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As filed with the Securities Exchange Commission on February 4, 2000
File No. 333-76609
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-11A
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. [ ]
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CALCULATION OF REGISTRATION FEE
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Title of Amount Proposed maximum Proposed maximum Amount of
securities to be offering price offering registration
being registered registered per unit price fee
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<S> <C> <C> <C> <C>
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.
<PAGE>
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:
o Our units will not be traded on any exchange or NASDAQ.
o We do not own any properties and have not specified any properties we
will purchase.
o If we sell less than all the units, we may lack asset diversification.
o You will rely completely on the managing member in managing the fund.
o We have authorized the payment of substantial fees to managing member
and its affiliates:
o Property management fee of 6% of rents
o Property refurbishment supervision fee of 10% of property
improvements
o Leasing commissions of up to 6% of scheduled rents
o Sales commissions of up to 6% on properties sold
o 10% of cash from operations each year until investors receive an
8% per year return, then 50% of cash from operations
o 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
o We are not charging a property acquisition fee or a fixed asset
management fee.
o We will pay substantial fees to dealer manager for selling the units:
o Commissions of 8% on first $3,000,000 of funds raised and 7%
thereafter
o Marketing fees of 2.0% of funds raised less $30,000
o Expense allowances of 1 1/2% of funds raised
o You may be unable to resell or disposeof 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 Southern California Bank, 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 Selling Proceeds
Public Commissions to Fund
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<S> <C> <C> <C>
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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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
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
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 are a new fund and we have no operating history for you to use in
evaluating us.............................................................5
Your investment in the units will not provide you with tax shelter for
your other income.........................................................5
Plan fiduciaries of ERISA plans investing in units could be
responsible for fund losses...............................................6
Year 2000 technology issues could affect our operations.....................6
We have not identified any properties we plan to purchase...................6
A delay in our purchase of properties may delay distributions to you........6
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...................................................6
Multi-tenant industrial properties accommodating small business tenants
have a substantial on-going risk of tenant lease defaults.................6
Risks we do not control will affect the value of our properties.............6
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..................................................7
If we lose our "partnership" status we would be taxed as a corporation......7
If we are classified as a "publicly traded partnership" we would
be taxed as a corporation.................................................7
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....................8
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.........................................................8
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.............................8
WHO MAY INVEST.................................................................9
ESTIMATED USE OF PROCEEDS.....................................................10
MANAGEMENT COMPENSATION.......................................................11
FIDUCIARY RESPONSIBILITIES OF THE MANAGING MEMBER.............................14
MANAGEMENT....................................................................15
Ownership and Management of the Managing Member............................16
Compensation...............................................................16
Services Performed by Others...............................................16
PRIOR PERFORMANCE.............................................................17
CONFLICTS OF INTEREST.........................................................18
INVESTMENT OBJECTIVES AND POLICIES............................................21
General....................................................................21
Types of Investments.......................................................21
Investment Restrictions....................................................21
Borrowing Policies.........................................................22
Distributions..............................................................22
Managing Cash Distributions................................................22
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Sale of Fund Properties....................................................22
Authority of the Managing Member...........................................23
BUSINESS......................................................................24
General....................................................................24
Multi-Tenant Industrial Business Parks.....................................24
Higher Construction Costs..................................................25
Acquisition Strategies.....................................................25
Property Features..........................................................26
Property Selection.........................................................26
The Asset Management Function..............................................27
Property Management Services...............................................27
SUMMARY OF THE OPERATING AGREEMENT............................................29
General....................................................................29
Capital Contributions and Members..........................................29
Capital Accounts...........................................................29
Control of Our Operations..................................................29
Compensation of the Managing Member and Affiliates.........................29
Allocations and Distributions..............................................29
Meetings of Members........................................................30
Voting.....................................................................30
The unitholders may, without the concurrence of the managing member:.......30
No Certificates for Units will be Issued...................................30
Transfer of Units..........................................................30
Allocations and Distributions on Transfer of Units.........................31
Other Activities...........................................................31
Dissolution................................................................31
Repurchase of Units........................................................31
Books and Records..........................................................31
Reports....................................................................31
Power of Attorney..........................................................32
FEDERAL INCOME TAX CONSIDERATIONS.............................................33
General....................................................................33
Legal Opinion..............................................................33
Partnership Status.........................................................34
Taxation of the Unitholders................................................35
Qualified Plan Investors...................................................36
Basis of Units.............................................................36
Allocations of Net Income and Net Loss.....................................37
Allocations to Newly Admitted Unitholders or Transferees of Units..........37
Basis, At Risk, and Passive Activity Limitations on Deduction of Losses....37
Passive Activity Income....................................................38
Cash Distributions to Unitholders..........................................38
Alternative Minimum Tax....................................................39
Syndication and Organizational Expenses....................................39
Tax Treatment of Certain Fees..............................................39
Sale of Units..............................................................39
Dissolution of the Fund....................................................40
Allocation of Fund's Purchase Price in Properties..........................40
Property Held Primarily For Sale...........................................40
Capital Gains and Losses...................................................40
Audit of Income Tax Returns................................................41
Election for Basis Adjustments.............................................41
Interest on Underpayment of Taxes..........................................41
Accuracy-Related Penalties.................................................42
State and Local Taxes......................................................42
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Foreign Investors as Unitholders...........................................43
Tax Shelter Registration...................................................43
Importance of Obtaining Professional Tax Advice............................43
ERISA CONSIDERATIONS..........................................................44
ERISA Fiduciary Duties.....................................................44
Prohibited Transactions....................................................44
Plan Asset Regulations.....................................................44
Publicly Offered Securities................................................44
Real Estate Operating Company..............................................45
Non-ERISA Plans............................................................45
THE OFFERING..................................................................46
Offering Amounts and Length of Offering....................................46
How the Units are Being Offered............................................46
Compensation to the Dealer Manager for Selling the Units...................46
Interest on Escrowed Funds.................................................48
How to Purchase Units......................................................48
Determination of Investor Suitability......................................48
HOW TO SUBSCRIBE..............................................................50
YOUR REPRESENTATIONS AND WARRANTIES IN THE SUBSCRIPTION AGREEMENT.............50
SUPPLEMENTAL SALES MATERIAL...................................................51
LEGAL MATTERS.................................................................51
EXPERTS.......................................................................51
AVAILABLE INFORMATION.........................................................51
ADDITIONAL INFORMATION........................................................52
INDEX TO FINANCIAL STATEMENTS.................................................53
PRIOR PERFORMANCE TABLES......................................................54
TABLE I - EXPERIENCE IN RAISING AND INVESTING FUNDS........................54
TABLE II - COMPENSATION TO SPONSOR AND AFFILIATES..........................54
TABLE III - OPERATING RESULTS FROM PRIOR PROGRAMS..........................54
TABLE IV - RESULTS OF COMPLETE PROGRAMS....................................54
TABLE V - SALE OR DISPOSAL OF PROPERTY.....................................54
TABLE VI - GENERAL INFORMATION OF PROJECTS.................................54
EXHIBITS:
Exhibit "A" - Operating Agreement
Exhibit "B" - Opinion of Tax Counsel
Exhibit "C" - Subscription Agreement
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<PAGE>
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 or shorter 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:
Reduce risk by acquiring properties on an all cash
basis
Provide periodic cash distributions from operations
Increase income by reducing operating costs and
entering into leases with scheduled rent increases.
Generate additional income on sale of 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 management.
---
Management: Our managing member is Cornerstone Industrial
Properties, LLC, a California limited liability
company. Our managing member is managed by Corner-
stone 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.
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<S> <C> <C>
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|Cornerstone | | Manager of
|Ventures, Inc. | |managing member
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| |
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|Managing Member | |Manager of fund
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|
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| Fund |
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Our managing member will:
o Identify properties to be acquired
o Create a business plan for enhancing the income
and values of our properties
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o Supervise property management, leasing,
refurbishment, and operations of our properties
o Supervise our operations and our communications
with you.
o Supervise the sale of our properties
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 17.
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 The minimum amount we will raise is $3,000,000.
Proceeds: 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 manager
Managing Member and significant compensation for services in the offering
Dealer/Manager: of units and the management, leasing and sale of pro-
perties as follows:
- 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% until investors receive an overall
8% per year return taking into account all prior
distributions, thereafter 50% of cash 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
fee 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
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believes that allocations and distribution and
managing member compensation have been structured
to align the interests of the managing member with
your interests.
We will also pay fees to the dealer manager for
selling the offering:
- Commissions of 8% of the first $3,000,000 funds
raised and 7% thereafter
- Marketing fees of 2% of funds raised less $30,000
- Expense allowances of 1 1/2% of funds raised
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 Unitholders will receive 90% of net cash flow from
from operations operations each yearuntil unitholders have received
distributions equal to 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 Unitholders will receive 100% of net proceeds from
property sales 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
- -------------------------- -----------------------------------------------------
Early investors 12% Unitholders who purchase the first 6,000 units we sell
incentive return: 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 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% incentive
return is not available for units subsequently sold.
Amount and timing of The amount and timing of distributions we make will
distributions: vary. While we areselling 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
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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 unit-
holders; and then (3) 50% to unitholders
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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 $225,000 excluding
your home, home furnishings and automobiles or
--
- have a net worth of at least $70,000 excluding your
home, home furnishings and automobiles and have
---
gross income in excess of $50,000 per year.
You should purchase the units only as a long-term
investment. You should not invest money which you may
need to use for emergencies. You may not be able to
sell your units in the event of a financial emergency
because there will not be a public trading market for
the units.
Risk Factors: Before purchasing units, you should carefully review
the "Risk Factors" section of the prospectus which
follows this summary.
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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.
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:
o Transfer units to persons who do not meet the suitability requirements
is described under "Who May Invest" at page 9 of this prospectus
o Transfer partial units
o Transfer less than the minimum investment of 5 units or 2 units for tax
qualified retirement plans
o Retain less than the minimum investment of 5 units or 2 units for tax
qualified retirement plan following a transfer
We are prohibited from forecasting the amount or certainty of the fund's
results. The use of forecasts in this offering is prohibited. Any
representations to the contrary and any predictions, written or oral, as to the
amount or certainty of any present or future cash benefit or tax consequence
which may flow from an investment in the fund is not permitted.
You may have adverse tax consequences if you sell your 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. 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.
We are a new fund and we have no operating history for you to use in
evaluating us.
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.
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<PAGE>
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.
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.
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.
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:
o changes in the general economic climate
o oversupply of space or reduced demand for real estate in local area
o competition from other available space o governmental regulations
o changes in zoning or tax laws
o interest rate levels o availability of financing
o potential liability under environmental laws
-6-
<PAGE>
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 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.
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.
-7-
<PAGE>
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.
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 overall tax and financial situation. You
should consult with your tax advisor regarding the possible application of this
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 tax 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
partners 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 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 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.
-8-
<PAGE>
WHO MAY INVEST
This offering is directed only to persons of legal age in the state of
his or her residence who have substantial net worth or substantial recurring
income or both. Units will be sold only to persons representing that they have
either
(1) .....a net worth of at least $225,000 exclusive of their home, home
---------
furnishings 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 in excess of
$50,000.
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 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"
-9-
<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
raised proceeds raised offering
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% 470,000 1.9%
Due diligence expense
allowance fee 15,000 0.5% 125,000 0.5%
Other organization and
offering expenses 120,000 4.0% 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 manage-
ment fees, payable to the
managing member 0 0% 0 0%
Reserves 60,000 2% 400,000 2%
---------- ------- ----------- -----
Proceeds invested including
reserves for operating and
capitalized tenant
improvements and leasing
concessions $2,565,000 85.5% $17,100,000 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>
We will not pay organizational and offering expenses in excess of 14.5% of gross
offering proceeds.
-10-
<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 Method of Compensation Estimated Amount
Recipient
- --------------------------------------------------------------------------------
ORGANIZATION AND
OFFERING STAGE
- --------------------------------------------------------------------------------
<S> <C> <C>
Selling Comissions Up to 8% of offering proceeds $240,000 if 6,000 units
payable to the dealer on the first $3,000,000 sold; $1,780,000 if
manager and partici- raised and 7% of offering 50,000 units are sold
pating brokers proceeds thereafter.
- --------------------------------------------------------------------------------
Marketing support fee Up to 2.0% of offering $30,000 if 6,000 units
payable to the dealer less $30,000 sold; $470,000 if
manager and participa- 50,000 units are sold
ting brokers
- --------------------------------------------------------------------------------
Reimbursement of non- Up to 1% of offering $30,000 if 6,000 units
accountable expenses proceeds are sold; $250,000 if
payable to the dealer 50,000 units are sold
manager and participa-
ting brokers
- --------------------------------------------------------------------------------
Due diligence expense Up to 0.5% of offering $15,000 if 6,000 units
allowance fee payable to proceeds are sold; $125,000 if
the dealer manager and 50,000 units are sold
participating brokers
- --------------------------------------------------------------------------------
Reimbursement to managing Reimbursement of actual Estimated at $120,000
member and its affiliates expenses and costs if 6,000 units are sold
for organizational and or $1,000,000 if 50,000
offering expenses units are sold but not
determinable at this
time
- --------------------------------------------------------------------------------
ACQUISITION STAGE
- --------------------------------------------------------------------------------
Acquisition fees payable
to the managing member and
its affiliates NONE NONE
- --------------------------------------------------------------------------------
</TABLE>
-11-
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Type of Compensation Method of Compensation Estimated Amount
and Recipient
- --------------------------------------------------------------------------------
<S> <C> <C>
Reimbursement to the Reimbursement of actual Not determinable
managing member and its expenses and costs. at this time.
affiliates for acquisition
expenses incurred in the
acquisition of properties
including non-refundable
option payments on pro-
perty not acquired,
surveys, appraisals, title
insurance and escrow fees,
legal and accounting fees
and expenses, architect-
ural 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 to the
managing member None None
- --------------------------------------------------------------------------------
Property management fees Property management fees equal Not determinable
payable to the managing to 6% of the gross rental at this time
member and/or its income generated by each
affiliates some or all property will be paid monthly
of which may be paid to
third parties
- --------------------------------------------------------------------------------
Property refurbishment Property refurbishment Not determinable
supervision fee payable supervision fee equal to 10% at this time
to the managing member of the cost of tenant improve-
and/or its affiliates ments or capital improvements
some or all of which may made to our properties
be paid to unaffiliated
third parties
- --------------------------------------------------------------------------------
Leasing commissions Leasing commissions paid upon Not determinable
payable to the managing execution of each lease equal at this time.
member and/or its to 6% of rent scheduled to be
affiliates some or all paid during the first and
of which may be paid to second year of the lease, 5%
unaffiliated third during the third and fourth
parties years and 4% during the fifth
and later years.
</TABLE>
- --------------------------------------------------------------------------------
-12-
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Type of Compensation Method of Compensation Estimated Amount
and Recipient
- --------------------------------------------------------------------------------
<S> <C> <C>
Incentive share of net 10% of net cash flow from Not determinable
cash flow from operations operations each year until at this time.
payable to the managing unitholders have received
member. 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 Reimbursement of actual Not determinable
costs of goods, materials expenses and costs at this time
and other services
supplied to the fund by
the managing member
- --------------------------------------------------------------------------------
LIQUIDATION STAGE
- --------------------------------------------------------------------------------
Incentive share of net After the unitholders have Not determinable
sales proceeds payable received an amount equal to at this time.
tothe managing member. their aggregate 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>
-13-
<PAGE>
FIDUCIARY RESPONSIBILITIES OF THE MANAGING MEMBER
The managing member is accountable to us as a fiduciary. This requires
the managing member to exercise good faith and integrity in handling our
affairs. The 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.
