CONFIDENTIAL PRIVATE OFFERING MEMORANDUM
HOMES FOR AMERICA HOLDINGS, INC.
$1,500,000 Minimum - $15,000,000 Maximum
Up to 20 Units, Each Unit Consisting of
30,000 Shares of Series A 8% Cumulative Convertible Redeemable Preferred Stock
Offering Price: $750,000 per Unit
Minimum Subscription: $750,000
THIS CONFIDENTIAL PRIVATE OFFERING MEMORANDUM CONTAINS MATERIAL NONPUBLIC
INFORMATION CONCERNING HOMES FOR AMERICA HOLDINGS, INC. AND IS PREPARED SOLELY
FOR THE USE OF THE OFFEREE NAMED ABOVE. ANY USE OF THIS INFORMATION FOR ANY
PURPOSE OTHER THAN IN CONNECTION WITH THE CONSIDERATION OF AN INVESTMENT IN THE
SECURITIES OFFERED HEREBY MAY SUBJECT THE USER TO CRIMINAL AND CIVIL LIABILITY.
In the event you decide not to participate in this Offering,
please return this Confidential Private Offering Memorandum
and the Subscription Documents to the principal office
of the Company or the Placement Agent.
PLACEMENT AGENT
HARMONIC RESEARCH, INC.
430 Park Avenue
New York, NY 10022
212-826-6655
December 8, 1999
Exhibit 10.23 - Page 1
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HOMES FOR AMERICA HOLDINGS, INC.
$1,500,000 Minimum - $15,000,000 Maximum
-------------------
Up to 20 Units, $750,000 Per Unit, each Unit Consisting of 30,000 Shares of
Series A 8% Cumulative Convertible Redeemable Preferred Stock
THESE ARE SPECULATIVE SECURITIES AND
INVOLVE A HIGH DEGREE OF RISK.
See "CERTAIN RISK FACTORS."
Offering Price: $750,000 per Unit
Minimum Investment: $750,000
-------------------
Homes for America Holdings, Inc. (the "Company") is offering to sell to
"accredited investors" (the "Offering") up to 20 Units, each Unit consisting of
30,000 Shares of Series A 8% Cumulative Convertible Redeemable Preferred Stock,
$.001 par value per share (the "Series A Shares" or "Series A Preferred Stock")
through Harmonic Research, Inc. (the "Placement Agent"), as exclusive agent for
the sale of the Units. Unless redeemed by the Company, each Series A Share is
convertible into such number of shares of Common Stock as shall equal $25.00
divided by a conversion rate (the "Conversion Rate") equal to the lower of (i)
$15.00; or (ii) 80% of the average of the last reported sales prices of the
Common Stock for the ten trading days immediately preceding the date of
Conversion (but not less than $10.00), subject to certain anti-dilution
adjustments. Cumulative quarterly dividends of $.50 (8% per annum) per Series A
Share will accrue from the date of original issue of the Series A Shares and be
payable in cash, when and as declared by the Board of Directors out of funds
legally available therefor, to holders of record on the 10th business day prior
to the dividend dates of November 15, February 15, May 15 and August 15 of each
year. The Series A Shares are redeemable by the Company on not less than 30 nor
more than 60 days written notice to the registered holders, at any time, at a
redemption price of $25.00 per share, plus accumulated dividends. See
"Description of Securities."
The price of the Series A Shares included in the Units has been determined by
negotiation between the Company and the Placement Agent and does not necessarily
relate to the Company's assets, book value, results of operations or other
established criteria of value. See "Plan of Distribution."
THIS CONFIDENTIAL PRIVATE OFFERING MEMORANDUM HAS NOT BEEN FILED WITH OR
REVIEWED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER
COMMISSION OR REGULATORY AUTHORITY, AND HAS NOT BEEN FILED WITH OR REVIEWED BY
THE SECURITIES COMMISSION OR AUTHORITY OF ANY STATE NOR HAS ANY SUCH COMMISSION
OR AUTHORITY DETERMINED WHETHER IT IS ACCURATE OR COMPLETE OR PASSED UPON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
Placement Agent Proceeds to
Offering Price Commissions(1) the Company(2)
----------------------------------------------------------------------------
Per Unit $750,000 $52,500 $697,500
----------------------------------------------------------------------------
Total Minimum $1,500,000 $105,000 $1,395,000
----------------------------------------------------------------------------
Total Maximum $15,000,000 $1,050,000 $13,950,000
----------------------------------------------------------------------------
Exhibit 10.23 - Page 2
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(Footnotes from previous page)
(1) Does not include (i) additional compensation payable to the Placement Agent
including a non-accountable expense allowance of 3% of the offering price
of the Units ($45,000 if the minimum number of Units are sold and $450,000
if the maximum number of Units are sold); or (ii) warrants to purchase up
to 500,000 common shares at an exercise price of $4.00 per share, and up to
an additional 1,000,000 common shares at an exercise price of $15.00 per
share. The number of Agent's Warrants issued will be determined pro rata,
based on the percentage of the maximum Offering sold by the Placement
Agent. The Company has also agreed to indemnify the Placement Agent against
certain liabilities, including liabilities under the Securities Act of
1933, as amended (the "Act"). See "Plan of Distribution."
(2) After deducting Placement Agent commissions, but before deducting other
estimated expenses of this Offering to be paid by the Company for filing,
legal, accounting, printing and other costs and expenses. See "Use of
Proceeds."
The Units are being offered on a "best efforts - all or none" basis as to 2
Units and on a "best efforts" basis as to an additional 18 Units. The Offering
Period commences on the date hereof and expires on February 7, 2000, unless
extended by the Company and the Placement Agent for up to an additional ninety
(90) days (such period, as same may be extended, is hereinafter referred to as
the "Offering Period"). No Units will be sold unless and until subscriptions for
at least two Units are received and accepted. All subscription proceeds will be
deposited in a non-interest bearing account at Chase Manhattan Bank. In the
event subscriptions for the minimum number of Units are not received during the
Offering Period, all subscriptions will be returned to subscribers without
interest or deduction. If subscriptions for a minimum of two Units are received
during the Offering Period, the Company may accept such subscriptions and direct
the escrow agent to deliver the proceeds to the Company. The Company may
thereafter continue the Offering during the Offering Period and accept
subscriptions for additional Units. However, subsequent to the receipt and
acceptance of the minimum number of Units, additional Units will only be
accepted in increments of two or more.
This Confidential Private Offering Memorandum (the "Memorandum") has been
prepared by and for the Company in connection with the Offering through the
Placement Agent. The information contained herein has not been independently
verified by the Placement Agent. Accordingly, there can be no representation by
the Placement Agent as to the completeness or accuracy of such information.
BY ACCEPTING DELIVERY OF THIS MEMORANDUM, THE RECIPIENT AGREES TO KEEP THE
CONTENTS HEREOF, AND ANY INFORMATION OBTAINED BY SUCH PERSON IN CONNECTION
HEREWITH, IN STRICTEST CONFIDENCE.
THIS MEMORANDUM CONSTITUTES AN OFFER ONLY TO THE PERSON WHOSE NAME APPEARS ON
THE COVER PAGE, AND ANY REPRODUCTION OR DISTRIBUTION OF THIS MEMORANDUM, IN
WHOLE OR IN PART, OR THE DISCLOSURE OF ANY OF ITS CONTENTS TO UNAUTHORIZED
PERSONS IS PROHIBITED. THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THIS OFFERING TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS MEMORANDUM AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS
MUST NOT BE RELIED UPON. STATEMENTS CONTAINED HEREIN AS TO THE CONTENTS OF ANY
AGREEMENT OR OTHER DOCUMENTS ARE SUMMARIES AND, THEREFORE, ARE NECESSARILY
SELECTIVE AND INCOMPLETE. COPIES OF THE DOCUMENTS REFERRED TO HEREIN MAY BE
OBTAINED FROM THE COMPANY, AND ARE AVAILABLE FOR INSPECTION AT THE OFFICES OF
THE COMPANY. THE INFORMATION HEREIN SHOULD BE READ IN CONJUNCTION WITH AND IS
SUBJECT TO THE EXHIBITS ANNEXED HERETO AND REFERRED TO HEREIN.
THIS OFFERING IS BEING MADE IN RELIANCE UPON THE AVAILABILITY OF AN EXEMPTION
FROM THE REGISTRATION PROVISIONS OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), BY VIRTUE OF THE COMPANY'S INTENDED COMPLIANCE WITH THE PROVISIONS OF
SECTIONS 4(2), 4(6) THEREOF AND RULE 506 ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION (THE "COMMISSION") THEREUNDER. THE UNITS HAVE NEITHER BEEN REGISTERED
WITH, NOR APPROVED OR DISAPPROVED BY, THE COMMISSION OR BY THE SECURITIES
REGULATORY AUTHORITY OF ANY STATE, AND NEITHER THE COMMISSION NOR ANY SUCH STATE
AUTHORITY HAS PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE
ACCURACY OR ADEQUACY OF THIS CONFIDENTIAL MEMORANDUM, AND IT IS NOT INTENDED
THAT ANY OF THEM WILL. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OFFERED HEREBY WILL BE ISSUED PURSUANT TO A CLAIM OF EXEMPTION FROM
THE REGISTRATION OR QUALIFICATION PROVISIONS OF FEDERAL AND STATE SECURITIES
LAWS AND MAY NOT BE SOLD OR TRANSFERRED WITHOUT COMPLIANCE WITH THE REGISTRATION
OR QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR
APPLICABLE EXEMPTIONS THEREFROM.
Exhibit 10.23 - Page 3
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EACH INVESTOR SHOULD BE AWARE THAT SUCH INVESTOR WILL BE REQUIRED TO BEAR THE
ECONOMIC RISK OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE SHARES
OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE ACT AND THEREFORE CANNOT BE
SOLD UNLESS SO REGISTERED OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
ACCORDINGLY, IN DETERMINING WHETHER AN INVESTOR CAN BEAR THE ECONOMIC RISK OF
THIS INVESTMENT, AN INVESTOR SHOULD CONSIDER, AMONG OTHER FACTORS, WHETHER SUCH
INVESTOR CAN AFFORD TO HOLD SUCH SERIES FOR AN INDEFINITE PERIOD, AND WHETHER
SUCH INVESTOR CAN AFFORD A COMPLETE LOSS OF HIS INVESTMENT.
UNDER NO CIRCUMSTANCES SHALL THE DELIVERY OF THIS MEMORANDUM OR ANY SALE
HEREUNDER CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET
FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY OR OTHER PARTIES DESCRIBED HEREIN
SINCE THE DATE HEREOF, OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE OF THIS MEMORANDUM.
IF ANY PERSON ELECTS NOT TO MAKE AN OFFER TO ACQUIRE THE SECURITIES OFFERED
HEREBY OR SUCH OFFER IS REJECTED IN WHOLE BY THE COMPANY, SUCH PERSON, BY
ACCEPTING DELIVERY OF THIS MEMORANDUM, AGREES TO RETURN THIS MEMORANDUM AND ALL
RELATED DOCUMENTS ENCLOSED HEREWITH OR FURNISHED SUBSEQUENTLY, TO THE COMPANY AT
ITS OFFICES AT ONE ODELL PLAZA, YONKERS, NY 10701.
THE CONTENTS OF THIS MEMORANDUM ARE NOT TO BE CONSTRUED AS TAX, LEGAL,
INVESTMENT OR OTHER ADVICE. EACH INVESTOR SHOULD CONSULT HIS OWN COUNSEL,
ACCOUNTANT, OR TAX OR BUSINESS ADVISOR AS TO TAX, LEGAL AND RELATED MATTERS
CONCERNING THIS INVESTMENT.
SALES OF THE UNITS CAN BE CONSUMMATED ONLY BY ACCEPTANCE BY THE COMPANY OF
OFFERS TO PURCHASE SUCH SECURITIES WHICH ARE TENDERED TO THE COMPANY BY
PROSPECTIVE INVESTORS. NO SOLICITATION OF ANY SUCH OFFER (INCLUDING ANY
SOLICITATION WHICH MAY BE CONSTRUED AS AN "OFFER" UNDER FEDERAL AND/OR STATE
SECURITIES LAWS) TO SUCH PROSPECTIVE INVESTORS IS AUTHORIZED WITHOUT THE PRIOR
APPROVAL BY THE COMPANY. THE COMPANY RESERVES THE RIGHT TO REVOKE THE OFFER MADE
HEREBY AND TO REJECT ANY OFFER TO PURCHASE THE SECURITIES BY ANY PROSPECTIVE
INVESTOR, IN WHOLE OR IN PART.
PROSPECTIVE INVESTORS AND THEIR REPRESENTATIVES, ACCOUNTANTS AND ATTORNEYS ARE
ENCOURAGED TO ASK QUESTIONS OF AND RECEIVE ANSWERS FROM THE COMPANY CONCERNING
THE TERMS AND CONDITIONS OF THIS OFFERING AND TO OBTAIN ADDITIONAL INFORMATION
CONCERNING THE COMPANY OR NECESSARY TO VERIFY THE ACCURACY OF ANY OF THE
INFORMATION CONTAINED HEREIN OR IN ANY DOCUMENT REFERRED TO HEREIN OR DELIVERED
IN CONNECTION HEREWITH.
THE COMPANY SHALL, PRIOR TO THE SALE OF ANY UNITS, ALLOW EACH INVESTOR OR HIS
AGENT THE OPPORTUNITY TO ASK QUESTIONS OF AND RECEIVE ANSWERS FROM ANY PERSON
AUTHORIZED TO ACT ON BEHALF OF THE COMPANY CONCERNING ANY ASPECT OF THE
INVESTMENT AND TO OBTAIN ANY ADDITIONAL INFORMATION (TO THE EXTENT THE COMPANY
POSSESSES SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE EFFORT OR
EXPENSE) NECESSARY TO VERIFY THE ACCURACY OF THE INFORMATION CONTAINED IN THIS
MEMORANDUM. INVESTORS OR THEIR REPRESENTATIVES HAVING QUESTIONS OR DESIRING
ADDITIONAL INFORMATION SHOULD CONTACT MR. WILLIAM QUARESIMO AT 914-964-3000 OR
JON NIX AT HARMONIC RESEARCH, INC. AT 212-826-6655.
Exhibit 10.23 - Page 4
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TABLE OF CONTENTS
Page
EXECUTIVE SUMMARY ................. 1
SUMMARY OF THE OFFERING ........... 7
SUMMARY CONSOLIDATED FINANCIAL DATA 10
CERTAIN RISK FACTORS .............. 12
CAPITALIZATION .................... 19
USE OF PROCEEDS ................... 20
BUSINESS .......................... 22
MANAGEMENT ........................ 38
PRINCIPAL STOCKHOLDERS ............ 43
CERTAIN TRANSACTIONS .............. 44
DESCRIPTION OF SECURITIES ......... 45
PLAN OF DISTRIBUTION .............. 51
GLOSSARY OF TERMS ................. 54
EXHIBITS
A. Certificate of Designation
B. Subscription Agreement
C. Purchaser Questionnaire
D. Financial Statements
Exhibit 10.23 - Page 5
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EXECUTIVE SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements appearing elsewhere in this Memorandum.
Each prospective investor is urged to read this Memorandum in its entirety.
Reference should be made to the Glossary for certain capitalized terms used
herein which are not otherwise defined. The information in this Memorandum
assumes the completion of a 1:4 reverse split of the Company's Common Stock to
be effected immediately prior to the first closing of the Offering. All share
numbers appearing herein have been revised to reflect the 1:4 reverse split.
Introduction
Homes For America Holdings, Inc. is a real estate operating company
organized to acquire, develop, own, rehabilitate and manage residential
properties throughout the United States. Our objective is to identify and
purchase undervalued residential properties which we renovate, operate and
manage. Our transactions are designed to generate short-term profit and
reliable, long-term cash flow from through the use of innovative financing
methods. Focusing on the acquisition of undervalued properties with prime
potential, and using minimal equity investment, management believes that the
Company offers both growth prospects and the security and stability of tangible
assets and real estate.
Utilizing the sale of tax credits for equity, tax-exempt and taxable bonds,
and utilizing regulatory non-recourse mortgage opportunities, the Company
acquires properties with relatively small equity investments. The Company earns
fees upon closing of a transaction and receives long-term income through
continued cash flow over the life of the property.
Specializing in the purchase and rehabilitation of affordable multi-family
homes, and the conversion of unique non-residential properties nationwide, the
Company's strategy affords shareholders the opportunity to realize a substantial
return on investment while helping to meet the housing needs of a vital and
growing America.
Exhibit 10.23 - Page 6
<PAGE>
The Company was incorporated in April 1996 under the laws of the State of
Nevada. The Company's executive offices are located at One Odell Place, Yonkers,
New York 10701 and its telephone number is (914) 964-3000.
