<PAGE>
As filed with the Securities Exchange Commission on April 5, 1999
File No. 333-___________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Cornerstone Industrial Properties Income and Growth Fund I, LLC
(Exact name of registrant as specified in its governing instruments)
4590 MacArthur Blvd., Suite 610
Newport Beach, CA 92660
(949) 852-1007
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Terry G. Roussel
4590 MacArthur Blvd., Suite 610
Newport Beach, CA 92660
(949) 852-1007
(Name, address, including zip code, and telephone number,
including area code, of registrant's agent for service of process)
Copies to:
Karen Nicolai Winnett, Esq.
Oppenheimer Wolff & Donnelly LLP
500 Newport Center Drive, Suite 700
Newport Beach, CA 92660
(949) 719-6000
Approximate date of commencement of the proposed sale of the securities
to the public: As soon as practicable after this Registration Statement becomes
effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<TABLE>
CALCULATION OF REGISTRATION FEE
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<CAPTION>
Title of Amount Proposed maximum Proposed maximum Amount of
securities being to be offering price offering registration
registered registered per unit price fee
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<S> <C> <C> <C> <C>
Limited Liability
Company Units. 40,000* $ 500 $ 20,000,000 $ 5,560
================================================================================
</TABLE>
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE
TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
CORNERSTONE INDUSTRIAL PROPERTIES INCOME AND GROWTH FUND I
CROSS REFERENCE SHEET
Item No. and Caption Location in Prospectus
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1. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus Outside Front Cover Page
2. Inside Front and Outside Back
Pages of Prospectus Inside Front Cover Page and
Outside Back Cover Page
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed Charges Prospectus Summary;
Risk Factors; Business
4. Determination of Offering Price Outside Front Cover Page
5. Dilution Not applicable
6. Selling Security Holders Not applicable
7. Plan of Distribution Underwriting
8. Use of Proceeds Use of Proceeds
9. Selected Financial Data Not Applicable
10. Management's Discussion and Analysis Not Applicable
of Financial Condition and Results
of Operations
11. General Information as to Registrant Business; Management; Summary
of Operating Agreement
12. Policy with Respect to Certain Activities Business
13. Investment Policies of Registrant Prospectus Summary; Business
14. Description of Real Estate Not applicable
15. Operating Data Not applicable
16. Tax Treatment of Registrant and
Its Security Holders Federal Income Tax
Considerations
17. Market Price of and Dividends
on the Registrant's Common Equity
and Related Stockholder Matters Not Applicable
18. Description of Registrant's Securities Description of Unit
19. Legal Proceedings Business
20. Security Ownership of Certain Beneficial
Owners and Management Management; Financial
Statements
i
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21. Directors and Executive Officers Management
22. Executive Compensation Management
23. Certain Relationships and
Related Transactions Risk Factors
24. Selection, Management and Custody
of Registrant's Investments Business; Management
25. Policies with Respect to
Certain Transactions Business
26. Limitations of Liability Management; Summary of the
Operating Agreement
27. Financial Statements and Information Prospectus Summary
28. Interests of Named Experts and Counsel Experts; Legal Matters
29. Disclosure of Commission Position
on Indemnification for Securities Act
Liabilities Not applicable
30. Quantitative and Qualitative Not applicable
Disclosure About Market Risk
ii
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION, DATED _______, 1999
$20,000,000
CORNERSTONE INDUSTRIAL PROPERTIES INCOME AND GROWTH FUND I, LLC
40,000 UNITS OF LIMITED LIABILITY COMPANY INTERESTS
MINIMUM INVESTMENT - 5 UNITS ($2,500)
(OR 2 UNITS ($1,000) FOR TAX-QUALIFIED RETIREMENT PLANS)
----------------
Cornerstone Industrial Properties Income and Growth Fund I, LLC ("we",
"our", "us" or the "Fund") is a California limited liability company which will
invest in multi-tenant industrial business parks catering to small business
tenants. Multi-tenant industrial business parks form a significant segment of
the U.S. commercial real estate market. Investment opportunities in multi-tenant
industrial business parks are ordinarily not readily available to investors
other than large institutional investors and experienced real estate operators
with specialized knowledge and experience in a specific geographic area. The
Managing Member believes that few, if any, publicly traded REIT's available to
small investors offer a portfolio consisting exclusively of multi-tenant
industrial properties.
We will purchase properties on an all cash basis using no debt
financing. We will purchase properties located in major metropolitan areas
throughout the United States. We will attempt to acquire the highest quality
properties available in the highest demand locations. We have not chosen any
specific properties to purchase.
Our Managing Member is Cornerstone Industrial Properties, LLC, a
California limited liability company.
Cornerstone specializes in the multi-tenant industrial segment of the
commercial real estate market. As managing partner in a joint venture with a
nationally prominent real estate company, Cornerstone has substantial operating
experience investing in and operating multi-tenant industrial properties.
When you purchase Units, you will become a Unitholder and Member of the
Fund and agree to the terms of our Operating Agreement. The Managing Member and
the Unitholders are all Members of the Fund.
See "Risk Factors" beginning on page 7 for a discussion of certain
factors relevant to the purchase of the Units including:
o We have not chosen any properties to purchase. You will not have a chance
to evaluate properties before we purchase them.
o We will pay fees to the Managing Member and its Affiliates for managing,
leasing and selling the properties. We will not pay fees to the Managing
Member and its Affiliates for property acquisition, asset management of
properties or administration of this Fund. The Managing Member will
experience conflicts of interest in conducting our operations.
o There is no market for the Units, and no market will develop. The transfer
of Units is restricted by the Operating Agreement. You may not be able to
sell your Units in the event of an emergency. Your sale of Units may result
in adverse federal income tax consequences to you.
o There are tax risks associated with your investment in the Units. Your
investment in the Units will not provide tax shelter for your other income.
Neither the Securities and Exchange Commission nor any state securities
commission approved or disapproved these securities, or determined if the
Prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Private Investors Equity Group
The date of this Prospectus is __________, 1999
The information in this Prospectus is not complete and may be amended.
The Fund may not sell Units until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell nor a solicitation of an offer to buy the Units in any state where the
offer or sale is not permitted.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY...........................................................1
RISK FACTORS.................................................................4
Investment Risks..........................................................4
Real Estate Risks.........................................................5
Tax Risks.................................................................6
ESTIMATED USE OF PROCEEDS....................................................8
MANAGEMENT COMPENSATION......................................................9
FIDUCIARY RESPONSIBILITIES OF THE MANAGING MEMBER...........................12
MANAGEMENT..................................................................13
Compensation.............................................................14
Services Performed by Others.............................................14
PRIOR PERFORMANCE...........................................................15
CONFLICTS OF INTEREST.......................................................16
General..................................................................16
Other Investment Interests of the Managing Member........................16
Competition for the Time and Services of the
Managing Member and its Affiliates.......................................16
Acquisition of Properties................................................16
Sale of Properties.......................................................17
Compensation of the Managing Member and its Affiliates...................17
Relationship with Dealer Manager.........................................17
Legal Counsel............................................................17
Certain Protective Arrangements..........................................17
Certain Conflict Resolution Procedures...................................17
INVESTMENT OBJECTIVES AND POLICIES..........................................19
General..................................................................19
Types of Investments.....................................................19
Distributions............................................................19
Managing Cash Distributions..............................................19
Borrowing Policies.......................................................20
Sale of Fund Properties..................................................20
Investment Restrictions..................................................20
Authority of the Managing Member.........................................20
BUSINESS....................................................................21
General..................................................................21
The Commercial Real Estate Market in General.............................21
Multi-Tenant Business Parks..............................................22
Higher Construction Costs................................................22
Acquisition Strategies...................................................23
Property Features........................................................23
Property Selection.......................................................24
The Asset Management Function............................................24
SUMMARY OF THE OPERATING AGREEMENT..........................................26
General..................................................................26
Capital Contributions and Members........................................26
Capital Accounts.........................................................26
Control of Our Operations................................................26
Compensation of the Managing Member and Affiliates.......................26
Allocations and Distributions............................................26
Meetings of Members......................................................27
Voting...................................................................28
Transfer of Units........................................................28
Allocations and Distributions on Transfer of Units.......................28
Other Activities.........................................................29
Dissolution..............................................................29
Repurchase of Units......................................................29
Reports..................................................................29
FEDERAL INCOME TAX CONSIDERATIONS...........................................31
General..................................................................31
Legal Opinion............................................................31
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Possible Tax Legislation or Other Developments...........................32
Partnership Status.......................................................32
Taxation of the Unitholders..............................................33
Qualified Plan Investors.................................................34
Basis of Units...........................................................34
Allocations of Net Income and Net Loss...................................34
Allocations to Newly Admitted Unitholders or Transferees of Units........36
Basis, At Risk, and Passive Activity Limitations on Deduction of Loss....36
Passive Activity Income..................................................37
Cash Distributions to Unitholders........................................37
Alternative Minimum Tax..................................................38
Syndication and Organizational Expenses..................................38
Tax Treatment of Certain Fees............................................38
Sale of Units............................................................39
Dissolution of the Fund..................................................39
Allocation of Fund's Basis in Properties.................................39
Property Held Primarily For Sale.........................................40
Capital Gains and Losses.................................................40
Audit of Income Tax Returns..............................................40
Election for Basis Adjustments...........................................41
Interest on Underpayment of Taxes........................................41
Accuracy-Related Penalties...............................................41
State and Local Taxes....................................................42
Foreign Investors as Unitholders.........................................43
Tax Shelter Registration.................................................43
Importance of Obtaining Professional Tax Advice..........................43
ERISA CONSIDERATIONS........................................................44
GLOSSARY....................................................................46
THE OFFERING................................................................50
General..................................................................50
Plan of Distribution.....................................................50
Escrow Conditions........................................................50
Subscription Process.....................................................50
Determination of Investor Suitability....................................50
Compensation.............................................................51
Volume Discounts.........................................................51
WHO MAY INVEST..............................................................53
HOW TO SUBSCRIBE............................................................53
SUPPLEMENTAL SALES MATERIAL.................................................53
LEGAL MATTERS...............................................................54
AVAILABLE INFORMATION.......................................................54
ADDITIONAL INFORMATION......................................................54
FINANCIAL STATEMENTS........................................................55
PRIOR PERFORMANCE TABLES....................................................56
EXHIBITS:
Exhibit "A" - Operating Agreement
Exhibit "B" - Form of Opinion of Tax Counsel
Exhibit "C" - Subscription Agreement
<PAGE>
PROSPECTUS SUMMARY
This Summary highlights selected information from the Prospectus and
may not contain all of the information that is important to you. Capitalized
terms which are not defined in this Summary are defined in the Glossary on page
49.
The Fund: Cornerstone Industrial Properties Income and Growth Fund
I, LLC ("we", "our", "us" or the "Fund") is a California
limited liability company which will invest in multi-
tenant industrial business parks catering to small busi-
ness tenants. Multi-tenant industrial business parks form
a significant segment of the U.S. commercial real estate
market. Investment opportunities in multi-tenant indus-
trial business parks are ordinarily not readily available
to investors other than large institutional investors and
experienced real estate operators with specialized know-
ledge and experience in a specific geographic area. The
Managing Member believes that few,if any, publicly traded
REIT's available to small investors offer a portfolio
consisting exclusively of multi-tenant industrial
properties.
We will purchase properties on an all cash basis using
no debt financing. We will purchase properties located
in major metropolitan areas throughout the United States.
. We will attempt to acquire the highest quality properties
available in the highest demand locations. We have not
chosen any specific properties to purchase.
Fund Members: By purchasing Units, you will become one of our Members
and Unitholders. As a Member you will not participate in
our management.
Term of Investment: We expect to own our properties for 5 years, but we may
hold our properties for a longer or shorter period of
time. We will terminate in the year 2010, unless we are
terminated sooner as provided in our Operating Agreement
which is included as Exhibit "A" to the Prospectus.
Investment Our primary investment objectives are to:
Objectives o Reduce risk by acquiring propertieson an all cash basis
And Policies o Provide periodic cash distributions from operations.
o Increase income by reducing operating costs and enter-
ing into leases with scheduled rent increases.
o Generate additional income on sale of our properties by
using asset management strategies to increase their
values.
Depreciation We intend to use the straight-line method of depreciation
Method: for real property and accelerated methods of depreciation
for personal property.
Management: Our Managing Member is Cornerstone Industrial Properties,
LLC, a California limited liability company managed by
Cornerstone Ventures, Inc.
Cornerstone Ventures, Inc. is an experienced real estate
operating company specializing in the acquisition, opera-
tion and repositioning of multi-tenant business parks
catering to the small business tenant. Cornerstone Vent-
ures, Inc. is the operating member of the Managing
Member.
Cornerstone Ventures, Inc. is also the managing partner
of a separate and independent real estate operating joint
venture with one of the largest real estate companies in
the world. By purchasing Units, you will not acquire any
interest in this separate joint venture. This separate
joint venture is in its seventh year of successful opera-
tion. Cornerstone Ventures, Inc. is responsible for the
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joint venture's selection, acquisition and operation
of multi-tenant industrial business properties which
are similar to the properties which we will purchase.
The unrelated joint venture acquires properties utilizing
funds provided by U.S.domestic institutional investors as
well as high net worth individual investors domiciled in
the United States and offshore. The minimum cash contri-
bution per individual investor for some of the most re-
cent joint venture projects has been $1,000,000 or
more. Cornerstone Ventures, Inc. intends to bring the
same level of managerial expertise to us as it has
brought to this unrelated joint venture.
The historical performance of these programs is disclosed
in the "Prior Performance" section of this Prospectus.
Cornerstone will provide property selection, acquisition,
and managerial services to us. Cornerstone will:
o Identify properties to be acquired.
o Create the business plan for enhancing the income and
values of our properties.
o Supervise the property management, leasing, refurbish-
ment, and operations of our properties.
o Supervise our operations and our communications with
you.
o Supervise the sale of our properties.
The Managing Member wil be solely responsible for our
management and you will not participate in management in
any way. The address of the Managing Member is 4590
MacArthur Boulevard, Suite 610, Newport Beach, California
92660; telephone 949/852-1007.
Estimated Use The minimum amount we will raise is $3,000,000. The
of Proceeds: maximum amount we expect to raise is $20,000,000. The
Managing Member and its Affiliates may purchase Units in
this Offering. These purchases may be made to enable us
to reach the minimum raise of $3,000,000. We will use the
money raised in the offering to purchase properties and
for working capital. The money raised may be invested
temporarily in short-term, highly liquid investments. The
Managing Member estimates that we will pay an average
purchase price of $5,000,000 for each property we
purchase.
Property We do not presently own any properties and, as of the
Descriptions: date of this Prospectus, we have not identified any prop-
erties which we intend to purchase. Properties which we
purchase will be described in a supplement to the Pros-
pectus.
Compensation to We will pay the Managing Member and its Affiliates signi-
the Managing Member ficant compensation for services in the offering of Units
and Affiliates: and the management, leasing and sale of properties. The
Managing Member has agreed not to charge us for property
acquisition fees, asset management fees or fund adminis-
tration fees.
Operating The Operating Agreement governs the manner in which we
Agreement: operate. There will be no regularly scheduled meetings
of our Members. Meetings of the Members may be called
by the Managing Member and must be called upon the writ-
ten request to the Managing Member by Unitholders holding
ten percent (10%) of our Units.
Distributions: The Managing Member believes that allocations and distri-
butions and Managing Member compensation have been struc-
tured to align the interests of the Managing Member with
your interests. The Managing Member will not charge us
for property acquisition fees which are typically paid in
cash to the manager at the time a property is first
acquired. The Managing Member will not charge us for ass-
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et management fees or fund administration fees which are
generally charged on a quarterly basis throughout the
life of a fund. In other programs, these fees are charged
even when the program is not profitable.
We will distribute net cash flow from operations (which
does not include proceeds from sales of properties) 90%
to the Unitholders and 10% to the Managing Member
until the Unitholders have received distributions equal
to an 8% annual, non-cumulative, non-compounded return
or, in the case of Unitholders who purchase the first
6,000 Units we sell, the early investor 12% incentive
return. (See below.) After that, we will distribute net
cash flow from operations of our properties 50% to the
Unitholders and 50% to the Managing Member.This structure
provides the Managing Member with strong financial incen-
tives to maximize our income and minimize our operating
expenses in order to maximize the overall level of cash
distributions to both Unitholders and the Managing
Member.
Unitholders who purchase the first 6,000 Units we
sell will receive the early investors' 12% incentive
return which is equal to a 12% annual, non-cumula-
tive, non-compounded return on those Units for 12 months
from the date the purchase price for those Units is
deposited in escrow. This 12% incentive return is
being made to the early investors instead of the regular
8% preferred return.
The amount and timing of distributions we make will vary
While we are selling Units in this Offering, we expect
distributions to be erratic or non-existent due to higher
uncertainty of cash flow and our higher administrative
costs. The amount of distributions will also depend
on the overall size of our Fund. If we sell less than
all of the Units we are offering, our fixed operating
costs will be higher per Unit and will reduce the amount
available for distributions per Unit.
We anticipate that we will make our first distribution
of net cash flow from operations no later than 12 months
after the closing of the Minimum Offering.
We will distribute proceeds from sales of properties 100%
to the Unitholders until the Unitholders have received an
amount equal to their original investment in the Units
and then 90% to the Unitholders and 10% to the Managing
Member until the Unitholders have received distributions
equal to an 8% annual, cumulative, non-compounded return.
After Unitholders have received a return of their ori-
ginal investment plus the 8% preferred return, we will
distribute proceeds from sale of properties 50% to the
Unitholders and 50% to the Managing Member. This
structure provides the Managing Member with strong finan-
cial incentives to maximize property values to the
greatest extent possible and to dispose of properties at
the optimal time.
Allocations: The allocation provisions of the Operating Agreement are
designed to allocate Net Income and Net Loss to the Mana-
ging Member and the Unitholders in a similar manner as
cash distributions are made. The allocations include bal-
ancing or "chargeback" provisions which (1) allocate Net
Income to the Managing Member and the Unitholders as a
chargeback to the extent that they have previously been
allocated Net Loss and (2) allocate Net Loss to the Man-
aging Member and the Unitholders as a chargeback to the
extent they have previously been allocated Net Income.
Net Income not allocated to "chargeback" a prior alloca-
tion of Net Loss is first allocated to the Members in
proportion to prior cash distributions to the extent
thereof, with any excess allocated 50% to the Managing
Member and 50% to the Unitholders. Net Loss not allocated
to chargeback a prior allocation of Net Income is allo-
cated 10% to the Managing Member and 90% to the Unit-
holders.
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Who Should Invest: You must meet one of two financial tests to invest in the
Units. You must either (1) have a net worth of at least
$225,000 excluding your home, home furnishings and auto-
mobiles or (2) have a net worth of at least $70,000
excluding your home, home furnishings and automobiles and
have gross income in excess of $70,000 per year. You
should purchase the Units only as a long-term investment.
You should not invest money which you may need to use for
emergencies. You may not be able to sell your Units in
the event of a financial emergency because there will not
be a public trading market for the Units.
Risk Factors: Before purchasing Units, you should carefully review the
"Risk Factors" section of the Prospectus which follows
this Summary.
RISK FACTORS
You should carefully consider the following risk factors and the other
information in this Prospectus before purchasing Units.
Investment Risks
Minimum Offering; Lack of Diversification. Our ability to reduce risk
by purchasing multiple properties in different geographic areas will be limited
by the amount of funds at our disposal. We will consider the purchase of
properties with prices ranging between $2.5 million and $25 million. We may not
sell all of the Units we are offering. The Managing Member and its Affiliates
may purchase Units in the Offering. These purchases may be made to enable us to
reach the minimum raise of $3,000,000. If only $3,000,000 is raised, we will be
able to acquire only one property.
Risks of Real Property Investments. Real estate values are affected by
changes in the general economic climate, local conditions (such as an over-
supply of space or reduced demand for real estate in an area) and by competi-
tion from other available space. Real estate values are also affected by
governmental regulations, changes in zoning or tax laws, interest rate
levels, the availability of financing and potential liability under environ-
mental and other laws. These factors may cause our rental income and the value
of our properties to decrease and may make it difficult for us to sell
properties.
Reliance on Management. You are relying entirely on the Managing Member
to manage the Fund. You will have no right or power to take part in the
management of the Fund, except through the exercise of your limited voting
rights described in the Operating Agreement. You should not purchase Units
unless you are willing to trust the Managing Member to manage the Fund.
Lack of Liquidity of Units; Limited Transferability. You may not be
able to sell your Units promptly or at the price you want. There will not be a
public market for the Units. You may not be able to use your Units as colla-
teral for a loan. You may not be able to sell your Units in the event of a
financial emergency. You should purchase Units only as a long-term investment.
Transfer of the Units is restricted by the Operating Agreement. You may have
adverse tax consequences if you sell your Units.
Conflicts of Interest. Cornerstone Ventures, Inc.and its officers also
have management responsibilities with respect to other entities. These entities
purchase,operate and sell the same type of properties which we will be purchas-
ing. Cornerstone Ventures, Inc. will experience conflicts of interest in
managing the operations of the Fund.
No Operating History. We are a new fund and we have no operating
history for you to use in evaluating us.
Lack of Significant Tax Shelter Features. Your investment in the Units
will not provide you with tax shelter for your other income. We expect that any
tax deductions you are allocated from us will not be sufficient to shelter all
of the income you receive from us.
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<PAGE>
Possible Effect of ERISA. We believe that our assets will not be ERISA
"plan assets" of any qualified pension, profit-sharing and stock bonus plans,
including Keogh plans and IRAs that invest in the Units. We have not obtained a
legal opinion on this issue.If our assets are "plan assets" under ERISA (i) the
exemptions from the "prohibited transaction" rules under ERISA might not be
available for our transactions, and (ii) the prudence standards of ERISA would
apply to investments made by us. ERISA makes plan fiduciaries personally
responsible for any losses resulting to any such plan from any breach of
fiduciary duty and the IRS imposes nondeductible excise taxes on prohibited
transactions.
Year 2000
We have conducted an evaluation to ensure that our business critical
computer systems will be able to function without disruption due to Year 2000
issues. We are, however, subject to disruptions with respect to the computer
systems of the persons and entities with whom we do business, including
providers of financial reporting, investor relations and management services,
sellers and purchasers of properties and tenants, which systems are outside our
control. Disruptions in their systems could impair our ability to do business
and could have a material adverse effect upon our financial condition and
results of operations.
Real Estate Risks
Inability of Potential Investors to Evaluate Properties. Our ability to
achieve our investment objectives and to make cash distributions to you depends
upon how well the Managing Member does in evaluating and acquiring properties
for us. You will not have a chance to evaluate the purchase terms or financial
data concerning the properties before we purchase them. The properties we
purchase may not be desirable income-producing properties. Our ability to
accomplish our investment objectives and the timing of distributions of cash to
you will depend upon the success and timing of the Managing Member's purchase
of properties for us. We cannot assure you that the properties we acquire will
be desirable properties or will increase in value.
Unspecified Property. As of the date of this Prospectus, we have has
not identified any properties we plan to purchase. As a result, you have no
information to assist you in evaluating the merits of any property which we may
purchase. There may be a substantial period of time before we purchase a
property, which would delay our making distributions to you.
No Assurance of Obtaining Suitable Investments. We cannot assure you
that desirable income-producing properties will be available for us to purchase
or that the purchase terms will be economically attractive. We cannot assure
you that we will be successful in purchasing properties on financially
attractive terms or that, if we purchase properties, our objectives will be
achieved.
Lack of Control Over Market and Business Conditions. The value of the
properties we purchase, the ability of our tenants to pay rent on a timely
basis, and the amount of the rent we receive may be adversely affected by
certain changes in general or local economic or market conditions, including
increased costs of operating a property, condemnation or uninsured losses,
voluntary termination by a tenant of its obligations under a lease, bankruptcy
of a tenant, and other factors. We and the Managing Member cannot control these
factors.
Re-leasing of Properties. Multi-tenant industrial properties
accommodating small business tenants have a substantial on-going risk of tenant
lease defaults. If a tenant defaults on a lease, we will generally lose rental
income and have to pay legal costs, repair costs and re-leasing commissions. We
may be unable either (i) to re-lease the property for as much rent as we
previously received or (ii) to re-lease the property without incurring
additional expenditures relating to the property. We could experience delays in
enforcing our rights and collecting rents due from a defaulting tenant.
Lack of Adequate Insurance; Uninsured Losses. If we, as a property
owner, incur any liability which is not fully covered by insurance, we would be
liable for such amounts, and the return you receive on your investment could be
reduced. We may not obtain earthquake insurance on our properties due to the
lack of available and affordable earthquake insurance. If one of our properties
sustains damage as a result of an earthquake, we may incur substantial losses
and lose our investment in the property.
Possible Environmental Liabilities. A current or previous owner or
operator of real estate may be required by various federal and state
environmental laws and regulations to investigate and clean up hazardous or
toxic substances, asbestos containing materials, or petroleum product releases
at the property. The owner may also be held liable to a governmental entity or
to third parties for property damage, and for investigation and cleanup costs
-5-
<PAGE>
in connection with the contamination. Some environmental laws create a lien on
the contaminated site in favor of the government for damages and costs it
incurs in connection with the contamination. The presence of contamination or
the failure to remedy contamination will adversely affect the owner's ability
to sell or lease real estate. The owner or operator of a site may be liable
to third parties for damages and injuries resulting from environmental
contamination.
We will obtain satisfactory Phase I environmental assessments on each
property we purchase. The Managing Member may determine that a Phase I or Phase
II environmental assessment is satisfactory even if an environmental problem
exists and has not been resolved at the time we purchase the property. This
could happen if the seller has agreed in writing to pay for any costs we incur
or if the Managing Member determines that the problem is minor or can be easily
remediated by us at a reasonable cost. It is possible that a seller will not be
able to pay the costs we incur or that the Managing Member may underestimate
the cost of remediation. It is also possible that all environmental liabilities
will not be identified or that a prior owner, operator or current occupant has
created an environmental condition which we do not know about. We are unable to
assure you that future laws, ordinances or regulations will not impose material
environmental liability on us or that the current environmental condition of
our properties will not be affected by our tenants, or by the condition of land
or operations in the vicinity of our properties such as the presence of under-
ground storage tanks or groundwater contamination.
Tax Risks
Your purchase of Units involves certain potential tax risks and tax
consequences which are discussed briefly below. This discussion is based upon
the Internal Revenue Code, effective and proposed Treasury Regulations,
judicial decisions, published and private rulings, and procedural announcements
issued by the United States Treasury Department. All of these authorities are
subject to amendment or changes that may be applied retroactively and in a man-
ner that is adverse to us and you. We will not seek any rulings from the
Internal Revenue Service regarding any tax issues. We are relying on
opinions of our legal counsel, which are not binding on the IRS or the courts
and which are based upon representations and assumptions and are conditioned
upon the existence of certain facts. For a more complete discussion of the
tax risks and tax consequences associated with an investment in Units. See
"Federal Income Tax Considerations."
Risks of Loss of "Partnership" Status. Our legal counsel will give us
an opinion that we will be treated as a "partnership" for federal income tax
purposes and that we will not be treated as an association taxable as a
corporation, subject to the publicly-traded partnership rules discussed below.
If we were to be reclassified as an association taxable as a corporation, we
would be taxable on our net income (at rates of up to 35% for federal income
tax purposes), and all items of our income, gain, loss, deduction, and credit
would be reflected only on our tax returns and would not be passed through to
you. If we were treated as a corporation, distributions to you would be
ordinary dividend income to the extent of our earnings and profits, and the
payment of such dividends would not be deductible by us. See "Federal
Income Tax Considerations -- Partnership Status."
Risk of Publicly Traded Partnership Classification. Due to the complex
nature of the rules about publicly traded partnerships and because the
application of the rules to us will be based upon future facts, the IRS may
determine that we will be treated as a "publicly-traded partnership" (generally
this could happen if our Units are publicly traded or frequently transferred).
We have included provisions in the Operating Agreement designed to avoid this
result. Any classification as a "publicly-traded partnership" could result in
our being taxable as a corporation and the treatment of our net income as
portfolio income rather than passive income. Our legal counsel will give an
opinion that it is more likely than not that the Fund will not be treated as a
"publicly-traded partnership."
Risks Relating to Allocations of Income, Gain, Loss, and Deduction. The
Operating Agreement provides for the allocation of income, gain, loss and
deduction among the Unitholders. Our legal counsel will give us an opinion that
it is more likely than not that all material allocations to the Unitholders
will be respected for federal income tax purposes. The rules regarding partner-
ship allocations are complex, and no assurance can be given that the IRS will
not successfully challenge the allocations in the Operating Agreement and re-
allocate items of income, gain, loss or deduction in a manner which reduces
benefits or increases income allocable to you.
Risks Relating to Disallowance of Deduction of Certain Fees and
Expenses or Reallocation of Basis. There can be no assurance that our deduction
of some or all fees and expenses will not be challenged or disallowed by the
IRS. The IRS could seek to reallocate our basis in properties among land,
improvements and personal property. This could result in reduced tax losses or
increased income without a corresponding increase in net cash flow to you.
-6-
<PAGE>
Risks Relating to Taxation of Allocated Income in Excess of Cash
Distributions. In any year in which we report income or gain in excess of
expenses, you will be required to report your share of such net income on your
personal income tax returns even though you may have received total cash
distributions which are less than the amount of net income you must report.
Risks of Applicability of Alternative Minimum Tax. You may be subject
to alternative minimum tax which could reduce certain tax benefits associated
with your purchase of Units. The effect of the alternative minimum tax upon you
depends on your particular overall tax and financial situation, and you should
consult with your tax adviser regarding the possible application of this tax.
Audit Risks, Interest, and Penalties. Our federal income tax returns
may be audited by the IRS. This could result in an audit by the IRS of your
federal income tax returns and adjustments to items on your returns that are
related or unrelated to us.There are special procedures pertaining to audits of
partnership tax returns which may reduce the control that you would otherwise
have over proceedings concerning any proposed adjustment of our tax items by
the IRS. If the IRS determines that you have underpaid tax, you would be
required to pay the amount of the underpayment plus interest on the under-
payment and may also be liable for certain penalties from the date the tax
originally was due. See "Federal Income Tax Considerations--Audit of Income Tax
Returns, -- Interest on Underpayment of Taxes, and -- Accuracy-Related
Penalties."
Risks Regarding State and Local Taxation and Requirements to Withhold
State Taxes.The state or locality in which you are a resident may impose income
tax upon your share of our taxable income. States in which we will own
properties may also impose income taxes upon us and/or your share of our tax-
able income allocable to any property located in that state. In addition, many
states have implemented or are implementing programs to require entities
taxed as partnerships to withhold and pay state income taxes owed by non-
resident partners relating to income-producing properties located in their
states. We may be required to withhold state taxes from cash distributions
otherwise payable to you. In the event we are required to withhold
state taxes from cash distributions otherwise payable to you, the
amount of the distributions otherwise payable to you will be reduced
These collection and filing requirements at the state or local level, and the
possible imposition of state or local taxes on the Fund, may result in
increases in our administrative expenses which would reduce cash available
for distribution to you. Your tax return filing obligations and expenses
may also be increased as a result of expanded state and local filing
obligations. We encourage you to consult with your own tax advisors with res-
pect to the impact of applicable state and local taxes and state tax withhold-
ing requirements on an investment in the Units.
Changes in Tax Laws. The discussion in this Prospectus of the federal
income tax aspects of the offering is based on current law, including the Code,
the Treasury Regulations, certain administrative interpretations, and court
decisions. Future events may result in federal income tax treatment of us and
you that is materially and adversely different from the treatment we have
described in this Prospectus. This could affect taxable years arising before and
after such events. We cannot assure you that future legislation and
administrative interpretations will not be applied retroactively.
-7-
<PAGE>
ESTIMATED USE OF PROCEEDS
The following table tells you about how we expect to use the funds we raise,
assuming we sell the minimum and maximum number of Units we are offering. Many
of the numbers in the table are estimates because we cannot determine all
expenses precisely at this time. Our actual use of the funds we raise is likely
to be different than the figures presented in the table.
<TABLE>
<CAPTION>
Minimum Offering Maximum Offering
Sale of 6,000 Units(1) Sale of 40,000 Units
---------------------- ---------------------
Percent of Percent of
Dollar GrossOffering Dollar GrossOffering
Amount Proceeds Amount Proceeds
--------- -------------- ------------- ---------
<S> <C> <C> <C> <C>
Gross Offering Proceeds $ 3,000,000 100.0% $ 20,000,000 100.0%
Offering Expenses:
Selling Commissions (2) 210,000 7.0% 1,400,000 7.0%
Marketing Support Fee 60,000 2.0% 400,000 2.0%
Non-Accountable Expense
Allowance 30,000 1.0% 200,000 1.0%
Due Diligence
Expense Allowance Fee 15,000 0.5% 100,000 0.5%
Other Organization and
Offering Expenses (3) 120,000 4.0% 800,000 4.0%
-------- -------- ------------- ---------
Amount Available
for Investment $ 2,565,000 85.5% $ 17,100,000 85.5%
=========== ======== ============ ======
Prepaid Terms and Fees Related Not determinable at this time.
to Purchase of Property
Cash Purchase Price Not determinable at this time.
Acquisition Fees Payable to
the Managing Member (Real
Estate Commissions) (4) 0 0% 0 0%
Reserves 60,000 2% 400,000 2%
----------- ------ ------------ --------
Proceeds Invested(5) $ 2,565,000 85.5% $ 17,100,000 85.5%
Public Offering Expenses 435,000 14.5% 2,900,000 14.5%
----------- ------ ------------ --------
Total Application of
Proceeds $ 3,000,000 100.0% $ 20,000,000 100.0%
=========== ======== ============ ======
</TABLE>
-------------------------
(1) The Managing Member and its Affiliates may purchase Units in this
Offering.These purchases may be made to enable us to reach the minimum
raise of $3,000,000.
(2) We will pay selling commissions of 7%. Selling commissions will be
reduced by the same amount as any volume discounts granted to
purchasers. No selling commissions, Marketing Support Fee, Non-Account-
able Expense Allowance or Due Diligence Expense Allowance Fee will
be paid on Units sold to our Managing Member and its Affiliates. See
"The Offering."
(3) Other Organization and Offering Expenses are estimated amounts we will
spend for legal,accounting, printing, filing, travel, escrow and other
expenses in connection with our formation, qualification and
registration and in marketing and distributing the Units under
applicable federal and state law. This includes any other expenses we
have which are directly related to the offering and sale of the Units
including the salary and benefits of one employee of Cornerstone
Ventures, Inc. who is dedicated to identifying and working with the
Participating Brokers.
(4) No Acquisition Fees will be paid to the Managing Member. Acquisition
Fees are fees and commissions paid by any person or entity to any other
person or entity including real estate or other commissions, finder's
fees, non-recurring management fees, consulting fees or any other fees
or commissions of a similar nature. The amount of Acquisition Fees
which we may pay is limited to 18% of the gross proceeds of this
offering or such lesser amount customarily charged in arms' length
transactions for similar services in the same geographical location for
comparable property.
-8-
<PAGE>
(5) Proceeds Invested includes Reserves which reflects both reserves for
operations and amounts we reserve for tenant improvements and leasing
commissions which may be capitalized in accordance with generally
accepted accounting principles.
-9-
<PAGE>
MANAGEMENT COMPENSATION
Our management compensation differs significantly from management
compensation in typical public real estate programs. The Managing Member is not
charging a property acquisition fee (typically 3% of the amount invested in
properties) or an asset management fee (typically .75% per annum of the amount
invested in properties). Fixed fees are generally paid to management of public
real estate programs whether or not the programs are profitable. Instead of
fixed fees, we have allocated a greater share of net proceeds from the sale and
operating cash flow of properties to the Managing Member. Our Managing Member's
compensation is dependent to a larger degree on the success of the Fund. Your
financial interests and the financial interests of our Managing Member are more
closely aligned than in other similar real estate programs.
The following table summarizes the compensation, reimbursements nd
distributions which we will pay (directly or indirectly) to the Managing Member
or its Affiliates.This does not include distributions to the Managing Member or
its Affiliates based on their purchase and ownership of Units. Where there are
maximum amounts or ceilings on the compensation which the Managing Member or
its Affiliates may receive for services rendered to us, the Managing Member and
its Affiliates may not charge us more by reclassifying their services under a
different compensation or fee category. The compensation arrangements between
us, the Managing Member and its Affiliates were not determined by arm's-length
negotiations. See "Conflicts of Interest."
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Type of Compensation Method of Compensation Estimated Amount
and Recipient Assuming 40,000 Units Sold
- -------------------------------------------------------------------------------
Organization and
Offering Stage
- -------------------------------------------------------------------------------
<S> <C> <C>
Selling Commissions
(payable to the Dealer Up to 7% $1,400,000(1)
Manager and of Gross Proceeds.
Participating Brokers)
- -------------------------------------------------------------------------------
Marketing Support Fee
(payable to the Up to 2% $ 400,000(2)
Dealer Manager of Gross Proceeds.
and Participating
Brokers)
- -------------------------------------------------------------------------------
Non-Accountable Expense Up to 1% of Gross Proceeds $200,000(3)
Allowance (payable to the
Dealer Manager and
Participating Brokers
- --------------------------------------------------------------------------------
Due Diligence Expense
Allowance Fee(payable to Up to 0.5% $ 100,000(3)
the Dealer Manager and of Gross Proceeds.
Participating Brokers)
- -------------------------------------------------------------------------------
Reimbursement to Managing
Member and its Affiliates Reimbursement of actual Not determinable
for Organizational and expenses and costs. at this time.(4)
Offering Expenses(4)
- -------------------------------------------------------------------------------
Acquisition Stage
- -------------------------------------------------------------------------------
Acquisition fees payable None None
to the Managing Member
and its Affiliates
- -------------------------------------------------------------------------------
Reimbursement to the Reimbursement of actual Not determinable
Managing Member and expenses and costs. at this time.(5)
its Affiliates for
Acquisition Expenses
- -------------------------------------------------------------------------------
</TABLE>
-10-
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Type of Compensation Method of Compensation Estimated Amount
and Recipient Assuming 40,000 Units Sold
- -------------------------------------------------------------------------------
Operational Stage
- -------------------------------------------------------------------------------
<S> <C> <C>
Fund Administration None None
Fee payable to the
Managing Member
- -------------------------------------------------------------------------------
Asset Management Fee None None
payable to the Managing
Member
- -------------------------------------------------------------------------------
Property Management Fees Property Management Fees Not determinable
payable to the Managing equal to 6% of the gross at this time.
Member and/or its Affi- income generated by the
liates some or all of Fund from gross rental
which may be paid to income generated by each
unaffiliated third property will be paid
parties(6) monthly.
- -------------------------------------------------------------------------------
Construction Supervision Fee Construction Supervision Notdeterminable
payable to the Managing fee equal to 10% of the at this time.
Member and/or its cost of tenant improvements
Affiliates some or all of or capital improvements
which may be paid to made to our properties.
unaffiliated third
parties(7)
- -------------------------------------------------------------------------------
Leasing Commissions Leasing Commissions paid Not determinable
payable to Managing upon execution of each lease at this time.
Member and/or its equal to 6% of rent sche-
Affiliates some or all of duled to be paid during the
which may be paid to first and second year of the
unaffiliated third lease, 5% during the third
parties(8) and fourth years and 4% dur-
years.
- -------------------------------------------------------------------------------
Incentive Share of Net 10% of Net Cash Flow from Not determinable
Cash Flow from Oper- Operations until Unitholders at this time.
ations payable to the have received distributions
Managing Member(9) equal to an 8% per annum,
non-cumulative, non-
compounded return (or,
in the case of the Unit-
holders who purchase
the first 6,000 Units,
distributions equal to
the early investor 12%
incentive return), then 50%
of Net Cash Flow from
Operations.
- -------------------------------------------------------------------------------
Reimbursement of actual Reimbursement of actual Not determinable
cost of goods, materials and expenses and costs. at this time.
other services supplied to
the Fund by the Managing
Member.
- -------------------------------------------------------------------------------
Liquidation Stage
- -------------------------------------------------------------------------------
Property Disposition Fees Property Disposition Fees in Not determinable
payable to the Managing an amount equal to 6% of at this time.
Member and/or its the contract sales price
affiliates some or all of the property.(10)
of which may be paid to
unaffiliated third parties
</TABLE>
- -------------------------------------------------------------------------------
-11-
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Type of Compensation Method of Compensation Estimated Amount
and Recipient Assuming 40,000 Units Sold
- -------------------------------------------------------------------------------
<S> <C> <C>
Incentive Share of After the Unitholders have Not determinable
Net Sales Proceeds received an amount equal to at this time.
payable to the their aggregate capital
Managing Member(9) contributions,10% of Net
Sales Proceeds until the
Unitholders have received an
amount equal to an aggregate
8% per annum, cumulative,
non-compounded return and
thereafter 50% of Net Sales
Proceeds.
- -------------------------------------------------------------------------------
</TABLE>
(1) Selling Commissions of 7% of the Gross Proceeds on all Units sold,
subject to reduction for volume purchases and for purchases by
registered representatives and principals or employees of the Dealer
Manager or Participating Brokers. Although Private Investors Equity
Group, the initial Dealer Manager, is not an Affiliate of the Managing
Member, an Affiliate of the Managing Member may become the Dealer
Manager prior to completion of the Offering. See "The Offering." The
Dealer Manager may pay all or a portion of the Selling Commissions to
Participating Brokers which sell the Units. The actual amount of
Selling Commissions depends upon the number of Units sold.
(2) The Dealer Manager may pay all or a portion of this fee to
Participating Brokers which sell the Units. The actual amount of the
Marketing Support Fee depends upon the number of Units sold.
(3) The Dealer Manager may pay all or a portion of these fees to
Participating Brokers which sell the Units. The amounts of the Non-
Accountable Expense Allowance and Due Diligence Expense Allowance Fee
depend upon the number of Units sold.
(4) Organizational and Offering Expenses are actual expenses incurred in
connection with the Offering including, but not limited to, legal and
accounting fees, registration and filing fees, printing costs, travel,
escrow and other expenses in connection with Fund formation,
qualification and registration and in marketing and distributing the
Units under applicable federal and state law. This includes any
expenses directly related to the offering and sale of the Units
including salary and benefits of one employee of Cornerstone Ventures,
Inc. who is dedicated to identifying and working with the Participating
Brokers. The amount of Organizational and Offering Expenses is
estimated to be 4.0% or, $120,000 if 6,000 Units are sold and $80,000
if 40,000 Units are sold.
(5) Acquisition Expenses are actual expenses incurred in connection with
our acquisition of properties whether or not acquired, including
non-refundable option payments on property not acquired, surveys,
appraisals, title insurance and escrow fees, legal and accounting fees
and expenses, architectural and engineering reports, environmental and
asbestos audits, travel and communication expenses and other related
expenses.
(6) The Managing Member may pay all or a portion of the Property Management
Fees we pay to the Managing Member to other companies providing
property management services for us.
(7) The Managing Member may pay all or a portion of the Construction
Supervision Fee we pay to the Managing Member to other companies or
persons who participate in supervising construction of tenant
improvements or capital improvements to our properties.
(8) The Managing Member may pay all or a portion of the Leasing Commissions
we pay to the Managing Member to other companies or persons which
participate in leasing our properties to tenants.
(9) The Managing Member may pay the Dealer Manager an annual soliciting
dealer servicing fee of up to 15% of the Managing Member's share of Net
Cash Flow from Operations and Net Sales Proceeds. The Dealer Manager
may pay all or part of any amount it receives to Participating Brokers
whose clients own Units.
(10) The Managing Member will not be given an exclusive right to sell
our properties.
-12-
<PAGE>
FIDUCIARY RESPONSIBILITIES OF THE MANAGING MEMBER
The Managing Member is accountable to us as a fiduciary. This requires
the Managing Member to exercise good faith and integrity in handling our
affairs.
The Operating Agreement, subject to the limitations set forth, requires
us to indemnify the Managing Member and its Affiliates from any damage,
liability, legal fees and expenses arising from participation in our operations.
We will only indemnify persons who have acted in good faith and in a manner
reasonably believed to be in, or not opposed to, our best interests. We will not
indemnify persons for acts which are a breach of fiduciary duty, fraud, gross
negligence or willful misconduct. Indemnity payments will be made only from our
assets. You are not required to make payments from your separate assets.
The Operating Agreement provides that the Managing Member is not liable
to us or you for errors in judgment or other acts or omissions which are not a
breach of fiduciary duty, fraud, willful misconduct or gross negligence. The
Operating Agreement may limit your rights against the Managing Member. Adequate
legal remedies may not be available to you or affordable in the event the
Managing Member breaches its fiduciary obligations to us or you.
The Managing Member will not be indemnified against liabilities arising
under the Securities Act of 1933, unless it succeeds in defending against the
claims and indemnification is approved by the court. The court will be advised
that the Securities and Exchange Commission believes that indemnification for
violations of securities law violates the Securities Act of 1933. In the opinion
of the Securities and Exchange Commission, indemnification for liabilities
arising under the Securities Act of 1933 is against public policy and therefore
unenforceable.
-13-
<PAGE>
MANAGEMENT
Cornerstone Industrial Properties, LLC ("the Managing Member") is a
California limited liability company which was organized solely for the purpose
of being our Managing Member. The Manager of the Managing Member is Cornerstone
Ventures, Inc.
Terry G. Roussel, age 45, is one of the founding shareholders of the
Cornerstone-related entities which commenced operations in 1989. Mr. Roussel is
President and Chief Executive Officer of Cornerstone Ventures, Inc.
("Cornerstone"), the operating member of the Managing Member. Cornerstone was
formed in 1995 for the purpose of joint venturing in the acquisition and
repositioning of multi-tenant industrial real estate with Koll Management
Services, Inc. At the time of the joint venture with Cornerstone, Koll
Management Services, Inc. was one of the largest managers and operators of
commercial real estate in the United States. Mr. Roussel is responsible for the
ongoing supervision, management and administration of Cornerstone, as well as
related Cornerstone entities including ongoing joint ventures with Koll
Management Services, Inc.
In 1993, Mr. Roussel formed the first joint venture partnership between
a Cornerstone-related entity and Koll Management Services, Inc. At the time the
first Koll/Cornerstone joint venture was formed in 1993, Koll Management
Services, Inc., was a publicly traded company listed on the NASDAQ stock
exchange. Koll Management Services, Inc. was involved in managing and operating
a portfolio of commercial and industrial real estate which grew to approximately
140 million square feet of commercial real estate properties managed through
approximately 140 offices located nationwide. The purpose of the joint venture
between Koll and the Cornerstone-related entity was specifically to acquire,
refurbish, and reposition multi-tenant industrial real estate properties serving
the needs of the small business tenant.
Under the direction of Mr. Roussel, Cornerstone and its Affiliates
continue as the managing partner of the Koll/Cornerstone joint ventures. As
managing partner of the Koll/Cornerstone joint ventures, Cornerstone and its
Affiliates are responsible for the acquisition, operation, leasing, and
disposition of all Koll/Cornerstone jointly owned properties. In connection with
acquiring properties for the account of Koll/Cornerstone, Mr. Roussel has
personally supervised the acquisition of each property, has initiated and
directed the business plan for each property, and has arranged financial joint
ventures with several large institutional real estate investors for the purpose
of financing the acquisition of such properties. In his capacity with
Koll/Cornerstone, Mr. Roussel has also arranged financial partnerships with high
net worth individuals living in both the United States and abroad for the
purpose of investing in multi-tenant industrial real estate serving the needs of
the small business tenant. High net worth individual partnerships arranged by
Mr. Roussel since 1995 and coordinated through one of the largest banking
organizations in the world have generally required a cash contribution by the
primary individual investor of $1,000,000 or more.
Mr. Roussel attended California State University at Fullerton where he
graduated with honors in 1977 and holds a B.A. in Business Administration.
James V. Camp, age 36, has been a Senior Vice President, Secretary and
Director of Cornerstone since its formation in 1995. Mr. Camp joined the
Cornerstone-related entities in 1993. Mr. Camp oversees the real estate
operations of Cornerstone including acquisitions, asset management and
dispositions. In this capacity, Mr. Camp reviews all property submittals,
coordinates with the real estate brokerage community and manages property
acquisitions including purchase negotiations, due diligence and escrow closings.
Once properties are purchased, Mr. Camp oversees the asset management function
including property leasing, property management, tenant improvement
construction, property refurbishment and entitlement processing through local
governmental municipalities.
From late 1989 to early 1993, Mr. Camp served as a project manager of
Burke Commercial Development, a Southern California based developer of
industrial buildings. Mr. Camp's responsibilities included site selection,
project design, construction management, leasing and sales. Mr. Camp began his
real estate career in 1988 as a commercial leasing agent with Trammell Crow
Company where he was responsible for leasing bulk distribution warehouse space
and build-to-suit industrial development projects.
Mr. Camp is an active member of the Orange County Chapter of the
National Association of Industrial and Office Parks, where he served on the
Board of Directors and also serves as Co-Chairman of the Membership Committee.
Prior to 1998, Mr. Camp served as a Director and Treasurer of the Commercial
Industrial Development Association.
-14-
<PAGE>
Mr. Camp received his Masters of Business Administration degree from
the University of Michigan in 1988. Mr.Camp also graduated with cum laude honors
from the University of Southern California in 1983 where he received a Bachelor
of Science Degree in Business Administration with an emphasis in accounting.
Robert C. Peterson, age 39, is a Director of Cornerstone Ventures, Inc.
Mr. Peterson is currently Executive Vice President of Acquisitions for Koll Bren
Realty Advisors. In this capacity, Mr. Peterson is responsible for identifying,
underwriting and closing real estate acquisition opportunities in the Western
half of the United States for Koll Bren. Mr. Peterson has been with Koll Bren
since its inception in 1992 and has been instrumental in Koll Bren's acquisition
of over 500 real estate assets on behalf of private and public pension fund
clients.
Prior to joining the Acquisition Division of Koll Bren Realty Advisors,
Mr. Peterson was a member of the Merger & Acquisition team within the National
Real Estate Division of the Koll organization, a nationwide real estate services
organization, where he assisted in the growth of the company through corporate
acquisitions and the formation of new business lines including Koll Cornerstone.
Mr. Peterson has 18 years of real estate investment experience including a
diverse background in property acquisitions, leasing and finance.
Mr. Peterson is a Certified Public Accountant (CPA), Certified
Commercial Investment Member (CCIM), Certified Property Manager (CPM) and a
licensed Real Estate Broker in the state of California. Mr. Peterson also holds
a Bachelor's Degree in Accounting from the University of Illinois.
Compensation
We will reimburse the Managing Member for its direct expenses relating
to administration of the Fund and pay the Managing Member compensation for its
services as provided in the Operating Agreement. The Managing Member will also
receive a percentage of net cash flow from operations and net sales proceeds. We
will not pay the Managing Member any other compensation for its services as
Managing Member. See "Management Compensation."
Services Performed by Others
The Managing Member and its Affiliates intend to hire independent
persons and companies to provide services to us as called for by the Operating
Agreement or, which in the opinion of the Managing Member, would be in our best
interests. We will pay the cost of all such services other than services for
which we are paying the Managing Member to perform.
-15-
<PAGE>
PRIOR PERFORMANCE
This section provides you with information about the historical
experience of real estate programs organized and sponsored by Cornerstone
Ventures, Inc. and its Affiliates, the Manager of the Managing Member. All of
these programs used debt financing to acquire properties and had different
investment policies and objectives than we have. YOU WILL NOT RECEIVE ANY
INTEREST IN THESE PROGRAMS OR PROPERTIES, AND YOU SHOULD NOT ASSUME THAT YOU
WILL EXPERIENCE INVESTMENT RETURNS COMPARABLE TO THE INVESTORS IN THESE OTHER
PROGRAMS.
During the last ten years, Cornerstone Ventures, Inc. and its
Affiliates have sponsored 7 real estate limited partnerships which raised a
total of $16,077,699 from 37 investors. These programs acquired a total of 10
properties, all of which were existing multi-tenant industrial business parks
located in Southern California. The total purchase price of these properties was
$55,896,000, a significant portion of which was represented by borrowed funds.
Of these properties, 3 have been sold in their entirety and subdivided portions
of 5 of the remaining properties have been sold as of December 31, 1998.
Because all of these prior private programs acquired their properties
with substantial amounts of borrowed funds and most had different investment
objectives, their investment objectives are not believed to be similar to the
Fund's investment objectives.
As of the date of this Prospectus, the Managing Member believes that
there have been no major adverse business developments or conditions experienced
by any prior program that would be material to investors in the Fund. Operating
results of these prior programs may be found in Table III of the Prior
Performance Tables.
During the most recent three years, these programs have acquired 3
properties, all of which were multi-tenant industrial business parks located in
Southern California. Each of these properties was acquired using debt financing
of approximately 75% of the purchase price of the properties.
Cornerstone Ventures, Inc. and its Affiliates have not
sponsored any prior public programs.
-16-
<PAGE>
CONFLICTS OF INTEREST
We may be subject to various conflicts of interest arising out of our
relationship with the Managing Member and its Affiliates. These conflicts arise
from the fact that the Managing Member will profit from our operations on terms
which were not negotiated on an arm's-length basis. These conflicts include, but
are not necessarily limited to, the following:
General
The financial interests of the Managing Member and its Affiliates may
differ, in certain respects, from your financial interests. There is a risk that
conflicts of interest may be resolved in a way that favors the Managing Member
and its Affiliates. The Managing Member has a fiduciary duty to conduct our
affairs in your best interests and to act with integrity and in good faith in
all matters relating to our business. See "Fiduciary Responsibilities of the
Managing Member."
The Managing Member and its Affiliates will try to balance our
interests with their own interests.
Purchase of Units
The Managing Member and its Affiliates may purchase Units in this
Offering. These purchases may be made to enable us to reach the minimum raise of
$3,000,000.
Other Investment Interests of the Managing Member
The Managing Member also invests for itself and through joint ventures
in multi-tenant industrial properties. The Managing Member and its Affiliates
also expect to form, sell interests in and manage other public and private real
estate entities and to continue to make real estate investments. The Managing
Member and its Affiliates may own, operate, lease, and manage multi-tenant
industrial business parks that may be suitable investments for us.
These entities may purchase multi-tenant industrial properties at the
same time that we are purchasing properties. If these properties are located
near our properties, the value of our investments and our lease income from our
properties and our cash flow could be affected. The Managing Member believes
that it is unlikely that its ownership or operation of any other properties
would have a material adverse effect on the value or business of our properties.
Competition for the Time and Services of the Managing Member and its Affiliates.
We rely on the Managing Member and its Affiliates to manage and oversee
our daily operation and our assets. Affiliates of the Managing Member may have
conflicts of interest in allocating management time, services and functions
between us and other existing and future real estate joint ventures and programs
and other business ventures. The Managing Member and its Affiliates believe they
have access to sufficient staff, including outsourcing to outside independent
agents, to be fully capable of performing their responsibilities.
Acquisition of Properties
As a result of their existing relationships and past experience, the
Managing Member and its Affiliates regularly will have opportunities to purchase
properties that are suitable for us to purchase. The Managing Member or its
Affiliates also may be subject to potential conflicts of interest in determining
which entity will acquire a particular property. In an effort to establish
standards for resolving these potential conflicts, the Managing Member and its
Affiliates have agreed to the guidelines set forth below under "Certain Conflict
Resolution Procedures," and in Section 9.5 of the Operating Agreement.
The Managing Member has a fiduciary obligation to act in your best
interests and will use its best efforts to assure that we will be treated as
favorably as any joint venture or other program with investment objectives that
are similar to or the same as ours. See "Fiduciary Responsibilities of the
Managing Member."
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Sale of Properties
A conflict could arise in the decision of the Managing Member or its
Affiliates whether or not to sell a property, since the interests of the
Managing Member and its Affiliates and your interests may differ as a result of
their financial and tax positions and the compensation to which they may be
entitled upon the sale of a property. See "Management Compensation" for a
description of these compensation arrangements. In the unlikely event that we
and another investment program managed by the Managing Member or its Affiliates
attempted to sell similar properties at the same time, a conflict could arise
since the two investment programs potentially could compete with each other for
a suitable purchaser. In order to resolve this potential conflict, the Managing
Member and its Affiliates have agreed not to attempt to sell any of our
properties at the same time as property owned by another investment program
managed by the Managing Member or its Affiliates if the two properties are
within a five-mile radius of each other, unless the Managing Member believes
that a suitable purchaser can be located for each property.
Compensation of the Managing Member and its Affiliates
The Managing Member and its Affiliates will be engaged to perform various
services for us and will receive fees and compensation for such services. None
of the agreements for such services is the result of arm's-length negotiations.
See "Management Compensation."
Potential Future Relationship with Dealer Manager
Cornerstone Ventures, Inc., the Manager of the Managing Member, or its
Affiliates, may form a broker dealer which may act as the Dealer Manager at some
time prior to the termination of this Offering. This relationship may create
conflicts for the Dealer Manager in fulfilling its due diligence obligations.
The Participating Brokers are expected to make their own due diligence
investigations. The initial Dealer Manager, or any subsequent Dealer Manager
affiliated with the Managing Member, can participate in the offer and sale of
securities offered by other programs that may have investment objectives similar
to ours.
Legal Counsel
Oppenheimer Wolff & Donnelly LLP ("Counsel"), which serves as our
securities counsel in this Offering, may also serve as securities counsel for
the Managing Member and its Affiliates in connection with other matters. We and
you will not have separate counsel. Pursuant to Section 12.1 of the Operating
Agreement, each Unitholder will (i) acknowledge that Counsel did not represent
the interests of the Unitholders and (ii) waive any conflict of interest with
respect to Counsel's representation of the Fund. In the event any controversy
arises following the termination of this Offering in which our interests appear
to be in conflict with the interests of the Managing Member or its Affiliates,
other legal counsel may be retained for one or more of the parties.
Certain Protective Arrangements
The Operating Agreement prohibits us from purchasing any real estate
investments from, or selling any real estate investment to, the Managing Member
or its Affiliates or any entity affiliated with or managed by any of them. We do
not intend to enter into a lease for any property with such persons or to make
loans to any persons.
The Operating Agreement prohibits the commingling of our funds with the
funds of any other person or entity.
The Operating Agreement prohibits the Managing Member and its
Affiliates from receiving rebates or give-ups or participating in reciprocal
business arrangements which would have the effect of increasing the compensation
of the Managing Member or its Affiliates or circumventing the restrictions
against the Fund dealing with the Managing Member or its Affiliates.
Certain Conflict Resolution Procedures
In order to reduce or eliminate certain potential conflicts of
interest, the Operating Agreement contains a number of restrictions relating to
(i) transactions between us and the Managing Member or its Affiliates, (ii)
certain future offerings, and (iii) allocation of properties among certain
affiliated ventures.