-14-
<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. is the owner of 50% of the ownership interests
in our Managing Member. Terry G. Roussel is the sole shareholder of
Cornerstone Ventures, Inc.
Terry G. Roussel, age 46, is one of the founding shareholders of the
Cornerstone-related entities which commenced operations in 1989. Mr. Roussel is
President and Chief Executive Officer of Cornerstone Ventures, Inc., 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: CBRE). 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 membership Committee.
Prior to 1998, Mr. Camp served as a Director and Treasurer of the Commercial
Industrial Development Association.
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.
-15
<PAGE>
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 are 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.
-16-
<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: CARE). Both joint ventures continue in operation today
and Cornerstone continues in its capacity as managing partner for these
entities. 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 52 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 7 real estate limited partnerships which raised a
total of $16,077,699 from 37 investors. These programs acquired a total of 10
properties, all of which were existing multi-tenant industrial business parks
located in Southern California. The total purchase price of these properties was
$55,896,000, a significant portion of which was represented by borrowed funds.
Of these properties, 3 have been sold in their entirety and subdivided portions
of 5 of the remaining properties have been sold as of December 31, 1998.
Because all of these prior private programs acquired their properties
with substantial amounts of borrowed 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 3
properties, all of which were multi-tenant industrial business parks located in
Southern California. Each of these properties was acquired using debt financing
of approximately 75% of the purchase price of the properties.
Cornerstone Ventures, Inc. and its affiliates have not sponsored any
prior public programs.
-17-
<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-tenantindustrial
properties. See "Prior Performance Tables." Cornerstone Ventures, Inc. has also
invested in an internet marketing company offering vacation resort information
to travel agents. 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 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
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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.
In the unlikely event that we and another investment program managed by
the managing member or its affiliates attempted to sell similar properties at
the same time, a conflict could arise since the two investment programs
potentially could compete with each other for a suitable purchaser. In order to
resolve this potential conflict, the managing member and its affiliates have
agreed not to attempt to sell any of our properties at the same time as property
owned by another investment program managed by the managing member or its
affiliates if the two properties are within a five-mile radius of each other,
unless the managing member believes that a suitable purchaser can be located for
each property.
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
o Acknowledges that counsel did not represent the interests of the
unitholders and
o Waives any conflict of interest with respect to counsel's
representation of the fund.
o 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.
o 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.
o The operating agreement prohibits the commingling of our funds with
the funds of any other person or entity.
o 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.
o 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 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:
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o 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.
o 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.
o The managing member and its affiliates have agreed that, in the
event an investment opportunity becomes available which is suit-
able for us and another entity with the same investment objectives
and structure, and for which we and the other entity have
sufficient funds available to invest, then the investment
opportunity will be first offered to the entity which has waited
the longest period of time since it was last offered an investment
opportunity. In determining whether or not an investment
opportunity is suitable for more than one investment program, the
managing member and its affiliates will examine such factors as
the cash requirements of each investment program, the effect of
the acquisition on diversification of each investment program's
investments by geographic area, the anticipated cash flow of each
investment program, the size of the investment, the amount of
funds available to each investment program, and the length of time
such funds have been available for investment.
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INVESTMENT OBJECTIVES AND POLICIES
General
Our primary investment objectives are to:
o reduce risk by acquiring properties on an all cash basis
o provide periodic cash distributions from operations
o increase income by reducing operating expenses and entering into
leases with scheduled rent escalations
o generate additional income on sale of our properties by using asset
management strategies to increase their values
Types of Investments
We will try to acquire a diversified portfolio of multi-tenant
industrial business parks. 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:
o issue securities which are senior to or have priority over the units
o make loans to any persons
o invest in the securities of other issuers for the purpose of
exercising control o underwrite securities of other issuers
o engage in the rapid purchase and sale (churning) of investments
o offer securities in exchange for property
o repurchase or otherwise reacquire our units or other securities
These policies cannot be changed by our managing member without a vote
------
of unitholders.
We will not:
o issue units other than for cash
o make loans or investments in real property mortgages
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o make loans to any persons
o operate in such a manner as to be classified as an investment company
for purposes of the Investment Company Act of 1940
o invest more than $10,000,000 in any single property
o engage in roll up transactions
o 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.
Sale of Fund Properties
We expect to own our properties for 5 years, but we may hold our
properties for a longer or shorter period of time. The actual time we sell a
property will depend upon factors which we cannot predict today. In deciding
whether or not to sell a property, the managing member will consider factors,
such as
o the value of the property
o the availability of buyers
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o our investment objectives
o the current real estate and money market conditions
o 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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BUSINESS
General
We will acquire and operate a diversified portfolio of existing, leased
multi-tenant industrial business parks catering to the small business tenant.
Investment opportunities in multi-tenant industrial business parks are
ordinarily not readily available to investors other than large institutional
investors and experienced real estate operators with specialized knowledge and
experience in a specific geographic area.
The 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.
Of all businesses in the United States, approximately 80% are
classified as "small business". Office parks serve businesses that are generally
service oriented. Industrial parks accommodate businesses that need both office
and warehouse space. The primary difference between these two types of buildings
is the percentage of office space within a given unit. We will acquire
multi-tenant industrial business parks with varying percentages of interior
office improvements. We may acquire properties with interior office improvements
approaching 100% which will have limited or no warehouse or assembly space.
The typical multi-tenant industrial business park includes 100,000
square feet of rentable space with rental unit sizes ranging from 500 square
feet to 30,000 square feet. This type of property accommodates tenant's growth
patterns. For example, a 1,200 square foot tenant may grow to 2,400 square feet
by leasing the adjacent unit. This flexibility diversifies the owner's risk of
losing a tenant as the tenant's business grows. A single-tenant industrial
building cannot accommodate a tenant's growth.
One of the most attractive features of multi-tenant industrial business
parks is the ability to adapt to changing market conditions. In good economic
times, new businesses are forming and existing businesses are growing.
Multi-tenant industrial business parks can accommodate this growth via a
tenant's expansion into multiple units. It is not uncommon to see a tenant
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occupy 2 to 4 units as its business expands. In difficult economic times, a
tenant's space requirements often contract. Many tenants who previously outgrew
their space in a multi-tenant industrial business park, move back during periods
of contraction since they can no longer afford the larger facility they leased.
Tenants move through this type of property in growing and declining economies.
These factors contribute to the advantage of shorter lease terms
inherent in multi-tenant industrial business parks. Lease terms generally range
from month-to-month to 5 years. The average lease term is 2 to 3 years. Leasing
activity is typically more diversified with smaller-size tenants. The managing
member views regularly expiring leases with varying lease terms as an attractive
diversification feature of multi-tenant industrial business parks. The most
significant benefit of shorter term leases is that we can adjust the rents
upward to market more rapidly in an upward trending market. In a downward
trending rental rate market, tenants tend to renegotiate lease terms downward
whether or not they have entered into long-term leases. Leasing for properties
that we purchase will contain stipulated rent escalation provisions when market
conditions allow. After rental adjustment, a property's income and the resulting
cash flow will adjust accordingly.
Higher Construction Costs
Compared to industrial buildings that serve the large or single user
tenant, costs to construct multi-tenant buildings serving the small business
tenant can be 50% to 60% higher due to the following differences:
o Two restrooms generally required for each individual tenant space
o Numerous walls to separate individual tenant spaces
o Multiple entrances for each tenant space
o Utility connections for each tenant space
o Separate office build-out in each tenant space
o Separate HVAC installations
o Individual truck roll-up doors for each tenant space
o Construction interest expense significantly higher due to longer
initial lease-up with numerous tenants
These additional features drive up the cost of multi-tenant industrial
business parks as compared to other industrial properties.
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.
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
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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 $15,000,000. If we sell
only the minimum number of units, the managing member estimates that we will
acquire only one property. If we sell the maximum number of units, we may
acquire up to 10 or more properties. These estimates are subject to significant
variations based on the individual purchase price of each property.
Property Features
Land: Lot sizes for the properties we purchase will generally range
from approximately 4 to 25 acres depending upon the number of buildings and
building sizes. Individual buildings contained in any specific property may be
located on a single parcel of land or on multiple parcels of land depending upon
the configuration and layout of the entire project. Sites will be zoned for
industrial, commercial and/or office uses depending on local governmental
regulations. The location of each property to be acquired will be considered
carefully and we will focus on purchasing what we consider to be prime
properties in prime locations.
Buildings: The actual buildings contained in any project will generally
be rectangular in shape and constructed utilizing concrete tilt up construction
methods and in some cases brick and mortar methods. Building sizes will
generally range from 5,000 to 200,000 square feet divided into leasable unit
sizes ranging from 500 square feet to 30,000 square feet. We will generally look
for the following building features:
o Functional site plan offering ample tenant parking and good truck
and car circulation
o Multiple truck doors with ground level and dock high loading
o Ceiling clear heights in each tenant space from 14 feet to 24 feet
high
o Attractive front entry with a location for tenant's address and sign
o Quality office improvements including private offices, restrooms and
reception area
o Minimum of 100 amps of electrical service
o Heating, ventilating and air conditioning systems for the office area
o Fire sprinklers where required by local governmental agencies
We will evaluate a property's physical condition and, if capital
improvements are necessary, we will incorporate this into the acquisition
analysis for the property.
Property Selection
The managing member will have experienced staff engaged in the
selection and evaluation of properties which we may acquire. The acquisition
process will be performed by the managing member with no acquisition fees
payable to the managing member by us. All property acquisitions will be approved
by the managing member based upon its experience in the area of multi-tenant
industrial business parks and our investment objectives 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:
o Functionality of the physical improvements at the property
o Historical financial performance of the property
o Current market conditions for leasing space at the property
o Proposed purchase price, terms, and conditions
o Potential cash flow and profitability of the property
o Estimated cost to develop a new competitive property within the
immediate market area
o Demographics of the area in which the property is located
o Demand for space by small business tenants in the immediate market
area
o Rental rates and occupancy levels at competing business parks in the
immediate area
o Historical tenant demand for space at the property
o Current market versus actual rental rates at the property and in the
immediate area
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o Operating expenses being incurred and expected to be incurred at the
property
o Potential capital improvements and leasing commissions reasonably
expected to be expended
o A review of the terms of each tenant lease in effect at the property
o An evaluation of title and the obtaining of satisfactory title
insurance
o An evaluation of a current appraisal conducted by a qualified
independent appraiser
o An evaluation of any reasonably ascertainable risks such as
environmental contamination
The managing member intends to bring us the same expertise Cornerstone
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 will perform the following asset
management services for us:
o Supervise the day-to-day operations of property managers assigned to
each property o Select and supervise the on-going marketing efforts
of leasing agents responsible for marketing the property to prospec-
tive tenants
o Coordinate semi-annual rental surveys of competitive projects in
the local geographic area - this function is designed to
maintain the property at the highest possible rental rates
allowable in the market where the property is located
o Approve lease terms negotiated by leasing agents with new tenants
and tenants renewing their leases - this includes making sure that
lease rates being attained are in line with market conditions
as well as in line with the then current operating plan for the
property
o Review and approve any capital improvements necessary at the
property, including tenant improvements necessary to lease space
o Supervise the collection of rent and resolution of tenant lease
defaults
o Review monthly financial reports prepared by property managers
with a focus on improving the cost efficiency of operating the pro-
perty
o Prepare annual property operating budgets for review and approval by
senior management
o Prepare regular updates regarding operations of the property as
compared to budget estimates
Although most real estate operating companies charge a separate fee for
asset management services, the managing member will not charge us a separate fee
for such services.
Property Management Services
The managing member is responsible for providing property management
services for our properties. The managing member will be responsible for all
day-to-day operations for each property, including the following:
o Invoice tenants for monthly rent
o Collect rents
o Pay property level operating expenses
o Solicit bids from vendors for monthly contract services
o Provide property level financial statements on a monthly basis
o Review and comment on annual property operating budgets
o On-going assessment of potential risks or hazards at the property
o Clean up and prepare vacant units to be leased
o Supervise tenant improvement construction
o Supervise tenant and owner compliance with lease terms
o Supervise tenant compliance with insurance requirements
o Periodically inspect tenant spaces for lease compliance
o Respond to tenant inquiries
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Due to the short-term nature of the tenant leases, as well as the large
number of small business tenants at each property, multi-tenant industrial
business parks are highly management intensive. The type of properties we will
acquire are generally considered to be more management intensive than other
types of commercial real estate used by larger business tenants with longer term
leases. For this reason, property management fees for multi-tenant industrial
properties are generally higher than property management fees for other types of
commercial real estate. The managing member believes in providing a very high
level of property management service in order to maximize the value of each
property. 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
o no interest will accrue on your capital contribution or on your
positive capital account balance
o you will not have any right to withdraw any part of your capital
account or to demand or receive the return of your capital contri-
bution
o you will have the right to receive distributions from us only as
determined by the managing member
o you will not be required to make any further contribution to our
capital or make any loan to us
o 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:
o permit the voluntary withdrawal of the merging member
o appoint a new managing member
o sell all or substantially all of the fund's assets other than in the
ordinary course of business
o adopt an agreement of merger or reorganization
o change the character of the business and affairs of the fund
o commit any act that would make it impossible for the fund to carry on
its ordinary business and affairs
o 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:
o 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
o remove the managing member
o elect a new managing member
o 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 Should Invest" at page 9 of this
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prospectus 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.
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.
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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:
o the operating agreement
o 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
o documents required to dissolve and terminate the fund
o amendments and modifications to the articles of organization or any
of the documents described above
o 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:
o Classification of the fund as a partnership for federal income tax
purposes
o Exemption of the fund from publicly traded partnership status
o Limitations on your deductions of fund loss due to the basis, at-
risk and passive loss rules
o Characterization of your fund net income as passive income
o Substantial economic effect of allocations of fund net income or
net loss
o Exemptions of the fund from tax shelter registration requirements
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.
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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:
o Depreciation and cost recovery deductions
o Income tax treatment of certain payments made by the fund
o Possible taxation of investments by qualified plans and other tax
exempt entities
o Sales of fund property
o Classification of the fund as a dealer in property
o Sales of fund units
o Special tax rates applicable to long-term capital gains and losses
from the fund
o Tax consequences upon fund dissolution
o Special tax rules for foreign investors
o State and local tax consequences to investors
o Special fund-level audit rules
o 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 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. 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.
Publicly Traded Partnership Rules. It is the opinion of counsel that it
is more likely than not 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 an established securities market or
(2) readily tradable on a secondary market (or the substantial
equivalent thereof).
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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), 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 an
established securities market 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) to allow any transfers of
units which could cause the fund to violate the safe harbors set
forth in the Section 7704 Regulations.
Based on (1) the items set forth above, (2) on the representations of
the managing member that the fund units will be issued in a transaction
registered under the Securities Act, (3) the representations of the managing
member that the units in the fund will not be traded on an established
securities market, and (4) the covenant of the managing member that it will take
all actions necessary to prevent the interests in the fund from being traded on
a secondary market or the substantial equivalent thereof, Counsel is of the
opinion that it is more likely than not that the fund will not be treated as a
"publicly traded partnership" for federal income tax purposes if such issue were
challenged by the IRS, litigated and judicially decided. There can be no
assurance, however, that the IRS will not successfully contend that the fund
should be treated as a publicly traded partnership based on, for example, the
recognition of transfers in contravention of the operating agreement, the
actions of third parties not within the control of the managing member or the
fund, the ineffectiveness of the provisions of the operating agreement designed
to avert the creation of a secondary market (or the substantial equivalent
thereof), or the fund failing to generate sufficient qualifying gross income to
avoid such status.
