UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 To
FORM S-11
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
CBCI INCOME AND GROWTH FUND, LLC
(Exact name of registrant as specified in governing instruments)
----------------
SUITE 715 PLYMOUTH BUILDING
12 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA 55402
(Address of principal executive offices)
----------------
RONALD A. CHRISTENSON
SUITE 715 PLYMOUTH BUILDING
12 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA 55402
(Name and address of agent for service)
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this
Registration Statement becomes effective.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same offering. [] _____________
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the securities Act, check the following box
and list the securities Act registration statement number of the
earlier effective registration statement for the same
offering. [ ] ______________
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
TITLE OF AMOUNT TO PROPOSED PROPOSED
SECURITIES BE PRICE PER AGGREGATE REGISTRATION
REGISTERED REGISTERED UNIT PRICE FEE
- -------------- -------------- ------------ ------------ ------------
Limited Units 4,000,000 Units $10 $40,000,000 $3,680
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE
UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OR REGISTRATION STATEMENT OF
INFORMATION REQUIRED BY ITEMS 1-30
OF FORM S-11
1. Forepart of Registration Statement and Outside front Cover
Page of Prospectus
See Forepart of Registration Statement and Outside Front
Cover Page of Prospectus.
2. Inside Front and Outside Back Cover Pages of Prospectus
See Inside Front and Outside Back Cover Pages of Prospectus.
3. Summary Information, Risk Factors, and Ratio of Earnings to
Fixed Charges.
See Prospectus Summary; Risk Factors; Conflicts of Interest
(Ratio of Earnings to Fixed Charges---Not Applicable).
4. Determination of Offering Price
Price is at par.
5. Dilution.
Not Applicable
6. Selling Security Holders
Not Applicable.
7. Plan of Distribution
Outside Front Cover Page; Prospectus Summary; Plan of
Distribution; Estimated Use of Proceeds.
8. Use Of Proceeds
Prospectus Summary; Estimated Use of Proceeds.
9. Selected Financial Data
Not Applicable.
10. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Not Applicable.
11. General Information as to Registrant.
Prospectus Summary; Managers; Summary of Operating
Agreement; Investment Objectives and Policies; The
Properties.
12. Policy With Respect to Certain Activities
Prospectus Summary; Investment Objectives and Policies; The
Properties; Summary of Operating Agreement.
13. Investment Policies of Registrant
Prospectus Summary; Investment Objectives and Policies.
14. Description of Real Estate
Prospectus Summary; The Properties; Investment Objectives
and Policies.
15. Operating Data
Not Applicable.
16. Tax Treatment of Registrant and Its Security Holders
Prospectus Summary; Cash Distributions and Tax Allocation;
Income Tax Aspects; Risk Factors.
17. Market Price of and Dividends on the Registrant's Common
Equity and Related Stockholder Matters
Not Applicable
18. Description of Registrant's Securities
Outside Front Cover Page; Prospectus Summary; Risk Factors;
Summary of Operating Agreement; Plan of Distribution.
19. Legal Proceedings
Legal Proceedings.
20. Security Ownership of Certain Beneficial Owners and
Management
Not Applicable
21. Directors and Executive Officers
Prospectus Summary; Managers; Summary of Operating
Agreement.
22. Executive Compensation
Prospectus Summary; Compensation to Managers and Affiliates;
Cash Distributions and Tax Allocations.
23. Certain Relationships and Related Transactions
Prospectus Summary; Risk Factors; Investment Objectives and
Policies; Conflicts of Interest.
24. Selection, Management and Custody of Registrant's
Investments
Prospectus Summary; Estimated Use of Proceeds; Investment
Objectives and Policies; The Properties; Summary of
Operating Agreement.
25. Policies With Respect to Certain Transactions.
Prospectus Summary; Risk Factors; Investment Objectives and
Policies; Managers; Conflict of Interest.
26. Limitations of Liability
Risk Factors; Management.
27. Financial Statements and Information.
Financial Statements
28. Interests Of Named Experts and Counsel
Not Applicable.
29. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities
Managers; Plan of Distribution.
30. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
CBCI INCOME AND GROWTH FUND, LLC
4,000,000 LIMITED LIABILITY COMPANY UNITS
=======================================================================================
Description Per Unit Total Percent of Total
=======================================================================================
Public Price $10.000 $40,000,000 100.00%
Commissions and expenses .550 2,200,000 5.50
Other offering costs .225 100,000 2.25
------- ----------- -------
Proceeds available to the
Company after commissions,
and other offering costs $ 9.425 $37,700,000 94.25%
Deduct:
Acquisition expenses .100 400,000 1.00
Working capital reserves .200 800,000 2.00
------- ----------- -------
Proceeds available for
acquisition of properties $ 9.125 $36,500,000 91.25%
======= =========== =======
All of the Units of the Company offered hereby are being sold by
the Company. Application will be made to list the Units on the
BBX exchange. Prior to the Offering, there has been no public
market for the Units.
WE ENCOURAGE YOU TO READ THE "RISKS" DESCRIBED ON PAGES 11 TO 21
OF THIS PROSPECTUS.
NEITHER THE SEC NOR ANY STATE SECURITIES ADMINISTRATOR HAS
APPROVED THE UNITS OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE AND COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Company will use its "Best Efforts" to sell a minimum of
2,000,000 Units.
The term of this offering will expire on December 31, 2003 but
we may extend it to December 31, 2004.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SEC IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING
AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
CBCI Income and Growth Fund, LLC
Phone: 612-338-7173 Fax:612-338-7236
Table of Contents
1 SUMMARY 6
1.1 CBCI INCOME AND GROWTH FUND, LLC 6
1.2 RISKS 7
1.3 PROPERTIES AND PROPERTY ACQUISITION 7
1.4 THE UNITS 8
1.5 THE MANAGERS AND PRIOR PROGRAMS 10
1.6 COMPENSATION TO THE MANAGERS 11
1.7 CONFLICTS OF INTEREST 12
2 RISK FACTORS 12
2.1 GENERAL RISKS 12
2.2 REAL ESTATE INVESTMENT RISKS 16
2.3 CONFLICT OF INTEREST RISKS 18
2.4 FEDERAL INCOME TAX RISKS 20
3 WHO MAY INVEST 22
3.1 GENERAL 22
3.2 TAX EXEMPT ENTITIES 23
3.2.1 FIDUCIARY OBLIGATIONS; PROHIBITED TRANSACTIONS 24
3.2.2 PUBLICLY OFFERED SECURITIES EXEMPTION 25
3.2.3 REAL ESTATE OPERATING COMPANY EXEMPTION 26
3.2.4 CONSEQUENCES IF NO EXEMPTIONS AVAILABLE 26
3.2.5 PROHIBITED TRANSACTIONS; CONSEQUENCES 27
3.2.6 OTHER CONSIDERATIONS 28
4 CAPITALIZATION 29
5 ESTIMATED USE OF PROCEEDS 29
6 INVESTMENT OBJECTIVES AND POLICIES 30
6.1 PRINCIPAL INVESTMENT OBJECTIVES 30
6.2 ACQUISITION OF PROPERTIES 31
6.3 TEMPORARILY INVESTED FUNDS 31
6.4 SALE OF PROPERTIES 32
6.5 BORROWING AND LENDING POLICIES 33
6.6 JOINT VENTURE INVESTMENTS 34
6.7 DISTRIBUTIONS 34
6.8 RESERVES FOR OPERATING EXPENSES AND CONTINGENCIES 35
6.9 MANAGEMENT OF PROPERTIES 35
6.10 CHANGES IN INVESTMENT OBJECTIVES AND POLICIES 36
7 THE PROPERTIES 36
7.1 NO EXISTING PROPERTIES 36
7.2 ACQUISITION CANDIDATES 37
7.3 ACQUISITION CRITERIA 37
7.4 PROPERTY UPDATES 38
8 MANAGERS 38
8.1 FIDUCIARY RESPONSIBILITY 38
8.2 INDEMNIFICATION FOR LIABILITIES 39
8.3 MANAGEMENT 39
8.4 BACKGROUND AND EXPERIENCE OF MANAGEMENT 40
8.4.1 CBCI FUND MANAGEMENT, INC. 40
8.4.2 RONALD A. CHRISTENSON 40
8.4.3 CBCI ACQUISITIONS I, LLC 41
8.5 SECURITY OWNERSHIP OF MANAGERS 41
8.6 REPLACEMENT OF MANAGERS 42
9 PRIOR PERFORMANCE 42
10 COMPENSATION TO MANAGERS AND AFFILIATES 43
11 CONFLICTS OF INTEREST 44
11.1 LACK OF ARM'S LENGTH NEGOTIATIONS WITH MANAGEMENT 45
11.2 OTHER REAL ESTATE ACTIVITIES OF MANAGERS 45
11.3 COMPETITION; MANAGERS; PURCHASES AND SALES 46
11.4 POSSIBLE JOINT INVESTMENTS WITH AFFILIATED PROGRAMS 47
11.5 REPRESENTATION IN IRS PROCEEDINGS 47
11.6 LACK OF SEPARATE REPRESENTATION 48
11.7 AFFILIATION OF SELLING AGENTS 48
11.8 EXPENSE REIMBURSEMENTS 48
12 CASH DISTRIBUTIONS AND TAX ALLOCATIONS 49
12.1 CASH DISTRIBUTIONS 49
12.2 TAX ALLOCATIONS 50
13 INCOME TAX ASPECTS 50
13.1 TAX CONSIDERATIONS FOR LIMITED MEMBERS 50
13.2 TAX OPINION 51
13.3 GENERAL 52
13.4 PARTNERSHIP STATUS 52
13.4.1 PARTNERSHIP; ASSOCIATION 52
13.4.2 STATUS OF PUBLICLY TRADED PARTNERSHIPS IN GENERAL 53
13.4.3 STATUS IF NO PUBLIC MARKET EXISTS 53
13.4.4 STATUS IF PUBLIC MARKET EXISTS 53
13.5 FACTORS AFFECTING TIMING; ALLOCATION OF INCOME 54
13.5.1 ALLOCATIONS 54
13.5.2 DEPRECIATION DEDUCTIONS 55
13.5.3 FORM OF LEASES 55
13.5.4 ORGANIZATION AND SYNDICATION COSTS; OTHER PAYMENTS 56
13.5.5 BASIS OF INTEREST IN THE COMPANY 57
13.5.6 SALE OF PROPERTY AND FORECLOSURES 58
13.5.7 LIQUIDATION 59
13.5.8 SALE OF YOUR UNITS 59
13.5.9 LOSSES AND CREDITS FROM PASSIVE ACTIVITIES 60
13.5.9.1 TREATMENT IF UNITS NOT PUBLICLY TRADED 60
13.5.9.2 TREATMENT IF UNITS PUBLICLY TRADED 60
13.5.10 PORTFOLIO INCOME 61
13.5.11 MINIMUM TAX 61
13.6 TAX AUDIT, RETURNS AND PENALTIES 62
13.7 QUALIFIED PLANS AND TAX EXEMPT ENTITIES 62
13.7.1 UNRELATED BUSINESS TAXABLE INCOME 62
13.7.2 MINIMUM DISTRIBUTION REQUIREMENTS 64
13.7.3 CHARITABLE REMAINDER TRUSTS 65
13.8 FOREIGN INVESTORS 65
13.9 STATE INCOME TAXES 65
14 ABSENCE OF PUBLIC MARKET; VOLATILITY OF UNIT PRICES 66
15 PROHIBITIONS ON TRANSFERS 66
16 SUMMARY OF OPERATING AGREEMENT 67
16.1 YOUR RIGHTS AS A LIMITED MEMBER 67
16.2 TERM AND DISSOLUTION 67
16.3 RETURN OF CAPITAL 68
16.4 VOTING RIGHTS 68
16.5 MEETINGS 68
16.6 REPURCHASE OF UNITS 69
16.7 DISTRIBUTION REINVESTMENT PLAN 70
16.8 LIABILITIES OF INVESTORS 72
16.9 RIGHTS, POWERS AND DUTIES OF THE MANAGERS 72
16.10 AUDIT COMMITTEE 72
16.11 APPOINTMENT OF MANAGERS AS ATTORNEYS-IN-FACT 72
16.12 ROLL-UPS 73
17 REPORTS TO INVESTORS 74
18 PLAN OF DISTRIBUTION 75
19 TRANSFER AGENT 77
20 SALES MATERIALS 77
21 LEGAL PROCEEDINGS 77
22 EXPERTS 77
23 LEGAL OPINION 78
24 ADDITIONAL INFORMATION 78
FINANCIAL STATEMENTS 79
GLOSSARY 83
1 SUMMARY
1.1 CBCI Income and Growth Fund, LLC
CBCI Income and Growth Fund, LLC is a Minnesota Limited
Liability Company organized on October 30, 2002. Although we
have not commenced operations, we intend to use the proceeds
from this offering to acquire a portfolio of income-producing,
commercial properties. We will lease these properties under
long-term "net" leases that will require our tenants to pay the
operating costs of the properties. We will operate from the
offices of our Managers at 715 Plymouth Building, 12 South Sixth
Street, Minneapolis, Minnesota 55402. We can be reached at
(612) 338-7173.
Our objective is to acquire properties that provide:
- An annual rate of return to investors equal to the rate
paid on 10-year Treasury Notes plus 4.00%; minimum rate
of 8.25%; maximum rate of 9.75%; (the "Targeted Rate");
- Stable performance from long-term leases with corporate
tenants that management believes possess "investment
grade" credit characteristics;
- Growth in lease income through rent escalations;
- Capital growth through appreciation in property values;
To achieve the objectives we may, from time to time, sell
properties and reinvest the proceeds in replacement net leased
properties. We cannot assure you that we will achieve these
objectives. CBCI Income and Growth Fund, LLC is not a "tax
shelter" and is not intended to shelter any of your taxable
income that you might derive from other sources.
Our Operating Agreement requires that the Company's existence
terminate on December 31, 2053. It is the current intention of
our Managers, however, to liquidate our properties and dissolve
the Company eight to twelve years after we complete property
acquisitions. Investors may also dissolve the Company earlier
by 75% majority vote.
1.2 Risks
An investment in the Units involves a number of risks, including
risks related to:
- Your inability to evaluate properties prior to purchase;
- The total reliance you must place on our Managers for our
operations;
- Your inability to exercise significant voting rights;
- Certain payments we will make to our Managers;
- Our inability to adequately diversify if only the minimum
amount of capital is raised;
- The lack of a prior public market for the Company's
Units;
- The discount at which any repurchase of Units may occur;
and,
- The potential conflicts of interest of our Managers;
These and other risks are described under "Risk Factors"
starting on page 11.
1.3 Properties And Property Acquisition
The properties we acquire will primarily be leased to corporate
tenants in the retail industry, although some properties may be
in the education, franchised restaurant, or medical industries.
We will execute long-term leases with these entities at, or
before the time we purchase the properties. The Manager will
seek tenants that it believes possess "investment grade" credit
characteristics that will provide the Company with stable, long-
term revenues.
Our properties will be acquired through CBCI Acquisitions I, LLC
our Acquisition Member.
We will not use any debt financing to acquire properties. If our
Managers believe it is advantageous, or if we do not have
adequate funds to acquire all of a property, we may acquire
properties jointly with other real estate programs that may or
may not be sponsored by Affiliates of our Managers. In such
cases, the other programs must meet the requirements described
under the caption "Investment Objectives and Policies-Joint
Venture Investments" of this Prospectus.
We expect that the properties we acquire will be recently
constructed, although we may acquire properties that have
operating histories, and may assist in financing construction or
remodeling costs by advancing funds before completion. If we
advance construction funds, it will be limited to 10% or less of
the offering proceeds.
Although we did not own any properties when this Prospectus was
written, we will supplement this Prospectus when we have
identified any property we intend to purchase.
1.4 The Units
Each Unit of limited liability company interest represents a
$10 equity interest in the Company. Unlike profits and losses
from "C" corporations, which are taxed at the corporate level,
profits, gains, losses, and tax deductions from the Company are
designed to be passed directly through to the investors and
taxed only once at the investor level. The rental income we
generate may be treated as "portfolio income" or "passive
income" for tax purposes, depending on whether or not our Units
trade on any public securities market. If our Units are traded
publicly, any rental income we generate in excess of rental
expenses will probably be taxed as "portfolio income". If our
Units are not traded on any public securities market, then our
rental income will be considered "passive income". We intend to
make application to list our Units on the BBX exchange. If this
application is successful, our rental income will be considered
portfolio income for tax purposes (see "Income Tax Aspects").
We expect to generate non-cash depreciation and amortization
expenses that we should be able to deduct over a period of
approximately 39 years on a "straight line basis" for tax
purposes. These deductions should allow us to distribute more
cash in the early years than the income our investors are
required to recognize; although this "deferred income" will
likely be recognized in later years when we sell properties.
There are risks associated with our ability to achieve these tax
objectives as further described on page 20.
As an investor and "Limited Member" of the Company, you will
have a different interest in our profits, losses and
distributions than our Managers. In addition, the cash you will
receive from rents will be allocated and paid in proportions
that are different from the cash you might receive from the sale
or refinancing of our properties.
Cash distributions will be made as follows:
1. After deducting operating expenses, rent and other
operating income will be paid 49% to investors and 51% to
Managers;
2. If the amount payable to investors does not equal the
amount computed by multiplying the Targeted Rate times
Adjusted Capital Contributions (the "Targeted
Distribution Amount"), then the funds required to provide
such amount will be paid to investors from amounts
otherwise payable to the Managers from the Managers'
share of cash flow (the "Yield Maintenance
Distribution"). In no event, however, will the Managers
receive less than 10% of rent and other operating income
(if any) in any year;
3. After provisions for reserves and operating expenses,
cash from the sale of properties will be paid 100% to
investors until our investors have received (i) total
cash distributions from property sales equal to their
initial investment, plus (ii) the "Targeted Cumulative
Distribution Amount" (whether from gains on property
sales or rental income);
4. Next, 100% of the cash available from sale or refinancing
will be paid to Managers up to the amount of any
unreimbursed Yield Maintenance Distributions; and
5. Any balance remaining will be paid 49% to investors and
51% to Managers.
The term "Targeted Cumulative Distribution Amount" shall have
the meaning ascribed to it in the Company's Operating Agreement
(see "Exhibit A-Definitions").
We will make quarterly distributions of available cash from
interest income, rents, and proceeds of sale and we anticipate
that the distributions will commence the first full quarter
after proceeds are released from escrow. No liability for Yield
Maintenance Distributions will accrue until the Determination
Date (see Exhibit A-Article 2-"Definitions"). Because we expect
that the interest income we earn on offering proceeds will be
less than the rental income we earn on properties, we expect
that distributions in the first few years of the Company's
operations will be lower than the distributions will be after
the proceeds are fully invested in properties.
1.5 The Managers And Prior Programs
This investment program will be managed by CBCI Fund Management
I, Inc., (the "Manager"), a Minnesota corporation. The Manager
may contract with other parties for all or a portion of its
management activities. A separate entity has been formed to
manage the Company to limit exposure from issues that may affect
other programs. Although our Managers believe they have adequate
staff to discharge their responsibilities to the Company, they
are not required by our Operating Agreement to devote any
minimum amount of time to providing services to the Company.
Ronald A. Christenson, President, CEO, sole director, and sole
shareholder of Christenson Construction Management Corporation
will serve as our Special Managing Member and will be
responsible for overseeing the corporate manager's activities.
