of the securities of any one issuer, no more than 20% of the value of our total assets can be represented by securities of one or more taxable REIT subsidiaries and no more than 25% of the value of our total assets can be represented by "nonqualified publicly offered REIT debt instruments." If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments to maintain REIT status. Such action may subject the REIT to the tax on prohibited transactions, discussed below.
Liquidation of assets may jeopardize our REIT status.
To continue to qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to satisfy our obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our status as a REIT, or we may be subject to a 100% tax on any resulting gain if we sell assets that are treated as dealer property or inventory.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on a stockholder's investment.
Our ability to dispose of property during the first few years following acquisition is restricted to a substantial extent as a result of our REIT status. Under applicable provisions of the Code regarding prohibited transactions by REITs, we will be subject to a 100% tax on any gain realized on the sale or other disposition of any property (other than foreclosure property) we own, directly or through any subsidiary entity, including our Operating Partnership, but excluding our taxable REIT subsidiaries, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of a trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. We intend to avoid the 100% prohibited transaction tax by (1) conducting activities that may otherwise be considered prohibited transactions through a taxable REIT subsidiary, (2) conducting our operations in such a manner so that no sale or other disposition of an asset we own, directly or through any subsidiary other than a taxable REIT subsidiary, will be treated as a prohibited transaction or (3) structuring certain dispositions of our properties to comply with certain safe harbors available under the Code for properties held for at least two years. However, no assurance can be given that any particular property we own, directly or through any subsidiary entity, including our Operating Partnership, other than our taxable REIT subsidiaries, will not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
Recharacterization of sale-leaseback transactions may cause us to lose our REIT status.
We may purchase real property and lease it back to the sellers of such property. We cannot assure stockholders that the IRS will not challenge any characterization of such a lease as a "true lease," which would allow us to be treated as the owner of the property for federal income tax purposes. In the event that any such sale-leaseback transaction is challenged and recharacterized as a financing transaction or loan for federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale-leaseback transaction were so recharacterized, we might fail to satisfy the REIT qualification "asset tests" or the "income tests" and, consequently, lose our REIT status. Alternatively, the amount of our REIT taxable income could be recalculated, which might also cause us to fail to meet the distribution requirement for a taxable year.
The stock ownership limit imposed by the Code for REITs and our charter may restrict our business combination opportunities.
To qualify as a REIT under the Code, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of any taxable year after our first year in which we qualify as a REIT. Our charter, with certain exceptions, authorizes our board of directors to take the actions that are necessary or appropriate to preserve our qualification as a REIT. Unless an exemption is granted prospectively or retroactively by our board of directors, no person (as defined to include certain entities) may own more than 9.8% in value of the aggregate of our outstanding shares of capital stock or more than 9.8%, in value or in number of shares, whichever is more restrictive, of the aggregate of our outstanding shares of common stock. Generally, this limit can be waived and adjusted by the board of directors. In addition, our charter will generally prohibit beneficial or constructive ownership of shares of our capital stock by any person that owns, actually or constructively, an interest in any of our tenants that would cause us to own, actually or constructively, 10% or more of any of our tenants. Our board of directors may grant an exemption from the 9.8% ownership limit prospectively or retroactively in its sole discretion, subject to such conditions, representations and undertakings as required by our charter or as it may determine. These and other ownership limitations in our charter are common in REIT charters and are intended, among other purposes, to assist us in complying with the tax law requirements and to minimize administrative burdens. However, these ownership limits and the other restrictions on ownership and transfer in our charter might also delay or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.
Non-U.S. investors may be subject to FIRPTA on the sale of common stock if we are unable to qualify as a domestically controlled REIT.
A non-U.S. person disposing of a U.S. real property interest, including shares of a U.S. corporation whose assets consist principally of U.S. real property interests, is generally subject to a tax under the Foreign Investment in Real Property Tax Act of 1980, or "FIRPTA," on the gain recognized on the disposition. FIRPTA does not apply, however, to the disposition of stock in a REIT if the REIT is a "domestically controlled REIT." A domestically controlled REIT is a REIT in which, at all times during a specified testing period, less than 50% in value of its shares is held directly or indirectly by non-U.S. holders. There can be no assurance that we will qualify as a domestically controlled REIT.
If we were to fail to so qualify, gain realized by a foreign investor on a sale of our common stock would be subject to FIRPTA unless our common stock was traded on an established securities market and the non-U.S. investor did not at any time during a specified testing period directly or indirectly own more than 10% of the value of our outstanding common stock. We are not currently traded on an established securities market, nor can we provide any assurance as to whether or when we will be traded on an established securities market.
Qualifying as a REIT involves highly technical and complex provisions of the Code.
Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our continued qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stock ownership and other requirements on a continuing basis. In addition, our ability to satisfy the requirements to qualify as a REIT may depend in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.
Recent changes to the U.S. tax laws could have a significant negative impact on our business operations, financial condition and earnings and on our tenants and investors.
The current U.S. administration included as part of its agenda a potential reform of U.S. tax laws. On December 20, 2017, the House of Representatives and the Senate passed a reconciled version of a tax reform bill, and the President signed the tax reform bill into law on December 22, 2017 (the "Tax Reform Legislation"). Among other things, the Tax Reform Legislation:
| · | Reduces the corporate income tax rate from 35% to 21%; |
| · | Generally, allows a deduction for individuals equal to 20% of certain income from pass-through entities, including ordinary dividends distributed by a REIT; |
| · | Allows an immediate 100% deduction of the cost of certain capital asset investments, subject to a phase-down of the deduction percentage; |
| · | Restricts the deductibility of interest expense by businesses except, among others, real property businesses; |
| · | Changes the recovery periods for certain real property and building improvements; |
| · | Restricts the benefits of like-kind exchanges that defer capital gains for tax purposes to exchanges of real property; |
| · | Eliminates the corporate alternative minimum tax; and |
| · | Implements a one-time deemed repatriation tax on corporate profits (at a rate of 15.5 percent on cash assets and 8 percent on noncash assets) held offshore, which profits are not to be considered for purposes of the REIT gross income tests. |
Many of the provisions in the Tax Reform Legislation expire in seven years (at the end of 2025). As a result of the changes to U.S. federal tax laws implemented by the Tax Reform Legislation, our taxable income and the amount of distributions to our stockholders required in order to maintain our REIT status, and our relative tax advantage as a REIT, may significantly change.
The Tax Reform Legislation is a far-reaching and complex revision to the U.S. federal income tax laws with disparate and, in some cases, countervailing impacts on different categories of taxpayers and industries, and will require subsequent rulemaking in a number of areas. The long-term impact of the Tax Reform Legislation on us, our investors, our tenants and the real estate industry cannot be reliably predicted at this early stage of the new law's implementation. Furthermore, the Tax Reform Legislation may negatively impact certain of our tenants' operating results, financial condition, and future business plans. There can be no assurance that the Tax Reform Legislation will not negatively impact our operating results, financial condition, and future business operations. Additionally, the Tax Reform Legislation may be averse to certain of our stockholders and other investors. Prospective investors are urged to consult their tax advisors regarding the effect of the changes to the U.S. federal tax laws on an investment in our shares and other securities.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
During August 2018, the Company moved its headquarters from 2965 S. Jones #C1-100, Las Vegas, NV 89146 to 8880 West Sunset Road, Suite 240, Las Vegas, Nevada 89148.
As of December 31, 2018, the Company held 42 properties. These acquisitions were funded with proceeds from issuance of common stock and preferred stock and debt financing, and includes properties acquired as part of the merger with MVP I, which closed on December 15, 2017.
The following map and table set forth the property name, percentage owned, location and other information with respect to the parking lots and/or facilities that the Company had acquired as of December 31, 2018:
The location marks are based on dollar amounts the Company has invested in each property in relation to the total property investment held at the time of filing.
| Property Name | Location | Acquisition Date | Property Type | # Spaces | Property Size (Acres) | Retail Sq. Ft | Investment Amount | % Owned |
|
| MVP Cleveland West 9th (1) | Cleveland, OH | 5/11/2016 | Lot | 260 | 2.00 | N/A | $5,845,000 | 100% |
| 33740 Crown Colony (1) | Cleveland, OH | 5/17/2016 | Lot | 82 | 0.54 | N/A | $3,050,000 | 100% |
| MVP San Jose 88 Garage | San Jose, CA | 6/15/2016 | Garage | 328 | 1.33 | N/A | $3,844,000 | 100% |
| MCI 1372 Street | Canton, OH | 7/8/2016 | Lot | 66 | 0.44 | N/A | $700,000 | 100% |
| MVP Cincinnati Race Street Garage | Cincinnati, OH | 7/8/2016 | Garage | 350 | 0.63 | N/A | $6,300,000 | 100% |
| MVP St. Louis Washington | St Louis, MO | 7/18/2016 | Lot | 63 | 0.39 | N/A | $3,007,000 | 100% |
| MVP St. Paul Holiday Garage | St Paul, MN | 8/12/2016 | Garage | 285 | 0.85 | N/A | $8,396,000 | 100% |
| MVP Louisville Station Broadway | Louisville, KY | 8/23/2016 | Lot | 165 | 1.25 | N/A | $3,107,000 | 100% |
| White Front Garage Partners | Nashville, TN | 9/30/2016 | Garage | 155 | 0.26 | N/A | $11,672,000 | 100% |
| Cleveland Lincoln Garage Owners | Cleveland, OH | 10/19/2016 | Garage | 536 | 1.14 | 45,272 | $10,541,000 | 100% |
| MVP Houston Preston Lot | Houston, TX | 11/22/2016 | Lot | 46 | 0.23 | N/A | $2,820,000 | 100% |
| MVP Houston San Jacinto Lot | Houston, TX | 11/22/2016 | Lot | 85 | 0.65 | 240 | $3,250,000 | 100% |
| MVP Detroit Center Garage | Detroit, MI | 1/10/2017 | Garage | 1,275 | 1.28 | N/A | $55,476,000 | 100% |
(table continued)
| St. Louis Broadway | St Louis, MO | 2/1/2017 | Lot | 161 | 0.96 | N/A | $2,400,000 | 100% |
| St. Louis Seventh & Cerre | St Louis, MO | 2/1/2017 | Lot | 174 | 1.06 | N/A | $3,300,000 | 100% |
| MVP Preferred Parking (3) | Houston, TX | 6/29/2017 | Garage/Lot | 528 | 0.98 | 784 | $21,115,000 | 100% |
| MVP Raider Park Garage | Lubbock, TX | 11/21/2017 | Garage | 1,495 | 2.15 | 20,536 | $11,029,000 | 100% |
| MVP PF Ft. Lauderdale | Ft. Lauderdale, FL | 12/15/2017 | Lot | 66 | 0.75 | 4,017 | $3,423,000 | 100% |
| MVP PF Memphis Poplar | Memphis, TN | 12/15/2017 | Lot | 127 | 0.87 | N/A | $3,735,000 | 100% |
| MVP PF Memphis Court | Memphis, TN | 12/15/2017 | Lot | 37 | 0.41 | N/A | $1,008,000 | 100% |
| MVP PF St. Louis 2013 | St Louis, MO | 12/15/2017 | Lot | 183 | 1.22 | N/A | $5,145,000 | 100% |
| Mabley Place Garage | Cincinnati, OH | 12/15/2017 | Garage | 775 | 0.9 | 8,400 | $21,185,000 | 83% |
| MVP Denver Sherman | Denver, CO | 12/15/2017 | Lot | 28 | 0.14 | N/A | $705,000 | 100% |
| MVP Fort Worth Taylor | Fort Worth, TX | 12/15/2017 | Garage | 1,013 | 1.18 | 11,828 | $27,663,000 | 100% |
| MVP Milwaukee Old World | Milwaukee, WI | 12/15/2017 | Lot | 54 | 0.26 | N/A | $2,044,000 | 100% |
| MVP Houston Saks Garage | Houston, TX | 12/15/2017 | Garage | 265 | 0.36 | 5,000 | $10,391,000 | 100% |
| MVP Milwaukee Wells | Milwaukee, WI | 12/15/2017 | Lot | 148 | 1.07 | N/A | $5,083,000 | 100% |
| MVP Wildwood NJ Lot 1 (2) | Wildwood, NJ | 12/15/2017 | Lot | 29 | 0.26 | N/A | $545,000 | 100% |
| MVP Wildwood NJ Lot 2 (2) | Wildwood, NJ | 12/15/2017 | Lot | 45 | 0.31 | N/A | $686,000 | 100% |
| MVP Indianapolis City Park | Indianapolis, IN | 12/15/2017 | Garage | 370 | 0.47 | N/A | $10,934,000 | 100% |
| MVP Indianapolis WA Street | Indianapolis, IN | 12/15/2017 | Lot | 141 | 1.07 | N/A | $5,749,000 | 100% |
| MVP Minneapolis Venture | Minneapolis, MN | 12/15/2017 | Lot | 195 | 1.65 | N/A | $4,012,000 | 100% |
| MVP Indianapolis Meridian | Indianapolis, IN | 12/15/2017 | Lot | 36 | 0.24 | N/A | $1,601,000 | 100% |
| MVP Milwaukee Clybourn | Milwaukee, WI | 12/15/2017 | Lot | 15 | 0.06 | N/A | $262,000 | 100% |
| MVP Milwaukee Arena Lot | Milwaukee, WI | 12/15/2017 | Lot | 75 | 1.11 | N/A | $4,631,000 | 100% |
| MVP Clarksburg Lot | Clarksburg, WV | 12/15/2017 | Lot | 94 | 0.81 | N/A | $715,000 | 100% |
| MVP Denver Sherman 1935 | Denver, CO | 12/15/2017 | Lot | 72 | 0.43 | N/A | $2,533,000 | 100% |
| MVP Bridgeport Fairfield | Bridgeport, CT | 12/15/2017 | Garage | 878 | 1.01 | 4,349 | $8,256,000 | 100% |
| Minneapolis City Parking | Minneapolis, MN | 12/15/2017 | Lot | 268 | 1.98 | N/A | $9,838,000 | 100% |
| MVP New Orleans Rampart | New Orleans, LA | 2/1/2018 | Lot | 78 | 0.44 | N/A | $8,105,000 | 100% |
| MVP Hawaii Marks Garage | Honolulu, HI | 6/21/2018 | Garage | 311 | 0.77 | 16,205 | $21,000,000 | 100% |
(1) These properties are held by West 9th St. Properties II, LLC.
(2) These properties are held by MVP Wildwood NJ Lot, LLC.
(3) MVP Preferred Parking holds two properties.
As of date of filing, all of the Company's parking facilities were fully leased to parking operators.
ITEM 3. LEGAL PROCEEDINGS
From time to time in the ordinary course of business, the Company or its subsidiaries may become subject to legal proceedings, claims or disputes. As of March 5, 2019, neither the Company nor any of its subsidiaries was a party to any material pending legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stockholder Information
As of March 5, 2019, there were 3,782 holders of record of the Company's common shares and 52 and 625 holders of record of the Company's Series A and Series 1 preferred shares, respectively. The number of stockholders is based on the records of the Company's transfer agent.
Market Information
The Company's shares of common stock are not currently listed on a national securities exchange or any over-the-counter market. The charter does not require the board of directors to pursue a liquidity event. Due to the uncertainties of market conditions in the future, the Company believes setting finite dates for possible, but uncertain, liquidity events may result in actions not necessarily in the best interests or within the expectations of the Company's stockholders. The Company expects that the Company's board of directors, in the exercise of its duties to stockholders, will determine to pursue a liquidity event when it believes that then-current market conditions are favorable for a liquidity event, and that such a transaction is in the best interests of stockholders. A liquidity event could include (1) the sale of all or substantially all assets either on a portfolio basis or individually followed by a liquidation, in which the net proceeds are distributed to stockholders, (2) a merger or another transaction approved by the board of directors in which stockholders will receive cash and/or shares of a publicly traded company or (3) a listing of shares on a national securities exchange. In the exercise of its duties to stockholders, the Company's board of directors has determined that it is in the best interests of the Company stockholders to pursue a listing of its shares of common stock on a national securities exchange. The Company filed an application to list its common stock on a national securities exchange on July 13, 2018. There can be no assurance that the Company will cause a liquidity event to occur in the near future or at all.
In order for members of FINRA and their associated persons to have participated in the offering and sale of the Company's common shares or to participate in any future offering of common shares, the Company is required pursuant to FINRA Rule 5110 to disclose in each Annual Report distributed to stockholders a per share estimated value of the Company's common shares, the method by which it was developed and the date of the data used to develop the estimated value. In addition, the Advisor must prepare annual statements of estimated share values to assist fiduciaries of retirement plans subject to the annual reporting requirements of ERISA in the preparation of their reports relating to an investment in the Company's common shares. On May 29, 2018 the Company announced an estimated per common share net asset value ("NAV") of approximately $161.2 million or $24.61 per common share as of May 29, 2018. The estimated per common share NAV was based on the estimated value of the REIT's assets less the estimated value of the Company's liabilities, divided by the approximate number of shares outstanding on a fully diluted basis, calculated as of May 29, 2018. However, as set forth above, there is no public trading market for the shares at this time and stockholders may not receive $24.61 per share if a market did exist. Please see our Current Reports on Form 8-K, filed with the SEC on May 30, 2018 for additional information regarding the NAV calculation.
Distribution Reinvestment Plan
The Company currently has a distribution reinvestment plan pursuant to which the Company's common stockholders may elect to have distributions on their common shares, if any, automatically reinvested in additional shares of the Company's common stock. The Company ceased payment of distributions on March 22, 2018 and as such there are currently no distributions to invest in the DRIP. Prior to the suspension of distributions and the NAV calculation, stockholders purchased common stock under the DRIP at a price equal to $25 per common share. In the event that distributions are reinstated and the DRIP is ongoing, the purchase price per DRIP share will be equal to the Company's NAV per common share. The Company announced a NAV per common share of $24.61 effective as of May 29, 2018. The Company may amend the plan to offer shares at such prices as the Company determines necessary or appropriate to ensure the Company's dividends are not "preferential" for incomes tax purposes. No sales commissions will be paid in connection with shares purchased pursuant to the Company's distribution reinvestment plan.
Investors participating in the Company's distribution reinvestment plan may purchase fractional shares. If sufficient shares of the Company's common stock are not available for issuance under the Company's distribution reinvestment plan, the Company will remit excess distributions in cash to the participants. If a stockholder elects to participate in the distribution reinvestment plan, the stockholder must agree that, if at any time the stockholder fails to meet the applicable investor suitability standards or cannot make the other investor representations or warranties set forth in the then current prospectus, the subscription agreement or the Company's articles relating to such investment, the stockholder will promptly notify us in writing of that fact.
Stockholders purchasing common stock pursuant to the distribution reinvestment plan will have the same rights and will be treated in the same manner as if such common stock were purchased pursuant to the Common Stock Offering.
At least quarterly, the Company will provide each participant a confirmation showing the amount of the distributions reinvested in the Company's shares during the covered period, the number of shares of the Company's common stock owned at the beginning of the covered period, and the total number of shares of common stock owned at the end of the covered period. The Company has the discretion not to provide a distribution reinvestment plan, and a majority of the Company's board of directors may amend, suspend or terminate the Company's distribution reinvestment plan for any reason (except that the Company may not amend the DRIP to eliminate a participant's ability to withdraw from the plan) at any time upon 10 days' prior notice to the participants. A stockholder's participation in the plan will also be terminated to the extent that a reinvestment of the stockholder's distributions in the Company's common stock would cause the percentage ownership limitation contained in the Company's charter to be exceeded. Otherwise, unless the stockholder terminates the stockholder's participation in the Company's distribution reinvestment plan in writing, the stockholder's participation will continue even if the shares to be issued under the plan are registered in a future registration. The stockholder may terminate the Stockholder's participation in the distribution reinvestment plan at any time by providing us with 10 days' written notice. A withdrawal from participation in the distribution reinvestment plan will be effective only with respect to distributions paid more than 30 days after receipt of written notice. Generally, a transfer of common stock will terminate the stockholder's participation in the distribution reinvestment plan as of the first day of the month in which the transfer is effective.
If the stockholder participates in the Company's distribution reinvestment plan and is subject to federal income taxation, the stockholder will incur a tax liability for distributions allocated to the stockholder even though the stockholder has elected not to receive the distributions in cash, but rather to have the distributions withheld and reinvested in the Company's common stock. Specifically, the stockholder will be treated as if the stockholder has received the distribution from us in cash and then applied such distribution to the purchase of additional shares of the Company's common stock. The stockholder will be taxed on the amount of such distribution as ordinary income to the extent such distribution is from current or accumulated earnings and profits, unless the Company has designated all or a portion of the distribution as a capital gain distribution. In addition, the difference between the public offering price of the Company's shares and the amount paid for shares purchased pursuant to the Company's distribution reinvestment plan may be deemed to be taxable as income to participants in the plan. Please see "Risk Factors — Federal Income Tax Risks — Stockholders may have current tax liability on distributions if they elect to reinvest in our shares."
Notwithstanding any of the foregoing, an investor's participation in the Company's distribution reinvestment plan will terminate automatically if the Company dishonors, or partially dishonors, any requests by such investor to redeem the Company's shares of common stock in accordance with the Company's share repurchase program. The Company will notify investors of any such automatic termination from the Company's distribution reinvestment plan.
The Company has issued a total of 83,437 shares of common stock under the DRIP as of December 31, 2018.
Share Repurchase Program
The Company has a Share Repurchase Program ("SRP") that enables the Company's stockholders to sell their shares to the Company. Under the SRP, the Company's stockholders may request that the Company redeem all or any portion, subject to certain minimum conditions described below, if such repurchase does not impair the Company's capital or operations.
On May 29, 2018, the Company's Board of Directors suspended the SRP, other than for repurchases in connection with a shareholder's death, as further described below.
Prior to the time that the Company's shares are listed on a national securities exchange, the repurchase price per share will depend on the length of time investors have held such shares as follows: no repurchases for the first two years unless shares are being repurchased in connection with a stockholder's death or disability (as defined in the Code). Repurchase requests made in connection with the death or disability of a stockholder will be repurchased at a price per share equal to 100% of the amount the stockholder paid for each share, or once the Company has established an estimated NAV per share, 100% of such amount as determined by the Company's board of directors, subject to any special distributions previously made to the Company's stockholders. With respect to all other repurchases, prior to the date that the Company establishes an estimated value per share of common stock, the purchase price will be 95.0% of the purchase price paid for the shares, if redeemed at any time between the second and third anniversaries of the purchase date, and 97.0% of the purchase price paid if redeemed after the third anniversary. After the Company establishes an estimated NAV per share of common stock, the purchase price will be 95.0% of the NAV per share for the shares, if redeemed at any time between the second and third anniversaries of the purchase date, 97.0% of the NAV per share if redeemed at any time between the third and fifth anniversaries, and 100.0% of the NAV per share if redeemed after the fifth anniversary. In the event that the Company does not have sufficient funds available to repurchase all of the shares for which repurchase requests have been submitted in any quarter, the Company will repurchase the shares on a pro rata basis on the repurchase date. The SRP will be terminated if the Company's shares become listed for trading on a national securities exchange or if the Company's board of directors determines that it is in the Company's best interest to terminate the SRP.
On May 29, 2018, the Company established a NAV equal to $24.61 per common share.
The Company is not obligated to repurchase shares of common stock under the share repurchase program. The number of shares to be repurchased during the calendar quarter is limited to the lesser of: (i) 5% of the weighted average number of shares outstanding during the prior calendar year, and (ii) those repurchases that could be funded from the net proceeds of the sale of shares under the DRIP in the prior calendar year plus such additional funds as may be reserved for that purpose by the Company's board of directors; provided, however, that the above volume limitations shall not apply to repurchases requested in connection with the death or qualifying disability of a stockholder. Because of these limitations, the Company cannot guarantee that the Company will be able to accommodate all repurchase requests.
The Company will repurchase shares as of March 31, June 30, September 30, and December 31 of each year. If and when the SRP is reinstated each stockholder whose repurchase request is approved will receive the repurchase payment approximately 30 days following the end of the applicable quarter, effective as of the last day of such quarter. The Company refers to the last day of such quarter as the repurchase date. If funds available for the Company's share repurchase program are not sufficient to accommodate all requests, shares will be repurchased as follows: (i) first, repurchases due to the death of a stockholder, on the basis of the date of the request for repurchase; (ii) next, in the discretion of the Company's board of directors, repurchases because of other involuntary exigent circumstances, such as bankruptcy; (iii) next, repurchases of shares held by stockholders subject to a mandatory distribution requirement under the stockholder's IRA; and (iv) finally, all other repurchase requests based upon the postmark of receipt. If the Stockholder's repurchase request is not honored during a repurchase period, the Stockholder will be required to resubmit the request to have it considered in a subsequent repurchase period.
The board of directors may, in its sole discretion, terminate, suspend or amend the share repurchase program upon 30 days' written notice without stockholder approval if it determines that the funds available to fund the share repurchase program are needed for other business or operational purposes or that amendment, suspension or termination of the share repurchase program is in the best interest of the stockholders. Among other things, the Company may amend the plan to repurchase shares at prices different from those described above for the purpose of ensuring the Company's dividends are not "preferential" for incomes tax purposes. Any notice of a termination, suspension or amendment of the share repurchase program will be made via a report on Form 8-K filed with the SEC at least 30 days prior to the effective date of such termination, suspension or amendment. The board of directors may also limit the amounts available for repurchase at any time in its sole discretion. Notwithstanding the foregoing, the share repurchase program will terminate if the shares of common stock are listed on a national securities exchange.
On October 27, 2016, the Company filed a Current Report on Form 8-K announcing, among other things, an amendment to the SRP providing for participation in the SRP by any holder of the Company's Series A Convertible Redeemable Preferred Stock, or any future board-authorized series or class of preferred stock that is convertible into common stock of the Company. Under the amendment, which became effective on November 26, 2016, a preferred stock holder may participate in the SRP by converting its preferred stock into common stock of the Company and submitting such common shares for repurchase. The time period, for purposes of determining how long such stockholder has held the common shares submitted for repurchase, begins as of the date such preferred stockholder acquired the underlying preferred shares that were converted into common shares and submitted for repurchase.
On February 7, 2018, the Company filed a Current Report on Form 8-K stating that the board of directors has determined that the Merger and the issuance of the Company's common stock as consideration for the Merger qualifies as an involuntary exigent circumstance under the SRP. As a result, shares of common stock that, when combined with the holding period of the related MVP I Common Stock, have been held for the Two-Year Holding Period (as such term is defined in the SRP), are eligible to participate in the SRP subject to the other requirements and limitations of the SRP. In addition, the issuance date for any shares of MVP I Common Stock issued pursuant to the MVP REIT, Inc. Distribution Reinvestment Plan shall be deemed to be the same date as the issuance of the shares of MVP I Common Stock to which such shares relate.
On May 29, 2018, the Company filed a Current Report on Form 8-K stating that the Company's board of directors suspended its SRP, other than for repurchases in connection with a shareholder's death or disability. In accordance with the SRP, the suspension of the SRP went into effect on June 28, 2018 which is 30 days after the date of the Form 8-K providing notice of the suspension. The Company utilizes the cash savings to further its business operations. The Company's Board of Directors may in the future reinstate the SRP, although there is no assurance as to if or when this will happen.
As of the date of this filing, 35,197 shares have been redeemed.
Recent Sales of Unregistered Securities
The Company did not sell any securities that were not registered under the Securities Act for the year ended December 31, 2018, other than any sales that have been previously reported by the Company in a quarterly report on 10-Q or current report on Form 8-K.
Use of Offering Proceeds
As of March 5, 2019, the Company had 6,540,818 shares of common stock issued and outstanding, 2,862 shares of preferred Series A stock outstanding and 39,811 shares of preferred Series 1 stock outstanding for total gross proceeds of approximately $183.3 million, less offering costs.
The following is a table of summary of offering proceeds from inception through December 31, 2018:
| Type | | Number of Shares Preferred | | Number of Shares Common | | | Value |
| Issuance of common stock | | -- | | 2,451,238 | | $ | 61,281,000 |
| Redeemed Shares | | -- | | (33,217) | | | (812,000) |
| DRIP shares | | -- | | 83,437 | | | 2,086,000 |
| Issuance of Series A preferred stock | | 2,862 | | -- | | | 2,544,000 |
| Issuance of Series 1 preferred stock | | 39,811 | | -- | | | 35,981,000 |
| Dividend shares | | -- | | 153,826 | | | 3,845,000 |
| Distributions | | -- | | -- | | | (7,305,000) |
| Deferred offering costs | | -- | | -- | | | (1,086,000) |
| Contribution from Advisor | | -- | | -- | | | 1,147,000 |
| Shares added for Merger | | -- | | 3,887,513 | | | 85,701,000 |
| Total | | 42,673 | | 6,542,797 | | $ | 183,382,000 |
From October 22, 2015 through December 31, 2017, the Company incurred organization and offering costs in connection with the issuance and distribution of the registered securities of approximately $1.1 million, which were paid to unrelated parties by the Sponsor. From October 22, 2015 through December 31, 2018, the net proceeds to the Company from its offerings, after deducting the total expenses and deferred offering costs incurred and paid by the Company as described above, were approximately $183.4 million. A majority of these proceeds were used, along with other sources of debt financing, to make investments in parking facilities, of which the Company's portion of the total purchase price for these parking facilities was approximately $320.0 million, which includes its $2.8 million investment in the DST. In addition, a portion of these proceeds were used to make cash distributions of approximately $1.8 million to the Company's stockholders. The ratio of the costs of raising capital to the capital raised is approximately 0.6%.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the years ended December 31, 2018, 2017 and 2016 should be read in conjunction with the accompanying consolidated financial statements and related notes thereto and "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected financial data has been derived from our audited consolidated financial statements.
| | | | | | | | | |
| BALANCE SHEET DATA: | | The year ended December 31, 2018 | | | The year ended December 31, 2017 | | | The year ended December 31, 2016 | | |
| Total Assets | | $ | 323,571,000 | | | $ | 312,943,000 | | | $ | 70,255,000 | |
| | | | | | | | | | | | | |
| Total Liabilities | | $ | 161,451,000 | | | $ | 150,767,000 | | | $ | 14,382,000 | |
| Total Equity | | $ | 162,120,000 | | | $ | 162,176,000 | | | $ | 55,873,000 | |
| Total Liabilities and Equity | | $ | 323,571,000 | | | $ | 312,943,000 | | | $ | 70,255,000 | |
| | | | | | | | | |
STATEMENT OF OPERATIONS DATA: | | The year ended December 31, 2018 | | | The year ended December 31, 2017 | | | The year ended December 31, 2016 | | |
| Total revenues | | $ | 22,100,000 | | | $ | 10,385,000 | | | $ | 1,602,000 | |
| Total expenses | | $ | (20,135,000 | ) | | $ | (17,718,000 | ) | | $ | (5,618,000 | ) |
| Income (loss) from continuing operations | | $ | 1,965,000 | | | $ | (7,333,000 | ) | | $ | (4,016,000 | ) |
| Income (loss) from continuing operations per common share | | $ | (1.19 | ) | | $ | (4.21 | ) | | $ | (3.87 | ) |
| Net loss | | $ | (7,773,000 | ) | | $ | (11,411,000 | ) | | $ | (4,268,000 | ) |
| | | | | | | | | | | | | |
| Weighted average shares outstanding | | | 6,550,099 | | | | 2,709,977 | | | | 1,102,459 | |
| | | | | | | | | |
| STATEMENT OF CASH FLOWS DATA: | | The year ended December 31, 2018 | | | The year ended December 31, 2017 | | | The year ended December 31, 2016 | | |
| Net cash (used in) provided by operating activities | | $ | (1,671,000 | ) | | $ | (8,493,000 | ) | | $ | (3,644,000 | ) |
| Net cash (used in) investing activities | | $ | (24,460,000 | ) | | $ | (88,388,000 | ) | | $ | (59,424,000 | ) |
| Net cash provided by financing activities | | $ | 18,836,000 | | | $ | 108,626,000 | | | $ | 65,685,000 | |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations is based on, and should be read in conjunction with the consolidated financial statements and the notes thereto contained elsewhere in this Annual Report on Form 10-K. Also see "Forward Looking Statements" preceding Part I.
Overview
The Company operates as a REIT and was formed to focus primarily on investments in parking facilities, including parking lots, parking garages and other parking structures throughout the United States and Canada. To a lesser extent, the Company may also invest in parking properties that contain other source of rental income, potentially including office, retail, storage, residential, billboard or cell towers. As of December 31, 2018, the Company held 42 properties in various cities, all of which are parking facilities. See note C – Commitments and Contingencies in Part II, Item 8 Financial Statements of this Annual Report for additional information.
The Company was incorporated in Maryland on May 4, 2015 and is the sole member of the Operating Partnership. The Company owns substantially all of its assets and conduct its operations through the Operating Partnership. On May 26, 2017, the Company, MVP REIT, Inc., a Maryland corporation ("MVP I"), MVP Merger Sub, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company ("Merger Sub"), and the Advisor entered into an agreement and plan of merger (the "Merger Agreement"), pursuant to which MVP I would merge with and into Merger Sub (the "Merger"). On December 15, 2017, the Merger was consummated. Following the Merger, the Company contributed 100% of its equity interests in Merger Sub to the Operating Partnership. See note P – Merger in Part II, Item 8 Financial Statements of this Annual Report for additional information.
The Company is externally managed by MVP Realty Advisors, LLC, dba The Parking REIT Advisors (the "Advisor"), a Nevada limited liability company. The Advisor is responsible for managing the Company's affairs on a day-to-day basis and for identifying and making investments on the Company's behalf pursuant to the restated advisory agreement among the Company, the Operating Partnership and the Advisor. See Part I, Item 1 Business of this Annual Report for additional information.
The Company has elected to be taxed as a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with our taxable year ended December 31, 2017.
Investment Objectives
The Company's primary investment objectives are to:
| · | realize growth in the value of the Company's investments; and |
| · | generate current income. |
Investment Strategy
The Company's investment strategy focuses, and will continue to focus, primarily on acquiring, owning and managing parking facilities, including parking lots, parking garages and other parking structures throughout the United States and Canada. To a lesser extent, the Company may also invest in parking properties that contain other sources of rental income, potentially including office, retail, storage, residential, billboard or cell towers. No more than 10% of the proceeds of the Common Stock Offering are authorized to be used for investment in Canadian properties. The Company intends to focus primarily on investing in income-producing parking lots and garages with air rights in central business districts. The Company generally seeks geographically-targeted investments that present key demand drivers, which are expected to generate steady cash flows and provide greater predictability during periods of economic uncertainty. Such targeted investments include, but are not limited to, parking facilities near one or more of the following demand drivers:
| · | Government buildings and courthouses |
Investment Criteria
The Company will focus on acquiring properties that meet the following criteria:
| · | properties that generate current cash flow; |
| · | properties that are located in populated metropolitan areas; and |
| · | while the Company may acquire properties that require renovation, the Company will only do so if the Company anticipates the properties will produce income within 12 months of the Company's acquisition. |
The foregoing criteria are guidelines, and the Advisor and the Company's board of directors may vary from these guidelines to acquire properties which they believe represent value opportunities.
