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As filed with the Securities Exchange Commission on June 14, 2000
File No. 333-76609
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-11A3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CORNERSTONE REALTY FUND, 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) 823-6000
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. [ ]
CALCULATION OF REGISTRATION FEE
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Amount Proposed maximum Proposed Amount of
Title of to be offering price maximum registration
securities being registered registered per unit offering price fee
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LIMITED LIABILITY COMPANY UNITS.......... 100,000* $500 $50,000,000 $13,900
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* Includes Limited Liability Company Units that may be offered upon the
Managing Member's exercise of the right to sell up to an additional 50,000
Limited Liability Company Units.
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.
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PROSPECTUS SUBJECT TO COMPLETION, DATED ____________, 2000
$3,000,000
CORNERSTONE REALTY FUND, LLC
UNITS OF LIMITED LIABILITY COMPANY INTERESTS
MINIMUM OFFERING OF 6,000 UNITS ($3,000,000)
MAXIMUM OFFERING OF 50,000 UNITS ($25,000,000)
----------------
Cornerstone Realty Fund, LLC is a California limited liability company
which will invest in multi-tenant industrial business parks catering to small
business tenants. We will purchase properties on an all cash basis. We will not
use debt financing. Our managing member is Cornerstone Industrial Properties,
LLC, a California limited liability company.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF THE MATERIAL
RISKS OF PURCHASING UNITS INCLUDING:
- OUR UNITS WILL NOT BE TRADED ON ANY EXCHANGE OR NASDAQ.
- WE DO NOT OWN ANY PROPERTIES AND HAVE NOT SPECIFIED ANY PROPERTIES WE
WILL PURCHASE. IF WE SELL LESS THAN ALL THE UNITS, WE MAY LACK ASSET
DIVERSIFICATION.
- YOU WILL RELY COMPLETELY ON THE MANAGING MEMBER IN MANAGING THE FUND.
- WE HAVE AUTHORIZED THE PAYMENT OF SUBSTANTIAL FEES TO MANAGING MEMBER
AND ITS AFFILIATES:
- Property management fee of 6% of rents
- Property refurbishment supervision fee of 10% of property
improvements
- Leasing commissions of up to 6% of scheduled rents
- Sales commissions of up to 6% on properties sold
- 10% of cash from operations each year until investors receive an 8%
per year return, then 50% of cash from operations
- After investors receive the return of their investment, 10% of cash
from property sales until investors receive an overall 8% per year
return taking into account all prior distributions, and thereafter
50% of cash from property sales
- WE WILL PAY SUBSTANTIAL FEES TO DEALER MANAGER FOR SELLING THE UNITS:
- Commissions of 8% on first $3,000,000 of funds raised and 7%
thereafter
- Marketing fees of 2.0% of funds raised less $30,000
- Expense allowances of 1 1/2% of funds raised
- YOU MAY BE UNABLE TO RESELL OR DISPOSE OF UNITS AND THERE ARE
LIMITATIONS ON TRANSFER.
The dealer manager must sell the minimum number of securities offered
(6,000 units) if any are sold. The dealer manager is required to use only its
best efforts to sell the maximum number of securities offered (50,000 units).
The offering will end on ______, 2002. Funds received from investors will be
placed in escrow at U.S. Bank, National Association, Newport Beach,
California until the minimum offering amount has been raised. There is a minimum
investment of $2,500 for 5 units or $1,000 for 2 units for IRAs and
tax-qualified retirement plans.
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Price to Public Selling Commissions Proceeds to Fund
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Per Limited Liability Company Unit
for the first $3,000,000 of Units...... $500 $40 $460
Per Limited Liability Company Unit
thereafter $500 $35 $465
Total Minimum.............................. $3,000,000 $240,000 $2,760,000
Total Maximum.............................. $25,000,000 $1,780,000 $23,220,000
Total Maximum with Right................... $50,000,000 $3,530,000 $46,470,000
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</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is __________, 2000
The information in this prospectus is not complete and may be amended.
We 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.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY................................................................................................1
RISK FACTORS......................................................................................................5
WE WILL NOT BE ABLE TO DIVERSIFY OUR INVESTMENTS IF WE RAISE ONLY THE MINIMUM OFFERING......................5
THE MANAGING MEMBER MAY PURCHASE UNITS TO ENABLE US TO REACH THE MINIMUM....................................5
YOU ARE RELYING ENTIRELY ON THE MANAGING MEMBER TO MANAGE THE FUND..........................................5
THERE WILL NOT BE A PUBLIC MARKET FOR THE UNITS.............................................................5
THERE ARE LIMITATIONS ON YOUR TRANSFER OF UNITS.............................................................5
WE MAY NOT GENERATE SUFFICIENT CASH FOR DISTRIBUTIONS.......................................................5
YOU MAY HAVE ADVERSE TAX CONSEQUENCES IF YOU SELL YOUR UNITS................................................5
CORNERSTONE VENTURES, INC. AND ITS OFFICERS ALSO HAVE MANAGEMENT RESPONSIBILITIES TO OTHER
ENTITIES....................................................................................................5
WE HAVE NOT IDENTIFIED ANY PROPERTIES WE PLAN TO PURCHASE...................................................6
YOUR INVESTMENT IN THE UNITS WILL NOT PROVIDE YOU WITH TAX SHELTER FOR YOUR OTHER INCOME....................6
PLAN FIDUCIARIES OF ERISA PLANS INVESTING IN UNITS COULD BE RESPONSIBLE FOR FUND LOSSES.....................6
YEAR 2000 TECHNOLOGY ISSUES COULD AFFECT OUR OPERATIONS.....................................................6
A DELAY IN OUR PURCHASE OF PROPERTIES MAY DELAY DISTRIBUTIONS TO YOU........................................7
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......................................7
MULTI-TENANT INDUSTRIAL PROPERTIES ACCOMMODATING SMALL BUSINESS TENANTS HAVE A SUBSTANTIAL ON-
GOING RISK OF TENANT LEASE DEFAULTS.........................................................................7
RISKS WE DO NOT CONTROL WILL AFFECT THE VALUE OF OUR PROPERTIES.............................................7
WE MAY EXPERIENCE UNINSURED LOSSES ON OUR PROPERTIES........................................................7
WE MAY BE SUBJECT TO ENVIRONMENTAL LIABILITIES..............................................................7
WE WILL NOT SEEK ANY RULINGS FROM THE INTERNAL REVENUE SERVICE REGARDING ANY TAX ISSUES.....................8
IF WE LOSE OUR "PARTNERSHIP" STATUS WE WOULD BE TAXED AS A CORPORATION......................................8
IF WE ARE CLASSIFIED AS A "PUBLICLY TRADED PARTNERSHIP" WE WOULD BE TAXED AS A CORPORATION..................8
THE IRS MAY CHALLENGE OUR ALLOCATIONS OF INCOME, GAIN, LOSS, AND DEDUCTION..................................8
THE IRS MAY DISALLOW DEDUCTION OF FEES AND EXPENSES OR REALLOCATE BASIS.....................................8
YOU MAY BE TAXED ON INCOME WHICH EXCEEDS THE CASH DISTRIBUTIONS MADE TO YOU.................................8
YOU MAY BE SUBJECT TO ALTERNATIVE MINIMUM TAX WHICH COULD REDUCE TAX BENEFITS FROM YOUR
PURCHASE OF UNITS...........................................................................................8
OUR FEDERAL INCOME TAX RETURNS MAY BE AUDITED BY THE IRS....................................................9
THE STATE OR LOCALITY IN WHICH YOU ARE A RESIDENT OR IN WHICH WE OWN PROPERTIES MAY IMPOSE
INCOME TAX ON US OR ON YOUR SHARE OF OUR TAXABLE INCOME.....................................................9
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.................................9
WHO MAY INVEST....................................................................................................9
For California Residents......................................................................................10
For California and Indiana Residents..........................................................................10
For Iowa Residents............................................................................................10
ESTIMATED USE OF PROCEEDS........................................................................................12
SELECTED FINANCIAL DATA..........................................................................................13
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATION..........................................14
MANAGEMENT COMPENSATION..........................................................................................15
OUR MANAGEMENT COMPENSATION DIFFERS SIGNIFICANTLY FROM MANAGEMENT COMPENSATION IN
TYPICAL PUBLIC REAL ESTATE PROGRAMS........................................................................15
FIDUCIARY RESPONSIBILITIES OF THE MANAGING MEMBER................................................................18
MANAGEMENT.......................................................................................................19
Management of the Managing Member.............................................................................20
(i)
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Compensation..................................................................................................20
Services Performed by Others..................................................................................20
PRIOR PERFORMANCE................................................................................................21
CONFLICTS OF INTEREST............................................................................................22
INVESTMENT OBJECTIVES AND POLICIES...............................................................................25
General.......................................................................................................25
Types of Investments..........................................................................................25
Investment Restrictions.......................................................................................25
Borrowing Policies............................................................................................26
Distributions.................................................................................................26
Managing Cash Distributions...................................................................................26
Sale of Fund Properties.......................................................................................27
Authority of the Managing Member..............................................................................27
BUSINESS.........................................................................................................28
General.......................................................................................................28
Multi-Tenant Industrial Business Parks........................................................................28
For California Residents......................................................................................29
The Small Business Opportunity................................................................................29
Higher Construction Costs.....................................................................................32
Acquisition Strategies........................................................................................32
Property Features.............................................................................................33
Property Selection............................................................................................33
The Asset Management Function.................................................................................34
Property Management Services..................................................................................34
SUMMARY OF THE OPERATING AGREEMENT...............................................................................36
General.......................................................................................................36
Capital Contributions and Members.............................................................................36
Capital Accounts..............................................................................................36
Control of Our Operations.....................................................................................36
Compensation of the Managing Member and Affiliates............................................................36
Allocations and Distributions.................................................................................36
Meetings of Members...........................................................................................37
Voting........................................................................................................37
Payments to Managing Member upon Removal......................................................................37
No Certificates for Units will be Issued......................................................................37
Transfer of Units.............................................................................................37
Allocations and Distributions on Transfer of Units............................................................38
Other Activities..............................................................................................38
Dissolution...................................................................................................38
Repurchase of Units...........................................................................................38
Books and Records.............................................................................................38
Reports.......................................................................................................39
Power of Attorney.............................................................................................39
FEDERAL INCOME TAX CONSIDERATIONS................................................................................40
General.......................................................................................................40
Legal Opinion.................................................................................................40
Partnership Status............................................................................................41
GENERAL CLASSIFICATION RULES...............................................................................41
PUBLICLY TRADED PARTNERSHIP RULES..........................................................................42
Taxation of the Unitholders...................................................................................43
Qualified Plan Investors......................................................................................43
(ii)
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Allocations of Net Income and Net Loss........................................................................44
Allocations to Newly Admitted Unitholders or Transferees of Units.............................................44
Basis, At Risk, and Passive Activity Limitations on Deduction of Losses.......................................45
Passive Activity Income.......................................................................................45
Cash Distributions to Unitholders.............................................................................46
Alternative Minimum Tax.......................................................................................46
Syndication and Organizational Expenses.......................................................................46
Tax Treatment of Certain Fees.................................................................................46
Sale of Units.................................................................................................47
Dissolution of the Fund.......................................................................................47
Allocation of Fund's Purchase Price in Properties.............................................................47
Property Held Primarily For Sale..............................................................................48
Capital Gains and Losses......................................................................................48
Audit of Income Tax Returns...................................................................................48
Election for Basis Adjustments................................................................................49
Interest on Underpayment of Taxes.............................................................................49
Accuracy-Related Penalties....................................................................................49
State and Local Taxes.........................................................................................50
Foreign Investors as Unitholders..............................................................................50
Tax Shelter Registration......................................................................................51
Importance of Obtaining Professional Tax Advice...............................................................51
ERISA CONSIDERATIONS.............................................................................................52
ERISA Fiduciary Duties........................................................................................52
Prohibited Transactions.......................................................................................52
Plan Asset Regulations........................................................................................52
Publicly Offered Securities...................................................................................52
REGISTERED.................................................................................................52
WIDELY-HELD................................................................................................52
FREELY-TRANSFERABLE........................................................................................52
Real Estate Operating Company.................................................................................53
Non-ERISA Plans...............................................................................................53
THE OFFERING.....................................................................................................54
Offering Amounts and Length of Offering.......................................................................54
How the Units are Being Offered...............................................................................54
Compensation to the Dealer Manager for Selling the Units......................................................54
Escrow Conditions.............................................................................................55
Interest on Escrowed Funds....................................................................................55
How to Purchase Units.........................................................................................55
Determination of Investor Suitability.........................................................................55
Volume Discounts..............................................................................................56
HOW TO SUBSCRIBE.................................................................................................57
YOUR REPRESENTATIONS AND WARRANTIES IN THE SUBSCRIPTION AGREEMENT................................................58
SUPPLEMENTAL SALES MATERIAL......................................................................................58
LEGAL MATTERS....................................................................................................59
EXPERTS..........................................................................................................59
AVAILABLE INFORMATION............................................................................................59
ADDITIONAL INFORMATION...........................................................................................60
INDEX TO FINANCIAL STATEMENTS....................................................................................61
PRIOR PERFORMANCE TABLES.........................................................................................62
TABLE I - EXPERIENCE IN RAISING AND INVESTING FUNDS...........................................................64
TABLE II - COMPENSATION TO SPONSOR AND AFFILIATES.............................................................65
TABLE III - OPERATING RESULTS FROM PRIOR PROGRAMS.............................................................66
(iii)
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TABLE IV - RESULTS OF COMPLETE PROGRAMS.......................................................................73
TABLE V - SALE OR DISPOSAL OF PROPERTY........................................................................75
TABLE VI - GENERAL INFORMATION OF PROJECTS....................................................................79
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EXHIBITS:
Exhibit "A" - Operating Agreement
Exhibit "B" - Opinion of Tax Counsel
Exhibit "C-1" - Subscription Agreement
Exhibit "C-2" - IRA Application and Subscription Document
(iv)
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PROSPECTUS SUMMARY
This summary highlights selected information from the prospectus and may not
contain all of the information that is important to you.
THE FUND: We are a California limited liability
company which will invest in multi-tenant
industrial business parks catering to small
business tenants. We will purchase
properties on an all cash basis. We will not
use any debt financing. We will purchase
existing, leased properties located in major
metropolitan areas in the United States.
TERM OF INVESTMENT: We expect to own our properties for 5 years,
but we may hold our properties for a longer
period of time. We are required by the
operating agreement to sell our properties
and dissolve in the year 2010.
INVESTMENT OBJECTIVES Our primary investment objectives are to:
AND POLICIES
- Reduce risk by acquiring
properties on an all cash basis
- Provide periodic cash
distributions from rental
operations
- Increase income by reducing
operating costs and entering
into leases with scheduled rent
increases
- Generate additional income on
sale of our properties by using
asset management strategies to
increase property values
DEPRECIATION METHOD: We intend to use the straight-line method of
depreciation for real property and accelerated
methods of depreciation for personal property.
FUND MEMBERS: By purchasing units, you will become a member
of the fund. You will NOT participate in our
management.
MANAGEMENT: Our managing member is Cornerstone Industrial
Properties, LLC, a California limited liability
company. Our managing member is managed by
Cornerstone Ventures, Inc. Cornerstone
Ventures, Inc. is an experienced real estate
operating company specializing in the
acquisition, operation and repositioning of
multi-tenant industrial business parks catering
to small business tenants.
-------------------
Cornerstone Manager of managing member
Ventures, Inc.
-------------------
-------------------
Managing Member Manager of fund
-------------------
-------------------
Fund
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Our managing member will:
- Identify properties to be acquired
- Create a business plan for enhancing
the income and values of our
properties
- Supervise property management,
leasing, refurbishment, and operations
of our properties
- Supervise our operations and our
communications with you.
- Supervise the sale of our properties
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The historical performance of other programs
managed by Cornerstone Ventures, Inc. and its
affiliates is disclosed in the "Prior
Performance" section of this prospectus
beginning at page 21.
The address and telephone number of the
managing member is:
4590 MacArthur Boulevard
Suite 610
Newport Beach, California 92660
949/852-1007
ESTIMATED USE OF PROCEEDS: The minimum amount we will raise is $3,000,000.
The maximum amount we expect to raise is
$25,000,000. The managing member has the right
to have the fund raise up to an additional
$25,000,000. 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 managing member estimates that we will pay
an average purchase price of $5,000,000 for
each property we purchase.
PROPERTY DESCRIPTIONS: We do not presently own any properties. As of
the date of this prospectus, we have not chosen
any properties to purchase. Properties which we
purchase will be described in a supplement to
the prospectus.
COMPENSATION TO THE We will pay the managing member and the dealer
MANAGING MEMBER AND manager significant compensation for services
DEALER MANAGER: in the offering of units and the management,
leasing and sale of properties as follows:
We have authorized the payment of substantial
fees to the managing member and its affiliates:
- Property management fee of 6% of rents
- Property refurbishment supervision fee
of 10% of property improvements
- Leasing commissions of up to 6% of
scheduled rents
- Sales commissions of up to 6% on
properties sold
- 10% of cash from operations each year
untilinvestors receive an 8% per year
return, then 50% of cash from operations
- After investors receive the return of
their investment, 10% of net proceeds
from property sales until investors
receive an overall 8% per year return
taking into account all prior
distributions, and thereafter 50% of net
proceeds from property sales
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 A FIXED ASSET MANAGEMENT FEE
OR FUND ADMINISTRATION SUPERVISORY 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. The managing member
believes that allocations and distributions and
managing member compensation have been
structured to align the interests of the
managing member with your interests. The
compensation structure
2
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motivates the managing member to maximize
income at the properties and minimize operating
costs in order to generate the highest possible
cash flow. The compensation structure also
motivates the managing member to maximize the
value of the properties as quickly as possible
and sell the properties.
We will also pay fees to the dealer manager for
selling the offering:
- Commissions of 8% of the first
$3,000,000 of funds raised and 7%
thereafter
- Marketing fees of 2% of funds raised
less $30,000
- Expense allowances of 1 1/2 of
funds raised.
The dealer manager is an affiliate of the
managing member.
OPERATING AGREEMENT: The operating agreement governs the manner in
which we operate. The operating agreement is
included as Exhibit "A" to this prospectus.
DISTRIBUTIONS:
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DISTRIBUTIONS TO UNITHOLDERS
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NET CASH FLOW FROM OPERATIONS Unitholders will receive 90% of net cash flow
from operations each year until unitholders
have received distributions equal to an 8% per
annum return for the year, and early investors
have received the early investors' 12%
incentive return, and thereafter unitholders
will receive 50% of net cash flow from
operations
NET PROCEEDS FROM PROPERTY Unitholders will receive 100% of net proceeds
SALES from property sales until unitholders have
received distributions equal to their original
investment, then unitholders will receive 90%
of net proceeds from property sales until
unitholders have received an 8% per annum
return since the date of their investment and
early investors have received the early
investors' 12% incentive return taking into
account all prior distributions, and thereafter
unitholders will receive 50% of net proceeds
from property sales
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EARLY INVESTORS 12% INCENTIVE Unitholders who purchase the first 6,000 units
RETURN: we sell will receive the early investors'
12% incentive return for a period of 12 months
from the date the purchase price for those
units is deposited in escrow. The early
investors' 12% incentive return is equal to a
12% annual, non-cumulative simple return. This
12% incentive return is being made to the early
investors instead of the regular 8% return. We
anticipate making distributions to pay the
early investors' 12% incentive return no later
than 12 months after the closing of the minimum
offering.
We will determine which investors purchased the
first 6,000 units based on the date their
investment funds are deposited in escrow. In
the event the escrow agent receives investment
funds which exceed 6,000 units, investors
depositing funds on the day on which we sell
the first 6,000 units will be chosen to be
included as early investors based first on the
amount of their investment with larger
investments being given first priority and
thereafter by random drawing.
Once the first 6,000 units are sold, we will
supplement this prospectus to advise potential
investors that the early investors' 12%
3
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incentive return is not available for units
subsequently sold.
AMOUNT AND TIMING OF The amount and timing of distributions we make
DISTRIBUTIONS: will vary. While we are selling units in this
offering, we expect distributions to be erratic
or non-existent due to lack of completing a
property acquisition, higher uncertainty of
cash flow from rental operations and our higher
administrative costs relative to the revenues
we are generating from rental operations. 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.
ALLOCATIONS: 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 to even
out net income and net loss allocations from
year to year.
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ALLOCATION OF NET INCOME AND NET LOSS TO UNITHOLDERS
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NET INCOME Net income is allocated (1) in an amount equal
to the prior allocation of net loss to
unitholders; (2) in an amount equal to prior
cash distributions to unitholders; and then (3)
50% to unitholders
--------------------------------------------------------------------------------
NET LOSS Net loss is allocated (1) in an amount equal to
the prior allocation of net income; and then
(2) 90% to unitholders
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THE OFFERING: We are offering a minimum of 6,000 units and a
maximum of 50,000 units at $500 per unit. We
will raise between $3,000,000 and $25,000,000.
The managing member may increase the maximum
amount we will raise to up to $50,000,000. The
offering will end on ___________, 2002. If we
do not raise $3,000,000 on or before
__________, 2001, subscription proceeds plus
interest as earned will be returned to
subscribers within 10 days thereafter.
WHO MAY INVEST: YOU MUST MEET ONE OF TWO FINANCIAL TESTS TO
INVEST IN THE UNITS. YOU MUST EITHER
- HAVE A NET WORTH OF AT LEAST $150,000
EXCLUDING YOUR HOME, HOME FURNISHINGS
AND AUTOMOBILES OR
- HAVE A NET WORTH OF AT LEAST $45,000
EXCLUDING YOUR HOME, HOME FURNISHINGS
AND AUTOMOBILES AND HAVE GROSS INCOME
IN EXCESS OF $45,000 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.
4
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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.
WE WILL NOT BE ABLE TO DIVERSIFY OUR INVESTMENTS IF WE RAISE ONLY THE
MINIMUM OFFERING. Our ability to reduce risk by purchasing multiple properties
in different geographic areas will be limited by the amount of funds we raise.
We will consider the purchase of properties with prices ranging between $2.5
million and $15 million. We may not sell all of the units we are offering. If
only $3,000,000 is raised, we will be able to acquire only one property.
THE MANAGING MEMBER MAY PURCHASE UNITS TO ENABLE US TO REACH THE
MINIMUM. The managing member may purchase up to $450,000 of units to enable us
to reach the minimum offering of $3,000,000.
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. See "Summary of the Operating Agreement -
Voting."
THERE WILL NOT BE A PUBLIC MARKET FOR THE UNITS. You may not be able to
sell your units promptly or at the price you want. You may not be able to use
your units as collateral 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.
THERE ARE LIMITATIONS ON YOUR TRANSFER OF UNITS. Transfer of the units
is restricted by the operating agreement. You may NOT:
- Transfer units to persons who do not meet the suitability
requirements is described under "Who May Invest" at page 9 of this
prospectus
- Transfer partial units
- Transfer less than the minimum investment of 5 units or 2 units
for tax qualified retirement plans
- Retain less than the minimum investment of 5 units or 2 units for
tax qualified retirement plan following a transfer
See "Summary of the Operating Agreement - Transfer of Units."
WE MAY NOT GENERATE SUFFICIENT CASH FOR DISTRIBUTIONS. If the rental
revenues from the properties we acquire do not exceed our operating expenses, we
will not be able to make cash distributions until such time as we sell a
property.
YOU MAY HAVE ADVERSE TAX CONSEQUENCES IF YOU SELL YOUR UNITS. If your
original basis in your units is reduced by losses, the sale of your units would
force you to recapture the prior losses even if the sale price was the same as
the amount you originally invested. See "Federal Income Tax Consequences - Sale
of Units."
CORNERSTONE VENTURES, INC. AND ITS OFFICERS ALSO HAVE MANAGEMENT
RESPONSIBILITIES TO OTHER ENTITIES. Cornerstone Ventures, Inc. may have
conflicts of interests in allocated management time between us and other
entities. These other entities purchase, operate and sell the same type of
properties which we will be purchasing. Our managing member which is operated by
Cornerstone Ventures, Inc.
5
<PAGE>
may have conflicts of interest in determining which entity will acquire a
particular property. A conflict could also arise in deciding whether or not
to sell a property since the interest of the managing member and your
interests may differ as a result of their financial and tax position and the
compensation to which our managing member or affiliates may be entitled to
receive upon the sale of a property. See "Conflicts of Interest."
WE HAVE NOT IDENTIFIED ANY PROPERTIES WE PLAN TO PURCHASE. Our ability
to achieve our investment objectives and to make cash distributions to you
depends upon the properties we purchase. You will not have a chance to evaluate
the purchase terms or financial data concerning the properties before we
purchase them.
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 are allocated by us.
RESIDENTS OF CERTAIN STATES MUST MEET HIGHER SUITABILITY STANDARDS.
The fund did not comply with all merit offering requirements in these states
and/or qualified the units for sale based on a limited offering qualification or
exemption. Residents of the states of california, indiana, iowa, north carolina
and washington must meet the higher suitability standards set forth under "Who
May Invest."
PLAN FIDUCIARIES OF ERISA PLANS INVESTING IN UNITS COULD BE RESPONSIBLE
FOR FUND LOSSES. If our assets are "plan assets" under ERISA (1) the exemptions
from the "prohibited transaction" rules under ERISA might not be available for
our transactions, and (2) the prudence standards of ERISA would apply to
investments made by us. 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. 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. See
"Erisa Considerations."
