Filed Pursuant to Rule 424(b)(3)
Registration No. 333-215272
COTTONWOOD COMMUNITIES, INC.
SUPPLEMENT NO. 7 DATED MAY 17, 2019
TO THE PROSPECTUS DATED AUGUST 13, 2018
This document supplements, and should be read in conjunction with, the prospectus of Cottonwood Communities, Inc. dated August 13, 2018 and supplement no. 6 dated May 3, 2019. As used herein, the terms “we,” “our” and “us” refer to Cottonwood Communities, Inc. and, as required by context, Cottonwood Communities O.P., LP, which we refer to as our “Operating Partnership,” and to their subsidiaries. Capitalized terms used in this supplement have the same meanings as set forth in the prospectus. The purpose of this supplement is to disclose:
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| • | updates risks related to an investment in us; |
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| • | information regarding distributions; |
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| • | “Management’s Discussion and Analysis of Financial Condition and Results of Operations” similar to that filed in our quarterly report on Form 10-Q for the period ended March 31, 2019; and |
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| • | our unaudited financial statements and the notes thereto as of and for the period ended March 31, 2019. |
Risk Factors
The following risk factor supplements the risk factors appearing in the prospectus.
We have paid distributions from offering proceeds. In the future we may continue to fund distributions with offering proceeds. To the extent we fund distributions from sources other than our cash flow from operations, we will have less funds available for investment in multifamily apartment communities and multifamily real estate-related assets and the overall return to our shareholders may be reduced.
Our charter permits us to make distributions from any source, including offering proceeds or borrowings (which may constitute a return of capital), and our charter does not limit the amount of funds we may use from any source to pay such distributions. We intend to make distributions on our common stock on a per share basis with each share receiving the same distribution. If we fund distributions from financings, the proceeds from this or future offerings or other sources, we will have less funds available for investment in multifamily apartment communities and other multifamily real estate-related assets and the number of real estate properties that we invest in and the overall return to our shareholders may be reduced. If we fund distributions from borrowings, our interest expense and other financing costs, as well as the repayment of such borrowings, will reduce our earnings and cash flow from operations available for distribution in future periods. If we fund distributions from the sale of assets or the maturity, payoff or settlement of multifamily real estate-related assets, this will affect our ability to generate cash flows from operations in future periods.
We expect to have little, if any, cash flow from operations available for distribution until we make substantial investments. During the early stages of our operations, it is likely that we will use sources of funds which may constitute a return of capital to fund distributions. During this offering stage, when we may raise capital more quickly than we acquire income-producing assets, and for some period after this offering stage, we may not be able to make distributions solely from our cash flow from operations. Further, because we may receive income from our investments at various times during our fiscal year and because we may need cash flow from operations during a particular period to fund capital expenditures and other expenses, we expect that at least during the early stages of our existence and from time to time during our operational stage, we will declare distributions in anticipation of cash flow that we expect to receive during a later period and we will make these distributions in advance of our actual receipt of these funds. In addition, to the extent our investments are in development or redevelopment projects or in properties that have significant capital requirements, our ability to make distributions may be negatively impacted, especially during our early periods of operation. In these instances, we expect to look to third party borrowings to fund our distributions. We may also fund such distributions from the sale of assets. To the extent distributions exceed cash flow from operations, a shareholder’s basis in our stock will be reduced and, to the extent distributions exceed a shareholder’s basis, the shareholder may recognize capital gain.
For the three months ended March 31, 2019, we paid aggregate distributions of $58,045, including $40,024 distributions paid in cash and $18,021 of distributions reinvested through our distribution reinvestment plan. Our net loss for the three months ended March 31, 2019 was $231,511. Cash flow used in operating activities for the three months ended March 31, 2019 was $19,449. We funded our total distributions paid, which includes net cash distributions and distributions reinvested by stockholders, with offering proceeds.
Information Regarding Distributions
On May 7, 2019, we paid distributions of $112,275 which related to distributions in the amount of $0.00136986 per share per day for daily record dates for each day in the period from April 1, 2019 through April 30, 2019. Cash distributions for distribution record dates from inception through the period ended April 30, 2019 have been funded with offering proceeds.
On May 13, 2019, our board of directors declared cash distributions on the outstanding shares of our common stock based on daily record dates for the period from June 1, 2019 through June 30, 2019, which we expect to pay in July 2019; the period from July 1, 2019 through July 31, 2019, which we expect to pay in August 2019; and the period from August 1, 2019 through August 31, 2019, which we expect to pay in September 2019. Investors may choose to receive cash distributions or purchase additional shares through our distribution reinvestment plan. Distributions for these periods will be calculated based on stockholders of record each day during these periods at a rate of $0.00136986 per share per day.
For more information regarding distributions, see “Management's Discussion and Analysis of Financial Condition and Results of Operations - Distributions” below.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our financial statements and the related notes included in this supplement.
This discussion contains forward-looking statements that can be identified with the use of forward-looking terminology such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Actual results may differ from those described in forward-looking statements. For a discussion of the factors that could cause actual results to differ from those anticipated, see “Risk Factors” in the prospectus and in this supplement.
