Filed Pursuant to Rule 424(b)(3)
Registration No. 333-215272
COTTONWOOD COMMUNITIES, INC.
SUPPLEMENT NO. 10 DATED AUGUST 16, 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, supplement no. 6 dated May 3, 2019, supplement no. 7 dated May 17, 2019, supplement no. 8 dated June 3, 2019 and supplement no. 9 dated August 1, 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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| • | the status of the offering; |
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| • | updated risks related to an investment in us; |
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| • | information regarding distributions; |
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| • | our preferred equity investment in a multifamily development project; |
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| • | renewal of our advisory agreement; |
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| • | the designation of Class A shares of common stock; |
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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 June 30, 2019; and |
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| • | our unaudited financial statements and the notes thereto as of and for the period ended June 30, 2019. |
Status of the Offering
We commenced this offering of $750.0 million of shares of common stock on August 13, 2018. As of August 5, 2019, we had sold approximately 5,800,000 shares of common stock in our public offering for aggregate gross offering proceeds of approximately $58,000,000. Included in these amounts were 12,258 shares of common stock sold pursuant to our distribution reinvestment plan for aggregate gross offering proceeds of $122,583. Accordingly, as of August 5, 2018, there was approximately $692,000,000 of shares available for sale in this offering.
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 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 shareholders may be reduced and subsequent investors will experience dilution. In addition, to the extent distributions exceed cash flow from operating activities, 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 six months ended June 30, 2019, we paid aggregate distributions of $399,057, including $311,471 distributions paid in cash and $87,586 of distributions reinvested through our distribution reinvestment plan. Our net loss for the six months ended June 30, 2019 was $934,223. Cash flows provided by operating activities for the six months ended June 30, 2019 was $364,861. We funded our total distributions paid, which includes net cash distributions and distributions reinvested by stockholders, with offering proceeds. Generally, for purposes of determining the source of our distributions paid, we assume first that we use cash flow from operating activities from the relevant or prior periods to fund distribution payments. However, due to the timing of the receipt of cash flow from operations in the second quarter of 2019, the cash was not available to fund distributions until July.
Information Regarding Distributions
On July 9, 2019, we paid distributions of $196,160, which related to distributions declared for daily record dates for each day in the period from June 1, 2019 through June 30, 2019. On August 7, 2019, we paid distributions of $229,412, which related to distributions declared for daily record dates for each day in the period from July 1, 2019 through July 31, 2019.
On August 6, 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 September 1, 2019 through September 30, 2019, which we expect to pay in October 2019; the period from October 1, 2019 through October 31, 2019, which we expect to pay in November 2019; and the period from November 1, 2019 through November 30, 2019, which we expect to pay in December 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.
Preferred Equity Investment
On August 15, 2019, we, through a wholly owned subsidiary, made a preferred equity investment of up to $9,900,000 in an entity that is developing a multifamily community in Ybor City, Florida (the “Lector85 Investment”). In connection with our investment we entered a joint venture agreement with an affiliate of Milhaus, LLC (“Milhaus”), the sponsor of the development.
Pursuant to the terms of the joint venture agreement, the Lector85 Investment has an annual preferred return of 13% that will be reduced to 10% annually upon the later to occur of (i) the stabilization of the development project, and (ii) the one-year anniversary of the development project receiving a temporary certificate of occupancy for the last unit(s) completed, subject to certain financial covenants being satisfied. The investment has a special preferred return of $200,000 to be paid upon redemption and also provides for a minimum cumulative return upon redemption, sale or similar transaction of 35%. Subject to one twelve-month extension option, the redemption date of the Lector85 Investment is no earlier than two years after the date on which the project receives a temporary certificate of occupancy with respect to the last unit(s) delivered at the project (the “Redemption Lockout Date”) but no later than the earlier of (i) the payment in full of the construction loan related to the project, but only if the loan is repaid after the Redemption Lockout Date, or (ii) the construction loan maturity date, but only if the construction loan is not refinanced prior to the Redemption Lockout Date.