Taxation of the Unitholders
As a partnership, 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
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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 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.
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
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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 more
likely than not 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 it is more likely than
not that the operating agreement will comply with the safe harbor provisions in
the Treasury Regulations under Code Section 704(b) and that the allocations of
net income and net loss set forth in the operating agreement more likely than
not will have substantial economic effect or will be otherwise treated as being
in accordance with 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 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
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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 it is more likely
than not 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 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 the 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.
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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;
(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. 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.
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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 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 a unit 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
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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 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 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.
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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.
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;
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(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 tax return on which such unitholder must report such Person's
distributive share of the fund's items of income, gain, loss, deduction and
credit, and pay United States federal income tax at regular United States tax
rates on such person's share of any net income, whether ordinary or capital
gains. A foreign investor may also be subject to tax on such person's
distributive share of the fund's income and gain in such person's country of
nationality or residence or elsewhere. In addition, cash distributions otherwise
payable to a foreign investor from the fund, allocations of net income that are
effectively connected with a United States trade or business, and amounts
payable upon the sale of a foreign investor's units may be reduced by United
States tax withholding made pursuant to various applicable provisions of the
Code, including, but not limited, to Code Sections 1445 and 1446.
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. No assurance can be given
that the DOL and the United States Department of the Treasury 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
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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. 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.
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.
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 Private
Investors Equity Group, 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. "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. There is an informal understanding with the dealer manager
that the dealer manager may be terminated and replaced by a broker-dealer being
formed by the owner of Cornerstone Ventures, Inc. The agreement with the dealer
manager may also 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
o 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
o 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
o Reimbursement of expenses of up to one percent (1%) of the offering
proceeds
o Due diligence expense allowance fee of one half of one percent (.05%)
of the offering proceeds on all units sold.
All or a portion of these fees may be paid by the dealer manager to the
participating brokers.
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The total amount of underwriting compensation, including commissions,
due diligence fees and reimbursement of expenses paid in connection with the
offering, will not exceed 14.5% of offering proceeds. See "Estimated Use of
Proceeds" and "Management Compensation."
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Escrow Conditions
Subscription proceeds will be deposited in a segregated escrow account
with Southern California Bank, 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:
o the fundamental risks and possible financial hazards of this type of
investment;
o the lack of liquidity of this investment;
o the managing member's role in directing or managing the investment;
and
o the tax consequences of the investment; and
(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.
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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 Re-Allowed Commissions
Investment 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
(3) an employee's trust, pension, profit-sharing, or other
employee benefit plan qualified under Section 401 of the Code
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
-49-
<PAGE>
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 the subscription agreement. A copy of the
subscription agreement and power of attorney and instructions is Exhibit "C" to
this prospectus.
3. Make your check payable to "Southern California Bank 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 participa-
ting broker.
By purchasing units, you confirm that you meet the suitability
standards for purchasers of units and agree to be bound by all of the terms of
the subscription agreement and the operating agreement.
Within ten days 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 understand 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 understand 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
-50-
<PAGE>
(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.
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.
-51-
<PAGE>
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.
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.
-52-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
------
Cornerstone Realty Fund, LLC
Report of Independent Auditors............................................. F-2
Balance Sheets as of December 31, 1999 and 1998............................ F-3
Statements of Operations and Members' Deficit for
the year Ended December 31, 1999 and the Period
from October 28, 1998 (Inception) to December 31, 1998................... F-4
Statements of Cash Flows for the Year Ended
December 31, 1999 and the Period from October
28, 1998 (Inception) to December 31, 1998................................ F-5
Notes to Financial Statements.............................................. F-6
Cornerstone Industrial Properties, LLC
Report of Independent Auditors............................................. F-9
Consolidated Balance Sheet as of December 31, 1999......................... F-10
Notes to Consolidated Balance Sheet........................................ F-11
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.
F-1
<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-2
<PAGE>
<TABLE>
<CAPTION>
CORNERSTONE REALTY FUND, LLC
(a California limited liability company)
BALANCE SHEETS
ASSETS
December 31,
1999 1998
-------------------------------
<S> <C> <C>
Office equipment, less accumulated
depreciation of $751 in 1999 and $268
in 1998..................................... $ 2,103 $ 2,034
Deferred offering costs...................... 178,350 72,244
--------------------------------
Total assets................................. $ 180,453 $ 74,278
===============================
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities
Accounts payable............................ $ 5,235 $ 51,849
Advances payable to member.................. 401,988 83,023
--------------------------------
407,223 134,872
Members' deficit............................... (226,770) (60,594)
--------------------------------
Total liabilities and members' deficit......... $ 180,453 $ 74,278
================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
CORNERSTONE REALTY FUND, LLC
(a California limited liability company)
STATEMENTS OF OPERATIONS AND MEMBERS' DEFICIT
Period from
October 28, 1998
Year Ended (Inception) to
December 31, December 31,
1999 1998
--------------------------------
<S> <C> <C>
Expenses
General and administrative expenses........ $ 48,420 $ 20,322
Consulting fees to related party........... 96,585 38,957
Interest expense on advances payable
to member................................ 21,171 2,315
--------------------------------
Net loss................................... (166,176) (61,594)
Members' Deficit
Deficit at beginning of period............. (60,594) --
Capital contributions...................... -- 1,000
--------------------------------
Deficit at end of period................... $ (226,770) $ (60,594)
================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CORNERSTONE REALTY FUND, LLC
(a California limited liability company)
STATEMENTS OF CASH FLOWS
Period from
October 28, 1998
Year Ended (Inception) to
December 31, December 31,
1999 1998
--------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss........................................$ (166,176) $ (61,594)
Adjustments to reconcile net loss to net
cash used in
Depreciation............................... 483 268
Changes in operating assets and liabilities
Accounts payable......................... (15,432) 17,466
--------------------------------
Net cash used in operating activities........... (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......................... (137,288) (37,861)
Advances from managing member................... 318,965 83,023
Capital contributions........................... -- 1,000
--------------------------------
Net cash provided by financing activities....... 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-5
<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 the 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 through at least January 1, 2001.
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
F-6
<PAGE>
Capital Contributions; and then 50% to the managing member and 50% to
the unitholders.
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
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
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.
F-7
<PAGE>
3. Related Party Transactions
In order to fund its initial operating costs, the Company has received
unsecured advances amounting to $401,988 from CIP. 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 1999, the Company incurred $11,651 in office rental expenses to
a related party. These expenses are included in general and administrative
expenses.
During 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 agreements.
F-8
<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-9
<PAGE>
<TABLE>
<CAPTION>
CORNERSTONE INDUSTRIAL PROPERTIES, LLC
(a California limited liability company)
CONSOLIDATED BALANCE SHEET
ASSETS
December 31,
1999
-------------------
<S> <C>
Current assets
Cash...................................................... $ 117,497
Marketable equity securities.............................. 1,034,580
-------------------
Total current assets......................................... 1,152,077
Office equipment, less accumulated depreciation of $751...... 2,103
Deferred offering costs 325,774
-------------------
Total assets................................................. $ 1,479,954
===================
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities
Accounts payable.......................................... $ 10,384
Advances payable to member................................ 45,837
-------------------
56,221
Members' capital............................................. 1,533,187
Member's capital contribution note........................ (109,454)
-------------------
Member's capital, net..................................... 1,423,733
-------------------
Total liabilities and members' capital....................... $ 1,479,954
===================
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-10
<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 Realty Fund, LLC, a California limited liability company ("Fund I"),
and Cornerstone Realty Fund II, a California limited liability company ("Fund
II") (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
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.
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.
F-11
<PAGE>
CORNERSTONE INDUSTRIAL PROPERTIES, LLC
(a California limited liability company)
2. Summary of Significant Accounting Policies (continued)
Marketable Equity Securities and Members' Capital (continued)
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 a
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.
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.
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.
F-12
<PAGE>
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-13
<PAGE>
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.
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 17 in the text of the prospectus.
-53-
<PAGE>
TABLE I - EXPERIENCE IN RAISING AND INVESTING FUNDS
The purpose of Table I is to present information as to the previous
performance of the affiliates of the managing member in raising funds through
programs the offering of which closed during the period of January, 1995 through
December, 1998. The managing member and its affiliates have not previously
participated in a public program.
TABLE II - COMPENSATION TO SPONSOR AND AFFILIATES
Table II summarizes the compensation paid to affiliates during the
years 1996 through 1998 for all programs, the offering of which closed during
such period. Also summarized in the aggregate is compensation received from all
other programs during the same period. The compensation as used in these Tables
includes acquisition fees, real estate commissions, property management and
administrative fees, construction supervision fees, and proceeds from the sale
or refinancing of the properties.
TABLE III - OPERATING RESULTS FROM PRIOR PROGRAMS
Table III summarizes the operating results for programs which were
formed during the years 1994 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 1994
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 on closing for programs which have closed in
the years 1996 through 1998.
TABLE VI - GENERAL INFORMATION OF PROJECTS
Table VI provides general information of each individual program
including location, type of commercial property, square footage, date of
purchase, number of units at time of purchase and the number of units sold for
programs which have closed in the years 1996 through 1998.
-54-
<PAGE>
<TABLE>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS - JANUARY 1, 1995 THROUGH AUGUST 31,1998
<CAPTION>
Van Buren Baldwin Torrance Carson Carson
Business Park Business Park Amapola Industrial Industrial
Partners Partners Partners Partners - Phase I Partners- Phase II
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dollar amount offered 1,572,781 2,186,400 1,601,046 529,677 2,223,323
Dollar amount raised (100%) 1,572,781 100.00% 2,186,400 100.00% 1,601,046 100.00% 529,677 100.00% 2,223,323 100.00%
Less offering expenses:
Organization expenses 13,419 0.85% 33,937 1.55% 2,544 0.16% 430 0.08% 1,693 0.08%
Equity placement &
administrative fees 132,300 8.41% 67,000 3.06% 162,955 10.18%
Investment acquisition fees 0 0.00% 0 0.00% 25,000 1.56% 13,949 2.63% 58,551 2.63%
Offering administrative
& selling expenses 0 0.00% 17,364 0.79% 0 0.00%
Reserves 5,000 0.32% 400 0.02% 4,478 0.28% 577 0.11% 2,423 0.11%
--------- ------ -------- ---- --------- ---- ------- ---- --------- ----
Amount Available for
Investment 1,422,062 90.42% 2,067,699 94.57% 1,406,069 87.82% 514,721 97.18% 2,160,656 97.18%
Prepaid items and
fees related to
purchase of property 8,488 0.25% 42,039 0.64% 18,960 0.45% 3,973 0.28% 3,817 0.06%
Cash down payment 1,155,037 34.44% 1,690,190 25.74% 854,536 20.40% 357,401 24.94% 1,500,191 24.95%
Mortgage financing 2,000,000 59.64% 4,700,000 71.58%[2]3,150,000 75.18% 1,038,960 72.51% 4,361,040 72.53%
Building improvements
paid outside of escrow 71,380 2.13% 0 0.00% 0 0.00% 4,540 0.32% 30,535 0.51%
Acquisition fees 118,500 3.53% 134,000 2.04% 166,316 3.97% 27,898 1.95% 117,102 1.95%
--------- ------ -------- ---- --------- ---- ------- ---- --------- ----
Total acquisition costs 3,353,405 100.00% 6,566,229 100.00% 4,189,812 100.00% 1,432,772 100.00% 6,012,685 100.00%
Percent leverage
(mortgage financing 59.64% 71.58% 75.18% 72.51% 72.53%
divided by total
acquisition cost)
Date offering began May-95 Dec-96 Dec-95 Aug-97 Aug-97
Length of offering
(in months) [1] [1] [1] [1] [1]
Months to invest 90% of amount
available for investment [1] [1] [1] [1] [1]
<FN>
[1] Offering was made within thirty days of acquiring the property.
[2] "The original loan agreement included an additional loan holdback of $660,000 available for leasing commissions,
construction costs for tenant improvements and accrued interest. The program has not requested additional disbursements
relating to these available holdbacks."
</FN>
</TABLE>
<PAGE>
<TABLE>
TABLE II
COMPENSATION TO SPONSOR JANUARY 1, 1995 THROUGH AUGUST 1998
<CAPTION>
All Other Programs-
Van Buren Baldwin Torrance Carson Carson Seven
Business Park Business Park Amapola Industrial Industrial Commercial Real
Type of Compensation Partners Partners Partners Partners-I Partners - Phase II Estate Programs
------------- ----------- -------- ---------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Jun-92
Date offering commenced May-95 Dec-96 Dec-95 Aug-97 Aug-97 through Oct-93
Dollar amount raised 1,572,781 2,186,400 1,601,046 529,677 2,223,323 5,365,372
Amount paid to sponsor
from proceeds of
offering:
Investment
acquisition fees 0 0 25,000 0 0 0
Acquisition fees 118,500 134,000 166,316 27,898 117,102 0
Equity appreciation
prior to funding 0 0 0 0 0 320,461
---------- --------- --------- ------- -------- ---------
118,500 134,000 191,316 27,898 117,102 320,461
========== ========= ========= ======= ========= =========
Dollar amount of cash
generated from
operations before
deducting
payments to sponsor 224,618 505,777 624,188 170,989 224,225 757,762
Amount paid to sponsor from
operations:
Property management fees 50,055[1] 0 98,639[1] 16,009[1] 38,290[1] 393,433[1]
Administrative service
fees 5,402[2] 29,400[2] 0 5,758[2] 24,454[2] 16,307[2]
Lease commissions 7,662[3] 151,478[3] 109,203[3] 7,100[3] 38,181[3] 311,706[3]
Construction supervision fee 0 56 20,318 1,291 22,850 40,886
---------- --------- ------- ------ ------- -------
63,119 180,934 228,160 30,158 123,775 762,332
====== ======= ======= ====== ======= =======
Dollar amount of property
sales and and refinancing
before deducting payments
to sponsor:
Cash 2,548,000 0 149,582 0 0 29,693,004
Notes 0 0 0 0 0 0
--------- -------- ------- ------ ------- ---------
2,548,000 0 149,582 0 0 29,693,004
========= ======== ======= ====== ====== ==========
Amount paid to
sponsor from
property sales
and refinancing:
Real estate
commissions 31,895 0 0 0 0 517,954
Incentive fees 0 0 0 0 0 0
------- -------- ------- ------ ------- ----------
31,895 0 0 0 0 517,954
======= ======== ======= ====== ====== ==========
<FN>
[1] The program paid management fees directly to the sponsor who paid a third-party company to provide the actual property
management services with the sponsor providing supervisory and ancillary management services. The amounts below reflect
the net compensation to the sponsor:
Total property
management fees
paid to sponsor 50,055 0 98,639 16,009 38,290 393,433
Less: Amount paid
by sponsor to
third party 40,997 0 91,193 0 0 359,606
------- -------- ------- ------ ------- --------
Net property
management fees
earned by sponsor 9,058 0 7,446 16,009 38,290 33,827
======= ======== ======= ====== ======= ==========
[2] The program paid partnership management & administrative fees directly to the sponsor who paid a third-party company who
provided partnership referral and management services. The amounts below reflect the net partnership management & administrative
fees compensation to the sponsor:
Total partnership
management fees
paid to sponsor 5,402 29,400 0 5,758 24,454 16,307
Less: Amount paid
by sponsor to
third party 0 4,410 0 0 0 0
------ -------- ------- ------ ------- -------
Net partnership
management fees
earned by sponsor 5,402 24,990 0 5,758 24,454 16,307
======= ======== ======= ====== ======= ==========
[3] The program paid leasing commission fees directly to the sponsor who incurred fees paid to a third-party company that provided
or assisted in the actual leasing services. The amounts below reflect the net leasing commission compensation to the sponsor:
Total leasing
commission fees
paid to sponsor 7,662 151,478 109,203 7,100 38,181 311,706
Less: Amount paid
by sponsor to
third party 7,662 87,578 70,740 0 5,362 219,663
------ -------- ------- ------ ------ -------
Net commission fees
earned by sponsor 0 63,900 38,463 7,100 32,819 92,043
</FN>
======= ======== ======= ====== ======= ========
</TABLE>
<PAGE>
TABLE III
<TABLE>
VAN BUREN BUSINESS PARK PARTNERS
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
1995 [1] 1996 1997 01/01/98-08/31/98
<S> <C> <C> <C> <C>
Gross Revenues 208,082 344,047 291,914 202,281
Profit on sale of properties 311,439 0 103,535 222,774
Less: Operating expenses 74,461 122,106 136,305 75,175
Interest expense 88,976 168,573 162,346 87,274
Depreciation & amortization 37,443 67,958 62,038 37,305
-------- ------- ------ -------
Net Income-GAAP Basis 318,641 (14,590) 34,760 225,301
======= ======== ====== =======
Taxable Income
- from operations 8,993 (16,091) (68,776) N/A
- from gain on sale 311,149 0 103,536 N/A
Cash generated from operations 64,882 58,484 14,204 23,929
Cash generated from sales - net 1,176,624 0 341,834 627,366
Cash generated from refinancing 0 230,000 0 0
--------- ------- ------ -------
Cash generated from operations,
sales and refinancing 1,241,506 288,484 356,038 651,295
Less: Cash distributions to
investors
- from operating cash flow 64,882 58,484 14,204 23,929
- from sales and refinancing 435,118 169,216 140,796 276,071
- from return of capital 0 0 0 0
-------- ------- ------ -------
500,000 227,700 155,000 300,000
======== ======= ====== =======
Cash generated (deficiency) after
cash distributions 741,506 60,784 201,038 351,295
Special items:
- Partner's capital contributions 1,572,781 0 0 0
- Borrowing secured by property 2,000,000 0 0 0
- Reserve retained in sub-tier
Partnership (5,000) 0 0 0
- Capitalized loan fees &
Organization costs (76,645) (2,867) 0 0
- Capitalized equity
placement fee (132,300) 0 0 0
- Property acquisitions and
improvements (3,353,405) (2,314) (4,574) 0
- Decrease in borrowings
secured by property (630,671) (11,787) (203,802) (335,026)
---------- -------- ------ -------
Cash generated (deficiency)
after cash distributions and
special items 116,266 43,816 (7,338) 16,269
========= ======= ====== =======
Tax and Distribution Data per
$1000 Invested
Federal Income Tax Results:
Ordinary income(loss)
- from operations 5.7 (10.2) (43.7) N/A
- from recapture 0.0 0.0 0.0 N/A
Capital gain(loss) 197.8[2] 0.0 65.8 N/A
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 202.6 0.0 12.8 143.3
- Return of capital 115.3 144.8 85.7 47.5
Source (on cash basis)
- Operations 0.0 0.0 0.0 0.0
- Refinancing 0.0 144.8 0.0 0.0
- Sales 317.9 0.0 98.6 190.7
Amount remaining invested at
the end of the period 88.47% 73.06% 65.42% 60.67%
</TABLE>
[FN]
[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.