The following table is a summary of the acquisitions for the year ended December 31, 2018:
| Property | Location | Date Acquired | Property Type | # Spaces | Size / Acreage | Retail Sq. Ft. | Property Purchase Price |
| MVP New Orleans Rampart, LLC | New Orleans, LA | 2/1/2018 | Lot | 78 | 0.44 | N/A | $8,105,000 |
| MVP Hawaii Marks Garage, LLC | Honolulu, HI | 6/21/2018 | Garage | 311 | 0.77 | 16,205 | $20,834,000 |
The following table is a summary of the dispositions for the year ended December 31, 2018:
| Property | Location | Date Sold | Property Type | # Spaces | Size / Acreage | Retail Sq. Ft. | Property Sale Price |
| MVP St. Louis Convention Plaza, LLC and MVP St. Louis Lucas, LLC | St. Louis, MO | 7/16/2018 | Lot | 218, 202 | 1.26, 1.07 | N/A | $8,500,000 |
| MVP PF Kansas City 2013, LLC and MVP KC Cherry Lot, LLC | Kansas City, MO | 8/20/2018 | Lot | 164, 84 | 1.18, 0.60 | N/A | $4,000,000 |
| MVP Minneapolis Venture, LLC (partial) | Minneapolis, MN | 10/5/2018 | Lot | 6 | 0.83 | N/A | $3,000,000 |
Results of Operations for the year ended December 31, 2018 compared to the year ended December 31, 2017.
The majority of the increase in revenues and expenses during the comparison periods are attributable to the Merger of the Company and MVP I which closed on December 15, 2017, and to a lesser extent, growth in investments in parking facilities for the year ended December 31, 2018 and professional fees. The Company expects that income and property operating expenses related to the Company's portfolio will increase in future years as a result of owning the properties acquired for a full year and as a result of anticipated future acquisitions of real estate and real estate-related assets. The results of operations described below may not be indicative of future results of operations.
| | | For the Years Ended December 31 |
| | | 2018 | | | 2017 |
| Revenues | | | | | |
| Base rent income | | $ | 19,534,000 | | | $ | 8,694,000 |
| Management agreement (a) | | | -- | | | | 518,000 |
| Percentage rent income | | | 2,566,000 | | | | 1,173,000 |
| Total revenues | | $ | 22,100,000 | | | $ | 10,385,000 |
Rental revenue: The increase in rental revenues and the number of properties held are primarily the result of the Company's planned and continued growth through new property acquisitions and the Merger of the Company and MVP I. The 25 consolidated parking facilities that were acquired through the Merger with MVP I accounted for a large portion of the increase. For the years ended December 31, 2018 and 2017 these 25 properties generated approximately $7.9 and $0.4 million, respectively, in rental income and $0.9 million and $34,000, respectively, in percentage rent income to the Company.
For additional information see Note D – Investments in Real Estate, Note I – Acquisitions, Note K - Disposition of Investments in Real Estate in the notes to the condensed consolidated financial statements included in Part II, Item 8 - Notes to the Consolidated Financial Statements of this Annual Report.
| a) | During January 2017, MVP Detroit Center Garage, LLC ("MVP Detroit") received a settlement amount from the previous operator of approximately $408,000 for the operations of the garage until SP+ assumed operations under a longer-term lease agreement. Through February 28, 2017, the San Jose 88 Garage was subject to a parking management agreement and the rental income of $110,000 represents the gross revenues generated by the property. Operating expenses for this property are included in Operations and Maintenance. Starting on March 1, 2017, this property was leased to a national parking operator, with an annual base rent of $450,000 per year. |
During the years ended December 31, 2018 and 2017 the Company received percentage rent on the following properties:
| | | For the Years Ended December 31 |
| | | 2018 | | 2017 |
| Percentage rent income | | | | |
| MVP St Louis 2013 (a) | $ | 166,000 | $ | 25,000 |
| Mabley Place Garage (a) | | 309,000 | | -- |
| MVP Ft Worth Taylor (b) | | 22,000 | | -- |
| MVP St Louis Convention (a) | | 63,000 | | -- |
| MVP St Louis Lucas (a) | | 65,000 | | -- |
| MVP Indianapolis Washington (a) | | 115,000 | | -- |
| MVP Indianapolis Meridian Lot (e) | | 9,000 | | -- |
| MVP Milwaukee Arena (b) | | 130,000 | | -- |
| MVP Denver 1935 Sherman (b) | | 16,000 | | -- |
| MVP San Jose 88 Garage (b) | | 24,000 | | -- |
| MCI 1372 Street | | -- | | 9,000 |
| MVP St Paul Holiday (b) | | 76,000 | | -- |
| MVP Louisville Station Broadway (b) | | 6,000 | | -- |
| White Front Garage | | 2,000 | | 16,000 |
| MVP Houston Preston (b) | | 4,000 | | -- |
| MVP Houston San Jacinto (b) | | 47,000 | | -- |
| MVP Detroit Center Garage (c) | | 1,489,000 | | 1,123,000 |
| MVP Raider Park Garage (d) | | 14,000 | | -- |
| MVP New Orleans Rampart (d) | | 9,000 | | -- |
| Total revenues | $ | 2,566,000 | $ | 1,173,000 |
| a) | Prior to the merger commenced on December 15, 2017, the following properties had received percentage revenue reported on the predecessor's financials: |
| · | MVP PF St Louis 2013 received approximately $146,000 in total. (Approximately $121,000 on predecessor) |
| · | Mabley Place Garage received approximately $225,000. |
| · | MVP St Louis Convention received approximately $9,000 |
| · | MVP St Louis Lucas received approximately $50,000. |
| · | MVP Indianapolis Washington received approximately $147,000. |
| b) | Neither the Company nor the predecessor received percentage rent for the year ended December 31, 2017. |
| c) | In January 2017, $408,000 of management fee income was recognized under the terms of the management agreement upon execution of lease agreement with new operator. All subsequent percentage rent revenue was recognized as such. |
| d) | Initial lease year reporting percentage rent for the year ended December 31, 2018. |
| e) | $5,000 percentage rent for the year ending December 31, 2017 reported in base rent income. |
| | | For the Years Ended December 31 |
| | | 2018 | | 2017 |
| Operating expenses | | | | |
| Property taxes | $ | 2,918,000 | $ | 677,000 |
| Property operating expense | | 1,404,000 | | 981,000 |
| Asset management expense – related party | | 2,000,000 | | 1,259,000 |
| General and administrative | | 3,620,000 | | 989,000 |
| Professional fees | | 4,243,000 | | 908,000 |
| Merger costs | | -- | | 2,616,000 |
| Merger costs – related party | | -- | | 3,600,000 |
| Acquisition expenses | | 412,000 | | 2,695,000 |
| Acquisition expenses – related party | | -- | | 1,957,000 |
| Impairment on investment in real estate | | 600,000 | | -- |
| Depreciation | | 4,938,000 | | 2,036,000 |
| Total operating expenses | | 20,135,000 | | 17,718,000 |
| Income (loss) from operations | $ | 1,965,000 | $ | (7,333,000) |
Operating expenses: The increase to property taxes of approximately $2.2 million, property operating expense of approximately $0.4 million and depreciation and amortization of approximately $2.9 million are primarily attributed to holding assets acquired through the merger for an entire year and to a lesser extent the addition of two properties in 2018. Additionally, certain municipalities increased assessed property values or increased tax rates which resulted in an increase in property tax expense.
Asset management fees increased approximately $0.7 million in 2018 primarily due to the increase in the post-merger asset balance and reached the maximum annual payment amount of $2.0 million per the Advisory Agreement during the third quarter of 2018. Approximately $1.4 million in asset management fees have been subordinated and will be recognized when it is certain the fees will be payable to the Advisor per GAAP guidance.
A significant portion of the increase in general and administrative expenses of approximately $2.6 million and professional fees of approximately $3.3 million was attributable to legal and accounting fees of approximately $0.8 million relating to an internal investigation conducted by the Audit Committee, see Form 8-K filed by the Company dated April 29, 2018 and professional fees of approximately $0.8 million relating to establishing a path for future internalization of our management and listing our common stock on the Nasdaq Global Market. The Company has submitted a claim to its directors' and officers' liability insurance carrier for reimbursement of costs and expenses incurred by the Company in connection with the internal investigation. As of the filing date of this report, the Company has not been informed by its insurance carrier if the claim, or any portion thereof, will be covered and no estimate can be given as to the amount of costs and expenses that may be reimbursed through such insurance coverage.
The Company incurred no merger costs in 2018 due to the merger commenced and completed on December 15, 2017. Acquisition expenses declined approximately $2.3 million in 2018 due to fewer acquisitions during the year and adoption of ASU 2017-01 as of January 1, 2018. Acquisitions costs related to purchased properties are capitalized with the investment in real estate. Acquisition expenses incurred during the year ended December 31, 2018 relate solely to dead deals.
The Company recorded impairment charges of approximately $0.6 million and $0 for the years ended December 31, 2018 and 2017, respectively. The estimated fair values, as they relate to property carrying values were primarily based upon estimated sales prices from third-party offers or indicative bids.
As the Company continues to acquire new properties, by means of equity raises and debt financing, the Company expects to see operations and maintenance and depreciation expenses grow.
| | | For the Years Ended December 31 |
| | | 2018 | | 2017 |
| Other income (expense) | | | | |
| Interest expense | $ | (9,449,000) | | (4,651,000) |
| Distribution income – related party | | -- | | 189,000 |
| Gain from sale of investment in real estate | | 2,276,000 | | 1,200,000 |
| Gain from acquisition of real estate - equity method | | -- | | 180,000 |
| Other income | | 81,000 | | -- |
| Income from DST | | 205,000 | | 105,000 |
| Income from investment in equity method investee | | -- | | 19,000 |
| Total other expense | $ | (6,887,000) | $ | (2,958,000) |
Other income and expense: The increase in interest expense of approximately $4.8 million for the year ended December 31, 2018, as compared to the same period in 2017, is primarily attributable to the Company's increased use of debt to acquire properties as well as loans assumed through the Merger and expensing deferred loan fees of approximately $0.8 million due to the early payoff of term and LOC debt. To maximize the use of cash, the Company will continue to look for opportunities to utilize debt financing in future acquisitions, including use of permanent debt. The interest expense will vary based on the amount of our borrowings and current interest rates at the time of financing. The Company will seek to secure appropriate leverage with the lowest interest rate available. The terms of the loans will vary depending on the quality of the applicable property, the credit worthiness of the tenant and the amount of income the property is able to generate through parking leases. There is no assurance, however, that the Company will be able to secure additional financing on favorable terms or at all. Interest expense recorded for the year ended December 31, 2018 includes loan amortization costs. Total loan amortization cost for the years ended December 31, 2018 and 2017 was approximately $1.7 million and $0.7 million, respectively.
During 2018, the Company sold four properties in St. Louis and Kansas City, MO and a portion of another in Minneapolis, MN for proceeds of $15.5 million. The proceeds were primarily used to reduce debt and fund operations. These sales resulted in a gain from sale of investments of real estate of approximately $2.3 million. During 2017 the Company sold one property in Houston, TX for proceeds of $2.0 million. The proceeds were used to fund investments in real estate.
For additional information see Note K – Disposal of Investment in Real Estate, Note L – Notes Payable in the notes to the consolidated financial statements included in Part II, Item 8 –Financial Statements of this Annual Report.
Since a majority of the Company's property leases call for additional percentage rent, the Company monitors the gross revenue generated by each property on a monthly basis. The higher the property's gross revenue the higher the Company's potential percentage rent. The graph below shows the comparison of the Company's quarterly rental income to the gross revenue generated by the properties.
Non-GAAP Financial Measures
Funds from Operations and Modified Funds from Operations
The Advisor believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient. Additionally, publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, the Company believes that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases.
In order to provide a more complete understanding of the operating performance of a REIT, NAREIT promulgated a measure known as FFO. FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, adding back asset impairment write-downs, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships and joint ventures. Because FFO calculations exclude such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, the Company believes that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of the Company's performance relative to the Company's competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than the Company does, making comparisons less meaningful.
The Investment Program Association ("IPA") issued Practice Guideline 2010-01 (the "IPA MFFO Guideline") on November 2, 2010, which extended financial measures to include modified funds from operations ("MFFO"). In computing MFFO, FFO is adjusted for certain non-operating cash items such as acquisition fees and expenses and certain non-cash items such as straight-line rent, amortization of in-place lease valuations, amortization of discounts and premiums on debt investments, nonrecurring impairments of real estate-related investments, mark-to-market adjustments included in net income (loss), and nonrecurring gains or losses included in net income (loss) from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Management is responsible for managing interest rate, hedge and foreign exchange risk. To achieve the Company's objectives, the Company may borrow at fixed rates or variable rates. In order to mitigate the Company's interest rate risk on certain financial instruments, if any, the Company may enter into interest rate cap agreements and in order to mitigate the Company's risk to foreign currency exposure, if any, the Company may enter into foreign currency hedges. The Company views fair value adjustments of derivatives, impairment charges and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. Additionally, the Company believes it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations, assessments regarding general market conditions, and the specific performance of properties owned, which can change over time.
No less frequently than annually, the Company evaluates events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present, the Company assesses whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) expected from the use of the assets and the eventual disposition. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of MFFO as described above, investors are cautioned that because impairments are based on estimated future undiscounted cash flows and the relatively limited term of the Company's operations, it could be difficult to recover any impairment charges through operational net revenues or cash flows prior to any liquidity event. The Company adopted the IPA MFFO Guideline as management believes that MFFO is a helpful indicator of the Company's on-going portfolio performance. More specifically, MFFO isolates the financial results of the REIT's operations. MFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings in accordance with GAAP. Further, since the measure is based on historical financial information, MFFO for the period presented may not be indicative of future results or the Company's future ability to pay the Company's dividends. By providing FFO and MFFO, the Company presents information that assists investors in aligning their analysis with management's analysis of long-term operating activities. MFFO also allows for a comparison of the performance of the Company's portfolio with other REITs that are not currently engaging in acquisitions, as well as a comparison of the Company's performance with that of other non-traded REITs, as MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and the Company believes it is often used by analysts and investors for comparison purposes. As explained below, management's evaluation of the Company's operating performance excludes items considered in the calculation of MFFO based on the following economic considerations:
| · | Straight-line rent. Most of the Company's leases provide for periodic minimum rent payment increases throughout the term of the lease. In accordance with GAAP, these periodic minimum rent payment increases during the term of a lease are recorded to rental revenue on a straight-line basis in order to reconcile the difference between accrual and cash basis accounting. As straight-line rent is a GAAP non-cash adjustment and is included in historical earnings, it is added back to FFO to arrive at MFFO as a means of determining operating results of the Company's portfolio. |
| · | Amortization of in-place lease valuation. As this item is a cash flow adjustment made to net income in calculating the cash flows provided by (used in) operating activities, it is added back to FFO to arrive at MFFO as a means of determining operating results of the Company's portfolio. |
| · | Acquisition-related costs. The Company was organized primarily with the purpose of acquiring or investing in income-producing real property in order to generate operational income and cash flow that will allow us to provide regular cash distributions to the Company's stockholders. In the process, the Company incurs non-reimbursable affiliated and non-affiliated acquisition-related costs, which, in accordance with GAAP, are expensed as incurred and are included in the determination of income (loss) from operations and net income (loss). These costs have been and will continue to be funded with cash proceeds from the Offering or included as a component of the amount borrowed to acquire such real estate. If the Company acquires a property after all offering proceeds from the Offering have been invested, there will not be any offering proceeds to pay the corresponding acquisition-related costs. Accordingly, unless the Advisor determines to waive the payment of any then-outstanding acquisition-related costs otherwise payable to the Advisor, such costs will be paid from additional debt, operational earnings or cash flow, net proceeds from the sale of properties, or ancillary cash flows. In evaluating the performance of the Company's portfolio over time, management employs business models and analyses that differentiate the costs to acquire investments from the investments' revenues and expenses. Acquisition-related costs may negatively affect the Company's operating results, cash flows from operating activities and cash available to fund distributions during periods in which properties are acquired, as the proceeds to fund these costs would otherwise be invested in other real estate related assets. By excluding acquisition-related costs, MFFO may not provide an accurate indicator of the Company's operating performance during periods in which acquisitions are made. However, it can provide an indication of the Company's on-going ability to generate cash flow from operations and continue as a going concern after the Company ceases to acquire properties on a frequent and regular basis, which can be compared to the MFFO of other non-listed REITs that have completed their acquisition activity and have similar operating characteristics to the Company. Management believes that excluding these costs from MFFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management. |
For all of these reasons, the Company believes the non-GAAP measures of FFO and MFFO, in addition to income (loss) from operations, net income (loss) and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of the Company's real estate portfolio. However, a material limitation associated with FFO and MFFO is that they are not indicative of the Company's cash available to fund distributions since other uses of cash, such as capital expenditures at the Company's properties and principal payments of debt, are not deducted when calculating FFO and MFFO. Additionally, MFFO has limitations as a performance measure in an offering such as the Company's where the price of a share of common stock is a stated value. The use of MFFO as a measure of long-term operating performance on value is also limited if the Company does not continue to operate under the Company's current business plan as noted above. MFFO is useful in assisting management and investors in assessing the Company's ongoing ability to generate cash flow from operations and continue as a going concern in future operating periods, and, after the Common Stock Offering and acquisition stages are complete and NAV is disclosed. However, MFFO is not a useful measure in evaluating NAV because impairments are considered in determining NAV but not in determining MFFO. Therefore, FFO and MFFO should not be viewed as a more prominent measure of performance than income (loss) from operations, net income (loss) or cash flows from operating activities and each should be reviewed in connection with GAAP measurements.
None of the SEC, NAREIT or any other organization has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate MFFO and its use as a non-GAAP performance measure. In the future, the SEC or NAREIT may decide to standardize the allowable exclusions across the REIT industry, and the Company may have to adjust the calculation and characterization of this non-GAAP measure.
The Company's calculation of FFO and MFFO attributable to common shareholders is presented in the following table for the years ended December 31, 2018 and 2017:
| | | For the Years Ended December 31, |
| | | 2018 | | 2017 |
| Net loss attributable to The Parking REIT, Inc. common shareholders | $ | (7,773,000) | $ | (11,411,000) |
| Add (Subtract): | | | | |
| Gain on Sale of real estate | | (2,276,000) | | (1,200,000) |
| Provision for impairment of real estate | | 600,000 | | -- |
| Depreciation and Amortization of real estate assets | | 4,938,000 | | 2,036,000 |
| FFO | $ | (4,511,000) | $ | (10,575,000) |
| Add: | | | | |
| Acquisition fees and expenses to non-affiliates | | 412,000 | | 2,695,000 |
| Acquisition fees and expenses to affiliates | | -- | | 1,957,000 |
| Acquisition / Merger costs – Related Party | | -- | | 3,600,000 |
| Acquisition / Merger costs | | -- | | 2,616,000 |
| Loan defeasance costs | | 643,000 | | -- |
| Loan fee costs due to loan defeasance | | 210,000 | | -- |
| Subtract: | | | | |
| Deferred Rental Assets | | (93,000) | | (195,000) |
| MFFO attributable to The Parking REIT, Inc. shareholders | $ | (3,339,000) | $ | 98,000 |
| Distributions paid to Common Shareholders | $ | 807,000 | $ | 2,296,000 |
Liquidity and Capital Resources
The Company commenced operations on December 30, 2015.
The Company's principal demand for funds is for the acquisition of real estate assets, the payment of operating expenses, capital expenditures, principal and interest on the Company's outstanding indebtedness and the payment of distributions to the Company's stockholders. Over time, the Company intends to generally fund its operating expenses from its cash flow from operations. The cash required for acquisitions and investments in real estate is funded primarily from the sale of shares of the Company's preferred stock and common stock, including those offered for sale through the Company's distribution reinvestment plan, dispositions of properties in the Company's portfolio and through third party financing and the assumption of debt on acquired properties.
On December 31, 2016, the Company ceased all selling efforts for its initial public offering of shares of its common stock at $25.00 per share, pursuant to a registration statement on Form S-11 (No. 333-205893). The Company accepted additional subscriptions through March 31, 2017, the last day of the initial public offering, and raised approximately $61.3 million in the initial public offering before payment of deferred offering costs of approximately $1.1 million, contribution from an affiliate of the Advisor of approximately $1.1 million and cash distributions of approximately $1.8 million.
The Company raised approximately $2.5 million, net of offering costs, in funds from the private placements of Series A Convertible Redeemable Preferred Stock and approximately $36.0 million, net of offering costs, in funds from the private placements of Series 1 Convertible Redeemable Preferred Stock. Combined $9.1 million and $29.4 million for the years ended December 31, 2018 and 2017, respectively.
During 2018, the Company sold four properties and a portion of another in St. Louis and Kansas City, MO and Minneapolis, MN for proceeds of $15.5 million. The proceeds were primarily used to reduce debt and fund operations. These sales resulted in a gain from sale of investments in real estate of approximately $2.3 million. During 2017 the Company sold one property in Houston, TX for proceeds of $2.0 million. The proceeds were used to fund investments in real estate, specifically.
In May 2018, the Company entered into agreements with the Redevelopment Agency for the City of Milwaukee ("RACM") and the Milwaukee Symphony ("Symphony"), regarding the MVP Milwaukee Wells surface parking lot (the "Lot"), wherein we acquired a parcel of land from RACM for $388,545 and sold a portion of the Lot to the Symphony for $200,000. These transactions resulted in an addition of approximately 5,000 square feet to the Lot and will allow us to add an additional 53 parking spaces.
As of December 31, 2018, the Company's debt consisted of approximately $118.9 million in fixed rate debt and $39.5 million in variable rate debt, net of loan issuance costs.
The Company may seek to raise additional funds through equity financings, as well as through additional debt financing.
Sources and Uses of Cash
The following table summarizes our cash flows for the years ended December 31, 2018 and 2017:
| | | For the Years Ended December 31, |
| | | 2018 | | 2017 |
| Net cash used in operating activities | $ | (1,671,000) | $ | (8,493,000) |
| Net cash used in investing activities | | (24,460,000) | | (88,388,000) |
| Net cash provided by financing activities | | 18,836,000 | | 108,626,000 |
Comparison of the year ended December 31, 2018, to the year ended December 21, 2017
Our cash and cash equivalents and restricted cash were approximately $9.4 million as of December 31, 2018, which was a decrease of approximately $7.3 million from the balance at December 31, 2017.
Cash flows from operating activities
Net cash used in operating activities decreased by approximately $6.8 million. The following are the significant factors for change:
| · | Decrease in net loss to approximately $5.0 million for the year ended December 31, 2018 compared to $10.3 million for the year ended December 31, 2017 |
| · | Decrease of amounts to related parties to $0.4 million during the year ended December 31, 2018 from $2.8 million during the year ended December 31, 2017. |
| · | Increase of depreciation to approximately $4.9 million during the year ended December 31, 2018 from $2.0 million during the year ended December 31, 2017. |
| · | Increase of amortization of loan costs to approximately $1.7 million during the year ended December 31, 2018 from $0.7 million during the year ended December 31, 2017. |
| · | Increase of gain from acquisition to approximately $2.3 million during the year ended December 31, 2018 from $0.2 million during the year ended December 31, 2017. |
| · | Decrease of merger from approximately $2.7 million during the year ended December 31, 2017 to none during the year ended December 31, 2018. |
Cash flows from investing activities
Net cash used in investing activities decreased by approximately $63.9 million. The following are the significant factors for change:
| · | Decrease in purchase of investments in real estate of approximately $63.3 million for the year ended December 31, 2018 compared to the year ended December 31, 2017. |
| · | Decrease of investments in assets held for sale and DST of approximately $3.8 million for the year ended December 31, 2018 compared to none during the year ended December 31, 2017. |
| · | Increase of building and land improvements of approximately $6.4 million for the year ended December 31, 2018 compared to $3.2 million the year ended December 31, 2017. |
| · | Increase of sale investments in real estate of approximately $10.1 million for the year ended December 31, 2018 compared to $1.6 million during the year ended December 31, 2017. |
| · | Decrease in cash from merger of approximately $1.3 million for year ended December 31, 2018 compared to the year ended December 31, 2017. |
| · | Decrease in proceeds from non-controlling interest of approximately $5.0 million for year ended December 31, 2018 compared to the year ended December 31, 2017. |
| · | Decrease in deposits for investment in real estate or debt of approximately $3.2 million for year ended December 31, 2018 compared to the year ended December 31, 2017. |
| · | Decrease of investments in MVP REIT of approximately $1.0 million for the year ended December 31, 2017 compared to none during the year ended December 31, 2018. |
Cash flows from financing activities
Net cash provided by financing activities decreased by approximately $89.8 million. The following are the significant factors for change:
| · | Decrease in proceeds of notes payable and line of credit of approximately $66.8 million for year ended December 31, 2018 compared to the year ended December 31, 2017. |
| · | Increase in line of credit payments of approximately $5.7 million for year ended December 31, 2018 compared to the year ended December 31, 2017. |
| · | Decrease in payments on notes payable of approximately $9.4 million for year ended December 31, 2018 compared to the year ended December 31, 2017. |
| · | Decrease in distribution to non-controlling interest of approximately $1.7 million for year ended December 31, 2018 compared to the year ended December 31, 2017. |
| · | Decrease in proceeds from issuance of common and preferred stock of approximately $25.3 million for year ended December 31, 2018 compared to the year ended December 31, 2017. |
| · | Increase in distributions paid to stockholders of approximately $2.1 million for year ended December 31, 2018 compared to the year ended December 31, 2017. |
On November 30, 2018, subsidiaries of the Company, consisting of MVP Hawaii Marks Garage, LLC, MVP Indianapolis City Park Garage, LLC, MVP Indianapolis Washington Street Lot, LLC, MVP New Orleans Rampart, LLC, MVP Raider Park Garage, LLC, and MVP Milwaukee Wells LLC (the "Borrowers") entered into a loan agreement, dated as of November 30, 2018 (the "Loan Agreement"), with LoanCore Capital Credit REIT LLC (the "LoanCore"). Under the terms of the Loan Agreement, LoanCore agreed to loan the Borrowers $39.5 million to repay and discharge in full the outstanding balance under the Company's prior credit facility with KeyBank. The loan is secured by a Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing on each of the properties owned by the Borrowers (the "Properties").
The loan bears interest at a floating rate equal to the sum of one-month LIBOR plus 3.65%, subject to a LIBOR minimum of 1.95%. Additionally, the Borrowers were required to purchase an Interest Rate Protection Agreement which caps its maximum LIBOR to 3.50% for the duration of the loan. Payments are interest-only for the duration of the loan, with the $39.5 million principal repayment due in a balloon payment on December 9, 2020, with an option to extend the term until December 9, 2021 subject to certain conditions and payment obligations. The Borrowers have the right to prepay all or any part of the loan, subject to payment of any applicable Spread Maintenance Premium and Exit Fee (as defined in the Loan Agreement). The loan is also subject to mandatory prepayment upon certain events of Insured Casualty or Condemnation (as defined in the Loan Agreement).
The Borrowers made customary representations and warranties to LoanCore and agreed to maintain certain covenants under the Loan Agreement, including but not limited to, covenants involving their existence; property taxes and other charges; access to properties, repairs, maintenance and alterations; performance of other agreements; environmental matters; title to properties; leases; estoppel statements; management of the Properties; special purpose bankruptcy remote entity status; change in business or operation of the Properties; debt cancellation; affiliate transactions; indebtedness of the Borrowers limited to Permitted Indebtedness (as defined in the Loan Agreement); ground lease reserve relating to the MVP New Orleans' Property; property cash flow allocation; liens on the Properties; ERISA matters; approval of major contracts; payments upon a sale of a Property; and insurance, notice and reporting obligations as set forth in the loan agreement. The Loan Agreement contains customary events of default and indemnification obligations.
The loan proceeds were used to repay and discharge the KeyBank Credit Agreement, dated as of December 29, 2017, as amended, per the terms outlined in the third amendment to the Credit Agreement dated September 28, 2018, as previously filed on Form 8-K on October 2, 2018 and incorporated herein by reference.
In addition, the loan with Bank of America for the MVP Detroit garage requires the Company to maintain $2.3 million in liquidity at all times, which is defined as unencumbered cash and cash equivalents. As of the date of this filing, the Company was in compliance with this lender requirement. The failure of Mr. Shustek to be a non-member manager of the Advisor or for the Advisor to continue to manage the Company is an event of default of the Company's secured mortgage debt of approximately $58.6 million and $71.0 million, respectively, for the years ended December 31, 2018 and 2017. For additional information regarding the Company's indebtedness, please see Note L – Notes Payable in Part II, Item 8 Financial Statements of this Annual Report. The Company will experience a relative decrease in liquidity as proceeds from its debt or equity financings are used to acquire and operate assets and may experience a temporary, relative increase in liquidity if and when investments are sold, to the extent such sales generate proceeds that are available for additional investments. The Advisor may, but is not required to, establish working capital reserves from proceeds from any common or preferred stock offering or cash flow generated by the Company's investments or out of proceeds from the sale of investments. The Company does not anticipate establishing a general working capital reserve; however, the Company may establish capital reserves with respect to particular investments. The Company also may, but is not required to, establish reserves out of cash flow generated by investments or out of net sale proceeds in non-liquidating sale transactions. Working capital reserves are typically utilized to fund tenant improvements, leasing commissions and major capital expenditures. The Company's lenders also may require working capital reserves.
To the extent that the working capital reserve is insufficient to satisfy the Company's cash requirements, additional funds may be provided from cash generated from operations or through short-term borrowing. In addition, subject to certain exceptions and limitations, the Company may incur indebtedness in connection with the acquisition of any real estate asset, refinance the debt thereon, arrange for the leveraging of any previously unfinanced property or reinvest the proceeds of financing or refinancing in additional properties.
Management Compensation Summary
The following table summarizes all compensation and fees incurred by us and paid or payable to the Advisor and its affiliates in connection with the Company's organization operations for the years ended December 31, 2018 and 2017.
| | | For the Years Ended December 31, |
| | | 2018 | | 2017 |
| Acquisition Expense | $ | 412,000 | $ | -- |
| Acquisition Expense (related party) | | -- | | 1,957,000 |
| Asset Management Fees | | 2,000,000 | | 1,259,000 |
| Merger Fees | | -- | | 3,600,000 |
| Total | $ | 2,412,000 | $ | 6,816,000 |
Distributions and Stock Dividends
The Company intends to make regular cash and stock distributions to its common stockholders and cash distributions to its Series A preferred stockholders and Series 1 preferred stockholders, typically on a monthly basis. The actual amount and timing of distributions, if any, will be determined by the Company's board of directors in its discretion and typically will depend on the amount of funds available for distribution, which is impacted by current and projected cash requirements, tax considerations and other factors. As a result, the Company's distribution rate and payment frequency may vary from time to time. However, to qualify as a REIT for federal income tax purposes, the Company must make distributions equal to at least 90% of its REIT taxable income each year.
The Company may not generate sufficient cash flow from operations to fully fund distributions. All or a portion of the distributions may be paid from other sources, such as cash flows from equity offerings, financing activities, borrowings, cash advances from the Advisor, or by way of waiver or deferral of fees. The Company has not established any limit on the extent to which distributions could be funded from these other sources. Accordingly, the amount of distributions paid may not reflect current cash flow from operations and distributions may include a return of capital, (rather than a return on capital). If the Company continues to pay distributions from sources other than cash flow from operations, the funds available to the Company for investments would be reduced and the share value may be diluted. The level of distributions will be determined by the board of directors and depend on several factors including current and projected liquidity requirements, anticipated operating cash flows and tax considerations, and other relevant items deemed applicable by the board of directors.
Common Stock
From inception through December 31, 2018, the Company had paid approximately $1.8 million in cash, issued 83,437 shares of its common stock as DRIP and issued 153,826 shares of its common stock in distributions to the Company's stockholders. All of the cash distributions were paid from offering proceeds and constituted a return of capital. On March 22, 2018 the Company suspended payment of distributions and as such there are currently no distributions to invest in the DRIP.
The Company's total distributions paid for the period presented, the sources of such distributions, the cash flows provided by (used in) operations and the number of shares of common stock issued pursuant to the Company's DRIP are detailed below.
To date, all distributions were paid from offering proceeds and therefore may represent a return of capital.
| | | Distributions Paid in Cash | | | Distributions Paid through DRIP | | | Total Distributions Paid | | | Cash Flows Generated from (used in) Operations (GAAP basis) | |
| 1st Quarter, 2018 | | $ | 806,000 | | | $ | 418,000 | | | $ | 1,224,000 | | | $ | (1,015,000 | ) |
2nd Quarter, 2018 | | | -- | | | | -- | | | | -- | | | | (506,000 | ) |
3rd Quarter, 2018 | | | -- | | | | -- | | | | -- | | | | 663,000 | |
4th Quarter, 2018 | | | -- | | | | -- | | | | -- | | | | (813,000 | ) |
| Total 2018 | | $ | 806,000 | | | $ | 418,000 | | | $ | 1,224,000 | | | $ | (1,671,000 | ) |
| | | Distributions Paid in Cash | | | Distributions Paid through DRIP | | | Total Distributions Paid | | | Cash Flows Used in Operations (GAAP basis) | |
1st Quarter, 2017 | | $ | 161,000 | | | $ | 285,000 | | | $ | 446,000 | | | $ | (2,647,000 | ) |
2nd Quarter, 2017 | | | 168,000 | | | | 306,000 | | | | 474,000 | | | | (296,000 | ) |
3rd Quarter, 2017 | | | 172,000 | | | | 309,000 | | | | 481,000 | | | | (1,753,000 | ) |
4th Quarter, 2017 | | | 178,000 | | | | 310,000 | | | | 488,000 | | | | (3,797,000 | ) |
| Total 2017 | | $ | 679,000 | | | $ | 1,210,000 | | | $ | 1,889,000 | | | $ | (8,493,000 | ) |
Preferred Series A Stock
The Company offered up to $50 million in shares of the Company's Series A Convertible Redeemable Preferred Stock ("Series A"), par value $0.0001 per share, together with warrants to acquire the Company's common stock, in a Regulation D 506(c) private placement to accredited investors. In connection with the private placement, on October 27, 2016, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 50,000 shares of Series A Convertible Redeemable Preferred Stock. The Company commenced the private placement of the Shares to accredited investors on November 1, 2016 and closed the offering on March 24, 2017. The Company raised approximately $2.5 million, net of offering costs, in the Series A private placements.
The offering price was $1,000 per share. In addition, each investor in the Series A received, for every $1,000 in shares subscribed by such investor, 30 detachable warrants to purchase shares of the Company's common stock if the Company's common stock is listed on a national securities exchange. The warrants' exercise price is equal to 110% of the volume weighted average closing stock price of the Company's common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of March 5, 2019, there were 84,510 detachable warrants that may be exercised after the 90th day following the occurrence of a listing event. These warrants will expire five years from the 90th day after the occurrence of a listing event.
For additional information see Note R — Preferred Stock and Warrants in Part II, Item 8 Financial Statements of this Annual Report for a discussion of the various related party transactions, agreements and fees.
From initial issuance through December 31, 2018, the Company had declared distributions of approximately $346,000 of which approximately $328,000 had been paid to Series A stockholders.
| | | Total Series A Distributions Paid | | | Cash Flows Generated from (used in) Operations (GAAP basis) | |
| 1st Quarter, 2018 | | $ | 41,000 | | | $ | (1,015,000 | ) |
2nd Quarter, 2018 | | | 51,000 | | | | (506,000 | ) |
3rd Quarter, 2018 | | | 54,000 | | | | 663,000 | |
4th Quarter, 2018 | | | 54,000 | | | | (813,000 | ) |
| Total 2018 | | $ | 200,000 | | | $ | (1,671,000 | ) |
| | | Total Series A Distributions Paid | | | Cash Flows Used in Operations (GAAP basis) | |
| 1st Quarter, 2017 | | $ | 5,000 | | | $ | (2,647,000 | ) |
2nd Quarter, 2017 | | | 41,000 | | | | (296,000 | ) |
3rd Quarter, 2017 | | | 41,000 | | | | (1,753,000 | ) |
4th Quarter, 2017 | | | 41,000 | | | | (3,797,000 | ) |
| Total 2017 | | $ | 128,000 | | | $ | (8,493,000 | ) |
Preferred Series 1 Stock
On March 29, 2017, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 97,000 shares of its authorized capital stock as shares of Series 1 Convertible Redeemable Preferred Stock ("Series 1"), par value $0.0001 per share. On April 7, 2017, the Company commenced the Regulation D 506(b) private placement of shares of Series 1, together with warrants to acquire the Company's common stock, to accredited investors. On January 31, 2018, the Company closed this offering. As of March 5, 2019, the Company had raised approximately $36.5 million, net of offering costs, in the Series 1 private placements and had 39,811 shares of Series 1 issued and outstanding.