Christenson Construction Management Corporation is engaged in
real estate development, acquisition, management and
disposition. It provides property management services to
several real estate programs, all of which are affiliated with
our Managers and described in more detail in the Section titled
"Prior Performance" and in Exhibit B. CBCI Acquisitions I, LLC
will serve as our Acquisition Member. The chart below
illustrates the ownership and management of the Company:
Management and Ownership Chart
CBCI Fund Management I Ronald A. Christenson CBCI Acquisitions I Limited Members
====================== ======================= =================== ===============
Managing Member Special Managing Member Acquisition Member Investors
Day-to-Day Manager Audit Committee Acquisitions Non-Management
.50% Ownership .50% Ownership 50% Ownership 49% Ownership
1.6 Compensation To The Managers
In addition to paying our Managers for their interests in the
profits and losses as Managing Members of the Company, we will
pay our Managers for the following services:
1. The organization and offering of Units in the Company
(estimated at 5.5% of total subscriptions), all of which
will be paid out to third parties;
2. The initial acquisition of properties (estimated at 1% of
total subscriptions);
3. Property management fees estimated at 5% of total rental
revenue, but only if such fees are paid by tenants;
4. An annual Asset Management Fee equal to 1/2 percent of
the average assets managed during each year;
5. Acquisition Fees equal to 3% of the cost of properties
acquired (excluding the initial properties); and,
6. Disposition Fees equal to 3% of the sales price of
properties, but only to the extent that substantial
disposition services are performed.
There are limits to the amount we pay to our Managers, their
Affiliates, and persons that control the Managers. The total
payments for organization, offering the Units and acquiring
properties (referred to as "Front-End Fees"), as well as amounts
for providing administrative services to the Company cannot
exceed the following:
- 5.5% of subscription capital raised; plus
- 5% of rental revenue from properties managed by the
manager, but only if the tenants pay the property
management fee; plus,
- 3% of the sales price of properties as Disposition Fees,
if the Managers provide sales services; plus
- 1% of the acquisition cost of the initial properties
acquired;
- 3% of the acquisition costs of properties acquired,
excluding the initial properties, up to a maximum of 3%
of original investor capital; and,
- .50% percent (one-half percent) of the average amount of
assets managed annually.
1.7 Conflicts of Interest
Because of the affiliation between our Managers, the Company,
CBCI Fund Management I, Inc., Ronald A. Christenson, Christenson
Construction Management Corporation, CBCI Acquisitions I LLC and
the various other real estate activities that these persons and
entities have formed and managed, our Managers will operate
under a number of conflicts of interest arising from:
- The allocation of their work time between the Company and
other activities;
- The absence of arms length negotiation of joint venture
arrangements where Affiliates are involved;
- Potential competition with Affiliated Entities for
properties to be purchased;
- The absence of independent "due diligence"
investigations;
- Payments our Managers receive, regardless of
profitability.
2 RISK FACTORS
2.1 General Risks
YOU WILL BE RELYING ON THE MANAGERS TO SELECT PROPERTIES AND
MIGHT NOT LIKE THE PROPERTIES THEY SELECT.
When this Prospectus was printed, we had not selected any
properties. You will not be able to evaluate properties before
they are purchased. Although we will supplement this Prospectus
when we believe that a property will be acquired, you must rely
upon the ability of our Managers to choose properties. We
cannot assure you that the properties our Managers select will
be favorable investments.
YOU WILL NOT HAVE A RIGHT TO A RETURN OF YOUR INVESTMENT IF YOU
DO NOT LIKE THE PROPERTIES PURCHASED.
Prior to this Offering, there has been no public market for the
Company's Units. Although application will be made to list the
Units on the BBX after completion of this Offering, no assurance
can be given that an active trading market for the Units will be
developed or sustained, or that Units might be resold at or
above the initial public offering price. In this event, you will
not have a right to withdraw from the Company or to receive a
return of your investment if you do not like the properties that
our Managers purchase. We will have a limited Unit repurchase
program (unless our Units are traded publicly), but that program
will not necessarily return your entire investment.
YOU WILL HAVE LITTLE CONTROL OVER OPERATIONS.
Except for limited voting rights, you will have no control over
our management and must rely almost exclusively on the Managers.
Our Managers have complete authority to make decisions regarding
our day-to-day operations. The Managers may take actions with
which you disagree. You will not have any right to object to
most management decisions unless the Managers breach their
duties and will only be able to remove the Managers by 75%
majority vote in other limited instances. Our investors will not
be able to amend our Operating Agreement in ways that adversely
affect our Managers without the consent of the Managers.
THERE MAY NOT BE A MARKET FOR YOUR UNITS AND, IF THAT IS THE
CASE, THERE WILL BE RESTRICTIONS PLACED ON THEIR TRANSFER.
Prior to this Offering, there has been no public market for the
Company's Units. Although application will be made to list the
Units on the BBX, no assurance can be given that an active
trading market will be developed or maintained. In such event,
certain restrictions, described hereafter, will apply to the
Units.
In the event the Units are not publicly traded, we are required
to place significant restrictions on the transfer of Units to
avoid being taxed as a corporation. That means that you will be
required to receive approval from the Managers before reselling
or transferring your Units. The Managers are required to refuse
a transfer when it would adversely affect our tax status. We
will also require as a condition to the transfer of any Units
that you be fully apprised by the purchaser of the apparent
value of your Units, including the most recent redemption price.
We will require you to confirm your understanding of this value
by notifying us in writing. If the purchaser does not have this
information, we will provide it to you. Our Operating Agreement
provides that if you agree to sell or transfer your Units before
this information is provided to you, the transfer agreement is
void. Our Operating Agreement also provides that you must
notify us when you agree to sell your Units and that the Company
will have a right to purchase your Units at the same price by
notifying you within 15 days. Because of these requirements,
you may not be able to sell the Units at the time you desire,
and any sale may be at a substantial discount.
ALTHOUGH WE WILL MAINTAIN A REPURCHASE PROGRAM IF OUR UNITS ARE
NOT PUBLICLY TRADED, OUR ABILITY TO REPURCHASE UNITS WILL BE
LIMITED BY TAX LAW AND BY OUR CASH NEEDS, AND WILL BE SUBJECT TO
OUR MANAGER'S DETERMINATION THAT THE REPURCHASE WILL NOT IMPAIR
OUR OPERATING CASH.
In the event that no public market for the Units is developed or
sustained, we will maintain a Unit repurchase plan starting
January 1, 2005. The amount of repurchases we may make in this
event is limited by tax law, by the provisions of our Operating
Agreement and by our operating cash needs as assessed by our
Managers. Our Operating Agreement limits aggregate repurchases
in any year to two percent of the Units that are outstanding at
the beginning of the year. Our Manager will also be able to
exercise its discretion to make no purchases if it would impair
operating capital. Further, even if repurchases are made, they
will be at a discount from asset value and our Managers will
determine asset value. We cannot assure you that our repurchase
program will provide you with an opportunity to sell your Units,
or that if it does, you will obtain full value for the Units.
YOU WILL NOT HAVE A RIGHT TO A RETURN OF YOUR CAPITAL BEFORE THE
TERMINATION OF THE PROGRAM.
Although we intend to dissolve earlier, we are not required to
dissolve until December 31, 2053 unless a 75% majority of
investors votes to have us dissolve earlier. You will not have
a right to redeem your Units with the Company until we are
dissolved. Although we will have a Unit repurchase program,
that program is limited, provides for discounts that may not
provide you with full value for your investment, may be
periodically suspended at the discretion of our Managers and may
not be available if there is not adequate capital to pay for
repurchases.
THE RATE OF DISTRIBUTIONS WE MAKE WILL VARY AND DEPEND UPON THE
TIMING OF OUR PROPERTY PURCHASES, INTEREST RATES AND SALES.
Although we intend to make distributions to investors quarterly,
the amount we distribute will depend on the amount of cash flow
generated by our operations and whether we have distributable
proceeds from properties we have sold. We cannot assure you
that we will always have adequate cash flow from either source
to cover expenses and be in a position to make distributions.
In the first few years of our operations, it is less likely that
we will have proceeds from sale of our properties and our
distributions will be primarily from interest earned on the
temporary investment of Offering proceeds. We will also not
receive rental income until after we have purchased properties;
therefore, a larger portion of our cash flow during the first
few years will be from interest income. Because we expect the
rate of interest we earn will be less than the rental rates we
might achieve, any distributions paid in the first years of
operation will likely be less than any distributions paid in
later years of operation.
WE MAY NOT BE ABLE TO DIVERSIFY OUR INVESTMENTS AND THE LACK OF
DIVERSIFICATION COULD INCREASE THE RISK THAT WE WILL NOT
ACCOMPLISH ALL OF OUR INVESTMENT OBJECTIVES.
If we raise only $20,000,000, we may purchase only one type of
property, and the proportion of capital spent on organizational
and offering costs will be higher. While we intend to diversify
our investments, we are under no obligation to do so and may
invest in a single property or property type. If we have only
one type of property, or a limited number of properties, our
operations will be subject to the increased risks of factors
affecting those properties.
WE MAY BE FORCED TO DISSOLVE IF THE MANAGERS DIE OR WITHDRAW.
If our Managers die, are removed, withdraw, or are declared
bankrupt, the Company may be required to dissolve early. If we
are forced to dissolve early, we might be required to sell our
properties at disadvantageous prices. We will not carry
insurance on the life of Ronald A. Christenson, the Special
Managing Member, the president of our Managing Member and the
managing participant in our Acquisition Member.
WE ARE CURRENTLY DEPENDENT ON THE KEY PERSONNEL OF OUR MANAGERS;
THE LOSS OF THEIR SERVICES, PARTICULARLY THE SERVICES OF RONALD
A. CHRISTENSON, WOULD HAVE A DETRIMENTAL EFFECT ON THE COMPANY.
Our success depends to a significant extent on the continued
service of the officers of our Managers and their Affiliates.
The departure of those officers could materially and adversely
affect our operations. We do not maintain, and our Managers do
not maintain for our benefit, employment agreements with or key
man insurance on Mr. Christenson.
WE ARE REQUIRED TO INDEMNIFY OUR MANAGERS FOR THEIR GOOD FAITH
ACTIONS AND THE INDEMNIFICATION OBLIGATION MAY CAUSE ANY
LIABILITY THEY INCUR TO BE PAID BY THE COMPANY.
Under our Operating Agreement, except for acts of negligence or
misconduct, our Managers are not liable to us for any acts or
omissions that they undertake in good faith and that they
believe are in the best interests of the Company. Under certain
circumstances, our Managers will be entitled to indemnification
from us for losses they incur in defending actions arising out
of their position as our Managers.
YIELD MAINTENANCE DISTRIBUTIONS MAY BE INSUFFICIENT.
Under our Operating Agreement, our Managers are required to
annually distribute an amount that would provide cash to our
investors equal to the Targeted Distribution Amount to the
extent not otherwise provided by the Company's operations (Yield
Maintenance Distributions). There are limits to the amounts
available for such distributions. Such amounts are only
available from our Managers' share of the Company's cash flow
and, in any event, Managers will never receive less than a 10%
share of rent and other operating income. Amounts available may
be insufficient to provide the Targeted Distribution Amount to
investors.
2.2 Real Estate Investment Risks
WE MIGHT NOT BE SUCCESSFUL IN ACHIEVING OUR INVESTMENT
OBJECTIVES IF THERE ARE SIGNIFICANT CHANGES IN THE ECONOMIC AND
REGULATORY ENVIRONMENT AFFECTING REAL ESTATE.
Our investments in properties will be subject to risks related
to national economic conditions, changes in the investment
climate for real estate, changes in local market conditions,
changes in interest rates, changes in real estate tax rates,
governmental rules, fiscal policies and other factors beyond the
control of our Managers. Changes in these economic and
regulatory factors could cause the value of the properties we
hold to decline, cause some of our tenants to default on their
lease obligations, reduce the tax benefits we provide to our
investors or otherwise render some of the ways we do business
unattractive.
WE FACE COMPETITION FOR PURCHASE AND FINANCING OF PROPERTIES
FROM ENTITIES WITH SUBSTANTIALLY MORE CAPITAL AT THEIR DISPOSAL,
SUCH AS REAL ESTATE INVESTMENT TRUSTS AND OTHER TRADITIONAL
FINANCING SOURCES. SUCH COMPETITION MAY CAUSE US TO HAVE
DIFFICULTY FINDING PROPERTIES THAT GENERATE FAVORABLE RETURNS.
The rental rates that we are able to receive on the properties
we purchase depend substantially on the presence of competition
from other property purchasers and to a certain extent on the
availability of financing at similar rates that allow a tenant
to own the property. The availability of these alternative
purchasers or sources of financing at lower rates has
periodically caused competition with affiliated programs for
attractive properties and caused reduction in market rental
rates both of which may adversely affect the performance of the
real estate program.
IF WE HAVE DIFFICULTY FINDING ATTRACTIVE PROPERTIES AND WE ARE
DELAYED IN INVESTING THE PROCEEDS FROM THIS OFFERING, IT IS
LIKELY THAT THE RETURNS TO OUR INVESTORS WILL BE REDUCED.
The proceeds from this Offering will be temporarily invested in
money market securities and will generally produce less income
than proceeds invested in properties. Accordingly, to the
extent we are delayed in investing those proceeds in properties,
the overall return to the Company may be reduced.
DEFAULTS BY TENANTS MAY INTERRUPT CASH FLOW OR CAUSE A DECLINE
IN A PROPERTY'S VALUE.
If a tenant defaults on its lease, we cannot assure you that we
will be able to find a new tenant for the vacant property at
equal rental rates or that we will be able to sell the property
without incurring a loss. If a tenant files for bankruptcy, we
might not be able to quickly recover the property from the
bankruptcy trustee. Because we probably could not obtain a new
tenant while a trustee holds a property, the property might not
generate enough rental revenue to cover expenses associated with
the property during this period.
SOME PROPERTIES MAY BE SUITABLE FOR ONLY ONE USE AND, IF A LEASE
IS TERMINATED, MAY BE COSTLY TO REFURBISH.
Most of the properties we buy will be designed for a particular
style of tenant. If we own a property when the lease terminates
and the tenant does not renew, or if the tenant defaults on its
lease, the property might not be marketable without substantial
capital improvements. Improvements could require the use of
cash that would otherwise be distributed to you. Attempting to
sell the property without improvements might also result in a
lower sales price.
WE COULD LOSE MONEY ON CONSTRUCTION LOANS.
We intend to occasionally advance funds before
acquisition of a property takes place to assist in financing
construction or remodeling. This type of "construction lending"
can be risky because of cost overruns, non-performing
contractors, and changes in construction codes. Changes in costs
can occur during construction that can cause default on the
construction loan. If a default occurs, we might be required to
foreclose on the mortgage. During a period of redemption after
foreclosure, we would not be able to sell the property and the
property would not likely produce income. If we acquire the
property through foreclosure, we might not be able to resell the
property at a price equal to the principal amount of the loan.
If the property is only partially complete at the time we
foreclose, we may also need to pay for its completion.
WE CAN REINVEST PROCEEDS FROM SALES OF PROPERTIES IN NEW
PROPERTIES WITHOUT YOUR APPROVAL.
We may, from time to time, sell properties and reinvest the
proceeds in new net leased properties rather than distribute all
the proceeds to you. We intend, however, to distribute to
investors any net cash gain representing the difference between
the sale price and the original purchase price of properties.
You will not have the right to receive cash when we sell
properties and you must rely on the ability of our Managers to
find replacement properties in which to reinvest the proceeds.
Upon the final sale of all of our properties, if we provide
financing to purchasers, our liquidation and the distribution of
cash to you could be delayed until we are fully paid.
2.3 Conflict of Interest Risks
WE ARE RELIANT UPON THE SERVICES OF THE MANAGERS.
We will not have any employees and will be dependent upon the
Managers for most of the services required for our operations.
Ronald Christenson is the President, CEO, sole director and sole
shareholder of our Managing Member and the managing member of
our Acquisition Member. Our investors will not have any interest
in the Managers or any Affiliated Entities and will not be in a
position to control their activities. The interlocking
interests of our Managers and Affiliated Entities create a
number of conflicts of interest. These are described below under
the caption "Conflicts of Interest" and include some of the
conflicts described hereafter.
OUR MANAGERS AND THE ENTITIES WITH WHICH THEY CONTRACT WILL
PROVIDE SIMILAR SERVICES TO A NUMBER OF AFFILIATED PROGRAMS THAT
MAY IMPAIR THEIR ABILITY TO PROVIDE SERVICES TO US.
The Special Managing Member provides services to several similar
affiliated programs and entities, many of which have been
operating for a number of years. These other programs acquire,
operate and dispose of properties. The time devoted by our
Managers to the activities of these other entities may conflict
with the time required to operate the Company. Our Operating
Agreement does not require our Managers to devote a minimum
amount of time to provide services to the Company.
WE MAY BE IN COMPETITION WITH OTHER AFFILIATED REAL ESTATE
PROGRAMS FOR THE PURCHASE OR SALE OF PROPERTIES.
The Company may have cash available for investment in properties
at the same time as another affiliated entity. Most of these
affiliated entities have investment objectives that are similar
or identical to the objectives of the Company. Because our
Managers and Affiliates will make property purchase decisions
for multiple programs, there may be conflicts of interest as to
which program should acquire a particular property. Although
the Managers have a fiduciary duty to act in the best interest
of the Company, they have a similar obligation with respect to
the affiliated programs; therefore, we cannot assure you that
the Company will always be in the position of purchasing the
most favorable properties that become available to our Managers.
IF WE PURCHASE PROPERTIES JOINTLY WITH ANOTHER AFFILIATED
ENTITY, CONFLICTS MAY ARISE IN DECISIONS REGARDING THE OPERATION
OR SALE OF THE PROPERTY.
If we purchase a property jointly with another affiliated
program, it is likely that all of the decisions relating to the
property will affect both programs. Nevertheless, some
operating decisions, such as the term of leases affecting the
property or the timing of the sale of a property, may affect one
program differently than another. Our Managers will be subject
to conflicts of interest in making these decisions.
OUR MANAGERS OR THEIR AFFILIATES MAY NOT PURCHASE UNITS FROM US
OR FROM OTHER INVESTORS AND THOSE PURCHASES MAY BE AT PRICES
THAT ARE LESS THAN THE ASSET VALUE ATTRIBUTABLE TO THE UNITS.
The Managers, their Affiliates and employees are prohibited
from purchasing any Units at any time. If the Company
purchases any Units, those Units will be retired.
THE COMPANY WILL COORDINATE THE SALE OF ITS OWN UNITS AND
PERFORM THE "DUE DILIGENCE INVESTIGATION" NORMALLY PERFORMED BY
AN OFFERING MANAGER.
The manager of an offering of securities is obligated to perform
a "due diligence" investigation to confirm the accuracy of the
statements made in the offering documents. In the case of the
Company, no such independent investigation has been performed.
WE WILL MAKE PAYMENTS TO OUR MANAGERS FOR THEIR SERVICES WHETHER
OR NOT WE ARE PROFITABLE.
The Operating Agreement that governs our operations requires us
to make payments to our Managers for the services they provide
whether or not we are profitable. Although the Managers are
required to act in a manner that is in the Company's best
interests, these payments may create conflicts in how the
Managers deal with us.
WE ARE NOT PROVIDING YOU WITH SEPARATE LEGAL OR ACCOUNTING
REPRESENTATION.
The Company, its investors and Managers are not represented by
separate counsel. Although our counsel has given the tax
opinion referenced in the "Tax Matters" section of this
Prospectus, and an opinion that there is legal authority to
issue the Units, our counsel and accountants have not been
retained, and will not be available to provide, other legal or
tax advice to individual investors.
2.4 Federal Income Tax Risks
OUR OPERATIONS COULD AFFECT THE PROPRIETY OF ALLOCATIONS AND
CAUSE ADDITIONAL TAX AND PENALTIES.
Each investor will be entitled to deduct his or her share of any
tax losses and will report his or her share of any income and
gain on the investor's own tax return. Whether these
allocations will be honored by the IRS depends on a number of
facts related to our future operations and particularly whether
our investors, as Limited Members of the Company, will have
positive balances in their capital accounts throughout the life
of the Company and whether or not we are taxed as a "publicly
traded partnership". Our counsel has rendered a qualified
opinion that, as long as positive balances are maintained in
capital accounts and certain "safe harbor" provisions are
adhered to by the Company, it is more likely than not that the
allocations will be honored. If these allocations were not
honored by the IRS, a change in the tax treatment of income,
gain, loss and deduction passed through to investors by the
Company could occur and, on audit, each investor could be forced
to pay taxes, penalties or both. In the event the Company is
deemed a "publicly traded partnership", the Company would be
taxed as a corporation unless certain gross income requirements
are met.