Background and Strategy
The Company was incorporated in January 1996, when Robert A. MacFarlane
(now Chief Executive Officer) and Robert M. Kohn (now Chief Acquisitions
Officer), both entrepreneurs with over a billion-dollars worth of real estate
transactions in their combined resumes, developed a strategy for financing
transactions that would create both short-term profit and long-term income.
Utilizing proceeds from the sale of tax credits as a source of equity investment
enables the Company to increase greatly the size of its investment portfolio and
achieve higher returns on equity invested.
Currently, we are able to generate transactional profits through the
purchase of Affordable Housing properties, where combinations of tax-exempt and
taxable bonds, tax credits and regulatory non-recourse mortgages can be arranged
that yield immediate income in the form of transaction fees, continuing income
in the form of management fees, and substantial interest in the value realized
upon the sale or other disposition of the property. The Company is also
exploring other profitable avenues of real estate investment, including
non-residential conversions, commercial properties, construction projects, and
other opportunities.
Market Opportunity: Affordable Housing
Nationwide, the demand for quality Affordable Housing generally exceeds
available supply. Providing a commodity in great demand and facing little
national competition, the Company anticipates strong growth over the next five
years.
The lack of national competition is directly attributable to the extensive
learning curves associated with government agency financing, housing credit
compliance issues, regulatory agencies protocol and effective marketing and
management. Familiarity with tax-exempt and taxable bond financing and tax
credits, as well as a clear understanding of the intricacies of property
rehabilitation are essential. The Company's principals have decades of
experience in all of these areas, and have learned how to identify quickly those
potential properties which meet the criteria for profitable rehabilitation.
Because government agency-based real estate financing is generally reliable
and stable, the potential risks of a soft real estate market may be diminished,
allowing the Company to operate successfully in both good and poor economic
climates. In fact, this strategy of finance-driven profits is actually enhanced
during times of inflation or recession by increased demand for Affordable
Housing. Demand for tax credits, from which a significant portion of the
Company's transaction income are derived, is consistent, even in times of
economic downturn.
Market Opportunity: Market Rate Properties
Market Rate multi-family residential properties will generally be acquired
using traditional methods of real estate financing. Residential properties which
may be reconverted are often: (i) Market Rate multi-use properties that are
purchased at a discount and then constructed or substantially rehabilitated;
(ii) non-residential properties that can be converted to residential use, such
as warehouses, industrial buildings, fire houses and vacant office buildings
that have unique architectural qualities; and (iii) existing residential
properties where rehabilitation is extensive enough to substantially alter the
quality and character of the property. Such conversions are currently popular in
redeveloping urban areas and we expect them to be a source of significant
revenue in the future. Our Dallas/Briar Meadows property is an example of such a
conversion.
Market Opportunity: Conversions An important opportunity also exists in the
conversion sector of the real estate market, where the Company can add
significant value to a property by improving or correcting pre-existing
conditions, or by converting an industrial structure to residential apartments,
studios and lofts. Essentially any remodeling or improvement which substantially
alters the quality and character of a property may be classified as a
conversion. Depending upon the individual property, such conversions may be
developed either as rental apartments, which can yield a steady income stream,
or as condominiums, which can generate more explosive transactional earnings.
Conversion properties may contain an Affordable Housing component, in which
case the Company will take advantage of the same profitable financing options
discussed previously. While such options are preferable, conversion properties
may require up to a 20% equity investment by the Company. In either case, the
Company targets the marginal, undervalued property which can be acquired at an
attractive price and successfully converted into profitable quality housing.
Exhibit 10.23 - Page 7
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Market Opportunity: Other
Other opportunities, of course, exist throughout all sectors of the real
estate market. As the Company grows and further establishes itself on a national
basis, all potential avenues for expansion and diversification will be
thoroughly investigated.
The Company's Current Portfolio of Properties
The Company's operations commenced in April, 1996. To date, the Company has
purchased five multi-family residential properties located in Dallas, Texas;
Bridgeport, Connecticut; Elkhart, Indiana and North Miami, Florida, as well as
17 acres of undeveloped land upon which the Company intends to develop 210
Market Rate units.
Dallas, TX / Willow Pond
This 386-unit apartment complex was acquired in an $8.4 million transaction
that closed in March 1997. Sale of tax credits earned the Company immediate
income of $642,000. Following a $334,000 rehabilitation, the property now
generates approximately $1.1 million in annual net operating income and is
valued at $11 million.
Bridgeport, CT / Putnam Square
This 18-unit mid-rise apartment building is appraised at $1.6 million. The
Company earned a developer's fee plus proceeds of half of the first mortgage
totaling $400,000 as a result of the takeover and subsequent rehabilitation
efforts. This property is expected to generate annual net operating income of
$50,000. Virtually empty when the Company assumed management, occupancy now
stands above 90%.
Elkhart, IN / Prairie Village
This 120-unit property was acquired for $1 million in December 1998. The
sale of tax credits earned $1 million, and the Company received a HUD-guaranteed
$3 million construction loan and has successfully maintained an existing Housing
Assistance Program ("HAP") contract with HUD guaranteeing payment for 95% of the
project's rental revenues. Projected annual net operating income from this
property, when stabilized, is $300,000. Current value of this property is
approximately $4 million.
Dallas, TX / Briar Meadows
This 118-unit garden apartment complex was in REO (lender owned & operated)
when the Company purchased it for $1 million in December 1998. Following a
$400,000 rehabilitation and stabilization, the property is now valued at $3
million, with a projected annual net operating income of $300,000.
Arlington, TX / Royal Crest
Originally a 17.7 acre industrial parcel purchased for $1 million in
December 1998, the Company succeeded in rezoning efforts and gained the right to
develop 210 garden/townhouse units, placing the property's built-out value at
approximately $12.2 million. Construction is scheduled to begin in third-quarter
1999, with a projected annual net operating income of $1.1 million.
North Miami, FL / Lake's Edge
This 400-unit apartment complex was purchased for $14.25 million in June
1999. After rehabilitation and stabilization, projected annual net operating
income at this property is expected to total approximately $1.9 million, and
projected post-rehabilitation value is expected to be approximately $18 million.
Recent Developments
Since its founding in 1996, the Company has demonstrated growth potential
and solid performance. From 1997 to 1998, pre-tax earnings grew from
approximately $280,000 to in excess of $1.1 million. Our1999 pre-tax earning are
expected to approach $3 million. These earnings have been realized from a total
combined investment of less than $950,000. A number of significant milestones
during this period have contributed to this growth and helped to accelerate
expansion:
A Washington, DC office was established in mid-1996, affording the Company
proximity to the legislators and attorneys drafting legislative programs under
which financing is obtained for Affordable Housing, as well as providing a
central location along the Eastern Seaboard. The Company opened its first
Regional Office in Dallas, Texas in August 1997, establishing the Company's
presence in the Mid- and Southwest regions. The Company expects that a number of
opportunities being explored in this area will be consummated, and management of
these properties will be centralized at this office. The Company also commenced
occupancy of its new Corporate Headquarters in April 1999. Located in Yonkers,
New York, the new facilities afford the Company necessary space for expansion of
its accounting, communications and administrative functions.
Exhibit 10.23 - Page 8
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3,324,700 shares of Common Stock were issued to 16 individuals and entities
in October 1996. This transaction, exempt from registration under the Securities
Act of 1933, provided the first infusion of operating capital to the Company.
The Company's first major purchase, the $8.3 million Willow Pond
apartments, closed in Dallas, Texas in March 1997, earning the Company $1
million from the sale of tax credits. Three transactions for properties in
Arlington, Texas, Dallas, Texas, and Elkhart, Indiana totaling $6 million were
closed in the month of December 1998. Completion of these acquisitions brought
1998 year-end gross assets to over $17 million. On June 30, 1999, the Company
acquired Lake's Edge Apartments in North Miami, Florida for $14.25 million. On
November 5th, 1999 we closed on the $12.2 million Country Lake apartments.
A promissory note in the amount of $250,000, 25,000 shares of Common Stock,
and warrants to purchase 30,000 shares of Common Stock were issued to a single
investor in a private transaction in July 1998.
Richard Weiss was hired as Chief Financial Officer in August 1998, bringing
decades of financial and real estate management experience to this critical
position, and Lazar, Levine & Felix LLP was engaged in January 1999 as corporate
accountants charged with preparing Consolidated 1998 Financial Statements. The
Company also hired William Quaresimo as Director, Corporate Communications in
March 1999, bringing 20 years of marketing, advertising and public relations
experience to the crucial task of communicating the Homes For America story.
Homes For America Real Estate Services, Inc. was created as a wholly owned
subsidiary of the Company in May 1999. This new entity will assume the tasks of
property management for all Company owned properties while concurrently
establishing a third-party management portfolio.
The Company also entered into a joint venture with MasterBuilt Companies,
creating MasterBuilt America. The new company will assume all renovation,
rehabilitation and construction projects at the Company's properties and
actively pursue third party contracts.
Projected Growth of Homes for America
The Company anticipates continued growth in its assets and its pre-tax
income in 2000. As of first week of November 1999, the Company's gross assets
were approximately $48 million, including the successful closing of the Country
Lakes acquisition. The Company expects to close on the Haverford, Kentucky
property by year end, which would increase its total assets to approximately $60
million. In addition, the Company has contractual agreements on two other
properties for an aggregate of $26 million.
Pre-tax income for the 1999 fiscal year is expected to be approximately $3
million. This figure is predicated on the current year's earnings to date, an
established income stream from existing rental properties, reasonable
predictions of transaction income in connection with pending acquisitions.
With the additional equity capital that management projects will be
available from the Offering (approximately $1.4-$13 million), the Company
expects not only to close on the currently pending transactions, but also to
provide equity funding in connection with a number of portfolio transactions
that the Company has been exploring. Should the Company be able to consummate
these transactions, management expects both gross assets and pre-tax income to
increase in fiscal 2000.
Exhibit 10.23 - Page 9
<PAGE>
SUMMARY OF THE OFFERING
Securities Offered
A maximum of 20 Units, each Unit consisting of 30,000 shares of Series A 8%
Cumulative Convertible Redeemable Preferred Stock ("Series A Shares" or
"Series A Preferred Stock"), for a maximum of 600,000 shares.
Series A Preferred Stock:
Offering Price
$25.00 per Series A Share, or $750,000 per Unit.
Liquidation Preference
$25.00 per Series A Share, together with accrued and unpaid dividends.
Dividend Rate
Cumulative quarterly dividends of $.50 (8% per annum) per Share will accrue
from the date of original issue of the Series A Shares and be payable in
cash, when and as declared by the Board of Directors out of funds legally
available therefor, to holders of record on the 10th business day prior to
the dividend dates of November 15, February 15, May 15 and August 15 of
each year.
Conversion Rights
Unless previously redeemed, the Series A Shares are convertible at any time
after 30 days from the date of the closing of any underwritten public
offering of shares of Common Stock of the Company, at the option of the
holder, into such number of shares of the Company's Common Stock as shall
equal $25.00 divided by the conversion price (the "Conversion Price") which
is the lower of (i) $15.00, or (ii) 80% of the average of the last reported
sale prices for each of the 10 trading days immediately preceding the date
of Conversion (but not less than $10.00), subject to certain anti-dilution
adjustments.
Redemption
The Series A Preferred Stock is redeemable at any time at the option of the
Company, on not less than 30 nor more than 60 days written notice to
registered holders, at a redemption price equal to $25.00 plus accrued and
unpaid dividends, provided (i) the Company shall have previously
consummated an underwritten public offering of shares of its Common Stock;
and (ii) during the immediately preceding 10 consecutive trading days
ending on the date prior to the date of the notice of redemption, the
closing bid price of the Company's Common Stock is not less than $20.00 per
share.
Use of Proceeds
The proceeds will be used principally to fund the acquisition and/or
development of various real estate projects that the Company is presently
considering or pursuing. In addition, the Company may utilize some of the
proceeds for various general corporate purposes including (but not limited
to) working capital and buy-back of outstanding stock. See "Use of
Proceeds."
Restrictions on Transferability
The Units and Series A Shares (collectively the "Securities") will not be
registered under the Act or under the securities laws of any state or other
jurisdiction. As a result, the Securities cannot be transferred without
registration under the Act or, if applicable, the securities laws of any
state or other jurisdiction, unless in the opinion of counsel reasonably
acceptable to the Company, such registration is not then required because
of the availability of an exemption from registration. See "Certain Risk
Factors-Restrictions on Transferability of Units."
Registration Rights
Subsequent to the completion of an initial public offering of the Company's
securities, the Company will notify the holders of the Series A Shares of
the Company's intent to file a subsequent Registration Statement under the
Act (except for registrations on Forms S-4 or S-8), and upon the request of
such holder, to include the Series A Shares in such Registration Statement.
The Company may require the holder to delay the sale of any Series A Shares
for up to ninety days in the event the Registration Statement covers an
underwritten public offering. There can be no assurance any such
Registration Statement will be filed or declared effective or that the
Company will ever complete an initial public offering.
Exhibit 10.23 - Page 10
<PAGE>
Proposed Future Financing
The Company intends to seek additional financing which may be used to
redeem the Series A Shares and for working capital. The terms and source of
this financing have not been determined at this time, and there can be no
assurance that such a financing will be consummated. See "Certain Risk
Factors-No Assurance of Sufficiency of Offering Proceeds."
Investor Suitability
Sales of the Units will be made only to "accredited investors" as such term
is defined in Rule 501 of Regulation D promulgated under the Act. Each
purchaser of a Unit will be required to represent that the Units are being
acquired for his own account, for investment and not with a view to resale
or distribution. The Units are suitable investments only for sophisticated
investors for whom an investment in the Units does not constitute a
complete investment program and who fully understand, are willing to
assume, and have the financial resources necessary to withstand, the risks
involved in investing in the Units and to bear the potential loss of their
entire investment in the Units. See "Plan of Distribution - Investor
Suitability."
Certain Risk Factors
An investment in the Units involves a high degree of risk. Purchasers of
the Units should carefully review the factors under the heading "Certain
Risk Factors."
Common Stock Outstanding(1) Before Offering: 2,093,500
Upon Sale of Minimum(2): 2,318,500
Upon Sale of Maximum(2): 3,593,500
(1) Does not include (i) up to 187,500 options to purchase the Company's Common
Stock under Company's 1998 Employee Stock Option Plan, (ii) up to 800,000
options which may be granted under other employee stock plans, under the
Non-Executive Director Stock Option Plan, or pursuant to individual grants
to purchase Company Common Stock; and (iii) the Placement Agent Warrants to
be issued to the Placement Agent in conjunction with this Offering
consisting of 500,000 warrants exercisable at $4.00 per share and 1,000,000
warrants exercisable at $15.00 per share. See "Plan of Distribution."
(2) Assuming conversion of all issued and outstanding Series A Shares at a
ratio of 2.5:1 which is based on a Conversion Price of $10.00.
Exhibit 10.19 - Page 11
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data presented below as of and for the
period ended December 31, 1998, has been derived from the consolidated financial
statements of the Company, and the notes related thereto, included elsewhere in
this Memorandum. The financial statements of the Company for the period ended
December 31, 1998, have been audited by Lazar, Levine & Felix LLP, Certified
Public Accountants. The summary consolidated financial data and balance sheet
data as of and for the nine months ended September 30, 1999 have been derived
from the consolidated financial statements of the Company, and the notes
thereto, included elsewhere in this Memorandum, which, in the opinion of
management, include all adjustments necessary for a fair presentation of the
financial condition and results of operations of the Company for such period.
The results of operations for the interim period are not necessarily indicative
of a full year's operations. The following information should be read in
connection with the section of this memorandum entitled "Capitalization," and
the consolidated financial statements of the Company, the notes related thereto,
and the other financial data appearing elsewhere in this Memorandum.
INCOME STATEMENT Year Ended Nine Months
12/31/98 9/30/99
Audited Unaudited
------------------------------------------------------------------------------
Revenues $4,233,867 $4,513,171
------------------------------------------------------------------------------
Expenses 3,290,747 4,262,875
------------------------------------------------------------------------------
Income (Loss) Before Minority Interests and 943,120 250,296
Provision for Income Taxes
------------------------------------------------------------------------------
Income (Loss) Before Provision for Income Taxes 1,186,623 610,525
------------------------------------------------------------------------------
Net Income (Loss) $787,923 $397,525
------------------------------------------------------------------------------
BALANCE SHEET DATA Year Ended Nine Months
12/31/98 9/30/99
Audited Unaudited
------------------------------------------------------------------------------
Assets
------------------------------------------------------------------------------
Current Assets $1,806,634 $3,727,877
------------------------------------------------------------------------------
Investments In Real Estate-Net 9,842,952 26,745,231
------------------------------------------------------------------------------
Fixed Assets-Net 48,574 46,868
------------------------------------------------------------------------------
Other Assets 5,082,395 3,661,858
------------------------------------------------------------------------------
$16,780,555 $34,181,824
------------------------------------------------------------------------------
Current Liabilities $ 1,047,740 $ 2,782,561
------------------------------------------------------------------------------
Liabilities Applicable To
Investments in Real Estate 11,293,785 26,079,478
------------------------------------------------------------------------------
Long Term Liabilities 880,716 1,016,254
------------------------------------------------------------------------------
Minority Interest In Subsidiaries 1,540,175 1,871,514
------------------------------------------------------------------------------
Shareholders' Equity 2,018,139 2,432,017
------------------------------------------------------------------------------
$16,780,555 $34,181,824
------------------------------------------------------------------------------
Exhibit 10.23 - Page 12
<PAGE>
CERTAIN RISK FACTORS
Prospective investors should carefully consider the risks described below
before making an investment decision. Investing in the Securities involves a
high degree of risk. Any of the following risks could have a material adverse
effect on the Company's business, operating results, and financial condition.