</FN>
<PAGE>
<TABLE>
TABLE III
BALDWIN BUSINESS PARK PARTNERS
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
1996 [1] 1997 01/01/98-08/31/98
<S> <C> <C> <C>
Gross Revenues 71,672 1,034,319 703,583
Profit on sale of properties 0 0 0
Less: Operating expenses 20,718 408,392 258,495
Interest expense 32,100 426,285 280,872
Depreciation & amortization 7,217 152,558 115,185
------ --------- -------
Net Income-GAAP Basis 11,637 47,084 49,031
====== ========= =======
Taxable Income
-from operations 7,374 60,171 N/A
-from gain on sale 0 0 N/A
------ --------- -------
Cash generated from operations 78,275 164,440 82,184
Cash generated from sales 0 0 0
Cash generated from refinancing 0 0 0
------ --------- -------
Cash generated from operations,
sales and refinancing 78,275 164,440 82,184
Less: Cash distributions to investors
from operating cash flow 0 60,294 60,027
from sales and refinancing 0 0 0
from return of capital 0 0 0
------ --------- -------
0 60,294 60,027
------ --------- -------
Cash generated (deficiency) after cash
distributions 78,275 104,146 22,157
Special items:
Partner's capital contributions 2,186,400 0 0
Borrowing secured by property 4,700,000 0 0
Accrued property acquisition fees 9,545 (9,545) 0
Reserve retained in sub-tier
Partnership (400) 0 0
Capitalized loan fees & organization
cost (170,373) (22,781) 0
Loans from/(to) Affiliates 0 (338) 338
Capitalized equity placement fees (67,000) 0 0
Property acquisitions and
improvements (6,566,229) (22,651) (88,974)
Decrease in borrowings
secured by property (3,198) (38,371) (25,580)
Cash generated (deficiency) after cash
distributions and special items 167,020 10,460 (92,059)
Tax and Distribution Data per $1000
Invested Federal Income Tax Results:
Ordinary income(loss)
- from operations 3.4 27.5 N/A
- from recapture 0.0 0.0 N/A
Capital gain(loss) 0.0 0.0 N/A
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 26.9 22.4
- Return of capital 0.0 0.7 5.0
Source (on cash basis)
- Operations 0.0 27.6 27.5
- Refinancing 0.0 0.0 0.0
- Sales 0.0 0.0 0.0
Amount remaining invested at
the end of the period 100% 99.93% 99.43%
(expressed as a percentage of the amount originally invested in the property)
<FN>
[1] For period 11/08/96 (inception) through 12/31/96.
[2] The Partnership files the tax return on the cash basis which result in differences between net income - GAAP basis and taxable
income from accounts payable and adjustments.
</FN>
</TABLE>
<PAGE>
<TABLE>
TABLE III
TORRANCE AMAPOLA PARTNERS
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
1995 [1] 1996 1997 01/01/98-08/31/98
<S> <C> <C> <C> <C>
Gross Revenues 40,337 712,378 698,382 478,165
Profit on sale of properties 0 0 0 0
Less: Operating expenses 5,171 265,312 210,186 146,787
Interest expense 14,372 289,747 301,001 203,452
Depreciation & amortization 3,914 86,675 104,574 77,482
----- ------ ------- ------
Net Income-GAAP Basis 16,880 70,644 82,621 50,444
====== ====== ====== ======
Taxable Income
- from operations 2,317 85,900 87,371 N/A
- from gain on sale 0 0 0
Cash generated from operations 24,401 154,828 131,640 105,477
Cash generated from sales 0 0 0 0
Cash generated from refinancing 0 0 149,582 0
----- ------ ------- ------
Cash generated from operations,
sales and refinancing 24,401 154,828 281,222 105,477
Less: Cash distributions to investors
- from operating cash flow 0 100,000 100,000 0
- from sales and refinancing 0 0 0 0
- from return of capital 0 0 0 0
----- ------ ------- ------
0 100,000 100,000 0
----- ------ ------- ------
Cash generated (deficiency) after cash
distributions 24,401 54,828 181,222 105,477
Special items:
- Partner's capital contributions 1,601,048 0 0 0
- Borrowing secured by property 3,150,000 0 0 0
- Accrued property acquisition fee 9,350 (9,350) 0 0
- Reserve retained in sub-tier
Partnership (5,000) 0 0 0
- Acquisition fee paid directly by (25,000) 0 0 0
- Capitalized loan fees &
Organization costs (83,450) (8,671) 0 0
- Loans from/(to) Affiliates (60,889) 60,789 0 0
- Capitalized equity placement fee (92,258) (70,697) 0 0
- Property acquisitions and
improvements 4,189,812 (127,172) (150,815) (20,191)
- Decrease in borrowings secured
by property 0 (29,993) (33,538) (24,487)
Cash generated (deficiency) after cash
distributions and special items 328,388 (130,266) (3,131) 60,799
========= ======== ======== =======
Tax and Distribution Data per $1000
Invested Federal Income Tax Results:
Ordinary income(loss)
- from operations 1.4 53.7 54.6 N/A
- from recapture 0.0 0.0 0.0 N/A
Capital gain(loss) 0.0 0.0 0.0 N/A
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 54.7 51.6 0.0
- Return of capital 0.0 7.8 10.9 0.0
Source (on cash basis)
- Operations 0.0 62.5 62.5 0.0
- Refinancing 0.0 0.0 0.0 0.0
- Sales 0.0 0.0 0.0
0.0
Amount remaining invested at
the end of the period 100.00% 99.22% 98.14% 98.14%
</TABLE>
[FN]
[1] For period 12/18/95 (inception) through 12/31/95.
</FN>
<PAGE>
<TABLE>
TABLE III
CARSON INDUSTRIAL PARTNERS - PHASE I
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
01/01/98
1997 [1] -08/31/98
-------- ---------
<S> <C> <C>
Gross Revenues 119,977 218,094
Profit on sale of properties 0 0
Less: Operating expenses 36,744 74,673
Interest expense 35,396 60,320
Depreciation & amortization 7,818 15,742
----- ------
Net Income-GAAP Basis 40,019 67,359
====== ======
Taxable Income
- from operations 36,239 N/A
- from gain on sale 0 N/A
Cash generated from operations 54,174 78,360
Cash generated from sales 0 0
Cash generated from refinancing 0 0
----- ------
Cash generated from operations,
sales and refinancing 54,174 78,360
Less: Cash distributions to investors
- from operating cash flow 0 4,620
- from sales and refinancing 0 0
- from return of capital 0 0
----- ------
0 4,620
----- ------
Cash generated (deficiency) after cash
distributions 54,174 73,740
Special items:
- Partner's capital contributions 529,677 0
- Borrowing secured by property 1,038,960 0
- Reserve retained in sub-tier
Partnership (577) 0
- Capitalized loan fees &
organization costs (29,650) 0
- Loans from/(to) affiliates 19 289
- Capitalized syndication costs (13,949) 0
- Property acquisitions and
improvements (1,432,772) (43,975)
- Decrease in borrowings secured
by property (3,597) (7,902)
--------- -------
Cash generated (deficiency) after cash
distributions and special items 142,285 22,152
======= ======
Tax and Distribution Data per
$1000 Invested Federal Income
Tax Results:
Ordinary income(loss)
- from operations 68.4 N/A
- from recapture 0.0 N/A
Capital gain(loss) 0.0 N/A
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 (8.7)
- Return of capital 0.0 0.0
Source (on cash basis)
- Operations 0.0 (8.7)
- Refinancing 0.0 0.0
- Sales 0.0 0.0
Amount remaining invested at
the end of the period 100% 100%
</TABLE>
(expressed as a percentage of the amount originally invested in the property)
[FN]
[1] For period 04/14/97 (inception) through 12/31/97.
</FN>
<PAGE>
<TABLE>
TABLE III
CARSON INDUSTRIAL PARTNERS - PHASE II
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
01/01/98-
1997 [1] 08/31/98
<S> <C> <C>
Gross Revenues 270,880 516,134
Profit on sale of properties 0 0
Less: Operating expenses 75,987 144,545
Interest expense 148,579 251,767
Depreciation & amortization 27,804 60,160
------ ------
Net Income-GAAP Basis 18,510 59,662
====== ======
Taxable Income
- from operations 10,074 N/A
- from gain on sale 0 N/A
Cash generated from operations 47,782 122,565
Cash generated from sales 0 0
Cash generated from refinancing 0 0
------ ------
Cash generated from operations,
sales and refinancing 47,782 122,565
Less: Cash distributions to investors
- from operating cash flow 0 19,392
- from sales and refinancing 0 0
- from return of capital 0 0
------ ------
0 19,392
------ ------
Cash generated (deficiency) after cash
distributions 47,782 103,173
Special items:
- Partner's capital contributions 2,223,323 0
- Borrowing secured by property 4,361,040 0
- Reserve retained in sub-tier
partnership (2,423) 0
- Capitalized loan fees
& organization (116,948) 0
- Loans from/(to) Affiliates 81 1,211
- Capitalized syndication costs (58,551) 0
- Property acquisitions and
improvements (6,012,685) (272,340)
- Decrease in borrowings
secured by property (15,097) (33,168)
---------- ---------
Cash generated (deficiency) after cash
distributions and special items 426,522 (201,124)
Tax and Distribution Data per
$1000 Invested
Federal Income Tax Results:
Ordinary income(loss)
- from operations 4.5 N/A
- from recapture 0.0 N/A
Capital gain(loss) 0.0 N/A
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 (8.7)
- Return of capital 0.0 0.0
Source (on cash basis)
- Operations 0.0 (8.7)
- Refinancing 0.0 0.0
- Sales 0.0 0.0
Amount remaining invested at the
end of the period 100% 100%
(expressed as a percentage of the amount originally invested in the property)
</TABLE>
[FN]
[1] For period 04/14/97 (inception) through 12/31/97.
</FN>
<PAGE>
<TABLE>
TABLE III
TAMARACK BREA PARTNERS
BASIS OF ACCOUNTING - MODIFIED CASH BASIS
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
01/01/98-
1993 [1] 1994 1995 1996 1997 08/31/98
<S> <C> <C> <C> <C> <C> <C>
Gross Revenues 159,327 362,123 357,188 291,018 211,574 141,984
Profit on sale of properties 60,044 49,405 97,048 0 166,032 137,030
Less: Operating expenses 48,892 165,695 139,213 109,548 134,436 68,712
Interest expense 62,571 106,566 123,574 107,735 73,032 26,535
Depreciation & amortization 26,019 52,875 52,912 44,017 38,266 23,737
------ ------ ------ ------ ------ ------
Net Income-Modified Cash Basis 81,889 86,392 138,537 29,718 131,872 160,030
====== ====== ======= ====== ======= =======
Taxable Income
- from operations 21,845 36,987 41,489 29,718 (34,160) N/A
- from gain on sale 60,044 [2] 49,405 97,048 0 166,032 N/A
Cash generated from operations 78,386 [3] 74,321 [3] 88,909 [3] 64,033 [3] (2,220)[3] 35,703 [3]
Cash generated from sales 236,164 232,256 419,840 0 647,924 458,202
Cash generated from refinancing 0 0 0 0 0 0
------- ------- ------- ------- ------- -------
Cash generated from operations,
sales and refinancing 314,550 306,577 508,749 64,033 645,704 493,905
Less: Cash distributions
to investors
- from operating cash flow 0 0 0 0 0 0
- from sales and refinancing 0 178,150 125,000 0 0 0
- from return of capital 0 0 0 0 0 0
------- ------- ------- ------- ------ --------
0 178,150 125,000 0 0 0
------- ------- ------- ------- ------ --------
Cash generated (deficiency
after cash distributions 314,550 128,427 383,749 64,033 645,704 493,905
Special items:
- Partners capital contribution 925,000
- Loans from/(to) Affiliates (60,380) 31,380 12,500 0 16,500 0
- Borrowing secured by property 1,900,000 0 0 0 0 0
- Capitalized loan fees
and organization costs (6,819) 0 0 0 0 0
- Property acquisitions and
improvements (2,764,561) 0 (5,913) (8,312) (10,995) (9,331)
- Decrease in borrowings
secured by property (187,578) (219,876) (367,159) (49,963) (606,674) (425,038)
--------- -------- -------- ------- --------- --------
Cash generated (deficiency)
after cash distributions
and special items 120,212 (60,069) 23,177 5,758 44,535 59,536
======= ======= ======== ====== ======= ======
Tax and Distribution Data per
$1000 Invested
Federal Income Tax Results:
Ordinary income(loss)
- from operations 23.6 40.0 44.9 32.1 (36.9) N/A
- from recapture 0.0 0.0 0.0 0.0 0.0 N/A
Capital gain(loss) 64.9 53.4 104.9 0.0 179.5 N/A
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 192.6 135.1 0.0 0.0 0.0
- Return of capital 0.0 0.0 0.0 0.0 0.0 0.0
Source (on cash basis)
- Operations 0.0 0.0 0.0 0.0 0.0 0.0
- Refinancing 0.0 0.0 0.0 0.0 0.0 0.0
- Sales 0.0 192.6 135.1 0.0 0.0 0.0
Amount remaining invested at the
end of the period 100% 100% 100% 100% 100% 100%
<FN>
[1] For the period 6/01/93 (inception) through 12/31/93
[2] Due to the short holding period of the property prior to sale gain on sale of the buildings was treated as ordinary income.