Overview
Cottonwood Communities, Inc. is a Maryland corporation formed on July 27, 2016 to invest primarily in multifamily apartment communities and multifamily real estate-related assets throughout the United States. We seek to invest at least 65% of our assets in stabilized multifamily apartment communities and up to 35% in mortgage loans, preferred equity investments, mezzanine loans or equity investments in a property or land which will be developed into a multifamily apartment community (including, by way of example, an existing multifamily apartment community that may require redevelopment capital for strategic repositioning within its market). We do not expect to be able to achieve the balance of these allocations until we have raised substantial proceeds in this offering. Although this is our current target portfolio, we may make adjustments to our target portfolio based on real estate market conditions and investment opportunities. We will not forego what we believe to be a good investment because it does not precisely fit our expected portfolio composition.
Our investment objectives are to:
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| • | preserve, protect and return invested capital; |
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| • | pay stable cash distributions to stockholders; |
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| • | realize capital appreciation in the value of our investments over the long term; and |
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| • | provide a real estate investment alternative with lower expected volatility relative to public real estate companies whose securities trade daily on a stock exchange. |
There is no assurance that we will attain our investment objectives. Our charter places numerous limitations on us with respect to the manner in which we may invest our funds. In most cases these limitations cannot be changed unless our charter is amended, which may require the approval of our stockholders.
On August 13, 2018, the SEC declared effective this initial public offering of up to $750,000,000 in shares of our common stock, through a primary offering of $675,000,000 of shares of common stock and a distribution reinvestment plan of up to $75,000,000 of shares of common stock. We are offering our shares for sale in the primary offering at $10.00 per share (with discounts available to certain categories of purchasers) and shares in the distribution reinvestment plan initially at $10.00 per share, all without any upfront costs or expenses charged to the investor. Any offering-related expenses will be paid by our advisor without reimbursement by us.
We operate under the direction of our board of directors. Our board of directors has retained CC Advisors III, LLC to conduct our operations and manage our portfolio of real estate investments, subject to the supervision of the board of directors. Our advisor is an affiliate of our sponsor. We have no paid employees.
We intend to qualify as a real estate investment trust beginning with the taxable year ending December 31, 2019. We utilize an UPREIT organizational structure to hold all or substantially all of our assets through Cottonwood Communities O.P., LP, the Operating Partnership. We are the general partner of the Operating Partnership.
From inception to March 31, 2019, we registered this offering with the SEC, raised proceeds in this offering, and commenced the identification of real estate investments to meet our investment objectives.
Multifamily Real Estate Outlook
We believe that current market dynamics and underlying fundamentals suggest the positive trends in United States multifamily housing will continue. Steady job growth, low unemployment, increased rentership rates, increasing household formation and aligned demographics provide the backdrop for strong renter demand. We believe that other factors impacting the prime United States renter demographic such as delayed major life decisions, increased levels of student debt and tight credit standards in the single-family home mortgage market also support the value proposition for owning multifamily apartment communities.
Identification of Property for Investment
On March 28, 2019, we entered into a purchase agreement with Luma at West Palm Beach, LLC, an unaffiliated third party, to acquire Luma at West Palm Beach, a 245-unit, elevator-serviced, concrete and stucco community in West Palm Beach, Florida. The purchase price is $67.0 million, of which $1.0 million was provided in earnest money, which is non-refundable except in limited circumstances, upon execution of the purchase agreement.
We expect the acquisition of the property to close in May 2019. Although we expect to close in accordance with the terms of the purchase agreement, there can be no assurance that events will not arise that could prevent us from acquiring this property.
Results of Operations
We broke escrow on December 18, 2018, and although we have identified a property for purchase, our assets consisted primarily of cash and we have not commenced real estate operations as of March 31, 2019. During the three months ended March 31, 2019, we earned interest of $31,432 on cash held at a financial institution and incurred operating expenses of $125,000, asset management fees of $19,783, and general and administrative expenses of $118,160, which included audit fees and costs associated with sourcing potential real estate for investment. We expect these amounts to increase in the future as a result of additional proceeds raised in this offering and anticipated future acquisitions of real estate investments.
Our advisor is paying all selling commissions, dealer manager fees and organizational and offering expenses related to this offering on our behalf without reimbursement by us.
Liquidity and Capital Resources
We are dependent upon the proceeds from this offering to conduct our proposed operations. We will obtain the capital required to purchase multifamily apartment communities and make investments in multifamily real estate-related assets and conduct our operations from the proceeds of this offering, from secured or unsecured financings from banks and other lenders, and from any undistributed funds from our operations. As of May 14, 2019, we have not made any investments, and our assets consisted of approximately $17,469,929 of cash and cash equivalents and $1,354,966 in other assets.
If we are unable to raise substantial funds in this offering, we will make fewer investments resulting in less diversification in terms of the type, number, and size of investments we make and the value of an investment in us will fluctuate with the performance of the specific assets we acquire. Further, we will have certain fixed operating expenses regardless of whether we are able to raise substantial funds. Our inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, reducing our net income and limiting our ability to make distributions. We do not expect to establish a permanent reserve from this offering proceeds for maintenance and repairs of real properties. However, to the extent that we have insufficient funds for such purposes, we may establish reserves from gross offering proceeds, out of cash flow from operations, or from net cash proceeds from the sale of properties.