THE TIMING OF TAX DEDUCTIONS COULD BE CHALLENGED BASED ON THE
ALLOCATION OF "BASIS" AMONG PROPERTIES AND INVESTORS COULD BE
SUBJECTED TO INCREASED TAX.
The allocations by our Managers of the purchase price of
properties among buildings, personal property, and the
underlying land will affect the amount of deductions we may take
because some of these items are depreciable and some are not.
Because properties have not been purchased, our counsel has not
rendered an opinion on whether the allocation of purchase price,
the rate of depreciation or the timing of deductions is proper.
If the IRS successfully challenged these types of allocations,
investors could lose a portion of their deductions and be
subject to increased taxable income.
THE RESALE OF PROPERTIES COULD CAUSE GAINS TO BE TAXED AS
ORDINARY INCOME.
If we were characterized as a "dealer" in real estate when
properties are sold, then gain or loss on sales will be
considered ordinary income or loss. Because our character as a
dealer in real estate is dependent on future events and the
timing of property purchases and sales, our counsel has not
rendered an opinion on this issue. Because ordinary income is
taxed, in most cases, at a higher rate than capital gains,
characterization of the Company as a dealer could increase the
amount of taxes you pay on any income we generate.
THE STRUCTURE OF THE PURCHASE AND LEASE TRANSACTIONS OF THE
COMPANY COULD CAUSE LOSS OF SOME DEPRECIATION AND OTHER
DEDUCTIONS.
Sale/leaseback transactions in which the property owner provides
certain options to the seller/lessee, such as a purchase option
at a fixed price, could cause the IRS to conclude the
transaction is not a true lease. If this were to occur, we
would not be able to use some of the deductions we anticipate
and more taxable income would be recognized during operation of
a property.
INCORRECT ALLOCATION OF EXPENSES AMONG START-UP, ORGANIZATION
AND SYNDICATION EXPENDITURES COULD CAUSE MORE TAXABLE INCOME.
Our Managers will allocate expenses during our early stages of
operation to start-up, organization, syndication and acquisition
expenses for purposes of the deduction or capitalization of such
expenses. These allocations cannot be made until the expenses
are incurred. Our counsel, therefore, has not rendered an
opinion as to their propriety. If the IRS determined that the
allocations were improper, we could lose some deductions and our
investors would recognize more income during the early stages of
the operation of properties.
3 WHO MAY INVEST
3.1 General
To purchase Units you must represent in the Subscription
Agreement (see Exhibit D) that you have received this
Prospectus and that you have either:
- A net worth (exclusive of homes, home furnishings and
automobiles) of at least $45,000 and an annual gross
income of at least $45,000; or
- Irrespective of annual gross income, a net worth of at
least $150,000 determined with the same exclusions as
specified above.
If you are purchasing through a trust, IRA or other fiduciary
account, these standards must be met by the beneficiary, the
trust or other fiduciary account itself or by the trust donor or
grantor if they are a fiduciary and directly or indirectly
supply the funds for the purchase.
You will be required to purchase a minimum of 100 Units
($1,000). An investment in the Company will not, by and of
itself, create an IRA or other tax-qualified plan for any
investor.
Because of the potential lack of a public market for the Units,
the potential restrictions on resale of the Units that will be
imposed if a public market for the Units does not develop and
the tax characteristics of an investment in the Units, you
should not purchase Units unless you do not need liquidity, are
willing to make a long-term investment and have income that
allows you to take advantage of the tax characteristics of the
Company. The Company and investment firms that may participate
in the distribution of this Offering and solicit orders for
Units are required to make every reasonable effort to determine
that the purchase is appropriate for each investor. In addition
to net worth and income standards, we are required to determine:
- Your ability to reasonably benefit from an investment in
the Units based on your investment objectives;
- Your ability to bear the risk of the investment; and
- Your understanding of the risks of the investment;
We must also determine whether you understand:
- The potential lack of liquidity of the Units;
- The potential restrictions on transferability of the
Units;
- The background and qualifications of our Managers; and
- The tax consequences of the investment;
3.2 Tax Exempt Entities
The following is a summary of some non-tax considerations
associated with an investment in our Units by tax-qualified
pension, stock bonus or profit sharing plans, employee benefit
plans, annuities described in Section 403(a) or (b) of the
Internal Revenue Code of 1986, as amended, or an individual
retirement account or annuity described in Section 408 of the
Internal Revenue Code, which are collectively herein referred to
as "Plans and IRAs." This summary is based on provisions of the
Employee Retirement Income Security Act of 1974, as amended,
commonly known as ERISA, and the Internal Revenue Code,
including amendments thereto through the date of this
Prospectus, and relevant regulations and opinions issued by the
Department of Labor (DOL), and the Internal Revenue Service
(IRS) through the date of this Prospectus. We cannot assure you
that adverse tax decisions or legislative, regulatory or
administrative changes that would significantly modify the
statements expressed herein will not occur. Any such changes may
or may not apply to transactions entered into prior to the date
of their enactment.
In considering an investment in our Units, the plan's fiduciary
should consider applicable provisions of the Internal Revenue
Code and ERISA. Even though certain tax-exempt entities, such as
most IRAs and many Keogh Plans, are not subject to the
provisions of ERISA, fiduciaries of such accounts should also
carefully review the rules and exceptions described below.
3.2.1 Fiduciary Obligations; Prohibited Transactions
Any person identified as a "fiduciary" with respect to an
employee benefit plan incurs duties and obligations under ERISA
as discussed herein. For purposes of ERISA, any person who
exercises any authority or control with respect to the
management or disposition of the assets of an employee benefit
plan is considered a fiduciary of such employee benefit plan.
Further, transactions between Plans or IRAs and "parties-in-
interest" (as such term is defined by ERISA) or "disqualified
persons" (as such term is defined by the Internal Revenue Code)
are prohibited. ERISA also requires generally that the assets of
employee benefit plans be held in trust and that the trustee, or
a duly authorized investment manager, have exclusive authority
and discretion to manage and control the assets of the plan.
In the event that our properties and other assets are deemed
assets of an employee benefit plan, referred to herein as "Plan
Assets," our Managers then would be deemed fiduciaries of any
employee benefit plans that purchase Units.
If this were to occur, certain contemplated transactions between
our Managers and the Company could be deemed "prohibited
transactions". Additionally, ERISA's fiduciary standards
applicable to investments by employee benefit plans would extend
to our Managers and the requirement that Plan Assets be held in
trust could be deemed violated.
A definition of Plan Assets is not set forth in ERISA or the
Internal Revenue Code; however, a DOL regulation (29 CFR Section
2510.3-101), referred to herein as the "Plan Asset Regulation,"
provides guidelines as to whether, and under what circumstances,
the underlying assets of an entity will be deemed to constitute
Plan Assets. Under the Plan Asset Regulation, the assets of an
entity in which an employee benefit plan makes an equity
investment will generally be deemed assets of the plan unless
the entity satisfies any of the exceptions to this general rule.
Our Managers have structured the Company to satisfy certain of
these exceptions as discussed below.
3.2.2 Publicly Offered Securities Exemption
If an employee benefit plan acquires "publicly offered
securities," the assets of the issuer of the securities will not
be deemed Plan Assets under the Plan Asset Regulation. The
definition of publicly offered securities requires that such
securities be "widely-held", "freely transferable" and satisfy
registration requirements under federal securities laws.
Our Managers believe our Units meet the registration and other
requirements discussed above. Application will be made to trade
our Units on the NASDAQ BBX exchange. Under the Plan Asset
Regulation, a class of securities will be "widely-held" if it is
held by 100 or more persons independent of the issuer. Our
Managers anticipate that this requirement will be easily met. In
addition, the Company must meet the "freely transferable"
requirement in order to qualify for this exemption. Units
tradable on an established securities market meet the definition
of "freely transferable".
In the event no Public Market for our Units is developed or
sustained, our Managers believe we will still qualify for the
publicly offered securities exemption. The Plan Asset Regulation
provides that "--whether a security is 'freely transferable' is
a factual question to be determined on the basis of all relevant
facts and circumstances--". It also provides several examples
of restrictions on transferability that, absent unusual
circumstances, will not prevent the rights of ownership in
question from being considered "freely transferable" if the
minimum investment is $10,000 or less.
3.2.3 Real Estate Operating Company Exemption
Even if we were deemed not to qualify for the "publicly offered
securities" exemption, the Plan Asset Regulation also provides
an exemption with respect to securities issued by a "Real Estate
Operating Company". We will be deemed to be a Real Estate
Operating Company if, during the relevant valuation periods
defined in the Plan Asset regulations, at least 50% of our
assets are invested in real estate in which we have the right to
participate substantially in management or development
activities. We intend to devote more than 50% of our assets to
the management and development of real estate. An example in the
Plan Asset Regulation, however, indicates that if over one-half
of an entity's properties are acquired subject to long-term
leases under which substantially all management and maintenance
activities with respect to the properties are the responsibility
of the tenants, then the entity may not be eligible for the Real
Estate Operating Company exemption. Based on this example, and
due to the uncertainty and the lack of guidance as to the
meaning of the term "Real Estate Operating Company", there can
be no assurance as to our ability to structure our operations to
qualify for the Real Estate Operating Company exemption,
although every attempt will be made to do so.
3.2.4 Consequences If No Exemptions Available
In the event that our underlying assets were treated by the DOL
as Plan Assets of investing employee benefit plans, our Managers
would be treated as fiduciaries with respect to each such plan.
Under such circumstances, an investment in our Units might
expose the fiduciaries of the employee benefit plan to co-
fiduciary liability under ERISA for any breach by our Managers
of the fiduciary duties mandated under ERISA. Further, if our
assets are deemed Plan Assets, an investment by an IRA in our
Units might be deemed to result in an impermissible commingling
of IRA assets with other property.
If our Managers or Affiliates were treated as fiduciaries with
respect to employee benefit plan Limited Members, the prohibited
transaction restrictions of ERISA would apply to any transaction
involving our assets. These restrictions could, for example,
require that we avoid transactions with our Affiliates or
restructure our activities in order to obtain an administrative
exemption from the prohibited transaction restrictions.
Alternatively, we might have to provide employee benefit plan
participants with the opportunity to sell their Units to us or
we might dissolve or terminate.
Generally, both ERISA and the Internal Revenue Code prohibit
Plans and IRAs from engaging in certain transactions involving
Plan Assets. Such transactions include disposition or leasing of
property, loans, extensions of credit, or other similar uses of
Plan Assets with "persons providing services" or owning equity
interests in an investment entity. Such parties are referred to
as "parties in interest" under ERISA and as "disqualified
persons" under the Internal Revenue Code. These definitions also
refer to employer sponsors of the Plan or IRA, "fiduciaries" and
other individuals or entities affiliated with the foregoing. For
this purpose, a person generally is a "fiduciary" with respect
to a Plan or IRA if, among other things, the person has
discretionary authority or control over Plan Assets or provides
investment advice for a fee. Under DOL regulations, a person is
deemed to provide investment advice if that person renders
advice about investing in our Units and regularly provides
investment advice to the Plan or IRA based upon its particular,
individualized needs. Thus, if we are deemed to hold Plan
Assets, our Managers could be characterized as "fiduciaries" and
each would be deemed a "party in interest " under ERISA and a
"disqualified person" under the Internal Revenue Code. If we are
deemed a holder of Plan Assets and are affiliated with an
investor, we might be a "disqualified person" or "party-in-
interest" and deemed to have participated in a Prohibited
Transaction resulting from the investment by such Plan or IRA in
our Units.
3.2.5 Prohibited Transactions; Consequences
ERISA forbids employee benefit plans from engaging in prohibited
transactions. Fiduciaries of employee benefit plans that allow
prohibited transactions to occur breach their fiduciary
responsibilities under ERISA and may be liable for any damages
sustained by the employee benefit plan, as well as civil and
criminal penalties. If it is determined by the DOL or the IRS
that a prohibited transaction has occurred, any "disqualified
person" or "party-in-interest" involved with the prohibited
transaction would be required to reverse or unwind the
transaction and compensate the plan for any loss resulting
therefrom. Additionally, the Internal Revenue Code requires that
a "disqualified person" involved with a prohibited transaction
must pay an excise tax equal to a percentage of the "amount
involved" in the transaction for each year in which the
transaction remains uncorrected. The percentage is generally
15%, but is increased to 100% if the prohibited transaction is
not corrected promptly. If an IRA engages in a prohibited
transaction, the IRA could lose its tax-exempt status.
3.2.6 Other Considerations
Fiduciaries of employee benefit plans are required to determine
the fair market value of the assets of such retirement plans on
at least an annual basis. If the fair market value of any
particular asset is not readily available (as, for instance, it
would be if its value was quoted on an established securities
exchange), the fiduciary is required to make a good faith
determination of that asset's value. A trustee or custodian of
an IRA must provide an IRA participant and the IRS with a
statement of the value of the IRA each year. Currently, neither
the IRS nor the DOL has promulgated regulations specifying how
"fair market value" should be determined.
We will prepare annual valuations of the Company's Net Value per
Unit.
Valuations provided by our Managers may not satisfy the
technical requirements imposed on plan fiduciaries under ERISA.
Similarly, the Unit valuations provided by our Managers may be
subject to challenge by the Internal Revenue Service if used for
any tax (income, estate and gift, or otherwise) valuation
purpose as an indicator of the fair market value of the Units.
We anticipate that we will provide annual reports of our
determination of value (1) to IRA trustees and custodians not
later than January 15 of each year, and (2) to other benefit
plan fiduciaries within 75 days after the end of each calendar
year.
There can be no assurance that:
- The estimated Net Value per Unit will actually be
realized by Limited Members upon liquidation;
- The Limited Members will be able to realize estimated net
asset values if they sell their Units; or
- The method used to establish value will comply with ERISA or
Internal Revenue Code requirements described above.
In addition to other considerations, trustees and custodians of
tax-qualified plans should consider the diversification
requirements of ERISA in light of the nature of an investment
in, and the compensation structure of, this investment and the
potential lack of liquidity of the Units. The prudence of a
particular investment must be determined by the responsible
fiduciary taking into account all the facts and circumstances of
the tax-qualified retirement plan and the investment.
4 CAPITALIZATION
The actual capitalization of the Company at November 30, 2002,
and the projected capitalization after the issuance and sale of
the minimum of 2,000,000 Units are illustrated by the table below:
Table 1: Capitalization of Company
SOURCE
OF ACTUAL AFTER SALE OF THE
CAPITAL CAPITAL MINIMUM (2,000,000 UNITS)
================== ========== =========================
Managing Members $1,000 $ 0
Limited Members $ 0 $20,000,000
Deduct:
Commissions 0 (1,100,000)
Other expenses 0 ( 100,000)
--------- ------------------------
Total capital $1,000 $18,800,000
========= ========================
5 ESTIMATED USE OF PROCEEDS
We expect to have approximately $18,200,000 available for
investment in properties if $20,000,000 in capital is raised and
$36,500,000 for properties if $40,000,000 in capital is raised.
Table 2 shows how we expect to use these proceeds. The items
included as "other offering expenses", consist of expenses
incurred by our Managers and the Company in preparing offering
documents and coordinating the sale of the Units. These items
cannot be precisely calculated and the amounts could materially
vary from those shown.
Table 2: Estimated Use of Proceeds
MINIMUM MAXIMUM
DESCRIPTION (2,000,000 UNITS) (4,000,000 UNITS)
Dollars Percent Dollars Percent
================= =========== ======= =========== =======
Gross proceeds $20,000,000 100.00% $40,000,000 100.00%
Deduct:
Commissions and
other offering
expenses 1,200,000 6.00% 2,300,000 5.75%
----------- ------ ---------- -------
Net proceeds $18,800,000 94.00% $37,700,000 94.25%
Deduct:
Acquisition expense 200,000 1.00% 400,000 1.00%
Working capital 400,000 2.00% 800,000 2.00%
----------- ------- ----------- -------
Available to
acquire properties $18,200,000 91.00% $36,500,000 91.25%
=========== ======= =========== =======
The amounts available for investment in properties will not, in
any event, be less than 90% of gross offering proceeds. We will
hold the proceeds of the Offering in trust for the benefit of
the purchasers of Units and use them only for the purposes set
forth above.
We will continue to offer and sell Units for 12 months after the
date of this Prospectus. At the election of our Managers, we
may offer Units during a second 12 months. We will not commit
to invest more money in properties than our capitalization
contemplates. Accordingly, our Managers believe that we will
have adequate capital to fund our operation for the first 24
months of operation.
6 INVESTMENT OBJECTIVES AND POLICIES
6.1 Principal Investment Objectives
The Company will acquire primarily commercial and retail
properties, but may acquire "medical office" or educational
facilities. Most of the properties will be leased to a single
tenant under a "net" lease that requires the tenant to pay the
operating expenses of the property, including the cost of taxes,
maintenance and insurance. The Company will seek to acquire
properties that it believes will produce annual cash flow to
investors from rental and other operating income equal to the
Targeted Distribution Amount. We may also sell properties from
time to time and purchase replacement properties when our
Managers believe conditions are favorable. We may commit to
purchase properties when construction is completed either at
agreed prices or subject to pricing formulas.
6.2 Acquisition Of Properties
We may acquire properties from our Managers or their
Affiliates. We also may purchase property that our Managers or
their Affiliates purchased in their own name to help us acquire
the property. Although we do not intend to acquire any
unimproved or undeveloped properties for long-term speculation
or to participate in the development stage of any properties, we
may acquire raw land before the building of improvements and may
advance funds or make loans in connection with the construction
of properties that we intend to acquire.
We will obtain an independent appraisal of the fair market value
of each property we acquire. Nevertheless, our Managers will
rely on their own analysis, not on the appraisals, in
determining whether to acquire a particular property. Copies of
appraisals will be retained at our offices for at least five
years and will be available for inspection and duplication by
any investor. Before we acquire a property, we will be provided
with evidence satisfactory to our Managers that we will acquire
marketable title to the property, subject only to liens and
encumbrances for tax assessments, utility easements, and other
encumbrances typical in commercial transactions. Evidence of
marketable title may include a policy of title insurance, an
opinion of counsel or such other evidence as is customary in the
locality in which the property is situated.
6.3 Temporarily Invested Funds
After release from escrow, and before investment in properties,
we will invest all funds in short-term government securities or
in deposits with a financial institution and will earn interest
at short-term deposit rates. Although we may retain some funds
to pay operating expenses and working capital reserves, we will
distribute to the investors as a return of capital any of the
net proceeds of this Offering that have not been invested or
committed for investment in real property within 24 months after
the date of this Prospectus or six months after termination of
the offering of Units, whichever is later. These distributions
will be without interest and will contain no deduction for
commissions or other organization and offering expenses. All
funds will be available for our general use during this period
and may be expended for operating any properties that have been
acquired.
For purposes of the foregoing, we will consider capital as being
committed to properties, and will not return capital to
investors if written contractual agreements have been signed
prior to the period described above, regardless of whether the
property is ultimately purchased. To the extent funds have been
reserved to make contingent payments under written contractual
agreements or our Managers determine that additional reserves
are necessary in connection with a property, regardless of
whether such payment is ultimately made, funds will not be
returned to investors.
6.4 Sale of Properties
At the discretion of our Managers, we will either distribute
all, or a portion, of the net proceeds from sale of properties
to investors or reinvest net proceeds in properties that meet
our acquisition criteria. We will not reinvest net proceeds
from the sale of a property unless enough cash is distributed to
investors to pay income taxes resulting from the sale, assuming
the proceeds are taxed at a rate of seven percent above the
individual capital gains rate.