[3] The cash flow from operations includes adjustments made to reflect the net change in capitalized lease
commissions and liability for tenant deposits
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE III
STRATEGIC INDUSTRIAL PARTNERS - BEACH
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
1993 [1] 1994 1995 1996 1997 [2]
-------- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C>
Gross Revenues 20,001 743,137 735,454 778,875 61,636
Profit on sale of properties 0 0 0 0 675,480
Less: Operating expenses 2,023 243,333 249,274 252,182 43,204
Partnership overhead all 0 5,514 55,435 29,134 2,364
Interest expense 3,465 419,520 471,003 426,800 38,132
Depreciation 3,513 103,454 122,429 129,761 116,773
----- ------- ------- ------- -------
Net Income-GAAP Basis 11,000 (28,684) (162,687) (59,002) 536,643
====== ======= ======== ======= =======
Taxable Income
- from operations 11,000 (28,684) (162,687) (59,002) (138,837)
- from gain on sale 0 0 0 0 675,480
Cash generated from operations 57,996 40,811 (37,189) (20,163) (28,263)
Cash generated from sales 0 0 0 175,293 [2] 4,523,712
Cash generated from refinancing 0 0 0 0 0
----- ------- ------- ------- ---------
Cash generated from operations,
sales and refinancing 57,996 40,811 (37,189) 155,130 4,495,449
Less: Cash distributions to
investors
- from operating cash flow 0 0 0 0 0
- from sales and refinanci 0 0 0 0 808,398
- from return of capital 0 0 0 0 0
----- ------- ------- ------- ---------
0 0 0 0 808,398
----- ------- ------- ------- ---------
Cash generated (deficiency) after
cash distributions 57,996 40,811 (37,189) 155,130 3,687,061
Special items:
- Partner's capital contributions 0 514,165 0 0 0
- Borrowing secured by property 3,413,950 426,055 35,249 37,718 0
- Note payable proceeds 577,974[3] 0 0 0 0
- Decrease in note payable 0 (577,974) 0 0 0
- Capitalized loan fees &
Organization costs (171,261) 0 0 0 0
- Loans from/(to) Affiliate 0 0 0 0 0
- Capitalized equity placement
fees 0 (80,325) 0 0 0
- Property acquisitions and
Improvements (455,223) (60,673) (31,473) 0
- Decrease in borrowings secured
by property 0 (36,321) 0 (221,859)
- Inter-entity transfer between
programs (182,364)[4] 181,048 [4] 113,282 [4] 64,264 [4] (98,943)[4]
-------- ------- ------- ------ -------
Cash generated (deficiency) after
cash distributions and
special items 0 12,236 50,669 3,780 (66,683)
====== ====== ====== ===== =======
Tax and Distribution Data
per $1000 Invested
Federal Income Tax Results:
Ordinary income(loss)
- from operations N/A [3] (55.8) (316.4) (114.8) (270.0)
- from recapture N/A [3] 0.0 0.0 0.0 0.0
Capital gain(loss) N/A [3] 0.0 0.0 0.0 1,313.7
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 0.0 0.0 0.0 1,572.3
- Return of capital 0.0 0.0 0.0 0.0 0.0
Source (on cash basis)
- Operations 0.0 0.0 0.0 0.0 0
- Refinancing 0.0 0.0 0.0 0.0 0
- Sales 0.0 0.0 0.0 0.0 1,572.3
Amount remaining invested
at the end of period 100.00% 100.00% 100.00% 100.00% 0.00%
(expressed as a percentage of the amount originally invested in the property)
<FN>
[1] For the period 12/23/93 (inception) to 12/31/93.
[2] Program sold in January of 1997 and an escrow deposit was received in 1996 and included in cash flow and sales
in the year received.
[3] The was entity organized by the sponsor and was initially funded by notes payable to non-related entities prior to
receipt of investor contributions in 1994.
[4] The inter entity transfers are advances to/(from) other programs included in the same reporting entity. The
transfers were a result of debt allocation and payments on an umbrella loan required by the lender as portions of the programs
sold. In addition, the entity manitained a general account and allocations were made for Investor contributions,
distributions and overhead costs.
</FN>
</TABLE>
<PAGE>
<TABLE>
TABLE III
STRATEGIC INDUSTRIAL PARTNERS - FAIRWAY
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
1993 [1] 1994 1995 1996 [2]
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Gross Revenues 17,617 703,382 771,221 91,139
Profit on sale of properties 0 0 0 1,623,641
Less: Operating expenses 2,293 237,647 231,408 26,276
Partnership overhead allocation 0 5,275 55,433 2,430
Interest expense 3,465 380,415 418,586 50,412
Depreciation 2,966 94,714 113,242 164,312
----- ------- ------- ---------
Net Income-GAAP Basis 8,893 (14,669) (47,448) 1,471,350
===== ======= ======= =========
Taxable Income
- from operations 8,893 (14,669) (47,448) (152,291)
- from gain on sale 0 0 0 1,623,641
Cash generated from operations 53,774 80,537 40,257 (83,046)
Cash generated from sales 0 0 100,000 [1] 5,010,653
Cash generated from refinancing 0 0 0 0
Cash generated from operations,
sales and refinancing 53,774 80,537 140,257 4,927,607
Less: Cash distributions to investors
- from operating cash flow 0 0 0 0
- from sales and refinancing 0 0 6,850 267,029
- from return of capital 0 0 0 0
----- ------- ------- ---------
0 0 6,850 267,029
----- ------- ------- ---------
Cash generated (deficiency) after cash
distributions 53,774 80,537 133,407 4,660,578
Special items:
- Partner's capital contribution 0 563,006 0 0
- Borrowing secured by property 2,901,750 493,633 31,908 0
- Note payable proceeds 527,836 [3] 0 0 0
- Decrease in note payable 0 (527,836) 0
- Capitalized loan fees &
Organization costs (163,972) (857) 0 0
- Loans from/(to) Affiliates 0 0 0 0
- Capitalized equity placement 0 (87,955) 0 0
- Property acquisitions and
improvements (3,128,272) (456,954) (33,659) (336)
- Decrease in borrowings secured
by property 0 (32,934) 0 (3,394,356)
- Inter-entity transfer
between programs (191,116)[4] 47,782 [4] (155,370)[4] (1,320,595)[4]
----------- -------- ------- ---------
Cash generated (deficiency) after cash
distributions and special items 0 78,422 (23,714) (54,709)
========== ====== ======= =======
Tax and Distribution Data per
$1000 Invested
Federal Income Tax Results:
Ordinary income(loss)
- from operations N/A [3] (26.1) (84.3) (270.5)
- from recapture N/A [3] 0.0 0.0 0.0
Capital gain(loss) N/A [3] 0.0 0.0 2,883.9
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 0.0 12.2 474.3
- Return of capital 0.0 0.0 0.0 0.0
Source (on cash basis)
- Operations 0.0 0.0 0.0 0.0
- Refinancing 0.0 0.0 0.0 0.0
- Sales 0.0 0.0 12.2 474.3
Amount remaining invested at the end
of the period 100.00% 100.00% 100.00% 0.00%
(expressed as a percentage of the amount originally invested in the property)
<FN>
[1] For the period 12/22/93 (inception) to 12/31/93.
[2] Program sold in February of 1996 and an escrow deposit was received in 1995 and included in cash flow and sales in the year
received
[3] The entity was organized by the sponsor and was initially funded by notes payable to non-related entities prior to receipt of
investor contributions in 1994
[4] The inter entity transfers are advances to/(from) other programs included in the same reporting entity. The transfers were a
result of debt allocation and payments on an umbrella loan required by the lender as portions of the programs sold. In
addition, the entity manitained a general account and allocations were made for Investor contributions, distributions and
overhead costs.
</FN>
</TABLE>
<PAGE>
TABLE III
<TABLE>
STRATEGIC INDUSTRIAL PARTNERS - THE PARK
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
01/01/98-
1993 [1] 1994 1995 1996 1997 08/31/98
<S> <C> <C> <C> <C> <C> <C>
Gross Revenues 81,861 675,490 650,625 666,442 676,609 335,313
Profit on sale of properties 0 109,915 0 0 870,606 269,024
Less: Operating expenses 6,760 215,196 220,455 181,046 212,430 125,968
Partnership overhead allocation 0 5,034 55,434 29,933 26,616 5,192
Interest expense 80,465 507,325 531,336 482,099 360,417 145,708
Depreciation 12,530 155,134 161,731 168,836 242,297 54,009
------ ------- ------- ------- ------- -------
Net Income-GAAP Basis (17,894) (97,284) (318,331) (195,472) 705,455 273,460
======= ======= ======== ======== ======= =======
Taxable Income
- from operations (43,316)[2] (181,777)[2] (318,331) (195,472) (165,151) N/A
- from gain on sale 0 109,915 0 0 870,606 N/A
Cash generated from operations 1,665 (15,825) (137,718) (177,333) 109,727 43,570
Cash generated from sales 0 287,286 0 0 2,124,815 634,726
Cash generated from refinancing 0 0 0 0 916,786 0
------ ------- ------- ------- --------- -------
Cash generated from operations,
sales and refinancing 1,665 271,461 (137,718) (177,333) 3,151,328 678,296
Less: Cash distributions to investors
- from operating cash flow 0 0 0 0 0 0
- from sales and refinancing 0 0 0 0 1,463,411 178,835
- from return of capital 0 0 0 0 0 0
------ ------- ------- ------- --------- -------
0 0 0 0 1,463,411 178,835
Cash generated (deficiency) after cash
distributions 1,665 271,461 (137,718) (177,333) 1,687,917 499,461
Special items:
- Partner's capital contributions 0 544,635 0 0 0 0
- Borrowing secured by
property 4,382,250 [3] 243,763 38,341 41,022 0 0
- Note payable proceeds 559,115 [4] 0 350,000 0 0 0
- Decrease in note payable 0 (559,115) (350,000) 0 0 0
- Capitalized loan fees &
organization costs (335,332) 0 0 0 (109,444) 0
- Loans from/(to) affiliates 200 182,563 241,762 (397,109) 800 0
- Capitalized equity placement
fees 0 (85,085) 0 0 0 0
- Property acquisitions
and improvements (4,604,240) (248,211) (18,560) (8,410) (48,546) (15,102)
- Decrease in borrowings
secured by property 0 (307,988) 0 (249,418) (2,222,979) (850,022)
- Inter- entity transfer
between programs 322,027 [5] (281,926)[5] (95,348)[5] 826,694 [5] 680,982 [5] 467,987 [5]
--------- ------- ------- ------- --------- -------
Cash generated (deficiency) after
cash distributions and
special items 325,685 (239,903) 28,477 35,446 (11,270) 102,324
======= ======= ======== ======== ======= =======
Tax and Distribution Data per
$1000 Invested Federal Income
Tax Results:
Ordinary income(loss)
- from operations N/A [2] (333.8) (584.5) (358.9) (303.2) N/A
- from recapture N/A [2] 0 0.0 0.0 0.0 N/A
Capital gain(loss) N/A [2] 201.8 0.0 0.0 1,598.5 N/A
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 0.0 0.0 0.0 2,687.0 328.4
- Return of capital 0.0 0.0 0.0 0.0 0.0 0.0
Source (on cash basis)
- Operations 0.0 0.0 0.0 0.0 0.0 0.0
- Refinancing 0.0 0.0 0.0 0.0 0.0 0.0
- Sales 0.0 0.0 0.0 0.0 2,687.0 328.4
Amount remaining invested at
the end of the period 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
(expressed as a percentage of the amount originally invested in the property)
<FN>
[1] For the period 11/22/93 (inception) to 12/31/93.
[2] Initial tax return was filed on the cash basis in 1993, the entity converted to accrual basis tax reporting in 1994 and the
difference in book and tax income in 1994
[3] This program was acquired two months before the other programs included in the reporting entity were closed in escrow. This
program was initially financed for $3,850,000 with a short term lender financing for the two month period prior to being
refinanced and included in the singel reporting entity. This schedule does not reflect this $3,850,000 proceeds and related
pay-off relating to the short term initial mortgage financing that was repolaced by the permanent financing.
[4] The entity was organized by the sponsor and was initially funded by notes payable to non-related entities prior to receipt
of investor contributions in 1994.
[5] The inter entity transfers are advances to/(from) other programs included in the same reporting entity. The transfers were a
result of debt allocation and payments on an umbrella loan required by the lender as portions of the programs sold. In
addition, the entity manitained a general account and allocations were made for Investor contributions, distributions and
overhead costs.
</FN>
</TABLE>
<PAGE>
<TABLE>
TABLE III
STRATEGIC INDUSTRIAL PARTNERS - WESTLAKE I
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
1993 [1] 1994 1995 1996 1997 [2]
-------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Gross Revenues 13,814 556,430 562,668 476,916 0
Profit on sale of properties 0 0 0 630,602 0
Less: Operating expenses 1,506 145,603 132,512 126,327 23,639
Partnership overhead allocation 0 4,075 55,433 24,287 0
Interest expense 3,465 328,243 357,763 274,473 0
Depreciation 2,452 75,086 93,233 184,116 0
------- -------- ------- ------- ------
Net Income-GAAP Basis 6,391 3,423 (76,273) 498,315 (23,639)[2]
======= ======== ======== ======= =======
Taxable Income
- from operations 6,391 3,423 (76,273) (132,287) (23,639)
- from gain on sale 0 0 0 630,602 0
Cash generated from operations 48,277 62,524 (30,584) (36,377) (3,102)
Cash generated from sales 0 0 0 3,812,464 0
Cash generated from refinancing 0 0 0 0 0
------- -------- ------- --------- ------
Cash generated from operations,
sales and refinancing 48,277 62,524 (30,584) 3,776,087 (3,102)
Less: Cash distributions to investors
- from operating cash flow 0 0 0 0 0
- from sales and refinancing 0 0 0 0 732,790
- from return of capital 0 0 0 0 0
------- -------- ------- -------- --------
0 0 0 0 732,790
Cash generated (deficiency) after cash
distributions 48,277 62,524 (30,584) 3,776,087 (735,892)
Special items:
- Partner's capital contribution 0 297,745 0 0 0
- Borrowing secured by property 2,635,208 314,411 25,486 70,746 0
- Note payable proceeds 305,661 [3] 0 0 0 0
- Decrease in note payable 0 (305,661) 0 0 0
- Capitalized loan fees & organi (116,118) 0 0 0 0
- Loans from/(to) affiliates 0 0 0 (21,688) 21,688
- Capitalized equity placement 0 (46,515) 0 0 0
- Property acquisitions and impr (2,892,836) (305,666) (21,285) (109,079) 0
- Decrease in borrowings secured 0 (19,072) 0 (2,501,158) 0
- Inter-entity transfer between 19,808 [4] (78,130)[4] 30,442 [4] (1,283,624)[4] 859,226
---------- -------- ------- ----------- -------
Cash generated (deficiency) after cash
distributions and special items 0 (80,364) 4,059 (68,716) 145,022
Tax and Distribution Data per
$1000 Invested
Federal Income Tax Results:
Ordinary income(loss)
- from operations N/A [3] 11.5 (256.2) (444.3) (79.4)
- from recapture N/A [3] 0.0 0.0 0.0 0.0
Capital gain(loss) N/A [3] 0.0 0.0 2,117.9 0.0
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 0.0 0.0 0.0 2,461.1
- Return of capital 0.0 0.0 0.0 0.0 0.0
Source (on cash basis)
- Operations 0.0 0.0 0.0 0.0 0.0
- Refinancing 0.0 0.0 0.0 0.0 0.0
- Sales 0.0 0.0 0.0 0.0 2,461.1
Amount remaining invested at the
end of the period 100.00% 100.00% 100.00% 100.00% 0.00%
(expressed as a percentage of the amount originally invested in the property)
<FN>
[1] For the period 12/23/93 (inception) to 12/31/93.