We have no outstanding debt. We will target an aggregate loan-to-cost or loan-to-value ratio of 45% to 65% at the REIT level; provided, however, that we may obtain financing that is less than or exceeds such ratio in the discretion of our board of directors if the board of directors deems it to be in our best interest to obtain such financing. Although there is no limit on the amount we can borrow to acquire a single real estate investment, we may not leverage our assets with debt financing such that our borrowings are in excess of 300% of our net assets, unless a majority of our conflicts committee finds substantial justification for borrowing a greater amount and such excess borrowings are disclosed in our next quarterly report, along with the conflicts committee’s justification for such excess. Examples of such a substantial justification include obtaining funds for the following: (i) to repay existing obligations, (ii) to pay sufficient distributions to maintain REIT status, or (iii) to buy an asset where an exceptional acquisition opportunity presents itself and the terms of the debt agreement and the nature of the asset are such that the debt does not increase the risk that we would become unable to meet our financial obligations as they became due. We anticipate that all financing obtained to acquire stabilized multifamily apartment communities will be non-recourse to the Operating Partnership and us (however, it is possible that some of these loans will require us to enter into guaranties with respect to certain non-recourse carve-outs). We may obtain recourse debt in connection with certain development transactions. The terms of any financing to be obtained are not currently known and we have not obtained any financing commitments for any multifamily apartment communities.
We may obtain a line of credit or other financing that will be secured by one or more of our assets. We may use the proceeds from any line of credit or financing to bridge the acquisition of, or acquire, multifamily apartment communities and multifamily real estate-related assets if our board of directors determines that we require such funds to acquire the multifamily apartment communities or real estate-related assets.
In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make certain payments to our advisor and our affiliated property manager pursuant to the terms of our advisory agreement and form of property management agreement.
We intend to make an election to be taxed as a REIT under the Internal Revenue Code commencing with the year ended December 31, 2019. To maintain our qualification as a REIT, we will be required to make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (computed without regard to the dividends-paid deduction and excluding net capital gain). Our board of directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board of directors deems relevant.
Cash Flows
The following table provides a breakdown of the net change in our cash and cash equivalents:
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| | | Three Months Ended March 31, 2019 |
| Cash flows used in operating activities | | $ | (19,449 | ) |
| Cash flows used in investing activities | | (1,000,000 | ) |
| Cash flows provided by financing activities | | 15,083,203 |
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| Net increase in cash and cash equivalents | | $ | 14,063,754 |
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Cash flows used in operating activities were $19,449 during the three months ended March 31, 2019, primarily as a result of general and administrative costs. We expect that our cash flows from operating activities will increase in future periods as a result of anticipated future acquisitions of real estate and real estate-related investments and the related operations of such investments.
Cash flows used in investing activities were $1,000,000 and relate to our $1,000,000 non-refundable earnest money provided upon the execution of the purchase agreement for Luma at West Palm Beach.
Cash flows provided by financing activities were $15,083,203 during the three months ended March 31, 2019, primarily due to the net proceeds we received from the issuance of our common stock.
Distributions
During our offering stage, when we may raise capital more quickly than we acquire income-producing assets, and for some period after our offering stage, we will not be able to make distributions solely from our cash flow from operating activities. Further, because we may receive income from our investments at various times during our fiscal year and because we may need cash flow from operations during a particular period to fund capital expenditures and other expenses, we expect that at least during the early stages of our existence and from time to time during our operational stage, we will declare distributions in anticipation of cash flow that we expect to receive during a later period and we will make these distributions in advance of our actual receipt of these funds.
Distributions declared, distributions paid and cash flow used in operating activities were as follows for the first quarter of 2019.
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| | | Distributions Paid(3) | |
| Period | Cash Distributions Declared (1) | Cash Distribution Declared Per Share (1)(2) | Cash | Reinvested (DRP) | Total | Cash Used In Operating Activities |
| First Quarter 2019 | $ | 117,486 |
| 0.0621627928 |
| $ | 40,024 |
| $ | 18,021 |
| $ | 58,045 |
| $ | 19,449 |
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(1) Distributions for the periods from January 1, 2019 through February 28, 2019 and March 19, 2019 through March 31, 2019 were based on daily record dates and were calculated at a rate of $0.00136986 per share per day. A daily distribution in the amount of 0.02465753 per share was declared for stockholders of record as of March 18, 2019.
(2) Assumes share was issued and outstanding each day during the period presented.
(3) Distributions are paid on a monthly basis and include distributions declared for record dates from December 18, 2018 through March 31, 2019. In general, distributions for all record dates of a given month are paid on or about the fifth business day of the following month.