Forward-Looking Statements
This Memorandum contains forward-looking statements including statements
regarding, among other items, our business strategy. Those forward-looking
statements are based largely on the expectations of management and are subject
to a number of risks and uncertainties, certain of which are beyond our control.
Forward-looking statements include statements which include the terms "may",
"will", "anticipate", or other similar terms. Actual results could differ
materially from these forward-looking statements as a result of the factors
described under "Certain Risk Factors" and elsewhere herein. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
information contained in this Memorandum will in fact transpire or prove to be
accurate. All written and oral forward-looking statements attributable to the
Company or persons acting on our behalf are expressly qualified in their
entirety by this section.
General Risks:
Limited Operating History
The Company was formed in April 1996 and has a limited operating history.
There can be no assurance that the Company will be able to manage and operate
its investments successfully or that the Company will be able to implement its
business plans or maintain profitable operations in the future. The Company is
subject to all of the risks, expenses, delays, and difficulties frequently
encountered by new ventures.
Risks Relating to Managing Growth; Potential Future Acquisitions
A key element of the Company's strategy is to expand through the
acquisition of additional residential properties. Although the Company has
operations in several geographic areas, the Company has limited experience in
integrating and managing residential properties located in a wide geographic
area. As the Company expands, it will be required to hire and retain additional
management and administrative personnel and develop and expand operational
systems to support its growth. This growth will continue to place significant
demands on the Company's management, financial and other resources. Accordingly,
there can be no assurance that the Company will be able to acquire and manage
other residential properties in the future. The failure to manage growth
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations.
No Assurance of Sufficiency of Offering Proceeds;
Redemption of Series A Preferred Shares
The sale of only the minimum number of Units will result in an insufficient
amount of funds to allow the Company to fully implement its operating plans.
There can be no assurance that the Company will sell the maximum number of
Units, or that the proceeds from the sale of less than the maximum number will
be sufficient for the Company's operating plans. In the event the maximum number
of Units are sold, the Company believes, but can not assure, that the proceeds
will be sufficient to satisfy the Company's capital requirements for a period of
twelve months. (See "Use of Proceeds" and "Plan of Distribution."). The Company
anticipates that in the future it will need additional funds from loans and/or
the sale of securities to redeem the Series A Preferred Shares and further
implement its business plans. The Company intends to use its best efforts to
arrange such financing in the future. No assurance can be given that such
financing will be available or, if available, will be on commercially reasonable
terms satisfactory to the Company. The terms of any offering may result in
additional dilution to the shareholders of the Company. Any inability to obtain
additional financing when needed will have a material adverse effect on the
Company.
Broad Discretion in Use of Proceeds
The Company has broad discretion with respect to the use of a substantial
portion of the net proceeds of the Offering which the Company currently intends
to use to purchase various residential real estate properties. Although the
Company is engaged in discussions with various owners of properties at this
time, the Company has no agreements or arrangements with respect to any
particular future transactions and, accordingly, it will have significant
flexibility in identifying and selecting prospective properties. (See "Use of
Proceeds.")
Exhibit 10.23 - Page 13
<PAGE>
Dependence on Key Personnel and Need for Additional Management
The Company's success will depend to a significant extent on the efforts of
Robert A. MacFarlane, the Company's Chairman of the Board and Chief Executive
Officer, and Robert M. Kohn, the Company's Chief Acquisitions Officer. Mr.
MacFarlane is also a principal stockholder of the Company. The loss of the
services of Mr. MacFarlane or Mr. Kohn would have a material adverse effect on
the Company. The Company does not currently have "key-man" life insurance
coverage on the lives of Messrs. MacFarlane or Kohn.
The Company believes that its future success will depend in part upon its
ability to attract and retain additional management personnel. The Company
anticipates recruiting additional executive officers and management personnel
following the closing of the Offering. Competition for such personnel is intense
and the Company will compete for qualified personnel with numerous other
employers, many of whom have significantly greater financial and other resources
than the Company. There can be no assurance that the Company will be successful
in attracting or retaining such personnel. (See "Management" and "Use of
Proceeds.")
Control by Management and Principal Stockholders
Following the completion of this Offering, and assuming the sale of the
maximum number of Units, current management of the Company will continue to own,
in the aggregate, approximately 25.3% of the outstanding Common Stock (assuming
conversion of the Series A Shares but excluding Shares issuable upon exercise of
any options or warrants). The percentage will increase to 39.2% if the minimum
number of Units is sold. Accordingly, the existing management may be able to
elect the entire Board of Directors of the Company and to direct the affairs of
the Company. See "Principal Stockholders."
Authorization and Discretionary Issuance of Preferred Stock; Possible
Anti-Takeover Effects
The Company's Certificate of Incorporation authorizes the issuance of up to
5,000,000 shares of "blank check" preferred stock with such designations, rights
and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights which would adversely affect the voting power or other
rights of the holders of the Company's Common Stock. In the event of issuance,
the preferred stock could be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing a change in control of the Company,
which could have the effect of discouraging bids for the Company and thereby
prevent stockholders from receiving the maximum value for their shares. The
Company has no present intention to issue any shares of its preferred stock in
order to discourage or delay a change of control of the Company. However, there
can be no assurance that additional preferred stock of the Company will not be
issued at some time in the future. (See "Description of Securities-Preferred
Stock.")
Restrictions on Payment of Dividends
The Company has not paid any dividends on its Common Stock since its
inception and does not contemplate or anticipate paying any dividends upon its
Common Stock in the foreseeable future. Earnings, if any, will be retained and
used to finance the development and expansion of the Company's business.
Arbitrary Determination of Offering Price
The price of the Series A Shares included in the Units has been arbitrarily
determined by negotiation between the Company and the Placement Agent and does
not necessarily relate to the Company's book value, results of operations, or
any other established criteria of value. See "Plan of Distribution."
Restrictions on Transferability of the Units
The Units, including the Series A Shares, have not been registered under
the Act. Accordingly, under the Act, neither the Units nor the Series A Shares
may be resold unless a registration statement is filed and becomes effective or
an exemption from registration is available. Similar restrictions on
transferability are imposed under the securities or "blue sky" laws of certain
states. As a result of these limitations on transferability, an investment in
the Units should not be considered liquid. Further, even though the holders of
the Series A Shares have been granted certain registration rights, there can be
no assurance that the Series A Shares will ever be registered for public sale
under the Act. In addition, the Company may require the holders to delay the
sale of any of the Series A Shares for a period of ninety (90) days after the
effective date of the applicable Registration Statement. (See "Description of
Securities.")
Exhibit 10.23 - Page 14
<PAGE>
Real Estate Related Risks:
Inability to Pay Debt Service
The Company is subject to the risks normally associated with debt
financing, including the risk that the cash flow generated by any specific
property will be insufficient to meet required payments of principal and
interest. Substantially all of the Company's outstanding indebtedness is secured
directly or indirectly by mortgages affecting the property which is the subject
of the loan. If the Company is unable to meet its obligations under any of these
agreements, a loss could be sustained as a result of foreclosure on the relevant
property by the mortgagee.
Variable Rate Debt
A substantial portion of the Company's currently outstanding indebtedness
bears interest at rates that adjust based on prevailing market interest rates.
Increases in the interest rates on the variable rate debt would adversely affect
the Company's results of operations and financial condition and could reduce the
amount of funds available for distribution to stockholders.
Refinancing Risks
Because the Company anticipates that it may not have available funds
sufficient to repay mortgage indebtedness at maturity, it may be necessary for
the Company to refinance debt through additional debt financing or equity
offerings. If the Company is unable to refinance its indebtedness on acceptable
terms, or at all, it might be forced to dispose of one or more of its properties
upon disadvantageous terms, which might result in losses and might adversely
affect its results of operations and financial condition and could reduce the
cash available for distribution. If prevailing interest rates or other factors
at the time of refinancing result in higher interest rates on refinancings, the
Company's interest expense would increase, which would adversely affect its
results of operations and financial condition and could reduce the cash
available for distributions and its ability to pay expected distributions to
stockholders.
Potential Limits on Income due to Resident Income Limitations and
Tax-Exempt Bond Compliance
Although the Company believes that it is in substantial compliance with the
requirements of government programs through which it has financed properties,
such compliance has the effect of limiting the income potential from these
properties. Moreover, permissible rental rate increases charged to residents may
not increase as quickly as comparable unregulated market rents.
General Real Estate Related Risks
The financial returns available from equity investments in properties
depend on the amount of revenue generated and expenses incurred in operating the
properties. If the Company's properties do not generate revenue sufficient to
meet operating expenses, debt service, if any, and capital expenditures, results
of the Company's operations, financial condition and ability to make
distributions to its stockholders will be adversely affected. A property's
income and value may be adversely affected by the national and regional economic
climates, local real estate conditions such as the over-supply of apartments or
a reduction in demand for apartments, availability of "for purchase" housing,
availability of single family home mortgage loans, the attractiveness of the
properties to tenants, competition from other apartment properties, and
increased operating costs (including real estate taxes). The Company's results
of operations and financial condition will also be adversely affected if a
significant number of tenants are unable to pay rent or if the apartments cannot
be rented on favorable terms. Certain significant expenditures associated with
each equity investment in real estate (such as mortgage payments, if any, real
estate taxes and maintenance costs) are generally not reduced when circumstances
cause a reduction in rental income. In addition, the income and value of an
apartment property are affected by such factors, among others, as changes in
zoning, building, environmental, rent control and other laws and regulations,
changes in real property taxes and interest rates, the availability of
financing, acts of God (such as earthquakes and floods), and other factors
beyond the Company's control. Additionally, the Company is exposed to the
various types of litigation that may be brought against a property owner or
manager in the ordinary course of business.
Illiquidity of Real Estate
Equity real estate investments are relatively illiquid and, therefore, will
tend to restrict the Company's ability to vary its portfolio of apartment
properties promptly in response to changes in economic or other conditions.
Exhibit 10.23 - Page 15
<PAGE>
Risks of Renovation, Development and Acquisitions
The Company's strategy includes the renovation of existing properties that
it acquires. In addition, the Company may develop new apartment properties if it
determines that such development is warranted. In connection with any renovation
or development project, the Company will bear certain risks, including the risks
of construction delays or cost overruns that may increase project costs and
could make such project uneconomical, the risk that occupancy or rental rates at
a completed project will not be sufficient to enable it to pay operating
expenses or earn its targeted rate of return on investment, and the risk of
incurring predevelopment costs in connection with projects that are not pursued
to completion. In the event of an unsuccessful renovation or development
project, the amount of the loss could exceed the Company's investment in such
project. Renovation or development projects may be more highly leveraged than
the Company's portfolio as a whole, which may result in an increased risk of
default and loss of equity investment if the project does not have sufficient
cash flow to cover its debt service requirements. In addition, the Company
anticipates that any new development will be financed under lines of credit or
other forms of secured or unsecured construction financing that will result in a
risk that permanent financing for newly developed projects might not be
available or would be available only on disadvantageous terms.
The Company intends to actively continue to acquire multifamily properties.
Acquisitions entail risks that investments will fail to perform in accordance
with expectations and that judgments made with respect to the costs of
improvements to bring an acquired property up to the standards established for
the market position intended for that property will prove inaccurate, as well as
general investment risks associated with any new real estate investment.
Regulation
The Company's business is significantly dependent upon the existence of
government subsidy programs such as Affordable Housing. Any future change to
such programs or to the laws governing such programs could have a material
adverse effect on the Company. In addition to the restrictions imposed in
connection with the government sponsored financings or tax credits, a number of
Federal, state and local laws exist, such as the Americans with Disabilities
Act, which may require modifications to existing buildings or restrict certain
renovations by requiring access to such buildings, and apartments in the
buildings, by disabled persons. Additional legislation may impose further
burdens or restrictions on owners with respect to access by disabled persons.
The costs of compliance with such laws may be substantial, and limits or
restrictions on completion of certain renovations may limit application of the
Company's investment strategy in certain instances or reduce overall returns on
its investments.
Competition
There are numerous real estate companies which compete with the Company in
seeking properties for acquisition and development, and for tenants to occupy
such properties. The Company competes with companies that have greater resources
as well as officers and directors who have greater experience than those of
Company management. In addition, the availability of single-family housing and
other forms of multifamily residential properties, such as manufactured housing
communities, provide alternatives to potential tenants of apartment properties.
These competitive factors could adversely affect the income generated by the
Company's properties and its results of operations and financial condition.
Possible Environmental Liabilities
Under various Federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under, in or emitting from such property. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, the presence of
hazardous or toxic substances, or the failure to remediate such property
properly, may result in personal injury or similar claims by private plaintiffs
and may adversely affect the owner's ability to sell or rent such property or to
borrow using such property as collateral. Moreover, certain loan documents
provide for recourse liability in connection with the presence of hazardous or
toxic substances. Certain environmental laws impose liability for release of
asbestos-containing materials into the air and third parties may seek recovery
from owners or operators of real properties for personal injury suffered by
reason of asbestos-containing materials. The Company may be potentially liable
for such costs in connection with the properties that it has acquired or that it
may acquire in the future.
Exhibit 10.23 - Page 16
<PAGE>
Uninsured Losses
The Company carries comprehensive liability, fire, flood (where appropriate
and available), extended coverage and rental loss insurance with respect to its
properties with policy specifications, limits and deductibles customarily
carried for similar properties. However, there are certain types of
extraordinary losses (such as from wars or earthquakes) which may be either
uninsurable or not economically insurable. Should an uninsured loss or a loss in
excess of insured limits occur at a property, the Company could lose its
invested capital in the property, as well as the anticipated future revenues
from the property, while remaining obligated for any recourse mortgage
indebtedness or other financial obligations related to the property. Any such
loss would adversely affect the Company's business, results of operations and
financial condition. Moreover, as the general partner of various limited
partnerships which own properties, the Company generally will be liable for any
such partnership's unsatisfied obligations other than non-recourse obligations.
Company management believes that the properties are insured adequately and in
accordance with prevailing real estate industry standards for similar
properties.
CAPITALIZATION
The following table (which reflects the Company's 1:4 reverse stock split)
sets forth the Company's actual capitalization as of March 31, 1999, and the
capitalization of the Company at such date, as adjusted, after giving effect to
the issuance of the minimum and maximum amount of Series A Shares offered
hereby. This table should be read in conjunction with the consolidated financial
statements of the Company, including the notes thereto, and the other financial
data included elsewhere in this Memorandum.
Actual As Adjusted As Adjusted
As of (1) (1)
3/31/99 Minimum Maximum
--------------------------------------------------------------------------------
Stockholders' (deficiency) equity:
--------------------------------------------------------------------------------
Preferred stock, $.001 par value,
5,000,000 shares authorized 0 0 0
--------------------------------------------------------------------------------
Common stock, $.001 par value,
25,000,000 shares authorized,
2,093,500 shares issued and outstanding
(as of March 31, 1999) 2,093 2,093 2,093
--------------------------------------------------------------------------------
Additional paid-in capital $965,767 $3,215,677 $15,965,167
--------------------------------------------------------------------------------
Retained Earnings $933,727 $933,727 $933,727
--------------------------------------------------------------------------------
Total stockholders' (deficiency) equity $1,901,587 $4,151,587 $16,901,587
--------------------------------------------------------------------------------
(1) Does not include (i) up to 187,500 options to purchase the Company's Common
Stock under Company's 1998 Employee Stock Option Plan, (ii) up to 800,000
options which may be granted under other employee stock plans, under the
Non-Executive Director Stock Option Plan, or pursuant to individual grants
to purchase Company Common Stock; and (iii) the Placement Agent Warrants to
be issued to the Placement Agent in conjunction with this Offering
consisting of 500,000 warrants exercisable at $4.00 per share and 1,000,000
warrants exercisable at $15.00 per share. See "Plan of Distribution."