[2] The program sold in October of 1996 and in 1997 expenses were recognized relating to uncollectible rent receivable and other
unrecorded expenditures by the property management company
[3] The entity was organized by the sponsor and was initially funded by notes payable to non-related entities prior to receipt of
investor contributions in 1994.
[4] The inter entity transfers are advances to/(from) other programs included in the same reporting entity. The transfers were a
result of debt allocation and payments on an umbrrella loan required by the lender as portions of the programs sold. In
addition, the entity maintained a general account and allocations were made for Investor contributions, distributions and
overhead costs.
</FN>
</TABLE>
<PAGE>
<TABLE>
TABLE III
STRATEGIC INDUSTRIAL PARTNERS - WESTLAKE II
BASIS OF ACCOUNTING - GAAP
OPERATING RESULTS OF PRIOR PROGRAMS
<CAPTION>
01/01/98
1993 [1] 1994 1995 1996 [1] 1997 [1] -08/31/98
-------- --------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gross Revenues 14,880 538,567 502,350 575,274 332,983 151,006
Profit on sale of properties 0 0 0 430,024 416,160 579,471
Less: Operating expenses 1,620 129,338 120,264 121,211 151,489 49,450
Partnership overhead
allocation 0 4,076 55,433 29,133 13,067 5,544
Interest expense 3,465 351,698 399,387 340,165 186,486 78,468
Depreciation 2,644 80,087 88,375 102,887 97,244 27,400
----- ------ ------ ------- ------ ------
Net Income-GAAP Basis 7,151 (26,632) (161,109) 411,902 300,857 569,615
===== ======= ======== ======= ======= =======
Taxable Income
- from operations 7,151 (26,632) (161,109) (18,122) (115,303) N/A
- from gain on sale 0 0 0 430,024 416,160 N/A
Cash generated from operations 41,632 36,183 (96,415) 24,165 (1,128) 17,451
Cash generated from sales 0 0 0 1,114,585 955,318 1,380,805
Cash generated from refinancing 0 0 0 0 746,287 0
----- ------ ------ ------- ------ ------
Cash generated from operations,
sales and refinancing 41,632 36,183 (96,415) 1,138,750 1,700,477 1,398,256
Less: Cash distributions to investors
- from operating cash flow 0 0 0 0 0 0
- from sales and refinancing 0 0 0 0 408,832 357,723
- from return of capital 0 0 0 0 0 0
----- ------ ------ ------- ------ ------
0 0 0 0 408,832 357,723
----- ------ ------ ------- ------- -------
Cash generated (deficiency)
after cash distributions 41,632 36,183 (96,415) 1,138,750 1,291,645 1,040,533
Special items:
- Partner's capital
contribution 0 320,821 0 0 0 0
- Borrowing secured
by property 2,838,842 350,968 28,651 34,674 13,039 0
- Note payable proceeds 329,351 [2] 0 0 0 0 0
- Decrease in note payable 0 (329,351) 0 0 0 0
- Capitalized loan fees
& Organization costs (125,090) 0 0 0 (80,441) 0
- Loans from/(to) Affiliates 0 0 0 0 0 0
- Capitalized equity placement 0 (50,120) 0 0 0 0
- Property acquisitions
and improvements (3,116,380) (323,021) (18,689) (2,569) 0 0
- Decrease in borrowings
secured by property 0 (20,291) 0 (2,766,851) 0 (527,871)
- Inter-entity transfer
between programs 31,645 [3] 131,225 [3] 106,995 [3] 1,685,245 [3] (1,441,266)[3] (467,986)
--------- ------- ------- --------- ---------- ---------
Cash generated (deficiency)
after cash distributions
and special items 0 116,414 20,542 89,249 (217,023) 44,676
========= ========= ========= ========= ========= =========
Tax and Distribution Data per
$1000 Invested
Federal Income Tax Results:
Ordinary income(loss)
- from operations N/A [2] (83.0) (502.2) (56.5) (359.4) N/A
- from recapture N/A [2] 0.0 0.0 0.0 0.0 N/A
Capital gain(loss) N/A [2] 0.0 0.0 1,340.4 1,297.2 N/A
Cash Distributions to Investors
Source (on GAAP basis)
- Investment income 0.0 0.0 0.0 0.0 1,274.3 1,115.0
- Return of capital 0.0 0.0 0.0 0.0 0.0 0.0
Source (on cash basis)
- Operations 0.0 0.0 0.0 0.0 0.0 0.0
- Refinancing 0.0 0.0 0.0 0.0 0.0 0.0
- Sales 0.0 0.0 0.0 0.0 1,274.3 1,115.0
Amount remaining invested at
the end of the period 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
(expressed as a percentage of the amount originally invested in the property)
<FN>
[1] For the period 12/23/93 (inception) to 12/31/93.
[2] The entity was organized by the sponsor and was initially funded by notes payable to non-related entities prior to receipt
of investor contributions in 1994.
[3] The inter entity transfers are advances to/(from) other programs included in the same reporting entity. The transfers were
a result of debt allocation and payments on an umbrella loan required by the lender as portions of the programs sold.
In addition, the entity maintained a general account and allocations were ade for Investor contributions, distributions and
overhead costs.
</FN>
</TABLE>
<PAGE>
<TABLE>
TABLE IV
RESULTS OF COMPLETED PROGRAMS FOR THE PERIOD 1993 - AUGUST 31, 1998
<CAPTION>
Fairway Beach Westlake I
------- --------- -----------
<S> <C> <C> <C>
Dollar amount raised 563,005 514,166 297,745
Number of properties
purchased One One One
Date of closing of offering 10/25/94 10/25/94 10/25/94
Date of sale of property 02/15/96 01/31/97 10/29/96
Tax and distribution data
per $1,000 investment
Federal income tax results:
Ordinary income(loss): [1] [2] [3]
From operations (205,515) (378,210) (222,385)
Gross capital gain 1,623,641 675,480 630,602
Deferred gain:
Capital 0 0 0
Cash distributions to investors:
Source (cash basis):
Sales 273,879 [4] 808,398 732,790
Refinancing 0 0 0
Operations 0 0 0
Receivable on net purchase
money financing 0 0 0
<FN>
[1] From 12/22/93 (inception) thru 2/15/96 (sale).
[2] From 12/22/93 (inception) thru 1/31/97 (sale).
[3] From 12/22/93 (inception) thru 10/29/96 (sale).
[4] This program was included with other programs that were reported by a single
partnership entity. All of the programs were financed by an umbrella loan.
Upon disposition of this property the lender required a paydown on the
umbrella loan in an amount greater than the debt that was allocated to it.
</FN>
</TABLE>
<PAGE>
<TABLE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES - JANUARY 1, 1995 THROUGH AUGUST 31, 1998
<CAPTION>
Excess
(Deficit) of
Operational
Cash
Cost of Property Receipts
Date Date Selling Price Net Including Closing Over Cash
Property Acquired of Sale of Closing Costs and GAAP Adjustments and Soft Costs Receipts
- -------------- -------- -------- ----------------------------------------------- ---------------------------------- -----------
Total
Purchase acquisition
Mortgage money Adjustments cost,capital
Cash balance mortgage resulting Improvements
received at taken from appli- Original closing
net of time back by cation of mortgageing & soft
closing of sale program GAAP Total financing Costs Total
------- ------- ------- ---- ----- ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Van Buren
Buildings 11
and 12 5/31/95 7/7/95 410,005 469,676 0 0 879,681 391,452 [1] 269,155 660,607 [3]
Van Buren
Building 9 5/31/95 11/3/95 140,600 156,344 0 0 296,944 130,305 [1] 92,520 222,825 [3]
Van Buren
Building 7 5/31/95 1/21/97 152,526 189,308 0 0 341,834 146,571 [1] 104,093 250,664 [3]
Van Buren
Building 10 5/31/95 3/13/98 157,049 168,299 0 0 325,348 130,305 [1] 94,790 225,095 [3]
Van Buren
Buildings 4 5/31/95 3/17/98 145,031 156,987 0 0 302,018 121,547 [1] 88,614 210,161 [3]
------- -------- - - --------- ------- ------ -------
1,005,211 1,140,614 0 0 2,145,825 920,180 649,172 1,569,352
========= ========= = = ========= ======= ======= =========
Tamarack Unit
450E 4/4/93 11/17/95 37,457 178,150 0 0 215,607 97,850 [1] 75,796 173,646 [3]
Tamarack Unit
450D 4/4/93 11/17/95 34,258 169,975 0 0 204,233 92,720 [1] 71,065 163,785 [3]
Tamarack Unit
480D 4/4/93 1/10/97 35,181 178,305 0 0 213,486 97,280 [1] 75,138 172,418 [3]
Tamarack Unit
450C 4/4/93 8/29/97 22,628 177,160 0 0 199,788 96,710 [1] 72,586 169,296 [3]
Tamarack Unit
450A 4/4/93 12/31/97 44,524 187,624 0 0 232,148 97,850 [1] 81,508 179,358 [3]
Tamarack Unit
420A 4/4/93 7/17/98 42,205 179,191 0 0 221,396 102,410 [1] 70,573 172,983 [3]
Tamarack Unit
480E 4/4/93 8/18/98 49,132 187,624 0 0 236,756 102,410 [1] 79,567 181,977 [3]
------- ------- - - ------- ------- ------ -------
265,385 1,258,029 0 0 1,523,414 687,230 526,233 1,213,463
======= ========= = = ========= ======= ======= =========
The Park Units
1041 & 1035 11/22/93 11/7/97 422,154 635,538 0 0 1,057,692 614,392[1][2] 95,159 709,551 [3]
The Park Unit
1025 11/22/93 11/26/97 157,804 242,228 0 0 400,032 234,012[1][2] 66,762 300,774 [3]
The Park Unit
1021 11/22/93 12/15/97 276,955 390,134 0 0 667,089 377,312[1][2] 52,902 430,214 [3]
The Park Unit
1001 11/22/93 2/20/98 98,740 123,539 0 0 222,279 119,635[1][2] 23,931 143,566 [3]
The Park Unit
1029 11/22/93 3/30/98 172,740 239,706 0 0 412,446 231,821[1][2] 46,920 278,741 [3]
---- ------- ------- - - ------- -------- ------ -------
1,128,393 1,631,145 0 0 2,759,538 1,577,172 285,674 1,862,846
========= ========= = = ========= ========= ======= =========
Westlake II
Units 201-2 12/22/93 12/27/96 43,882 1,070,703 0 0 1,114,585 579,339[1][2] 160,724 740,063 [3]
Westlake II
Unit 301 12/22/93 4/24/97 175,278 440,294 0 0 615,572 308,981[1][2] 78,805 387,786 [3]
Westlake II
Unit 403 12/22/93 7/15/97 106,898 232,848 0 0 339,746 163,403[1][2] 41,816 205,219 [3]
Westlake Units
401-2 12/22/93 1/2/98 192,971 465,696 0 0 658,667 326,806[1][2] 91,362 418,168 [3]
Westlake Unit
302 12/22/93 6/30/98 204,698 517,440 0 0 722,138 363,118[1][2] 104,800 467,918 [3]
------- ------- - - ------- ------- ------- -------
723,727 2,726,981 0 0 3,450,708 1,741,647 477,507 2,219,154
======= ========= = = ========= ========= ======= =========
Fairway Com-
merce Center 12/22/93 2/15/96 896,162 4,214,491 0 0 5,110,653 3,429,586 425,607 3,855,19 91,522
======= ========= = = ========= ========= ======= ======== ======
Beach Com-
merce Center 12/22/93 1/31/97 330,170 4,368,836 0 0 4,699,006 4,115,000 299,926 4,414,926 13,192
======= ========= = = ========= ========= ======= ========= ======
Westlake Com-
merce Center
Phase I 12/22/93 10/29/96 (35,047) 3,847,511 0 0 3,812,464 3,168,193 276,791 3,444,984 40,738
======= ========= = = ========= ========= ======= ========= ======
<FN>
[1] Original mortgage financing allocated to unit based on square footage percentage of total project.
[2] Debt paid on outstanding blanket loan at time of sale was determined by the lender who required a payment for a larger
percentage of total debt then allocated to the individual unit.
[3] The sponsor did not record income and expenditures on a unit by unit basis and excess cash receipts over
expenditures information by unit is not available.
</FN>
</TABLE>
<PAGE>
<TABLE>
TABLE VI
ACQUISITIONS OF PROPERTIES BY PROGRAMS
For the Period 1993 - August 31, 1998
<CAPTION>
Van Buren Business Park Baldwin Business Park Torrance Amapola Partners
----------------------- --------------------- -------------------------
<S> <C> <C> <C>
Location . . . . . . Placentia, California Baldwin Park, California Torrance, California
Type of Property . . . . Industrial Buildings Free-Standing Industrial Bldgs. Multi-tenant Business Park
Gross Leasable Space . . 89,513 square feet 166,191 square feet 95,000
Date of Purchase . . . May 31, 1995 August 15, 1997 December 15, 1995
No. of Buildings/Units . . Twelve Condominium Units Seven Buildings Two Bldgs.
No. of Buildings/Units Sold Thro 6 0 0
Total Acquisition Cost . . $3,282,025 $6,012,685 $4,214,812
</TABLE>
<PAGE>
<TABLE>
TABLE VI
ACQUISITIONS OF PROPERTIES BY PROGRAMS For the Period 1993 - August 31, 1998
CARSON INDUSTRIAL PARTNERS
--------------------------
<CAPTION>
Carson Phase I Carson Phase II Tamarack Business Center
-------------- --------------- ------------------------
<S> <C> <C> <C>
Location . . . . . . Carson, California Carson, California Brea, California
Type of Property . . . . Multi-tenant Industrial Bldgs. Free-Standing Industrial Bldgs. Multi-tenant Industrial
Gross Leasable Space . . 39,592 square feet 166,191 square feet 54,744 square feet
Date of Purchase . . . August 15, 1997 August 15, 1997 June 30, 1993
No. of Buildings/Units . . Two Bldgs/28 Units Seven Buildings Sixteen Condominium Units
No. of Buildings/Units Sold Thro 0 0 7
Total Acquisition Cost . . $1,432,772 $6,012,685 $2,764,561
</TABLE>
<PAGE>
<TABLE>
TABLE VI
ACQUISITIONS OF PROPERTIES BY PROGRAMS For the Period 1993 - August 31, 1998
STRATEGIC INDUSTRIAL HOLDINGS, LTD.