For the three months ended March 31, 2019, we paid aggregate distributions of $58,045, including $40,024 distributions paid in cash and $18,021 of distributions reinvested through our distribution reinvestment plan. Our net loss for the three months ended March 31, 2019 was $231,511. Cash flow used in operating activities for the three months ended March 31, 2019 was $19,449. We funded our total distributions paid, which includes net cash distributions and distributions reinvested by stockholders, with proceeds from this offering. To the extent that we pay distributions from sources other than our cash flow from operating activities, we will have less funds available for the acquisition of real estate investments, the overall return to our stockholders may be reduced and subsequent investors will experience dilution. In addition, to the extent distributions exceed cash flow from operating activities, a stockholder's basis in our stock will be reduced and, to the extent distributions exceed a stockholder's basis, the stockholder may recognize capital gain.
We expect our board of directors to continue to authorize and declare distributions based on daily record dates and to pay these distributions on a monthly basis. We have not established a minimum distribution level, and our charter does not require that we make distributions to our shareholders. We may also issue stock dividends. The timing and amount of distributions will be determined by our board of directors in its sole discretion and may vary from time to time.
Critical Accounting Policies
A critical accounting policy is one that is both important to our financial condition and results of operations and that involves some degree of uncertainty. The preparation of our financial statements may require significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. As of March 31, 2019, we had no accounting policies that were considered critical under this definition.
For more information regarding our significant accounting policies see Note 2 to the consolidated financial statements included elsewhere in this supplement.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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| Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018 | F-2 |
| Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 (unaudited) | F-3 |
| Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018 (unaudited) | F-4 |
| Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (unaudited) | F-5 |
| Notes to Consolidated Financial Statements (unaudited) | F-6 |
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| Cottonwood Communities, Inc. |
| Consolidated Balance Sheets |
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| | | March 31, 2019 | | December 31, 2018 |
| | | (Unaudited) | | |
| Assets | | | | |
| Cash and cash equivalents | | $ | 17,469,929 |
| | $ | 3,406,175 |
|
| Other assets | | 1,354,966 |
| | 317,279 |
|
| Total assets | | 18,824,895 |
| | 3,723,454 |
|
| Liabilities and equity | | | | |
| Liabilities | | | | |
| Related party payables | | 289,077 |
| | 128,617 |
|
| Accounts payable and accrued liabilities | | 57,768 |
| | 29,146 |
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| Total liabilities | | 346,845 |
| | 157,763 |
|
| Commitments and contingencies (Note 7) | | | | |
| Stockholders' equity | | | | |
| Preferred stock, $0.01 par value; 100,000,000 shares authorized | | — |
| | — |
|
| Common stock, $0.01 par value, 1,000,000,000 shares authorized; 1,889,973 shares issued and outstanding at March 31, 2019; 366,654 shares issued and outstanding at December 31, 2018 | | 18,900 |
| | 3,667 |
|
| Additional paid-in capital | | 18,848,915 |
| | 3,662,233 |
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| Accumulated distributions | | (58,045 | ) | | — |
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| Accumulated deficit | | (331,720 | ) | | (100,209 | ) |
| Total stockholders' equity | | 18,478,050 |
| | 3,565,691 |
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| Total liabilities and stockholders' equity | | $ | 18,824,895 |
| | $ | 3,723,454 |
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| | | | | |
| See accompanying notes to consolidated financial statements |
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| | | | | | | | |
| Cottonwood Communities, Inc. |
| Consolidated Statements of Operations |
| (Unaudited) |
| | | | | |
| | | Three Months Ended March 31, |
| | | 2019 | | 2018 |
| Revenues | | | | |
| Interest income | | $ | 31,432 |
| | $ | — |
|
| Expenses | | | | |
| Reimbursable operating expenses to related parties | | 125,000 |
| | — |
|
| Asset management fee to related party | | 19,783 |
| | — |
|
| General and administrative expenses | | 118,160 |
| | 963 |
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| Total expenses | | 262,943 |
| | 963 |
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| Net loss | | $ | (231,511 | ) | | $ | (963 | ) |
| | | | | |
| Weighted-average shares outstanding | | 876,743 |
| | 20,000 |
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| Net loss per common share - basic and diluted | | $ | (0.26 | ) | | $ | (0.05 | ) |
| | | | | |
| See accompanying notes to consolidated financial statements |
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| | | | | | | | | | | | | | | | | | | | | | | |
| Cottonwood Communities, Inc. |
| Consolidated Statements of Stockholders' Equity |
| (Unaudited) |
| | | | | | | | | | | | | |
| | | Common Stock | | |
| | | Shares | | Amount | | Additional Paid-In Capital | | Accumulated Distributions | | Accumulated Deficit | | Total Equity |
| Balance at December 31, 2017 | | 20,000 |
| | $ | 200 |
| | $ | 199,800 |
| | $ | — |
| | $ | — |
| | $ | 200,000 |
|
| Net loss | | — |
| | — |
| | — |
| | — |
| | (963 | ) | | (963 | ) |
| Balance at March 31, 2018 | | 20,000 |
| | $ | 200 |
| | $ | 199,800 |