Milhaus intends to use the loan, along with a $34.0 million construction loan and equity of $9.3 million to fund total development costs of $53.3 million for a 4-story, 254-unit urban-style apartment community that will include over 11,000 square feet of retail.
Renewal of Advisory Agreement
On August 13, 2019, we renewed our advisory agreement with CC Advisors III, LLC for another one-year term expiring August 13, 2020. The renewed agreement is substantially the same as the agreement previously in effect except that it clarifies that the definition of "gross assets " for purposes of calculating the asset management fee includes the debt underlying any B-notes and other real estate-related assets along with mezzanine loans and preferred equity investments previously included in the definition.
Class A Shares of Common Stock
Effective August 13, 2019, we established two classes of our common stock: Class A and Class T by filing Articles Supplementary with the Maryland State Department of Assessments and Taxation. As a result, our currently offered shares of common stock are designated "Class A" shares. Other than the designation as "Class A" there were no changes to the rights and privileges of our shares of common stock available for purchase in this offering. We expect to offer the Class T shares in this offering upon effectiveness of the post-effective amendment to our Registration Statement for the offering as filed on August 6, 2019. Additional information about our Class T shares is available in post-effective amendment no. 3 to our Registration Statement on Form S-11 filed with the SEC on August 6, 2019.
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 as supplemented to date.
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.
We are offering 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. On August 6, 2019, we filed an amendment to our registration statement for this offering to offer two classes of shares of common stock: Class A and Class T. Upon effectiveness of this amendment, our currently offered and outstanding common stock will be designated Class A and we will also offer a Class T share. The share classes have a different selling commission structure; however, any offering-related expenses are being 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.
As of June 30, 2019, we have raised approximately $50.6 million and acquired Cottonwood West Palm (formerly "Luma at West Palm Beach"), a multifamily community in West Palm Beach, Florida.
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.
Our Investment
On May 30, 2019, we acquired Cottonwood West Palm, a 245-unit, elevator-serviced, concrete and stucco community in West Palm Beach, Florida. The contract purchase price was approximately $67.0 million, excluding closing costs. Refer to our Form 8-K filed with the SEC on June 4, 2019 disclosing information about the property as well as the purchase and financing arrangement for this investment.
Results of Operations
We commenced real estate operations on May 30, 2019 with the acquisition of Cottonwood West Palm and, as a result, do not have three months of real estate operations for discussion. During the three months ended June 30, 2019, we continued our capital raising and deal sourcing efforts, earning interest of $130,599 on cash deposits while incurring operating expenses owed to related parties of $125,485, asset management fees of $137,942, and general and administrative expenses of $134,198. As expected, these amounts increased as a result of additional proceeds raised in this offering and activities related to the sourcing and acquisition of real estate investments.
Our advisor is paying all selling commissions, dealer manager fees and organizational and offering expenses related to our offering on our behalf without reimbursement by us.
Liquidity and Capital Resources
We are dependent upon the proceeds from our 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 June 30, 2019, we had one real estate investment and cash and cash equivalents of $18,659,104 as well as other smaller 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 our 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 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.
The Facility agreement with Berkadia entered in connection with our acquisition of Cottonwood West Palm is our only outstanding debt obligation as of June 30, 2019. It has no limit on the amount that we can borrow so long as we maintain the loan-to-value ratio and other requirements set forth in the loan documents. We may obtain additional lines of credit or enter into other financing arrangements that may 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 and restricted cash:
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| | | | |
| | | Six Months Ended June 30, 2019 |
| Net cash provided by operating activities | | $ | 364,861 |
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| Net cash used in investing activities | | (31,174,928 | ) |
| Net cash provided by financing activities | | 46,217,774 |
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| Net increase in cash and cash equivalents and restricted cash | | $ | 15,407,707 |
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Cash flows provided by operating activities were $364,861 during the six months ended June 30, 2019, primarily as a result of one month of real estate income combined with the deferral of payment on related party and other payables.
Cash flows used in investing activities were $31,174,928 during the six months ended June 30, 2019, primarily due to our purchase of Cottonwood West Palm.