We may sell co-tenancy or other fractional interests in
properties rather than selling our entire interest in a
property. Our Managers believe that sales of smaller interests
through exchanges designed to comply with Section 1031 of the
Internal Revenue Code can result in greater overall profits than
listing and selling the property through a real estate broker.
In those instances in which we do not sell all of a property, we
will retain the authority to manage the property.
Although we intend to sell our properties for cash, purchase
money obligations secured by mortgages may be taken as partial
payment. The terms of payment of the aforementioned obligations
may be affected by custom in the area in which the property is
located and by prevailing economic conditions. To the extent we
receive notes and property other than cash, that portion of the
proceeds will not be included in net proceeds from sale until
and to the extent the notes or other property are actually
collected, sold, refinanced or otherwise liquidated.
Accordingly, the distribution to investors of the cash proceeds
of a sale may be delayed until the notes or other property are
collected at maturity, sold, refinanced or otherwise converted
to cash.
We may receive payment in the year of sale in an amount less
than the full sales price and subsequent payments to us may be
spread over several years. The entire balance of the principal
may be a balloon payment due at maturity. For federal income
tax purposes, unless we elect otherwise, we will report the gain
on such sale proportionately under the installment method of
accounting as principal payments are received.
6.5 Borrowing And Lending Policies
We will acquire all properties for cash. We will not use any
debt financing to acquire properties or refinance properties to
generate funds to acquire other properties. Our Managers do not
expect that we will incur any indebtedness, although we may
borrow against a property to finance its refurbishing or for
other cash operating needs. The programs sponsored by
Affiliates of our Managers have rarely borrowed for such
purposes and we believe it is unlikely that such borrowings will
be incurred.
We will not obtain permanent financing from the Managers or
their Affiliates. Recourse for any indebtedness will be limited
to the particular property to which the indebtedness relates.
To the extent recourse is limited to a particular property,
under most circumstances such indebtedness would increase the
investors' tax basis in the Units. We will not issue any senior
securities and will not invest in junior mortgages, junior deeds
of trust or similar obligations. To the extent that any
financing is not fully amortizing and exceeds 10% of the
original cost of properties, its maturity will not be earlier
than ten years after the date of purchase of the underlying
property.
The Company will not underwrite securities of other issuers and,
except with respect to the joint venture investments described
below, will not invest in the securities of other issuers unless
the sole purpose is the acquisition of property that meets our
investment objectives. We may, however, make loans to the
owners of properties we intend to acquire to assist with the
construction of the properties. If we make construction loans,
the land or both the land and the improvements under
construction will secure the loan. Construction loans will not
exceed 10% of offering proceeds. We will not make any loans to
our Managers or their Affiliates with the exception of our
Acquisition Member, and then solely for purposes of acquiring
properties. Upon successful closing of the property such
indebtedness shall be repaid.
6.6 Joint Venture Investments
We may purchase property jointly with another program sponsored
by our Managers or their Affiliates. We will make these joint
ventured investments only with a program that has investment
objectives and management compensation provisions substantially
the same as our own. Our ability to enter into a joint venture
may be important if we wish to acquire an interest in a specific
property but do not have sufficient funds to acquire the
property in its entirety.
In any joint venture with another fund sponsored by our Managers
or their Affiliates, the following minimum conditions must be
satisfied:
- The joint venture must have comparable investment
objectives and the investment by each party to the joint
venture must be on substantially the same terms and
conditions:
- We will not pay more than once for the same services and
will not act indirectly through any such joint venture if
we would be prohibited from doing so directly;
- The compensation of the Managers and such Affiliates in
the other fund must be substantially the same as their
compensation in the Company; and
- We must have a right of first refusal to purchase the
other party's interest if the other party to the joint
venture wishes to sell a property.
There is a potential risk of impasse on joint venture decisions
and a risk that, even though we will have the right of first
refusal to purchase the other party's interest in the joint
venture, the Company may not have the resources to exercise such
right.
6.7 Distributions
We intend to make distributions to investors on a quarterly
basis, commencing with the first quarterly period after proceeds
are released from escrow. The distribution rate will vary based
on the availability of cash flows from operations or proceeds of
sale. During the first few years of our operations, cash flow
will be derived from interest we earn on offering proceeds and,
as we acquire properties, from rent. Because we expect that the
interest rate we earn will be less than the rental rates we
achieve, we expect that distributions will be lower during the
first few years of operation.
We will not use net cash flow from operations to acquire
properties, although we may hold cash flow for reserves or to
repurchase Units. We will distribute, on a quarterly basis,
substantially all of the cash flow we receive that is not needed
in operations or to fund reserves. To the extent rental cash
flow is interrupted by tenant defaults or other factors, or the
cash that we must apply to manage properties or operations
increases, these distributions may fluctuate. We also intend to
distribute, at the time we sell properties, the excess of the
cash received on the sale, less the costs of the sale, over the
cash we invested in the property.
Distributions to investors who elect to participate in the
Company's Distribution Reinvestment Plan will be applied to the
purchase of additional Units. You should read the section of
this Prospectus entitled "Cash Distributions and Tax
Allocations" for a more detailed description of how our cash is
allocated between the interests of our Managers and the
interests of our investors.
6.8 Reserves For Operating Expenses And Contingencies
Our Managers expect that up to 2% of the offering proceeds will
initially be reserved to meet unanticipated future costs and
expenses. To the extent that such reserves and any income are
insufficient to defray our costs and other obligations, it may
be necessary to sell properties, possibly on unfavorable terms.
During the holding period of a property, we may increase
reserves to meet anticipated costs, expenses or other economic
contingencies. To the extent that our Managers determine that
reserves are not necessary for operations, any excess reserves
may be distributed to investors.
6.9 Management Of Properties
Our Managers or their Affiliates will manage each property and
enforce the lease obligations of the tenants.
The Managers will:
- Negotiate disputes with tenants;
- Re-let and remodel properties;
- Receive and deposit monthly lease payments;
- Verify payment of real estate taxes and insurance
coverage; and
- Inspect properties and tenant sales records, where
applicable.
Since our properties will be "net-leased", the tenants will be
responsible for taxes, insurance and maintenance expenses of the
properties.
6.10 Changes In Investment Objectives And Policies
We will not make any material changes in the investment
objectives and policies described above without first obtaining
the written consent or approval of investors owning in the
aggregate more than 75% of outstanding Units, excluding Units
held by the Managers and their Affiliates.
7 THE PROPERTIES
7.1 No Existing Properties
We had not acquired any properties when this Prospectus was
printed. Our Managers are continually evaluating properties for
acquisition and engaging in negotiations with sellers, tenants
and developers regarding the potential purchase of properties.
Depending upon the amount of proceeds available from this
Offering, our Managers intend to diversify the type and location
of properties we acquire. We have not placed any limitations on
the amount or percentage of assets that may be invested in any
one property. Although we currently intend to purchase several
properties with the net proceeds of this Offering, we may
purchase only a single property if, in our Manager's judgment,
that would be in the best interest of the Company.
Our leases will provide that risks such as fitness for use or
purpose, design or condition, quality of material or
workmanship, latent or patent defects, compliance with
specifications, location, use, condition, quality, description
or durability will be borne by the lessee. As is customary in
commercial property transactions, most of our leases will
provide for early termination upon the occurrence of events such
as casualty loss or substantial condemnation. Some of our
leases, particularly those for properties used in the sale of
retail goods or services, will require that we bear the costs of
maintaining the structural integrity of the building, including
the roof and foundation.
7.2 Acquisition Candidates
Many of our properties will be leased to tenants in the retail
industry, although there is no prohibition against the
acquisition of properties in other industries. Past programs of
the Affiliates of our Managers have invested most of their
proceeds in retail properties. Currently we expect that we may
also acquire a limited number of properties in the medical, and
education industries. Our Managers intend to monitor industry
trends and invest in properties that serve to provide the most
favorable return balanced with risk.
Prior programs sponsored by our Managers or their Affiliates
have invested in or constructed properties such as the
following:
ShopKo Pamida McDonald's
Snyder Drugs Cub Foods Pier I Imports
7.3 Acquisition Criteria
In determining whether a property may be a suitable acquisition,
our Managers will consider the following factors, among others:
- The creditworthiness of the lessee and the lease
guarantor, if any, and their ability to meet the lease
obligations;
- The terms of the proposed lease and guaranty, if any,
including any provisions relating to rent increases and
the passing on of operating expenses to tenants;
- The location, condition, use and design of the property
and its suitability for a long-term net lease;
- The demographics of the community in which a property is
located;
- The prospects for long-term appreciation of the property;
and
- The prospects for long-range salability;
All property acquisition decisions made by our Managers will
involve balancing these factors with the economic
characteristics, including rental return and purchase price, of
each property to provide, in their judgment, the likelihood of a
favorable return while minimizing risk of loss. In making those
decisions, our Managers may give more weight to some of the
foregoing factors than others and the weight attributed to any
one factor may not be consistent among all properties acquired.
Our success in achieving our investment objectives will be
primarily dependent upon the considerable latitude in judgment
given to our Managers in making those decisions.
7.4 Property Updates
During the offering period, if there is a reasonable probability
that a property will be acquired, we will supplement this
Prospectus to disclose important information about the property.
Based upon the experience and acquisition methods of our
Managers, this will normally occur when a legally binding
purchase agreement is signed for a property, but may occur in a
different manner depending upon the circumstances involved.
Supplements to this Prospectus will describe the property to be
acquired, the proposed terms of purchase, the financial results
of any prior operations of the property, and other information
considered appropriate for an understanding of the transaction.
Upon termination of this Offering, no further supplements to
this Prospectus will be distributed. We will continue to provide
investors with acquisition reports that contain the same
information regarding the properties acquired. You should
understand that you should not rely on the initial disclosure
about a proposed acquisition as our assurance that we will
ultimately consummate the acquisition or that the information
provided concerning an acquisition will not change between the
date of this Prospectus (or any supplement) and the actual
purchase date.
8 MANAGERS
8.1 Fiduciary Responsibility
Our Managers are accountable to us as fiduciaries and must
exercise good faith in handling our affairs. Our Managers have
fiduciary responsibility for the safekeeping and use of all our
capital and assets, whether or not in the Managers' possession
or control. Our Managers are prohibited from employing, or
allowing any other person or entity to employ our capital or
assets in any manner except for the exclusive benefit of our
investors.
8.2 Indemnification For Liabilities
The Managers will not be liable to us or our investors for acts
or omissions that may occur in the exercise of their "good
faith" judgment. We will indemnify the Managers for any claim or
liability arising out of their activities on behalf of the
Company, unless the claim or liability was the result of
negligence or misconduct.
With respect to liabilities arising under securities laws, in
the opinion of the SEC, and the securities administrators of
most states, indemnification for liabilities arising under
securities laws is against public policy and therefore
unenforceable. If a claim for indemnification for liabilities
under securities laws is asserted by our Managers in connection
with registration of the Units, we will submit to a court of
appropriate jurisdiction, after apprising such court of the
position of the SEC and state securities administrators, the
question of whether indemnification by it is against public
policy and will be governed by the final adjudication of such
issue.
8.3 Management
Our Managers will have the sole and exclusive right, power and
responsibility to manage our business. Among other powers, and
subject to the restriction that financing not be obtained to
acquire properties, our Managers will have authority to borrow
funds to meet our operating cash needs and to secure those
borrowings with our properties.
Our Managers will make all of the investment decisions,
including:
- The decisions relating to the properties to be acquired;
- The method and timing of any refinancing of such
properties;
- The selection of tenants;
- The terms of leases on such properties; and
- The method and timing of the sale of our interest in
properties;
Our Managers will coordinate and manage all of our activities,
maintain our records and accounts, and arrange for the
preparation and filing of all our tax returns. Certain of the
administrative and management functions to be performed by our
Managers may be delegated to their Affiliates, provided that any
compensation to Affiliates of our Managers is at cost and not
otherwise includable as an activity for which Asset Management
Fees, Property Management Fees, Acquisition Fees, or Disposition
Fees are charged. For these purposes, cost means the actual
expenses Affiliates incur in providing services, including:
- The salaries, including bonuses, fees and expenses paid
to employees and consultants of our Managers and their
Affiliates for work they perform on our behalf; and
- Office rent, telephone, travel, employee benefit expenses
and other expenses attributable to providing such
services.
Our Managers allocate and charge us for a majority of these
expenses based on the number of hours devoted by their employees
to our affairs, as recorded on employee daily time records.
They allocate some expenses at the end of each month based upon
the number of our investors and our capitalization.
8.4 Background And Experience Of Management
8.4.1 CBCI Fund Management, Inc.
CBCI Fund Management I Inc., (the "Manager") is a Minnesota
corporation formed in October 2002 to serve as the Managing
Member of the Company. The sole shareholder and director of our
Managing Member is Ronald A. Christenson, who also serves as its
President.
8.4.2 Ronald A. Christenson
Ronald A. Christenson is President, Chief Operating Officer and
sole shareholder of Christenson Construction Management
Corporation, a real estate development and construction
management firm. Christenson Construction Management Corporation
manages the development of institutional, commercial, retail,
industrial, and residential projects throughout the United
States.
Mr. Christenson, through related entities and Affiliates, has
developed over 1.5 million square feet of retail properties as
well as 300 residential units over the last three years alone.
He has also programmed and structured a sixty-five million
dollar mixed-use development in Minnetonka, Minnesota that
includes 250 townhouse units, 250,000 square feet of retail
property, a 120-unit apartment building, a 130-unit senior
housing facility, and a 36,000 square foot church.
Mr. Christenson also owns retail, office-warehouse, and
apartment projects comprising over 500,000 square feet of space.
These properties are owned through a variety of entities and
Affiliates and are listed in Exhibit B hereto.
Mr. Christenson's background includes employment as a project
manager for a national contracting and construction management
firm as well as a national department store chain. He has also
served as a Structural and Civil Engineer with a major
international contractor.
Mr. Christenson is a 1967 civil engineering graduate of the
University of Minnesota and a Registered Professional Engineer
in the State of Minnesota. He has also served as an officer with
the Minnesota Construction Management Association and on the
board of directors of the Minnesota Multi-Housing Association.
8.4.3 CBCI Acquisitions I, LLC
CBCI Acquisitions I, LLC is a Minnesota Limited Liability
Company formed in October 2002 to act as our acquisition
manager. Its responsibilities include purchasing and disposing
of property on behalf of the Company. Its sole member is Ronald
A. Christenson. A separate company was formed to shield the
Company from any liabilities that may arise during the course of
purchasing properties prior to the time purchases are closed.
Ronald A. Christenson is the sole owner and Managing Member of
CBCI Acquisitions I, LLC.
8.5 Security Ownership Of Managers
None of the Managers, the Affiliates of the Managers, or the
officers or directors of the Managers, holds any Units or other
interest in the Company other than that specified herein.
The Managers, their Affiliates, directors and officers are
prohibited from purchasing Units at any time.
8.6 Replacement Of Managers
Our Special Managing Member and our Managing Member may not
withdraw from their positions as Managers without providing
investors, as Limited Members, at least 90 days written notice
and providing substitute Managing Members that are approved by
vote of a majority of the Units outstanding (excluding Units
held by the Managing Members and Affiliates). Our Special
Managing Member may not withdraw during the first 36 months of
our operations. Our Operating Agreement provides that any of
the Managing Members may be removed as a manager if a court
determines that:
- The manager was grossly negligent in performing its
obligations under our Operating Agreement;
- The manager committed fraud against our investors or the
Company;
- The manager committed a felony in connection with the
management of the Company;
- The manager was in material breach of its obligations
under our Operating Agreement; or
- The manager is bankrupt.
Our Operating Agreement also allows investors to remove and
replace either the Managing Member or Special Managing Member by
vote of the holders of a 75% majority of the Units, excluding
Units held by the Managers.
Any removal of any of the Managing Members must be accompanied
by payment in full for the fair market value of their interests.
9 PRIOR PERFORMANCE
The information presented in Exhibit B represents the historical
experience of our Manager.
The Managers and their Affiliates have owned some properties
leased to tenants that failed to fully perform under the terms
of their leases, including timely payment of rent. When a
tenant defaults, the Affiliates managing the properties have
taken such action as they deemed prudent in commercial lease
transactions. Such actions have included termination of leases,
in which case the property faced the possibility of being re-let
to a new tenant or sold. When tenants have failed to meet their
lease obligations, rental payments have been interrupted.
Although this interruption has caused a decrease in
distributions of cash flow, the overall diversification amongst
the properties has so far prevented the Managers from missing a
cash distribution or to have inadequate cash to fund operations.
It has been a continuing objective of the Managers to minimize
reductions in cash flow through careful evaluation of
properties, and the creditworthiness of lessees.
10 COMPENSATION TO MANAGERS AND AFFILIATES
CBCI Fund Management I, Inc., CBCI Acquisitions I, LLC, and
Ronald A. Christenson will provide nearly all of the operational
services we require and they will be compensated accordingly.
The Company is coordinating the sale of its own Units and it is
anticipated that no commissions will be paid for subscriptions
to the program; however the Company may chose to pay for such
services on a case-by-case basis. The Managers will provide
administrative services. We will pay the Managers an Asset
Management Fee and reimburse the Managers for some of their
expenses in furnishing services at their "cost", including a
portion of their general expenses directly related to the
furnishing of such services. In addition, the Managers will
receive an interest in net cash flow and net proceeds from sale
of properties. Our Managers allocate and charge us for some
expenses based on the number of hours devoted by their employees
to our affairs, as recorded on employee daily time records.
They allocate some expenses at the end of each month based upon
the number of our investors and our capitalization.
We will not pay real estate commissions to our Managers or their
Affiliates for the purchase or sale of any of our properties.
We will, however, compensate our Managers and their Affiliates
subject to the limitations set forth in the following table and
in Section 6.3 of our Operating Agreement, for services and
expenses they incur in connection with the purchase and sale of
properties (which may include bonus compensation to non-
controlling employees). In addition, we will pay Acquisition
Fees and Disposition Fees to our Managers.
Table 3 describes the forms of compensation, distributions and
cost reimbursements that we will or may pay to the Managers.
Table 3: Compensation to Managers
====================================================================================
OFFERING STAGE
====================================================================================
Person or Entity Form and Method of Compensation Estimated Amount
======================== =============================== ================
Managers and Affiliates Reimbursement at cost for commissions $1.1 million
Managers and Affiliates Reimbursement at cost for organization
and business start-up expenses and
other expenses of offering $100,000 maximum
=====================================================================================
PROPERTY ACQUISITION STAGE
=====================================================================================
Managers and Affiliates Acquisition Fees equal to 1% of
purchase price of properties (3% for
properties acquired thereafter) plus
reimbursement at cost for acquisition
expenses $1,200,000 maximum
======================================================================================
OPERATING STAGE
======================================================================================
Managers and Affiliates 51% of Net Cash Flow less Yield
Maintenance Distributions Not yet determinable
Managers and Affiliates One-half percent (.50%) of Net Equity
Value of the Company's assets as
an Asset Management Fee Not yet determinable
Managers and Affiliates 5% of gross rental revenue of
properties managed as a Property
Management Fee, but only to the extent
billed to and paid by tenants Not yet determinable
Limited Members 49% of Net Cash Flow plus Yield
Maintenance Distributions Not yet determinable
========================================================================================
SALE, DISPOSITION, OR LIQUIDATION STAGE
========================================================================================
Managers and Affiliates Disposition Fees equal to 3% of gross
proceeds of sales, refinancings or
other property dispositions, if
significant services are rendered Not yet determinable
Limited Members 100% of Adjusted Capital Contributions
plus: (i) the Targeted Cumulative
Distribution Amount less the total of
all Yield Maintenance Distributions;
and (ii) 49% of all Net Proceeds of
Sale to the extent they exceed the
amount computed above Not yet determinable
Managers and Affiliates 51% of Net Sales Proceeds subject to
Limited Members receiving Adjusted
Capital Contributions and Targeted
Distribution Amounts plus reimbursement
for Yield Maintenance Distributions to
the extent not previously paid Not yet determinable
=========================================================================================
11 CONFLICTS OF INTEREST
The Company will not have any employees, but instead will be
dependent upon its Managers for most of the services required
for its operations.