Exhibit 10.23 - Page 17
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Series A Shares offered hereby, after
deduction of selling commissions and other estimated expenses of the Offering,
are estimated to be approximately $1,395,000 if the minimum number of Units are
sold and $13,950,000 if the maximum number of Series A Shares are sold. The
proceeds will be used principally to fund the acquisition and/or development of
various real estate projects that the Company is presently considering or
pursuing. These projects, and the approximate funds they would require, are as
follows:
Projects Units Minimum Maximum
-------------------------------------------------------------------------------
Country Lake Apts., West Palm Beach, FL 192 $2,092,500 $2,600,000
-------------------------------------------------------------------------------
Villa Americana Apts., Houston, TX 256 0 2,500,000
-------------------------------------------------------------------------------
Winter Oaks Apts., Winter Haven, FL 460 0 950,000
-------------------------------------------------------------------------------
Nations Bank Atlanta Portfolio, Atlanta, GA 1078 0 6,250,000
===============================================================================
Courtyard Apts., Anderson, IN 137 0 500,000
===============================================================================
Totals 2123 $2,092,500 $12,800,000
There can be no assurance that all or any of these properties will be
acquired by the Company. To the extent these properties are not acquired, it is
the Company's expectation that the proceeds will be applied to the acquisition
and/or development of other properties. In addition, the Company may utilize
some of the proceeds for various general corporate purposes including (but not
limited to) working capital or redemption of Series A Preferred Stock.
The amount of the net proceeds that will be invested in particular areas of
the Company's business will depend upon future economic conditions and business
opportunities. To the extent that the Company may incur a loss from operations,
such loss will be funded from the Company's general funds, including the net
proceeds of this Offering. In such event the amount available for use in the
expansion of the various aspects of the Company's business will be reduced by
the amounts expended in the course of day-to-day operations, including working
capital requirements and by any operating losses. A portion of the proceeds may
be used by the Company to diversify into complementary businesses, either by
internal growth or by acquisition. As of the date hereof, the Company does not
have any contract with any such acquisition candidate, and no assurance can be
given that any business acquisition opportunity may be obtained in the future,
or if obtained, may be negotiated on terms which are favorable to the Company.
While the forgoing amounts are management's best estimates of the use of
the proceeds of the Offering, actual expenditures may vary depending on the
actual proceeds realized from this Offering and the extent to which future
revenues generated by the Company are sufficient to pay the Company's expenses.
Such conditions may influence management to alter the Company's proposed
activities and/or may require the Company to seek additional funds through
borrowing from banks or through other financial arrangements. No assurance can
be given that the Company would be successful in obtaining such additional
funds.
Exhibit 10.23 - Page 18
<PAGE>
BUSINESS
Introduction
Homes for America Holdings, Inc. was organized on January 9, 1996 as a real
estate operating company to acquire, develop, own, rehabilitate and manage
residential properties throughout the United States. Our objective is to
identify and purchase undervalued residential properties which we renovate,
operate and manage. We rely upon the expertise and experience of our executive
officers as well as unaffiliated real estate brokers, attorneys, bankers and
property owners to assist us in identifying suitable multi-family residential
properties throughout the United States. These properties are purchased either
through a variety of government-sponsored financing arrangements exclusively
available for properties qualifying as Affordable Housing, or with traditional
financing arrangements available for Market Rate properties. In addition to the
net rental income derived from our portfolio of multi-family residential
properties, we earn a portion of revenues and profits from transactional fees
associated with the acquisition, financing, development and construction of
Affordable Housing.
Our operations commenced in April 1996. To date, we have purchased six
multi-family residential properties located in Dallas, Texas; Bridgeport,
Connecticut; Elkhart, Indiana, North Miami, Florida and West Palm Beach,
Florida. In 1998, we purchased 17 acres of undeveloped land upon which we will
develop 210 Market Rate units. We have also contracted for the purchase a second
multi-family residential property in Florida, expected to close in the third
quarter of 1999.
Background
One of our primary objectives is to develop multi-family residential
properties which will qualify as Affordable Housing. Such properties enable us
to apply for Tax Exempt Bond allocations, Low Income Housing Tax Credit
allocations, or both, which then can be used to provide capital and/or financing
for the purchase and rehabilitation of the property. In return for such
financing arrangements, we must limit tenants in the Affordable Housing projects
to those whose income are within the Restrictions. We anticipate that eventually
sixty percent of our portfolio will be Affordable Housing properties and the
remainder will be Market Rate properties which we have purchased and then either
rehabilitated or converted into residential units.
Market Rate multi-family residential properties will generally be acquired
using traditional methods of real estate financing. Residential properties which
may be reconverted are often: (i) Market Rate multi-use properties that are
purchased at a discount and then constructed or substantially rehabilitated;
(ii) non-residential properties that can be converted to residential use, such
as warehouses, industrial buildings, fire houses and vacant office buildings
that have unique architectural qualities; and (iii) existing residential
properties where rehabilitation is extensive enough to substantially alter the
quality and character of the property. Such conversions are currently popular in
redeveloping urban areas and we expect them to be a source of significant
revenue in the future. Our Dallas/Briar Meadows property is an example of such a
conversion. Affordable Housing properties for potential acquisition are
identified by maintaining regular contact with real estate brokers throughout
the United States. We inform the brokers that we are interested in acquiring
property in certain locations within a designated state for which Tax Exempt
Bond and Tax Credit financing is available. Investment decisions are made by our
executive officers with the consent of the Board of Directors. In addition, we
will often utilize the knowledge and experience of outside consultants that we
retain.
Affordable Housing
Affordable Housing properties are multi-family residential properties in
excess of four units for which government sponsored financing programs are
available. These properties are subject to Restrictions which govern, among
other things, the income of the tenants to which the units are rented.
Initially, we identify an area where Affordable Housing financing is
available. After we have located and entered into a contract to purchase a
property qualifying as Affordable Housing, we prepare and submit an application
for a Tax Exempt Bond allocation to the appropriate governmental agency. Once
the application for Tax Exempt Bonds is approved, we then prepare and submit an
application for an allocation of Low Income Housing Tax Credits. In connection
with these applications, we must, among other things, conduct a market study of
the property, provide an architectural analysis, obtain a property appraisal and
prepare an environmental study and analysis of the property. We also provide a
proposed cost of the entire project which includes fees and reimbursements that
we receive out of the funding of the project. We engage outside consultants and
professionals operating near the location of the subject property to assist in
obtaining the required information and in preparing these applications.
Exhibit 10.23 - Page 19
<PAGE>
Each Affordable Housing property in which we have an interest is owned by a
separate limited partnership or limited liability company. After the Low Income
Housing Tax Credit allocation and if applicable, a Tax Exempt Bond allocation,
is received, the limited partnership acquires title to the Affordable Housing
property. We then offer and sell a limited partnership interest to an investor.
The investor usually acquires a "nominal" 99.9% interest in the partnership for
a purchase price of $.50 to $.80 per $1.00 of Low Income Housing Tax Credits
(See "Low Income Housing Tax Credits -Value of the Credits", and "Current
Operations"). The agreement with the investor, however, typically allows us to
retain between 70% and 90% of the operating cash flow from the property as well
as 70% and 90% of the residual value of the real estate. In addition, Tax Exempt
Bonds are sold to various independent bond houses. The investor who purchases
the limited partnership interest from the limited partnership is usually a
limited partnership formed by an experienced Low Income Housing Tax Credit
syndicator. We are not involved in these syndication efforts. The general
partner for each limited partnership is a newly formed, wholly owned subsidiary
of Homes for America Holdings, Inc.
The issuer of the Tax Exempt Bonds, which is usually a local government
authority, issues and sells the Bonds to finance the project through investment
bankers such as CharterMac, The Sturges Company and Greenwich Partners. All Tax
Exempt Bond placements are accomplished by the issuer to a single institutional
purchaser. For example, the bonds for Prairie Village were purchased by The
Sturges Company and the bonds for Lake's Edge were purchased by Charter Mac.
The proceeds from the sale of the Tax Exempt Bonds are loaned to Homes for
America and are used to provide funding for the acquisition of the property,
including either the construction loan, the permanent loan, or both. After
acquiring the property and finalizing the sale of the limited partnership
interests to the investor, we are entitled to receive various transaction fees
and expense reimbursements at the closing which is paid out of the funding for
the project. Transaction fees may include acquisition fees, developer fees,
rehabilitation fees, asset management fees, administrative fees, general partner
fees, and other fees associated with the acquisition, financing, development,
rehabilitation, construction, and operation of an Affordable Housing project.
The realization of these fees is dependent upon the number, type and terms of
the purchase and financing transactions that occur during the course of the
year. Following the closing, we rehabilitate the property and lease the units.
In addition to the fees received at closing, we receive income from the
acquired property through management fees and participation in operating
profits. We also provide services to the properties including, but not limited
to, marketing, ownership property reviews, social service programs for parents,
and outreach programs for children. These may include computer learning
workshops, tutoring, and organized sports activities. Property services may be
included as a requirement to ensure municipal state or federal financing
approval. As each municipality, county or state applies a scale in determining
whether an applicant qualifies for Tax Exempt Bond financing and/or Tax Credits,
adding services to the property for the benefit of the tenants may significantly
improve an applicant's ability to obtain financing and/or credits. We believe
that the quality of tenancy increases with the amount of services offered, and
that providing these services reduces apartment turnover, helps maintain quality
of life, and thereby controls costs.
We believe a considerable need for quality Affordable Housing exists in the
United States. Historically, demand has exceeded supply. We also believe that
there is a strong market for the conversion of undervalued market-rate
residential properties, where new construction or substantial rehabilitation is
required, and in the conversion of non-residential property to unique
residential and loft-type living. Moreover, our founders are experienced in
these types of conversions. We believe, but cannot assure, that we will achieve
significant revenues from this area in the future.
As we have been in operation only since 1996, there can be no assurance we
will continue to be a commercially viable or profitable business. We have a
limited operating history to use to predict whether we will be successful in the
future.
Current Operations
We manage, or oversee the management and operation, of each property that
we acquire. Accordingly, we have established our own on-site management in areas
where we have a substantial investment, such as Texas, Florida and the
Northeast. In other areas, we may utilize outside management firms to assist in
the operation of the properties.
Whether we are the on-site property manager or the off-site asset manager,
we maintain responsibility for the operation of each property. Every property
that we directly manage has one of our senior managers responsible for the
property's day to day operations. Every site that we operate through an outside
management firm has one of our officers directly responsible for the property.
In addition, we engage outside auditors to provide compliance audit services to
verify key financial information and tenant certification issues. Further, each
property is visited periodically by our officers.
Exhibit 10.23 - Page 20
<PAGE>
We currently own properties in Texas, Connecticut, Indiana and Florida with
contracts pending for additional properties. The following is a description of
the properties under management as well as properties subject to purchase
agreements.
Willow Pond Apartments
Willow Pond Apartments, formerly known as Glen Hills Apartments, located in
Dallas, Texas, is a 386-unit Affordable Housing complex.
The Willow Pond complex was purchased for approximately $8,400,000, and is
owned by a limited partnership, of which we are the general partner with a .01%
interest in the partnership, approximately a 90% interest in cash flow and an
80% interest in the residual value of the partnership.
Through the limited partnership formed to own Willow Pond, we sold a
limited partnership interest to an investor for $2,500,000 in exchange for a
nominal 99.99% interest in the limited partnership. Notwithstanding the limited
partner's 99.99% nominal interest in the limited partnership, the general
partner and the limited partner have varying interests in the items of tax
profit, tax losses, distributions of cash available from operations, and
distributions of cash available from refinancing of the limited partnership's
debt or upon sale of its asset. Since the limited partner's primary financial
motivation for purchasing an interest in the limited partnership was the
benefits it would derive from the Low Income Housing Tax Credits and other tax
losses, the limited partner has retained 99.99% of those items. Because this
allocation of Low Income Housing Tax Credits and losses met the limited
partner's yield requirements, we were able to obtain an aggregate interest of
approximately 90% in the cash available from operations, and an aggregate
interest of approximately 80% in the cash available from sale of the
partnership's asset or refinancing of its debt. The limited partner has a right
to the difference. The balance of the funding was obtained through mortgages on
the property.
After we acquired the property, we renovated it and it is now 98% occupied.
In addition to the renovation, we established a computer learning facility which
provides tenants and their children with professional instruction in, among
other things, the use of the Internet and spreadsheet skills. Adults are offered
the opportunity to learn word processing and spreadsheet skills or to otherwise
improve existing skills to aid them in the work place.
Glen Hills Homes for America, Inc., a wholly-owned subsidiary of Homes for
America, was incorporated on February 26, 1997 in the state of Texas was formed
to serve as the general partner of Dallas/Glen Hills, LP, the owner and operator
of this property. Dallas/Glen Hills, LP was organized on March 27, 1997 in the
state of Texas for the purpose of owning and operating this property. Glen Hills
Homes for America, the general partner, owns .01% of Dallas/Glen Hills LP
(a.k.a. Willow Pond). 90% of the cash flow from this property, as well as 90% of
the residual property value if sold, resides with the general partner. Because
Homes for America Holdings, Inc. exerts full control over the limited
partnership, it is treated as a wholly-owned subsidiary.
Putnam Square Apartments
Putnam Square Apartments is an Affordable Housing complex composed of 18
units located in Bridgeport, Connecticut. In November 1997, in return for an
indemnification against operating losses of up to $65,000 and an agreement to
operate and rehabilitate the facility, we succeeded to the interests of the
general partner of the partnership that originally owned the property. We have
substantially renovated the property and approximately 90% of the units are
currently rented.
As additional consideration for assuming the position of general partner,
the Company received a developer's note in the amount of $200,000, and 50% of a
$400,000 first mortgage, or $200,000. Under the terms of the partnership
agreement, the developer's note has first priority on the property's cash flow.
In total, the Company received notes in the amount of $400,000 for assuming the
general partner position.
The partnership has one investor limited partner who made capital
contributions of $692,065 in exchange for a 99% interest in the partnership.
Under the terms of the agreement, the limited partner is allocated 99% of
partnership income or loss, and 99% of the tax credits earned annually. Cash
flow is distributed 75% to the general partner as payment of the development
note, and thereafter as payment of the partnership administration fee; and 25%
to the limited partner.
Exhibit 10.23 - Page 21
<PAGE>
Putnam Homes for American, Inc., a wholly-owned subsidiary of Homes for
America, was incorporated on October 14, 1997 in the state of Connecticut for
the purpose of serving as the general partner of TVMJG1996-Putnam Square, LP,
the owner and operator of Putnam Square. TVMJG1996-Putnam Square, LP was
organized on April 26, 1997 in the state of Connecticut for the purpose of
owning and operating Putnam Square. Putnam Homes for America, the general
partner, owns 1.0% of TVMJG1996-Putnam Square, LP (a.k.a. Putnam Square). Homes
for America Holdings, Inc. earned a developer's fee of $200,000, payable by a
note senior to a first mortgage of $400,000, plus an additional $200,000
representing one-half of the first mortgage note, and retains 75% of cash flow
from the property, as well as 75% of the residual value is sold. Because Homes
for America Holdings, Inc. exerts full control over the limited partnership, it
is treated as a wholly owned subsidiary.
Prairie Village Apartments
Prairie Village Apartments, a 120-unit Affordable Housing project located
in Elkhart, Indiana, was purchased on December 16, 1998 for approximately
$804,000. The project costs totaled approximately $3,950,000, which included the
establishment of a $2,200,000 restricted cash fund for current renovations from
which we will draw during the construction period, and the establishment of
reserves in the amount of approximately $425,000 for future renovations, repairs
and maintenance. This transaction included the attainment of a $2.4 million
private activity cap for Tax Exempt Bonds, $600,000 of taxable bonds and the
sale of $1,000,000 of tax credits. This transaction provided us with
reimbursement of our pre-acquisition expenses of $250,000 and developer fees of
approximately $400,000. The transaction was financed with non-recourse bonds
bearing interest at 5.9% fixed for 30 years.
Prairie Village Apartments is owned by a limited partnership in which our
wholly owned subsidiary is the general partner. Through this limited
partnership, we sold a limited partnership interest to an investor for
$1,060,510 in exchange for a nominal 99.90% interest in the limited partnership.
Notwithstanding the limited partner's 99.90% nominal interest in the limited
partnership, the general partner and the limited partner have varying interests
in the items of tax profit, tax losses, distributions of cash available from
operations, and distributions of cash available from refinancing of the
partnership's debt or upon sale of its asset. Since the limited partner's
primary financial motivation for purchasing an interest in the partnership was
the benefits it would derive from the Low Income Housing Tax Credits and other
tax losses, the limited partner has retained 99.90 % of those items. Because
this allocation of Low Income Housing Tax Credits and losses met the limited
partner's yield requirements, we were able to obtain an aggregate interest of
approximately 80% in the cash available from operations, and an aggregate
interest of approximately 70% to 90% in the cash available from a future sale of
the limited partnership's asset or refinancing of its debt. The limited partner
has a right to the difference. The balance of the funding was obtained through
Tax Exempt and taxable bonds on the property.
Rehabilitation will consist of new facades and exteriors, new kitchens,
windows, insulation, air conditioning, carpeting, landscaping and noise
attenuation. This work will take approximately one year, and is currently
approximately 30% complete. During this period, existing tenants will be moved
from non-renovated units into fully renovated units at no additional cost.