| | $ | — |
| | $ | (963 | ) | | $ | 199,037 |
|
| | | | | | | | | | | | | |
| Balance at December 31, 2018 | | 366,654 |
| | $ | 3,667 |
| | $ | 3,662,233 |
| | $ | — |
| | $ | (100,209 | ) | | $ | 3,565,691 |
|
| Issuance of common stock | | 1,523,319 |
| | 15,233 |
| | 15,186,682 |
| | — |
| | — |
| | 15,201,915 |
|
| Distributions to investors | | — |
| | — |
| | — |
| | (58,045 | ) | | — |
| | (58,045 | ) |
| Net loss | | — |
| | — |
| | — |
| | — |
| | (231,511 | ) | | (231,511 | ) |
| Balance at March 31, 2019 | | 1,889,973 |
| | $ | 18,900 |
| | $ | 18,848,915 |
| | $ | (58,045 | ) | | $ | (331,720 | ) | | $ | 18,478,050 |
|
| | | | | | | | | | | | | |
| See accompanying notes to consolidated financial statements |
|
| | | | | | | | |
| Cottonwood Communities, Inc. |
| Consolidated Statements of Cash Flows |
| (Unaudited) |
| | | | | |
| | | Three Months Ended March 31, |
| | | 2019 | | 2018 |
| Operating activities | | | | |
| Net loss | | $ | (231,511 | ) | | $ | (963 | ) |
| Changes in operating assets and liabilities: | | | | |
| Other assets | | 22,980 |
| | — |
|
| Related party payables | | 160,460 |
| | — |
|
| Accounts payable and accrued liabilities | | 28,622 |
| | 963 |
|
| Net cash used in operating activities | | (19,449 | ) | | — |
|
| Investing activities | | | | |
| Acquisition deposit | | (1,000,000 | ) | | — |
|
| Net cash used in investing activities | | (1,000,000 | ) | | — |
|
| Financing activities | | | | |
| Issuance of common stock | | 15,123,227 |
| | — |
|
| Distributions to common stockholders | | (40,024 | ) | | — |
|
| Net cash provided by financing activities | | 15,083,203 |
| | — |
|
| | | | | |
| Net increase in cash and cash equivalents | | 14,063,754 |
| | — |
|
| Cash and cash equivalents at beginning of period | | 3,406,175 |
| | 200,000 |
|
| Cash and cash equivalents at end of period | | $ | 17,469,929 |
| | $ | 200,000 |
|
| | | | | |
| Supplemental schedule of non-cash financing activities | | | | |
| Proceeds receivable for issuance of common stock | | $ | 316,667 |
| | $ | — |
|
| Issuance of common stock through dividend reinvestment program | | $ | 18,021 |
| | $ | — |
|
| | | | | |
| See accompanying notes to consolidated financial statements |
| |
| 1. | Organization and Business |
Cottonwood Communities, Inc. is a Maryland corporation formed on July 27, 2016 that intends to qualify as a real estate investment trust or REIT. The Company is the sole general partner of Cottonwood Communities O.P., LP, a Delaware limited partnership (the “Operating Partnership”). Cottonwood Communities Investor, LLC, a wholly owned subsidiary of Cottonwood Residential O.P., LP (“CROP”) is currently the sole limited partner of the Operating Partnership. Unless the context indicates otherwise, the “Company,” “we,” “our” or “us” refers to Cottonwood Communities, Inc. and its consolidated subsidiaries, including the Operating Partnership. We were formed to invest in multifamily apartment communities and real estate related assets located throughout the United States. Substantially all of our business is conducted through the Operating Partnership.
On December 2, 2016, the Company was capitalized with a $200,000 investment by CROP in exchange for 20,000 shares of our common stock issued to CROP.
On August 13, 2018, we registered with the Securities and Exchange Commission (the "SEC") an offering of up to $750,000,000 in shares of common stock (the "Offering"), consisting of up to $675,000,000 in shares in our primary offering and up to $75,000,000 in shares pursuant to our distribution reinvestment plan (the "DRP Offering”). The price for shares of common stock in the Offering is $10.00 per share (with discounts available to certain categories of purchasers in the primary offering), all without any upfront costs or expenses charged to the investor. Any offering-related expenses are paid by our advisor without reimbursement by us. On December 18, 2018, we satisfied the minimum offering requirement and broke escrow in the Offering.
Effective March 1, 2019, we are externally managed by CC Advisors III, LLC (our “advisor”), an affiliate of CROP, and have no employees. Prior to March 1, 2019, Cottonwood Communities Management, LLC, also an affiliate of CROP, acted as our advisor and our property manager. Cottonwood Communities Management, LLC will continue to act as property manager for our multifamily apartment communities.
On March 28, 2019, we entered into a purchase and sale agreement to acquire a multifamily apartment community in West Palm Beach, Florida.
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| 2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the accounting and disclosure rules and regulations of the SEC, and reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of our financial position as of March 31, 2019 and the results of operations and cash flows for the periods presented.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and cash equivalents
We consider all cash on deposit, money market funds and short-term investments with original maturities of three months or less to be cash and cash equivalents. Cash and cash equivalents consist of amounts the Company has on deposit with major commercial financial institutions.
Income Taxes
We intend to qualify as a REIT and to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, beginning with the year ending December 31, 2019.
To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our taxable income to our stockholders. As a REIT, we generally are not subject to federal corporate income tax on that portion of our taxable income that is currently distributed to stockholders.
If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially and adversely affect our net income and net cash available for distribution to stockholders. However, we intend to organize and operate in such a manner as to qualify for treatment as a REIT.