Cash flows provided by financing activities were $46,217,774 during the six months ended June 30, 2019, primarily due to the net proceeds we received from the issuance of our common stock.
There were no operating, investing or financing activities for the six months ended June 30, 2018.
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:
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| | | | | | | | | | | | | | | | | |
| | | Distributions Paid(3) | |
| Period | Distributions Declared(1) | Distributions Declared Per Share(1)(2) | Cash | Reinvested (DRP) | Total | Cash Provided By (Used In) Operating Activities |
| First Quarter 2019 | $ | 117,486 |
| 0.06216279 |
| $ | 40,024 |
| $ | 18,021 |
| $ | 58,045 |
| $ | (19,449 | ) |
| Second Quarter 2019 | 477,731 |
| 0.09442300 |
| 271,447 |
| 69,565 |
| 341,012 |
| 384,310 |
|
| Total | $ | 595,217 |
| | $ | 311,471 |
| $ | 87,586 |
| $ | 399,057 |
| $ | 364,861 |
|
(1) Distributions for the periods from January 1, 2019 through February 28, 2019 and March 19, 2019 through June 30, 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 daily record dates starting December 18, 2018. 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 June 30, 2019, we paid aggregate distributions of $341,012, including $271,447 distributions paid in cash and $69,565 of distributions reinvested through our distribution reinvestment plan. For the six months ended June 30, 2019, we paid aggregate distributions of $399,057, including $311,471 distributions paid in cash and $87,586 of distributions reinvested through our distribution reinvestment plan. Our net loss for the six months ended June 30, 2019 was $934,223. Cash flows provided by operating activities for the six months ended June 30, 2019 was $364,861. We funded our total distributions paid, which includes net cash distributions and distributions reinvested by stockholders, with offering proceeds. Generally, for purposes of determining the source of our distributions paid, we assume first that we use cash flow from operating activities from the relevant or prior periods to fund distribution payments. However, due to the timing of the receipt of cash flow from operations in the second quarter of 2019, the cash was not available to fund distributions until July. 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. We consider our accounting policy over investments in real estate to be critical. See Note 2 of the consolidated financial statements included elsewhere in this supplement for further description of this policy.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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| Consolidated Balance Sheets as of June 30, 2019 (Unaudited) and December 31, 2018 | |
| Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited) | |
| Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited) | |
| Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (Unaudited) | |
| Notes to Consolidated Financial Statements (Unaudited) | |
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| Cottonwood Communities, Inc. |
| Consolidated Balance Sheets |
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| | | June 30, 2019 | | December 31, 2018 |
| Assets | | (Unaudited) | | |
| Real estate assets, net | | $ | 66,011,032 |
| | $ | — |
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| Cash and cash equivalents | | 18,659,104 |
| | 3,406,175 |
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| Restricted cash | | 154,778 |
| | — |
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| Other assets | | 504,163 |
| | 317,279 |
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| Total assets | | 85,329,077 |
| | 3,723,454 |
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| Liabilities and equity | | | | |
| Liabilities | | | | |
| Credit facility, net | | 34,936,791 |
| | — |
|
| Related party payables | | 435,456 |
| | 128,617 |
|
| Accounts payable, accrued expenses and other liabilities | | 1,161,848 |
| | 29,146 |
|
| Total liabilities | | 36,534,095 |
| | 157,763 |
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| Commitments and contingencies (Note 9) | | | | |
| 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; 5,059,447 shares issued and outstanding at June 30, 2019; 366,654 shares issued and outstanding at December 31, 2018 | | 50,595 |