These restrictions include the following:
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1. All transactions where the Managing Member or its Affiliates provide
goods or services to us, other than those specifically provided for in the
Operating Agreement, must be pursuant to written agreements which may be
terminated without penalty, upon 60 days' prior written notice, by a vote of
Members holding a majority of the outstanding Units. The terms of such
agreements must be comparable to the terms available from unrelated parties, and
the compensation payable must be competitive with the amount charged by
independent parties for comparable goods or services.
2. Reimbursement to the Managing Member or its Affiliates for goods,
materials and services provided by them for the Fund (other than for services
already specified in the Operating Agreement) is limited to the cost we would
pay an unaffiliated party for goods, materials, and services which the Managing
Member believes are reasonably necessary for our prudent operation.
3. The Managing Member and its Affiliates have agreed that, in the
event an investment opportunity becomes available which is suitable for us and
another entity with the same investment objectives and structure, and for which
we and the other entity have sufficient funds available to invest, then the
investment opportunity will be first offered to the entity which has waited the
longest period of time since it was last offered an investment opportunity. In
determining whether or not an investment opportunity is suitable for more than
one investment program, the Managing Member and its Affiliates will examine such
factors as the cash requirements of each investment program, the effect of the
acquisition on diversification of each investment program's investments by
geographic area, the anticipated cash flow of each investment program, the size
of the investment, the amount of funds available to each investment program, and
the length of time such funds have been available for investment.
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INVESTMENT OBJECTIVES AND POLICIES
General
Our primary investment objectives are to: (1) reduce risk by acquiring
properties on an all cash basis; (2) provide periodic cash distributions from
operations; (3) increase income by reducing operating expenses and entering into
leases with scheduled rent escalations; and (4) generate additional income on
sale of our properties by using asset management strategies to increase their
values.
Types of Investments
We will try to acquire a diversified portfolio of multi-tenant
industrial business parks. Multi-tenant industrial business parks, in general,
comprise a significant segment of the commercial real estate market on a
nationwide basis. Each property we purchase will have 5 or more business tenants
and some properties may have more than 100 business tenants. Having multiple and
diverse tenants is intended to mitigate the impact which may be experienced from
losing a single tenant. We will purchase properties located in major
metropolitan areas throughout the United States. Geographic diversification of
our properties is also intended to mitigate the impact which may be experienced
from an economic downturn in any one geographic location. We will acquire
properties on an all cash basis using no debt financing.
We will acquire properties that are currently existing and generating
income from rental operations. We will not develop new properties or acquire raw
land.
We will attempt to acquire multi-tenant industrial business parks at
prices below what the Managing Member estimates the new development cost of a
similar property located within a competitive geographic area to be. Our ability
to acquire properties at prices below new development cost is subject to market
conditions and there is no assurance that we will be able to do so.
Although, we are permitted to invest in multi-tenant industrial
properties through partnerships or joint ventures with non-Affiliates of the
Managing Member that own or operate one or more properties provided we acquire a
controlling interest in the general partnerships or joint ventures, we do not
expect that we will do this. If we do this, there will be no duplicate fees
payable to the Managing Member and its Affiliates, our investment and the
investment of the other entity will be on substantially the same terms and
conditions, and we will have the right of first refusal to buy the property if
the general partnership or joint venture decides to sell the property.
Distributions
We will distribute Net Cash Flow from Operations to Unitholders
periodically. We anticipate that we will begin making periodic distributions of
Net Cash Flow from Operations not later than 12 months after the closing of the
Minimum Offering. Distributions will be made to the Unitholders as of the record
dates selected by the Managing Member.
The amount and timing of distributions we make will vary. While we are
selling Units in this Offering, we expect distributions to be erratic or
non-existent due to the uncertainty of cash flow and our higher administrative
costs. The amount of distributions will also depend on the overall size of our
Fund. If we sell less than all of the Units we are offering, our fixed operating
costs will be higher per Unit and will reduce the amount available for
distributions per Unit.
The frequency of the distributions we make will depend on the cost of
making the distributions and the dates on which properties are acquired. We will
not make distributions more frequently than quarterly and may make distributions
much less frequently to minimize our operating cost and your return on
investment.
Our distributions will be made at the discretion of the Managing Member
depending primarily on Net Cash Flow from Operations and our general financial
condition. We intend to increase distributions based on increases in Net Cash
Flow from Operations.
Managing Cash Distributions
We expect distributions to fluctuate until the Offering is terminated
and the funds we raise are used to purchase properties. After that, to the
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extent possible, we will attempt to avoid the fluctuations in distributions
which might result if distributions were based strictly on cash received during
the distribution period. We may use Net Cash Flow from Operations received
during prior periods or during subsequent periods, but prior to the date of the
distribution, in order to pay annualized distributions consistent with the
distribution level we establish from time to time. Our ability to maintain this
policy is dependent upon our Net Cash Flow From Operations. We cannot assure you
that we will have Net Cash Flow from Operations available to pay distributions,
or that the amount we distribute will not fluctuate.
Borrowing Policies
We intend to acquire properties for all cash and without debt
financing. We are authorized to borrow the greater of $100,000 or five percent
of the Invested Capital Contributions of all Unitholders on an unsecured basis
in order to meet our operating expenses. If we borrow money from the Managing
Member or its Affiliates, the Managing Member or Affiliate will loan the money
to us at its cost of borrowing.
Sale of Fund Properties
We expect to own our properties for 5 years, but we may hold our
properties for a longer or shorter period of time. The actual time we sell a
property will depend upon factors which we cannot predict today. In deciding
whether or not to sell a property, the Managing Member will consider factors,
such as the value of the property, the availability of buyers, our investment
objectives, the current real estate and money market conditions and the
operating results of the property.
Net Cash Flow from Operations and Net Sale Proceeds will be distributed
to Unitholders in accordance with the Operating Agreement and will not be
reinvested in additional properties. The Managing Member will decide whether Net
Sales Proceeds from the sale of properties will be applied to working capital
reserves for our contingent or future liabilities, for repair or improvement of
properties or to distributions.
Investment Restrictions
We will not (i) issue Units other than for cash; (ii) make loans or
investments in real property mortgages; (iii) make loans to any persons; (iv)
operate in such a manner as to be classified as an investment company for
purposes of the Investment Company Act of 1940; or (v) invest more than
$25,000,000 in any single property.
Authority of the Managing Member
The Managing Member is vested with full authority as to our general
management and supervision of our business and affairs. You will have no right
to participate in management. All our policies other than those specified in or
limited by the Operating Agreement may be changed by the Managing Member without
a vote of the Members. The Managing Member will determine how our business will
be conducted. You should not purchase Units unless you are willing to trust the
Managing Member with all aspects of our management.
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BUSINESS
General
We will acquire and operate a diversified portfolio of existing, leased
multi-tenant industrial business parks catering to the small business tenant.
Investment opportunities in multi-tenant industrial business parks are
ordinarily not readily available to investors other than large institutional
investors and experienced real estate operators with specialized knowledge and
experience in a specific geographic area. The Managing Member believes that few,
if any, publicly traded REIT's available to small investors offer a portfolio
consisting exclusively of multi-tenant industrial properties.
Multi-tenant industrial parks comprise a significant segment of the
commercial real estate market on a nationwide basis. Each property we purchase
will have 5 or more business tenants and some properties may have more than 100
business tenants. Having multiple and diverse tenants is intended to mitigate
the impact which may be experienced from losing a single tenant. The properties
we acquire will cater to the small business tenant and have lease terms
averaging two to three years. During economic conditions when rental rates are
rising rapidly, these relatively short-term leases should allow us to increase
rental income at a faster rate than on properties with longer-term leases. This
occurs at times when the annual rental rate increases provided for in existing
leases are less than the actual level of growth in market rents.
We will purchase properties located in major metropolitan areas
throughout the United States. Geographic diversification of our properties is
also intended to mitigate the impact which may be experienced from an economic
downturn in any one geographic location. We will emphasize the acquisition of
properties in geographic areas nationwide that have historically demonstrated
strong levels of demand for rental space by tenants requiring small industrial
buildings. We will attempt to acquire the highest quality properties available
in the highest demand locations.
We will acquire properties only on an all cash basis using no debt
financing.
We will acquire properties that are currently existing and generating
income from rental operations. We will not develop new properties or acquire raw
land.
We will attempt to acquire properties at prices below what the Managing
Member estimates the new development cost of a similar property located within
the same competitive geographic area to be. In stabilized market areas where
tenant demand for space is high, when a tenant's lease expires, the tenant may
not be able to find a competitive space to rent. In high tenant demand
locations, rental rates and property values should eventually increase to the
levels necessary to justify the construction of competitive properties. The
increase in rental rates and property values is expected to occur to balance out
the high levels of tenant demand for space as compared to the restricted amounts
of available space for a tenant to choose from. If this occurs, we could
experience financial gain as a result of having acquired properties at prices
below their new development cost.
The Commercial Real Estate Market in General
Commercial real estate consists of the 5 major property types described
below:
Industrial properties including small or large warehouse buildings
generally utilized by a single tenant primarily for distribution of products;
small or large manufacturing buildings generally used by a single tenant for the
manufacture or assembly of products; and multi-tenant industrial business parks
which cater to the small business tenant and are utilized for assembly, storage
and distribution of products as well as for office space. Multi-tenant business
properties may contain individual rental units with either a high or low level
of interior office improvements. We will purchase multi-tenant industrial
business parks that cater to a diversified base of small business tenants. We
will not acquire warehouse or manufacturing buildings utilized by large,
individual tenants.
Retail properties including neighborhood retail centers, community
centers, regional malls, power centers, outlet centers and strip centers.
Specialty properties including restaurant facilities, senior housing
facilities, medical/health care properties, hotels and manufactured housing.
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Multi-family rentals which are generally limited to apartment
buildings.
Office properties including high-rise or low-rise urban or suburban
properties.
Multi-Tenant Industrial Business Parks
Multi-tenant industrial business parks comprise one of the major
segments of the commercial real estate market on a nationwide basis. These
properties contain a large number of diversified tenants and differ from large
warehouse and manufacturing buildings which rely on a single tenant.
Multi-tenant industrial business parks are ideal for small businesses that
require both office and warehouse space. This combination of office and
warehouse space cannot be met in any other commercial property type.
Of all businesses in the United States, approximately 80% are
classified as "small business". Office parks serve businesses that are generally
service oriented. Industrial parks accommodate businesses that need both office
and warehouse space. The primary difference between these two types of buildings
is the percentage of office space within a given unit. We will acquire
multi-tenant industrial business parks with varying percentages of interior
office improvements. We may acquire properties with interior office improvements
approaching 100% which will have limited or no warehouse or assembly space.
The typical multi-tenant industrial business park includes 100,000
square feet of rentable space with rental unit sizes ranging from 500 square
feet to 30,000 square feet. This type of property accommodates tenant's growth
patterns. For example, a 1,200 square foot tenant may grow to 2,400 square feet
by leasing the adjacent unit. This flexibility diversifies the owner's risk of
losing a tenant as the tenant's business grows.
A single-tenant industrial building cannot accommodate a tenant's growth.
One of the most attractive features of multi-tenant industrial business
parks is the ability to adapt to changing market conditions. In good economic
times, new businesses are forming and existing businesses are growing.
Multi-tenant industrial business parks can accommodate this growth via a
tenant's expansion into multiple units. It is not uncommon to see a tenant
occupy 2 to 4 units as its business expands. In difficult economic times, a
tenant's space requirements often contract. Many tenants who previously outgrew
their space in a multi-tenant industrial business park, move back during periods
of contraction since they can no longer afford the larger facility they leased.
Tenants move through this type of property in growing and declining economies.
These factors contribute to the advantage of shorter lease terms
inherent in multi-tenant industrial business parks. Lease terms generally range
from month-to-month to 5 years. The average lease term is 2 to 3 years. Leasing
activity is typically more diversified with smaller-size tenants. The Managing
Member views regularly expiring leases with varying lease terms as an attractive
diversification feature of multi-tenant industrial business parks. The most
significant benefit of shorter term leases is that we can adjust the rents
upward to market more rapidly in an upward trending market. In a downward
trending rental rate market, tenants tend to renegotiate lease terms downward
whether or not they have entered into long-term leases. Leasing for properties
that we purchase will contain stipulated rent escalation provisions when market
conditions allow. After rental adjustment, a property's income and the resulting
cash flow will adjust accordingly.
Higher Construction Costs
Compared to industrial buildings that serve the large or single user
tenant, costs to construct multi-tenant buildings serving the small business
tenant can be 50% to 60% higher due to the following differences:
o Two restrooms generally required for each individual tenant space
o Numerous walls to separate individual tenant spaces
o Multiple entrances for each tenant space
o Utility connections for each tenant space
o Separate office build-out in each tenant space
o Separate HVAC installations
o Individual truck roll-up doors for each tenant space
o Construction interest expense significantly higher due to longer initial
lease-up with numerous tenants
These additional features drive up the cost of multi-tenant industrial
business parks as compared to other industrial properties.
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Acquisition Strategies
Cornerstone Ventures, Inc. ("Cornerstone") specializes in the
multi-tenant industrial segment of the commercial real estate market. As
managing partner in a joint venture with a nationally prominent real estate
company, Cornerstone has substantial operating experience investing in and
operating multi-tenant industrial business parks.
The essence of Cornerstone's acquisition strategy is the recognition of
opportunities to purchase multi-tenant industrial business parks at prices below
replacement cost. Cornerstone has observed that such opportunities exist because
rental rates at projects configured for the small business tenant are at times
below the levels necessary to justify the development of new projects. With
market rents at such levels, the Managing Member expects to purchase properties
at prices below the levels needed to justify development of competitive
properties.
Because projects serving the needs of the small industrial business
tenant may be currently operating at or near capacity in many sub-markets,
rental rates are expected to continue to rise to the point where development of
new space is justified. Compared to single-user industrial properties that
typically have longer lease terms, the shorter-term multi-tenant industrial
business park leases allow for greater opportunities to increase rents and
maximize revenue growth in upward trending markets. The Managing Member's
acquisition strategy, therefore, will be to purchase and reposition properties
and capitalize on shorter lease terms, rising rents, increasing cash flow and
increasing market value.
We expect to achieve diversification by purchasing multi-tenant
industrial business parks serving the small business tenant in high tenant
demand markets nationwide. The number of properties which we will purchase will
depend on the amount of funds we raise in this Offering and upon the size and
location of the properties we purchase. The maximum dollar amount of net
proceeds which we will invest in any single property is $25,000,000. If we sell
only the minimum number of Units, the Managing Member estimates that we will
acquire only one property. If we sell the maximum number of Units, we may
acquire up to 10 or more properties. These estimates are subject to significant
variations based on the individual purchase price of each property.
Property Features
Land: Lot sizes for the properties we purchase will generally range
from approximately 4 to 25 acres depending upon the number of buildings and
building sizes. Individual buildings contained in any specific property may be
located on a single parcel of land or on multiple parcels of land depending upon
the configuration and layout of the entire project. Sites will be zoned for
industrial, commercial and/or office uses depending on local governmental
regulations. The location of each property to be acquired will be considered
carefully and we will focus on purchasing what we consider to be prime
properties in prime locations.
Buildings: The actual buildings contained in any project will generally
be rectangular in shape and constructed utilizing concrete tilt up construction
methods and in some cases brick and mortar methods. Building sizes will
generally range from 5,000 to 200,000 square feet divided into leasable unit
sizes ranging from 500 square feet to 30,000 square feet. We will generally look
for the following building features:
o Functional site plan offering ample tenant parking and good truck and car
circulation
o Multiple truck doors with ground level and dock high loading
o Ceiling clear heights in each tenant space from 14 feet to 24 feet high
o Attractive front entry with a location for tenant's address and sign
o Quality office improvements including private offices, restrooms and
reception area
o Minimum of 100 amps of electrical service
o Heating, ventilating and air conditioning systems for the office area
o Fire sprinklers where required by local governmental agencies
We will evaluate a property's physical condition and, if capital
improvements are necessary, we will incorporate this into the acquisition
analysis for the property.
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Property Selection
The Managing Member will have experienced staff engaged in the
selection and evaluation of properties which we may acquire. The acquisition
process will be performed by the Managing Member with no acquisition fees
payable to the Managing Member by us. All property acquisitions will be approved
by the Managing Member based upon its experience in the area of multi-tenant
industrial business parks and our investment objectives.
We will purchase properties based on the independent decision of the
Managing Member after an examination and evaluation of some or all of the
following:
o Functionality of the physical improvements at the property
o Historical financial performance of the property
o Current market conditions for leasing space at the property
o Proposed purchase price, terms, and conditions
o Potential cash flow and profitability of the property
o Estimated cost to develop a new competitive property within the immediate
market area
o Demographics of the area in which the property is located
o Demand for space by small business tenants in the immediate market area
o Rental rates and occupancy levels at competing business parks in the
immediate area
o Historical tenant demand for space at the property
o Current market versus actual rental rates at the property and in the
immediate area
o Operating expenses being incurred and expected to be incurred at the
property
o Potential capital improvements and leasing commissions reasonably expected
to be expended
o A review of the terms of each tenant lease in effect at the property
o An evaluation of title and the obtaining of satisfactory title insurance
o An evaluation of a current appraisal conducted by a qualified independent
appraiser
o An evaluation of any reasonably ascertainable risks such as environmental
contamination
The Managing Member intends to bring us the same expertise Cornerstone
has exercised in the accumulation and operation of its joint venture properties
in conjunction with one of the nation's leading real estate companies.
See "Management."
The Asset Management Function
Asset management includes preparation, implementation, supervision and
monitoring of a business plan specifically designed for each property. The
Managing Member will perform the asset management function for us at no charge.
The Managing Member will perform the following asset management services for us:
o Supervise the day-to-day operations of property managers assigned to each
property
o Select and supervise the on-going marketing efforts of leasing agents res-
ponsible for marketing the property to prospective tenants
o Coordinate semi-annual rental surveys of competitive projects in the local
geographic area -- this function is designed to maintain the property
at the highest possible rental rates allowable in the market where the prop-
erty is located
o Approve lease terms negotiated by leasing agents with new tenants and
tenants renewing their leases -- this includes making sure that lease rates
being attained are in line with market conditions as well as in line with
the business plan created for the property
o Review and approve any capital improvements necessary at the property,inclu-
ding tenant improvements necessary to lease space
o Supervise the collection of rent and resolution of tenant lease defaults
o Review monthly financial reports prepared by property managers with a focus
on improving the cost efficiency of operating the property
o Prepare annual property operating budgets for review and approval by senior
management
o Prepare regular updates regarding operations of the property as compared to
budget estimates
Although most real estate operating companies charge a separate fee for
asset management services, the Managing Member will not charge us a separate fee
for such services.
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Property Management Services
The Managing Member is responsible for providing property management
services for our properties. The Managing Member will be responsible for all
day-to-day operations for each property, including the following:
o Invoice tenants for monthly rent
o Collect rents
o Pay property level operating expenses
o Solicit bids from vendors for monthly contract services
o Provide property level financial statements on a monthly basis
o Review and comment on annual property operating budgets
o On-going assessment of potential risks or hazards at the property
o Clean up and prepare vacant units to be leased
o Supervise tenant improvement construction
o Supervise tenant and owner compliance with lease terms
o Supervise tenant compliance with insurance requirements
o Periodically inspect tenant spaces for lease compliance
o Respond to tenant inquiries
Due to the short-term nature of the tenant leases, as well as the large
number of small business tenants at each property, multi-tenant industrial
business parks are highly management intensive. The type of properties we will
acquire are generally considered to be more management intensive than other
types of commercial real estate used by larger business tenants with longer term
leases. For this reason, property management fees for multi-tenant industrial
properties are generally higher than property management fees for other types of
commercial real estate. The Managing Member believes in providing a very high
level of property management service in order to maximize the value of each
property. We will pay the Managing Member a fee equal to six percent (6%) of the
gross income generated by the Fund from gross rental income generated by each
property. We will also pay the Managing Member a Construction Supervision Fee
equal to ten percent (10%) of the cost of any leasehold improvements or capital
improvements. The Managing Member may subcontract for such services with either
an Affiliate or third party property management organization.
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SUMMARY OF THE OPERATING AGREEMENT
You should read and familiarize yourself with the Operating Agreement
that appears as Exhibit "A" to this Prospectus. The following statements are
brief summaries of certain provisions of the Operating Agreement. These
summaries are not complete. These summaries do not modify or amend the Operating
Agreement. In the event these summaries differ from the Operating Agreement, the
provisions of the Operating Agreement will control.
General
We are a California limited liability company. A limited liability
company is a business organization that is generally intended to be taxed as a
"partnership" for federal income taxation purposes, while providing limited
liability for its members. The owners of the equity interests in a limited
liability company are called "members." For federal income tax purposes, a
limited liability company, like a partnership, is a pass-through entity, and
generally its income and losses are taxed only at the member level. See "Federal
Income Tax Considerations." The business affairs of a limited liability company
are governed by an operating agreement, which is like a partnership agreement.
Capital Contributions and Members
Our initial Members will be Cornerstone Industrial Properties, LLC (the
"Managing Member"), Terry G. Roussel and the persons who purchase Units in this
Offering (collectively, "Unitholders"). The initial Capital Contributions will
be the amounts contributed by Cornerstone Industrial Properties, LLC, as
Managing Member, and the proceeds of this Offering. Mr. Roussel will contribute
the same amount for his Units as other Unitholders. The Managing Member and
Unitholders will collectively be referred to as the Fund's "Members."
Capital Accounts
We will establish and maintain a separate capital account for each
Member. Except as otherwise provided in the Operating Agreement (i) no interest
will accrue on your Capital Contribution or on your positive Capital Account
balance, (ii) you will not have any right to withdraw any part of your Capital
Account or to demand or receive the return of your Capital Contribution, (iii)
you will have the right to receive distributions from us only as determined by
the Managing Member, (iv) you will not be required to make any further
contribution to our capital or make any loan to us, and (v) you will not have
any liability for the return of any other Member's Capital Account or Capital
Contributions.
Control of Our Operations
The Managing Member is vested with full, exclusive and complete
discretion in the management and control of our business.
Compensation of the Managing Member and Affiliates
See "Management Compensation".
Allocations and Distributions
The following summarizes the allocations and distributions to which
Members are entitled under the Operating Agreement. This description is only a
summary and is qualified in its entirety by reference to the Operating Agreement
attached hereto as Exhibit "A." In addition, the simplified definitions that
follow are designed to facilitate an understanding of our allocations and
distributions, but do not include all of the details of the defined terms
included in the "Glossary" section of this Prospectus or in Article 14 of the
Operating Agreement.
Certain Definitions
"Net Cash Flow from Operation," in general terms, is our cash generated
from operations less our cash expenses and reserves exclusive of Net Sales
Proceeds.
"Net Sales Proceeds," in general, is the cash we receive from the sale
of a property or any interest therein, less expenses related to the sale.
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A Unitholder's "Invested Capital Contribution" generally is such
Unitholder's investment of capital increased by the amount of any Volume
Discount received by the Unitholder and reduced by all prior distributions of
Net Sales Proceeds that are considered a return of a Unitholder's invested
capital.
The terms "Net Income" and "Net Loss" describe the items of income,
gain, loss, and deduction to be allocated among the Managing Member and
Unitholders for federal income tax purposes.
The "Unitholders' 8% Preferred Return" generally refers to, in the case
of distributions of Net Cash Flow from Operations, an amount equal to an 8%
non-cumulative, non-compounded annual return on the Invested Capital
Contributions of the Unitholders, and in all other cases (such as distributions
of Net Sales Proceeds), an amount equal to an 8% cumulative, non-compounded
return on the Invested Capital Contributions of a Unitholder (calculated from
the dates the Unitholders are admitted to the Fund and the Capital Accounts
attributable to the Unitholders initially are established), in each case reduced
by all prior distributions of Net Cash Flow from Operations and Net Sales
Proceeds other than those made as a return of the Unitholders' Invested Capital
Contributions.
The "Early Investors' 12% Incentive Return" refers to an amount equal
to a 12% non-cumulative, non-compounded return on the first 6,000 Units sold
calculated for 12 months from the date the purchase price for those Units is
deposited in escrow which is being earned instead of the Unitholders' 8%
Preferred Return during the 12 month period for which it applies.
Distributions of Net Cash Flow from Operations. To the extent the
Managing Member determines that funds are available for distribution, periodic
distributions of Net Cash Flow from Operations will be made quarterly.
Distributions are expected to commence no later than 12 months following the
closing of the Minimum Offering.
Distributions of Net Cash Flow from Operations for any fiscal year will
be made 90% to the Unitholders and 10% to the Managing Member until the
Unitholders' 8% Preferred Return and Early Investors' 12% Incentive Return is
attained. Thereafter, Distributions of Net Cash Flow from Operations will be
allocated 50% to the Unitholders and 50% to the Managing Member.
Distributions of Net Sales Proceeds. Net Sales Proceeds from a sale,
after replenishment of any reserves, will be distributed in the following order
of priority: (i) first, 100% to the Unitholders in an amount equal to their
Invested Capital Contributions, calculated at the time of such distribution;
(ii) second, 90% to the Unitholders and 10% to the Managing Member until
Unitholders have received distributions in an amount equal to their aggregate
Unitholders' 8% Preferred Return; (iii) thereafter, 50% to the Unitholders and
50% to the Managing Member.
Allocation of Net Income and Net Loss. The allocation provisions of the
Operating Agreement are designed to allocate Net Income and Net Loss to the
Managing Member and the Unitholders in a similar manner as cash distributions
are made. The allocations include balancing or "chargeback" provisions which (1)
allocate Net Income to the Managing Member and the Unitholders as a chargeback
to the extent that they have previously been allocated Net Loss and (2) allocate
Net Loss to the Managing Member and the Unitholders as a chargeback to the
extent they have previously been allocated Net Income. Net Income not allocated
to "chargeback" a prior allocation of Net Loss is first allocated to the Members
in proportion to prior cash distributions to the extent thereof, with any excess
allocated 50% to the Managing Member and 50% to the Unitholders. Net Loss not
allocated to chargeback a prior allocation of Net Income is allocated 10% to the
Managing Member and 90% to the Unitholders.
Meetings of Members
There will be no regularly scheduled meetings of our Members. Meetings
of our Members may be called by the Managing Member, and will be called upon the
written request to the Managing Member of Unitholders holding in the aggregate
at least ten percent (10%) of the Units.
Voting
Unless a greater or lesser quorum is required by law, the Members
present at a meeting in person or by proxy who, as of the record date for such
meeting, are holders of a majority of all the issued and outstanding Units shall
constitute a quorum at the meeting. When an action is to be taken by a vote of
the Members, it will be authorized by the affirmative vote of the Unitholders
holding a majority of all the issued and outstanding Units. See "Management".
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Approval of the Members is required to: (a) adopt an agreement of
merger or consolidation; (b) change the character of the business and affairs of
the Fund; (c) commit any act that would make it impossible for the Fund to carry
on its ordinary business and affairs; or (d) commit any act that would
contravene any provision of the Articles, this Agreement, or the Limited
Liability Company Law. The Unitholders may, without the concurrence of the
Managing Member: (i) amend or restate the Articles or this Agreement provided an
amendment which modifies the compensation or Distributions to which the Managing
Member is entitled, or affects its duties, requires the consent of the Managing
Member and provided that an amendment is required, in the opinion of tax counsel
to the Fund, to permit the Fund to be taxed as a partnership for federal income
tax purposes, shall not require the approval of the Unitholders; (ii) remove the
Managing Member (including, without limitation, upon the Managing Member's
Bankruptcy); (iii) elect a new Managing Member or (iv) dissolve the Fund.
Book-Entry Evidence of Ownership
The Units will be issued only in fully registered book-entry form.
Certificates evidencing ownership of the Units will not be issued.
Transfer of Units
If you want to transfer your Units subsequent to your initial
investment, you must comply with the applicable provisions of the Operating
Agreement among other restrictions. The Managing Member may impose "suitability
standards" of the type described under "Who Should Invest" to transfers of Units
by you. You may not transfer less than the minimum number of Units investors are
required to purchase in this Offering. You may not transfer, fractionalize or
subdivide Units if you will retain less than this minimum number of Units. You
may not separate financial rights of Units from the Units and assign them
separately from the Units.
The Managing Member must consent to all transfers or dispositions of
Units; and certain "prohibited dispositions" are set forth in Section 7.2 of the
Operating Agreement. Subject to the limitations and restrictions of the
Operating Agreement, all transfers which comply with Section 7.3 of the
Operating Agreement (including obtaining the consent of the Managing Member)
shall be effective as of the last day of the month following the date in the
assignment and receipt of notice of such assignment by the Managing Member, or
such earlier date as may be required by applicable rules and regulations. You
must pay a transfer fee to cover our costs. Payment of these costs is a
condition to effectiveness of a transfer. Further, you may not sell or transfer
Units if our legal counsel believes it would result in our termination or result
in adverse tax consequences to us or our Unitholders.
Upon delivery of the completed and executed assignment to the Managing
Member and its acceptance thereof, the assignee becomes entitled to receive the
various benefits of ownership of the Units, including income, distributions and
losses.
Allocations and Distributions on Transfer of Units
In the event of a transfer of Units, we will make all allocations and
distributions as of the last day of the calendar month for which such allocation
or distribution is to be made by us. All allocations of Net Income and Net Loss
to any Unit which may have been transferred during a year will be allocated
between the transferor and the transferee based on the number of days that each
was recognized as the holder or assignee of the Unit, without regard to results
of our operations during the calendar year and without regard to whether cash
distributions were made to the transferor or transferee during the calendar
year.
Other Activities
The Managing Member is generally permitted to compete with us without
limitation. See "Conflicts of Interest."
Dissolution
We will dissolve and our affairs will be wound up on the first to occur
of the following events: (a) December 31, 2010; (b) the entry of a decree of
judicial dissolution, as provided under California law or (c) by the consent of
Unitholders owning a majority of all the issued and outstanding Units.
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Repurchase of Units
The Fund will not repurchase Units. The Managing Member and its
Affiliates may, but are not required to, purchase Units from Unitholders who
want to sell their Units. The Managing Member and its Affiliates will hold any
Units purchased by them for investment and will not resell the Units.
Books and Records
You have the right to inspect our records including a list of all our
Unitholders and their ownership interest.
Reports
We will provide you with the following reports, statements and tax
information:
Within 75 Days of the End of Our Taxable Year. Information necessary in
the preparation of the Federal income tax returns and state income and other tax
returns with regard to the jurisdictions where the properties are located.
Within 120 Days of the End of Our Taxable Year. Upon request, annual
financial statements (balance sheet, statement of income or loss, statement of
Unitholders' and Managing Member's equity and a statement of cash flows)
prepared in accordance with generally accepted accounting principles and
accompanied by a report therein containing the opinion of an independent
certified public accountant; an annual report on our business; an annual report
identifying the various types of distributions; and a detailed statement of any
transactions with the Managing Member or its Affiliates, and of fees,
commissions, compensation and other benefits paid or accrued to the Managing
Member or its Affiliates for the fiscal year completed, showing the amount paid
or accrued to each recipient and the services performed.
Within 60 Days of the End of Each of the First Three Fiscal Quarters of
Our Taxable Year. Upon request, the information specified in Form 10-Q,
beginning with the fiscal quarter in which we are first required to register
under Section 12(g) of the Securities Exchange Act of 1934.
If We are Not a "Reporting Company." If filings are not required by the
Securities and Exchange Commission, a semiannual report for the first six (6)
months of operations will be prepared containing at least a balance sheet,
statement of income and cash flow statement and other pertinent information
regarding the Fund and furnished upon request within 60 days following the end
of the first six (6) month period.
Within 60 Days of the End of Each Quarterly Period of Our Taxable Year.
Upon request, a statement of compensation received by the Managing Member from
us during the quarter, including the nature of services rendered or to be
rendered by the Managing Member, and any other relevant information.
Within 60 Days of the End of Each Quarterly Period in which We Acquire
Properties. Upon request, a special report setting forth details of the
acquisition by us of properties. The report may be in the form of a supplement
to the Prospectus and may be distributed to Unitholders more frequently than
quarterly if deemed appropriate by the Managing Member.
Indemnification
See "Fiduciary Responsibilities of the Managing Member."
Arbitration
Section 13 of the Operating Agreement provides that Unitholders have
agreed to arbitrate any controversy or claim in Orange County, California
pursuant to the rules of the American Arbitration Association.
Power of Attorney
Each Unitholder, by executing the Subscription Agreement, appoints the
Managing Member as such Unitholder's attorney in fact with respect to the
matters identified in Section 12.6 of the Operating Agreement.
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FEDERAL INCOME TAX CONSIDERATIONS
General
This summary discusses the material federal income tax considerations
that reasonably can be anticipated to affect an investment in the Fund by a
Unitholder. No attempt has been made, however, to comment on all federal income
or other tax matters that may affect the Fund or particular Unitholders. In
particular, this summary assumes that the Unitholders will be individuals. It
does not generally discuss the federal income tax consequences of an investment
in the Fund peculiar to corporate taxpayers, tax-exempt pension or
profit-sharing trusts or IRAs, foreign taxpayers, estates, or taxable trusts or
to transferees of Units.
THIS SECTION IS NOT TO BE CONSTRUED AS A SUBSTITUTE FOR CAREFUL TAX
PLANNING. BECAUSE THE INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND WILL
NOT BE THE SAME FOR ALL INVESTORS, PROSPECTIVE INVESTORS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS WITH SPECIFIC REFERENCE TO THEIR OWN TAX AND FINANCIAL
SITUATION INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, AND OTHER TAX
LAWS AND ANY POSSIBLE CHANGES IN THE TAX LAWS AFTER THE DATE HEREOF.
Except as expressly noted, the statements, conclusions, and opinions
contained herein are based on existing law as contained in the Code, Treasury
Regulations, administrative rulings, and court decisions as of the date of this
Prospectus. Moreover, there is uncertainty concerning some of the federal income
tax consequences relating to the operation of entities classified as
partnerships which own real estate and the ownership of interests in such
entities. Many provisions of relatively recent tax legislation, which
significantly affect the tax consequences of investments in such partnerships,
have not yet been the subject of court decisions, IRS rulings, or interpretive
regulations. Moreover, the availability and amount of deductions or the amount
of income attributable to the activities of the Fund will depend not only on the
legal principles described herein, but also upon the resolution of various
factual issues. No rulings have been or will be requested from the IRS
concerning any of the tax matters described herein. Accordingly, there can be no
assurance that the IRS or a court will agree with the following discussion or
with any of the positions taken by the Fund for federal income tax reporting
purposes.
Legal Opinion
The U.S. Treasury Department has set forth certain guidelines that are
to be followed by practitioners who provide opinions analyzing the federal tax
effects of so-called "tax shelter" investments. Generally, in such an opinion,
the practitioner must provide, where possible, an opinion as to whether it is
more likely than not that an investor will prevail on the merits of each
material tax issue presented by the offering as well as an overall evaluation of
whether the material tax benefits in the aggregate more likely than not will be
realized. Where the practitioner cannot give such an opinion with respect to any
material tax issue, the opinion must set forth the reasons for the
practitioner's inability to opine as to the likely outcome. Likewise, the
opinion must explain why the practitioner is unable to give an overall
evaluation. For purposes of these guidelines, a "tax shelter" is an investment
which has as a significant and intended feature for federal income or excise tax
purposes the generation of tax losses or credits to offset taxable income from
other sources.
Oppenheimer Wolff & Donnelly LLP ("Counsel") does not believe that the
Fund constitutes a "tax shelter" because the production of losses or credits to
offset income or tax liability from other sources is not a significant or
intended feature of an investment in the Fund. Thus, Counsel is not required to
render an overall opinion with respect to realization of the material tax
benefits from such investment. Nevertheless, Counsel will render its opinion, a
copy of the form of which is attached hereto as Exhibit "B" with respect to
certain material federal income tax issues presented by an investment in the
Fund which may impact the economic value of such an investment to Unitholders.
As of the date of this Prospectus, the Fund has not invested in any
properties. Therefore, it is impossible at this time to opine on the application
of the law to the specific facts which will exist when such investments are
made. In addition, Counsel is unable to express an opinion as to certain issues
because of the lack of, or the existence of contradictory, legal authority on
those issues or because of their inherently factual nature.
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Counsel's opinions described herein are based on (i) the facts,
representations and warranties set forth in this Prospectus and such other
documents and information as Counsel has deemed applicable, and (ii) certain
factual representations made by the Managing Member. If such facts or
representations are inaccurate or if circumstances change, Counsel's opinions
may not apply. A Unitholder should be aware that an opinion of Counsel
represents only such Counsel's best legal judgment and that it is not binding on
the IRS or the courts.
Possible Tax Legislation or Other Developments
The presently anticipated federal income tax treatment of an investment
in the Fund may be adversely modified by legislative, judicial, or
administrative action, possibly with retroactive effect. Furthermore, the U.S.
Treasury Department currently has several hundred separate projects to issue tax
regulations. Many of the tax provisions pertinent to the tax treatment of an
investment in the Fund are the subject of such projects. It cannot be predicted
when any such regulations will be issued, what they will provide, or what their
effective dates will be.
Partnership Status
Treatment of the Fund as a "partnership" for federal income tax
purposes is essential to a Unitholder's ability to derive tax benefits from
their purchase of Units. If, for any reason, the Fund were classified as an
association taxable as a corporation: (i) the Fund would be subject to federal
income tax on any taxable income it earned at regular federal corporate tax
rates of up to 35%, (ii) the Unitholders would not be required or entitled to
take into account their distributive share of the tax items of the Fund, and
(iii) distributions of cash or property by the Fund would be taxed to
Unitholders (without a corresponding deduction to the Fund), first, as dividend
income to the extent of the Fund's current and accumulated earnings and profits,
and second, as capital gain to the extent that any remaining distributions
exceed a Unitholder's basis in such Person's Units; also, any income so
recognized by the Unitholders would constitute portfolio income not subject to
offset by any losses they may have from other passive activities. See "Basis, At
Risk, and Passive Activity Limitations on Deduction of Losses," and "Passive
Activity Income," below. Further, Unitholders may recognize gain (without the
receipt of cash) if the status of the Fund were deemed to change for federal
income tax purposes from a "partnership" to an "association taxable as a
corporation" at some point following formation. For all purposes of this
Prospectus, the Fund will be treated as a "partnership" for federal income tax
purposes.
General Classification Rules. The Fund has been formed as a "limited
liability company" under California law. A California limited liability company
is considered an "eligible entity" under Treasury Regulations classifying
business entities. Since its formation, the Fund has had at least two members.
Under current Treasury Regulations, a newly formed domestic eligible entity that
has two or more owners will automatically qualify for "partnership" tax
classification status. Treas. Regs. ss. 301.7701-3(b)(1)(i). If this default
classification as a partnership is not acceptable, or the entity desires to
change its classification, a domestic eligible entity may elect to be classified
as a corporation for federal income tax purposes. See Treas. Regs. ss.
301.7701-3(c)(1)(i). The Fund, as a California limited liability company, has
been formed as a qualifying domestic eligible entity, and, accordingly, it
automatically will default to "partnership" classification status. Moreover, the
Operating Agreement of the Fund prohibits the Managing Member from electing
corporate classification status. Accordingly, it is the opinion of Counsel that,
subject to the discussion below regarding "publicly traded partnerships," the
Fund will be classified as a "partnership" and not as an "association taxable as
a corporation" for federal income tax purposes if such issue were challenged by
the IRS, litigated and judicially decided. The Fund will not seek a ruling from
the IRS that it will be treated as a partnership for federal income tax
purposes.
Publicly Traded Partnership Rules. Section 7704 of the Code provides
that any "publicly traded partnership" will be taxed as a "corporation" for
federal income tax purposes even though such partnership otherwise would be
classified as a partnership for federal income tax purposes. It is important for
the Fund to avoid "publicly traded partnership" status due to the adverse tax
consequences of such "corporate" classification status on the Fund and
Unitholders, as described above. A partnership is considered to be a publicly
traded partnership if interests in the partnership are (or become) (i) traded on
an established securities market or (ii) readily tradable on a secondary market
(or the substantial equivalent thereof). The IRS has issued regulations under
Section 7704 (the "Section 7704 Regulations") that set forth limited safe
harbors from the definition of a publicly traded partnership, at least two of
which may be applicable to the Fund. First, interests in a partnership will not
be considered readily tradable on a secondary market or the substantial
equivalent thereof if the partnership does not participate in the establishment
of the market or the inclusion of its interests thereon and the partnership does
not recognize any transfers made on the market by (i) redeeming the transferor
partner (in the case of a redemption or repurchase by the partnership), or (ii)
admitting the transferee as a partner or otherwise recognizing any rights of the
transferee, such as a right of the transferee to receive partnership
distributions (directly or indirectly) or to acquire an interest in the capital
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or profits of the partnership. Second, interests in a partnership will not be
considered readily tradable if, for any taxable year of the partnership, the sum
of the percentage interests in partnership capital or profits represented by
partnership interests that are sold or otherwise disposed of during the taxable
year does not exceed two percent (2%) of the total interests in partnership
capital or profits. The Section 7704 Regulations further provide that the
failure to satisfy a safe harbor provision under the Regulations will not cause
a partnership to be treated as a publicly traded partnership if, after taking
into account all of the facts and circumstances, partners are not readily able
to buy, sell or exchange their partnership interests in a manner that is
comparable, economically, to trading on an established securities market.
An exception from "publicly traded partnership" status also exists
under Code Section 7704(c) for certain partnerships where ninety percent (90%)
or more of their gross income consists of certain "qualifying" passive types of
income (including interest, dividends, certain real property rents and gain from
the sale or other disposition of real property (including property described in
Section 1221(1) of the Code), and gain from the sale or disposition of capital
assets (or property described in Code Section 1231(b)) held for the production
of any such qualifying income, among other items. The term "real property rent"
for these purposes means amounts which would qualify as rent from real property
under Section 856(d) of the real estate investment trust rules, as modified. In
addition, "qualifying" income includes any income that would qualify as
appropriate real estate investment trust income under Code Section 856(c)(2).
Such income generally includes interest, dividends, rents, gains from the sale
of securities or real estate assets, property tax refunds and foreclosure
property income. Since a significant portion of the Fund's gross income will
consist of rental income from commercial real estate, the Fund may also meet the
exception from publicly traded partnership status set forth in Code Section
7704(c) due to its receipt of such qualifying income in the amount of ninety
percent (90%) or more of its gross income. Nevertheless, the Fund intends to
restrict trading in Units in such a manner as to qualify for the various
regulatory safe harbors from "publicly traded partnership" status irrespective
of the amount and/or nature of its gross income. It should also be noted that if
only the qualifying income exception is relied upon to avoid publicly traded
partnership status, the passive activity rules, pursuant to Code Section 469(k),
will be applied separately with respect to the Fund, thus, for example,
preventing Fund Net Income from being offset against passive activity losses of
Unitholders from other sources.
The Operating Agreement prohibits the Managing Member or any other
Member from (i) listing, facilitating, or recognizing the trading of Units on an
established securities market or (ii) creating for Units or facilitating or
recognizing the trading of Units on a secondary market (or the substantial
equivalent thereof) within the meaning of Code Section 7704 and the Section 7704
Regulations promulgated thereunder. The Managing Member has also agreed to take
all steps reasonably available (and the Operating Agreement grants broad powers
to the Managing Member) to prevent the trading of Units by third parties on an
established securities market or a secondary market (or the substantial
equivalent thereof) or to allow any transfers of Units which could cause the
Fund to violate the safe harbors set forth in the Section 7704 Regulations.
Based on (i) the items set forth above, (ii) on the representations of
the Managing Member that the Fund Units will be issued in a transaction
registered under the Securities Act, (iii) the representations of the Managing
Member that the Units in the Fund will not be traded on an established
securities market, and (iv) the covenant of the Managing Member that it will
take all actions necessary to prevent the interests in the Fund from being
traded on a secondary market or the substantial equivalent thereof, Counsel is
of the opinion that it is more likely than not that the Fund will not be treated
as a "publicly traded partnership" for federal income tax purposes if such issue
were challenged by the IRS, litigated and judicially decided. There can be no
assurance, however, that the IRS will not successfully contend that the Fund
should be treated as a publicly traded partnership based on, for example, the
recognition of transfers in contravention of the Operating Agreement, the
actions of third parties not within the control of the Managing Member or the
Fund, the ineffectiveness of the provisions of the Operating Agreement designed
to avert the creation of a secondary market (or the substantial equivalent
thereof), or the Fund failing to generate sufficient qualifying gross income to
avoid such status.
Taxation of the Unitholders
As a partnership, the Fund will not be subject to federal income tax.
Instead, the Unitholders will be required to report on their federal income tax
returns, and to take into account in determining their own income tax, their
allocable shares of the income, gain, loss, deductions and tax preference items
of the Fund for the portion of any year during which they are Unitholders of the
Fund.
The Unitholders are subject to tax on their distributive shares of the
Fund's taxable income and items of Fund income, gain, or items of tax preference
required to be taken into account separately even though the Unitholders may
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have received total cash distributions less than the amount of reportable income
or gain, or less than the resultant federal income tax liability. To the extent
that the resultant income tax imposed on a Unitholder exceeds cash distributions
to a Unitholder in any year, such excess will constitute an out-of-pocket
expense that must be funded by the Unitholder from other sources.
Regarding certain limitations on the extent to which the Unitholders
can deduct their share of Fund Net Loss, see "Basis, At Risk, and Passive
Activity Limitations on Deduction of Losses," below.
Qualified Plan Investors
Qualified Plans generally are exempt from federal income taxation
except to the extent that their "unrelated business taxable income" ("UBTI")
from all sources exceeds $1,000 during any fiscal year. Income from partnerships
will be considered UBTI unless an exemption applies. For example, dividends,
interest, royalties, certain rents, and gains from non-inventory sales of
property, among other items, are excluded, as well as all deductions directly
connected with such UBTI; provided, however, that if such otherwise exempt
income is from "debt-financed property" the exemption may not be available.
Because the Fund will not incur indebtedness with respect to the properties it
acquires, distributions by the Fund to a Unitholder that is a tax-exempt entity
are not expected to constitute UBTI unless the tax-exempt entity borrows funds
to acquire its Units (or otherwise incurs acquisition indebtedness within the
meaning of the Code with respect to its acquisition of Units), or Units are
otherwise used in an unrelated trade or business of the tax-exempt entity.
Certain income from unrelated businesses, such as interest and
dividends, is considered income from "passive activities" and is excluded from
UBTI. Also excluded from UBTI is certain rental income and gain from the sale of
property, but only if such, property neither (i) was held primarily for sale to
customers in the ordinary course of the seller's trade or business, nor (ii) was
stock in trade or other property of a kind which would be properly included in
the seller's inventory if on hand at the close of the taxable year. The Fund has
not been organized to engage in the purchase and sale of properties and,
accordingly, it is not expected that the Fund will be treated as a dealer in
properties. See "Property Held Primarily For Sale," below. However, since the
determination of this issue depends on the intentions of the Managing Member and
the Fund and also depends on the facts of the Fund's operations from time to
time (including the timing and number of purchases, the sales of properties
held, the manner in which such sales are solicited, and the amount of time and
effort spent in managing and attempting to sell properties), Counsel is unable
to render an opinion as to whether the Fund will be treated as a dealer in
property.
ALTHOUGH THE FUND INCOME LIKELY WILL NOT CONSTITUTE UBTI, NO OPINION IS
EXPRESSED ON THIS ISSUE AND QUALIFIED PLAN INVESTORS ARE URGED TO SEEK TAX
ADVICE FROM THEIR OWN COUNSEL REGARDING WHETHER OR NOT THEY SHOULD INVEST IN THE
FUND AND THE TAX CONSEQUENCES TO THEM OF RECEIVING DISTRIBUTIONS AND ALLOCATIONS
FROM THE FUND.
Basis of Units
A Unitholder's adjusted basis in such Person's Units is relevant in
determining gain or loss on the sale or other disposition of the Units (see
"Sale of Units" below), in determining the taxability of cash distributions to
the Unitholders (see "Cash Distributions to Unitholders" below), and in
determining the ability of the Unitholders to deduct losses of the Fund (see
"Basis, At-Risk, and Passive Activity Limitations on Deduction of Losses"
below).
A Unitholder's adjusted basis in a Unit initially will equal the amount
of the Unitholder's actual cash Capital Contribution to the Fund (i.e., the
purchase price of Units) and will be increased by the Unitholder's allocable
share of items of Fund Net Income. A Unitholder's basis in a Unit will be
decreased (but not below zero) by (i) cash distributions received from the Fund,
and (ii) the Unitholder's distributive share of items of the Fund Net Loss. A
Unitholder's basis in Units is also generally affected by the amount of Fund
debt allocated to such Unitholder, with increases in allocable debt increasing
basis and decreases reducing basis. Since the Fund does not intend to incur any
debt, such basis adjustments resulting from increases or decreases in Fund debt
are not addressed in detail herein.
Allocations of Net Income and Net Loss
A partner's distributive share of partnership income, gain, loss, or
deduction for federal income tax purposes generally is determined in accordance
with the provisions of the partnership agreement, or, in the case of the Fund,
the Operating Agreement. Under Section 704(b) of the Code, however, an
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allocation, or portion thereof, will be respected only if it either has
"substantial economic effect" or is in accordance with the "partner's interest
in the partnership." If the allocation or portion thereof contained in the
partnership agreement does not meet either test, the IRS will make a
reallocation of such items in accordance with the IRS' determination of each
partner's economic interest in the partnership.
Treasury Regulations under Code Section 704(b) contain guidelines as to
whether partnership allocations have substantial economic effect. These
regulations provide that allocations to the partners generally have economic
effect if: (i) the partners' capital accounts are maintained in accordance with
a prescribed set of guidelines; (ii) liquidating distributions, throughout the
term of the partnership, are to be made in accordance with the partners' capital
account balances; and (iii) the partnership agreement contains either a
"qualified income offset" provision (and does not allocate losses to partners
that create or increase a deficit capital account balance) or a requirement that
partners with deficit balances in their capital accounts following the
liquidation of their interest in the partnership, or the distribution of
liquidation proceeds, are required to restore the amount of such deficit to the
partnership, which amount will be distributed to partners in accordance with
their positive capital account balances or paid to creditors. A "qualified
income offset" provision causes a partner to be allocated items of gross income
where and to the extent, by reason of a distribution or certain other factors, a
deficit balance in the partner's capital account has been created or increased
beyond the amount, if any, that the partner is or is considered to be obligated
to restore. In determining a partner's deficit capital account balance for this
purpose, the partner's capital account must be reduced by distributions
reasonably expected to be made to the partner in future taxable years to the
extent they exceed offsetting increases to such partner's capital account that
reasonably are expected to occur during (or prior to) such years ("Excess
Expected Distributions"). In order to meet the substantiality test, the economic
effect of an allocation, when considered together with all prior and expected
allocations (for all taxable years), must be substantial and not be merely
transitory.
The allocations contained in the Operating Agreement (see "Summary of
the Operating Agreement -- Allocations and Distributions," above) are intended
to comply with the Treasury Regulations' test for having economic effect. The
Operating Agreement requires Capital Accounts to be properly maintained,
requires distributions of proceeds from the liquidation of a Unitholder's
interest in the Fund (whether or not in connection with the liquidation of the
Fund) to be made in accordance with the Unitholder's positive Capital Account
balance, and contains a qualified income offset provision (as well as a
provision that prohibits loss allocations that would cause or increase a deficit
Capital Account). Moreover, the economic effect of the allocations should be
substantial because the economic and tax consequences of deductions representing
paid or incurred expenses will move in tandem.
Because of the lack of any significant borrowings by the Fund, it is
not anticipated that a Unitholder's Capital Account will be reduced below zero
by any distributions of Net Cash Flow from Operations or Net Sales Proceeds, any
allocations of Net Loss, or any Excess Expected Distributions. Consequently, the
Unitholders should not be required by operation of the qualified income offset
provision to recognize gross income or Net Income in any year in excess of their
pro rata share of Net Income.
The Operating Agreement, in addition to meeting the Treasury
Regulations' test for allocations to have economic effect, contains "minimum
gain chargeback" provisions, although, due to the anticipated lack of Fund-level
indebtedness, it is not likely that any such chargebacks will arise.
Accordingly, it is the opinion of Counsel that it is more likely than not that
the Operating Agreement will comply with the safe harbor provisions in the
Treasury Regulations under Code Section 704(b) and that the allocations of Net
Income and Net Loss set forth in the Operating Agreement more likely than not
will have substantial economic effect or will be otherwise treated as being in
accordance with the interests of the Unitholders in the Fund, if such issue were
challenged by the IRS, litigated and judicially decided. Further, the
allocations of deductions and losses set forth in the Operating Agreement more
likely than not will be treated as having substantial economic effect or as
being otherwise in accordance with the interests of the Unitholders in the Fund
to the extent that such allocations do not create a deficit in any Unitholder's
Capital Account balance, taking into account all reasonably expected increases
and decreases in such balance.
The Treasury Regulations under Code Section 704(b) are extremely
complex, however, and in many respects subject to varying interpretations. There
can be no assurance that the IRS will not challenge the allocations of Net
Income or Net Loss provided in the Operating Agreement. If the allocations of
profits and losses set forth in a partnership agreement are deemed not to have
substantial economic effect, the allocations are then to be made in accordance
with the partners' interests in the partnership as determined by taking into
account all of the relevant facts and circumstances. The Treasury Regulations
provide in this regard that a partner's interest in a partnership will be
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determined by taking into account all facts and circumstances relating to the
economic arrangement of the partners, including: (i) the partners' relative
contributions to the partnership; (ii) the interests of the partners in economic
profits and losses (if different from those in taxable income or loss); (iii)
the interests of the partners in cash flow and other non-liquidating
distributions; and (iv) the rights of the partners to distributions of capital
upon liquidation.
Allocations to Newly Admitted Unitholders or Transferees of Units
Section 706(d) of the Code requires that a partner's distributive share
of items of partnership income, gain, loss, deduction, and credit be determined
by the use of a method prescribed in the Treasury Regulations that takes into
account the varying interests of the partners (attributable, for example, to the
admission of new Unitholders or the transfer of Units) during the partnership's
taxable year.
The Operating Agreement permits the Managing Member to select any
method and convention permissible under Code Section 706(d) for the allocation
of tax items during the time persons are admitted as Unitholders, but requires
that any method or convention first utilized be consistently applied thereafter
for all subsequent admissions of Unitholders, unless it is determined
subsequently that such method or convention is not permissible under Section
706(d). In addition, the Operating Agreement provides that: (i) upon the
transfer of all or a portion of a Unitholder's Units, other than at the end of
the Fund's fiscal year, the entire year's Net Income or Net Loss allocable to
the transferred Units will be apportioned between the transferor and transferee
based on the number of days during the year that each is treated under the
Operating Agreement as owning the Units and (ii) permitted transfers of Units
will be deemed to occur at the end of the month in which they actually occur.
Basis, At Risk, and Passive Activity Limitations on Deduction of Losses
The Managing Member anticipates that the Fund will produce taxable Net
Income in each year of operations beginning in 1999 and that Unitholders
generally will not be allocated Net Loss. There can, of course, be no assurance
that such objective can be achieved in any fiscal year of the Fund. Anticipated
operating Net Income may not materialize due to reduced rental income with
respect to the properties or increased or unanticipated expenses. Moreover, Net
Loss could arise upon the disposition of any properties at a loss that is in
excess of taxable income from operations in the year of such loss. The ability
of a Unitholder to utilize any Net Loss in a year, should a Net Loss be
allocated to a Unitholder, is determined by applying the following three
limitations dealing with basis, at-risk and passive losses. Because of the
Fund's investment criteria of acquiring properties on an all-cash basis, without
so-called "leverage," it is not expected that the Fund will generate significant
Net Loss in excess of a Unitholder's basis or amount at risk in the Fund (i.e.,
their Capital Contributions). Even where the basis and at-risk rules do not
limit Net Loss allocated to the Unitholders, it is anticipated, however, that
the passive loss rules will apply to limit the deductibility of any allocated
Net Loss.
First, Unitholders may not deduct an amount exceeding their adjusted
basis in their Units pursuant to Code Section 704(d). See "Basis of Units,"
above, for a discussion of the computation of a Unitholder's adjusted basis in
such Person's Units. If a Unitholder's share of the Fund's Net Loss exceeds
their basis in their Units at the end of any taxable year, such excess Net Loss
may be carried over indefinitely and deducted to the extent that at the end of
any succeeding year the Unitholder's adjusted basis in their Units exceeds zero.
Second, under the Section 465 "at-risk" provisions of the Code,
individual taxpayers (including an individual partner in a partnership) and
certain closely-held corporations may deduct losses from a trade or business
activity, and thereby reduce their taxable income from other sources, only to
the extent they are considered "at risk" with respect to that particular
activity. The amount taxpayers are considered to have at risk includes money
contributed to the activity and certain amounts borrowed with respect to the
activity (including certain "qualified nonrecourse financing" incurred by
partnerships engaged in the business activity of holding real property).
Taxpayers, however, are not considered at risk to the extent they are protected
against loss through guarantees or similar arrangements. The taxpayers' amount
at risk is increased by net income from the activity but reduced by deductions
or net losses permitted under the at-risk limitation and by distributions from
the activity. Losses that are not deductible because of the at-risk limitation
may be carried forward indefinitely to succeeding years but will continue to be
subject to the at-risk limitation. In addition, when taxpayers have been
permitted under the at-risk limitation to deduct net losses and the amount of
risk is subsequently reduced to less than zero (for example, by distributions
from the activity), they are required to include in income an amount equal to
the lesser of such previously allowable losses or their negative at-risk amount.
Third, under Section 469 of the Code, deductions by individuals (and
certain closely-held corporations) of losses from all businesses in which the
taxpayer does not "materially participate" and from all rental activities in
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which the taxpayer does not "actively participate" (collectively "Passive
Activities") are allowed only to the extent of income from such Passive
Activities. Because of this limitation, net losses from Passive Activities
cannot be used to offset earned income, income from businesses in which the
taxpayer is significantly involved, or portfolio income (such as interest,
dividends, royalties, and non-business capital gains). Any losses in excess of
income from Passive Activities can be carried forward indefinitely to offset
future income from Passive Activities, including any income or gain from the
eventual complete disposition of the activity that generated the losses. The
amount of tax losses subject to the Passive Activity limitation is determined by
first applying the basis and at-risk limitations described above. Losses that
are not otherwise limited by the basis or at-risk rules are subjected to the
Passive Activity loss limitation rules.
In general, it is not anticipated that Unitholders will materially or
actively participate in Fund activities, except to the extent such Unitholders
may be affiliated with the Managing Member and provide substantial services to
the Fund. Moreover, any rental activity, such as the commercial real property
acquisition and leasing activity of the Fund, is deemed to be a passive
activity, except for certain taxpayers principally engaged in a real property
trade or business (as defined in Code Section 469(c)(7)). Thus, the Fund's
commercial real property leasing activities are anticipated to be Passive
Activities for most Unitholders and Counsel will opine that it is more likely
than not that a Unitholder's interest in the Fund will be a Passive Activity for
those Unitholders not affiliated with or employed by the Managing Member.