The offering price is $1,000 per share. In addition, each investor in the Series 1 will receive, for every $1,000 in shares subscribed by such investor, 35 detachable warrants to purchase shares of the Company's common stock if the Company's common stock is listed on a national securities exchange. The warrants' exercise price is equal to 110% of the volume weighted average closing stock price of the Company's common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of March 5, 2019, there were 1,382,675 detachable warrants that may be exercised after the 90th day following the occurrence of a listing event. These warrants will expire five years from the 90th day after the occurrence of a listing event.
For additional information see Note R — Preferred Stock and Warrants in Part II, Item 8 Financial Statements of this Annual Report for a discussion of the various related party transactions, agreements and fees.
From issuance date through December 31, 2018, the Company had declared distributions of approximately $3.1 million of which approximately $2.9 million had been paid to Series 1 stockholders.
| | | Total Series 1 Distributions Paid | | | Cash Flows Generated from (used in) Operations (GAAP basis) | |
1st Quarter, 2018 | | $ | 477,000 | | | $ | (1,015,000 | ) |
2nd Quarter, 2018 | | | 639,000 | | | | (506,000 | ) |
3rd Quarter, 2018 | | | 697,000 | | | | 663,000 | |
4th Quarter, 2018 | | | 697,000 | | | | (813,000 | ) |
| Total 2018 | | $ | 2,510,000 | | | $ | (1,671,000 | ) |
| | | Total Series 1 Distributions Paid | | | Cash Flows Used in Operations (GAAP basis) | |
1st Quarter, 2017 | | $ | -- | | | $ | (2,647,000 | ) |
2nd Quarter, 2017 | | | 14,000 | | | | (296,000 | ) |
3rd Quarter, 2017 | | | 98,000 | | | | (1,753,000 | ) |
4th Quarter, 2017 | | | 268,000 | | | | (3,797,000 | ) |
| Total 2017 | | $ | 380,000 | | | $ | (8,493,000 | ) |
Related-Party Transactions and Arrangements
The Company has entered into agreements with affiliates of its Sponsor, whereby the Company will pay certain fees or reimbursements to the Advisor or its affiliates in connection with, among other things, acquisition and financing activities, asset management services and reimbursement of operating and offering related costs. For additional information see Note E — Related Party Transactions and Arrangements in Part II, Item 8 Financial Statements of this Annual Report for a discussion of the various related party transactions, agreements and fees.
On November 5, 2016, the Company purchased 338,409 shares of MVP I's common stock from an unrelated third party for $3.0 million or $8.865 per share. During the year ended December 31, 2017, the Company received approximately $189,000, in stock distributions, related to the Company's ownership of MVP I common stock.
At the effective time of the Merger, 174,026 shares of MVP I Common Stock held by the Company was retired.
Inflation
The Company expects to include provisions in its tenant leases designed to protect the Company from the impact of inflation. These provisions will include reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements, or in some cases annual reimbursement of operating expenses above a certain allowance. Due to the generally long-term nature of these leases, annual rent increases may not be sufficient to cover inflation and rent may be below market.
The Company is organized and conducts operations to qualify as a REIT under Sections 856 to 860 of the Code and to comply with the provisions of the Code with respect thereto. A REIT is generally not subject to federal income tax on that portion of its REIT taxable income, which is distributed to its stockholders, provided that at least 90% of such taxable income is distributed and provided that certain other requirements are met. Our REIT taxable income may substantially exceed or be less than our net income as determined based on GAAP because differences in GAAP and taxable net income consist primarily of allowances for loan losses or doubtful account, write-downs on real estate held for sale, amortization of deferred financing cost, capital gains and losses, and deferred income.
The Company elected to be treated as a REIT effective January 1, 2017 and believes that it has been organized and has operated during 2018 in such a manner to meet the qualifications to continue to be treated as a REIT for federal and state income tax purposes.
If the Company does not qualify as a REIT for the tax year ended December 31, 2018, it will file as a C corporation and deferred tax assets and liabilities will be established for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for the deferred tax assets is provided if the Company believes that it is more likely than not that it will not realize the tax benefit of deferred tax assets based on the available evidence at the time the determination is made. For the tax year ended December 31, 2018, the Company believes that it is more likely than not that it will not realize the benefits of its deferred tax assets, and thus a valuation allowance should be recorded against its net deferred tax assets.
The Company uses a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolutions of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more likely than not of being realized upon ultimate settlement. The Company believes that its income tax filing positions and deductions would be sustained upon examination; thus, the Company has not recorded any uncertain tax positions as of December 31, 2018.
A full valuation allowance for deferred tax assets was provided since the Company believes that it is more likely than not that it will not realize the benefits of its deferred tax assets. A change in circumstances may cause the Company to change its judgment about whether deferred tax assets should be recorded, and further whether any such assets would more likely than not be realized. The Company would generally report any change in the valuation allowance through its income statement in the period in which such changes in circumstances occur. Because the Company is a REIT, it will generally not be subject to corporate level federal income taxes on earnings distributed to our stockholders and therefore may not realize any benefit from deferred tax assets. arising during 2018 or any prior period. The Company intends to distribute at least 100% of its taxable income annually and intends to do so for the tax year ending December 31, 2018 and future periods. The Company has placed a full valuation allowance on all of its deferred tax assets, and thus not asset is recorded on the Company's balance sheet.
REIT Compliance
The Company has elected to be treated as a REIT for federal income tax purposes for the year ended December 31, 2018, and therefore the Company generally will not be subject to federal income tax on income that the Company distributes to its stockholders. If the Company fails to qualify as a REIT in any taxable year, including and after the taxable year in which the Company initially elects to be taxed as a REIT, the Company will be subject to federal income tax on the taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which qualification is denied. Failing to qualify as a REIT could materially and adversely affect the Company's net income.
To qualify as a REIT for tax purposes, the Company is required to distribute at least 90% of its REIT taxable income to the Company's stockholders. The Company must also meet certain asset and income tests, as well as other requirements. The Company will monitor the business and transactions that may potentially impact the Company's REIT status. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax on the taxable income at regular corporate rates.
Off-Balance Sheet Arrangements
Series A Preferred Stock
Each investor in the Series A received, for every $1,000 in shares subscribed by such investor, detachable warrants to purchase 30 shares of the Company's common stock if the Company's common stock is listed on a national securities exchange. The warrants' exercise price is equal to 110% of the volume weighted average closing stock price of the Company's common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of December 31, 2018, there were detachable warrants that may be exercised for 84,510 shares of the Company's common stock after the 90th day following the occurrence of a listing event. These potential warrants will expire five years from the 90th day after the occurrence of a listing event. If all the potential warrants outstanding at December 31, 2018 became exercisable because of a listing event and were exercised at the minimum price of $25 per share, the Company would issue an additional 84,510 shares of common stock and would receive gross proceeds of approximately $2.1 million.
For additional information see "— Liquidity and Capital Resources" and "—Preferred Series A Stock" above and Note R — Preferred Stock and Warrants in Part II, Item 8 Financial Statements of this Annual Report for a discussion of the various related party transactions, agreements and fees.
Series 1 Preferred Stock
Each investor in the Series 1 received, for every $1,000 in shares subscribed by such investor, detachable warrants to purchase 35 shares of the Company's common stock if the Company's common stock is listed on a national securities exchange. The warrants' exercise price is equal to 110% of the volume weighted average closing stock price of the Company's common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of December 31, 2018, there were detachable warrants that may be exercised for approximately 1,382,675 shares of the Company's common stock after the 90th day following the occurrence of a listing event. These potential warrants will expire five years from the 90th day after the occurrence of a listing event. If all the potential warrants outstanding at December 31, 2018 became exercisable because of a listing event and were exercised at the minimum price of $25 per share, the Company would issue an additional 1,382,675 shares of common stock and would receive gross proceeds of approximately $34.6 million.
For additional information see "— Liquidity and Capital Resources" and "—Preferred Series A Stock" above and Note R — Preferred Stock and Warrants in Part II, Item 8 Financial Statements of this Annual Report for a discussion of the various related party transactions, agreements and fees.
Critical Accounting Policies
The Company's accounting policies have been established in conformity with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If management's judgment or interpretation of the facts and circumstances relating to various transactions is different, it is possible that different accounting policies will be applied, or different amounts of assets, liabilities, revenues and expenses will be recorded, resulting in a different presentation of the financial statements or different amounts reported in the financial statements.
Additionally, other companies may utilize different estimates that may impact comparability of the Company's results of operations to those of companies in similar businesses. Below is a discussion of the accounting policies that management considers to be most critical once the Company commences significant operations. These policies require complex judgment in their application or estimates about matters that are inherently uncertain.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
The Company is required to make subjective assessments as to the useful lives of the Company's properties for purposes of determining the amount of depreciation to record on an annual basis with respect to the Company's investments in real estate. These assessments have a direct impact on the Company's net income because if the Company were to shorten the expected useful lives of the Company's investments in real estate, the Company would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
Purchase Price Allocation
The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on cost segregation studies performed by independent third parties or on the Company's analysis of comparable properties in the Company's portfolio. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates, the value of in-place leases, and the value of customer relationships, as applicable.
The aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as if vacant. Factors considered by the Company in its analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, considering current market conditions and costs to execute similar leases. In estimating carrying costs, the Company will include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up period. Estimates of costs to execute similar leases including leasing commissions, legal and other related expenses are also utilized. Above-market and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and management's estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease intangibles are amortized as a decrease to rental income over the remaining term of the lease. The capitalized below-market lease values will be amortized as an increase to rental income over the remaining term and any fixed rate renewal periods provided within the respective leases. In determining the amortization period for below-market lease intangibles, the Company initially will consider, and periodically evaluate on a quarterly basis, the likelihood that a lessee will execute the renewal option. The likelihood that a lessee will execute the renewal option is determined by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located.
The aggregate value of intangible assets related to customer relationship, as applicable, is measured based on the Company's evaluation of the specific characteristics of each tenant's lease and the Company's overall relationship with the tenant. Characteristics considered by the Company in determining these values include the nature and extent of the Company's existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant's credit quality and expectations of lease renewals, among other factors.
The value of in-place leases is amortized to expense over the initial term of the respective leases. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event, does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.
In making estimates of fair values for purposes of allocating purchase price, the Company will utilize several sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company will also consider information obtained about each property as a result of the pre-acquisition due diligence, as well as subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Deferred Costs
Deferred costs may consist of deferred financing costs, deferred offering costs and deferred leasing costs. Deferred financing costs represent commitment fees, legal fees and other costs associated with obtaining commitments for financing. These costs are amortized over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not close.
Contractual Obligations
As of December 31, 2018, our contractual obligations consisted of the mortgage notes secured by our acquired properties:
| Contractual Obligations | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| Long-term debt obligations | $ | 158,404,000 | $ | 11,691,000 | $ | 43,512,000 | $ | 4,751,000 | $ | 98,450,000 |
| Lines of credit: | | -- | | -- | | -- | | -- | | -- |
| Interest | | -- | | -- | | -- | | -- | | -- |
| Principal | | -- | | -- | | -- | | -- | | -- |
| Total | $ | 158,404,000 | $ | 11,691,000 | $ | 43,512,000 | $ | 4,751,000 | $ | 98,450,000 |
Contractual obligations table amount does not reflect the unamortized loan issuance costs of approximately $2.4 million for notes payable as of December 31, 2018.
Subsequent Events
See Note S — Subsequent Events in Part II, Item 8 Financial Statements of this Annual Report for a discussion of the various subsequent events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing the Company's business plan, the Company expects that the primary market risk to which the Company will be exposed is interest rate risk. Our primary interest rate exposure will be the one-month LIBOR.
As of December 31, 2018, the Company's debt consisted of approximately $118.9 million in fixed rate debt and $39.5 million in variable rate debt, net of loan issuance costs. Our variable interest rate debt in related to the LoanCore loan, where the floating rate loan is set at one-month LIBOR plus 3.65%, LIBOR can't go below 1.95% and the Company has purchased a rate cap that caps LIBOR at 3.50%. Changes in interest rates have different impacts on the fixed rate and variable rate debt. A change in interest rates on fixed rate debt impacts its fair value but has no impact on interest incurred or cash flows. A change in interest rates on variable rate debt could impact the interest incurred and cash flows and its fair value. Assuming no increase in the level of our variable debt, if interest rates increased by 1.0%, or 100 basis points, our cash flow would decrease by approximately $0.4 million per year. At December 31, 2018 LIBOR was approximately 2.52%. Assuming no increase in the level of variable rate debt, if LIBOR were reduced to 1.95%, our cash flow would increase by approximately $0.2 million per year.
The following tables summarizes gross annual debt maturities, average interest rates and estimated fair values on the Company's outstanding debt as of December 31, 2018:
| | For the Years Ending December 31 | | | | | |
| | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total | | Fair Value |
| Fixed rate debt | $ | 11,691,000 | $ | 41,454,000 | $ | 2,058,000 | $ | 2,252,000 | $ | 2,499,000 | $ | 98,450,000 | $ | 158,404,000 | $ | 146,657,000 |
| | | | | | | | | | | | | | | | | |
| Average interest rate | | 6.11% | | 6.09% | | 4.87% | | 4.88% | | 4.89% | | 4.94% | | | | |
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
| | Page |
| | |
| |
| | |
| FINANCIAL STATEMENTS | |
| |
| |
| |
| |
| |
THE PARKING REIT, INC.
CONSOLIDATED BALANCE SHEETS
| | | As of December 31, | |
| | | 2018 | | | 2017 | |
| ASSETS | |
| Investments in real estate | | | | | | |
| Land and improvements | | $ | 142,607,000 | | | $ | 131,169,000 | |
| Buildings and improvements | | | 170,206,000 | | | | 153,456,000 | |
| Construction in progress | | | 1,872,000 | | | | 750,000 | |
| Software | | | 63,000 | | | | -- | |
| Intangible Assets | | | 2,288,000 | | | | 2,427,000 | |
| | | | 317,036,000 | | | | 287,802,000 | |
| Accumulated depreciation | | | (7,131,000 | ) | | | (2,231,000 | ) |
| Total investments in real estate, net | | | 309,905,000 | | | | 285,571,000 | |
| | | | | | | | | |
| Assets held for sale | | | -- | | | | 6,543,000 | |
| Cash | | | 5,106,000 | | | | 8,501,000 | |
| Cash – restricted | | | 4,329,000 | | | | 8,229,000 | |
| Prepaid expenses | | | 616,000 | | | | 184,000 | |
| Accounts receivable | | | 712,000 | | | | 409,000 | |
| Investment in DST | | | 2,821,000 | | | | 2,821,000 | |
| Deposits | | | -- | | | | 675,000 | |
| Due from related parties | | | 3,000 | | | | -- | |
| Other assets | | | 79,000 | | | | 10,000 | |
| Total assets | | $ | 323,571,000 | | | $ | 312,943,000 | |
| LIABILITIES AND EQUITY | |
| Liabilities | | | | | | | | |
| Notes payable, net of unamortized loan issuance costs of approximately $2.4 million and $1.9 million as of December 31, 2018 and 2017, respectively | | $ | 155,961,000 | | | $ | 123,770,000 | |
| Lines of credit, net of unamortized loan issuance costs of approximately $0.5 million as of December 31, 2017 | | | -- | | | | 22,302,000 | |
| Accounts payable and accrued liabilities | | | 5,258,000 | | | | 3,913,000 | |
| Security Deposit | | | 139,000 | | | | 202,000 | |
| Due to related parties | | | -- | | | | 385,000 | |
| Deferred revenue | | | 93,000 | | | | 195,000 | |
| Total liabilities | | | 161,451,000 | | | | 150,767,000 | |
| Commitments and contingencies | | | -- | | | | -- | |
| Equity | | | | | | | | |
| The Parking REIT, Inc. Stockholders' Equity | | | | | | | | |
| Preferred stock Series A, $0.0001 par value, 50,000 shares authorized, 2,862 shares issued and outstanding (stated liquidation value of $2,862,000 as of December 31, 2018 and 2017, respectively) | | | -- | | | | -- | |
| Preferred stock Series 1; $0.0001 par value, 97,000 shares authorized, 39,811 and 29,789 shares issued and outstanding (stated liquidation value of $39,811,000 and $29,789,000 as of December 31, 2018 and 2017, respectively) | | | -- | | | | -- | |
| Non-voting, non-participating convertible stock, $0.0001 par value 1,000 shares authorized, no shares issued and outstanding | | | -- | | | | -- | |
| Common stock, $0.0001 par value, 98,999,000 shares authorized, 6,542,797 and 6,532,009 shares issued and outstanding as of December 31, 2018 and 2017, respectively | | | -- | | | | -- | |
| Additional paid-in capital | | | 183,382,000 | | | | 177,598,000 | |
| Accumulated deficit | | | (23,953,000 | ) | | | (18,173,000 | ) |
| Total The Parking REIT, Inc. Shareholders' Equity | | | 159,429,000 | | | | 159,425,000 | |
| Non-controlling interest | | | 2,691,000 | | | | 2,751,000 | |
| Total equity | | | 162,120,000 | | | | 162,176,000 | |
| Total liabilities and equity | | $ | 323,571,000 | | | $ | 312,943,000 | |
The accompanying notes are an integral part of these consolidated financial statements.
THE PARKING REIT, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
| | | For the Years Ended December 31, | |
| | | 2018 | | | 2017 | |
| Revenues | | | | | | |
| Base rent income | | $ | 19,534,000 | | | $ | 8,694,000 | |
| Management agreement | | | -- | | | | 518,000 | |
| Percentage rent income | | | 2,566,000 | | | | 1,173,000 | |
| Total revenues | | | 22,100,000 | | | | 10,385,000 | |
| | | | | | | | | |
| Operating expenses | | | | | | | | |
| Property taxes | | | 2,918,000 | | | | 677,000 | |
| Property operating expense | | | 1,404,000 | | | | 981,000 | |
| Asset management fee – related party | | | 2,000,000 | | | | 1,259,000 | |
| General and administrative | | | 3,620,000 | | | | 989,000 | |
| Professional fees | | | 4,243,000 | | | | 908,000 | |
| Merger costs | | | -- | | | | 2,616,000 | |
| Merger costs – related party | | | -- | | | | 3,600,000 | |
| Acquisition expenses | | | 412,000 | | | | 2,695,000 | |
| Acquisition expenses – related party | | | -- | | | | 1,957,000 | |
| Impairment on investment in real estate | | | 600,000 | | | | -- | |
| Depreciation and amortization | | | 4,938,000 | | | | 2,036,000 | |
| Total operating expenses | | | 20,135,000 | | | | 17,718,000 | |
| | | | | | | | | |
| Income (loss) from operations | | | 1,965,000 | | | | (7,333,000 | ) |
| | | | | | | | | |
| Other income (expense) | | | | | | | | |
| Interest expense | | | (9,449,000 | ) | | | (4,651,000 | ) |
| Distribution income – related party | | | -- | | | | 189,000 | |
| Gain from sale of investment in real estate | | | 2,276,000 | | | | 1,200,000 | |
| Gain from acquisition of real estate – equity method | | | -- | | | | 180,000 | |
| Other Income | | | 81,000 | | | | -- | |
| Income from DST | | | 205,000 | | | | 105,000 | |
| Income from investment in equity method investee | | | -- | | | | 19,000 | |
| Total other expense | | | (6,887,000 | ) | | | (2,958,000 | ) |
| | | | | | | | | |
| Net loss | | | (4,922,000 | ) | | | (10,291,000 | ) |
| Net income attributable to non-controlling interest | | | 41,000 | | | | 460,000 | |
Net loss attributable to The Parking REIT, Inc.'s stockholders | | $ | (4,963,000 | ) | | $ | (10,751,000 | ) |
| | | | | | | | | |
| Preferred stock distributions declared - Series A | | | (205,000 | ) | | | (142,000 | ) |
| Preferred stock distributions declared - Series 1 | | | (2,605,000 | ) | | | (518,000 | ) |
Net loss attributable to The Parking REIT, Inc.'s common stockholders | | $ | (7,773,000 | ) | | $ | (11,411,000 | ) |
| | | | | | | | | |
| Basic and diluted loss per weighted average common share: | | | | | | | | |
| Net loss per share attributable to The Parking REIT, Inc.'s common stockholders - basic and diluted | | $ | (1.19 | ) | | $ | (4.21 | ) |
| Distributions declared per common share | | $ | 0.12 | | | $ | 0.85 | |
| Weighted average common shares outstanding, basic and diluted | | | 6,550,099 | | | | 2,709,977 | |
The accompanying notes are an integral part of these consolidated financial statements.
THE PARKING REIT, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN EQUITY
| | | Preferred stock | | Common stock | | | | | | | | |
| | | Number of Shares | | Par Value | | Number of Shares | | Par Value | | Additional Paid-in Capital | | Accumulated Deficit | | Non-controlling interest | | Total |
| Balance, December 31, 2016 | | -- | | -- | | 2,301,828 | | -- | | 56,875,000 | | (5,126,000) | | 4,124,000 | | 55,873,000 |
| Distributions to non-controlling interest | | -- | | -- | | -- | | -- | | -- | | -- | | (427,000) | | (427,000) |
| Issuance of common stock | | -- | | -- | | 196,985 | | -- | | 4,925,000 | | -- | | -- | | 4,925,000 |
| Issuance of common stock – DRIP | | -- | | -- | | 53,800 | | -- | | 1,321,000 | | -- | | -- | | 1,321,000 |
| Issuance of preferred Series A | | 2,862 | | -- | | -- | | -- | | 2,544,000 | | -- | | -- | | 2,544,000 |
| Issuance of preferred Series 1 | | 29,789 | | -- | | -- | | -- | | 26,892,000 | | -- | | -- | | 26,892,000 |
| Issuance of Common Stock in connection with the merger | | -- | | -- | | 3,887,513 | | -- | | 85,701,000 | | -- | | (6,245,000) | | 79,456,000 |
| Contributions | | -- | | -- | | -- | | -- | | -- | | -- | | 6,264,000 | | 6,264,000 |
| Consolidation of Houston Preston | | -- | | -- | | -- | | -- | | -- | | -- | | 6,000 | | 6,000 |
| Loan proceeds to NCI | | -- | | -- | | -- | | -- | | -- | | -- | | (1,431,000) | | (1,431,000) |
| Distributions - Common | | -- | | -- | | -- | | -- | | (2,296,000) | | -- | | | | (2,296,000) |
| Distributions – Series A | | -- | | -- | | -- | | -- | | (142,000) | | | | -- | | (142,000) |
| Distributions – Series 1 | | -- | | -- | | -- | | -- | | (518,000) | | | | -- | | (518,000) |
| Stock dividend | | -- | | -- | | 91,883 | | -- | | 2,296,000 | | (2,296,000) | | -- | | -- |
| Net income (loss) | | -- | | -- | | -- | | -- | | -- | | (10,751,000) | | 460,000 | | (10,291,000) |
| Balance, December 31, 2017 | | 32,651 | $ | -- | | 6,532,009 | $ | -- | $ | 177,598,000 | $ | (18,173,000) | $ | 2,751,000 | $ | 162,176,000 |
| | | | | | | | | | | | | | | | | |
| Distributions to non-controlling interest | | -- | | -- | | -- | | -- | | -- | | -- | | (101,000) | | (101,000) |
| Issuance of common stock – DRIP | | -- | | -- | | 11,326 | | -- | | 307,000 | | -- | | -- | | 307,000 |
| Issuance of preferred Series 1 | | 10,022 | | -- | | -- | | -- | | 9,089,000 | | -- | | -- | | 9,089,000 |
| Redeemed Shares | | -- | | -- | | (33,217) | | -- | | (812,000) | | -- | | -- | | (812,000) |
| Distributions - Common | | -- | | -- | | -- | | -- | | (807,000) | | -- | | -- | | (807,000) |
| Distributions – Series A | | -- | | -- | | -- | | -- | | (205,000) | | -- | | -- | | (205,000) |
| Distributions – Series 1 | | -- | | -- | | -- | | -- | | (2,605,000) | | -- | | -- | | (2,605,000) |
| Stock dividend | | -- | | -- | | 32,679 | | -- | | 817,000 | | (817,000) | | -- | | -- |
| Net income (loss) | | -- | | -- | | -- | | -- | | -- | | (4,963,000) | | 41,000 | | (4,922,000) |
| Balance, December 31, 2018 | | 42,673 | $ | -- | | 6,542,797 | $ | -- | $ | 183,382,000 | $ | (23,953,000) | $ | 2,691,000 | $ | 162,120,000 |
The accompanying notes are an integral part of these consolidated financial statements.
THE PARKING REIT, INC.
CONSOLIDATED STATEMENTS OF
CASH FLOWS
| | | For the Years Ended December 31 | |
| | | 2018 | | | 2017 | |
| Cash flows from operating activities: | | | | | | |
| Net Loss | | $ | (4,922,000 | ) | | $ | (10,291,000 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Depreciation and amortization expense | | | 4,938,000 | | | | 2,036,000 | |
| Gain from sale of real estate | | | (2,276,000 | ) | | | (180,000 | ) |
| Income from investment in equity method investee | | | -- | | | | (19,000 | ) |
| Merger | | | -- | | | | 2,721,000 | |
| Distribution from MVP REIT | | | -- | | | | (189,000 | ) |
| Distribution from DST | | | (205,000 | ) | | | (105,000 | ) |
| Impairment on real estate | | | 600,000 | | | | -- | |
| Amortization of loan costs | | | 1,658,000 | | | | 691,000 | |
| Changes in operating assets and liabilities | | | | | | | | |
| Due to/from related parties | | | (388,000 | ) | | | (2,829,000 | ) |
| Accounts payable | | | 1,343,000 | | | | 1,693,000 | |
| Loan Fees | | | (1,750,000 | ) | | | (1,610,000 | ) |
| Deferred revenue | | | 198,000 | | | | (53,000 | ) |
| Other assets | | | (69,000 | ) | | | -- | |
| Assets held for sale | | | -- | | | | (577,000 | ) |
| Security deposits | | | (63,000 | ) | | | -- | |
| Accounts receivable | | | (303,000 | ) | | | 84,000 | |
| Prepaid expenses | | | (432,000 | ) | | | 135,000 | |
| Net cash used in operating activities | | | (1,671,000 | ) | | | (8,493,000 | ) |
| Cash flows from investing activities: | | | | | | | | |
| Purchase of investment in real estate | | | (28,939,000 | ) | | | (92,200,000 | ) |
| Investment in assets held for sale | | | -- | | | | (1,015,000 | ) |
| Investment in DST | | | -- | | | | (2,821,000 | ) |
| Building and land improvements | | | (6,405,000 | ) | | | (3,218,000 | ) |
| Fixed Asset Purchase | | | (63,000 | ) | | | -- | |
| Proceeds from Investments | | | 205,000 | | | | 167,000 | |
| Proceeds from sale of investments in real estate | | | 10,067,000 | | | | 1,577,000 | |
| Payment of deposit for purchase of investment in real estate or debt | | | (4,003,000 | ) | | | 3,890,000 | |
| Return of deposit for purchase of investment in real estate or debt | | | 1,788,000 | | | | -- | |
| Deposits applied to purchase of investment in real estate or debt | | | 2,890,000 | | | | -- | |
| Investment in cost method investee | | | -- | | | | (67,000 | ) |
| Investment in cost method investee – held for sale | | | -- | | | | (3,000 | ) |
| Investment in equity method investee | | | -- | | | | (50,000 | ) |
| Investment in MVP REIT, Inc. | | | -- | | | | (1,018,000 | ) |
| Cash from Merger | | | -- | | | | 1,295,000 | |
| Proceeds from non-controlling interest | | | -- | | | | 5,075,000 | |
| Net cash used in investing activities | | | (24,460,000 | ) | | | (88,388,000 | ) |
| Cash flows from financing activities | | | | | | | | |
| Proceeds from notes payable | | | 45,843,000 | | | | 77,752,000 | |
| Payments on notes payable | | | (2,013,000 | ) | | | (11,455,000 | ) |
| Proceeds from line of credit | | | 29,500,000 | | | | 64,400,000 | |
| Payments on line of credit | | | (59,360,000 | ) | | | (53,633,000 | ) |
| Distribution to non-controlling interest | | | (101,000 | ) | | | (1,858,000 | ) |
| Distribution from investment in cost method investee | | | -- | | | | 42,000 | |
| Distribution from investment in equity method investee | | | -- | | | | 195,000 | |
| Proceeds from issuance of common stock | | | -- | | | | 4,925,000 | |
| Proceeds from issuance of preferred stock | | | 9,089,000 | | | | 29,436,000 | |
| Redeemed shares | | | (812,000 | ) | | | -- | |
| Dividends paid to stockholders | | | (3,310,000 | ) | | | (1,178,000 | ) |
| Net cash provided by financing activities | | | 18,836,000 | | | | 108,626,000 | |
| Net change in cash, cash equivalents and restricted cash | | | (7,295,000 | ) | | | 11,745,000 | |
| Cash cash equivalents and restricted cash, beginning of period | | | 16,730,000 | | | | 4,985,000 | |
| Cash cash equivalents and restricted cash, end of period | | $ | 9,435,000 | | | $ | 16,730,000 | |
THE PARKING REIT, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
| | | For the Years Ended December 31, | |
| | | 2018 | | | 2017 | |
| Reconciliation of Cash, Cash Equivalents and Restricted Cash: | | | | | | |
| Cash, cash equivalents at beginning of period | | $ | 8,501,000 | | | $ | 4,885,000 | |
| Restricted cash at beginning of period | | | 8,229,000 | | | | 100,000 | |
| Cash, cash equivalents and restricted cash at beginning of period | | $ | 16,730,000 | | | $ | 4,985,000 | |
| | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 5,106,000 | | | | 8,501,000 | |
| Restricted cash at end of period | | | 4,329,000 | | | | 8,229,000 | |
| Cash, cash equivalents and restricted cash at end of period | | $ | 9,435,000 | | | | 16,730,000 | |
| | | | | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | | | |
| Interest Paid | | $ | 5,692,000 | | | $ | 4,651,000 | |
| Non-cash investing and financing activities: | | | | | | | | |
| Distributions - DRIP | | $ | 307,000 | | | $ | 1,210,000 | |
| Dividend shares | | $ | 817,000 | | | $ | 2,296,000 | |
| Dividends declared not yet paid | | $ | 250,000 | | | $ | 457,000 | |
| Payment of deposit for purchase of investment in real estate or debt | | $ | (4,003,000 | ) | | $ | 3,890,000 | |
| Return of deposit for purchase of investment in real estate or debt | | $ | 1,788,000 | | | $ | -- | |
| Deposits applied to purchase of investment in real estate or debt | | $ | 2,890,000 | | | $ | -- | |
| Conversion from debt to preferred shares | | $ | -- | | | $ | 2,000,000 | |
| Payments on note payable through sale of investment in real estate | | $ | (11,092,000 | ) | | $ | -- | |
| Proceeds on line of credit through sale of investment in real estate | | $ | 7,103,000 | | | $ | -- | |
The accompanying notes are an integral part of these consolidated financial statements
THE PARKING REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Note A — Organization and Business Operations
The Parking REIT, Inc., formerly known as MVP REIT II, Inc. (the "Company," "we," "us" or "our"), is a Maryland corporation formed on May 4, 2015 and has elected to be taxed, and has operated in a manner that will allow the Company to qualify as a real estate investment trust ("REIT") for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2017; therefore, it is the Company's intention to make a REIT election for the ended December 31, 2018.
The Company was formed to focus primarily on investments in parking facilities, including parking lots, parking garages and other parking structures throughout the United States and Canada. To a lesser extent, the Company may also invest in properties other than parking facilities.
The Company is the sole general partner of MVP REIT II Operating Partnership, LP, a Delaware limited partnership (the "Operating Partnership"). The Company owns substantially all of its assets and conducts substantially all of its operations through the Operating Partnership. The Company's wholly owned subsidiary, MVP REIT II Holdings, LLC, is the sole limited partner of the Operating Partnership. The operating agreement provides that the Operating Partnership is operated in a manner that enables the Company to (1) satisfy the requirements to qualify and maintain qualification as a REIT for federal income tax purposes, (2) avoid any federal income or excise tax liability and (3) ensure that the Operating Partnership is not classified as a "publicly traded partnership" for purposes of Section 7704 of the Internal Revenue Code of 1986, as amended (the "Code"), which classification could result in the Operating Partnership being taxed as a corporation.
The Company utilizes an Umbrella Partnership Real Estate Investment Trust ("UPREIT") structure to enable the Company to acquire real property in exchange for limited partnership interests in the Operating Partnership from owners who desire to defer taxable gain that would otherwise normally be recognized by them upon the disposition of their real property or transfer of their real property to the Company in exchange for shares of the Company's common stock or cash.
As part of the Company's initial capitalization, 8,000 shares of common stock were sold for $200,000 to an affiliate of the Advisor.
The Company's advisor is MVP Realty Advisors, LLC, dba The Parking REIT Advisors (the "Advisor"), a Nevada limited liability company, which is owned 60% by Vestin Realty Mortgage II, Inc. ("VRM II") and 40% by Vestin Realty Mortgage I, Inc. ("VRM I"). The Advisor is responsible for managing the Company's affairs on a day-to-day basis and for identifying and making investments on the Company's behalf pursuant to a second amended and restated advisory agreement among the Company, the Operating Partnership and the Advisor (the "Amended and Restated Advisory Agreement"), which became effective upon consummation of the Merger (as such term is defined below). VRM II and VRM I are Maryland corporations that trade on the OTC pink sheets and were managed by Vestin Mortgage, LLC, an affiliate of the Advisor, prior to being internalized in January 2018.
On September 21, 2018, the Company entered into a Third Amended and Restated Advisory Agreement with the Advisor. The Third Amended Advisory Agreement will become effective and replace the existing advisory agreement upon the listing of the shares of our common stock on The Nasdaq Global Market, unless the Company completes an internalization transaction before listing, in which case, the advisory agreement is expected to be terminated as part of the internalization transaction. For more information, please see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations". The Third Amended and Restated Advisory Agreement is filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on September 26, 2018.
Merger of MVP REIT with Merger Sub, LLC
On May 26, 2017, the Company, MVP REIT, Inc., a Maryland corporation ("MVP I"), MVP Merger Sub, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company ("Merger Sub"), and the Advisor entered into an agreement and plan of merger (the "Merger Agreement"), pursuant to which MVP I would merge with and into Merger Sub (the "Merger"). On December 15, 2017, the Merger was consummated. Following the Merger, the Company contributed 100% of its equity interests in Merger Sub to the Operating Partnership.
At the effective time of the Merger, each share of MVP I common stock, par value $0.001 per share, that was issued and outstanding immediately prior to the Merger (the "MVP I Common Stock"), was converted into the right to receive 0.365 shares of Company common stock. A total of approximately 3.9 million shares of Company common stock were issued to former MVP I stockholders, and former MVP I stockholders, immediately following the Merger, owned approximately 59.7% of the Company's common stock. The Company was subsequently renamed "The Parking REIT, Inc.".