| | 3,667 |
|
| Additional paid-in capital | | 50,374,036 |
| | 3,662,233 |
|
| Accumulated distributions | | (595,217 | ) | | — |
|
| Accumulated deficit | | (1,034,432 | ) | | (100,209 | ) |
| Total stockholders' equity | | 48,794,982 |
| | 3,565,691 |
|
| Total liabilities and stockholders' equity | | $ | 85,329,077 |
| | $ | 3,723,454 |
|
| | | | | |
| See accompanying notes to consolidated financial statements |
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| | | | | | | | | | | | | | | |
| Cottonwood Communities, Inc. |
| Consolidated Statements of Operations |
| (Unaudited) |
| | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Revenues | | | | | | | |
| Rental and other property revenues | $ | 367,542 |
| | $ | — |
| | $ | 367,542 |
| | $ | — |
|
| Total revenues | 367,542 |
| | — |
| | 367,542 |
| | — |
|
| Expenses | | | | | | | |
| Property operations expense | 222,641 |
| | — |
| | 222,641 |
| | — |
|
| Reimbursable operating expenses to related parties | 125,485 |
| | — |
| | 250,485 |
| | — |
|
| Asset management fee to related party | 137,942 |
| | — |
| | 157,725 |
| | — |
|
| Depreciation and amortization | 445,951 |
| | — |
| | 445,951 |
| | — |
|
| General and administrative expenses | 134,198 |
| | 1,109 |
| | 252,358 |
| | 2,072 |
|
| Total operating expenses | 1,066,217 |
| | 1,109 |
| | 1,329,160 |
| | 2,072 |
|
| Other income (expense) | | | | | | | |
| Interest income | 130,599 |
| | — |
| | 162,031 |
| | — |
|
| Interest expense | (134,636 | ) | | — |
| | (134,636 | ) | | — |
|
| Total other (expense) income | (4,037 | ) | | — |
| | 27,395 |
| | — |
|
| Net loss | $ | (702,712 | ) | | $ | (1,109 | ) | | $ | (934,223 | ) | | $ | (2,072 | ) |
| | | | | | | | |
| Weighted-average shares outstanding | 3,828,105 |
| | 20,000 |
| | 2,360,577 |
| | 20,000 |
|
| Net loss per common share - basic and diluted | $ | (0.18 | ) | | $ | (0.06 | ) | | $ | (0.40 | ) | | $ | (0.10 | ) |
| | | | | | | | |
| See accompanying notes to consolidated financial statements |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 January 1, 2019 | | 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 |
|
| Issuance of common stock | | 3,169,474 |
| | 31,695 |
| | 31,525,121 |
| | — |
| | — |
| | 31,556,816 |
|
| Distributions to investors | | — |
| | — |
| | — |
| | (537,172 | ) | | — |
| | (537,172 | ) |
| Net loss | | — |
| | — |
| | — |
| | — |
| | (702,712 | ) | | (702,712 | ) |
| Balance at June 30, 2019 | | 5,059,447 |
| | $ | 50,595 |
| | $ | 50,374,036 |
| | $ | (595,217 | ) | | $ | (1,034,432 | ) | | $ | 48,794,982 |
|
| | | | | | | | | | | | | |
| | | Common Stock | | |
| | | Shares | | Amount | | Additional Paid-In Capital | | Accumulated Distributions | | Accumulated Deficit | | Total Equity |
| Balance at January 1, 2018 | | 20,000 |
| | $ | 200 |
| | $ | 199,800 |
| | $ | — |
| | $ | — |
| | $ | 200,000 |
|
| Net loss | | — |
| | — |
| | — |
| | — |
| | (963 | ) | | (963 | ) |
| Balance at March 31, 2018 | | 20,000 |
| | 200 |
| | 199,800 |
| | — |
| | (963 | ) | | 199,037 |
|
| Net loss | | — |
| | — |
| | — |
| | — |
| | (1,109 | ) | | (1,109 | ) |
| Balance at June 30, 2018 | | 20,000 |
| | $ | 200 |
| | $ | 199,800 |
| | $ | — |
| | $ | (2,072 | ) | | $ | 197,928 |
|
| | | | | | | | | | | | | |
| See accompanying notes to consolidated financial statements |
|
| | | | | | | | |
| Cottonwood Communities, Inc. |
| Consolidated Statements of Cash Flows |
| (Unaudited) |
| | | | | |
| | | Six Months Ended June 30, |
| | | 2019 | | 2018 |
| Cash flows from operating activities: | | | | |
| Net loss | | $ | (934,223 | ) | | $ | (2,072 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | |
| Depreciation and amortization | | 445,951 |
| | — |
|
| Amortization of loan fees | | 8,893 |
| | — |
|
| Changes in operating assets and liabilities: | | | | |
| Other assets | | 67,208 |
| | — |
|
| Related party payables | | 306,839 |
| | — |
|
| Accounts payable, accrued expenses and other liabilities | | 470,193 |
| | 2,072 |
|
| Net cash provided by operating activities | | 364,861 |
| | — |
|
| Cash flows from investing activities: | | | | |
| Acquisition of real estate | | (31,171,298 | ) | | — |
|