Consequently, a Unitholder's share of the Fund's Net Loss will generally be
allowed as a deduction only to the extent of the Unitholder's share of the Fund
Passive Activity income (see "Passive Activity Income" below), plus the
Unitholder's net income, if any, from other Passive Activities.
Code Section 469(k) provides that the passive activity loss rules will
be applied separately with respect to items attributable to each publicly traded
partnership. Accordingly, if the Fund were deemed to be a publicly traded
partnership, Fund Loss, if any, would be available only to offset future
non-portfolio income of the Fund. In addition, if the Fund were deemed to be a
publicly traded partnership which is not treated as a corporation because of the
qualifying income exception, Fund income would generally be treated as portfolio
income rather than passive income. (See "Publicly Traded Partnership Rules"
above and "Passive Activity Income," below.)
Passive Activity Income
If the Fund is successful in achieving its investment and operating
objectives, the Unitholders are likely to be allocated taxable income from the
Fund in each year. To the extent that a Unitholder's share of the Fund's Net
Income constitutes income from a Passive Activity (as described above), such
income may generally be offset by the Unitholder's net losses and credits from
investments in other Passive Activities.
Counsel will opine that, assuming (i) the properties are acquired and
operated in the manner described in this Prospectus, (ii) the properties are
owned for federal income tax purposes by the Fund, and (iii) the Fund is not
viewed as a "publicly traded partnership" within the meaning of Code Section
469(k), that it is more likely than not that an individual Unitholder's share of
the Fund Net Income will be net income or gain from a "passive activity," as
defined in Section 469 of the Code, which passive income can generally be offset
by a Unitholder's net losses and credits from other Passive Activities, if such
issue were challenged by the IRS, litigated and judicially decided. This opinion
will not apply to the income that is attributable to (i) the investment by the
Fund in liquid investments, such as certificates of deposit or money-market
funds prior to the investment in properties, or to distributions of Net Cash
Flow from Operations or Net Sales Proceeds to the Members, or (ii) the
investment, in interest bearing accounts or otherwise, of amounts held as
working capital, as security deposits, or in reserve. Such income described in
the preceding sentence will constitute, for purposes of Section 469, "portfolio
income" which cannot be offset by losses from passive activities. Moreover, if
the Fund is a "publicly traded partnership" within the meaning of Code Section
469(k), any income from the Fund cannot offset losses from other Passive
Activities and will be treated in a manner similar to portfolio income. The
Treasury Department has been given broad authority to issue regulations defining
income that does not constitute Passive Activity income, and no assurance can be
given that future regulations promulgated under Code Section 469 will not treat
Fund Net Income as income that is not from a passive activity, thereby
preventing any setoff of such income against unrelated passive losses or
credits. See "Basis, At-Risk, and Passive Activity Limitations on Deduction of
Losses," above.
Cash Distributions to Unitholders
A cash distribution to the Unitholders from the Fund (other than a cash
distribution made in exchange for all or part of an interest in the Fund) will
not be taxable to the recipient Unitholder except to the extent, if any, that
the distribution exceeds the adjusted basis in the Unitholder's Units in the
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Fund. See "Basis of Units" above. A cash distribution in excess of the
Unitholder's adjusted basis in a Unit will be taxable to the Unitholder as if it
resulted from a sale or exchange of the Unit. See "Sale of Units" below.
If a Unitholder realizes Net Loss from an investment in the Fund, a
cash distribution which reduces the Unitholder's amount at risk below zero will
be taxable to the extent of the lesser of (i) the amount of the cash
distribution, or (ii) the amount of Net Loss from the Fund previously deducted
by the Unitholder. See "Basis, At-Risk, and Passive Activity Limitations on
Deduction of Losses," above.
Alternative Minimum Tax
The Code contains an "alternative minimum tax," which may reduce the
benefit to particular Unitholders of an investment in the Fund. The individual
alternative minimum tax is imposed at tax rates of from 26% to 28% of
alternative minimum taxable income ("AMTI") in excess of certain exemption
amounts. Capital gains, however, are taxed for alternative minimum tax purposes
at the same rates as those that apply for regular income tax purposes. See
"Capital Gains and Losses," below. The alternative minimum tax is payable to the
extent that it exceeds the "regular" federal income tax payable for that year.
No regular tax credits other than the foreign tax credit may be applied against
the alternative minimum tax.
AMTI generally is computed by adding defined tax preference items and
making specified adjustments to adjusted gross income and then subtracting
certain specified deductions. In determining adjusted gross income for this
purpose, a less beneficial alternative method of depreciation must be used for
certain property. For AMTI purposes, real property placed in service on or
before December 31, 1998 must be depreciated using the straight-line method over
40 years, and equipment must be depreciated using the 150% declining balance
method switching to the straight-line method over the asset's remaining
alternative depreciation class life. The AMTI adjustment for real property will
not apply for properties placed in service after December 31, 1998. Certain
itemized deductions otherwise permitted for regular tax purposes are not
permitted in calculating AMTI. For example, state and local income tax and some
other itemized deductions do not reduce a taxpayer's AMTI. Further, the
alternative minimum tax provisions require the application of the Passive
Activity loss rules when determining AMTI, except that in determining the amount
of such passive income and losses for AMTI purposes, the special alternative
minimum tax rules are applied. The amount of alternative minimum tax imposed
depends upon various factors peculiar to the particular taxpayer, and the extent
if any, to which this tax may adversely affect any Unitholder cannot be
predicted. It should be noted that certain states also impose a minimum tax on
items of tax preference.
Syndication and Organizational Expenses
The Code provides for various treatments of certain initial
expenditures of the Fund. Expenses incurred by the Fund with respect to the
offering and sale of Units (i.e., syndication costs) must be capitalized and
cannot be deducted or amortized. In contrast, amounts paid to organize the Fund
as well as other start-up expenditures, may (if so elected) be amortized ratably
over 60 months. The Fund intends to treat Selling Commissions, the Due Diligence
and Marketing Support Fee, and most of Organizational and Offering Expenses as
syndication expenses. The remainder of Organizational and Offering Expenses will
be treated as amortizable organizational expenses. There can be no assurance
that the IRS will not challenge the treatment of certain fees and expenses paid
by the Fund by asserting, for example, that fees and expenses were allocated
improperly between organizational and syndication expenses or that some or all
of the fees paid to the Managing Member or its Affiliates are properly
characterized as nondeductible syndication expenses or as organizational
expenses. If the IRS were successful in seeking to disallow or re-characterize
these expenditures, the deductions of the Fund available to offset Fund income
could be decreased. See "Tax Treatment of Certain Fees," below for a description
of possible limitations on the deduction of expenses.
Tax Treatment of Certain Fees
The Fund will pay fees to the Managing Member and its Affiliates for
services rendered to the Fund. For a more complete description of these fees,
see "Management Compensation." The amount of the fees has not been determined by
arm's-length negotiations. Instead, the amounts have been set by the Managing
Member on the basis of its judgment as to the reasonable value of the services
provided.
The IRS could assert that the amount paid for some or all of the
services should be treated as a nondeductible Fund distribution or that such
amount exceeds the reasonable value of those services and is not deductible to
the extent of such excess. In addition, the IRS might accept the reasonableness
of a fee, but contend that the fee should be deducted in a later year, or be
capitalized rather than deducted, or be amortized over a period longer than the
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period chosen by the Fund. Finally, the IRS might attempt to re-characterize a
fee as a nondeductible, non-amortizable syndication expense or as an itemized
deduction subject to the limitation on deductions of such so-called
"miscellaneous itemized deductions" by Unitholders on their individual income
tax returns. If the IRS were successful in seeking to disallow or recharacterize
these expenditures, the deductions available to offset the Fund's income would
be decreased. Counsel is unable to render an opinion with respect to the
deductibility of the foregoing fees, due to the inherently factual nature
thereof.
Sale of Units
Upon sale of a Unit by a Unitholder, the excess, if any, of the amount
realized on the sale over the Unitholder's adjusted basis in the Unit will be
taxable gain to the Unitholder. The amount realized will include the amount of
Fund debt, if any, which was allocated to the Unitholder and from which the
Unitholder will be deemed relieved, but such amount, if any, will also have been
included in a Unitholder's basis so no additional gain should be recognized as a
result of such debt allocation. Gain realized on sale of a Unit by a Unitholder
who is not a "dealer" with respect to such Unit and who held it for more than
one year generally is treated as long-term capital gain, except for that portion
of any gain attributable to such Unitholder's share of the Fund's "unrealized
receivables" and "inventory items," as defined in Section 751 of the Code, which
would be taxable as ordinary income. Any recapture of cost recovery allowances
(i.e., depreciation) taken previously by the Fund with respect to personal
property associated with Fund properties will be treated as "unrealized
receivables" for this purpose and subjected to tax at ordinary income rate.
Investors should note in this regard that the Code requires the Fund to report
any sale of Units to the IRS if any portion of the gain realized upon such sale
is attributable to the transferor's share of the Fund's Section 751 property.
Moreover, the portion of any long-term capital gain attributable to depreciation
allowances taken previously with respect to Fund real property may be subject to
a maximum tax rate of 25%, rather than the 20% maximum rate applicable to most
long-term capital gains. See "Capital Gain and Losses," below.
The Managing Member has the right to prohibit the transfer of an
economic interest in the Fund if counsel to the Fund is of the view that there
is a substantial risk that such transfer either would cause the Fund to be taxed
as a "publicly traded partnership" or would cause the Fund to terminate under
Section 708 of the Code. See "Partnership Status," above. The Operating
Agreement also prohibits the transfer of Units if the transfer would cause the
assets of the Fund to be characterized as "plan assets" under ERISA. See "ERISA
Considerations," below.
Transfers of property by gift and on the death of an owner generally
are not taxable transfers and do not result in the recognition of gain or loss.
The transferability of accrued losses from passive activities are problematic in
such transfers by gift or upon death. Unitholders who desire to make gifts of
their Units should seek advice from their own tax advisors.
Dissolution of the Fund
The dissolution of the Fund will involve the distribution to the
Unitholders of the assets, if any, remaining after payment of all of the debts
and liabilities of the dissolving Fund. Upon dissolution of the Fund, a
Unitholder's Unit may be liquidated by one or more distributions of cash or
other property. If the Unitholders receive only cash upon the dissolution, gain
would be recognized by each Unitholder to the extent, if any, that the amount of
cash received exceeds the Unitholder's adjusted basis in such person's Units. No
gain or loss is recognized by a partnership upon distributions of its own assets
in dissolution. The Managing Member does not intend to have the Fund make any
distributions in kind.
Allocation of Fund's Basis in Properties
Following the acquisition of properties, the Managing Member will
allocate the Fund's aggregate basis in each of the properties among the various
components thereof according to their relative fair market values. The Fund will
allocate its purchase price of each of the properties into three major
categories: land, real property improvements, and personal property. Land is
non-depreciable, while real property improvements and personal property will be
depreciated from the dates such assets are placed in service by the Fund.
The valuation of the Fund properties and the various components thereof
(as well as the correct allocation of the aggregate tax basis among the various
components of the Fund properties) is inherently a factual question not
susceptible to a legal determination because such a determination can only be
made by a qualified real estate professional based on information available at
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the time of acquisition. In making these allocations, the Managing Member will
review the facts and circumstances relevant to each of the properties and
consider the report of the appraiser(s), if any, of the properties. The
allocations computed by the Managing Member can be challenged by the IRS who may
assert that the aggregate bases of the properties should be allocated in a
different manner that would yield less favorable tax consequences to the
Unitholders. For example, the IRS could attempt to allocate a greater portion of
the aggregate purchase price of certain of the properties to items such as land,
which is non-depreciable. Since allocation of the cost basis of the properties
is not susceptible to a legal analysis because such a determination can only be
made by a qualified real estate professional based on information available at
the time of acquisition, Counsel is unable to express any opinion, favorable or
unfavorable, as to whether the Fund's allocations of purchase price, when they
are made, will be respected for tax purposes.
Property Held Primarily For Sale
The Fund has been organized for the purpose of acquiring and developing
real estate for investment and rental purposes. However, if the Fund were at any
time deemed for tax purposes to be a "dealer" in real property (one who holds
real estate primarily for sale to customers in the ordinary course of business),
any gain recognized upon a sale of such real property would be taxable as
ordinary income, rather than as capital gain, and would constitute UBTI to
Unitholders which are tax-exempt entities.
Under existing law, whether property is or was held primarily for sale
to customers in the ordinary course of business must be determined from all of
the facts and circumstances surrounding the particular property and sale in
question. The Fund intends to acquire real estate for investment and rental
purposes only and to engage in the business of owning and operating such
improvements. The Fund will make sales thereof only as, in the opinion of the
Managing Member, are consistent with the Fund's investment objectives. Although
the Managing Member does not anticipate that the Fund will be treated as a
dealer with respect to any of its properties, there is no assurance that the IRS
will not take a contrary position. Because the issue is dependent upon facts
which will not be known until the time a property is sold or held for sale and
due to the lack of judicial authority in this area, Counsel is unable to render
an opinion as to whether the Fund will be considered to hold any or all of its
properties primarily for sale to customers in the ordinary course of business.
Capital Gains and Losses
The characterization of income or gain recognized by a Unitholder upon
a sale of properties by the Fund or a sale of a Unit by a Unitholder as capital
or ordinary income is relevant in determining the rate at which such income is
taxed and the extent to which a Unitholder may deduct capital losses. See "Sale
of Units," Ordinary income is taxed to individuals at a maximum federal marginal
rate of 39.6%, while long-term capital gains of individuals (on most capital
assets held for more than one year) are taxed at a maximum marginal rate of 20%
(10% for taxpayers in the 15% rate bracket). To the extent that any gain from
the sale of real property by the Fund represents the recapture of prior
straight-line depreciation deductions by the Fund, the capital gain attributable
to depreciation from real estate held for more than one year will be subjected
to a maximum tax rate of 25%, rather than the general 20% maximum long-term
capital gain rate. These lower long-term capital gain rates also apply for
purposes of computing a Unitholder's alternative minimum tax. Recapture of
depreciation with respect to personal property is taxed at ordinary income tax
rates. Unitholders are also cautioned that the sale of a Unit may require the
Unitholder to "look through" the Units sold, with a portion of such sale
possibly taxable as ordinary income (see "Sale of Units"), and a portion of any
long-term capital gain generated on the sale of a Unit subjected to the higher
25% maximum long-term capital gain rate applicable to straight-line real estate
depreciation recapture, although the position of the IRS on whether such a
"look-through" rule applies for real estate depreciation recapture is not
entirely clear. Capital losses generally may be used by individuals to offset
capital gains and, in addition, a maximum of $3,000 of ordinary income annually.
The capital losses not utilized by individuals in any year may be carried
forward indefinitely to succeeding years.
Audit of Income Tax Returns
The IRS may examine the returns of the Fund and may disagree with the
tax positions taken on such returns. If challenged by the IRS, the tax position
taken on the returns may not be sustained by the courts. An audit of the return
of the Fund could lead to separate audits of the Unitholders' tax returns, which
could result in adjustments attributable to non-Fund items as well as the Fund
items.
Generally, the tax treatment of partnership items will be determined at
the Fund level pursuant to administrative or judicial proceedings conducted at
the Fund level. Partners generally are required to file their tax returns in a
manner consistent with the information returns filed by the partnership or they
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are subject to possible penalties, unless the partners file statements with
their tax returns on Form 8082 describing any inconsistency. The Managing Member
will be the "tax matters partner" for the Fund and as such will have certain
responsibilities with respect to any IRS audit and any court litigation relating
to the Fund. All potential Unitholders should consult their tax advisors as to
the potential impact of these procedural rules upon them.
In the event of an audit of the information return of the Fund, the tax
matters partner, pursuant to advice of counsel, will take all actions necessary
to preserve the rights of Unitholders, will provide all Unitholders with any
notices of such proceedings and other information as required by law, and will
notify all Unitholders of their rights with respect to settlement negotiations.
All expenses of such proceedings undertaken by the tax matters partner, which
might be substantial, will be paid for entirely out of the assets of the Fund,
which funds used for such expenses might otherwise have been available to
distribute to the Unitholders. Moreover, the tax matters partner of the Fund is
not obligated to contest adjustments made by the IRS. Unitholders who elect to
participate in such proceedings will be responsible for any expenses they incur
in connection with such proceedings.
Election for Basis Adjustments
Under Section 754 of the Code, partnerships may elect to adjust the
basis of partnership property upon the transfer of an interest in the
partnership so that the transferee of a partnership interest will be treated for
purposes of calculating depreciation and realizing gain as though such
transferee had acquired a direct interest in the partnership's assets. However,
as a result of the complexities and added expense of the tax accounting required
to implement such an election, the Managing Member does not intend to cause the
Fund to make any such election on behalf of the Fund. As a consequence,
depreciation available to a transferee of Units will be limited to the
transferor's share of the remaining depreciable basis of Fund properties, and
upon a sale of a Fund property, taxable income or loss to the transferee of the
Units will be measured by the difference between such person's share of the
amount realized upon such sale and such person's share of the Fund's tax basis
in the property, which may result in greater tax liability to such person than
if a Section 754 election had been made. In addition, the absence of such an
election by the Fund may result in Unitholders having greater difficulty in
selling their Units.
Interest on Underpayment of Taxes
If it is finally determined that a taxpayer has underpaid tax for any
taxable year, the taxpayer must pay the amount of underpayment plus interest on
the underpayment and certain penalties from the date the tax originally was due.
Under recent law changes, the accrual of interest and penalties may be suspended
for certain qualifying individual taxpayers if the IRS does not notify them of
amounts owing within 18 months of the date they filed their income tax return.
The suspension period ends 21 days after the IRS sends the required notice.
The rate of interest is compounded daily and is adjusted quarterly.
Accuracy-Related Penalties
Section 6662 of the Code imposes penalties relating to the accuracy of
tax returns. A 20% penalty is imposed with respect to any "substantial
understatement of income tax" and with respect to the portion of any
underpayment of tax attributable to a "substantial valuation misstatement" or to
"negligence." All of those penalties are subject to an exception to the extent a
taxpayer had reasonable cause for a position and acted in good faith.
Substantial Understatement Penalty. Section 6662 imposes a 20% penalty
on the amount of an understatement of income tax if such understatement is
"substantial." An understatement of tax liability is "substantial" if the amount
of the understatement exceeds the greater of $5,000 ($10,000 for certain
corporations) or 10% of the total tax required to be shown on the return for the
taxable year. If the understatement is not attributable to a "tax shelter"
(defined as an arrangement a significant purpose of which is the avoidance or
evasion of federal income tax), there will be no substantial understatement
penalty if there was "substantial authority" for the taxpayer's position or if
the position had a "reasonable basis" and the relevant facts are disclosed
adequately on the taxpayer's tax return. A taxpayer may use Form 8275 to ensure
adequate disclosure of a non-tax shelter matter. If the understatement arises
out of a tax shelter, to avoid the penalty the taxpayer must have relied upon
substantial authority for such position and must also have had a reasonable
belief that the position taken was more likely than not the proper treatment.
The Managing Member expects that the Fund will not be considered a "tax shelter"
for this purpose; however, because the issue is dependent upon facts relating to
future Fund operations, the acquisition and disposition of Fund properties and
other factual determinations which are not known at this time, Counsel is unable
to render an opinion as to whether an investment in the Fund will be considered
a tax shelter for purposes of Section 6662 of the Code.
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Substantial Valuation Misstatement Penalty. A 20% substantial valuation
misstatement penalty applies to the portion of any underpayment of tax
attributable to a "substantial valuation misstatement." There is a substantial
valuation misstatement under Section 6662 if (i) the value or adjusted basis of
property claimed on a return is 200% or more of the correct value or adjusted
basis, and (ii) the resulting underpayment of tax exceeds $5,000. Further, the
amount of the penalty is increased to 40% of the resulting underpayment if the
value or adjusted basis of property claimed on a return is 400% or more of the
correct value or adjusted basis. The IRS has ruled under the predecessor
provision of Section 6662 that the substantial valuation misstatement penalty
applies to individual partners when the overstatement is made by a partnership
on the partnership return.
Negligence Penalty. Section 6662 imposes a 20% penalty with respect to
any underpayment of tax attributable to negligence. An underpayment is
attributable to negligence if such underpayment results from any failure to make
a reasonable attempt to comply with the provisions of the Code, or any careless,
reckless, or intentional disregard of the federal income tax rules or
regulations. In addition, regulations provide that the failure by a taxpayer to
include on a tax return any amount shown on an information return is strong
evidence of negligence. The disclosure of a position on the taxpayer's return
will not necessarily prevent the imposition of the negligence penalty. In
addition, a valuation misstatement that results in the underpayment of tax but
does not fall within the scope of the substantial valuation misstatement
provisions may still be subject to a 20% penalty if it is attributable to
negligence.
State and Local Taxes
In addition to the federal income tax consequences described above,
prospective investors should consider state and local tax consequences of an
investment in the Fund. This Prospectus makes no attempt to summarize the state
and local tax consequences to an investor in those states in which the Fund may
own properties or carry on activities, and each investor is urged to consult
such person's own tax advisor on all matters relating to state and local
taxation, including the following: (i) whether the state in which the investor
resides will impose a tax upon a share of the taxable income of the Fund; (ii)
whether an income tax or other return must also be filed in those states where
the Fund will own properties; (iii) whether the investor will be subject to
state income tax withholding in states where the Fund will own properties; (iv)
whether a state or locality where the Fund owns properties will levy an income,
franchise, gross receipts or similar Fund-level tax on the Fund irrespective of
its classification as a "partnership" for federal income tax purposes; and (v)
whether an investor's state of residence will offer a tax credit for taxes paid
by the Unitholder or the Fund to those other states or localities.
A Unitholder's distributive share of the taxable income, gain or loss
of the Fund generally will be required to be included in determining reportable
income for state or local tax purposes. Unitholders may be required to file tax
returns in the states and localities where properties are owned (directly or
indirectly) by the Fund as well as returns in their state of domicile or
residence. The Fund does not expect to file composite returns on behalf of its
Unitholders in any states or localities where the Fund owns properties; any
responsibility for such state or local filings will remain with the Unitholders.
Certain tax benefits which are available to Unitholders for federal
income tax purposes may not be available to Unitholders for state and local tax
purposes, and, in this regard, investors are urged to consult their own tax
advisors. Depending on the states in which properties are located, the Fund may
be required to pay Fund-level tax or withhold state taxes from distributions or
allocations to Unitholders who are considered nonresidents in states where
properties are located. The Managing Member intends to supply Unitholders with
information to determine their income tax obligations, if any, in the
jurisdictions in which the Fund operates.
It is possible that some states or localities where properties are
located will require that the Fund withhold state or local taxes on Net Income
allocated (or distributions made) to the Unitholders with respect to such
properties. The Fund is authorized to withhold from amounts otherwise
distributable to the Unitholders such amounts as the Managing Member determines
are necessary or appropriate to satisfy the Fund's state or local tax
withholding requirement. Any such withholding will be treated as if the amount
withheld was actually distributed to the Unitholders.
To the extent that a Unitholder pays tax to a state or locality in
which the Unitholder is not a resident or the Fund pays a Fund-level tax to such
a state or locality, the Unitholder may be entitled, in whole or in part, to a
deduction or credit against tax owed to the Unitholder's state of residence with
respect to the same income, and Unitholders should consult a tax advisor in that
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regard. In addition, payment of such state or local taxes presently constitutes
a deduction for federal income tax purposes assuming that the taxpayer itemizes
deductions, but such taxes do not constitute a deduction in determining
alternative minimum taxable income. See "Alternative Minimum Tax" above.
No opinion has been or will be rendered by Counsel on matters of state
or local income tax law.
Foreign Investors as Unitholders
As a general matter, foreign investors may purchase Units in the Fund.
This Prospectus makes no attempt to summarize the tax consequences to foreign
investors and no opinion is expressed thereon. A foreign investor who purchases
Units and becomes a Unitholder in the Fund will generally be required to file a
United States tax return on which such Unitholder must report such Person's
distributive share of the Fund's items of income, gain, loss, deduction and
credit, and pay United States federal income tax at regular United States tax
rates on such Person's share of any net income, whether ordinary or capital
gains. A foreign investor may also be subject to tax on such Person's
distributive share of the Fund's income and gain in such Person's country of
nationality or residence or elsewhere. In addition, cash distributions otherwise
payable to a foreign investor from the Fund, allocations of Net Income that are
effectively connected with a United States trade or business, and amounts
payable upon the sale of a foreign investor's Units may be reduced by United
States tax withholding made pursuant to various applicable provisions of the
Code, including, but not limited, to Code Sections 1445 and 1446.
FOREIGN INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO
THE EFFECT OF BOTH THE UNITED STATES TAX LAWS AND FOREIGN LAWS ON AN INVESTMENT
IN THE FUND AND THE POTENTIAL THAT THE FUND WILL BE REQUIRED TO WITHHOLD FEDERAL
INCOME TAXES FROM AMOUNTS OTHERWISE ALLOCABLE OR PAYABLE TO FOREIGN INVESTORS.
Tax Shelter Registration
Any entity deemed to be a "tax shelter," as defined in Section 6111 of
the Code, is required to register with the IRS. Treasury Regulations under
Section 6111 define a "tax shelter" as an investment in connection with which an
investor can reasonably infer from the representations made that the "tax
shelter ratio" may be greater than 2 to 1 as of the close of any of the first
five years ending after the date in which the investment is offered for sale.
The "tax shelter ratio" is generally determined by dividing the investor's share
of the aggregate deductions derived from the investment, determined without
regard to income, by the amount of the investor's capital contributions.
The Fund is not intended to constitute a "tax shelter." Further, the
Managing Member has represented that, in the absence of events which are
unlikely to occur, the aggregate amount of deductions derived from any
Unitholder's investment in the Fund, determined without regard to income, will
not exceed twice the amount of any such Unitholder's investment in the Fund, as
of the close of any year in the Fund's first five calendar years.
Based upon the authority of the Treasury Regulations under Section 6111
(including the exception for "projected income investments") and the
representations of the Managing Member that, in the absence of events which are
unlikely to occur, the "tax shelter ratio" with respect to an investment in the
Fund will not exceed 2 to 1 for any investor as of the close of any year in the
Fund's first five calendar years, Counsel has concluded that it is more likely
than not that the Fund is not currently required to register as a tax shelter
with the IRS under Section 6111 of the Code prior to the offer and sale of the
Units, if the issue were challenged by the IRS, litigated and judicially
decided.
Importance of Obtaining Professional Tax Advice
THE FOREGOING ANALYSIS IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX
PLANNING, PARTICULARLY SINCE THE INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE
FUND ARE COMPLEX AND CERTAIN OF THESE CONSEQUENCES COULD VARY SIGNIFICANTLY WITH
THE PARTICULAR TAX AND FINANCIAL SITUATION OF EACH UNITHOLDER. ACCORDINGLY,
PROSPECTIVE UNITHOLDERS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS
WITH SPECIFIC REFERENCE TO THEIR OWN TAX AND FINANCIAL SITUATIONS REGARDING THE
POSSIBLE TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND.
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ERISA CONSIDERATIONS
The following is a summary of material considerations arising under
ERISA and the prohibited transaction provisions of Code Section 4975 that may be
relevant to a prospective investor. This discussion does not address all aspects
of ERISA or Code Section 4975 or, to the extent not preempted, state law that
may be relevant to particular employee benefit plan Unitholders (including plans
subject to Title I of ERISA, other employee benefit plans and IRAs subject to
the prohibited transaction provisions of Code Section 4975, and governmental
plans and church plans that are exempt from ERISA and Code Section 4975 but that
may be subject to state law requirements) in light of their particular
circumstances.
ERISA also imposes certain duties on persons who are fiduciaries of
pension, profit-sharing, retirement or other employee benefit plans subject to
ERISA ("Plans"). Under ERISA, any person who exercises any authority or control
with respect to the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan, subject to the standards of fiduciary
conduct under ERISA. These standards include the requirements that the assets of
Plans be invested and managed for the exclusive benefit of Plan participants and
beneficiaries, a determination by the Plan fiduciary that any such investment is
permitted under the governing Plan instruments and is prudent and appropriate
for the Plan in view of its overall investment policy and the composition and
diversification of its portfolio.
In considering whether to invest a portion of the assets of a Plan, the
fiduciary of the Plan should consider, among other things whether the
investment: (i) will be in accordance with the documents and instruments
covering the investments by such Plan; (ii) will allow the Plan to satisfy the
diversification requirements of ERISA, if applicable; (iii) will result in UBTI
to the Plan (see "Federal Income Tax Considerations--Qualified Plan Investors");
(iv) will provide sufficient liquidity; and (v) is prudent under the general
ERISA standards. In addition to imposing general fiduciary standards of
investment prudence and diversification, ERISA and the corresponding provisions
of the Code prohibit a wide range of transactions involving the assets of the
Plan and persons who have certain specified relationships to the Plan ("parties
in interest" within the meaning of ERISA, "disqualified persons" within the
meaning of the Code). Thus, a designated Plan fiduciary considering an
investment in the Units should also consider whether the acquisition or the
continued holding of the Units might constitute or give rise to a direct or
indirect prohibited transaction.
The fiduciary of an IRA or of an employee benefit plan not subject to
Title I of ERISA because it is a governmental or church plan or because it does
not cover common law employees (a "Non-ERISA Plan") should consider that such an
IRA or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents, not prohibited under Code Section 4975 and
permitted under applicable state law.
The United States Department of Labor (the "DOL") has issued final
regulations (the "DOL Regulations") which provide guidance on the definition of
"plan assets" under ERISA. Under the DOL Regulations, if a Plan acquires an
equity interest in an entity, which is neither a "publicly-offered security" nor
a security issued by an investment company registered under the Investment
Company Act of 1940, as amended, the Plan's assets would include, for ERISA
purposes, both the equity interest and an undivided interest in each of the
entity's underlying assets unless certain specified exceptions apply.
Under the DOL Regulations, a publicly-offered security is a security
that is "widely-held", "freely-transferable" and registered under the Securities
Exchange Act of 1934, as amended. The Units are registered under the Securities
Exchange Act of 1934, as amended.
The DOL Regulations provide that a security is "widely-held" only if it
is part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another. A security will not fail to be
"widely-held" because the number of independent investors falls below 100
subsequent to the initial offering as a result of events beyond the issuer's
control. The Fund expects the Units to be "widely-held" upon completion of the
offering.
The DOL Regulations provide that whether a security is
"freely-transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL Regulations further provide that when
a security is part of an offering in which the minimum investment is $ 10,000 or
less, as is the case with this Offering, certain restrictions ordinarily will
not, alone or in combination, affect the finding that such securities are
freely-transferable. The DOL Regulations provide that a restriction or
prohibition against a transfer or assignment which would result in a termination
or reclassification of an entity for federal or state income tax purposes will
not affect whether securities are freely transferable. The DOL Regulations are
interpretive in nature and, therefore, no assurance can be given that the DOL
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and the United States Department of the Treasury will conclude that the Units
are freely-transferable.
Even if the Fund's Units were not to qualify for the "publicly-offered
securities" exemption, the DOL Regulations also provide an exemption from the
plan assets definition with respect to securities issued by a "real estate
operating company." An entity is a real estate operating company if, during the
relevant valuation periods defined in the DOL Regulations, at least 50% of its
assets (other than short-term investments pending long-term commitment or
distribution to investors) valued at cost, are invested in real estate which is
managed or developed and with respect to which the Fund has the right to
participate substantially in the management or development activities. The Fund
intends to devote more than 50% of its assets to management and development of
real estate; however, an example contained in the DOL Regulations indicates
that, although some management and development activities may be performed by
independent contractors rather than by the entity itself, if over one-half of
the entity's properties are acquired subject to long-term leases under which
substantially all management and maintenance activities with respect to the
properties are the responsibility of the lessees thereof, then the entity is not
eligible for the real estate operating company exemption.
In an attempt to comply with the real estate operating company
exemption under the DOL Regulations, the Managing Member intends to structure
the management and development activities of the Fund such that at all times
more than 50% of the Fund's assets are invested in multi-tenant properties with
individually negotiated leases whereby maintenance of the common areas and
general maintenance activities with respect to such properties will be the
Fund's responsibility and not passed through to the lessees of such properties.
Due to the uncertainty of the application of the standards set forth in the
examples in the DOL Regulations, however, there can be no assurance as to the
Fund's ability to qualify for the real estate operating company exemption.
A Plan fiduciary considering the purchase of Units should consult its
legal advisor regarding whether our assets would be considered Plan assets, the
possibility of indirect prohibited transactions and other issues and their
potential consequences.
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GLOSSARY
"Acquisition Expenses" shall mean any and all expenses incurred by the Fund, the
Managing Member, or any Affiliate of the Managing Member in connection with the
selection or acquisition of any property for the Fund, whether or not acquired,
including, without limitation, legal fees and expenses, travel and communication
expenses, costs of appraisals, non-refundable option payments on property or
interests not acquired, accounting fees and expenses, taxes, and title
insurance.
"Acquisition Fees" shall mean any and all fees and commissions, exclusive of
Acquisition Expenses, paid by any person or entity to any other person or entity
in connection with the selection or acquisition of any property, including,
without limitation, real estate or other commissions, acquisition fees, finder's
fees, selection fees, non-recurring management fees, consulting fees, or any
other fees or commissions of a similar nature.
"Affiliate" shall mean (i) any person or entity directly or indirectly through
one or more intermediaries controlling, controlled by, or under common control
with another person or entity; (ii) any person or entity owning or controlling
ten percent or more of the outstanding voting securities of another person or
entity; (iii) any officer, director, partner or trustee of such person or
entity; and (iv) if such other person or entity is an officer, director, partner
or trustee of a person or entity, the person or entity for which such person or
entity acts in any such capacity.
"Capital Account" shall mean the book capital account which shall be established
and maintained for the Managing Member and each Unitholder of the Fund in
accordance with Treasury Regulations Section 1.704-1(b)(2)(iv), as amended, in
such fashion as the Managing Member deems advisable. Each Capital Account shall,
reflect, among other items (i) all capital contributions made to the Fund, (ii)
all allocations of Net Income or Net Loss and (iii) all Distributions made by
the Fund. Any and all amounts distributed by the Fund to a Member as a fee
and/or as compensation or reimbursement for services shall not reduce such
Member's Capital Account.
"Capital Contribution" as to any Unitholder shall mean $500 multiplied by the
number of Units subscribed for by the Unitholder, and, as to the Managing Member
shall mean the amount of cash contributed to the Fund by the Managing Member.
Roussel, on or before a specified date. The Capital Contribution of a
substituted Unitholder shall be that attributable to the interest in the Fund
assigned to such substituted Unitholder.
"Closing" shall mean the date or dates on which purchasers of Units are admitted
to the Fund as Unitholders.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" shall mean the Securities and Exchange Commission.
"Dealer Manager" shall mean Private Investors Equity Group or such other person
or entity selected by the Managing Member to act as the dealer manager for the
Offering.
"Distributions" shall mean cash or property distributed to the Managing Member
and the Unitholders arising from their respective interests in the Fund.
"Due Diligence Expense Allowance Fee" shall mean a fee equal to .5% of the Gross
Proceeds which is payable to the Dealer Manager in consideration for assisting
Participating Brokers in fulfilling their due diligence obligations. All or a
portion of this fee may be reallowed to the Participating Brokers.
"Early Investors' 12% Incentive Return" shall mean distributions of Net Cash
Flow from Operations in an amount equal to a 12% non-cumulative, non-compounded
annual return on the first 6,000 nits sold for 12 months following the date the
purchase price for these Units is deposited in escrow which is in lieu of the
Unitholders' 8% Preferred Return during the 12 month period for which it
applies.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" shall mean the Securities and Exchange Act of 1934, as amended.,
"FIRPTA" shall mean the Foreign Investment in Real Property Tax Act of 1980.
"Fund"shall mean Cornerstone Industrial Properties Income and Growth Fund I,LLC.
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"GAAP" shall mean generally accepted accounting principles.
"Gross Proceeds" shall mean $500 multiplied by the number of Units of the Fund
sold through the Offering.
"Invested Capital Contribution", as of any date, shall mean, the Capital
Contribution to the Fund of a Unitholder increased by the amount of any Volume
Discounts received by the Unitholder, reduced by all prior distributions to such
Unitholder representing a return of capital. Invested Capital Contributions may
differ from Capital Accounts, but may not be less than zero.
"IRA" shall mean an Individual Retirement Account.
"IRS" shall mean the United States Internal Revenue Service.
"Managing Member" shall mean Cornerstone Industrial Properties, LLC, a
California limited liability company, or any other person or entity which is
substituted for or succeeds to the interest of such entity as the Managing
Member of the Fund pursuant to the Operating Agreement.
"Marketing Support Fee" shall mean a fee equal to 2% of the Gross Proceeds which
is payable to the Dealer Manager in consideration for assisting Participating
Brokers by providing marketing support. All or a portion of such fee may be
reallowed to Participating Brokers.
"Maximum Offering Amount" shall mean the sale of 40,000 Units.
"Member" shall mean the Managing Member and any Unitholder admitted to the Fund
as a member, including any Person admitted to the Fund as a substituted member
in accordance with the Operating Agreement and "Members" shall mean all Members
of the Fund, including the Managing Member and all Unitholders.
"Minimum Offering Amount" shall mean the sale of 6,000 Units.
"Minimum Initial Purchase" shall mean the minimum amount which must be purchased
by a Person who is not a Member at the time of purchase.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"Net Cash Flow from Operations" shall mean the Net Income or Net Loss for each
fiscal year exclusive of Net Sales Proceeds, with the following adjustments: (i)
there shall be added to such Net Income or Net Loss the amount charged for any
deduction not involving a cash expenditure (such as depreciation, amortization
and accruals), and any cash receipts (excluding Net Sales Proceeds) or reserves
which the Managing Member, in its sole discretion, deems to be available for
Distribution; and (ii) there shall be subtracted from such Net Income or Net
Loss the amount of any nondeductible reserves established or maintained by the
Managing Member in its sole discretion and any other nondeductible cash items,
including expenditures for the acquisition of properties and similar capital
outlay items, distributions made to the Unitholders and the Managing Member
prior to the end of such fiscal year, and, the amount of any and all income not
attributable to cash receipts of the Fund (such as accrued accounts receivable).
"Net Income" shall mean the taxable income of the Fund for federal income tax
purposes for each taxable year, if any, determined using the accrual method of
accounting.
"Net Loss" shall mean the taxable loss of the Fund for federal income tax
purposes for each taxable year, if any, determined using the accrual method of
accounting.
"Net Sales Proceeds" shall mean, in the case of a transaction described in the
definition of Sale, the proceeds of any such transaction less the amount of all
real estate and other brokerage commissions and closing costs paid by the Fund.
In any case in which a property is sold and the Fund receives a payment as a
result thereof, such payment also shall constitute Net Sales Proceeds. Net Sales
Proceeds shall not include any reserves established by the Managing Member in
its sole discretion.
"Non-Accountable Expense Allowance" shall mean a fee equal to 1% of the Gross
Proceeds which is payable to the Dealer Manager as reimbursement for espenses to
be incurred in connection with the offering of Units. All or a portion of this
fee may be reallowed to the Participating Brokers.
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"Offering" means the offering of Units pursuant to the Prospectus.
"Operating Agreement" shall mean the Operating Agreement of the Fund, in sub-
stantially the form attached hereto as Exhibit "A."
"Organizational and offering expenses" shall mean any and all costs and,
expenses, exclusive of Selling Commissions, the Marketing Support Fee and the
Due Diligence Expense Allowance Fee payable to the Dealer Manager, incurred by
the Fund, the Managing Member or any Affiliate of the Managing Member in
connection with the formation, qualification, organization, and registration of
the Fund, and the marketing and distribution of Units, including, without
limitation, the following: legal, accounting, and escrow fees; printing,
amending, supplementing, mailing, and distributing costs; filing, registration,
and qualification fees and taxes; facsimile and telephone costs; and all
advertising and marketing expenses including travel and the costs related to
broker-dealer sales meetings, including the salary and benefits of one employee
of Cornerstone Ventures, Inc.
solely dedicated to identifying and working with the Participating Brokers.
"Participating Brokers" shall mean those broker-dealers that are members of the
National Association of Securities Dealers, Inc., and that enter into a
participating broker agreement with the Dealer Manager to sell Units. The Dealer
Manager will be considered a Participating Broker to the extent it sells Units
directly to investors.
"Person" shall mean any natural person, partnership, corporation, association,
trust, limited liability company or other legal entity.
"Prospectus" shall mean the final prospectus included in the Fund's Registration
Statement filed with the Commission, pursuant to which the Fund will offer Units
to the public, as the same may be amended or supplemented from time to time
after the effective date of such Registration Statement.
"Qualified Plans" or "Plans" shall mean qualified pension, profit-sharing, and
stock bonus plans, including Keogh plans and IRAs.
"Registration Statement" shall mean the registration of the Units offered hereby
on Form S-11 and related exhibits filed with the Commission by the Fund, as
amended.
"Sale" shall mean any transaction or series of transactions whereby the Fund
sells, grants, transfers, conveys, or relinquishes its ownership and/or interest
in any property or any portion thereof, including any event with respect to any
property which gives rise to a significant amount of insurance proceeds or
condemnation awards.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Selling Commissions" shall mean the sales commissions payable to the Dealer
Manager in connection with the sale of Units as described in the Prospectus
equal to 7% of Gross Proceeds, subject to reduction under certain circumstances.
"Sponsor" shall mean the Managing Member and any other person directly or
indirectly instrumental in organizing, wholly or in part, the Fund or any person
who will manage or participate in the management of the Fund, and any Affiliate
of any such person. Sponsor does not include a person whose only relationship to
the Fund is as that of an independent property manager and whose only
compensation is as such. Sponsor also does not include wholly independent third
parties such as attorneys, accountants and underwriters whose only compensation
is for professional services.
"Subscription Agreement" shall mean the Subscription Agreement and the Power of
Attorney, in the form included in the Subscription Agreement, attached hereto as
Exhibit "C".
"Treasury Regulations" means those final, temporary and proposed regulations
promulgated by the United States Treasury Department interpreting and
implementing various provisions of the Code, as amended.
"Unit" shall mean the membership interest of a Unitholder in the Fund which is
represented by a Capital Contribution of $500. Where applicable, Units shall
mean multiple or fractional Units held by a Unitholder.
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"Unitholder" shall mean any Person that owns Units, including the Managing
Member with respect to Units, if any, owned by it.
"Unitholders' 8% Preferred Return" shall mean (i) in the case of distributions
of Net Cash Flow from Operations an amount equal to an 8% non-cumulative,
non-compounded annual return on a Unitholder's Invested Capital Contribution,
and (ii) in all other cases, an amount equal to an 8% cumulative, non-compounded
annual return on the Unitholders' Invested Capital Contribution calculated in
each case from the date a Unitholder is admitted to the Fund and the Capital
Account attributable to such Unitholder is established, to the extent that
sufficient cash is available to make such distributions, in each case reduced by
all prior distributions of Net Cash Flow from Operations and of Net Sales
Proceeds for the current fiscal year and all prior fiscal years other than made
as a return of Unitholders' Invested Capital Contribution.
"Volume Discount" shall mean, with respect to a Unitholder, the amount by which
the Selling Commissions payable with respect to the Units purchased by the
Unitholder are reduced.
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THE OFFERING
General
We are offering a minimum of 6,000 Units ($3,000,000) and a maximum of
40,000 Units ($20,000,000) at a purchase price of $500 per Unit on a "best
efforts" basis to persons who meet the standards set forth under "Who May
Invest." A minimum purchase of five Units ($2,500) is required, subject to the
right of the Managing Member in its sole discretion, to accept subscriptions for
a single Unit after the initial subscription has been made by a Unitholder.
Qualified Plans must make a minimum purchase of at least two Units ($1,000).
"Best efforts" means that the Dealer Manager is not guaranteeing that
any specified amount will be raised. The Offering will commence as of the date
of this Prospectus and will terminate not later than __________, 2001. Unless
the Minimum Offering is sold on or before __________, 2000, all subscription
proceeds will be promptly refunded to subscribers together with interest earned
thereon on a pro rata basis, based on the number of days the subscriber's funds
were held in escrow.
Plan of Distribution
The Units will be offered on a "best efforts" basis through the Dealer
Manager and the Participating Brokers, who are members of the National
Association of Securities Dealers, Inc. (the "NASD") or other persons or
entities exempt from broker-dealer registration. The Participating Brokers will
use their best efforts during the offering period to find eligible persons who
desire to subscribe for the purchase of Units.
Escrow Conditions
Subscription proceeds for qualified subscriptions will be deposited in
a segregated escrow account with Southern California Bank, Newport Beach,
California, and will not be commingled with the accounts of the Managing Member
and its Affiliates. The subscription proceeds will be held in trust for the
benefit of the subscribers until released to us from the escrow account
following receipt of subscription proceeds for the Minimum Offering. Thereafter,
we expect subscription proceeds to be released to us periodically as
subscriptions are accepted, but not less frequently than monthly. We will pay
you interest from the date your funds were deposited in escrow until the release
from escrow (net of escrow expense) as soon as practicable after the date the
minimum number of Units is sold. No interest checks for amounts less than $5.00
will be issued. The Managing Member or its Affiliates may purchase Units to
permit the release of funds from escrow.
Subscription Process
The Units are being offered to the public by the Dealer Manager and the
Participating Brokers. The agreement between the Dealer Manager and the
Participating Brokers requires the Participating Brokers to make inquiries of
all prospective purchasers in order to ascertain whether a purchase of Units is
suitable for the person and promptly transmit the completed subscription
documentation and any supporting documentation to the Managing Member.
The Units are being sold when, as and if subscriptions are received and
accepted by us, subject to the satisfaction by the Managing Member of certain
other conditions and approval by legal counsel of certain legal matters. The
Managing Member has the unconditional right to accept or reject any
subscription. Your subscription will be accepted or rejected by us within ten
days (and generally within 24 hours) after our receipt of a copy of your
Subscription Agreement, fully completed, and your payment in good funds for the
number of subscribed Units is received. If your subscription is accepted, a
confirmation will be mailed to you not more than ten business days after our
acceptance. A sale of the Units may not be completed until at least five
business days after the date you receive a Prospectus and, as may be required by
certain state regulatory authorities, a copy of our organizational documents. If
for any reason your subscription is rejected, your check and Subscription
Agreement will be returned to you, without interest or deduction, within ten
days after a receipt.
Determination of Investor Suitability
The Dealer Manager and each Participating Broker will make every
reasonable effort to determine that you satisfy the suitability standards set
forth herein and that an investment in the Units is an appropriate investment
for you. See "Who May Invest." The Participating Brokers must ascertain that you
can reasonably benefit from an investment in the Units. In making the
determination, the Participating Brokers will consider whether: (i) you have the
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capability of understanding our fundamental aspects based on your employment
experience, education, access to advice from qualified sources such as
attorneys, accountants and tax advisors and prior experience with investments of
a similar nature; (ii) you have an apparent understanding of (a) the fundamental
risks and possible financial hazards of this type of investment; (b) the lack of
liquidity of this investment; (c) the Managing Member's role in directing or
managing the investment; and (d) the tax consequences of the investment; and
(iii) you have the financial capability to invest in the Units.
By executing the Subscription Agreement, your Participating Broker
acknowledges its determination that the Units are a suitable investment for you.
Each Participating Broker is required to represent and warrant that it has
complied with all applicable laws in determining the suitability of the Units as
an investment for you. The Dealer Manager and/or the Participating Brokers must
maintain a record of the information obtained to determine that an investor
meets the suitability standards and a representation of the investor that the
investor is investing for the investor's own account or, in lieu of such
representation, information indicating that the investor for whose account the
investment was made met the suitability standards, for at least six years.
Compensation
We will pay the Dealer Manager Selling Commissions equal to up to seven
percent (7%) of the Gross Proceeds on all Units sold for serving as the Dealer
Manager of the Offering and for the sale of Units through its efforts. All or a
portion of these Selling Commissions may be paid to Participating Brokers, as
compensation for their services in soliciting and obtaining subscribers for the
purchase of Units. We will pay an additional two percent (2%) of the Gross
Proceeds to the Dealer Manager as a Marketing Support Fee for marketing fees,
wholesaleing fees, expense reimbursements, bonuses and incentive compensation.
All or a portion of the Marketing Support Fee may be paid to the Participating
Brokers. We will also pay the Dealer Manager a Non-Accountable Expense Allowance
of one percent (1%) of the Gross Proceeds for reimbursement of costs incurred in
connection with the sale of the Units and a Due Diligence Expense Allowance Fee
of one half of one percent (.05%) of the Gross Proceeds on all Units sold. All
or a portion of these fees may be paid to the Participating Brokers.
The total amount of underwriting compensation, including commissions,
due diligence fees and reimbursement of expenses paid in connection with the
offering, wil not exceed (14.5%) of Gross Proceeds. See "Estimated Use of
Proceeds" and "Management Compensation."
Volume Discounts
Investors purchasing in excess of $250,000 worth of Units (501 Units)
will be entitled to a reduction in the selling commission payable in connection
with the sale of these Units in accordance with the following schedule:
<TABLE>
Amount of Purchaser's Investment Re-Allowed Commissions Per Unit
- --------------------------------- -------------------------------
<CAPTION>
From To Price Per Unit Percent Dollar Amount
- ------------- ------------- -------------- ------- -------------
<S> <C> <C> <C> <C>
$1,000 $250,000 $500.00 7.0% $35.00
$250,001 $500,000 $495.00 6.0% $30.00
$500,001 $1,000,000 $490.00 5.0% $25.00
$1,000,001 $5,000,000 $485.00 4.0% $20.00
$5,000,001 $10,000,000 $480.00 3.0% $15.00
$10,000,001 $20,000,000 $475.00 2.0% $10.00
</TABLE>
Any such reduction in the Selling Commission for volume discounts will
be credited to the "purchaser," as defined below, by reducing the total purchase
price otherwise payable by the "purchaser." For example, if you purchase 2,000
Units, you could pay as little as $980,000 rather than $1,000,000 for the Units,
in which event the Selling Commissions on the sale of such Shares would be
$60,000 ($30 per Unit). The net proceeds we receive will not be affected by such
discounts.
Subscriptions may be combined for the purpose of determining the volume
discounts in the case of subscriptions made by any "purchaser," provided all
such Units are purchased through the same Participating Broker or through the
Dealer Manager. The volume discount will be prorated among the separate
subscribers considered to be a single Purchaser (as hereinafter defined).
Further subscriptions for Units will not be combined for purposes of the volume
discount in the case of subscriptions by any "purchaser" who subscribes for
additional Units subsequent to the purchaser's initial purchase of Units.
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<PAGE>
For purposes of such volume discounts, "purchaser" includes (1) an
individual, his or her spouse, and their children under the age of 21, who
purchase the Units for his, her or their own accounts, and all pension or trust
funds established by each such individual; (2) a corporation, partnership,
limited liability company association, joint stock company, trust fund, or any
organized group of persons, whether incorporated or not (provided that the
entities described in this clause (2) must have been in existence for at least
six months before purchasing the Units and must have formed such group for a
purpose other than to purchase the Units at a discount); (3) an employee's
trust, pension, profit-sharing, or other employee benefit plan qualified under
Section 401 of the Code; and (4) all pension, trust, or other funds maintained
by a given bank. In addition, the Managing Member, in its sole discretion, may
aggregate and combine separate subscriptions for Units received during the
offering period from (a) the Dealer Manager or the same Participating Broker;
(b) investors whose accounts are managed by a single investment adviser
registered under the Investment Advisers Act of 1940; (c) investors over whose
accounts a designated bank, insurance company, trust company, or other entity
exercises discretionary investment responsibility; or (d) a single corporation,
partnership, trust association, or other organized group of persons, whether
incorporated or not and whether such subscriptions are by or for the benefit of
such corporation, partnership, trust association, or group. Except as provided
in this paragraph, subscriptions will not be cumulated, combined, or aggregated.
Any request to combine more than one subscription must be made in
writing in a form satisfactory to the Managing Member and must set forth the
basis for such request. Any such request will be subject to verification by the
Dealer Manager that all of such subscriptions were made by a single "purchaser."
If a "purchaser" does not reduce the per Unit purchase price, the excess
purchase price over the discounted purchase price will be returned to the actual
separate subscribers for Units.
Any reduction in commissions will reduce the effective purchase price
per Unit to the Unitholder involved but will not alter the net proceeds payable
to us as a result of such sale. All Unitholders will be deemed to have
contributed the same amount per Unit to us whether or not the Unitholder
receives a discount. Accordingly, for purposes of distributions, Unitholders who
pay reduced commissions will receive higher returns on their investments in us
as compared to Unitholders who do not pay reduced commissions.
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<PAGE>
WHO MAY INVEST
This Offering is directed only to persons of legal age in the state of
his or her residence who have substantial net worth or substantial recurring
income or both. Transfer of Units is subject to certain conditions and the
investment is illiquid because there is no ready market for the Units and no
trading market is expected to develop. See "Summary of the Operating Agreement."
Units will be sold only to Persons representing that they have either (i) a net
worth of at least $225,000 exclusive of their home, home furnishings and
personal automobiles, or (ii) a net worth of at least $70,000 exclusive of their
home, home furnishings and personal automobiles, and annual gross income in
excess of $70,000. In the case of the purchase of Units by fiduciary accounts,
one of the foregoing conditions must be met by the fiduciary or by the fiduciary
account or by the donor who directly or indirectly supplies the funds for the
purchase of the Units. In the case of gifts to minors, one of the foregoing
conditions must be met either by the custodian or by the person who directly or
indirectly supplies the funds for such purchase. Assignees may be required to
comply with these requirements under the securities laws of the state of the
transfer and in order to be admitted as a Unitholder.
The agreement between the Dealer Manager and Participating Brokers
requires your Participating Broker to make inquiries of you as required by law
in order to determine whether a purchase of Units is suitable for you. Your
Participating Broker is required to promptly transmit to the Managing Member all
fully completed and duly executed Subscription Agreements. The Dealer Manager
will also be subject to this requirement. The Managing Member will maintain for
at least six years records evidencing your compliance with the suitability
requirements described above.
The suitability standards referred to above represent minimum
suitability requirements for prospective investors and do not necessarily mean
that the Units are a suitable investment for such investors. You may not be able
to liquidate your investment in the Units in the event of a financial emergency,
and, therefore, you should consider an investment in the Units only as a
long-term investment.
An investment in the Units may also be suitable for tax-exempt entities,
including Qualified Plans. See "Federal Income Tax Considerations - Qualified
Plan Investors" and "ERISA Considerations."
We anticipate that comparable suitability standards will be imposed by
us in connection with any resale of Units. Any resale of Units is subject to
various restrictions and may result in substantial adverse tax consequences. See
"Summary of the Operating Agreement" and "Federal Income Tax Considerations".
HOW TO SUBSCRIBE
You may purchase Units if you meet the suitability standards described
above under "Who May Invest" by doing the following:
1. Read the entire Prospectus and any current supplement(s) and the
Operating Agreement, set forth as Exhibit "A" to the Prospectus.
2. Fill out and sign the Subscription Agreement. A copy of the
Subscription Agreement and Power of Attorney and instructions is Exhibit "C" to
the Prospectus.
3. Make your check payable to "Southern California Bank Escrow No.
12563-GG for Cornerstone Fund I".
4. Send your Subscription Agreement and check to your Participating
Broker.
By purchasing Units, you confirm that you meet the suitability
standards for purchasers of Units and agree to be bound by all of the terms of
the Subscription Agreement and the Operating Agreement.
Within ten days (and generally within twenty-four hours) of our receipt
of your Subscription Agreement, we will accept or reject your subscription. If
your subscription is accepted, we will mail you a confirmation within three
days. If your subscription is rejected, your check and Subscription Agreement
will be promptly returned to you, without interest or deduction, within ten days
after receipt.
Subscriptions made through Qualified Plans must be processed through
and forwarded to us by an approved trustee. In the case of Qualified Plan
subscribers, the confirmation will be sent to the trustee.
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<PAGE>
SUPPLEMENTAL SALES MATERIAL
In addition to this Prospectus, we will utilize certain sales material
in connection with the Offering of the Units, including an investor sales
promotion brochure, an investment summary, a fact sheet to be used internally by
broker/dealers, a CD ROM, an audio tape, a video tape, form letters, and
third-party articles. We will also establish an internet web site which may be
accessed by potential purchasers of Units.
Other than as described herein, we have not authorized the use of other
sales material (including fact sheets or marketing bulletins which are expressly
labeled for broker/dealer use only). The Offering is made only by means of this
Prospectus. Although the information contained in such sales material does not
conflict with any of the information contained in this Prospectus, Units are
being offered only through this Prospectus. The sales material does not purport
to be complete and should be read only in conjunction with this Prospectus.
LEGAL MATTERS
Inquiries or requests for information should be directed to the
Managing Member at 4590 MacArthur Boulevard, Suite 610, Newport Beach,
California 92660, Attention: Investor Services Department.
The law firm of Oppenheimer Wolff & Donnelly LLP, serves as securities
counsel to the Fund, the Managing Member, and certain of its Affiliates, and
will render an opinion with respect to certain material federal income tax
issues relating to this offering. See Exhibit "B" - Form of Tax Opinion. In
addition, a copy of such securities counsel's opinion concerning the
organization and existence of the Fund and the valid issuance and
non-accessibility of the Units will be supplied to you or your representative
upon written request to the Managing Member at 4590 MacArthur Boulevard, Suite
610, Newport Beach, California 92660, Attention: Investor Services Department.
AVAILABLE INFORMATION
We have filed a Registration Statement on Form S-11 under the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder, with respect to the Units offered pursuant to this Prospectus. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. For further information with respect to us
and the Units we are offering, reference is made to the Registration Statement
and such exhibits.
We will become subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, we will file reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission")
pursuant to the Exchange Act.
The Registration Statement, including exhibits, and the reports, proxy
statements and other information filed by us can be inspected without charge at,
or copies obtained upon payment of the prescribed fees from, the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Commission also maintains a Web site
that contains Registration Statements, reports, proxy and information statements
and other materials that are filed through the Commission's Electronic Data
Gathering, Analysis, and Retrieval System. This Web site can be accessed at
http://www.sec.gov.
Statements contained in this Prospectus as to the contents of any
contract or other document which is filed as an Exhibit to the Registration
Statement are not necessarily complete, and each such statement is qualified in
its entirety by reference to the full text of such contract or document.
In addition to applicable legal requirements, if any, we will make
annual reports containing audited financial statements with a report thereon
from our independent public accountants and quarterly reports containing
unaudited financial information for each of the first three quarters of each
fiscal year available to the Unitholders upon request.