Capitalization
As of December 31, 2018, the Company had 6,542,797 shares of common stock issued and outstanding. On December 31, 2016, the Company ceased all selling efforts for the Common Stock Offering of its common stock. The Company accepted additional subscriptions through March 31, 2017, the last day of the Common Stock Offering. In connection with its formation, the Company sold 8,000 shares of common stock to the Sponsor for $200,000.
On October 27, 2016, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 50,000 shares of Series A Convertible Redeemable Preferred Stock, par value $0.0001 per share (the "Series A"). The Company commenced a private placement of the shares of Series A, together with warrants to acquire the Company's common stock, to accredited investors on November 1, 2016 and closed the offering on March 24, 2017. The Company raised approximately $2.5 million, net of offering costs, in the Series A private placement and had 2,862 Series A shares issued and outstanding as of December 31, 2018.
On March 29, 2017, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 97,000 shares of its authorized capital stock as shares of Series 1 Convertible Redeemable Preferred Stock par value $0.0001 per share (the "Series 1"). On April 7, 2017, the Company commenced a private placement of shares of Series 1, together with warrants to acquire the Company's common stock to accredited investors and closed the offering on January 31, 2018. The Company raised approximately $36.0 million, net of offering costs, in the Series 1 private placements and had 39,811 Series 1 shares issued and outstanding as of December 31, 2018.
Note B — Summary of Significant Accounting Policies
Basis of Accounting
The consolidated financial statements of the Company are prepared on the accrual basis of accounting and in accordance with principles generally accepted in the United States of America ("GAAP") for financial information as contained in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"), and in conjunction with rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. In the opinion of management, all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented have been included.
Consolidation
The Company's consolidated financial statements include its accounts, the accounts of the Company's assets that were sold during 2018 and 2017 (as applicable), the accounts of its subsidiaries, Operating Partnership and all of the following subsidiaries. All intercompany profits and losses, balances and transactions are eliminated in consolidation. The following list includes the subsidiaries that are included in the Company's consolidated financial statements, not the number of properties owned by the Company at December 31, 2018 and 2017.
| MVP PF Ft. Lauderdale 2013, LLC | MVP Clarksburg Lot, LLC |
| MVP PF Kansas City 2013, LLC | MVP Denver Sherman 1935, LLC |
| MVP PF Memphis Poplar 2013, LLC | MVP Bridgeport Fairfield Garage, LLC |
| MVP PF Memphis Court 2013, LLC | West 9th Street Properties II, LLC |
| MVP PF St. Louis 2013, LLC | MVP San Jose 88 Garage, LLC |
| Mabley Place Garage, LLC | MCI 1372 Street, LLC |
| MVP Denver Sherman, LLC | MVP Cincinnati Race Street, LLC |
| MVP Fort Worth Taylor, LLC | MVP St. Louis Washington, LLC |
| MVP Milwaukee Old World, LLC | MVP St. Paul Holiday Garage, LLC |
| MVP St. Louis Convention Plaza, LLC | MVP Louisville Station Broadway, LLC |
| MVP Houston Saks Garage, LLC | White Front Garage Partners, LLC |
| MVP St. Louis Lucas, LLC | Cleveland Lincoln Garage, LLC |
| MVP Milwaukee Wells, LLC | MVP Houston Preston, LLC |
| MVP Wildwood NJ Lot, LLC | MVP Houston San Jacinto Lot, LLC |
| MVP Indianapolis City Park, LLC | MVP Detroit Center Garage, LLC |
| MVP KC Cherry Lot, LLC | St Louis Broadway, LLC |
| MVP Indianapolis WA Street Lot, LLC | St Louis Seventh & Cerre, LLC |
| Minneapolis City Parking, LLC | MVP Preferred Parking, LLC |
| MVP Minneapolis Venture, LLC | MVP Raider Park Garage, LLC |
| MVP Indianapolis Meridian Lot, LLC | MVP New Orleans Rampart, LLC |
| MVP Milwaukee Clybourn, LLC | MVP Hawaii Marks Garage, LLC |
| MVP Milwaukee Arena Lot, LLC | |
Under GAAP, the Company's consolidated financial statements will also include the accounts of its consolidated subsidiaries and joint ventures in which the Company is the primary beneficiary, or in which the Company has a controlling interest. In determining whether the Company has a controlling interest in a joint venture and the requirement to consolidate the accounts of that entity, the Company's management considers factors such as an entity's purpose and design and the Company's ability to direct the activities of the entity that most significantly impacts the entity's economic performance, ownership interest, board representation, management representation, authority to make decisions and contractual and substantive participating rights of the partners/members as well as whether the entity is a variable interest entity in which it will absorb the majority of the entity's expected losses, if they occur, or receive the majority of the expected residual returns, if they occur, or both.
Equity investments in which the Company exercises significant influence but does not control and is not the primary beneficiary are accounted for using the equity method. The Company's share of its equity method investees' earnings or losses is included in other income in the accompanying condensed consolidated statements of operations. Investments in which the Company is not able to exercise significant influence over the investee are accounted for under the cost method.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management makes significant estimates regarding revenue recognition, purchase price allocations to record investments in real estate, and derivative financial instruments and hedging activities, as applicable.
Concentration
The Company had fifteen parking tenants as of December 31, 2018 and fourteen parking tenants as of December 31, 2017. One tenant, SP Plus Corporation (Nasdaq: SP) ("SP+"), represented 57.6% of the Company's base parking rental revenue for the year ended December 31, 2018.
SP+ is one of the largest providers of parking management in the United States. As of December 31, 2018, SP+ managed approximately 3,400 locations in North America.
Below is a table that summarizes parking rent by tenant:
| | | For the Year Ended December 31, |
| Parking Tenant | | 2018 | | 2017 |
| SP + | | 57.6% | | 54.5% |
| iPark Services*** | | 13.3% | | 12.9% |
| ABM * | | 4.5% | | 2.2% |
| ISOM Mgmt | | 4.2% | | 1.0% |
| Premier Parking*** | | 3.7% | | 7.8% |
| Interstate Parking | | 2.7% | | 6.2% |
| 342 N. Rampart | | 2.7% | | -- |
| Denison | | 2.5% | | 0.2% |
| Lanier | | 2.4% | | 4.2% |
| St. Louis Parking | | 2.2% | | 4.1% |
| BEST PARK | | 1.5% | | 0.1% |
| Riverside Parking | | 1.0% | | 2.2% |
| PCAM, LLC | | 0.6% | | 0.1% |
| TNSH, LLC | | 0.8% | | -- |
| Denver School | | 0.2% | | <0.1% |
| Secure | | 0.1% | | <0.1% |
| Miller Parking ** | | -- | | 4.5% |
* Through February 28, 2017, MVP San Jose 88 Garage, LLC was subject to a parking management agreement with ABM and received revenue of $110,000. Starting on March 1, 2017, this property was leased to Lanier Parking Solutions.
** Revenue for Miller Parking represents a settlement received by MVP Detroit Center Garage, LLC of approximately $408,000 for the operations of the garage through January 2017, at which time SP+ assumed operations under a longer-term lease agreement.
*** During June 2018 Premier Parking acquired iPark Services. Subsequent to the acquisition Premier and iPark continue to operate under their original company names
In addition, the Company had concentrations in various cities based on parking rental revenue for the years ended December 31, 2018 and 2017, as well as concentrations in various cities based on the real estate the Company owned as of December 31, 2018 and December 31, 2017. The below tables summarize this information by city.
| City Concentration for Parking Rental Revenue |
| | | For the Year Ended December 31, |
| | | 2018 | | 2017 |
| Detroit | | 18.2% | | 39.6% |
| Houston | | 13.3% | | 12.9% |
| Cincinnati | | 9.2% | | 4.0% |
| Fort Worth | | 8.1% | | 0.7% |
| Indianapolis | | 6.5% | | 0.6% |
| St. Louis | | 5.4% | | 6.2% |
| Cleveland | | 5.3% | | 11.7% |
| Minneapolis | | 4.3% | | 0.4% |
| Lubbock | | 4.2% | | 1.0% |
| Nashville | | 3.7% | | 7.7% |
| Milwaukee | | 3.5% | | 0.3% |
| St Paul | | 2.7% | | 6.2% |
| New Orleans | | 2.7% | | -- |
| Honolulu | | 2.6% | | -- |
| San Jose | | 2.4% | | 5.4% |
| Bridgeport | | 2.3% | | 0.2% |
| Memphis | | 1.6% | | 0.1% |
| Louisville | | 1.0% | | 2.2% |
| Ft. Lauderdale | | 0.6% | | 0.1% |
| Denver | | 0.8% | | 0.1% |
| Kansas City | | 0.6% | | 0.1% |
| Wildwood | | 0.4% | | <0.1% |
| Canton | | 0.3% | | 0.5% |
| Clarksburg | | 0.3% | | <0.1% |
| Real Estate Investment Concentration by City |
| | | As of December 31, |
| | | 2018 | | 2017 |
| Detroit | | 17.6% | | 18.8% |
| Houston | | 11.9% | | 12.7% |
| Fort Worth | | 8.8% | | 9.4% |
| Cincinnati | | 8.7% | | 9.1% |
| Honolulu | | 6.7% | | -- |
| Cleveland | | 6.2% | | 5.6% |
| Indianapolis | | 5.8% | | 6.2% |
| Minneapolis | | 4.4% | | 5.6% |
| St Louis | | 4.4% | | 7.0% |
| Milwaukee | | 3.8% | | 4.0% |
| Nashville | | 3.7% | | 4.0% |
| Lubbock | | 3.5% | | 3.7% |
| St Paul | | 2.7% | | 2.9% |
| Bridgeport | | 2.6% | | 2.8% |
| New Orleans | | 2.6% | | -- |
| Memphis | | 1.5% | | 1.7% |
| San Jose | | 1.2% | | 1.3% |
| Fort Lauderdale | | 1.1% | | 1.2% |
| Denver | | 1.0% | | 1.1% |
| Louisville | | 1.0% | | 1.1% |
| Wildwood | | 0.4% | | 0.5% |
| Clarksburg | | 0.2% | | 0.2% |
| Canton | | 0.2% | | 0.2% |
| Kansas City | | -- | | 0.9% |
Acquisitions
The Company records the acquired tangible and intangible assets and assumed liabilities of acquisitions of all operating properties and those development and redevelopment opportunities that meet the accounting criteria to be accounted for as business combinations at fair value at the acquisition date. The Company assesses and considers fair value based on estimated cash flow projections that utilize available market information and discount and/or capitalization rates that the Company deems appropriate. Estimates of future cash flows are based on several factors including historical operating results, known and anticipated trends, and market and economic conditions. The acquired assets and assumed liabilities for an operating property acquisition generally include but are not limited to: land, buildings and improvements, construction in progress and identified tangible and intangible assets and liabilities associated with in-place leases, including tenant improvements, leasing costs, value of above-market and below-market operating leases and ground leases, acquired in-place lease values and tenant relationships, if any. Costs directly associated with all operating property acquisitions and those development and redevelopment acquisitions that meet the accounting criteria to be accounted for as business combinations are expensed as incurred within operating expenses in the consolidated statement of operations.
Impairment of Long-Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, the property is written down to fair value and an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
The Company recorded impairment charges of $0.6 million for the year ended December 31, 2018. The estimated fair values, as they relate to property carrying values were primarily based upon estimated sales prices from third-party offers or indicative bids. No impairments were necessary for the year ended December 31, 2017.
Cash
The Company maintains a significant portion of its cash deposits at KeyBank, which are held by the Company's subsidiaries allowing the Company to maximize FDIC insurance coverage. The balances are insured by the Federal Deposit Insurance Corporation ("FDIC") under the same ownership category of $250,000. As of December 31, 2018, and 2017, the Company had approximately $0.5 million and $5.6 million, respectively, in excess of the federally-insured limits. As of December 31, 2018, the Company has not experienced any losses on cash deposits.
Restricted Cash
Restricted cash primarily consists of escrowed tenant improvement funds, real estate taxes, capital improvement funds, insurance premiums and other amounts required to be escrowed pursuant to loan agreements.
Revenue Recognition
The Company's revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Since many of the Company's leases will provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that the Company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. Percentage rents will be recorded when earned and certain thresholds have been met.
The Company will continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. If the collectability of a receivable is in doubt, the Company will record an increase in the Company's allowance for uncollectible accounts or record a direct write-off of the receivable after exhaustive efforts at collection.
Advertising Costs
Advertising costs incurred in the normal course of operations are expensed as incurred. During the years ended December 31, 2018 and 2017, the Company had no advertising costs.
Investments in Real Estate and Fixed Assets
Investments in real estate and fixed assets are stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which are primarily 3 to 40 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).
The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
Purchase Price Allocation
The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on cost segregation studies performed by independent third parties or on the Company's analysis of comparable properties in the Company's portfolio. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates, the value of in-place leases, and the value of customer relationships, as applicable. The aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as if vacant. Factors considered by the Company in its analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, considering current market conditions and costs to execute similar leases. In estimating carrying costs, the Company will include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up period. Estimates of costs to execute similar leases including leasing commissions, legal and other related expenses are also utilized.
Above-market and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and management's estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease intangibles are amortized as a decrease to rental income over the remaining term of the lease.
The capitalized below-market lease values will be amortized as an increase to rental income over the remaining term and any fixed rate renewal periods provided within the respective leases. In determining the amortization period for below-market lease intangibles, the Company initially will consider, and periodically evaluate on a quarterly basis, the likelihood that a lessee will execute the renewal option. The likelihood that a lessee will execute the renewal option is determined by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located.
The aggregate value of intangible assets related to customer relationship, as applicable, is measured based on the Company's evaluation of the specific characteristics of each tenant's lease and the Company's overall relationship with the tenant. Characteristics considered by the Company in determining these values include the nature and extent of its existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant's credit quality and expectations of lease renewals, among other factors.
The value of in-place leases is amortized to expense over the initial term of the respective leases. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.
In making estimates of fair values for purposes of allocating purchase price, the Company will utilize several sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company will also consider information obtained about each property as a result of the Company's pre-acquisition due diligence, as well as subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Organization, Offering and Related Costs
Certain organization and offering costs will be incurred by the Advisor. Pursuant to the terms of the Amended and Restated Advisory Agreement, the Company will not reimburse the Advisor for these out of pocket costs and future organization and offering costs it may incur. Such costs shall include legal, accounting, printing and other offering expenses, including marketing, and direct expenses of the Advisor's employees and employees of the Advisor's affiliates and others.
All direct offering costs incurred and or paid by the Company that are directly attributable to a proposed or actual offering, including sales commissions, if any, were charged against the gross proceeds of the Common Stock Offering and recorded as an offset to additional paid-in-capital. All indirect costs will be expensed as incurred.
Stock-Based Compensation
The Company has a stock-based incentive award plan, which is accounted for under the guidance for share based payments. The expense for such awards will be included in general and administrative expenses and is recognized over the vesting period or when the requirements for exercise of the award have been met (See Note G — Stock-Based Compensation).
The Company is organized and conducts operations to qualify as a REIT under Sections 856 to 860 of the Code and to comply with the provisions of the Code with respect thereto. A REIT is generally not subject to federal income tax on that portion of its REIT taxable income, which is distributed to its stockholders, provided that at least 90% of such taxable income is distributed and provided that certain other requirements are met. Our REIT taxable income may substantially exceed or be less than our net income as determined based on GAAP because differences in GAAP and taxable net income consist primarily of allowances for loan losses or doubtful account, write-downs on real estate held for sale, amortization of deferred financing cost, capital gains and losses, and deferred income.
The Company elected to be treated as a REIT effective January 1, 2017 and believes that it has been organized and has operated during 2018 in such a manner to meet the qualifications to continue to be treated as a REIT for federal and state income tax purposes.
If the Company does not qualify as a REIT for the tax year ended December 31, 2018, it will file as a C corporation and deferred tax assets and liabilities will be established for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for the deferred tax assets is provided if the Company believes that it is more likely than not that it will not realize the tax benefit of deferred tax assets based on the available evidence at the time the determination is made. For the tax year ended December 31, 2018, the Company believes that it is more likely than not that it will not realize the benefits of its deferred tax assets, and thus a valuation allowance should be recorded against its net deferred tax assets.
The Company uses a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolutions of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more likely than not of being realized upon ultimate settlement. The Company believes that its income tax filing positions and deductions would be sustained upon examination; thus, the Company has not recorded any uncertain tax positions as of December 31, 2018.
A full valuation allowance for deferred tax assets was provided since the Company believes that it is more likely than not that it will not realize the benefits of its deferred tax assets. A change in circumstances may cause the Company to change its judgment about whether deferred tax assets should be recorded, and further whether any such assets would more likely than not be realized. The Company would generally report any change in the valuation allowance through its income statement in the period in which such changes in circumstances occur. Because the Company is a REIT, it will generally not be subject to corporate level federal income taxes on earnings distributed to our stockholders and therefore may not realize any benefit from deferred tax assets. arising during 2018 or any prior period. The Company intends to distribute at least 100% of its taxable income annually and intends to do so for the tax year ending December 31, 2018 and future periods. The Company has placed a full valuation allowance on all of its deferred tax assets, and thus not asset is recorded on the Company's balance sheet.
Per Share Data
The Company calculates basic income (loss) per share by dividing net income (loss) for the period by weighted-average shares of its common stock outstanding for the respective period. Diluted income per share considers the effect of dilutive instruments, such as stock options and convertible stock, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding. The Company had no outstanding common share equivalents during the years ended December 31, 2018 and 2017.
There is a potential for dilution from the Company's Series A Convertible Redeemable Preferred Stock which may be converted into the Company's common stock at any time beginning upon the earlier of (i) 90 days after the occurrence of a listing event or (ii) the second anniversary of the final closing of the offering (whether or not a listing event has occurred). As of December 31, 2018, there were 2,862 shares of the Series A Convertible Redeemable Preferred Stock issued and outstanding.
There is a potential for dilution from the Company's Series 1 Convertible Redeemable Preferred Stock which may be converted upon a holder's election into the Company's common stock at any time beginning upon the earlier of (i) 45 days after the occurrence of a listing event or (ii) April 7, 2019 (whether or not a listing event has occurred). As of December 31, 2018, there were 39,811 shares of the Series 1 Convertible Redeemable Preferred Stock issued and outstanding.
Each share of Series A preferred stock and Series 1 preferred stock will convert into the number of shares of the Company's common stock determined by dividing (i) the stated value per Series A share or Series 1 share of $1,000 (as may be adjusted pursuant to the applicable articles supplementary) plus any accrued but unpaid dividends to, but not including, the conversion date by (ii) the conversion price. The conversion price is equal to 100% or, if the conversion notice is received on or prior to December 1, 2017 (for Series 1 shares) or on or prior to the day immediately preceding the first anniversary of the issuance of such share (for Series A shares), 110% of the volume weighted average price per share of the Company's common stock for the 20 trading days prior to the delivery date of the conversion notice; provided that if the Company's common stock is not then traded on a national securities exchange, the conversion price will be equal to the net asset value per share of the Company's common stock. The Company will have the right (but not the obligation) to redeem any Series A or Series 1 shares that are subject to a conversion notice on the terms set forth in the applicable articles supplementary.
There is also potential for dilution in the event that the Company completes the contemplated redemption of all the outstanding shares of the Series A preferred stock and Series 1 preferred stock and pays entire redemption price in the form of shares of the Company's common stock, within 30 days after the completion of the listing of the Company's common stock on a national securities exchange in order to comply with the terms of its amended credit agreement, as further described in "Management's Discussion And Analysis Of Financial Condition And Results Of Operations – Liquidity and Capital Resources."
Reportable Segments
The Company currently operates one reportable segment.
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
Accounting and Auditing Standards Applicable to "Emerging Growth Companies"
The Company is an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). For as long as the Company remains an "emerging growth company," which may be up to five fiscal years, the Company is not required to (1) comply with any new or revised financial accounting standards that have different effective dates for public and private companies until those standards would otherwise apply to private companies, (2) provide an auditor's attestation report on management's assessment of the effectiveness of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (3) comply with any new requirements adopted by the Public Company Accounting Oversight Board (the "PCAOB"), requiring mandatory audit firm rotation or a supplement to the auditor's report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer or (4) comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the SEC determines otherwise. The Company intends to take advantage of such extended transition period. Since the Company will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, the Company's financial statements may not be comparable to the financial statements of companies that comply with public company effective dates. If the Company were to subsequently elect to instead comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.
Non-controlling Interests
The FASB issued authoritative guidance for non-controlling interests in December 2007, which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as an unconsolidated investment, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, the guidance requires consolidated net income to be reported at amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest.
Note C — Commitments and Contingencies
Litigation
The nature of the Company's business exposes its properties, the Company, its Operating Partnership and its other subsidiaries to the risk of claims and litigation in the normal course of business. Other than routine litigation arising out of the ordinary course of business, the Company is not presently subject to any material litigation nor, to its knowledge, is any material litigation threatened against the Company.
Environmental Matters
Investments in real property create the potential for environmental liability on the part of the owner or operator of such real property. If hazardous substances are discovered on or emanating from a property, the owner or operator of the property may be held strictly liable for all costs and liabilities relating to such hazardous substances. The Company has obtained a Phase I environmental study (which involves inspection without soil sampling or ground water analysis) conducted by independent environmental consultants on each of our properties and, in certain instances, has conducted additional investigation, including a Phase II environmental assessment. Furthermore, the Company has adopted a policy of conducting a Phase I environmental study on each property we acquire and any additional investigation as warranted.
The Company believes that it complies, in all material respects, with all federal, state and local ordinances and regulations regarding hazardous or toxic substances. Furthermore, as of December 31, 2018, the Company has not been notified by any governmental authority of any noncompliance, liability or other claim in connection with any of the Company's properties.
During the Company's predecessor's due diligence of a property purchased on December 15, 2017 (originally purchased by predecessor on March 31, 2015) and located in Milwaukee, it was discovered that the soil and ground water at the subject property had been impacted by the site's historical use as a printing press as well as neighboring property uses. As a result, the Company retained a local environmental engineer to seek a closure letter or similar certificate of no further action from the State of Wisconsin due to the Company's use of the property as a parking lot. As of December 31, 2018, management does not anticipate a material adverse effect related to this environmental matter. As of December 31, 2018, the Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on the results of operations. The Company, however, cannot predict the impact of any unforeseen environmental contingencies or new or changed laws or regulations on properties in which the Company holds an interest, or on properties that may be acquired directly or indirectly in the future.
Note D – Investments in Real Estate
2018
As of December 31, 2018, the Company had the following Investments in Real Estate that were consolidated on the Company's balance sheet:
| Property Name | Location | Date Acquired | Property Type | # Spaces | Property Size (Acres) | Retail Sq. Ft | Investment Amount | Parking Tenant |
| MVP Cleveland West 9th (1) | Cleveland, OH | 5/11/2016 | Lot | 260 | 2 | N/A | $5,845,000 | SP + |
| 33740 Crown Colony (1) | Cleveland, OH | 5/17/2016 | Lot | 82 | 0.54 | N/A | $3,050,000 | SP + |
| MVP San Jose 88 Garage | San Jose, CA | 6/15/2016 | Garage | 328 | 1.33 | N/A | $3,844,000 | Lanier |
| MCI 1372 Street | Canton, OH | 7/8/2016 | Lot | 66 | 0.44 | N/A | $700,000 | ABM |
| MVP Cincinnati Race Street Garage | Cincinnati, OH | 7/8/2016 | Garage | 350 | 0.63 | N/A | $6,300,000 | SP + |
| MVP St. Louis Washington | St Louis, MO | 7/18/2016 | Lot | 63 | 0.39 | N/A | $3,007,000 | SP + |
| MVP St. Paul Holiday Garage | St Paul, MN | 8/12/2016 | Garage | 285 | 0.85 | N/A | $8,396,000 | Interstate Parking |
| MVP Louisville Station Broadway | Louisville, KY | 8/23/2016 | Lot | 165 | 1.25 | N/A | $3,107,000 | Riverside Parking |
| White Front Garage Partners | Nashville, TN | 9/30/2016 | Garage | 155 | 0.26 | N/A | $11,672,000 | Premier Parking |
| Cleveland Lincoln Garage Owners | Cleveland, OH | 10/19/2016 | Garage | 536 | 1.14 | 45,272 | $10,541,000 | SP + |
| MVP Houston Preston Lot | Houston, TX | 11/22/2016 | Lot | 46 | 0.23 | N/A | $2,820,000 | iPark Services |
| MVP Houston San Jacinto Lot | Houston, TX | 11/22/2016 | Lot | 85 | 0.65 | 240 | $3,250,000 | iPark Services |
| MVP Detroit Center Garage | Detroit, MI | 2/1/2017 | Garage | 1,275 | 1.28 | N/A | $55,476,000 | SP + |
| St. Louis Broadway | St Louis, MO | 5/6/2017 | Lot | 161 | 0.96 | N/A | $2,400,000 | St. Louis Parking |
| St. Louis Seventh & Cerre | St Louis, MO | 5/6/2017 | Lot | 174 | 1.06 | N/A | $3,300,000 | St. Louis Parking |
| MVP Preferred Parking (4) | Houston, TX | 8/1/2017 | Garage/Lot | 528 | 0.98 | 784 | $21,115,000 | iPark Services |
| MVP Raider Park Garage | Lubbock, TX | 11/21/2017 | Garage | 1,495 | 2.15 | 20,536 | $11,029,000 | ISOM Management |
| MVP PF Ft. Lauderdale | Ft. Lauderdale, FL | 12/15/2017 | Lot | 66 | 0.75 | 4,017 | $3,423,000 | SP + |
| MVP PF Memphis Court | Memphis, TN | 12/15/2017 | Lot | 37 | 0.41 | N/A | $1,008,000 | SP + |
| MVP PF Memphis Poplar | Memphis, TN | 12/15/2017 | Lot | 127 | 0.87 | N/A | $3,735,000 | Best Park |
| MVP PF St. Louis | St Louis, MO | 12/15/2017 | Lot | 183 | 1.22 | N/A | $5,145,000 | SP + |
| Mabley Place Garage (2) | Cincinnati, OH | 12/15/2017 | Garage | 775 | 0.9 | 8,400 | $21,185,000 | SP + |
| MVP Denver Sherman | Denver, CO | 12/15/2017 | Lot | 28 | 0.14 | N/A | $705,000 | Denver School |
| MVP Fort Worth Taylor | Fort Worth, TX | 12/15/2017 | Garage | 1,013 | 1.18 | 11,828 | $27,663,000 | SP + |
(table continued)
| MVP Milwaukee Old World | Milwaukee, WI | 12/15/2017 | Lot | 54 | 0.26 | N/A | $2,044,000 | SP + |
| MVP Houston Saks Garage | Houston, TX | 12/15/2017 | Garage | 265 | 0.36 | 5,000 | $10,391,000 | iPark Services |
| MVP Milwaukee Wells | Milwaukee, WI | 12/15/2017 | Lot | 148 | 1.07 | N/A | $5,083,000 | Symphony |
| MVP Wildwood NJ Lot 1 (3) | Wildwood, NJ | 12/15/2017 | Lot | 29 | 0.26 | N/A | $545,000 | SP + |
| MVP Wildwood NJ Lot 2 (3) | Wildwood, NJ | 12/15/2017 | Lot | 45 | 0.31 | N/A | $686,000 | SP+ |
| MVP Indianapolis City Park | Indianapolis, IN | 12/15/2017 | Garage | 370 | 0.47 | N/A | $10,934,000 | ABM |
| MVP Indianapolis WA Street | Indianapolis, IN | 12/15/2017 | Lot | 141 | 1.07 | N/A | $5,749,000 | Denison |
| MVP Minneapolis Venture | Minneapolis, MN | 12/15/2017 | Lot | 195 | 1.65 | N/A | $4,012,000 | N/A |
| Minneapolis City Parking | Minneapolis, MN | 12/15/2017 | Lot | 268 | 1.98 | N/A | $9,838,000 | SP + |
| MVP Indianapolis Meridian | Indianapolis, IN | 12/15/2017 | Lot | 36 | 0.24 | N/A | $1,601,000 | Denison |
| MVP Milwaukee Clybourn | Milwaukee, WI | 12/15/2017 | Lot | 15 | 0.06 | N/A | $262,000 | Secure |
| MVP Milwaukee Arena Lot | Milwaukee, WI | 12/15/2017 | Lot | 75 | 1.11 | N/A | $4,631,000 | SP + |
| MVP Clarksburg Lot | Clarksburg, WV | 12/15/2017 | Lot | 94 | 0.81 | N/A | $715,000 | ABM |
| MVP Denver Sherman 1935 | Denver, CO | 12/15/2017 | Lot | 72 | 0.43 | N/A | $2,533,000 | SP + |
| MVP Bridgeport Fairfield | Bridgeport, CT | 12/15/2017 | Garage | 878 | 1.01 | 4,349 | $8,256,000 | SP + |
| MVP New Orleans Rampart | New Orleans, LA | 2/1/2018 | Lot | 78 | 0.44 | N/A | $8,105,000 | 342 N. Rampart |
| MVP Hawaii Marks Garage | Honolulu, HI | 6/21/2018 | Garage | 311 | 0.77 | 16,205 | 21,000,000 | SP + |
| Construction in progress | | | | | | $1,872,000 | |
| Software | | | | | | $63,000 | |
| Total Investment in real estate and fixed assets | | | | | $317,036,000 | |
| (1) | These properties are held by West 9th St. Properties II, LLC. |
| (2) | The Company holds an 83.3% undivided interest in the Mabley Place Garage pursuant to a tenancy-in-common agreement and is the Managing Co-Owner of the property. |
| (3) | These properties are held by MVP Wildwood NJ Lot, LLC. |
| (4) | MVP Preferred Parking, LLC holds a Garage and a Parking Lot. |
2017
As of December 31, 2017, the Company had the following Investments in Real Estate that were consolidated on the Company's balance sheet:
| Property Name | Location | Date Acquired | Property Type | # Spaces | Property Size (Acres) | Retail Sq. Ft | Investment Amount | Parking Tenant |
| MVP Cleveland West 9th (1) | Cleveland, OH | 5/11/2016 | Lot | 260 | 2 | N/A | $5,823,000 | SP + |
| 33740 Crown Colony (1) | Cleveland, OH | 5/17/2016 | Lot | 82 | 0.54 | N/A | $3,049,000 | SP + |
| MVP San Jose 88 Garage | San Jose, CA | 6/15/2016 | Garage | 328 | 1.33 | N/A | $3,825,000 | Lanier |
| MCI 1372 Street | Canton, OH | 7/8/2016 | Lot | 66 | 0.44 | N/A | $700,000 | ABM |
| MVP Cincinnati Race Street Garage | Cincinnati, OH | 7/8/2016 | Garage | 350 | 0.63 | N/A | $5,558,000 | SP + |
| MVP St. Louis Washington | St Louis, MO | 7/18/2016 | Lot | 63 | 0.39 | N/A | $3,000,000 | SP + |
| MVP St. Paul Holiday Garage | St Paul, MN | 8/12/2016 | Garage | 285 | 0.85 | N/A | $8,396,000 | Interstate Parking |
| MVP Louisville Station Broadway | Louisville, KY | 8/23/2016 | Lot | 165 | 1.25 | N/A | $3,107,000 | Riverside Parking |
| White Front Garage Partners | Nashville, TN | 9/30/2016 | Garage | 155 | 0.26 | N/A | $11,673,000 | Premier Parking |
| Cleveland Lincoln Garage Owners | Cleveland, OH | 10/19/2016 | Garage | 536 | 1.14 | 45,272 | $7,406,000 | SP + |
| MVP Houston Preston Lot | Houston, TX | 11/22/2016 | Lot | 46 | 0.23 | N/A | $2,820,000 | iPark Services |
| MVP Houston San Jacinto Lot | Houston, TX | 11/22/2016 | Lot | 85 | 0.65 | 240 | $3,250,000 | iPark Services |
| MVP Detroit Center Garage | Detroit, MI | 2/1/2017 | Garage | 1,275 | 1.28 | N/A | $55,306,000 | SP + |
(table continued)
| St. Louis Broadway | St Louis, MO | 5/6/2017 | Lot | 161 | 0.96 | N/A | $2,400,000 | St. Louis Parking |
| St. Louis Seventh & Cerre | St Louis, MO | 5/6/2017 | Lot | 174 | 1.06 | N/A | $3,300,000 | St. Louis Parking |
| MVP Preferred Parking | Houston, TX | 8/1/2017 | Garage/Lot | 528 | 0.98 | 784 | $20,500,000 | iPark Services |
| MVP Raider Park Garage | Lubbock, TX | 11/21/2017 | Garage | 1,495 | 2.15 | 20,536 | $11,000,000 | ISOM Management |
| MVP PF Ft. Lauderdale (2) | Ft. Lauderdale, FL | 12/15/2017 | Lot | 66 | 0.75 | 4,017 | $3,423,000 | SP + |
| MVP PF Kansas City (2) | Kansas City, MO | 12/15/2017 | Lot | 164 | 1.18 | N/A | $1,812,000 | SP + |
| MVP PF Memphis Poplar (2) | Memphis, TN | 12/15/2017 | Lot | 127 | 0.87 | N/A | $3,735,000 | Best Park |
| MVP PF Memphis Court (2) | Memphis, TN | 12/15/2017 | Lot | 37 | 0.41 | N/A | $1,208,000 | SP + |
| MVP PF St. Louis (2) | St Louis, MO | 12/15/2017 | Lot | 183 | 1.22 | N/A | $5,145,000 | SP + |
| Mabley Place Garage (2) (3) | Cincinnati, OH | 12/15/2017 | Garage | 775 | 0.9 | 8,400 | $21,142,000 | SP + |
| MVP Denver Sherman (2) | Denver, CO | 12/15/2017 | Lot | 28 | 0.14 | N/A | $705,000 | Denver School |
| MVP Fort Worth Taylor (2) | Fort Worth, TX | 12/15/2017 | Garage | 1,013 | 1.18 | 11,828 | $27,658,000 | SP + |
| MVP Milwaukee Old World (2) | Milwaukee, WI | 12/15/2017 | Lot | 54 | 0.26 | N/A | $2,043,000 | SP + |
| MVP St. Louis Convention Plaza (2) | St. Louis, MO | 12/15/2017 | Lot | 221 | 1.26 | N/A | $3,091,000 | SP + |
| MVP Houston Saks Garage (2) | Houston, TX | 12/15/2017 | Garage | 265 | 0.36 | 5,000 | $10,391,000 | iPark Services |
| MVP St. Louis Lucas (2) | St. Louis, MO | 12/15/2017 | Lot | 202 | 1.07 | N/A | $3,695,000 | SP + |
| MVP Milwaukee Wells (2) | Milwaukee, WI | 12/15/2017 | Lot | 100 | 0.95 | N/A | $4,873,000 | PCAM, LLC |
| MVP Wildwood NJ Lot 1 (2)(4) | Wildwood, NJ | 12/15/2017 | Lot | 29 | 0.26 | N/A | $745,000 | SP + |
| MVP Wildwood NJ Lot 2 (2)(4) | Wildwood, NJ | 12/15/2017 | Lot | 45 | 0.31 | N/A | $886,000 | SP+ |
| MVP Indianapolis City Park (2) | Indianapolis, IN | 12/15/2017 | Garage | 370 | 0.47 | N/A | $10,813,000 | ABM |
| MVP KC Cherry Lot (2) | Kansas City, MO | 12/15/2017 | Lot | 84 | 0.6 | N/A | $987,000 | SP + |
| MVP Indianapolis WA Street (2) | Indianapolis, IN | 12/15/2017 | Lot | 141 | 1.07 | N/A | $5,749,000 | Denison |
| Minneapolis City Parking (2) | Minneapolis, MN | 12/15/2017 | Lot | 268 | 1.98 | N/A | $9,838,000 | SP + |
| MVP Indianapolis Meridian (2) | Indianapolis, IN | 12/15/2017 | Lot | 36 | 0.24 | N/A | $1,601,000 | Denison |
| MVP Milwaukee Clybourn (2) | Milwaukee, WI | 12/15/2017 | Lot | 15 | 0.06 | N/A | $262,000 | Secure |
| MVP Milwaukee Arena Lot (2) | Milwaukee, WI | 12/15/2017 | Lot | 75 | 1.11 | N/A | $4,632,000 | SP + |
| MVP Clarksburg Lot (2) | Clarksburg, WV | 12/15/2017 | Lot | 94 | 0.81 | N/A | $715,000 | ABM |
| MVP Denver Sherman 1935 (2) | Denver, CO | 12/15/2017 | Lot | 72 | 0.43 | N/A | $2,534,000 | SP + |
| MVP Bridgeport Fairfield (2) | Bridgeport, CT | 12/15/2017 | Garage | 878 | 1.01 | 4,349 | $8,256,000 | SP + |
| Construction in progress | | | | | | | $750,000 | |
| Total Investment in real estate and fixed assets | | | | | | $287,802,000 | |
| (1) | These properties are held by West 9th St. Properties II, LLC. |
| (2) | These properties were acquired as a result of the Merger with MVP I. |
| (3) | The Company holds an 83.3% undivided interest in the Mabley Place Garage pursuant to a tenancy-in-common agreement and is the Managing Co-Owner of the property. |
| (4) | These properties are held by MVP Wildwood NJ Lot, LLC. |
Note E — Related Party Transactions and Arrangements
The transactions described in this Note were approved by a majority of the Company's board of directors (including a majority of the independent directors) not otherwise interested in such transactions as fair and reasonable to the Company and on terms and conditions no less favorable to the Company than those available from unaffiliated third parties.