Our investors will not have any interest in any management
entities and will not be in a position to control their
activities. The interlocking interests of our Managers and
Affiliated Entities create a number of conflicts of interest,
including the following:
11.1 Lack Of Arm's Length Negotiations With Management
Our Managers will receive fees and reimbursements for the cost
of providing services to the Company and may realize income from
the Company during our operations and upon our liquidation. Our
agreements and arrangements with the Managers and with their
Affiliates, including those relating to compensation, were not
negotiated at arm's length. Although the aggregate amount of
fees and reimbursements our Managers may receive is limited by
our Operating Agreement, the amount of services that our
Managers provide, and therefore the amount of fees and
reimbursements they receive within these limits will be
determined, in the first instance, by our Managers. Further,
and consistent with their fiduciary obligations, the Managers
believe that their substantial interest in cash flow and
potential liability for Yield Maintenance Distributions provides
an incentive not to overcharge. The Company and the Managers
intend to make decisions regarding allocation of services in the
best interest of the Company.
The interests of our Managers and our investors with respect to
the timing and price of any sale of our properties may also
conflict because a significant portion of our Managers'
compensation will not be payable until the sale of properties.
Nevertheless, our Managers believe their inability to share
substantially in sale proceeds unless there is significant
appreciation in the value of the properties provides an
incentive to maximize proceeds both to the Managers and the
investors.
11.2 Other Real Estate Activities Of Managers
Our Managers and their Affiliates are actively engaged in the
commercial real estate business as general partners and
principals in other real estate programs. Our Managers also
intend to offer additional real estate programs in the future
through companies with which they are affiliated. We will not
have independent management but will rely on our Managers and
their Affiliates for our operations. Our Managers will devote
only so much of their time to our business as, in their
judgment, is reasonably required and are not required to devote
any minimum amount of time to our operations. We anticipate
that, although Mr. Christenson may devote a substantial amount
of his time to our business while we are offering Units and
acquiring property, he may devote less than 10% of his overall
work time after properties are acquired. The allocation by our
Managers of their time, services and functions among current
programs and future programs they may sponsor, as well as other
business ventures in which they may be involved, may create
conflicts of interest. Our Managers believe that they have, or
can retain directly or through Affiliates, sufficient staff to
be fully capable of discharging their responsibilities to all
programs with which they are affiliated.
11.3 Competition; Managers; Purchases And Sales
Our Managers and their Affiliates may engage in other business
ventures, including forming and sponsoring other public or
private programs, and neither the Company nor any of our
investors will be entitled to any interest in those programs.
It is possible that we will periodically have money available to
acquire additional properties at the same time as other programs
sponsored by our Managers or their Affiliates. If this happens,
conflicts of interest will arise as to which program should
acquire a particular property. Our Managers will review the
investment portfolio of each program and will make a decision as
to which program will acquire the property based on several
factors, including:
- The cash flow requirements of each program;
- The degree of diversification of each program;
- The estimated income tax effects of the purchase on each
program;
- The amount of capital available to each program; and
- The length of time such capital has been available for
investment.
If funds are available in two or more programs to purchase the
same property, and the factors enumerated above have been
evaluated and deemed equally applicable to each program, the
property will be acquired by the program that first reached its
minimum subscription level. Our Managers in their sole
discretion will resolve any other conflicts.
Conflicts of interest may arise when we attempt to sell our
properties. Our Managers may sell less than a 100% interest in
a property and we may then own a fractional interest in that
property. Our Managers may be forced to choose between selling
a property we hold and a property held by them or an affiliated
program. Our Managers, in their discretion, will resolve such
conflicts after consideration of the investment objectives of
the program holding the property and the length of time until
the planned final disposition of properties. Our Managers may
allow the sale of a fractional interest they hold or that is
held by an affiliated program before the sale of an interest we
hold. We cannot assure you that the terms of sale of all
fractional interests in a property sold at different times will
be the same.
11.4 Possible Joint Investments With Affiliated Programs
We may invest in property jointly with another program sponsored
by our Managers or their Affiliates under the conditions
described in "Investment Objectives and Policies-Joint Venture
Investments." Although we may make these joint investments only
with another program possessing similar investment objectives
and compensation structures, the programs may have different
objectives with respect to the timing of disposing of the
property or the level of short-term, versus long-term, income
from the property. The same personnel from our Managers and
their Affiliates will make all of the decisions for the joint
investment and may have conflicting duties to act for the
benefit of the Company and for the other program that is party
to the joint investment. In such a situation, conflicts of
interest could arise between the joint venture partners.
11.5 Representation In IRS Proceedings
Our Managing Member will act as the "tax matters partner"
pursuant to Section 6231 of the Internal Revenue Code. This
grants our manager discretion and authority regarding extensions
of time for assessment of additional tax against the investors
related to our income, deductions or credits and for settlement
or litigation of controversies involving such items. The
positions taken by the Manager on tax matters may have differing
effects on the Managers and our investors. It is possible that
in some disputes, such as disputes over whether allocations in
our Operating Agreement should control tax allocations, the
interests of our Managers will actually be adverse to the
interests of our investors. Any decisions made by our Managers
with respect to these matters will be made in good faith
consistent with their fiduciary duties to our investors and us.
Our Managing Member, to the extent its actions as tax matters
partner are in good faith and reasonably intended to be in our
best interests and subject to the indemnification and
exculpation language contained in our Operating Agreement, may
be entitled to indemnity for liability incurred as a result of
its actions on tax matters (see Exhibit A, Section 6.5).
11.6 Lack Of Separate Representation
Separate counsel does not represent our Managers and our
investors. Our Managers' counsel has performed and will
continue to provide services to the Managers that relate to the
Company. The attorneys and accountants performing services on
behalf of the Managers also perform services for other
Affiliates of the Managers. Without independent legal
representation, you might not receive legal advice regarding
matters that might be in your interest but contrary to the
interest of our Managers and their Affiliates. Should a dispute
arise between the Company and our Managers or their Affiliates
or should negotiations or agreements between the Company and our
Managers (other than those existing or contemplated on the
effective date of this Prospectus) be necessary, our Managers
will cause the Company to retain separate counsel. Any
agreements between the Company and the Managers or their
Affiliates made after the completion of this Offering will
provide that such agreements may be terminated at the option of
the company upon 60 days' notice without penalty to the Company.
11.7 Affiliation Of Selling Agents
The Company is coordinating the offering of its Units.
Normally, the dealer/ manager or underwriter of securities would
perform an arms-length investigation of an issuer of securities
to make certain that the Offering and related documents are
accurate and complete. In our case, the "due diligence"
investigation customarily performed by an underwriter is being
performed by the Company and its Managers. Investors should
note that under Rule 2810(b)(2) of the NASD Conduct Rules, any
investment firm that sells Units has an obligation to make an
appropriate independent inquiry about the Offering.
11.8 Expense Reimbursements
Our Managers and their Affiliates will be reimbursed at their
cost for expenses they incur on our behalf for managing the
Company. These expenses may include, but are not limited to the
cost of paper, photocopies, office expenses and other
expenditures necessary for the operation and management of the
Company.
12 CASH DISTRIBUTIONS AND TAX ALLOCATIONS
12.1 Cash Distributions
Our Managers intend to make distributions of available net cash
flow, if any, within 30 days after the end of each fiscal
quarter. Our objective is to acquire net leased properties that
will generate partially "tax deferred" cash distributions to you
because of the depreciation deductions that the properties will
generate. Any net cash flow from operations for each fiscal
year will be distributed 49% to investors and 51% to our
Managers.
If the amount payable to investors from operations in any year
does not equal the Targeted Distribution Amount, then the amount
required to provide it will be deducted from the amount
otherwise payable to the Managers from the Managers' share of
cash flow (the "Yield Maintenance Distribution"). In no event,
however, will Managers ever receive less than a 10% share of
rent and other operating income (if any) in any year.
When we refinance, sell or otherwise dispose of any of our
properties, we are allowed to reinvest the net proceeds from the
sale of refinancing in other properties. If we do not reinvest,
we will distribute the net proceeds from the sale or refinancing
as follows:
- First, 100% to the investors until the investors have
received an amount from net sales proceeds equal to the
total of their Adjusted Capital Contributions plus an
amount necessary to provide the Cumulative Targeted
Distribution Amount (to the extent not previously
distributed from sales proceeds or cash flow);
- Second, 100% to the Managers in an amount equal to the
total of any unreimbursed Yield Maintenance
Distributions; and
- Any remaining balance will be distributed 49% to the
investors and 51% to the Managers.
The term "Adjusted Capital Contributions" shall have the meaning
ascribed to it by Article 2 of our Operating Agreement (see
Exhibit A).
12.2 Tax Allocations
For income tax purposes, we will allocate all income, profits,
gains and losses for each fiscal year, other than any gain or
loss realized upon the sale exchange or other disposition of any
property, as follows:
- Net loss will be allocated 49% to the investors and 51%
to the Managers; and
- Net income will be allocated 49% to the investors plus
any Yield Maintenance Distributions paid from the
Managers' share of current year rents and operations;
and, 51% to the Managers minus any Yield Maintenance
Distributions paid to investors during the current year.
For income tax purposes, the gain realized upon the sale,
exchange, or other disposition of any property will be allocated
as follows:
- First, to and among the participants in an amount equal
to the negative balances in their respective capital
accounts (pro rata based on the relative amounts of such
negative balances);
- Then, 100% to the investors until the amount allocated
equals the sum of the investors' Adjusted Capital
Contributions plus an amount equal to the Targeted
Cumulative Distribution Amount (to the extent not
previously distributed);
- Then, 100% to the Managers in an amount equal to any
unreimbursed Yield Maintenance Distributions; and
- Any remaining gain will then be allocated 49% to
investors and 51% to Managers.
13 INCOME TAX ASPECTS
13.1 Tax Considerations For Limited Members
Federal income tax laws and regulations as they apply to us are
complicated and are only summarized below. You should realize
that consultation with your own advisor may be necessary to
understand the tax implications of an investment in the Company
on your personal tax situation and that periodic consultation
about changes in tax laws may be necessary because of future
changes in statutes and regulations or in interpretations by
courts or state and federal tax authorities.
13.2 Tax Opinion
______________, legal counsel to our Managers, has rendered an
opinion on the material federal tax issues relating to an
investment in our Units that involve a reasonable possibility of
challenge by the Internal Revenue Service. Where such an
opinion cannot be rendered with respect to a material tax issue,
___________ has described the reasons for its inability to
opine. As described below, counsel has not rendered an opinion
on federal tax issues whose outcome depends upon facts and
circumstances that will be determinable or will arise only in
the future. In particular, counsel has rendered no opinion with
respect to the probable outcome of:
- Whether our allocation of basis among buildings, personal
property, and the underlying land will be upheld;
- Whether we will be characterized as a "dealer" in real
estate at the time of sale or disposition of our
properties;
- Whether the leases we enter into will be "true leases" or
will be "stepped payment leases" for purposes of
determining whether we will be considered an "owner of
properties entitled to take depreciation and other
deductions" and for purposes of the timing and
recognition of rental income; and
- Whether our allocation of start-up, organization,
syndication and acquisition expenses, for purposes of the
deduction or capitalization of such expenses, will be
upheld.
Where counsel has not issued an opinion because the factors
relevant to the issue involved cannot be determined, depend on
an investor's tax situation, or turn on aspects of law that are
at present uncertain, no inferences should be drawn as to any
possible legal outcome. Furthermore, as explained below in more
detail under "Allocation," because of the uncertainty in the law
regarding whether allocations made to members of a limited
liability company treated as a partnership for tax purposes have
"substantial economic effect", counsel has rendered a qualified
opinion as to whether allocations made to investors under the
Operating Agreement will be respected for tax purposes.
Subject to the information contained in this Prospectus and in
counsel's opinion (a copy of which is included as Exhibit H to
the registration statement that has been filed with the SEC),
counsel has advised the Company that in the aggregate the
significant tax benefits, described herein and potentially
available to an investor, will more likely than not be realized.
An opinion of counsel represents only such counsel's best legal
judgment and has no binding effect or official status of any
kind. No assurance can be given that a court, if challenged by
the IRS, would sustain the conclusions reached in an opinion.
Consequently, investors will assume the risks of a challenge by
the IRS of the tax interpretations set forth herein or otherwise
made by the Company or the Managers and the risks of changes in
tax laws, rules, regulations, and interpretations.
13.3 General
We have not been formed to serve as a "tax shelter". We provide
a tax advantaged form of investment primarily because:
- We avoid two levels of taxation by using a "pass-through"
organizational structure;
- We "defer" some taxes because some of the cash we
generate in early years can be offset for tax purposes by
non-cash depreciation and amortization charges; and
- Most of the income (from rents) that we may generate is
either (i) "portfolio income" that can be offset by
"portfolio expenses" from other sources, or (ii) "passive
income" that can be offset by "passive losses" from other
sources;
There are, however, a number of factors that can affect our
ability to achieve these benefits, the timing of the benefits
and the taxes you might have to pay. These are described below.
13.4 Partnership Status
13.4.1 Partnership; Association
We have been formed as a limited liability company to allow our
investors to obtain a direct pass-through of a pro rata share of
our operating results. Under the Internal Revenue Code and
applicable IRS regulations, no federal income tax is payable by
a limited liability company that does not elect to be taxed as a
corporation. Each investor and Managing Member is required to
report on his or her federal income tax return his or her share
of our profits, losses, gains, income, deductions and credits.
Subject to limitations, including limitations on passive
activity losses, each investor and manager may deduct his or her
share of our losses, if any, for any fiscal year on his or her
individual return to the extent of the adjusted basis of his or
her interest in the Company as of the end of such year.
Likewise, each investor and manager must include his or her
distributive share of any of our taxable income for each year
with his or her other taxable income whether or not he or she
has received cash distributions from us during the year.
We have received an opinion from our Managers' legal counsel
that we will be treated as a partnership for federal income tax
purposes and will not be treated as an "association" taxable as
a corporation. In rendering this opinion, counsel has relied on
the existing tax regulations and our representation that we will
not elect to be treated as an association taxable as a
corporation.
13.4.2 Status Of Publicly Traded Partnerships In General
Under the Internal Revenue Code, a "publicly traded partnership"
is taxed as a corporation unless 90% or more of its income is
from passive-type investments. For tax purposes, "publicly
traded partnership" means any partnership whose interests are
traded on an established securities market, secondary market, or
the equivalent thereof.
13.4.3 Status If No Public Market Exists
Although we intend to apply to the BBX or other public exchange
to list our Units, no assurance can be given that our
application will be accepted.
In such a case, IRS Regulations provide several "safe harbors"
from publicly traded partnership status for partnership
interests that are not traded on an established securities
market or readily tradable on a secondary market or the
substantial equivalent thereof. Based upon these safe harbors,
and based on the provisions of our Operating Agreement, counsel
to our Managers is of the opinion that we would not be
considered a publicly traded partnership under these
circumstances.
13.4.4 Status If Public Market Exists
If our Units are listed on the BBX or other public securities
exchange, we will be classified as a "publicly traded
partnership" for tax purposes. Even so, we will not be taxed as
a corporation if 90% or more of our income consists of
"qualifying income". Some examples of "qualifying income" are:
- Interest (on temporary investments);
- Dividends;
- Real property rents;
- Gains from the sale of real property; and,
- Gains from the sale or disposition of property held for
investment.
Although their opinion is qualified because we have not yet
begun operating, our Managers' counsel has rendered an opinion
that it is more likely than not that our income from rental
activities and sales of property will constitute "qualifying
income" and we will therefore be taxed as a partnership and not
a corporation. In rendering this opinion, counsel has relied
upon our representations concerning the manner and form of our
business activities.
13.5 Factors Affecting Timing; Allocation Of Income
13.5.1 Allocations
Our Operating Agreement allocates to each investor and Manager
his or her distributive share of income, gain, loss, deduction,
or credit. Whether these allocations will be respected for
federal income tax purposes depends upon whether they have
"substantial economic effect" under applicable IRS regulations.
If the allocations do not have substantial economic effect, the
distributive share of income, gain, loss, deduction, or credit
of each investor and Manager will be determined in accordance
with the interest in the Company they hold rather than in
accordance with the contractual allocation.
Because the application of the law (concerning substantial
economic effect of the allocations that may be made under our
Operating Agreement) is uncertain, counsel has not rendered an
unqualified opinion concerning whether the allocations made to
investors will be respected. Nevertheless, assuming that all
investors and Managers have positive balances in their capital
accounts (determined after adjusting capital accounts as
provided in our Operating Agreement) throughout our existence
and that the after-tax economic consequences of the allocations
made in our Operating Agreement do not violate the
"substantiality" requirement imposed by IRS regulations, counsel
is of the opinion that it is more likely than not that
allocations made under the Operating Agreement will have
substantial economic effect. Counsel is unable to render an
opinion on the allocation of losses or deductions where the
investors have negative balances in their capital accounts
because the Operating Agreement does not contain an
unconditional obligation to restore such deficit balance.
13.5.2 Depreciation Deductions
The Internal Revenue Code allows a taxpayer to claim
depreciation deductions on property used in a trade or business
or held for the production of income. As a general rule, the
cost of acquiring or constructing property, including incidental
costs, may be included in taxable basis for purposes of
computing these deductions. We will claim depreciation, cost
recovery and amortization deductions on the properties we
acquire. Although these deductions will reduce our taxable
income, they will also reduce our adjusted basis in the
properties and increase the potential gain (or decrease the
potential loss) when the properties are sold.
Because our investment portfolio is anticipated to consist
solely of commercial properties, we will depreciate most of our
real property over 39 years using the straight-line method
(although some of our property may be tax-exempt use property
that must be depreciated over a 40-year period). A small
portion of the cost of the properties we purchase is expected to
be fifteen year or five-year recovery property.
Allocation of the purchase price of a property among the various
depreciable and non-depreciable assets is a factual question,
and we cannot assure you that the IRS will accept the
allocations made by our Managers. Because none of our
properties have been acquired and the issue depends on facts
that are not yet determined, counsel has not rendered an opinion
on this issue. Adjustment of the allocation of the purchase
price of a property could decrease depreciation deductions
thereby increasing taxable income or decreasing losses that we
recognize and pass on to our investors.
13.5.3 Form Of Leases
Although we anticipate that we will be treated as the "owner" of
our properties, the IRS has taken the position, in some
situations, that lease transactions should be treated as
financing transactions. If one of our leases were to be
considered a financing transaction for federal income tax
purposes, we would not be treated as an owner and would not be
entitled to take depreciation and other deductions on our
investment. Although we intend to use leases that will result
in our being treated as the owner of the leased property, we
have not yet entered into any leases and counsel has not
expressed an opinion on our status as owner and lessor of
properties.
Further, a lessor may be required to accrue rental income for
income tax purposes during a taxable period in amounts that
differ from the period during which the actual rental payments
were received. This can occur if: (1) rental payments are made
after the close of the calendar year following the calendar year
in which the use of the property occurs, or (2) rental payments
increase over the term of the lease. Prior programs sponsored
by our Managers have entered into leases of this type. In
certain instances, these agreements may require accrual of a
constant amount of rental income despite changes in rental rates
or may require recapture on the disposition of the property
subject to the lease. Because we have not yet entered into any
leases, we cannot tell you whether this treatment will apply.
If we enter into a lease that requires accrual of a constant
amount, such an accrual could result in recognition of a greater
amount of income than we receive in the form of cash in some
years.
13.5.4 Organization And Syndication Costs; Other Payments
Our Managers and their Affiliates will be reimbursed for costs
they incur on our behalf. These reimbursements will include the
costs of forming the Company, managing the Offering and selling
Units in the Company (including related general and
administrative costs). Our Managers will categorize these
reimbursements as start-up, syndication, organization,
management or acquisition costs. Although the Internal Revenue
Code allows deduction of amounts paid to organize the Company or
to create an active trade or business over a period of not less
than 60 months, it does not allow deduction of amounts paid to
issue or market the Units. There can be no assurance that the
IRS will accept our Managers' determination of the
classification of costs, and because the issue is factual in
nature, counsel to the Managers has not issued an opinion on
this issue.