ADDITIONAL INFORMATION
The Managing Member will answer all inquiries from you and your
representatives concerning any matters relating to the offer and sale of the
Units, and will give you and your representatives the opportunity to review any
documents referred to in this Prospectus or any other documents relating to
investment in properties and the opportunity to obtain any additional
information necessary to verify the accuracy of any representations or
information set forth in this Prospectus (to the extent that the Managing Member
possesses such information, or can acquire it without unreasonable effort or
expense).
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<PAGE>
FINANCIAL STATEMENTS
As of March 20, 1999, the fund had not been captialized and the Managing
Member had been only minimally capitalized. Accordingly, audited financial
statements for these entities have not been provided. Prior to the effective
date of this Prospectus, the Managing Member will have net equity of $1,000,000
resulting from the contribution of a $1,000,000 note receivable from an
affiliate of one of its members. The note, which will mature six months after
the date contributed, will bear simple interest at 6% per annum and will be
secured by an irrevocable letter of credit.
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<PAGE>
PRIOR PERFORMANCE TABLES
The prior performance tables that follow present certain information
regarding private placement programs previously sponsored by Affiliates of the
Managing Member. The information presented in the tables represents certain
historical experience of thirteen private real estate programs organized and
managed by Affiliates of the Managing Member. The prior private programs
utilized substantial amounts of acquisition debt and had investment policies and
objectives different than ours. This information should not be considered as
indicative of the results to be obtained by any investment in our Fund. The
information contained in these tables does not relate to any properties our Fund
may acquire and the purchase of the Units will not create any ownership interest
in the programs included in these tables.
Our Fund is designed for all cash property purchases to generate
maximum cash flow from operations, with returns also anticipated from property
value appreciation. Our Fund does not have significant tax shelter features. The
prior private placement programs of the Affiliates were oriented more towards
capital growth with a modest near-term emphasis on cash flow.
The Tables described below contain certain information on the prior
programs, but none of the information in the Tables is covered by the report of
an independent certified public accountant. The purpose of the Tables is to
provide information from the prior performance of the Affiliates of the Managing
Member. For a narrative summary of the prior performance of the Affiliates of
the Managing Member , see "Prior Performance" at page 15 in the text of the
Prospectus.
TABLE I - EXPERIENCE IN RAISING AND INVESTING FUNDS
The purpose of Table I is to present information as to the previous
performance of the Affiliates of the Managing Member in raising funds through
programs the offering of which closed during the period of January, 1995 through
August, 1998. The Managing Member and its Affiliates have not previously
participated in a public program.
TABLE II - COMPENSATION TO SPONSOR AND AFFILIATES
Table II summarizes the compensation paid to Affiliates during the
years 1995 through 1997 and the eight months ended August 31, 1998 for all
programs, the offering of which closed during such period. Also summarized in
the aggregate is compensation received from all other programs during the same
period. The compensation as used in these Tables includes acquisition fees, real
estate commissions, property management and administrative fees, construction
supervision fees, and proceeds from the sale or refinancing of the properties.
TABLE III - OPERATING RESULTS FROM PRIOR PROGRAMS
Table III summarizes the operating results for programs which were
formed during the years 1992 through 1997 and the eight months ended August 31,
1998. The basis for accounting is indicated on each program report. Generally,
the information is presented on a Generally Accepted Accounting Principles
(GAAP) basis. However, some of the Programs maintained their financial
statements on a tax basis and they are noted accordingly. On these Programs, the
GAAP basis reporting would include differences in such matters as accrual and
recognition of income and expense items, capitalization, depreciation and
amortization bases and periods.
TABLE IV - RESULTS OF COMPLETE PROGRAMS
Table IV summarizes the operating and disposition results of programs
that have completed operations (no longer hold properties) during the years 1992
through 1997 and the eight months ended August 31, 1998.
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TABLE V - SALE OR DISPOSAL OF PROPERTY
Table V identifies the sales or disposals of properties by program and
the details of the cash received on closing.
TABLE VI - GENERAL INFORMATION OF PROJECTS
Table VI provides general information of each individual program
including location, type of commercial property, square footage, date of
purchase, number of units at time of purchase and the number of units sold.
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<PAGE>
<TABLE>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS - JANUARY 1, 1995 THROUGH AUGUST 31,1998
<CAPTION>
Van Buren Baldwin Torrance Carson Carson
Business Park Business Park Amapola Industrial Industrial
Partners Partners Partners Partners - Phase I Partners- Phase II
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dollar amount offered 1,572,781 2,186,400 1,601,046 529,677 2,223,323
Dollar amount raised (100%) 1,572,781 100.00% 2,186,400 100.00% 1,601,046 100.00% 529,677 100.00% 2,223,323 100.00%
Less offering expenses:
Organization expenses 13,419 0.85% 33,937 1.55% 2,544 0.16% 430 0.08% 1,693 0.08%
Equity placement &
administrative fees 132,300 8.41% 67,000 3.06% 162,955 10.18%
Investment acquisition fees 0 0.00% 0 0.00% 25,000 1.56% 13,949 2.63% 58,551 2.63%
Offering administrative
& selling expenses 0 0.00% 17,364 0.79% 0 0.00%
Reserves 5,000 0.32% 400 0.02% 4,478 0.28% 577 0.11% 2,423 0.11%
--------- ------ -------- ---- --------- ---- ------- ---- --------- ----
Amount Available for
Investment 1,422,062 90.42% 2,067,699 94.57% 1,406,069 87.82% 514,721 97.18% 2,160,656 97.18%
Prepaid items and
fees related to
purchase of property 8,488 0.25% 42,039 0.64% 18,960 0.45% 3,973 0.28% 3,817 0.06%
Cash down payment 1,155,037 34.44% 1,690,190 25.74% 854,536 20.40% 357,401 24.94% 1,500,191 24.95%
Mortgage financing 2,000,000 59.64% 4,700,000 71.58%[2]3,150,000 75.18% 1,038,960 72.51% 4,361,040 72.53%
Building improvements
paid outside of escrow 71,380 2.13% 0 0.00% 0 0.00% 4,540 0.32% 30,535 0.51%
Acquisition fees 118,500 3.53% 134,000 2.04% 166,316 3.97% 27,898 1.95% 117,102 1.95%
--------- ------ -------- ---- --------- ---- ------- ---- --------- ----
Total acquisition costs 3,353,405 100.00% 6,566,229 100.00% 4,189,812 100.00% 1,432,772 100.00% 6,012,685 100.00%
Percent leverage
(mortgage financing 59.64% 71.58% 75.18% 72.51% 72.53%
divided by total
acquisition cost)
Date offering began May-95 Dec-96 Dec-95 Aug-97 Aug-97
Length of offering
(in months) [1] [1] [1] [1] [1]
Months to invest 90% of amount
available for investment [1] [1] [1] [1] [1]
[1] Offering was made within thirty days of acquiring the property.
[2] "The original loan agreement included an additional loan holdback of $660,000 available for leasing commissions,
construction costs for tenant improvements and accrued interest. The program has not requested additional disbursements
relating to these available holdbacks."
</TABLE>
<PAGE>
<TABLE>
TABLE II
COMPENSATION TO SPONSOR JANUARY 1, 1995 THROUGH AUGUST 1998
<CAPTION>
All Other Programs-
Van Buren Baldwin Torrance Carson Carson Seven
Business Park Business Park Amapola Industrial Industrial Commercial Real
Type of Compensation Partners Partners Partners Partners-I Partners - Phase II Estate Programs
------------- ----------- -------- ---------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Jun-92
Date offering commenced May-95 Dec-96 Dec-95 Aug-97 Aug-97 through Oct-93
Dollar amount raised 1,572,781 2,186,400 1,601,046 529,677 2,223,323 5,365,372
Amount paid to sponsor
from proceeds of
offering:
Investment
acquisition fees 0 0 25,000 0 0 0
Acquisition fees 118,500 134,000 166,316 27,898 117,102 0
Equity appreciation
prior to funding 0 0 0 0 0 320,461
---------- --------- --------- ------- -------- ---------
118,500 134,000 191,316 27,898 117,102 320,461
========== ========= ========= ======= ========= =========
Dollar amount of cash
generated from
operations before
deducting
payments to sponsor 224,618 505,777 624,188 170,989 224,225 757,762
Amount paid to sponsor from
operations:
Property management fees 50,055[1] 0 98,639[1] 16,009[1] 38,290[1] 393,433[1]
Administrative service
fees 5,402[2] 29,400[2] 0 5,758[2] 24,454[2] 16,307[2]
Lease commissions 7,662[3] 151,478[3] 109,203[3] 7,100[3] 38,181[3] 311,706[3]
Construction supervision fee 0 56 20,318 1,291 22,850 40,886
---------- --------- ------- ------ ------- -------
63,119 180,934 228,160 30,158 123,775 762,332
====== ======= ======= ====== ======= =======
Dollar amount of property
sales and and refinancing
before deducting payments
to sponsor:
Cash 2,548,000 0 149,582 0 0 29,693,004
Notes 0 0 0 0 0 0
--------- -------- ------- ------ ------- ---------
2,548,000 0 149,582 0 0 29,693,004
========= ======== ======= ====== ====== ==========
Amount paid to
sponsor from
property sales
and refinancing:
Real estate
commissions 31,895 0 0 0 0 517,954
Incentive fees 0 0 0 0 0 0
------- -------- ------- ------ ------- ----------
31,895 0 0 0 0 517,954
======= ======== ======= ====== ====== ==========
[1] The program paid management fees directly to the sponsor who paid a third-party company to provide the actual property
management services with the sponsor providing supervisory and ancillary management services. The amounts below reflect
the net compensation to the sponsor:
Total property
management fees
paid to sponsor 50,055 0 98,639 16,009 38,290 393,433
Less: Amount paid
by sponsor to
third party 40,997 0 91,193 0 0 359,606
------- -------- ------- ------ ------- --------
Net property
management fees
earned by sponsor 9,058 0 7,446 16,009 38,290 33,827
======= ======== ======= ====== ======= ==========
[2] The program paid partnership management & administrative fees directly to the sponsor who paid a third-party company who
provided partnership referral and management services. The amounts below reflect the net partnership management & administrative
fees compensation to the sponsor:
Total partnership
management fees
paid to sponsor 5,402 29,400 0 5,758 24,454 16,307
Less: Amount paid
by sponsor to
third party 0 4,410 0 0 0 0
------ -------- ------- ------ ------- -------
Net partnership
management fees
earned by sponsor 5,402 24,990 0 5,758 24,454 16,307
======= ======== ======= ====== ======= ==========
[3] The program paid leasing commission fees directly to the sponsor who incurred fees paid to a third-party company that provided
or assisted in the actual leasing services. The amounts below reflect the net leasing commission compensation to the sponsor:
Total leasing
commission fees
paid to sponsor 7,662 151,478 109,203 7,100 38,181 311,706
Less: Amount paid
by sponsor to
third party 7,662 87,578 70,740 0 5,362 219,663
------ -------- ------- ------ ------ -------
Net commission fees
earned by sponsor 0 63,900 38,463 7,100 32,819 92,043
======= ======== ======= ====== ======= ========
</TABLE>
<PAGE>
TABLE III
<TABLE>
VAN BUREN BUSINESS PARK PARTNERS
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
1995 [1] 1996 1997 01/01/98-08/31/98
<S> <C> <C> <C> <C>
Gross Revenues 208,082 344,047 291,914 202,281
Profit on sale of properties 311,439 0 103,535 222,774
Less: Operating expenses 74,461 122,106 136,305 75,175
Interest expense 88,976 168,573 162,346 87,274
Depreciation & amortization 37,443 67,958 62,038 37,305
-------- ------- ------ -------
Net Income-GAAP Basis 318,641 (14,590) 34,760 225,301
======= ======== ====== =======
Taxable Income
- from operations 8,993 (16,091) (68,776) N/A
- from gain on sale 311,149 0 103,536 N/A
Cash generated from operations 64,882 58,484 14,204 23,929
Cash generated from sales - net 1,176,624 0 341,834 627,366
Cash generated from refinancing 0 230,000 0 0
--------- ------- ------ -------
Cash generated from operations,
sales and refinancing 1,241,506 288,484 356,038 651,295
Less: Cash distributions to
investors
- from operating cash flow 64,882 58,484 14,204 23,929
- from sales and refinancing 435,118 169,216 140,796 276,071
- from return of capital 0 0 0 0
-------- ------- ------ -------
500,000 227,700 155,000 300,000
======== ======= ====== =======
Cash generated (deficiency) after
cash distributions 741,506 60,784 201,038 351,295
Special items:
- Partner's capital contributions 1,572,781 0 0 0
- Borrowing secured by property 2,000,000 0 0 0
- Reserve retained in sub-tier
Partnership (5,000) 0 0 0
- Capitalized loan fees &
Organization costs (76,645) (2,867) 0 0
- Capitalized equity
placement fee (132,300) 0 0 0
- Property acquisitions and
improvements (3,353,405) (2,314) (4,574) 0
- Decrease in borrowings
secured by property (630,671) (11,787) (203,802) (335,026)
---------- -------- ------ -------
Cash generated (deficiency)
after cash distributions and
special items 116,266 43,816 (7,338) 16,269
========= ======= ====== =======
Tax and Distribution Data per
$1000 Invested
Federal Income Tax Results:
Ordinary income(loss)
- from operations 5.7 (10.2) (43.7) N/A
- from recapture 0.0 0.0 0.0 N/A
Capital gain(loss) 197.8[2] 0.0 65.8 N/A
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 202.6 0.0 12.8 143.3
- Return of capital 115.3 144.8 85.7 47.5
Source (on cash basis)
- Operations 0.0 0.0 0.0 0.0
- Refinancing 0.0 144.8 0.0 0.0
- Sales 317.9 0.0 98.6 190.7
Amount remaining invested at
the end of the period 88.47% 73.06% 65.42% 60.67%
</TABLE>
[1] For period 04/24/95 (inception) through 12/31/95.
[2] Due to the holding period of the asset, the entire gain was recognized as
ordinary income on the tax return.
<PAGE>
<TABLE>
TABLE III
BALDWIN BUSINESS PARK PARTNERS
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
1996 [1] 1997 01/01/98-08/31/98
<S> <C> <C> <C>
Gross Revenues 71,672 1,034,319 703,583
Profit on sale of properties 0 0 0
Less: Operating expenses 20,718 408,392 258,495
Interest expense 32,100 426,285 280,872
Depreciation & amortization 7,217 152,558 115,185
------ --------- -------
Net Income-GAAP Basis 11,637 47,084 49,031
====== ========= =======
Taxable Income
-from operations 7,374 60,171 N/A
-from gain on sale 0 0 N/A
------ --------- -------
Cash generated from operations 78,275 164,440 82,184
Cash generated from sales 0 0 0
Cash generated from refinancing 0 0 0
------ --------- -------
Cash generated from operations,
sales and refinancing 78,275 164,440 82,184
Less: Cash distributions to investors
from operating cash flow 0 60,294 60,027
from sales and refinancing 0 0 0
from return of capital 0 0 0
------ --------- -------
0 60,294 60,027
------ --------- -------
Cash generated (deficiency) after cash
distributions 78,275 104,146 22,157
Special items:
Partner's capital contributions 2,186,400 0 0
Borrowing secured by property 4,700,000 0 0
Accrued property acquisition fees 9,545 (9,545) 0
Reserve retained in sub-tier
Partnership (400) 0 0
Capitalized loan fees & organization
cost (170,373) (22,781) 0
Loans from/(to) Affiliates 0 (338) 338
Capitalized equity placement fees (67,000) 0 0
Property acquisitions and
improvements (6,566,229) (22,651) (88,974)
Decrease in borrowings
secured by property (3,198) (38,371) (25,580)
Cash generated (deficiency) after cash
distributions and special items 167,020 10,460 (92,059)
Tax and Distribution Data per $1000
Invested Federal Income Tax Results:
Ordinary income(loss)
- from operations 3.4 27.5 N/A
- from recapture 0.0 0.0 N/A
Capital gain(loss) 0.0 0.0 N/A
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 26.9 22.4
- Return of capital 0.0 0.7 5.0
Source (on cash basis)
- Operations 0.0 27.6 27.5
- Refinancing 0.0 0.0 0.0
- Sales 0.0 0.0 0.0
Amount remaining invested at
the end of the period 100% 99.93% 99.43%
(expressed as a percentage of the amount originally invested in the property)
[1] For period 11/08/96 (inception) through 12/31/96.
[2] The Partnership files the tax return on the cash basis which result in differences between net income - GAAP basis and taxable
income from accounts payable and adjustments.
</TABLE>
<PAGE>
<TABLE>
TABLE III
TORRANCE AMAPOLA PARTNERS
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
1995 [1] 1996 1997 01/01/98-08/31/98
<S> <C> <C> <C> <C>
Gross Revenues 40,337 712,378 698,382 478,165
Profit on sale of properties 0 0 0 0
Less: Operating expenses 5,171 265,312 210,186 146,787
Interest expense 14,372 289,747 301,001 203,452
Depreciation & amortization 3,914 86,675 104,574 77,482
----- ------ ------- ------
Net Income-GAAP Basis 16,880 70,644 82,621 50,444
====== ====== ====== ======
Taxable Income
- from operations 2,317 85,900 87,371 N/A
- from gain on sale 0 0 0
Cash generated from operations 24,401 154,828 131,640 105,477
Cash generated from sales 0 0 0 0
Cash generated from refinancing 0 0 149,582 0
----- ------ ------- ------
Cash generated from operations,
sales and refinancing 24,401 154,828 281,222 105,477
Less: Cash distributions to investors
- from operating cash flow 0 100,000 100,000 0
- from sales and refinancing 0 0 0 0
- from return of capital 0 0 0 0
----- ------ ------- ------
0 100,000 100,000 0
----- ------ ------- ------
Cash generated (deficiency) after cash
distributions 24,401 54,828 181,222 105,477
Special items:
- Partner's capital contributions 1,601,048 0 0 0
- Borrowing secured by property 3,150,000 0 0 0
- Accrued property acquisition fee 9,350 (9,350) 0 0
- Reserve retained in sub-tier
Partnership (5,000) 0 0 0
- Acquisition fee paid directly by (25,000) 0 0 0
- Capitalized loan fees &
Organization costs (83,450) (8,671) 0 0
- Loans from/(to) Affiliates (60,889) 60,789 0 0
- Capitalized equity placement fee (92,258) (70,697) 0 0
- Property acquisitions and
improvements 4,189,812 (127,172) (150,815) (20,191)
- Decrease in borrowings secured
by property 0 (29,993) (33,538) (24,487)
Cash generated (deficiency) after cash
distributions and special items 328,388 (130,266) (3,131) 60,799
========= ======== ======== =======
Tax and Distribution Data per $1000
Invested Federal Income Tax Results:
Ordinary income(loss)
- from operations 1.4 53.7 54.6 N/A
- from recapture 0.0 0.0 0.0 N/A
Capital gain(loss) 0.0 0.0 0.0 N/A
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 54.7 51.6 0.0
- Return of capital 0.0 7.8 10.9 0.0
Source (on cash basis)
- Operations 0.0 62.5 62.5 0.0
- Refinancing 0.0 0.0 0.0 0.0
- Sales 0.0 0.0 0.0
0.0
Amount remaining invested at
the end of the period 100.00% 99.22% 98.14% 98.14%
</TABLE>
[1] For period 12/18/95 (inception) through 12/31/95.
<PAGE>
<TABLE>
TABLE III
CARSON INDUSTRIAL PARTNERS - PHASE I
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
01/01/98
1997 [1] -08/31/98
-------- ---------
<S> <C> <C>
Gross Revenues 119,977 218,094
Profit on sale of properties 0 0
Less: Operating expenses 36,744 74,673
Interest expense 35,396 60,320
Depreciation & amortization 7,818 15,742
----- ------
Net Income-GAAP Basis 40,019 67,359
====== ======
Taxable Income
- from operations 36,239 N/A
- from gain on sale 0 N/A
Cash generated from operations 54,174 78,360
Cash generated from sales 0 0
Cash generated from refinancing 0 0
----- ------
Cash generated from operations,
sales and refinancing 54,174 78,360
Less: Cash distributions to investors
- from operating cash flow 0 4,620
- from sales and refinancing 0 0
- from return of capital 0 0
----- ------
0 4,620
----- ------
Cash generated (deficiency) after cash
distributions 54,174 73,740
Special items:
- Partner's capital contributions 529,677 0
- Borrowing secured by property 1,038,960 0
- Reserve retained in sub-tier
Partnership (577) 0
- Capitalized loan fees &
organization costs (29,650) 0
- Loans from/(to) affiliates 19 289
- Capitalized syndication costs (13,949) 0
- Property acquisitions and
improvements (1,432,772) (43,975)
- Decrease in borrowings secured
by property (3,597) (7,902)
--------- -------
Cash generated (deficiency) after cash
distributions and special items 142,285 22,152
======= ======
Tax and Distribution Data per
$1000 Invested Federal Income
Tax Results:
Ordinary income(loss)
- from operations 68.4 N/A
- from recapture 0.0 N/A
Capital gain(loss) 0.0 N/A
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 (8.7)
- Return of capital 0.0 0.0
Source (on cash basis)
- Operations 0.0 (8.7)
- Refinancing 0.0 0.0
- Sales 0.0 0.0
Amount remaining invested at
the end of the period 100% 100%
</TABLE>
(expressed as a percentage of the amount originally invested in the property)
[1] For period 04/14/97 (inception) through 12/31/97.
<PAGE>
<TABLE>
TABLE III
CARSON INDUSTRIAL PARTNERS - PHASE II
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
01/01/98-
1997 [1] 08/31/98
<S> <C> <C>
Gross Revenues 270,880 516,134
Profit on sale of properties 0 0
Less: Operating expenses 75,987 144,545
Interest expense 148,579 251,767
Depreciation & amortization 27,804 60,160
------ ------
Net Income-GAAP Basis 18,510 59,662
====== ======
Taxable Income
- from operations 10,074 N/A
- from gain on sale 0 N/A
Cash generated from operations 47,782 122,565
Cash generated from sales 0 0
Cash generated from refinancing 0 0
------ ------
Cash generated from operations,
sales and refinancing 47,782 122,565
Less: Cash distributions to investors
- from operating cash flow 0 19,392
- from sales and refinancing 0 0
- from return of capital 0 0
------ ------
0 19,392
------ ------
Cash generated (deficiency) after cash
distributions 47,782 103,173
Special items:
- Partner's capital contributions 2,223,323 0
- Borrowing secured by property 4,361,040 0
- Reserve retained in sub-tier
partnership (2,423) 0
- Capitalized loan fees
& organization (116,948) 0
- Loans from/(to) Affiliates 81 1,211
- Capitalized syndication costs (58,551) 0
- Property acquisitions and
improvements (6,012,685) (272,340)
- Decrease in borrowings
secured by property (15,097) (33,168)
---------- ---------
Cash generated (deficiency) after cash
distributions and special items 426,522 (201,124)
Tax and Distribution Data per
$1000 Invested
Federal Income Tax Results:
Ordinary income(loss)
- from operations 4.5 N/A
- from recapture 0.0 N/A
Capital gain(loss) 0.0 N/A
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 (8.7)
- Return of capital 0.0 0.0
Source (on cash basis)
- Operations 0.0 (8.7)
- Refinancing 0.0 0.0
- Sales 0.0 0.0
Amount remaining invested at the
end of the period 100% 100%
(expressed as a percentage of the amount originally invested in the property)
</TABLE>
[1] For period 04/14/97 (inception) through 12/31/97.
<PAGE>
<TABLE>
TABLE III
TAMARACK BREA PARTNERS
BASIS OF ACCOUNTING - MODIFIED CASH BASIS
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
01/01/98-
1993 [1] 1994 1995 1996 1997 08/31/98
<S> <C> <C> <C> <C> <C> <C>
Gross Revenues 159,327 362,123 357,188 291,018 211,574 141,984
Profit on sale of properties 60,044 49,405 97,048 0 166,032 137,030
Less: Operating expenses 48,892 165,695 139,213 109,548 134,436 68,712
Interest expense 62,571 106,566 123,574 107,735 73,032 26,535
Depreciation & amortization 26,019 52,875 52,912 44,017 38,266 23,737
------ ------ ------ ------ ------ ------
Net Income-Modified Cash Basis 81,889 86,392 138,537 29,718 131,872 160,030
====== ====== ======= ====== ======= =======
Taxable Income
- from operations 21,845 36,987 41,489 29,718 (34,160) N/A
- from gain on sale 60,044 [2] 49,405 97,048 0 166,032 N/A
Cash generated from operations 78,386 [3] 74,321 [3] 88,909 [3] 64,033 [3] (2,220)[3] 35,703 [3]
Cash generated from sales 236,164 232,256 419,840 0 647,924 458,202
Cash generated from refinancing 0 0 0 0 0 0
------- ------- ------- ------- ------- -------
Cash generated from operations,
sales and refinancing 314,550 306,577 508,749 64,033 645,704 493,905
Less: Cash distributions
to investors
- from operating cash flow 0 0 0 0 0 0
- from sales and refinancing 0 178,150 125,000 0 0 0
- from return of capital 0 0 0 0 0 0
------- ------- ------- ------- ------ --------
0 178,150 125,000 0 0 0
------- ------- ------- ------- ------ --------
Cash generated (deficiency
after cash distributions 314,550 128,427 383,749 64,033 645,704 493,905
Special items:
- Partners capital contribution 925,000
- Loans from/(to) Affiliates (60,380) 31,380 12,500 0 16,500 0
- Borrowing secured by property 1,900,000 0 0 0 0 0
- Capitalized loan fees
and organization costs (6,819) 0 0 0 0 0
- Property acquisitions and
improvements (2,764,561) 0 (5,913) (8,312) (10,995) (9,331)
- Decrease in borrowings
secured by property (187,578) (219,876) (367,159) (49,963) (606,674) (425,038)
--------- -------- -------- ------- --------- --------
Cash generated (deficiency)
after cash distributions
and special items 120,212 (60,069) 23,177 5,758 44,535 59,536
======= ======= ======== ====== ======= ======
Tax and Distribution Data per
$1000 Invested
Federal Income Tax Results:
Ordinary income(loss)
- from operations 23.6 40.0 44.9 32.1 (36.9) N/A
- from recapture 0.0 0.0 0.0 0.0 0.0 N/A
Capital gain(loss) 64.9 53.4 104.9 0.0 179.5 N/A
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 192.6 135.1 0.0 0.0 0.0
- Return of capital 0.0 0.0 0.0 0.0 0.0 0.0
Source (on cash basis)
- Operations 0.0 0.0 0.0 0.0 0.0 0.0
- Refinancing 0.0 0.0 0.0 0.0 0.0 0.0
- Sales 0.0 192.6 135.1 0.0 0.0 0.0
Amount remaining invested at the
end of the period 100% 100% 100% 100% 100% 100%
[1] For the period 6/01/93 (inception) through 12/31/93
[2] Due to the short holding period of the property prior to sale gain on sale of the buildings was treated as ordinary income.
[3] The cash flow from operations includes adjustments made to reflect the net change in capitalized lease
commissions and liability for tenant deposits
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE III
STRATEGIC INDUSTRIAL PARTNERS - BEACH
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
1993 [1] 1994 1995 1996 1997 [2]
-------- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C>
Gross Revenues 20,001 743,137 735,454 778,875 61,636
Profit on sale of properties 0 0 0 0 675,480
Less: Operating expenses 2,023 243,333 249,274 252,182 43,204
Partnership overhead all 0 5,514 55,435 29,134 2,364
Interest expense 3,465 419,520 471,003 426,800 38,132
Depreciation 3,513 103,454 122,429 129,761 116,773
----- ------- ------- ------- -------
Net Income-GAAP Basis 11,000 (28,684) (162,687) (59,002) 536,643
====== ======= ======== ======= =======
Taxable Income
- from operations 11,000 (28,684) (162,687) (59,002) (138,837)
- from gain on sale 0 0 0 0 675,480
Cash generated from operations 57,996 40,811 (37,189) (20,163) (28,263)
Cash generated from sales 0 0 0 175,293 [2] 4,523,712
Cash generated from refinancing 0 0 0 0 0
----- ------- ------- ------- ---------
Cash generated from operations,
sales and refinancing 57,996 40,811 (37,189) 155,130 4,495,449
Less: Cash distributions to
investors
- from operating cash flow 0 0 0 0 0
- from sales and refinanci 0 0 0 0 808,398
- from return of capital 0 0 0 0 0
----- ------- ------- ------- ---------
0 0 0 0 808,398
----- ------- ------- ------- ---------
Cash generated (deficiency) after
cash distributions 57,996 40,811 (37,189) 155,130 3,687,061
Special items:
- Partner's capital contributions 0 514,165 0 0 0
- Borrowing secured by property 3,413,950 426,055 35,249 37,718 0
- Note payable proceeds 577,974[3] 0 0 0 0
- Decrease in note payable 0 (577,974) 0 0 0
- Capitalized loan fees &
Organization costs (171,261) 0 0 0 0
- Loans from/(to) Affiliate 0 0 0 0 0
- Capitalized equity placement
fees 0 (80,325) 0 0 0
- Property acquisitions and
Improvements (455,223) (60,673) (31,473) 0
- Decrease in borrowings secured
by property 0 (36,321) 0 (221,859)
- Inter-entity transfer between
programs (182,364)[4] 181,048 [4] 113,282 [4] 64,264 [4] (98,943)[4]
-------- ------- ------- ------ -------
Cash generated (deficiency) after
cash distributions and
special items 0 12,236 50,669 3,780 (66,683)
====== ====== ====== ===== =======
Tax and Distribution Data
per $1000 Invested
Federal Income Tax Results:
Ordinary income(loss)
- from operations N/A [3] (55.8) (316.4) (114.8) (270.0)
- from recapture N/A [3] 0.0 0.0 0.0 0.0
Capital gain(loss) N/A [3] 0.0 0.0 0.0 1,313.7
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 0.0 0.0 0.0 1,572.3
- Return of capital 0.0 0.0 0.0 0.0 0.0
Source (on cash basis)
- Operations 0.0 0.0 0.0 0.0 0
- Refinancing 0.0 0.0 0.0 0.0 0
- Sales 0.0 0.0 0.0 0.0 1,572.3
Amount remaining invested
at the end of period 100.00% 100.00% 100.00% 100.00% 0.00%
(expressed as a percentage of the amount originally invested in the property)
[1] For the period 12/23/93 (inception) to 12/31/93.
[2] Program sold in January of 1997 and an escrow deposit was received in 1996 and included in cash flow and sales
in the year received.
[3] The was entity organized by the sponsor and was initially funded by notes payable to non-related entities prior to
receipt of investor contributions in 1994.
[4] The inter entity transfers are advances to/(from) other programs included in the same reporting entity. The
transfers were a result of debt allocation and payments on an umbrella loan required by the lender as portions of the programs
sold. In addition, the entity manitained a general account and allocations were made for Investor contributions,
distributions and overhead costs.
</TABLE>
<PAGE>
<TABLE>
TABLE III
STRATEGIC INDUSTRIAL PARTNERS - FAIRWAY
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
1993 [1] 1994 1995 1996 [2]
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Gross Revenues 17,617 703,382 771,221 91,139
Profit on sale of properties 0 0 0 1,623,641
Less: Operating expenses 2,293 237,647 231,408 26,276
Partnership overhead allocation 0 5,275 55,433 2,430
Interest expense 3,465 380,415 418,586 50,412
Depreciation 2,966 94,714 113,242 164,312
----- ------- ------- ---------
Net Income-GAAP Basis 8,893 (14,669) (47,448) 1,471,350
===== ======= ======= =========
Taxable Income
- from operations 8,893 (14,669) (47,448) (152,291)
- from gain on sale 0 0 0 1,623,641
Cash generated from operations 53,774 80,537 40,257 (83,046)
Cash generated from sales 0 0 100,000 [1] 5,010,653
Cash generated from refinancing 0 0 0 0
Cash generated from operations,
sales and refinancing 53,774 80,537 140,257 4,927,607
Less: Cash distributions to investors
- from operating cash flow 0 0 0 0
- from sales and refinancing 0 0 6,850 267,029
- from return of capital 0 0 0 0
----- ------- ------- ---------
0 0 6,850 267,029
----- ------- ------- ---------
Cash generated (deficiency) after cash
distributions 53,774 80,537 133,407 4,660,578
Special items:
- Partner's capital contribution 0 563,006 0 0
- Borrowing secured by property 2,901,750 493,633 31,908 0
- Note payable proceeds 527,836 [3] 0 0 0
- Decrease in note payable 0 (527,836) 0
- Capitalized loan fees &
Organization costs (163,972) (857) 0 0
- Loans from/(to) Affiliates 0 0 0 0
- Capitalized equity placement 0 (87,955) 0 0
- Property acquisitions and
improvements (3,128,272) (456,954) (33,659) (336)
- Decrease in borrowings secured
by property 0 (32,934) 0 (3,394,356)
- Inter-entity transfer
between programs (191,116)[4] 47,782 [4] (155,370)[4] (1,320,595)[4]
----------- -------- ------- ---------
Cash generated (deficiency) after cash
distributions and special items 0 78,422 (23,714) (54,709)
========== ====== ======= =======
Tax and Distribution Data per
$1000 Invested
Federal Income Tax Results:
Ordinary income(loss)
- from operations N/A [3] (26.1) (84.3) (270.5)
- from recapture N/A [3] 0.0 0.0 0.0
Capital gain(loss) N/A [3] 0.0 0.0 2,883.9
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 0.0 12.2 474.3
- Return of capital 0.0 0.0 0.0 0.0
Source (on cash basis)
- Operations 0.0 0.0 0.0 0.0
- Refinancing 0.0 0.0 0.0 0.0
- Sales 0.0 0.0 12.2 474.3
Amount remaining invested at the end
of the period 100.00% 100.00% 100.00% 0.00%
(expressed as a percentage of the amount originally invested in the property)
[1] For the period 12/22/93 (inception) to 12/31/93.
[2] Program sold in February of 1996 and an escrow deposit was received in 1995 and included in cash flow a
[3] The entity was organized by the sponsor and was initially funded by notes payable to non-related entiti
[4] The inter entity transfers are advances to/(from) other programs included in the same reporting entity
</TABLE>
<PAGE>
TABLE III
<TABLE>
STRATEGIC INDUSTRIAL PARTNERS - THE PARK
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
01/01/98-
1993 [1] 1994 1995 1996 1997 08/31/98
<S> <C> <C> <C> <C> <C> <C>
Gross Revenues 81,861 675,490 650,625 666,442 676,609 335,313
Profit on sale of properties 0 109,915 0 0 870,606 269,024
Less: Operating expenses 6,760 215,196 220,455 181,046 212,430 125,968
Partnership overhead allocation 0 5,034 55,434 29,933 26,616 5,192
Interest expense 80,465 507,325 531,336 482,099 360,417 145,708
Depreciation 12,530 155,134 161,731 168,836 242,297 54,009
------ ------- ------- ------- ------- -------
Net Income-GAAP Basis (17,894) (97,284) (318,331) (195,472) 705,455 273,460
======= ======= ======== ======== ======= =======
Taxable Income
- from operations (43,316)[2] (181,777)[2] (318,331) (195,472) (165,151) N/A
- from gain on sale 0 109,915 0 0 870,606 N/A
Cash generated from operations 1,665 (15,825) (137,718) (177,333) 109,727 43,570
Cash generated from sales 0 287,286 0 0 2,124,815 634,726
Cash generated from refinancing 0 0 0 0 916,786 0
------ ------- ------- ------- --------- -------
Cash generated from operations,
sales and refinancing 1,665 271,461 (137,718) (177,333) 3,151,328 678,296
Less: Cash distributions to investors
- from operating cash flow 0 0 0 0 0 0
- from sales and refinancing 0 0 0 0 1,463,411 178,835
- from return of capital 0 0 0 0 0 0
------ ------- ------- ------- --------- -------
0 0 0 0 1,463,411 178,835
Cash generated (deficiency) after cash
distributions 1,665 271,461 (137,718) (177,333) 1,687,917 499,461
Special items:
- Partner's capital contributions 0 544,635 0 0 0 0
- Borrowing secured by
property 4,382,250 [3] 243,763 38,341 41,022 0 0
- Note payable proceeds 559,115 [4] 0 350,000 0 0 0
- Decrease in note payable 0 (559,115) (350,000) 0 0 0
- Capitalized loan fees &
organization costs (335,332) 0 0 0 (109,444) 0
- Loans from/(to) affiliates 200 182,563 241,762 (397,109) 800 0
- Capitalized equity placement
fees 0 (85,085) 0 0 0 0
- Property acquisitions
and improvements (4,604,240) (248,211) (18,560) (8,410) (48,546) (15,102)
- Decrease in borrowings
secured by property 0 (307,988) 0 (249,418) (2,222,979) (850,022)
- Inter- entity transfer
between programs 322,027 [5] (281,926)[5] (95,348)[5] 826,694 [5] 680,982 [5] 467,987 [5]
--------- ------- ------- ------- --------- -------
Cash generated (deficiency) after
cash distributions and
special items 325,685 (239,903) 28,477 35,446 (11,270) 102,324
======= ======= ======== ======== ======= =======
Tax and Distribution Data per
$1000 Invested Federal Income
Tax Results:
Ordinary income(loss)
- from operations N/A [2] (333.8) (584.5) (358.9) (303.2) N/A
- from recapture N/A [2] 0 0.0 0.0 0.0 N/A
Capital gain(loss) N/A [2] 201.8 0.0 0.0 1,598.5 N/A
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 0.0 0.0 0.0 2,687.0 328.4
- Return of capital 0.0 0.0 0.0 0.0 0.0 0.0
Source (on cash basis)
- Operations 0.0 0.0 0.0 0.0 0.0 0.0
- Refinancing 0.0 0.0 0.0 0.0 0.0 0.0
- Sales 0.0 0.0 0.0 0.0 2,687.0 328.4
Amount remaining invested at
the end of the period 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
(expressed as a percentage of the amount originally invested in the property)
[1] For the period 11/22/93 (inception) to 12/31/93.
[2] Initial tax return was filed on the cash basis in 1993, the entity converted to accrual basis tax reporting in 1994 and the
difference in book and tax income in 19
[3] This program was acquired two months before the other programs included in the reporting entity were closed in escrow. This
program was initially financed for $3,8
[4] The entity was organized by the sponsor and was initially funded by notes payable to non-related entities prior to receipt
of investor contributions in 1994.
[5] The inter entity transfers are advances to/(from) other programs included in the same reporting entity. The transfers were a
result of debt allocation and payments
</TABLE>
<PAGE>
<TABLE>
TABLE III
STRATEGIC INDUSTRIAL PARTNERS - WESTLAKE I
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
1993 [1] 1994 1995 1996 1997 [2]
-------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Gross Revenues 13,814 556,430 562,668 476,916 0
Profit on sale of properties 0 0 0 630,602 0
Less: Operating expenses 1,506 145,603 132,512 126,327 23,639
Partnership overhead allocation 0 4,075 55,433 24,287 0
Interest expense 3,465 328,243 357,763 274,473 0
Depreciation 2,452 75,086 93,233 184,116 0
------- -------- ------- ------- ------
Net Income-GAAP Basis 6,391 3,423 (76,273) 498,315 (23,639)[2]
======= ======== ======== ======= =======
Taxable Income
- from operations 6,391 3,423 (76,273) (132,287) (23,639)
- from gain on sale 0 0 0 630,602 0
Cash generated from operations 48,277 62,524 (30,584) (36,377) (3,102)
Cash generated from sales 0 0 0 3,812,464 0
Cash generated from refinancing 0 0 0 0 0
------- -------- ------- --------- ------
Cash generated from operations,
sales and refinancing 48,277 62,524 (30,584) 3,776,087 (3,102)
Less: Cash distributions to investors
- from operating cash flow 0 0 0 0 0
- from sales and refinancing 0 0 0 0 732,790
- from return of capital 0 0 0 0 0
------- -------- ------- -------- --------
0 0 0 0 732,790
Cash generated (deficiency) after cash
distributions 48,277 62,524 (30,584) 3,776,087 (735,892)
Special items:
- Partner's capital contribution 0 297,745 0 0 0
- Borrowing secured by property 2,635,208 314,411 25,486 70,746 0
- Note payable proceeds 305,661 [3] 0 0 0 0
- Decrease in note payable 0 (305,661) 0 0 0
- Capitalized loan fees & organi (116,118) 0 0 0 0
- Loans from/(to) affiliates 0 0 0 (21,688) 21,688
- Capitalized equity placement 0 (46,515) 0 0 0
- Property acquisitions and impr (2,892,836) (305,666) (21,285) (109,079) 0
- Decrease in borrowings secured 0 (19,072) 0 (2,501,158) 0
- Inter-entity transfer between 19,808 [4] (78,130)[4] 30,442 [4] (1,283,624)[4] 859,226
---------- -------- ------- ----------- -------
Cash generated (deficiency) after cash
distributions and special items 0 (80,364) 4,059 (68,716) 145,022
Tax and Distribution Data per
$1000 Invested
Federal Income Tax Results:
Ordinary income(loss)
- from operations N/A [3] 11.5 (256.2) (444.3) (79.4)
- from recapture N/A [3] 0.0 0.0 0.0 0.0
Capital gain(loss) N/A [3] 0.0 0.0 2,117.9 0.0
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 0.0 0.0 0.0 2,461.1
- Return of capital 0.0 0.0 0.0 0.0 0.0
Source (on cash basis)
- Operations 0.0 0.0 0.0 0.0 0.0
- Refinancing 0.0 0.0 0.0 0.0 0.0
- Sales 0.0 0.0 0.0 0.0 2,461.1
Amount remaining invested at the
end of the period 100.00% 100.00% 100.00% 100.00% 0.00%
(expressed as a percentage of the amount originally invested in the property)
[1] For the period 12/23/93 (inception) to 12/31/93.
[2] The program sold in October of 1996 and in 1997 expenses were recognized relating to uncollectible rent receivable and other
unrecorded expenditures by the pr
[3] The entity was organized by the sponsor and was initially funded by notes payable to non-related entities prior to receipt of
investor contributions in 1994.
[4] The inter entity transfers are advances to/(from) other programs included in the same reporting entity. The transfers were a
result of debt allocation and pay
</TABLE>
<PAGE>
<TABLE>
TABLE III
STRATEGIC INDUSTRIAL PARTNERS - WESTLAKE II
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
01/01/98
1993 [1] 1994 1995 1996 [1] 1997 [1] -08/31/98
-------- --------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gross Revenues 14,880 538,567 502,350 575,274 332,983 151,006
Profit on sale of properties 0 0 0 430,024 416,160 579,471
Less: Operating expenses 1,620 129,338 120,264 121,211 151,489 49,450
Partnership overhead
allocation 0 4,076 55,433 29,133 13,067 5,544
Interest expense 3,465 351,698 399,387 340,165 186,486 78,468
Depreciation 2,644 80,087 88,375 102,887 97,244 27,400
----- ------ ------ ------- ------ ------
Net Income-GAAP Basis 7,151 (26,632) (161,109) 411,902 300,857 569,615
===== ======= ======== ======= ======= =======
Taxable Income
- from operations 7,151 (26,632) (161,109) (18,122) (115,303) N/A
- from gain on sale 0 0 0 430,024 416,160 N/A
Cash generated from operations 41,632 36,183 (96,415) 24,165 (1,128) 17,451
Cash generated from sales 0 0 0 1,114,585 955,318 1,380,805
Cash generated from refinancing 0 0 0 0 746,287 0
----- ------ ------ ------- ------ ------
Cash generated from operations,
sales and refinancing 41,632 36,183 (96,415) 1,138,750 1,700,477 1,398,256
Less: Cash distributions to investors
- from operating cash flow 0 0 0 0 0 0
- from sales and refinancing 0 0 0 0 408,832 357,723
- from return of capital 0 0 0 0 0 0
----- ------ ------ ------- ------ ------
0 0 0 0 408,832 357,723
----- ------ ------ ------- ------- -------
Cash generated (deficiency)
after cash distributions 41,632 36,183 (96,415) 1,138,750 1,291,645 1,040,533
Special items:
- Partner's capital
contribution 0 320,821 0 0 0 0
- Borrowing secured
by property 2,838,842 350,968 28,651 34,674 13,039 0
- Note payable proceeds 329,351 [2] 0 0 0 0 0
- Decrease in note payable 0 (329,351) 0 0 0 0
- Capitalized loan fees
& Organization costs (125,090) 0 0 0 (80,441) 0
- Loans from/(to) Affiliates 0 0 0 0 0 0
- Capitalized equity placement 0 (50,120) 0 0 0 0
- Property acquisitions
and improvements (3,116,380) (323,021) (18,689) (2,569) 0 0
- Decrease in borrowings
secured by property 0 (20,291) 0 (2,766,851) 0 (527,871)
- Inter-entity transfer
between programs 31,645 [3] 131,225 [3] 106,995 [3] 1,685,245 [3] (1,441,266)[3] (467,986)
--------- ------- ------- --------- ---------- ---------
Cash generated (deficiency)
after cash distributions
and special items 0 116,414 20,542 89,249 (217,023) 44,676
========= ========= ========= ========= ========= =========
Tax and Distribution Data per
$1000 Invested
Federal Income Tax Results:
Ordinary income(loss)
- from operations N/A [2] (83.0) (502.2) (56.5) (359.4) N/A
- from recapture N/A [2] 0.0 0.0 0.0 0.0 N/A
Capital gain(loss) N/A [2] 0.0 0.0 1,340.4 1,297.2 N/A
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 0.0 0.0 0.0 1,274.3 1,115.0
- Return of capital 0.0 0.0 0.0 0.0 0.0 0.0
Source (on cash basis)
- Operations 0.0 0.0 0.0 0.0 0.0 0.0
- Refinancing 0.0 0.0 0.0 0.0 0.0 0.0
- Sales 0.0 0.0 0.0 0.0 1,274.3 1,115.0
Amount remaining invested at
the end of the period 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
(expressed as a percentage of the amount originally invested in the property)
[1] For the period 12/23/93 (inception) to 12/31/93.
[2] The entity was organized by the sponsor and was initially funded by notes payable to non-related entities prior to receipt
of investor contributions in 1994.
[3] The inter entity transfers are advances to/(from) other programs included in the same reporting entity. The transfers were
a result of debt allocation and payments on an umbrella loan required by the lender as portions of the programs sold.
In addition, the entity maintained a general account and allocations were ade for Investor contributions, distributions and
overhead costs.
</TABLE>
<PAGE>
<TABLE>
TABLE IV
RESULTS OF COMPLETED PROGRAMS FOR THE PERIOD 1993 - AUGUST 31, 1998
<CAPTION>
Fairway Beach Westlake I
------- --------- -----------
<S> <C> <C> <C>
Dollar amount raised 563,005 514,166 297,745
Number of properties
purchased One One One
Date of closing of offering 10/25/94 10/25/94 10/25/94
Date of sale of property 02/15/96 01/31/97 10/29/96
Tax and distribution data
per $1,000 investment
Federal income tax results:
Ordinary income(loss): [1] [2] [3]
From operations (205,515) (378,210) (222,385)
Gross capital gain 1,623,641 675,480 630,602
Deferred gain:
Capital 0 0 0
Cash distributions to investors:
Source (cash basis):
Sales 273,879 [4] 808,398 732,790
Refinancing 0 0 0
Operations 0 0 0
Receivable on net purchase
money financing 0 0 0
[1] From 12/22/93 (inception) thru 2/15/96 (sale).
[2] From 12/22/93 (inception) thru 1/31/97 (sale).
[3] From 12/22/93 (inception) thru 10/29/96 (sale).
[4] This program was included with other programs that were reported by a single
partnership entity. All of the programs were financed by an umbrella loan.
Upon disposition of this property the lender required a paydown on the
umbrella loan in an amount greater than the debt that was allocated to it.
</TABLE>
<PAGE>
<TABLE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES - JANUARY 1, 1995 THROUGH AUGUST 31, 1998
<CAPTION>
Excess
(Deficit) of
Operational
Cash
Cost of Property Receipts
Date Date Selling Price Net Including Closing Over Cash
Property Acquired of Sale of Closing Costs and GAAP Adjustments and Soft Costs Receipts
- -------------- -------- -------- ----------------------------------------------- ---------------------------------- -----------
Total
Purchase acquisition
Mortgage money Adjustments cost,capital
Cash balance mortgage resulting Improvements
received at taken from appli- Original closing
net of time back by cation of mortgageing & soft
closing of sale program GAAP Total financing Costs Total
------- ------- ------- ---- ----- ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Van Buren
Buildings 11
and 12 5/31/95 7/7/95 410,005 469,676 0 0 879,681 391,452 [1] 269,155 660,607 [3]
Van Buren
Building 9 5/31/95 11/3/95 140,600 156,344 0 0 296,944 130,305 [1] 92,520 222,825 [3]
Van Buren
Building 7 5/31/95 1/21/97 152,526 189,308 0 0 341,834 146,571 [1] 104,093 250,664 [3]
Van Buren
Building 10 5/31/95 3/13/98 157,049 168,299 0 0 325,348 130,305 [1] 94,790 225,095 [3]
Van Buren
Buildings 4 5/31/95 3/17/98 145,031 156,987 0 0 302,018 121,547 [1] 88,614 210,161 [3]
------- -------- - - --------- ------- ------ -------
1,005,211 1,140,614 0 0 2,145,825 920,180 649,172 1,569,352
========= ========= = = ========= ======= ======= =========
Tamarack Unit
450E 4/4/93 11/17/95 37,457 178,150 0 0 215,607 97,850 [1] 75,796 173,646 [3]
Tamarack Unit
450D 4/4/93 11/17/95 34,258 169,975 0 0 204,233 92,720 [1] 71,065 163,785 [3]
Tamarack Unit
480D 4/4/93 1/10/97 35,181 178,305 0 0 213,486 97,280 [1] 75,138 172,418 [3]
Tamarack Unit
450C 4/4/93 8/29/97 22,628 177,160 0 0 199,788 96,710 [1] 72,586 169,296 [3]
Tamarack Unit
450A 4/4/93 12/31/97 44,524 187,624 0 0 232,148 97,850 [1] 81,508 179,358 [3]
Tamarack Unit
420A 4/4/93 7/17/98 42,205 179,191 0 0 221,396 102,410 [1] 70,573 172,983 [3]
Tamarack Unit
480E 4/4/93 8/18/98 49,132 187,624 0 0 236,756 102,410 [1] 79,567 181,977 [3]
------- ------- - - ------- ------- ------ -------
265,385 1,258,029 0 0 1,523,414 687,230 526,233 1,213,463
======= ========= = = ========= ======= ======= =========
The Park Units
1041 & 1035 11/22/93 11/7/97 422,154 635,538 0 0 1,057,692 614,392[1][2] 95,159 709,551 [3]
The Park Unit
1025 11/22/93 11/26/97 157,804 242,228 0 0 400,032 234,012[1][2] 66,762 300,774 [3]
The Park Unit
1021 11/22/93 12/15/97 276,955 390,134 0 0 667,089 377,312[1][2] 52,902 430,214 [3]
The Park Unit
1001 11/22/93 2/20/98 98,740 123,539 0 0 222,279 119,635[1][2] 23,931 143,566 [3]
The Park Unit
1029 11/22/93 3/30/98 172,740 239,706 0 0 412,446 231,821[1][2] 46,920 278,741 [3]
---- ------- ------- - - ------- -------- ------ -------
1,128,393 1,631,145 0 0 2,759,538 1,577,172 285,674 1,862,846
========= ========= = = ========= ========= ======= =========
Westlake II
Units 201-2 12/22/93 12/27/96 43,882 1,070,703 0 0 1,114,585 579,339[1][2] 160,724 740,063 [3]
Westlake II
Unit 301 12/22/93 4/24/97 175,278 440,294 0 0 615,572 308,981[1][2] 78,805 387,786 [3]
Westlake II
Unit 403 12/22/93 7/15/97 106,898 232,848 0 0 339,746 163,403[1][2] 41,816 205,219 [3]
Westlake Units
401-2 12/22/93 1/2/98 192,971 465,696 0 0 658,667 326,806[1][2] 91,362 418,168 [3]
Westlake Unit
302 12/22/93 6/30/98 204,698 517,440 0 0 722,138 363,118[1][2] 104,800 467,918 [3]
------- ------- - - ------- ------- ------- -------
723,727 2,726,981 0 0 3,450,708 1,741,647 477,507 2,219,154
======= ========= = = ========= ========= ======= =========
Fairway Com-
merce Center 12/22/93 2/15/96 896,162 4,214,491 0 0 5,110,653 3,429,586 425,607 3,855,19 91,522
======= ========= = = ========= ========= ======= ======== ======
Beach Com-
merce Center 12/22/93 1/31/97 330,170 4,368,836 0 0 4,699,006 4,115,000 299,926 4,414,926 13,192
======= ========= = = ========= ========= ======= ========= ======
Westlake Com-
merce Center
Phase I 12/22/93 10/29/96 (35,047) 3,847,511 0 0 3,812,464 3,168,193 276,791 3,444,984 40,738
======= ========= = = ========= ========= ======= ========= ======
[1] Original mortgage financing allocated to unit based on square footage percentage of total project.
[2] Debt paid on outstanding blanket loan at time of sale was determined by the lender who required a payment for a larger
percentage of total debt then allocated to the individual unit.
[3] The sponsor did not record income and expenditures on a unit by unit basis and excess cash receipts over
expenditures information by unit is not available.
</TABLE>
<PAGE>
<TABLE>
TABLE VI
ACQUISITIONS OF PROPERTIES BY PROGRAMS
For the Period 1993 - August 31, 1998
<CAPTION>
Van Buren Business Park Baldwin Business Park Torrance Amapola Partners
----------------------- --------------------- -------------------------
<S> <C> <C> <C>
Location . . . . . . Placentia, California Baldwin Park, California Torrance, California
Type of Property . . . . Industrial Buildings Free-Standing Industrial Bldgs. Multi-tenant Business Park
Gross Leasable Space . . 89,513 square feet 166,191 square feet 95,000
Date of Purchase . . . May 31, 1995 August 15, 1997 December 15, 1995
No. of Buildings/Units . . Twelve Condominium Units Seven Buildings Two Bldgs.
No. of Buildings/Units Sold Thro 6 0 0
Total Acquisition Cost . . $3,282,025 $6,012,685 $4,214,812
</TABLE>
<PAGE>
<TABLE>
TABLE VI
ACQUISITIONS OF PROPERTIES BY PROGRAMS For the Period 1993 - August 31, 1998
CARSON INDUSTRIAL PARTNERS
--------------------------
<CAPTION>
Carson Phase I Carson Phase II Tamarack Business Center
-------------- --------------- ------------------------
<S> <C> <C> <C>
Location . . . . . . Carson, California Carson, California Brea, California
Type of Property . . . . Multi-tenant Industrial Bldgs. Free-Standing Industrial Bldgs. Multi-tenant Industrial
Gross Leasable Space . . 39,592 square feet 166,191 square feet 54,744 square feet
Date of Purchase . . . August 15, 1997 August 15, 1997 June 30, 1993
No. of Buildings/Units . . Two Bldgs/28 Units Seven Buildings Sixteen Condominium Units
No. of Buildings/Units Sold Thro 0 0 7
Total Acquisition Cost . . $1,432,772 $6,012,685 $2,764,561
</TABLE>
<PAGE>
<TABLE>
TABLE VI
ACQUISITIONS OF PROPERTIES BY PROGRAMS For the Period 1993 - August 31, 1998
STRATEGIC INDUSTRIAL HOLDINGS, LTD.