On December 15, 2017, the Merger was consummated. At the effective time of the Merger, and pursuant to the terms of the Merger Agreement, each share of MVP I Common Stock that was issued and outstanding immediately prior to the Merger was converted into the right to receive 0.365 shares of Company common stock. A total of approximately 3.9 million shares of Company common stock were issued to former MVP I stockholders, and former MVP I stockholders, following the Merger, own approximately 59.7% of the Company's common stock. To the extent that an MVP I stockholder was otherwise entitled to receive a fraction of a share of Company common stock, computed based on the aggregate number of shares of MVP I Common Stock held by such holder, as applicable, such holder instead received a cash payment in lieu of a fractional share or unit.
Concurrently with the entry into the Merger Agreement, on May 26, 2017, the Company, MVP I, the Advisor and the Operating Partnership entered into a termination and fee agreement (the "Termination Agreement"). Pursuant to the Termination Agreement, at the effective time of the Merger, the Advisory Agreement, dated September 25, 2012, as amended, among MVP I and the Advisor was terminated, and the Company paid the Advisor an Advisor Acquisition Payment (as such term is defined in the Termination Agreement) of approximately $3.6 million, which was the only fee payable to the Advisor in connection with the Merger.
The Advisor has the option to request reimbursement of certain payroll expenses for salaries and benefits paid to non-executive officers. As of December 31, 2018, the Advisor was due approximately $0.2 million in reimbursable expenses, of which has been paid as of the date of this filing.
Ownership of Company Stock
During May 2017, VRM II acquired approximately 35,000 shares of the Company's common stock from third party investors in exchange for various trust deed investments. During November 2017, Corporate Center Sunset Holdings, an entity owned by VRM I and VRM II, acquired 1,039,620 shares of MVP I stock pursuant to a membership purchase agreement. As of December 31, 2018, Corporate Center Sunset Holdings had distributed all acquired shares to VRM I and VRM II. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each outstanding share of MVP I's common stock, $0.001 par value per share, was automatically cancelled and retired, and converted into the right to receive 0.365 shares of common stock of the Company.
As of December 31, 2018, the Sponsor owned 13,269 shares, VRM II owned 364,960 shares and VRM I owned 136,834 shares of the Company's outstanding common stock. During the years ended December 31, 2018 and 2017, VRM II received approximately $50,550 and $19,750, respectively, in distributions in accordance with the Company's DRIP program. During the year ended December 31, 2018, VRM I received approximately $18,700 in both cash and DRIP distributions. VRM I did not own shares of the Company's stock in 2017.
Ownership of MVP REIT
Prior to the Merger, the Company held 476,784 shares of MVP I common stock. Upon completion of the Merger, these shares were retired. During the year ended December 31, 2018, there were no distributions due to the completion of the Merger. During the year ended December 31, 2017, MVP I paid the Company approximately $189,000 in stock distributions. In addition, the Company received 15,996 shares of MVP I Common Stock in accordance with its DRIP program.
Ownership of the Advisor
VRM I and VRM II own 40% and 60%, respectively, of the Advisor. Neither VRM I nor VRM II paid any up-front consideration for these ownership interests, but each agreed to be responsible for its proportionate share of future expenses of the Advisor.
Fees Paid in Connection with the Offering – Common Stock
Various affiliates of the Company were involved in the Common Stock offering and the Company's operations including MVP American Securities, LLC ("AMS"), which was a broker-dealer and member of the Financial Industry Regulatory Authority, Inc. AMS is owned by MS MVP Holdings, LLC, which is owned and managed by Mr. Shustek.
The Company's Sponsor or its affiliates paid selling commissions of up to 6.5% of gross offering proceeds from the sale of shares in the Common Stock Offering without any right to seek reimbursement from the Company.
The Company's sponsor or its affiliates also paid non-affiliated selling agents a one-time fee separately negotiated with each selling agent for due diligence expenses, subject to the total underwriting compensation limitation set forth below. Such due diligence expenses were approximately 1.25% to 2.00% of total offering proceeds. Such commissions and fees were paid by the Company's sponsor or its affiliates (other than the Company) without any right to seek reimbursement from the Company.
Fees Paid in Connection with the Offering – Preferred Stock
In connection with the private placement of the Series A and Series 1 preferred stock, the Company paid selling commissions of up to 6.0% of gross offering proceeds from the sale of shares in the private placements, including sales by affiliated and non-affiliated selling agents. During the years ended December 31, 2018 and 2017, the Company paid approximately $0.8 and $2.4 million, respectively, in selling commissions, of which $0.2 and $0.6 million, respectively, were paid to affiliated selling agents.
The Company paid non-affiliated selling agents a one-time fee separately negotiated with each selling agent for due diligence expenses of up to 2.0% of gross offering proceeds. The Company also paid a dealer manager fee to AMS of up to 2.0% of gross offering proceeds from the sale of the shares in the private placements as compensation for acting as dealer manager. During the years ended December 31, 2018 and 2017, the Company paid approximately $0.2 and $0.6 million, respectively, to AMS as compensation.
Fees Paid in Connection with the Operations of the Company
The Advisor or its affiliates receives an asset management fee at a rate equal to 1.1% of the cost of all assets held by the Company, or the Company's proportionate share thereof in the case of an investment made through a joint venture or other co-ownership arrangement. Pursuant to the Amended and Restated Advisory Agreement, the asset management fee may not exceed $2 million per annum until the earlier of such time, if ever, that (i) the Company holds assets with an appraised value equal to or in excess of $500,000,000 or (ii) the Company reports AFFO equal to or greater than $0.3125 per share of common stock (an amount intended to reflect a 5% or greater annualized return on $25.00 per share of common stock) for two consecutive quarters, on a fully diluted basis. All amounts of the asset management fee in excess of $2 million per annum, plus interest thereon at a rate of 3.5% per annum, will be due and payable by the Company no later than ninety (90) days after the condition for payment is satisfied. As of December 31, 2018, approximately $1.6 million was paid and $0.4 was due to the Advisor and subsequently paid prior to the filing. From and after May 29, 2018 (or the Valuation Date), the asset management fee shall be calculated based on the lower of the value of the Company's assets and their historical cost. As of December 31, 2018, the Company has subordinated approximately $1.4 million in asset management fees which will be accrued and paid once the above criteria are met.
Prior to the Merger, the Company was to determine the Company's NAV on a date not later than the Valuation Date. Following the Valuation Date, the asset management fee was based on the value of the Company's assets rather than their historical cost. Asset management fees for the year ended December 31, 2017 were approximately $1.3 million.
The Company was to reimburse the Advisor or its affiliates for costs of providing administrative services, subject to the limitation that it will not reimburse the Advisor for any amount by which the Company's operating expenses, at the end of the four preceding fiscal quarters (commencing after the quarter in which the Company made its first investment), exceed the greater of (a) 2.0% of average invested assets and (b) 25.0% of net income in connection with the selection or acquisition of an investment, whether or not the Company ultimately acquires, unless the excess amount is approved by a majority of the Company's independent directors. The Company was not to reimburse the Advisor for personnel costs in connection with services for which the Advisor received a separate fee, such as an acquisition fee, disposition fee or debt financing fee, or for the salaries and benefits paid to the Company's executive officers. In addition, the Company was not to reimburse the Advisor for rent or depreciation, utilities, capital equipment or other costs of its own administrative items. During the year ended December 31, 2018, approximately $2.7 million in operating expenses were incurred by the Company reimbursable to the Advisor. During the year ended December 31, 2018, approximately $2.5 million had been reimbursed to the Advisor. For the year ended December 31, 2017, the Advisor was due approximately $0.2 million in reimbursable expenses. These reimbursable expenses were paid as of June 21, 2018, the date of the Company's 2017 annual filing.
On September 21, 2018, we entered into a Third Amended and Restated Advisory Agreement with the Advisor. The Third Amended Advisory Agreement will become effective and replace the existing advisory agreement upon the listing of the shares of our common stock on any national exchange, unless an internalization transaction is completed before listing. For more information, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations – Overview". The Third Amended and Restated Advisory Agreement is filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on September 26, 2018.
Note F — Economic Dependency
Under various agreements, the Company has engaged or will engage the Advisor and its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition services, the sale of shares of the Company's securities available for issuance, as well as other administrative responsibilities for the Company, including accounting services and investor relations. In addition, the Sponsor paid selling commissions in connection with the sale of the Company's shares in the Common Stock Offering and the Advisor paid the Company's organization and offering expenses.
As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. If these companies are unable to provide the Company with the respective services, the Company may be required to find alternative providers of these services.
Note G — Stock-Based Compensation
Long-Term Incentive Plan
The Company's board of directors has adopted a long-term incentive plan which the Company may use to attract and retain qualified directors, officers, employees and consultants. The Company's long-term incentive plan will offer these individuals an opportunity to participate in the Company's growth through awards in the form of, or based on, the Company's common stock. The Company currently anticipates that it will not issue awards under the Company's long-term incentive plan, although it may do so in the future, including possible equity grants to the Company's independent directors as a form of compensation.
The long-term incentive plan authorizes the granting of restricted stock, stock options, stock appreciation rights, restricted or deferred stock units, dividend equivalents, other stock-based awards and cash-based awards to directors, officers, employees and consultants of the Company and the Company's affiliates selected by the board of directors for participation in the Company's long-term incentive plan. Stock options granted under the long-term incentive plan will not exceed an amount equal to 10% of the outstanding shares of the Company's common stock on the date of grant of any such stock options. Stock options may not have an exercise price that is less than the fair market value of a share of the Company's common stock on the date of grant.
The Company's board of directors or a committee appointed by its board of directors will administer the long-term incentive plan, with sole authority to determine all of the terms and conditions of the awards, including whether the grant, vesting or settlement of awards may be subject to the attainment of one or more performance goals. No awards will be granted under the long-term incentive plan if the grant or vesting of the awards would jeopardize the Company's status as a REIT under the Code or otherwise violate the ownership and transfer restrictions imposed under its charter. Unless otherwise determined by the Company's board of directors, no award granted under the long-term incentive plan will be transferable except through the laws of descent and distribution.
The Company has authorized and reserved an aggregate maximum number of 500,000 common shares for issuance under the long-term incentive plan. In the event of a transaction between the Company and its stockholders that causes the per-share value of the Company's common stock to change (including, without limitation, any stock dividend, stock split, spin-off, rights offering or large nonrecurring cash dividend), the share authorization limits under the long-term incentive plan will be adjusted proportionately and the board of directors will make such adjustments to the long-term incentive plan and awards as it deems necessary, in its sole discretion, to prevent dilution or enlargement of rights immediately resulting from such transaction. In the event of a stock split, a stock dividend or a combination or consolidation of the outstanding shares of common stock into a lesser number of shares, the authorization limits under the long-term incentive plan will automatically be adjusted proportionately and the shares then subject to each award will automatically be adjusted proportionately without any change in the aggregate purchase price.
The Company's board of directors may in its sole discretion at any time determine that all or a portion of a participant's awards will become fully vested. The board may discriminate among participants or among awards in exercising such discretion. The long-term incentive plan will automatically expire on the tenth anniversary of the date on which it is approved by the board of directors and stockholders, unless extended or earlier terminated by the board of directors. The Company's board of directors may terminate the long-term incentive plan at any time. The expiration or other termination of the long-term incentive plan will not, without the participant's consent, have an adverse impact on any award that is outstanding at the time the long-term incentive plan expires or is terminated. The board of directors may amend the long-term incentive plan at any time, but no amendment will adversely affect any award without the participant's consent and no amendment to the long-term incentive plan will be effective without the approval of the Company's stockholders if such approval is required by any law, regulation or rule applicable to the long-term incentive plan. During the years ended December 31, 2018 and 2017, no grants were made under the long-term incentive plan.
Note H – Recent Accounting Pronouncements
In May 2014, Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), an updated standard on revenue recognition. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The standard requires expanded disclosure surrounding revenue recognition. Early application is not permitted. The standard was initially to be effective for fiscal periods beginning after December 15, 2016 and allows for either full retrospective or modified retrospective adoption. In July 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, Deferral of Effective Date, which delays the effective date of ASU 2014-09 by one year to fiscal periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations and the effective date is the same as requirements in ASU 2015-14. The Company adopted ASU 2014-09 using the modified retrospective transition method in the first quarter of 2018 and such adoption did not have a material impact on the Company's condensed consolidated financial statements. The adoption of this standard did not require any adjustments to the opening balance of retained earnings as of January 1, 2018.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value with changes in fair value recognized in net income. The ASU also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The requirement to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet has been eliminated by this ASU. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-01 in the first quarter of 2018 and such adoption did not have a material impact on the Company's condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases – (Topic 842). This update will require lessees to recognize all leases with terms greater than 12 months on their balance sheet as lease liabilities with a corresponding right-of-use asset. This update maintains the dual model for lease accounting, requiring leases to be classified as either operating or finance, with lease classification determined in a manner similar to existing lease guidance. The basic principle is that leases of all types convey the right to direct the use and obtain substantially all the economic benefits of an identified asset, meaning they create an asset and liability for lessees. Lessees will classify leases as either finance leases (comparable to current capital leases) or operating leases (comparable to current operating leases). Costs for a finance lease will be split between amortization and interest expense, with a single lease expense reported for operating leases. This update also will require both qualitative and quantitative disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; however, early adoption is permitted. The Company has determined that the provisions of ASU 2016-02 may result in an increase in assets to recognize the present value of the lease obligations with a corresponding increase in liabilities for leases in the future however the Company was not a lessee on any lease agreements at December 31, 2018. The Company adopted ASU 2016-02 and such adoption did not have a material impact on the Company's consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this ASU replace the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU 2016-13 and such adoption did not have a material impact on the Company's consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash. The new guidance requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statements of cash flows include restricted cash and restricted cash equivalents. If restricted cash is presented separately from cash and cash equivalents on the balance sheet, companies will be required to reconcile the amounts presented on the statement of cash flows to the amounts on the balance sheet. Companies will also need to disclose information about the nature of the restrictions. The standard permits the use of either the retrospective or cumulative effect transition method. This update will become effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2016-18 in the first quarter of 2018 and such adoption had no material impact on the Company's condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. This update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. This update will become effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company adopted ASU 2016-18 beginning in the first quarter of 2018. The effect of ASU 2017-01 on the Company's condensed consolidated financial statements is dependent upon the value and quantity of acquisitions during the year.
In May 2017, the FASB issued Accounting Standards Update ASU 2017-09, Compensation-Stock Compensation: Scope of Stock Compensation Modification Accounting. The ASU was issued to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The update is effective for annual periods beginning after December 15, 2017, and interim periods thereafter. Early adoption is permitted, including adoption in any interim period. The Company adopted ASU 2017-09 in the first quarter of 2018 and such adoption did not have a material impact on the Company's condensed consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The objective of ASU 2017-12 is to expand hedge accounting for both financial (interest rate) and commodity risks and create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. ASU 2017-12 will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company adopted ASU 2017-12 and such adoption did not have a material impact on the Company's condensed consolidated financial statements.
Note I – Acquisitions
2018
The following table is a summary of the acquisitions for the year ended December 31, 2018.
| Property | Location | Date Acquired | Property Type | # Spaces | Size / Acreage | Retail Sq. Ft. | Property Purchase Price |
| MVP New Orleans Rampart, LLC | New Orleans, LA | 2/1/2018 | Lot | 78 | 0.44 | N/A | $8,105,000 |
| MVP Hawaii Marks Garage, LLC | Honolulu, HI | 6/21/2018 | Garage | 311 | 0.77 | 16,205 | $20,834,000 |
The following table is a summary of the allocated acquisition value of all properties acquired by the Company for the year ended December 31, 2018.
| | | Assets | |
| | | Land and Improvements | | | Building and improvements | | | Total assets acquired | |
| MVP New Orleans | | $ | 8,105,000 | | | $ | -- | | | $ | 8,105,000 | * |
| MVP Hawaii Marks Garage | | $ | 9,118,000 | | | $ | 11,716,000 | | | $ | 20,834,000 | * |
| | | $ | 17,223,000 | | | $ | 11,716,000 | | | $ | 28,939,000 | |
*Includes acquisition and closing costs
The following table presents the results of operations of the acquired properties for the year ended December 31, 2018:
| | | For the Year Ended December 31, 2018 | |
| | | Total Revenues | | | Net Income | |
| 2018 acquisitions | | $ | 1,241,000 | | | $ | 745,000 | |
Pro forma results of the Company
The following table of pro forma consolidated results of operations of the Company for the year ended December 31, 2018 and 2017 and assumes that the acquisitions were completed as of January 1, 2017.
| | | For the Year Ended December 31, | |
| | | 2018 | | | 2017 | |
| Revenues from continuing operations | | $ | 22,593,000 | | | $ | 11,891,000 | |
| Net income (loss) from continuing operations | | $ | (4,508,000 | ) | | $ | (9,326,000 | ) |
| Net income (loss) from continuing operations per share – basic | | $ | (0.69 | ) | | $ | (3.44 | ) |
| Net income (loss) from continuing operations per share – diluted | | $ | (0.69 | ) | | $ | (3.44 | ) |
2017
The following table is a summary of the acquisitions for the year ended December 31, 2017, excluding properties acquired in the Merger.
| Property | Location | Date Acquired | Property Type | # Spaces | Size / Acreage | Retail Sq. Ft. | Property Purchase Price |
| MVP Detroit Center Garage | Detroit, MI | 01/10/2017 | Garage | 1,275 | 1.28 | N/A | $55,000,000 |
| St Louis Broadway | St Louis, MO | 02/01/2017 | Lot | 161 | 0.96 | N/A | $2,400,000 |
| St Louis Seventh & Cerre | St Louis, MO | 02/01/2017 | Lot | 174 | 1.06 | N/A | $3,300,000 |
| MVP Preferred Parking | Houston, TX | 06/29/2017 | Garage/Lot | 528 | 0.98 | 784 | $20,500,000 |
| MVP Raider Park Garage | Lubbock, TX | 11/21/2017 | Garage | 1,495 | 2.15 | 20,536 | $11,000,000 |
The following table is a summary of the properties acquired in the merger on December 15, 2017:
| Property Name | Location | Property Type | # Spaces | Size / Acreage | Retail Sq. Ft | Purchase Price Allocation in merger |
|
| MVP PF Ft. Lauderdale 2013 | Ft. Lauderdale, FL | Lot | 66 | 0.75 | 4,017 | $3,423,000 |
| MVP PF Kansas City 2013 | Kansas City, MO | Lot | 164 | 1.18 | N/A | $1,812,000 |
| MVP PF Memphis Poplar 2013, | Memphis, TN | Lot | 127 | 0.87 | N/A | $3,735,000 |
| MVP PF Memphis Court 2013 | Memphis, TN | Lot | 37 | 0.41 | N/A | $1,208,000 |
| MVP PF St. Louis 2013 | St Louis, MO | Lot | 183 | 1.22 | N/A | $5,145,000 |
| Mabley Place Garage | Cincinnati, OH | Garage | 775 | 0.9 | 8,400 | $21,142,000 |
| MVP Denver Sherman | Denver, CO | Lot | 28 | 0.14 | N/A | $705,000 |
| MVP Fort Worth Taylor | Fort Worth, TX | Garage | 1,013 | 1.18 | 11,828 | $27,658,000 |
| MVP Milwaukee Old World | Milwaukee, WI | Lot | 54 | 0.26 | N/A | $2,044,000 |
| MVP St. Louis Convention Plaza | St. Louis, MO | Lot | 221 | 1.26 | N/A | $3,091,000 |
| MVP Houston Saks Garage | Houston, TX | Garage | 265 | 0.36 | 5,000 | $10,391,000 |
| MVP St. Louis Lucas | St. Louis, MO | Lot | 202 | 1.07 | N/A | $3,695,000 |
| MVP Milwaukee Wells | Milwaukee, WI | Lot | 100 | 0.95 | N/A | $4,873,000 |
| MVP Wildwood NJ Lot 1 (1) | Wildwood, NJ | Lot | 29 | 0.26 | N/A | $745,000 |
| MVP Wildwood NJ Lot 2 (1) | Wildwood, NJ | Lot | 45 | 0.31 | N/A | $886,000 |
| MVP Indianapolis City Park | Indianapolis, IN | Garage | 370 | 0.47 | N/A | $10,813,000 |
| MVP KC Cherry Lot | Kansas City, MO | Lot | 84 | 0.6 | N/A | $987,000 |
| MVP Indianapolis WA Street Lot | Indianapolis, IN | Lot | 141 | 1.07 | N/A | $5,749,000 |
| Minneapolis City Parking | Minneapolis, MN | Lot | 268 | 1.98 | N/A | $9,838,000 |
| MVP Minneapolis Venture | Minneapolis, MN | Lot | 201 | 2.48 | N/A | $6,543,000 |
| MVP Indianapolis Meridian Lot | Indianapolis, IN | Lot | 36 | 0.24 | N/A | $1,601,000 |
| MVP Milwaukee Clybourn | Milwaukee, WI | Lot | 15 | 0.06 | N/A | $262,000 |
| MVP Milwaukee Arena Lot | Milwaukee, WI | Lot | 75 | 1.11 | N/A | $4,632,000 |
| MVP Clarksburg Lot | Clarksburg, WV | Lot | 94 | 0.81 | N/A | $715,000 |
| MVP Denver Sherman 1935 | Denver, CO | Lot | 72 | 0.43 | N/A | $2,534,000 |
| MVP Bridgeport Fairfield Garage | Bridgeport, CT | Garage | 878 | 1.01 | 4,349 | $8,256,000 |
(1) These properties are held by a single LLC.
The following table is a summary of the allocated acquisition value of all properties acquired by the Company for the year ended December 31, 2017.
| | | Assets |
| | | Land and Improvements | | | Building and improvements | | | Total assets acquired |
| MVP Detroit Center Garage | | $ | 7,000,000 | | | $ | 48,000,000 | | | $ | 55,000,000 |
| St Louis Broadway, LLC | | | 2,400,000 | | | | -- | | | | 2,400,000 |
| St Louis Seventh & Cerre, LLC | | | 3,300,000 | | | | -- | | | | 3,300,000 |
| MVP Preferred Parking, LLC | | | 15,800,000 | | | | 4,700,000 | | | | 20,500,000 |
| MVP Raider Park Garage | | | 1,960,000 | | | | 9,040,000 | | | | 11,000,000 |
| MVP PF Ft. Lauderdale 2013, LLC | | | 3,423,000 | | | | -- | | | | 3,423,000 |
| MVP PF Memphis Court 2013, LLC | | | 1,208,000 | | | | -- | | | | 1,208,000 |
| MVP PF Memphis Poplar 2013, LLC | | | 3,735,000 | | | | -- | | | | 3,735,000 |
| MVP PF Kansas City 2013, LLC | | | 1,812,000 | | | | -- | | | | 1,812,000 |
| MVP PF St. Louis 2013, LLC | | | 5,145,000 | | | | -- | | | | 5,145,000 |
| Mabley Place Garage, LLC * | | | 1,585,000 | | | | 19,557,000 | | | | 21,142,000 |
| MVP Denver Sherman, LLC | | | 705,000 | | | | -- | | | | 705,000 |
| MVP Fort Worth Taylor, LLC | | | 2,845,000 | | | | 24,813,000 | | | | 27,658,000 |
| MVP Milwaukee Old World, LLC | | | 2,044,000 | | | | -- | | | | 2,044,000 |
| MVP St. Louis Convention Plaza, LLC | | | 3,091,000 | | | | -- | | | | 3,091,000 |
| MVP Houston Saks Garage, LLC | | | 4,931,000 | | | | 5,460,000 | | | | 10,391,000 |
| MVP St. Louis Lucas, LLC | | | 3,695,000 | | | | -- | | | | 3,695,000 |
| MVP Milwaukee Wells, LLC | | | 4,873,000 | | | | - | | | | 4,873,000 |
| MVP Wildwood NJ Lot, LLC | | | 1,631,000 | | | | -- | | | | 1,631,000 |
| MVP Indianapolis City Park, LLC | | | 2,055,000 | | | | 8,758,000 | | | | 10,813,000 |
| MVP KC Cherry Lot, LLC | | | 987,000 | | | | -- | | | | 987,000 |
| MVP Indianapolis WA Street Lot, LLC | | | 5,749,000 | | | | -- | | | | 5,749,000 |
| MVP Minneapolis Venture, LLC** | | | 6,543,000 | | | | -- | | | | 6,543,000 |
| MVP Indianapolis Meridian Lot, LLC | | | 1,601,000 | | | | -- | | | | 1,601,000 |
| MVP Milwaukee Clybourn, LLC | | | 262,000 | | | | -- | | | | 262,000 |
| MVP Milwaukee Arena Lot, LLC | | | 4,632,000 | | | | -- | | | | 4,632,000 |
| MVP Clarksburg Lot, LLC | | | 715,000 | | | | -- | | | | 715,000 |
| MVP Denver Sherman 1935, LLC | | | 2,534,000 | | | | -- | | | | 2,534,000 |
| MVP Bridgeport Fairfield Garage, LLC | | | 498,000 | | | | 7,758,000 | | | | 8,256,000 |
| Minneapolis City Parking, LLC | | | 9,838,000 | | | | -- | | | | 9,838,000 |
| | | $ | 106,597,000 | | | $ | 128,086,000 | | | $ | 234,683,000 |
*The Company holds an 83.3% undivided interest in the Mabley Place Garage pursuant to a tenancy-in-common agreement and is the Managing Co-Owner. The Company acknowledges that the Mabley Place Garage is not a legal entity pursuant to ASC 810 and the Company's undivided interest represents an interest in the property itself, not in an entity that owns the property. Nevertheless, the Company concluded the most appropriate presentation was to consolidate the property in accordance with ASC 810 as the controlling party.
** During June 2016, Minneapolis Venture entered into a PSA to sell the 10th Street lot "as is" to a third party for approximately $6.1 million. During October 2016, the PSA was cancelled. During February 2017, the Company entered into a letter of intent to sell a portion of the property (approximately 2.2 acres) to an unrelated third party for $3.0 million. The remaining portion of the property will continue to be reported as held for sale. The Company will continue look for an Operator if the entire property is not sold.
The following table presents the results of operations of the acquired properties for the year ended December 31, 2017:
| | | Year Ended December 31, 2017 |
| | | Total Revenues | | | Net Income |
| 2017 acquisitions | | $ | 6,407,000 | | | $ | 1,525,000 |
Merger with MVP I
On December 15, 2017, in connection with the Merger, the Company acquired interests in 31 properties. This included the acquisition of the non-controlling interest MVP I held in five of the Company's properties.
As of December 15, 2017, there were 11,130,295 shares of MVP I common stock issued and outstanding, resulting in all stock consideration of $92,296,038 comprised of 0.365 shares of the Company's stock in exchange for 1 share of MVP I common stock valued at $22.72 implied per share value.
100% of MVP I stockholders received stock consideration in the Merger resulting in the Company's then current stockholders owning 40.3% and former MVP I stockholders owning 59.7% of the common stock of the Company outstanding after the consummation of the Merger, as follows:
| Company common shares outstanding at date of merger | | 2,451,237 |
| Company common shares issued to MVP I stockholders on date of merger | | 3,887,513 |
| Total Company common shares outstanding after Merger | | 6,338,750 |
ASC 805-10-55-14 states that determining the acquirer shall include a consideration of, among other things, which of the combining entities initiated the combination. As stated in foot note P, the original LOI came from the Company to acquire MVP I. Additionally, no new entity was formed, i.e. "Newco" post-merger. The Company was the surviving entity and MVP I was dissolved. Based on the review of ASC 805-10-55, Management have concluded that the Company is the legal and accounting acquirer in the merger transaction between the Company and MVP I.
The aggregate purchase price consideration was allocated to assets and liabilities as follows:
| Assets | | |
| Investment in properties | $ | 155,626,892 |
| Cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses, construction in progress and deferred rental assets | | 4,433,296 |
| Liabilities and Equity | | |
| Notes payable | | (64,299,290) |
| Accounts payable, accrued expenses, deferred revenue, security deposits, liabilities related to assets held for sale and due to related parties | | (3,464,860) |
| Aggregate merger consideration | $ | 92,296,038 |
On December 15, 2017, the closing date, pursuant to the merger agreement, the Company owned 174,026.48 shares of MVP I and these shares were "retired" through the merger and therefore the net merger purchase consideration was valued at $85,701,000.
In accordance with ASC 805-10-25-13, the estimated fair values for the assets acquired and the liabilities assumed are preliminary and are subject to change during the measurement period as additional information related to the inputs and assumptions used in determining the fair value of the assets and liabilities becomes available. Subsequent adjustments to the preliminary purchase price allocation are not expected to have a material impact to the Company's consolidated financial statements.
Purchase price allocation was based on the Company's assessment of the fair value of the acquired assets and liabilities, as summarized below.
The fair value of MVP I assets acquired and liabilities assumed consisted of a combination of both the income approach and the sales comparison approach. Furthermore, the assets acquired included assets consisting of a current use of a leased surface parking lot or garage. For these assets, fair value was estimated via the contractual income by applying an estimated capitalization rate based on a variety of factors such as location, development potential, strength of operator, retail leases and overall growth projections. Based on these various factors the resulting capitalization rates ranged from 4% to 8%.
Land - Land values were determined via the sales comparison approach whereby recent sales and listings were analyzed on a per square foot basis. Attributes that affect value such as size, location, zoning, access, sale date, and intended use were considered and appropriately adjusted for.
Building, Site Improvements - For the building and site Improvements, the cost approach was used to estimate fair value. As the buildings square footages consist of parking structure and retail space the appropriate multipliers were applied for perimeter, height, story, cost, and local multipliers.
Equipment - The fair value was estimated to be the net book value of the equipment based on the most recent balance sheet.
Tenant Improvements - Tenant improvements were not assumed for the parking leases. However, for a small number of the retail leases, market tenant improvements were assumed ranging from $5 - $15 per square foot.
Lease in Place - Parking lease fair value was estimated using a market based three-month downtime plus reimbursable expenses.
Cash and Cash Equivalents, Accounts Receivables, Prepaid Expenses, Construction in Progress and Deferred Rental Assets - The fair value was estimated to be their cost basis.
Notes payable - The fair value was estimated to be their cost basis as MVP I debt was considered to have no above/below market debt rate value and were within a reasonable range of variance of current prevailing market debt rates.
Accounts Payable, Deferred Revenue, Security Deposits, Liabilities related to Assets Held for Sale and Due to Related Parties - The fair value was estimated to be their cost basis.
Pro forma results of the Company
The following table of pro forma consolidated results of operations of the Company for the year ended December 31, 2017 and 2016 and assumes that the acquisitions were completed as of January 1, 2016.
| | | For the Years Ended December 31, |
| | | 2017 | | | 2016 |
| Revenues from continuing operations | | $ | 20,134,000 | | | $ | 16,185,000 |
| Net income (loss) from continuing operations | | $ | (2,561,000 | ) | | $ | 8,596,000 |
| Net income (loss) from continuing operations per share – basic | | $ | (0.95 | ) | | $ | 7.80 |
| Net income (loss) from continuing operations per share – diluted | | $ | (0.95 | ) | | $ | 7.80 |
Note J — Assets held for sale
During the year ended December 31, 2018, the Company had an 87.09% ownership interest in one property that was listed as held for sale, with a carrying value of approximately $6.1 million. This property is accounted for at the fair value based on an appraisal. During June 2016, Minneapolis Venture entered into a PSA to sell the 10th Street lot "as is" to a third party for approximately $6.1 million. During October 2016, the PSA was cancelled. During February 2017, the Company entered into a letter of intent to sell a portion of the property (approximately 2.2 acres) to an unrelated third party for $3.0 million. During October 2018, the Company completed the partial sale for cash consideration of $3.0 million.
The remaining portion of the property will be reported as held for use.
Note K – Disposition of Investments in Real Estate
In May 2018, the Company entered into agreements with the Redevelopment Agency for the City of Milwaukee ("RACM") and the Milwaukee Symphony ("Symphony"), regarding the MVP Milwaukee Wells surface parking lot (the "Lot"), wherein we acquired a parcel of land from RACM for $388,545 and sold a portion of the Lot to the Symphony for $200,000. These transactions resulted in an addition of approximately 5,000 square feet to the Lot and will allow us to add an additional 53 parking spaces.
On June 14, 2018, the Company, through entities wholly owned by the Company, sold two surface parking lots in St. Louis for $8.5 million to the Land Clearance For Redevelopment Authority of the City of St. Louis, a public body corporate and politic of the State of Missouri. Additionally, the purchaser agreed to pay 50% of the premium associated with defeasance of two CMBS loans which were cross-collateralized. The loans encumbered the following properties: MVP St. Louis Convention Plaza, MVP St. Louis Lucas, MVP KC Cherry Lot, MVP Indianapolis City Park Garage, and MVP Indianapolis Washington Street Lot. Subsequent to the defeasance of the loan that encumbered MVP Indianapolis City Park Garage and MVP Indianapolis Washington Street Lot, the Company added the two Indianapolis properties to the KeyBank Borrowing Base revolving credit facility, drawing approximately $8.7 million, of which approximately $1.6 million was used to pay down the KeyBank Working Capital revolving credit facility.
The following is a summary of the results of operations related to the two surface parking lots in St. Louis for the years ended December 31, 2018 and 2017:
| | | For the Years Ended December 31, | |
| | | 2018 | | | 2017 | |
| Revenue | | $ | 312,000 | | | $ | 17,000 | |
| Expenses | | | (52,000 | ) | | | (4,000 | ) |
| Income from disposed assets, net of income taxes | | $ | 260,000 | | | $ | 13,000 | |
On August 8, 2018 the Company, through entities wholly owned by the Company, sold two surface parking lots in Kansas City for cash consideration of $4.0 million to Block 66, LLC, a third-party buyer. Approximately $2.9 million of the proceeds were used to pay down the KeyBank Working Capital revolving credit facility. The properties were originally purchased in August 2013 and October 2015 by MVP I, for a combined total of $2.1 million. The properties were later acquired by The Parking REIT, Inc. for approximately $2.8 million based upon the allocation of the merger consideration for the merger of MVP I and the Company in December 2017.