Further, we will create a computer learning facility on the premises available
to all rent paying residents and their families. Classes in computer skills such
as word processing, spreadsheets and compiling databases will be offered free of
charge.
Prairie Village Homes for America, Inc., a wholly-owned subsidiary of Homes
for America, was incorporated on July 17, 1997 in the state of Indiana for the
purpose of serving as the general partner of Middlebury/Elkhart LP, which owns
and operates Prairie Village. Middlebury/Elkhart, LP was organized on July 16,
1997 in the state of Indiana for the purpose of owning and operating Prairie
Village. Prairie Village Homes for America, the general partner, owns 0.1% of
Middlebury/Elkhart LP (a.k.a. Prairie Village). 90% of the cash flow from this
property, as well as 90% of the residual property value if sold, resides with
the general partner. Because Homes for America Holdings, Inc. exerts full
control over the limited partnership, it is treated as a wholly-owned
subsidiary.
Briar Meadows Apartments
We purchased the Briar Meadows Apartments, a 118-unit residential complex
located in Dallas, Texas for $1,050,000 on December 18, 1998. The project has
been financed with a first mortgage in the amount of $840,000 and a second
mortgage of $500,000. A rehabilitation escrow in the amount of $250,000 has been
established from the proceeds of the mortgages. We have begun substantially
rehabilitating the units at an anticipated cost of $400,000. This is a Market
Rate transaction and we will not utilize any government guarantee programs.
Exhibit 10.23 - Page 22
<PAGE>
This property is 100% owned by a wholly-owned subsidiary of Homes for
America, Briar Meadows Homes for America, Inc. This subsidiary was incorporated
on November 20, 1998 in the state of Texas for the purpose of owning and
operating this property. Current occupancy is 98%.
Homes For America Holdings, Inc. refinanced the Briar Meadows property in
Dallas, Texas. This property carried an $825,000 first mortgage from Beal Bank
of Texas, and a $500,000 second mortgage from USA Capital of Nevada.
Upon receipt of a $1.5-million loan from Key Bank, both of the
aforementioned mortgage holders were repaid, leaving Key Bank with a first
position on the property. Subsequently, the Company received a $400,000 second
mortgage from Frost Bank. The proceeds of this loan were used substantially as
deposit money on pending transactions.
The Company has now borrowed $1.6-million from USA Capital, of which
$400,000 was used to pay the Frost Bank second mortgage, and the balance will be
used to complete the Country Lake acquisition in West Palm Beach, Florida.
In consideration for this loan, the Company granted USA Capital a second
position on the Briar Meadows property, and pledged the stock of several
wholly-owned subsidiaries.
Arlington - Royal Crest
On December 18, 1998, we purchased 17 acres of undeveloped land located in
Arlington, Texas for $1,200,000. The purchase was financed with a first mortgage
on the property in the amount of $1,200,000. We recognized transaction fees of
approximately $287,000 on this purchase.
We have received approval from HUD to file for a "fast-track" commitment
for insurance on a construction loan and permanent mortgage in the amount of
approximately $12,200,000. Closing on the loan and the commencement of
construction is expected to occur in the first quarter of 2000. Occupancy is
anticipated to begin in September, 2000.
We own 100% of the Arlington property and do not expect to sell any
partnership interests in it. Arlington Homes for America, Inc., a wholly-owned
subsidiary of Homes for America, was incorporated on December 9, 1998 in the
state of Texas for the purpose of developing the Arlington property.
Lake's Edge Apartments
On June 30, 1999, the Company acquired Lake's Edge Apartments, a 400 unit
apartment complex located in North Miami, Fla., for $14,025,000. We will
commence approximately $1,400,000 of improvements to this property in the Fall
of 1999. Including project costs at closing, the total project cost is
approximately $16,500,000. Acquisition, including project costs and planned
improvements, has been completely financed with a combination of Tax Exempt and
taxable Bonds. Approximately $400,000 in transaction fees were realized on this
purchase, and gain on sale of Bonds totaled approximately $825,000, for a total
revenue gain of $1,200,000. Current occupancy is 94%.
We own 100% of the property and do not plan to sell any partnership
interests in it. Lake's Edge Homes for America, Inc., a wholly-owned subsidiary
of Homes for America, was incorporated on March 25, 1999 in the state of Florida
for the purpose of owning and operating this property.
Homes for America is also the sole owner of LEHH, Inc., which was formed
for the sole purpose of purchasing outstanding bonds and subsequently reselling
the bonds to an institutional investor in connection with the Lake's Edge
transaction. LEHH was incorporated on March 25, 1999 in the state of Florida.
Country Lake Apartments
We closed on the Country Lake Apartments, a 192 unit property located in
West Palm Beach, Florida on November 5th, 1999. This $12.2 million property was
financed through Tax Exempt and taxable bonds in the amount of $10.4 million and
a loan.
Proposed Properties
Villa Americana
Homes For America Holdings, Inc. signed a Purchase and Sale Agreement on
September 23, 1999 to acquire this 258-unit affordable housing complex in
Houston, Texas for $8,615,000. This transaction will be financed with either a
HUD or conventional market-rate mortgage in the full amount of the purchase
price (terms and conditions pending), and closing is expected by first-quarter
2000.
Exhibit 10.23 - Page 23
<PAGE>
Louisville, KY (Haversford)
Homes For America Holdings, Inc. signed an Assignment and Assumption
Agreement on October 30, 1999 for this pre-existing transaction. HUD financing
approval is already in place, terms and conditions to be determined upon HUD
review and appraisal of property and project. The Company is awaiting completion
of architectural plans and construction bids to proceed. The project will
include construction of 160 new market-rate units at an estimated cost of
$10-million.
New Business Ventures
Homes for America Real Estate Services, Inc., a wholly-owned subsidiary of
Homes for America, was incorporated on July 6, 1999 in the state of Texas. This
company was organized to serve as a management company for properties owned by
third parties and is seeking such contracts.
MasterBuilt America, Inc. was formed as a joint venture on July 1, 1999 in
the state of Virginia between Homes for America and MasterBuilt Companies, Inc.,
a commercial building company located in Virginia. MasterBuilt America may be
engaged by Homes for America to construct and/or rehabilitate some of the
apartments owned and operated by Homes for America and its affiliates.
Financing:
Affordable Housing Financing
We purchase Affordable Housing properties through the use of relatively
small amounts of our own capital, the sale of Tax Credit benefits to Tax Credit
investors, conventional debt, government agency loans, and, in some cases, the
use of low-interest Tax Exempt and taxable Bonds. In addition, we often purchase
Affordable Housing properties with relatively small amounts of capital through
the use of low interest rate, non-recourse bonds, thereby preserving capital for
other transactions. Aside from the equity that we provide, the balance of the
equity for the purchase of an Affordable Housing property is obtained through
the sale of a limited partnership interest to an investor/limited partner
("Limited Partner") formed specifically to own the Affordable Housing property
for cash. The Limited Partner's interest entitles it to share in the tax credit
and cash benefits associated with the property. From the transaction, we may
receive: (i) reimbursement of expenses; (ii) BSPRA or developer's fee (up to
15%); (iii) acquisition fees (up to 5% of the acquisition); (iv) rehabilitation
fees (up to 10% of any rehabilitation or construction); (v) management fees (up
to 6% of total income); (vi) retention of approximately 70% to 90% of all
operational cash flow; and (vii) 80-90% of the cash available for distribution
upon sale or refinancing.
An Affordable Housing project's financing may consist of some or all of the
following: (i) equity, the majority of which is provided mainly through the sale
of Low Income Housing Tax Credits to a single outside investor and the minority
of which is provided by us as the developer, (ii) conventional debt, which will
consist of conventional loans provided by financial institutions such as banks
and insurance companies, (iii) government agency loans provided by local
government agencies at lower than market interest rate and repayable solely out
of a portion of the project's available cash flow, if any, in lieu of a fixed
monthly payment, (iv) government agency grants awarded to the project which do
not need to be repaid, and (v) debt generated by the sale of Bonds (see "Tax
Exempt Bonds"). In general, the equity portion of an Affordable Housing
project's financing will be between one-third and one-half of the Affordable
Housing project's total financing with the balance consisting of one or more of
the types of debt described above. The amount of conventional debt available as
financing to an Affordable Housing project depends entirely upon the net
operating income available to make payments of principal and interest. Net
operating income is the amount of money available after the payment of operating
expenses. Conventional lenders require a ratio of net operating income to
principal and interest payments from as low as 1.10:1 to as high as 1.35:1.
Thus, the lower rents required by Restrictions reduce the availability of
conventional debt for Affordable Housing projects and increase the need for the
government financing described above.
In general, the Limited Partner investors in limited partnerships owning
Affordable Housing projects are primarily seeking the benefits generated by the
Low Income Housing Tax Credits and the other tax losses, and give less
consideration to cash distributions as a means of obtaining a desired yield from
an investment. Therefore, the limited partnerships typically grant the general
partner up to 90% of the cash flow from operations and up to 90% of residual
interest in the properties.
Although approximately one-half of our business relies on HUD or other
government financing, once a transaction is closed, it is not subject to
re-negotiation or termination. Therefore, after closing, the government agency
may neither elect to renegotiate our agreed upon profits nor terminate our
contracts or subcontracts.
Exhibit 10.23 - Page 24
<PAGE>
Conversions Financing
Market Rate purchases of undervalued residential or non-residential
property that we substantially rehabilitate or convert may be financed by a
capital investment of up to 10-20% of the project's costs, with the balance
furnished by debt financing. The Company believes that such level of financing
is generally available and was used for the purchase of Briar Meadows
Apartments. These properties are generally well situated and/or architecturally
unique, and can frequently be purchased at low prices due to the need for
significant rehabilitation. Unit costs will vary region by region. Replacement
costs are determined by regional industry standards and are supported by
appraisals and feasibility studies. Although costs vary by region, we believe
that this method of acquisition, rehabilitation and financing is much more cost
effective than the approximate cost from $25,000 to $60,000 to construct
comparable new units. HUD is the ultimate determinant of replacement costs and
HUD loans are based upon the lowest of four test criteria: (1) Letter of credit
service by income; (2) market value based on the HUD appraisal; (3) a statutory
allowance; or (4) replacement cost.
Low Income Housing Tax Credits
A significant portion of our housing portfolio is financed through the use
of Low Income Housing Tax Credits (the "Tax Credits").
Tax Credits were created by the Tax Reform Act of 1986, which established a
single program of Tax Credits benefiting the owners of rental housing
developments specifically targeted to a defined group of lower income
households. Tax Credits can be utilized by the owner of the development and
constitute a dollar for dollar reduction of the owner's federal tax liability.
In the case of pass-through tax entities such as limited partnerships and
limited liability companies, each owner of the entity (i.e., the partners in the
case of a limited partnership or the members in the case of a limited liability
company) is allocated a proportionate share of the Tax Credits which may be used
as a direct reduction of an individual's or corporation's federal income tax
liability.
State Allocation of Tax Credits
State housing agencies are responsible for the allocation of Low Income
Housing Tax Credits and for monitoring program compliance. Pursuant to the
Volume Cap applicable to Low Income Housing Tax Credits, each state annually may
allocate Low Income Housing Tax Credits to Affordable Housing projects up to an
amount equal to $1.25 per state resident. Without reducing the amount of Low
Income Housing Tax Credits that a state has available annually to allocate under
the Low Income Housing Tax Credit Volume Cap, a state may also allocate Tax
Credits to Affordable Housing projects financed with Bonds that are subject to
the separate Volume Cap applicable to Bonds. In other words, Low Income Housing
Tax Credits allocated to Affordable Housing Projects financed with Bonds do not
reduce the amount of Low Income Housing Tax Credits available to Affordable
Housing projects that are not financed with Bonds.
Qualifying for Tax Credits Tax
Credits are obtained through an application to the responsible state
agency, and are allocated to developments which meet certain threshold
requirements set forth in the Internal Revenue Code and the particular State
Agency's Qualified Allocation Plan ("QAP"). Bond allocation applicants, because
they are not part of this Volume Cap, do not compete for the Tax Credits. Once a
Bond allocation development has received its allocation of bonding authority, it
will receive a Tax Credit allocation if that applicant meets the minimum
threshold standards for a Tax Credit allocation.
Volume Cap Tax Credits and Bond allocation Tax Credits are allocated to
developments involving either new construction or rehabilitation of existing
housing developments. In addition, Volume Cap Tax Credits and Bond allocation
Tax Credits may also be awarded for the acquisition of an existing development
if that development qualifies for the rehabilitation Tax Credits.
The amount of Tax Credits allocated for a new development will be the
equivalent of 70% of the present value of the eligible basis, which includes
costs of construction and other permissible fees and expenses, as provided by
Section 42(b)(2)(B) of the Internal Revenue Code. Ten percent of the Tax Credits
may be applied against tax liabilities each year for ten years. The amount of
Tax Credits allocated for a rehabilitation development will be the equivalent of
70% of the present value (determined over a ten-year period) of the cost of the
rehabilitation. The amount of Tax Credits allocated for qualified acquisitions
will be the equivalent of 30% of the acquisition cost. If any portion of the
permanent financing for the development is provided at below market interest
rates by or through the federal government, with certain exceptions, the amount
of the Tax Credit allocated will be the equivalent of 30% of the present value
(determined over a ten-year period) of the cost of new construction or
rehabilitation.
Exhibit 10.23 - Page 25
<PAGE>
The amount of Tax Credits allocated in Bond allocation developments is the
equivalent of 30% of the present value (determined over a ten-year period) of
the cost of new construction or rehabilitation, as the case may be, and 30% of
the cost of acquisition if the development also receives rehabilitation credits.
The amount of Tax Credits allocated to a development is also a function of
eligible costs of construction or rehabilitation ("Eligible Basis"), the number
of housing units in the development which are deemed to be qualified low income
units, and the applicable federal rate ("AFR"), which is the factor used to
arrive at the present value of the Tax Credits over ten years. The number of
qualified low income units is determined by the number of rental units in the
development which are rented to qualified low income tenants at appropriate low
income rents. A development must elect a low income set aside test ("Set Aside")
which is (i) 40% of the units rented to tenants whose income is 60% of the area
median income, or (ii) 20% of the units rented to tenants whose income is 50% of
the area median income. Area median income is determined for all localities in
the United States by HUD. The Set Aside is a threshold for Tax Credit Allocation
qualification, but due to the intense competition for Tax Credits, state
agencies have successfully required developments to set aside more units at
significantly lower rent. For a housing unit to be considered a low income unit,
it must be rented at no more than 30% of the tenant's income, with the rental
amount adjusted for family size.
Utilization and Loss of Tax Credits
Tax Credits are taken over a period beginning in the year in which the
development is first occupied by tenants ("Placed in Service") and ending ten
years later ("Tax Credit Period"). Developments must remain in compliance with
their initial low rent levels and initial low income occupancy levels for a
minimum of 15 years ("Compliance Period"), but in order to qualify for Tax
Credits in the first instance, developments must agree to remain in compliance
with rent levels and low income occupancy levels for an additional 15 years
beyond the Compliance Period agreement (the "Extended Use Agreement"). The
additional time period contemplated thereby is referred to as the Extended Use
Period.
The Extended Use Agreement extends the Compliance Period for an additional
15 years, making the Affordable Housing Project subject to the Low Income
Housing Tax Credit Restrictions for a total of 30 years (the initial 15 years of
the Compliance Period plus the 15 years of the Extended Use Period). The
Extended Use Agreement does not alter the owner's ability to operate the
property, since the owner must contemplate the 30 year period of restrictions
when the investment is initially acquired. Only if, under circumstances
contemplated by Section 42(h)(6)(E) of the Internal Revenue Code, the 30 year
period is reduced to 15 years, will the operation of the property be affected.
If the 30 year period is reduced so that there are no Low Income Housing Tax
Credit Restrictions applicable to the project, and if no other Restrictions
exist which limit the rents and the tenant's income, the project can then be
operated as a Market Rate residential project, with the likelihood that it could
generate higher operating income.
Developments are subject to tax credit recapture during the Compliance
Period if: (i) they fall below the required number of low income units; (ii) the
rental amounts exceed the required rates; (iii) units are rented to tenants
whose incomes exceed the maximum allowed; or (iv) they are transferred to third
parties. In years 1-11 of the Compliance Period, the amount of the recapture is
equal to one-third of all prior Tax Credits claimed by the taxpayer. In years
12-15 of the Compliance Period, the amount of the recapture is one-fifteenth of
all prior Tax Credits claimed by the taxpayer.
Disposition of Tax Credit Developments
Generally, Tax Credit developments can be disposed of at any time. When and
how the disposition occurs controls whether there will be Tax Credit recapture,
and whether the development will remain subject to the Extended Use Agreement.