-----------------------------------
<CAPTION>
Westlake Westlake
The Park Fairway Beach Commerce Commerce
Fullerton Commerce Center Commerce Center Center Phase I Center Phase II
---------- --------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Location . . . . . .Fullerton, City of Industry La Habra, Westlake Westlake
California California California Village, CA Village, CA
Type of Property . . . .Multi-tenant Industrial Bldgs. Multi-tenant Industrial Industrial
Industrial Bldgs. Retail & Industrial
Gross Leasable Space . . 116,819 square feet 120,763 square feet 110,322 square feet 63,862 sq ft 68,798 square feet
Date of Purchase . . . November 22, 1993 December 22, 1993 December 22, 1993 December 22, 1993 December 22, 1993
No. of Buildings/Units . . Two Bldgs/ Seven Bldgs/
18 Condominiums 58 Units Four Buildings Six Buildings 10 Buildings
No. of Buildings/Units Sold
Through 8/31/98 7 Entire Project Entire Project Entire Project 7
Total Acquisition Cost . . $4,439,248 $3,138,175 $3,708,632 $2,901,291 $3,121,704
</TABLE>
<PAGE>
EXHIBIT "A"
CORNERSTONE INDUSTRIAL PROPERTIES INCOME AND GROWTH FUND I, LLC
A CALIFORNIA LIMITED LIABILITY COMPANY
OPERATING AGREEMENT
<PAGE>
TABLE OF CONTENTS
Page
1. ORGANIZATION..............................................................A-1
1.1. FORMATION...............................................................A-1
1.2. NAME....................................................................A-1
1.3. PURPOSE.................................................................A-1
1.4. DURATION................................................................A-2
1.5. PRINCIPAL PLACE OF BUSINESS, REGISTERED OFFICE AND RESIDENT AGENT.......A-2
1.6. TITLE TO FUND PROPERTY..................................................A-2
1.7. INTENTION FOR FUND......................................................A-2
1.8. DEFINITIONS.............................................................A-2
2. BOOKS, RECORDS AND ACCOUNTING.............................................A-2
2.1. BOOKS AND RECORDS.......................................................A-2
2.2. FISCAL YEAR; ACCOUNTING.................................................A-3
2.3. BANK ACCOUNTS...........................................................A-3
2.4. REPORTS TO MEMBERS......................................................A-3
2.5. TAX RETURNS.............................................................A-4
3. MEMBERS, UNITHOLDERS AND MEETINGS OF MEMBERS..............................A-4
3.1. UNITS OF MEMBERSHIP INTEREST............................................A-4
3.2. MEMBERSHIP CERTIFICATES.................................................A-4
3.3. PLACE OF MEETINGS.......................................................A-4
3.4. MEETINGS OF MEMBERS.....................................................A-4
3.5. NOTICE OF MEETINGS......................................................A-5
3.6. RECORD DATES............................................................A-5
3.7. LIST OF MEMBERS.........................................................A-5
3.8. QUORUM..................................................................A-5
3.9. PROXIES.................................................................A-5
3.10. INSPECTORS OF ELECTION.................................................A-5
3.11. MANNER OF VOTING.......................................................A-6
3.12. ACTIONS WITHOUT A MEETING..............................................A-6
4. CAPITAL CONTRIBUTIONS.....................................................A-6
4.1. CONTRIBUTIONS, MEMBERS AND UNITHOLDERS..................................A-6
4.2. CAPITAL ACCOUNTS........................................................A-7
4.3. CAPITAL ACCOUNTS AND CAPITAL CONTRIBUTIONS IN GENERAL...................A-7
5. ALLOCATIONS OF NET INCOME AND NET LOSS....................................A-7
5.1. TIMING AND EFFECT.......................................................A-7
5.2. ALLOCATION OF NET INCOME AND NET LOSS...................................A-7
5.3. REALLOCATIONS TO AVOID EXCESS DEFICIT BALANCES..........................A-8
5.4. ALLOCATIONS AMONG UNITHOLDERS...........................................A-8
5.5. ALLOCATION IN THE EVENT OF SECTION 754 ELECTION.........................A-8
5.6. RECAPTURE OF DEDUCTIONS AND CREDITS.....................................A-8
5.7. REGULATORY AND CURATIVE ALLOCATIONS.....................................A-9
A-i
<PAGE>
6. DISTRIBUTIONS...........................................................A-10
6.1. DISTRIBUTIONS TO MEMBERS..............................................A-10
6.2. DISTRIBUTIONS OF UNINVESTED ASSETS....................................A-11
6.3. LIMITATIONS ON DISTRIBUTIONS..........................................A-11
6.4. RETURN OF DISTRIBUTION................................................A-11
6.5. WITHHOLDING ON DISTRIBUTIONS..........................................A-11
7. DISPOSITION OF UNITS....................................................A-11
7.1. GENERAL...............................................................A-11
7.2. PROHIBITED DISPOSITIONS...............................................A-12
7.3. PERMITTED DISPOSITIONS................................................A-12
7.4. ADMISSION OF ASSIGNEE AS A MEMBER.....................................A-12
8. MANAGEMENT..............................................................A-12
8.1. MANAGEMENT OF BUSINESS................................................A-12
8.2. GENERAL POWERS OF THE MANAGING MEMBER.................................A-13
8.3. LIMITATIONS; VOTING RIGHTS OF MEMBERS.................................A-13
8.4. COMPENSATION AND EXPENSE REIMBURSEMENT................................A-13
8.5 CONTRACTS WITH THE MANAGING MEMBER AND ITS AFFILIATES..................A-15
8.6. AUTHORITY.............................................................A-15
8.7. STANDARD OF CARE......................................................A-15
8.8. LIABILITY.............................................................A-15
8.9. OTHER INTERESTS.......................................................A-15
8.10. PROHIBITED ACTS......................................................A-15
9. INVESTMENT OBJECTIVES AND POLICIES......................................A-16
9.1. DUTIES AND RESPONSIBILITIES; INVESTMENT ALLOCATION....................A-16
9.2. PROHIBITED INVESTMENTS AND ACTIVITIES.................................A-16
9.3. BORROWING POLICIES....................................................A-17
9.4. CONFLICTS OF INTEREST.................................................A-17
9.5. CONFLICT RESOLUTION PROCEDURES........................................A-17
10. INDEMNIFICATION........................................................A-18
10.1. INDEMNIFICATION......................................................A-18
10.2. CERTAIN ACTIONS......................................................A-18
10.3. EXPENSES OF SUCCESSFUL DEFENSE.......................................A-19
10.4. DETERMINATION THAT INDEMNIFICATION IS PROPER.........................A-19
10.5. INDEMNIFICATION FOR PORTION OF EXPENSES..............................A-19
10.6. EXPENSE ADVANCES.....................................................A-19
10.7. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE FUND..................A-20
10.8. FORMER MANAGING MEMBERS, OFFICERS, EMPLOYEES AND AGENTS..............A-20
10.9. INSURANCE............................................................A-20
10.10. CONTRACT RIGHT TO INDEMNITY.........................................A-20
10.11. EXCLUSIVITY; OTHER INDEMNIFICATION..................................A-20
10.12. AMENDMENT OR DELETION...............................................A-20
11. DISSOLUTION, WINDING UP AND REDEMPTION.................................A-20
11.1. DISSOLUTION..........................................................A-20
11.2. WINDING UP...........................................................A-21
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12. MISCELLANEOUS PROVISIONS...............................................A-21
12.1. COUNSEL TO THE FUND..................................................A-21
12.2. COUNTERPARTS.........................................................A-21
12.3. ENTIRE AGREEMENT.....................................................A-21
12.4. SEVERABILITY.........................................................A-21
12.5. PRONOUNS; STATUTORY REFERENCE........................................A-21
12.6. POWER OF ATTORNEY....................................................A-22
12.7. NOTICES..............................................................A-22
12.8. BINDING EFFECT.......................................................A-22
12.9. GOVERNING LAW........................................................A-22
13. BINDING ARBITRATION....................................................A-22
13.1. ARBITRATION OF CONTROVERSY OR CLAIM..................................A-22
13.2. SINGLE ARBITRATOR; SITUS OF ARBITRATION..............................A-22
13.3. DISCOVERY............................................................A-23
13.4. ATTORNEYS'FEES.......................................................A-23
14. DEFINITIONS............................................................A-23
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OPERATING AGREEMENT
FOR
CORNERSTONE INDUSTRIAL PROPERTIES INCOME AND GROWTH FUND I, LLC
A California Limited Liability Company
THIS OPERATING AGREEMENT is dated as of October 28, 1998 among
Cornerstone Industrial Properties, LLC, a California limited liability company,
Terry G. Roussel, and the Persons executing this Agreement as members of the
Fund and those Persons who will hereafter be admitted as members upon acceptance
by the Managing Member of an executed Subscription Agreement pursuant to which
such parties accept and adopt the provisions of this Operating Agreement (the
"Members"), who agree as follows:
1........ORGANIZATION
1.1. Formation. Cornerstone Industrial Properties Income and Growth Fund I,
LLC (the "Fund") has been organized as a California limited liability company
pursuant to the laws of the State of California, including the Beverly-Killea
Limited Liability Company Act, all as the same may be amended from time to time
(all of such applicable laws being hereinafter referred to as the "Limited
Liability Company Law"), by the filing of Articles of Organization ("Articles")
with the Office of the Secretary of State of the State of California as required
by the Limited Liability Company Law. The Managing Member shall cause the
execution, filing, and recording of all such other certificates and documents,
including amendments to the Articles of the Fund, and shall do or cause to be
done such other acts as may be appropriate to comply with all requirements for
the formation, continuation, and operation of a limited liability company, the
ownership of property, and the conduct of business under the laws of the State
of California and any other jurisdiction in which the Fund may own property or
conduct business.
1.2. Name. The name of the Fund will be Cornerstone Industrial Properties
Income and Growth Fund I, LLC. The Fund may also conduct its business under one
or more assumed names.
1.3. Purpose. The purpose of the Fund is to engage for a
competitive profit in any activity within the purposes for which limited
liability companies may be organized under the Limited Liability Company Law.
Notwithstanding the foregoing, without the consent of Unitholders owning a
majority of the outstanding Units and the Managing Member, the Fund shall not
engage in any business other than the following:
1.3.1. The business of acquiring, operating and selling multi-tenant
industrial Properties; and
1.3.2.Such other activities directly related to the foregoing business
as may be necessary, advisable, or appropriate in the reasonable discretion
of the Managing Member to further the foregoing business.
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The Fund will have all the powers necessary or convenient to effect
that purpose, including all powers granted by the Limited Liability Company Law.
1.4. Duration. The Fund will continue in existence for the period fixed in
the Articles for the duration of the Fund or until the Fund is sooner dissolved
and its affairs wound up in accordance with the Limited Liability Company Law or
this Agreement.
1.5. Principal Place of Business, Registered Office and Resident Agent. The
principal office of the Fund shall be located at 4590 MacArthur Blvd., Suite
610, Newport Beach, CA 92660, or such other address as may be designated from
time to time by the Managing Member. The Fund shall have an office at such other
address(es) as may be designated from time to time by the Managing Member. The
name and address of the registered agent for service of process on the Fund in
the State of California is Terry G. Roussel, 4590 MacArthur Blvd., Suite 610,
Newport Beach, CA 92660, or such other agent and address as may be designated
from time to time by the Managing Member.
1.6. Title to Fund Property. All Properties owned by the Fund, whether real
or personal, tangible or intangible, shall be deemed to be owned by the Fund as
an entity, and no Member, individually, shall have any ownership of such
Properties. The Fund may hold any of its assets in its own name or in the name
of a nominee.
1.7. Intention for Fund. The Members have formed the Fund as a limited
liability company under the Limited Liability Company Law. The Members
specifically agree that, except for purposes of federal income tax
classification, the Fund will not be a partnership (including a limited
partnership) or any other venture, but the Fund will be a limited liability
company under the Limited Liability Company Law. Except for purposes of federal
income tax classification, no Member will be construed to be a partner in the
Fund or a partner of any other Member or Person; and the Articles, and this
Agreement and the relationships it creates, will not be construed to suggest
otherwise. Except as required under the Limited Liability Company Law or as
expressly set forth in this Agreement, no Member shall be personally liable for
any debt, obligation, or liability of the Fund, whether that liability or
obligation arises in contract, tort, or otherwise. A Member's liability shall be
limited to such Member's Capital Contribution and its share of undistributed Net
Income of the Fund.
1.8. Definitions. Certain capitalized terms used in this Agreement are
defined in Section 14.
2. BOOKS, RECORDS AND ACCOUNTING
2.1. Books and Records.The Fund will maintain at its principal office
complete and accurate books of account and records of the Fund's business and
affairs as required by the Limited Liability Company Law, and showing the
assets, liabilities, costs, expenditures, receipts, profits and losses of the
Fund, and which books of account and records shall include provision for
separate Capital Accounts for each Member, and shall provide for such other
matters and information as a Member shall reasonably request, together with
copies of all documents executed on behalf of the Fund. Each Member and its
representatives, duly authorized in writing, shall have the right to inspect and
examine, at all reasonable times, at the Fund's principal office, all such books
of account, records, and documents. The Managing Member shall appoint a firm of
certified public accountants to audit the Fund's annual financial statements.
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2.2. Fiscal Year; Accounting. The Fund's fiscal year will be the calendar
year. The Fund shall follow generally accepted accounting principles and use the
accrual method of accounting in preparation of its financial statements and the
appropriate tax method in preparation of its tax returns.
2.3. Bank Accounts. One or more accounts in the name of the Fund shall be
maintained in such bank or banks as the Managing Member may from time to time
select. Any checks of the Fund may be signed by any Person(s) designated, from
time to time, by the Managing Member.
2.4. Reports to Members. At the expense of the fund, the Managing Member
shall cause to be prepared and made available to the Members during each year
the following:
2.4.1. If and for as long as the Fund is required to file quarterly
reports on Form 10-Q with the Securities and Exchange Commission,the information
contained in each such report for a quarter shall be sent upon request to the
Members within sixty (60) days after the end of such quarter. Such reports shall
contain at least an unaudited balance sheet, an unaudited statement of income
for the quarter then ended, an unaudited cash flow statement for the quarter
then ended (in the form set forth in quarterly reports required from time to
time under the Securities Exchange Act of 1934), and other pertinent information
concerning the Fund and its activities during the quarter covered by such
reports. If and when such reports are not required to be filed, each Member will
be furnished within sixty (60) days after the end of the first six (6) month
period of Fund operations an unaudited financial report for that period
containing the same information required in the quarterly reports described
above.
2.4.2. Within seventy-five (75)days after the end of the Fund's fiscal
year, all information necessary for the preparation of the Members' federal
income tax returns and state income and other tax returns with regard to the
jurisdictions where the Properties are located shall be sent to each Member.
2.4.3. Within one hundred twenty (120)days after the end of the Fund's
fiscal year, an annual report containing (i) a balance sheet as of the end of
its fiscal year and statements of income, Member's equity, and statement of cash
flows, for the year then ended, shall be prepared in accordance with generally
accepted accounting principles and accompanied by an auditor's report containing
an opinion of an independent certified public accountant, and (ii) a report of
the activities of the Fund during the period covered by the report shall be sent
to each member upon request. Such report shall set forth Distributions to the
Members for the period covered thereby and shall separately identify
Distributions from (1) Net Cash Flow from Operations during such period, (2) Net
Cash Flow from Operations during a prior period which had been held as reserves,
(3) Net Sales Proceeds from the disposition of Property and investments, and (4)
reserves from the Gross Proceeds of the offering originally contributed by the
Members.
2.4.4. The Managing Member shall, within sixty (60) days of the end of
each quarter wherein fees were received, send upon request to each Member a
detailed statement setting forth the services rendered, or to be rendered,
by the Managing Member and the amount of the fees received. In addition, an
annual report shall be prepared summarizing such fees and other remuneration and
such report shall include a breakdown of costs reimbursed to the Managing
Member. Such annual report shall be furnished at the same time as the report in
Section 2.4.3 above.
2.4.5. Within sixty (60) days of the end of each quarter in which
we acquire Properties, the Managing Member shall send quarterly reports setting
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forth the details of the acquisition of Properties to each Member upon request.
The report may be in the form of a supplement to the Prospectus and may be
prepared more frequently than quarterly.
The Managing Member shall also make such reports available upon request of the
administrator of the securities agency in any state in which Units were
registered for sale.
2.5. Tax Returns. As soon as practicable after the end of each fiscal year,
the Fund shall cause to be prepared and transmitted to the Members federal and
appropriate state and local Income Tax Schedules "K-1," or any substitute
therefor, with respect to such fiscal year on appropriate forms prescribed. The
Fund, in the discretion of the Managing Member, shall be entitled to utilize any
special reporting opportunities available under the Code to programs with a
large number of Members.
3. MEMBERS, UNITHOLDERS AND MEETINGS OF MEMBERS
3.1. Units of Membership Interest. Units shall be issued to Members
pursuant to the Fund's offering of interests as described in the Form S-11
registration statement and prospectus included therein (the "Prospectus") filed
by the Fund under the Securities Act of 1933, as amended (Registration No.
333-__________) (the "Offering"). Except as otherwise provided in this Section
3.1, no additional Units shall thereafter be issued by the Fund. Notwithstanding
any contrary provision of this Agreement, the Fund shall do or cause to be done
whatever is required so that the Units shall be "Publicly-Offered Securities"
within the meaning of Section 2510.3-101 of the Department of Labor Regulations,
29 CFR ss. 2510.3-101, as amended, or any successor provision. The Managing
Member may, in its discretion, in order to comply with the foregoing
requirement, issue for such consideration as it may determine (including by
gift) Units to such Persons and in such Percentage Interests as it may
determine. The Managing Member will receive its interest in the Fund for a
contribution of $1,000, and such interest of the Managing Member will not be
considered an interest in Units for purposes hereof. Notwithstanding the
preceding sentence, the Managing Member may acquire Units and be treated in the
same manner as other Unitholders with respect thereto.
3.2. Book-Entry Evidence of Ownership
3.2.1. The Units will be issued only in fully registered book-entry
form. Ownership of Units in the Fund will be shown on and transfer thereof will
be effected only through book-entry in records maintained by the Fund.
Certificates evidencing ownership of Units will not be issued.
3.2.2. Units of the Fund shall be transferable in the manner pre-
scribed by law and in this Agreement, subject to restrictions set forth in
Article 7 hereof. Assuming all restrictions on transfers have been met,
transfers of Units shall be made on the books of the Fund.
3.3. Place of Meetings. All meetings of Members shall be held at the
principal office of the Fund or at such other place as shall be determined by
the Managing Member and stated in the notice of meeting.
3.4. Meetings of Members. Meetings of all Members may be called by the
Managing Member and shall be called upon the written request to the Managing
Member of Members holding in the aggregate at least ten percent (10%) of the
Percentage Interests owned by all Members. The request shall state the purpose
or purposes for which the meeting is to be called.
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3.5. Notice of Meetings. In the case of a meeting requested by Members
holding at least ten percent (10%) in the aggregate of the Percentage Interests
owned by all Members, the notice shall be delivered to the Members of the Fund
within 10 business days of receipt of such request. Except as otherwise provided
by statute, written notice of the time, place and purposes of a meeting of
Members shall be given not less than 10 nor more than 60 days before the date of
the meeting to each Member, either personally or by mailing such notice to its
last address as it appears on the books and records of the Fund. No notice need
be given of an adjourned meeting provided the time and place to which such
meeting is adjourned are announced at the meeting at which the adjournment is
taken and at the adjourned meeting only such business is transacted as might
have been transacted at the original meeting. However, if after the adjournment
a new record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each Member of record on the new record date entitled
to notice as provided in this Agreement.
3.6. Record Dates. The Managing Member may fix in advance a date as the
record date for the purpose of determining Members entitled to notice of and to
vote at a meeting of Members or an adjournment thereof, or to express consent or
to dissent from a proposal without a meeting, or for the purpose of determining
Members entitled to receive payment of a Distribution or allotment of a right,
or for the purpose of any other action. The date fixed shall not be more than 60
nor less than 20 days before the date of the meeting, nor more than 60 days
before any other action. In such case only such Members as shall be Members of
record on the date so fixed shall be entitled to notice of and to vote at such
meeting or adjournment thereof, or to express consent or to dissent from such
proposal, or to receive payment of such Distribution or to receive such
allotment of rights, or to participate in any other action, as the case may be,
notwithstanding any transfer of any Units on the books of the Fund, or
otherwise, after any such record date. Nothing in this Agreement shall affect
the rights of a Member and its transferee or transferor as between themselves.
3.7. List of Members. The agent of the Fund having charge of the transfer
records for Units of the Fund shall make and certify a complete list of the
Members entitled to vote at a Members' meeting or any adjournment thereof. The
list (i) shall be arranged alphabetically, with the address of, and the
Percentage Interest of, each Member; (ii) shall be produced at the time and
place of the meeting; (iii) shall be subject to inspection by any Member during
the whole time of the meeting; and (iv) shall be prima facie evidence as to who
are the Members entitled to examine the list or vote at the meeting.
3.8. Quorum. Unless a greater or lesser quorum is required in the Articles
or by the Limited Liability Company Law, the Members present at a meeting in
person or by proxy who, as of the record date for such meeting, were holders of
a majority of the Percentage Interests held by all Members shall constitute a
quorum at the meeting. Whether or not a quorum is present, a meeting of Members
may be adjourned by a vote of the Members present in person or by proxy.
3.9. Proxies. A Member entitled to vote at a meeting of Members or to
express consent or dissent without a meeting may authorize other Persons to act
for such Member by proxy. A proxy shall be signed by the Member or its
authorized agent or representative and shall not be valid after the expiration
of one year from its date unless otherwise provided in the proxy. A proxy is
revocable at the pleasure of the Member executing it except as otherwise
provided by the Limited Liability Company Law.
3.10. Inspectors of Election. The Managing Member, in advance of a Members'
meeting, may, and on request of a Member entitled to vote thereat shall, appoint
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one or more inspectors. In case a Person appointed fails to appear or act, the
vacancy may be filled by appointment made by the Managing Member in advance of
the meeting or at the meeting by the Person presiding thereat. If appointed, the
inspectors shall determine the Percentage Interests of all Members represented
at the meeting, the existence of a quorum and the validity and effect of
proxies, and shall receive votes, ballots or consents, hear and determine
challenges or consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all Members. On request of the
person presiding at the meeting or a Member entitled to vote thereat, the
inspectors shall make and execute a written report to the Person presiding at
the meeting of any of the facts found by them and matters determined by them.
The report shall be prima facie evidence of the facts stated and of the vote as
certified by the inspectors.
3.11. Manner of Voting. Votes shall be cast in writing, signed by the
Member or its proxy. When an action is to be taken by a vote of the Members, and
a quorum is present, it shall be authorized by the affirmative vote of the
holders of a majority of the Percentage Interests owned by all of the Members,
unless a greater plurality is required by the Articles, this Agreement or by the
Limited Liability Company Law.
3.12. Actions Without a Meeting. Any action required or permitted to be
taken at a meeting of the Members may be taken without a meeting, without prior
notice, and without a vote, if consents in writing, setting forth the action so
taken, are signed by the number of Members required to approve such action, but
in no event less than a majority in Percentage Interest of the Members. Each
written consent will bear the date and signature of each Member who signs the
consent.
4. CAPITAL CONTRIBUTIONS
4.1. Contributions, Members and Unitholders.
4.1.1. The Fund intends to issue and sell in a public offering pursu-
ant to a Form S-11 registration statement under the Securities Act of 1933 as
amended, not less than $3,000,000 nor more than $20,000,000 in Units and to
admit as Members the Unitholders who contribute cash to the capital of the Fund
for such Units. Each purchaser of Units must purchase a minimum of five (5)
Units, except that for Qualified Plans the minimum purchase shall be two (2)
Units. Units shall be issued in Units of $500 each. A minimum of 6,000 Units and
a maximum of 40,000 Units shall be issued pursuant to said registration
statement.
4.2. Upon receipt by the Escrow Agent of Three Million Dollars ($3,000,000)
in cash, representing the subscription payments for 6,000 Units, the Fund will
direct the Escrow Agent to transfer such funds to the Fund's general account and
will commence admitting the purchasers of the Units to the Fund as Members and
Unitholders not later than fifteen (15) days after escrow funds are released.
Interest from the date funds were deposited in escrow until the release from
escrow (net of escrow expenses) will be distributed to purchasers pro rata based
on the number of days such purchaser's funds were held in escrow as soon as
practicable after the date the minimum number of Units is sold. No interest in
an amount less than $5.00 will be paid to purchasers. The Managing Member or its
Affiliates may purchase Units to permit the release of funds from escrow. Units
so purchased will be acquired for investment and on the same terms as offered to
other purchasers. If subscriptions for at least 6,000 Units have not been
received by __________, 2000, all funds received from purchasers as of such time
will be promptly refunded to each purchaser along with any interest earned
thereon (after escrow expenses) on a pro rata basis, based on the number of days
such purchaser's funds were held in escrow.
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4.2 Capital Accounts.
4.2.1. The Fund shall establish and maintain a separate capital
account for each Member ("Capital Account"). The Fund shall determine and
maintain each Capital Account in accordance with Regulations Section
1.704-1(b)(2)(iv). Each Capital Account shall reflect, among other items (i) all
Capital Contributions made to the Fund, (ii) all allocations of Net Income and
Net Loss, and (iii) all Distributions made by the Fund. Any and all amounts
distributed by the Fund to a Member as a fee and/or as compensation or
reimbursement for services shall not reduce such Member's Capital Account.
4.2.2. The Capital Accounts and the other provisions in this Agreement relating
to the maintenance of Capital Accounts are intended to comply with Regulation
Sections 1.704-1(b) and 1.704-2 and shall be interpreted and applied in a manner
consistent with those Regulations and in the event of any conflict, those
Regulations shall prevail.
4.3. Capital Accounts and Capital Contributions in General.
4.3.1. In the event that a Member's Units or a portion thereof are
transferred in accordance with the provisions of this Agreement, the transferee
shall succeed to the Capital Account of the transferor to the extent that it
relates to the Units or portion thereof so transferred.
4.3.2. Except as otherwise provided in this Agreement (i) no interest
will accrue on any Capital Contribution or on the positive balance, if any, in
any Capital Account, (ii) no Member will have any right to withdraw any part of
its Capital Account or to demand or receive the return of its Capital
Contribution, or to receive any Distributions from the Fund, (iii) no Member
shall be required to make any additional contribution to the capital of, or any
loan to, the Fund, and (iv) no Member shall have any liability for the return of
any other Member's Capital Account or Capital Contributions.
5. ALLOCATIONS OF NET INCOME AND NET LOSS
5.1. Timing and Effect.Except as otherwise provided in this Article 5, Net
Income and Net Loss shall be allocated to the Members for any fiscal year in a
manner so as to comply with the requirements of Regulation Section
1.704-1(b)(2)(iv).
5.2. Allocation of Net Income and Net Loss.
5.2.1. Subject to Sections 5.3 and 5.7, Net Income shall be allocated
to the Members as follows:
(a) First, ten percent (10%) to the Managing Member and
ninety percent (90%) to the Unitholders, until the Net Income allocated pursuant
to this Section 5.2.1(a) for the current year and all prior fiscal years equals
the cumulative Net Loss allocated to the Members pursuant to Section 5.2.2(b)
for all prior fiscal years (pro rata among the Members in proportion to their
share of the Net Loss being offset); and
(b) Next, to the Members in the same proportion as Net
Cash Flow from Operations or Net Sales Proceeds were distributed to the Members
pursuant to Sections 6.1.1 and 6.1.2 for the current year and all prior fiscal
years, exclusive of any Distributions representing a return of Invested Capital
Contributions pursuant to Section 6.1.2(i), until such time as the allocations
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of Net Income pursuant to this Section 5.2.1(b) for the current year and all
prior fiscal years equal such Distributions for the current year and all prior
fiscal years (pro rata among the Members in proportion to their share of such
Distributions); and
(c) The balance, if any, fifty percent (50%) to the Managing
Member and fifty percent (50%) to the Unitholders.
5.2.2. Subject to Sections 5.3 and 5.7, Net Loss shall be allocated as
follows:
(a) First, fifty percent (50%) to Managing Member and fifty
percent (50%) to the Unitholders until the Net Loss allocated pursuant to this
Section 5.2.2(a) for the current year and all prior fiscal years equals the
cumulative Net Income allocated to the Members pursuant to Section 5.2.1(c) for
all prior fiscal years (pro rata among the Members in proportion to their share
of the Net Income being offset); and
(b) The balance, if any, ten percent (10%) to the Managing
Member and ninety percent (90%) to the Unitholders.
5.3. Reallocations to Avoid Excess Deficit Balances. Notwithstanding any
other provisions of this Agreement to the contrary, no Net Loss shall be
allocated to any Member to the extent that such allocation would cause such
Member to have an Adjusted Capital Account Deficit. Such Net Loss or deduction
shall be reallocated away from such Member and to the other Members, on a pro
rata basis, but only to the extent that such reallocation would not cause or
increase any such other Member's Adjusted Capital Account Deficit. Any Net Loss
reallocated hereunder shall be subject to an immediate chargeback of Net Income
prior to any other allocations of Net Income pursuant to Section 5.2.1 in any
subsequent period.
5.4. Allocations Among Unitholders. Except as otherwise provided in this
Article V, including, without limitation, Section 5.7.7 with respect to
transferred Units, allocations of Net Income or Net Loss to Unitholders as a
class shall be allocated among the Unitholders in accordance with their
respective Percentage Interests, including, without limitation, Section 5.7.7
with respect to transferred Units.
5.5. Allocation in the Event of Section 754 Election. To the extent
an adjustment to the adjusted tax basis of any Fund asset pursuant to Code
Section 734(b) or Code Section 743(b) is required pursuant to Regulation Section
1.704-1(b)(2)(iv)(m) to be taken into account in determining Capital Accounts,
the amount of that adjustment to the Capital Accounts shall be treated as an
item of Net Income (if the adjustment increases the basis of the asset) or Net
Loss (if the adjustment decreases the basis of the asset), and that Net Income
or Net Loss shall be specially allocated to the Members in a manner consistent
with the manner in which their Capital Accounts are required to be adjusted
pursuant to that Regulation.
5.6. Recapture of Deductions and Credits. If any "recapture" of deductions or
credits previously claimed by the Fund is required under the Code upon the sale
or other taxable disposition of any Property, those recaptured deductions or
credits shall, to the extent possible, be allocated to the Members pro rata in
the same manner that the deductions and credits giving rise to the recapture
items were originally allocated, using the "first-in, first-out" method of
accounting; provided, however, that this Section 5.6 shall only affect the
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characterization, but not amount of Net Income allocated among the Members for
tax purposes.
5.7. Regulatory and Curative Allocations.
5.7.1. Qualified Income Offset. In the event that any Member un-
expectedly receives any adjustment, allocation or distribution described in
Regulation Sections 1.704-1(b)(2)(ii)(d) (4), (5) or (6), items of Net Income
shall be specially allocated to such Member in an amount and manner sufficient
to eliminate, to the extent required by the Regulations, the Adjusted Capital
Account Deficit of that Member as quickly as possible.
5.7.2. Gross Income Allocation. In the event that, despite Section
5.3, any Member has an Adjusted Capital Account Deficit at the end of any fiscal
year, that Member shall be specially allocated items of Net Income (or gross
income) to eliminate such deficit as quickly as possible, provided that an
allocation pursuant to this Section 5.7.2 shall be made only if and to the
extent that such Member would have an Adjusted Capital Account Deficit after all
other allocations provided for in this Article 5 have been made as if Section
5.7.1 and this Section 5.7.2 were not in the Agreement.
5.7.3. Minimum Gain Chargeback. To the extent required under Regu-
lation Section 1.704-2(f), if there is a net decrease in Fund Minimum Gain
during any fiscal year, each Member shall be allocated, before any other
allocation of Fund items for such taxable year, items of Net Income for such
year (and, if necessary, subsequent years), in proportion to, and to the extent
of, an amount equal to the portion of such Member's share of such net decrease
in Minimum Gain as determined under Regulation Section 1.704-2(g). The items so
allocated shall be determined in accordance with Regulation Section
1.704-2(j)(2)(i). This Section 5.7.3 is intended to comply with the "minimum
gain chargeback" requirements of the Regulations and shall be interpreted
consistently therewith.
5.7.4. Member Minimum Gain Chargeback. To the extent required under
Regulation Section 1.704-2(i), if there is a net decrease in minimum gain
attributable to Member non-recourse debt during a Fund taxable year, any Member
with a share of that Member non-recourse debt minimum gain (determined under
Regulation Section 1.704-2(i)(5)) as of the beginning of the year must be
allocated items of Net Income for such year (and if necessary, subsequent years)
equal to that Member's share of the net decrease in the Member non-recourse debt
minimum gain. A Member's share of the net decrease in Member non-recourse debt
minimum gain is determined in a manner consistent with the provisions of
Regulation Section 1.704-2(i)(5). The items so allocated shall be determined in
accordance with Regulation Section 1.704-2(j)(2)(ii). This Section 5.7.4 is
intended to comply with the "partner minimum gain chargeback" requirements of
the Regulations and shall be interpreted consistently therewith.
5.7.5. Curative Allocations. The allocations set forth in Sections
5.3, 5.5, 5.7.1, 5.7.2, 5.7.3 and 5.7.4 (the "Regulatory Allocations") are
intended to comply with certain requirements of Regulation Sections 1.704-1(b)
and 1.704-2. Notwithstanding any other provision of this Article 5 (other than
the Regulatory Allocations), the Regulatory Allocations shall be taken into
account in allocating other items of income, gain, loss and deduction among the
Members so that, to the extent possible, the net amount of such allocation of
other items and the Regulatory Allocations to each Member should be equal to the
net amount that would have been allocated to each such Member if the Regulatory
Allocations had not occurred.
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5.7.6. Adjustment to Allocations. It is the intention of the Members
that the Net Income and Net Loss for each fiscal year will be allocated to the
Members in such a manner that would cause each Member's Adjusted Capital Account
Balance to equal the amount that would be distributed to such Member pursuant to
Section 11.2 upon a hypothetical liquidation of the Fund. For purposes of this
Section 5.7.6, the "Adjusted Capital Account Balance" of a Member equals the
balance of such Member's Capital Account at the end of the fiscal year increased
by any amount which the Member is deemed to be obligated to restore pursuant to
the penultimate sentences of Regulation Sections 1.704-2(g)(1) and (i)(5). In
determining the amounts distributable to the Members under Section 11.2 upon a
hypothetical liquidation, it shall be presumed that (i) all of the Fund's assets
would be sold at their fair market value as determined in good faith by the
Managing Member, (ii) payments to any holder of a non-recourse debt would be
limited to the fair market value of the assets secured by repayment of such
debt, and (iii) the proceeds of such hypothetical sale would be applied and
distributed in accordance with Section 11.2. If, upon the advice of the public
accounting firm retained to prepare the income tax returns of the Fund, it is
determined that the intentions set forth in this Section 5.7.6 are not being met
by the allocations in Article V, the Managing Member shall make such allocations
of Net Income or Net Loss, or items of income, gain, loss, or deduction
comprising such Net Income or Net Loss as necessary to achieve the intentions
set forth in this Agreement.
5.7.7. Allocation of Net Income and Net Loss and Distributions in
Respect of Transferred Interest. To the extent allowed by Section 706(d) of the
Code, and except as otherwise expressly provided in this Article V, if any Units
are transferred during any tax year of the Fund, each item of income, gain,
loss, deduction, or credit of the Fund for such tax year that is allocable to
Unitholders shall be assigned pro rata to each day in the fiscal year to which
such item is attributable and the amount of each such item so assigned to any
such day shall be allocated to the Unitholder based upon its respective
Percentage Interest at the close of such day; provided, however, for the purpose
of accounting convenience and simplicity, the Fund shall treat a transfer of, or
an increase or decrease in, Units which occurs at any time during a month as
having been consummated on the last day of such month, regardless of when during
such month such transfer, increase, or decrease actually occurs.
6. DISTRIBUTIONS
6.1. Distributions To Members.
6.1.1. Net Cash Flow from Operations. Subject to Section 6.3, distri-
butions of Net Cash Flow from Operations of the Fund for any fiscal year will be
made ninety percent (90%) to the Unitholders and ten percent (10%) to the
Managing Member until the "Unitholders' 8% Preferred Return" is attained (pro
rata among the Unitholders in proportion to their share of the Unitholders' 8%
Preferred Return) and until the Early Investors' 12% Incentive Return is
attained (pro rata among the Unitholders in proportion to their shares of the
Early Investors' 12% Incentive Return). Thereafter, Distributions of Net Cash
Flow from Operations shall be made fifty percent (50%) to the Unitholders (pro
rata among the Unitholders in proportion to their Percentage Interests) and
fifty percent (50%) to the Managing Member.
6.1.2. Net Sales Proceeds.Subject to Section 6.3, Net Sales Proceeds,
after replenishment of any reserves, will be distributed in the following order
of priority: (i) first, one hundred percent (100%) to the Unitholders in an
amount equal to their Invested Capital Contributions, calculated at the time of
such Distribution (pro rata among the Unitholders in proportion to their
Invested Capital Contributions); (ii) ninety percent (90%) to the Unitholders
and ten percent (10%) to the Managing Member until the Unitholders have received
distributions in an amount equal to the unpaid balance of their aggregate
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Unitholders' 8% Preferred Return (pro rata among the Unitholders in proportion
to their share of the Unitholders' 8% Preferred Return); and (iii) thereafter,
fifty percent (50%) to the Unitholders (pro rata among the Unitholders in
proportion to their Percentage Interests) and fifty percent (50%) to the
Managing Member.
6.2. Distributions of Uninvested Assets. Subject to the provisions of
Section 6.4, all cash or cash equivalents which constitute part of the assets
of the Fund which have not been invested in Properties by December 31, 2001
shall be distributed pursuant to Section 6.1.2(i) to the Unitholders promptly
after and as of the end of such year.
6.3. Limitations on Distributions. The Distributions to be made pursuant to
this Article 6 are subject to the limitations of this Section 6.3. Distributions
may be made only if the Managing Member determines in its reasonable judgment
that the Fund has sufficient cash on hand exceeding the current and the
anticipated needs of the Fund to fulfill its business purposes (including its
needs for operating expenses, acquisitions and reserves). Distributions will be
made in cash. No Distribution will be declared or made if, after giving it
effect, the Fund would not be able to pay its debts as they become due in the
usual course of business or the fair market value of the Fund's assets would be
less than the sum of its liabilities. All such Distributions to Unitholders
shall be made only to the Persons who, according to the books and records of the
Fund, are the holders of record of the Units in respect of which such
Distributions are made on the actual date of Distribution. Neither the Fund nor
the Managing Member shall incur any liability for making Distributions in
accordance with this Article 6.
6.4. Return of Distribution. Except for Distributions made in violation
of the Limited Liability Company Law or this Agreement, no Unitholder shall
be obligated to return any Distribution to the Fund or pay the amount of any
Distribution for the account of the Fund or to any creditor of the Fund. The
amount of any Distribution returned to the Fund by a Unitholder or paid by a
Unitholder for the account of the Fund or to a creditor of the Fund shall be
added to the account or accounts from which it was subtracted when it was
distributed to the Unitholder.
6.5. Withholding on Distributions. To the extent that any Distribution
is subject to Federal or state withholding, the portion of any such Distribution
withheld and paid over to Federal or state authorities shall be treated for all
purposes hereunder as if such amount was actually distributed to the particular
Member otherwise entitled to receive such amount.
7. DISPOSITION OF UNITS
7.1. General. Every sale, assignment, transfer, exchange, mortgage, pledge,
grant, hypothecation, or other disposition of any Units will be made only in
compliance with this Article 7. No Units will be disposed of unless and until:
7.1.1. such instruments as may be required by the Limited Liability
Company Law or other applicable law or to effect the continuation of the Fund
and the Fund's ownership of its Properties are executed and delivered and/or
filed;
7.1.2. the instrument of assignment binds the assignee to all of the
terms and conditions of this Agreement, and all amendments thereto, as if the
assignee were a signatory party hereto; and
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7.1.3. the instrument of assignment is manually signed by the
assignee and assignor and the proposed disposition is consented to by the
Managing Member, in its reasonable discretion, after determining that such
disposition will not be a prohibited disposition pursuant to Section 7.2.
7.2. Prohibited Dispositions. Any attempted sale, assignment, transfer,
exchange, mortgage, pledge, grant, hypothecation, or other disposition of any
Units will be null and void if it is not made in compliance with this Article 7
or:
7.2.1. subject to waiver by the Managing Member upon advice of coun-
sel, if the disposition (in conjunction with prior dispositions) would cause a
termination of the Fund under the Code;
7.2.2. if the disposition would, in the opinion of tax counsel to
the Fund, jeopardize the status of the Fund as a partnership for federal income
tax purposes or cause the Fund to be treated as a publicly-traded partnership;
7.2.3. if the disposition would not be in compliance with any and all
state and federal securities laws and regulations; or
7.2.4. if the disposition would cause the assets of the Fund to be
characterized as "plan assets" under ERISA.
7.3. Permitted Dispositions. Subject to applicable law, and the provisions
of this Article 7, a Member may assign all or part of its Units in the Fund.
Unless authorized by the Managing Member, a Member may not assign fractional
Units or less than the minimum number of Units purchasers were initially
required to purchase pursuant to the Form S-11 registration statement. No
partial interest (i.e., an interest in only Distributions and allocations of the
Fund) in any Unit or Units may be assigned by a Unitholder, only an entire
interest in any Unit or Units may be assigned pursuant to this Article 7.
7.4. Admission of Assignee as a Member.
7.4.1. An assignee of a Unit pursuant to an assignment permitted in
this Agreement shall, subject to the provisions of this Article 7, and with the
consent of the Managing Member pursuant to Section 7.1.3, be admitted as a
Member and Unitholder in the Fund in the place and stead of the assignor
Unitholder in respect of the Units acquired from the assignor Unitholder and
shall have all of the rights, powers, obligations, and liabilities, and be
subject to all of the restrictions, of the assignor Unitholder, including,
without limitation, but without release of the assignor Unitholder, the
liability of the assignor for any existing unperformed obligations of the
assignor Unitholder.
7.4.2. The substitute Unitholder will be considered a Member of the
Fund, will have all of the rights and powers and is subject to all of the
restrictions and liabilities of an initial Unitholder.
8. MANAGEMENT
8.1. Management of Business. The business and affairs of the Fund shall be
managed by its Managing Member. The initial Managing Member of the Fund shall be
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Cornerstone Industrial Properties, LLC, a California limited liability company.
No Member, in its individual capacity, shall have the power or authority to
legally bind the Fund, except as otherwise provided herein.
8.2. General Powers of the Managing Member. Except as may otherwise be pro-
vided in this Agreement, the ordinary and usual decisions concerning the
business and affairs of the Fund will be made by the Managing Member. The
Managing Member has the power, on behalf of the Fund, to do all things necessary
or convenient to carry out the business and affairs of the Fund, including,
without limitation, the power to: (a) purchase, lease or otherwise acquire any
real or personal property; (b) sell, convey, lease, exchange, or otherwise
dispose any real or personal property; (c) open one or more depository accounts
and make deposits into and checks and withdrawals against such accounts; (d)
incur liabilities, and other obligations; (e) enter into agreements and execute
contracts, documents, and instruments; (f) engage employees and agents, define
their duties, and establish their compensation or remuneration; (g) obtain
insurance covering the business and affairs of the Fund and its property and its
employees and agents; (h) prosecute or defend any proceeding in the Fund's name;
and (i) take all steps reasonably available to prevent the trading of Units by
third parties on an established securities market or a secondary market (or the
substantial equivalent thereof) or to allow any transfers of Units which could
cause the Fund to violate the safe harbors set forth in the Regulations
promulgated under Section 7704 of the Code.
8.3. Limitations; Voting Rights of Members. Notwithstanding the fore-
going Section 8.2, or any other provision contained in this Agreement to the
contrary, no act will be taken, sum expended, decision made, obligation
incurred, or power exercised by the Managing Member or any officer on behalf of
the Fund except by the affirmative vote of the Managing Member and Unitholders
holding a majority of the Percentage Interests with respect to (a) the adoption
of an agreement of merger or consolidation; (b) any change in the character of
the business and affairs of the Fund; (c) the commission of any act that would
make it impossible for the Fund to carry on its ordinary business and affairs;
or (d) any act that would contravene any provision of the Articles, this
Agreement, or the Limited Liability Company Law. Unitholders holding a majority
of the Percentage Interests may, without the concurrence of the Managing Member:
(i) amend or restate the Articles or this Agreement provided an amendment which
modifies the compensation or Distributions to which the Managing Member is
entitled, or affects its duties, requires the consent of the Managing Member and
provided that an amendment is required, in the opinion of tax counsel to the
Fund, to permit the Fund to be taxed as a partnership for federal income tax
purposes, shall not require the approval of the Unitholders; (ii) remove the
Managing Member (including, without limitation, upon the Managing Member's
bankruptcy); (iii) elect a new Managing Member; or (iv) dissolve the Fund. The
removal of the Managing Member shall not affect the interest of the Managing
Member in the Fund or its right to receive Distributions as provided in Article
6 of this Agreement. Without the concurrence of Unitholders owning a majority of
the Percentage Interests, the Managing Member may not voluntarily withdraw as
the Managing Member unless such withdrawal would not affect the tax status of
the Fund and would not materially adversely affect the Unitholders.
8.4. Compensation and Expense Reimbursement. The Managing Member and/or its
Affiliates which may include the Dealer Manager shall be entitled to receive the
following compensation and expense reimbursements:
8.4.1. Selling commissions of seven percent (7%) per Unit on all
Units issued by the Fund, payable to the Dealer Manager;
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8.4.2. Marketing Support Fee of two percent (2%) per Unit on all
Units issued by the Fund;
8.4.3 Non-Accountable Expense Allowance of one percent (1%) per
Units issued by the Fund
8.4.4. Due Diligence Expense Allowance Fee of up to one-half percent
(0.5%) per Unit on all Units issued by the Fund, payable to the Dealer Manager;
8.4.5. Reimbursement of actual expenses incurred in connection with
the offer and sale of the Units by the Fund including but not limited to legal
and accounting fees, registration and filing fees, printing costs, travel,
escrow and other expenses in connection with Fund formation, qualification and
registration and in marketing and distributing the Units under applicable
federal and state law. This includes any expenses directly related to the
offering and sale of Units including the salary and benefits of one employee of
Cornerstone Ventures, Inc. who is solely dedicated to identifying and working
with the Participating Brokers;
8.4.6. Reimbursement of actual expenses incurred in connection
with the acquisition of Properties whether or not acquired, including
non-refundable option payments on property not acquired, surveys, appraisals,
title insurance and escrow fees, legal and accounting fees, architectural and
engineering reports, environmental and asbestos audits, travel and communication
expenses and other related expenses;
8.4.7.Reimbursement of actual cost of goods and materials and services
supplied to the Fund by the Managing Member but not in excess of the cost of the
Fund would pay an unaffiliated third party for such goods, materials or
services;
8.4.8. Property management fees of no more than six percent (6%) of
the gross income generated by the Fund from gross rental income generated by
each Property;
8.4.9. Leasing commissions paid upon execution of new and renewal
leases equal to six percent (6%) of rent scheduled to be paid during the first
and second year of the lease, five percent (5%) during the third and fourth
years and four percent (4%) during the fifth and later years;
8.4.10. Construction supervision fee equal to ten percent (10%) of th
cost of tenant improvements and capital improvements to the Properties;
8.4.11. Distribution of ten percent (10%) of Net Cash Flow from Oper-
ations until Unitholders have received Distributions equal to the Unitholders'
8% Preferred Return and thereafter fifty percent (50%) of Net Cash Flow from
Operations;
8.4.12. Property disposition fees equal to six percent (6%) of the
contract sales price of the Properties sold by the Managing Member and/or its
Affiliates pursuant to a non-exclusive arrangement; and
8.4.13. Ten percent (10%) of the Net Sales Proceeds after Unitholders
have received an amount equal to one hundred percent (100%) of their Invested
Capital Contributions and their Unitholders' 8% Preferred Return and thereafter,
fifty percent (50%) of Net Sales Proceeds after Unitholders have received an
amount equal to their Unitholders' 8% Preferred Return.
8.5. Contracts with the Managing Member and its Affiliates. Any agree-
ments, contracts and arrangements with the Managing Member or its Affiliates
permitted hereunder shall be subject to the following conditions: (i) any such
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agreements, contracts or arrangements, other than for Property leasing services,
Property management services, construction supervision services or Property
disposition services provided for in Sections 8.4.7, 8.4.8, 8.4.9 and 8.4.11 of
this Agreement, shall be embodied in a written contract which describes the
services to be rendered and all compensation to be paid; (ii) the compensation,
price or fee must be competitive, (iii) any such agreements, contracts or
arrangements shall be fully and promptly disclosed to all Members in the reports
made available pursuant to Section 2.4; (iv) any such agreements, contracts or
arrangements other than for Property leasing services, Property management
services, construction supervision services or Property disposition services
provided for in Sections 8.4.7, 8.4.8, 8.4.9 and 8.4.11 of this Agreement shall
be terminable by a majority in Percentage Interest of the Unitholders, without
penalty, upon not more than sixty (60) days' prior written notice; and (v) the
Managing Member or its Affiliate must be previously and independently engaged in
the business of rendering the services or selling or leasing the goods to be
provided, as an ordinary and ongoing business.
8.6. Authority. All employees and agents of the Fund shall have such
authority and perform such duties in the conduct and management of the business
and affairs of the Fund as may be designated by the Managing Member and this
Agreement.
8.7. Standard of Care. Each person appointed by the Managing Member to
perform duties for the Fund will discharge his or her duties in good faith,
with the care an ordinarily prudent person in a like position would exercise
under similar circumstances, and in a manner he or she reasonably believes to be
in the best interests of the Fund.
8.8. Liability. To the extent that, at law or in equity, a Member or
other Person has duties (including fiduciary duties) and liabilities thereto to
the Fund or to another Member or the Managing Member, any such Member or other
Person acting under this Agreement shall not be liable to the Fund or to any
such other Member for the Member's or other Person's good faith reliance on the
provisions of this Agreement. No Member or any other Person shall be liable for
any monetary damages to the Fund for any breach of such duties except for
receipt of a financial benefit to which the Member or other Person is not
entitled, voting for or assenting to a Distribution to Members in violation of
this Agreement or the Limited Liability Company Law, a knowing violation of law,
participation in tortious conduct or pursuant to a written agreement or
contractual obligation other than this Agreement entered into by the Member.
8.9. Other Interests. Subject to Sections 9.4 and 9.5 and applicable law,
each of the Members may engage in or possess an interest in other business
ventures (unconnected with the Fund) of every kind and description,
independently or with others including, but not limited to, participation in
other limited liability companies and partnerships engaged in the same line of
business as the Fund. Neither the Fund nor the Members shall have any rights in
and to such independent ventures or the income or profits therefrom by reason of
any position in the Fund.
8.10. Prohibited Acts.
8.10.1. Tax Election. The Managing Member is prohibited from electing
corporate tax classification status.
8.10.2. No Trading Market for Units. The Members are prohibited
from (i) listing, facilitating, or recognizing the trading of Units on an
established securities market or (ii) creating for Units or facilitating or
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recognizing the trading of Units on a secondary market (or the substantial
equivalent thereof) within the meaning of Code Section 7704 and the Regulations
promulgated thereunder.
9. INVESTMENT OBJECTIVES AND POLICIES
9.1. Duties and Responsibilities; Investment Allocation. It shall be the
duty of the Managing Member to ensure that the purchase, sale, retention and
disposal of the Fund's Properties, and the investment policies of the Fund and
the limitations thereon or amendment thereof are at all times consistent with
such policies, limitations and restrictions as are contained in this Article 9.
Except as specifically restricted in this Agreement, the investment objectives
and policies of the Fund shall be controlled by the Managing Member, which has
the power to modify or alter such policies without the consent of the Members.
9.2. Prohibited Investments and Activities. Unless approved by the Members
of the Fund in the manner provided in Section 3.11, the Fund shall commit funds
to investment in Properties and shall further be subject to the following
restrictions:
9.2.1. Prior to acquisition of Properties,and with respect to reserves
and any other uninvested funds of the Fund, the Fund may temporarily invest its
funds in short-term, highly liquid investments where there is appropriate safety
of principal, such as (i) government obligations, (ii) bank accounts or
certificates of deposit, (iii) short-term debt obligations and interest-bearing
accounts all of which are insured, guaranteed, or issued by the United States
Government and (iv) money market funds investing solely in government-backed
securities. No funds shall be commingled with those of other Persons.
9.2.2. No investment shall be made in mortgages, trust deeds and
other similar obligations.
9.2.3. The Fund shall not reinvest Net Cash Flow from Operations or
Net Sale Proceeds.
9.2.4. Investments by the Fund in Properties other than multi-tenant
industrial properties shall be prohibited. The Fund may invest in multi-tenant
industrial properties through general partnerships or joint ventures with
non-Affiliates that own or operate one or more Properties if the Fund acquires a
controlling interest in the general partnerships, limited liability companies or
joint ventures.
9.2.5. All Property purchases by the Fund will be supported by an
appraisal.
9.2.6. The Fund will not invest more than $25,000,000 in any one
Property.
9.2.7. The Fund shall not purchase any properties from or sell
properties to the Managing Member or its Affiliates or any entity affiliated
with or managed by any of them.
9.2.8. The Fund shall not make loans to the Managing Member or its
Affiliates or
to any other person or entity.
9.2.9. The Fund shall not repurchase Units.
9.2.10. The Fund shall not pay Acquisition Fees for any Property
which exceed 18% of the Gross Proceeds applicable to such Property or such
lesser amount customarily charged in arms' length transactions by persons
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rendering similar services as an ongoing public activity in the same geographic
location and for comparable property.
9.3. Borrowing Policies. The Members acknowledge that funds may be required
in addition to the Capital Contributions made pursuant to Section 4.1 hereof in
order to meet the operating expenses of the Fund. All additional funds required
for such purpose will be obtained from the proceeds of unsecured loans pursuant
to such terms, provisions and conditions and in such manner as the Managing
Member shall determine. The Fund will not borrow funds for any other purpose,
including, without limitation, for the purpose of acquiring or holding any
Properties. The aggregate borrowings of the Fund for operating expenses will not
exceed the greater of $100,000 or five percent of the Capital Contributions of
all Members and will be reviewed by the Managing Member at least quarterly. In
the event the Fund borrows money from the Managing Member or an Affiliate of the
Managing Member, the Managing Member or Affiliate shall make such loan to the
Fund at the Managing Member's of Affiliate's cost of borrowing.
9.4. Conflicts of Interest. Any Member may engage independently or with
others, in other business ventures of any nature and description, whether or not
in competition, including, without limitation, the rendering of advice or
services of any kind to other investors and the making or management of other
investments. Nothing in this Agreement shall be deemed to prohibit the Managing
Member or any of its Affiliates from dealing, or otherwise engaging in business,
with Persons transacting business with the Fund or from providing services
relating to the purchase, sale, management, development or operation of real
property and receiving compensation therefor; provided that such dealings,
business, or provisions of services shall not involve any rebate or reciprocal
arrangement that has the effect of circumventing any restriction set forth
herein upon dealing with Affiliates of the Managing Member. Neither the Fund nor
any Member shall have any right by virtue of this Agreement or the relationship
created hereby in or to such ventures, even if such ventures compete with the
business of the Fund.
9.5. Conflict Resolution Procedures. In order to reduce or eliminate
certain potential conflicts of interest, the Managing Member hereby agrees to
the following restrictions relating to (i) transactions between the Fund and the
Managing Member or any of its Affiliates, (ii) certain future offerings, and
(iii) allocation of Properties among certain affiliated ventures:
9.5.1. All transactions between the Fund and the Managing Member or
any of its Affiliates for the provision of goods or services to the Fund,
other than those specifically provided for in the Operating Agreement, must be
evidenced by written agreements which may be terminated without penalty, upon 60
days' prior written notice, by vote of the Members as provided in Section 3.11.
The terms of such agreements must be comparable to the terms available from
unrelated parties, and the compensation payable thereunder shall be competitive
with the amount charged by independent parties for comparable goods or services.
9.5.2. In the event that the Fund and a public or private entity with
which the Managing Member or any of its Affiliates are affiliated have the same
investment objectives and structure, and an investment opportunity becomes
available which is suitable for both entities and for which both entities have
sufficient funds available to invest, then the entity which has had the longest
period of time elapse since it was offered an investment opportunity will first
be offered the investment opportunity. In determining whether or not an
investment opportunity is suitable for more than one investment program, the
Managing Member and its Affiliates will examine such factors, among others, as
the cash requirements of each investment program, the effect of the acquisition
both on diversification of each investment program's investments by geographic
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area, the size of the investment, the amount of funds available to each
investment program, and the length of time such funds have been available for
investment.
9.5.3. The Managing Member and its Affiliates have agreed not to
attempt to sell any Property or any interest therein contemporaneously with a
property owned by another investment program managed by the Managing Member or
any of its Affiliates if the two properties are within a five-mile radius of
each other, unless it is believed that a suitable purchaser for each facility
can be located.
10. INDEMNIFICATION
10.1. Indemnification. Subject to all of the other provisions of this
Article 10, the Fund shall indemnify a Person who was or is a party or is
threatened to be made a party to a threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative and
whether formal or informal, other than an action by or in the right of the Fund,
by reason of the fact that he, she or it is or was a Managing Member of the
Fund, or is or was serving at the request of the Fund as a director, officer,
partner, trustee, employee or agent of another foreign or domestic limited
liability company, corporation, partnership, joint venture, trust or other
enterprise, whether for profit or not, against expenses, including attorneys'
fees, judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him, her or it in connection with the action, suit or
proceeding, if the Person acted in good faith and in a manner he, she or it
reasonably believed to be in or not opposed to the best interests of the Fund or
its Members, did not breach such Person's fiduciary duties to the Fund and whose
actions did not constitute fraud, willful misconduct or gross negligence, and
with respect to a criminal action or proceeding, if the Person had no reasonable
cause to believe his, her or its conduct was unlawful. The termination of an
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, does not, itself, create a
presumption that the Person did not act in good faith and in a manner which he,
she or it reasonably believed to be in or not opposed to the best interests of
the Fund or its Members, and, with respect to a criminal action or proceeding,
had reasonable cause to believe that his, her or its conduct was not unlawful.
10.2. Certain Actions. Subject to all of the provisions of this Article,
the Fund shall indemnify a Person who was or is a party to or is threatened to
be made a party to a threatened, pending or completed action or suit by or in
the right of the Fund to procure a judgment in its favor by reason of the fact
that he, she or it is or was a Managing Member or officer of the Fund, or is or
was serving at the request of the Fund as a director, officer, partner, trustee,
employee or agent of another foreign or domestic limited liability company,
corporation, partnership, joint venture, trust or other enterprise, whether for
profit or not, against expenses, including actual and reasonable attorneys'
fees, and amounts paid in settlement incurred by the Person in connection with
the action or suit, if the Person acted in good faith and in a manner the Person
reasonably believed to be in or not opposed to the best interests of the Fund or
its Members, did not breach such Person's fiduciary duties to the Fund and whose
actions did not constitute fraud, willful misconduct or gross negligence.
However, indemnification shall not be made for a claim, issue, or matter in
which the Person has been found liable to the Fund unless and only to the extent
that the court in which the action or suit was brought has determined upon
application that, despite the adjudication of liability but in view of all
circumstances of the case, the Person is fairly and reasonably entitled to
indemnification for the expenses which the court considers proper.
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10.3. Expenses of Successful Defense. To the extent that a Person has
been successful on the merits or otherwise in defense of an action, suit, or
proceeding referred to in Section 10.1 or 10.2 of this Agreement, or in defense
of a claim, issue or matter in the action, suit, or proceeding, he, she or it
shall be indemnified against expenses, including actual and reasonable
attorneys' fees, incurred by him, her or it in connection with the action, suit
or proceeding and an action, suit, or proceeding brought to enforce the
mandatory indemnification provided in this Article 10.
10.4. Determination that Indemnification is Proper. An indemnification
under Section 10.1 or 10.2 of this Agreement, unless ordered by a court, shall
be made by the Fund only as authorized in the specific case upon a determination
that indemnification of the Person is proper in the circumstances because he,
she or it has met the applicable standard of conduct set forth in Section 10.1
or 10.2, whichever is applicable. Determination that indemnification is proper
shall be made as follows:
10.4.1. Managing Member. For the indemnification of the Managing Mem-
ber of the Fund, such determination shall be made only if all of the following
conditions shall be satisfied:
10.4.1.1. The Managing Member has determined, in good faith, that
the course of conduct which caused the loss or liability was in the best
interests of the Fund.
10.4.1.2. Such liability or loss was not the result of fraud,
gross negligence or willful misconduct by the Managing Member.
10.4.1.3. Such indemnification or agreement to hold harmless is
recoverable only out of the assets of the Fund and not from the Members.
10.4.1.4. Such determination shall be made in either of the
following ways: (A) by independent legal counsel in a written opinion; or (B) by
the Members pursuant to Section 3.11.
If and only to the extent prohibited by applicable law, indemnification
will not be allowed on any liability imposed by judgment, and costs associated
therewith, including attorneys' fees, arising from or out of a violation of
state or federal securities laws associated with the offer and sale of the
Fund's Units. Indemnification will be allowed for settlements and related
expenses of lawsuits alleging securities law violations, and for expenses
incurred in successfully defending such lawsuits, provided that a court either:
(1) approves the settlement and finds that indemnification of the settlement and
related costs should be made; or (2) approves indemnification of litigation
costs if a successful defense is made.
10.4.2. Others. For the indemnification of all Persons other than the
Managing Member of the Fund, such determination shall be made in any of the
following ways: (A) by the Managing Member provided the Managing Member was not
a party to the action, suit or proceeding; (B) by independent legal counsel in a
written opinion; or (C) by the Members pursuant to Section 3.11.
10.5. Indemnification for Portion of Expenses. If a Person is entitled to
indemnification under Section 10.1 or Section 10.2 of this Agreement for a
portion of expenses including attorneys' fees, judgments, penalties, fines and
amounts paid in settlement, but not for the total amount thereof, the Fund may
indemnify the Person for the portion of the expenses, judgments, penalties,
fines or amounts paid in settlement for which the Person is entitled to be
indemnified.