YEAR 2000 TECHNOLOGY ISSUES COULD AFFECT OUR OPERATIONS. Many computer
systems record years in a two-digit format. These systems may recognize a date
using "00" as the year 1900 rather than the year 2000. This could lead to
disruptions of operations. We have confirmed that all of our computer systems
will be able to function without disruption due to Year 2000 issues. We cannot
predict the extent to which the Year 2000 issues will affect the operations of
the properties we acquire or the companies with whom we do business, including
providers of financial reporting, investor relations and management services,
sellers and purchasers of properties and tenants. Disruptions in the systems of
others could have a material adverse effect on our business financial condition
and results of operations. The worst case scenario would be that (1) we
experience limited operational problems with the properties we acquire, (2) we
receive inaccurate financial reports from others, and (3) that we experience
delays in receipt of money due to us. Few computer-based systems are used in the
operation of multi-tenant industrial real properties other than fire monitoring
systems which automatically notify the fire department. A failure of these
systems can be temporarily addressed by providing on-site after hours security
personnel. Because we are buying the properties for all cash, inaccurate
financial reports or delay in receipt of funds due to us over a short period of
time is not expected to require extensive contingency plans since we will not
be at risk of loan defaults or property foreclosures.
6
<PAGE>
A DELAY IN OUR PURCHASE OF PROPERTIES MAY DELAY DISTRIBUTIONS TO YOU.
Our ability to accomplish our investment objectives and the timing of
distributions of cash to you will depend upon the success and timing of our
purchase of properties. There may be a substantial period of time before we
purchase a property, which would delay our making distributions to you.
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,
the properties we purchase will be desirable properties or will increase in
value.
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 to re-lease the
property for as much rent as we previously received. We may incur additional
expenditures in re-leasing the property. We could experience delays in enforcing
our rights and collecting rents due from a defaulting tenant.
RISKS WE DO NOT CONTROL WILL AFFECT THE VALUE OF OUR PROPERTIES. The
values of the properties we purchase will be affected by:
- changes in the general economic climate
- oversupply of space or reduced demand for real estate in local
area
- competition from other available space
- governmental regulations
- changes in zoning or tax laws
- interest rate levels
- availability of financing
- potential liability under environmental 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.
WE MAY EXPERIENCE UNINSURED LOSSES ON OUR PROPERTIES. We intend to
obtain commercial general liability insurance and property damage insurance on
our properties. We believe this insurance will be adequate to cover most risks.
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. 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 BE SUBJECT TO ENVIRONMENTAL LIABILITIES. An 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
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. A Phase I assessment is an inspection and review of the
property, its existing and prior uses, aerial maps and records of government
agencies for the purpose of determining the likelihood of environmental
contamination. A Phase I assessment includes only non-invasive testing. Where
indicated, we may also obtain a Phase II assessment of the property. A Phase II
assessment involves further exploration and may include soils testing, lead
paint testing or asbestos testing. 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
7
<PAGE>
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
underground storage tanks or groundwater contamination.
WE WILL NOT SEEK ANY RULINGS FROM THE INTERNAL REVENUE SERVICE
REGARDING ANY TAX ISSUES. We are relying on opinions of our legal counsel. The
opinions are based upon representations and assumptions and conditioned upon the
existence of specified facts. The opinions are not binding on the IRS or the
courts. For a more complete discussion of the tax risks and tax consequences of
an investment in units, see "Federal Income Tax Considerations."
IF WE LOSE OUR "PARTNERSHIP" STATUS WE WOULD BE TAXED AS A
CORPORATION. Our legal counsel has given the opinion included as Exhibit "B"
to the prospectus 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 taxed on our net income at rates of up to 35% for
federal income tax purposes. 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 Consequences - Partnership Status."
IF WE ARE CLASSIFIED AS A "PUBLICLY TRADED PARTNERSHIP" WE WOULD BE
TAXED AS A CORPORATION. The application of "publicly traded partnership" rules
to us will be based upon future facts. The IRS may determine that we will be
treated as a "publicly-traded partnership" if our units are publicly traded or
frequently transferred. We have included provisions in the operating agreement
designed to avoid this result. Our classification as a "publicly-traded
partnership" could result in our being taxed as a corporation. Our net income
could be treated as portfolio income rather than passive income. See "Federal
Income Tax Consequences - Partnership Status."
THE IRS MAY CHALLENGE OUR ALLOCATIONS OF INCOME, GAIN, LOSS, AND
DEDUCTION. The operating agreement provides for the allocation of income, gain,
loss and deduction among the unitholders. The rules regarding partnership
allocations are complex. It is possible that the IRS could successfully
challenge the allocations in the operating agreement and reallocate items of
income, gain, loss or deduction in a manner which reduces benefits or increases
income allocable to you. See "Federal Income Tax Consequences - Allocation of
Net Income and Net Loss."
THE IRS MAY DISALLOW DEDUCTION OF FEES AND EXPENSES OR REALLOCATE
BASIS. The IRS may challenge or disallow our deduction of some or all fees and
expenses. 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.
YOU MAY BE TAXED ON INCOME WHICH EXCEEDS THE CASH DISTRIBUTIONS MADE TO
YOU. 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.
YOU MAY BE SUBJECT TO ALTERNATIVE MINIMUM TAX WHICH COULD REDUCE TAX
BENEFITS FROM YOUR PURCHASE OF UNITS. The effect of the alternative minimum tax
upon you depends on your particular
8
<PAGE>
overall tax and financial situation. You should consult with your tax advisor
regarding the possible application of this tax. See "Federal Income Tax
Consequences - Alternative Income Tax."
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. An audit of
your returns could result in 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 underpayment. You may
also be liable for 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."
THE STATE OR LOCALITY IN WHICH YOU ARE A RESIDENT OR IN WHICH WE OWN
PROPERTIES MAY IMPOSE INCOME OR OTHER TAXES ON US OR ON YOUR SHARE OF OUR
TAXABLE INCOME. Many states have implemented or are implementing programs to
require entities taxed as partnerships to withhold and pay state income taxes
owed by nonresident members on income-producing properties located in their
states. We may be required to withhold state taxes from cash distributions
otherwise payable to you. These collection and filing requirements at the
state or local level, and the possible imposition of state or local income,
franchise or other 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 advisor on the impact of applicable state and local
taxes and state tax withholding requirements.
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. The discussion in this prospectus of the
federal income tax aspects of the offering is based on current law, including
the internal revenue code, the treasury regulations, administrative
interpretations, and court decisions. Changes 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.
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. Units will be sold only to persons representing that they have
either
(1) a net worth of at least $150,000 EXCLUSIVE of their home,
home furnishings and personal automobiles, OR
(2) a net worth of at least $45,000 EXCLUSIVE of their home, home
furnishings and personal automobiles, AND annual gross income in excess of
$45,000.
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.
An investment in the units may also be suitable for tax-exempt
entities, including tax qualified retirement plans including IRAs and Keogh
plans. See "Federal Income Tax Considerations - Qualified Plan Investors" and
"ERISA Considerations."
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
9
<PAGE>
met either by the custodian or by the person who directly or indirectly
supplies the funds for such purchase.
We anticipate that comparable suitability standards will be imposed by
us in connection with any resale of units. See "Summary of the Operating
Agreement" and "Federal Income Tax Considerations"
For California Residents
This offering was approved in California on the basis of a limited
offering qualification where offers and sales may be made to prospective
investors based on their meeting the suitability standards set forth below. The
fund was not required to demonstrate compliance with some or all of the merit
regulations of the Department of Corporation as found in Title 10, CA Code of
Regulations, Rule 260.140 et seq.
The exceptions for secondary trading available under Corporations Code
Section 25104(h) have been withheld, but there may be other exceptions to cover
private sales of the units by the bona fide owner for his own account without
advertising and without being effected by or through a broker dealer in a public
offering.
For California and Indiana Residents
Units will be sold only to residents of the States of California and
Indiana representing that they meet one of the following suitability standards.
(1) a net worth of at least $500,000 exclusive of their home, home
furnishings and personal automobiles; OR
(2) a net worth of at least $250,000, exclusive of their home, home
furnishings and personal automobiles, AND annual gross income of $65,000 or
more; OR
(3) a net worth of at least $1,000,000; OR
(4) annual gross income of $200,000 or more.
For Iowa Residents
Units will be sold only to residents of the State of Iowa representing
that they meet one of the following suitability standards:
(1) a net worth of at least $350,000, exclusive of their home, home
furnishing and personal automobiles; OR
(2) a net worth of at least $100,000, exclusive of their home, home
furnishings and personal automobiles, AND annual taxable income of $75,000 or
more.
IRA investors must purchase a minimum of $3,000 of units.
For North Carolina Residents
Units will be sold only to residents of the State of North Carolina
representing that they meet one of the following suitability standards:
(1) a net worth of at least $250,000, exclusive of their home, home
furnishing and personal automobiles; OR
(2) a net worth of at least $60,000, exclusive of their home, home
furnishings and personal automobiles, AND had annual taxable income of $60,000
or more during the last tax year
10
<PAGE>
or estimates having annual taxable income of $60,000 or more during the
current tax year without regard to the investment in the units.
For Washington Residents
Units will be sold only to residents of the State of Washington
representing that they meet one of the following suitability standards:
(1) a net worth of at least $225,000, exclusive of their home, home
furnishing and personal automobiles; OR
(2) a net worth of at least $70,000, exclusive of their home, home
furnishings and personal automobiles, AND annual gross income of $50,000 or
more.
11
<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.
The managing member and its affiliates may purchase units in this offering.
These purchases may be made to enable us to reach the minimum offering amount of
$3,000,000. Many of the numbers in the table are estimates because we cannot
determine all expenses precisely at this time.
<TABLE>
<CAPTION>
MINIMUM OFFERING MAXIMUM OFFERING
6,000 UNITS 50,000 UNITS
------------------------------------ ------------------------------------------
DOLLAR PERCENT OF DOLLAR PERCENT OF
AMOUNT GROSS OFFERING AMOUNT GROSS OFFERING
RAISED PROCEEDS RAISED PROCEEDS
-------------- --------------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Gross offering proceeds $3,000,000 100.0% $25,000,000 100.0%
Offering expenses:
Selling commissions 240,000 8.0% 1,780,000 7.1%
Marketing support fee 30,000 1.0% 470,000 1.9%
Expenses reimbursed to
dealer manager 30,000 1.0% 250,000 1.0%
Due diligence expense
allowance fee 15,000 0.5% 125,000 0.5%
Other organization and
offering expenses 120,000 4.0% 1,000,000 4.0%
--------------- --------------------- -------------------- ---------------------
Amount available for investment $2,565,000 85.5% $21,375,000 85.5%
=============== ===================== ==================== =====================
Prepaid terms and fees related Not determinable at this time.
to purchase of property
Cash purchase price Not determinable at this time.
Real estate or other
commissions, finder's fees,
selection fees or non-
recurring management fees,
payable to the managing member 0 0% 0 0%
Reserves 60,000 2.0% 400,000 2.0%
--------------- --------------------- -------------------- ---------------------
Proceeds invested including
reserves for operating and
capitalized tenant
improvements and leasing
concessions $2,565,000 85.5% $21,375,000 85.5%
Public offering expenses 435,000 14.5% 3,625,000 14.5%
--------------- -------------------- --------------------- ---------------------
Total application of proceeds $3,000,000 100.0% $25,000,000 100.0%
=============== ==================== ===================== =====================
</TABLE>
12
<PAGE>
Public offering expenses which are also referred to as organizational
and offering expenses are those expenses incurred by the fund in preparing the
fund for registration and offering the fund units including sales commissions
and other amounts paid to broker-dealers in connection with sale of the units.
We will not pay organizational and offering expenses including underwriting
compensation in excess of 14.5% of gross offering proceeds.
SELECTED FINANCIAL DATA
The following selected financial data are derived from the financial
statements of Cornerstone Realty Fund, LLC. The data should be read in
conjunction with the financial statements, related notes, and other financial
information included herein and the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which follows.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Period from
Three Months Three Months October 28, 1998
Ended Ended Year Ended (Inception) to
March 31, 2000 March 31, 1999 December 31, 1999 December 31, 1998
-------------- -------------- ----------------- -----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ -0- $ -0- $ -0- $ -0-
Net loss (71,008) (31,299) (166,176) (61,594)
Net loss per unit N/A N/A N/A N/A
Cash distributions per unit N/A N/A N/A N/A
BALANCE SHEET DATA
As of December 31
As of -----------------
March 31, 2000 1999 1998
-------------- ---- ----
(unaudited)
Total assets $232,890 $180,453 $74,278
Total liabilities (all current) 530,668 407,223 134,872
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY
The fund is in the organizational stage. The fund's organizational
activities have been financed to date through advances from the managing
member. The fund will continue to incur organizational and offering expenses
until it has completed the registration of its units with the Securities and
Exchange Commission and state securities commissions and completed the sale
of such units. The fund is currently dependent on its ability to obtain
capital contributions and advances in order for it to meet its obligations as
they become due. The managing member believes that it has sufficient liquid
assets available to finance all capital contributions that will be required
to pay for the fund's obligations as they come due prior to the closing of
the minimum offering (see the managing member's balance sheet included
elsewhere in this registration statement). In the event that the managing
member does not have sufficient liquid assets, the terms of its operating
agreement indicate that its members may be asked to make additional
contributions; however, its members are not committed by any contract to make
such additional contributions or provide any other financial assistance. In
the event its members choose not to make such additional contributions, its
managing member would be entitled to look to a third party to fund any
shortfall and may reduce the percentage interest of its non-contributing
members.
Provided the fund is able to sell the minimum offering of 6,000
units, the fund will use the gross offering proceeds received from the sale
of units to pay offering and other organizational expenses and to reimburse
the managing member for amounts advanced for organizational and other
expenses only in the amounts and percentages set forth in the "Estimated Use
of Proceeds" section at page 12 of this prospectus. The fund will not
reimburse the managing member for any amounts advanced for organizational
expenses which exceed the amounts and percentages set forth in the "Estimated
Use of Proceeds" section. Any such expenses incurred by the managing member
on behalf of the fund, that are not reimbursed by the fund, will be reflected
as a capital contribution to the fund by the managing member with an
offsetting expense recognized in the fund's statement of operations.
CAPITAL RESOURCES
The fund intends to use the net proceeds from the sale of its units to
acquire multi-tenant industrial properties and for capital improvement,
operating and other reserves. The fund has not identified any properties which
it may purchase and has not made any material commitment for capital
expenditures.
RESULTS OF OPERATIONS
The fund is in the organizational stage and the fund has generated
no revenues. The fund's expenses, including interest on advances, aggregated
$61,594 for the period from October 28, 1998 (inception) to December 31,
1998, aggregated $166,176 for the year ended December 31, 1999 and aggregated
$71,008 for the three months ended March 31, 2000. Organizational and other
start-up expenses and associated losses are expected to continue until the
organization of the fund is completed.
14
<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 or a fixed asset management fee. Instead of
these 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. WE BELIEVE THAT 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 and
distributions which we will pay directly or indirectly to the managing member or
its affiliates. The actual amounts received will depend on the number of units
sold and the values of our properties. The table 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
AND RECIPIENT METHOD OF COMPENSATION ESTIMATED AMOUNT
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ORGANIZATION AND
OFFERING STAGE
-------------------------------------------------------------------------------------------------------------------
Selling commissions payable to the Up to 8% of offering proceeds on the $240,000 if 6,000 units are sold;
dealer manager and participating first $3,000,000 raised and 7% of $1,780,000 if 50,000 units
brokers offering proceeds thereafter. are sold
-------------------------------------------------------------------------------------------------------------------
Marketing support fee payable to Up to 2.0% of offering proceeds less $30,000 if 6,000 units are sold;
the dealer manager and $30,000. $470,000 if 50,000 units are sold
participating brokers
-------------------------------------------------------------------------------------------------------------------
Reimbursement of non-accountable Up to 1% of offering proceeds. $30,000 if 6,000 units are sold;
expenses payable to the dealer $250,000 if 50,000 units are sold
manager and participating brokers
-------------------------------------------------------------------------------------------------------------------
Due diligence expense allowance fee Up to 0.5% of offering proceeds. $15,000 if 6,000 units are sold;
payable to the dealer manager and $125,000 if 50,000 units are sold
participating brokers
-------------------------------------------------------------------------------------------------------------------
Estimated at $120,000 if 6,000
Reimbursement to managing member Reimbursement of actual expenses units are sold or $1,000,000 if
and its affiliates for and costs. 50,000 units are sold but not
organizational and offering expenses determinable at this time
-------------------------------------------------------------------------------------------------------------------
ACQUISITION STAGE
-------------------------------------------------------------------------------------------------------------------
Acquisition fees payable to the
managing member and its affiliates
NONE NONE
-------------------------------------------------------------------------------------------------------------------
15
<PAGE>
-------------------------------------------------------------------------------------------------------------------
TYPE OF COMPENSATION
AND RECIPIENT METHOD OF COMPENSATION ESTIMATED AMOUNT
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
Reimbursement to the managing Reimbursement of actual expenses Not determinable at this time.
member and its affiliates for and costs.
acquisition expenses incurred in
the acquisition of properties
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
-------------------------------------------------------------------------------------------------------------------
OPERATIONAL STAGE
-------------------------------------------------------------------------------------------------------------------
Fund administration supervisory fee
payable to the managing member
NONE NONE
-------------------------------------------------------------------------------------------------------------------
Fixed asset management fee payable NONE NONE
to the managing member
-------------------------------------------------------------------------------------------------------------------
Property management fees payable to Property management fees equal to Not determinable at this time.
the managing member and/or its 6% of the gross rental income
affiliates some or all of which may generated by each property will be
be paid to unaffiliated third paid monthly.
parties
-------------------------------------------------------------------------------------------------------------------
Property refurbishment supervision Property refurbishment supervision Not determinable at this time.
fee payable to the managing member fee equal to 10% of the cost of
and/or its affiliates some or all tenant improvements or capital
of which may be paid to improvements made to our properties.
unaffiliated third parties
-------------------------------------------------------------------------------------------------------------------
Leasing commissions payable Leasing commissions paid upon Not determinable at this time.
to the managing member and/or execution of each lease equal to
its affiliates some or all 6% of rent scheduled to be paid be
of which may paid to unaffiliated during the first and second year of
third parties the lease, 5% during the third and
fourth years and 4% during the fifth
and later years.
-------------------------------------------------------------------------------------------------------------------
16
<PAGE>
-------------------------------------------------------------------------------------------------------------------
TYPE OF COMPENSATION
AND RECIPIENT METHOD OF COMPENSATION ESTIMATED AMOUNT
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Incentive share of net cash flow 10% of net cash flow from operations Not determinable at this time.
from operations payable to the each year until unitholders have
managing member. received distributions equal to an
8% per annum, simple return for the year
or the early investors 12% incentive
return, then 50% of net cash flow from
operations.
-------------------------------------------------------------------------------------------------------------------
Reimbursement of actual cost of Reimbursement of actual expenses Not determinable at this time.
goods, materials and other services and costs.
supplied to the fund by the
managing member.
-------------------------------------------------------------------------------------------------------------------
LIQUIDATION STAGE
-------------------------------------------------------------------------------------------------------------------
Property disposition fees payable Property disposition fees in an Not determinable at this time.
to the managing member and/or its amount equal to 6% of the contract
affiliates some or all of which may sales price of the property.
be paid to unaffiliated third
parties. The managing member will
not be given an exclusive right to
sell our properties.
-------------------------------------------------------------------------------------------------------------------
Incentive share of net sales After the unitholders have received Not determinable at this time.
proceeds payable to the managing an amount equal to their aggregate
member. capital contributions, 10% of
proceeds from property sales until the
unitholders have received an amount
equal to an aggregate 8% per annum,
cumulative, non-compounded return taking
into account all prior distributions and
thereafter 50% of proceeds from property
sales.
-------------------------------------------------------------------------------------------------------------------
</TABLE>
17
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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 managing member has fiduciary responsibility for the safekeeping
and use of our money and properties. The managing member may not use or permit
anyone else to use our assets except for our exclusive benefit.
The operating agreement 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 to bring an action against the
managing member for simple negligence. Further, if we are required to indemnify
the managing member, any damages would be paid by us and 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 damage from the breach of
fiduciary duty could exceed the available assets of the managing member. You may
not be able to afford the legal fees and costs of bringing a legal action
against the managing member.
The managing member will not be indemnified against liabilities arising
under the Securities Act of 1933, unless it succeeds in defending against the
claims or the 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.
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<PAGE>
MANAGEMENT
Cornerstone Industrial Properties, LLC 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. Cornerstone Ventures, Inc. oversees the activities of the managing
member and provides many of the services necessary for the managing member to
fulfill its responsibilities to the fund. The Cornerstone Ventures, Inc. team
of professionals brings together a unique blend of talent and experience.
Cornerstone Ventures, Inc. is the owner of 45% of the equity profits
interests in our Managing Member and has sole voting control with respect to
operations of the fund. Terry G. Roussel is the sole shareholder of
Cornerstone Ventures, Inc.
TERRY G. ROUSSEL, age 47, is one of the founding shareholders of
the Cornerstone-related entities which commenced operations in 1989. Mr. Roussel
is President, Chief Executive Officer and sole shareholder of Cornerstone
Ventures, Inc., the operating member of the Managing Member. In 1993,
Cornerstone related entities were formed for the purpose of joint venturing in
the acquisition and repositioning of multi-tenant industrial real estate with
Koll Capital Markets Group, Inc., a wholly owned subsidiary of Koll Management
Services, Inc. At the time of the joint venture with Cornerstone Ventures, Inc.,
Koll Management Services, Inc. was one of the largest managers and operators of
commercial real estate in the United States. In August 1997, Koll Capital
Markets Group, Inc. was acquired by CB Richard Ellis (NYSE: CBG). Mr. Roussel is
responsible for the ongoing supervision, management and administration of
Cornerstone Ventures, Inc., as well as related Cornerstone entities including
ongoing joint ventures with Koll Capital Markets Group, Inc., and its parent
company CB Richard Ellis.
Under the direction of Mr. Roussel, Cornerstone Ventures, Inc. and its
affiliates continue as the managing partner of these above-described joint
ventures. As managing partner of the above-described joint ventures, Cornerstone
and its affiliates are responsible for the acquisition, operation, leasing, and
disposition of all jointly owned properties. In connection with acquiring
properties for the account of these joint ventures, 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 for
the purpose of financing the acquisition of such properties.
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 38, has been a Senior Vice President, Secretary and
Director of Cornerstone Ventures, Inc. since its formation in 1995. Mr. Camp
joined the Cornerstone-related entities in 1993. Mr. Camp oversees the real
estate operations of Cornerstone Ventures, Inc. 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 Special Events
Committee. Prior to 1998, Mr. Camp served as a Director and Treasurer of the
Commercial Industrial Development Association.
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<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.
MANAGEMENT OF THE MANAGING MEMBER
The managing member is managed by Cornerstone Ventures, Inc. The
managing member is owned by Cornerstone Ventures, Inc. and various investors
none of whom have any voting rights or control with respect to the operations of
the managing member. The management of the managing member is vested solely in
Cornerstone Ventures, Inc.
COMPENSATION
We will reimburse the managing member for its direct expenses in
administering 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.
DEALER MANAGER MANAGEMENT
The dealer manager of the fund is Pacific Cornerstone Capital,
Incorporated, an affiliate of the managing member and a member of the National
Association of Securities Dealers, Inc. The officers of the dealer manager bring
45 years of combined experience in the broker dealer community and will be
responsible for marketing of the fund to the broker dealers.
Belden Brown joined Cornerstone in July 1999 and is a Senior Vice
President of the dealer manager. Mr. Brown has 17 years of experience in
marketing programs nationally in the broker dealer community with a major real
estate development firm and then subsequently with a San Diego, California based
registered investment advisory firm. Mr. Brown holds Series 24, 7 and 63
licenses. Mr. Brown attended the University of Miami and Norwalk Community
College where he majored in Business Administration and Marketing.
Alfred Pizzurro joined Cornerstone in April 1998 and is a Senior Vice
President of the dealer manager. Mr. Pizzurro focuses on new business
development and institutional investors. Mr. Pizzurro served as a pilot in the
United States Marine Corps between 1979 and 1986 where he attained the rank of
CAPTAIN. From 1986 to 1992, Mr. Pizzurro was the Director of Marketing for a
regional real estate company. Between 1993 and 1998, Mr. Pizzurro was
responsible for business development both domestically and internationally for a
research and development company. Mr. Pizzurro holds Series 24, 7 and 63
licenses.
20
<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 our managing member. Since
February 1993, Cornerstone entities have been responsible for the
identification, acquisition and operation of multi-tenant industrial
properties being acquired by two real estate operating joint ventures formed
between Cornerstone and Koll Capital Markets Group, Inc. The two joint
ventures have historically operated under the name of Koll Cornerstone.
Between February 1993 and August 1997, Koll Capital Markets Group, Inc., was
owned by Koll Management Services, Inc. In August 1997, Koll Capital Markets
Group, Inc. was acquired by CB Richard Ellis (NYSE: CBRE). Both joint
ventures continue in operation today and Cornerstone entities continue in
their capacity as managing partner for these entities. Cornerstone Ventures,
Inc. and its affiliates have also acquired properties in partnership with one
of the largest financial institutions in the United States. THE
ABOVE-DESCRIBED OPERATING JOINT VENTURES ARE UNRELATED TO THE FUND. NEITHER
KOLL NOR CB RICHARD ELLIS HAS ANY INVOLVEMENT WITH THE FUND.
Cornerstone Ventures, Inc. intends to bring the same level of
managerial expertise to us as it has brought to the unrelated joint ventures
between Koll Capital Markets Group, Inc. and CB Richard Ellis, Inc.
A tabular presentation of information about these programs is presented
under "Prior Performance Tables" at page 61 of this prospectus. 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 8 real estate limited partnerships which raised a
total of $18,315,699 from 52 investors. These programs acquired a total of 11
properties, all of which were existing multi-tenant industrial business parks
located in Southern California. The total purchase price of these properties was
$61,476,000, a significant portion of which was represented by borrowed funds.
Of these properties, 5 have been sold in their entirety as of December 31, 1999
and another property was in escrow and closed in January of 2000. Subdivided
portions of 4 of the remaining properties have been sold as of December 31,
1999.
Because all of these prior private programs acquired their properties
with substantial amounts of borrowed money and most had different investment
objectives, their investment objectives are not believed to be similar to our
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 you. 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 2
properties, 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.