-----------------------------------
<CAPTION>
Westlake Westlake
The Park Fairway Beach Commerce Commerce
Fullerton Commerce Center Commerce Center Center Phase I Center Phase II
---------- --------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Location . . . . . .Fullerton, City of Industry La Habra, Westlake Westlake
California California California Village, CA Village, CA
Type of Property . . . .Multi-tenant Industrial Bldgs. Multi-tenant Industrial Industrial
Industrial Bldgs. Retail & Industrial
Gross Leasable Space . . 116,819 square feet 120,763 square feet 110,322 square feet 63,862 sq ft 68,798 square feet
Date of Purchase . . . November 22, 1993 December 22, 1993 December 22, 1993 December 22, 1993 December 22, 1993
No. of Buildings/Units . . Two Bldgs/ Seven Bldgs/
18 Condominiums 58 Units Four Buildings Six Buildings 10 Buildings
No. of Buildings/Units Sold
Through 8/31/98 7 Entire Project Entire Project Entire Project 7
Total Acquisition Cost . . $4,439,248 $3,138,175 $3,708,632 $2,901,291 $3,121,704
</TABLE>
<PAGE>
EXHIBIT "A"
CORNERSTONE REALTY FUND, LLC
A CALIFORNIA LIMITED LIABILITY COMPANY
OPERATING AGREEMENT
(AMENDED AND RESTATED)
<PAGE>
[TABLE OF CONTENTS
Page
1. ORGANIZATION A-6
1.1. Formation...................................................A-6
1.2. Name........................................................A-6
1.3. Purpose.....................................................A-6
1.4. Duration....................................................A-6
1.5. Principal Place of Business, Registered Office
and Resident Agent..........................................A-6
1.6. Title to Fund Property......................................A-7
1.7. Intention for Fund..........................................A-7
1.8. Definitions.................................................A-7
2. BOOKS, RECORDS AND ACCOUNTING..........................................A-7
2.1. Books and Records...........................................A-7
2.2. Fiscal Year; Accounting.....................................A-7
2.3. Bank Accounts...............................................A-2
2.4. Reports to Members..........................................A-7
2.5. Tax Returns.................................................A-9
2.6. Appraisals..................................................A-9
2.7. List of Members.............................................A-9
2.8. Valuation of Units..........................................A-9
3. MEMBERS, UNITHOLDERS AND MEETINGS OF MEMBERS...........................A-9
3.1. Units of Membership Interest................................A-9
3.2. Book Entry Evidence of Ownership............................A-5
3.3. Place of Meetings..........................................A-10
3.4. Meetings of Members........................................A-10
3.5. Notice of Meetings.........................................A-10
3.6. Record Dates...............................................A-10
3.7. List of Members............................................A-10
3.8. Quorum.....................................................A-10
3.9. Proxies....................................................A-11
3.10. Inspectors of Election....................................A-11
3.11. Manner of Voting..........................................A-11
3.12. Actions Without a Meeting.................................A-11
4. CAPITAL CONTRIBUTIONS.................................................A-11
4.1. Contributions, Members and Unitholders.....................A-11
4.2. Capital Accounts...........................................A-12
4.3. Capital Accounts and Capital Contributions in General......A-12
5. ALLOCATIONS OF NET INCOME AND NET LOSS................................A-12
5.1. Timing and Effect..........................................A-12
5.2. Allocation of Net Income and Net Loss......................A-12
5.3. Reallocations to Avoid Excess Deficit Balances.............A-13
5.4. Allocations Among Unitholders..............................A-13
5.5. Allocation in the Event of Section 754 Election............A-13
5.6. Recapture of Deductions and Credits........................A-14
5.7. Regulatory and Curative Allocations........................A-14
A-i
<PAGE>
6. DISTRIBUTIONS A-15
6.1. Distributions To Members...................................A-15
6.2. Distributions of Uninvested Assets.........................A-16
6.3. Limitations on Distributions...............................A-16
6.4. Return of Distribution.....................................A-16
6.5. Withholding on Distributions...............................A-16
7. DISPOSITION OF UNITS..................................................A-16
7.1. General....................................................A-16
7.2. Prohibited Dispositions....................................A-16
7.3. Permitted Dispositions.....................................A-17
7.4. Admission of Assignee as a Member..........................A-17
8. MANAGEMENT A-12
8.1. Management of Business.....................................A-13
8.2. General Powers of the Managing Member......................A-17
8.3. Limitations; Voting Rights of Members......................A-18
8.4. Compensation and Expense Reimbursement.....................A-13
8.5 Contracts with the Managing Member and its Affiliates.......A-20
8.6. Authority..................................................A-20
8.7. Fiduciary Duty; Standard of Care...........................A-20
8.8. Liability..................................................A-20
8.9. Other Interests............................................A-21
8.10. Prohibited Acts...........................................A-21
9. INVESTMENT OBJECTIVES AND POLICIES....................................A-21
9.1. Duties and Responsibilities; Investment Allocation.........A-21
9.1. Duties and Responsibilities; Investment Allocation.........A-21
9.2. Prohibited Investments and Activities......................A-21
9.3. Borrowing Policies.........................................A-22
9.4. Conflicts of Interest......................................A-23
9.5. Conflict Resolution Procedures.............................A-23
10. INDEMNIFICATION......................................................A-24
10.1. Indemnification...........................................A-24
10.2. Certain Actions...........................................A-24
10.3. Expenses of Successful Defense............................A-24
10.4. Determination that Indemnification is Proper..............A-24
10.5. Indemnification for Portion of Expenses...................A-25
10.6. Expense Advances..........................................A-25
10.7. Indemnification of Employees and Agents of the Fund.......A-25
10.8. Former Managing Members, Officers, Employees and Agents...A-26
10.9. Insurance.................................................A-26
10.10. Contract Right to Indemnity..............................A-26
10.11. Exclusivity; Other Indemnification.......................A-26
10.12. Amendment or Deletion....................................A-26
11. DISSOLUTION, WINDING UP AND REDEMPTION...............................A-26
11.1. Dissolution...............................................A-26
11.2. Winding Up................................................A-26
A-ii
<PAGE>
12. MISCELLANEOUS PROVISIONS.............................................A-27
12.1. Counsel to the Fund.......................................A-27
12.2. Counterparts..............................................A-27
12.3. Entire Agreement..........................................A-27
12.4. Severability..............................................A-27
12.5. Pronouns; Statutory Reference.............................A-27
12.6. Power of Attorney.........................................A-27
12.7. Notices...................................................A-28
12.8. Binding Effect............................................A-28
12.9. Governing Law.............................................A-28
12.10. Attorneys' Fees..........................................A-28
13. DEFINITIONS..........................................................A-28
A-iii
<PAGE>
OPERATING AGREEMENT
FOR
CORNERSTONE {INDUSTRIAL PROPERTIES INCOME AND GROWTH FUND I}
[CORNERSTONE REALTY FUND], LLC
A California Limited Liability Company
THIS OPERATING AGREEMENT is dated as of {October 28, 1998}
[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 {Industrial Properties Income
---------
and Growth Fund I} [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
----
{Industrial Properties Income and Growth Fund I} [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.
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
A-1
<PAGE>
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 Fun'ds fiscal year will be
------------------------
the calendar year. The Fund shall follow generally accepted accounting
principles and use the accrual method of accounting in preparation of its
financial statements and the appropriate tax method in preparation of its tax
returns.
2.3. Bank Accounts. One or more accounts in the name of the
--------------
Fund shall be maintained in such bank or banks as the Managing Member may from
time to time select. Any checks of the Fund may be signed by any Person(s)
designated, from time to time, by the Managing Member.
2.4. Reports to Members. At the expense of the Fund, the
------------------
Managing Member shall cause to be prepared and made available to the Members
during each year the following:
2.4.1. If and for as long as the Fund is required to file
quarterly reports on Form 10-Q with the Securities and Exchange Commission, the
information contained in each such report for a quarter shall be sent upon
request to the Members within sixty (60) days after the end of such quarter.
Such reports shall contain at least an unaudited balance sheet, an unaudited
statement of income for the quarter then ended, an unaudited cash flow statement
for the quarter then ended (in the form set forth in quarterly reports required
A-2
<PAGE>
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 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.
A-3
<PAGE>
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, address-
----------------
es 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 2510.3-101, as amended, or any
successor provision. The Managing Member may, in its discretion, in order to
comply with the foregoing requirement, issue for such consideration as it may
determine (including by gift) Units to such Persons and in such Percentage
Interests as it may determine. The Managing Member will receive its interest in
the Fund for a contribution of $1,000, and such interest of the Managing Member
will not be considered an interest in Units for purposes hereof. Notwithstanding
the preceding sentence, the Managing Member may acquire Units and be treated in
the same manner as other Unitholders with respect thereto.
3.2. Book-Entry Evidence of Ownership
--------------------------------
3.2.1. The Units will be issued only in fully
registered book-entry form. Ownership of Units in the Fund will be shown on and
transfer thereof will be effected only through book-entry in records maintained
by the Fund. Certificates evidencing ownership of Units will not be issued.
A-4
<PAGE>
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
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
------
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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, signe
----------------
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 {$20,000,000}
[$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 {40,000} [100,000] Units shall
be issued pursuant to said registration statement.
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
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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 {__________,
2000} [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{.
----------------
4.2.1}. The Fund shall establish and maintain a separate capital
account for each Member ("Capital Account"). The Fund shall determine and
maintain each Capital Account in accordance with Regulations Section
1.704-1(b)(2)(iv). Each Capital Account shall reflect, among other items (i) all
Capital Contributions made to the Fund, (ii) all allocations of Net Income and
Net Loss, and (iii) all Distributions made by the Fund. Any and all amounts
distributed by the Fund to a Member as a fee and/or as compensation or
reimbursement for services shall not reduce such Member's Capital Account.
{4.2.2} [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).
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:
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(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 pro-
portion 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. Notwith-
-----------------------------------------------
standing any other provisions of this Agreement to the contrary, no Net Loss
shall be allocated to any Member to the extent that such allocation would cause
such Member to have an Adjusted Capital Account Deficit. Such Net Loss or
deduction shall be reallocated away from such Member and to the other Members,
on a pro rata basis, but only to the extent that such reallocation would not
cause or increase any such other Member's Adjusted Capital Account Deficit. Any
Net Loss reallocated hereunder shall be subject to an immediate chargeback of
Net Income prior to any other allocations of Net Income pursuant to
Section 5.2.1 in any subsequent period.
5.4. Allocations Among Unitholders. Except as otherwise
-------------------------------
provided in this Article V, including, without limitation, Section 5.7.7 with
respect to transferred Units, allocations of Net Income or Net Loss to
Unitholders as a class shall be allocated among the Unitholders in accordance
with their respective Percentage Interests, including, without limitation,
Section 5.7.7 with respect to transferred Units.
5.5. Allocation in the Event of Section 754 Election. To the
-------------------------------------------------
extent an adjustment to the adjusted tax basis of any Fund asset pursuant to
Code Section 734(b) or Code Section 743(b) is required pursuant to Regulation
Section 1.704-1(b)(2)(iv)(m) to be taken into account in determining Capital
Accounts, the amount of that adjustment to the Capital Accounts shall be treated
as an item of Net Income (if the adjustment increases the basis of the asset) or
Net Loss (if the adjustment decreases the basis of the asset), and that Net
Income or Net Loss shall be specially allocated to the Members in a manner
consistent with the manner in which their Capital Accounts are required to be
adjusted pursuant to that Regulation.
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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 Regulation
Sections 1.704-1(b) and 1.704-2. Notwithstanding any other provision of this
Article 5 (other than the Regulatory Allocations), the Regulatory Allocations
shall be taken into account in allocating other items of income, gain, loss and
deduction among the Members so that, to the extent possible, the net amount of
such allocation of other items and the Regulatory Allocations to each Member
should be equal to the net amount that would have been allocated to each such
Member if the Regulatory Allocations had not occurred.
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5.7.6. Adjustment to Allocations. It is the intentio
---------------------------
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 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.
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6.2. Distributions of Uninvested Assets. Subject to the
--------------------------------------
provisions of Section 6.4, all cash or cash equivalents which constitute part of
the assets of the Fund which have not been invested in Properties {by
December31, 2001} [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
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:
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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.] {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.
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
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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)appointment}[(b) voluntarily withdraw as the
Managing Member, (c) appointment] of a new managing member, {(c)sale}[(d) sale]
of all or substantially all of the Fund's assets other than in the ordinary
course of business, {(d)causing}[(e) causing] the merger or other reorganization
of the Fund; {(e)any}[(f) any] change in the character of the business and
affairs of the Fund; {(f)the}[(g) the] commission of any act that would make it
impossible for the Fund to carry on its ordinary business and affairs;
{(g)any}[(h) any] act that would contravene any provision of the Articles, this
Agreement, or the Limited Liability Company Law; or {(h)}[(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 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.]
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<PAGE>
Without the concurrence of Unitholders owning a majority of the
Percentage Interests, the Managing Member may not voluntarily withdraw as the
Managing Member unless such withdrawal would not affect the tax status of the
Fund and would not materially adversely affect the Unitholders.
8.4. Compensation and Expense Reimbursement. The Managing
-------------------------------------------
Member and/or its Affiliates which may include the Dealer Manager shall be
entitled to receive the following compensation and expense reimbursements:
8.4.1. Selling commissions of {seven} [eight] percent
{(7%)}[(8%)] per Unit on {all} [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 {is} [were] solely dedicated to
{identifying and working with the Participating Brokers;} [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 {of}
[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;
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;
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<PAGE>
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 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 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
A-15
<PAGE>
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
Members 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 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:
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<PAGE>
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 no reinvest Net Cash Flow from
Operations or Net Sale Proceeds.
9.2.4. Investments by the Fund in Properties other than
multi-tenant industrial properties shall be prohibited. The Fund may invest in
{multi-tenant industrial} properties through general partnerships[, limited
liability companies] or joint ventures with non-Affiliates that own or operate
one or more {Properties} [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 inves more than {$25,000,000}
[$15,000,000] 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.
9.2.11 The Fund will not engage in any roll-up trans-
action.
9.3. Borrowing Policies. The Members acknowledge that funds
may be required in addition to the Capital Contributions made pursuant to
Section 4.1 hereof in order to meet the operating expenses of the Fund. All
additional funds required for such purpose will be obtained from the proceeds of
unsecured loans pursuant to such terms, provisions and conditions and in such
manner as the Managing Member shall determine. The Fund will not borrow funds
for any other purpose, including, without limitation, for the purpose of
acquiring or holding any Properties. The aggregate borrowings of the Fund for
operating expenses will not exceed the greater of $100,000 or five percent of
A-17
<PAGE>
the Capital Contributions of all Members and will be reviewed by the Managing
Member at least quarterly. In the event the Fund borrows money from the Managing
Member or an Affiliate of the Managing Member, the Managing Member or Affiliate
shall make such loan to the Fund at the Managing Member's {of} [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
---------------------
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.
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.
A-23
<PAGE>
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. mandatory indemnification
provided in this Article 10.
10.4. Determination that Indemnification is Proper. An indem-
-----------------------------------------------
nification 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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<PAGE>
10.4.1.1. The Managing Member has determined, in good
faith, that the course of conduct which caused the loss or liability was in the
best interests of the Fund.
10.4.1.2. Such liability or loss was not the
result of fraud, gross negligence or willful misconduct by the Managing Member.