As of March 31, 2019, we had incurred cumulative net losses of $331,720. We had a deferred tax asset of approximately $83,000 associated with these cumulative net losses. This deferred tax asset was fully reserved as we do not expect to realize the tax benefit due to the expectation that we will qualify for REIT status for the tax year ending December 31, 2019.
Organization and Offering Costs
Organization costs include all expenses incurred in connection with our formation, including but not limited to legal fees and other costs to incorporate the Company. Offering costs include all expenses incurred in connection with the Offering, including legal, accounting, printing, mailing and filing fees, escrow charges and transfer agent fees, dealer manager fees and selling commissions. All organization and offering costs are paid by our advisor. We will not incur any liability for or reimburse our advisor for any of these organizational and offering costs. As of March 31, 2019, organizational and offering costs incurred by our advisor were approximately $2,800,000.
On March 28, 2019, we entered into a purchase agreement with an unaffiliated third party to acquire Luma at West Palm Beach. $1,000,000 was provided in non-refundable earnest money upon execution of the purchase agreement and is included in other assets on the consolidated balance sheet. The remaining balance of other assets consist primarily of $316,667 of receivables related to common stock issued prior to March 31, 2019 and subsequently collected.
Our charter authorizes the issuance of up to 1,100,000,000 shares of capital stock, of which 1,000,000,000 shares are designated as common stock at $0.01 par value per share and 100,000,000 are designated as preferred stock at $0.01 par value per share.
Voting Common Stock
Holders of our common stock are entitled to receive such distributions as may be declared from time to time by our board of directors out of legally available funds, subject to any preferential rights of outstanding preferred stock. With respect to each authorized and declared distribution, each outstanding share of common stock shall be entitled to receive the same amount. The holders of our common stock are also entitled to one vote per share on all matters submitted to a shareholder vote, including the election of directors. As of March 31, 2019, we had outstanding shares of 1,889,973, which includes 20,000 shares owned by CROP and 1,802 issued through our distribution reinvestment program.
Preferred Stock
The board of directors is authorized, without approval of common shareholders, to provide for the issuance of preferred stock, in one or more classes or series, with such rights, preferences and privileges as the board of directors approves. No preferred stock was issued and outstanding as of March 31, 2019.
Distributions
Distributions are determined by the board of directors based on the Company’s financial condition and other relevant factors. We expect to have little, if any, cash flows from operations available for distribution until we make substantial investments. Should cash flows from operations not cover distributions during the early stages of real estate investment or during the operational stages we may look to offering proceeds or third party borrowings to fund distributions. We may also use funds from the sale of assets or from the maturity, payoff or settlement of debt investments for distributions not covered by operating cash. Our charter permits us to make distributions from any source, including offering proceeds or borrowings (which may constitute a return of capital), and our charter does not limit the amount of funds we may use from any source to pay such distributions. If we make distributions from sources other than our cash flow from operations, we will have less funds available for investment in properties and other assets. For the three months ended March 31, 2019, we paid aggregate distributions of $58,045, including $40,024 distributions paid in cash and $18,021 of distributions reinvested through our distribution reinvestment plan.
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| 5. | Related-Party Transactions |
Advisory Agreement
On August 13, 2018, we entered an advisory agreement with Cottonwood Communities Management, LLC, our initial advisor and property manager and an affiliate of CROP. Effective March 1, 2019, as a result of the determination by CROP to restructure the ownership of the entity that provides our advisory services, the advisory agreement was amended to remove references to property management services and assigned to a newly formed affiliate of CROP, CC Advisors III, LLC (“CC Advisors III”) such that our advisory services will be provided by CC Advisors III going forward. Property management services will continue to be provided by Cottonwood Communities Management, LLC under separate property management agreements to be entered at the time we acquire a property.
Cottonwood Capital Management, Inc. wholly owns Cottonwood Communities Management, LLC and will continue to have an indirect ownership interest in the new advisor, CC Advisors III; however, two additional entities in which employees of CROP and its affiliates have an ownership interest will also have an indirect ownership interest in the new advisor. As the new advisor will be an affiliate of CROP, the new advisor will rely on the expertise and experience of CROP and its affiliates to provide our advisory services.
Per the terms of our advisory agreement, and in exchange for the fees discussed below, our advisor will make decisions related to the structuring, acquisition, management, financing and disposition of our assets in accordance with our investment objectives, guidelines, policies and limitations. Our advisor will also manage day-to-day operations, retain property managers, and perform other duties. These activities are all subject to oversight by our board of directors.
Contingent Acquisition Fee
After stockholders have received, or are deemed to have received (with respect to a merger or a listing), together as a collective group, aggregate distributions sufficient to provide a return of their invested capital, plus a cumulative, noncompounded annual return on their investment (a “Required Return”), our advisor will receive a contingent acquisition fee from us that is a percentage of the cost of investments acquired or originated by us, or the amount to be funded by us to acquire or originate loans, including acquisition and origination expenses and any debt attributable to such investments plus significant capital expenditures related to the development, construction or improvement of the investment as follows: 1% contingent acquisition fee if stockholders receive a 6% Required Return; and 2% additional contingent acquisition fee if stockholders receive a 13% Required Return. The contingent acquisition fee is immediately payable when each Required Return has been met. The fee is based on all assets we have acquired even if no longer in our portfolio. To the extent we acquire any assets after satisfying the return threshold, the contingent acquisition fee will be immediately payable at the closing of the acquisition.