21
<PAGE>
CONFLICTS OF INTEREST
We are subject to various conflicts of interest arising out of our
relationship with the managing member and its affiliates. Following is a
discussion of all of the material conflicts of interest. The managing member and
its affiliates will try to balance our interests with their own interests. 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 involving
our business. See "Fiduciary Responsibilities of the Managing Member."
THE MANAGING MEMBER AND ITS AFFILIATES MAY PURCHASE UNITS IN THIS
OFFERING. Purchases of up to $450,000 of units may be made to enable us to reach
the minimum raise of $3,000,000. The managing member will not purchase more than
$450,000 of units.
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 was formed for
the purpose of being the managing member of the fund and other funds to be
offered in the future and has no other investment interests at this time.
Cornerstone Ventures, Inc. invests for itself and through joint ventures in
multi-tenant industrial properties. See "Prior Performance Tables." The
managing member and its affiliates may own, operate, lease, and manage
multi-tenant industrial business parks that may be suitable investments for us.
AFFILIATES OF THE MANAGING MEMBER 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.
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.
We rely on the managing member and its affiliates to manage and oversee our
daily operations and our assets. Cornerstone Ventures, Inc., the manager of the
managing member, manages multi-tenant industrial properties for three joint
venture entities and is developing an internet travel resource company. The
amount of time Cornerstone Ventures, Inc. will spend on fund affairs will depend
on the amount we raise and the number of properties we purchase. There is no
minimum amount of time which Cornerstone Ventures, Inc. has committed to
allocate to fund management. The fund will use outside agents for investor
relations and reporting, accounting, on-site property management, construction
of tenant improvements, leasing, environmental assessments and appraisals. 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 for the fund.
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 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."
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
22
<PAGE>
BE ENTITLED UPON THE SALE OF A PROPERTY. The managing member would have an
incentive to retain a property if the property management fees, leasing
commissions and construction supervision fees it was receiving exceeded the
sales commission and percentage of cash from net sales it would receive on
sale of the property. See "Management Compensation" for a description of
these compensation arrangements.
IF 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.
NONE OF THE AGREEMENTS FOR SERVICES PERFORMED BY THE MANAGING MEMBER IS
THE RESULT OF ARM'S-LENGTH NEGOTIATIONS. The managing member and its affiliates
will be engaged to perform various services for us and will receive fees and
compensation for such services. It is possible that the fund will pay the
managing member more than it would pay a third party for comparable services.
See "Management Compensation."
THE OWNER OF CORNERSTONE VENTURES, INC., IS FORMING A BROKER DEALER
WHICH WILL LIKELY BECOME THE DEALER MANAGER 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.
OPPENHEIMER WOLFF & DONNELLY LLP, 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
- Acknowledges that counsel did not represent the interests of the
unitholders and
- Waives 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.
The operating agreement contains provisions designed to minimize
conflicts of interest.
- 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.
- The operating agreement prohibits the managing member and its
affiliates directly or indirectly from paying or awarding
commissions to any person engaged by a potential investor for
investment advice to induce such person to advise the purchase of
the units. This
23
<PAGE>
does not prohibit the payment of normal sales commissions to
registered broker-dealers for selling the units.
IN ORDER TO REDUCE OR ELIMINATE POTENTIAL CONFLICTS OF INTEREST, THE
OPERATING AGREEMENT CONTAINS A NUMBER OF RESTRICTIONS ON TRANSACTIONS BETWEEN US
AND THE MANAGING MEMBER OR ITS AFFILIATES, FUTURE OFFERINGS, AND ALLOCATION OF
PROPERTIES AMONG AFFILIATED VENTURES. These restrictions include the following:
- 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 must be comparable to
the terms available from unrelated parties. The compensation
payable must be competitive with the amount charged by independent
parties for comparable goods or services.
- Reimbursement to the managing member or its affiliates for goods,
materials and services other than as provided 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.
- 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.
24
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
Our primary investment objectives are to:
- reduce risk by acquiring properties on an all cash basis
- provide periodic cash distributions from rental operations
- increase income by reducing operating expenses and entering into
leases with scheduled rent escalations
- generate additional income on sale of our properties by using asset
management strategies to increase property values
TYPES OF INVESTMENTS
We will try to acquire a diversified portfolio of multi-tenant
industrial business parks. 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, (1) the fund and the other entity
must have similar investment objectives, (2) there will be identical sponsor
compensation and no duplicate fees payable to the managing member and its
affiliates, (3) our investment and the investment of the other entity will be on
substantially the same terms and conditions, and (4) we will have the right of
first refusal to buy the property if the joint venture decides to sell the
property.
INVESTMENT RESTRICTIONS
We have not engaged in the following types of activities and it is our
policy NOT to engage in any of the following types of activities:
- issue securities which are senior to or have priority over the
units
- make loans to any persons
- invest in the securities of other issuers for the purpose of
exercising control
- underwrite securities of other issuers
- engage in the rapid purchase and sale (churning) of investments
- offer securities in exchange for property
- repurchase or otherwise reacquire our units or other securities
These policies CANNOT be changed by our managing member without a vote
of unitholders.
25
<PAGE>
We will not:
- issue units other than for cash
- make loans or investments in real property mortgages
- make loans to any persons
- operate in such a manner as to be classified as an investment
company for purposes of the
- Investment Company Act of 1940
- invest more than $10,000,000 in any single property
- engage in roll up transactions
- invest in trust deeds, mortgage or other similar obligations
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 but not in excess of that charged by unrelated
lending institutions on comparable loans for the same purpose.
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 relative to revenues being generated by leasing of properties. 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 maximize 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
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.
26
<PAGE>
SALE OF FUND PROPERTIES
We expect to own our properties for 5 years, but we may hold our
properties for a longer 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
- 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.
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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<PAGE>
BUSINESS
GENERAL
We are a real estate fund that seeks positive return on investment
through the acquisition, management and sale of multi-tenant industrial business
parks. We intend to acquire and operate a diversified portfolio of existing,
leased multi-tenant industrial business parks catering to the small business
tenant. The managing member believes that 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. We believe we are offering a unique opportunity for you to
participate in an asset class under-looked by most investors, with a sharing
arrangement which aligns closely with yours. We are committed to creating
investor opportunity with the highest level of integrity and ethics, through
excellence in the acquisition, operations and sales of multi-tenant industrial
business parks.
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. 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 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.
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 generally be met in other commercial property types.
Multi-tenant industrial business park tenants come from a broad spectrum of
industries including light manufacturing, assembly, distribution, import/export,
general contractors, telecommunications, computer technology, general
office/warehouse, wholesale, service, high-tech and other fields. These
properties diversify revenue by generating rental income from multiple
businesses instead of relying on one or two large tenants.
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
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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 and to meet the
diversification needs of small business tenants. A multi-tenant industrial
business park is the first home for many small businesses. 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.
The managing member believes that multi-tenant industrial business
parks offer specific characteristics that may support an investor's portfolio
diversification strategy.
THE SMALL BUSINESS OPPORTUNITY
For the last ten years, Cornerstone Ventures, Inc. and its affiliates
have achieved success by focusing on the needs of small business tenants.
Cornerstone Ventures, Inc. focuses on what the small business tenant wants in
terms of functional, well-designed space in which to operate its business.
Cornerstone Ventures, Inc. believes that it knows how to differentiate between
tenant spaces and projects that should maintain their demand over the long term
versus those that might ultimately lag in performance.
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From 1994 through 1998, smaller businesses led the growth in the
economy (see Fig.1). with the advent of newer technology and the [GRAPH]
world becoming a global economy, smaller firms are able to adapt
quickly. Multi-tenant industrial parks can accommodate this growth
by allowing tenant expansion into multiple units.
Fig. 1
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Small businesses is a large part of our economy. Most of the
businesses operating in the united states are classified as "small
businesses," employing fewer than twenty employees (Fig. 2) and [GRAPH]
multi-tenant industrial parks fulfill this need.
Fig. 2
From 1994 to 1998 businesses that employed under 100 people
expanded their employment base by 26.8% vs. larger businesses (100
employees or greater), which only expanded by 6.0%. Businesses [GRAPH]
with fewer than 20 employees represented 69.7% of that growth in
the small business sector (see Fig. 3). In each industry group,
smaller firms outgrew larger firms (see Fig. 4).
Fig. 3
The statistical information presented here is based on a 1999
survey published by Cognetics, Inc., a Cambridge, [GRAPH]
Massachusetts-based economic and business research firm founded
in 1983.
Fig. 4
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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:
- Two restrooms generally required for each individual tenant space
- Numerous walls to separate individual tenant spaces
- Multiple entrances for each tenant space
- Utility connections for each tenant space
- Separate office build-out in each tenant space
- Separate HVAC installations
- Individual truck roll-up doors for each tenant space
- 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.
ACQUISITION STRATEGIES
Cornerstone Ventures, Inc. 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 Ventures,
Inc. has substantial operating experience investing in and operating
multi-tenant industrial business parks. Cornerstone Ventures, Inc. offers
in-depth real estate expertise through an experienced team of industry
professionals with extensive understanding of industrial real estate.
The fund will pursue a strategy of purchasing properties in major
industrial markets with considerable tenant demand. The fund intends to acquire
properties in areas with strong tenant demand and a large base of existing
industrial properties, a high population of small business tenants and
substantial competitive barriers to entry.
Among Cornerstone Ventures, Inc.'s acquisition strategies, one is the
recognition of opportunities to purchase multi-tenant industrial business parks
at prices below replacement cost. Cornerstone Ventures, Inc. 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 may be able to identify an opportunity to purchase a property at a price
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 $10,000,000. 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
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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:
- Functional site plan offering ample tenant parking and good truck
and car circulation
- Multiple truck doors with ground level and dock high loading
- Ceiling clear heights in each tenant space from 14 feet to 24 feet
high
- Attractive front entry and visibility with a location for
tenant's address and sign
- Quality office improvements including private offices, restrooms
and reception area
- Minimum of 100 amps of electrical service
- Heating, ventilating and air conditioning systems for the office
area
- 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.
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 through Cornerstone Ventures, Inc. based upon its
experience in the area of multi-tenant industrial business parks and our
investment objectives and supported by an appraisal prepared by a competent
independent appraiser.
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:
- Functionality of the physical improvements at the property
- Historical financial performance of the property
- Current market conditions for leasing space at the property
- Proposed purchase price, terms, and conditions
- Potential cash flow and profitability of the property
- Estimated cost to develop a new competitive property within the
immediate market area
- Demographics of the area in which the property is located
- Demand for space by small business tenants in the immediate market
area
- Rental rates and occupancy levels at competing business parks in the
immediate area
- Historical tenant demand for space at the property
- Current market versus actual rental rates at the property and in the
immediate area
- Operating expenses being incurred and expected to be incurred at the
property
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- Potential capital improvements and leasing commissions reasonably
expected to be expended
- A review of the terms of each tenant lease in effect at the property
- An evaluation of title and the obtaining of satisfactory title
insurance
- An evaluation of a current appraisal conducted by a qualified
independent appraiser
- An evaluation of any reasonably ascertainable risks such as
environmental contamination
The managing member intends to bring us the same expertise Cornerstone
Ventures, Inc. has exercised in the accumulation and operation of its joint
venture properties. See "Management" and "Prior Performance."
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
additional charge. The managing member through Cornerstone Ventures, Inc. will
perform the following asset management services for us:
- Create and implement an individualized plan for enhancing the
profitability and value of each property
- Supervise the day-to-day operations of property managers assigned to
each property
- Select and supervise the on-going marketing efforts of leasing
agents responsible for marketing the property to prospective tenants
- 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 property is located
- 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 then current operating plan for the
property
- Review and approve any capital improvements necessary at the
property, including tenant improvements necessary to lease space
- Supervise the collection of rent and resolution of tenant lease
defaults
- Review monthly financial reports prepared by property managers with
a focus on improving the cost efficiency of operating the property
- Prepare annual property operating budgets for review and approval by
senior management
- 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.
PROPERTY MANAGEMENT SERVICES
The managing member is responsible for providing property management
services for our properties. The managing member through Cornerstone Ventures,
Inc. will be responsible for overseeing all day-to-day operations for each
property, including the following:
- Invoice tenants for monthly rent - Collect rents - Pay property
level operating expenses
- Solicit bids from vendors for monthly contract services
- Provide property level financial reports on a monthly basis
- Review and comment on annual property operating budgets
- On-going assessment of potential risks or hazards at the property
- Clean up and prepare vacant units to be leased
- Supervise tenant improvement construction
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- Supervise tenant and owner compliance with lease terms
- Supervise tenant compliance with insurance requirements
- Periodically inspect tenant spaces for lease compliance
- 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 and in ensuring strict property
maintenance standards in order to maximize the value of each property. 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 the material 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 our managing member, Terry G. Roussel and
the persons who purchase units in this offering. The initial capital
contributions will be the amounts contributed by the managing member and Mr.
Roussel, and the proceeds of this offering. Mr. Roussel will contribute the same
amount for his units as other unitholders. The managing member and unitholders
are 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
- no interest will accrue on your capital contribution or on your
positive capital account balance
- 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
- you will have the right to receive distributions from us only as
determined by the managing member
- you will not be required to make any further contribution to our
capital or make any loan to us
- 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
See "Prospectus Summary" at page 1 of this prospectus.
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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".
Approval of the members is required to:
- permit the voluntary withdrawal of the managing member
- appoint a new managing member
- sell all or substantially all of the fund's assets other than in the
ordinary course of business
- adopt an agreement of merger or reorganization
- change the character of the business and affairs of the fund
- commit any act that would make it impossible for the fund to carry
on its ordinary business and affairs
- commit any act that would contravene any provision of the articles,
the operating agreement, or the limited liability company law
The unitholders may, without the concurrence of the managing member:
- 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
- remove the managing member
- elect a new managing member
- dissolve the fund
PAYMENTS TO MANAGING MEMBER UPON REMOVAL
Upon the removal or termination of the managing member, the fund is
required to pay the terminated managing member all amounts owed to the managing
member. The fund may terminate the terminated managing member's interest in fund
income, losses, distributions and capital by payment of an amount equal to the
then present fair market value of the terminated managing member's interest
determined by agreement of the terminated managing member and the fund, or, if
they cannot agree, by arbitration in accordance with the rules of the American
Arbitration Association. The expense of arbitration shall be borne equally by
the terminated managing member and the fund.
NO CERTIFICATES FOR UNITS WILL BE ISSUED
Ownership of the units will be registered on the books of the fund. No
certificates evidencing ownership of the units will 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 May Invest" at page 9 of this
prospectus
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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. You must pay a
transfer fee of $250 to cover our costs.
The managing member must consent to all transfers or dispositions of
units. "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 the operating agreement 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. 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:
- December 31, 2010
- the entry of a decree of judicial dissolution, as provided under
California law
- by the consent of unitholders owning a majority of all the
issued and outstanding units
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. The fund will maintain copies of
appraisals for all properties acquired by the fund for at least five years.
The appraisals shall be made available to you for inspection and duplication.
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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 to unitholders and the source of
such 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, the amount paid or accrued to each recipient, the source
of each distribution 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.
POWER OF ATTORNEY
Each unitholder, by executing the Subscription Agreement, appoints the
managing member as such unitholder's attorney in fact with to sign:
- the operating agreement
- 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
- documents required to dissolve and terminate the fund
- amendments and modifications to the articles of organization or any
of the documents described above
- amendments and modifications to the operating agreement which have
been approved pursuant to the terms thereof
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 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 you.
This summary assumes that you are an individual. 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.
YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR WITH SPECIFIC REFERENCE
TO YOUR 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. THIS SECTION IS NOT TO BE CONSTRUED AS A SUBSTITUTE FOR CAREFUL
TAX PLANNING.
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. 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 you 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
specifically intended feature of an investment in the fund, it merely follows
from the pass-through nature of 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 has rendered its opinion,
which is attached hereto as Exhibit "B" with respect to all material federal
income tax issues presented by an investment in the fund for which a legal
opinion is possible:
Counsel's opinion addresses the following material federal income tax
issues:
- Classification of the fund as a partnership for federal income tax
purposes
- Exemption of the fund from publicly traded partnership status
- Treatment of your fund interest as a passive activity and
characterization of your fund net income as
passive income
- Allocations of fund net income or net loss by the fund comply
with applicable Treasury Regulations
- Exemption of the fund from tax shelter registration requirements
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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 only exist when such
investments are made. In addition, counsel is unable to express an opinion as
to certain issues because of their inherently factual nature or which will
vary for each investor.
The tax issues which are discussed below but for which no opinion has
been given because of the lack of actual facts with respect to the issue, or the
inherently factual nature of the inquiry, or the issue being dependent upon your
specific situation, are as follows:
- Income tax treatment of certain payments made by the fund
- Possible taxation of investments by qualified plans and other tax
exempt entities
- Allocation of the fund's purchase price in properties
- Classification of the fund as a dealer in property
- Sales of fund units
- Special tax rates applicable to long-term capital gains and losses
from the fund
- Tax consequences upon fund dissolution - Special tax rules for
foreign investors
- State and local tax consequences to investors
- Special fund-level audit rules
- Federal penalties possibly applicable to tax understatements
PARTNERSHIP STATUS
THE FUND IS EXPECTED TO BE TREATED AS A PARTNERSHIP FOR TAX PURPOSES
WITH "PASS-THROUGH" TAX CONSEQUENCES TO YOU AS AN INVESTOR. Treatment of the
fund as a "partnership" for federal income tax purposes is essential to your
ability to derive tax benefits from your purchase of units. If, for any reason,
the fund were classified as an association taxable as a corporation:
(1) 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%,
(2) you would not be required or entitled to take into account your
distributive share of the tax items of the fund, and
(3) distributions of cash or property by the fund would be taxed to
you (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 your basis in
units.
GENERAL CLASSIFICATION RULES. IT IS THE OPINION OF COUNSEL THAT,
SUBJECT TO THE ASSUMPTIONS SET FORTH IN 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 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 subject to other Code provisions that
may alter such status, such as the publicly traded partnership rules,
discussed below. 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 subject to
other Code provisions that may alter such status, such as the publicly traded
partnership rules, discussed below.
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PUBLICLY TRADED PARTNERSHIP RULES. IT IS THE OPINION OF COUNSEL
THAT, THE FUND WILL NOT BE TREATED AS A PUBLICLY TRADED PARTNERSHIP TAXABLE
AS A CORPORATION. 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):
(1) traded on established securities markets or
(2) 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:
(1) 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 redeeming the transferor partner or admitting
the transferee as a partner or otherwise recognizing any rights
of the transferee; or
(2) 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.
Since a significant portion of the fund's gross income will consist of
rental income from commercial real estate, the fund may also meet an 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. An exception from "publicly traded partnership" status
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 and gain from the sale
or disposition of capital assets). 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) and discussed below, 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:
(1) listing, facilitating, or recognizing the trading of units on
established securities markets, or
(2) 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 (a) prevent the trading of units by third parties on an
established securities market or a secondary market (or the
substantial equivalent thereof) or (b) allow any transfers
of units which could cause the fund to violate the safe harbors
set forth in the Section 7704 Regulations.
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Based on (1) the items set forth above, and the nature of the fund's
expected gross income, (2) the fund being operated in accordance with the
operating agreement, (3) the representations of the managing member that the
fund units will be issued in a transaction registered under the Securities
Act, (4) the representations of the managing member that the units in the
fund will not be traded on an established securities market, and (5) 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 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 an investor in a partnership, you will be required to report on
your federal income tax returns, and to take into account in determining your
own income tax, your allocable shares of the income, gain, loss, deductions
and tax preference items of the fund for the portion of any year during which
you are a unitholder of the fund. The fund itself will not be subject to tax.
You are subject to tax on your 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 you may have received
total cash distributions that are less than the amount of reportable income or
gain to you, or less than the resultant federal income tax liability. To the
extent that the resultant income tax imposed on you exceeds cash distributions
to you in any year, such excess will constitute an out-of-pocket expense that
must be funded by you from other sources.
QUALIFIED PLAN INVESTORS
BECAUSE THE FUND WILL NOT INCUR INDEBTEDNESS WITH RESPECT TO THE
PROPERTIES IT ACQUIRES, DISTRIBUTIONS BY THE FUND YOU TO YOU IF YOU ARE 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. Qualified plans including IRAs and SEPs 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.
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.
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ALTHOUGH THE FUND INCOME LIKELY WILL NOT CONSTITUTE UBTI, NO OPINION IS
EXPRESSED ON THIS ISSUE. IF YOU ARE A QUALIFIED PLAN INVESTOR YOU ARE URGED TO
SEEK TAX ADVICE FROM YOUR OWN COUNSEL REGARDING WHETHER OR NOT YOU SHOULD INVEST
IN THE FUND AND THE TAX CONSEQUENCES TO YOU OF RECEIVING DISTRIBUTIONS AND
ALLOCATIONS FROM THE FUND.
BASIS OF UNITS
Your basis in units is relevant in determining:
(1) gain or loss on the sale or other disposition of the units
(see "Sale of Units" below);
(2) the taxability of cash distributions to you (see "Cash
Distributions to Unitholders" below); and
(3) your ability to deduct losses of the fund (see "Basis,
At-Risk, and Passive Activity Limitations on Deduction of
Losses" below).
Your adjusted basis in a unit initially will equal the amount of your
actual cash capital contribution to the fund (I.E., the purchase price of units)
and will be increased by your allocable share of items of fund net income. Your
basis in a unit will be decreased (but not below zero) by (1) cash distributions
received from the fund, and (2) your distributive share of items of the fund's
net loss. Your basis in units is also generally affected by the amount of fund
debt allocated to you, 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
THE PASS-THROUGH OF FUND INCOME, GAIN OR LOSS TO YOU WILL BE RESPECTED
BY THE INTERNAL REVENUE SERVICE IF REVIEWED BY THEM. Your 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 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. 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 substantial economic effect.
Accordingly, it is the opinion of Counsel 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 will have substantial economic effect or will
be otherwise treated as being in accordance with your interest in the fund, if
such issue were challenged by the IRS, litigated and judicially decided.
ALLOCATIONS TO NEWLY ADMITTED UNITHOLDERS OR TRANSFEREES OF UNITS
NEW UNITHOLDERS WILL BE ALLOCATED A PROPORTIONATE SHARE OF INCOME OR
LOSS FOR THE YEAR IN WHICH THEY BECAME UNITHOLDERS. 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
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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 2000 and that you generally will
not be allocated net loss because of the fund's investment criteria of acquiring
properties on an all-cash basis. There can, of course, be no assurance that such
objective can be achieved in any fiscal year of the fund. Your ability to
utilize any net loss in a year, should a net loss be allocated to you, is
determined by applying the following three limitations dealing with basis,
at-risk and passive losses.
(1) BASIS. You may not deduct an amount exceeding your adjusted basis
in your units pursuant to Code Section 704(d). If your share of the fund's net
loss exceeds your basis in your 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 your adjusted basis in your units exceeds
zero.
(2) AT-RISK RULES. Under the Section 465 "at-risk" provisions of the
Code, if you are an individual taxpayer (including an individual partner in a
partnership) or a closely-held corporation, you may deduct losses from a trade
or business activity, and thereby reduce your taxable income from other sources,
only to the extent you are considered "at risk" with respect to that particular
activity. The amount you are considered to have at risk includes money
contributed to the activity and certain amounts borrowed with respect to the
activity.
(3) PASSIVE LOSS RULES. Under Section 469 of the Code, deductions by
you, if you are an individual (or certain closely-held corporations) of losses
from all businesses in which you do not "materially participate" and from all
rental activities in which you do 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 you are
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 fund's commercial real property leasing activities are anticipated
to be passive activities for you and counsel will opine that your interest in
the fund will be a passive activity if you are not affiliated with or employed
by the managing member.
PASSIVE ACTIVITY INCOME
FUND OPERATING INCOME WILL MORE LIKELY THAN NOT BE CONSIDERED "PASSIVE
INCOME" AND BE AVAILABLE TO OFFSET YOUR CURRENT OR SUSPENDED PASSIVE LOSSES FROM
THE FUND OR CERTAIN OTHER INVESTMENTS. If the fund is successful in achieving
its investment and operating objectives, you may be allocated taxable income
from the fund. To the extent that your share of the fund's net income
constitutes income from a passive activity (as described above), such income may
generally be offset by your net losses and credits from investments in other
passive activities.
Counsel will opine that, assuming (1) the properties are acquired and
operated in the manner described in this prospectus, (2) the properties are
owned for federal income tax purposes by the fund, and (3) 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 your 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
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by your 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 any income that is attributable to (1) 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 (2)
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.
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.
CASH DISTRIBUTIONS TO UNITHOLDERS
CASH DISTRIBUTIONS THAT ARE LESS THAN YOUR ADJUSTED TAX BASIS IN THE
FUND WILL NOT BE TAXABLE TO YOU. A cash distribution to you from the fund (other
than a cash distribution made in exchange for all or part of your interest in
the fund) will not be taxable to you except to the extent, if any, that the
distribution exceeds the adjusted basis of your units in the fund. See "Basis of
Units" above. A cash distribution in excess of your 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.
ALTERNATIVE MINIMUM TAX
YOU COULD BE SUBJECT TO THE ALTERNATIVE MINIMUM TAX. The Code contains
an "alternative minimum tax," which may reduce the benefit to you 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.
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 such fees and expenses paid by
the fund.
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:
(1) assert that the amount paid for some or all of the services
should be treated as a nondeductible fund distribution;
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(2) assert that such amount exceeds the reasonable value of those
services and is not deductible to the extent of such excess;
(3) 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 period
chosen by the fund; or
(4) 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.
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
YOU MAY HAVE GAIN OR LOSS ON THE SALE OF YOUR UNITS, WHICH GAIN MAY BE
PARTIALLY TAXABLE AS ORDINARY INCOME OR AT SPECIAL DEPRECIATION RECAPTURE RATES.