Value of the Credits; Sale to Investors and Relationship with Investors
Tax Credits result in a dollar for dollar reduction of a taxpayer's federal
tax liability. They represent the equivalent of cash in the amount of the tax
savings. The market for Tax Credits enables owners of Affordable Housing
projects which have received an allocation of Low Income Housing Tax Credits to
sell the credits as interests in limited partnerships for cash. There is no
secondary market, or after-market, for the limited partnership interests. Tax
Credit purchasers and investors in this market are long term. The value of the
Tax Credits and other benefits are allocated between the partners based upon an
agreed upon percentage for each of the items of benefit such as Tax Credits and
cash flow. The range of Tax Credit prices we receive is between fifty cents and
eighty cents per Low Income Housing Tax Credit dollar.
Exhibit 10.23 - Page 26
<PAGE>
Every Tax Credit purchaser has different investment criteria, required
rates of return, and exit strategies. Generally, we can expect to receive a
portion of the proceeds from the purchaser during construction or rehabilitation
of the development, a portion when the development is substantially complete and
the remainder when the development has achieved predetermined stabilized rent
and occupancy levels. The partnership agreement between us and the Tax Credit
purchaser will contain many provisions which govern the operation of the
development, including: (i) regular periodic reporting; (ii) providing the Tax
Credit purchaser with certain remedies if the development falls out of Tax
Credit compliance; and (iii) providing the Tax Credit purchaser with an exit
strategy after 15 years.
We do not sell Tax Credits to individual purchasers. The Tax Credits are
purchased by institutions such as The Related Capital Company, Inc., The Sturges
Company and Greenwich Partners. These institutions are specialists in the
purchase of Tax Credits.
Tax-Exempt Bonds
Of the three types of Tax Exempt Bonds available for Affordable Housing, we
generally employ Private Activity Bonds issued under Section 142(d) of the
Internal Revenue Code. Private Activity Bonds are subject to a Volume Cap for
each state equal to the greater of $150 million or $50 per person, whichever is
higher. These Volume Cap Private Activity Bonds are the Bonds that qualify for
Bond allocation Tax Credits. (See "Low Income Housing Tax Credits"). Tax Exempt
Bonds provide a low interest rate source of debt financing for housing
developments.
Once a local or state agency has passed a resolution (the "Inducement
Resolution"), the owner of the development can apply to the appropriate agency
for a Bond allocation. At the same time, the owner of the development may apply
for a credit enhancement from HUD that guarantees repayment of the bonds to the
bondholders. The HUD credit enhancement guarantees repayment of bonds, thereby
enabling the issuer of the Bonds to charge a lower rate of interest on the loan.
Once the credit enhancement is obtained, the issuer can sell its bonds and lend
the money to the development. The revenues of the development are used to make
the monthly payments of principal and interest on the mortgage which are used to
repay the principal and interest on the Bonds.
Utilization of Tax Exempt Bonds adds time to the development process
because of the regulatory approvals necessary and requires compliance with
Internal Revenue Service regulations in order to maintain the Bonds' Tax Exempt
status. In all other respects, the employment of Tax Exempt Bonds to provide
debt financing differs little from the use of conventional mortgage financing.
Government Regulations
In addition to the government financing requirements referred to above, we
are subject to environmental and other governmental regulations. Compliance with
laws and regulations governing our business can be complicated, expensive, and
time-consuming and may require significant managerial and legal supervision.
Failure to comply with such laws and regulations could have a materially adverse
effect on our business. Further, any changes in any of these laws and
regulations could materially and adversely affect our business. There is no
assurance that we will be able to secure on a timely basis, or at all, necessary
regulatory approvals in the future. These regulations and related considerations
include, but are not limited to, federal government Tax Exempt Bond laws and
regulations, allocations of specific amounts of Bonds to the various states,
state regulations, state political decisions as to how to use the allocations,
obtaining Bond Inducement Resolutions from state and municipal agencies and the
continued availability of HUD insurance where necessary. In addition, we are
often dependent on Bond ratings offered to finance real estate purchases.
Environmental compliance issues do not have a material effect on the
management and earnings of our properties. However, we cannot obtain financing
or close a transaction without certifying that there are no environmental
hazards present on the property.
The primary costs relating to the environmental compliance are
pre-acquisition inspections. These costs typically range from $5,000 to $20,000
per project. In the event that there is an environmental problem, mortgage
financing would be obstructed and we would be unable to acquire the property.
The compliance and costs associated with the Americans with Disability Act
("ADA") are always included in the cost of renovating a residential property. In
many cases, if little or no renovation is required, the new owner is not
required to meet current ADA requirements. This is referred to as being
"grandfathered" under a previous set of rules or housing codes.
Exhibit 10.23 - Page 27
<PAGE>
As a general rule, Homes for America will not consider a property for
purchase if local zoning regulations do not conform with the Company's intended
use of the property. Inasmuch as the majority of transactions involve
pre-existing multi-family structures in appropriately zoned areas, such
regulations and the potential for neighborhood opposition are nonexistent. In
the rare circumstance where this is not the case, the Company would stipulate at
contract that closing be contingent upon obtaining necessary variances,
easements or changes in regulations. Feasibility of compliance would be
determined in the due diligence phase of the transaction, as would the potential
for and severity of neighborhood opposition. If either issue were determined to
have an ultimately adverse effect upon performance of the property, the pending
transaction would be terminated.
Competition
All of our currently owned properties, or properties under agreement to be
purchased, are located in developed areas. There are numerous other multifamily
properties and real estate companies, many of which have greater financial and
other resources than us within the market area of each of these properties, and
which will compete with us for tenants and development and acquisition
opportunities. The number of competitive multifamily properties and real estate
companies in such areas could have a material effect on: (i) our ability to rent
the apartments; (ii) the rents charged; and (iii) development and acquisition
opportunities. The activities of these competitors could cause us to pay a
higher price for a new property than we otherwise would have paid, or may
prevent us from purchasing a desired property at all, which could have a
material adverse effect on our business. In addition, there is intense
competition for Tax Credit and Tax Exempt Bond allocations, and many of these
competitors have greater financial resources and longer operating histories than
do we. Accordingly, there can be no assurance that we will be able to
successfully compete in the future.
Employees
We employ approximately 25 full-time employees including executive
officers. No employees are covered by a collective bargaining agreement. We
believe that our relations with our employees are satisfactory.
Projected Growth of the Company
The Company anticipates continued growth in its assets and its pre-tax
income in 2000. As of first week of November 1999, the Company's gross assets
were approximately $48 million, including the successful closing of the Country
Lakes acquisition. The Company expects to close on the Haverford, Kentucky
property by year end, which would increase its total assets to approximately $60
million. In addition, the Company has contractual agreements on two other
properties for an aggregate of $26 million.
Pre-tax income for the 1999 fiscal year is expected to be approximately $3
million. This figure is predicated on the current year's earnings to date, an
established income stream from existing rental properties, reasonable
predictions of transaction income in connection with pending acquisitions.
With the additional equity capital that management projects will be
available from the Offering (approximately $1.4-$13 million), the Company
expects not only to close on the currently pending transactions, but also to
provide equity funding in connection with a number of portfolio transactions
that the Company has been exploring. Should the Company be able to consummate
these transactions, management expects both gross assets and pre-tax income to
increase in 2000.
Exhibit 10.23 - Page 28
<PAGE>
MANAGEMENT
Directors and Executive Officers
The executive officers and directors of the Company are as follows:
Name Age Office
--------------------------------------------------------------------------------
Robert A. MacFarlane 55 President, Chief Executive Officer
and Chairman of the Board
Richard J. Weiss 47 Chief Financial Officer
Robert M. Kohn 48 Director & Chief Acquisitions Officer
David Harwell 53 Director, Secretary & Operations Manager
Joel Heffron 54 Director
Daniel Hayes 41 Director
All directors hold office until the next annual meeting of shareholders or
until their successors are elected and qualify. Officers are elected annually
by, and serve at the discretion of, the Board of Directors.
Robert A. MacFarlane has served as the Company's Chief Executive Officer
and Chairman of the Board of the Company since 1996. From 1994 to 1996, Mr.
MacFarlane was an independent tax exempt bond and tax credit consultant. From
1992 to 1994, he was Senior Property Acquisitions Officer of the Boutwell
Company, a Rockefeller Family Trust specializing in residential property
throughout the United States, especially along the Eastern Seaboard. He was
directly responsible for the closing of more than $500 million of real estate
transactions in Texas alone, two of which were turnaround, value-added
acquisitions totaling $300 million.
Richard J. Weiss has been the Company's Chief Financial Officer since
August 1998. From 1994 to 1998, Mr. Weiss was a senior manager with Stuart
Fleischer Associates, Certified Public Accountants; from 1993 to 1994, he served
as corporate controller of Mountain Hospitality Corp.; from 1992 to 1994, Mr.
Weiss also founded and was the president of Playgrounds USA of America, Inc.;
from 1982 to 1994, Mr. Weiss served as the chief financial officer of Rayel
Hotels Group; and from 1976 to 1982, he was an accountant with the firm of
Siskin, Shapiro & Company. Mr. Weiss has a B.A. in psychology from American
International College and a B.S. in Accounting from the University of
Massachusetts at Amherst where he graduated magna cum laude. Mr. Weiss is a
certified public accountant.
Robert M. Kohn has been a Director of the Company since 1998 and is the
Company's Chief Acquisitions Officer. From 1979 to 1996, Mr. Kohn was the
president of Alfred Kohn Realty Corporation and Schuyler Realty. He has
orchestrated the acquisition and financing of thousands of multi-family housing
units, converted rental properties and warehouses into residential lofts, and
managed more than 22,000 apartments in the tri-state area. Mr. Kohn graduated
cum laude from Ohio University with a B.S. in Economics. Mr. Kohn is also an
employee of International Business Realty & Consultants, LLC, which is a
shareholder of the Company and which provides consulting services to the
Company. See "Certain Transactions."
Daniel Hayes, Esq. has had an individual law practice since 1990. From 1987
to 1990, he was the General Counsel to The Rojac Group, Inc., a real estate
development concern. He is admitted to the bars of Virginia, the District of
Columbia and Illinois. He holds a J.D. degree from Cornell Law School.
David Harwell has been the Company's Corporate Secretary, Director and
Operations Manager since 1996. Previously, he was corporate controller for ABC
Air Freight, Inc. for over six years. Prior to 1990, he was an accountant in
independent practice. Mr. Harwell holds a B.B.A. in Finance from Baruch College.
Joel Heffron, Esq. has been president of Risk Management Corp. since 1994,
a company that assists businesses in the conversion and disposal of assets. From
1987 to 1994, he was president of Westminster Equities and, from 1983 to 1987,
he was vice president of Whitney Stores, Inc. From 1966 to 1983, Mr. Heffron was
a partner in the law firm of Sohn, Gross, Findlay and Heffron, New York, NY. He
holds a Bachelor of Laws degree from New York University.
Exhibit 10.23 - Page 29
<PAGE>
Committees of the Board of Directors
The Board of Directors has two Committees: Audit and Compensation.
Audit Committee
The members of the Audit Committee are Daniel Hayes and Joel Heffron. The
Audit Committee acts to: (i) acquire a complete understanding of the Company's
audit functions; (ii) review with management the finances, financial condition
and interim financial statements of the Company; (iii) review with the Company's
independent auditors the year-end financial statements; and (iv) review
implementation of any action recommended by the independent auditors with the
independent auditors and management. The Audit Committee was formed during the
current fiscal year and to date has not met.
Compensation Committee
The members of the Compensation Committee are Daniel Hayes and Joel
Heffron. The Compensation Committee's functions include administration of the
Company's 1998 Employee Stock Option Plan and Non-Executive Director Stock
Option Plan and negotiation and review of all employment agreements for
executive officers of the Company. The Compensation Committee was formed during
the current fiscal year and to date has not met.
Meetings of the Board of Directors
During the fiscal year ended December 31, 1998, the Board of Directors of
the Company met on three occasions and voted by unanimous written consent on
three occasions. No member of the Board of Directors attended fewer than 75% of
the meetings of the Board of Directors.
Employment Agreements
The Company has employment contracts with certain of its employees. The
following is a brief description of each such contract.
Robert A. MacFarlane
In August 1998, the Company entered into a five-year employment agreement
with Mr. MacFarlane. The contract provides for Mr. MacFarlane to receive a base
salary at the rate of $186,000 per year for the period covering August 1998
through December 1998. Thereafter, his base salary will be determined annually
by the Company's Board of Directors, with a minimum annual increase in base
salary of 5%. The contract provides for the reimbursement for all reasonable
expenses incurred by Mr. MacFarlane on behalf of the Company. The contract is
subject to termination provisions and also contains a two year non-competition
provision.
Robert M. Kohn
In August 1998, the Company entered into a five-year consulting agreement
with International Business & Realty Consultants, L.L.C. ("IB&R"), for services
to be rendered to the Company by Mr. Kohn, who is an employee of IB&R. The
contract provides for Mr. Kohn to receive a monthly consulting fee of $3,750 for
the period of July 1998 through December 1998, and thereafter a fee to be
determined annually by the Company's Board of Directors with a minimum annual
increase in monthly consulting fees of 5%. The contract also provides for the
reimbursement of all reasonable expenses incurred by Mr. Kohn on behalf of the
Company. The contract is subject to termination provisions and also contains a
two year non-competition provision.
Compensation of Directors
Directors were not compensated for their services as such during the last
fiscal year. The Directors are to receive options to purchase 3,750 shares of
the Company's Common Stock for each year of service under the Non-Executive
Director Stock Option Plan and are reimbursed for expenses incurred in order to
attend meetings of the Board of Directors. See "Stock Option Plans."
Stock Option Plans
Employee Stock Option Plan
In September 1998, the Company adopted the 1998 Employees Stock Option Plan
(the "1998 Plan") which provided for the grant of options to purchase up to
187,500 shares of the Company's Common Stock. Under the terms of the 1998 Plan,
options granted thereunder may be designated as options which qualify for
incentive stock option treatment ("ISOs") under Section 422A of the Code, or
options which do not so qualify ("Non-ISOs"). Unless sooner terminated, the 1998
Plan will expire in 2008. No options under the 1998 Plan were granted in 1998.
The 1998 Plan is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee has the discretion to determine the
eligible employees to whom, and the times and the price at which, options will
be granted, whether such options shall be ISOs or Non-ISOs, the periods during
which each option will be exercisable, and the number of shares subject to each
option. The Board or the Compensation Committee shall have full authority to
interpret the 1998 Plan and to establish and amend rules and regulations
relating thereto.
Exhibit 10.23 - Page 30
<PAGE>
Under the 1998 Plan, the exercise price of an option designated as an ISO
shall not be less than the fair market value of the Common Stock on the date the
option is granted. However, in the event an option designated as an ISO is
granted to a ten percent stockholder (as defined in the 1998 Plan) such exercise
price shall be at least 110% of such fair market value. Exercise prices of
Non-ISOs options may be less than such fair market value. The aggregate fair
market value of ISO options granted to a participant and which become
exercisable in any calendar year shall not exceed $100,000. The "fair market
value" will be the closing NASDAQ bid price, or if the Company's Common Stock is
not quoted by NASDAQ, as reported by the National Quotation Bureau, Inc., or a
market maker of the Company's Common Stock, or if the Common Stock is not quoted
by any of the above, by the Board of Directors acting in good faith.
The Compensation Committee may, in its sole discretion, grant bonuses or
authorize loans to or guarantee loans obtained by an optionee to enable such
optionee to pay any taxes that may arise in connection with the exercise or
cancellation of an option.
Non-Executive Director Option Plan
In September 1998, the Board of Directors adopted the Non-Executive
Director Stock Option Plan (the "Director Plan"). The Director Plan provides for
issuance of a maximum of 100,000 shares of Common Stock upon the exercise of
stock options granted under the Director Plan. Options may be granted under the
Director Plan until April, 2008 to (i) non-executive directors as defined and
(ii) members of any advisory board established by the Company who are not
full-time employees of the Company or any of its subsidiaries. The Director Plan
provides that each non-executive director will automatically be granted an
option to purchase 3,750 shares of the Company's Common Stock upon joining the
Board of Directors, and on each September 1st thereafter, provided such person
has served as a director for the 12 months immediately prior to such September
1st. Similarly, each eligible member of an advisory board will receive, upon
joining the advisory board, and on each September 1st thereafter, an option to
purchase 2,500 shares of the Company's Common Stock, providing such person has
served as a member of the advisory board for the previous 12 month period.
The exercise price for options granted under the Director Plan shall be
100% of the fair market value of the Common Stock on the date of grant
determined in the same manner as applicable to the 1998 Plan. Until otherwise
provided in the 1998 Plan, the exercise price of options granted under the
Director Plan must be paid at the time of exercise, either in cash, by delivery
of shares of Common Stock of the Company, or by a combination of each. The term
of each option commences on the date it is granted and unless terminated sooner
as provided in the Director Plan, expires five years from the date of grant. The
Director Plan is administered by a committee of the Board of Directors composed
of not fewer than three persons who are officers of the Company (the
"Committee"). The Committee has no discretion to determine which non-executive
director or advisory board member will receive options or the number of shares
subject to the option, the term of the option or the exercisability of the
option. However, the Committee will make all determinations of the
interpretation of the Director Plan. Options granted under the Director Plan are
not qualified for incentive stock option treatment.