The following is a summary of the results of operations related to the two surface parking lots in Kansas City for the years ended December 31, 2018 and 2017:
| | | For the Years Ended December 31, | |
| | | 2018 | | | 2017 | |
| Revenue | | $ | 107,000 | | | $ | 8,000 | |
| Expenses | | | (24,000 | ) | | | (1,000 | ) |
| Income from disposed assets, net of income taxes | | $ | 83,000 | | | $ | 7,000 | |
On October 5, 2018, The Parking REIT, Inc., through an entity wholly owned by the Company, completed a partial sale of 36,155 square feet of land adjoining a surface parking lot in Minneapolis for cash consideration of $3.0 million to Camber Lodging, LLC and Amber Lodging, LLC, for a proposed hotel development. The Company originally purchased the approximately 108,000 square foot parcel in January 2016 for $6.1 million.
The following is a summary of the results of operations related to the sold portion of the surface parking lot in Minneapolis for the years ended December 31, 2018 and 2017:
| | | For the Years Ended December 31, | |
| | | 2018 | | | 2017 | |
| Revenue | | $ | -- | | | $ | 52,000 | |
| Expenses | | | (270,000 | ) | | | (11,000 | ) |
| Gain/(Loss) from disposed assets, net of income taxes | | $ | (270,000 | ) | | $ | 41,000 | |
During September 2017, the Company sold one property listed as held for sale for $2.0 million. The Company acquired the property on November 22, 2016 and recorded at the fair value based on an appraisal. During March 2017, Houston Jefferson entered into a purchase and sale agreement to sell the property "as is" to a third party for approximately $2.0 million. During May 2017, this purchase and sale agreement was cancelled. During May and June 2017, another unsolicited third party expressed interest in purchasing the property for $2.0 million and during July 2017, the Company entered into a purchase and sale agreement with this third party, which closed on September 20, 2017. As a result of the sale, the Company recorded a gain of approximately $1.2 million.
The following is a summary of the results of operations related to the surface parking lot in Houston for the years ended December 31, 2018 and 2017:
| | | For the Years Ended December 31, | |
| | | 2018 | | | 2017 | |
| Revenue | | $ | -- | | | $ | 63,000 | |
| Expenses | | | -- | | | | (47,000 | ) |
| Income from disposed assets, net of income taxes | | $ | -- | | | $ | 16,000 | |
Note L — Notes Payable
As of December 31, 2018, the principal balances on notes payable are as follows:
| Property | Original Debt Amount | Monthly Payment | Balance as of 12/31/2018 | Lender | | Term | Interest Rate | Loan Maturity |
| MVP PF Ft. Lauderdale 2013, LLC (3) | $4,300,000 | $25,000 | $3,830,000 | KeyBank | | 5 Year | 4.94% | 2/1/2019 |
| MVP Cincinnati Race Street, LLC | $2,550,000 | Interest Only | $2,550,000 | Multiple | | 1 Year | 7.50% | 3/25/2019 |
| MVP Wildwood NJ Lot, LLC | $1,000,000 | Interest Only | $1,000,000 | Tigges Construction Co. | | 1 Year | 7.50% | 4/1/2019 |
| The Parking REIT D&O Insurance | $390,000 | $28,000 | $30,000 | First Insurance Funding | | 1 Year | 3.70% | 4/3/2019 |
| MVP San Jose 88 Garage, LLC | $1,645,000 | Interest Only | $2,500,000 | Multiple | | 1 Year | 7.50% | 6/3/2019 |
| MVP Raider Park Garage, LLC (4) | $7,400,000 | Interest Only | $7,400,000 | LoanCore | | 2 Year | Variable | 12/9/2020 |
| MVP New Orleans Rampart, LLC (4) | $5,300,000 | Interest Only | $5,300,000 | LoanCore | | 2 Year | Variable | 12/9/2020 |
| MVP Hawaii Marks Garage, LLC (4) | $13,500,000 | Interest Only | $13,500,000 | LoanCore | | 2 Year | Variable | 12/9/2020 |
| MVP Milwaukee Wells, LLC (4) | $2,700,000 | Interest Only | $2,700,000 | LoanCore | | 2 Year | Variable | 12/9/2020 |
| MVP Indianapolis City Park, LLC (4) | $7,200,000 | Interest Only | $7,200,000 | LoanCore | | 2 Year | Variable | 12/9/2020 |
| MVP Indianapolis WA Street, LLC (4) | $3,400,000 | Interest Only | $3,400,000 | LoanCore | | 2 Year | Variable | 12/9/2020 |
(table continued)
| Mabley Place Garage, LLC | $9,000,000 | $44,000 | $8,362,000 | Barclays | | 10 year | 4.25% | 12/6/2024 |
| MVP Houston Saks Garage, LLC | $3,650,000 | $20,000 | $3,357,000 | Barclays Bank PLC | | 10 year | 4.25% | 8/6/2025 |
| Minneapolis City Parking, LLC | $5,250,000 | $29,000 | $4,928,000 | American National Insurance, of NY | | 10 year | 4.50% | 5/1/2026 |
| MVP Bridgeport Fairfield Garage, LLC | $4,400,000 | $23,000 | $4,140,000 | FBL Financial Group, Inc. | | 10 year | 4.00% | 8/1/2026 |
West 9th Properties II, LLC | $5,300,000 | $30,000 | $5,039,000 | American National Insurance Co. | | 10 year | 4.50% | 11/1/2026 |
| MVP Fort Worth Taylor, LLC | $13,150,000 | $73,000 | $12,528,000 | American National Insurance, of NY | | 10 year | 4.50% | 12/1/2026 |
| MVP Detroit Center Garage, LLC | $31,500,000 | $194,000 | $30,360,000 | Bank of America | | 10 year | 5.52% | 2/1/2027 |
| MVP St Louis Washington, LLC (1) | $1,380,000 | Interest Only | $1,380,000 | KeyBank | | 10 year * | 4.90% | 5/1/2027 |
| St Paul Holiday Garage, LLC (1) | $4,132,000 | Interest Only | $4,132,000 | KeyBank | | 10 year * | 4.90% | 5/1/2027 |
| Cleveland Lincoln Garage, LLC (1) | $3,999,000 | Interest Only | $3,999,000 | KeyBank | | 10 year * | 4.90% | 5/1/2027 |
| MVP Denver Sherman, LLC (1) | $286,000 | Interest Only | $286,000 | KeyBank | | 10 year * | 4.90% | 5/1/2027 |
| MVP Milwaukee Arena Lot, LLC (1) | $2,142,000 | Interest Only | $2,142,000 | KeyBank | | 10 year * | 4.90% | 5/1/2027 |
| MVP Denver Sherman 1935, LLC (1) | $762,000 | Interest Only | $762,000 | KeyBank | | 10 year * | 4.90% | 5/1/2027 |
| MVP Louisville Broadway Station, LLC (2) | $1,682,000 | Interest Only | $1,682,000 | Cantor Commercial Real Estate | | 10 year ** | 5.03% | 5/6/2027 |
| MVP Whitefront Garage, LLC (2) | $6,454,000 | Interest Only | $6,454,000 | Cantor Commercial Real Estate | | 10 year ** | 5.03% | 5/6/2027 |
| MVP Houston Preston Lot, LLC (2) | $1,627,000 | Interest Only | $1,627,000 | Cantor Commercial Real Estate | | 10 year ** | 5.03% | 5/6/2027 |
| MVP Houston San Jacinto Lot, LLC (2) | $1,820,000 | Interest Only | $1,820,000 | Cantor Commercial Real Estate | | 10 year ** | 5.03% | 5/6/2027 |
| St. Louis Broadway, LLC (2) | $1,671,000 | Interest Only | $1,671,000 | Cantor Commercial Real Estate | | 10 year ** | 5.03% | 5/6/2027 |
| St. Louis Seventh & Cerre, LLC (2) | $2,057,000 | Interest Only | $2,057,000 | Cantor Commercial Real Estate | | 10 year ** | 5.03% | 5/6/2027 |
| MVP Indianapolis Meridian Lot, LLC (2) | $938,000 | Interest Only | $938,000 | Cantor Commercial Real Estate | | 10 year ** | 5.03% | 5/6/2027 |
| MVP Preferred Parking, LLC | $11,330,000 | Interest Only | $11,330,000 | Key Bank | | 10 year ** | 5.02% | 8/1/2027 |
| Less unamortized loan issuance costs | | | ($2,443,000) | | | | | |
| | | | $155,961,000 | | | | | |
| (1) | The Company issued a promissory note to KeyBank for $12.7 million secured by a pool of properties, including (i) MVP Denver Sherman, LLC, (ii) MVP Denver Sherman 1935, LLC, (iii) MVP Milwaukee Arena, LLC, (iv) MVP St. Louis Washington, LLC, (v) St Paul Holiday Garage, LLC and (vi) Cleveland Lincoln Garage Owners, LLC. |
| (2) | The Company issued a promissory note to Cantor Commercial Real Estate Lending, L.P. ("CCRE") for $16.25 million secured by a pool of properties, including (i) MVP Indianapolis Meridian Lot, LLC, (ii) MVP Louisville Station Broadway, LLC, (iii) MVP White Front Garage Partners, LLC, (iv) MVP Houston Preston Lot, LLC, (v) MVP Houston San Jacinto Lot, LLC, (vi) St. Louis Broadway Group, LLC, and (vii) St. Louis Seventh & Cerre, LLC. |
| (3) | Secured by four properties, including (i) MVP PF Ft. Lauderdale 2013, LLC, (ii) MVP PF Memphis Court 2013, LLC, (iii) MVP PF Memphis Poplar 2013, LLC and (iv) MVP PF St. Louis 2013, LLC). |
| (4) | On November 30, 2018, subsidiaries of the Company., consisting of MVP Hawaii Marks Garage, LLC, MVP Indianapolis City Park Garage, LLC, MVP Indianapolis Washington Street Lot, LLC, MVP New Orleans Rampart, LLC, MVP Raider Park Garage, LLC, and MVP Milwaukee Wells LLC (the "Borrowers") entered into a loan agreement, dated as of November 30, 2018 (the "Loan Agreement"), with LoanCore Capital Credit REIT LLC (the "LoanCore"). Under the terms of the Loan Agreement, LoanCore agreed to loan the Borrowers $39.5 million to repay and discharge the outstanding KeyBank Revolving Credit Facility. The loan is secured by a Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing on each of the properties owned by the Borrowers (the "Properties"). The loan bears interest at a floating rate equal to the sum of one-month LIBOR plus 3.65%, subject to a LIBOR minimum of 1.95%. Additionally, the Borrowers were required to purchase an Interest Rate Protection Agreement which caps its maximum LIBOR at 3.50% for the duration of the loan. Payments are interest-only for the duration of the loan, with the $39.5 million principal repayment due in a balloon payment due on December 9, 2020, with an option to extend the term until December 9, 2021 subject to certain conditions and payment obligations. The Borrowers have the right to prepay all or any part of the loan, subject to payment of any applicable Spread Maintenance Premium and Exit Fee (as defined in the Loan Agreement). The loan is also subject to mandatory prepayment upon certain events of Insured Casualty or Condemnation (as defined in the Loan Agreement). The Borrowers made customary representations and warranties to LoanCore and agreed to maintain certain covenants under the Loan Agreement, including but not limited to, covenants involving their existence; property taxes and other charges; access to properties, repairs, maintenance and alterations; performance of other agreements; environmental matters; title to properties; leases; estoppel statements; management of the Properties; special purpose bankruptcy remote entity status; change in business or operation of the Properties; debt cancellation; affiliate transactions; indebtedness of the Borrowers limited to Permitted Indebtedness (as defined in the Loan Agreement); ground lease reserve relating to MVP New Orleans' Property; property cash flow allocation; liens on the Properties; ERISA matters; approval of major contracts; payments upon a sale of a Property; and insurance, notice and reporting obligations as set forth in the loan agreement. The Loan Agreement contains customary events of default and indemnification obligations. The loan proceeds were used to repay and discharge the KeyBank Credit Agreement, dated as of December 29, 2017, as amended, per the terms outlined in the third amendment to the Credit Agreement dated September 28, 2018, as previously filed on Form 8-K on October 2, 2018 and incorporated herein by reference. |
* 2 Year Interest Only
** 10 Year Interest Only
The following table shows notes payable that had been paid in full during the year ended December 31, 2018.
| Property | Original Debt Amount | Monthly Payment | Balance as of 12/31/2018 | Lender | Term | Interest Rate | Loan Maturity |
| St. Louis Lucas (1)(3) | $3,490,000 | $20,000 | -- | Key Bank | 10 year | 4.59% | 2/1/2026 |
| Indianapolis Garage (2)(3) | $8,200,000 | $46,000 | -- | Key Bank | 10 year | 4.59% | 2/1/2026 |
| (1) | Secured by three properties, including (i) MVP St. Louis Convention, (ii) MVP St. Louis Lucas and (iii) MVP KC Cherry. |
| (2) | Secured by two properties, including (i) MVP Indianapolis City Park and (ii) MVP Indianapolis Washington Street. |
| (3) | Loans were defeased through sale of St Louis Lucas and Indianapolis Garage loans. MVP Indianapolis City Park and MVP Indianapolis Washington Street were added to the KeyBank Borrowing Base revolving credit facility, drawing approximately $8.7 million, of which approximately $1.6 million was used to pay down the KeyBank Working Capital revolving credit facility. |
Total interest expense incurred for the year ended December 31, 2018, was approximately $7.8 million. Total loan amortization cost for the year ended December 31, 2018, was approximately $1.7 million.
As of December 31, 2018, future principal payments on the notes payable are as follows:
| 2019 | $ | 11,691,000 |
| 2020 | | 41,454,000 |
| 2021 | | 2,058,000 |
| 2022 | | 2,252,000 |
| 2023 | | 2,499,000 |
| Thereafter | | 98,450,000 |
| Less unamortized loan issuance costs | | (2,443,000) |
| Total | $ | 155,961,000 |
As of December 31, 2017, the principal balances on notes payable are as follows
| Property | Original Debt Amount | Monthly Payment | Balance as of 12/31/2017 | Lender | Term | Interest Rate | Loan Maturity |
West 9th Properties II, LLC | $5,300,000 | $30,000 | $5,163,000 | American National Insurance Co. | 10 year | 4.50% | 11/1/2026 |
| MVP Detroit Center Garage, LLC | $31,500,000 | $194,000 | $30,970,000 | Bank of America | 10 year | 5.52% | 2/1/2027 |
| MVP St Louis Washington, LLC (1) | $1,380,000 | Interest Only | $1,380,000 | KeyBank | 10 year * | 4.90% | 5/1/2027 |
| St Paul Holiday Garage, LLC (1) | $4,132,000 | Interest Only | $4,132,000 | KeyBank | 10 year * | 4.90% | 5/1/2027 |
|
| Cleveland Lincoln Garage, LLC (1) | $3,999,000 | Interest Only | $3,999,000 | KeyBank | 10 year * | 4.90% | 5/1/2027 |
|
| Louisville Broadway Station, LLC (4) | $1,682,000 | Interest Only | $1,682,000 | Cantor Commercial Real Estate | 10 year ** | 5.03% | 5/6/2027 |
| Whitefront Garage, LLC (2) | $6,454,000 | Interest Only | $6,454,000 | Cantor Commercial Real Estate | 10 year ** | 5.03% | 5/6/2027 |
| MVP Houston Preston Lot, LLC (2) | $1,627,000 | Interest Only | $1,627,000 | Cantor Commercial Real Estate | 10 year ** | 5.03% | 5/6/2027 |
| MVP Houston San Jacinto Lot, LLC (2) | $1,820,000 | Interest Only | $1,820,000 | Cantor Commercial Real Estate | 10 year ** | 5.03% | 5/6/2027 |
| St. Louis Broadway, LLC (2) | $1,671,000 | Interest Only | $1,671,000 | Cantor Commercial Real Estate | 10 year ** | 5.03% | 5/6/2027 |
| St. Louis Seventh & Cerre, LLC (2) | $2,058,000 | Interest Only | $2,058,000 | Cantor Commercial Real Estate | 10 year ** | 5.03% | 5/6/2027 |
| MVP Preferred Parking, LLC (1) | $11,330,000 | Interest Only | $11,330,000 | Key Bank | 10 year ** | 5.02% | 8/1/2027 |
| MVP PF Ft. Lauderdale 2013, LLC (3) | $4,300,000 | $25,000 | $3,935,000 | KeyBank | 5 Year | 4.94% | 2/1/2019 |
| Mabley Place Garage, LLC | $9,000,000 | $44,000 | $8,530,000 | Barclays | 10 year | 4.25% | 12/6/2024 |
| MVP Denver Sherman, LLC (1) | $286,000 | Interest Only | $286,000 | KeyBank | 10 year ** | 4.90% | 5/1/2027 |
| MVP Fort Worth Taylor, LLC | $13,150,000 | $73,000 | $12,834,000 | American National Insurance, of NY | 10 year | 4.50% | 12/1/2026 |
| MVP Houston Saks Garage, LLC | $3,650,000 | $20,000 | $3,447,000 | Barclays Bank PLC | 10 year | 4.25% | 8/6/2025 |
| MVP St. Louis Lucas, LLC (4) | $3,490,000 | $20,000 | $3,345,000 | Key Bank | 10 year | 4.59% | 2/1/2026 |
| MVP Indianapolis City Park, LLC (5) | $8,200,000 | $46,000 | $7,860,000 | Key Bank | 10 year | 4.59% | 2/1/2026 |
| MVP Indianapolis Meridian Lot, LLC (2) | $938,000 | Interest Only | $938,000 | Cantor Commercial Real Estate | 10 year ** | 5.03% | 5/6/2027 |
| MVP Milwaukee Arena Lot, LLC (1) | $2,142,000 | Interest Only | $2,142,000 | KeyBank | 10 year ** | 4.90% | 5/1/2027 |
| MVP Denver Sherman 1935, LLC (1) | $762,000 | Interest Only | $762,000 | KeyBank | 10 year ** | 4.90% | 5/1/2027 |
| Minneapolis City Parking, LLC | $5,250,000 | $29,000 | $5,053,000 | American National Insurance, of NY | 10 year | 4.50% | 5/1/2026 |
| MVP Bridgeport Fairfield Garage, LLC | $4,400,000 | $23,000 | $4,252,000 | FBL Financial Group, Inc. | 10 year | 4.00% | 8/1/2026 |
| Less unamortized loan issuance costs | | | ($1,900,000) | | | | |
| | | | $123,770,000 | | | | |
| (1) | The Company issued a promissory note to KeyBank for $12.7 million secured by a pool of properties, including (i) MVP Denver Sherman, LLC, (ii) MVP Denver Sherman 1935, LLC, (iii) MVP Milwaukee Arena, LLC, (iv) MVP St. Louis Washington, LLC, (v) MVP Louisville Station Broadway, LLC and (vi) Cleveland Lincoln Garage Owners, LLC. |
| (2) | The Company issued a promissory note to Cantor Commercial Real Estate Lending, L.P. ("CCRE") for $16.25 million secured by a pool of properties, including (i) MVP Indianapolis Meridian Lot, LLC, (ii) MVP Louisville Station Broadway, LLC, (iii) White Front Garage Partners, LLC, (iv) MVP Houston Preston Lot, LLC, (v) MVP Houston San Jacinto Lot, LLC, (vi) St. Louis Broadway Group, LLC, and (vii) St. Louis Seventh & Cerre, LLC. |
| (3) | Secured by four properties facilities, including (i) MVP PF Ft. Lauderdale 2013, LLC, (ii) MVP PF Memphis Court 2013, LLC, (iii) MVP PF Memphis Poplar 2013, LLC and (iv) MVP PF St. Louis 2013, LLC). |
| (4) | Secured by three properties, including (i) MVP St. Louis Convention, (ii) MVP St. Louis Lucas and (iii) MVP KC Cherry. |
| (5) | Secured by two properties, including (i) MVP Indianapolis City Park and (ii) MVP Indianapolis Washington Street. |
* 2 Year Interest Only
** 10 Year Interest Only
The following table shows notes payable that had been paid in full during the year ending December 31, 2017.
| Property | Original Debt Amount | Monthly Payment | Balance as of 12/31/2017 | Lender | Term | Interest Rate | Loan Maturity |
| D&O Financing | $140,000 | $14,000 | -- | | 1 Year | 3.81% | 8/3/2017 |
| JNL Parking | $300,000 | -- | -- | JNL Parking | 3 Months (I/O) | 1.00% | 9/30/2017 |
| iPark | $500,000 | -- | -- | iPark Services, LLC | 3 Months (I/O) | 5.75% | 9/30/2017 |
| MVP Realty Advisors | $2,100,000 | -- | -- | MVP Realty Advisors | 1 Year (I/O) | 5.00% | 6/30/2018 |
| MVP San Jose 88 Garage, LLC | $2,200,000 | Interest Only | -- | Owens Realty Mortgage, Inc. | 2 year (I/O) | 7.75% | 1/15/2019 |
| MVP Cincinnati Race Street Garage, LLC | $3,000,000 | Interest Only | -- | Moonshell, LLC | 3 Months (I/O) | 9.00% | 1/10/2018 |
Total interest expense incurred for the year ended December 31, 2017 was approximately $4.7 million. Total loan amortization cost for the year ended December 31, 2017 was approximately $1.9 million.
As of December 31, 2017, future principal payments on the notes payable are as follows:
| 2018 | $ | 1,925,000 |
| 2019 | | 5,901,000 |
| 2020 | | 2,259,000 |
| 2021 | | 2,378,000 |
| 2022 | | 2,586,000 |
| Thereafter | | 110,617,000 |
| Less unamortized loan issuance costs | | (1,896,000) |
| Total | $ | 123,770,000 |
Note M — Fair Value
A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an orderly transaction. The hierarchy for inputs used in measuring fair value are as follows:
| 1. | Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. |
| 2. | Level 2 – Inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations whose inputs are observable. |
| 3. | Level 3 – Model-derived valuations with unobservable inputs. |
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
The Company's financial instruments include cash and cash equivalents, restricted cash, accounts payable and accrued expenses. Due to their short maturities, the carrying amounts of these assets and liabilities approximate fair value.
Assets and liabilities measured at fair value Level 3 on a non-recurring basis may include Assets Held for Sale.
Note N – Investment In DST
On May 31, 2017, the Company, through a wholly-owned subsidiary of its Operating Partnership, purchased a 51.0% beneficial interest in MVP St. Louis Cardinal Lot, DST, a Delaware Statutory Trust ("MVP St. Louis"), for approximately $2.8 million. MVP St. Louis is the owner of a 2.56-acre, 376-vehicle commercial parking lot located at 500 South Broadway, St. Louis, Missouri 63103, known as the Cardinal Lot (the "Property"), which is adjacent to Busch Stadium, the home of the St. Louis Cardinals major league baseball team. The Property was purchased by MVP St. Louis from an unaffiliated seller for a purchase price of $11,350,000, plus payment of closing costs, financing costs, and related transactional costs.
Concurrently with the acquisition of the Property, MVP St. Louis obtained a first mortgage loan from Cantor Commercial Real Estate Lending, L.P ("St. Louis Lender"), in the principal amount of $6,000,000, with a 10-year, interest-only term at a fixed interest rate of 5.25%, resulting in an annual debt service payment of $315,000 (the "St. Louis Loan"). MVP St. Louis used the Company's investment to fund a portion of the purchase price for the Property. The remaining equity portion was funded through short-term investments by VRM II, an affiliate of the Advisor, pending the private placements of additional beneficial interest in MVP St. Louis exempt from registration under the Securities Act. VRM II and Michael V. Shustek, the Company's Chairman and Chief Executive Officer, provided non-recourse carveout guaranties of the loan and environmental indemnities of St. Louis Lender.
Also, concurrently with the acquisition of the Property, MVP St. Louis, as landlord, entered into a 10-year master lease (the "St. Louis Master Lease"), with MVP St. Louis Cardinal Lot Master Tenant, LLC, an affiliate of MVP Realty, as tenant, (the "St. Louis Master Tenant"). St. Louis Master Tenant, in turn, concurrently entered into a 10-year sublease with Premier Parking of Missouri, LLC. The St. Louis Master Lease provides for annual rent payable monthly to MVP St. Louis, consisting of base rent in an amount to pay debt service on the St. Louis Loan, stated rent of $414,000 and potential bonus rent equal to a share of the revenues payable under the sublease in excess of a threshold. The Company will be entitled to its proportionate share of the rent payments based on its ownership interest. Under the St. Louis Master Lease, MVP St. Louis is responsible for capital expenditures and the St. Louis Master Tenant is responsible for taxes, insurance and operating expenses. Investment income earned was distributed to the Company for the years ended December 31, 2018 and 2017 totaled approximately $205,000 and $105,000, respectively.
The Company conducted an analysis and concluded that the 51% investment in the DST should not be consolidated. As a DST, the entity is subject to the Variable Interest Entity ("VIE") Model under ASC 810-10.
As stated in ASC 810: "A controlling financial interest in the VIE model requires both of the following:
a. The power to direct the activities that most significantly impact the VIE's economic performance
b. The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE."
As a VIE, the DST is governed in a manner similar to a limited partnership (i.e., there are trustees and there is no board) and the Company, as a beneficial owner, lacks the power though voting rights or otherwise to direct the activities of the DST that most significantly impact the entity's economic performance. Specifically, the beneficial interest owners do not have the rights set forth in ASC 810-10-15-14(b)(1)(ii) – the beneficial owners can only remove the trustees if the trustees have engaged in fraud or gross negligence with respect to the trust and the beneficial owners have no substantive participating rights over the trustees.
The Advisor is the advisor to the Company pursuant to the Amended and Restated Advisory Agreement. The Company is controlled by its independent board of directors and its shareholders. As noted in the Amended and Restated Advisory Agreement, the agreement is effective for one year to be renewed for an unlimited number of successive one-year terms, as approved by the board of directors. The Amended and Restated Advisory Agreement may be terminated by the board of directors at any time upon a written 60-day notice.
In addition, the Advisor is the 100% direct/indirect owner of the MVP Parking DST, LLC ("DST Sponsor"), the MVP St. Louis Cardinal Lot Signature Trustee, LLC ("Signature Trustee") and MVP St. Louis Cardinal Lot Master Tenant, LLC (the "Master Tenant"), who have no direct or indirect ownership in the Company. The Signature Trustee and the Master Tenant can direct the most significant activities of the DST.
The Advisor controls and consolidates the Signature Trustee, the Master Tenant, and the DST Sponsor. The Company concluded the Master Tenant/property management agreement exposes the Master Tenant to funding operating losses of the Property. As such, that agreement should be considered a variable interest in DST (ASC 810-10-55-37 and 810-10-55-37C). Accordingly, the Advisor has a variable interest in the DST (through the master tenant/property manager) and has power over the significant activities of the DST (through the Signature Trustee and the master tenant/property manager). Accordingly, the Company believes that the Master Tenant is the primary beneficiary of the DST, which is ultimately owned and controlled by the Advisor. In addition, the Company does not have the power to direct or change the activities of the Trust and shares income and losses pari passu with the other owners. As such, the Company accounts for its investment under the equity method and does not consolidate its investment in the DST.
Summarized Balance Sheets—Unconsolidated Real Estate Affiliates—Equity Method Investments
| | | December 31, 2018 | | | December 31, 2017 | |
| | | (Unaudited) | | | (Unaudited) | |
| ASSETS | |
| Investments in real estate and fixed assets | | $ | 11,512,000 | | | $ | 11,512,000 | |
| Cash | | | 32,000 | | | | 26,000 | |
| Cash – restricted | | | 15,000 | | | | 5,000 | |
| Accounts receivable | | | 141,000 | | | | | |
| Prepaid expenses | | | 8,000 | | | | 82,000 | |
| Total assets | | $ | 11,708,000 | | | $ | 11,625,000 | |
| LIABILITIES AND EQUITY | |
| Liabilities | | | | | | | | |
| Notes payable, net of unamortized loan issuance costs of approximately $62,000 and $65,000 as of December 31, 2018 and 2017 , respectively | | $ | 5,945,000 | | | $ | 5,935,000 | |
| Accounts payable and accrued liabilities | | | 63,000 | | | | 61,000 | |
| Due to related party | | | 181,000 | | | | 87,000 | |
| Total liabilities | | | 6,189,000 | | | | 6,083,000 | |
| Equity | | | | | | | | |
| Member's equity | | | 6,129,000 | | | | 6,129,000 | |
| Offering costs | | | (574,000 | ) | | | (574,000 | ) |
| Accumulated earnings | | | 606,000 | | | | 225,000 | |
| Distributions to members | | | (642,000 | ) | | | (238,000 | ) |
| Total equity | | | 5,519,000 | | | | 5,542,000 | |
| Total liabilities and equity | | $ | 11,708,000 | | | $ | 11,625,000 | |
Summarized Statements of Operations—Unconsolidated Real Estate Affiliates—Equity Method Investments
| | | For the Year Ended December 31, 2018 | | | For the Period from June 1, 2017 through December 31, 2017 | |
| Revenue | | $ | 729,000 | | | $ | 425,000 | |
| Expenses | | | (348,000 | ) | | | (200,000 | ) |
| Net income | | $ | 381,000 | | | $ | 225,000 | |
Note O — Investment in Equity Method Investee
The Company did not have any investment in equity method investee holdings for the year ended December 31, 2018.
Prior to the Merger, the Company held an investment in equity method investee in the following companies. Upon completion of the Merger on December 15, 2017 these properties were fully consolidated with the Company.
MVP Denver 1935 Sherman, LLC
On February 12, 2016, the Company along with MVP I, through MVP Denver 1935 Sherman, LLC ("MVP Denver"), a Nevada limited liability company owned 24.49% by the Company and 75.51% by MVP I, closed on the purchase of a parking lot for approximately $2.4 million in cash, of which the Company's share was approximately $0.6 million. The parking lot is located at 1935 Sherman Avenue, Denver, Colorado (the "Denver parking lot"). The Denver parking lot consists of approximately 18,765 square feet and has approximately 72 parking spaces. The Denver parking lot is leased by SP+ under a net lease agreement where MVP Denver is responsible for property taxes and SP+ pays for all insurance and maintenance costs. SP+ pays annual rent of $120,000. In addition, the lease provides revenue participation with MVP Denver receiving 70% of gross receipts over $160,000. The term of the lease is for 10 years.
Summarized Statements of Operations—Unconsolidated Real Estate Affiliates—Equity Method Investments— MVP Denver
| | | For the Period from June 1, 2017 through December 15, 2017 | |
| Revenue | | $ | 115,000 | |
| Expenses | | | (77,000 | ) |
| Net income | | $ | 38,000 | |
Houston Preston Lot
On November 22, 2016, the Company and MVP I, through MVP Houston Preston Lot, LLC, a Delaware limited liability company ("MVP Preston"), an entity wholly owned by the Company, closed on the purchase of a parking lot consisting of approximately 46 parking spaces, located in Houston, Texas, for a purchase price of $2.8 million in cash plus closing costs, of which the Company's portion was $560,000. Prior to the Merger, the Company held an 80% ownership interest in Houston Preston, while MVP I held a 20% ownership interest in Houston Preston. The parking lot is under a 10-year lease with iPark Services LLC ("iPark"), a regional parking operator, under a modified net lease agreement where MVP Preston is responsible for property taxes above a $38,238 threshold, and iPark pays for insurance and maintenance costs. iPark pays annual rent of $228,000. In addition, the lease provides revenue participation with MVP Preston receiving 65% of gross receipts over $300,000. The term of the lease is for 10 years.
During April 2017, the company increased their ownership interest in the MVP Houston Preston Lot from 20% to 60%, by purchasing $1.12 million of MVP I ownership and will now be considered the controlling party.
Summarized Statements of Operations—Unconsolidated Real Estate Affiliates—Equity Method Investments— MVP Preston
| | | For the Period from June 1, 2017 through April 31, 2017 | |
| Revenue | | $ | 76,000 | |
| Expenses | | | (13,000 | ) |
| Net income | | $ | 63,000 | |
Note P – Merger
On May 26, 2017, the Company, MVP I, Merger Sub, and the Advisor entered into the Merger Agreement. Subject to the terms and conditions of the Merger Agreement, MVP I merged with and into Merger Sub on December 15, 2017, with Merger Sub surviving the Merger, such that following the Merger, the Merger Sub continued as a wholly owned subsidiary of the Company. The Merger is intended to qualify as a "reorganization" under, and within the meaning of, Section 368(a) of the Code. The combined company was subsequently renamed "The Parking REIT, Inc."
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each outstanding share of MVP I Common Stock was automatically cancelled and retired and converted into the right to receive 0.365 shares of common stock of the Company. Holders of shares of MVP I Common Stock received cash in lieu of fractional shares.
At the effective time of the Merger, each share of MVP I Common Stock, if any, then held by any wholly owned subsidiary of MVP I or by the Company or any of its wholly owned subsidiaries was no longer outstanding and was automatically retired and ceased to exist, and no consideration was paid, nor will any other payment or right inure or be made with respect to such shares of MVP I Common Stock in connection with or as a consequence of the Merger. In addition, each share of MVP I's Non-Participating, Non-Voting Convertible Stock, $0.001 par value per share ("MVP I Convertible Stock"), all 1,000 of which are held by the Advisor, was automatically retired and ceased to exist, and no consideration was paid, nor will any other payment or right inure or be made with respect to such shares of MVP I Convertible Stock in connection with or as a consequence of the Merger.
Amended and Restated Advisory Agreement
Concurrently with the entry into the Merger Agreement, on May 26, 2017, the Company, the Operating Partnership and the Advisor entered into the Amended and Restated Advisory Agreement, which became effective at the effective time of the Merger. The Amended and Restated Advisory Agreement amended the Company's existing advisory agreement, dated October 5, 2015, to provide for, among other amendments, (i) elimination of acquisition fees, disposition fees and subordinated performance fees and (ii) the payment of an asset management fee by the Company to the Advisor calculated and paid monthly in an amount equal to one-twelfth of 1.1% of the (a) cost of each asset then held by the Company, without deduction for depreciation, bad debts or other non-cash reserves, or (b) the Company's proportionate share thereof in the case of an investment made through a joint venture or other co-ownership arrangement excluding (only for clause (b)) debt financing on the investment. Pursuant to the Amended and Restated Advisory Agreement, the asset management fee may not exceed $2,000,000 per annum (the "Asset Management Fee Cap") until the earlier of such time, if ever, that (i) the Company holds assets with an Appraised Value (as defined Amended and Restated Advisory Agreement) equal to or in excess of $500,000,000 or (ii) the Company reports AFFO (as defined in the Amended and Restated Advisory Agreement) equal to or greater than $0.3125 per share of the Company's common stock (an amount intended to reflect a 5% or greater annualized return on $25.00 per share of the Company's common stock) (the "Per Share Amount") for two consecutive quarters, on a fully diluted basis. All amounts of the asset management fee in excess of the Asset Management Fee Cap, plus interest thereon at a rate of 3.5% per annum, will be due and payable by the Company no later than ninety (90) days after the earlier of the date that (i) the Company holds assets with an Appraised Value equal to or in excess of $500,000,000 or (ii) the Company reports AFFO per share of Company's common stock equal to or greater than the Per Share Amount for two consecutive quarters, on a fully diluted basis.