Upon your sale of a unit, the excess, if any, of the amount realized on the sale
over your adjusted basis in the unit will be taxable gain to you. If you are not
a "dealer" with respect to such unit and you held it for more than one year,
your gain will generally be treated as long-term capital gain, except for that
portion of any gain attributable to your share of the fund's "unrealized
receivables" and "inventory items," as defined in Section 751 of the Code, would
be taxable as ordinary income. Recently proposed regulations provide that the
holding period of a partnership interest will be divided if a partner acquires
portions of an interest at different times. 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.
DISSOLUTION OF THE FUND
A FUND DISSOLUTION AND LIQUIDATION MAY BE TAXABLE TO YOU, UNLESS FUND
PROPERTIES ARE DISTRIBUTED IN KIND. The dissolution of the fund will involve the
distribution to you of the assets, if any, remaining after payment of all of the
debts and liabilities of the dissolving fund. Upon dissolution of the fund, your
unit may be liquidated by one or more distributions of cash or other property.
If you receive only cash upon the dissolution, gain would be recognized by you
to the extent, if any, that the amount of cash received exceeds your adjusted
basis in your 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 PURCHASE PRICE IN PROPERTIES
THE ALLOCATION OF PURCHASE PRICE TO VARIOUS CATEGORIES OF ASSETS
PURCHASED BY THE FUND COULD BE CHALLENGED BY THE IRS. 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
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
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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 you. 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 DOES NOT EXPECT TO BE CONSIDERED A "DEALER" IN REAL PROPERTY.
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 you if you are
a tax-exempt entity. 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. 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 you upon a sale
of properties by the fund or a sale of units by you as capital or ordinary
income is relevant in determining the rate at which such income is taxed and
the extent to which you may deduct capital losses. See "Sale of Units."
Ordinary income is taxed to you, if you are an individual, 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 your alternative
minimum tax. Recapture of depreciation with respect to personal property is
taxed at ordinary income tax rates. You are also cautioned that the sale of a
unit may require you to "look through" the units sold, with a portion of such
sale possibly taxable as ordinary income (see "Sale of Units"), and, under
recently promulgated proposed regulations, 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. Capital losses generally may be used by you to offset
capital gains and, in addition, a maximum of $3,000 of ordinary income
annually. The capital losses not utilized by you 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 your 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. You generally are required to file your tax returns in a manner
consistent with the information returns filed by the fund or you are subject to
possible penalties, unless you file a statement with your tax return on Form
8082 describing any
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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. You should consult your
tax advisors as to the potential impact of these procedural rules upon you.
ELECTION FOR BASIS ADJUSTMENTS
THE FUND WILL NOT ADJUST ITS TAX BASIS IN PROPERTIES UPON A SALE OF
UNITS BY YOU, SO A PURCHASER MIGHT PAY LESS FOR THE UNITS YOU SELL. 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 you underpaid tax for any taxable
year, you must pay the amount of underpayment plus interest on the underpayment
and possibly 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 you of
amounts owing within 18 months of the date you filed your 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. Congress
and the Treasury Department are currently considering a number of
alternatives for modifying the definition of, and
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the tax consequences related to, "tax shelters" and there can be no assurance
that any such modification will not adversely affect the fund.
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, you
should consider the 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.
You are urged to consult your own tax advisor on all matters relating
to state and local taxation, including the following:
(1) whether the state in which you reside will impose a tax upon your
share of the taxable income of the fund;
(2) whether an income tax or other return must also be filed by you
in those states where the fund will own properties;
(3) whether you will be subject to state income tax withholding in
states where the fund will own properties;
(4) 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
(5) whether your state of residence will offer a tax credit for taxes
paid by you or the fund to other states or localities.
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 income 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
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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.
TAX SHELTER REGISTRATION
THE FUND MORE LIKELY THAN NOT WILL NOT BE CONSIDERED A TAX SHELTER
SINCE LOSSES ARE NOT ANTICIPATED. Any entity deemed to be a "tax shelter," as
defined in Section 6111 of the Code, is required to register with the IRS. 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 YOUR
PARTICULAR TAX AND FINANCIAL SITUATION. ACCORDINGLY, YOU ARE STRONGLY URGED TO
CONSULT YOUR OWN TAX ADVISOR WITH SPECIFIC REFERENCE TO YOUR 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 which is an employee benefit plan or
holds assets of an employee benefit plan. 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 in light of their particular circumstances.
ERISA FIDUCIARY DUTIES
ERISA 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 in the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan and is subject to the standards of
fiduciary conduct under ERISA. These standards require that the fiduciary of
the Plan consider, among other things, whether the investment of Plan assets:
(i) will be in accordance with the documents and instruments governing 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; (v) is prudent under the
general ERISA fiduciary standards; and (vi) is being made for the exclusive
benefit of the Plan's participants and beneficiaries.
PROHIBITED TRANSACTIONS
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 a 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 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.
PLAN ASSET REGULATIONS
The United States Department of Labor (the "DOL") has issued final
regulations (the "DOL Regulations") providing guidance on the definition of
"plan assets" under ERISA. Under the DOL Regulations, if a Plan acquires an
equity interest in an entity such as the fund, both the equity interest and
an individual interest in the assets held by the entity may be treated as the
Plan's assets, unless certain exemptions apply. These exemptions include
"publicly-offered securities" and a security issued by certain operating
companies, including a "real estate operating company."
PUBLICLY OFFERED SECURITIES
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. As discussed below, the units of
the fund should be treated as publicly offered securities and, as such, the
assets of the fund should not be considered plan assets of any unitholder
which is an employee benefit plan.
REGISTERED. The units are registered under the Securities Exchange
Act of 1934, as amended.
WIDELY-HELD 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 may still be treated as "widely-held" if 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.
FREELY-TRANSFERABLE. The DOL Regulations provide that whether a
security is a "freely-transferable" is a factual question to be determined on
the basis of all relevant facts and circumstances.
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No assurance can be given that the DOL will conclude that the units are
freely-transferable. The DOL Regulations 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 any entity for federal or state income tax purposes will
not affect whether securities are freely transferable.
REAL ESTATE OPERATING COMPANY
Even if the fund's units were not to qualify for the "publicly-offered
securities" exemption, the DOL Regulations also exempt an investment entity's
assets as plan assets if the entity is a "real estate operating company." An
entity is a real estate operating company if 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 entity 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
and will attempt to comply with the requirements of this exemption.
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 50% 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 tenants thereof, the entity is not eligible for the real
estate operating company exemption. In an effort to comply with the real estate
operating company exemption, the managing member of the fund intends to
structure its management and development activities such that at all times more
than 50% of the fund's assets are invested in multi-tenant properties with
individually negotiated leases pursuant to which general and common area
maintenance activities will be the fund's responsibility and not that of the
tenants 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 the fund's assets would be considered Plan
assets and, as such, whether the Plan's investment could give rise to other
violations of its fiduciary standards.
NON-ERISA PLANS
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.
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THE OFFERING
OFFERING AMOUNTS AND LENGTH OF OFFERING
We are offering a minimum of 6,000 units ($3,000,000) and a maximum
of 50,000 units ($25,000,000) at a purchase price of $500 per unit to persons
who meet the standards set forth under "Who May Invest." Our managing member
has the right to increase the maximum number of units we offer to 100,000
units ($50,000,000). 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 pension, profit sharing and stock bonus plans,
including Keogh plans and IRAs, must make a minimum purchase of at least two
units ($1,000).
The managing member and its affiliates may purchase up to $450,000
of units to enable us to meet the minimum offering. The units will be
purchased for investment and will not be resold. No commissions will be paid
on units purchased by the managing member and its affiliates.
The offering will terminate not later than __________, 2002. Unless
we sell 6,000 units on or before __________, 2001, we will refund all
subscription proceeds 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, less escrow expenses within 10 days.
HOW THE UNITS ARE BEING OFFERED
The units will be offered on a "best efforts" basis through the
Pacific Cornerstone Capital, Incorporated, the dealer manager, and the
participating brokers who are members of the National Association of
Securities Dealers, Inc. or other persons or entities exempt from
broker-dealer registration. The dealer manager is an affiliate of the
managing member. "Best efforts" means that the dealer manager is not
guaranteeing that any specified amount will be raised. There are no undertakings
with the dealer manager with respect to volume limitations on sales. The
agreement with the dealer manager may be terminated by the dealer manager
prior to reaching the minimum offering of (1) the fund or managing member has
become a defendant in litigation expected to have a materially adverse outcome,
(2) if there is a material adverse change in the financial or other condition
of the fund, (3) there are changes in financial markets, national or world
affairs, postal strikes, a general banking moratorium or acts of God, or (4) the
managing member has breached the agreement. After reaching the minimum offering,
the dealer manager may terminate the agreement at any time.
The fund and the managing member have agreed to indemnify the
dealer-manager from liabilities based on any untrue statement of a material fact
or omission in this prospectus or in any supplemental sales material.
COMPENSATION TO THE DEALER MANAGER FOR SELLING THE UNITS
We will pay the dealer manager
- Selling commissions equal to eight percent (8%) of the first
$3,000,000 of offering proceeds and seven percent (7%) of the
offering proceeds on all units sold thereafter for serving as the
dealer manager of the offering and for the sale of units through
its efforts
- Marketing support fee equal to two percent (2%) of the offering
proceeds less $30,000 for marketing fees, wholesaling fees,
expense reimbursements, bonuses and incentive compensation
- Reimbursement of expenses of up to one percent (1%) of the
offering proceeds
- Due diligence expense allowance fee of one half of one percent
(.05%) of the offering proceeds on all units sold.
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All or a portion of these fees may be paid by the dealer manager to the
participating brokers.
The total amount of underwriting compensation, including sales
commissions, due diligence fees and reimbursement of expenses paid in
connection with the offering will not exceed 10% for sales commissions,
expense reimbursement, wholesaling fees, marketing support fees, bonus and
incentive compensation, plus a 0.5% for bona fide due diligence fee on units
sold. See "Estimated Use of Proceeds" and "Management Compensation."
ESCROW CONDITIONS
Subscription proceeds will be deposited in a segregated escrow
account with U.S. Bank, National Association, Newport Beach, California and
held in trust for the benefit of the subscribers until the minimum of
$3,000,000 has been raised. Thereafter, subscription proceeds will be
deposited directly into the fund's accounts.
The fund will pay escrow fees of $1,500 plus $1 per $1,000 of
subscription funds in excess of $1,500,000 but less than $10,000,000. This will
be $3,000 in the event 6,000 units are sold. The fund will also pay a $250 fee
to hold the escrow open beyond one year. The fund will pay wire fees of $25 per
wire and disbursement fees of $15 per check. The fund will also pay for
messenger fees, air courier charges and other out-of-pocket expenses of the
escrow holder.
INTEREST ON ESCROWED FUNDS
We will pay you interest from the date your funds are deposited in
escrow until the release from escrow. No interest checks for amounts less than
$25 will be issued.
HOW TO PURCHASE UNITS
The units are being sold subject to acceptance by the managing member.
The managing member has the unconditional right to accept or reject any
subscription. Your subscription will be accepted or rejected by us within 10
days after our receipt of a copy of your subscription agreement, fully
completed, and your payment in good funds for the number of units you have
subscribed to purchase. Most of the time, we will accept or reject subscriptions
within 24 hours. 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, in some states, a copy of our organizational
documents. If for any reason your subscription is rejected, your check and
subscription agreement will be returned to you within ten days after 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:
(1) You have the 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;
(2) You have an apparent understanding of:
- the fundamental risks and possible financial hazards of this type
of investment;
- the lack of liquidity of this investment;
- the managing member's role in directing or managing the investment;
and
- the tax consequences of the investment; and
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(3) 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.
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>
<CAPTION>
AMOUNT OF PURCHASER'S INVESTMENT RE-ALLOWED COMMISSIONS PER UNIT
------------------------------------- -----------------------------------
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 units 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. 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.
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 which have been
in existence for at least six months before purchasing the
units and were formed for a purpose other than to purchase the
units at a discount
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(3) an employee's trust, pension, profit-sharing, or other
employee benefit plan qualified under Section 401 of the Code
(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
(1) the dealer manager or the same participating broker
(2) investors whose accounts are managed by a single investment
advisor registered under the Investment Advisers Act of 1940
(3) investors over whose accounts a designated bank, insurance
company, trust company, or other entity exercises
discretionary investment responsibility
(4) 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 herein, 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.
HOW TO SUBSCRIBE
You may purchase units if you meet the suitability standards described
above under "Who May Invest" at page 9 of this Prospectus by doing the
following:
(1) Read the entire prospectus and any current supplement(s) and
the operating agreement, set forth as Exhibit "A" to this prospectus.
(2) Fill out and sign a subscription agreement. A copy of the
subscription agreement and power of attorney and instructions for all investors
other than IRA investors is Exhibit "C-1". A copy of the IRA application,
subscription agreement and power of attorney and instructions for IRA investors
is Exhibit "C-2" to this prospectus.
(3) Make your check payable to "USB Escrow No. 12563-GG for
Cornerstone Realty Fund" during the escrow impound period or to "Cornerstone
Realty Fund, LLC" following the termination of the escrow impound.
(4) Send your subscription agreement and check to your
participating broker.
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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 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 after it is accepted. 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 pension, profit sharing and stock bonus
plans, must be processed through and forwarded to us by an approved trustee. In
the case of plan subscribers, the confirmation will be sent to the trustee.
YOUR REPRESENTATIONS AND WARRANTIES IN THE SUBSCRIPTION AGREEMENT
By executing the subscription agreement, you are making representations
and warranties to us that:
(1) You have received this prospectus;
(2) You meet the suitability standards for investors in this
offering;
(3) You are aware that there are restrictions on your transfer
of units;
(4) You are purchasing the units for your or your family's benefit
or account, or in a fiduciary capacity for another person and NOT as an agent;
(5) You are aware that there is no public market for the units;
(6) You are purchasing the units for economic profit and not for
tax benefits;
(7) You adopt and agree to be bound by the operating agreement;
and
(8) You have granted the managing member the power of attorney
described in "Summary of the Operating Agreement."
These representations and warranties are being made to us to assure us
that you understand the investment you are making and for us to rely on in
determining that we can sell securities to you. If you act in a manner contrary
to these representations and warranties, we would assert that you could not do
so based upon the representations and warranties you made in the subscription
agreement.
SUPPLEMENTAL SALES MATERIAL
In addition to this prospectus, we plan to utilize other 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, an audio tape, a video tape, form letters, and third-party
articles. We also plan to establish an internet web site, http:\\www.cvinc.net,
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.
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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 and the managing member and has rendered an opinion with
respect to material federal income tax issues relating to this offering. See
Exhibit "B" - Tax Opinion. In addition, a copy of 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.
EXPERTS
The financial statements of Cornerstone Realty Fund, LLC at December
31, 1999 and 1998, and for the year ended December 31, 1999 and the period from
October 28, 1998 to December 31, 1998 and the consolidated balance sheet of
Cornerstone Industrial Properties, LLC at December 31, 1999, all appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given on the
authority of such firm as experts in accounting and auditing.
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, and, in accordance therewith, we
will file reports, proxy statements and other information with the SEC 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 SEC at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. The SEC also maintains a Web site that contains
registration statements, reports, proxy and information statements and other
materials that are filed through the SEC's Electronic Data Gathering, Analysis,
and Retrieval System. This 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.
59
<PAGE>
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. This information will be provided to
the extent that the managing member possesses such information, or can acquire
it without unreasonable effort or expense.
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
CORNERSTONE REALTY FUND, LLC
Report of Independent Auditors............................................................................F-1
Balance Sheets as of March 31, 2000 (Unaudited) and December 31, 1999 and 1998............................F-2
Statements of Operations and Members' Deficit for the Three Months Ended March 31, 2000 and
March 31, 1999 (Unaudited) and for the Year Ended December 31, 1999 and the Period from October 28, 1998
(Inception) to December 31, 1998..........................................................................F-3
Statements of Cash Flows for the Three Months Ended March 31, 2000 and March 31, 1999 (Unaudited)
and for the Year Ended December 31, 1999 and the Period from October 28, 1998 (Inception) to
December 31, 1998.........................................................................................F-4
Notes to Financial Statements.............................................................................F-5
CORNERSTONE INDUSTRIAL PROPERTIES, LLC
Report of Independent Auditors ..........................................................................F-8
Consolidated Balance Sheets as of March 31, 2000 (Unaudited) and December 31, 1999 .......................F-9
Notes to Consolidated Balance Sheets.....................................................................F-10
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
61
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Members
Cornerstone Realty Fund, LLC
We have audited the accompanying balance sheets of Cornerstone Realty
Fund, LLC, a California limited liability company (the "Fund"), as of December
31, 1999 and 1998 and the related statements of operations and members' deficit
and cash flows for the year ended December 31, 1999 and for the period from
October 28, 1998 (inception) to December 31, 1998. These financial statements
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Cornerstone Realty
Fund, LLC at December 31, 1999 and 1998 and the results of its operations and
its cash flows for the year ended December 31, 1999 and for the period from
October 28, 1998 (inception) to December 31, 1998, in conformity with accounting
principles generally accepted in the United States.
/S/ ERNST & YOUNG LLP
Newport Beach, California
February 1, 2000
F-1
<PAGE>
CORNERSTONE REALTY FUND, LLC
(A CALIFORNIA LIMITED LIABILITY COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------- ------------------------
2000 1999 1998
---- ------------------------
(unaudited)
<S> <C> <C> <C>
Office equipment, less accumulated depreciation of $893 in 2000,
$751 in 1999 and $268 in 1998................................. $ 1,961 $ 2,103 $ 2,034
Deferred offering costs.......................................... 230,929 178,350 72,244
-------- --------- ----------
Total assets..................................................... $232,890 $ 180,453 $ 74,278
======== ========= ==========
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities
Accounts payable.............................................. $ 29,749 $ 5,235 $ 51,849
Advances payable to managing member........................... 500,919 401,988 83,023
-------- --------- ----------
530,668 407,223 134,872
Members' deficit (100,000 units authorized, none issued or
outstanding).................................................. (297,778) (226,770) (60,594)
-------- --------- ----------
Total liabilities and members' deficit........................... $232,890 $ 180,453 $ 74,278
======== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
CORNERSTONE REALTY FUND, LLC
(A CALIFORNIA LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS AND MEMBERS' DEFICIT
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERIOD FROM
------------------ OCTOBER 28, 1998
MARCH 31, YEAR ENDED (INCEPTION) TO
--------- DECEMBER 31, DECEMBER 31,
2000 1999 1999 1998
---- ---- -------------------------------
(unaudited)
-----------
<S> <C> <C> <C> <C>
Expenses
General and administrative expenses... $ 28,948 $ 12,373 $ 48,420 $20,322
Consulting fees to related party...... 30,906 16,394 96,585 38,957
Interest expense on advances payable
to member........................... 11,154 2,532 21,171 2,315
---------- ---------- ---------- ----------
Net loss.............................. (71,008) (31,299) (166,176) (61,594)
Members' Deficit
Deficit at beginning of period........ (226,770) (60,594) (60,594) -
Capital contributions................. - - - 1,000
---------- ---------- ---------- ----------
Deficit at end of period.............. $(297,778) $ (91,893) $(226,770) $ (60,594)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CORNERSTONE REALTY FUND, LLC
(A CALIFORNIA LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERIOD FROM
------------------ OCTOBER 28, 1998
MARCH 31, YEAR ENDED (INCEPTION) TO
-------- DECEMBER 31, DECEMBER 31,
2000 1999 1999 1998
---- ---- -------------------------------
(unaudited)
------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss..................................... $(71,008) $(31,299) $(166,176) $(61,594)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation............................ 142 115 483 268
Changes in operating assets and
liabilities
Accounts payable............... 24,514 (26,299) (15,432) 17,466
--------- --------- ---------- ---------
Net cash used in operating activities........ (46,352) (57,483) (181,125) (43,860)
INVESTING ACTIVITIES
Purchases of office equipment................ - - (552) (2,302)
Net cash used in investing activities........ - - (552) (2,302)
FINANCING ACTIVITIES
Deferred offering costs...................... (52,579) (41,006) (137,288) (37,861)
Advances from managing member................ 98,931 98,489 318,965 83,023
Capital contributions........................ - - - 1,000
--------- --------- ---------- ---------
Net cash provided by financing activities 46,352 57,483 181,677 46,162
--------- --------- ---------- ---------
Net change in cash........................... - - - -
Cash at beginning of period.................. - - - -
--------- --------- ---------- ---------
Cash at end of period........................ $ - $ - $ - $ -
========= ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CORNERSTONE REALTY FUND, LLC
(A CALIFORNIA LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Cornerstone Realty Fund, LLC, a California limited liability company
(the "Fund") (formerly Cornerstone Multi-Tenant Industrial Business Parks Fund,
LLC and Cornerstone Industrial Properties Income and Growth Fund I, LLC) was
formed on October 28, 1998. The members of Fund are Cornerstone Industrial
Properties, LLC, a California limited liability company ("CIP"), as the managing
member and Terry G. Roussel, an individual. The purpose of the Fund is to
acquire, operate and sell multi-tenant industrial properties. The Fund intends
to issue and sell in a public offering equity interests ("units") in the Fund
and to admit the new unitholders as members of the Fund.
The Fund is currently dependent on the managing member providing
capital contributions and advances in order for it to meet its obligations as
they come due. The managing member intends to continue providing such capital
contributions and advances until the initial closing of the Fund's public
offering, at which time management believes the fund will have sufficient
cash to meet its obligations as they come due.
Each member's liability is limited pursuant to the provisions of the
Beverly-Killea Limited Liability Company Act. The term of the Fund shall
continue until December 31, 2010, unless terminated sooner pursuant to the
operating agreement.
The operating agreement, as amended and restated, provides, among other
things, for the following:
The managing member generally has complete and exclusive discretion in
the management and control of the Fund; however, the unitholders
holding the majority of all outstanding and issued units have certain
specified voting rights which include the removal and replacement of
the managing member.
Net Cash Flow from Operations, as defined, will be distributed 90% to
the unitholders and 10% to the managing member until the unitholders
have received either an 8% or 12% non-cumulative, non-compounded annual
return on their Invested Capital Contributions, as defined. The 12%
return applies to specified early investors for the twelve-month period
subsequent to the date of their Invested Capital Contributions and is
in lieu of the 8% return during that period.
Net Sales Proceeds, as defined, will be distributed first, 100% to the
unitholders in an amount equal to their Invested Capital Contributions;
then, 90% to the unitholders and 10% to the managing member until the
unitholders have received an amount equal to the unpaid balance of
their aggregate 8% non-cumulative, non-compounded annual return on
their Invested Capital Contributions; and thereafter, 50% to the
unitholders and 50% to the managing member.
Net Income, as defined, is allocated first, 10% to the managing member
and 90% to the unitholders until Net Income allocated equals cumulative
Net Losses, as defined, previously allocated in such proportions;
second, in proportion to and to the extent of Net Cash Flow from
Operations and Net Sales Proceeds previously distributed to the
members, exclusive of distributions representing a return of Invested
Capital Contributions; and then 50% to the managing member and 50% to
the unitholders.
F-5
<PAGE>
1. ORGANIZATION AND BUSINESS (continued)
Net Loss is allocated first, 50% to the managing member and 50% to the
unitholders, until Net Loss allocated equals cumulative Net Income
previously allocated in such proportions; then remaining Net Loss is
allocated 10% to the managing member and 90% to the unitholders.
All allocations and distributions to the unitholders are to be pro rata
in proportion to their share of the allocations and distributions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The accompanying unaudited consolidated financial statements as of
March 31, 2000 and for the three months ended March 31, 2000 and 1999, have been
prepared in accordance with accounting principles generally accepted in the
United States and the requirements of Regulation S-X for interim financial
information. Accordingly, they do not disclose all of the information required
by accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation, have
been included. Operating results for the three months ended March 31, 2000 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and the reported amount
of revenue and expenses during the reporting period. Actual results could differ
materially from the estimates in the near term.
INCOME TAX MATTERS
It is the intent of the Fund and its members that the Fund be treated
as a partnership for income tax purposes. As a limited liability company, the
Fund is subject to certain minimal taxes and fees; however, income taxes on the
income or losses realized by the Fund are generally the obligation of the
members.
OFFICE EQUIPMENT
Office equipment is stated at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the related assets. The
estimated useful life of the office equipment is five years.
F-6
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
DEFERRED OFFERING COSTS
Specific incremental costs incurred in connection with the offering of
membership units are deferred and charged against the gross proceeds of the
related offerings. Deferred costs related to aborted offerings are expensed in
the period the offering is aborted.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Fund believes that the recorded value of all financial instruments
approximates their current values.
3. RELATED PARTY TRANSACTIONS
In order to fund its initial operating costs, the Fund has received
unsecured advances amounting to $401,988 from CIP through December 31, 1999.
These advances bear simple interest at the prevailing prime commercial lending
rate plus two percentage points. Interest expense totaling $21,171 in 1999 and
$2,315 during the period from October 28, 1998 to December 31, 1998 was incurred
on these advances. The accrued interest incurred through December 31, 1999 has
been added to the advances payable balance. These advances and accrued interest
are expected to be repaid with proceeds from the planned offering of units.
During the 1999, the Fund incurred $11,651 in office rental expenses to
a related party. These expenses are included in general and administrative
expenses.
During the 1999 and during the period from October 28, 1998 to December
31, 1998, $96,585 and $38,957, respectively, was paid to employees of CIP's
managing member for services related to the planned offering of units.
The managing member and/or its affiliates are entitled to receive
various fees, compensation and reimbursements as specified in the Fund's
operating agreement.
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Members
Cornerstone Industrial Properties, LLC
We have audited the accompanying consolidated balance sheet of
Cornerstone Industrial Properties, LLC, a California limited liability company
(the "Company"), as of December 31, 1999. This consolidated balance sheet is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this consolidated balance sheet based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated balance
sheet is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above
presents fairly, in all material respects, the consolidated financial position
of Cornerstone Industrial Properties, LLC at December 31, 1999 in conformity
with accounting principles generally accepted in the United States.