Exhibit 10.23 - Page 31
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1998 by (i) each
person who owns beneficially more than five percent of the Company's outstanding
Common Stock; (ii) each of the Company's directors and officers; and (iii) all
directors and officers of the Company as a group. As of December 31, 1998, there
were 2,087,750 shares of Common Stock issued and outstanding.
Shares of Common Approximate
Stock Beneficially Percentage
Name of Beneficial Owner Owned Owned
-----------------------------------------------------------------------------
Robert A. MacFarlane (1)
83 Boutwell Trust 454,733 21.70%
One Odell Plaza
Yonkers, NY 10701
-----------------------------------------------------------------------------
Robert M. Kohn (2) 403,000 19.30%
1725 DeSales Street, NW
Washington, DC 20036
-----------------------------------------------------------------------------
Richard Weiss (3)
One Odell Plaza 0 0
Yonkers, NY 10701
-----------------------------------------------------------------------------
Joel Hefron
c/o Risk Management Corp. 50,000 2.40%
P. O. Box 3685
Beverly Hills, CA 90212
-----------------------------------------------------------------------------
International Business and Realty 1,612,000 19.30%
Consultants, LLC (4)
1725 DeSales Street, N.W.
Washington, D.C. 20036
-----------------------------------------------------------------------------
Daniel Hayes, Esq. 0 0
8779 Mathis Avenue
Manassas, VA 20110
-----------------------------------------------------------------------------
David Harwell 0 0
One Odell Plaza
Yonkers, NY 10701
-----------------------------------------------------------------------------
Robert Pozner 162,000 7.80%
454 Stevens Avenue
Ridgewood, NJ 07450
-----------------------------------------------------------------------------
Officers and Directors
As a Group (6 Persons) 1,070,233 51.10%
-----------------------------------------------------------------------------
(1) Mr. MacFarlane is the beneficial owner of these shares which are held in
the name of 83 Boutwell Trust, an irrevocable trust established by Mr.
Robert MacFarlane for the benefit of himself and certain members of his
family. He retains voting control over these shares.
(2) Mr. Kohn disclaims beneficial interest in 403,000 shares included in the
above table. These shares are owned by International Business and Realty
Consultants, LLC, at which he is employed and which is solely owned by Mr.
Kohn's spouse.
(3) Excludes options to purchase 25,000 shares of Common Stock vesting
quarterly (6,250 per quarter) over the first year of employment.
(4) International Business and Realty Consultants, LLC ("IBRC") is solely owned
by Ms. Christiane Kohn, the wife of Mr. Robert Kohn, the Chief Acquisition
Officer and a Director of the Company. IBRC performs services for the
Company and owns all of the indicated shares.
Exhibit 10.23 - Page 32
<PAGE>
CERTAIN TRANSACTIONS
In December 1996, we entered into a settlement agreement (the "Settlement
Agreement") with Canton Financial Services, a former financial consultant (the
"Former Consultant") to us and Homes For America, L.C., a Virginia Corporation
which is an affiliate of ours and is principally owned by our President, Chief
Executive Officer and Chairman of the Board, Mr. Robert A. MacFarlane. Among
other things, the Settlement Agreement provided for the termination of a
consulting agreement, and any other relationship, between us and the Former
Consultant. Pursuant to the Settlement Agreement, we agreed to pay the Former
Consultant the sum of $89,096.88, and to reimburse the Former Consultant
$15,891.43 for out-of-pocket expenses. The Former Consultant agreed to surrender
2,000,000 restricted shares of Common Stock it owned to Homes For America, L.C.
By unanimous written consent dated February 1997, for various financial and
consulting services, we transferred the 2,000,000 shares of our Common Stock,
represented by the Former Consultant's surrendered shares to Homes for America,
L.C. A subsequent agreement reached in March 1999 further reduced Home for
America's obligation for fees and expenses to $99,000.
We engage one of our shareholders, International Business Realty and
Consultants, LLC ("IBRC) to perform various consulting services related to the
purchase, acquisition and management of our properties. Mr. Robert M. Kohn, one
of our Directors, is also an officer of IBRC and actually performs services for
us on behalf of IBRC. IBRC is wholly owned by Mr. Kohn's spouse, Ms. Christiane
Kohn. Since inception and through June 30, 1999, we have paid $509,000 to IBRC
for consulting services. We believe that all such fees, if any, paid to Mr. Kohn
are for amounts consistent with industry standards for transactions of this
type.
The Company has an agreement with Mr. Robert MacFarlane, the Company's
Chief Executive Officer, whereby he retains the right to earn commissions on
certain tax credit transactions that were procured by him prior to his
employment as Chief Executive Officer of the Company. All commissions, if any,
paid to Mr. MacFarlane are for amounts consistent with industry standards for
transactions of this type. Since inception, and through March 31, 1999, Mr.
MacFarlane has been paid $62,500 in commissions.
The Company has an agreement with Mr. Robert Kohn, a Director of the
Company, whereby he retains the right to earn real estate broker fees on certain
transactions that were procured by him prior to his appointment as Director. The
Company believes that all commissions, if any, paid to Mr. Kohn are for amounts
consistent with industry standards for transactions of this type. The Company
engages one of its shareholders, International Business Realty & Consultants,
LLC ("IBRC"), to perform various consulting services related to the purchase,
acquisition, and management of its properties. Mr. Robert M. Kohn, a Director of
the Company, is an employee of IBRC and actually performs services for the
Company on behalf of IBRC. IBRC is wholly owned by Mr. Kohn's spouse. Since
inception and through March 31, 1999, IBRC has been paid $399,000 for consulting
services. In January 1997, the Company entered into a settlement agreement (the
"Settlement Agreement") with a former financial consultant of the Company (the
"Former Consultant") and Homes For America, L.C., a Virginia Corporation which
is an affiliate of the Company and principally owned by the Company's President,
Chief Executive Officer and Chairman of the Board, Mr. Robert MacFarlane. Among
other things, the Settlement Agreement provided for the termination of a
consulting agreement, and any other relationship, between the Company and the
Former Consultant. Pursuant to the Settlement Agreement, the Company agreed to
pay the Former Consultant $89,096.88 and reimburse the Former Consultant
$15,891.43 for out-of-pocket expenses. The Former Consultant agreed to surrender
2,000,000 restricted shares of Common Stock of the Company and also agreed to
transfer the remaining 500,000 shares of common stock it owned to Homes For
America, L.C. By Unanimous Written Consent dated February 14, 1997, the Company,
for various financial and consulting services, transferred the 2,000,000 shares
of the Company's common stock represented by the Former Consultant's surrendered
shares, to Homes For America, L.C.
In connection with the acquisition of the Willow Pond Apartments, the
Company paid a fee to Related Capital Inc., a tax credit purchaser and
syndicator of the tax credits generated by the Willow Pond Partnership. Although
they are described in the governing partnership agreement as an "Investor
Limited Partner", they are not, in fact, an investor in the Company or any
related party to the Company. The fee of $110,756 was paid to an affiliate of
Related Capital Inc. for services rendered in the purchase and syndication of
the tax credits.
Exhibit 10.23 - Page 33
<PAGE>
DESCRIPTION OF SECURITIES
The Company is authorized to issue 25,000,000 shares of Common Stock, par
value $.001 per share, and 5,000,000 shares of Preferred Stock, par value $.001
per share. As of March 31, 1999, there were 8,374,000 shares of Common Stock
issued and outstanding. The Company's stock transfer agent is a Signature Stock
Transfer, Inc. of Dallas, Texas.
Common Stock
Subject to the rights of the holders of any shares of Preferred Stock which
may be issued in the future, holders of shares of Common Stock of the Company
are entitled to cast one vote for each share held at all stockholders' meetings
for all purposes, including the election of directors. Directors are elected
each year at the Company's annual meeting of stockholders to serve for a period
of one year and until their respective successors have been duly elected and
qualified. Common stockholders have the right to share ratably in such dividends
on shares of Common Stock as may be declared by the Board of Directors out of
funds legally available therefor. Upon liquidation or dissolution, each
outstanding share of Common Stock will be entitled to share equally in the
assets of the Company legally available for distribution to stockholders after
the payment of all debts and other liabilities, subject to any superior rights
of the holders of Preferred Stock. Common stockholders have no pre-emptive
rights. All of the outstanding shares of Common Stock are validly issued, fully
paid and non-assessable. The Common Stock does not have cumulative voting rights
so holders of more than 50% of the outstanding Common Stock can elect 100% of
the Directors of the Company if they choose to do so, subject to the rights of
the holders of outstanding Series A Preferred Stock.
Preferred Stock
The Board of Directors is authorized to issue shares of Preferred Stock,
$.001 par value per share, from time to time in one or more series. The Board
may issue a series of Preferred Stock having the right to vote on any matter
submitted to stockholders, including, without limitation, the right to vote by
itself as a series, or as a class together with any other or all series of
Preferred Stock. The Board of Directors may determine that the holders of
Preferred Stock voting as a class will have the right to elect one or more
additional members of the Board of Directors, or the majority of the members of
the Board of Directors.
The Board of Directors may also grant to holders of any series of Preferred
Stock preferential rights to dividends and amounts payable in liquidation.
Furthermore, the Board of Directors may determine whether the shares of any
series of Preferred Stock may be convertible into Common Stock or any other
series of Preferred Stock of the Company at a specified conversion price or
rate, and upon other terms and conditions as determined by the Board of
Directors.
Series A Preferred Stock
Prior to the sale of any Units in this Offering, the Company will file a
Certificate of Designation (the "Certificate of Designation") designating
600,000 shares of Preferred Stock as "Series A 8% Cumulative Convertible
Redeemable Preferred Stock" ("Series A Shares" or "Series A Preferred Stock").
The following is a summary of the rights, preferences and privileges of the
Series A Preferred Stock and is qualified in its entirety by the provisions of
the Company's Articles of Incorporation and the Certificate of Designation.
Dividends. Subject to the limitations described below, holders of Series A
Preferred Stock will be entitled to receive, when, as and if declared by the
Board out of funds of the Company legally available for payment, dividends in
cash or Series A Preferred Stock, at the sole option of the Company, at an
annual rate of $2.00 per share, payable quarter-annually on November 15,
February 15, May 15 and August 15, except that if any such date is a Saturday,
Sunday or legal holiday, then such dividend shall be payable on the next day
that is not a Saturday, Sunday or legal holiday. Dividends will be cumulative
from the date of original issuance of the Series A Preferred Stock and will be
payable to holders of record as they appear on the stock books of the Company on
the tenth business day prior to the dividend payment.
The Series A Preferred Stock will be junior to dividends to any series or
class of the Company's stock hereafter issued which ranks senior as to dividends
to the Series A Preferred Stock ("senior dividend stock"), and if at any time
any dividend on senior dividend stock is in default, the Company may not pay any
dividend on the Series A Preferred Stock until all accrued and unpaid dividends
on the senior dividend stock for all prior periods and the current period are
paid or declared and set aside for payment. No such senior dividend stock shall
be issued without the approval of holders of a majority of the Series A
Preferred Stock. See "Voting Rights." The Series A Preferred Stock will have
priority as to dividends over the Common Stock and any other series or class of
the Company's stock hereafter issued which ranks junior as to dividends to the
Series A Preferred Stock ("junior dividend stock"), and no dividend (other than
dividends payable solely in junior dividend stock) may be paid on, and no
purchase, redemption or other acquisition may be made by the Company of, any
Exhibit 10.23 - Page 34
<PAGE>
junior dividend stock unless all accrued and unpaid dividends on the Series A
Preferred Stock for all prior periods and the current period have been paid or
declared and set apart for payment. The Company may not pay dividends on any
class or series of the Company's stock having parity with the Series A Preferred
Stock as to dividends ("parity dividend stock"), unless it has paid or declared
and set apart for payment or contemporaneously pays or declares and sets apart
for payment all accrued and unpaid dividends for all prior periods on the Series
A Preferred Stock and may not pay dividends on the Series A Preferred Stock
unless it has paid or declared and set apart for payment or contemporaneously
pays or declares and sets apart for payment all accrued and unpaid dividends for
all prior periods on the parity dividend stock. Whenever all accrued dividends
are not paid in full on the Series A Preferred Stock or any parity dividend
stock, all dividends declared on the Series A Preferred Stock and such parity
dividend stock will be declared or made pro rata so that the amount of dividends
declared per share on the Series A Preferred Stock and such parity dividend
stock will bear the same ratio that accrued and unpaid dividends per share on
the Series A Preferred Stock and such parity dividend stock bear to each other.
The amount of dividends payable for the initial dividend period and for any
period shorter than a full year dividend period will be computed on the basis of
a 360-day year of twelve 30-day months. No interest will be payable in respect
of any dividend payment on the Series A Preferred Stock which may be in arrears.
See "Redemption" below for information regarding restrictions on the
Company's ability to redeem the Series A Preferred Stock when dividends on the
Series A Preferred Stock are in arrears.
Liquidation Rights. In case of the voluntary or involuntary liquidation,
dissolution or winding up of the Company, holders of shares of Series A
Preferred Stock are entitled to receive the liquidation price of $25.00 per
share, plus an amount equal to any accrued and unpaid dividends to the payment
date before any payment or distribution is made to the holders of the Common
Stock or any other series or class of the Company's stock hereafter issued which
ranks junior as to liquidation rights to the Series A Preferred Stock. The
holders of the shares of the Series A Preferred will not be entitled to receive
the liquidation price of such shares until the liquidation price of any other
series or class of the Company's stock hereafter issued which ranks senior as to
the liquidation rights to the Series A Preferred Stock ("senior liquidation
stock") has been paid in full. No such senior liquidation stock shall be issued
without the approval of holders of a majority of the Series A Preferred Stock.
See "Voting Rights." The holders of Series A Preferred Stock and all series or
classes of the Company's stock hereafter issued which rank on a parity as to
liquidation rights with the Series A Preferred Stock ("parity liquidation
stock") are entitled to share ratably, in accordance with the respective
preferential amounts payable on such stock, in any distribution (after payment
of the liquidation price of the senior liquidation stock) which is not
sufficient to pay in full the aggregate of the amounts payable thereon. After
payment in full of the liquidation price of the shares of the Series A Preferred
Stock, the holders of such Shares will not be entitled to any further
participation in any distribution of assets by the Company. Neither a
consolidation or merger of the Company with another corporation, nor a sale or
transfer of all or part of the Company's assets for cash, securities or other
property will be considered a liquidation, dissolution or winding up of the
Company.
Voting Rights. The holders of the Series A Preferred Stock will be entitled
to no voting rights except as required by Nevada law; provided, however, that
approval by a majority of the holders of Series A Preferred Stock is required to
(A) increase the authorized amount of Preferred Stock, (B) create any other
class of Parity Stock or Senior Stock or increase the authorized amount of any
such other class, (C) amend, alter or repeal any provision of the Certificate of
Incorporation or this Certificate so as to adversely affect the rights,
preferences or privileges of the Preferred Stock, or (D) merge or consolidate
with or into any other person, or sell substantially all of its assets or
business to any other person, except that the Company may merge with any other
person if the Company is the entity surviving such merger and such merger does
not adversely affect the rights, preferences and privileges of the Preferred
Stock.
Redemption at Option of Company. The Series A Preferred Stock is redeemable
for cash, in whole or in part at any time at the option of the Company, at
$25.00 per share, plus accrued and unpaid dividends to the redemption date
provided that: (i) the Company shall have previously consummated an underwritten
public offering of shares of its Common Stock; and (ii) during the immediately
preceding 10 consecutive trading days ending on the date prior to the date of
the notice of redemption, the closing bid price of the Company's Common Stock is
not less than $20.00 per share.
Exhibit 10.23 - Page 35
<PAGE>
If less than all of the outstanding shares of Series A Preferred Stock are
to be redeemed, the Company will select those to be redeemed pro rata or by lot
or in such other manner as the Board of Directors may determine. In the event
that the Company has failed to pay accrued and unpaid dividends on the Series A
Preferred Stock, it may not redeem any of the then outstanding shares of the
Series A Preferred Stock, unless all the then outstanding shares are redeemed,
until all such accrued and unpaid dividends and (except with respect to shares
to be redeemed) the then quarterly dividend has been paid in full.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Series A Preferred
Stock to be redeemed at the address shown on the stock books of the Company.
After the redemption date, dividends will cease to accrue on the shares of
Series A Preferred Stock called for redemption, and all rights of the holders of
such shares will terminate except the right to receive the redemption price
without interest (unless the Company defaults in the payment of the redemption
price). Shares of Series A Preferred Stock redeemed by the Company will be
restored to the status of authorized but unissued shares of preferred stock,
without designation as to series, and may thereafter be issued, but not as
shares of Series A Preferred Stock unless used to pay dividends on the then
outstanding Series A Preferred Stock.