On September 21, 2018, the Company entered into a Third Amended and Restated Advisory Agreement with the Advisor. The Third Amended Advisory Agreement will become effective and replace the existing advisory agreement upon the listing of the shares of our common stock on any national exchange, unless the Company completes an internalization transaction before listing, in which case, the Company expects that the advisory agreement will be terminated as part of the internalization transaction. The Third Amended and Restated Advisory Agreement is filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on September 26, 2018.
Termination Agreement
Concurrently with the entry into the Merger Agreement, on May 26, 2017, the Company, MVP I, the Advisor and the Operating Partnership entered into the Termination Agreement. Pursuant to the Termination Agreement, at the effective time of the Merger, the Advisory Agreement, dated September 25, 2012, as amended, among MVP I and the Advisor was terminated, and the Company paid the Advisor an Advisor Acquisition Payment (as such term is defined in the Termination Agreement) of approximately $3.6 million, which was the only fee payable to the Advisor in connection with the Merger.
The foregoing description of the Merger Agreement, the Amended and Restated Advisory Agreement and the Termination Agreement is only a summary, does not purport to be complete and is qualified in its entirety by reference to the full text of the applicable agreements, each of which is filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on May 31, 2017.
Amended Charter
In connection with the Merger, at the Company's annual stockholders' meeting held on September 27, 2017, the Company's stockholders approved, among other matters, the amendment and restatement of its charter (the "Amended Charter"). As described in more detail in the final proxy statement distributed to the Company's stockholders for the annual meeting, the Amended Charter is primarily intended to accomplish two objectives in connection with the possible listing of the Company's common stock after the closing of the Merger: (1) to remove provisions of the Company's charter that it believes may unnecessarily restrict the Company's ability to take advantage of further opportunities for liquidity events or are redundant with or otherwise addressed or permitted to be addressed under Maryland law and (2) to amend certain provisions in a manner that the Company believes would be more suitable for becoming a publicly-traded REIT.
The Amended Charter will become effective upon its filing with the State Department of Assessments and Taxation of Maryland. We expect to file the proposed Amended Charter immediately before the Company's common stock becomes listed for trading on a national securities exchange. This means that the changes to the charter will not be effective unless and until the Company completes an exchange listing.
Note Q — Income Taxes and Critical Accounting Policy
Income Taxes and Distributions
As a REIT, the Company generally will not be subject to federal income tax on taxable income distributed to the stockholders. In 2018, the Company has no distributable taxable income. In addition, the Company does not have any subsidiaries elected to be treated as TRSs pursuant to the Code to participate in services that would otherwise be considered impermissible for REITs and are subject to federal and state income tax at regular corporate tax rates.
Tax Treatment of Distributions
For federal income tax purposes, distributions to stockholders are characterized as ordinary income, capital gain distributions, or nontaxable distributions. Nontaxable distributions will reduce U.S. stockholders' basis (but not below zero) in their shares. The income tax treatment for distributions reportable for the years ended December 31, 2018, 2017 and 2016 is as follows:
| | | 2018 | | | 2017 | | | 2016 | |
| Ordinary - Preferred | | $ | 2,709,000 | | | $ | 509,000 | | | $ | -- | |
| Capital Gain | | | -- | | | | -- | | | | -- | |
| Return of Capital - Common | | | 1,224,000 | | | | 1,890,000 | | | | 732,000 | |
| | | $ | 3,933,000 | | | $ | 2,399,000 | | | $ | 732,000 | |
Note R —Preferred Stock and Warrants
The Company reviewed the relevant ASC's, specifically ASC 480 – Distinguishing Liabilities from Equity and ASC 815 – Derivatives and Hedging, in connection with the presentation of the Series A and Series 1 preferred stock. Below is a summary of the Company's preferred stock offerings.
Series A Preferred Stock
On November 1, 2016, the Company commenced an offering of up to $50 million in shares of the Company's Series A Convertible Redeemable Preferred Stock ("Series A"), par value $0.0001 per share, together with warrants to acquire the Company's common stock, in a Regulation D 506(c) private placement to accredited investors. In connection with the private placement, on October 27, 2016, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 50,000 shares of Series A Convertible Redeemable Preferred Stock. The Company closed the offering on March 24, 2017 and raised approximately $2.5 million, net of offering costs, in the Series A private placements.
The holders of the Series A Preferred Stock are entitled to receive, when and as authorized by the board of directors and declared by the Company out of funds legally available for the payment of dividends, cash dividends at the rate of 5.75% per annum of the initial stated value of $1,000 per share. Since a Listing Event, as defined in the charter, did not occur by March 31, 2018, the cash dividend rate has been increased to 7.50%, until a Listing Event at which time, the annual dividend rate will be reduced to 5.75% of the Stated Value. Based on the number of Series A shares outstanding at December 31, 2018, the increased dividend rate would cost the Company approximately $13,000 more per quarter in Series A dividends.
Subject to the Company's redemption rights as described below, each Series A share will be convertible into shares of the Company's common stock, at the election of the holder thereof by written notice to the Company (each, a "Series A Conversion Notice") containing the information required by the charter, at any time beginning upon the earlier of (i) 90 days after the occurrence of a Listing Event or (ii) the second anniversary of the final closing of the Series A offering (whether or not a Listing Event has occurred). Each Series A share will convert into a number of shares of the Company's common stock determined by dividing (i) the sum of (A) 100% of the Stated Value, initially $1,000, plus (B) any accrued but unpaid dividends to, but not including, the date of conversion, by (ii) the conversion price for each share of the Company's common stock (the "Series A Conversion Price") determined as follows:
| · | Provided there has been a Listing Event, if a Series A Conversion Notice with respect to any Series A share is received on or prior to the day immediately preceding the first anniversary of the issuance of such share, the Series A Conversion Price will be equal to 110% of the volume weighted average price per share of the common stock of the Company (or its successor) for the 20 trading days prior to the delivery date of the Series A Conversion Notice. |
| · | Provided there has been a Listing Event, if a Series A Conversion Notice with respect to any Series A share is received after the first anniversary of the issuance of such share, the Series A Conversion Price will be equal to the volume weighted average price per share of the common stock of the Company (or its successor) for the 20 trading days prior to the delivery date of the Series A Conversion Notice. |
| · | If a Series A Conversion Notice with respect to any Series A share is received on or after the second anniversary of the final closing of the Series A offering, and at the time of receipt of such Series A Conversion Notice, a Listing Event has not occurred, the Series A Conversion Price will be equal to 100% of the Company's net asset value per share. |
If the Amended Charter (as hereinafter defined) becomes effective, the date by which holders of Series A must provide notice of conversion will be changed from the day immediately preceding the first anniversary of the issuance of such share to December 31, 2017. This change will conform the terms of the Series A with the terms of the Series 1 with respect to conversions.
At any time, from time to time, after the 20th trading day after the date of a Listing Event, the Company (or its successor) will have the right (but not the obligation) to redeem, in whole or in part, the Series A at the redemption price equal to 100% of the Stated Value, initially $1,000 per share, plus any accrued but unpaid dividends if any, to and including the date fixed for redemption. If the Company (or its successor) chooses to redeem any Shares, the Company (or its successor) has the right, in its sole discretion, to pay the redemption price in cash or in equal value of common stock of the Company (or its successor), based on the volume weighted average price per share of the common stock of the Company (or its successor) for the 20 trading days prior to the redemption, in exchange for the Series A. The Company (or its successor) also will have the right (but not the obligation) to redeem all or any portion of the Series A subject to a Series A Conversion Notice for a cash payment to the holder thereof equal to the applicable redemption price, by delivering a redemption notice to the holder of such Shares on or prior to the 10th trading day prior to the close of trading on the applicable Conversion Date.
Each investor in the Series A received, for every $1,000 in shares subscribed by such investor, detachable warrants to purchase 30 shares of the Company's common stock if the Company's common stock is listed on a national securities exchange. The warrants' exercise price is equal to 110% of the volume weighted average closing stock price of the Company's common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of December 31, 2018, there were detachable warrants that may be exercised for 84,510 shares of the Company's common stock after the 90th day following the occurrence of a listing event. These potential warrants will expire five years from the 90th day after the occurrence of a listing event. If all the potential warrants outstanding at December 31, 2018 became exercisable because of a listing event and were exercised at the minimum price of $25 per share, gross proceeds to the Company would be approximately $2.1 million and the Company would as a result issue an additional 84,510 shares of common stock. As of the date of this filing the Company had an estimated fair market value of potential warrants that was immaterial.
Series 1 Preferred Stock
On March 29, 2017, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 97,000 shares of its authorized capital stock as shares of Series 1 Convertible Redeemable Preferred Stock ("Series 1"), par value $0.0001 per share. On April 7, 2017, the Company commenced the Regulation D 506(b) private placement of shares of Series 1, together with warrants to acquire the Company's common stock, to accredited investors. On January 31, 2018 the Company closed this offering.
The holders of the Series 1 Preferred Stock are entitled to receive, when and as authorized by the Company's board of directors and declared by us out of legally available funds, cumulative, cash dividends on each Share at an annual rate of 5.50% of the Stated Value pari passu with the dividend preference of the Series A Preferred Stock and in preference to any payment of any dividend on the Company's common stock; provided, however, that Qualified Purchasers (who purchased $1.0 million or more in a single closing) are entitled to receive, when and as authorized by the Company's board of directors and declared by us out of legally available funds, cumulative, cash dividends on each Series 1 share held by such Qualified Purchaser at an annual rate of 5.75% of the Stated Value (instead of the annual rate of 5.50% for all other holders of the Series 1 shares) until April 7, 2018, at which time, the annual dividend rate will be reduced to 5.50% of Stated Value; provided further, however, that since a Listing Event has not occurred by April 7, 2018, the annual dividend rate on all Series 1 shares (without regard to Qualified Purchaser status) has been increased to 7.00% of the Stated Value until the occurrence of a Listing Event, at which time, the annual dividend rate will be reduced to 5.50% of the Stated Value. Based on the number of Series 1 shares outstanding at December 31, 2018, the increased dividend rate would cost the Company approximately $150,000 more per quarter in Series 1 dividends.
Subject to the Company's redemption rights as described below, each Series 1 share will be convertible into shares of the Company's common stock, at the election of the holder thereof by written notice to the Company (each, a "Series 1 Conversion Notice") containing the information required by the charter, at any time beginning upon the earlier of (i) 45 days after the occurrence of a Listing Event or (ii) April 7, 2019 (whether or not a Listing Event has occurred). Each Series 1 share will convert into a number of shares of the Company's common stock determined by dividing (i) the sum of (A) 100% of the Stated Value, initially $1,000, plus (B) any accrued but unpaid dividends to, but not including, the date of conversion, by (ii) the conversion price for each share of the Company's common stock (the "Series 1 Conversion Price") determined as follows:
| · | Provided there has been a Listing Event, if a Series 1 Conversion Notice is received prior to December 1, 2017, the Series 1 Conversion Price will be equal to 110% of the volume weighted average price per share of the common stock of the Company (or its successor) for the 20 trading days prior to the delivery date of the Series 1 Conversion Notice. |
| · | Provided there has been a Listing Event, if a Series 1 Conversion Notice is received on or after December 1, 2017, the Series 1 Conversion Price will be equal to the volume weighted average price per share of the common stock of the Company (or its successor) for the 20 trading days prior to the delivery date of the Series 1 Conversion Notice. |
| · | If a Series 1 Conversion Notice is received on or after April 7, 2019, and at the time of receipt of such Series 1 Conversion Notice, a Listing Event has not occurred, the Series 1 Conversion Price for such Share will be equal to 100% of the Company's net asset value per share, or NAV per share. |
At any time, from time to time, on and after the later of (i) the 20th trading day after the date of a Listing Event, if any, or (ii) April 7, 2018, the Company (or its successor) will have the right (but not the obligation) to redeem, in whole or in part, the Series 1 Preferred Stock at the redemption price equal to 100% of the Stated Value, initially $1,000 per share, plus any accrued but unpaid dividends if any, to and including the date fixed for redemption. In case of any redemption of less than all of the shares by the Company, the shares to be redeemed will be selected either pro rata or in such other manner as the board of directors may determine. If the Company (or its successor) chooses to redeem any shares, the Company (or its successor) has the right, in its sole discretion, to pay the redemption price in cash or in equal value of common stock of the Company (or its successor), based on the volume weighted average price per share of the common stock of the Company (or its successor) for the 20 trading days prior to the redemption, in exchange for the shares. The Company (or its successor) also will have the right (but not the obligation) to redeem all or any portion of the Series 1 Preferred Stock subject to a Series 1 Conversion Notice for a cash payment to the holder thereof equal to the applicable redemption price, by delivering a Redemption Notice to the holder of such Shares on or prior to the 10th trading day prior to the close of trading on the Conversion Date for such Shares.
Each investor in the Series 1 received, for every $1,000 in shares subscribed by such investor, detachable warrants to purchase 35 shares of the Company's common stock if the Company's common stock is listed on a national securities exchange. The warrants' exercise price is equal to 110% of the volume weighted average closing stock price of the Company's common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of December 31, 2018, there were detachable warrants that may be exercised for 1,382,675 shares of the Company's common stock after the 90th day following the occurrence of a listing event. These potential warrants will expire five years from the 90th day after the occurrence of a listing event. If all the potential warrants outstanding at December 31, 2018 became exercisable because of a listing event and were exercised at the minimum price of $25 per share, gross proceeds to the Company would be approximately $34.6 million and as a result the Company would issue an additional 1,382,675 shares of common stock. As of the date of this filing the Company had an estimated fair market value of potential warrants that was immaterial.
Note S — Subsequent Events
As of the date of the filing of this report, the Company continues to be managed externally by the Advisor. The independent members of the Company's board of directors and the Advisor have been engaged in discussions regarding a potential internalization transaction. If the Company and the Advisor are able to reach agreement on an internalization transaction, the Company expects to acquire substantially all of the assets of the Advisor and hire certain employees of the Advisor to continue to manage the Company's investment portfolio. No assurances can be given that the Company and the Advisor will reach agreement on the consideration and other terms providing for an internalization of the management of the Company within any particular time frame or at all. For more information on risks and uncertainties regarding a potential internalization transaction, please see Item 1A – Risk Factors – Risk Related to Conflicts of Interest – A stockholder's interest in us could be diluted and we could incur other significant costs associated with being self-managed if we internalize our management functions.
On February 8, 2019, subsidiaries of the Company, consisting of MVP PF St. Louis 2013, LLC ("MVP St. Louis"), and MVP PF Memphis Poplar 2013 ("MVP Memphis Poplar"), LLC entered into a loan agreement, dated as of February 8, 2019, with LoanCore Capital Credit REIT LLC ("LoanCore"). Under the terms of the Loan Agreement, LoanCore agreed to loan MVP St. Louis and MVP Memphis Poplar $5.5 million to repay and discharge the outstanding KeyBank loan agreement. The loan is secured by a Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing on each of the properties owned by MVP St. Louis and MVP Memphis Poplar.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2018
| | | Initial Cost | | | Gross Carrying Amount at December 31, 2018 | | |
| Description | ST | | Encumbrance | | Land | | Buildings and Improvements | | Total | | Cost Capitalized Subsequent to Acquisition | | Land | | Building and Improvements | | Total | | Accumulated Depreciation (1) | Date Acquired | Life on Which Depr in Latest Statement is Computed |
| West 9th Street | OH | $ | -- | $ | 5,675,000 | $ | -- | $ | 5,675,000 | $ | -- | $ | 5,845,000 | $ | -- | $ | 5,845,000 | $ | 13,000 | 2016 | 15 |
| Crown Colony | OH | | -- | | 3,030,000 | | -- | | 3,030,000 | | -- | | 3,050,000 | | -- | | 3,050,000 | | 2,000 | 2016 | 15 |
| San Jose | CA | | -- | | 1,073,000 | | 2,503,000 | | 3,576,000 | | -- | | 1,073,000 | | 2,771,000 | | 3,844,000 | | 191,000 | 2016 | 39,15 |
| MCI 1372 Street | OH | | -- | | 700,000 | | -- | | 700,000 | | -- | | 700,000 | | -- | | 700,000 | | -- | 2016 | N/A |
| Cincinnati Race Street | OH | | -- | | 2,142,000 | | 2,358,000 | | 4,500,000 | | -- | | 2,142,000 | | 4,158,000 | | 6,300,000 | | 229,000 | 2016 | 39,15 |
| St Louis Washington | MO | | -- | | 3,000,000 | | -- | | 3,000,000 | | -- | | 3,007,000 | | -- | | 3,007,000 | | -- | 2016 | 15 |
| St Paul Holiday Garage | MN | | -- | | 1,673,000 | | 6,527,000 | | 8,200,000 | | -- | | 1,673,000 | | 6,723,000 | | 8,396,000 | | 413,000 | 2016 | 39,15 |
| Louisville Station | KY | | -- | | 3,050,000 | | -- | | 3,050,000 | | -- | | 3,107,000 | | -- | | 3,107,000 | | 6,000 | 2016 | 15 |
| Whitefront Garage | TN | | -- | | 3,116,000 | | 8,380,000 | | 11,496,000 | | -- | | 3,116,000 | | 8,556,000 | | 11,672,000 | | 500,000 | 2016 | 39,15 |
| Cleveland Lincoln Garage | OH | | -- | | 2,195,000 | | 5,122,000 | | 7,317,000 | | -- | | 2,195,000 | | 8,346,000 | | 10,541,000 | | 312,000 | 2016 | 39,15 |
| Houston Preston | TX | | -- | | 2,800,000 | | -- | | 2,800,000 | | -- | | 2,820,000 | | -- | | 2,820,000 | | 2,000 | 2016 | 15 |
| Houston San Jacinto | TX | | -- | | 3,200,000 | | -- | | 3,200,000 | | -- | | 3,250,000 | | -- | | 3,250,000 | | 5,000 | 2016 | 15 |
| MVP Detroit Center Garage | MI | | -- | | 7,000,000 | | 48,000,000 | | 55,000,000 | | -- | | 7,000,000 | | 48,476,000 | | 55,476,000 | | 2,436,000 | 2017 | 39,15 |
| St. Louis Broadway Group | MO | | -- | | 2,400,000 | | -- | | 2,400,000 | | -- | | 2,400,000 | | -- | | 2,400,000 | | -- | 2017 | N/A |
| St. Louis Seventh & Cerre | MO | | -- | | 3,300,000 | | -- | | 3,300,000 | | -- | | 3,300,000 | | -- | | 3,300,000 | | -- | 2017 | N/A |
| MVP Preferred Parking | TX | | -- | | 15,800,000 | | 4,700,000 | | 20,500,000 | | -- | | 15,800,000 | | 5,315,000 | | 21,115,000 | | 196,000 | 2017 | 39,15 |
| MVP Raider Park Garage | TX | | -- | | 1,960,000 | | 9,040,000 | | 11,000,000 | | -- | | 1,964,000 | | 9,065,000 | | 11,029,000 | | 255,000 | 2017 | 39,15 |
| MVP PF Ft. Lauderdale 2013 | FL | | -- | | 3,423,000 | | -- | | 3,423,000 | | -- | | 3,423,000 | | -- | | 3,423,000 | | -- | 2017 | N/A |
| MVP PF Memphis Court 2013 | TN | | -- | | 1,208,000 | | -- | | 1,208,000 | | -- | | 1,008,000 | | -- | | 1,008,000 | | -- | 2017 | N/A |
| MVP PF Memphis Poplar 2013 | TN | | -- | | 3,735,000 | | -- | | 3,735,000 | | -- | | 3,735,000 | | -- | | 3,735,000 | | 70,000 | 2017 | 15 |
| MVP PF St. Louis 2013 | MO | | -- | | 5,145,000 | | -- | | 5,145,000 | | -- | | 5,145,000 | | -- | | 5,145,000 | | 111,000 | 2017 | 15 |
| Mabley Place Garage | OH | | -- | | 1,585,000 | | 19,557,000 | | 21,142,000 | | -- | | 1,592,000 | | 19,593,000 | | 21,185,000 | | 596,000 | 2017 | 39,15 |
| MVP Denver Sherman | CO | | -- | | 705,000 | | -- | | 705,000 | | -- | | 705,000 | | -- | | 705,000 | | -- | 2017 | N/A |
| MVP Fort Worth Taylor | TX | | -- | | 2,845,000 | | 24,813,000 | | 27,658,000 | | -- | | 2,845,000 | | 24,818,000 | | 27,663,000 | | 713,000 | 2017 | 39,15 |
| MVP Milwaukee Old World | WI | | -- | | 2,044,000 | | -- | | 2,044,000 | | -- | | 2,044,000 | | -- | | 2,044,000 | | 23,000 | 2017 | 15 |
| MVP Houston Saks Garage | TX | | -- | | 4,931,000 | | 5,460,000 | | 10,391,000 | | -- | | 4,931,000 | | 5,460,000 | | 10,391,000 | | 174,000 | 2017 | 39,15 |
| MVP Milwaukee Wells | WI | | -- | | 4,873,000 | | -- | | 4,873,000 | | -- | | 5,083,000 | | -- | | 5,083,000 | | 29,000 | 2017 | 15 |
| MVP Wildwood NJ Lot | NJ | | -- | | 1,631,000 | | -- | | 1,631,000 | | -- | | 1,231,000 | | -- | | 1,231,000 | | -- | 2017 | N/A |
| MVP Indianapolis City Park | IN | | -- | | 2,055,000 | | 8,758,000 | | 10,813,000 | | -- | | 2,056,000 | | 8,878,000 | | 10,934,000 | | 310,000 | 2017 | 39,15 |
| MVP Indianapolis WA Street Lot | IN | | -- | | 5,749,000 | | -- | | 5,749,000 | | -- | | 5,749,000 | | -- | | 5,749,000 | | 23,000 | 2017 | 15 |
| MVP Minneapolis Venture | MN | | -- | | 6,543,000 | | -- | | 6,543,000 | | -- | | 4,012,000 | | -- | | 4,012,000 | | -- | 2017 | N/A |
| MVP Indianapolis Meridian Lot | IN | | -- | | 1,601,000 | | -- | | 1,601,000 | | -- | | 1,601,000 | | -- | | 1,601,000 | | 5,000 | 2017 | 15 |
| MVP Milwaukee Clybourn | WI | | -- | | 262,000 | | -- | | 262,000 | | -- | | 262,000 | | -- | | 262,000 | | 3,000 | 2017 | 15 |
| MVP Milwaukee Arena | WI | | -- | | 4,632,000 | | -- | | 4,632,000 | | -- | | 4,631,000 | | -- | | 4,631,000 | | -- | 2017 | N/A |
| MVP Clarksburg Lot | WV | | -- | | 715,000 | | -- | | 715,000 | | -- | | 715,000 | | -- | | 715,000 | | 5,000 | 2017 | 15 |
| MVP Denver Sherman 1935 | CO | | -- | | 2,534,000 | | -- | | 2,534,000 | | -- | | 2,533,000 | | -- | | 2,533,000 | | -- | 2017 | N/A |
| MVP Bridgeport Fairfield Garage | CT | | -- | | 498,000 | | 7,758,000 | | 8,256,000 | | -- | | 498,000 | | 7,758,000 | | 8,256,000 | | 237,000 | 2017 | 39,15 |
| Minneapolis City Parking | MN | | -- | | 9,838,000 | | -- | | 9,838,000 | | -- | | 9,838,000 | | -- | | 9,838,000 | | 91,000 | 2017 | 15 |
| MVP New Orleans Rampart | LA | | -- | | 8,105,000 | | -- | | 8,105,000 | | -- | | 8,105,000 | | -- | | 8,105,000 | | -- | 2018 | N/A |
| MVP Hawaii Marks | HI | | -- | | 9,118,000 | | 11,716,000 | | 20,834,000 | | -- | | 9,118,000 | | 11,882,000 | | 21,000,000 | | 160,000 | 2018 | 39,15 |
| | | $ | -- | $ | 145,889,000 | $ | 164,692,000 | $ | 310,581,000 | $ | -- | $ | 143,302,000 | $ | 171,799,000(2) | $ | 315,101,000 | $ | 7,110,000 (3) | | |
| (1) | The initial costs of buildings are depreciated over 39 years using a straight-line method of accounting; improvements capitalized subsequent to acquisition are depreciated over the shorter of the lease term or useful life, generally ranging from one to 20 years. |
| (2) | This amount does not include CIP of approximately $1.9 million. |
| (3) | This amount does not include approximately $21,000 for depreciation of software. |
The aggregate gross cost of property included above for federal income tax purposes approximated $288.2 million as of December 31, 2018.
The following table reconciles the historical cost of total real estate held for investment for the years ended December 31, 2018 and 2017.
| | | 2018 | | | 2017 | |
| Total real estate held for investment, inception (prior) | | $ | 287,052,000 | | | $ | 53,743,000 | |
| Additions during period: | | | 5,068,000 | | | | 2,370,000 | |
| Acquisitions | | | 33,166,000 | | | | 230,939,000 | |
| Deductions during period: | | | (10,185,000 | ) | | | -- | |
| Total real estate held for investment, end of year (1) | | $ | 315,101,000 | | | $ | 287,052,000 | |
| (1) | This amount does not include investments in software and construction in progress totaling approximately $1.9 million as of December 31, 2018 and approximately $0.8 million as of December 31, 2017. |
The following table reconciles the accumulated depreciation for the years ended December 31, 2018 and 2017.
| | | 2018 | | | 2017 | |
| Accumulated depreciation, inception (prior) | | $ | 2,231,000 | | | $ | 195,000 | |
| Deductions during period: | | | (38,000 | ) | | | -- | |
| Depreciation of real estate | | | 4,917,000 | | | | 2,036,000 | |
| Accumulated depreciation, end of year (1) | | $ | 7,110,000 | | | $ | 2,231,000 | |
| (1) | 2018 amount does not include approximately $21,000 for depreciation of software. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have evaluated the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.
(b) Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting during the year ended 2018, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting.
During the Company's two most recent fiscal years ended December 31, 2018 and 2017 and the period from January 1, 2019 through March 5, 2019, the Company did not consult with RBSM on (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on the Company's consolidated financial statements, and RBSM did not provide either a written report or oral advice to the Company that was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii) any matter that was the subject of any disagreement, as defined in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for our Company, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of our Company are being made only in accordance with authorizations of management and directors of our Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our Company's assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management has conducted an assessment, including testing, of the effectiveness of our internal control over financial reporting as of December 31, 2018. In making its assessment of internal control over financial reporting, management used the criteria in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this assessment, management, with the participation of the Chief Executive and Chief Financial Officers, believes that, as of December 31, 2018, the Company's internal control over financial reporting is effective based on those criteria.
Auditor Attestation
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management's report in this annual report.
Changes in Internal Control Over Financial Reporting
As required by Rule 13a-15(d) under the Exchange Act, our management, including our CEO and CFO, has evaluated our internal control over financial reporting to determine whether any changes occurred during the fourth fiscal quarter of 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the fourth fiscal quarter of 2018.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Company will rely on the Advisor to manage the day-to-day activities and to implement the Company's investment strategy, subject to the supervision of the Company's board of directors. The Advisor performs its duties and responsibilities as the Company's fiduciary pursuant to an Amended and Restated Advisory Agreement. The Advisor is managed by Michael V. Shustek.
Directors and Executive Officers
The following table sets forth the names and ages as of March 5, 2019 and positions of the individuals who serve as our directors and executive officers as of March 5, 2019:
| Name | Age | Title |
| Michael V. Shustek | 60 | Chief Executive Officer and Director |
| J. Kevin Bland | 55 | Chief Financial Officer |
| David Chavez (1) | 53 | Independent Director |
| John E. Dawson | 61 | Independent Director |
| Robert J. Aalberts | 67 | Independent Director |
| Nicholas Nilsen (1) | 82 | Independent Director |
| Shawn Nelson | 52 | Independent Director |
| William Wells (1) | 65 | Independent Director |
| (1) | Member of the audit committee |
The following table sets forth the names and ages as of March 5, 2019 and positions of the individuals who serve as directors, executive officers and certain significant employees of the Advisor or our affiliates:
| Name | Age | Title |
| | | |
| Michael V. Shustek | 60 | Chief Executive Officer |
| J. Kevin Bland | 55 | Chief Financial Officer |
Michael V. Shustek is Chief Executive Officer, Secretary and has served as Chairman of the Board of Directors of the Company since its inception and serves as the Chief Executive Officer of our Advisor. He has also served as Chief Executive Officer and a director of MVP I (prior to the Merger), Chairman of the Board of Directors, Chief Executive Officer and a director of Vestin Group since April 1999 and a director and CEO of VRM II and VRM I since January 2006. In July 2012, Mr. Shustek became a principal of AMS. During January 2014, Mr. Shustek became the sole owner of AMS.
In 2003, Mr. Shustek became the Chief Executive Officer of Vestin Originations, Inc. In 1997, Mr. Shustek was involved in the initial founding of Nevada First Bank, with the largest initial capital base of any new state charter in Nevada's history at that time.
Mr. Shustek has co-authored two books, entitled "Trust Deed Investments," on the topic of private mortgage lending, and "If I Can Do It, So Can You." Mr. Shustek has been a guest lecturer at the University of Nevada, Las Vegas, where he also has taught a course in Real Estate Law and Ethics. Mr. Shustek received a Bachelor of Science degree in Finance at the University of Nevada, Las Vegas. As our founder and CEO, Mr. Shustek is highly knowledgeable with regard to our business operations. In addition, his participation on our board of directors is essential to ensure efficient communication between the board and management.
J. Kevin Bland is Chief Financial Officer and is a certified public accountant. He has over 25 years of experience as a financial professional and executive. Mr. Bland served as Chief Financial Officer of UMTH General Services, L.P. from June 2008 to November 2018. From 2007 to 2008 Mr. Bland served as Vice President, Controller and Principal Accounting Officer of Pizza Inn, Inc. (Nasdaq: RAVE). Mr. Bland spent three years with Metromedia Restaurant Group as Vice President, Controller from 2005 to 2007 and Accounting Manager from 2001 to 2002. From 2003 to 2005, Mr. Bland was Company Controller of Sendera Investment Group, LLC and controller of a homebuilding and land division with Lennar Corporation in Dallas, Texas from 2002 to 2003. Mr. Bland began his career with Enrst & Young in 1989. Mr. Bland earned a bachelor's degree in accounting from The University of Texas at Austin in 1985 and an M.BA from Texas Christian University in 1989.
Independent Directors of the Company
David Chavez is one of our independent directors. Since 2009, Mr. Chavez has served as Chief Executive Officer of Assured Strategies, LLC, a strategic consulting, coaching and advisory firm. From 1996 to 2007, Mr. Chavez served as Chief Executive Officer of Chavez & Koch, a Professional Corporation and certified public accounting firm, and from 1995 to 1996, he was a private business and financial consultant. From 1991 to 1995 Mr. Chavez worked with Arthur Andersen's Las Vegas office, taking several companies public, and working in audit and consulting. Mr. Chavez received a Bachelor of Science in Business Administration Degree, with a concentration in Accounting, from the University of Nevada, Las Vegas.
John E. Dawson is one of our independent directors. He has also been a director of MVP REIT, Inc. since its inception. He was a director of Vestin Group from March 2000 to December 2005, was a director of VRM II from March 2007 until he resigned in November 2013 and was a director for VRM I from March 2007 until January 2008. Since January 2015, Mr. Dawson has been a Partner at the International law firm of Dickinson Wright PLLC. Mr. Dawson was a partner of the Las Vegas law firm of Lionel Sawyer & Collins from 2005 until its closing in December of 2014. From 1995 to 2005, Mr. Dawson was a partner at the law firm of Marquis & Aurbach. Mr. Dawson received his bachelor's degree from Weber State and his Juris Doctor from Brigham Young University. Mr. Dawson received his Master of Law (L.L.M.) in Taxation from the University of San Diego in 1993. Mr. Dawson was admitted to the Nevada Bar in 1988 and the Utah Bar in 1989.
Robert J. Aalberts served as an independent director of MVP I, and was a director of Vestin Group, Inc., from April 1999 to December 2005. He was a director for VRM I from January 2006 until he resigned in January 2008 and for VRM II from January 2006 until he resigned in November 2013. Most recently, Professor Aalberts was Clinical Professor of Business Law in the Smeal College of Business at Pennsylvania State University in University Park, PA from 2014 to June 2017. Prior to his position at Penn State, Professor Aalberts held the Ernst Lied Professor of Legal Studies professorship in the Lee College of Business at the University of Nevada, Las Vegas from 1991 to 2014. Before UNLV, Professor Aalberts was an Associate Professor of Business Law at Louisiana State University in Shreveport, LA from 1984 to 1991. From 1982 through 1984, he served as an attorney for the Gulf Oil Company in its New Orleans office, specializing in contract negotiations and mineral law. Professor Aalberts has co-authored books relating to the regulatory environment and the law and business of real estate; including Real Estate Law (2015), now in its 9th edition, published by the Cengage Book Company. He is also the author of numerous legal articles dealing with various aspects of real estate, business and the practice of law. From 1992 to 2016, Professor Aalberts was the Editor-in-chief of the Real Estate Law Journal published by the Thomson-West Publishing Company. Professor Aalberts received his Juris Doctor degree from Loyola University in New Orleans, Louisiana, a Master of Arts from the University of Missouri, Columbia, and a Bachelor of Arts degree in Social Sciences and Geography from Bemidji State University in Minnesota. He was admitted to the State Bar of Louisiana in 1982 (currently inactive status).
Nicholas Nilsen served as an independent director of MVP I. He has been involved in the financial industry for more than four decades. He has been in retirement during the past five years. Most recently, Mr. Nilsen served as a Senior Vice President of PNC Financial, a bank holding company, where he served from 1960 to 2000. He began his long career with PNC Financial as a stock analyst. Later, he managed corporate and Taft-Hartley pension plans for the bank. Mr. Nilsen served as an executive investment officer at the time of his retirement from PNC Financial. Mr. Nilsen is a CFA charter holder. Mr. Nilsen received a bachelor's degree from Denison University and a Master of Business Administration from Northwestern University.
Shawn Nelson served as an independent director of MVP I. Effective January 7, 2019, Mr. Nelson became the Chief Assistant District Attorney of Orange County, California. Mr. Nelson had served as a member of the Orange County Board of Supervisors in Orange County, California, since June 2010, serving as chairman in 2013 and 2014. Mr. Nelson currently serves on the board of the Southern California Regional Rail Authority (Metrolink) and was the former Chairman. He is a director of the Orange County Transportation Authority having served as the chair in 2014 and is a director of the South Coast Air Quality Management District, Southern California Association of Governments, Transportation Corridor Agency, Foothill/Eastern, Southern California Water Committee, Orange County Council of Governments and Orange County Housing Authority Board of Commissioners. From 1994 to 2010, Mr. Nelson was the managing partner of the law firm of Rizio & Nelson. From 1992 to 1994, he was the Leasing Director/Project Manager of S&P Company. Prior to that, from 1989 to 1992 Mr. Nelson served as the Leasing Director/Acquisitions Analyst for IDM Corp and from 1988 to 1989 he served as a Construction Superintendent for Pulte Homes. Mr. Nelson has a Bachelor of Science degree in business with a certificate in real property development from the University of Southern California and a Juris Doctor Degree from Western State University College of Law.