/S/ ERNST & YOUNG LLP
Newport Beach, California
February 1, 2000
F-8
<PAGE>
CORNERSTONE INDUSTRIAL PROPERTIES, LLC
(A CALIFORNIA LIMITED LIABILITY COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
Current assets
Cash...................................................................... $ 147,043 $ 117,497
Marketable equity securities.............................................. 1,181,458 1,034,580
----------- -----------
Total current assets......................................................... 1,328,501 1,152,077
Office equipment, less accumulated depreciation of $893 in 2000 and $751 in 1,961
1999...................................................................... 2,103
Deferred offering costs 405,886 325,774
----------- -----------
Total assets................................................................. $ 1,736,348 $1,479,954
=========== ===========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities
Accounts payable.......................................................... $ 71,253 $ 10,384
Advances payable to member................................................ 46,754 45,837
----------- -----------
118,007 56,221
Members' capital............................................................. 1,730,759 1,533,187
Member's capital contribution note........................................ (112,418) (109,454)
----------- -----------
Member's capital, net..................................................... 1,618,341 1,423,733
----------- -----------
Total liabilities and members' capital....................................... $1,736,348 $1,479,954
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheet.
F-9
<PAGE>
CORNERSTONE INDUSTRIAL PROPERTIES, LLC
(A CALIFORNIA LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
1. ORGANIZATION AND BUSINESS
Cornerstone Industrial Properties, LLC, a California limited liability
Company (the "Company"), was formed on February 5, 1999. The managing member is
Cornerstone Ventures, Inc., a California corporation ("Ventures"). The purpose
of the Company is to sponsor, organize and serve as the managing member of
Cornerstone Industrial, a California limited liability company ("Fund I"), and
Cornerstone Realty Fund, a California limited liability company ("Fund")
(collectively, the "Funds"). The purpose of the Funds is to acquire, operate and
sell multi-tenant industrial properties.
Each member's liability is limited pursuant to the provisions of the
Beverly-Killea Limited Liability Company Act. The term of the Company shall
continue until December 31, 2033, unless terminated sooner pursuant to the
operating agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The accompanying unaudited consolidated balance sheet as of March 31,
2000 has been prepared in accordance with accounting principles generally
accepted in the United States and the requirements of Regulation S-X for interim
financial information. Accordingly, it does not disclose all of the information
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments,
consisting of normal recurring accruals, considered necessary for a fair
presentation, have been included.
CONSOLIDATION
The consolidated balance sheet includes the accounts of the Company and
the Funds. All significant intercompany transactions have been eliminated in
consolidation. The Company consolidates the Funds because it has control over
all activities of the Funds and has provided 100% of the Funds' required
advances and capital contributions.
USE OF ESTIMATES
The preparation of the consolidated balance sheet in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the balance sheet and
accompanying notes. Actual results could differ materially from those estimates
in the near term.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes all of the financial instruments' recorded values
approximate current values.
F-10
<PAGE>
CORNERSTONE INDUSTRIAL PROPERTIES, LLC
(A CALIFORNIA LIMITED LIABILITY COMPANY)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE EQUITY SECURITIES AND MEMBERS' CAPITAL
Marketable equity securities consist of common stock investments.
Marketable equity securities are stated at market value as determined by the
most recently traded price of each security at the balance sheet date. All
marketable securities are defined as trading securities or available-for-sale
securities under the provisions of Statement of Financial Accounting Standards
No. ("SFAS") 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES.
Management determines the appropriate classification of its investments
in marketable securities at the time of purchase and reevaluates such
determination at each balance sheet date. Securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and unrealized holding gains and losses are included in
earnings. Equity securities not classified as trading securities are classified
as available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported as a separate component of
members' equity. The cost of investments sold is determined on the specific
identification or the first-in, first-out method. As of December 31, 1999, all
marketable equity securities are classified as trading securities and are
carried on the balance sheet at their aggregate fair value of $1,034,580. The
cost of and unrealized gain on these securities are $1,007,600 and $26,980,
respectively, at December 31, 1999.
The marketable equity securities were contributed to the Company by
certain members as their capital contributions. The purpose of the contributions
was to maintain the Company's net worth as specified in the operating agreement,
as amended. The operating agreement requires that the securities be held in
segregated accounts of the Company ("Special Accounts") apart from other assets
and that the Special Accounts are not to be used by the Company for any purpose
other than to maintain the Company's net worth as specified in operating
agreement. If any of the assets in the Special Accounts are used to pay Company
expenses or fund any of the Company's investees, the funds withdrawn are to earn
interest at the prevailing prime commercial lending rate plus two percentage
points. Any amounts withdrawn from the Special Accounts, plus interest thereon,
is to be repaid into the Special Accounts prior to any other payments or
distributions to the members. The funds in the Special Accounts are to be
invested at the direction of the contributing members or their designees. In the
event that the aggregate fair market value of the assets held in any Special
Account is less than the initial capital contribution of the contributing
member, then the Manager may require such member to make an additional capital
contribution to the extent of the difference. In the event such member defaults
in making an additional capital contribution, the Company may obtain the
shortfall from a third party and may dilute the defaulting member's equity
ownership percentage as specified in the operating agreement.
Any member that contributed into a Special Account may request a
distribution of all of the balance in the account upon 120 days notice. The
Company is obligated to distribute the balance if it is able to secure an equal
amount of replacement capital from an existing or new member, otherwise, the
Company is not obligated to distribute such balances to the requesting member.
F-11
<PAGE>
CORNERSTONE INDUSTRIAL PROPERTIES, LLC
(A CALIFORNIA LIMITED LIABILITY COMPANY)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAX MATTERS
It is the intent of the Company and its members that the Company be
treated as a partnership for income tax purposes. As a limited liability
company, the Company is subject to certain minimal taxes and fees; however,
income taxes on income or losses realized by the Company are generally the
obligation of the members.
3. ADVANCES PAYABLE TO MEMBER
The advances payable to member bear simple interest at the prevailing
prime commercial lending rate plus two percentage points.
4. MEMBER'S CAPITAL CONTRIBUTION NOTE
The member's capital contribution note represents a $100,000 revolving
note receivable from Ventures. The note bears interest at the prevailing prime
commercial lending rate plus two percentage points. The note matures on December
2, 2001 and is secured by Venture's interest in a California general partnership
and is personally guaranteed by the sole shareholder of Ventures. Accrued
interest receivable of $9,454 has been added to the note receivable balance at
December 31, 1999.
F-12
<PAGE>
PRIOR PERFORMANCE TABLES
The prior performance tables that follow present information regarding
private placement programs previously sponsored by affiliates of the managing
member. The information presented in the tables represents 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 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 21 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 1, 1997
through December 31, 1999. 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 1997 through 1999 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 1995 through 1999. 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 1995
through 1999.
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 through closing for sales or disposals which
have closed been acquired in the years 1997 through 1999.
62
<PAGE>
TABLE VI - GENERAL INFORMATION OF PROJECTS
Table VI provides general information of each individual program
regarding the nature and location of the properties and the manner in which the
properties were acquired during the years 1997 through 1999.
63
<PAGE>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS - JANUARY 1, 1997
THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
WHITE STAR WHITE STAR
PARTNERS - PARTNERS -
PHASE I PHASE II
--------------- ---------------
<S> <C> <C> <C> <C>
Dollar amount offered 3,524,603 1,312,897
Dollar amount raised (100%) 3,524,603 100.00% 1,312,897 100.00%
Less offering expenses:
Organization expenses 6,160 0.17% 3,035 0.23%
Equity placement & administrative fees 0 0.00% 0 0.00%
Investment acquisition fees 0 0.00% 0 0.00%
Offering administrative & selling expenses 0 0.00% 0 0.00%
Reserves 0 0.00% 0 0.00%
--------------- ---------------
Amount Available for Investment 3,518,443 99.83% 1,309,862 99.77%
=============== ===============
Acquisition costs:
Prepaid items and fees related
to purchase of property 142,837 1.21% 18,997 0.44%
Cash down payment 2,655,560 22.50% 989,183 22.68%
Mortgage financing 8,743,200 74.09% 3,256,800 74.67%
Building improvements paid outside of escrow 0 0.00% 0 0.00%
Acquisition fees 259,017 2.19% 96,483 2.21%
--------------- ---------------
Total acquisition costs 11,800,614 100.00% 4,361,463 100.00%
--------------- ---------------
Percent leverage (mortgage financing 74.09% 74.67%
divided by total acquisition cost)
Date offering began Feb-99 Feb-99
Length of offering (in months) [1] [1]
Months to invest 90% of amount
available for investment [1] [1]
<CAPTION>
CARSON CARSON
INDUSTRIAL INDUSTRIAL
PARTNERS - PARTNERS-
PHASE I PHASE II
-------------- --------------
<S> <C> <C> <C> <C>
Dollar amount offered 529,677 2,223,323
Dollar amount raised (100%) 529,677 100.00% 2,223,323 100.00%
Less offering expenses:
Organization expenses 430 0.08% 1,693 0.08%
Equity placement & administrative fees 0 0.00% 0 0.00%
Investment acquisition fees 13,949 2.63% 58,551 2.63%
Offering administrative & selling expenses 0 0.00% 0 0.00%
Reserves 577 0.11% 2,423 0.11%
-------------- --------------
Amount Available for Investment 514,721 97.18% 2,160,656 97.18%
============== ==============
Acquisition costs:
Prepaid items and fees related
to purchase of property 3,973 0.28% 3,817 0.06%
Cash down payment 357,401 24.94% 1,500,191 24.95%
Mortgage financing 1,038,960 72.51% 4,361,040 72.53%
Building improvements paid outside of escrow 4,540 0.32% 30,535 0.51%
Acquisition fees 27,898 1.95% 117,102 1.95%
-------------- --------------
Total acquisition costs 1,432,772 100.00% 6,012,685 100.00%
-------------- --------------
Percent leverage (mortgage financing 72.51% 72.53%
divided by total acquisition cost)
Date offering began Aug-97 Aug-97
Length of offering (in months) [1] [1]
Months to invest 90% of amount
available for investment [1] [1]
</TABLE>
[1] Offering was made within thirty days of acquiring the property.
64
<PAGE>
TABLE II
COMPENSATION TO SPONSOR JANUARY 1, 1997 THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
CARSON CARSON
WHITE STAR WHITE STAR INDUSTRIAL INDUSTRIAL
PARTNERS - PARTNER - PARTNERS - PHASE PARTNERS - PHASE
Type of Compensation PHASE I PHASE II I II
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Date offering commenced Feb-99 Feb-99 Aug-97 Aug-97
Dollar amount raised 3,524,603 1,312,897 529,677 2,223,323
Amount paid to sponsor from proceeds
of offering:
Investment acquisition fees 0 0 0 0
Acquisition fees 172,678 64,322 27,898 117,102
--------------- ---------------- ---------------- ----------------
172,678 64,322 27,898 117,102
--------------- ---------------- ---------------- ----------------
Dollar amount of cash generated from operations
before deducting payments to sponsor: 486,128 61,965 146,211 586,113
Amount paid to sponsor from operations:
Property management fees 0 0 17,477 82,722
Administrative service fees 21,046 [1] 5,138 [1] 11,450 [1] 62,196 [1]
Lease commissions 8,005 [2] 15,042 [2] 12,461 [2] 40,531 [2]
Construction supervision fee 315 [3] 736 [3] 1,291 [3] 25,047 [3]
--------------- ---------------- ---------------- ----------------
29,366 20,916 42,679 210,496
--------------- ---------------- ---------------- ----------------
Dollar amount of property sales and refinancing
before deducting payments to sponsor:
Cash 3,905,000 4,800,000 2,500,000 0
Notes 0 0 0 0
--------------- ---------------- ---------------- ----------------
3,905,000 4,800,000 2,500,000 0
--------------- ---------------- ---------------- ----------------
Amount paid to sponsor from
property sales and refinancing:
Real estate commissions 39,050 48,000 25,000 0
Incentive fees 0 0 0 0
--------------- ---------------- ---------------- ----------------
39,050 48,000 25,000 0
--------------- ---------------- ---------------- ----------------
[1] 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 21,046 5,138 11,450 62,196
Less: Amount paid by sponsor to third
party 3,157 771 714 9,329
--------------- ---------------- ---------------- ----------------
Net partnership management fees
earned by sponsor 17,889 4,367 10,736 52,867
=============== ================ ================ ================
[2] 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 8,005 15,042 12,461 40,531
Less: Amount paid by sponsor to third
party 7,037 12,153 0 0
--------------- ---------------- ---------------- ----------------
Net commission fees earned by
sponsor 968 2,889 12,461 40,531
=============== ================ ================ ================
[3] Construction supervision fees paid to the sponsor were capitalized and
depreciated, therefore they were not fully expensed in operations.
</TABLE>
65
<PAGE>
TABLE III
BALDWIN BUSINESS PARK PARTNERS
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<TABLE>
<CAPTION>
1996 [1] 1997 1998 1999
----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Gross Revenues 71,672 1,034,319 1,090,925 780,958
Profit on sale of properties 0 0 0 1,952,898
Less: Operating expenses 20,718 408,392 389,095 270,199
Interest expense 32,100 426,285 415,810 259,704
Depreciation & amortization 7,217 152,558 179,760 315,370
----------------- ---------------- ---------------- ---------------
Net Income-GAAP Basis 11,637 47,084 106,260 1,888,583
================= ================ ================ ===============
Taxable Income
- from operations 7,374 60,171 110,870 (77,749)
- from gain on sale 0 0 0 1,952,898
Cash generated from operations 78,275 164,440 206,400 125,130
Cash generated from sales 0 0 0 8,404,304
Cash generated from refinancing 0 0 0 0
----------------- ---------------- ---------------- ---------------
Cash generated from operations,
sales and refinancing 78,275 164,440 206,400 8,529,434
Less: Cash distributions to investors
- from operating cash flow 0 60,294 60,027 453,924
- from sales and refinancing 0 0 0 1,479,319
- from return of capital 0 0 0 2,119,000
----------------- ---------------- ---------------- ---------------
0 60,294 60,027 4,052,243
----------------- ---------------- ---------------- ---------------
Cash generated (deficiency) after cash distributions 78,275 104,146 146,373 4,477,191
Special items:
- Partners' capital contributions 2,186,400 0 0 0
- Borrowing secured by property 4,700,000 0 0 0
- Accrued property acquisition fees 9,545 (9,545) 0 0
- Reserve retained in sub-tier Partnership (400) 0 0 0
- Capitalized loan fees & organization cost (170,373) (22,781) 0 0
- Loans from/(to) Affiliates 0 (338) 338 0
- Capitalized equity placement fees (67,000) 0 0 0
- Property acquisitions and improvements (6,566,229) (22,651) (142,951) 0
- Decrease in borrowings secured by property (3,198) (38,371) (38,371) (4,620,060)
Cash generated (deficiency) after cash
----------------- ---------------- ---------------- ---------------
distributions and special items 167,020 10,460 (34,611) (142,869)
================= ================ ================ ===============
TAX AND DISTRIBUTION DATA PER $1000 INVESTED
Federal Income Tax Results:
Ordinary income (loss)
- from operations 3.4 27.5 50.7 (35.6)
- from recapture 0.0 0.0 0.0 0.0
Capital gain (loss) 0.0 0.0 0.0 893.2
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 26.9 27.5 884.9
- Return of capital 0.0 0.7 0.0 968.5
Source (on cash basis)
- Operations 0.0 27.6 27.5 207.6
- Refinancing 0.0 0.0 0.0 0.0
- Sales 0.0 0.0 0.0 1,645.8
Amount remaining invested at the end of the period 100% 99.93% 99.93% 3.08% [3]
(expressed as a percentage of the amount originally invested in
the property)
</TABLE>
[1] For period 11/08/96 (inception) through 12/31/96.
[2] The partnership files the tax return on the cash basis which
results in differences between net income - GAAP basis and taxable
income.
[3] The partnership sold all assets and liquidated in 1999. The
remaining amount invested represents capitalized equity placement
fees that are not deductible by the partnership.
66
<PAGE>
TABLE III
VAN BUREN BUSINESS PARK PARTNERS
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<TABLE>
<CAPTION>
1995 [1] 1996 1997 1998 1999
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross Revenues 208,082 344,047 291,914 293,036 49,369
Profit on sale of properties 311,439 0 103,535 222,775 1,174,923
Less: Operating expenses 74,461 122,106 136,305 113,656 51,518
Interest expense 88,976 168,573 162,346 125,540 7,881
Depreciation & amortization 37,443 67,958 62,038 55,105 31,920
-----------------------------------------------------------------------------
Net Income-GAAP Basis 318,641 (14,590) 34,760 221,510 1,132,973
=============================================================================
Taxable Income
- from operations 8,993 (16,091) (68,776) (1,263) (41,951)
- from gain on sale 311,149 [2] 0 103,536 222,774 1,174,922
Cash generated from operations 64,882 58,484 14,204 21,754 (33,777)
Cash generated from sales 1,176,624 0 341,834 627,366 2,692,774
Cash generated from refinancing 0 230,000 0 0 0
-----------------------------------------------------------------------------
Cash generated from operations,
sales and refinancing 1,241,506 288,484 356,038 649,120 2,658,997
Less: Cash distributions to investors
- from operating cash flow 64,882 58,484 14,204 21,754 0
- from sales and refinancing 311,439 169,216 103,535 222,775 1,174,923
- from return of capital 123,679 0 37,261 55,471 591,954
-----------------------------------------------------------------------------
500,000 227,700 155,000 300,000 1,766,877
-----------------------------------------------------------------------------
Cash generated (deficiency) after cash distributions 741,506 60,784 201,038 349,120 892,120
Special items:
- Partners' capital contributions 1,572,781 0 0 0 0
- Borrowing secured by property 2,000,000 0 0 0 0
- Reserve retained in sub-tier Partnership (5,000) 0 0 0 0
- Capitalized loan fees & Organization Cost (76,645) (2,867) 0 0 0
- Capitalized equity placement fees (132,300) 0 0 0 0
- Property acquisitions and improvements (3,353,405) (2,314) (4,574) 0 0
- Decrease in borrowings secured by property (630,671) (11,787) (203,802) (338,343) (1,045,396)
Cash generated (deficiency) after cash
-----------------------------------------------------------------------------
distributions and special items 116,266 43,816 (7,338) 10,777 (153,276)
=============================================================================
TAX AND DISTRIBUTION DATA PER $1000 INVESTED
Federal Income Tax Results:
Ordinary income(loss)
- from operations 5.7 (10.2) (43.7) (0.8) (26.7)
- from 1231 gain 197.8 [2] 0.0 0.0 0.0 0.0
Capital gain(loss) 0.0 0.0 65.8 141.6 747.0
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 202.6 0.0 12.8 140.8 720.4
- Return of capital 115.3 144.8 85.7 49.9 403.0
Source (on cash basis)
- Operations 0.0 0.0 0.0 0.0 0.0
- Refinancing 0.0 144.8 0.0 0.0 0.0
- Sales 317.9 0.0 98.6 190.7 1,123.4
Amount remaining invested at the end of the period 88.47% 73.99% 65.42% 60.43% 20.12%
(expressed as a percentage of the amount originally
invested in the property)
</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.
67
<PAGE>
TABLE III
TORRANCE AMAPOLA PARTNERS
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<TABLE>
<CAPTION>
1995 [1] 1996 1997 1998 1999 [2]
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross Revenues 40,337 712,378 698,382 686,737 897,607
Profit on sale of properties 0 0 0 0 0
Less: Operating expenses 5,171 265,312 210,186 231,994 251,317
Interest expense 14,372 289,747 301,001 303,494 388,314
Depreciation & amortization 3,914 86,675 104,574 120,809 172,178
----------------------------------------------------------------------
Net Income-GAAP Basis 16,880 70,644 82,621 30,440 85,798
======================================================================
Taxable Income
- from operations 2,317 85,900 87,371 44,896 102,100
- from gain on sale 0 0 0
Cash generated from operations 24,401 154,828 131,640 66,616 220,170
Cash generated from sales 0 0 0 0 0
Cash generated from refinancing 0 0 149,582 0 1,347,737
----------------------------------------------------------------------
Cash generated from operations,
sales and refinancing 24,401 154,828 281,222 66,616 1,567,907
Less: Cash distributions to investors
- from operating cash flow 0 100,000 100,000 0 196,555
- from sales and refinancing 0 0 0 0 1,347,737
- from return of capital 0 0 0 0 0
----------------------------------------------------------------------
0 100,000 100,000 0 1,544,292
----------------------------------------------------------------------
Cash generated (deficiency) after cash distributions 24,401 54,828 181,222 66,616 23,615
Special items:
- Partners' capital contributions 1,601,046 0 0 0 0
- Borrowing secured by property 3,150,000 0 0 0 0
- Accrued property acquisition fees 9,350 (9,350) 0 0 0
- Reserve retained in sub-tier Partnership (5,000) 0 0 0 0
- Acquisition fee paid directly by sub-tier Partnership (25,000) 0 0 0 0
- Capitalized loan fees & Organization Cost (83,450) (8,671) 0 0 0
- Loans from/(to) Affiliates (60,889) 60,789 0 0 0
- Capitalized equity placement fees (92,258) (70,697) 0 0 0
- Property acquisitions and improvements (4,189,812) (127,172) (150,815) (95,119) (99,918)
- Decrease in borrowings secured by property 0 (29,993) (33,538) (38,397) (69,957)
- Escrow Deposits [2] 0 0 0 0 200,000
Cash generated (deficiency) after cash
distributions and special items
----------------------------------------------------------------------
328,388 (130,266) (3,131) (66,900) 53,740
======================================================================
TAX AND DISTRIBUTION DATA PER $1000 INVESTED
Federal Income Tax Results:
Ordinary income (loss)
- from operations 1.4 53.7 54.6 28.0 63.8
- from recapture 0.0 0.0 0.0 0.0 0.0
Capital gain (loss) 0.0 0.0 0.0 0.0 0.0
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 54.7 51.6 0.0 124.2
- Return of capital 0.0 7.8 10.9 0.0 840.3
Source (on cash basis)
- Operations 0.0 62.5 62.5 0.0 122.8
- Refinancing 0.0 0.0 0.0 0.0 841.8
- Sales 0.0 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% 14.10%
(expressed as a percentage of the amount originally invested in
the property)
</TABLE>
[1] For period 12/18/95 (inception) through 12/31/95.
[2] Sale of project in escrow at 12/31/99; escrow closed on January 7, 2000
with a contract sales price of $7,075,000.
68
<PAGE>
TABLE III
CARSON INDUSTRIAL PARTNERS - PHASE I
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<TABLE>
<CAPTION>
1997 [1] 1998
------------------ ------------------
<S> <C> <C>
Gross Revenues 119,977 250,754
Profit on sale of properties 0 879,003
Less: Operating expenses 36,744 90,039
Interest expense 35,396 72,708
Depreciation & amortization 7,818 41,326
------------------ ------------------
Net Income-GAAP Basis 40,019 925,684
================== ==================
Taxable Income
- from operations 36,239 45,555
- from gain on sale 0 879,003
Cash generated from operations 54,174 50,649
Cash generated from sales 0 2,337,534
Cash generated from refinancing 0 0
------------------ ------------------
Cash generated from operations,
sales and refinancing 54,174 2,388,183
Less: Cash distributions to investors
- from operating cash flow 0 104,823
- from sales and refinancing 0 860,880
- from return of capital 0 1,385
------------------ ------------------
0 967,088
------------------ ------------------
Cash generated (deficiency) after cash distributions 54,174 1,421,095
Special items:
- Partners' 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 cost (29,650) 0
- Transfers between Phase I and Phase II 0 (527,998)[2]
- Advances to affiliates 19 (19)
- Capitalized equity placement fees (13,949) 0
- Property acquisitions and improvements (1,432,772) 0
- Decrease in borrowings secured by property (3,597) (1,035,363)
Cash generated (deficiency) after cash
distributions and special items
------------------ ------------------
142,285 (142,285)
================== ==================
TAX AND DISTRIBUTION DATA PER $1000 INVESTED
Federal Income Tax Results:
Ordinary income (loss)
- from operations 68.4 86.0
- from recapture 0.0 0.0
Capital gain (loss) 0.0 1,659.5
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 1,823.2 [2]
- Return of capital 0.0 2.6
Source (on cash basis)
- Operations 0.0 197.9
- Refinancing 0.0 0.0
- Sales 0.0 1,625.3
Amount remaining invested at the end of the period 100% 99.68%
(expressed as a percentage of the amount originally invested in the
property)
</TABLE>
[1] For period 04/14/97 (inception) through 12/31/97.