10.6. Expense Advances. Expenses incurred in defending a civil or
criminal action, suit or proceeding described in Section 10.1 or 10.2 of this
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Agreement may be paid by the Fund in advance of the final disposition of the
action, suit or proceeding upon receipt of an undertaking by or on behalf of the
Person involved to repay the expenses if it is ultimately determined that the
Person is not entitled to be indemnified by the Fund. The undertaking shall be
by unlimited general obligation of the Person on whose behalf advances are made
but need not be secured.
10.7. Indemnification of Employees and Agents of the Fund.The Fund may, to
the extent authorized from time to time by the Managing Member, grant rights to
indemnification and to the advancement of expenses to any employee or agent of
the Fund to the fullest extent of the provisions of this Article 10 with respect
to the indemnification and advancement of expenses of the Managing Member and
officers of the Fund.
10.8. Former Managing Members, Officers, Employees and Agents.
The indemnification provided in the foregoing sections of this Article 10
continues as to a Person who has ceased to be a Managing Member, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such Person.
10.9. Insurance. The Fund may purchase and maintain insurance on behalf
of any Person who is or was a Managing Member, officer, employee or agent of the
Fund, or who is or was serving at the request of the Fund as a director,
officer, employee or agent of another limited liability company, corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against such Person and incurred by such Person in any such capacity or
arising out of such Person's status as such, whether or not the Fund would have
power to indemnify such Person against such liability under this Agreement or
the laws of the State of California.
10.10. Contract Right to Indemnity. The right to indemnification conferred
in this Article 10 shall be a contract right, and shall apply to services of a
Managing Member or officer as an employee or agent of the Fund as well as in
such Person's capacity as a Managing Member or officer. Except as provided in
Section 10.4 of this Agreement, the Fund shall have no obligations under this
Article 10 to indemnify any Person in connection with any proceeding, or part
thereof, initiated by such Person without authorization by the Managing Member.
10.11. Exclusivity; Other Indemnification. The indemnification or advancement of
expenses provided under this Article 10 is not exclusive of other rights to
which a Person seeking indemnification or advancement of expenses may be
entitled under a contractual arrangement with the Fund. However, the total
amount of expenses advanced or indemnified from all sources combined shall not
exceed the amount of actual expenses incurred by the Person seeking
indemnification or advancement of expenses.
10.12. Amendment or Deletion. No amendment or deletion of this Article 10
shall apply to or have any effect on any Managing Member or officer of the Fund
for or with respect to any acts or omissions of any such Person occurring prior
to such amendment or repeal.
11. DISSOLUTION, WINDING UP AND REDEMPTION
11.1. Dissolution. The Fund will dissolve and its affairs will be wound up on
the first to occur of the following events: (a) December 31, 2010; (b) the entry
of a decree of judicial dissolution, as provided under the Limited Liability
Fund Law; or (c) by the consent of a majority of the Unitholders by Percentage
Interest. None of the events set forth in Section 17350(d) of the Limited
Liability Company Law will cause or result in a dissolution of the Fund, and the
occurrence of any such events will have no effect on the Fund or its continuing
existence. All of the Members are hereby deemed to consent to continue the Fund
without interruption upon the occurrence of any such events to the extent that
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this Agreement is determined not to control whether a dissolution has occurred
upon the occurrence of any such events.
11.2. Winding Up. Upon dissolution, the Fund will cease carrying on its
business and affairs, will commence the winding up of the Fund's business and
affairs, and will complete the winding up as soon as practicable. The Managing
Member will control such winding-up process. Upon the winding up of the Fund,
the assets of the Fund will be distributed first to creditors to the extent
permitted by law in satisfaction of the Fund's debts, liabilities, and
obligations, including contingent liabilities for which reserves may be
established in the discretion of the Managing Member, and then to the Members in
accordance with Article 6 and their relative positive Adjusted Capital Account
Balances. Such proceeds will be distributed to such Members as soon as
practicable after the date of winding up.
12. MISCELLANEOUS PROVISIONS
12.1. Counsel to the Fund. Counsel to the Fund may also be counsel to
the Managing Member or any Affiliate of the Managing Member. The Managing Member
may execute on behalf of the Company and the Unitholders any consent to the
representation of the Fund that counsel may request pursuant to the California
Rules of Professional Conduct or similar rules in any other jurisdiction
("Rules"). The Fund has initially selected Oppenheimer Wolff & Donnelly LLP
("Counsel") as legal counsel to the Fund. Each Unitholder acknowledges that
Counsel does not represent any Unitholder in the absence of a clear and explicit
agreement to such effect between the Unitholder and Counsel, and that in the
absence of any such agreement, Counsel will owe no duties directly to a
Unitholder. In the event any dispute or controversy arises between any Members
and the Fund, or between any Unitholders or the Fund, on the one hand, and the
Managing Member (or Affiliate of the Managing Member) that Counsel represents,
on the other hand, then each Member agrees that Counsel may represent either the
Fund or such Managing Member (or its Affiliate), in any such dispute or
controversy to the extent permitted by the Rules, and each Member hereby
consents to such representation. Each Unitholder further acknowledges that
Counsel has not represented the interests of any Unitholder and hereby waives
any conflict of interest with respect to Counsel's representation of the Fund.
12.2. Counterparts. This Agreement may be executed in several counterparts,
each of which will be deemed an original, but all of which will constitute one
and the same.
12.3. Entire Agreement. This Agreement constitutes the entire agreement
among the parties and contains all of the agreements among the parties with res-
pect to its subject matter. This Agreement supersedes all other agreements,
either oral or written, among the parties with respect to its subject matter.
12.4. Severability. The invalidity or unenforceability of any particular
provision of this Agreement will not affect its other provisions, and this
Agreement will be construed in all respects as if such invalid or unenforceable
provisions were omitted.
12.5. Pronouns; Statutory Reference. All pronouns and all variations there-
of shall be deemed to refer to the masculine, feminine, or neuter, singular or
plural, as the context in which they are used may require. Any reference to the
Code, the Regulations, the Limited Liability Company Law or other statutes or
laws will include all amendments, modifications, or replacements of the specific
sections and provisions concerned.
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12.6. Power of Attorney. Each Member constitutes and appoints the Managing
Member of the Fund with full power of substitution, its true and lawful attorney
to make, execute, and acknowledge and file in its name, place and stead:
12.6.1. This Agreement;
12.6.2. Any certificate or other instrument, including registrations
or filings concerning the use of fictitious names and necessary or appropriate
filings under the federal and state securities laws;
12.6.3. Documents required to dissolve and terminate the Fund;
12.6.4. Amendments and modifications to the Articles or any of the
instruments described above;
12.6.5. Amendments and modifications to this Agreement which have
been approved pursuant to the terms hereof; and
12.6.6. All loan and security agreements, notes, instruments and
other similar documents which are necessary or desirable for the Fund to conduct
its business as contemplated by this Agreement.
This power of attorney is coupled with an interest and is irrevocable.
12.7. Notices. Any notice permitted or required under this Agreement will
be conveyed to the party at the address set forth in the books and records of
the Fund and will be deemed to have been given when deposited in the United
States mail, postage paid, or when delivered in person, by courier, or by
facsimile transmission. In the event all notices and distributions sent to a
Unitholder have been returned for two consecutive years, the Fund may cease
sending notices and distributions to said Unitholder.
12.8. Binding Effect. Subject to the provisions of this Agreement relating
to disposition of Units, this Agreement will be binding upon and will inure to
the benefit of the parties and their distributees, heirs, successors, and
assigns.
12.9. Governing Law. This Agreement will be governed by, and construed
and enforced in accordance with, the laws of the State of California.
13. BINDING ARBITRATION
13.1. Arbitration of Controversy or Claim. Any controversy or claim arising
out of or relating to this Agreement or the breach hereof, shall be settled by
arbitration in accordance with the commercial rules of the American Arbitration
Association then in effect. The decision of the arbitrator shall, except for
mistakes of law, be final and binding upon the parties hereto, and judgment upon
the award rendered by the arbitrator, which shall, in the case of damages, be
limited to actual damages proven in the arbitration, may be entered in any court
having jurisdiction thereof.
13.2. Single Arbitrator; Situs of Arbitration. There shall be a single
arbitrator who shall be an existing or former judge of a court of record within
the United States or an attorney in good standing admitted to practice for a
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period of at least ten (10) years within the United States. No arbitration shall
involve parties other than the parties hereto and their respective successors
and assigns or be in any respect binding with respect to any such other parties.
The situs of the arbitration will be in the County of Orange, State of
California.
13.3. Discovery.The parties to any arbitration arising hereunder shall have
the right to take depositions and to obtain discovery regarding the subject
matter of the arbitration and to use and exercise all of the same rights,
remedies and procedures, and be subject to all of the same duties, liabilities,
and obligations in the arbitration with respect to the subject matter thereof,
as if the subject matter of the arbitration were pending in a civil action
before a court of highest jurisdiction in the state where the arbitration is
held. The arbitrator shall have the power to enforce said discovery by
imposition of the same terms, conditions, consequences, liabilities, sanctions
and penalties as can be or may be imposed in like circumstances in a civil
action by a court of highest jurisdiction of the state in which the arbitration
is held, except the power to order the arrest or imprisonment of a person.
13.4. Attorneys' Fees. If any party commences an action, either arbitration
or court proceedings, against any other party arising out of or in connection
with this Agreement, the prevailing party or parties shall be entitled to
receive from the losing party or parties, both attorney's fees and costs of the
arbitration and/or suit as part of the judgment rendered.
14. DEFINITIONS
The following terms used in this Agreement shall have the meanings
described below:
"Acquisition Fees" shall mean the total of all fees and commissions
paid by any person or entity to any other person or entity in connection with
the selection or acquisition of any property, including, without limitation,
real estate or other commissions, acquisition fees, finder's fees, selection
fees, non-recurring management fees, consulting fees, or any other fees or
commissions of a similar nature.
"Adjusted Capital Account Balance" shall have the meaning given such
term in Section 5.7.6.
"Adjusted Capital Account Deficit" shall mean, with respect to any
Member, the deficit balance, if any, in that Person's Capital Account as of the
end of the relevant fiscal year, after giving effect to the following
adjustments: (a) credit to that Capital Account the amount by which that Person
is obligated to restore or is deemed to be obligated to restore pursuant to the
penultimate sentences of Regulation Sections 1.704-2(g)(1) and (i)(5) and (b)
debit to that Capital Account the items described in paragraphs (4), (5) and (6)
in Section 1.704-1(b)(2)(ii)(d) of the Regulations. This definition of Adjusted
Capital Account Deficit is intended to comply with the provisions of Section
1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently
therewith.
"Affiliate" of another Person shall mean (i) any Person or entity
directly or indirectly through one or more intermediaries controlling,
controlled by or under common control with another Person or entity, (ii) any
Person or entity owning or controlling ten percent (10%) or more of the
outstanding voting securities of another Person or entity, (iii) any officer,
director, partner or trustee of such Person or entity, and (iv) if such other
Person is an officer, director, partner or trustee of a Person or entity, the
Person or entity for which such other Person or entity acts in any such
capacity.
"Agreement" shall mean this Operating Agreement, as the same may be
amended from time to time.
"Articles" shall have the meaning given such term in Section 1.1.
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<PAGE>
"Bankruptcy" shall mean, with respect to the Managing Member, the hap-
pening of any of the following:
(a) the making of a general assignment for the benefit of
creditors;
(b) the filing of a voluntary petition in bankruptcy or the
filing of a pleading in any court of record admitting in writing an inability to
pay debts as they become due;
(c) the entry of an order, judgment or decree by any court of
competent jurisdiction adjudicating the Person to be bankrupt or insolvent;
(d) the filing of a petition or answer seeking any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any statute, law or regulation;
(e) the filing of an answer or other pleading admitting the
material allegations of, or consenting to, or defaulting in answering, a
bankruptcy petition filed against the Person in any bankruptcy proceeding;
(f) the filing of an application or other pleading or any
action otherwise seeking, consenting to or acquiescing in the appointment of a
liquidating trustee, receiver or other liquidator of all or any substantial part
of the Person's properties;
(g) the commencement of any proceeding seeking reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any statute, law or regulation which has not been quashed or
dismissed within 180 days; or
(h) the appointment without consent of such Person or
acquiescence of a liquidating trustee, receiver or other liquidator of all or
any substantial part of such person's properties without such appointment being
vacated or stayed within 90 days and, if stayed, without such appointment being
vacated within 90 days after the expiration of any such stay.
"Capital Account" shall have the meaning given such term in Section
4.2.1.
"Capital Contribution" as to any Unitholder shall mean $500 multiplied
by the number of Units subscribed for by the Unitholder and, as to the Managing
Member and Terry G. Roussel, shall mean the $1,000 contributed to the Fund by
the Managing Member on or before a specified date. The Capital Contribution of a
substituted Unitholder shall be that attributable to the interest in the Fund
assigned to such substituted Unitholder.
"Closing" shall mean the date or dates on which purchasers of Units are
admitted to the Fund as Members.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Dealer Manager" shall mean Pacific Cornerstone Financial Incorporated,
an entity under common ownership with the Managing Member, or such other Person
or entity selected by the Managing Member to act as the dealer manager for the
Offering.
"Distributions" shall mean cash or property distributed to the Members
arising from their respective interests in the Fund.
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<PAGE>
"Due Diligence Expense Allowance Fee" shall mean a fee equal to one-half
percent (0.5%) of the Gross Proceeds which is payable to the Dealer Manager
to coverits due diligence expenses. Such fee may be reallowed in whole or in
part to Participating Brokers which sell Units.
"Early Investors' 12% Incentive Return" shall mean distributions of Net
Cash Flow from Operations in an amount equal to a 12% non-cumulative,
non-compounded annual return on a Unitholders' Invested Capital Contribution
with respect to the first 6,000 Units sold by the Fund, calculated from the date
the purchase price for the Units is deposited in escrow, and for twelve (12)
months thereafter, to the extent that sufficient cash is available to make such
distributions, in each case reduced by all prior Distributions of Net Cash Flow
from Operations for the current fiscal year and all prior fiscal years. The
Early Investors' 12% Incentive Return is in lieu of the Unitholders' 8%
Preferred Return during the twelve (12) month period for which it applies.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"Escrow Agent" shall mean a Southern California bank in Newport Beach,
California, which will hold subscribers' funds until the minimum number of Units
is sold.
"Fund" shall mean Cornerstone Industrial Properties Income and Growth
Fund I, LLC, a California limited liability company.
"Gross Proceeds" shall mean $500 multiplied by the number of Units of
the Fund sold through the Offering.
"Invested Capital Contribution", as of any date, shall mean the Capital
Contribution to the Fund of a Unitholder, increased by the amount of any Volume
Discount received by the Unitholder, reduced by all prior Distributions to such
Unitholder pursuant to Section 6.1.2(i). Invested Capital Contributions may
differ from Capital Accounts, but may not be less than zero.
"Limited Liability Company Law" shall have the meaning given such term
in Section 1.1.
"Managing Member" shall have the meaning given such term in Section
8.1.
"Marketing Support Fee" shall mean a fee equal to two percent (2%) of
the Gross Proceeds which is payable to the Dealer Manager in consideration for
assisting Participating Brokers in marketing the Units. Such fee may be
reallowed in whole or in part to Participating Brokers who sell Units.
"Member" shall mean the Managing Member and any Unitholder admitted to
the Fund as a Member, including any Person admitted to the Fund as a substituted
Member in accordance with the Operating Agreement. "Members" shall mean all
Members of the Fund, including the Managing Member and all Unitholders.
"Minimum Gain" shall have the meaning set forth in Regulation Section
1.704-2(d)(1).
"Net Cash Flow From Operations" shall mean the Net Income or Net Loss
for each fiscal year, exclusive of Net Sales Proceeds with respect to gain or
loss arising from a Sale, with the following adjustments: (i) there shall be
added to such Net Income or Net Loss the amount charged for any deduction not
involving a cash expenditure (such as depreciation, amortization and accruals),
and any cash receipts (excluding Net Sales Proceeds) or reserves which the
Managing Member, in its sole discretion, deems to be available for Distribution;
and (ii) there shall be subtracted from such Net Income or Net Loss the amount
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<PAGE>
of any reserves established or maintained by the Managing Member in its sole
discretion and any other nondeductible cash items, including expenditures for
the acquisition of Properties and, similar capital outlay items, Distributions
made to the Members prior to the end of such fiscal year, and, the amount of any
and all income not attributable to cash receipts of the Fund (such as accrued
accounts receivable).
"Net Income" shall mean the taxable income of the Fund for federal
income tax purposes for each taxable year, if any, determined using the accrual
method of accounting.
"Net Loss" shall mean the taxable loss of the Fund for federal income
tax purposes for each taxable year, if any, determined using the accrual method
of accounting.
"Net Sales Proceeds" shall mean, in the case of a transaction described
in the definition of Sale, the proceeds of any such transaction less the amount
of all real estate and other brokerage commissions and closing costs paid by the
Fund. In any case in which a Property is sold and the Fund receives a payment as
a result thereof, such payment also shall constitute Net Sales Proceeds. Net
Sales Proceeds shall not include any reserves established by the Managing Member
in its sole discretion.
"Non-Accountable Expense Allowance" shall mean a fee equal to one
percent (1%) of the Gross Proceeds which is payable to the Dealer Manager as
reimbursement of its costs incurred in selling the Units. Such fee may be re-
allowed in whole or in part to Participating Brokers which sell Units.
"Offering" shall have the meaning given such term in Section 3.1.
"Organizational and Offering Expenses" shall mean any and all costs
and, expenses, exclusive of Selling Commissions and the Due Diligence and
Marketing Support Fee payable to the Dealer Manager, incurred by the Fund, the
Managing Member, or its Affiliates in connection with the formation,
qualification, organization, and registration of the Fund and the marketing and
distribution of Units, including, without limitation, the following: legal,
accounting, and escrow fees; printing, amending, supplementing, mailing, and
distributing costs; filing, registration, and qualification fees and taxes;
facsimile and telephone costs; and all advertising and marketing expenses
including the costs related to broker-dealer sales meetings, including the
salary and benefits of one employee of Cornerstone Ventures, Inc. solely
dedicated to identifying and communicating with the Participating Brokers.
"Participating Brokers" shall mean those broker-dealers that are
members of the National Association of Securities Dealers, Inc., and that enter
into participating broker agreements with the Dealer Manager to sell Units. The
Dealer Manager will be considered a Participating Broker to the extent it sells
Units directly to investors.
"Percentage Interest" shall mean the percentage set forth in the books
and records of the Fund, and identified as such Member's Percentage Interest, as
the same may be increased or decreased from time to time pursuant to the
provisions of this Agreement. Such Percentage Interest is calculated with
respect to any Member by dividing the Units held by such Member by the total
Units issued and outstanding and held by all the Members. The total Percentage
Interest held by the Members shall always equal 100%. The Managing Member shall
have no Percentage Interest with respect to its interest as Managing Member, but
it may own Units and hold a Percentage Interest in the Fund with respect
thereto.
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"Person" shall mean any natural person, partnership, corporation,
association, trust, limited liability company or other legal entity.
"Property" or "Properties" shall mean the land, buildings and
improvements, and related personal property, if any, which the Fund acquires.
"Prospectus" shall have the meaning given such term in Section 3.1.
"Public Offering Expenses" shall mean all expenses incurred by the Fund
in connection with the preparation and filing of the Form S-11 registration
statement by the Fund under the Securities Act of 1933, as amended, and the sale
of Units pursuant to said registration statement.
"Qualified Plans" shall mean qualified pension, profit-sharing, and
stock bonus plans, including Keogh plans and individual retirement accounts.
"Regulatory Allocations" shall have the meaning given such term in
Section 5.7.5.
"Sale" shall mean any transaction or series of transactions whereby the
Fund sells, grants, transfers, conveys, or relinquishes its ownership and/or
interest in any Property or any portion thereof, including any event with
respect to any Property which gives rise to a significant amount of insurance
proceeds or condemnation awards.
"Selling Commissions" shall mean the sales commissions payable to the
Dealer Manager in connection with the sale of Units as described in the
Prospectus equal to seven percent (7%) of Gross Proceeds, subject to reduction
under certain circumstances.
"Treasury Regulations" or "Regulations" shall mean those final,
temporary and proposed regulations promulgated by the United States Treasury
Department interpreting and implementing various provisions of the Code, as
amended.
"Unit" shall mean the membership interest of a Unitholder in the Fund
which is represented by a Capital Contribution of $500. Where applicable,
"Units" shall mean multiple or fractional Units held by a Unitholder.
"Unitholder" shall mean any Person that owns Units, including the
Managing Member with respect to Units, if any, owned by it.
"Unitholders' 8% Preferred Return" shall mean (i) in the case of
distributions of Net Cash Flow from Operations, an amount equal to an 8%
non-cumulative, non-compounded annual return on a Unitholder's Invested Capital
Contribution, and (ii) in all other cases, an amount equal to an 8% cumulative,
non-compounded annual return on a Unitholder's Invested Capital Contribution, in
each case calculated from the date a Unitholder acquires the Units and the
Capital Account attributable to such Unitholder is established, to the extent
that sufficient cash is available to make such Distributions, in each case
reduced by all prior Distributions of Net Cash Flow from Operations and of Net
Sales Proceeds for the current fiscal year and all prior fiscal years other than
those prior Distributions made as a return of an Unitholder's Invested Capital
Contribution pursuant to Section 6.1.2(i).
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement, to be
effective on the date first above written.
"MANAGING MEMBER"
CORNERSTONE INDUSTRIAL PROPERTIES, LLC,
a California limited liability company
By: Cornerstone Ventures, Inc., a California corporation
Its Manager
/S/ TERRY G. ROUSSEL
By: ---------------------------------------
Terry G. Roussel, President
"UNITHOLDERS"
By: Cornerstone Industrial Properties, LLC,
a California limited company, the Managing
Member, as attorney-in-fact for the Unitholders
set forth in the books and records of the Fund,
pursuant to Section 12.6 and each such Unit-
holder's Subscription Agreement
By: Cornerstone Ventures, Inc., a California
corporation,
Its Manager
/S/ TERRY G. ROUSSEL
By: ------------------------------------
Terry G. Roussel, President
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<PAGE>
EXHIBIT "B"
____________________, 1999
FORM OF OPINION OF
COUNSEL WITH RESPECT TO
CERTAIN FEDERAL INCOME TAX MATTERS
Cornerstone Industrial Properties Income
and Growth Fund I, LLC
4590 MacArthur Blvd., Suite 610
Newport Beach, CA 92660
Re: Cornerstone Industrial Properties Income and Growth Fund I, LLC
Ladies and Gentlemen:
You have requested our opinion concerning certain federal income tax
aspects of the offering and sale of Units of limited liability company interest
in Cornerstone Industrial Properties Income and Growth Fund I, LLC, a California
limited liability company (hereinafter referred to as the "Fund"), which has
Cornerstone Industrial Properties, LLC, a California limited liability company,
as managing member (the "Managing Member"), all as described in the Registration
Statement on Form S-11 filed with the Securities and Exchange Commission on or
about April 1, 1999, as amended (as amended, the "Registration Statement"),
and the Prospectus included therein (as amended, the "Prospectus"). Capitalized
terms used herein shall have the meaning ascribed to them in the "Glossary"
section of the Prospectus or as set forth in Article 14 of the Operating
Agreement of the Fund included as Exhibit A to the Prospectus. Any reference to
a "partnership" or to a "partner" in the discussion which follows includes a
limited liability company, such as the Fund, classified as a partnership for
federal income tax purposes and the members, such as the Managing Member and
Unitholders, thereof.
In order to render our opinion, we have reviewed and relied upon (a) an
executed copy of the Articles of Organization of the Fund dated October 28,
1998; (b) the Prospectus; and (c) representations of the Managing Member
provided herein and as disclosed in the Prospectus, including, inter alia, that:
(i) all statements and information in the Prospectus are accurate and complete;
and (ii) the Fund will be operated in a business-like manner and substantially
in accordance with the Operating Agreement and Prospectus. We have assumed the
accuracy of the representations contained in the Prospectus, that the Operating
Agreement will be executed substantially in the form included as Exhibit "A" to
the Prospectus and that the Fund will be operated in accordance with the
provisions of the Operating Agreement. We have also relied upon, and based our
interpretation on, pertinent provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations (including Temporary and Proposed
Regulations) promulgated thereunder ("Regulations"), existing judicial
decisions, and current administrative rulings and procedures issued by the
Internal Revenue Service ("IRS"), all of which are subject to change, with or
without retroactive application, by legislation, administrative action and
judicial decision. Any changes in the facts assumed hereunder or in the Code or
Regulations made subsequent to the date of this opinion could materially affect
the statements made herein and have adverse effects on the income tax
consequences of investing in the Fund.
This opinion is strictly subject to all of the terms, conditions and
limitations set forth herein, and all references to this opinion contained in
the Prospectus are expressly qualified by reference to the entirety of this
<PAGE>
Managing Member
___________________,1999
Page 2
opinion. Further, this opinion is directed primarily to individual taxpayers who
are citizens of the United States. No opinion is given with respect to federal
income tax aspects of the offering which depend upon a Unitholder's particular
financial or tax circumstances, and no opinion is given with respect to the
federal income tax consequences to any new Unitholder substituted for a
Unitholder. Foreign, state or local tax consequences are not generally addressed
herein. The opinions expressed herein also do not extend to a continuation of
operations following the resignation or removal of the Managing Member.
In giving this opinion, we have considered and attempted to follow the
guidelines of Formal Opinion 346 (revised) of the American Bar Association
Standing Committee on Ethics and Professional Responsibility issued January 29,
1982, which requires that an attorney should, if possible, state his or her
opinion as to the probable outcome on the merits of each material tax issue,
i.e., each issue that would have a significant effect in sheltering income from
sources other than the Fund from federal income taxes by providing deductions to
investors in excess of the income of the Fund. In this regard, it should be
noted that Section 9.3 of the Operating Agreement prohibits the Fund from
borrowing funds for the purpose of acquiring or holding any Properties;
accordingly, the Managing Member does not intend for an investment in the Fund
to be a tax shelter. Our opinion attempts to address each material tax issue
that involves a reasonable possibility of challenge by the IRS; however, it
should be noted that this opinion is not a representation or a guarantee that
the tax results opined to herein or described in the Prospectus will be
achieved. This opinion has no binding effect or official status of any kind, and
no assurance can be given that the conclusions reached in this opinion would be
sustained by a court if contested by the IRS. For purposes of our opinion, any
statement that it is "more likely than not" that any tax position will be
sustained means that in our judgment at least a 51% chance of prevailing exists
if the IRS were to challenge the allowability of such tax position and that
challenge were to be litigated and judicially decided.
SUMMARY OF OPINIONS
In reliance on the representations and assumptions described herein and
in the Prospectus, and subject to the qualifications set forth herein and in the
Prospectus, we are of the opinion that the following material tax issues are
more likely than not to have a favorable outcome on the merits for federal
income tax purposes if challenged by the IRS, litigated and judicially decided:
(1) The Fund will be classified as a "partnership" for federal income tax
purposes and not as an "association taxable as a corporation";
(2) The Fund will not be classified as a "publicly traded partnership"
under Section 7704 of the Code since the Operating Agreement limits
transfers of Units, except for transfers of Units which satisfy
applicable safe harbors from "publicly traded partnership" status
adopted by the IRS;
(3) A Unitholder's interest in the Fund will be treated as a passive
activity; and Net Income will be considered income from a passive
activity subject to the potential issuance of Regulations that could
classify Fund income as non-passive income;
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Managing Member
___________________,1999
Page 3
(4) Fund items of income, gain, loss, deduction and credit will, pursuant
to Section 704(b) of the Code and the related Regulations, be properly
allocated among the Managing Member and the Unitholders, assuming such
allocations are made substantially in accordance with the allocation
provisions of the Operating Agreement; and
(5) The Fund is not currently required to register as a tax shelter with
the IRS under Section 6111 of the Code prior to the offer and sale of
the Units based upon the Managing Member's representation that the "tax
shelter ratio" with respect to an investment in the Fund, as defined in
the Code and Regulations, will not exceed 2 to 1 for any investor as of
the close of any year in the Fund's first five calendar years.
In addition, we are of the opinion that, in the aggregate,
substantially more than one-half of the material federal income tax benefits
contemplated by the Prospectus, in terms of their financial impact on a typical
investor, will more likely than not be realized by an investor in the Fund.
We are unable to form opinions as to the probable outcome of certain
material tax aspects of the transactions described in the Prospectus if
challenged by the IRS, litigated and judicially decided, including (i) the
deductibility of and timing of deductions for certain payments made by the Fund,
including but not limited to fees paid to the Managing Member and its
Affiliates, (ii) whether the Fund will be considered to hold any or all of its
Properties primarily for sale to customers in the ordinary course of business,
and (iii) whether the Fund will be classified as a "tax shelter" under Section
6662(d) of the Code for purposes of determining the availability of certain
potential exemptions from the application of the accuracy-related penalty
provisions.
The IRS may also attempt to disallow or limit some of the tax benefits
derived from an investment in the Fund by applying certain provisions of the
Code at the individual or Member level rather than at the Fund level. No opinion
is given herein as to the tax consequences to Unitholders with regard to any
material tax issue which is determined at the individual or Member level and
which is dependent upon an individual Unitholder's tax circumstances, including
but not limited to, issues relating to the alternative minimum tax, investment
interest limitations or the application of Section 183 of the Code.
As of the date of this opinion, no Properties have been acquired by the
Fund, nor has the Fund entered into any contracts to acquire Properties.
Therefore, it is impossible at this time for us to opine on the application of
federal income tax laws to the specific facts which will exist when Properties
are acquired by the Fund.
DISCUSSION
1. Fund Classification (Generally).
The availability of the income tax attributes of the Fund's activities
to the Unitholders depends upon the classification of the Fund as a
"partnership" for federal income tax purposes and not as an "association taxable
as a corporation." In the event that the Fund, for any reason, were to be
treated for federal income tax purposes as an association taxable as a
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Managing Member
___________________,1999
Page 4
corporation, the Members of the Fund would be treated as shareholders of a
corporation with the following results, among others: (a) the Fund would become
a taxable entity subject to the federal income tax imposed on corporations; (b)
items of income, gain, loss, deduction and credit would be accounted for by the
Fund on its own federal income tax return and would not flow through to the
Members; and (c) Distributions of cash would generally be treated as dividends
taxable to the Members at ordinary income rates, to the extent of current or
accumulated earnings and profits of the Fund, and would not be deductible by the
Fund in computing its income tax.
The Fund has been formed as a "limited liability company" under
California law. A California limited liability company is considered an
"eligible entity" under Treasury Regulations classifying business entities.
Since its formation, the Fund has had at least two Members. Under current
Treasury Regulations, a newly formed domestic eligible entity that has two or
more owners will automatically qualify for "partnership" tax classification
status. Treas. Regs. ss. 301.7701-3(b)(1)(i). If this default classification as
a partnership is not acceptable, or the entity desires to change its
classification, a domestic eligible entity may elect to be classified as a
corporation for federal income tax purposes. See Treas. Regs. ss.
301.7701-3(c)(1)(i). The Fund, as a California limited liability company, has
been formed as a qualifying domestic eligible entity, and, accordingly, it
automatically will default to "partnership" classification status. Moreover, the
Operating Agreement of the Fund prohibits the Managing Member from electing
corporate classification status. Accordingly, it is our opinion that, subject to
the discussion below regarding "publicly traded partnerships," the Fund will be
classified as a "partnership" and not as an "association taxable as a
corporation" for federal income tax purposes if such issue were challenged by
the IRS, litigated and judicially decided. The Fund will not seek a ruling from
the IRS that it will be treated as a partnership for federal income tax
purposes.
In rendering this opinion, we have relied specifically upon the fact
that the Fund is duly organized and in good standing as a limited liability
company under the laws of the State of California. This opinion is also premised
expressly on the representation by the Managing Member that the Fund will be
organized and operated strictly in accordance with the provisions of the
Operating Agreement.
2. Fund Classification (Status as a Publicly Traded Partnership).
Section 7704 of the Code provides that even though an entity may
generally be treated as a "partnership" under Section 7701(a) of the Code,
entities which are deemed to be "publicly traded partnerships" will nonetheless
be treated as corporations, rather than as partnerships, for federal income tax
purposes, with the adverse income tax consequences to the Members as described
above. Under Section 7704(b), a publicly traded partnership is defined as any
partnership (or entity otherwise taxable as a partnership) whose interests are
traded on an established securities market or are readily tradable on a
secondary market (or the substantial equivalent thereof).
The IRS has issued Regulations under Section 7704 (the "Section 7704
Regulations") that set forth limited safe harbors from the definition of a
publicly traded partnership, at least two of which may be applicable to the
Fund. First, interests in a partnership (or entity otherwise taxable as a
partnership) will not be considered readily tradable on a secondary market or
the substantial equivalent thereof if the partnership does not participate in
the establishment of the market or the inclusion of its interests thereon and
the partnership does not recognize any transfers made on the market by (i)
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Managing Member
___________________,1999
Page 5
redeeming the transferor partner (in the case of a redemption or repurchase by
the partnership), or (ii) admitting the transferee as a partner or otherwise
recognizing any rights of the transferee, such as a right of the transferee to
receive partnership distributions (directly or indirectly) or to acquire an
interest in the capital or profits of the partnership. Second, interests in a
partnership (or entity otherwise taxable as a partnership) will not be
considered readily tradable if, for any taxable year of the partnership, the sum
of the percentage interests in partnership capital or profits represented by
partnership interests that are sold or otherwise disposed of during the taxable
year, other than "disregarded transfers," does not exceed two percent (2%) of
the total interests in partnership capital or profits. Disregarded transfers
include, among other things, transfers by gift, transfers at death, transfers
between family members, distributions from a qualified retirement plan, block
transfers (which are defined as transfers by a partner and any persons related
to such partner during any 30 calendar day period of partnership interests
representing more than two percent (2%) of the total interests in a
partnership's capital or profits), and transfers not recognized by the
partnership. The Section 7704 Regulations further provide that the failure to
satisfy a safe harbor provision under the Regulations will not cause a
partnership to be treated as a publicly traded partnership if, after taking into
account all of the facts and circumstances, partners are not readily able to
buy, sell or exchange their partnership interests in a manner that is
comparable, economically, to trading on an established securities market.
An exception from "publicly traded partnership" status also exists
under Code Section 7704(c) for certain partnerships where ninety percent (90%)
or more of their gross income consists of certain "qualifying" passive types of
income (including interest, dividends, certain real property rents and gain from
the sale or other disposition of real property (including property described in
Section 1221(1) of the Code), and gain from the sale or disposition of capital
assets (or property described in Code Section 1231(b))) held for the production
of any such qualifying income, among other items. The term "real property rent"
for these purposes means amounts which would qualify as rent from real property
under Section 856(d) of the real estate investment trust rules, as modified. In
addition, "qualifying" income includes any income that would qualify as
appropriate real estate investment trust income under Code Section 856(c)(2).
Such income generally includes interest, dividends, rents, gains from the sale
of securities or real estate assets, property tax refunds and foreclosure
property income. According to the legislative history of Section 7704,
qualifying income does not include real property rents which are contingent on
the profits of the lessees or income from the rental or lease of personal
property. H.R. Rep. No. 495, 100th Cong., 1st Sess. 947, reprinted in [1987]
U.S. Code Cong. & Ad. News 2313-1693. Since a significant portion of the Fund's
gross income will consist of rental income from commercial real estate, the Fund
may also meet the exception from publicly traded partnership status set forth in
Code Section 7704(c) due to its receipt of such qualifying income in the amount
of ninety percent (90%) or more of its gross income. Nevertheless, the Fund
intends to restrict trading in Units in such a manner as to qualify for the
various regulatory trading safe harbors from "publicly traded partnership"
status irrespective of the amount and/or nature of its gross income. It should
also be noted that if only the qualifying income exception is relied upon by the
Fund to avoid publicly traded partnership status, the passive activity rules,
pursuant to Code Section 469(k), will be applied separately with respect to the
Fund, thus, for example, preventing Fund passive income, if any, from being
offset against passive activity losses from other sources.
<PAGE>
Managing Member
___________________,1999
Page 6
The Managing Member has represented that Units in the Fund, when
issued, will not be traded on an established securities market or a secondary
market or the substantial equivalent thereof. Further, the Managing Member has
represented that it does not intend to cause the Units to be traded on an
established securities market or a secondary market in the future. Further, the
Operating Agreement limits Unit transfers of all types to transfers of Units
which satisfy an applicable secondary market safe harbor contained in the
Section 7704 Regulations (or which shall satisfy any other applicable safe
harbor from "publicly traded partnership" status adopted by the IRS). The
Managing Member has represented that the Fund will be operated strictly in
accordance with the Operating Agreement and that it will void any transfers or
assignments of Units if it believes that such transfers or assignments will
cause the Fund to be treated as a publicly traded partnership under the Section
7704 Regulations or any Regulations adopted by the IRS in the future.
Based on (i) the items set forth above, (ii) the representations of the
Managing Member that the Fund Units will be issued in a transaction registered
under the Securities Act, (iii) the representations of the Managing Member that
the Units in the Fund will not be traded on an established securities market,
and (iv) the covenant of the Managing Member that it will take all actions
necessary to prevent the interests in the Fund from being traded on a secondary
market or the substantial equivalent thereof, we are of the opinion that it is
more likely than not that the Fund will not be treated as a "publicly traded
partnership" for federal income tax purposes if such issue were challenged by
the IRS, litigated and judicially decided. There can be no assurance, however,
that the IRS will not successfully contend that the Fund should be treated as a
publicly traded partnership based on, for example, the recognition of transfers
in contravention of the Operating Agreement, the actions of third parties not
within the control of the Managing Member or the Fund, the ineffectiveness of
the provisions of the Operating Agreement designed to avert the creation of a
secondary market (or the substantial equivalent thereof), or the Fund failing to
generate sufficient qualifying gross income to avoid such status.
The Managing Member has also represented that it intends to operate the
Fund such that at all times more than 90% of the gross income of the Fund will
be derived from interest, real property rents (excluding rents which are
contingent on the profits of the lessees and rents from rental of personal
property) and gains from the sale of real property in an attempt to qualify for
the 90% qualifying income exception. Hence, even if the Fund were deemed to be a
publicly traded partnership, assuming the Fund is operated in accordance with
its stated investment objectives, it is more likely than not that the qualifying
income exception will be satisfied by the Fund and that the Fund will not be
treated as a corporation for federal income tax purposes.
The remaining summary of federal income tax consequences in this
Opinion assumes that the Fund will be classified as a "partnership" for federal
income tax purposes. Accordingly, if, as anticipated, the Fund is treated as a
partnership for federal income tax purposes, the Fund will not be treated as a
separate taxable entity subject to federal income tax, but instead each Member
will be required to report on such Member's federal income tax return for each
year a distributive share of the Fund's items of income, gain, loss, deduction
or credit for that year, without regard to whether any actual cash distributions
have been made to the Member.
<PAGE>
Managing Member
___________________,1999
Page 7
3. Limitations on Deduction of Fund Loss.
The Managing Member anticipates that the Fund will produce taxable
income in each year of operations and that Unitholders generally will not be
allocated losses. There can, of course, be no assurance that such objective can
be achieved in any fiscal year of the Fund. Anticipated operating income may not
materialize due to reduced rental income with respect to the Properties or
increased or unanticipated expenses. Moreover, losses could arise upon the
disposition of any Properties at a loss that is in excess of taxable income from
operations in the year of such loss. The ability of a Unitholder to utilize any
losses in a year, should a loss be allocated to a Unitholder, is determined by
applying the following three limitations dealing with basis, at-risk and passive
losses. Because of the Fund's investment criteria of acquiring Properties on an
all-cash basis, without so-called "leverage," it is not expected that the Fund
will generate significant loss in excess of a Unitholder's basis or amount at
risk in the Fund (i.e., its Capital Contribution). Even where the basis and
at-risk rules do not limit losses allocated to the Unitholders, it is
anticipated, however, that the passive loss rules will apply to limit the
deductibility of any allocated loss.
(a) Basis Limitations.
A Unitholder may not deduct his share of Fund losses and deductions in
excess of the adjusted basis of his Fund interest determined as of the end of
the taxable year. I.R.C. ss. 704(d). Losses which exceed a Unitholder's basis
will not be allowed but may be carried over indefinitely and claimed as a
deduction in a subsequent year to the extent that such Unitholder's adjusted
basis in his Units has increased above zero. Id. A Unitholder's adjusted basis
in his Units will include his cash investment in the Fund along with his
pro-rata share of any Fund liabilities. I.R.C. ss.ss. 722 and 752(a). A
Unitholder's basis in his Units will be increased by his distributive share of
the Fund's Net Income and decreased (but not below zero) by his distributive
share of the Fund's Net Loss and by the amount of any cash Distributions which
are made to him. I.R.C. ss. 705. A cash distribution to a Unitholder will
constitute a return of capital to the extent of the basis of his Units and, in
the event that a Unitholder has no remaining basis in his Units, will generally
be taxable to him as gain from the sale of his Units.
(b) At-Risk Limitations.
The deductibility of Fund Net Loss is limited further by the "at risk"
limitations in the Code. I.R.C. ss. 465(a). Members who are individuals,
estates, trusts and certain closely-held corporations are not allowed to deduct
Fund losses in excess of the amounts which such Members are considered to have
"at risk" at the close of the Fund's year. Id. A Member's amount "at risk" will
include the amount of his cash Capital Contribution to the Fund plus his
pro-rata share of "qualified nonrecourse financing" of the Fund, if any. I.R.C.
ss. 465(b). Qualified nonrecourse financing is defined to mean nonrecourse
financing provided by a person unrelated to the taxpayer which is actively and
regularly engaged in the business of lending money (other than a person from
whom the property was purchased). I.R.C. ss. 465(b)(6). Unless and until the
Fund incurs any such financing, which is not expected, only the cash Capital
Contribution of a Unitholder will be taken into account when determining such
Member's amount "at risk." A Member's amount "at risk" is reduced by his
allocable share of Fund Net Loss and by Fund Distributions and increased by his
allocable share of Fund Net Income. Any deductions disallowed to a Member under
<PAGE>
Managing Member
___________________,1999
Page 8
this limitation may be carried forward indefinitely and utilized in subsequent
years to the extent that the Member's amount "at risk" is increased in those
years.
(c) Passive Loss Limitations; Passive Income.
The Code substantially restricts the ability of many taxpayers
(including individuals, estates, trusts, certain closely-held corporations and
certain personal service corporations) to deduct losses derived from so-called
"passive activities." I.R.C. ss. 469(a). Passive activities generally include
any activity involving the conduct of a trade or business in which the taxpayer
does not materially participate (including the activity of a limited liability
company in which the taxpayer is a Member) and certain rental activities
(including the rental of real estate). I.R.C. ss. 469(c). Based on the
above-cited authority, we are of the opinion that it is more likely than not
that a Unitholder's interest in the Fund will be treated as a passive activity,
for those Unitholders not affiliated with or employed by the Managing Member, if
such issue were challenged by the IRS, litigated and judicially decided.
Generally, losses from passive activities are deductible only to the
extent of a taxpayer's income or gains from passive activities and will not be
allowed as an offset against other income, including salary or other
compensation for personal services, active business income and "portfolio
income," which includes nonbusiness income derived from dividends, interest,
royalties, annuities and gains from the sale of property held for investment.
I.R.C. ss. 469(e)(1). Passive activity losses that are not allowed in any
taxable year are suspended and carried forward indefinitely and allowed in
subsequent years as an offset against passive activity income in future years.
I.R.C. ss. 469(f). Upon a taxable disposition of a taxpayer's entire interest in
a passive activity to an unrelated party, suspended passive losses with respect
to that activity will then be allowed as a deduction against: (i) first, any
remaining income or gain from that activity including gain recognized on such
disposition; (ii) then, net income or gain for the taxable year from other
passive activities; and (iii) finally, any other non-passive income or gain.
I.R.C. ss. 469(g). Under the Regulations, suspended losses derived from a
specific Fund Property would generally not be available to offset non-passive
income or gain following the sale of such Property (other than in liquidation of
the Fund) because similar real estate undertakings under common control and
ownership of a pass-through entity such as the Fund are generally aggregated
into a single "activity" for purposes of these rules; hence, the sale of a
single Fund property not in liquidation of the Fund would not be treated as a
disposition of the entire interest of a Unitholder in the passive activity.
In the case of entities which are deemed to be publicly traded partner-
ships, the Code provides that the passive activity loss rules are applied separ-
ately with respect to items attributable to a publicly traded partnership.
I.R.C. ss. 469(k). Accordingly, if the Fund were deemed to be a publicly traded
partnership,Fund Loss, if any, would be available only to offset future non-
portfolio income of the Fund. H.R. Rep. No. 495, 100th Cong., 1st Sess. 951, re-
printed in [1987] U.S. Code Cong. & Ad. News 2313-1697.
If the Fund is successful in achieving its investment and operating
objectives, the Unitholders are likely to be allocated Net Income from the Fund
in each year. To the extent that a Unitholder's share of the Fund's Net Income
constitutes income from a passive activity (as described above), such income may
<PAGE>
Managing Member
___________________,1999
Page 9
generally be offset by the Unitholder's net losses and credits from investments
in other passive activities unrelated to the Fund.
Assuming (i) the Properties are acquired and operated in the manner
described in the Prospectus, (ii) the Properties are owned for federal income
tax purposes by the Fund, and (iii) the Fund is not viewed as a "publicly traded
partnership" within the meaning of Code Section 469(k), we are of the opinion
that it is more likely than not that an individual Unitholder's share of the
Fund's Net Income will be net income or gain from a "passive activity," as
defined in Section 469 of the Code, which passive income can generally be offset
by a Unitholder's net losses and credits from other passive activities, if such
issue were challenged by the IRS, litigated and judicially decided. This opinion
does not apply to the income that is attributable to (i) the investment by the
Fund in liquid investments, such as certificates of deposit or money-market
funds prior to the investment in Properties, or to Distributions of Net Cash
Flow from Operations or Net Sales Proceeds to the Members, or (ii) the
investment, in interest bearing accounts or otherwise, of amounts held as
working capital, as security deposits, or in reserve. Such income described in
the preceding sentence constitutes, for purposes of Section 469, "portfolio
income" which cannot be offset by losses from passive activities. Moreover, if
the Fund is a "publicly traded partnership" within the meaning of Code Section
469(k), any income from the Fund cannot offset losses from other passive
activities and will be treated in a manner similar to portfolio income. You
should also be aware that the Treasury Department has been given broad authority
to issue Regulations defining income that does not constitute passive activity
income, and no assurance can be given that future Regulations promulgated under
Code Section 469, which could be applied to the Fund, will not treat Fund Net
Income as income that is not from a passive activity, thereby preventing any
setoff of such income against unrelated passive losses or credits. See, e.g.,
Treasury Decision 8175, 53 Federal Register 5686, 5695 (February 25, 1988)
(discussing the possibility of issuing prospective Regulations that could
characterize certain preferential income rights to partners of a partnership as
"portfolio," rather than "passive," income).
4. Allocation of Net Income and Net Loss.
Generally, partnership items of income, gain, loss, deduction and
credit are allocated among partners as set forth in the relevant partnership
agreement pursuant to Section 704(a) of the Code. Section 704(b) provides,
however, that if an allocation to a partner under the partnership agreement of
income, gain, loss, deduction or credit (or items thereof) does not have
"substantial economic effect," such allocation will instead be made in
accordance with the partner's interest in the partnership (determined by taking
into account all facts and circumstances).
The Fund has not received an advance ruling with respect to whether its
allocations of Net Income or Net Loss will be recognized for federal income tax
purposes, and the IRS may attempt to challenge the allocations of Net Income or
Net Loss made by the Fund, which challenge, if successful, could adversely
affect the Unitholders by changing their respective shares of taxable income or
loss.
The Regulations under Section 704(b) (the "Section 704(b) Regulations")
provide that in order to have "economic effect": (i) partners' capital accounts
must be determined and maintained in accordance with the Section 704(b)
Regulations; (ii) upon the liquidation of the partnership, liquidating
<PAGE>
Managing Member
___________________,1999
Page 10
distributions must be made in accordance with the positive capital account
balances of the partners after taking into account all capital account
adjustments for the partnership's taxable year during which such liquidation
occurs; and (iii) if a partner has a deficit balance in his capital account
following the liquidation of his interest in the partnership after taking into
account all capital account adjustments for the partnership taxable year during
which such liquidation occurs, he must be unconditionally obligated to restore
the amount of such deficit balance to the partnership. Treas. Reg. ss.
1.704-1(b)(2)(ii)(b).
The Section 704(b) Regulations contain an alternate test for economic
effect, however, which sets forth circumstances under which allocations will be
deemed to have economic effect without the requirement to restore capital
account deficits upon liquidation. Such alternative test provides that an
allocation will be considered to have economic effect if the partnership
agreement contains provisions satisfying clauses (i) and (ii) above, the
partnership agreement contains a "qualified income offset" provision and the
allocation in question does not cause or increase a deficit balance in a
partner's capital account as of the end of the partnership's taxable year to
which such allocation relates. Treas. Reg. ss. 1.704-1(b)(2)(ii)(d). In
determining whether an allocation causes or increases a deficit balance in a
partner's capital account, such partner's capital account must be reduced for
distributions that are reasonably expected to be made to such partner to the
extent they exceed offsetting increases to such partner's capital account that
are reasonably expected to occur during or prior to the partnership taxable
years in which distributions reasonably are expected to be made. Id. A
partnership agreement contains a qualified income offset provision if it
provides that a partner who unexpectedly receives an adjustment, allocation or
distribution which causes a deficit capital account balance will be allocated
items of income and gain (consisting of a pro-rata portion of each item of
partnership income, including gross income, and gain for such year) in an amount
and manner sufficient to eliminate the deficit balance as quickly as possible.
The Operating Agreement (which is the Fund's equivalent of a
partnership agreement) provides for the determination and maintenance of Capital
Accounts pursuant to the Section 704(b) Regulations and provides that
liquidation proceeds are to be distributed in accordance with Capital Accounts;
however, the Operating Agreement does not contain any provision requiring
Members having deficit Capital Accounts to restore the amount of such Capital
Account deficits upon liquidation. The Operating Agreement does, however,
contain a qualified income offset provision and a provision that prevents the
allocation of Net Loss to a Member where such an allocation would cause or
increase a deficit Capital Account. The qualified income offset provision in the
Operating Agreement provides that in the event that any Member receives an
adjustment, allocation or distribution described in Treasury Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6) which causes a deficit balance in such
Member's Capital Account, such Member will be allocated items of Net Income
(consisting of a pro-rata portion of each item of Fund Net Income, including
gross income) in an amount and manner sufficient to eliminate such deficit
balance as quickly as possible. Accordingly, no Member will be allocated items
of Net Loss which would cause his Capital Account to be reduced below zero in
any year. In addition, the Managing Member has represented that Fund
Distributions are not anticipated to reduce any Unitholder's Capital Account
balance below zero and that Distributions of Net Cash Flow from Operations and
Net Sales Proceeds should not have a material effect on a Unitholder's Capital
Account since such Distributions are anticipated to be matched by corresponding
allocations of Net Income to such Member.
<PAGE>
Managing Member
___________________,1999
Page 11
Even if the allocations of profits and losses of a partnership are
deemed to have "economic effect" under the Section 704(b) Regulations, an
allocation will not be upheld unless the economic effect of such allocation is
"substantial." The Section 704(b) Regulations generally provide that the
economic effect of an allocation is "substantial" if there is a reasonable
possibility that the allocation will affect substantially the dollar amounts to
be received by partners from a partnership, independent of tax consequences.
Treas. Reg. ss. 1.704-1(b)(2)(iii). The economic effect of an allocation is
presumed not to be substantial if there is a strong likelihood that the net
adjustments to the partner's capital account for any taxable year will not
differ substantially from the net adjustments which would have been made for
such year in the absence of such allocation and the total tax liability of the
partners for such year is less than it would have been in the absence of such
allocations. Id. The economic effect will also be presumed not to be substantial
where: (i) the partnership agreement provides for the possibility that the
allocation will be largely offset by one or more other allocations; (ii) the net
adjustments to the partners' capital accounts for the taxable years to which the
allocations relate will not differ substantially from the net adjustments which
would have been recorded in such partners' respective capital accounts for such
years if the original allocations and the offsetting allocations were not
contained in the partnership agreement; and (iii) the total tax liability of the
partners for such year is less than it would have been in the absence of such
allocations. With respect to the foregoing provision, the Section 704(b)
Regulations state that original allocations and offsetting allocations will not
be insubstantial if, at the time the allocations become part of the partnership
agreement, there is a strong likelihood that the offsetting allocations will
not, in large part, be made within five years after the original allocations are
made. The Section 704(b) Regulations further state that for purposes of testing
substantiality, the adjusted tax basis of partnership property will be presumed
to be the fair market value of such property, and adjustments to the adjusted
tax basis of partnership property (such as depreciation or cost recovery
deductions) will be presumed to be matched by corresponding changes in the
property's fair market value.
The allocations contained in the Operating Agreement are intended to
comply with the Treasury Regulations' test for having economic effect. The
Operating Agreement requires Capital Accounts to be properly maintained,
requires Distributions of proceeds from the liquidation of a Unitholder's or
Managing Member's interest in the Fund (whether or not in connection with the
liquidation of the Fund) to be made in accordance with the Unitholder's or
Managing Member's positive Capital Account balance, and contains a qualified
income offset provision (as well as a provision that prohibits Net Loss
allocations that would cause or increase a deficit Capital Account). Moreover,
the economic effect of the allocations should be substantial because the
economic and tax consequences of deductions representing paid or incurred
expenses will move in tandem.
Because of the lack of any significant borrowings by the Fund, it is
not anticipated that a Unitholder's Capital Account will be reduced below zero
by any Distributions of Net Cash Flow from Operations or Net Sales Proceeds, any
allocations of Net Loss, or any excess expected Distributions. Consequently, the
Unitholders should not be required by operation of the qualified income offset
provision to recognize gross income or Net Income in any year in excess of their
pro-rata share of Net Income. The Operating Agreement, in addition to meeting
the Treasury Regulations' test for allocations to have economic effect, contains
"minimum gain chargeback" provisions, although, due to the anticipated lack of
Fund-level indebtedness, it is not likely that any such chargebacks will arise.
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Managing Member
___________________,1999
Page 12
Accordingly, it is our opinion that it is more likely than not that the
Operating Agreement will comply with the safe harbor provisions in the Treasury
Regulations under Code Section 704(b) and that the allocations of Net Income and
Net Loss set forth in the Operating Agreement more likely than not will have
substantial economic effect or will be otherwise treated as being in accordance
with the interests of the Unitholders and Managing Member in the Fund, if such
issue were challenged by the IRS, litigated and judicially decided. Further, the
allocations of deductions and losses set forth in the Operating Agreement more
likely than not will be treated as having substantial economic effect or as
being otherwise in accordance with the interests of the Unitholders and Managing
Member in the Fund to the extent that such allocations do not create a deficit
in any Unitholder's or the Managing Member's capital account balance, taking
into account all reasonably expected increases and decreases in such balance.
The Section 704(b) Regulations are extremely complex, however, and in many
respects subject to varying interpretations. There can be no assurance that the
IRS will not challenge the allocations provided in the Operating Agreement and,
if successful, reduce the anticipated tax benefits to the Unitholders and
Managing Member.
If the allocations of profits and losses in a partnership agreement are
deemed not to have substantial economic effect, then as stated above, the
allocations will be made in accordance with partners' interests in the
partnership as determined by taking into account all of the facts and the
circumstances. Treas. Reg. ss. 1.704-1(b)(3)(i). In this regard, the Section
704(b) Regulations provide that a partner's interest in a partnership will be
determined by taking into account all facts and circumstances relating to the
economic arrangement of the partners, including: (i) the partners' relative
contributions to the partnership; (ii) the interests of the partners in economic
profits and losses (if different from that in taxable income or loss); (iii) the
interests of the partners in cash flow and other nonliquidating distributions;
and (iv) the rights of the partners to distributions of capital upon
liquidation. Id. ss. 1.704-1(b)(3)(ii).
5. Tax Shelter Registration.
Under Section 6111 of the Code, any entity deemed to be a "tax shelter"
as defined in Section 6111(c) is required to register with the IRS. For these
purposes, a "tax shelter" is defined as any investment with respect to which (i)
a person can reasonably infer from the representations made that the "tax
shelter ratio" for any investor may be greater than 2 to 1 as of the close of
any of the first five years ending after the date in which the investment is
offered for sale; and (ii) is either registered under federal or state
securities laws, sold pursuant to an exemption from such registration which
requires the filing of a notice with a federal or state securities agency or is
a substantial investment. The "tax shelter ratio" is determined by dividing the
investor's share of the aggregate deductions derived from the investment,
determined without regard to income or any limitations on the deductibility of
passive losses, by the amount of an investor's contributions.
The aggregate amount of the deductions potentially allowable to any of
the Members, including the Managing Member, in the offering of Units in the Fund
is not expected, and has not been represented in the Prospectus or any other
writing connected with the offering approved by the Managing Member, to exceed
an amount equal to twice any such Member's investment in the Fund in any of the
Fund's first five calendar years. In addition, the Managing Member has
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Managing Member
___________________,1999
Page 13
represented that, in the absence of events which are unlikely to occur, the
aggregate amount of deductions derived from any Member's investment in the Fund,
determined without regard to income, will not exceed twice the amount of any
such Member's investment in the Fund as of the close of any year in the Fund's
first five calendar years. Further, even if the Fund were deemed to constitute a
tax shelter under Section 6111, the Regulations provide that the registration
requirements are suspended with respect to a tax shelter that qualifies as a
"projected income investment." Temp. Treas. Reg. ss. 301.6111-1T, Q&A 57. The
Regulations define a "projected income investment" as a tax shelter that is not
expected to reduce the cumulative tax liability of any investor for any year
during the first five years ending after the date in which the investment is
offered for sale. A tax shelter is not expected to reduce the cumulative tax
liability of an investor for any year during the five year period only if (a) a
written financial projection or other written representation that is provided
the investor prior to sale of interests in the investment states (or leads a
reasonable investor to believe) that the investment will not reduce the
investor's tax liability with respect to any year in the five year period, and
(b) no written or oral projections or representations, other than those related
to circumstances that are highly unlikely to occur, state (or lead a reasonable
investor to believe) that the investment may reduce the cumulative tax liability
of any investor with respect to such years.
Based upon the authority of the Regulations and the representations of
the Managing Member that, in the absence of events which are unlikely to occur,
the "tax shelter ratio" with respect to an investment in the Fund will not
exceed 2 to 1 for any investor as of the close of any year in the Fund's first
five calendar years, we are of the opinion that it is more likely than not the
Fund is not currently required to register as a tax shelter with the IRS under
Section 6111 of the Code prior to the offer and sale of the Units, if the issue
were challenged by the IRS, litigated and judicially decided.