If our advisor agreement is terminated before August 13, 2028 for any reason other than our advisor’s fraud, willful misconduct or gross negligence, our advisor will receive a 3% contingent acquisition fee less the amount of any prior payments of contingent acquisition fees to our advisor.
Acquisition Expense Reimbursement
Subject to the limitations contained in our charter, our advisor receives reimbursement from us for all out-of-pocket expenses incurred in connection with the selection and acquisition or origination of investments, whether or not we ultimately acquire the property or other real estate-related investment.
Contingent Financing Fee
After our stockholders have received, or are deemed to have received (with respect to a merger or a listing), together as a collective group, aggregate distributions sufficient to provide a return of their invested capital, plus a Required Return of 13%, our advisor will receive from us a contingent financing fee of 1% of the original principal amount of any financing obtained or assumed by us.
The contingent financing fee is payable upon satisfying the return threshold with respect to any financing obtained or assumed by us prior to satisfaction of the return threshold and at the closing of new financing following satisfaction of the return threshold. If our advisor agreement is terminated before August 13, 2028 for any reason other than the advisor’s fraud, willful misconduct or gross negligence, the payment of the contingent financing fee will be immediately due and payable.
Asset Management Fee
Our advisor receives an annual asset management fee, paid monthly, in an amount equal to 1.25% of gross assets as of the last day of the prior month. In this context, “gross assets” means (i) the gross book value of our assets until such time as our board of directors has established a net asset value of our assets, and (ii) after our board of directors has established a net asset value of our assets, the gross asset value of our assets based on the net asset value determination; provided that, the value of any assets acquired after our determination of a net asset value will be the gross book value of the assets until such assets are included in a net asset value determination. We incurred asset management fees of $19,783 and $0 for the three months ended March 31, 2019 and 2018, respectively.
Reimbursable Operating Expenses
We reimburse our advisor or its affiliates for all actual expenses paid or incurred by our advisor or its affiliates in connection with the services provided to us, including our allocable share of our advisor’s or its affiliates’ overhead, such as rent, personnel costs, utilities, cybersecurity and IT costs; provided, however, that we will not reimburse our advisor or its affiliates for salaries, wages and related benefits of personnel who perform investment advisory services for us or serve as our executive officers. In addition, subject to the approval of our board of directors we may reimburse our advisor or its affiliates for costs and fees associated with providing services to us that we would otherwise engage a third party to provide. Reimbursable company operating expenses were $125,000 and $0 for the three months ended March 31, 2019 and 2018, respectively.
Commencing with the quarter ending June 30, 2020, our advisor must reimburse us the amount by which our aggregate total operating expenses for the four fiscal quarters then ended exceed the greater of 2% of our average invested assets or 25% of our net income, unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors.
Property Management Fee
Property management services will be provided by Cottonwood Communities Management, LLC under separate property management agreements to be entered at the time we acquire a property. Cottonwood Communities Management, LLC will receive from us a property management fee in an amount up to 3.5% of the annual gross revenues of our multifamily apartment communities that it manages. Cottonwood Communities Management, LLC may subcontract the performance of its property management duties to third parties and will pay a portion of its property management fee to the third parties with whom it subcontracts for these services.
Promotional Interest
Cottonwood Communities Investor, LLC will receive from the Operating Partnership a promotional interest equal to 15% of net income and cash distributions, but only after our stockholders, together as a collective group, receive in the aggregate, cumulative distributions from us sufficient to provide a return of their invested capital plus a 6% cumulative, non-compounded annual return on their invested capital. Cottonwood Communities Investor, LLC, will not be required to make any capital contributions to our Operating Partnership in order to obtain the promotional interest.
In addition, Cottonwood Communities Investor, LLC will be entitled to a separate one-time payment upon (1) the listing of our common stock on a national securities exchange or (2) the occurrence of certain events that result in the termination or non-renewal of our advisory agreement, in each case for an amount that Cottonwood Communities Investor, LLC would have been entitled to receive, as described above, as if our Operating Partnership had disposed of all of its assets at the market value of our shares of common stock as of the date of the event triggering the payment. If the event triggering the payment is a listing of our shares on a national securities exchange, the market value will be calculated based on the market value of the shares issued and outstanding at listing over a period of 30 trading days selected by Cottonwood Communities Investor, LLC beginning after the first day of the 6th month, but not later than the last day of the 18th month, after the shares are first listed on a national securities exchange. If the triggering event is the termination or non-renewal of our advisory agreement the market value will be calculated based on an appraisal or valuation of our assets by an independent third party.
This separate one-time payment following the termination or non-renewal of our advisory agreement for reasons unrelated to a liquidity event for our stockholders will be in the form of an interest-bearing promissory note that is payable only after our stockholders have actually received distributions in the amount required before Cottonwood Communities Investor, LLC can receive the promotional interest. Provided, however, if the promissory note has not been repaid prior to a liquidity event for our stockholders, the promissory note shall be paid in full on the date of or immediately prior to the liquidity event.