[2] This program was included with another program that was reported by
a single partnership entity. Both programs were financed by an
umbrella loan. Upon disposition of this property the lender
required paydown on the umbrella in an amount greater than the debt
allocated to it. The remaining partners' equity was transferred to
the other program (Carson Industrial Partners - Phase II)
69
<PAGE>
TABLE III
CARSON INDUSTRIAL PARTNERS - PHASE II
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<TABLE>
<CAPTION>
1997 [1] 1998 1999
------------------ ------------------ -----------------
<S> <C> <C> <C>
Gross Revenues 270,880 766,821 763,738
Profit on sale of properties 0 0 0
Less: Operating expenses 75,987 234,284 256,264
Interest expense 148,579 367,328 331,752
Depreciation & amortization 27,804 93,479 102,050
------------------ ------------------ -----------------
Net Income-GAAP Basis 18,510 71,730 73,672
================== ================== =================
Taxable Income
- from operations 10,074 114,826 76,127
- from gain on sale 0 0 0
Cash generated from operations 47,782 167,303 183,692
Cash generated from sales 0 0 0
Cash generated from refinancing 0 0 0
------------------ ------------------ -----------------
Cash generated from operations,
sales and refinancing 47,782 167,303 183,692
Less: Cash distributions to investors
- from operating cash flow 0 0 130,500
- from sales and refinancing 0 0 0
- from return of capital 0 0 0
------------------ ------------------ -----------------
0 0 130,500
------------------ ------------------ -----------------
Cash generated (deficiency) after cash distributions 47,782 167,303 53,192
Special items:
- Partners' capital contributions 2,223,323 0 0
- Borrowing secured by property 4,361,040 0 0
- Reserve retained in sub-tier partnership (2,423) 0 0
- Capitalized loan fees & organization cost (116,948) 0 0
- Transfers Phase I and Phase II 0 527,998 [2] 0
- Loans from/(to) Affiliates 81 19 0
- Capitalized equity placement fees (58,551) 0 0
- Property acquisitions and improvements (6,012,685) (319,114) (26,118)
- Decrease in borrowings secured by property (15,097) (441,774) (49,500)
Cash generated (deficiency) after cash
distributions and special items
------------------ ------------------ -----------------
426,522 (65,568) (22,426)
================== ================== =================
TAX AND DISTRIBUTION DATA PER $1000 INVESTED
Federal Income Tax Results:
Ordinary income (loss)
- from operations 4.5 51.6 34.2
- from recapture 0.0 0.0 0.0
Capital gain (loss) 0.0 0.0 0.0
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 0.0 58.7
- Return of capital 0.0 0.0 0.0
Source (on cash basis)
- Operations 0.0 0.0 58.7
- Refinancing 0.0 0.0 0.0
- Sales 0.0 0.0 0.0
Amount remaining invested at the end of the period 100% 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.
[2] This program was included with another program that were reported
by a single partnership entity. Both programs were financed by an
umbrella loan. Upon disposition of Phase I property the lender
required paydown on the umbrella in an amount greater than the debt
allocated to it. The remaining partners equity from sales and
operational profit was transferred from the other program (Carson
Industrial Partners - Phase I)
70
<PAGE>
TABLE III
WHITE STAR PARTNERS - PHASE I
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<TABLE>
<CAPTION>
1999 [1]
------------------
<S> <C>
Gross Revenues 1,275,332
Profit on sale of properties 515,042
Less: Operating expenses 342,508
Interest expense 569,813
Depreciation & amortization 146,695
------------------
Net Income-GAAP Basis 731,357
==================
Taxable Income
- from operations 226,024
- from gain on sale (ordinary income) 515,042 [3]
Cash generated from operations 457,077
Cash generated from sales 3,711,443
Cash generated from refinancing 0
------------------
Cash generated from operations,
sales and refinancing 4,168,520
Less: Cash distributions to investors
- from operating cash flow 0
- from sales and refinancing 101,925
- from return of capital 0
------------------
101,925
------------------
Cash generated (deficiency) after cash distributions 4,066,595
Special items:
- Partners' capital contributions 3,524,603
- Borrowing secured by property 8,743,200
- Capitalized loan fees & organization cost (137,492)
- Transfers Phase I and Phase II (32,068)[2]
- Property acquisitions and improvements (11,827,537)
- Decrease in borrowings secured by property (3,671,936)
Cash generated (deficiency) after cash
distributions and special items
------------------
665,366
==================
TAX AND DISTRIBUTION DATA PER $1000 INVESTED
Federal Income Tax Results:
Ordinary income (loss)
- from operations 64.1
- from 1231 gain 146.1 [3]
Capital gain (loss) 0.0
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 28.9
- Return of capital 0.0
Source (on cash basis)
- Operations 0.0
- Refinancing 0.0
- Sales 28.9
Amount remaining invested at the end of the period 100%
(expressed as a percentage of the amount originally invested in the property)
</TABLE>
[1] For period 02/04/99 (inception) through 12/31/99.
[2] This program was included with another program that was reported by
a single partnership entity. Both programs were financed by an
umbrella loan. Upon disposition of Phase II property the loan fees
and other intangible assets were transferred to Phase I from Phase
II. Some of the partners' equity from sales and operational profit
was transferred to the Phase II program to pay- off the original
investment. (See White Star Partners - Phase II)
[3] Due to the holding period of the asset, the entire gain was
recognized as ordinary income on the tax return.
71
<PAGE>
TABLE III
WHITE STAR PARTNERS - PHASE II
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<TABLE>
<CAPTION>
1999 [1]
------------------
<S> <C>
Gross Revenues 343,572
Profit on sale of properties 193,729
Less: Operating expenses 130,561
Interest expense 174,453
Depreciation & amortization 50,062
------------------
Net Income-GAAP Basis 182,225
==================
Taxable Income
- from operations 12,707
- from gain on sale (ordinary income) 193,730 [3]
Cash generated from operations 41,785
Cash generated from sales 4,570,830
Cash generated from refinancing 0
------------------
Cash generated from operations,
sales and refinancing 4,612,615
Less: Cash distributions to investors
- from operating cash flow 41,785
- from sales and refinancing 140,440
- from return of capital 1,312,897
------------------
1,495,122
------------------
Cash generated (deficiency) after cash distributions 3,117,493
Special items:
- Partners' capital contributions 1,312,897
- Borrowing secured by property 3,256,800
- Capitalized loan fees & organization cost (51,218)
- Transfers Phase I and Phase II 32,068 [2]
- Property acquisitions and improvements (4,411,240)
- Decrease in borrowings secured by property (3,256,800)
Cash generated (deficiency) after cash
distributions and special items
------------------
(0)
==================
TAX AND DISTRIBUTION DATA PER $1000 INVESTED
Federal Income Tax Results:
Ordinary income (loss)
- from operations 9.7
- from 1231 gain 147.6 [3]
Capital gain (loss) 0.0
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 138.8
- Return of capital 1,000.0
Source (on cash basis)
- Operations 31.8
- Refinancing 0.0
- Sales 1,107.0
Amount remaining invested at the end of the period 0%
(expressed as a percentage of the amount originally invested in the
property)
</TABLE>
[1] For period 02/04/99 (inception) through 12/31/99.
[2] This program was included with another program that was reported by
a single partnership entity. Both programs were financed by an
umbrella loan. Upon disposition of this property, loan fees and
other intangible assets were transferred to Phase I. Additional
partners' equity from Phase I was transferred to pay-off the
original investment in Phase II. ( See White Star Partners - Phase
I)
[3] Due to the holding period of the asset, the entire gain was
recognized as ordinary income on the tax return.
72
<PAGE>
TABLE IV
RESULTS OF COMPLETED PROGRAMS FOR THE PERIOD JANUARY 1, 1995 - DECEMBER 31, 1999
<TABLE>
<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 first sale of property 02/15/96 01/31/97 10/29/96
Date of final 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):
From operations (365.0) (735.6) (746.9)
From recapture or holding period 0.0 0.0 0.0
Gross capital gain 2,883.9 1,313.7 2,117.9
Deferred gain: 0.0 0.0 0.0
Cash distributions to investors:
Source (on GAAP basis)
Investment income 2,518.9 578.2 1,371.0
Return of capital 843.8 [3] 843.8 [3] 843.8 [3]
Source (cash basis):
Sales 3,362.6 [1] 1,421.9 [1] 2,214.8 [1]
Refinancing 0.0 0.0 0.0
Operations 0.0 0.0 0.0
Other 0.0 0.0 0.0
Receivable on net purchase money financing 0.0 0.0 0.0
<CAPTION>
CARSON
INDUSTRIAL
PARTNERS
WESTLAKE II PHASE I
---------------- -----------------
<S> <C> <C>
Dollar amount raised 320,821 529,677
Number of properties purchased Nine One
Date of closing of offering 10/25/94 4/14/97
Date of first sale of property 12/27/96 10/9/98
Date of final sale of property 10/13/99 10/9/98
Tax and distribution data per $1,000 investment
Federal income tax results:
Ordinary income (loss):
From operations (1,137.0) 154.4
From recapture or holding period 0.0 0.0
Gross capital gain 7,571.7 1,659.5
Deferred gain: 0.0 0.0
Cash distributions to investors:
Source (on GAAP basis)
Investment income 6,433.9 1,823.2
Return of capital 843.8 [3] 2.6 [1]
Source (cash basis):
Sales 7,277.7 [1] 1,627.9
Refinancing 0.0 0.0
Operations 0.0 197.9
Other 0.0 0.0
Receivable on net purchase money financing 0.0 0.0
</TABLE>
73
<PAGE>
TABLE IV
RESULTS OF COMPLETED PROGRAMS FOR THE PERIOD JANUARY 1, 1995 - DECEMBER 31, 1999
<TABLE>
<CAPTION>
BALDWIN BUSINESS WHITE STAR
PARK PHASE II
------------------- -----------------------
<S> <C> <C>
Dollar amount raised 2,186,400 1,312,897
Number of properties purchased One One
Date of closing of offering 11/8/96 2/4/99
Date of first sale of property 8/30/99 9/17/99
Date of final sale of property 8/30/99 9/17/99
Tax and distribution data per $1,000 investment
Federal income tax results:
Ordinary income (loss):
From operations 46.0 9.7
From recapture or holding period 0.0 147.6
Gross capital gain 893.2 0.0
Deferred gain: 0.0 0.0
Cash distributions to investors:
Source (on GAAP basis)
Investment income 939.2 138.8
Return of capital 969.2 [3] 1,000.0
Source (cash basis):
Sales 1,645.8 1,107.0
Refinancing 0.0 0.0
Operations 262.6 31.8
Other 0.0 0.0
Receivable on net purchase money financing 0.0 0.0
<CAPTION>
CORNERSTONE WALNUT CORNERSTONE WALNUT
PHASE I PHASE II
--------------------- ----------------------
<S> <C> <C>
Dollar amount raised 642,400 1,557,600
Number of properties purchased One Eleven
Date of closing of offering 7/2/92 7/2/92
Date of first sale of property 5/6/98 3/8/94
Date of final sale of property 5/6/98 4/9/99
Tax and distribution data per $1,000 investment
Federal income tax results:
Ordinary income (loss):
From operations 108.0 (367.2)
From recapture or holding period 0.0 0.0
Gross capital gain 1,150.7 959.3
Deferred gain: 0.0 0.0
Cash distributions to investors:
Source (on GAAP basis)
Investment income n/a [2] n/a [2]
Return of capital n/a [2] n/a [2]
Source (cash basis):
Sales 764.3 1,376.3
Refinancing 303.2 217.8
Operations 557.8 0.0
Other 0.0 0.0
Receivable on net purchase money financing 0.0 0.0
</TABLE>
[1] 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 properties the lender may have
required a paydown on the umbrella loan in an amount greater than the
debt that was allocated to it.
[2] The program's books and records were maintained on a cash basis and
therefore GAAP information is not available.
[3] All capital was distributed net of equity placement fees.
74
<PAGE>
TABLE V.
SALES OR DISPOSALS OF PROPERTIES
JANUARY 1, 1997 THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
DATE DATE OF
PROPERTY ACQUIRED SALE SELLING PRICE NET OF CLOSING COSTS AND GAAP ADJUSTMENTS
========================================== =================================================================================
PURCHASE
MONEY ADJUSTMENT
CASH MORTGAGE MORTGAGE RESULTING FROM
RECEIVED NET BALANCE AT TAKEN BACK APPLICATION OF
OF CLOSING TIME OF SALE BY PROGRAM GAAP TOTAL
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
VAN BUREN
Building 7 5/31/1995 1/21/1997 152,526 189,308 0 0 341,834
Building 10 5/31/1995 3/13/1998 157,049 168,299 0 0 325,348
Building 4 5/31/1995 3/17/1998 145,031 156,987 0 0 302,018
Buildings 1-3 5/31/1995 1/13/1999 817,023 715,157 0 0 1,532,180
Building 8 5/31/1995 2/26/1999 404,273 324,324 0 0 728,597
Building 6 5/31/1995 7/30/1999 430,752 0 0 0 430,752
---------------------------------------------------------------------------------
2,106,654 1,554,075 0 0 3,660,729
=================================================================================
TAMARACK
Unit 480D 4/4/1993 1/10/1997 35,181 178,305 0 0 213,486
Unit 450C 4/4/1993 8/29/1997 22,628 177,160 0 0 199,788
Unit 420A 4/4/1993 12/31/1997 44,524 187,624 0 0 232,148
Unit 450A 4/4/1993 7/17/1998 42,205 179,191 0 0 221,396
Unit 480E 4/4/1993 8/18/1998 49,132 187,624 0 0 236,756
Unit 420E 4/4/1993 4/27/1999 182,761 0 0 0 182,761
Unit 595D 4/4/1993 7/15/1999 225,604 0 0 0 225,604
Unit 595E 4/4/1993 11/24/1999 243,487 0 0 0 243,487
---------------------------------------------------------------------------------
845,522 909,904 0 0 1,755,426
=================================================================================
COST OF PROPERTY INCLUDING CLOSING AND SOFT COSTS
===============================================================
EXCESS (DEFICIT)
TOTAL ACQUISITION OF PROPERTY
COST, CAPITAL OPERATIONAL CASH
ORIGINAL IMPROVEMENTS RECEIPTS OVER
MORTGAGE CLOSING & SOFT CASH
FINANCING FTNT COSTS TOTAL EXPENDITURES
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VAN BUREN
Building 7 146,571 [1] 104,093 250,664 [2]
Building 10 130,305 [1] 94,790 225,095 [2]
Building 4 121,547 [1] 88,614 210,161 [2]
Buildings 1-3 553,707 [1] 393,170 946,877 [2]
Building 8 261,057 [1] 185,380 446,437 [2]
Building 6 159,061 [1] 112,946 272,007 [2]
----------------- -------------------------------------
1,372,248 978,993 2,351,241
================= =====================================
TAMARACK
Unit 480D 97,280 [1] 75,138 172,418 [2]
Unit 450C 96,710 [1] 72,586 169,296 [2]
Unit 420A 102,410 [1] 76,948 179,358 [2]
Unit 450A 97,850 [1] 75,133 172,983 [2]
Unit 480E 102,410 [1] 79,266 181,676 [2]
Unit 420E 70,870 [1] 55,646 126,516 [2]
Unit 595D 83,809 [1] 87,188 170,997 [2]
Unit 595E 90,250 [1] 86,098 176,348 [2]
----------------- -------------------------------------
741,589 608,003 1,349,592
================= =====================================
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
DATE DATE OF
PROPERTY ACQUIRED SALE SELLING PRICE NET OF CLOSING COSTS AND GAAP ADJUSTMENTS
========================================== =================================================================================
PURCHASE
MONEY ADJUSTMENT
CASH MORTGAGE MORTGAGE RESULTING FROM
RECEIVED NET BALANCE AT TAKEN BACK APPLICATION OF
OF CLOSING TIME OF SALE BY PROGRAM GAAP TOTAL
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
THE PARK
Units 1041/1035 11/22/1993 11/7/1997 422,154 635,538 0 0 1,057,692
Unit 1025 11/22/1993 11/26/1997 157,804 242,228 0 0 400,032
Unit 1021 11/22/1993 12/15/1997 276,955 390,134 0 0 667,089
Unit 1001 11/22/1993 2/20/1998 98,740 123,539 0 0 222,279
Unit 1029 11/22/1993 3/30/1998 172,740 239,706 0 0 412,446
Unit 1139 11/22/1993 9/22/1998 117,447 139,525 0 0 256,972
Unit 1127 11/22/1993 1/6/1999 159,395 222,828 0 0 382,223
Unit 1111 11/22/1993 6/15/1999 167,323 200,014 0 0 367,337
Units 1101 & 1107 11/22/1993 10/22/1999 584,414 631,703 0 0 1,216,117
-----------------------------------------------------------------------------
2,156,972 2,825,215 0 0 4,982,187
=============================================================================
WESTLAKE II
Unit 301 12/22/1993 4/24/1997 175,278 440,294 0 0 615,572
Unit 403 12/22/1993 7/15/1997 106,898 232,848 0 0 339,746
Units 401-2 12/22/1993 1/2/1998 192,971 465,696 0 0 658,667
Unit 302 12/22/1993 6/30/1998 206,199 517,440 0 0 723,639
Units 501-502 12/22/1993 8/13/1999 397,989 895,994 0 0 1,293,983
Building 1 12/22/1993 10/13/1999 298,928 667,498 0 0 966,426
-----------------------------------------------------------------------------
1,378,263 3,219,770 0 0 4,598,033
=============================================================================
=============================================================================
WALNUT I 7/2/1992 5/6/1998 603,488 1,645,018 0 0 2,248,506
---------
=============================================================================
WALNUT II
Unit 5B 7/2/1992 6/3/1997 325,757 0 0 0 325,757
Unit 4B 7/2/1992 12/5/1997 446,855 0 0 0 446,855
Unit 9 7/2/1992 4/9/1999 697,893 0 0 0 697,893
------------------------------------------------------------------------------
1,470,505 0 0 0 1,470,505
==============================================================================
COST OF PROPERTY INCLUDING CLOSING AND SOFT COSTS
=======================================================
EXCESS (DEFICIT)
TOTAL ACQUISITION OF PROPERTY
COST, CAPITAL OPERATIONAL CASH
ORIGINAL IMPROVEMENTS RECEIPTS OVER
MORTGAGE CLOSING & SOFT CASH
FINANCING FTNT COSTS TOTAL EXPENDITURES
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THE PARK
Units 1041/1035 614,392 [1][3] 95,159 709,551 [2]
Unit 1025 234,012 [1][3] 66,927 300,939 [2]
Unit 1021 377,312 [1][3] 52,902 430,214 [2]
Unit 1001 119,635 [1][3] 23,931 143,566 [2]
Unit 1029 231,821 [1][3] 46,920 278,741 [2]
Unit 1139 134,973 [1][3] 27,273 162,246 [2]
Unit 1127 215,607 [1][3] 43,899 259,506 [2]
Unit 1111 193,257 [1][3] 51,553 244,810 [2]
Units 1101 & 1107 610,886 [1][3] 160,424 771,310 [2]
----------------- -------------------------------------
2,731,895 568,988 3,300,883
================= =====================================
WESTLAKE II
Unit 301 308,981 [1][3] 78,805 387,786 [2]
Unit 403 163,403 [1][3] 41,816 205,219 [2]
Units 401-2 326,806 [1][3] 91,362 418,168 [2]
Unit 302 363,118 [1][3] 104,800 467,918 [2]
Units 501-502 628,772 [1][3] 163,811 792,583 [2]
Building 1 468,423 [1][3] 119,417 587,840 [2]
----------------- -------------------------------------
2,259,503 600,011 2,859,514
================= =====================================
================= =====================================
WALNUT I 1,153,400 [1][3] 689,848 1,843,248 358,319
================= =================================================
WALNUT II
Unit 5B 169,850 [1][3] 120,372 290,222 [2]
Unit 4B 225,150 [1][3] 151,157 376,307 [2]
Unit 9 292,300 [1][3] 237,948 530,248 [2]
----------------- -------------------------------------
687,300 509,477 1,196,777
================= =====================================
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
DATE DATE OF
PROPERTY ACQUIRED SALE SELLING PRICE NET OF CLOSING COSTS AND GAAP ADJUSTMENTS
============================================== ==============================================================================
PURCHASE
MONEY ADJUSTMENT
CASH MORTGAGE MORTGAGE RESULTING FROM
RECEIVED NET BALANCE AT TAKEN BACK APPLICATION OF
OF CLOSING TIME OF SALE BY PROGRAM GAAP TOTAL
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALDWIN BUSINESS PARK 12/5/1996 8/30/1999 3,822,901 4,597,678 0 0 8,420,579
=============================================================================
CARSON PHASE I 8/15/1997 10/9/1998 921,042 1,420,834 0 0 2,341,876
=============================================================================
BEACH COMMERCE CENTER 12/22/1993 1/31/1997 330,170 4,368,836 0 0 4,699,006
=============================================================================
WHITE STAR I
Bldgs 2-3 2/5/1999 9/20/1999 791,811 2,957,900 0 0 3,749,711
=============================================================================
WHITE STAR PHASE II 2/5/1999 9/17/1999 875,930 3,694,900 0 0 4,570,830
=============================================================================
<CAPTION>
COST OF PROPERTY INCLUDING CLOSING AND SOFT COSTS
===============================================================
EXCESS (DEFICIT)
TOTAL ACQUISITION OF PROPERTY
COST, CAPITAL OPERATIONAL CASH
ORIGINAL IMPROVEMENTS RECEIPTS OVER
MORTGAGE CLOSING & SOFT CASH
FINANCING FTNT COSTS TOTAL EXPENDITURES
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALDWIN BUSINESS PARK 5,360,000 1,585,313 6,945,313 574,245
================ ==================================================
CARSON PHASE I 1,038,960 [1][3] 467,025 1,505,985 104,823
================ ==================================================
BEACH COMMERCE CENTER 4,115,000 299,926 4,414,926 13,192
================ ==================================================
WHITE STAR I
Bldgs 2-3 2,389,600 [1][3] 871,439 3,261,039 [2]
================ ====================================
WHITE STAR PHASE II 3,256,800 [1][3] 1,205,658 4,462,458 41,785
================ ==================================================
</TABLE>
[1] Original mortgage financing allocated to unit based on square footage
percentage of total project.
[2] The sponsor did not record income and expenditures on a unit by unit
basis and excess cash receipts over expenditures by unit is not
available.
[3] Debt paid down on blanket loan at time of sale that included multiple
units in the same program or multiple programs. The lender determined
debt paydown at each property sale and often required a paydown in a
larger percentage of total debt than allocated to the individual unit.
77
<PAGE>
TABLE V.
SALES OR DISPOSALS OF PROPERTIES
JANUARY 1, 1997 THROUGH DECEMBER 31, 1999
[4] The following project was in escrow on December 31, 1999 and closed
January 7, 2000 with a contract sales price of $7,075,000.
<TABLE>
<CAPTION>
DATE DATE OF
PROPERTY ACQUIRED SALE SELLING PRICE NET OF CLOSING COSTS AND GAAP ADJUSTMENTS
============================================ ===============================================================================
PURCHASE
MONEY ADJUSTMENT
CASH MORTGAGE MORTGAGE RESULTING FROM
RECEIVED NET BALANCE AT TAKEN BACK APPLICATION OF
OF CLOSING TIME OF SALE BY PROGRAM GAAP TOTAL
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
TORRANCE AMAPOLA
PARTNERS 12/15/1995 1/7/2000 2,092,886 4,505,043 0 0 6,597,929
===============================================================================
<CAPTION>
EXCESS (DEFICIT)
OF PROPERTY
OPERATIONAL CASH
RECEIPTS OVER
CASH
COST OF PROPERTY INCLUDING CLOSING AND SOFT COSTS EXPENDITURES
=================================================
TOTAL
ACQUISITION
COST, CAPITAL
ORIGINAL IMPROVEMENTS
MORTGAGE CLOSING & SOFT
FINANCING FTNT COSTS TOTAL
------------------------------------------------------
<S> <C> <C> <C> <C>
TORRANCE AMAPOLA
PARTNERS 3,150,000 1,645,045 4,795,045 597,655
================ ================================================
</TABLE>
78
<PAGE>
TABLE VI
ACQUISITIONS OF PROPERTIES BY PROGRAMS
FOR THE PERIOD JANUARY 1, 1997 THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
WHITE STAR PARTNERS WHITE STAR PARTNERS
PHASE I PHASE II
------------------------ --------------------------
<S> <C> <C>
Location Anaheim, California Anaheim, California
Multi-tenant Multi-tenant Industrial
Type of Property Industrial Bldgs. Bldgs.
Gross Leasable Space 204,047 square feet 76,012 square feet
Date of Purchase February 4, 1999 February 4, 1999
Mortgage Financing $8,743,200 $3,256,800
Cash Down Payment $2,655,560 $989,183
Purchase Price plus Acquisition Fee $11,688,160 $4,319,574
Other Cash Expenditures Expensed N/A N/A
Other Cash Expenditures Capitalized $112,454 $41,889
Total Acquisition Cost $11,800,614 $4,361,463
<CAPTION>
CARSON PHASE I CARSON PHASE II
------------------------ ------------------------
<S> <C> <C>
Location Carson, California Carson, California
Multi-tenant Free-Standing
Type of Property Industrial Bldgs. Industrial Bldgs.
