The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations" should be read in conjunction with the Company's
consolidated balance sheets and the notes thereto contained in Part I of this
Quarterly Report on Form 10-Q. See also "Cautionary Note Regarding Forward
Looking Statements" preceding Part I. As used herein, "we," "us," and "our"
We have not entered into any arrangements to acquire any specific properties with the net proceeds from our offering. The number of properties we may acquire will depend upon the number of shares sold and the resulting amount of the net proceeds available for investment in properties.
Our advisor may, but will not be required to, establish reserves from gross offering proceeds, out of cash flow generated by operating properties or out of non-liquidating net sale proceeds from the sale of our properties. Working capital reserves are typically utilized for non-operating expenses such as major repairs or capital expenditures. Alternatively, if a credit facility or other debt is established or incurred, a lender may require its own formula for escrow of working capital reserves. We do not anticipate establishing a general working capital reserve out of the proceeds of our offering.
The net proceeds of our offering will provide funds to enable us to purchase properties. We may acquire properties free and clear of permanent mortgage indebtedness by paying the entire purchase price of each property in cash or from proceeds raised in our offering, or a combination thereof, or we may selectively encumber all or certain properties, if favorable financing terms are available, in connection with or following acquisition in accordance with our financing strategy. In the event that our offering is not fully sold, our ability to diversify our investments may be diminished.
We intend to make an election under Section 856(c) of the Internal Revenue Code of 1986, (the "Code"), to be taxed as a real estate investment trust, ("REIT"), under the Code, commencing with the taxable year ending
Upon our qualification as a REIT, we will monitor the various qualification tests that we must meet to maintain our status as a REIT, including the minimum number of 100 stockholders and limitations of ownership. Ownership of our shares will be monitored to ensure that no more than 50% in value of our outstanding shares is owned, directly or indirectly, by five or fewer individuals at any time after the first taxable year for which we make an election to be taxed as a REIT. We will also determine as we acquire properties, on a quarterly basis that the asset test is met, and, on an annual basis, that the gross income and distribution tests are met as described in the "Federal Income Tax Considerations - Requirements for Qualification as a REIT" section contained in our registration statement.
Liquidity and Capital Resources
We expect to meet our short-term operating liquidity requirements initially through advances from our advisor or its affiliates, from time to time, as we need to fund our operating expenses incurred before we have raised the minimum offering. After we break escrow, we expect we will meet our short-term operating liquidity requirements from the proceeds of our
offering and that any advances from our advisor will be repaid, without interest, as funds are available after meeting our current liquidity requirements, subject to the limitations on reimbursement set forth in the "Management Compensation" section contained in our registration statement, and discussed in Note 2, Basis of Presentation and Summary of Significant Accounting Policies - Organizational and Offering Costs, to the consolidated balance sheets. We do not expect our operating costs to be significant until we make our initial investments. We expect that any advances will be made under an advance arrangement, which will not be written, with our advisor. We expect that this arrangement will allow for repayments to be made as funds are available from the offering proceeds or from operating cash flows, but no later than two years from the date of the advance. The terms of the arrangement will be finalized upon the initial advance, if any. After we make our initial investments from the proceeds of our offering, we expect our short-term operating liquidity requirements to be met through net cash provided by property operations. Operating cash flows are expected to increase as properties are added to our portfolio.
On a long-term basis, our principal demands for funds will be for property acquisitions, either directly or through entity interests, for the payment of operating expenses and distributions, and for the payment of interest on our outstanding indebtedness and other investments. Generally, cash needs for items, other than property acquisitions, will be met from cash flow generated from operations and proceeds received from our offering. However, there may be a delay between the sale of our shares and our purchase of properties that could result in a delay in the benefits to our stockholders, if any, of returns generated from our investment operations. Our advisor will evaluate potential property acquisitions and engage in negotiation of specific terms with sellers on our behalf. Investors should be aware that after a purchase contract is executed, the property will not be purchased until the successful completion of due diligence, which includes review of the title insurance commitment, an appraisal, an inspection of the property condition and an environmental analysis. In some instances, the proposed acquisition will require the negotiation of final binding agreements, which may include financing documents. During this period, we may decide to temporarily invest any unused proceeds from the offering in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.
Our board of directors will determine the amount and timing of distributions to our stockholders and will base such determination on a number of factors, including funds available for payment of distributions, financial condition, capital expenditure requirements and annual distribution requirements needed to maintain our status as a REIT under the Code.
Potential future sources of capital include proceeds from our offering, proceeds from secured or unsecured financings from banks or other lenders, proceeds from the sale of properties and undistributed funds from operations. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures. Currently, we do not have a credit facility or other third party source of liquidity. To the extent we do not secure a credit facility or other third party source of liquidity, we will be dependent upon the proceeds of our offering and income from operations in order to meet our long-term liquidity requirements and to fund our distributions.
Results of Operations
Our management is not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally (such as lower capitalization and tightening in the debt markets), that may reasonably be expected to have a material impact, favorable or unfavorable, on our ability to acquire properties, or on revenues or income from the acquisition and operations of these properties.
The real estate market has not been affected significantly by inflation in the past several years due to the relatively low inflation rate. However, in the event inflation does become a factor, our leases typically do not include provisions that would protect us from the impact of inflation. We will attempt to acquire leases that require the tenants to pay, directly or indirectly, all operating expenses and certain capital expenditures, which will protect us from increases in certain expenses, including, but not limited to, material and labor costs.
Summary of Significant Accounting Policies
We have established accounting policies which conform to generally accepted accounting principles ("GAAP") as contained in the
consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different estimates would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may use different estimates and assumptions that may impact the comparability of our financial condition and results of operations to those companies.
We believe the accounting policies listed below are the most critical in the preparation of our consolidated financial statements. These policies are described in greater detail in Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to the consolidated balance sheets:
• Real Estate- Valuation and purchase price allocation, depreciation;
• Impairment of Real Estate and Related Intangible Assets and Liabilities;
• Revenue Recognition;
• Noncontrolling Interests in Consolidated Subsidiaries;
• Common Stock and Noncontrolling Interests Subject to Redemption;
• Fair Value Measurements;
• Income Taxes- Deferred tax assets and related valuation allowance, REIT qualification; • Loss Contingencies; and
• Related Party Transactions.