Expenses to acquire properties will generally be added to the
purchase price and deducted over their useful lives. All other
reimbursements will be deducted as management expenses.
Although our Managers believe that the management expenses for
which they will be reimbursed will be deductible and will be
paid for necessary and ordinary services rendered, the IRS could
assert that some of those expenses are not currently deductible.
Counsel has not issued an opinion on the deductibility of these
expenses because their deductibility is a factual issue.
13.5.5 Basis Of Interest In The Company
Subject to the "at risk rules" and the "passive activity loss
limitations" that are described in greater detail below, an
investor will generally be allowed to deduct his or her share of
our losses to the extent of the adjusted basis in the investor's
Units. Each investor's adjusted basis of the Units initially
will include the investor's investment plus the investor's pro
rata share of indebtedness as to which neither the Company or
any investor is personally liable. Under the "at risk" rules, a
taxpayer cannot deduct losses arising from an activity,
including the activity of holding real property, to the extent
the losses exceed the aggregate amount with respect to which the
taxpayer is financially "at risk" in such activity. Generally,
a taxpayer is "at risk" in the amount of the investor's
investment plus the investor's share of recourse liabilities and
"qualified nonrecourse liabilities". The Managers will attempt
to ensure that financing that may be placed on properties will
be qualified nonrecourse financing. Because that determination
depends on facts not yet in existence, no assurances can be
given that loans actually obtained by the Company will qualify
as amounts "at risk".
An investor's adjusted basis of his or her Units will increase
by the investor's share of our income for each year and decrease
by his or her share of our losses and by distributions of cash
and other property we make to the investor. The investor's
share of any reduction in principal of our indebtedness will be
treated as a distribution of cash to the investor. The adjusted
basis of an investor's Units may not be reduced below zero. In
the event that the amount of losses allocated to an investor for
any fiscal year exceeds the investor's available basis of his or
her Units, the excess losses may be carried forward to the time,
if ever, that the basis is sufficient to absorb such excess
losses.
Distributions of cash to an investor that are made when we are
liquidating will, in most cases, be treated as a return of
capital to the extent of an investor's adjusted basis in his or
her Units and serve to reduce basis by an amount equal to the
cash distributed. If the cash distributed exceeds the investor's
adjusted basis of her or his Units before distribution, the
investor will recognize taxable gain to the extent of any
excess.
13.5.6 Sale Of Property And Foreclosures
If we sell a property, gain will be recognized to the extent
that the amount realized from the sale exceeds our adjusted
basis in the property and loss will be recognized to the extent
that the adjusted basis of the property exceeds the amount
realized. The amount realized from the sale of a property
includes all cash received, all liabilities assumed by the buyer
and the fair market value of all property received other than
cash. In general, investors will also recognize taxable gain on
foreclosure of a mortgage securing a property to the extent the
foreclosed liability exceeds the adjusted basis of the property.
If property is sold within one year after it is acquired, gain,
if any, will be recaptured as ordinary income to the extent that
depreciation deductions were taken. If the depreciated property
is sold in an installment sale, all depreciation will be
recaptured in the year of sale.
Under certain circumstances, the sale of property may not
generate net cash proceeds in amounts sufficient to cover the
tax liabilities created for the investors. These circumstances
might include:
- The sale of a property on adverse terms (i.e., for gross
proceeds that exceed the depreciated book value of the
property by an amount significantly greater than the net
proceeds remaining after payment of the principal amount
of any related mortgage or deed of trust);
- The sale or transfer of a property pursuant to
foreclosure; or
- The sale of a property for proceeds that include illiquid
assets (such as promissory notes of the purchaser);
Any gain or loss on the sale or other disposition of (i)
property that is held by the Company as a "dealer" or (ii)
property that is neither a capital asset nor a Section 1231
asset will be taxed as ordinary income or loss.
13.5.7 Liquidation
When we are liquidated, you will recognize taxable gain to the
extent that any money distributed to you exceeds the adjusted
basis of your Units. You will recognize a loss only if you
receive liquidation distributions consisting solely of money,
unrealized receivables or inventory items and then only to the
extent that the adjusted basis of your Units exceeds your basis
in the items we distribute.
13.5.8 Sale Of Your Units
Unless you are a "dealer" in securities, gain or loss on sale or
disposition of your Units will be treated as capital gain or
loss. You might have to report ordinary income, however, to the
extent that:
- We have "unrealized receivables and inventory items";
- We have depreciation recapture property or items that are
not capital assets;
- We are considered a "dealer" in such property;
- We have nonrecourse partnership liabilities on properties
at the time of your sale that would create additional
gain or ordinary income for you. Your gain on the sale
or exchange of Units can exceed the cash proceeds from
the sale, and the income taxes payable with respect to
such gain also may exceed the cash proceeds;
- You make a gift of your Units at a time when your share
of our nonrecourse liabilities exceeds your basis in the
Units.
Because of the complexities and added expense of the tax
accounting required to implement special elections to adjust the
basis of a transferee of Units in those Units, we do not intend
to make a "Section 754" election when an investor sells his or
her Units to another investor. You may have greater difficulty
selling your Units or may realize a lower sales price because
the purchaser will obtain no current tax benefits from his
investment to the extent that the cost of the investment exceeds
the allocable share of the company's basis in its assets.
13.5.9 Losses And Credits From Passive Activities
13.5.9.1 Treatment If Units Not Publicly Traded
Our manager intends to conduct our operations in a manner that
will cause our real estate rental activities to constitute
"passive activity income" if our Units are not traded, or cease
to be traded, on any public securities market, secondary
exchange or the substantial equivalent thereof. Although the
opinion of Managers' counsel is qualified because we have not
purchased properties and they cannot determine whether the
properties will be considered used in a trade or business rather
than held for investment, they have rendered an opinion that it
is more likely than not that our income from rental activities
will constitute passive activity income. Under the Internal
Revenue Code, losses and credits from a "passive activity" are
deductible only against the income and gain from other passive
activities. Passive activity losses that are not deductible
against Company income are carried forward and become deductible
against future passive activity income or when the taxpayer
liquidates his or her interest in the activity. When you
dispose of our Units or we are liquidated, any passive activity
losses that you have not deducted (together with any losses
caused by the disposition or liquidation) will be deductible (1)
first against passive income or gain from the Company; (2) next
against income or gain from other passive activities; and (3)
lastly, against any other income or gain
13.5.9.2 Treatment If Units Publicly Traded
If our Units are traded on any public securities market,
secondary exchange or the substantial equivalent thereof, we
will be classified as a "publicly traded partnership" that is
not taxable as a corporation because of its "qualified
income"(See "Status" above). The passive activity provisions of
the Internal Revenue Code apply differently in the case of
publicly traded partnerships. Investors should note the
following and discuss with their tax advisor any implications
these provisions may have on their particular tax situation:
(a) Passive activity loss rules are applied separately to
items attributable to each publicly traded partnership;
(b) Passive activity losses of the Company, if any, can only
be used to offset current or future passive activity
income of the Company;
(c) Passive activity income of the Company, to the extent it
exceeds passive activity losses of the Company, is
generally treated as "portfolio income" and cannot be
used to offset losses from passive activities of other
investments;
(d) Passive activity losses of the Company, to the extent
they exceed passive activity income of the Company,
cannot be used to offset income from passive activities
of other investments unless the entire interest in the
Company is liquidated.
13.5.10 Portfolio Income
The interest income we earn on the investment of the proceeds of
this Offering, working capital investments, and rental income
(if we are deemed a publicly traded partnership) will be treated
as portfolio income. You will not be able to deduct losses from
passive activities from your share of income we derive from
these portfolio income items. Although counsel cannot evaluate
the investments we may make and therefore cannot determine in
advance whether the income the properties may generate will be
portfolio income, we have received an opinion of our Managers'
counsel that it is more likely than not that our interest income
and rental income (if we are deemed a publicly traded
partnership) will be portfolio income.
13.5.11 Minimum Tax
Passive losses, such as operating losses we may generate, are
not allowed as a deduction from alternative minimum taxable
income to the extent they exceed alternative minimum taxable
income from passive activities. The amount of any passive loss
that is disallowed is determined after computing all preferences
and making all other adjustments to income that apply for
minimum tax purposes. Thus, the amount of suspended losses
attributable to passive activities may differ for minimum and
regular tax purposes. You should consult your tax advisor about
the effect of the alternative minimum tax on your tax position.
13.6 Tax Audit, Returns And Penalties
Our Manager will arrange for the preparation and filing of all
our tax returns. The Manager also will serve as the "tax
matters partner" as defined in the Internal Revenue Code. As
tax matters partner, our manager will have discretion and
authority regarding extensions of time for assessment of
additional tax against you caused by the Company and regarding
settlement or litigation of controversies involving federal
taxation. This is significant because controversies regarding
determination of taxable income will be resolved by settlement
or litigation at the Company level. You will be required to
report any item of income, gain or loss consistently with the
way we report the item, unless you include a specific
explanation of the inconsistency in your income tax return.
If you have an interest of 1% or more in our revenues, you will
receive notice of any tax controversy from the IRS. You will
have the right to participate in settlement or litigation of any
tax controversy if such right is exercised timely. If you do
not reserve your right to reject settlements accepted by our
Manager, you will be bound by the settlement. All investors
will be bound by the outcome of any litigation that may result.
The IRS may assess penalties against you for understatement of
tax if there was not "substantial basis" for the treatment
claimed by the Company.
13.7 Qualified Plans And Tax Exempt Entities
Any person who is a fiduciary of an IRA, Keogh Plan, qualified
plan or other tax-exempt entity, collectively referred to herein
as "Exempt Organizations", considering an investment in Units
should be aware that a number of tax related and non-tax related
issues apply to them. For a discussion of non-tax related issues
(see "Who May Invest").
Exempt Organizations and fiduciaries should consider the
following tax matters before considering an investment in the
Units.
13.7.1 Unrelated Business Taxable Income
Certain income allocable to Units owned by Exempt Organizations
may be subject to federal income tax. This would occur in the
event that any portion of our income is deemed UBTI, generally
defined as income derived from any unrelated trade or business
carried on by a tax-exempt entity or by a partnership of which
it is a member. A tax-exempt Limited Member other than a
charitable remainder trust that has UBTI in any tax year from
all sources of more than $1,000 may be subject to taxation on
such income. A trustee of a charitable remainder trust should be
aware that if any portion of the income derived from the trust's
ownership of Units is deemed to be UBTI, the trust will lose its
exemption from income taxation with respect to all of its income
for the tax year in question. See "Investment by Charitable
Remainder Trusts" below.
If we are deemed to hold partnership properties primarily for
sale to customers in the ordinary course of business, or we were
deemed to own "debt-financed property" (i.e., property that is
subject to "Acquisition Indebtedness"), as defined below, then a
portion of such income or gain would constitute UBTI to
investing Exempt Organizations.
Acquisition Indebtedness includes:
- Indebtedness incurred in acquiring or improving property;
- Indebtedness incurred before the acquisition or
improvement of property if such indebtedness would not
have been incurred but for such acquisition or
improvement; and
- Indebtedness incurred after the acquisition or
improvement of property if such indebtedness would not
have been incurred but for such acquisition or
improvement and the incurrence of such indebtedness was
reasonably foreseeable at the time of such acquisition or
improvement.
Our Operating Agreement prohibits us from incurring indebtedness
to acquire Properties. Although we are permitted to borrow to
cover costs of Major Repairs or Rehabilitation, we will not
incur indebtedness to cover such costs in connection with the
acquisition of any Property. Instead, such costs, if any, will
be paid for by utilizing equity capital of the Company. Based
upon the representations of our Managers and the provisions of
our Operating Agreement, counsel is of the opinion that it is
not likely that we will incur debt that could be characterized
as Acquisition Indebtedness. Counsel's opinion is limited,
however, because the characterization of our indebtedness, if
any, is dependent on future events and the timing of property
purchases and borrowings.
The Company is acquiring Property for the purpose of long-term
investment and not with a view toward immediate resale.
Consequently, our Managers believe that we will not be deemed a
"dealer" for tax purposes. Because our character as a dealer in
real estate is dependent on future events and the timing of
property purchases and sales, our counsel has not rendered an
opinion on this issue.
13.7.2 Minimum Distribution Requirements
Any person who is a fiduciary of an Exempt Organization
considering an investment in our Units should also consider the
impact of minimum distribution requirements under the Internal
Revenue Code. Section 401(a)(9) of the Internal Revenue Code
provides generally that certain minimum distributions from
retirement plans must be made commencing no later than April 1
of the year following the calendar year during which the
recipient attains age 70 1/2. If our Units are publicly traded,
the liquidity requirements imposed can be met by selling
Units in the Public Market.
If no Public Market exists for the Units, and mandatory
distributions are required to be made to an IRA beneficiary or a
qualified plan participant before we sell our Properties, it is
likely that a distribution-in-kind for the Units will be
required to be made. Such distribution will be includable in the
taxable income of said IRA beneficiary or qualified plan
participant for the year in which the Units are received at the
fair market value of the Units without any corresponding cash
distributions from us with which to pay the income tax liability
arising out of any such distribution.
In certain circumstances, a distribution-in-kind of Units may be
deferred beyond the date set for required distributions, but
only upon a showing of compliance with the minimum distribution
requirements of the Internal Revenue Code because of
distributions from other retirement plans established for the
benefit of the recipient. Compliance with these requirements is
complex, however, and potential investors are urged to consult
with and rely upon their individual tax advisors with regard to
all matters concerning the tax effects of distributions from
retirement plans. No assurances can be given that our properties
will be sold or otherwise disposed of in a fashion that would
permit sufficient liquidity in any retirement plan holding Units
for the retirement plan to be able to avoid making a mandatory
distribution-in-kind of Units.
13.7.3 Charitable Remainder Trusts
A charitable remainder trust, or CRT, is a trust created to
provide income for the benefit of at least one non-charitable
beneficiary for life or a term of up to 20 years, with the
property comprising the trust corpus then transferred to a
charitable beneficiary upon the expiration of the trust. Upon
the creation of a CRT, the grantor would normally be entitled to
a charitable income tax deduction equal to the current fair
market value of the remainder interest that will ultimately pass
to charity. A CRT is also exempt from federal income taxation if
the trust is established and maintained in compliance with
highly complex rules contained in the Internal Revenue Code and
underlying Regulations. Among these rules is a provision that if
any portion of the income recognized by a CRT is deemed UBTI,
all of the CRT's income for the taxable year in which UBTI is
incurred, from whatever sources derived, will be subject to
income taxation at the trust level. As set forth above in
"Investment by Qualified Plans and Other Tax-Exempt Entities,"
our Managers do not believe that the Company will incur UBTI.
13.8 Foreign Investors
Although this discussion is not intended to describe foreign or
federal tax consequences of an investment in the Company by
foreign investors, you should understand that the Foreign
Investment in Real Property Tax Act of 1980 taxes non-resident
aliens and foreign corporations on gains from the disposition of
United States real property interests as if the taxpayers were
engaged in a trade or business in the United States. If we
dispose of properties or if a foreign investor disposes of Units
in the Company, the foreign investor may be subject to tax and
withholding because of the disposition.
13.9 State Income Taxes
This Prospectus does not summarize the state income tax
consequences of owning a Unit in the various states in which
investors may reside or of owning property in the various states
in which we may acquire properties. You should consult with
your own tax counsel about the state income tax consequences in
your state of residence.
14 ABSENCE OF PUBLIC MARKET; VOLATILITY OF UNIT PRICES
Prior to the offering hereunder, there has been no public market
for the Units. Application will be made to list the Units on the
BBX; however, no assurance can be given that an active trading
market for the Units will develop or be sustained after the
Offering or that the Units can be resold at or above the initial
public offering price. The market for equity securities can be
volatile and the trading price of the Units could be subject to
wide fluctuations in response to operating results, news
announcements, trading volume, general market trends and other
factors. One of the factors that may influence the price of the
Units will be the annual distribution rate associated with the
Units as compared with the yields on alternative investment
products. Any significant increase in market interest rates from
their current low levels could lead holders of Units to seek
higher yields through other investments, possibly adversely
affecting the market price of the Units. Moreover, numerous
other factors such as governmental regulatory action and tax
laws could have a significant impact on the future market price
of the Units.
15 PROHIBITIONS ON TRANSFERS
Our Operating Agreement restricts certain transfers.
In the event no public trading market exists for the resale of
Units, our Operating Agreement prohibits us from transferring
Units that you sell unless you confirm, directly and not through
a power of attorney that you knew the repurchase price that we
were offering when you agreed to sell the Units. The Operating
Agreement provides that your agreement to sell your Units
without this information is void.
You must also provide us with 15 days written notice before you
can complete a sale of your Units. We have the right to
purchase your Units on the same terms you propose to a third
party by notifying you in writing during this 15 day period.
This may render it more difficult for you to sell your Units.
Under our Operating Agreement, we will require any substituted
investor to agree in the instrument of assignment to become an
investor and to pay reasonable legal fees and filing costs in
connection with his substitution as an investor. We will
recognize transfers of Units only as of the last day of the
month in which we receive written evidence regarding the
assignment in form satisfactory to our Managers.
16 SUMMARY OF OPERATING AGREEMENT
16.1 Your Rights As A Limited Member
Your rights as a member in the Company are established and
governed by our Operating Agreement (Exhibit A). The
Subscription Agreement that you must sign to invest includes a
power of attorney that gives our Managers the power to sign the
Operating Agreement on your behalf.
This section of the Prospectus, together with the sections
referenced in the next paragraph below, summarizes the material
provisions of the Operating Agreement. It is not, however, as
complete or as detailed as the Operating Agreement itself. You
should carefully review the Operating Agreement with your
advisors.
Some provisions of the Operating Agreement are described in
other sections of this Prospectus:
- For a discussion of compensation and payments to our
Managers and their Affiliates, see "Compensation to
Managers and Affiliates."
- For a discussion of the distribution of cash and the
allocation of profits and losses for tax purposes, see
"Cash Distributions and Tax Allocations."
- For a discussion of investment objectives and policies,
see "Investment Objectives and Policies."
- For a discussion of the liability of our Managers for
their acts or omissions and the indemnification of the
Managers, see "Managers-Fiduciary Responsibility" and
"Managers-Indemnification For Liabilities";
- For a discussion of rights of our Managers to withdraw,
or of our investors to remove a manager, see "Managers-
Management."
- For a discussion of the reports to be received by the
investors, see "Reports to Investors."
16.2 Term And Dissolution
Our Operating Agreement provides that we will be dissolved and
liquidated at any of the following times or events:
- On December 31, 2053;
- At the time the decision of investors holding a 75%
majority of the Units (exclusive of the Managers or
Affiliates of the Managers) to dissolve or liquidate;
- Upon the final sale or disposition of our assets;
- Upon the final decree of a court that dissolution is
required under law; or
- Upon the withdrawal of our Managing Member or Special
Managing Member before a successor is appointed.
16.3 Return Of Capital
Before dissolution and liquidation, you will not have the right
to demand the return of any portion of your investment from the
Company unless we are unable to fully utilize the offering
proceeds for the purchase of properties or joint venture
interests (or other similar interests).
16.4 Voting Rights
As a Limited Member, you will have the right to vote on and
approve the following matters:
- Amendments to our Operating Agreement;
- Removal of any or all of our Managers;
- Election of a new manager;
- The bulk sale of all or substantially all of our assets;
- Dissolution; or
- Changes to our investment objectives.
Investors may vote at a meeting or by written consent. In
either case, the vote of the holders of the majority of the
Units outstanding (or in some cases, a 75% majority) will decide
each matter, except that any amendment to the Operating
Agreement that adversely affects our Managers may not be
approved without the consent of the Managers.