Gross Leasable Space 39,592 square feet 166,191 square feet
Date of Purchase August 15, 1997 August 15, 1997
Mortgage Financing $1,038,960 $4,361,040
Cash Down Payment $357,401 $1,500,191
Purchase Price plus Acquisition Fee $1,413,178 $5,931,822
Other Cash Expenditures Expensed N/A N/A
Other Cash Expenditures Capitalized $19,594 $80,863
Total Acquisition Cost $1,432,772 $6,012,685
</TABLE>
79
<PAGE>
EXHIBIT "A"
CORNERSTONE REALTY FUND, LLC
A CALIFORNIA LIMITED LIABILITY COMPANY
OPERATING AGREEMENT
(AMENDED AND RESTATED)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. ORGANIZATION.................................................................................................A-1
1.1. Formation.........................................................................................A-1
1.2. Name..............................................................................................A-1
1.3. Purpose...........................................................................................A-2
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-2
2.3. Bank Accounts.....................................................................................A-2
2.4. Reports to Members................................................................................A-3
2.5. Tax Returns.......................................................................................A-4
2.6. Appraisals........................................................................................A-4
2.7. List of Members...................................................................................A-4
2.8. Valuation of Units................................................................................A-4
3. MEMBERS, UNITHOLDERS AND MEETINGS OF MEMBERS.................................................................A-4
3.1. Units of Membership Interest......................................................................A-4
3.2. Book Entry Evidence of Ownership..................................................................A-5
3.3. Place of Meetings.................................................................................A-5
3.4. Meetings of Members...............................................................................A-5
3.5. Notice of Meetings................................................................................A-5
3.6. Record Dates......................................................................................A-5
3.7. List of Members...................................................................................A-5
3.8. Quorum............................................................................................A-6
3.9. Proxies...........................................................................................A-6
3.10. Inspectors of Election...........................................................................A-6
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-8
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-9
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-14
8.5 Contracts with the Managing Member and its Affiliates.............................................A-15
8.6. Authority........................................................................................A-15
8.7. Fiduciary Duty; Standard of Care.................................................................A-15
8.8. Liability........................................................................................A-15
8.9. Other Interests..................................................................................A-16
8.10. Prohibited Acts.................................................................................A-16
9. INVESTMENT OBJECTIVES AND POLICIES..........................................................................A-16
9.1. Duties and Responsibilities; Investment Allocation...............................................A-16
9.2. Prohibited Investments and Activities............................................................A-17
9.3. Borrowing Policies...............................................................................A-28
9.4. Conflicts of Interest............................................................................A-28
9.5. Conflict Resolution Procedures...................................................................A-28
10. INDEMNIFICATION............................................................................................A-20
10.1. Indemnification.................................................................................A-20
10.2. Certain Actions.................................................................................A-20
10.3. Expenses of Successful Defense..................................................................A-20
10.4. Determination that Indemnification is Proper....................................................A-20
10.5. Indemnification for Portion of Expenses.........................................................A-21
10.6. Expense Advances................................................................................A-21
10.7. Indemnification of Employees and Agents of the Fund.............................................A-21
10.8. Former Managing Members, Officers, Employees and Agents.........................................A-22
10.9. Insurance.......................................................................................A-22
10.10. Contract Right to Indemnity....................................................................A-22
10.11. Exclusivity; Other Indemnification.............................................................A-22
10.12. Amendment or Deletion..........................................................................A-22
11. DISSOLUTION, WINDING UP AND REDEMPTION.....................................................................A-22
11.1. Dissolution.....................................................................................A-22
11.2. Winding Up......................................................................................A-22
A-ii
<PAGE>
12. MISCELLANEOUS PROVISIONS...................................................................................A-23
12.1. Counsel to the Fund.............................................................................A-23
12.2. Counterparts....................................................................................A-23
12.3. Entire Agreement................................................................................A-23
12.4. Severability....................................................................................A-23
12.5. Pronouns; Statutory Reference...................................................................A-23
12.6. Power of Attorney...............................................................................A-24
12.7. Notices.........................................................................................A-24
12.8. Binding Effect..................................................................................A-24
12.9. Governing Law...................................................................................A-24
12.10. Attorneys' Fees................................................................................A-24
13. DEFINITIONS................................................................................................A-24
</TABLE>
A-iii
<PAGE>
OPERATING AGREEMENT
(AMENDED AND RESTATED)
FOR
CORNERSTONE REALTY FUND, LLC
A CALIFORNIA LIMITED LIABILITY COMPANY
THIS OPERATING AGREEMENT is dated as of January 31, 2000 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 Realty Fund, 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
Realty Fund, 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.
The Fund will have all the powers necessary or convenient to effect
that purpose, including all powers granted by the Limited Liability Company Law.
A-1
<PAGE>
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.
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.
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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 include a schedule of all compensation paid and distributions made to the
Managing Member, including a description of the services performed and
identifying the source of each distribution. Such report shall also 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. Such report shall set forth the valuation of a Unit
in accordance with Section 2.8 of this Agreement.
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 with verification of the allocation of costs confirmed by
the Fund's certified public accountants. 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 the Fund acquires Properties, the Managing Member shall send
quarterly reports setting 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 report shall
contain the following information: (a) the location and a description of the
general character of all materially important real properties acquired or
presently intended to be acquired by the Fund during the quarter, (b) the
present or proposed use of such properties and their suitability and adequacy
for such use, (c) the terms of any material lease affecting the property, (d) a
statement that title insurance has been or will be obtained on all properties
acquired, and (e) a statement of the amount of proceeds in the Fund which
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remain uncommitted or unexpended, stated as both a dollar amount and
percentage of the total amount of the offering proceeds of the Fund.
The Fund shall post all of the foregoing reports on its website.
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.
2.6 APPRAISALS. All Property acquisitions made by the
Fund shall be supported by an appraisal prepared by a competent, independent
appraiser. The appraisals shall be maintained by the Managing Member for at
least five years, and shall be available for inspection and duplication by any
Unitholder.
2.7 LIST OF MEMBERS. An alphabetical list of names,
addresses and business telephone numbers of Unitholders and the number of Units
held by each of them shall be maintained as part of the books and records of the
Fund and shall be made available for inspection by Unitholder or its designated
agent at the principal office of the Fund upon request by a Unitholder. A copy
of such list in readily readable type size shall be mailed to any Unitholder
requesting the list within 10 days of the request. The Fund may make a
reasonable charge for copy work.
2.8 VALUATION OF UNITS. For the first two (2) full fiscal
years following the termination of the offering, the value of a Unit will be
deemed to be $500, and no valuations will be performed. Thereafter the estimated
value of each Unit will be determined annually based upon the estimated amount a
Unitholder would receive if all of the Fund's assets were sold as of the close
of the Fund's fiscal year for their estimated values and if such proceeds,
without reduction for selling expenses, together with the other assets of the
Fund, were distributed in liquidation of the Fund. Such estimated values will be
based upon annual valuations of Fund properties performed by the Managing
Member, but no independent appraisals will be obtained.
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.
333-76609) (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 Section 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.
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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 prescribed 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.
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. The notice must include a detailed statement of the action proposed,
including a verbatim statement of the wording of any resolution proposed for
adoption by the Members and of any proposed amendment to the Agreement. The Fund
will provide for proxies or written consents which specify a choice between
approval and disapproval of each matter to be acted upon at the meeting. 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
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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 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 pursuant to a Form S-11 registration statement under the
Securities Act of 1933 as amended, not less than $3,000,000 nor more than
$50,000,000 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 100,000 Units shall be issued pursuant
to said registration statement.
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4.1.2. 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 up to $450,000 of 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 one year
following the effective date of the Offering, 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. Following release
of funds from escrow, Unitholders will be admitted not later than the last day
of the calendar month following the date their subscription is accepted by the
Fund.
4.2 CAPITAL ACCOUNTS. 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.
4.2.1. 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).
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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 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
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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 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 unexpectedly 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 Regulation 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
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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.
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, distributions 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
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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 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 within one
year following the termination of the Offering 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 transfer fee of $250 is paid 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 counsel, 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. The Fund shall admit substitute members
on the first day of each fiscal quarter or more frequently in the discretion of
the Managing Member.
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 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.
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8.2 GENERAL POWERS OF THE MANAGING MEMBER. Except as may
otherwise be provided 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) within the
meaning of Code Section 7704 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 foregoing 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) amendment of the Articles or this Agreement except amendments
which do not adversely affect the right of Unitholders, (b) voluntarily withdraw
as the Managing Member, (c) appointment of a new managing member, (d) sale of
all or substantially all of the Fund's assets other than in the ordinary course
of business, (e) causing the merger or other reorganization of the Fund; (f) any
change in the character of the business and affairs of the Fund; (g) the
commission of any act that would make it impossible for the Fund to carry on its
ordinary business and affairs; (h) any act that would contravene any provision
of the Articles, this Agreement, or the Limited Liability Company Law; or (i)
dissolving the Fund. 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; (iv) approve or disapprove the Sale of all or
substantially all of the assets of the Fund other than in the ordinary course of
its business; or (v) dissolve the Fund. In any such vote, the Managing Member
may not vote any Units owned by it.
Upon the removal or termination of the Managing Member, the Fund is
required to pay the terminated Managing Member all amounts then accrued and
owing to the Managing Member. The Fund may terminate the terminated Managing
Member's interest in Fund income, losses, distributions and capital by payment
of an amount equal to the then present fair market value of the terminated
Managing Member's interest determined by agreement of the terminated Managing
Member and the Fund, or, if they cannot agree, by arbitration in accordance with
the then current rules of the American Arbitration Association. The expense of
arbitration shall be borne equally by the terminated Managing Member and the
Fund. The fair market value of the terminated Managing Member's interest shall
be the amount of the terminated Managing Member would receive upon dissolution
and termination of the Fund assuming that such dissolution or termination
occurred on the date of the terminating event and the assets of the Fund were
sold for their then fair market value without any compulsion on the part of the
Fund to sell such assets. Where the termination is voluntary, the payment to the
terminated Managing Member will be made by a non-interest bearing unsecured
promissory note with principal payments payable, if at all, from
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distributions which the terminated Managing Member would have received under
this Agreement had the Managing Member not terminated. Where the termination
is involuntary, the payment will be made by an interest bearing promissory
note coming due in no less than 5 years with equal installments each year.
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 eight percent (8%)
per Unit on the first $3,000,000 of Units issued by the Fund and seven percent
(7%) per Unit on all Units issued by the Fund thereafter, payable to the Dealer
Manager;
8.4.2. Marketing Support Fee of two percent (2%)
per Unit on all Units issued by the Fund less $30,000 payable to the Dealer
Manager;
8.4.3. Non-Accountable Expense Allowance of one
percent (1%) per Unit on all Units issued by the Fund payable to the Dealer
Manager;
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 two
employees of Cornerstone Ventures, Inc. who were solely dedicated to working
with members of the National Association of Securities Dealers, Inc. to evaluate
products available and attractive to their customers and to structure the Fund
and in developing advertising materials for the Fund;
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 necessary to the prudent operation of the Fund which are
supplied to the Fund by the Managing Member but not in excess of the cost that
the Fund would pay an unaffiliated third party for such goods, materials or
services, provided, however, that the Fund will not reimburse the Managing
Member or its Affiliates for the general overhead of the Managing Member or its
Affiliates;
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;
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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 the cost of tenant improvements and capital improvements to the
Properties;
8.4.11. Distribution of ten percent (10%) of Net
Cash Flow from Operations until Unitholders have received Distributions equal to
the Unitholders' 8% Preferred Return (an Early Investors' 12% Incentive Return,
as applicable) 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 agreements, contracts and arrangements with the Managing Member
or its Affiliates permitted hereunder shall be subject to the following
conditions: (i) 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
8.4.8, 8.4.9, 8.4.10 and 8.4.12 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
with the compensation price or fee of any non-affiliate which could render
comparable services or sell or lease comparable goods on competitive terms to
the Fund; (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
8.4.8, 8.4.9, 8.4.10 and 8.4.12 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; (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; and (vi) goods or services other than for
Property leasing services, Property management services, construction
supervision services or Property disposition services provided for in Sections
8.4.8, 8.4.9, 8.4.10 and 8.4.12 of this Agreement shall be provided by the
Managing Member only in extraordinary circumstances.
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 FIDUCIARY DUTY; STANDARD OF CARE. The Managing Member
shall have fiduciary responsibility for the safekeeping and use of all funds and
assets of the Fund, whether or not in the Managing Member's possession or
control. The Managing Member shall not employ, or permit another to employ such
funds or assets in any manner except for the exclusive benefit of the Fund. Each
person appointed by the Managing Member to perform duties for the Fund will
discharge his or her duties in
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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 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.
8.10.3 REBATES, KICKBACKS AND RECIPROCAL
ARRANGEMENTS. No rebates or give-ups may be received by the Managing Member or
its Affiliates nor may the Managing Member or its Affiliates participate in any
reciprocal business arrangements which would circumvent the restrictions on
Managing Member imposed by this Agreement.
8.10.4 NO PAYMENT FOR INVESTMENT ADVICE FOR SALE OF
UNITS. The Managing Member and its Affiliates shall not directly or indirectly
pay or award any commissions or other compensation to any person engaged by a
potential investor for investment advice as an inducement to such advisor to
advise the purchase of the Units; provided, however, that this clause shall not
prohibit the normal sales commissions payable to a registered broker-dealer or
other properly licensed person for selling the Units.
8.10.5 CONTRACTING AWAY FIDUCIARY DUTY. The
Managing Member shall not permit the Fund or its Unitholders to contract away
the fiduciary duty owed to the Unitholders by the Managing Member under common
law.
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
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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 properties through general partnerships, limited liability companies or joint
ventures with non-Affiliates that own or operate one or more properties if the
Fund (i) acquires a controlling interest in the general partnerships, limited
liability companies or joint ventures, (ii) such entities have similar
investment objectives, (iii) the entities have identical sponsor compensation
and no duplication of fees, (iv) the investment of the Fund and other entity
will be on substantially the same terms and conditions, and (v) the Fund has the
right of first refusal to buy the property if the other entity decides to sell
the property.
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
$10,000,000 in any one Property.
9.2.7. The Fund shall not purchase or lease any
properties from, or sell or lease 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 rendering similar services as an ongoing public activity in the same
geographic location and for comparable property.
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9.2.11 The Fund will not engage in any roll-up
transaction.
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. Following completion of the
Fund's public offering, 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 or Affiliate's cost
of borrowing but not in excess of the cost charged by unrelated lending
institutions on comparable loans for the same purpose.
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 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.
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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.
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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.
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 Member of the Fund, such determination shall be made only if
all of the following conditions shall be satisfied:
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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 if (1) there has
been a successful adjudication of the merits of each count involving alleged
securities law violations as to the indemnitee or (2) the claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction
as to the indemnitee or (3) a court of competent jurisdiction approves the
settlement of the claims against the indemnitee and finds that
indemnification of the settlement and related costs should be made and prior
to seeking such approval, the court has been apprised that the California
Commissioner of Corporations and the Securities and Exchange Commission
believes that indemnification for violations of securities law violates the
California Corporate Securities Law of 1968 and the Securities Act of 1933
and is against public policy and therefore unenforceable.
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 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 and, in the event of an action initiated by a Unitholder or a third
party, provided a court of competent jurisdiction specifically approves such
advance. 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.
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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.
The Fund will not incur the cost of that portion of liability insurance which
insures the Managing Member for any liability for which the Fund is
prohibited from indemnifying the Managing Member.
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 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
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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 respect 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 thereof 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.
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;
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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.
12.10 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.
13. 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.
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"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.
"BANKRUPTCY" shall mean, with respect to the Managing Member, the
happening 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.
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"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 Capital,
Incorporated, or such other Person or entity selected by the Managing Member
to act as the dealer manager for the Offering, which Person may be an
Affiliate of the Managing Member.
"DISTRIBUTIONS" shall mean cash or property distributed to the
Members arising from their respective interests in the Fund.
"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 cover its 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. For purposes of determining the Unitholders' 8% Preferred
Return pursuant to clause (ii) of Section 6.1.2, the Unitholders' 8% Preferred
Return shall include the Early Investors' 12% Incentive Return.
"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 Realty Fund, 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 less $30,000 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
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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 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
reallowed 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
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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.
"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 eight percent (8%) of the first $3,000,000 of Gross
Proceeds and seven percent (7%) of Gross Proceeds thereafter, 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
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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).
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
By: /S/ TERRY G. ROUSSEL
---------------------------------
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
Unitholder's Subscription Agreement
By: Cornerstone Ventures, Inc., a
California corporation,
Its Manager
By: /S/ TERRY G. ROUSSEL
---------------------------------
Terry G. Roussel, President
A-29
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EXHIBIT "B"
June 12, 2000
OPINION OF
COUNSEL WITH RESPECT TO
MATERIAL FEDERAL INCOME TAX MATTERS
Cornerstone Realty Fund, LLC
4590 MacArthur Blvd., Suite 610
Newport Beach, CA 92660
Re: CORNERSTONE REALTY FUND, LLC
Ladies and Gentlemen:
You have requested our opinion concerning the material federal
income tax aspects of the offering and sale of Units of limited liability
company interest in Cornerstone Realty Fund, 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 20, 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
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
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Managing Member
June 12, 2000
Page 2
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 addresses each material tax issue that involves a
reasonable possibility of challenge by the IRS for which a legal opinion can
be given at this time; 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 all of the material tax issues relevant to an investor for which
an opinion can be given and such material tax issues are more likely than not
(except for items (1), (2) and (4) below as to which we express an
unqualified opinion) 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" taxable as a corporation under Section 7704 of
the Code since the Operating Agreement limits transfers of
Units, and the Fund is expected to satisfy certain trading
safe harbors from "publicly traded partnership" status as
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
June 12, 2000
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(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.
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.
In summary, 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 the
following potentially material tax aspects of the transactions described in
the Prospectus if challenged by the IRS, litigated and judicially decided,
because of the lack of any actual facts on which to base such opinion or such
issues requiring a factual determination that is not susceptible to a legal
analysis:
(i) The amount and timing of any depreciation or cost recovery
deductions available to the Fund;
(ii) 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;
(iii) The tax consequences of an investment in the Fund by qualified
plans and other tax-exempt entities;
(iv) The tax consequences of a sale of Fund Properties;
(v) Whether the Fund might be considered a "dealer" in Fund
properties or whether such properties should be treated as
held for investment;
(vi) The tax consequences of a sale of Fund Units;
(vii) Capital gain or loss characterization and applicable tax
rates;
(viii) The tax consequences upon dissolution of the Fund;
(ix) The tax consequences to foreign investors;
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Managing Member
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(x) The state or local tax consequences to investors;
(xi) Applicability of Fund-level audit rules;
(xii) Whether the Fund is a "tax-shelter" for purposes of investors
seeking to avoid application of the accuracy-related penalty
provisions of the Code; and
(xiii) Federal penalties potentially applicable to understatements of
tax liability by investors.
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 Unitholder 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 Unitholder 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.
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
corporation, the Unitholders 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 Unitholders; and (c) distributions of cash would
generally be treated as dividends taxable to the Unitholders 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, subject to other Code provisions that could alter such "default"
classification, such as the publicly traded partnership rules described below.
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Managing Member
June 12, 2000
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Treas. Regs. Section 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. Section
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, subject to
other Code provisions that could alter such "default" classification, such as
the publicly traded partnership rules described below. 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 assumptions set forth below in the discussion 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
Unitholders 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)
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
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Managing Member
June 12, 2000
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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.
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. Moreover,
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 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 Fund being operated in
accordance with the Operating Agreement, (iii) the representations of the
Managing Member that the Fund Units will be issued in a transaction registered
under the Securities Act, (iv) the representations of the Managing Member that
the Units in the Fund will not be traded on an established securities market,
and (v) 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,
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Managing Member
June 12, 2000
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we are of the opinion 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 due to excessive trading outside of the
available safe harbors, assuming the Fund is operated in accordance with its
stated investment objectives, the qualifying income exception should be
satisfied by the Fund and, therefore, the Fund should not be treated as a
corporation for federal income tax purposes by reason of the exemption for
such qualifying income.
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 Unitholder will be required to report on such Unitholder'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
Unitholder.
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 losses
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.
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Managing Member
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(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. Section 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.
Sections 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. Section 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. Section 465(a). Unitholders who are
individuals, estates, trusts and certain closely-held corporations are not
allowed to deduct Fund losses in excess of the amounts which such Unitholders
are considered to have "at risk" at the close of the Fund's year. ID. A
Unitholder'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. Section 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. Section 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 Unitholder's
amount "at risk." A Unitholder'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 Unitholder
under this limitation may be carried forward indefinitely and utilized in
subsequent years to the extent that the Unitholder'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. Section 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. Section
469(c). Based on the above-cited authority, we are of the opinion 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. Such
determination may limit a Unitholder's ability to claim a current deduction
for losses, if any, of the Fund. In addition, the ability of Unitholders to
treat income of the Fund as passive income is discussed below and subject to
a separate opinion described below.
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Managing Member
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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. Section 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. Section 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. Section 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
partnerships, the Code provides that the passive activity loss rules are
applied separately with respect to items attributable to a publicly traded
partnership. I.R.C. Section 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 Section 951, reprinted 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. 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 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. Our opinion is issued on a "more likely than not" basis
due to the implicit threat issued by the Treasury to promulgate regulations
that would treat certain passive income streams as "portfolio" income, rather
than "passive" income, as referenced in the last sentence of this paragraph,
and the possibility that the Service could adopt such a position even if such
Regulations are never promulgated. This opinion does not apply to 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 an investment in
Properties, or to Distributions of Net Cash Flow from Operations or Net Sales
Proceeds to the Unitholders, 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
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Managing Member
June 12, 2000
Page 10
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 (even if the exception for qualifying income applies), 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 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. Section 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. Section
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
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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 Unitholders 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 Unitholder 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 Unitholder 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 Unitholder's Capital Account, such
Unitholder 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 Unitholder 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 allocations 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 (except to the extent such Distributions represent a return of
capital should not have a material effect on a Unitholder's Capital Account
since such Distributions of profits or gain are anticipated to be matched by
corresponding allocations of Net Income to such Unitholder.
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. Section 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
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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.
Accordingly, it is our opinion 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 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 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. Section 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
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distributions; and (iv) the rights of the partners to distributions of
capital upon liquidation. ID. Section 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 Unitholders, 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 Unitholder's investment
in the Fund in any of the Fund's first five calendar years. In addition, 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.
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. Section 301.6111-1T, Q&A 57A. 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.
Our opinion is limited to a "more likely than not" basis due to the lack of
clarity in the statute and regulations, or any administrative guidance or
judicial authority, as to the computation of the "tax shelter ratio" and the
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possibility that, in a single taxable period, the ratio could be exceeded in
such period for unanticipated reasons.
6. OTHER POTENTIALLY MATERIAL TAX ISSUES.
The following tax issues could be considered to be material
to potential investors in the Fund but we are unable to express any opinion
with respect thereto for the reasons stated. In general, such issues are not
susceptible to an opinion because the resolution of such issues (i) is an
inherently factual matter on which no legal opinion can be made, (ii) is
dependent upon facts that do not currently exist since the Fund has not
acquired any properties, or (iii) is dependent upon certain financial or
other characteristics of the individual investor.
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. No
opinion on this issue is expressed, however, the amount of depreciation or
cost recovery deductions available to offset taxable income of the Fund is
dependent upon the type of properties acquired and the allocation of the
acquisition cost to various components of the properties, including land,
buildings, other improvements and personal property. 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
entities are "qualified allocations." I.R.C. Section 168(h)(6). The
allocations under the Operating Agreement will not likely constitute
"qualified allocations," and, therefore, it is possible, although no opinion
of Counsel is expressed, that real and personal property will be partially
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.
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. Section 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 opinion is expressed on the classification of
various expenses as organizational, start-up or syndication expenses since
such a determination is purely factual.
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
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than 60 months. I.R.C. Section 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. Section 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. Section 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.
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. Section 512(a).
Because the classification of the fund income as UBTI to tax-exempt investors
is largely dependent upon the particular tax-exempt investors' method of
financing their investment, we are unable to express any opinion thereon.
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While the types of income and gain which are anticipated to be
realized by the Fund would not generally constitute UBTI within the meaning
of Section 512(a) of the Code, all or a portion of such income may constitute
UBTI if Unitholders borrow to acquire their Units or the Fund were to own
property which is subject to "acquisition indebtedness." I.R.C. Section
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. Section 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 (discussed above),
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. Section
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
(Form 990-T) 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. Section 1231(a). Because the ability of such property to qualify
as Section 1231 property can only be determined at the time of sale after an
analysis of all relevant facts and circumstances no opinion is expressed on
this issue. 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, 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. Section 1231(c).
Gain will be recognized by the Fund to the extent that the amount
realized from any sale of Fund Property exceeds the adjusted basis of such
Property. I.R.C. Section 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. Section 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. Section 1001(b).
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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. Section
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. Sections 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. Sections 741, 751.
Potential cost recovery allowance recapture on personal property (not real
property) associated with Fund Properties will be treated as "unrealized
receivables" for this purpose. I.R.C. Section 751(c). A portion of the gain
attributable to prior real estate depreciation may be subject to special
capital gain rates as discussed in Paragraph G below. In addition, recently
proposed regulations provide that the holding period of a partnership
interest will be divided if a partner acquires portions of an interest at
different times. 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. Section 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. Section 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 allocable to
him, if any. Treas. Reg. Section 1.752-3. Any negative Capital Account
balance existing at the time of a sale of Units would be recaptured, possibly
resulting in taxable income in excess of cash proceeds from sale. No opinion
is expressed on this issue, since relevant facts cannot be determined until a
sale takes place.
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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. The position
of the IRS on whether such a "look-through" rule applies for real estate
depreciation recapture was recently clarified when the Treasury Department
issued proposed regulations providing that a partner selling a partnership
interest will be required to recognize gain at the higher 25% rate to the
extent the partner would have been allocated such recapture gain if the
partnership had sold all of its Section 1250 property in a fully taxable
transaction. 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. No opinion is expressed on
this issue since the relevant facts cannot be determined until the Fund sells
properties or a Unitholder sells Units.
H. DISSOLUTION AND LIQUIDATION OF THE FUND. The dissolution
and liquidation of the Fund will involve the Distribution to the Unitholders
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 Unitholder receives cash in
excess of the basis of his Units, such excess will be taxable as a gain.
I.R.C. Section 731(a)(1). If a Unitholder 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. Section 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 Unitholder 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 Unitholders and
a different kind of property to others under Section 751(b) of the Code. No
opinion is expressed on this issue since the relevant facts cannot be
determined until the fund is dissolved and liquidated.
I. FOREIGN INVESTORS. Non-resident aliens, foreign
corporations, foreign partnerships, foreign trusts and foreign estates
(collectively referred 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. Section 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
B-18
<PAGE>
Managing Member
June 12, 2000
Page 19
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 such investor 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 to be withheld 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. Section 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. Section 897. Further, under
Section 1445 of the Code, a partnership is required to withhold tax equal to
35% (or, to the extent provided in Regulations, 20%) 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. Section 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
amount realized on the disposition of the Units. I.R.C. Section 1445(e)(5).
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
B-19
<PAGE>
Managing Member
June 12, 2000
Page 20
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. Section 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. Section 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. No opinion is expressed on this
issue since the relevant facts would not be known until an examination of the
fund is initiated.
(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 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. Section 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 the income tax
treatment of (a) 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" for such
position and adequately discloses on his return the relevant facts affecting
the item's income tax treatment. I.R.C. Section 6662(d)(2). In the case of a
"tax shelter," which is defined in Section 6662(d)(2)(c)(iii) 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
B-20
<PAGE>
Managing Member
June 12, 2000
Page 21
question, the taxpayer reasonably believed that the income tax treatment of
that item was more likely than not the proper treatment. I.R.C. Section
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. Moreover, no opinion can be expressed as to the
application of any penalty provisions of the Code due to a lack of relevant
facts at this time. 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. Section 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. Because the actual
maintenance of such a list is a factual determination, no opinion of counsel
is expressed with respect to this issue.