6. Other Material Tax Issues.
A. Depreciation and Cost Recovery. Section 167(a) of the Code provides
that the real property improvements acquired by the Fund and the personal
property acquired by the Fund shall generally be entitled to a reasonable
allowance for exhaustion, wear and tear or obsolescence. The amount of the
allowable deduction is generally determined under Section 168 of the Code.
In this regard, Sections 168(g)(1)(B) and (g)(2) of the Code provide
that to the extent real property constitutes "tax-exempt use property," the cost
recovery period will be 40 years, and in the case of personal property which
constitutes "tax-exempt use property," the recovery period will be 12 years and
the straight-line method must be utilized for determining deductions in each
case. "Tax-exempt use property" generally includes that percentage of
depreciable property owned by a partnership, such as the Fund, which equals the
percentage of the partnership interests owned by tax-exempt entities unless all
allocations of partnership items to the tax-exempt entity are "qualified
allocations." I.R.C. ss. 168(h)(6). The allocations under the Operating
Agreement may not constitute "qualified allocations," and, therefore, it is
possible, although no opinion of Counsel is expressed, that real and personal
property will be treated as "tax-exempt use property" to be depreciated for tax
purposes using the straight-line method over 40-year and 12-year recovery
periods, respectively, resulting in less favorable timing with respect to
depreciation or amortization deductions of the Fund.
<PAGE>
Managing Member
___________________,1999
Page 14
It should also be noted that if the Fund were determined to be holding
one or more Properties primarily for sale to customers in the ordinary course of
business, the Fund might not be entitled to depreciation allowances with respect
to such Properties, or such depreciation allowances could be substantially
curtailed.
See I.R.C. ss. 167(a).
B. Income Tax Treatment of Certain Payments Made by the Fund. The
income tax consequences to the Fund as a result of certain payments made by the
Fund will be as follows:
(i) No deduction will be allowed for the cost of organizing
the Fund, but at the election of the Fund certain qualified "organizational
expenses" may be amortized ratably over a period of not less than 60 months.
I.R.C. ss. 709(b). Organizational expenses are generally defined as expenses
which are incident to the creation of a partnership, are chargeable to a capital
account and are of a character which, if expended incident to the creation of a
partnership having an ascertainable life, would be amortized over such life.
In addition, certain "start-up expenditures" may, at the election of
the taxpayer, be amortized ratably over a period of not less than 60 months.
I.R.C. ss. 195. Under Code Section 195, start-up expenditures which may qualify
for this treatment include amounts which are paid or incurred in connection with
investigating the creation or acquisition of a business, the actual creation of
an active trade or business, or any activity engaged in for profit and the
production of income before the active trade or business begins, in anticipation
of such activity becoming an active trade or business, and which would otherwise
be deductible in the year in which paid or incurred.
The cost of syndicating the Fund, including costs and expenditures
incurred in connection with promoting and marketing the Units such as sales
commissions, professional fees and printing costs, are neither deductible nor
amortizable.
(ii) The Fund intends to claim deductions for property
management fees, leasing fees and real property sales commissions paid to the
Managing Member or its Affiliates. Such fees will be deductible by the Fund only
to the extent that such expenses are ordinary and necessary and reasonable in
amount. I.R.C. ss. 162(a). Because this issue is dependent upon factual
determinations which will not be known until the actual services are performed
and such fees are paid by the Fund, we are unable to render an opinion as to
whether such fees will constitute ordinary and necessary business expenses
deductible under Section 162 of the Code.
(iii) Any ongoing expenses of the Fund paid to the Managing
Member, such as management fees, will be deductible by the Fund only to the
extent that such expenses are ordinary and necessary and reasonable in amount
and either are received by the Managing Member otherwise than in its capacity as
a Member under Section 707(a) of the Code or, if it constitutes a guaranteed
payment to the Managing Member, under Section 707(c) of the Code. Because these
issues are dependent upon factual determinations which will not be known until
actual services are performed and such fees are paid by the Fund, we are unable
to render an opinion as to whether such fees will be deductible by the Fund.
<PAGE>
Managing Member
___________________,1999
Page 15
In summary, since the appropriate classification of fees and expenses
paid by the Fund into their proper categories and a determination of whether
certain fees and expenses are ordinary and necessary and reasonable in amount
depend upon facts relating to and existing at the time the services are to be
rendered to the Fund, we are unable to render an opinion as to the probable
outcome if the IRS were to challenge the deductibility (or the timing of
deduction or amortization) of those fees and expenses.
C. Investment by Qualified Plans and Other Tax-Exempt Entities. The IRS
may take the position that income derived from the ownership of Units should be
subject to federal income tax as "unrelated business taxable income" ("UBTI"),
which is defined generally as income derived from any unrelated trade or
business carried on by a tax-exempt entity or by a partnership of which it is a
member. I.R.C. ss. 512(a).
While the types of income and gain which should be realized by the Fund
should not generally constitute UBTI within the meaning of Section 512(a) of the
Code, all or a portion of such income would constitute UBTI if the Fund were to
own property which is subject to "acquisition indebtedness." I.R.C. ss.
512(b)(4). Acquisition indebtedness is defined as the unpaid amount of: (i)
indebtedness incurred in acquiring or improving property; (ii) indebtedness
incurred before the acquisition or improvement of property if such indebtedness
would not have been incurred but for such acquisition or improvement; and (iii)
indebtedness incurred after the acquisition or improvement of property if such
indebtedness would not have been incurred but for such acquisition or
improvement and the incurrence of such indebtedness was reasonably foreseeable
at the time of such acquisition or improvement. I.R.C. ss. 514(c)(1). The Fund's
acquisitions of Properties will be made on an all cash basis and the Operating
Agreement prohibits the Fund from borrowing funds in order to finance
acquisitions of and improvements to Properties.
If all or any portion of the Fund's income were to be characterized as
UBTI by reason of the "acquisition indebtedness" rules, the "dealer" status
rules (discussed at paragraph E below) or otherwise, a tax-exempt entity holding
Units would be required to report a portion of its pro-rata share of the Fund's
taxable income as UBTI. I.R.C. ss. 514(a)(1). Moreover, a "charitable remainder
trust" qualifying for exemption from income taxation under Section 664 of the
Code would lose such exemption with respect to all of its income for a tax year
in which UBTI is derived from its ownership of Units and it would be required to
file an income tax return on Form 1041. A tax-exempt entity (other than a
charitable remainder trust) is required to file an Exempt Organization Business
Income Tax Return when its gross UBTI from all sources exceeds $1,000 in any
year and it is generally taxable on UBTI in excess of $1,000 in each year.
D. Sales of Fund Property. The Managing Member anticipates that most
and perhaps all of the assets to be acquired and held by the Fund will
constitute "Section 1231 property," defined as real property and depreciable
assets used in a trade or business and held for more than one year. I.R.C. ss.
1231(a). To the extent that Fund assets constitute Section 1231 property, a
Unitholder's share of the gains or losses resulting from the sale of the Fund's
assets would be combined with any other Section 1231 gains or losses realized by
the Unitholder in that year from sources other than the Fund, and the net
Section 1231 gain or loss would be treated as long-term capital gain (subject to
depreciation or cost recovery allowance recapture, if any) or ordinary loss, as
the case may be. Net Section 1231 gains must be treated as ordinary income,
<PAGE>
Managing Member
___________________,1999
Page 16
however, in certain situations, but only to the extent of the aggregate amount
of net Section 1231 ordinary losses claimed for the five most recent taxable
years (to the extent such losses have not previously been "recaptured" pursuant
to this rule). I.R.C. ss. 1231(c).
Gain will be recognized by the Fund to the extent that the amount real-
ized from any sale of Fund Property exceeds the adjusted basis of such Property.
I.R.C. ss. 1001(a). The adjusted basis of Fund Property will in general be its
original cost less depreciation and cost recovery allowances allowed to the Fund
with respect to such Property. I.R.C. ss. 1011. Loss will be recognized to the
extent that the adjusted basis of such Property exceeds the amount realized. The
amount realized from a sale or other disposition of Property includes the sum of
cash and property received plus the amount of any liabilities assumed by the
purchaser or to which the Property remains subject. I.R.C. ss. 1001(b).
Any excess of gains over losses realized by the Fund on sales of
capital assets (generally all property other than property held primarily for
sale in the ordinary course of a trade or business or Section 1231 property)
held for more than one year will be long-term capital gain. I.R.C. ss. 1201. Any
excess of losses over gains by the Fund on the sales of any such capital assets
held for more than one year will be net long-term capital loss. General ordinary
and long-term capital gain tax rates and special real property depreciation
recapture rates are discussed below at paragraph G.
E. Property Held Primarily for Sale. The Fund has been organized for
the purpose of acquiring and developing real estate for investment and rental
purposes; however, if the Fund were at any time deemed for tax purposes to be a
"dealer," i.e., a seller of real estate held primarily for sale to customers in
the ordinary course of a trade or business, any gain recognized upon a sale of
such real property would be taxable as ordinary income, rather than as capital
gain, and would constitute UBTI to Unitholders which are exempt organizations.
I.R.C. ss.ss. 1221(1) and 512(b)(5)(B).
Whether property is held primarily for sale to customers in the
ordinary course of a trade or business must be determined from all the facts and
circumstances surrounding the particular property and sale in question. In this
regard, the Managing Member has represented that the Fund intends to acquire
existing multi-tenant industrial real estate for investment and rental purposes
only and to engage in the business of owning and operating such properties.
Further, the Fund will make sales thereof only as, in the opinion of the
Managing Member, are consistent with the Fund's investment objectives. The IRS
may take the position, however, that the gain realized on the sale of a Fund
Property should be characterized as ordinary income (and UBTI) because the Fund
is a dealer in such Properties. Because the resolution of this issue is
dependent upon facts which will not be known until the time a Property is sold
or held for sale, and due to the lack of judicial authority in this area, we are
unable to render an opinion as to whether the Fund will be considered to hold
any or all of its Properties primarily for sale to customers in the ordinary
course of a trade or business.
F. Sales of Units. The gain or loss realized on any sale of Units by a
Unitholder (who is not a "dealer" with respect to such Units) who has held the
Units for more than one year will be long-term capital gain or loss, except for
that portion of any gain attributable to such Unitholder's share of the Fund's
"unrealized receivables" and "inventory items," which portion would be taxed as
ordinary income. I.R.C. ss.ss. 741, 751. Potential cost recovery allowance
recapture on personal property (not real property) associated with Fund
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Managing Member
___________________,1999
Page 17
Properties will be treated as "unrealized receivables" for this purpose. I.R.C.
ss. 751(c). The Fund generally must report to the IRS the sale or exchange of
any Units where any portion of the consideration received in exchange for such
Unit is attributable to "unrealized receivables" of the Fund. I.R.C. ss. 6050K.
Gain or loss on any such sale will be measured by the difference between
the gross sale price and the Unitholder's adjusted tax basis in his Units.
I.R.C. ss. 1001(a). In computing the gross proceeds received from the sale or
other disposition of his Units, a Unitholder must include among other items his
share of the Fund's nonrecourse indebtedness, if any. Treas. Reg. ss. 1.752-3.
G. Capital Gains and Losses. The characterization of income or gain
recognized by a Unitholder upon a sale of Properties by the Fund or a sale of a
Unit by a Unitholder as capital or ordinary income is relevant in determining
the rate at which such income is taxed and the extent to which a Unitholder may
deduct capital losses. Ordinary income is taxed to individuals at a maximum
federal marginal rate of 39.6%, while long-term capital gains of individuals (on
most capital assets held for more than one year) are taxed at a maximum marginal
rate of 20% (10% for taxpayers in the 15% rate bracket). To the extent that any
gain from the sale of real property by the Fund represents the recapture of
prior straight-line depreciation deductions by the Fund, the capital gain
attributable to depreciation from real estate held for more than one year will
be subjected to a maximum capital gains tax rate of 25%, rather than the general
20% maximum long-term capital gain rate otherwise applicable. These long-term
capital gain rates also apply for purposes of computing a Unitholder's
alternative minimum tax. Unitholders are also cautioned that the sale of a Unit
may require the Unitholder to "look through" the Units sold, with a portion of
such sale possibly taxable as ordinary income under Code Section 751 (see "Sale
of Units" in paragraph F above), and a portion of any long-term capital gain
generated on the sale of a Unit subjected to the higher 25% maximum long-term
capital gain rate applicable to straight-line real estate depreciation
recapture, although the position of the IRS on whether such a "look-through"
rule applies for real estate depreciation recapture is not entirely clear.
Capital losses generally may be used by individuals to offset capital gains and,
in addition, a maximum of $3,000 of ordinary income annually. The capital losses
not utilized by individuals in any year may be carried forward indefinitely to
succeeding years.
H. Dissolution and Liquidation of the Fund. The dissolution and
liquidation of the Fund will involve the Distribution to the Members of the cash
remaining after the sale of its assets, if any, and after payment of all the
Fund's debts and liabilities. If a Member receives cash in excess of the basis
of his Units, such excess will be taxable as a gain. I.R.C. ss. 731(a)(1). If a
Member were to receive only cash upon dissolution and liquidation, he would
recognize a loss to the extent, if any, that the adjusted basis of his Units
exceeded the amount of cash received. I.R.C. ss. 731(a)(2). There are a number
of exceptions to such general rules, however, including but not limited to, (i)
the effect of a special basis election under Section 732(d) of the Code for a
Member who may have acquired his Fund interest within the two years prior to the
dissolution, and (ii) the effect of distributing one kind of property to some
Members and a different kind of property to others under Section 751(b) of the
Code.
I. Foreign Investors. Non-resident aliens, foreign corporations,
foreign partnerships, foreign trusts and foreign estates (collectively referred
<PAGE>
Managing Member
___________________,1999
Page 18
to as "foreign investors") who are partners in a partnership engaged in a trade
or business in the United States will be considered to be engaged in such trade
or business, even if such foreign investors are only limited partners or members
in a limited liability company. A foreign investor engaged in a U.S. trade or
business who has income that is "effectively connected" with that trade or
business will be subject to regular U.S. income taxes. I.R.C. ss. 871(b).
After the Fund has acquired income-producing equity investments, the
anticipated activities of the Fund will likely constitute a U. S. trade or
business and a "permanent establishment" within the meaning of the Code and tax
treaties entered into with foreign jurisdictions ("Tax Treaties") and the income
from such investments (i.e., rents) will likely be deemed to be effectively
connected with that trade or business. Therefore, a foreign investor who becomes
a Unitholder in the Fund will be required to file a U.S. income tax return on
which he must report his distributive share of the Fund's items of income, gain,
loss, deduction and credit, and pay U.S. income taxes at regular U.S. income tax
rates on his share of any allocable income or gain. In addition, Section 1446 of
the Code (to the extent Section 1445 of the Code, discussed below, does not
apply) provides for U.S. withholding taxes on the effectively connected taxable
income allocated to such foreign investors.
Since a foreign investor who becomes a Unitholder in the Fund will
likely be considered to be engaged in a U.S. trade or business and to have a
permanent establishment in the United States, certain types of U.S. related
income from other business transactions of the foreign investor could also be
attributed to that trade or business or permanent establishment under the Code
or a Tax Treaty (e.g., rents from other U.S. real estate owned by such
investor). Furthermore, a foreign investor may be subject to tax on his
distributive share of the Fund's income and gain in his country of nationality,
residence or elsewhere. The method of taxation in such jurisdictions, if any,
may vary considerably from the U.S. tax system with respect to characterization
of the Fund and its income.
It should also be noted that a foreign investor's allocable share of
escrow earnings and interest income from funds placed in temporary investments
pending acquisition of income-producing equity investments will likely not be
considered to be income effectively connected with a U.S. trade or business, and
the foreign investor will not be deemed to be otherwise engaging in a U.S. trade
or business with respect to those investments. Accordingly, the Fund will
generally be obligated to withhold U.S. tax in the amount of 30% (or lower Tax
Treaty rate) of such investor's allocable share of the income derived from these
investments, unless a statutory exemption applies to the particular type of
income. I.R.C. ss. 1441(a).
A foreign investor will also be subject to U.S. income tax on gain
realized from the sale of a United States real property interest and also, for
this purpose, the sale of a Unit. I.R.C. ss. 897. Further, under Section 1445 of
the Code, a partnership is required to withhold tax equal to 34% of the foreign
investor's allocable share of the gain realized from the sale of partnership
real property (regardless of whether an actual distribution is made to such
investor). I.R.C. ss. 1445(e)(1). The amount required to be withheld by a
purchaser of Units from a foreign investor is generally equal to 10% of the
purchase price paid for the Units. I.R.C. ss. 1445(e)(5).
<PAGE>
Managing Member
___________________,1999
Page 19
It is impossible for us to predict the impact of the above-described
general principles on specific foreign investors, or how the provisions of any
Tax Treaty between the United States and the foreign investor's country of
nationality or residence may affect these results. Accordingly, we offer no
opinion as to the income tax consequences to a foreign investor investing as a
Unitholder in the Fund.
J. State and Local Taxes. The Fund will conduct its activities and own
properties in different taxing jurisdictions. Accordingly, it is likely that an
investment in the Fund will impose upon a Unitholder the obligation to file
annual tax returns in a number of different states or localities, as well as the
obligation to pay taxes to a number of different states or localities. In
addition, many states require partnerships or entities taxable as partnerships,
like the Fund, to withhold and pay state income taxes owed by non-resident
partners relating to income-producing properties located in such states. Some
states or localities may also impose income, franchise, gross receipts or
similar taxes on the Fund as an entity, whether or not they respect its federal
tax classification status.
The Prospectus makes no attempt to summarize the state and local tax
consequences to a Unitholder in those states in which the Fund may own
Properties or carry on activities, and it is impractical for us to opine on all
state laws or to predict the states in which the Fund may own Properties.
However, the issues which a Unitholder should consider include: (i) whether the
state in which he resides will impose a tax upon his share of the taxable income
of the Fund; (ii) whether an income tax or other return must be filed in those
states where the Fund will acquire Properties; (iii) whether he will be subject
to state income tax withholding in states where the Fund will acquire
properties; (iv) whether a state where the Fund owns properties will levy an
income, franchise, gross receipts or similar Fund level tax on the Fund,
irrespective of its classification as a "partnership" for federal income tax
purposes; and (v) whether his state of residence will offer a tax credit for
taxes paid by the Unitholder or the Fund to those other states.
K. General Considerations.
(i) Fund Items. The income tax treatment of all Fund items
will be determined at the Fund level. I.R.C. ss. 6221. In this regard, the
Managing Member will take primary responsibility for contesting federal income
tax adjustments proposed by the IRS, to extend the statute of limitations as to
all Unitholders and, in certain circumstances, to bind the Unitholders to such
adjustments. For partnerships such as the Fund, where the total number of
partners is more than 100, the IRS is not required to furnish notice of the
commencement of any administrative proceeding or the final disposition of any
such proceeding to any partner having less than a 1% interest in the profits of
the partnership. I.R.C. ss. 6223(b). You should also be aware that Congress
added Code Sections 771 to 777 to the Code in 1997 to provide special reporting
rules and certain administrative relief for qualifying "electing large
partnerships." Section 2.5 of the Operating Agreement authorizes the Managing
Member to utilize these provisions if it is determined such an election is
appropriate.
(ii) Accuracy-Related Penalties. Under Section 6662 of the
Code, a penalty equal to 20% of any underpayment of tax due to (i) negligence or
disregard of rules or regulations, (ii) any substantial valuation misstatement,
or (iii) any "substantial understatement of income tax" can be imposed on a
taxpayer. In general, a "substantial understatement of income tax" will exist if
<PAGE>
Managing Member
___________________,1999
Page 20
the actual income tax liability of the taxpayer exceeds the income tax liability
shown on his return by the greater of 10% of the actual income tax liability or
$5,000 ($10,000 in the case of a corporation other than a subchapter S
corporation or a personal holding company). I.R.C. ss. 6662(d)(1). Unless the
understatement is attributable to a "tax shelter," the amount of an
understatement is reduced by any portion of such understatement which is
attributable to (a) the income tax treatment of any item shown on the return if
there is "substantial authority" for the taxpayer's treatment of such item on
his return or (b) any item with respect to which the taxpayer has a reasonable
basis and adequately discloses on his return the relevant facts affecting the
item's income tax treatment. I.R.C. ss. 6662(d)(2). In the case of a "tax
shelter," which is defined in Section 6662(d)(2)(C)(ii) of the Code as a
partnership or other entity, plan or arrangement, a significant purpose of which
is the avoidance or evasion of federal income tax, this reduction in the
understatement only will apply in cases where, in addition to having
"substantial authority" for treatment of the item in question, the taxpayer
reasonably believed that the income tax treatment of that item was more likely
than not the proper treatment. I.R.C. ss. 6662(d)(2)(C)(i).
Although the Fund is not intended to be a so-called "tax shelter," it
is possible that it may be considered a tax shelter for purposes of Section 6662
of the Code and that certain Fund tax items could be considered tax shelter
items within the meaning of Section 6662. Based on the investment objectives of
the Fund, the Managing Member believes that there are substantial grounds for a
determination that the Fund does not constitute a tax shelter; however, because
the issue is dependent upon facts relating to future Fund operations, the
acquisition and disposition of Fund Properties and other factual determinations
which are not known at this time, we are unable to render an opinion as to
whether an investment in the Fund will be considered a tax shelter for purposes
of determining certain potential exemptions from the application of the
accuracy-related penalties under Section 6662 of the Code. Please be aware that
all of the accuracy-related penalties described above may be abated where a
taxpayer had reasonable cause for its position and acted in good faith. I.R.C.
ss. 6664(c).
(iii) Tax Shelter Investor Lists. Section 6112 of the Code
requires that a list identifying each person who has invested in a potentially
abusive tax shelter be maintained by the tax shelter organizer. The list must
include the name, address and taxpayer identification number of each investor,
as well as certain other information. The organizer is also required to make the
list available for inspection upon request by the IRS. The term "potentially
abusive tax shelter" is defined for this purpose as (i) any tax shelter with
respect to which registration is required, as described above in Section 5, and
(ii) any other entity, plan or arrangement that is treated by applicable
Regulations as a tax shelter for purposes of the list requirements. The
Regulations under Section 6112 clarify that an entity which is a tax shelter
under Section 6111, but which is not required to register as such because it
qualifies as a "projected income investment," continues to be subject to the
list requirements of Section 6112. Although the Managing Member does not believe
that the Fund constitutes a potentially abusive tax shelter, the Managing Member
does intend to maintain a list of the Unitholders as required by Section 6112 of
the Code.
AGGREGATE OPINION
Subject to the assumptions and limitations set forth herein, it is our
opinion that it is more likely than not that, in the aggregate, substantially
<PAGE>
Managing Member
____________________, 1999
Page 21
more than one-half of the material tax benefits contemplated by the Prospectus,
in terms of their financial impact on a typical investor, will be realized by an
investor in the Fund. We advise you further that the section of the Prospectus
entitled "Federal Income Tax Considerations" accurately reflects our opinion
with respect to those matters therein as to which an opinion is specifically
attributed to us.
Consent is hereby given to the filing of this opinion as an exhibit to
the Registration Statement and to the references to this Firm under the captions
"Federal Income Tax Considerations" and "Legal Matters" in the Prospectus.
Very truly yours,
<PAGE>
EXHIBIT "C"
MAKE CHECK PAYABLE TO:
SCB ESCROW NO. 12563-GG FOR CORNERSTONE FUND I
SUBSCRIPTION AGREEMENT FOR MEMBERS OF
CORNERSTONE INDUSTRIAL PROPERTIES INCOME AND GROWTH FUND I, LLC
CONTINUED ON REVERSE SIDE OF THIS SIGNATURE PAGE
- --------------------------------------------------------------------------------
INVESTMENT: Initial Purchase|_| Additional Purchase |_| U.S. CITIZEN |_|YES|_|NO
1 Minimum Purchase - 5 Units (2 Units if Qualified Plan)
$_______________ Amount Enclosed (must be in increments of $500)
- --------------------------------------------------------------------------------
TYPE OF OWNERSHIP: 1 |_| Individual 5 |_| Trust
Check One 2 |_| Community Property 6 |_| Pension Plan
2 Right of survivorship 7 |_| Profit Sharing Plan
*3 |_| Tenants in Common 8 |_| IRA
*4 |_| Joint Tenants with right 9 |_| Keogh (H.R. 10)
of survivorship 10 |_| Other (explain)____
______________________
*Two signatures required. Complete Section 3. If using Ownership Boxes 5
through 10, also complete Section
4.
- --------------------------------------------------------------------------------
INVESTOR -----------------------------------------------------------------
REGISTRATION Name(s)typed or printed Social Security # Primary State
AND of Residence
REPORT -----------------------------------------------------------------
INFORMATION: Name(s)typed or printed Social Security # Primary State
3 of Residence
-----------------------------------------------------------------
Mailing Address City, State, Zip Code
Investor Phones: Business:( )________ Home:( )_________
- --------------------------------------------------------------------------------
TRUST
REGISTRATION: Name of Trust:
4 ----------------------------------------------
Please print here the exact name (Trust and
Trustee, Trust Officer or Administrator)
----------------------------------------------
Address
----------------------------------------------
City, State, Zip Code Tax ID #
- --------------------------------------------------------------------------------
(THE UNDERSIGNED HAS THE AUTHORITY TO ENTER INTO THIS SUBSCRIPTION AGREEMENT ON
BEHALF OF THE PERSON(S) OR ENTITY REGISTERED IN SECTION 3. ABOVE.)
SIGNATURES: Executed this ______ day of ______, ___ at_________,_________
5 City State
X -----------------------------------------------------
Signature (Investor, Trustee, Custodian, Administrator)
X -----------------------------------------------------
Signature (Investor, Trustee, Custodian, Administrator)
- --------------------------------------------------------------------------------
BROKER/DEALER ------------------------------------------------------------
REGISTERED Broker/Dealer name Address and Dealer code number of Reg.
REPRESENTATIVE: ------------------------------------------------------------
6 Rep's Branch Office
------------------------------------------------------------
Main office address City State Zip
( ) X
--------------------------- ----------------------------------
City State Zip Phone No Broker/Dealer authorized signature
The undersigned Registered Representative hereby certifies that he has
reasonable grounds to believe, on the basis of information obtained from the
investor concerning his investment objectives, other investments, financial
situation and any other information known by the Registered Representative, that
investment in these limited liability company Units is suitable for the above
investor. Additionally, it is hereby certified that the investor has been
apprised of the probable illiquidity of this investment and the unlikelihood of
a public trading market developing for the Units. I have previously sold Units
of Cornerstone Industrial Properties Income and Growth Fund I, LLC |_|Yes |_|No
( ) X
- --------------------------------------------------------------------------------
Registered Representative Telephone Number Registered Representative Signature
Name (Print or Type) Date_______________________________
- --------------------------------------------------------------------------------
MAIL TO: SEND SUBSCRIPTION AGREEMENT B/D #______________(Office Use Only)
7 (WHITE COPY) AND CHECK TO: Branch #___________
Southern California Bank Rep #______________
4100 Newport Place, Suite 130 Other _____________
Newport Beach, CA 92660
Attn: Gloria Garriott
Accepted: _________________ , _______ By:____________________
Managing Member
WHITE COPY:Managing Member Copy (submit with check)/YELLOW COPY:Broker/Dealer
Copy/PINK COPY:Investor Copy
- --------------------------------------------------------------------------------
<PAGE>
SUBSCRIPTION AGREEMENT
Cornerstone Industrial Properties Income and Growth Fund I, LLC, a California
limited liability company:
The undersigned desires to become a Member in Cornerstone Industrial
Properties Income and Growth Fund I, LLC, a California limited liability company
(the "Fund") and to purchase the number of units of limited liability company
interest ("Units") appearing on the signature page of this Subscription
Agreement in accordance with the terms and conditions of the Operating Agreement
(the "Agreement") in substantially the form attached as Exhibit "A" to the
Prospectus of the Fund. In connection therewith, the undersigned hereby
represents, warrants and agrees as follows:
1. Subscription. The undersigned agrees to purchase the number of Units
set forth in Section 1 of the Subscription Agreement, and hereby tenders the
amount required to purchase such Units ($500 per Unit, minimum subscription five
(5) Units, two (2) Units for Qualified Plans).
2. Adoption. The undersigned hereby specifically adopts and agrees to
be bound by each and every provision of the Agreement, including the power of
attorney granted to the Managing Member in Section 12.6.
3. Representations. In order to induce the Managing Member to accept
this subscription, the undersigned hereby represents and warrants to the Fund
and its Managing Member that:
(a) I have received a copy of the Prospectus.
(b) I meet the applicable suitability standards and/or
financial requirements set forth in the Prospectus under "Who May Invest" or in
a supplement to the Prospectus as they pertain to the state of my primary
residence and domicile.
(c) I understand that (i) the Agreement contains restrictions
applicable to transfers of the Units; and (ii) if I am a California resident or
any person to whom I may subsequently propose to assign or transfer any Units is
a California resident, I may not consummate a sale or transfer of my Units, or
any interest therein or receive any consideration therefor, without the prior
written consent of the Commissioner of Corporations of the State of California,
except as permitted in the Commissioner's Rules, and I understand that my Units,
or any document evidencing my Units, will bear a legend reflecting the substance
of the foregoing understanding.
(d) I am purchasing the Units for my own account or for the
account or benefit of a member or members of my immediate family or in a
fiduciary capacity for the account of another person or entity and not as an
agent for another.
(e) I am aware that this subscription may be rejected in whole
or in part by the Managing Member in its sole and absolute discretion; and that
there will be no public market for Units, and accordingly, it may be impossible
for me to readily liquidate his investment in the Fund.
(f) I am purchasing the Units with the expectation of deriving
an economic profit from the Fund without regard to any tax benefits of an
investment in the Fund.
4. Special Power of Attorney. Each Member constitutes and appoints the
Managing Member of the Fund with full power of substitution, its true and lawful
attorney to make, execute, and acknowledge and file in its name, place and
stead:
(a) The Agreement;
(b) Any certificate or other instrument, including
registrations or filings concerning the use of fictitious names and necessary or
appropriate filings under the federal and state securities laws;
(c) Documents required to dissolve and terminate the Fund;
(d) Amendments and modifications to the Articles of Organi-
zation or any of the instruments described above;
(e) Amendments and modifications to the Agreement which have
been approved pursuant to the terms hereof; and
(f) All loan and security agreements, notes, instruments and
other similar documents which are necessary or desirable for the Fund to conduct
its business as contemplated by the Agreement.
This power of attorney is coupled with an interest and is
irrevocable.
The foregoing grant of authority (i) is a special power of
attorney coupled with an interest, (ii) is irrevocable and shall survive his
health or disability, and (iii) may be exercised by such attorney-in-fact by
listing his name along with the names of all other persons for whom such
attorney-in-fact is acting, and executing the Agreement and such other
certificates, instruments and documents with the single signature of such
attorney-in-fact is acting, and for all of the persons whose names are so
listed.
The undersigned shall mean the person or entity whose signature appears
in item 5 on the reverse side of this form.
5. Certification of Taxpayer Identification Number. Under the penalties
of perjury, the undersigned certifies that (1) the number provided herein is his
correct Taxpayer Identification Number; and (2) he is not subject to backup
withholding either because he has not been notified that he is subject to backup
withholding as a result of a failure to report all interest or dividends, or the
Internal Revenue Service has notified him that he is no longer subject to backup
withholding. (If the undersigned has been notified that he is currently subject
to backup withholding, he has stricken the language under clause (2) above
before signing).
<PAGE>
NO DEALER, SALESPERSON OR OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTA-
TION OTHER THAN THOSE CONTAINED IN THIS $20,000,000
PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, TO ANY PERSON OR BY ANYONE IN
ANY JURISDICTION IF SUCH OFFER OR SOLI-
CITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY CORNERSTONE INDUSTRIAL PROPERTIES
OFFER OR SALE MADE HEREUNDER SHALL, INCOME AND GROWTH FUND I, LLC
UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE FUND OR A California Limited Liability
THAT THE INFORMATION CONTAINED HEREIN Company
IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
THIS PROSPECTUS OMITS CERTAIN INFORMA-
TION CONTAINED IN THE REGISTRATION
STATEMENT ON FILE WITH THE SECURITIES 40,000 Units of
AND EXCHANGE COMMISSION.THE INFORMATION Membership Interest
SO OMITTED MAY BE OBTAINED FROM THE
PRINCIPAL OFFICE OF THE COMMISSION IN
WASHINGTON, D.C. UPON PAYMENT OF THE
FEE PRESCRIBED BY THE COMMISSION, OR
EXAMINED THERE WITHOUT CHARGE.
TABLE OF CONTENTS
Prospectus Summary.....................................
Risk Factors...........................................
Estimated Use of Proceeds..............................
Management Compensation................................
Fiduciary Responsibilities of the Managing Member......
Management.............................................
Prior Performance......................................
Conflicts of Interest..................................
Investment Objectives and Policies.....................
Business...............................................
Summary of the Operating Agreement.....................
Federal Income Tax Considerations......................
ERISA Considerations...................................
Glossary...............................................
The Offering...........................................
Who May Invest.........................................
How to Subscribe.......................................
Supplemental Sales Material............................
Legal Matters..........................................
Available Information..................................
Additional Information.................................
Financial Statements...................................
Prior Performance Tables...............................
UNTIL TERMINATION OF THIS OFFERING,
AND IN ANY EVENT UNTIL NINETY (90)
DAYS AFTER THE EFFECTIVE DATE OF THIS
PROSPECTUS, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECUR-
ITIES, WHETHER OR NOT PARTICIPATING IN PROSPECTUS
THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDI- , 1999
TION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================= ==================================
<PAGE>
PART II
INFORMATION REQUIRED IN PROSPECTUS
Item 31. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with the offering are as follows:
Securities and Exchange Commission Registration Fee...... $ 5,560
National Association of Securities Dealers, Inc.
and Blue Sky Registration Fees...................... $ 21,810*
Accounting Fees and Expenses............................. $
Legal Fees and Expenses.................................. $ 150,000*
Printing and Design...................................... $
Mailing.................................................. $
Broker/Dealer and Investor Meetings...................... $
Miscellaneous............................................ $
Total......................... $
==============
*Estimated
Item 32. Sales to Special Parties.
Not applicable.
Item 33. Recent Sales of Unregistered Securities.
Not applicable
Item 34. Indemnification of Directors and Officers.
Indemnification of the Managing Member, including its
partners, employees, agents, Affiliates, subsidiaries and assigns is provided
for in Article X of the Operating Agreement, which Article is incorporated
herein by reference. (See "Fiduciary Responsibility of the Managing Member".)
Item 35. Treatment of Proceeds from Stock Being Registered.
Not applicable.
Item 36. Financial Statements and Exhibits.
(a) Financial Statements. The following financial statements
will be filed in an amendment to the Registration Statement
......... Cornerstone Industrial Properties Income and Growth Fund I, LLC
Pro Forma Balance Sheet as of May 31, 1999
......... Cornerstone Industrial Properties, LLC
Pro Forma Balance Sheet as of May 31, 1999
II-1
<PAGE>
<TABLE>
<CAPTION>
.........(b) Exhibits:
<S> <C> <C> <C>
......... 1.1 Form of Dealer Manager Agreement.
......... 1.2 Form of Participating Broker Agreement
......... 3.1 Articles of Organization of the Fund.
......... 3.2 Operating Agreement, included in the
Prospectus as Exhibit "A" and incorporated
herein by reference.
......... 4.1 Subscription Agreement and Power of Attorney
whereby a purchaser agrees to purchase Units
and adopts the provisions of the Operating
Agreement, included in the Prospectus as
Exhibit "C" and incorporated herein by
reference.
......... 5.1 Form of Opinion of Counsel with Respect to
the Legality of the Securities Being Reg-
istered, including consent to the use of
such opinion in the Registration Statement,
......... 8.1 Form of Opinion of Counsel with Respect to
certain Federal income tax matters,including
consent to the use of such opinion in the
Registration Statement. Included in the
Prospectus as Exhibit "B" and incorporated
herein by reference.
......... 10.1 Form of Escrow Agreement.
......... 24.1 Consent of Southern California Bank.
</TABLE>
II-2
<PAGE>
UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1)......To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933 (the
"Act"); (ii) to reflect on the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2)......That, for the purpose of determining any liability under the
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3)......To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4)......To send to each Member at least on an annual basis a detailed
statement of any transactions with the Managing Member or its Affiliates, and of
fees, commissions, compensation and other benefits paid, or accrued to the
Managing Member or its Affiliates for the fiscal year completed, showing the
amount paid or accrued to each recipient and the services performed;
(5)......To provide to the Unitholders the financial statements
required by Form 10-K for the first full fiscal year of operations of the Fund;
(6)......To file a sticker supplement pursuant to Rule 424(c) under the
Act during the distribution period describing each property not identified in
the Prospectus at such time as there arises a reasonable probability that such
property will be acquired and to consolidate all such stickers into a
post-effective amendment filed at least once every three months, with the
information contained in such amendment provided simultaneously to the existing
Unitholders; each sticker supplement will disclose all compensation and fees
received by the Managing Member and its Affiliates in connection with any such
acquisition, the post-effective amendment shall include audited financial
statements meeting the requirements of Rule 3-14 of Regulation S-X only for
properties acquired during the distribution period; and
(7)......To file, after the end of the distribution period, a current
report on Form 8-K containing the financial statements and any additional
information required by Rule 3-14 of Regulation S-X, to reflect each commitment
(i.e., the signing of a binding purchase agreement) made after the distribution
period involving the use of 10% or more (on a cumulative basis) of the net
proceeds of the offering and to provide the information contained in such report
to the Unitholders at least once each quarter after the distribution period of
the offering has ended.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registration
pursuant to the foregoing provision, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Newport Beach, State of California on March 30,
1999.
CORNERSTONE INDUSTRIAL PROPERTIES INCOME
AND GROWTH FUND I, LLC
By: CORNERSTONE INDUSTRIAL PARTNERS, LLC
Its Managing Member
By: CORNERSTONE VENTURES, INC.
Its Manager
/S/ TERRY G. ROUSSEL
By: --------------------------------------
Terry G. Roussel, President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ TERRY G. ROUSSEL Director of March 30, 1999
- ------------------------------- Cornerstone Ventures, Inc.
Terry G. Roussel
/S/ JAMES V CAMP Director of March 30, 1999
- ------------------------------- Cornerstone Ventures, Inc.
James V. Camp
/S/ ROBERT C PETERSON Director of March 30, 1999
- ------------------------------- Cornerstone Ventures, Inc.
Robert C. Peterson
II-4
<PAGE>
EXHIBIT 1.1
CORNERSTONE INDUSTRIAL PROPERTIES INCOME AND GROWTH FUND I, LLC
FORM OF
DEALER-MANAGER AGREEMENT
Private Investors Equity Group
23279 Park Basilico
Calabasas, California 91302
Dear Sirs:
Cornerstone Industrial Properties Income and Growth Fund I, LLC,a
California limited liability company (the "Fund"), and its managing member,
Cornerstone Industrial Properties, a California limited liability company (the
"Managing Member"), propose to offer and sell to selected persons or entities
acceptable to the Managing Member, upon the terms and subject to the conditions
set forth in the enclosed Prospectus, up to 40,000 units of limited liability
company interest ("Units") aggregating a maximum of $20,000,000, and to enter
into the Operating Agreement in the form included in such Prospectus as Exhibit
"A" ("Operating Agreement").
The Fund hereby invites you, Pacific Cornerstone Financial Incorporated
a California corporation ("Dealer Manager"), to become the Dealer Manager in
connection with the offer and sale of the Units. By your acceptance hereof, you
agree to act in such capacity and to use your best efforts to find purchasers
for the Units in accordance with the terms and conditions of the Prospectus and
this Agreement. You agree to use your best efforts to find purchasers of Units
both directly and indirectly through a selling group consisting of participa-
ting brokers ("Participating Brokers") with whom you shall contract pursuant
to a Participating Broker Agreement substantially in the form attached as
Attachment 1 hereto or such other form as may be requested by a Participa-
ting Broker provided the consent of the Managing Member is obtained for the
use of such form.
Accompanying this Agreement is a copy of the Prospectus and the
Supplemental Material (as hereinafter defined) prepared by the Fund for use in
conjunction with the offer and sale of the Units. You are not authorized to use
any solicitation material other than that referred to in this section, which
material has been furnished by the Fund.
1. Representations and Warranties of the Fund and the Managing Member.
-------------------------------------------------------------------
The Fund and the Managing Member, jointly and severally,
represent and warrant to Dealer Manager and Participating Brokers that:
(a) The Fund is a limited liability company duly organized under
the laws of the State of California, is validly existing as a limited liability
company under such laws and has power and authority to conduct business as
described in the Prospectus under the laws of the State of California and every
other jurisdiction in which it conducts business or owns or leases property.
(b) The Fund has prepared and filed with the Securities and Exc-
hange Commission ("SEC") a Registration Statement on Form S-11 ("Registration
Statement")and may have prepared and filed amendments thereto for the offer and
<PAGE>
sale of the Units together with a Prospectus to be used in connection with the
offer and sale of the Units to persons and entities which are residents of the
States of __________________________ only. Copies of the Registration Statement
and amendments thereto, if any, will be made available to Dealer Manager upon
request. The Registration Statement, including the Prospectus, financial
statements and exhibits and all amendments, if any, as of the time when the
Registration Statement became effective ("Effective Date") and the Prospectus
included therein, is referred to herein as the "Prospectus".
(c) The SEC has not issued any order preventing or suspending
the use of the Prospectus, and no proceedings for that purpose have been insti-
tuted or are pending before or threatened by the SEC.
(d) From the Effective Date and at all times subsequent thereto
up to and including the Termination Date (as defined in Section 3 below), the
Registration Statement and the Prospectus, and all amendments or supplements
thereto, have fully complied with and will fully comply with the provisions of
the Securities Act of 1933, as amended (the "Act") and the published rules and
regulations thereunder and have not contained and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; pro-
vided, however, that none of the representations and warranties in this sub-
paragraph shall apply to statements in, or omissions from, the Registration
Statement or the Prospectus or any amendment thereof or supplement thereto
based upon and in conformity with written information furnished to the Fund by
Dealer Manager or on Dealer Manager's behalf specifically for use with refer-
ence to Dealer Manager in the preparation of the Registration Statement or the
Prospectus or any such amendment or supplement.
(e) All additional written, audio or audio-visual material,
including an investment summary, CD Rom, audio tape, video tape and internet
site prepared by the Fund for use in conjunction with the offer or sale of the
Units("Supplemental Material") will be distributed by the Fund and the Managing
Member only in full compliance with the requirements of the Act (including,
without limitation, the requirement that such Supplemental Material not be
delivered to any prospective purchaser unless accompanied or preceded by a
Prospectus), and at the time the Registration Statement is declared effective
and at all times subsequent thereto up to and including the Termination Date,
such Supplemental Material has not contained and will not contain any untrue
statement of material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(f) The Fund will obtain an opinion of Oppenheimer Wolff &
Donnelly LLP confirming that the Fund will be classified as a partnership
subject to subchapter K of the Internal Revenue Code of l986, as amended, and
not as an association taxable as a corporation for federal income tax purposes.
The conditions on which the opinion will be issued will be met at the time of
such issuance and will continue to exist.
(g) The accountants who have certified or shall certify the
financial statements filed and to be filed with the SEC as part of the
Registration Statement and the Prospectus are independent certified public
accountants, as required by the Act and the rules and regulations thereunder.
(h) Subsequent to the respective dates as of which information is
given in the Prospectus and up to and including the Termination Date, and
except as contemplated by or reflected in the Prospectus or an amendment or
supplement to the Prospectus, (i) neither the Managing Member nor the Fund have
incurred or will have incurred any liabilities or obligations, direct or
contingent, not in the ordinary course of business, or entered into any trans-
action not in the ordinary course of business and (ii) neither the Managing
Member nor the Fund has become or will have become a party to any legal or
governmental proceedingS which may result in any material adverse change in
-2-
<PAGE>
condition (financial or other) of the Managing Member or the Fund.
(i) The balance sheet (including the related notes) of the
Managing Member set forth in the Prospectus fairly presents the financial
position of the Managing Member at the date thereof. The balance sheet has been
prepared in accordance with generally accepted accounting principles.
(j) There are no contracts or other documents required to be
filed by the Act or the rules and regulations thereunder as exhibits to the
Registration Statement which have not been so filed.
(k) The sale of the Units has been duly and validly authorized
by the Fund, and when subscriptions for the Units have been accepted by
the Managing Member as contemplated in the Prospectus, the Units will repre-
sent valid membership interests in the Fund and will conform to the description
thereof contained in the Prospectus.
(l) The liability of each member of the Fund based upon current
law will be limited to the amount actually paid by each such member to the
Fund, and each such member will not be subject to personal liability for the
debts, obligations or liabilities of the Fund, by reason of being such a mem-
ber, beyond such amount except in the event of the member's participation
in tortious conduct or the member's agreement to be personally liable for
the debts, obligations or liabilities of the Fund.
(m) The person or persons who have signed this Agreement on
behalf of the Fund and the Managing Member and the person or persons who have
signed the Operating Agreement on behalf of the Managing Member are duly
authorized to so sign, and this Agreement and the Operating Agreement are
valid, legal, and binding agreements of the Fund and the Managing Member en-
forceable in accordance with their respective terms, except as such enforce-
ability may be limited by bankruptcy, insolvency or similar laws affecting
the rights of creditors generally.
(n) The Managing Member is a limited liability company organized
under the laws of the State of California and is validly existing as a limited
liability company under such laws. The Managing Member has power and authority
to conduct business as described in the Prospectus under the laws of the State
of California, and every other jurisdiction in which it conducts business or
owns or leases property.
(o) At all times subsequent to the date of this Agreement and up
to and including the Termination Date, the representations and warranties made
in this Section l will be true and correct with the same effect as if they had
been made on and as of such time, except as may ubsequently be disclosed in
writing to the Dealer Manager.
2. Sale of the Units.
-----------------
A subscription agreement ("Subscription Agreement") must be
completed by each person desiring to purchase Units, or, at Dealer Manager's or
Participating Broker's option by Dealer Manager or Participating Broker on
behalf of each such person, and returned by Dealer Manager or Participating
Broker together with any other documents that may be required under state
securities laws or by the Managing Member, to the Managing Member at 4590
MacArthur Blvd., Suite 610, Newport Beach, California 92660, Attention: Terry G
Roussel. The Dealer Manager or Participating Broker shall ascertain that the
Subscription Agreement has been properly completed in full and signed by the
prospective purchaser prior to its return.
All subscription checks shall be made payable to the order of SCB
ESCROW NO.12563-GG FOR CORNERSTONE FUND I. If Dealer Manager or Participating
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Broker receives a check not conforming to the foregoing instructions, Dealer
Manager and/or Participating Broker must return such check directly to the
subscriber not later than the end of the next business day following its
receipt. Subscription checks conforming to the foregoing instructions shall be
transmitted by Dealer Manager or Participating Broker for deposit directly to
Southern California Bank ("Escrow Agent"), at 4100 Newport Place, Suite 130,
Newport Beach, California 92660 by the end of the next business day following
receipt by Dealer Manager or Participating Broker.In the event Dealer Manager's
or Participating Broker's final internal supervisory review is conducted at a
different location, then checks must be transmitted to Dealer Manager's or
Participating Broker's final review office by the end of the next business day
following receipt by Dealer Manager or Participating Broker and Dealer
Manager's or Participating Broker's final review office must in turn by the
end of the next business day following receipt by it, transmit the check
for deposit directly to the Escrow Agent.
Upon receipt of the Subscription Agreement, the Managing Member,
on behalf of the Fund, will determine promptly (and in any event within ten
(10) days after such receipt)whether it wishes to accept the proposed purchaser
as a member in the Fund, it being understood that the Managing Member reserves
the right to reject the tender of any Subscription Agreement and to reject
all tenders after the Termination Date Should the Managing Member determine to
accept the tender of the Subscription Agreement, the Managing Member will
promptly advise Dealer Manager or Participating Broker of such action. Should
the Managing Member determine to reject the tender it will promptly notify in
writing the prospective purchaser, Dealer Manager and Participating Broker, if
any, of such determination and will promptly return the tendered Subscription
Agreement and instruct the Escrow Agent to return the purchase price of the
Units directly to the prospective purchaser.
All payments received on or prior to the Minimum Subscription
Date, except as hereinafter provided, from purchasers of Units shall be
transmitted directly to the Escrow Agent and deposited in an escrow account
(the "Escrow Account") with Escrow Agent. Such funds may be temporarily
invested in
bank savings accounts, bank or money market accounts, bank short-term
certificates of deposit of U.S. banks having a net worth of $100 million, or
short-term U.S. government issued or guaranteed obligations. Prior to the
Minimum Subscription Date, the Fund will have no right to obtain any funds from
the Escrow Agent. Funds for Units purchased on or before the Minimum
Subscription Date shall be made available to the Fund, or its order, by the
Escrow Agent, on the Minimum Subscription Date.
Nothing contained in this Section 2 shall be construed to impose
upon the Managing Member the responsibility of assuring that prospective
purchasers meet the suitability standards contained in the Prospectus and the
Subscription Agreement or to relieve Dealer Manager and Participating Brokers
of the responsibility of complying with the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD").
3. Termination Date and Minimum Subscription Closing Date.
-------------------------------------------------------
As used herein, the term "Termination Date" shall mean the
earliest to occur of (i) the date upon which subscriptions for the maximum
number of Units offered have been accepted by the Managing Member which date
the Managing Member shall designate by notice to Dealer Manager in writing; or
(ii) ____________, 2001. The Managing Member may terminate the offering of
Units at any time for any reason by written notice to the Dealer Manager at
least two (2) business days prior to the date of termination.
As used herein, the term "Minimum Subscription Date" shall mean
the earlier of the date on which the Managing Member shall mail or otherwise
furnish to Dealer Manager notification that subscriptions and payments for an
aggregate of at least 6,000 Units have been received and accepted by the
Managing Member and deposited with the Escrow Agent. In the event that
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subscriptions and payments for an aggregate of at least 6,000 Units shall not
have been received and accepted by the Managing Member on or prior to
____________, 2000, this Agreement will terminate and neither the Fund nor the
Managing Member shall have any further obligation or liability hereunder to
Dealer Manager or Participating Brokers. In the event of such termination, all
purchase payments deposited with the Escrow Agent shall be returned to the
subscribers and no selling commissions (as described below) will be payable.
4. Compensation.
-------------
Except in such cases where the Dealer Manager grants a Volume Discount (as def-
ined in the Prospectus), for your services as Dealer Manager in solici-
ting and obtaining purchasers of the Units, the Fund agrees to pay a selling
commission of seven (7%) of the gross offering proceeds realized from the sale
of each Unit sold. All or a portion of these selling commissions may be
reallowed by Dealer Manager to Participating Brokers, as compensation for their
services in soliciting and obtaining subscribers for the purchase of Units. An
additional two percent (2%) of the gross offering proceeds, all or a portion of
which may be reallowed to Participating Brokers, will be paid to the Dealer
Manager as a marketing support fee for marketing services, wholesaling fees,
expense reimbursements, bonuses and incentive compensation. An additional one
percent (1%) of the gross proceeds, all or a portion of which may be reallowed
to Participating Brokers,will be paid to the Dealer Manager as a non-accountable
expense reimbursement allowance. An additional one-half percent (1/2%) of the
gross offering proceeds, all or a portion of which may be reallowed to Partici-
pating Brokers, will be paid to the Dealer Manager as a due diligence expense
allowance. The selling commissions, marketing support fee, non-accountable
expense allowance and due diligence expense allowance will be paid as follows:
(i) on or promptly following the Minimum Subscription Date, the Fund will pay
the selling commissions, marketing support fee, non-accountable expense allow-
ance and due diligence expense allowance payable with respect to the Units pur-
chased on or before the Minimum Subscription Date, and (ii) after the Minimum
Subscription Date, the Fund will pay the selling commissions, non-accountable
expense allowance marketing support fees and due diligence expense allowance
payable with respect to Units purchased during the period commencing with the
first business day following the Minimum Subscription Date and ending on the
Termination Date unless otherwise agreed, no later than the 15th day of the
month with respect to purchases made through the end of the prior month. Subject
to the provisions of Section 8 below, in the event the offer and sale of Units
is terminated prior to the Minimum Subscription Date, you shall not be entitled
to any reimbursement for your due diligence expenses incurred in connection with
the offering of Units.
In the event the Managing Member gives you any advances of any
portion of the marketing support fee, non-accountable expense allowance or due
diligence expense allowance, the amount of the advance shall be deducted by
the Fund from amounts owed to Dealer Manager for selling commissions, marketing
support fees, non-accountable expense allowance or due diligence expense allow-
ance and such amount shall be promptly reimbursed to the Managing Member.
No person will be entitled to a selling commission, marketing
support fee, non-accountable expense allowance or due diligence expense allow-
ance in any case in which it is determined that the solicitation or obtaining
of purchasers by such person was made in violation of the securities laws of the
United States or any state or other jurisdiction.
In addition to the foregoing compensation payable by the Fund,
the Managing Member may, but is not required to, pay the Dealer Manager an
annual soliciting dealer servicing fee of up to 15% of the Managing Member's
share of Net Cash Flow from Operations and Net Sales Proceeds. The Dealer
Manager may pay all or any part of any amount it receives to Participating
Brokers whose clients own Units.
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<PAGE>
5. Further Agreements of the Fund and the Managing Member.
------------------------------------------------------
(a) The Fund and the Managing Member, jointly and severally,
covenant and agree that they will pay or cause to be paid (i) all expenses and
fees in connection with the preparation, printing, filing, delivery and shipp-
ing of the Registration Statement (including this Agreement and all other ex-
hibits to the Registration Statement), the Prospectus and any amendments or
supplements thereto and the Supplemental Material, (ii) filing fees, Fund
counsel's fees and expenses paid and incurred in connection with the registra-
tion and qualification of the Units for offer and sale by Dealer Manager and
Participating Brokers under the Act and the securities or Blue Sky laws of the
states in which offers are to be made, and (iii) filing fees, Fund counsel's
fees and expenses paid and incurred in connection with the review by the NASD
of the terms of the offering of the Units.
(b) The Fund will advise Dealer Manager and Participating Brokers
promptly of the issuance of any stop order withdrawing the qualification for
the offer and sale of the Units or of the institution of any proceedings for
that purpose, and will use its best efforts to prevent the issuance of any such
stop order and to obtain as soon as possible the lifting thereof, if issued.
(c) If at any time when a Prospectus relating to the Units is
required to be delivered under the Act any event shall have occurred as a
result of which, in the opinion of counsel for the Fund, the Prospectus as
amended or supplemented includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, or if it is necessary at any time to amend the
Prospectus to comply with the Act, the Fund promptly will prepare and
file with the SEC an appropriate amendment or supplement.
(d) The Fund will deliver to Dealer Manager and Participating
Brokers from time to time without charge as many copies of the Prospectus (and,
in the event of an amendment or supplement to the Prospectus pursuant to the
provisions of this Agreement, of such amended or supplemented Prospectus) and
the Supplemental Material as Dealer Manager or Participating Brokers may
reasonably request, which Prospectus(s), as from time to time amended or
supplemented, and Supplemental Material the Fund authorizes Dealer Manager and
Participating Brokers to use in connection with the sale of the Units.
(e) The Fund will use its best efforts to register and qualify
the Units for sale under the laws of those states and other jurisdictions where
it is intended that offers and sales will be made and will comply to the best
of its ability with the laws of those states so as to permit the continuance
of sales of the Units thereunder. The Fund and the Managing Member, jointly
and severally, covenant and agree that neither the Fund nor the Managing Member
nor any officer, manager or employee of either of them will make any offer or
sale of the Units unless such offer or sale is made in compliance with the Act
and the rules and regulations thereunder.
(f) The Managing Member and the Fund, jointly and severally,
agree to execute or cause to be executed all such certificates and other
documents required by and conforing to the Operating Agreement and to do or
cause to be done all such filing, recording, publishing and other acts as may
be appropriate to comply with the requirements of law for the operation of
a foreign limited liability company in all jurisdictions, other than Califor-
nia, where the Fund shall desire to conduct business or own properties as the
case may be.
6. Agreements of Dealer Manager.
-----------------------------
(a) Dealer Manager covenants and agrees to comply, and to use its
best efforts to cause the Participating Brokers to comply, with any applicable
requirements of the Act, and of the l934 Act, and the published rules and
regulations thereunder, and the Conduct Rules of the NASD and, in particular,
the Conduct Rules which require Dealer Manager (i) to recommend the purchase of
Units only when Dealer Manager has reasonable grounds to believe that the
investment is suitable for the investor, and that the investor is in a finan-
cial position to sustain the risks inherent in the investment including loss
of investment and lack of liquidity, (ii) to maintain certain files concerning
the basis for Dealer Manager's determination of the suitability of the
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<PAGE>
investors, (iii) to determine the adequacy and accuracy of the disclos-
ure in the Prospectus, and (iv) to inform the prospective investor of all
pertinent facts relating to the liquidity and marketability of the investment
during the term of the investment. Dealer Manager agrees not to, and to use
its best efforts to cause the Participating Brokers, not to execute any
transaction in a discretionary account without the prior written approval of
the transaction by the customer. In determining the adequacy of disclosed
facts, Dealer Manager shall, and shall use its best efforts to cause the
Participating Brokers to, obtain facts relating at a minimum to the following
to the extent relevant to the investment: (1) items of compensation;
(2) physical properties; (3) tax aspects; (4) financial stability and
experience of the sponsor; (5) the investment's conflicts and risk factors
and (6) appraisals and other pertinent reports. Dealer Manager may only rely
upon the results of an inquiry conducted by another NASD member or members if:
(x) Dealer Manager has reasonable grounds to believe that such inquiry was
conducted with due care; (y) the results of the inquiry were provided to Dealer
Manager with the consent of the NASD member or members conducting or directing
the inquiry; and (z) no NASD member that participated in the inquiry is a
sponsor of the investment or an affiliate of such sponsor. Dealer Manager also
agrees not to deliver the Supplemental Material to any person unless the
Supplemental Material is accompanied or preceded by the Prospectus. Dealer
Manager confirms that Dealer Manager is registered as a broker-dealer and is
in good standing under the l934 Act. Dealer Manager also confirms that Dealer
Manager is a member in good standing of the NASD. Dealer Manager agrees that
Dealer Manager will reallow commissions only to other broker-dealers who are
members of the NASD or not subject to registration pursuant to the Securities
Exchange Act of l934.