William Wells is one of the Company's independent directors. From 1990 until April 2018, Mr. Wells served as the Las Vegas Office Managing Audit Partner of RSM US LLP, an international audit, tax and consulting firm ("RSM"). In his role as an Audit Partner, Mr. Wells has served as a business advisor to clients in a variety of industries including transportation, real estate, retail, wholesale distribution, construction, financial institutions, manufacturing, automotive, professional services and timeshare. He also has experience in business litigation and has testified as an expert witness in court and in arbitration hearings. From 2000 to 2011 (prior to a firm reorganization in 2012) Mr. Wells was the Desert Southwest Managing Partner, which included oversight of the Phoenix office as well as the Las Vegas office. Mr. Wells earned his B.S. in Accounting from Millikin University, where he graduated summa cum laude. He also participated in executive programs at the University of Chicago and the Minneapolis Center for Character-Based Leadership. He is a licensed CPA in Nevada. During his nearly 40 year tenure in Las Vegas, Mr. Wells has participated in a variety of business and philanthropic organizations including: Las Vegas Metro Chamber of Commerce (Chairman), Opportunity Village (Chairman), Young Presidents Organization (Chairman), UNLV Presidents Associates, UNLV Accounting Advisory Council, LVGEA (Board Member), UMC (Board Member), Discovery Children's Museum (Board Member), Boulder Dam Area Boy Scouts (Board Member), Economic Club of LV (Board Member), US Bank (Advisory Board Member), Las Vegas Executives Association, Kiwanis Club of Las Vegas, and the Las Vegas FBI Citizens Academy. He received the H&R Block Outstanding Community Service Award for stewardship to his community.
CORPORATE GOVERNANCE
Board of Directors
The Company operates under the direction of the Company's board of directors, the members of which are accountable to the Company and the stockholders as fiduciaries. The board of directors is responsible for directing the management of the Company's business and affairs. The board of directors has retained the Advisor to manage the Company's day-to-day affairs and to implement the Company's investment strategy, subject to the board of directors' direction, oversight and approval.
The Company has a total of seven directors, six of whom are independent, the Advisor, the Sponsor and their respective affiliates as determined in accordance with the North American Securities Administrators Association's Statement of Policy Regarding Real Estate Investment Trusts, as revised and adopted on May 7, 2007 (the "NASAA REIT Guidelines"). The NASAA REIT Guidelines require the Company's charter to define an independent director as a director who is not and has not for the last two years been associated, directly or indirectly, with the Sponsor or the Advisor. A director is deemed to be associated with the Sponsor or the Advisor if he or she owns any interest in, is employed by, is an officer or director of, or has any material business or professional relationship with the Sponsor, the Advisor or any of their affiliates, performs services (other than as a director) for the Company, or serves as a director or trustee for more than three REITs sponsored by the Sponsor or advised by the Advisor. A business or professional relationship will be deemed material per se if the gross revenue derived by the director from the Sponsor, the Advisor or any of their affiliates exceeds five percent of (1) the director's annual gross revenue derived from all sources during either of the last two years or (2) the director's net worth on a fair market value basis. An indirect relationship is defined to include circumstances in which the director's spouse, parents, children, siblings, mothers- or fathers-in-law, sons- or daughters-in-law or brothers- or sisters-in-law is or has been associated with the Company, the Sponsor, the Advisor or any of its affiliates. The Company's board of directors has determined that each of David Chavez, William Wells, John Dawson, Robert J. Aalberts, Nicholas Nilsen and Shawn Nelson qualifies as an independent director under the NASAA REIT Guidelines.
On August 6, 2018, John Dawson was appointed as sole Chairman by the board of directors.
The Company refers to the directors who are not independent as the "affiliated directors." Currently, the only affiliated director is Michael V. Shustek.
The Company's charter provides that the number of directors is currently seven, which number may be increased or decreased as set forth in the bylaws. The Company's charter also provides that a majority of the directors must be independent directors and that at least one of the independent directors must have at least three years of relevant real estate experience. The independent directors will nominate replacements for vacancies among the independent directors.
The Company's board of directors is elected by the Company's common stockholders on an annual basis. Any director may resign at any time and may be removed with or without cause by the stockholders upon the affirmative vote of stockholders entitled to cast at least a majority of all the votes entitled to be cast generally in the election of directors. The notice of any special meeting called to remove a director will indicate that the purpose, or one of the purposes, of the meeting is to determine if the director will be removed.
At such time as the Company is subject to Subtitle 8 of the MGCL, the Company has elected to provide that a vacancy following the removal of a director or a vacancy created by an increase in the number of directors or the death, resignation, adjudicated incompetence or other incapacity of a director may be filled only by a vote of a majority of the remaining directors and for the remainder of the full term of the directorship in which the vacancy occurred and, in the case of an independent director, the director must also be nominated by the remaining independent directors.
Responsibilities of Directors
The responsibilities of the members of the board of directors include:
| · | approving and overseeing the Company's overall investment strategy, which will consist of elements such as investment selection criteria, diversification strategies and asset disposition strategies; |
| · | approving and overseeing the Company's debt financing strategies; |
| · | approving joint ventures and other such relationships with third parties; |
| · | approving a potential liquidity transaction; |
| · | determining the Company's distribution policy and authorizing distributions from time to time; and |
| · | approving amounts available for repurchases of shares of the Company's common stock. |
The directors are accountable to the Company and the Company's stockholders as fiduciaries. This means that the directors must perform their duties in good faith and in a manner each director believes to be in the Company's best interests. Further, the Company's directors must act with such care as an ordinarily prudent person in a like position would use under similar circumstances, including exercising reasonable inquiry when taking actions. Our directors and executive officers will serve until their successors are elected and qualify. The directors are not required to devote all of their time to the Company's business and are only required to devote such time to the Company's affairs as their duties require. The directors meet quarterly or more frequently as necessary.
The Company will follow investment guidelines adopted by the Company's board of directors and the investment and borrowing policies described in this Annual Report unless they are modified by our directors. The Company's board of directors may establish further written policies on investments and borrowings and shall monitor our administrative procedures, investment operations and performance to ensure that the policies are fulfilled and are in the best interests of our stockholders. Any change in our investment objectives as set forth in the Company's charter must be approved by the stockholders.
In order to reduce or eliminate and address certain potential conflicts of interest, the Company's charter requires that a majority of the Company's board of directors (including a majority of the independent directors) not otherwise interested in the transaction approve any transaction with any of the Company's directors, the Sponsor, the Advisor, or any of their affiliates. The independent directors will also be responsible for reviewing from time to time but at least annually (1) the performance of the Advisor and determining that the compensation to be paid to the Advisor is reasonable in relation to the nature and quality of services performed; (2) that the Company's total fees and expenses are otherwise reasonable in light of the Company's investment performance, net assets, net income, the fees and expenses of other comparable unaffiliated REITs and other factors deemed relevant by our independent directors; and (3) that the provisions of the Amended and Restated Advisory Agreement are being carried out. Each such determination shall be reflected in the applicable board minutes.
Board Committees
The board of directors has delegated various responsibilities and authority to three standing committees and one special committee. Each committee regularly reports on its activities to the full board of directors. The Audit Committee, the Compensation Committee, the Nominating and Governance Committee and the Special Committee are composed entirely of independent directors. The table below sets forth the current membership of the three standing committees of the board of directors.
| Name | | Audit | | Compensation | | Nominating and Corporate Governance |
|
|
| David Chavez | | Co-Chair | | | | |
| William Wells | | Co-Chair | | | | |
| Robert J. Aalberts | | | | | | Chair |
| Nicholas Nilsen | | X | | Chair | | X |
| Shawn Nelson | | | | X | | X |
Audit Committee
The Audit Committee meets on a regular basis, at least quarterly and more frequently as necessary. The Audit Committee's primary function is to assist the board of directors in fulfilling its oversight responsibilities by reviewing the financial information to be provided to the stockholders and others, the system of internal controls which management has established and the audit and financial reporting process. The Audit Committee is comprised of three directors, all of whom are independent directors, two of which have been deemed as Audit Committee financial experts. The Company's Audit Committee consists of David Chavez, William Wells and Nicholas Nilsen. The board of directors also determined that Mr. Chavez and Mr. Nilsen met the Audit Committee financial expert requirements. For the years ended December 31, 2018 and 2017, the Audit Committee held twenty and five meetings, respectively. Mr. Chavez and Mr. Wells serve as co-chairs of the Audit Committee.
Compensation Committee
The Compensation Committee establishes and oversees director compensation. The Company's executive officers and affiliated directors do not receive compensation directly from the Company for services rendered to the Company, and the Company does not intend to pay compensation directly to the executive officers or affiliated directors as long as the Company remains externally managed. The Company's independent directors receive certain compensation from the Company, which is described in more detail under "Item 11. Executive Compensation." The Company's Compensation Committee consists of Nicholas Nilsen and Shawn Nelson. For the years ended December 31, 2018 and 2017, the Compensation Committee held no meetings and five meetings, respectively.
Nominating and Corporate Governance Committee
The Nominating and Governance Committee is responsible for establishing the requisite qualifications for directors, identifying and recommending the nomination of individuals qualified to serve as directors and recommending directors for each board committee. The Nominating and Governance Committee also establishes corporate governance practices in compliance with applicable regulatory requirements and consistent with the highest standards and recommends to the board of directors the corporate governance guidelines applicable to the Company. The Company's Nominating and Corporate Governance Committee consists of Robert Aalberts as Nominating and Corporate Governance Committee Chair, with Shawn Nelson and Nicholas Nilsen as committee members. For the years ended December 31, 2018 and 2017, the Nominating and Corporate Governance Committee held no meetings and five meetings, respectively.
Special Committees
On February 1, 2018, the board of directors appointed a Special Committee, naming Allen Wolff as Special Committee Chair, with Erik Hart and David Chavez as committee members. The purpose of the Special Committee is to review and negotiate the potential internalization with the Advisor. In connection therewith, the Special Committee has authority to hire counsel and a valuation firm. On April 23, 2018 the board of directors disbanded the Special Committee for internalization and this committee held two meetings prior to its termination.
On May 31, 2018 the board of directors again appointed a Special Committee, naming John Dawson as Special Committee Chair, with Nick Nilsen and Robert Aalberts as committee members. The purpose of this Special Committee was to review and negotiate the potential internalization with the Advisor. In connection therewith, the Special Committee had authority to hire counsel and a valuation firm. On November 7, 2018 the board of directors disbanded the Special Committee for internalization at which time it was decided that all future negotiations regarding potential internalization would be the responsibility of the Company's entire board of directors.
All future negotiations regarding potential internalization are the responsibility of all of the Company's independent directors.
Code of Ethics
The Company has adopted a Code of Business Conduct and Ethics (the "Code of Ethics"), which contains general guidelines for conducting the Company's business and is designed to help directors, employees and independent consultants resolve ethical issues in an increasingly complex business environment. The Code of Ethics applies to all of the Company's officers, including the Company's principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions, as well as all members of the Company's board of directors. The Code of Ethics covers topics including, but not limited to, conflicts of interest, record keeping and reporting, payments to foreign and U.S. government personnel and compliance with laws, rules and regulations. The Company will provide to any person without charge a copy of the Company's Code of Ethics, including any amendments or waivers, upon written request delivered to the Company's principal executive office at the address listed on the cover page of this Annual Report.
Board Meetings and Annual Stockholder Meeting
The board of directors held nineteen meetings and nine meetings during the fiscal years ended December 31, 2018 and 2017, respectively. Each director attended at least 75% of his board and committee meetings in 2018 and 2017. Although the Company does not have a formal policy regarding attendance by members of the Company's board of directors at the Company's Annual Meeting of Stockholders, the Company encourages all of our directors to attend.
Communication with Directors
The Company has established procedures for stockholders or other interested parties to communicate directly with the Company's board of directors. Such parties can contact the board by mail at: David Chavez and/or William Wells, Co-Chairmen of The Parking REIT Audit Committee, c/o Corporate Secretary, 8880 W. Sunset Rd Suite 240, Las Vegas, NV 89148.
The co-chairmen of the Audit Committee will receive all communications made by these means and will distribute such communications to such member or members of the Company's board of directors as he or she deems appropriate, depending on the facts and circumstances outlined in the communication received. For example, if any questions regarding accounting, internal controls and auditing matters are received, they will be forwarded by the co-chairmen of the Audit Committee to the members of the Audit Committee for review.
ITEM 11. EXECUTIVE COMPENSATION
Executive Officers
As of March 5, 2019, the Company had no employees. Each of the Company's executive officers, including each executive officer who serves as a director, is employed or compensated by the Advisor or also serves as an executive officer of the Advisor. Each of these individuals receives compensation from the Advisor for his or her services, including services performed for the Company and for the Advisor. As executive officers of the Advisor, these individuals will manage the Company's day-to-day affairs and carry out the directives of the Company's board of directors in the review and selection of investment opportunities and will oversee and monitor the Company's acquired investments to ensure they are consistent with the Company's investment objectives. The duties that these executive officers will perform on the Company's behalf will also serve to fulfill the corporate governance obligations of these persons as our appointed officers pursuant to the Company's charter and bylaws. As such, these duties will involve the performance of corporate governance activities that require the attention of one of the Company's corporate officers, including signing certifications required under the Sarbanes-Oxley Act of 2002, as amended, for filing with our periodic reports. Although the Company will reimburse the Advisor for certain expenses incurred in connection with providing these services to the Company, the Company does not intend to pay any compensation directly to the Company's executive officers.
Independent Directors
The Company pays each independent director an annual retainer of $30,000 (to be prorated for a partial term), with an additional $5,000 annual retainer (to be prorated for a partial term) paid to the Audit Committee chairperson. Each independent director also will receive $500 for each meeting of the board of directors attended in-person or by telephone.
Special Committee members were paid $35,000 for the Chair and $30,000 for the remaining members in connection with the Internalization.
All directors receive reimbursement of reasonable out-of-pocket expenses incurred in connection with attending meetings of the board of directors. If a director is also one of our officers, we will not pay any compensation to such person for services rendered as a director. The following table sets forth information with respect to our independent director compensation during the fiscal year ended December 31, 2018:
| Name | | Fees Earned or Paid in Cash | | Stock Awards ($) | | Option Awards ($) | | Non-Equity Incentive Plan Compensation ($) | | Change in Pension Value and Nonqualified Deferred Compensation Earnings | | All Other Compensation ($) | | Total ($) |
| Allen Wolff (1) | $ | 59,500 | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | 59,500 |
| David Chavez | | 82,250 | | -- | | -- | | -- | | -- | | -- | | 82,250 |
| Erik Hart (2) | | 72,000 | | -- | | -- | | -- | | -- | | -- | | 72,000 |
| John Dawson | | 53,000 | | -- | | -- | | -- | | -- | | -- | | 53,000 |
| Robert J. Aalberts | | 47,500 | | -- | | -- | | -- | | -- | | -- | | 47,500 |
| Nicholas Nilsen | | 46,500 | | -- | | -- | | -- | | -- | | -- | | 46,500 |
| Shawn Nelson | | 37,500 | | -- | | -- | | -- | | -- | | -- | | 37,500 |
| William Wells (3) | | 23,250 | | -- | | -- | | -- | | -- | | -- | | 23,250 |
| Total | $ | 421,500 | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | 421,500 |
| (1) | Mr. Wolff resigned as an independent director from the Company's board of directors effective April 29, 2018. |
| (2) | Mr. Hart resigned as an independent director from the Company's board of directors effective September 14, 2018. |
| (3) | Mr. Wells was appointed to serve on the Company's board of directors on May 31, 2018. |
On May 31, 2018 the board of directors voted to change their compensation structure. The board will receive one-half of its $30,000 fee in cash and the other one-half in common stock. However, the committee has postponed the stock portion until the company is listed on an exchange. The initial issuance price for the common stock will be at the then current NAV. In the event the Company is listed on a national securities exchange, the issuance of common stock will be based on the twenty-day trailing closing stock price average. In addition, the audit chair will be entitled to receive his additional $5,000 either in cash or at his option, half in cash and half in common stock. Finally, the board reduced its per meeting fee to $500 per meeting until such time as distributions commence.
Compensation Committee Interlocks and Insider Participation
Other than Michael V. Shustek, no member of the Company's board of directors served as an officer, and no member of the Company's board of directors served as an employee, of the Company or any of its subsidiaries during the year ended December 31, 2018. In addition, during the year ended December 31, 2018, none of the Company's executive officers served as a member of the Compensation Committee (or other committee of the Company's board of directors performing equivalent functions or, in the absence of any such committee, our entire board of directors) of any entity that has one or more executive officers serving as a member of the Company's board of directors or Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership
Shown below is certain information As of March 5, 2019, with respect to beneficial ownership, as that term is defined in Rule 13d-3 under the Exchange Act, of shares of common stock by the only persons or entities known to us to be a beneficial owner of more than 5% of the outstanding shares of common stock. Unless otherwise noted, the percentage ownership is calculated based on 6,540,818 shares of our common stock outstanding as of March 5, 2019.
| Name and Address of Beneficial Owner | | Amount and Nature of Beneficial Ownership | | Percent of Class |
Vestin Realty Mortgage II, Inc. 8945 Post Rd Suite 110 Las Vegas, NV 89148 | | Sole voting and investment power of 364,960 shares | | 5.58% |
The following table sets forth the total number and percentage of common stock beneficially owned as of March 5, 2019, by:
| · | Our chief executive officer and the officers of our manager who function as the equivalent of our executive officers; and |
| · | All executive officers and directors as a group. |
Unless otherwise noted, the percentage ownership is calculated based on 6,540,818 shares of our total outstanding common stock and 42,672 shares of our total outstanding preferred stock as of March 5, 2019:
| | | Common Shares Beneficially Owned | | Preferred Shares Beneficially Owned |
| Beneficial Owner | Address | Number | | Percent | | Number | | Percent |
| Michael V. Shustek | 8880 W. Sunset Rd Suite 240, Las Vegas, NV 89148 | 13,423 | | <1% | | -- | | -- |
| David Chavez | 28 Strada Prinicipale Henderson, NV 89011 | -- | | -- | | -- | | -- |
| John E. Dawson | 1321 Imperia Drive Henderson, NV 89052 | 2,570 | | <1% | | *54 | | <1% |
| Robert J. Aalberts | 311 Vallarte Dr. Henderson NV 89014 | -- | | -- | | -- | | -- |
| Nicholas Nilsen | 3074 Soft Horizon Way Las Vegas, NV 89135 | 2,141 | | <1% | | -- | | -- |
| Shawn Nelson | Hall of Administration 333 W. Santa Ana Blvd. Santa Ana, CA 92701 | -- | | -- | | -- | | -- |
| William Wells | 2021 Redbird Drive Las Vegas, NV 89134 | -- | | -- | | -- | | -- |
| All directors and officers | | 18,134 | | <1% | | 54 | | <1% |
*Mr. Dawson received 1,750 warrants with his purchase of 54 shares of preferred stock. The warrants may be exercised after the 90th day following the occurrence of a Listing Event, at an exercise price, per share, equal to 110% of the volume weighted average closing price during the 20 trading days ending on the 90th day after the occurrence of such Listing Event; however, in no event shall the exercise price of the warrants be less than $25 per share.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Conflicts of Interests
The Company is subject to various conflicts of interest arising out of the Company's relationship with the Advisor and other affiliates, including (1) conflicts related to the compensation arrangements between the Advisor, certain affiliates and the Company, (2) conflicts with respect to the allocation of the time of the Advisor and its key personnel and (3) conflicts with respect to the allocation of investment opportunities. The Company's independent directors have an obligation to function on the Company's behalf in all situations in which a conflict of interest may arise and will have a fiduciary obligation to act on behalf of the stockholders.
Please refer to Note E – Related Party Transactions and Arrangements in Part II, Item 8 Financial Statements of this Annual Report for information regarding our related party transactions, which are incorporated herein by reference. Please also see "Risk Factors–Risks Related to Conflict of Interests." in Part I, Item 1A "Risk Factors" of this Annual Report.
Certain Conflict Mitigation Measures
In order to reduce or mitigate certain potential conflicts of interests, the Company has adopted the procedures set forth below, which includes procedures imposed by the NASAA REIT Guidelines. The Company will no longer be subject to the requirements imposed by the NASAA REIT Guidelines if and when the Company lists its shares on a national securities exchange.
Advisor Compensation
The independent directors evaluate at least annually whether the compensation that the Company contracts to pay to the Advisor and its affiliates is reasonable in relation to the nature and quality of services performed and whether such compensation is within the limits prescribed by the Company's charter. The independent directors supervise the performance of the Advisor and its affiliates and the compensation we pay to them to determine whether the provisions of the Amended and Restated Advisory Agreement are being carried out. This evaluation is based on the following factors as well as any other factors they deem relevant:
| · | the amount of the fees and any other compensation, including stock-based compensation, paid to the Advisor and its affiliates in relation to the size, composition and performance of the assets; |
| · | the success of the Advisor in generating appropriate investment opportunities; |
| · | the rates charged to other companies, including other REITs, by advisors performing similar services; |
| · | additional revenues realized by our Advisor and its affiliates through their relationship with us, including whether the Company pays them, or they are paid by others with whom the Company does business; |
| · | the quality and extent of service and advice furnished by the Advisor and its affiliates; |
| · | the performance of the Company's investment portfolio; and |
| · | the quality of the Company's portfolio relative to the investments generated by the Advisor and its affiliates for their own account and for their other clients. |
Term of Advisory Agreement
Each contract for the services of the Advisor may not exceed one year, although there is no limit on the number of times that the Company may retain a particular advisor. The Company's charter provides that a majority of the independent directors may terminate the Amended and Restated Advisory Agreement with the Advisor without cause or penalty on 60 days' written notice. The Advisor may terminate the Amended and Restated Advisory Agreement with good reason on 60 days' written notice to us.
Independent Directors
The NASAA REIT Guidelines require the Company's charter to define an independent director as a director who is not and has not for the last two years been associated, directly or indirectly, with the Sponsor or the Advisor. A director is deemed to be associated with the Sponsor or the Advisor if he or she owns any interest in, is employed by, is an officer or director of, or has any material business or professional relationship with the Sponsor, the Advisor or any of their affiliates, performs services (other than as a director) for us, or serves as a director or trustee for more than three REITs sponsored by the Sponsor or advised by the Advisor. A business or professional relationship will be deemed material per se if the gross revenue derived by the director from the Sponsor, the Advisor or any of their affiliates exceeds five percent of (1) the director's annual gross revenue derived from all sources during either of the last two years or (2) the director's net worth on a fair market value basis. An indirect relationship is defined to include circumstances in which the director's spouse, parents, children, siblings, mothers- or fathers-in-law, sons- or daughters-in-law or brothers- or sisters-in-law is or has been associated with the Company, the Sponsor, the Advisor or any of its affiliates.
A majority of the Company's board of directors, including a majority of the independent directors, must determine the method used by the Advisor for the allocation of the acquisition of investments by two or more affiliated programs seeking to acquire similar types of assets is fair and reasonable to us. The Company's independent directors, acting as a group, will resolve potential conflicts of interest whenever they determine that the exercise of independent judgment by the full board of directors or the Advisor or its affiliates could reasonably be compromised. However, the independent directors may not take any action which, under Maryland law, must be taken by the entire board of directors or which is otherwise not within their authority. The independent directors, as a group, are authorized to retain their own legal and financial advisors. Among the matters we expect the independent directors to review and act upon are:
| · | the continuation, renewal or enforcement of our agreements with our Advisor and its affiliates, including the Amended and Restated Advisory Agreement and the property management agreement; |
| · | transactions with affiliates, including our directors and officers; |
| · | awards under our equity incentive plan; and |
| · | pursuit of a potential liquidity event. |
Those conflict of interest matters that cannot be delegated to the independent directors, as a group, under Maryland law must be acted upon by both the board of directors and the independent directors.
The Company's Acquisitions
The Company will not purchase or lease assets in which the Sponsor, the Advisor, any of the Company's directors or any of their affiliates has an interest without a determination by a majority of the Company's directors (including a majority of the independent directors) not otherwise interested in the transaction that such transaction is fair and reasonable to us and at a price to us no greater than the cost of the asset to the Sponsor, the Advisor, the director or the affiliated seller or lessor, unless there is substantial justification for the excess amount and such excess is reasonable. In no event may the Company acquire any such asset at an amount in excess of its current appraised value.
The consideration the Company pays for real property will ordinarily be based on the fair market value of the property as determined by a majority of the members of the board of directors or the members of a duly authorized committee of the board. In cases in which a majority of the Company's independent directors so determine, and in all cases in which real property is acquired from the Sponsor, the Advisor, any of the Company's directors or any of their affiliates, the fair market value shall be determined by an independent expert selected by the Company's independent directors not otherwise interested in the transaction.
Loans
The Company will not make any loans to the Sponsor, the Advisor or the Company's directors or officers or any of their affiliates (other than mortgage loans complying with the limitations set forth in Section V.K.3 of the NASAA REIT Guidelines or loans to wholly owned subsidiaries). In addition, the Company will not borrow from these affiliates unless a majority of the Company's board of directors (including a majority of the independent directors) not otherwise interested in the transaction approves the transaction as being fair, competitive and commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties. These restrictions on loans will only apply to advances of cash that are commonly viewed as loans, as determined by the Company's board of directors.
Other Transactions Involving Affiliates
A majority of the Company's directors, including a majority of the independent directors not otherwise interested in the transaction, must conclude that all other transactions between the Company and the Sponsor, the Advisor, any of the Company's directors or any of their affiliates are fair and reasonable to the Company and on terms and conditions not less favorable to the Company than those available from unaffiliated third parties. To the extent that the Company contemplates any transactions with affiliates, members of the Company's board of directors who serve on the board of the affiliated entity will be deemed "interested directors" and will not participate in approving or making other substantive decisions with respect to such related party transactions.
Limitation on Operating Expenses
In compliance with the NASAA REIT Guidelines, the Advisor must reimburse the Company the amount by which the Company's aggregate total operating expenses for the four fiscal quarters then ended exceed the greater of 2% of our average invested assets or 25% of the Company's net income, unless the independent directors have determined that such excess expenses were justified based on unusual and non-recurring factors. "Average invested assets" means the average of the aggregate monthly book value of the Company's assets during a specified period invested, directly or indirectly in equity interests in and loans secured by real estate, before deducting depreciation, bad debts or other non-cash reserves. "Total operating expenses" means all costs and expenses paid or incurred by the Company, as determined under GAAP, that are in any way related to the Company's operation, including advisory fees, but excluding (i) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and stock exchange listing of the Company's stock; (ii) interest payments; (iii) taxes; (iv) non-cash expenditures such as depreciation, amortization and bad debt reserves; (v) incentive fees paid in compliance with the NASAA REIT Guidelines; (vi) acquisition fees and expenses; (vii) real estate commissions on the sale of real property; and (viii) other fees and expenses connected with the acquisition, disposition, management and ownership of real estate interests, mortgage loans or other property (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of property).
Notwithstanding the foregoing, to the extent that operating expenses payable or reimbursable by us exceed these limits and the independent directors determine that the excess expenses were justified based on unusual and nonrecurring factors which they deem sufficient, the Advisor may be reimbursed in future periods for the full amount of the excess expenses or any portion thereof. Within 60 days after the end of any fiscal quarter for which the Company's total operating expenses for the four consecutive fiscal quarters then ended exceed these limits, the Company will send our stockholders a written disclosure of such fact, together with an explanation of the factors our independent directors considered in determining that such excess expenses were justified. In addition, the Company's independent directors will review the total fees and expense reimbursements for operating expenses paid to the Advisor to determine if they are reasonable considering the Company's performance, net assets and income, and the fees and expenses of other comparable unaffiliated REITs.
Issuance of Options and Warrants to Certain Affiliates
Until the Company's shares of common stock are listed on a national securities exchange, the Company will not issue options or warrants to purchase our common stock to the Advisor, the Sponsor, any of the Company's directors or any of their affiliates, except on the same terms as such options or warrants, if any, are sold to the general public. We may issue options or warrants to persons other than the Advisor, the Sponsor, the Company's directors and their affiliates prior to listing the Company's common stock on a national securities exchange, but not at an exercise price less than the fair market value of the underlying securities on the date of grant and not for consideration (which may include services) that in the judgment of the Company's board of directors has a market value less than the value of such option or warrant on the date of grant. Any options or warrants we issue to the Advisor, the Sponsor or any of their affiliates shall not exceed an amount equal to 10% of the outstanding shares of the Company's common stock on the date of grant.
Reports to Stockholders
The Company will prepare an annual report and deliver it to the Company's common stockholders within 120 days after the end of each fiscal year. The Company's directors are required to take reasonable steps to ensure that the annual report complies with the Company's charter provisions as applicable. Among the matters that must be included in the annual report or included in a proxy statement delivered with the annual report are:
| · | financial statements prepared in accordance with GAAP that are audited and reported on by independent certified public accountants; |
| · | the ratio of the costs of raising capital during the year to the capital raised; |
| · | the aggregate amount of advisory fees and the aggregate amount of other fees paid to the Advisor and any affiliates of the Advisor by the Company or third parties doing business with the Company during the year; |
| · | the Company's total operating expenses for the year stated as a percentage of the Company's average invested assets and as a percentage of the Company's net income; |
| · | a report from the independent directors that the Company's policies are in the best interests of the Company's stockholders and the basis for such determination; and |
| · | a separately stated, full disclosure of all material terms, factors and circumstances surrounding any and all transactions involving us and the Advisor, a director or any affiliate thereof during the year, which disclosure has been examined and commented upon in the report by the independent directors regarding the fairness of such transactions. |
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES; AUDIT COMMITTEE REPORT
Principal Accounting Fees and Services
For the years ended December 31, 2018 and 2017 RBSM LLP ("RBSM"), our independent public accounting firm, billed the Company approximately $462,000 and $179,000, respectively, for their professional services.
For the years ended December 31, 2018 and 2017, RSM US LLP ("RSM"), our former independent public accounting firm, billed the Company approximately $443,000 and $120,000, respectively, for their professional services.
For the year ended December 31, 2018 and 2017, HCVT LLP ("HCVT"), our independent accounting firm, billed the Company approximately $219,000 and $46,000, respectively, for their professional services.
| | | RBSM 12/31/2018 | | RBSM 12/31/2017 | | RSM 12/31/2018 | | RSM 12/31/2017 | | HCVT 12/31/2018 | | HCVT 12/31/2017 |
| Audit Fees | $ | 420,000 | $ | 168,000 | $ | 343,000 | $ | 120,000 | $ | -- | $ | -- |
| Audit Related Fees | | -- | | -- | | -- | | -- | | -- | | -- |
| Tax Fees | | -- | | -- | | -- | | -- | | 219,000 | | 46,000 |
| All Other Fees | | 25,000 | | 11,000 | | 100,000 | | -- | $ | -- | | -- |
| Total | $ | 445,000 | $ | 179,000 | $ | 443,000 | $ | 120,000 | $ | 219,000 | $ | 46,000 |
Audit fees. Consists of fees billed for the audit of the Company's annual financial statements, review of the Company's Form 10-K, review of the Company's interim financial statements included in the Company's Form 10-Q and services that are normally provided by the accountant in connection with year-end statutory and regulatory filings or engagements.
Audit-related fees. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company's financial statements and are not reported under "Audit Fees," such as acquisition audit, audit of the Company's financial statements, review of our Form 8-K, review of the Company's registration statement on Form S-11 and Form S-4 filings.
Tax fees. Consists of professional services rendered by a company aligned with the Company's principal accountant for tax compliance, tax advice and tax planning.
Other fees. The services provided by the Company's accountants within this category consisted of advice and other services.
Pre-Approval Policy
The Audit Committee has direct responsibility to review and approve the engagement of the independent auditors to perform audit services or any permissible non-audit services. All audit and non-audit services to be provided by the independent auditors must be approved in advance by the Audit Committee. The Audit Committee may not engage the independent auditors to perform specific non-audit services proscribed by law or regulation. All services performed by our independent auditors under engagements entered into were approved by the Company's Audit Committee, pursuant to the Company's pre-approval policy, and none was approved pursuant to the de minimis exception to the rules and regulations of the Exchange Act, Section 10A(i)(1)(B), on pre-approval.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following are filed as part of this Report:
1. Financial Statements
The list of the financial statements contained herein are contained in Part II, Item 8. Financial Statements on this Annual Report, which is hereby incorporated by reference.
2. Financial Statement Schedules
Schedule III – Combined Real Estate and Accumulated Depreciation
3. Exhibits
Reference is made to the Exhibit Index appearing immediately before the signature page to this report for a list of exhibits filed as part of this report.
None.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | The Parking REIT, Inc. |
| | | |
| | By: | /s/ Michael V. Shustek |
| | | Michael V. Shustek |
| | | Chief Executive Officer |
| | Date: | March 5, 2019 |
| | | |
| | By: | /s/ J. Kevin Bland |
| | | J. Kevin Bland |
| | | Chief Financial Officer |
| | Date: | March 5, 2019 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | | Capacity | | Date |
| | | | | |
| /s/ Michael V. Shustek | | Chief Executive Officer and Director | | March 5, 2019 |
| Michael V. Shustek | | (Principal Executive Officer) | | |
| | | | | |
| /s/ J. Kevin Bland | | Chief Financial Officer | | March 5, 2019 |
| J. Kevin Bland | | (Principal Financial and Accounting Officer) | | |
| | | | | |
| /s/ John E. Dawson | | Director | | March 5, 2019 |
| John E. Dawson | | | | |
| | | | | |
| /s/ David Chavez | | Director | | March 5, 2019 |
| David Chavez | | | | |
| | | | | |
| /s/ Robert J. Aalberts | | Director | | March 5, 2019 |
| Robert J. Aalberts | | | | |
| | | | | |
| /s/ Nicholas Nilsen | | Director | | March 5, 2019 |
| Nicholas Nilsen | | | | |
| | | | | |
| /s/ Shawn Nelson | | Director | | March 5, 2019 |
| Shawn Nelson | | | | |
| | | | | |
/s/ William Wells | | Director | | March 5, 2019 |
| William Wells | | | | |
EXHIBIT INDEX
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| 23.1(*) | | |
| | |
| | |
| | |
| 101(*) | | The following materials from the Company's Annual Report on Form 10-K for the year ended December 31, 2016, formatted in XBRL (extensible Business Reporting Language (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statement of Stockholder's Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Financial Statements. As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
| | | |
| * | Filed concurrently herewith. |
| (1) | Filed previously on Form 8-K on May 31, 2017 and incorporated herein by reference. |
| (2) | Filed previously with Pre-Effective Amendment No. 2 to the Registration Statement on Form S-11 on September 24, 2015 and incorporated herein by reference. |
| (3) | Filed previously on Form 8-K on December 18, 2017 and incorporated herein by reference. |
| (4) | Filed previously on Form 8-K on October 28, 2016 and incorporated herein by reference. |
| (5) | Filed previously on Form 8-K on March 30, 2017 and incorporated herein by reference. |
| (6) | Filed previously with the Registration Statement on Form S-11 on July 28, 2015 and incorporated herein by reference. |
| (7) | Filed previously on Form 8-K on May 15, 2017 and incorporated herein by reference. |
| (8) | Filed previously as Appendix D to the Registrant's prospectus filed October 23, 2015 and incorporated herein by reference. |
| (9) | Filed previously with Post-Effective Amendment No. 1 to the Registration Statement on Form S-11 on April 6, 2016 and incorporated herein by reference. |
| (10) | Filed previously on Form 8-K on January 5, 2018 and incorporated herein by reference. |
| (11) | Filed previously on Form 8-K on December 8, 2016 and incorporated herein by reference. |
| (12) | Filed previously on Form 8-K on January 1, 2017 and incorporated herein by reference. |
| (13) | Filed previously on Form 10-K on June 22, 2018 and incorporated herein by reference. |
| (14) | Filed previously on Form 8-K on September 26, 2018 and incorporate herein by reference. |
| (15) | Filed previously on Form 8-K on October 2, 2018 and incorporate herein by reference. |
| (16) | Filed previously on Form 8-K on December 6, 2018 and incorporate herein by reference. |