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 more than one-half of the material tax benefits contemplated by
the Prospectus for which an opinion can be given at this time, in terms of
their financial impact on a typical Unitholder, will be realized by a
Unitholder 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.
B-21
<PAGE>
Managing Member
June 12, 2000
Page 22
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,
/s/ OPPENHEIMER WOLFF & DONNELLY, LLP
B-22
<PAGE>
EXHIBIT "C-1"
SUBSCRIPTION AGREEMENT
<TABLE>
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT / / Initial Purchase / / Additional Purchase U.S. CITIZEN / / YES / / NO
1 Minimum Purchase - 5 Units (2 Units if IRA or other Qualified Plan)
Amount Enclosed $______________________________ (must be in increments of $500)
-----------------------------------------------------------------------------------------------------------------------------------
TYPE OF / / Individual / / Joint Tenants* / / Roth IRA** / / Pension Plan** / / LLC**
OWNERSHIP / / Community Property* / / Trust** / / Keogh (H.R. 10)** / / Profit Sharing Plan**
/ / Partnership**
CHECK ONE / / Tenants in Common* / / IRA** / / Other
(explain)_____________________________________________
2 *Two names and signatures required. **Complete Sections 3 and 4.
-----------------------------------------------------------------------------------------------------------------------------------
INVESTOR ________________________________________________________________________________________________________________
REGISTRATION Name (print or type) Social Security # Primary State of Residence
AND ________________________________________________________________________________________________________________
REPORT Name (print or type) Social Security # Primary State of Residence
INFORMATION ________________________________________________________________________________________________________________
3 Mailing Address City, State, Zip Code
________________________________________________________________________________________________________________
Phone #: Business Home
/ / Please mail me the reports described in Section 2.4 of the Operating Agreement.
/ / Do NOT mail reports to me. I prefer to access reports from the Fund's website at
www.cvinc.net.
-----------------------------------------------------------------------------------------------------------------------------------
TRUST OR ________________________________________________________________________________________________________________
CUSTODIAL Exact Name of Trust and Trustee, Custodian, Trust Officer or Administrator
REGISTRATION
4 ________________________________________________________________________________________________________________
Address
________________________________________________________________________________________________________________
City, State, Zip Code Tax Id #
-----------------------------------------------------------------------------------------------------------------------------------
REPRESENTATION In order to induce the Managing Member to accept this subscription, the undersigned hereby
5 represents and warrants to the Fund and its Managing Member that:
____ (a) I have received a copy of the Prospectus.
initial
____ (b) I meet the applicable suitability standards and/or financial requirements set forth in the Prospectus under
initial "Who May Invest" or in a supplement to the Prospectus as they pertain to the state of my primary residence and
domicile. If I am a resident of California, Indiana, Iowa, North Carolina or Washington, I also meet the
financial requirements set forth on the reverse side.
____ (c) I am purchasing the Units for my own account or for the account or benefit of a member or members of my
initial immediate family or in a fiduciary capacity for the account of another person or entity
and not as an agent for another.
____ (d) I am aware that there will be no public market for Units, and accordingly, it may be impossible for me
initial to readily liquidate this investment in the Fund.
____ (e) I am purchasing the Units with the expectation of deriving an economic profit from the Fund without
initial regard to any tax benefits of an investment in the Fund.
____ (f) I am aware that (i) the Operating Agreement contains restrictions applicable to transfers of the Units;
initial 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 prior therefore, without the 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.
------------------------------------------------------------------------------------------------------------------------------------
SIGNATURES The undersigned has the authority to enter into this subscription agreement on behalf of the
6 person(s) or entity registered in Sections 3 and/or 4 above.
Executed this________________day of____________________at_____________________________________,_______________
City State
--------------------------------------------------- ----------------------------------------------------------
Signature (Investor, Trustee, Custodian, Signature (Investor, Trustee, Custodian, Administrator)
Administrator)
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The undersigned 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 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 REALTY FUND, LLC / / YES / / NO
<TABLE>
<S> <C> <C>
BROKER/DEALER
AND REGISTERED ___________________________________________________ ___________________________________________________________
REPRESENTATIVE Broker/Dealer Firm Registered Representative Name (print or type)
7
___________________________________________________ ___________________________________________________________
Main Office Address Registered Representative Branch Office Address
___________________________________________________ ___________________________________________________________
City, State Zip City, State Zip
___________________________________________________ ___________________________________________________________
Dealer Code Telephone Number
___________________________________________________ ___________________________________________________________
Broker/Dealer Authorized Signature Registered Representative Signature Date
------------------------------------------------------------------------------------------------------------------------------------
PAYMENT DURING ESCROW IMPOUND MAKE CHECK PAYABLE TO: AFTER TERMINATION OF ESCROW IMPOUND, MAKE CHECK PAYABLE TO:
AND MAILING USB ESCROW NO. 12563-GG FOR CORNERSTONE REALTY FUND, LLC
8 CORNERSTONE REALTY FUND
AND MAIL TO: AND MAIL TO:
U.S. Bank, National Association Pacific Cornerstone Capital, Incorporated
4100 Newport Place, Suite 130 4590 MacArthur Blvd., Suite 610
Newport Beach, CA 92660 Attn: Gloria Garriott Newport Beach, CA 92660
------------------------------------------------------------------------------------------------------------------------------------
-----------------------------
ACCEPTANCE ___________________________________________________ WHITE - Managing Member
9 Managing Member Authorized Signature Date copy (submit with check)
YELLOW - Broker/Dealer copy
Subscription Agreement for members of Cornerstone Realty Fund, LLC PINK - Investor copy
continued on reverse side of this signature page. -----------------------------
</TABLE>
<PAGE>
SUBSCRIPTION AGREEMENT
Cornerstone Realty Fund, LLC, a California limited liability company:
The undersigned desires to become a Member in Cornerstone Realty Fund,
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). I am aware
that this subscription may be rejected in whole or in part by the Managing
Member in its sole and absolute discretion.
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. 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 Organization
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 Section 6 on the reverse side of this form.
4. 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).
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, THE UNDERSIGNED IS NOT WAIVING ANY
RIGHTS UNDER FEDERAL OR STATE SECURITIES LAWS.
For California Residents
This offering was approved in California on the basis of a limited
offering qualification where offers and sales may be made to prospective
investors based on their meeting the suitability standards set forth below. The
fund was not required to demonstrate compliance with some or all of the merit
regulations of the Department of Corporation as found in Title 10, CA Code of
Regulations, Rule 260.140 et seq.
The exceptions for secondary trading available under Corporations Code
Section 25104(h) have been withheld, but there may be other exceptions to cover
private sales of the units by the bona fide owner for his own account without
advertising and without being effected by or through a broker dealer in a public
offering.
For California and Indiana Residents
Units will be sold only to residents of the States of California and
Indiana representing that they meet one of the following suitability standards:.
(1) a net worth of at least $500,000 exclusive of their home, home furnishings
and personal automobiles; or (2) a net worth of at least $250,000, exclusive of
their home, home furnishings and personal automobiles, and annual gross income
of $65,000 or more; or (3) a net worth of at least $1,000,000; or (4) annual
gross income of $200,000 or more.
For Iowa Residents
Units will be sold only to residents of the State of Iowa representing
that they meet one of the following suitability standards: (1) a net worth of at
least $350,000, exclusive of their home, home furnishing and personal
automobiles; or (2) a net worth of at least $100,000, exclusive of their home,
home furnishings and personal automobiles, and annual taxable income of $75,000
or more. ira investors must purchase a minimum of $3,000 of units.
For North Carolina Residents
Units will be sold only to residents of the State of North Carolina
representing that they meet one of the following suitability standards: (1) a
net worth of at least $250,000, exclusive of their home, home furnishing and
personal automobiles; or (2) a net worth of at least $60,000, exclusive of their
home, home furnishings and personal automobiles, and had annual taxable income
of $60,000 or more during the last tax year or estimates having annual taxable
income of $60,000 or more during the current tax year without regard to the
investment in the units.
For Washington Residents
Units will be sold only to residents of the State of Washington
representing that they meet one of the following suitability standards: (1) a
net worth of at least $225,000, exclusive of their home, home furnishing and
personal automobiles; OR (2) a net worth of at least $70,000, exclusive of their
home, home furnishings and personal automobiles, AND annual gross income of
$50,000 or more.
<PAGE>
<TABLE>
<S><C>
EXHIBIT "C-2"
IRA APPLICATION AND SUBSCRIPTION AGREEMENT
-----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT / / Initial Purchase / / Additional Purchase Amount Enclosed $ _____________________ (in $500 increments)
1 U.S. CITIZEN / / YES / / NO Minimum Purchase -- 2 Units
-----------------------------------------------------------------------------------------------------------------------------------
TYPE OF / / Regular IRA / / Rollover IRA / / SEP-IRA / / Roth IRA / / Roth Contributory IRA
OWNERSHIP / / Contribution for ______ Tax Year (if no year is stated, contribution will be designated for year received)
2 / / Transfer of Existing IRA (please complete and enclose IRA Transfer Letter)
-----------------------------------------------------------------------------------------------------------------------------------
CUSTODIAL First Regional Bank/Trust Administration Services Corp. (TASC) [see disclosure information on reverse]
REGISTRATION P.O. Box 85410
3 San Diego, CA 92186-5410 TIN 95-4716174
-----------------------------------------------------------------------------------------------------------------------------------
INVESTOR
REGISTRATION, ----------------------------------------------------------------------------------------------------------------
REPORT Name (print or type) Social Security # Primary State of Residence
INFORMATION
AND ----------------------------------------------------------------------------------------------------------------
BENEFICIARY Mailing Address City, State, Zip Code Date of Birth
DESIGNATON
4 ----------------------------------------------------------------------------------------------------------------
Business Telephone Number Home Telephone Number E-Mail Address
/ / Please mail me the reports described in Section 2.4 of the Operating Agreement.
/ / Do NOT mail reports to me. I prefer to access reports from the Fund's website at www.cvinc.net.
-----------------------------------------------------------------------------------------------------------------------------------
Primary Beneficiary Name and Address Social Security # Date of Birth Relationship % Share
-----------------------------------------------------------------------------------------------------------------------------------
Contingent Beneficiary Name and Address Social Security # Date of Birth Relationship % Share
If you are married and designate someone other than your spouse as Primary Beneficiary, spousal consent is required by his/her
signature below. If a Trust is designated as either a Primary or Contingent Beneficiary, a copy of the Trust document must be
provided to TASC.
I agree to my spouse's naming of a Primary Beneficiary other than myself and also acknowledge that I shall have no claim
whatsoever against the Trustee for any payment to my spouse's named Beneficiary.
--------------------------------------------------------- ---------------------------------------------------
Spouse's Signature Date
-----------------------------------------------------------------------------------------------------------------------------------
REPRESENTATION To induce the Managing Member to accept this subscription, I represent and warrant to the Fund and its Managing
5 Member that:
_______ (a) I have received a copy of the Prospectus.
initial
_______ (b) I meet the applicable suitability standards and/or financial requirements set forth in the Prospectus under
initial "Who May Invest" or in a supplement to the Prospectus as they pertain to the state of my primary residence and
domicile. [IF I AM A RESIDENT OF CALIFORNIA, INDIANA, IOWA, NORTH CAROLINA OR WASHINGTON, I ALSO MEET THE
FINANCIAL STANDARDS SET FORTH ON THE REVERSE SIDE.]
_______ (c) I am purchasing the Units for my own account or for the account or benefit of a member or
initial 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.
_______ (d) I am aware that there will be no public market for Units, and accordingly, it may be impossible for me to
initial readily liquidate this investment in the Fund.
_______ (e) I am purchasing the Units with the expectation of deriving an economic profit from the Fund without regard
initial to any tax benefits of an investment in the Fund.
_______ (f) I am aware that (i) the Operating Agreement contains restrictions applicable to transfers of the Units;
initial 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 prior therefore, without the 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.
-----------------------------------------------------------------------------------------------------------------------------------
The Registered Representative named below will receive a copy of your IRA account statement unless you check the box below:
/ / Do NOT send copies of my IRA Statement to the Registered Representative named below.
The undersigned 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 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 REALTY FUND, LLC / / YES / / NO
BROKER/DEALER
AND REGISTERED --------------------------------------------------- ----------------------------------------------------------
REPRESENTATIVE Broker/Dealer Firm Registered Representative Name (print or type)
6
--------------------------------------------------- ----------------------------------------------------------
Main Office Address Registered Representative Branch Office Address
--------------------------------------------------- ----------------------------------------------------------
City, State Zip City, State Zip
--------------------------------------------------- ----------------------------------------------------------
Dealer Code Telephone Number
--------------------------------------------------- ----------------------------------------------------------
Broker/Dealer Authorized Signature Registered Representative Signature Date
-----------------------------------------------------------------------------------------------------------------------------------
PAYMENT DURING ESCROW IMPOUND MAKE CHECK PAYABLE TO: AFTER TERMINATION OF ESCROW IMPOUND, MAKE CHECK PAYABLE TO:
AND MAILING USB ESCROW NO. 12563-GG FOR CORNERSTONE REALTY FUND, LLC AND MAIL TO:
7 CORNERSTONE REALTY FUND AND MAIL TO:
US National Bank Association Pacific Cornerstone Capital, Incorporated
4100 Newport Place, Suite 130 4590 MacArthur Blvd., Suite 610
Newport Beach, CA 92660 Attn: Gloria Garriott Newport Beach, CA 92660
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SIGNATURES By signing this IRA Application and Subscription Agreement, I hereby warrant and represent that I have read
8 and understand the disclosure on the reverse side of this form. PLEASE SIGN EACH COPY OF THIS FORM.
Executed this day of at ,
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State
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Signature (Investor) Signature (Custodian)
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ACCEPTANCE
9 --------------------------------------------------- ----------------------------------------------------------
Managing Member Authorized Signature Date
Subscription Agreement for members of Cornerstone Realty Fund, LLC continued on reverse side of this signature page.
WHITE - Managing Member copy (submit with check) YELLOW - Broker/Dealer copy PINK - Transfer Agent GREEN - Investor copy
</TABLE>
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TASC PARTIAL FEE SCHEDULE
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Establishment Fee . . . . . . . . . . . . . . . . . . . . . . $35 Partnerships, LLCs and Private Stock
Annual Administration Fee . . . . . $55 plus Asset Holding Fee Transaction Fee . . . . . . . . . . . . . . . . . . . . . . $25
Termination Fee . . . . . . . . . . . . .5%of distributed value Additional Purchase/ Partial Sale . . . . . . . . . . . . . $10
Minimum $100, Maximum $250) plus direct costs Asset Holding Fee . . . . . . . . .$5.00 per asset, per quarter
Asset Transfer Fee . . . . . . . . . . $25 per asset plus costs
</TABLE>
Other fees may apply, please refer to TASC Complete Published Fee Schedule for
Self-Directed Accounts at www.trustlynk.com or contact us at (800) 455-9472.
TASC DOCUMENT REQUIREMENTS AND DISCLOSURE
I hereby acknowledge that the retirement plan I am establishing is self-directed
and that I am solely responsible for the success or failure of my investments. I
have read and understand the IRA Custodial Agreement, including, but not limited
to Article VIII. I understand that TASC (TASC) is a subsidiary of First Regional
Bank, the named Custodian of my IRA, and will handle the daily administration of
my account. All references to TASC include First Regional Bank, its subsidiaries
and/or agents.
I understand that, with the exception of deposits in amounts under $100,000 held
at First Regional Bank and/or other similar banking institution, my investments
are: (a) not insured by the FDIC or any other federal or state deposit
guaranteed fund; (b) not guaranteed by First Regional Bank, its subsidiaries,
and/or agents; and (c) subject to investment risk, including the possible loss
of the principal invested.
I understand that my account is subject to an Arbitration provision that appears
in the IRA Agreement. I hereby give consent to have my telephone conversations
with TASC recorded. I hereby acknowledge receipt and acceptance of TASC's
Self-Directed IRA fee schedule.
I hold harmless, protect and indemnify TASC from and against any and all
liabilities, losses, damages, expenses and charges, including but not limited to
attorney's fees and expenses of litigation, which TASC may sustain or might
sustain resulting directly or indirectly from my investment direction or those
received from my authorized financial representative and/or agent.
If I use a financial representative they work for me and do not in any way
represent TASC. TASC makes no representations or guarantees concerning
investments purchased at my direction, and any such claims made by a financial
representative or product provider are not supported by TASC. TASC does not
sponsor or endorse any investment nor does it evaluate investments as to their
merit. I understand that TASC is not a "fiduciary" for my account as such term
is defined in the Internal Revenue Code, ERISA or any other applicable local,
state or federal laws.
I understand that certain transactions are prohibited for tax-exempt retirement
arrangements under Internal Revenue Code Section 4975. I further understand that
the determination of whether the transaction directed hereby is a prohibited
transaction depends on the facts and circumstances surrounding this purchase. I
warrant and represent that I have consulted with such advisors as I deem
necessary and appropriate, and have determined among other things, that this
investment does not constitute a prohibited transaction as defined in Internal
Revenue Code Section 4975, and that the offering entity or any affiliate
thereof, is neither a "disqualified person" (as defined in Section 4975 (e) (2)
of the Internal Revenue Code). To the extent that any such self-dealing may
otherwise be involved, this investment transaction is the subject of a specific
statutory exemption or administrative exemption. Furthermore, I understand that,
should my IRA engage in a prohibited transaction, a taxable distribution equal
to the fair market value of my account will result. I further understand that if
such a deemed distribution takes place prior to my attaining age 59 1/2, an
additional 10% premature distribution excise tax may be imposed.
I hereby authorize TASC to invest all uninvested cash into a FDIC insured
account. In addition to the fees reflected on the most recent fee schedule of
TASC, I understand a service fee may be billed to my account relating to the
recordkeeping responsibilities provided by TASC for the master money market
account. This fee is reimbursed in full by First Regional Bank to the money
market account and, therefore, is not reflected on my fee invoice, as it does
not affect the yield on my money market deposit balances.
I agree to be responsible for any and all collection actions, including
contracting with a collection agency or instituting legal action, and bringing
any other suits or actions which may become necessary to protect the rights of
my Account as a result of the operation or administration of my investment(s).
In the event that any of my investments produce taxable income (unrelated
business or debt-financed income), pursuant to the provision of sections 511
through 514 of the Internal Revenue Code, I understand that TASC does not
monitor the amount of UBTI in my Account and does not prepare Form 990-T. If
such a tax is applicable, I agree to prepare, or have prepared, the proper 990-T
tax form and forward it to TASC, along with authorization to pay the tax from my
Account.
SUBSCRIPTION AGREEMENT
Cornerstone Realty Fund, LLC, a California limited liability company:
The undersigned desires to become a Member in Cornerstone Realty
Fund, 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). I am aware
that this subscription may be rejected in whole or in part by the Managing
Member in its sole and absolute discretion.
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. 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 Organization 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 Section 8 on the reverse side of this form.
4. 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).
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, THE UNDERSIGNED IS NOT WAIVING ANY
RIGHTS UNDER FEDERAL OR STATE SECURITIES LAWS.
For California Residents
This offering was approved in California on the basis of a limited
offering qualification where offers and sales may be made to prospective
investors based on their meeting the suitability standards set forth below. the
fund was not required to demonstrate compliance with some or all of the merit
regulations of the Department of Corporation as found in Title 10, CA Code of
Regulations, Rule 260.140 et seq.
The exceptions for secondary trading available under Corporations Code
Section 25104(h) have been withheld, but there may be other exceptions to cover
private sales of the units by the bona fide owner for his own account without
advertising and without being effected by or through a broker dealer in a public
offering.
For California and Indiana Residents
Units will be sold only to residents of the States of California and
Indiana representing that they meet one of the following suitability standards:.
(1) a net worth of at least $500,000 exclusive of their home, home furnishings
and personal automobiles; or (2) a net worth of at least $250,000, exclusive of
their home, home furnishings and personal automobiles, and annual gross income
of $65,000 or more; or (3) a net worth of at least $1,000,000; or (4) annual
gross income of $200,000 or more.
For Iowa Residents
Units will be sold only to residents of the State of Iowa
representing that they meet one of the following suitability standards: (1) a
net worth of at least $350,000, exclusive of their home, home furnishing and
personal automobiles; or (2) a net worth of at least $100,000, exclusive of
their home, home furnishings and personal automobiles, and annual taxable
income of $75,000 or more. ira investors must purchase a minimum of $3,000 of
units.
For North Carolina Residents
Units will be sold only to residents of the State of North Carolina
representing that they meet one of the following suitability standards: (1) a
net worth of at least $250,000, exclusive of their home, home furnishing and
personal automobiles; or (2) a net worth of at least $60,000, exclusive of their
home, home furnishings and personal automobiles, and had annual taxable income
of $60,000 or more during the last tax year or estimates having annual taxable
income of $60,000 or more during the current tax year without regard to the
investment in the units.
For Washington Residents
Units will be sold only to residents of the State of Washington
representing that they meet one of the following suitability standards: (1) a
net worth of at least $225,000, exclusive of their home, home furnishing and
personal automobiles; or (2) a net worth of at least $70,000, exclusive of their
home, home furnishings and personal automobiles, and annual gross income of
$50,000 or more.
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN
THIS 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 SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO HANGE IN THE AFFAIRS OF THE FUND OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
THIS PROSPECTUS OMITS CERTAIN INFORMATION CONTAINED IN THE REGISTRATION
STATEMENT ON FILE WITH THE SECURITIES AND EXCHANGE COMMISSION. THE
INFORMATION 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
<TABLE>
<S> <C>
Prospectus Summary....................................................1
Risk Factors..........................................................5
Who May Invest........................................................9
Estimated Use of Proceeds............................................12
Selected Financial Data..............................................13
Management's Discussion of Financial Condition and Results
of Operation.......................................................14
Management Compensation..............................................15
Fiduciary Responsibilities of the Managing Member....................18
Management...........................................................19
Prior Performance....................................................21
Conflicts of Interest................................................22
Investment Objectives and Policies...................................25
Business.............................................................28
Summary of the Operating Agreement...................................36
Federal Income Tax Considerations....................................40
ERISA Considerations.................................................52
The Offering.........................................................54
How to Subscribe.....................................................57
Your Representations and Warranties in the Subscription
Agreement..........................................................58
Supplemental Sales Material..........................................58
Legal Matters........................................................59
Experts..............................................................59
Available Information................................................59
Additional Information...............................................60
Index to Financial Statements........................................61
Prior Performance Tables.............................................62
</TABLE>
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 SECURITIES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
===============================================================================
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$3,000,000
CORNERSTONE REALTY FUND, LLC
A California Limited Liability Company
6,000 units of
membership interest
PROSPECTUS
_________, 2000
===============================================================================
<PAGE>
PART II
INFORMATION REQUIRED IN PROSPECTUS
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Item 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable
Item 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the offering are as follows:
</TABLE>
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Securities and Exchange Commission Registration Fee........................................... 13,900
National Association of Securities Dealers, Inc. and Blue Sky Registration Fees............... 28,210
Accounting Fees and Expenses.................................................................. $ 30,000*
Legal Fees and Expenses....................................................................... $ 125,000*
Printing and Design........................................................................... $ 275,000*
II-1
<PAGE>
Seminars...................................................................................... $ 255,000*
Marketing Support Fee, Reimbursement of Expenses and Due Diligence Expense
Allowance Fee Payable to the Dealer Manager.............................................. $ 815,000*
Miscellaneous................................................................................. $ 302,890*
Total $1,845,000*
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</TABLE>
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* Estimated
Item 32. SALES TO SPECIAL PARTIES.
Not applicable.
Item 33. RECENT SALES OF UNREGISTERED SECURITIES.
In November 1999, the fund sold $500 of membership interest
to the managing member and $500 of membership interest to Terry G. Roussel.
These sales are exempt from registration under the Securities Act of 1933, as
amended (the "Act"), pursuant to Section 4(2) of the Act.
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.
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<PAGE>
Item 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS.
The financial statements required by Regulation
S-X are filed as a part of the Registration Statement and are included in the
prospectus commencing on page F-1.
(b) EXHIBITS:
1.1 Form of Dealer Manager Agreement.
1.2 Form of Participating Broker Agreement.
3.1 Articles of Organization of the Fund
(previously filed).
3.2 Operating Agreement, included in the
prospectus as Exhibit "A" and incorporated
herein by reference.
3.3 Amendment to Articles of Organization of the
Fund filed August 18, 1999 (previously
filed).
3.4 Amendment to Articles of Organization of the
Fund filed January 26, 2000 (previously
filed).
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
Exhibits "C-1" and "C-2" and incorporated
herein by reference.
5.1 Opinion of Counsel with respect to the
legality of the securities being registered,
including consent to the use of such opinion
in the Registration Statement.
8.1 Opinion of Counsel with respect to 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.
23.1 Consent of U.S. Bank, National Association.
23.2 Consent of Ernst & Young LLP.
II-3
<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-4
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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
amendment No. 3 to registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Newport Beach, State
of California on June 14, 2000.
CORNERSTONE REALTY FUND, LLC
By: CORNERSTONE INDUSTRIAL PARTNERS, LLC
Its Managing Member
By: CORNERSTONE VENTURES, INC.
Its Manager
By: /s/ TERRY G. ROUSSEL
--------------------------------------
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.
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<CAPTION>
Signature Title Date
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<S> <C> <C>
/s/ TERRY G. ROUSSEL Director of Cornerstone Ventures, Inc. June 14, 2000
-------------------------------
Terry G. Roussel
/s/ JAMES V. CAMP Director of Cornerstone Ventures, Inc. June 14, 2000
-------------------------------
James V. Camp
</TABLE>
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