| Capital improvements to real estate | | (3,630 | ) | | — |
|
| Net cash used in investing activities | | (31,174,928 | ) | | — |
|
| Cash flows from financing activities: | | | | |
| Issuance of common stock | | 46,529,245 |
| | — |
|
| Distributions to common stockholders | | (311,471 | ) | | — |
|
| Net cash provided by financing activities | | 46,217,774 |
| | — |
|
| Net increase in cash and cash equivalents and restricted cash | | 15,407,707 |
| | — |
|
| Cash and cash equivalents and restricted cash, beginning of period | | 3,406,175 |
| | 200,000 |
|
| Cash and cash equivalents and restricted cash, end of period | | $ | 18,813,882 |
| | $ | 200,000 |
|
| | | | | |
| Reconciliation of cash and cash equivalents and restricted cash to the consolidated balance sheets: | | | | |
| Cash and cash equivalents | | $ | 18,659,104 |
| | $ | 200,000 |
|
| Restricted cash | | 154,778 |
| | — |
|
| Total cash and cash equivalents and restricted cash | | $ | 18,813,882 |
| | $ | 200,000 |
|
| | | | | |
| Supplemental disclosure of cash flow information: | | | | |
| Cash paid for interest | | $ | 7,859 |
| | $ | — |
|
| Cash paid for income and other taxes | | 100 |
| | 200 |
|
| | | | | |
| Supplemental disclosure of non-cash investing and financing activities: | | | | |
| Credit facility entered into in conjunction with acquisition of real estate | | $ | 35,995,000 |
| | $ | — |
|
| Assumption of liability in connection with acquisition of real estate | | 452,639 |
| | — |
|
| Proceeds receivable for issuance of common stock | | 397,900 |
| | — |
|
| Issuance of common stock through dividend reinvestment program | | 87,586 |
| | — |
|
| Distributions declared but not yet paid | | 196,160 |
| | — |
|
| | | | | |
| See accompanying notes to consolidated financial statements |
Cottonwood Communities, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
| |
| 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 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.
We are offering 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.
We are externally managed and have no employees. From August 13, 2018, the effective date of the Offering, to March 1, 2019, Cottonwood Communities Management, LLC, an affiliate of CROP, acted as our advisor and our property manager. Effective March 1, 2019, CC Advisors III, LLC (our “advisor”) became our advisor. Cottonwood Communities Management, LLC (our "property manager") continues to act as property manager for our multifamily apartment communities.
As of June 30, 2019, we owned Cottonwood West Palm (formerly "Luma at West Palm Beach"), a 245-unit, elevator-serviced, concrete and stucco multifamily apartment community in West Palm Beach, Florida. Refer to Note 10 for an investment made subsequent to June 30, 2019.
| |
| 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 our opinion, necessary for a fair presentation of our financial position as of June 30, 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 us 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.
Investments in Real Estate
In accordance with the guidance for business combinations, we determine whether the acquisition of a property qualifies as a business combination, which requires that the assets acquired and liabilities assumed constitute a business. If the property acquired does not constitute a business, we account for the transaction as an asset acquisition. The guidance for business combinations states that when substantially all of the fair value of the gross assets to be acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the asset or set of assets is not a business. All property acquisitions to date have been accounted for as asset acquisitions.
We account for asset acquisitions by allocating the total cost, including transaction costs, to the individual assets acquired and liabilities assumed on a relative fair value basis. Real estate assets and liabilities include land, building, furniture, fixtures and equipment, other personal property, in-place lease intangibles and debt. The fair values are determined using methods similar to those used by independent appraisers, and include using replacement cost estimates less depreciation, discounted cash flows, market comparisons, and direct capitalization of net operating income.