Conversion Rights. The holders of Series A Preferred Stock will be
entitled, at any time after 30 days from the closing of an underwritten public
offering of shares of the Company's Common Stock, to convert their shares of
Series A Preferred Stock into such number of shares of Common Stock (the
"Conversion Shares") as shall equal $25.00 divided by a Conversion Rate equal to
the lower of (i) $15.00 or (ii) 80% of the average of the last reported sales
prices of the Common Stock for the 10 trading days immediately preceding the
date of Conversion (but not less than $10.00), subject to adjustment as
described below, except that, with respect to shares of Series A Preferred Stock
which the Company has called for redemption, conversion rights will expire after
the close of business on the redemption date. No payment or adjustment will be
made in respect of dividends for Series A Preferred Stock that may be accrued or
unpaid or in arrears upon conversion of shares of Series A Preferred Stock. No
fractional shares will be issued and, in lieu of any fractional share, cash in
an amount based on the then current market price of the Common Stock, determined
as provided in the Certificate of Designation, will be paid. Any shares of
Common Stock obtained pursuant to conversion are subject to a one year lock-up
period.
The conversion rate of the Series A Preferred Stock is subject to
adjustment in certain circumstances, including the payment of a stock dividend
on shares of the Common Stock, combinations and subdivisions of the Common
Stock, certain reclassifications of the Common Stock, certain cash dividends and
distributions of evidences of indebtedness or assets to holders of certain of
the Company's capital stock, or certain issuances of shares of Common Stock or
options or warrants exercisable to purchase shares of Common Stock at a price
less than the Conversion Price. No adjustment in the conversion rate is required
unless it would result in at least a $.25 increase or decrease in the conversion
rate; however, any adjustment not made is carried forward.
In case of any consolidation or merger of the Company with any other
corporation (other than a wholly owned subsidiary), or in case of sale or
transfer of all or substantially all of the assets of the Company, or in the
case of any share exchange whereby the Common Stock is converted into other
securities or property, the Company will be required to make appropriate
provision so that the holder of each share of Series A Preferred Stock then
outstanding will have the right thereafter to convert such share of Series A
Preferred Stock into the kind and amount of shares of stock and other securities
and property receivable upon such consolidation, merger, sale, transfer or share
exchange by a holder of the number of shares of Common Stock into which such
share of Series A Preferred Stock might have been converted immediately prior to
such consolidation, merger, sale, transfer or share exchange.
No Sinking Fund. The Company is not required to provide for the retirement
or redemption of the Series A Preferred Stock through the operation of a sinking
fund.
Other Provisions. The shares of Series A Preferred Stock, when issued, will
be duly and validly issued, fully paid and nonassessable. The holders of the
shares of the Series A Preferred Stock have no preemptive rights with respect to
any shares of capital stock of the Company or any other securities of the
Company convertible into or carrying rights or options to purchase any such
shares.
Exhibit 10.23 - Page 36
<PAGE>
Registration Rights
Subsequent to the completion of an initial public offering of the Company's
securities, the Company will notify the holders of the Series A Shares of the
Company's intent to file a subsequent registration statement under the Act
except registrations on Forms S-4 or S-8 (the "Registration Statement"), and
upon the request of such holder, include the Series A Shares in the Registration
Statement. The Company may require the holder to delay the sale of any Series A
Shares for up to ninety days in the event the Registration Statement covers an
underwritten public offering. There can be no assurance any such Registration
Statement will be filed or declared effective. This action will be taken at the
Company's expense except for brokerage commissions, transfer taxes and the fees
of counsel to the holders. In connection with filing the Registration Statement,
holders will be required to furnish certain information to the Company and to
indemnify the Company against certain civil liabilities, including liabilities
arising under the Act with respect to such information. It may in fact not be
practicable to qualify the Series A Shares for sale in every state in which
holders of the Series A Shares reside. Accordingly, it is possible that the
substantial restrictions on the transferability of the Series A Shares will
continue, even after registration.
PLAN OF DISTRIBUTION
Harmonic Research, Inc., the Placement Agent, has agreed, subject to the
terms and conditions contained in the Agency Agreement between the Company and
the Placement Agent, to act as the Placement Agent for the sale by the Company
of 2 Units, on a "best efforts, all-or-none" basis and an additional 18 Units on
a "best efforts" basis.
The Offering shall commence on the date hereof and terminate on February 7,
1999, unless extended by the Company and the Placement Agent for up to an
additional 90 days (the "Expiration Date").
Officers, directors, shareholders and affiliates of the Company may
purchase Units in this Offering, which purchases will be included in calculating
the minimum. Certain holders of an aggregate of $1,575,000 of notes of the
Company, including certain shareholders, have agreed, subject to written
confirmation, to convert all or a portion of the loans into Units pursuant to
this Offering. Accordingly, even if no additional Units are sold, the minimum of
the Offering may be achieved through the conversion of the outstanding loans.
The Placement Agent will receive a commission equal to 7% of the aggregate
purchase price of the Units sold ($105,000 if the minimum number of Units are
sold and $1,050,000 if the maximum number are sold). In addition, the Company
shall pay the Placement Agent a non-accountable expense allowance equal to 3% of
the gross proceeds from the sale of the Units ($45,000 if the minimum number of
Units are sold and $450,000 if the maximum number are sold). The amount of such
commissions and non-accountable expense allowance will increase proportionally
in the event the maximum number of Units offered hereby is increased. The
Company has also reserved the right to offer and sell up to 40 additional Units
on the same terms and conditions. This right may only be exercised with the
consent of the Company and the Placement Agent.
Simultaneously with payment for and delivery of the Units at the Closing,
the Company shall issue to the Placement Agent or its designees, warrants to
purchase up to 500,000 shares of Common Stock at an exercise price of $4.00 per
share, and warrants to purchase up to 1,000,000 shares of Common Stock at an
exercise price of $15.00 per share (the "Agent Warrants"). The number of Agent's
Warrants issued will be determined pro rata, based on the percentage of the
maximum Offering sold by the Placement Agent. The Agent Warrants will be
exercisable for five years commencing on the date of the Final Closing. The
Agent Warrants will contain standard anti-dilution provisions. The shares of
Common Stock issuable upon conversion of the Series A Shares received upon
exercise of the Agent Warrants have piggy-back and demand registration rights.
The Company also has agreed to indemnify the Placement Agent against
certain liabilities in connection with the Offering under the Act.
Exemption from Registration
The Units offered hereby have not been registered under the Act or other
securities laws, and will be sold without any such registration under Section
4(2), 4(6) of the Act and/or Regulation D promulgated thereunder for sales of
securities not involving a public offering, and similar available exemptions
under other securities laws. Such exemption might not be available if any
investor were purchasing the Units with a view to the resale or other
distribution thereof. Accordingly, each potential investor will be required to
make certain representations to the Company in this regard and agree to certain
restrictions on the transfer of the Units. See "Subscription Agreement and
Procedures."
Exhibit 10.23 - Page 37
<PAGE>
Investor Suitability
Sales of the Units will be made only to "accredited investors", as such
term is defined in Rule 501 of Regulation D promulgated under the Act.
Generally, to be an "accredited investor", an investor who is a natural person
must, at the time of his purchase, (i) have a net worth, individually or jointly
with one's spouse, in excess of $1,000,000 or (ii) have had an individual income
in excess of $200,000 in each of the two most recent years, or joint income with
one's spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year. An
organization or entity subscribing for Units also may qualify as an "accredited
investor" if it is: (a) a bank as defined in Section 3(a)(2) of the Act or a
savings and loan association or other institution defined in Section 3(a)(5)(A)
of the Act whether acting in its individual or fiduciary capacity; a
broker-dealer registered pursuant to Section 15 of the Securities Exchange Act
of 1934, as amended; an insurance company as defined in Section 2(13) of the
Act; an investment company registered under the Investment Company Act of 1940
or a business development company as defined in Section 2(a)(48) of that Act;
any Small Business Investment Company licensed by the U.S. Small Business
Administration under Section 301(c) or (d) of the Small Business Investment Act
of 1958; a plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality thereof, for the benefit of its
employees, if such plan has total assets in excess of $5,000,000; an employee
benefit plan within the meaning of the Employee Retirement Income Security Act
of 1974 ("ERISA"), if the investment decision is made by a plan fiduciary, as
defined in Section 3(21) of ERISA, which is either a bank, savings and loan
association, insurance company or registered investment adviser, or if the
employee benefit plan has total assets in excess of $5,000,000, or, if a
self-directed plan, with investment decisions made solely by persons that are
accredited investors; (b) a private business development company as defined in
Section 202(a)(22) of the Investment Advisers Act of 1940; (c) an organization
described in Section 503(c) of the Internal Revenue Code, a corporation,
Massachusetts or similar business trust or partnership, not formed for the
specific purpose of acquiring Units, with total assets in excess of $5,000,000;
(d) a director or officer of the Company; (e) a trust with total assets in
excess of $5,000,000, not formed for the specific purpose of acquiring Units,
whose purchase is directed by a sophisticated person and described in Rule
506(b)(2)(ii) of the Act; or (f) an entity all of the equity owners of which are
accredited investors, all as defined in Regulation D.
Subscription Agreement and Procedures
All subscriptions must be made by the execution and delivery of a
Subscription Agreement in the form attached to this Memorandum. By executing the
Subscription Agreement, each purchaser will represent, among other things, that
(a) he is acquiring the Units being purchased by him for his own account, for
investment purposes and not with a view towards resale or distribution and (b)
immediately prior to his purchase, such purchaser satisfies the eligibility
requirements set forth in this Memorandum. See "Investor Suitability" above.
Notwithstanding the foregoing representations, the Company has the right to
revoke the offer made herein and to refuse to sell Units to a particular
subscriber if the subscriber does not promptly supply all information requested
by the Company or the Company disapproves the sale.
In addition, since each purchaser will be subject to certain restrictions
on the sale, transfer or disposition of his Units as contained in the
Subscription Agreement and because there is only a limited market for the Units,
a purchaser must be prepared to bear the economic risk of an investment in the
Units for an indefinite period of time. An investor in the Units, pursuant to
the Subscription Agreement and applicable law, will not be permitted to transfer
or dispose of the Units, unless they are registered or unless such transaction
is exempt from registration under the Act and other applicable securities laws
and in the case of a purportedly exempt sale, such investor provides (at his own
expense) an opinion of counsel reasonably satisfactory to the Company that such
exemption is, in fact, available. Certificates representing the Series A Shares
comprising the Units will bear a legend relating to such restrictions on
transfer.
Subscriptions are not binding on the Company until accepted by the Company.
The Company will refuse any subscription by giving written notice to the
Subscriber by personal delivery or first-class mail. In its sole discretion, the
Company may establish a limit on the purchase of Units by a particular
purchaser.
Exhibit 10.23 - Page 38
<PAGE>
In order to subscribe for the Units, a prospective investor must deliver
the following documents to the Placement Agent:
1. One executed copy of the Subscription Agreement (included in the
Subscription Documents delivered with this Memorandum) with signatures
properly acknowledged;
2. One completed and signed confidential Purchaser Questionnaire (included in
the Subscription Documents delivered with this Memorandum);
3. A check payable to "Homes for America Holdings, Inc. - Escrow Account" in
the full amount of the subscription price for the Units subscribed for.
Escrow Account
All funds received on account of the sale of the Units will be placed in an
non-interest-bearing escrow account entitled "Homes for America Holdings, Inc. -
Escrow Account" at Chase Manhattan Bank, 3775 Riverdale Avenue, Riverdale, New
York 10463. Chase Manhattan Bank will hold all of the proceeds from the Offering
until subscriptions for three Units have been received and accepted and it
receives notice from the Company of this fact. Upon receipt of such notice,
Chase Manhattan Bank will release the subscription funds to the Company and, as
soon as practicable thereafter, the Company will deliver the Units to the
purchasers. If the minimum required proceeds from the Offering are not received
prior to the Expiration Date, all subscription funds received will be returned
by Chase Manhattan Bank to investors, without interest thereon, as soon as
practicable thereafter. If subscriptions for a minimum of three Units are
received during the Offering Period, the Company may accept such subscriptions
and direct the escrow agent to deliver the proceeds to the Company. The Company
may thereafter continue the Offering during the Offering Period and accept
subscriptions for additional Units. However, subsequent to the receipt and
acceptance of the minimum number of Units, additional Units will only be
accepted in increments of two or more.
Exhibit 10.23 - Page 39
<PAGE>
GLOSSARY OF TERMS
Affordable Housing: any multi-family residential property in compliance
with the Restrictions of local, state or federal governmental agencies which are
designed to make the rental and occupancy affordable to Low Income Persons and,
in some cases, Moderate Income Persons. Affordable Housing, in accordance with
the Affordable Housing Act, must provide at least 20% of the apartments to
individuals or families whose incomes do not exceed 60% of the median income in
that particular census track.
Applicable Federal Rate or AFR: either the short term, medium term, or long
term interest rate for use in certain transactions as published monthly by the
Internal Revenue Service.
Area Median Income: the median income for any particular local area as
published by HUD.
Bonds or Municipal Bonds: obligations issued by state or local governmental
agencies which are generally sold to the public to raise capital for
governmental activities or governmentally approved projects. The income earned
on such Bonds may either be exempt from federal income taxation or be includable
in income for federal income tax purposes.
Compliance Period: the fifteen (15) year period commencing with the first
year in which a project actually uses Tax Credits.
Conversion: the rehabilitation of an existing Market Rate multi-family
residential Property, or the conversion to multi-family residential use through
redesign, reconstruction, and rehabilitation of a property not previously
utilized as a multi-family residential property.
Eligible Basis: the total amount of development, rehabilitation, and
construction costs which are allowed under the Internal Revenue Code in
determining the total amount of Low Income Housing Tax Credits to which an
Affordable Housing project will be entitled.
Extended Use Period: the fifteen (15) year period commencing in the first
year after the end of the Compliance Period.
HUD: the United States Department of Housing and Urban Development.
Inducement Resolution: the formal written action by the local or state
governmental agency approving the Affordable Housing project for which Tax
Exempt Bonds will be sought as part of the financing.
Low Income Housing Tax Credit or Tax Credit: a credit against federal
income tax provided by Section 42 of the Internal Revenue Code to qualified
Affordable Housing.
Low Income Housing Tax Credit Restrictions: Restrictions imposed in
connection with the allocation of Low Income Housing Tax Credits and contained
in the agreement between the owner of an Affordable Housing project and the
state agency which allocates the Tax Credits.
Low Income Person: an individual whose annual income does not exceed 80% of
the Area Median Income.
Market Rate: a property which is not subject to Restrictions.
Moderate Income Person: an individual whose annual income does not exceed
120% of the Area Median Income.
Placed in Service: the date on which a multi-family residential property
can be lawfully occupied by tenants, which is contemporaneous with the issuance
of a certificate of occupancy by the building department of the local
jurisdiction in which the project is located.
Private Activity Bond: a Bond, the income from which is exempt from federal
income taxation because it meets the definitions set forth in Section 142(d) of
the Internal Revenue Code.
Qualified Allocation Plan or QAP: the annual housing plan adopted by each
state pursuant to Section 42 of the Internal Revenue Code, which details the
housing needs of the state and the manner in which the state will utilize its
portion of Low Income Housing Tax Credits.
Exhibit 10.23 - Page 40
<PAGE>
Restrictions: the laws, ordinances, or regulations adopted, enacted, or
imposed by local, state or federal government agencies on, or restrictive
covenants and agreements entered into between such agencies and the owners of,
residential properties, which: (i) limits the amount of rent that may be charged
for a particular dwelling unit in a multi-family residential property; (ii)
restricts tenants to those whose annual income is less than a specified maximum,
or (iii) otherwise limits the use and/or availability of the dwelling units in a
residential project.
Set Aside: in a Low Income Housing Tax Credit Affordable Housing project,
the minimum number of units to be rented to tenants at the maximum allowable
rent which, at the owner's election, will be either: (i) 20% of the units rented
at a maximum rent of 50% of the Area Median Income; or (ii) 40% of the units
rented at a maximum of 60% of the Area Median Income.
Tax Exempt Bond: a Bond, including a Private Activity Bond, the income from
which is exempt from federal income taxation because the requirements of the
Internal Revenue Code are met.
Tax Credit Period: the ten (10) year period commencing in the first year in
which a project actually uses Tax Credits.
Volume Cap: as it relates to Low Income Housing Tax Credits under Internal
Revenue Code Section 42(h)(3)(C), $1.25 per person resident in the state in
which the Low Income Housing Tax Credits are sought. As it relates to Private
Activity Bonds under Internal Revenue Code Section 142, for each state, the
greater of $150 million or $50 per person in such state.
Exhibit 10.23 - Page 41
<PAGE>