16.5 Meetings
Periodic meetings of our investors are not required and we
currently do not intend to hold meetings. Our Managers may,
however, call a meeting at any time and are required to call a
meeting if investors holding at least 10% of the Units properly
request a meeting. After receipt of a request for a meeting,
our Managers are required to send notice to all investors of the
meeting within 10 days and hold the meeting at the time
requested (which must be more than 15 days and less than 60 days
after the request).
16.6 Repurchase Of Units
In the event no public market for the Units develops, or in the
event a public market for the Units is not sustained, then,
subject to certain conditions discussed in the Operating
Agreement, we will repurchase an investor's Unit(s) upon receipt
of a proper written request. The repurchase price will be equal
to 80% of the net value per Unit, as estimated by our Manager.
For these purposes, our Manager will base the net value per Unit
on the discounted present value of the rental income from
properties, on the most recent price at which third parties have
purchased Units, or such other method as it believes is
reasonable.
Our Managers will calculate and make available to you as soon as
possible after the first business day of January and July of
each year the price at which Units may be presented for
repurchase. Our obligation to repurchase Units is limited in
any year to 2% of the number of Units outstanding at the
beginning of the year of repurchase.
You will be allowed to present your Units for repurchase during
two different periods in each year. If you want your Units
repurchased, you must submit notification of the number of Units
you want repurchased on a form provided by our Manager. You
must mail the notice after January 1, but before January 31, or
after July 1, but before July 31 of the year of repurchase. If
investors tender Units totaling more than 2% of the Units
outstanding at the beginning of the purchase period, we will
honor repurchase requests with the earliest postmarks first. We
will repurchase Units on March 31 and September 30 of each year
based on the value at the beginning of the repurchase period.
You will not be entitled to distributions from the beginning of
the repurchase period to the date of repurchase and any
distributions you receive during the repurchase period will be
deducted from the repurchase price paid to you. Any investor
who tenders Units that are not repurchased must re-tender the
Units in succeeding periods if he or she wants the request
reconsidered.
We are not obligated to repurchase any Unit(s) if doing so would
in the discretion of our Managers, impair our operations. We
will fund repurchases out of revenues or borrowings. We cannot
assure you that revenues or borrowings will be available for
repurchases; that we will be able to repurchase any or all of
the Units tendered; or that our Managers will not suspend
repurchases. A repurchase will result in smaller distributions
to remaining investors in the year of repurchase.
16.7 Distribution Reinvestment Plan
We have established a Distribution Reinvestment Plan for
investors who elect in writing to have their distributions of
our cash reinvested in additional Units during the period of
this Offering. Our Managers, in their discretion, may decide at
any time to terminate the reinvestment plan. The plan allows
participating investors to directly purchase Units at the public
offering price of $10 per Unit.
No distributions accruing to an investor who participates in the
reinvestment plan before release of funds from escrow and
execution of the Operating Agreement will be reinvested. All
other distributions to participants in the reinvestment plan
will be reinvested within 30 days after the date of the
distribution, provided that:
- The sale of Units continues to be registered or qualified
for sale under federal and applicable state securities
laws; and,
- Each participant has received a current copy of this
Prospectus, including any supplements, and has executed a
confirmation within one year of such reinvestment
indicating his or her intention to purchase Units and
that he or she continues to satisfy the investor
suitability requirements; and
- There has been no distribution of sale or refinancing
proceeds to investors.
The reinvestment plan will terminate upon completion of this
Offering. If any requirement described above is not satisfied,
distributions will be paid in cash to participants rather than
used in the reinvestment plan.
If you participate in the reinvestment plan you must agree that
if you at any time fail to meet our suitability standards or
cannot make the other investor representations contained in our
current Prospectus, the Subscription Agreement, or the Operating
Agreement, you will promptly notify us in writing.
You should understand that affirmative action is required to
change or withdraw from the reinvestment plan. Change in or
withdrawal from participation in the reinvestment plan will be
effective only with respect to distributions made 30 days
following receipt by our Managers of written notice of change or
withdrawal. In the event you transfer your Units, the transfer
will terminate your participation in the reinvestment plan as of
the first day of the calendar quarter in which the transfer is
effective.
We may pay selling commissions of up to 5.5% on Units purchased
with reinvested distributions. If you participate in the
reinvestment plan you will be permitted to identify, change or
eliminate the name of your account executive as a participating
dealer for any distribution. If you do not identify an account
executive, or if your account executive is not employed by a
broker-dealer with which we have a dealer or underwriting
agreement, no selling commission will be paid on your reinvested
distribution, and we will retain for additional investment in
real estate any amounts otherwise payable as commissions. All
holders of Units, based on the number of Units outstanding, will
receive the benefit of the savings we realize from investors who
do not identify account executives.
We will not charge or offset any reinvestment fee against any
reinvested distributions under the reinvestment plan. The cost
of administering the reinvestment plan will be considered an
organization and offering cost and the actual cost of
administering the reinvestment plan may be reimbursed to our
Managers in accordance with the limitations on reimbursements
for organization and offering expenses.
Following each reinvestment, each participant in the plan will
be sent a statement showing the distributions received and the
number and price of Units issued to the participant. Taxable
participants will incur tax liability for income allocated to
them even though they have elected not to receive their
distributions in cash but rather to have their distributions
reinvested in the purchase of Units.
We reserve the right to amend any aspect of the reinvestment
plan, or to terminate the reinvestment plan with respect to any
distribution of cash flow subsequent to notice of such amendment
or termination, provided that notice is sent to all participants
in the plan at least 10 days prior to the record date for the
distribution. Our Managers also reserve the right to assign the
administrative duties of the reinvestment plan to a reinvestment
agent who may hold Units on behalf of participants, provide
reports to participants, and satisfy other record keeping
requirements.
16.8 Liabilities Of Investors
You will not be liable for any of our obligations in excess of
the capital you agree to contribute by signing a Subscription
Agreement, plus your share of undistributed net income. If you
receive a return of your capital contribution, you will be
liable, for a period of one year, for any obligations to
creditors whose claims arose before your capital contribution
was returned (but not in excess of the returned capital
contribution with interest). You will not have the right to a
return of your capital contributions except in accordance with
the distribution and repurchase provisions of our Operating
Agreement.
16.9 Rights, Powers And Duties Of The Managers
Our Managers will have the exclusive right to manage our
business. Our Managers will be responsible for the selection,
acquisition, sale, refinancing and leasing of all our
properties. The rights powers and duties of our Managers may be
delegated or contracted to an Affiliate of the Managers at cost.
CBCI Fund Management I, Inc., CBCI Acquisitions I, LLC, and
Ronald A. Christenson will initially be our Managers.
16.10 Audit Committee
Prior to consummation of the Offering, an Audit Committee will
be formed, and will consist of the Special Managing Member and
an Independent Audit Committee Member. The Audit Committee makes
recommendations concerning the engagement of independent public
accountants, reviews with the independent public accountants the
plans and results of the audit engagement, approves professional
services provided by the independent public accountants, reviews
the independence of the independent public accountants,
considers the range of audit and non-audit fees, reviews the
adequacy of the Company's internal accounting controls, and
reviews related party transactions.
16.11 Appointment Of Managers As Attorneys-In-Fact
By signing the Subscription Agreement, you will irrevocably
constitute and appoint our Managing Member as your attorney-in-
fact, with power to execute documents necessary to carry out the
provisions of our Operating Agreement.
16.12 Roll-Ups
Our Operating Agreement prohibits transactions in which Units
are required to be exchanged for securities of another entity
(as defined in the Operating Agreement as a "Roll-Up") unless
certain rights of the investors are maintained in the resulting
entity and unless a vote of the majority of our investors is
obtained. The Operating Agreement defines a Roll-Up to include
certain transactions involving the acquisition, merger,
conversion, or consolidation, either directly or indirectly, of
the Company and the issuance of securities from another entity.
This definition comports with requirements under certain state
securities laws but differs slightly from definitions used by
the SEC and may differ from definitions contained in rules or
legislation promulgated in the future. Our Managers will, in
the first instance, make the determination of whether a
transaction constitutes a Roll-Up.
Our Operating Agreement provides, in material part, that we may
not participate in any Roll-Up that would:
- Reduce the democracy rights of our investors;
- Impede the ability of the equity owners of the resulting
entity to purchase the securities of that entity;
- Limit the voting rights of our investors as equity owners
of the resulting entity;
- Limit rights to access the records of the resulting
entity; or
- Provide, without the consent of investors, that the costs
of the Roll-Up are to be borne by the Company.
Further, our Operating Agreement requires that we obtain an
appraisal by a competent independent expert of our assets, based
on all available information and assuming an orderly liquidation
of our assets, in connection with any Roll-Up that we summarize
for investors. If the appraisal is included in a Roll-Up
Prospectus, it must be filed with securities authorities and we
will have liability for misrepresentations or omissions that it
contains.
A Roll-Up requires the vote of holders of not less than a 75%
majority of the Units. Our Operating Agreement provides that an
investor who votes against the Roll-Up must be given the option
of accepting securities in the resulting entity or accepting
either: (i) cash for the investor's Units at the pro rata
appraised value of our assets or (ii) the ability to retain the
investor's interest in the Company on the same terms and
conditions as existed previously.
17 REPORTS TO INVESTORS
Our books and records will be maintained at our principal
offices and will be open for examination and inspection by our
investors during reasonable business hours. We will furnish a
list of names and addresses and number of Units held by
investors to any investor who requests the list in writing for a
proper purpose, with costs of photocopying and postage to be
borne by the requesting investor. The assignee of an investor
does not have a right to receive any reports unless the assignee
is admitted as a substitute member in accordance with our
Operating Agreement.
Within 75 days after the close of each taxable year, we will
distribute both to investors and assignees of investor interests
who held the assignment interest during the relevant tax period,
all information relating to the Company, consisting of a Form K-
1 report, that is necessary for the preparation of their federal
income tax returns.
Within 120 days after the end of each fiscal year, we will also
distribute to you an annual report containing a balance sheet
and statements of operations, changes in members' equity and
cash flows (which will be prepared on a GAAP basis of accounting
and will be examined and reported upon by an independent public
accountant) and a report of our activities during the period
reported upon. The annual report will describe all
reimbursements to our Managers and their Affiliates and all
distributions to investors, including the sources of the
payments. The annual report will also include our Manager's
estimate of the value of a Unit in the Company, a statement of
the method used to develop this estimated value, and the date of
the data used to develop the estimated value.
Within 60 days after the end of each quarter, we will also
distribute to you a report containing a condensed balance sheet,
condensed statements of operation, and a related cash flow
statement, together with a detailed statement describing all
real properties acquired (including the geographic locale and
the plan of operation, the appraised value and purchase price
and all other material information), setting forth all fees, if
any, received by our Managers or their Affiliates and describing
the services rendered for these fees.
Finally, when and if required by applicable SEC rules, we will
make available to investors, upon request, the information set
forth in SEC Form 10-Q within 45 days after the close of each
quarter and SEC Form 10-K within 90 days after the close of each
fiscal year. Our Managers are permitted to combine such reports
so long as they are distributed in a timely manner.
18 PLAN OF DISTRIBUTION
We are offering up to $40,000,000 ($20,000,000 minimum) of our
limited liability company interests in the form of 4,000,000 Units
(2,000,000 Units, minimum) of $10 each. You must purchase a
minimum of 100 Units ($1,000) to invest. The offering period
will commence on the date of this Prospectus. We will not sell
any Units unless we receive subscriptions for at least 2,000,000
Units within one year from the date of this Prospectus.
To invest, you will be required to accept and adopt the
provisions of the Operating Agreement (Exhibit A) and to
complete and sign the Subscription Agreement (Exhibit D). At
the time you submit a Subscription Agreement, you must submit a
check for $10 for each Unit you are purchasing. Checks should
be made payable to "XXXXX Bank-CBCI Income Fund Escrow." We
will sell Units to you only if you represent in writing that, at
the time you sign the Subscription Agreement, you meet the
suitability requirements described under "How to Invest" above.
We will deposit all funds received from investors in an escrow
account with the aforementioned bank until $20,000,000 has been
deposited. Purchases by our Managers and their Affiliates will
not be counted for purposes of meeting this minimum. If the
required $20,000,000 has not been deposited within one year
after the date of this Prospectus, all subscriptions will be
canceled and all funds will be promptly returned to investors
with interest and without any deduction. An investor may not
withdraw his funds from the escrow account. When we have
received subscriptions for the minimum number of Units, our
Managers may remove funds from escrow and instruct the escrow
agent to pay accrued selling commissions, if any. After this
initial release from escrow, the escrow account will convert to
a convenience clearing account for our use.
Upon admission to the Company, you will receive your pro rata
share of any interest earned on escrowed funds based on the date
of deposit of your subscription payment. Escrow funds will be
invested in insured deposits with a financial institution and
earn interest at short-term deposit rates. Following first
admission, we will admit additional investors as Limited Members
on or before the last business day of each month until the
termination of the Offering. Only subscribers whose
subscriptions have been received and accepted at least five
business days before each admittance date will be admitted as
Limited Members on such date.
Our Managers have complete discretion to reject any Subscription
Agreement within 30 days of its submission. Funds from a
rejected subscriber will be returned within 10 days after
rejection. Subscriptions may be rejected for an investor's
failure to meet the suitability requirements, an over-
subscription of the Offering, or for other reasons determined to
be in the best interest of the Company. Our Managers and their
Affiliates may not purchase Units offered hereunder.
Broker-dealers who may participate in the sale of the Units are
not obligated to purchase Units and resell them or to sell any
or all of the Units. Participating dealers in the Offering will
offer and sell Units on the same terms and conditions as
specified in this Prospectus. We will pay selling commissions
and a non-accountable expense allowance totaling up to 5 percent
of the gross proceeds from the sale of Units at our discretion.
We may also pay up to one-half of one percent of the gross
offering proceeds for the reimbursement of due diligence
expenses of the participating dealers. We will not pay any other
incentive fees, wholesaling costs or other expense
reimbursements or commissions for sales efforts.
We will indemnify the broker-dealers that act as participating
dealers and their controlling persons, against certain
liabilities, including liabilities under the Securities Act of
1933. With respect to liabilities arising under securities laws,
in the opinion of the SEC, and the securities administrators of
most states, indemnification for liabilities arising under
securities laws is against public policy and therefore
unenforceable. If a claim for indemnification for liabilities
under securities laws is asserted by our Managers in connection
with registration of the Units, we will submit to a court of
appropriate jurisdiction, after apprising such court of the
position of the SEC and state securities administrators, the
question of whether indemnification by it is against public
policy and will be governed by the final adjudication of such
issue.
We will also reimburse our Managers for certain expenses
incurred by them in connection with the supervision and
monitoring of the organizational and pre-sale activities of the
Company.
19 TRANSFER AGENT
The Transfer Agent and Registrar for the Units is xxxxxxxx.
20 SALES MATERIALS
Sales material may be used in connection with this Offering only
when accompanied or preceded by the delivery of this Prospectus.
The sales materials that may be disseminated to prospective
investors may include a brochure, video, slide presentation or
transmittal letter prepared by our Managers describing the
Company and its proposed operations. In certain states, not all
sales materials may be available. Except for these materials,
sales materials have not been authorized for use by anyone and
should be disregarded.
This Offering is made only by means of this Prospectus.
Although the information contained in the supplemental sales
material does not conflict with the information contained in
this Prospectus, such sales material does not purport to be
complete and should not be considered part of this Prospectus or
as forming the basis for the offering of the Units.
21 LEGAL PROCEEDINGS
Neither the Company nor the Managers are parties to any pending
legal proceedings that are material to the Company. Neither
CBCI Fund Management I, Inc., CBCI Acquisitions I LLC, nor
Ronald A. Christenson, who are principals or affiliates of
principals of other investment programs, is an adverse party in
any legal proceedings with participants in such other programs.
22 EXPERTS
The balance sheets of the Company as of November 30, 2002
included in this Prospectus have been examined by XXXXXXXXXX,
independent public accountants, as indicated in their report
with respect thereto, and are included herein in reliance on the
authority of said firm as experts in giving such report.
The statements concerning federal taxes under the headings
"Income Tax Aspects" and "Risks and Other Important Factors-
Federal Income Tax Risks" have been reviewed by XXXXXX, counsel
to our Managers, and have been included herein, to the extent
they constitute matters of law, in reliance upon the authority
of said firm as experts thereon. Counsel believes that such
material constitutes a full and fair general disclosure of the
material tax risks associated with an investment in the Units.
23 LEGAL OPINION
The legality of the Units will be passed upon for the Company by
counsel to our Managers, XXXXXX.
24 ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement (of which
this Prospectus is a part) on form S-11 under the Securities Act
with respect to the securities offered hereby. This Prospectus
does not contain all the information set forth in the
Registration Statement, certain portions of which have been
omitted as permitted by the rules and regulations of the
Commission. Statements contained in this Prospectus as to the
content of any contract or other document are not necessarily
complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in
all respects by such reference and the exhibits and schedules
hereto. For further information regarding the Company and the
Units offered hereunder, reference is hereby made to the
Registration Statement and such exhibits and schedules.
The Registration Statement and the exhibits and schedules
forming a part thereof filed by the Company with the Commission
can be inspected and copies obtained from the Commission at Room
1204 Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549.
FINANCIAL STATEMENTS
To the Members
CBC Income and Growth Fund, LLC
Minneapolis, Minnesota
We have audited the accompanying balance sheet of
CBC Income and Growth Fund, LLC as of November 30,
2002. This financial statement is the responsibility of
the Company's management. Our responsibility is to
express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the
overall financial statement presentation. We believe
that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to
above presents fairly, in all material respects, the
financial position of CBCI Income and Growth Fund, LLC
as of November 30, 2002 in conformity with generally
accepted accounting principles.
Certified Public Accountants
December ___, 2002
Minneapolis, Minnesota
CBCI Income and Growth Fund, LLC
BALANCE SHEET
November 30, 2002
ASSETS
Cash $1,000
------
Total assets $1,000
======
LIABILITIES AND MEMBERS' EQUITY
MEMBERS EQUITY:
Managing Members' equity $1,000
------
Total liabilities and
members' equity $1,000
======
The accompanying Notes to the Balance Sheet are an integral part
of this statement.
CBCI Income and Growth Fund, LLC
NOTES TO THE BALANCE SHEET
(1) Summary of Organization and significant Accounting
Policies
Organization
CBC Income and Growth Fund, LLC (the LLC), a limited
liability company, commenced operations in November 2002
to acquire and lease commercial properties to operating
tenants. The LLC's operations are managed by CBCI Fund
Management I, Inc.(CBCI), the Managing Member of the
LLC. The LLC has elected December 31 for its fiscal
year end. The Operating Agreement of LLC provides that
the entity is to expire on December 31, 2053.
Offering
The LLC has filed a Registration Statement with the
Securities Exchange Commission for the offering and sale
of its Units. The terms of the Offering call for a
subscription price of $10 per Unit payable upon
acceptance of the offer. The LLC has not sold any Units.
Under the terms of the LLC's Operating Agreement, up to
4,000,000 Units are available for subscription, which, if
fully subscribed, will result in contributed Limited
Member capital of $40,000,000. The Operating Agreement
sets forth the methods for allocation of Net Cash Flow,
Net Proceeds of Sale, profits, losses and other items.
Operations
In the interim period since inception, the LLC did not
engage in any operations or incur any expenses except
for banking fees. Accordingly, a Statement of Income,
Statement of Cash Flows and Statement of Changes in
Members' Capital are not presented.
Accounting Estimates
Management uses estimates and assumptions in preparing
the balance sheet in accordance with generally accepted
accounting principles. Those estimates and assumptions
affect the reported amounts of assets, liabilities and
equity. Actual results could differ from those
estimates.
(2) Income Taxes
The income or loss of the LLC for federal income tax
reporting purposes is includable in the income tax
returns of the members. Accordingly, no recognition has
been given to income taxes in the accompanying balance
sheet.