Real Estate Assets, Net
We state real estate assets at cost, less accumulated depreciation. We capitalize costs related to the development, construction, improvement, and significant renovation of properties, which include capital replacements such as scheduled carpet replacement, new roofs, HVAC units, plumbing, concrete, masonry and other paving, pools and various exterior building improvements. We also capitalize salary costs directly attributable to significant renovation work.
We compute depreciation on a straight-line basis over the estimated useful lives of the related assets and intangible assets are amortized to depreciation and amortization over the remaining lease term. The useful lives of our real estate assets are as follows (in years):
|
| |
| Land improvements | 5-15 |
| Buildings | 30 |
| Building improvements | 5-15 |
| Furniture, fixtures and equipment | 5-15 |
| Intangible assets | Over lease term |
We expense ordinary maintenance and repairs to operations as incurred. We capitalize significant renovations and improvements that improve and/or extend the useful life of an asset and amortize over their estimated useful life, generally five to 15 years.
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.
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 June 30, 2019, organizational and offering costs incurred by our advisor were approximately $5,960,000.
| |
| 3. | Real Estate Assets, Net |
The following table summarizes the carrying amounts of our consolidated real estate assets:
|
| | | |
| | June 30, 2019 |
| Building and building improvements | $ | 52,279,725 |
|
| Land and land improvements | 10,658,155 |
|
| Furniture, fixtures and equipment | 2,015,778 |
|
| Intangible assets | 1,503,325 |
|
| | 66,456,983 |
|
| Less: Accumulated depreciation and amortization | (445,951 | ) |
| Real estate assets, net | $ | 66,011,032 |
|
We had no real estate assets as of December 31, 2018.
Asset acquisitions
On May 30, 2019, we acquired 100% of Cottonwood West Palm (formerly "Luma at West Palm Beach"), a multifamily community in West Palm Beach, Florida for $66,923,500. Acquired assets and liabilities were recorded at relative fair value as an asset acquisition (Note 2).
The following table summarizes the purchase price allocation of the real estate assets acquired during the three months ended June 30, 2019:
|
| | | | | | | | | | | | | | | | | | |
| | Allocated Amounts |
| Property | Building | Land | Land Improvements | Personal Property | Intangible | Total |
| Cottonwood West Palm | $ | 52,276,096 |
| $ | 9,379,895 |
| $ | 1,278,260 |
| $ | 2,015,778 |
| $ | 1,503,325 |
| $ | 66,453,354 |
|
The weighted-average amortization period for the intangible lease assets acquired in connection with the Cottonwood West Palm acquisition was 0.5 years.
On May 30, 2019, in conjunction with the acquisition of Cottonwood West Palm, we, through a wholly owned subsidiary of our operating partnership, entered a Master Credit Facility Agreement with Berkadia Commercial Mortgage, LLC, an unaffiliated lender, under the Fannie Mae credit facility program (the “Credit Facility”). Pursuant to the terms of the Facility, we obtained an advance secured against Cottonwood West Palm in the amount of $35,995,000. The advance carries an interest-only term of 10 years and bears a fixed interest rate of 3.93%. We have the right to prepay all or a portion of the Facility at any time subject to certain fees and conditions contained in the loan documents.
We may finance other future acquisitions through the Credit Facility. The aggregate loan-to-value ratio for all advances made with respect to the Credit Facility cannot exceed 65% at the time any advance is made. There is no limit on the amount that we can borrow under the Credit Facility so long as we maintain the loan-to-value ratio and other requirements set forth in the Facility loan documents. Each advance will be cross-collateralized with the other advances. The Credit Facility permits us to sell the multifamily apartment communities that are secured by the Credit Facility individually, provided that certain debt coverage ratios and other requirements are met.