(b) Dealer Manager will not give any information or make any
representation in connection with the offering of the Units other than those
contained in the Prospectus and Supplemental Material furnished by the Managing
Member and the Fund. Dealer Manager agrees not to publish, circulate or
otherwise use any other advertisement or solicitation material. Dealer Manager
is not authorized to act as agent of the Fund or the Managing Member in any
connection or transaction, and Dealer Manager agrees not to act as such agent
and not to purport to do so without the prior written approval of the Managing
Member. Dealer Manager agrees that if and when the Managing Member supplies
Dealer Manager with copies of any supplement to the Prospectus, Dealer Manager
will affix such copies of such supplement to copies of the Prospectus already
in Dealer Manager's possession, and that thereafter Dealer Manager will only
distribute Prospectuses containing such supplement and that Dealer Manager will
accept subscriptions only from investors who have received a copy of the
Prospectus containing such supplement. Dealer Manager further agrees to comply
with all instructions from the Managing Member concerning the destruction of
out-dated Prospectuses and the use of supplemented or amended Prospectuses.
(c) Dealer Manager agrees to solicit purchases of Units only in
the States and other jurisdictions in which the Managing Member indicates that
such solicitation can be made and in which Dealer Manager has determined that
such solicitation can be made by Dealer Manager and in which Dealer Manager is
qualified to so act.
(d) Dealer Manager will not sell the Units pursuant to this
Agreement unless the Prospectus is furnished to the purchaser at least five (5)
business days prior to the execution of the Subscription Agreement and Power of
Attorney, or is sent to such person under circumstances that it would be
received by him five (5) business days prior to his execution of the
Subscription Agreement and Power of Attorney.
(e) Dealer Manager will use reasonable efforts to select
investors who Dealer Manager reasonably believes meet the investor suitability
requirements which are set forth in the Prospectus and Subscription Agreement
(Exhibit "C" to the Prospectus) and such additional individual state
requirements as are specified in the Subscription Agreement and which are
confirmed by the investors by payment of the purchase price for the Units
including that each investor be of legal age in the state of his or her
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<PAGE>
residence. Dealer Manager will, for a period of six years, maintain in Dealer
Manager's files a copy of the Subscription Agreement for each investor for whom
Dealer Manager acts as Dealer Manager.
(f) To the extent that information is provided to Dealer Manager
marked "For Broker-Dealer Use Only," Dealer Manager covenants and agrees not to
provide such information to prospective investors.
(g) Dealer Manager shall take all action necessary to assure that
its computer-based systems are able to effectively process data including dates
and date sensitive functions. Dealer Manager represents and warrants that
Dealer Manager's ability to perform its obligations under this Agreement will
be unaffected by the transition to the Year 2000. Upon request, Dealer Manager
shall provide assurance acceptable to the Fund and Managing Member that Dealer
Manager's computer systems and software are or will be Year 2000 compliant on a
timely basis. Dealer Manager shall immediately advise the Fund and Managing
Member in writing of any material changes in Dealer Manager's Year 200 plan
timetable.
7. Indemnification.
----------------
(a) Dealer Manager agrees to indemnify, defend and hold harmless
the Fund and the Managing Member from all losses, claims, demands, liabilities
and expenses, including reasonable legal and other expenses incurred in
defending such claims or liabilities, whether or not resulting in any liability
to the Fund or the Managing Member, which the Fund or the Managing Member may
incur in connection with the offer or sale of any Units, either by Dealer
Manager pursuant to this Agreement or any Participating Broker acting on the
Dealer Manager's behalf pursuant to the Participating Broker Agreement which
arise out of or are based upon (i) an untrue statement or alleged untrue
statement of a material fact, or any omission or alleged omission of a material
fact, other than a statement or omission contained in the Prospectus, the
Registration Statement, or any state securities filing which was not based on
information supplied to the Fund or the Managing Member by Dealer Manager or a
Participating Broker, or (ii) the breach by Dealer Manager or any Participating
Broker acting on its behalf of any of the terms and conditions of this Agree-
ment or any Participating Broker Agreement, including, but not limited to,
alleged violations of the Securities Act of 1933, as amended; or (iii) the vio-
lation by Dealer Manager or any Participating Broker of the NASD Conduct Rules.
(b) The Fund will indemnify and hold harmless the Dealer Manager,
its affiliates, and each of its officers, directors and employees, and each
person, if any, who "controls" the Dealer Manager (within the meaning of the
1933 Act) from and against any and all losses, claims, damages, liabilities,
costs or expenses (including reasonable attorney's fees), joint or several, to
which the Dealer Manager, its affiliates, or any such officer or employee or
such controlling person may become subject, under the 1933 Act or any other
federal or state securities law or otherwise, insofar as such losses, claims,
damages, liabilities, costs or expenses (or actions or proceedings in respect
thereof) arise out of or are based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in any Prospectus or Supplemental
Material or in information furnished pursuant to this Agreement or otherwise by
the Fund, or its representatives, in each case taken together with all other
such documents and information, or in any "blue sky" application or other
document filed under state securities laws or regulations (collectively, "Blue
Sky Documents"); (ii) the omission or alleged omission from the Prospectus or
Supplemental Material, from information furnished pursuant to this Agreement or
otherwise by the Fund or its representatives, in each case taken together with
all other such documents and information, or from any Blue Sky Documents,of any
statement or information which is required to be stated therein or is necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; (iii) the making of an offer by the Fund or its
affiliates, or anyone acting on behalf of it, other than the Dealer Manager, of
any interests or securities; (iv) violations by the Fund or any of its
representations, warranties, covenants and agreements contained in this
Agreement; or (v) the failure of the offer and sale of the Units to be
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<PAGE>
registered or qualified for exemption from registration under any state
securities of "blue sky" laws other than as a result of the non-compliance by
the Dealer Manager with its obligations hereunder; and the Fund will reimburse
the Dealer Manager for any legal or other expenses reasonably incurred by it,
its affiliates, or any such officer, director or employee or any such
controlling person in connection with investigating, defending or preparing to
defend any such loss, claim, damage, liability or action. The indemnity
agreement in this Section 7(b) shall be in addition to any liability which the
Fund may otherwise have to such Dealer Manager, its affiliates, or any such
officer or employee or any such controlling person.
8. Effective Date and Termination.
-------------------------------
Provided that at least one counterpart of this Agreement shall
then have been executed and delivered, this Agreement shall become effective at
12:00 noon, California time, of the first full business day following the
effective date of the Registration Statement or at such later time after the
Registration Statement becomes effective as the Managing Member shall first
release the Units for sale to the public. For the purpose of this section the
Units shall be deemed to have been eleased for sale to the public upon release
by the Managing Member of correspondence or other notification to Dealer Mana-
ger indicating the effectiveness of the Registration Statement, whichever
shall first occur.
Until the Minimum Subscription Date, this Agreement may be
terminated by Dealer Manager at Dealer Manager's option by giving notice to the
Fund and the Managing Member if the Fund or the Managing Member shall have
become a defendant in any litigation which, in Dealer Manager's opinion, may
reasonably be expected to result in a judgment having materially adverse
consequences for the Fund or the Managing Member or there shall have been,since
the respective dates as of which information is given in the Registration
Statement or the Prospectus, ny material adverse change in the condition,
financial or otherwise, of the Fund or the Managing Member, which change in
Dealer Manager's judgment shall render it inadvisable to proceed with the
delivery of the Units.
Following the Minimum Subscription Date, this Agreement may be
terminated by Dealer Manager at Dealer Manager's option by giving notice to
the Fund and the Managing Member. In any case, this Agreement will terminate at
the close of business on the Termination Date; provided, however, that all
fees payable to Dealer Manager under the terms and conditions hereof shall be
paid when due although this Agreement shall have theretofore been terminated.
Any termination of this Agreement pursuant to this Section 8
shall be without liability of the Fund and the Managing Member to Dealer
Manager and without liability on Dealer Manager's part to the Fund or the
Managing Member.
9. Survival of Indemnities, Warranties and Representations.
--------------------------------------------------------
The indemnity agreements contained in Section 7 hereof, and the
representations and warranties of the Fund and the Managing Member set forth in
Sections l and 5(f) hereof,shall remain operative and in full force and effect,
regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of the Fund, the Managing Member, Dealer
Manager or any controlling person referred to in Section 7, and shall survive
the delivery of and payment for the Units, and any successor of Dealer Manager
or the Fund or the Managing Member or of any such controlling person or any
legal representative of any such controlling person, as the case may be, shall
be entitled to the benefit of the respective indemnity agreements and
representations and warranties.
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<PAGE>
l0. Notices.
--------
Except as in this Agreement otherwise provided, (a) whenever
notice is required by the provisions of this Agreement or otherwise to be given
to the Fund, or the Managing Member, such notice shall be in writing addressed
to the Fund or the Managing Member at 4590 MacArthur Blvd., Suite 610, Newport
Beach, California 92660, Attention: Terry G. Roussel, and (b) whenever notice
is required by the provisions of this Agreement or otherwise to be given to
Dealer Manager, such notice shall be in writing addressed to Dealer Manager at
P.O. Box 8489, Calabasas, California 91372-8489. Any notice referred to
herein may be given in writing or by facsimile or telephone and if by facsimile
or telephone shall be immediately confirmed in writing. Notice (unless actual)
shall be effective upon mailing or facsimile transmission with confirmation of
receipt, as the case may be.
11. Persons Entitled To Benefit of Agreement.
-----------------------------------------
Except as provided in the next sentence, this Agreement is made
solely for the benefit of Dealer Manager, Participating Brokers, the Fund and
the Managing Member or controlling persons thereof, and their respective
successors and assigns, and no other person shall acquire or have any right by
virtue of this Agreement, and the term "successors and assigns,"as used in this
Agreement, shall not include any purchaser, as such purchaser, of any of the
Units. The agreements of the Fund and the Managing Member specified in Section
5(f) are made also for the benefit of the purchasers of the Units and such
purchasers and their successors and assigns shall be entitled to the
indemnification therein provided.
12. Not a Separate Entity.
----------------------
Nothing contained herein shall constitute the Dealer Manager and
Participating Brokers, or any of them, as an association, partnership,
unincorporated business or other separate entity.
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<PAGE>
Please confirm your agreement to become Dealer Manager under the terms
and conditions herein set forth by signing and returning the enclosed duplicate
copy of this Agreement at once to the Managing Member at the address specified
in Section 10 above.
Very truly yours,
CORNERSTONE INDUSTRIAL PROPERTIES
INCOME AND GROWTH FUND I, LLC,
a California limited liability company
By: CORNERSTONE INDUSTRIAL PROPERTIES, LLC
a California limited liability company
By: CORNERSTONE VENTURES, INC.,
its Operating Partner
By: _________________________
Terry G. Roussel, President
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<PAGE>
AGREED AND ACCEPTED:
PRIVATE INVESTORS EQUITY GROUP
[a California corporation]
By _______________________________________________
Dated: _________________ , 1999
-11-
EXHIBIT 1.2
CORNERSTONE INDUSTRIAL PROPERTIES INCOME AND GROWTH FUND I, LLC
FORM OF
PARTICIPATING BROKER AGREEMENT
Dear Sirs:
Cornerstone Industrial Properties Income and Growth Fund I, LLC, a
California limited liability company (the "Fund"), and its managing member,
Cornerstone Industrial Properties, a California limited liability company
("Managing Member"), propose to offer and sell to selected persons or entities
acceptable to the Managing Member, upon the terms and subject to the conditions
set forth in the enclosed Prospectus, up to 40,000 units of limited liability
company interests relating to the Fund ("Units") aggregating a maximum of
$20,000,000, in the minimum number of five Units (two Units for Tax-Qualified
Retirement Plans), and to enter into the Operating Agreement in the form
included in such Prospectus as Exhibit "A" (the "Operating Agreement") with such
persons or entities.
Private Investors Equity Group, [a California corporation] ("Dealer
Manager") has entered into a dealer manager agreement ("Dealer Manager
Agreement") with the Fund pursuant to which it has agreed to act as dealer
manager in connection with the offer and sale of the Units. Dealer Manager has
agreed to use its best efforts to find purchasers of Units both directly and
indirectly through a selling group consisting of participating brokers
("Participating Brokers").
Dealer Manager hereby invites you to become a Participating Broker in
connection with the offer and sale of the Units. By your acceptance hereof, you
agree to act in such capacity and to use your best efforts to find purchasers
for the Units in accordance with the terms of the Prospectus and this Agreement.
Accompanying this Agreement is a copy of the Prospectus and all
written, audio or audio-visual material, including an investment summary, CD
Rom, audio tape, video tape and internet site ("Supplemental Material") prepared
by the Fund for use in conjunction with the offer and sale of the Units. You are
not authorized to use any solicitation material other than that referred to in
this paragraph, which material has been furnished by the Fund.
1. Sale of the Units.
A subscription agreement ("Subscription Agreement") must be
completed by each person desiring to purchase Units, or, at your option, by you
on behalf of each such person, and returned by you together with any other
documents that may be required under state securities laws or by the Managing
Member, to the Managing Member at 4590 MacArthur Blvd., Suite 610, Newport
Beach, California 92660, Attention: Terry G. Roussel. You shall ascertain that
the Subscription Agreement has been properly completed in full and signed by the
prospective purchaser prior to its return.
All subscription checks shall be made payable to the order of
SCB ESCROW NO. 12563-GG FOR CORNERSTONE FUND I. If you receive a check not
conforming to the foregoing instructions, you must return such check directly to
the subscriber not later than the end of the next business day following its
receipt. Subscription checks conforming to the foregoing instructions shall be
transmitted by you for deposit directly to Southern California Bank ("Escrow
Agent"), at 4100 Newport Place, Suite 130, Newport Beach, California 92660 by
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<PAGE>
the end of the next business day following receipt by you. In the event your
final internal supervisory review is conducted at a different location, then
checks must be transmitted to your final review office by the end of the next
business day following receipt by you and your final review office must in turn,
by the end of the next business day following receipt by it, transmit the check
for deposit directly to the Escrow Agent.
Upon receipt of the Subscription Agreement, the Managing
Member, on behalf of the Fund, will determine promptly (and in any event within
ten (10) days after such receipt) whether it wishes to accept the proposed
purchaser as a member in the Fund, it being understood that the Managing Member
reserves the right to reject the tender of any Subscription Agreement and to
reject all tenders after the Termination Date, in each case in its sole
discretion. Should the Managing Member determine to accept the tender of the
Subscription Agreement, the Managing Member will promptly advise you of such
action. Should the Managing Member determine to reject the tender, it will
promptly notify in writing the prospective purchaser and you of such
determination and will promptly return the tendered Subscription Agreement and
instruct the Escrow Agent to return the purchase price of the Units directly to
the prospective purchaser.
All payments received prior to the Minimum Subscription Date,
except as hereinafter provided, from purchasers of Units shall be transmitted
directly to the Escrow Agent and deposited in an escrow account (the "Escrow
Account") with Escrow Agent. Such funds may be temporarily invested in bank
savings accounts, bank or money market accounts, bank short-term certificates of
deposit of U.S. banks having a net worth of $100 million, or short-term U.S.
government issued or guaranteed obligations. Prior to the Minimum Subscription
Closing Date, the Fund will have no right to obtain any funds from the Escrow
Agent. Funds for Units purchased on or before the Minimum Subscription Date
shall be made available to the Fund, or its order, by the Escrow Agent, on the
Minimum Subscription Closing Date.
Nothing contained in this Section 1 shall be construed to
impose upon the Managing Member the responsibility of assuring that prospective
purchasers meet the suitability standards contained in the Prospectus and the
Subscription Agreement or to relieve you of the responsibility of complying with
the Conduct Rules of the National Association of Securities Dealers, Inc.
("NASD").
2. Termination Date, Minimum Subscription Date and Minimum Subscription
Closing Date.
As used herein, the term "Termination Date" shall mean the
earliest to occur of (i) the date upon which subscriptions for the maximum
number of Units have been accepted by the Managing Member, which date the
Managing Member shall designate by notice to Dealer Manager in writing, or (ii)
____________, 2001. The Managing Member may terminate the offering of Units at
any time for any reason by written notice to the Dealer Manager at least two (2)
business days prior to the termination date.
As used herein, the term "Minimum Subscription Date" or
"Minimum Subscription Closing Date" shall mean the date on which the Managing
Member shall mail or otherwise furnish to Dealer Manager notification that
subscriptions and payments for an aggregate of at least 6,000 Units have been
received and accepted by the Managing Member and deposited with the Escrow
Agent. In the event that subscriptions and payments for at least 6,000 Units
shall not have been received and accepted by the Managing Member on or prior to
____________, 2000, this Agreement will terminate and neither the Fund nor the
Managing Member shall have any further obligation or liability hereunder to
Dealer Manager or Participating Brokers. In the event of such termination, all
purchase payments deposited with the Escrow Agent shall be returned to the
subscribers and no selling commissions (as described below) will be payable.
-2-
<PAGE>
3. Compensation.
Except in cases where the purchaser of Units receives a Volume
Discount as defined in the Prospectus, for your services as a Participating
Broker in soliciting and obtaining purchasers of Units, Dealer Manager shall
reallow to you from the selling commissions received from the Fund, only with
respect to prospective purchasers who are accepted as members of the Fund, a
selling concession of _____ % of the gross offering proceeds realized from the
sale of each Unit sold by you in accordance with the provisions of this
Agreement. [Dealer Manager shall reallow to you an additional ___% of the gross
offering proceeds realized from the sale of each Unit sold by you as a marketing
support fee for marketing services, expense reimbursements, bonuses and
incentive compensation. Dealer Manager shall reallow to you an additional _____%
of the gross offering proceeds realized from the sale of each Unit sold by you
as a non-accountable expense allowance. Dealer Manager shall reallow to you an
additional _____% of gross offering proceeds realized from the sale of each Unit
sold by you as due diligence expense.] The selling commissions, marketing sup-
port fee, non-accountable expense allowance and due diligence expense allowance
will be paid as follows: (i) on or promptly following the Minimum Subscription
Closing Date, the Fund will pay the selling commissions, marketing support fees,
non-accountable expense allowance and due diligence expense allowance payable
with respect to the Units purchased on or before the Minimum Subscription Date,
and (ii) after the Minimum Subscrip- tion Closing Date, the Fund will pay the
selling commissions, marketing support fees and due diligence expense allowance
payable with respect to Units purchased during the period commencing with the
first business day following the Minimum Subscription Date and ending on the
Termination Date unless otherwise agreed no later than the 15th day of the month
with respect to purchases made through the end of the prior month.
In the event the Dealer Manager gives you any advance of any
portion of the marketing support fee, non-accountable expense allowance or due
diligence expense allowance, the amount of the advance shall be deducted by the
Fund from amounts owed to you for selling commissions, marketing support fees or
due diligence expense allowance.
No person will be entitled to a selling commission in any case
in which it is determined that the solicitation or obtaining of purchasers by
such person was made in violation of the securities laws of the United States or
any state or other jurisdiction or in violation of the requirements of Section 5
hereof.
In addition to the foregoing compensation payable by the Fund,
the Managing Member may, but is not required to, pay the Dealer Manager an
annual soliciting dealer servicing fee of up to 15% of the Managing Member's
share of Net Cash Flow from Operations and Net Sales Proceeds. The Dealer
Manager may, but is not required to, pay you all or any part of any amount it
receives with respect to your clients which own Units.
4. Representations, Warranties and Covenants of Participating Broker.
The Participating Broker represents and warrants to and covenants to the Dealer
Manager, the Fund and the Managing Member that:
(a) It is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its formation. It has full power
and authority to act as a Participating Broker in connection with the offer and
sale of the Units, and to perform all of its obligations hereunder or
contemplated hereby or in the Prospectus, and is qualified to do business in
each jurisdiction in which such qualification is necessary to enable it to
perform such obligations or to so act as the Participating Broker.
-3-
<PAGE>
(b) This Agreement has been duly authorized, executed and
delivered by it and constitutes the legal, valid and binding obligation of the
Participating Broker, enforceable against the Participating Broker in accordance
with its terms, subject, as to enforcement, to the availability of equitable
remedies and limitations imposed by bankruptcy, insolvency, reorganization and
other similar laws and related court decisions relating to or affecting
creditors' rights generally.
(c) It is (i) a registered broker-dealer under the Securities
Exchange Act of 1934, (ii) a member in good standing of the National Association
of Securities Dealers, Inc. ("NASD"), and (iii) registered as a broker-dealer in
each jurisdiction in which it is required to be registered as such in order to
offer and sell the Units in such jurisdiction.
(d) It has not violated any of the "bad boy" disqualification
provisions contained in the securities or "blue sky" laws of any jurisdiction in
which the Units may be offered.
(e) It will not make any written or oral statement with
respect to the Fund or the offering of Units that is materially inconsistent
with the statements in the Prospectus or Supplemental Material.
(f) It will periodically notify the Dealer Manager of the
jurisdictions in which the Units are being, or will be, offered by it, and will
periodically notify the Dealer Manager of the status of the offering conducted
pursuant to this Agreement.
(g) It will cease making offers and soliciting subscriptions
for Units if so requested by the Dealer Manager in order to comply with
applicable federal and state securities laws, and will forward to offerees for
execution and delivery such additional documents and instruments as the Dealer
Manager may reasonably require.
(h) It will: (i) maintain all representation letters,
questionnaires and other materials utilized by it to ascertain the satisfaction
of the above criteria by offerees and Investors, for a period of at least six
years from the date of the offering is completed; and (ii) make such material
available to the Dealer Manager upon its request.
(i) Before, during or after the offering, except with the
prior written consent of the Dealer Manager and except for internal-use only
purposes or for the delivery to its advisors, it has not duplicated and will not
duplicate any of the Supplemental Material or other similar selling
documentation furnished to it by the Dealer Manager, the Fund or Managing
Member.
(j) It has not paid or awarded, and will not pay or award,
directly or indirectly, any commission or other compensation to any person
engaged to render investment advice to a potential subscriber as an inducement
to advise the purchase of the Units, except as such commissions or other
compensation may be paid or awarded to it or reallowed by it in connection with
the sale of the Units as described in the Prospectus.
5. Agreements of Participating Broker.
(a) You covenant and agree to comply with any applicable
requirements of the Act and of the 1934 Act, and the published rules and
regulations thereunder, and the Conduct Rules of the NASD, and, in particular
the Conduct Rules which require you: (i) to recommend the purchase of Units only
when you have reasonable grounds to believe that the investment is suitable for
the investor, and that the investor is in a financial position to sustain the
risks inherent in the investment including loss of investment and lack of
-4-
<PAGE>
liquidity, (ii) to maintain certain files concerning the basis for your
determination of the suitability of the investor, (iii) to determine the
adequacy and accuracy of the disclosure in the Prospectus, and (iv) to inform
the prospective investor of all pertinent facts relating to the liquidity and
marketability of the investment during the term of the investment. You agree you
shall not execute any transaction in a discretionary account without the prior
written approval of the transaction by the customer. In determining the adequacy
of disclosed facts, you shall obtain facts relating at a minimum to the
following to the extent relevant to the investment: (1) items of compensation;
(2) physical properties; (3) tax aspects; (4) financial stability and experience
of the sponsor; (5) the investment's conflicts and risk factors; and (6)
appraisals and other pertinent reports. You may only rely upon the results of an
inquiry conducted by another NASD member or members if: (x) you have reasonable
grounds to believe that such inquiry was conducted with due care; (y) the
results of the inquiry were provided to you with the consent of the NASD member
or members conducting or directing the inquiry; and (z) no NASD member that
participated in the inquiry is a sponsor of the investment or an affiliate of
such sponsor. You also agree not to deliver the Supplemental Material to any
person unless the Supplemental Material is accompanied or preceded by the
Prospectus. You confirm that you are registered as a broker-dealer and are in
good standing under the 1934 Act. You also confirm that you are a member in good
standing of the NASD.
(b) You will not give any information or make any
representation in connection with the offering of the Units other than those
contained in the Prospectus and Supplemental Material furnished by the Managing
Member and the Fund. You agree not to publish, circulate or otherwise use any
other advertisement or solicitation material. You are not authorized to act as
agent of the Fund or the Managing Member in any connection or transaction, and
you agree not to act as such agent and not to purport to do so without the prior
written approval of the Managing Member. You agree that if and when the Managing
Member supplies you with copies of any supplement to the Prospectus, you will
affix such copies of such supplement to copies of the Prospectus already in your
possession, and that thereafter you will only distribute Prospectuses containing
such supplement and that you will accept subscriptions only from investors who
have received a copy of the Prospectus containing such supplement. You further
agree to comply with all instructions from the Managing Member concerning the
destruction of out-dated Prospectuses and the use of supplemented or amended
Prospectuses.
(c) You agree to solicit purchases of the Units only in the
states and other jurisdictions in which the Managing Member indicates that such
solicitation can be made and in which you have determined that such solicitation
can be made by you and in which you are qualified to so act.
(d) You will not sell the Units pursuant to this Agreement
unless the Prospectus is furnished to the purchaser at least five (5) business
days prior to the mailing of the confirmation of sale, or is sent to such person
under circumstances that it would be received by him five (5) business days
prior to his receipt of a confirmation of the sale.
(e) You will use reasonable efforts to select investors who
you reasonably believe meet the investor suitability requirements which are set
forth in the Prospectus and Subscription Agreement (Exhibit "C" to the
Prospectus) and such additional individual state requirements as are specified
in the applicable Subscription Agreement, and which are confirmed by the
investors by payment of the purchase price for the Units including that each
individual or custodial investor be of legal age in the state of his or her
residency. You will, for a period of six years, maintain in your files a copy of
the Subscription Agreement for each investor for whom you act as Participating
Broker.
(f) To the extent that information is provided to you marked
"For Broker-Dealer Use Only", you covenant and agree not to provide such
information to prospective investors.
-5-
<PAGE>
(g) You shall take all action necessary to assure that your
computer-based systems are able to effectively process data including dates and
date sensitive functions. You represent and warrant that your ability to perform
your obligations under this Agreement will be unaffected by the transition to
the Year 2000. Upon request, you shall provide adequate assurance acceptable to
Dealer Manager, the Fund and the Managing Member that your computer systems and
software are or will be Year 2000 compliant on a timely basis. You shall
immediately advise Dealer Manager, the Fund and the Managing Member in writing
of any material changes in your Year 2000 plan timetable.
6. Indemnification.
You agree to indemnify, defend and hold harmless the Fund, the
Managing Member and the Dealer Manager from all losses, claims, demands,
liabilities and expenses, including reasonable legal and other expenses incurred
in defending such claims or liabilities, whether or not resulting in any
liability to the Fund, the Managing Member or the Dealer Manager, which the
Fund, the Managing Member or the Dealer Manager may incur in connection with the
offer or sale of any Units by you pursuant to this Agreement which arise out of
or are based upon (1) an untrue statement or alleged untrue statement of a
material fact, or any omission or alleged omission of a material fact, other
than a statement or omission contained in the Prospectus, the Registration
Statement, or any state securities filing which was not based on information
supplied to the Fund, the Managing Member or the Dealer Manager by you, or (ii)
your breach of any of the terms and conditions of this Agreement, including, but
not limited to, alleged violations of the Securities Act of 1933, as amended; or
(iii) your violation of the NASD Conduct Rules.
7. Effective Date and Termination.
This Agreement shall become effective upon its execution and
delivery by Dealer Manager, the Fund and you.
Until the Minimum Subscription Closing Date, this Agreement
may be terminated by you or Dealer Manager at either of our option by giving
written notice to the other and the Fund and the Managing Member if: (a) the
Fund or the Managing Member shall have become a defendant in any litigation
which, in Dealer Manager's opinion, may reasonably be expected to result in a
judgment having materially adverse consequences for the Fund or the Managing
Member or there shall have been, since the respective dates as of which
information is given in the Registration Statement or the Prospectus, any
material adverse change in the condition, financial or otherwise, of the Fund or
the Managing Member, which change in Dealer Manager's or your judgment shall
render it inadvisable to proceed with the delivery of the Units, or (b) there
shall have been any important change in market levels, major catastrophe,
substantial change in national, international or world affairs, national
calamity, postal strike, act of God, or other event or occurrence which, in
Dealer Manager's or your judgment, will materially disrupt the financial markets
of the United States, or (c) trading in securities generally on the New York
Stock Exchange shall have been suspended or minimum prices shall have been
established on such Exchange by the Commission or by such Exchange, or (d) a
general banking moratorium shall have been declared by federal or state
authorities, or (e) the Managing Member has terminated the offering of Units as
provided in Section 2 hereof.
Following the Minimum Subscription Closing Date, this
Agreement may be terminated by you or Dealer Manager at our option by giving
written notice to the other and the Fund and the Managing Member. In any case,
this Agreement will terminate at the close of business on the Termination Date;
provided, however, that all fees payable to you under the terms and conditions
hereof shall be paid when due although this Agreement shall have theretofore
been terminated.
-6-
<PAGE>
Any termination of this Agreement pursuant to this Paragraph 7
shall be without liability of Dealer Manager, the Fund and the Managing Member
to you and without liability on your part to Dealer Manager, the Fund or the
Managing Member, except with respect to compensation earned for accepted
subscriptions.
8. Survival of Indemnities, Warranties and Representations.
Your indemnity agreements contained in Section 6 hereof shall remain
operative and in full force and effect, regardless of any termination or
cancellation of this Agreement or any investigation made by or on behalf of you,
Dealer Manager, the Fund, the Managing Member, or any controlling person
thereof, and shall survive the delivery of and payment for the Units, and any
successor of the Fund, the Managing Member or the Dealer Manager or of any such
controlling person or any legal representative of any such controlling person,
as the case may be, shall be entitled to the benefit of your indemnity
agreements.
9. Notices.
Except as otherwise provided in this Agreement, (a) whenever
notice is required by the provisions of this Agreement or otherwise to be given
to the Fund, or the Managing Member, such notice shall be in writing addressed
to the Fund or the Managing Member at 4590 MacArthur Boulevard, Suite 610,
Newport Beach, California 92660, Attention: Terry G. Roussel, (b) whenever
notice is required by the provisions of this Agreement or otherwise to be given
to Dealer Manager, such notice shall be in writing addressed to Dealer Manager
at P.O. Box 8489, Calabasas, California 91372-8489, and (c) whenever notice is
required by the provisions of this Agreement or otherwise to be given to you, at
the address set forth on the last page of this Agreement. Any notice referred to
herein may be given in writing or by facsimile or telephone and if by telephone
shall be immediately confirmed in writing. Notice (unless actual) shall be
effective upon mailing or facsimile transmission with confirmation of receipt,
as the case may be.
9. Persons Entitled To Benefit of Agreement.
Except as provided in the next sentence, this Agreement is
made solely for the benefit of you, the other Participating Brokers, Dealer
Manager, the Fund and the Managing Member or controlling persons thereof, and
their respective successors and assigns, and no other person shall acquire or
have any right by virtue of this Agreement, and the term "successors and
assigns," as used in this Agreement, shall not include any purchaser, as such
purchaser, of any of the Units.
10. Not a Separate Entity.
Nothing contained herein shall constitute you, Dealer Manager
or the other Participating Brokers, or any of them, as an association,
partnership, unincorporated business or other separate entity.
-7-
<PAGE>
Please confirm your agreement to become a Participating Broker
under the terms and conditions herein set forth by signing and returning the
enclosed duplicate copy of this Agreement at once to Dealer Manager at P.O. Box
8489, Calabasas, California 91372-8489.
Very truly yours,
PRIVATE INVESTORS EQUITY GROUP
[a California corporation]
By:_________________________
Its: ____________________
AGREED AND ACCEPTED:
(Name of Participating Broker) (Address of Participating Broker)
By:_________________________
Its: _________________________
Dated: _________________________, 1999
CORNERSTONE INDUSTRIAL PROPERTIES
INCOME AND GROWTH FUND I, LLC,
a California limited liability company
By: CORNERSTONE INDUSTRIAL PROPERTIES, LLC
a California limited liability company
By: CORNERSTONE VENTURES, INC.,
its Operating Partner
By:____________________________
Terry G. Roussel, President
-8-
EXHIBIT 3.1
State of California
Bill Jones
Secretary of State
LLC-1
LIMITED LIABILITY COMPANY
ARTICLES OF ORGANIZATION
IMPORTANT - Read the instructions before completing the form.
This document is presented for filing pursuant to section 17050 of the
California Corporates Code
- --------------------------------------------------------------------------------
1. Limited Liability company name:
Cornerstone Industrial Properties income & Growth Fund I, LLC
- --------------------------------------------------------------------------------
2. Latest date (month/day/year) onwhich the limited liability company is to
dissolve.
12/31/10
- --------------------------------------------------------------------------------
3. The purpose of the limited liability company is to engage in any lawful act
or activity for which a limited liability company may be organized under the
Beverly-Killea limited Liability Company Act.
- --------------------------------------------------------------------------------
4. Enter the name and address of initial agent for service of process and check
the appropriate provision below:
Terry G. Roussel
--------------------------------------------------------------,which is
{X} an individual residing in California
{ } a corporation which has filed a certificate pursuant to Section 1505 of
the Calfornia Corporations Code.
Skip Item 5 and proceed to Item 6
- --------------------------------------------------------------------------------
5. If the initial agent for service of process is an individua, enter a
business or residential street address in California:
Street address: 4590 MacArthur Boulevard, Suite 610
City: Newport Beach State: California Zip Code: 92660
- --------------------------------------------------------------------------------
6. The limited liability company will be managed by: (check one)
{X} one manager { } more than one manager { } limited liability company
members
- --------------------------------------------------------------------------------
7. Describe type of business of the Limited Liability Company.
Investment in multi-tenant industrial business parks.
- --------------------------------------------------------------------------------
8. If other matters are to be included in the Articles of Organization attach
one or more separate pages.
Number of pages attached, if any: 0
- --------------------------------------------------------------------------------
9. It is hereby declared that I am the person who executed this instrument,
which execution is my act and deed.
/S/ TERRY G. ROUSSEL For Secretary of State Use
--------------------- File No. 101998301009
Terry G. Roussel
Date: October 23, 1998 Filed
- ------------------------- In the office of the Secretary of State
of the State of California
OCTOBER 28 1998
/S/ BILL JONES
------------------------------
Bill Jones, Secretary of State
EXHIBIT 5.1
FORM OF OPINION OF COUNSEL
WITH RESPECT TO THE LEGALITY
OF THE SECURITIES BEING REGISTERED
OPPENHEIMER WOLFF & DONNELLY LLP
500 Newport Center Drive
Suite 700
Newport Beach, California 92660
(949) 719-6000
(949) 719-6020 (Fax)
_____________, 1999
Cornerstone Industrial Properties Income
and Growth Fund I, LLC
4590 MacArthur Blvd.
Suite 610
Newport Beach, CA 92660
Re: Cornerstone Industrial Properties Income and Growth Fund I, LLC
Legality of the Securities Being Registered
Gentlemen:
In connection with the registration of Units of limited liability
company interests of Cornerstone Industrial Properties Income and Growth Fund I,
LLC, a California limited liability company (the "Fund") under the Securities
Act of 1933, as amended, you have requested our opinion as to whether the Units
of limited liability company interests, when issued, will be lawfully and
validly issued, fully paid and non-assessable.
For purposes offering this opinion, we have examined originals or
copies of the documents listed below. In conducting such examination, we have
assumed the genuineness of all signatures and the authenticity of all documents
submitted to us as originals and conformity to original documents of all
documents submitted to us as copies. The documents we have examined are:
1. The Form S-11 Registration Statement which was initially filed by
the Fund with the Securities and Exchange Commission on March _____, 1999, as
amended, (the "Registration Statement");
2. The Articles of Organization of the Fund dated as of October 28,
1998;
3. The Operating Agreement of the Fund dated as of October 28, 1998;
4. The form of Certificate of Limited Liability Company Units which is
to be issued to the Members of the Fund.
In addition, in rendering this opinion, we have relied upon your
representation that the Units of limited liability company interests will be
offered to the public in the manner and on the terms identified or referred to
in the Registration Statement.
<PAGE>
Cornerstone Industrial Properties Income
and Growth Fund I, LLC
_____________, 1999
Page 2
Based upon and subject to the forgoing and the effect, if any, of the
matters discussed below, after having given due regard to such issues of law as
we deemed relevant, and assuming that (i) the Registration Statement becomes and
remains effective, and the prospectus which is part thereof, and the prospectus
delivery requirements with respect thereto, fulfill all of the requirements of
the Securities Act of 1933, as amended, throughout all periods relevant to this
opinion, (ii) all offers and sales of the Units of limited liability company
interest are made in a manner complying with the terms of the Registration
Statement, and (iii) all offers and sales of the Units of limited liability
company interests are in compliance with the securities laws of the states
having jurisdiction thereto, we are of the opinion that the Units of limited
liability company interests, when issued, will be lawfully and validly issued,
fully paid and non-assessable.
This opinion is furnished to you in connection with the registration of
Units of limited liability company interests in the Fund, is solely for your
benefit, and may not be relied on by, nor copies delivered to, any other person
or entity without our prior written consent. Notwithstanding the preceding
sentence we hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
OC: 79730 V02 3/8/99
EXHIBIT 10.1
CORNERSTONE INDUSTRIAL PROPERTIES INCOME AND GROWTH FUND I, LLC
ESCROW AGREEMENT
This Escrow Agreement ("Agreement") is entered into ____________ , 1999
by and among Southern California Bank (the "Escrow Agent"), Cornerstone
Industrial Properties Income and Growth Fund I, LLC, a California limited
liability company (the "Fund") and Pacific Cornerstone Financial Incorporated, a
California corporation (the "Dealer Manager").
R E C I T A L S
A. The Fund proposes to offer up to $20,000,000 of limited liability
company units ("Units") in the Fund, pursuant to a Prospectus dated ____________
, 1999, as amended or supplemented from time to time (the "Prospectus"), with a
minimum investment required of five Units at $500 per Unit (or two Units at $500
per Unit for tax-qualified retirement plans).
B. The Dealer Manager and others (collectively, the "Participating
Brokers") have been named as Participating Brokers in connection with the
proposed offering of the Units and are entitled to certain commissions and
selling expense allowances set forth in those certain selling agreements among
the Fund, the Participating Brokers and the Managing Member of the Fund,
Cornerstone Industrial Properties, LLC, a California limited liability company
("Managing Member").
C. In compliance with the Prospectus and each Selling Agreement, the
Fund proposes to establish an escrow fund with the Escrow Agent.
D. The offering of Units will terminate no later than __________ , 2001
(the "Offering Termination Date") and, if subscriptions for at least $3,000,000
are not accepted by the Fund prior to _______________, 2000 (the "Minimum
Offering Termination Date"), no Units in the Fund will be sold.
E. The Escrow Agent has agreed to act as escrow agent in connection
with the proposed offering.
A G R E E M E N T
It is agreed as follows:
1. Incorporation of Recitals and General Provisions. The recitals set
forth above and the General Provisions attached hereto as Exhibit "A" shall
constitute and shall be deemed to be an integral part of this Agreement.
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<PAGE>
2. Escrow.
2.1 Escrow Agent. For a period commencing on the date hereof
and terminating 15 days after the Offering Termination Date, the Escrow Agent
shall act as an escrow agent and shall receive and disburse the proceeds from
the sale of the Units in accordance with the terms of this Agreement. The Escrow
Agent hereby represents and warrants to each Selling Agent that it is a "Bank"
as such term is defined in Section 3(a)(6) of the Securities Exchange Act of
1934, as amended (the "Act").
2.2 Escrow Account. Commencing on the date hereof, the parties
shall establish an interest-bearing escrow account with the Escrow Agent (the
"Escrow Account"). The Participating Brokers will instruct subscribers to make
checks for subscriptions of Units payable to the order of the Escrow Agent. Any
checks received that are made payable to a party other than the Escrow Agent
shall be returned to the Selling Agent who submitted the check.
3. Deposits into the Escrow Account. Proceeds from the sale of Units
(the "Proceeds") shall be received by the Escrow Agent from the Participating
Brokers and deposited promptly in the Escrow Account; provided, however, that
Proceeds received by the Escrow Agent within 48 hours prior to a scheduled
Initial or Additional Closing Date (as hereinafter defined) may be held by the
Escrow Agent until such closing (but not longer than 48 hours) and, upon joint
instruction of the Managing Member and the Dealer Manager, deposited directly
into the Fund's account or returned to the subscriber(s).
4. Subscriber Information. Each Selling Agent shall provide the Escrow
Agent with the name, address, social security number or taxpayer identification
number, and the amount to be deposited for each subscriber whose funds are
deposited with the Escrow Agent pursuant to Section 2 hereof. Such Selling Agent
shall also notify the Escrow Agent if a properly executed U.S. Treasury
Department Form W-9 has not been received from any subscriber whose funds are
deposited with the Escrow Agent.
5. Investment of Proceeds. The Escrow Agent shall invest all Proceeds
deposited with it hereunder as directed by the Fund, in (i) Bank accounts, (ii)
Bank money-market accounts, (iii) short-term certificates of deposit of Banks
located in the United States, or (iv) short-term securities issued or guaranteed
by the U.S. government. The term "Bank" is defined in Section 3(a)(6) of the
Act. Such investments shall be made in a manner consistent with the requirement
that the Proceeds be available for delivery by the Escrow Agent at the times
described herein. After any reductions made in accordance with Section 11
hereof, income received from investment of the Proceeds shall be credited to the
subscribers in proportion to the amounts deposited with respect to each
subscriber and in proportion to the number of days the collected Proceeds from
each subscriber are held in the Escrow Account. Pursuant to the provisions of
this Agreement, Escrow Agent shall disburse all income earned (less any amounts
required to be withheld by the Escrow Agent under the applicable federal income
tax laws) directly to the Fund with respect to the Proceeds, and the Managing
Member shall determine and disburse to each subscriber his or her proportionate
share of such income computed as provided above. The Fund is aware that there
may be a forfeiture of interest in the event of early withdrawal from an
interest bearing account of investment.
6. Initial Closing Date. The term "Qualifying Subscriptions" shall
refer to all subscriptions which have been received by the Managing Member and
which the Managing Member intends to accept into the Fund. If Qualifying
Subscriptions have been received for at least $3,000,000 of Units on or before
the Minimum Offering Termination Date, the Managing Member shall notify the
Escrow Agent and by instructions (which may accompany such notice or be provided
subsequently) given at least 2 business days in advance, shall specify the
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<PAGE>
"Initial Closing Date" (which must be not more than 10 days after the Minimum
Offering Termination Date), the approximate amount of Qualifying Subscriptions
for the Fund to be accepted as of such Initial Closing Date, the identity of the
subscribers whose subscriptions are anticipated to be accepted as of the Initial
Closing Date, and the approximate amount of the Proceeds to be paid to the Fund
and to each Selling Agent, respectively. On the Initial Closing Date, the Escrow
Agent, upon telephonic notice from the Managing Member and the Dealer Manager
that all contingencies for payment have been satisfied as required by Rule
15c2-4 under the Act (which notice the Managing Member shall promptly confirm in
writing) shall pay to the Fund and each Selling Agent the amounts specified by
such notice, and shall additionally pay to the Fund the interest earned on such
Proceeds for disbursement to subscribers pursuant to Section 5 hereof.
7. Additional Closing Dates. Thereafter, from time to time prior to the
Offering Termination Date, the Managing Member may notify the Escrow Agent and,
by instructions given at least 2 business days in advance of each, specify
Additional Closing Dates, the approximate amount of Qualifying Subscriptions for
such Fund to be accepted as of each Additional Closing Date, the identity of the
Subscribers whose subscriptions are anticipated to be accepted as of each
Additional Closing Date, and the approximate amount of the Proceeds to be paid
to the Fund and to the Participating Brokers, respectively. On each such
Additional Closing Date, the Escrow Agent, upon telephonic notice from the
Managing Member and the Dealer Manager that all contingencies for payment have
been satisfied as required by Rule 15c2-4 under the Act (which notice the
Managing Member promptly shall confirm in writing) shall pay to the Fund and
each Selling Agent the amounts specified by such notice, and shall additionally
pay to the Fund the interest earned on such Proceeds for disbursement to the
subscribers pursuant to Section 5 hereof.
8. Rejected Subscriptions. From time to time, upon instructions from
the Managing Member identifying those subscribers whose subscriptions have been
rejected, the Escrow Agent shall return such funds to the subscribers so
identified with such interest as has been credited to them pursuant to Section 5
hereof. If the Managing Member rejects any subscription for which the Escrow
Agent has already collected funds, the Escrow Agent shall promptly issue a
refund check to the rejected subscriber. If the Managing Member rejects any
subscription for which the Escrow Agent has not yet collected funds but has
submitted the subscriber's check for collection, the Escrow Agent shall promptly
issue a check in the amount of the subscriber's check to the rejected subscriber
after the Escrow Agent has cleared such funds. If the Escrow Agent has not yet
submitted a rejected subscriber's check for collection, the Escrow Agent shall
promptly remit the subscriber's check directly to the subscriber.
9. Failure to Meet Minimum Subscription. If Qualifying Subscriptions
for at least $3,000,000 of Units have not been received by the Minimum Offering
Termination Date, then the Escrow Agent, upon instructions from the Managing
Member, shall promptly return all collected funds and uncollected checks and
other instruments to the subscribers, with such interest as has been credited to
them pursuant to Section 5 hereof. Prior to the Initial Closing Date, the Fund
is aware and understands that it is not entitled to any funds received into
escrow and no amounts deposited in the Escrow Account shall become the property
of the Fund or any other entity, or be subject to the debts of the Fund or any
other entity.
10. Notice of Extension or Termination of Offering. Upon final
termination of the offering, the Managing Member shall instruct Escrow Agent
pursuant to Section 6 as to the disposition of any remaining funds and interest
thereon.
11. Fees. The Escrow Agent, for services rendered under this Agreement,
shall receive a fee as set forth on Exhibit "B" hereto. The fees of the Escrow
Agent shall be deducted from the aggregate interest earned on the Proceeds of
the subscribers whose subscriptions are accepted by the Managing Member prior to
crediting the interest earned to such subscribers pursuant to Section 5, and the
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Managing Member shall pay on demand any unpaid portion of the Escrow Agent's
fees. In no event shall the fees of the Escrow Agent be deducted from or
otherwise offset against the Proceeds (or interest earned thereon) of
subscribers whose subscriptions are not accepted by the Managing Member.
12. Resignation. The Escrow Agent shall have the right to resign at any
time and be discharged from its duties as escrow agent hereunder by giving the
Fund at least 30 days prior written notice thereof; provided, however, that if
the Escrow Agent shall exercise its right of resignation hereunder, it shall
receive as its fee for services rendered as escrow agent a fee as provided in
Section 11 hereof.
13. Duties and Responsibilities of Escrow Agent. The Escrow Agent shall
have no duties or responsibilities other than those set forth herein and shall:
(a) Be under no duty to enforce payment of any subscript-
ion which is to be paid to and held by it hereunder;
(b) Be under no duty to accept funds, checks, drafts or
instruments for the payment of money from anyone other than the Participating
Brokers or the Managing Member or to give any receipt therefor except to the
Participating Brokers or the Managing Member;
(c) Be protected in acting upon any notice, request,
certificate, approval, consent or other paper believed by it to be genuine,
signed by the proper party or parties and in accordance with the terms of this
Agreement;
(d) Be deemed conclusively to have given and delivered any
notice required to be given or delivered hereunder if the same is in writing,
signed by any one of its authorized officers and mailed, by registered or
certified mail, in a sealed postpaid wrapper, addressed to the Fund at the
following address:
Cornerstone Industrial Properties Income
and Growth Fund I, LLC
4590 MacArthur Blvd.
Suite 610
Newport Beach, CA 92660
(e) Be indemnified and held harmless by the Managing Member
from any and all claims made against it (including claims regarding the
disbursement of funds), or any and all expenses incurred by it (including
reasonable attorneys' fees), by reason of its acting or failing to act in
connection with any of the transactions contemplated hereby and against any loss
it may sustain in carrying out the terms of this Agreement, except such claims,
expenses or losses which are occasioned by its bad faith, negligence or willful
misconduct; and
(f) Not be liable for any forgeries or impersonations
concerning any documents to be handled by it.
14. Disputes. If the Managing Member, the Participating Brokers, or
anyone else, disagree on any matter connected with this escrow, (i) Escrow Agent
will not have to settle the matter, (ii) Escrow Agent may wait for a settlement
by appropriate legal proceedings or other means Escrow Agent may require, and in
such event Escrow Agent will not be liable for interest or damage, (iii) Escrow
Agent will be entitled to such reasonable compensation for services, costs and
attorneys' fees as a court may award if Escrow Agent intervenes in or is made a
party to any legal proceedings, (iv) Escrow Agent shall be entitled to hold
documents and funds deposited in this escrow pending settlement of the
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disagreement by any of the above means, and (v) Escrow Agent shall be entitled
to file an interpleader action and deposit any Proceeds or property with an
appropriate court.
15. No Legal Advice. This transaction is an escrow and Escrow Agent is
an escrow holder only and as escrow holder Escrow Agent may not give legal
advice as to any conditions or requirements in this escrow.
16. Notices to Escrow Agent. Any written notice required to be given or
delivered to the Escrow Agent shall be deemed conclusively given and delivered
hereunder if the written notice is mailed, by registered or certified mail, in a
sealed postpaid wrapper, addressed as follows:
Southern California Bank
4100 Newport Place
Suite 130
Newport Beach, CA 92660
Attn: Gloria Garriott
17. Instructions; Copies of Notices. Any instructions or other
communications to the Escrow Agent provided for herein shall be in writing, but
may be in telegraphic or telex form if promptly confirmed in writing. A copy of
this Agreement, or any amendment or addendum hereto, or closing statement or
document deposited in this escrow shall be furnished by Escrow Agent to those
persons outside of this escrow designated from time to time by the Fund.
18. Payments. All disbursements from the escrow account shall be made
to the party concerned, by Escrow Agent's cashier's check to such party's order
or to deposit to such party's bank account. All checks, documents, and
correspondence shall be mailed to such party at the address given by the
Managing Member.
19. Miscellaneous. Nothing in this Agreement is intended to or shall
confer upon anyone other than the parties hereto any legal or equitable right,
remedy or claim. This Agreement shall be construed in accordance with the laws
of the State of California and may be modified only in writing.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed on the day and year first hereinabove written.
CORNERSTONE INDUSTRIAL PROPERTIES
INCOME AND GROWTH FUND I, LLC,
a California limited liability company
By: CORNERSTONE INDUSTRIAL PROPERTIES, LLC,
a California limited liability company
By: CORNERSTONE VENTURES, INC.,
its Operating Partner
By:______________________________
Terry G. Roussel, President
PACIFIC CORNERSTONE FINANCIAL INCORPORATED,
a California corporation
By: _____________________________________
Terry G. Roussel, President
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ACKNOWLEDGED AND AGREED
SOUTHERN CALIFORNIA BANK
By:_____________________
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GENERAL PROVISIONS
DEPOSITS - All funds received in escrow shall be deposited in an interest
bearing escrow account of Southern California Bank.
RESPONSIBILITY FOR DEPOSITED PROPERTY - Escrow Agent is not a party to, or bound
by, any provisions contained in any agreements which may be deposited under,
evidenced by, or arise out of these instructions, and with respect thereto, acts
as a depository only and is not responsible or liable in any manner whatsoever
for the sufficiency, correctness, genuineness, or validity of any Property or
with respect to the form or execution of any agreements, or the identity,
authority or right of any person executing or depositing any property herein.
DEFAULTS - Escrow Agent shall not be required to take or be bound by notice of
any default of any person, including any Principal, or to take any action with
respect to such default whether or not such action involves any expense or
liability. These instructions shall not be subject to modification or rescission
except upon receipt by Escrow Agent (at the office named above) of written
instructions from each of the Principals or their successors in interest, and no
such rescission or modification shall be effective unless and until consented to
by Escrow Agent in writing.
NOTICES - Principals hereby indemnify and hold Escrow Agent harmless against any
loss, liability, damage, cost or expense, including reasonable attorneys' fees,
(a) related in any way to Escrow Agent's acting upon any notice, request,
waiver, consent, receipt or other paper or document believed by Escrow Agent to
be signed by Principals or any other proper person, and (b) incurred in
connection with any act or thing done hereunder.
EXERCISE OF JUDGMENT - Escrow Agent shell not be liable for any error of
judgment or for any act done or step taken or omitted by it in good faith or for
any mistake of fact or law or for anything which Escrow Agent may do or refrain
from doing in connection herewith, except its own gross negligence or willful
misconduct. Escrow Agent shall have duties only to Principals, and no person or
entity shall be deemed a third party beneficiary of these instructions.
COUNSEL - Escrow Agent may consult with legal counsel in the event of any
dispute or question as to the construction of these instructions or Escrow
Agent's duties thereunder, and Escrow Agent shall incur no liability and shall
be fully protected in acting in accordance with the opinion and instructions of
counsel,
DISAGREEMENTS - In the event of any disagreement between the Principals, or any
of them or any other person or persons whether or not named in these
instructions, and adverse claims or demands are made in connection with or for
any of the Property, Escrow Agent shall be entitled at its option to refuse to
comply with any such claim or demand so long as such disagreement shall
continue, and in so doing, Escrow Agent shall not be or become liable for
damages or interest to the Principals, or any of them, or to any other person or
persons for Escrow Agent's failure or refusal to comply with such conflicting or
adverse claims or demands. Escrow Agent shall be entitled to continue so to
refrain and refuse so to act until:
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a. the rights of the adverse claimants have been fully adjudicated in a
court assuming and having jurisdiction of the claimants and the Property; or
b. all differences shall have been adjusted by agreement, and Escrow
Agent shall have been notified thereof in writing by all persons deemed by
Escrow Agent, in its sole discretion, to have an interest therein.
In addition, Escrow Agent, in its sole discretion, may file a suit in
interpleader for the purpose of having the respective rights of all claimants
adjudicated, and may deposit with the court all of the Property deposited in
escrow; and the Principals agree to pay all costs and counsel fees incurred by
Escrow Agent in such action, such costs and fees to be included in the judgment
in any such action.
INDEMNITY - In consideration of this appointment by Escrow Agent, the Principals
agree to indemnify and hold Escrow Agent harmless as to any liability incurred
by Escrow Agent to any person, firm or corporation by reason of its having
accepted same or in carrying out any of the terms hereof, and to reimburse
Escrow Agent for all its expenses, including among other things, counsel fees
and court costs incurred by reason of its position or actions taken pursuant to
these Escrow Instructions. The Principals hereby agree that the Escrow Agent
shall not be liable to any of them for any actions taken by Escrow Agent
pursuant to the terms hereof.
COURT ORDERS - Escrow Agent is hereby authorized, in its exclusive discretion,
to obey and comply with all writs, orders, judgments or decrees issued by any
court or administrative agency affecting any money, documents or things held by
Escrow Agent, Escrow Agent shall not be liable to any of the parties hereto,
their successors, heirs or personal representatives by reason of Escrow Agent's
compliance with such writ, order, judgment or decree, notwithstanding if such
writ, order, judgment or decree is later reversed, modified, set aside or
vacated.
ATTORNEY'S FEES - If any action be brought to interpret or enforce these
instructions, or any part thereof, the Principals jointly and severally agree to
pay to Escrow Agent all Escrow Agent's attorney fees, accounting fees, special
and extra service fees and other costs related to such action.
CANCELLATION - In the event the escrow established hereby is cancelled, the
Principals jointly and severally shall nevertheless pay to the Escrow Agent the
initial fee together with all costs end expenses of Escrow Agent, including
attorney fees. Notwithstanding anything in these instructions to the contrary,
Escrow Agent may, in its sole discretion, upon ten (10) days written notice to
any of the Principals, resign as Escrow Agent and shall be entitled to
reimbursement for those costs and expenses incurred to the date of such
resignation. Upon cancellation by the Principals or resignation by Escrow Agent,
after deducting Escrow Agent's fees, costs and expenses, the balance of any
funds or Property shall be returned to the respective Principals who shall have
deposited same.
FEES AND CHARGES - In the event that (a) Escrow Agent performs any services not
specifically provided for herein or (b) there is an assignment or attachment of
any interest in the subject matter of the escrow established hereby or any
modification thereof, or (c) any dispute or controversy arises hereunder, or (d)
Escrow Agent is named a party to, or intervenes in, any litigation pertaining to
this escrow or the subject matter thereof, Escrow Agent shall, in addition to
fees and charges for ordinary services, be reasonably compensated therefore and
reimbursed for all costs and expenses, including attorneys' fees, occasioned
thereby. Escrow Agent shall have a first lien on the Property for such
compensation and expenses, and the Principals agree jointly and severally to pay
the same for its ordinary services hereunder.
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Escrow Agent shall be entitled to an initial, non-refundable set-up fee
("initial fee") of $1,500.00, payable concurrently with its acceptance, and to
additional compensation for wire fees, messenger fees, $250.00 yearly hold-open
fee (due if escrow open over 1 year from the date of these instructions), and/or
any other reasonable and necessary out-of-pocket expenses incurred by Escrow
Agent.
The Principals understand that Escrow Agent will charge additional fees,
including premium hourly fees, for any services performed according to these
Escrow Instructions, or any modification or any service not specifically
provided therein, that involve concerted effort, employees working overtime,
expedited handling of any aspect of the Escrow, or other similar services.
SIGNATURES - These instructions may be executed in counterparts, each of which
so executed shall be deemed as original, irrespective of the date of its
execution and delivery, and said counterparts together shall constitute one and
the same instrument.
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SOUTHERN CALIFORNIA BANK
SCHEDULE OF FEES
FOR
CORNERSTONE INDUSTRIAL PROPERTIES INCOME AND GROWTH FUND I, LLC
Acceptance Fee (Non-Refundable)......................................$1,500.00
Additional Escrow Fees of $1.00 per $1,000.00 subscription funds
as received in escrow in excess of $1,500,000.00. * * * * * * * *
Yearly Hold-Open Fee (due if escrow open over 1 year from
the date of these instructions)...................................$ 250.00
Wire fee, per wire...................................................$ 25.00
Disbursement fee, per check..........................................$ 15.00
Reasonable and customary charges for unscheduled services, including messenger
fees, federal express charges or other
out-of pocket expense.............................................various
* * * * * * * * When subscription funds reach $10,000,000.00, the additional
escrow fee of $1.00 per $1,000.00 of funds deposited in escrow shall be waived.
oOC: 79333 v03 3/8/99
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EXHIBIT 24.1
SOUTHERN CALIFORNIA BANK
4100 Newport Place
Suite 130
Newport Beach, California 92660
March 31, 1999
Cornerstone Industrial Properties
4590 MacArthur Boulevard, Suite 610
Newport Beach, CA 92660
Re: Escrow Account No. 12563-GG
Cornerstone Industrial Properties
Income and Growth Fund I, LLC (the "Fund")
Gentlemen:
Southern California Bank does hereby agree to be the Escrow Agent with
respect to the subject account. We further agree to release funds to Cornerstone
Industrial Properties, the Managing Member of the Fund, only in accordance with
the terms of the Escrow Agreement described in the Prospectus of the Fund.
Southern California Bank does hereby further agree to the use of its
name for the purpose of reference to it as Escrow Agent for the Fund in its
Registration Statement.
Very truly yours,
SOUTHERN CALIFORNIA BANK