The tax return, the qualification of the LLC as such for
tax purposes and the amount of distributable LLC income
or loss are subject to examination by federal and state
taxing authorities. If such an examination results in
changes with respect to the LLC qualification or in
changes to distributable LLC income or loss, the taxable
income of the members would be adjusted accordingly.
(3) Fair Value of Financial Instruments
The carrying value of certain assets and liabilities
approximate fair value.
GLOSSARY
Unless the context otherwise requires, the following terms shall
have the meanings set forth below for the purposes of this
Prospectus:
"ACQUISITION EXPENSES" means expenses including, but not limited
to, legal fees and expenses, travel and communication expenses,
costs of appraisals, non-refundable option payments on
properties not acquired, accounting fees and expenses, title
insurance and miscellaneous expenses related to selection and
acquisition of properties, whether or not acquired.
"ACQUISITION FEES" means the total of all fees and commissions
paid by any party in connection with making or investing in
mortgage loans or the purchase, development or construction of
Properties, whether designated as a real estate commission
relating to the purchase of Properties, nonrecurring management
fees, loan fees or points paid by borrowers to the Managing
Member if the Company invests in mortgage loans, or any fees of
a similar nature, however designated or however treated for tax
or accounting purposes. Acquisition Fees shall not include
Development Fees and Construction Fees paid to any person or
entity in connection with the actual development and
construction of projects.
"ACQUISITION MEMBER" means CBCI Acquisitions I, LLC.
"ADJUSTED CAPITAL CONTRIBUTIONS" means the aggregate original
capital contribution of a Limited Member reduced, from time to
time, by (i) any return of capital contributions pursuant to
Section 4.5 of the Operating Agreement; and, (ii) by total cash
distributed from Net Proceeds of Sale to the extent Net Proceeds
of Sale exceed amounts necessary to provide the Targeted
Cumulative Distribution Amount; and increased from time to time
by the product of (a) the Adjusted Capital Contribution of any
Limited Member whose Units are repurchased and (b) the ratio of
each remaining Limited Member's Units to the total Units
outstanding after such repurchase. Adjusted Capital
Contributions shall not be reduced by distributions of Net Cash
Flow.
"ADMINISTRATIVE EXPENSES" means expenses incurred by the
Managing Members and their Affiliates during the operation of
the Company directly attributable to rendering the following
services to the Company: (i) administering the Company
(including agency type services, member relations and
communications, financial and tax reporting, accounting and
payment of accounts, payment of distributions, payment of unit
redemptions, staffing and processing other investor requests);
(ii) property management (including collecting, depositing and
monitoring rental payments and penalties, monitoring compliance
with leases, monitoring the maintenance of property and
liability insurance and the payment of taxes, maintenance of
lease insurance (if applicable), monitoring and negotiating
other forms of tenant security and financial condition, ongoing
site inspections and property reviews and reviewing tenant
reports); (iii) property and lease workout (including enforcing
lease provisions in default, filing lease insurance claims,
enforcing guarantees, collecting letters of credit or
foreclosing other collateral, if applicable, eviction of tenants
in default, re-leasing of properties, and monitoring tenant
disputes and foreclosures); (iv) property financing and
refinancing; and (v) Company dissolution and liquidation
(accounting, final payment to creditors, administrative filings
and other costs).
"AFFILIATE" means (i) any person directly or indirectly
controlling, controlled by or under common control with another
person, (ii) any person owning or controlling 10% or more of the
outstanding voting securities of such other person, (iii) any
officer, director or partner of such person and (iv) if such
other person is an officer, director or partner, any such
company for which such person acts in such capacity.
"ASSET MANAGEMENT AGREEMENT" means the agreement between the
Company and the Managing Member detailing the responsibilities,
duties and remuneration of the Managing Member.
"ASSET MANAGEMENT FEE" means the annual fee paid by the Company
under the Asset Management Agreement.
"AUDIT COMMITTEE" means a committee consisting of the Special
Managing Member and an independent member and organized for the
purposes of reviewing the propriety of, and reporting of,
financial information as further described in Section 6.2 of the
Operating Agreement.
"COMPANY" means CBCI Income and Growth Fund, LLC
"COMPETITIVE REAL ESTATE COMMISSIONS" means real estate or
brokerage commissions paid for the purchase or sale of a
Property that are reasonable, customary and competitive in light
of the size, type and location of such Property and which do
not, in any event, exceed 6% of the contract price for the sale
of such Property.
"CONSTRUCTION FEE" means a fee or other remuneration for acting
as general contractor and/or construction manager to construct
improvements, supervise and coordinate projects or to provide
Major Repairs or Rehabilitation of Company Property.
"COST" means, when used with respect to services furnished by
the Managing Members or their Affiliates to, or on behalf of,
the Company (other than services described in the Asset
Management Agreement), the lesser of (i) the actual expenses
incurred by such Managing Members and Affiliates in providing
services necessary to the prudent operation of the Company,
including salaries and expenses paid to officers, directors,
employees and consultants, depreciation and amortization, office
rent, travel and communication expenses, employee benefit
expenses, supplies and other overhead expenses directly
attributable to the furnishing of such services; or (ii) the
price that would be charged by unaffiliated parties rendering
similar services in the same geographic location. Overhead
expenses shall be charged only if directly attributable to the
services provided and shall be allocated based upon the amount
of time personnel actually spend providing such services, or
such other method of allocation as is acceptable to the
Company's independent public accountant.
"DETERMINATION DATE" means January 1 of the calendar year
immediately subsequent to the later to occur of: (i) two years
after the date of the Prospectus; or (ii) six months after the
date the offer and sale of Units pursuant to the Prospectus is
terminated.
"DEVELOPMENT FEE" means a fee paid to any party, including the
Managing Members or their Affiliates for packaging the Company's
Property, including negotiating and approving plans, and
undertaking to assist in obtaining zoning and necessary
variances and necessary financing for a specific Property,
either initially or at a later date.
"DISPOSITION FEES" means fees paid to any party, including the
Managing Members or their Affiliates, for services or expenses
related to the sale or disposition of Properties and mortgage
loans, or any fees of a similar nature, however designated or
however treated for tax or accounting purposes. Disposition Fees
shall not include Competitive Real Estate Commissions.
"DISTRIBUTION REINVESTMENT PLAN" means the plan whereby Limited
Members may elect to reinvest distribution of Net Cash Flow in
additional Units as further described in Section 4.10 of the
Operating Agreement.
"FRONT-END FEES" means fees and expenses paid by any party for
services rendered during the Company's organizational or
acquisition phase, including Organization and Offering Expenses,
Acquisition Fees, Acquisition Expenses, interest on deferred
fees and expenses and other similar fees, however designated by
the Managing Member.
"INDEPENDENT AUDIT COMMITTEE MEMBER" means a person who is not a
Limited Member, Managing Member, Affiliate of a Managing Member
or Affiliate of a Limited Member of the Company and serves on
the Audit Committee.
"INDEX RATE" means an annual rate, subject to change from time
to time, equal to the annual yield on United States Treasury
Notes bearing ten year maturities as published in the Wall
Street Journal. Where a range of rates has been published, then
the higher of the rates will be used.
"INVESTMENT IN PROPERTIES" means the amount of capital
contributions actually paid or allocated to the purchase of
Properties, including working capital reserves allocable thereto
(except that working capital reserves in excess of 5% will not
be included) and other cash payments such as interest and taxes,
but excluding Front-End Fees.
"LIMITED MEMBERS" means all parties who shall execute, either
personally or by an authorized attorney-in-fact, the Operating
Agreement as Limited Members and comply with the conditions in
Section 4.2 of the Operating Agreement, and any and all
assignees of the Limited Members, whether or not such assignees
are admitted to the Company as substitute Limited Members;
provided, however, that an assignee of the interest of any
Limited Member shall not be considered a "Limited Member" for
purposes of Articles 10 and 11 of the Operating Agreement unless
such assignee is admitted as a substitute Limited Member as
provided in Article 9 of the Operating Agreement.
"LIMITED LIABILITY COMPANY ACT" means the Minnesota Limited
Liability Company Act, as the same may be amended.
"LIMITED LIABILITY COMPANY UNIT" OR "UNIT" means the Company
interest and appurtenant rights, powers and privileges of a
Limited Member and represents the stated capital contributions
with respect thereto, all as set forth elsewhere in this
agreement.
"MAJOR REPAIRS OR REHABILITATION" means the repair,
rehabilitation or reconstruction of a Property where the
aggregate costs exceed 10% of the fair market value of the
Property at the time of such services.
"MANAGING MEMBER" means CBCI Fund Management I, Inc., and any
substitute as provided in Article 10 of the Operating Agreement.
"MANAGING MEMBERS" means the Managing Member, the Special
Managing Member, any substitute Managing Member as provided in
Article 10 of the Operating Agreement, and the Acquisition
Member.
"MEMBERS" means the Managing Member, the Special Managing
Member, the Limited Members, and the Acquisition Member.
"NET CASH FLOW" means Company cash funds provided from
operations, including lease payments from builders and sellers
without deduction for depreciation, but after deducting cash
funds used to pay all other expenses, debt payments, capital
improvements and replacements and less the amount set aside for
restoration or creation of reserves.
"NET PROCEEDS OF SALE" means the excess of gross proceeds from
any sale, refinancing (including the financing of a Property
that was initially purchased debt-free) or other disposition of
a Property over all costs and expenses related to the
transaction, including fees payable in connection therewith, and
over the payments made or required to be made on any prior
encumbrances against such Property in connection with such
transaction.
"NET VALUE PER UNIT" means the aggregate value of the Company's
assets less the Company's liabilities, and less the value
attributable to the interest of the Managing Members, divided by
the number of Units outstanding. Such aggregate value shall be
as determined by the Managing Members, after taking into account
(i) the present value of future net cash flow from rental income
on the Fund's properties, (ii) the price at which Units of the
Company have last been purchased, and (ii) such other factors as
the Managing Members deem relevant.
"ORGANIZATION AND OFFERING EXPENSES" means those expenses
incurred in connection with and in preparing the Company for
registration and subsequently offering and distributing it to
the public, including any sales commissions, nonaccountable
expense allowances or reimbursement of due diligence expenses
paid to broker-dealers in connection with the distribution of
the Company and all advertising expenses.
"PERMITTED TRANSFER" means, with respect to the transfer of
Units in any fiscal year of the Company (i) transfers in which
the basis of the Unit in the hands of the transferee is
determined, in whole or in part, by reference to its basis in
the hands of the transferor, or is determined under Section 732
of the Internal Revenue Code of 1986, as amended (the "Code"),
(ii) transfers of Units upon the death of a Limited Member,
(iii) transfers of Units between members of a family (as defined
in Section 267(c)(4) of the Code), (iv) transfers of Units at
original issuance and sale, (v) transfers of Units pursuant to
distribution under a Qualified Plan, and (vi) block transfers of
Units by a single Member in one or more transactions during any
thirty calendar day period representing in the aggregate not
more than five percent (5%) of the total interest of all Members
in Company capital and profits.
"PROPERTIES" OR "PROPERTY" means real properties or any interest
therein acquired directly or indirectly by the Company and all
improvements thereon and all repairs, replacements or renewals
thereof, together with all personal property acquired by the
Company that from time to time is located thereon or
specifically used in connection therewith.
"PROPERTY MANAGEMENT FEES" means fees paid to any party for
managing the day-to-day operations of any Property, provided
such fees are billable to and paid by tenants occupying the
Property.
"PROSPECTUS" means that certain prospectus of the Company dated
xxxxxx, 2002.
"PUBLIC MARKET" means a forum for the purchase and sale of Units
on an established securities market, secondary market, or the
substantial equivalent thereof.
"QUALIFIED STOCK EXCHANGE TRANSFER" means a transfer of Units,
through subscribing members of any national or regional
securities exchange, the OTC Bulletin Board, or BBX.
"QUALIFIED MATCHING SERVICE" means a listing system operation,
provided either through the Managing Members or through any
unrelated third party (including any dealer in the Units), in
which Limited Members contact the operator of such Qualified
Matching Service to list Units they desire to transfer and
through which the operator attempts to match the listing Limited
Member with a customer desiring to buy Units without (i)
regularly quoting prices at which the operator stands ready to
buy or sell interests, (ii) making such quotes available to the
public, or (iii) buying or selling interests for its own
account.
"QUALIFIED MATCHING SERVICE TRANSFER" means a transfer of Units
through a Qualified Matching Service in which (i) at least a
fifteen (15) calendar day delay occurs between the day (the
"Contact Date") a Limited Member provides written confirmation
to the Qualified Matching Service that his or her Units are
available for sale and the earlier of (A) the day information is
made available to potential buyers that such Units are available
for sale, or (B) the day information is made available to the
selling Limited Member regarding the existence of outstanding
bids to purchase Units, (ii) the closing of the transfer does
not occur until at least forty five (45) days after the Contact
Date, (iii) the Limited Member's offer to sell is removed from
the Qualified Matching Service within one hundred and twenty
(120) days of the Contact Date, and (iv) no Units of such
Limited Member are entered for listing by the Qualified Matching
Service for at least sixty (60) days after the removal of the
Limited Member's information from such Qualified Matching
Service; provided, however, that no transfer shall be a
Qualified Matching Service Transfer if, after giving effect to
such transfer, the aggregate of (a) Qualified Matching Service
Transfers, (b) transfers pursuant to the repurchase provisions
contained in section 7.7 of the Operating Agreement of Limited
Member interests and (c) all other transfers of Limited Member
interests except Permitted Transfers and Qualified Stock
Exchange Transfers since the beginning of the fiscal year in
which such transfer is made would exceed ten percent (10%) of
the Company interests outstanding.
"QUALIFIED PLANS" means Keogh Plans and pension/profit-sharing
plans that are qualified under Section 401 of the Internal
Revenue Code.
"ROLL-UP" means a transaction involving the acquisition, merger,
conversion, or consolidation, either directly or indirectly, of
the Company and the issuance of securities of a Roll-Up Entity;
provided, however, that a Roll-Up shall not include a
transaction involving the conversion of only the Company if, as
a consequence of such transaction, there will be no significant
adverse change in (i) voting rights of Limited Members; (ii) the
term of existence of the surviving entity beyond that of the
Company; (iii) compensation to the Managing Members or their
Affiliates; (iv) the investment objectives of the Company or the
surviving entity.
"ROLL-UP ENTITY" means a company, real estate investment
corporation, trust or other entity that would be created or
would survive after successful completion of a Roll-Up
transaction.
"SPECIAL MANAGING MEMBER" means Ronald A. Christenson, and any
substitute as provided in Article 10 of the Operating Agreement.
"SPONSOR" means any person, company, corporation, association or
other entity which is directly or indirectly instrumental in
organizing, wholly or in part, the Company or any person,
company, corporation, association or other entity which will
manage or participate in the management of the Company, and any
Affiliate of such person, company, corporation, association or
other entity; but does not include a person, company,
corporation, association or other entity whose only relation
with the Company is as that of an independent property manager
and whose only compensation is as such. "Sponsor" does not
include wholly independent third parties such as attorneys,
accountants, filing agents and underwriters whose only
compensation is for professional services rendered in connection
with the offering of Company interests. A person, company,
corporation, association or other entity may also be a Sponsor
of the Company by: (i) taking the initiative, directly or
indirectly, in founding or organizing the business or enterprise
of the Company, either alone or in conjunction with one or more
other persons, companies, corporations, associations or other
entities; (ii) receiving a material participation in the Company
in connection with the founding or organizing of the business of
the Company, in consideration of services or property, or both
services and property; (iii) having a substantial number of
relationships and contacts with the Company; (iv) possessing
significant rights to control Company Properties; (v) receiving
fees for providing services to the Company which are paid on a
basis that is not customary in the industry; (vi) providing
goods or services to the Company on a basis which was not
negotiated at arm's length with the Company.
"TARGETED CUMULATIVE DISTRIBUTION AMOUNT" means the cumulative
total of all Targeted Distribution Amounts at any point in time.
"TARGETED DISTRIBUTION AMOUNT" means an amount computed by
dividing the Targeted Rate by the number of days in a year times
the amount of Adjusted Capital Contributions, times the actual
number of days the amount of such Adjusted Capital Contributions
was outstanding.
"TARGETED RATE" means a rate of 4.00 percentage points over the
Index Rate. Under no circumstances will the Targeted Rate be
less than 8.25% nor more than 9.75% in any year. The Targeted
Rate for any particular period shall be based on the Index Rate
in effect on the last business day of the immediately preceding
calendar quarter.
"YIELD MAINTENANCE DISTRIBUTIONS" means amounts required to be
distributed by the Managing Members to Limited Members for any
period subsequent to the Determination Date, from not more than
80.39% of the Managing Members' share of Net Cash Flow for such
period, and not exceeding an amount computed by subtracting the
Limited Members' share of Net Cash Flow for the period from the
Targeted Distribution Amount for such period.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS NOT
CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY, THE SHARES IN ANY JURISDICTION WHERE, OR TO ANY
PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS, NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN ANY CHANGE IN THE FACTS SET
FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
UNTIL (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTION.
4,000,000 LIMITED LIABILITY COMPANY UNITS
CBCI INCOME AND GROWTH FUND, LLC
PROSPECTUS
CBCI FUND MANAGEMENT, INC.
PART
II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than the
underwriting discounts and commissions payable by the Registrant
in connection with the sale of the Units being registered. All
of the amounts shown are estimates except for the SEC
registration fee, and the BBX filing fee.
SEC registration fee.............. $ 3,680
BBX registration fee.............. $ 2,500
Printing and engraving fees....... $ 15,000
Legal fees and expenses........... $ 25,000
Accounting fees and expenses...... $ 5,000
Blue-sky fees and expenses........ $ 5,000
Transfer agent and registrar...... $ 5,000
Miscellaneous..................... $ 38,820
---------
Total $ 100,000
=========
Item 32. SALES TO SPECIAL PARTIES
Not Applicable
Item 33. RECENT SALES OF UNREGISTERED SECURITIES
In November 2002, the Company sold $1,000 of membership
interests to the Managing Members. These sales are exempt from
registration under the Securities Act of 1933 (the "Act"), as
amended, pursuant to Section 4(2) of the Act.
Item 34. INDEMNIFICATION OF MANAGERS
The Company will obtain, and pay the cost of, Directors' and
Officers' Liability Insurance coverage in the amount of $5
million (subject to a retention of a "deductible" of $250,000).
Directors' and Officers' coverage insures (i) the directors and
officers of the Company from any claim arising out of an alleged
wrongful them in their respective capacities, and (ii) the
Company to the extent that the Company has indemnified the
directors and officers for such loss. The Registrant's Operating
Agreement provides for indemnification to the full extent
permitted by Minnesota law.
Item 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not Applicable
Item 36. FINANCIAL STATEMENTS AND EXHIBITS
(a) CBCI Income and Growth Fund, LLC Audited Financial
Statements dated November 30, 2002 (included in the
Prospectus as part of this registration.)
(b) Exhibits:
Exhibit A~ Operating Agreement of the Company
Exhibit B~ Prior Performance Tables
Exhibit C~ State Suitability Requirements
Exhibit D~ Subscription Agreement
Exhibit E Specimen Certificate of Participation
Exhibit F* Audited Financial Statements
Exhibit G* Opinion as to Legality of the Units
Exhibit H* Opinion as to Tax Matters
Exhibit I* Opinion as to Organization of Company
Exhibit J* Consent of Accountants
Exhibit K* Consent of Attorneys
Exhibit L Asset Management Agreement
Exhibit M* Escrow Agreement
Exhibit N* Acceptance and Consent of Escrow Agent
Exhibit O Acquisition Framework Agreement
~ Resubmitted to correct format problems
* To be filed by amendment
** Previously filed
Filed herewith
Item 37. UNDERTAKINGS
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement.
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-11
and has duly caused this Amendment No. 1 to the registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Minneapolis,
State of Minnesota, on November 21, 2002.
CBCI Income and Growth Fund, LLC
/s/ RONALD A. CHRISTENSON
Ronald A. Christenson
Special Managing Member
II-3