The Credit Facility is presented net of the origination fees that were incurred to obtain the financing. The executed agreements regarding the Credit Facility are included as exhibits in this Quarterly Report on Form 10-Q.
| |
| 5. | Fair Value of Financial Instruments |
We estimate the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate. As of June 30, 2019 and December 31, 2018, the fair values of cash and cash equivalents, restricted cash, other assets, related party payables, and accounts payable, accrued expenses and other liabilities approximate their carrying values due to the short-term nature of these instruments.
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. Fair value measurements are categorized into one of three levels of the fair value hierarchy based on the lowest level of significant input used. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. Considerable judgment and a high degree of subjectivity are involved in developing these estimates. These estimates may differ from the actual amounts that we could realize upon settlement.
The fair value hierarchy is as follows:
Level 1 - Quoted (unadjusted) prices in active markets for identical assets or liabilities.
Level 2 - Other observable inputs, either directly or indirectly, other than quoted prices included in Level 1, including:
| |
| • | Quoted prices for similar assets/liabilities in active markets; |
| |
| • | Quoted prices for identical or similar assets/liabilities in non-active markets (e.g., few transactions, limited information, non-current prices, high variability over time); |
| |
| • | Inputs other than quoted prices that are observable for the asset/liability (e.g., interest rates, yield curves, volatilities, default rates); and |
| |
| • | Inputs that are derived principally from or corroborated by other observable market data. |
Level 3 - Unobservable inputs that cannot be corroborated by observable market data.
The table below includes the carrying value and fair value for our financial instruments for which it is practicable to estimate fair value:
|
| | | | | | | | | | | | | | | | |
| | | As of June 30, 2019 | | As of December 31, 2018 |
| | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Credit Facility | | $ | 35,995,000 |
| | $ | 35,995,000 |
| | $ | — |
| | $ | — |
|
The Credit Facility is categorized as Level 2 in the fair value hierarchy.
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 June 30, 2019, we had outstanding shares of 5,059,447, which includes 20,000 shares owned by CROP and 8,759 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 June 30, 2019.
Distributions
Distributions are determined by the board of directors based on the Company’s financial condition and other relevant factors. We have paid distributions from offering proceeds and may continue to fund distributions with offering proceeds. For the three months ended June 30, 2019, we paid aggregate distributions of $341,012, including $271,447 distributions paid in cash and $69,565 of distributions reinvested through our distribution reinvestment plan. For the six months ended June 30, 2019, we paid aggregate distributions of $399,057, including $311,471 distributions paid in cash and $87,586 of distributions reinvested through our distribution reinvestment plan.
On April 8, 2019 we declared 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 declared 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.
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; the period from July 1, 2019 through July 31, 2019; and the period from August 1, 2019 through August 31, 2019. Investors may choose to receive cash distributions or purchase additional shares through our distribution reinvestment plan. Distributions for these periods are based on stockholders of record each day at a rate of $0.00136986 per share per day.
| |
| 7. | Related-Party Transactions |
Advisory Agreement
Our advisor is responsible for making 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 also manages day-to-day operations, retains property managers, and performs other duties. These activities are all subject to oversight by our board of directors. Per the terms of our advisory agreement, our advisor is entitled to receive the fees for these services which are mentioned below.
Asset Management Fee
Our advisor receives an annual asset management fee, paid monthly, in an amount equal to 1.25% of gross assets, as defined in the advisory agreement, as of the last day of the prior month. We incurred asset management fees of $137,942 and $157,725for the three and six months ended June 30, 2019 and 2018, respectively. No asset management fees were paid for the three and six months ended June 30, 2018.
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 advisory 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. No contingent acquisition fees were incurred for the three and six months ended June 30, 2019 and 2018.
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. No contingent financing fees were incurred for the three and six months ended June 30, 2019 and 2018.
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.
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 $125,485 and $250,485 for the three and six months ended June 30, 2019, respectively. There were no reimbursable company operating expenses for the three and six months ended June 30, 2018.
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
Our property manager operates under the terms of separate property management agreements for each community. Our property manager receives from us a property management fee in an amount up to 3.5% of the annual gross revenues of the multifamily apartment communities that it manages. We incurred property management fees of $14,544 for the three and six months ended June 30, 2019. No property management fees were incurred in 2018. Property management fees are presented within property operations expense on the Consolidated Statements of Operations.