Effective March 1, 2019, Cottonwood Communities Advisors Promote, LLC, owns the promotional interest in us previously held by Cottonwood Communities Investor, LLC.
Independent Director Compensation
We pay each of our independent directors an annual retainer of $10,000. We also pay our independent directors for attending meetings as follows: (i) $500 for each board meeting attended and (ii) $500 for each committee meeting attended (if held at a different time or place than a board meeting). All directors receive reimbursement of reasonable out of pocket expenses incurred in connection with attendance at meetings of the board of directors.
Under various agreements, we have engaged or will engage our advisor or its affiliates to provide certain services that are essential to us, including asset management services and other administrative responsibilities for the Company including accounting services and investor relations. Because of these relationships, we are dependent upon our advisor. If these companies were unable to provide us with the respective services, we would be required to find alternative providers of these services.
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| 7. | Commitments and Contingencies |
Litigation
As of March 31, 2019, we were not subject to any material litigation nor were we aware of any material litigation threatened against us.
Distribution Reinvestment Plan
We have adopted a distribution reinvestment plan whereby stockholders may elect to have us apply their dividends and other distributions to the purchase of additional shares of common stock. Participants in the plan will acquire common stock at the per share price effective on the date of purchase (initially $10.00).
Share Repurchase Program
We have a share repurchase program whereby, on a quarterly basis, stockholders may request that we repurchase all or any portion of their shares. We may choose to repurchase all, some or none of the shares that have been requested to be repurchased at our discretion, subject to limitations in the share repurchase plan. The total amount of aggregate repurchases shares will be limited to 5% of the weighted average number of shares of common stock outstanding during the prior calendar year. In addition, during any calendar year, we may redeem only the number of shares that we could purchase with the amount of net proceeds from the sale of shares under our distribution reinvestment plan during the prior calendar year.
Except for Exceptional Repurchases (as defined in the share repurchase program), the repurchase price is subject to the following discounts, depending on how long a redeeming stockholder has held each share:
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| Share Purchase Anniversary | Repurchase Price as a Percentage of Estimated Value (1) |
| Less than 1 year | No repurchase allowed |
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| 1 year - 2 years | 85 | % |
| 3 years - 4 years | 90 | % |
| 5 years and thereafter | 95 | % |
| A stockholder’s death or complete disability, less than 2 years | 95 | % |
| A stockholder’s death or complete disability, 2 years or more | 100 | % |
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| (1) | For the purposes of the share repurchase program, the “estimated value per share” will initially be equal to the purchase price per share at which the original purchaser or purchasers of the shares bought its shares from us, and the purchase price per share will be adjusted to reflect any stock dividends, combinations, splits, recapitalizations or any similar transaction with respect to the shares outstanding.
We plan to establish an estimated net asset value (“NAV”) per share of its common stock based on valuations of its assets and liabilities no later than May 17, 2021 and annually thereafter. Upon our establishment of an estimated NAV per share, the estimated NAV per share will be the estimated value per share pursuant to the share repurchase program. |
No shares were redeemed during the periods ended March 31, 2019 and 2018.
Our board of directors may, in its sole discretion, amend, suspend or terminate our share repurchase program for any reason upon 15 days’ notice to our stockholders.
We evaluate subsequent events up until the date the consolidated financial statements are issued and have determined there are none to be reported or disclosed in the consolidated financial statements other than those mentioned below.
Status of the Offering
We commenced the public offering on August 13, 2018. As of May 10, 2019, we had sold approximately 3,800,000 shares of common stock in our public offering for aggregate gross offering proceeds of approximately $38,000,000. Included in these amounts were approximately 5,500 shares of common stock sold pursuant to our distribution reinvestment plan for aggregate gross offering proceeds of $55,000.
Distributions Paid
On April 8, 2019 we paid distributions of $59,441 which related to distributions in the amount of $0.02465753 per share to stockholders of record as of March 18, 2019 and distributions in the amount of $0.00136986 per share per day for daily record dates for each day in the period from March 19, 2019 through March 31, 2019. On May 7, 2019, we paid distributions of $112,275 which related to distributions in the amount of $0.00136986 per share per day for daily record dates for each day in the period from April 1, 2019 through April 30, 2019.
Distributions Declared
On May 13, 2019, our board of directors declared cash distributions on the outstanding shares of our common stock based on daily record dates for the period from June 1, 2019 through June 30, 2019, which we expect to pay in July 2019; the period from July 1, 2019 through July 31, 2019, which we expect to pay in August 2019; and the period from August 1, 2019 through August 31, 2019, which we expect to pay in September 2019. Investors may choose to receive cash distributions or purchase additional shares through our distribution reinvestment plan. Distributions for these periods will be calculated based on stockholders of record each day during these periods at a rate of $0.00136986 per share per day.
Luma Extension
On May 3, 2019, we provided an additional $250,000 in non-refundable earnest money to extend the period to close the acquisition of Luma at West Palm Beach through May 30, 2019.