Promotional Interest
Cottonwood Communities Advisors Promote, LLC, an affiliated entity, 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 Advisors Promote, 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 Advisors Promote, 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 Advisors Promote, LLC would have been entitled to receive 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.
A 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 Advisors Promote, 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.
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.
| |
| 9. | Commitments and Contingencies |
Litigation
As of June 30, 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:
|
| | |
| Share Purchase Anniversary | Repurchase Price as a Percentage of Estimated Value (1) |
| Less than 1 year | No repurchase allowed |
|
| 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 | % |
|
| |
(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 three and six months ended June 30, 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 Offering on August 13, 2018. As of August 9, 2019, we had sold approximately 5,895,000 shares of common stock in our public offering for aggregate gross offering proceeds of approximately $58,747,000. Included in these amounts were 16,265 shares of common stock sold pursuant to the DRP Offering for aggregate gross offering proceeds of $162,650.
Investment
On July 31, 2019, we, through our operating partnership, invested in a B note secured by a deed of trust on a development project for an amount of up to $10 million (which commitment could rise to $10.5 million in certain circumstances) (the “Dolce B Note”). The borrower under the Dolce B Note is Dolce Twin Creeks Phase 2, LLC, a Delaware limited liability company, an unaffiliated third party. The borrower intends to use the proceeds from the Dolce B Note, additional financing in the amount of $45.5 million (the “Dolce A Note”) and $17.9 million in common equity for the development of Dolce Twin Creeks, Phase II, a proposed 366-unit multifamily project and approximately 15,000 square feet of medical office space on a 10.89 acre site located in Allen, Texas, a northern suburb of Dallas (the “Project”). We funded the Dolce B Note with proceeds from the Offering.
The Dolce B Note bears interest at a rate of 9.50% plus 1-month LIBOR and is expected to be drawn upon in stages as needed throughout the construction of the Project. The loan includes a 1-month LIBOR floor equal to 2.50%, resulting in an interest rate floor equal to 12.00% for the Dolce B Note. The maturity date of the Dolce B Note is December 31, 2021 with two six-month extension options. Prior to maturity, the borrower under the Dolce B Note is required to make monthly interest only payments with principal due at maturity. Prepayment of the Dolce B Note is permitted in whole but not in part subject to certain prepayment fees. The borrower may obtain a release of the parcel that will contain the medical office space for a minimum release price of $3,960,000 (82.5% of the as-stabilized appraised value of that parcel), which would be applied pro rata, without prepayment fees, to repayment of the A Note and the B Note.
Distributions Paid
Distributions paid subsequent to June 30, 2019 are as follows:
|
| | | | | | | |
| Period | Daily Distribution Rate | Date Paid | Amount |
| June 1, 2019 - June 30, 2019 | $ | 0.00136986 |
| July 9, 2019 | $ | 196,160 |
|
| July 1, 2019 - July 31, 2019 | $ | 0.00136986 |
| August 7, 2019 | $ | 229,412 |
|
Distributions Declared
Our board of directors have declared cash distributions as follows:
|
| | | | | |
| Period | Declaration Date | Daily Distribution Rate | Expected Payment |
| August 1, 2019 - August 31, 2019 | May 13, 2019 | $ | 0.00136986 |
| September 2019 |
| September 1, 2019 - September 30, 2019 | August 6, 2019 | $ | 0.00136986 |
| October 2019 |
| October 1, 2019 - October 31, 2019 | August 6, 2019 | $ | 0.00136986 |
| November 2019 |
| November 1, 2019 - November 30, 2019 | August 6, 2019 | $ | 0.00136986 |
| December 2019 |
Investors may choose to receive cash distributions or purchase additional shares through our distribution reinvestment plan.
Amendment to our Registration Statement for the Offering
On August 6, 2019, we filed an amendment to our registration statement for the Offering to offer two classes of shares of common stock: Class A and Class T. The share classes have a different selling commission structure; however, any offering-related expenses are being paid by our advisor without reimbursement by us.