10.4.1.3. Such indemnification or agreement to
hold harmless is recoverable only out of the assets of the Fund and not from the
Members.
10.4.1.4. Such determination shall be made in
either of the following ways: (A) by independent legal counsel in a written
opinion; or (B) by the Members pursuant to Section 3.11.
If and only to the extent prohibited by applicable law, indemnification
will not be allowed on any liability imposed by judgment, and costs associated
therewith, including attorneys' fees, arising from or out of a violation of
state or federal securities laws associated with the offer and sale of the
Fund's Units. Indemnification will be allowed for settlements and related
expenses of lawsuits alleging securities law violations, and for expenses
incurred in successfully defending such lawsuits{, provided that a court either:
(1)} [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 {;
or (2) approves indemnification of litigation costs if a successful defense is
made. The court will be advised that }[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
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<PAGE>
Article 10 with respect to the indemnification and advancement of expenses of
the Managing Member and officers of the Fund.
10.8. Former Managing Members, Officers, Employees and Agents.
---------------------------------------------------------
The indemnification provided in the foregoing sections of this Article 10
continues as to a Person who has ceased to be a Managing Member, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such Person.
10.9. Insurance. The Fund may purchase and maintain insurance
---------
on behalf of any Person who is or was a Managing Member, officer, employee or
agent of the Fund, or who is or was serving at the request of the Fund as a
director, officer, employee or agent of another limited liability company,
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against such Person and incurred by such Person in any such
capacity or arising out of such Person's status as such, whether or not the Fund
would have power to indemnify such Person against such liability under this
Agreement or the laws of the State of California. 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 {not required to indemnify} [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
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<PAGE>
extent permitted by law in satisfaction of the Fund's debts, liabilities, and
obligations, including contingent liabilities for which reserves may be
established in the discretion of the Managing Member, and then to the Members in
accordance with Article 6 and their relative positive Adjusted Capital Account
Balances. Such proceeds will be distributed to such Members as soon as
practicable after the date of winding up.
12. MISCELLANEOUS PROVISIONS
12.1. Counsel to the Fund. Counsel to the Fund may also be
-------------------
counsel to the Managing Member or any Affiliate of the Managing Member. The
Managing Member may execute on behalf of the Company and the Unitholders any
consent to the representation of the Fund that counsel may request pursuant to
the California Rules of Professional Conduct or similar rules in any other
jurisdiction ("Rules"). The Fund has initially selected Oppenheimer Wolff &
Donnelly LLP ("Counsel") as legal counsel to the Fund. Each Unitholder
acknowledges that Counsel does not represent any Unitholder in the absence of a
clear and explicit agreement to such effect between the Unitholder and Counsel,
and that in the absence of any such agreement, Counsel will owe no duties
directly to a Unitholder. In the event any dispute or controversy arises between
any Members and the Fund, or between any Unitholders or the Fund, on the one
hand, and the Managing Member (or Affiliate of the Managing Member) that Counsel
represents, on the other hand, then each Member agrees that Counsel may
represent either the Fund or such Managing Member (or its Affiliate), in any
such dispute or controversy to the extent permitted by the Rules, and each
Member hereby consents to such representation. Each Unitholder further
acknowledges that Counsel has not represented the interests of any Unitholder
and hereby waives any conflict of interest with respect to Counsel's
representation of the Fund.
12.2. Counterparts. This Agreement may be executed in several
------------
counterparts, each of which will be deemed an original, but all of which will
constitute one and the same.
12.3. Entire Agreement. This Agreement constitutes the entire
-----------------
agreement among the parties and contains all of the agreements among the parties
with 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;
A-27
<PAGE>
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 Agree-
---------------
ment 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.
A-28
<PAGE>
"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 happen-
----------
ing 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 reorg-
anization, 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.
A-29
<PAGE>
"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 Private Equity Investors {Company} [Group],
--------------
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.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
-----
as amended.
"Escrow Agent" shall mean a Southern California bank in Newport Beach,
California, which will hold subscribers' funds until the minimum number of Units
is sold.
"Fund" shall mean Cornerstone {Industrial Properties Income and Growth
----
Fund I} [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 Operating Agreement. "Members" shall mean all
A-30
<PAGE>
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 time to time pursuant to the
-31-
<PAGE>
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 the current fiscal year and all prior fiscal years other than
A-32
<PAGE>
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-33
<PAGE>
EXHIBIT "B"
{ ,1999
-------------
FORM OF}[January 31, 2000
OPINION OF
COUNSEL WITH RESPECT TO
CERTAIN FEDERAL INCOME TAX MATTERS
Cornerstone [Realty Fund] {Ineustrial Properties Income
and Growth Fund I}, LLC
4590 MacArthur Blvd., Suite 610
Newport Beach, CA 92660
Re: Cornerstone {Industrial Properties Income and Growth Fund I}
[Realty Fund], LLC
Ladies and Gentlemen:
You have requested our opinion concerning certain federal income tax
aspects of the offering and sale of Units of limited liability company interest
in Cornerstone {Industrial Properties Income and Growth Fund I} [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 {March ___}[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
<PAGE>
Managing Member
January 31, 2000
Page 2
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 given with respect to the
federal income tax consequences to any new Unitholder substituted for a
Unitholder. Foreign, state or local tax consequences are not generally addressed
herein. The opinions expressed herein also do not extend to a continuation of
operations following the resignation or removal of the Managing Member.
In giving this opinion, we have considered and attempted to follow the
guidelines of Formal Opinion 346 (revised) of the American Bar Association
Standing Committee on Ethics and Professional Responsibility issued January 29,
1982, which requires that an attorney should, if possible, state his or her
opinion as to the probable outcome on the merits of each material tax issue,
i.e., each issue that would have a significant effect in sheltering income from
sources other than the Fund from federal income taxes by providing deductions to
investors in excess of the income of the Fund. In this regard, it should be
noted that Section 9.3 of the Operating Agreement prohibits the Fund from
borrowing funds for the purpose of acquiring or holding any Properties;
accordingly, the Managing Member does not intend for an investment in the Fund
to be a tax shelter. [
]Our opinion {attempts to address} [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
more likely than not [(except for item (1) 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";
<PAGE>
Managing Member
January 31, 2000
Page 3
(2) The Fund will not be classified as a "publicly traded partner-
ship" under Section 7704 of the Code since the Operating
Agreement limits transfers of Units, except for transfers of
Units which satisfy applicable safe harbors from "publicly
traded partnership" status adopted by the IRS;
(3) A Unitholder's interest in the Fund will be treated as a
passive activity; and Net Income will be considered income
from a passive activity subject to the potential issuance of
Regulations that could classify Fund income as non-passive
income;
(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] {In addition}, we are of the opinion that, in the
aggregate, substantially more than one-half of the material federal income tax
benefits contemplated by the Prospectus, in terms of their financial impact on a
typical investor, will more likely than not be realized by an investor in the
Fund.
We are unable to form opinions as to the probable outcome of {certain}
[the following potentially] material tax aspects of the transactions described
in the Prospectus if challenged by the IRS, litigated and judicially decided,
{including (i) the }[because of the lack of any actual facts on which to have
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} [fund], including but not limited
to fees paid to the {Managing Member and its Affiliates, (ii)
whether the Fund will be considered to hold any or all of its
Properties primarily for sale to customer in the ordinary
course of business, and (iii) whether the Fund will be classi-
fied as a "tax shelter" under Section 6662(d) of the Code for
purposes of determining the availability of certain potential
exemptions from the} [managing member and its affiliates;
<PAGE>
Managing Member
January 31, 2000
Page 4
(iii) The tax consequences of an investment in the fund by qualified
plans and other tax-exempt entities;
(iv) Whether the fund might be considered a "dealer" in fund prop-
erties or whether such properties should be treated as held
for investment; and
(v) Whether the fund is a "tax-shelter" for purposes of investors
avoiding] application of the
accuracy-related penalty provisions [of the Code;
(vi) The tax consequences upon dissolution of the fund;
(vii) The tax consequences to foreign investors;
(viii) The state or local tax consequences to investors;
(ix) Applicability of fund-level audit rules; and
(x) 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 Member level rather than at the Fund level. No opinion
is given herein as to the tax consequences to Unitholders with regard to any
material tax issue which is determined at the individual or Member level and
which is dependent upon an individual Unitholder's tax circumstances, including
but not limited to, issues relating to the alternative minimum tax, investment
interest limitations or the application of Section 183 of the Code.
{As of the date of this opinion, no Properties have been acquired by the Fund,
nor has the Fund entered into any contracts to acquire Properties. Therefore, it
is impossible at this time for us to opine on the application of federal income
tax laws to the specific facts which will exist when Properties are acquired by
the Fund.
}DiscussioN
1. Fund Classifications (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 Members of the Fund would be treated as shareholders of a
corporation with the following results, among others: (a) the Fund would become
a taxable entity subject to the federal income tax imposed on corporations; (b)
items of income, gain, loss, deduction and credit would be accounted for by the
Fund on its own federal income tax return and would not flow through to the
Members; and (c) Distributions of cash would generally be treated as dividends
taxable to the Members at ordinary income rates, to the extent of current or
accumulated earnings and profits of the Fund, and would not be deductible by the
Fund in computing its income tax.
<PAGE>
Managing Member
January 31, 2000
Page 5
The Fund has been formed as a "limited liability company" under
California law. A California limited liability company is considered an
"eligible entity" under Treasury Regulations classifying business entities.
Since its formation, the Fund has had at least two Members. Under current
Treasury Regulations, a newly formed domestic eligible entity that has two or
more owners will automatically qualify for "partnership" tax classification
status. Treas. Regs. 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.
301.7701-3(c)(1)(i). The Fund, as a California limited liability company, has
been formed as a qualifying domestic eligible entity, and, accordingly, it
automatically will default to "partnership" classification status. Moreover, the
Operating Agreement of the Fund prohibits the Managing Member from electing
corporate classification status. Accordingly, it is our opinion that, subject to
the discussion below regarding "publicly traded partnerships," the Fund will be
classified as a "partnership" and not as an "association taxable as a
corporation" for federal income tax purposes if such issue were challenged by
the IRS, litigated and judicially decided. The Fund will not seek a ruling from
the IRS that it will be treated as a partnership for federal income tax
purposes.
In rendering this opinion, we have relied specifically upon the fact that the
Fund is duly organized and in good standing as a limited liability company under
the laws of the State of California. This opinion is also premised expressly on
the representation by the Managing Member that the Fund will be organized and
operated strictly in accordance with the provisions of the Operating Agreement.
<PAGE>
Managing Member
January 31, 2000
Page 6
2. Fund Classification (Status as a Publicly Traded Partnership).
Section 7704 of the Code provides that even though an entity may
generally be treated as a "partnership" under Section 7701(a) of the Code,
entities which are deemed to be "publicly traded partnerships" will nonetheless
be treated as corporations, rather than as partnerships, for federal income tax
purposes, with the adverse income tax consequences to the Members as described
above. Under Section 7704(b), a publicly traded partnership is defined as any
partnership (or entity otherwise taxable as a partnership) whose interests are
traded on an established securities market or are readily tradable on a
secondary market (or the substantial equivalent thereof).
The IRS has issued Regulations under Section 7704 (the "Section 7704
Regulations") that set forth limited safe harbors from the definition of a
publicly traded partnership, at least two of which may be applicable to the
Fund. First, interests in a partnership (or entity otherwise taxable as a
partnership) will not be considered readily tradable on a secondary market or
the substantial equivalent thereof if the partnership does not participate in
the establishment of the market or the inclusion of its interests thereon and
the partnership does not recognize any transfers made on the market by (i)
redeeming the transferor partner (in the case of a redemption or repurchase by
the partnership), or (ii) admitting the transferee as a partner or otherwise
recognizing any rights of the transferee, such as a right of the transferee to
receive partnership distributions (directly or indirectly) or to acquire an
interest in the capital or profits of the partnership. Second, interests in a
partnership (or entity otherwise taxable as a partnership) will not be
considered readily tradable if, for any taxable year of the partnership, the sum
of the percentage interests in partnership capital or profits represented by
partnership interests that are sold or otherwise disposed of during the taxable
year, other than "disregarded transfers," does not exceed two percent (2%) of
the total interests in partnership capital or profits. Disregarded transfers
include, among other things, transfers by gift, transfers at death, transfers
between family members, distributions from a qualified retirement plan, block
transfers (which are defined as transfers by a partner and any persons related
to such partner during any 30 calendar day period of partnership interests
representing more than two percent (2%) of the total interests in a
partnership's capital or profits), and transfers not recognized by the
partnership. The Section 7704 Regulations further provide that the failure to
satisfy a safe harbor provision under the Regulations will not cause a
partnership to be treated as a publicly traded partnership if, after taking into
account all of the facts and circumstances, partners are not readily able to
buy, sell or exchange their partnership interests in a manner that is
comparable, economically, to trading on an established securities market.
An exception from "publicly traded partnership" status also exists
under Code Section 7704(c) for certain partnerships where ninety percent (90%)
or more of their gross income consists of certain "qualifying" passive types of
income (including interest, dividends, certain real property rents and gain from
the sale or other disposition of real property (including property described in
Section 1221(1) of the Code), and gain from the sale or disposition of capital
assets (or property described in Code Section 1231(b)) held for the production
of any such qualifying income, among other items. The term "real property rent"
for these purposes means amounts which would qualify as rent from real property
under Section 856(d) of the real estate investment trust rules, as modified. In
addition, "qualifying" income includes any income that would qualify as
appropriate real estate investment trust income under Code Section 856(c)(2).
Such income generally includes interest, dividends, rents, gains from the sale
of securities or real estate assets, property tax refunds and foreclosure
property income. According to the legislative history of Section 7704,
qualifying income does not include real property rents which are contingent on
the profits of the lessees or income from the rental or lease of personal
property. H.R. Rep. No. 495, 100th Cong., 1st Sess. 947, reprinted in [1987]
U.S. Code Cong. & Ad. News
<PAGE>
Managing Member
January 31, 2000
Page 7
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. Further, the Operating
Agreement limits Unit transfers of all types to transfers of Units which satisfy
an applicable secondary market safe harbor contained in the Section 7704
Regulations (or which shall satisfy any other applicable safe harbor from
"publicly traded partnership" status adopted by the IRS). The Managing Member
has represented that the Fund will be operated strictly in accordance with the
Operating Agreement and that it will void any transfers or assignments of Units
if it believes that such transfers or assignments will cause the Fund to be
treated as a publicly traded partnership under the Section 7704 Regulations or
any Regulations adopted by the IRS in the future.
Based on (i) the items set forth above, (ii) the representations of the
Managing Member that the Fund Units will be issued in a transaction registered
under the Securities Act, (iii) the representations of the Managing Member that
the Units in the Fund will not be traded on an established securities market,
and (iv) the covenant of the Managing Member that it will take all actions
necessary to prevent the interests in the Fund from being traded on a secondary
market or the substantial equivalent thereof, we are of the opinion that it is
more likely than not that the Fund will not be treated as a "publicly traded
partnership" for federal income tax purposes if such issue were challenged by
the IRS, litigated and judicially decided. There can be no assurance, however,
that the IRS will not successfully contend that the Fund should be treated as a
publicly traded partnership based on, for example, the recognition of transfers
in contravention of the Operating Agreement, the actions of third parties not
within the control of the Managing Member or the Fund, the ineffectiveness of
the provisions of the Operating Agreement designed to avert the creation of a
secondary market (or the substantial equivalent thereof), or the Fund failing to
generate sufficient qualifying gross income to avoid such status.
The Managing Member has also represented that it intends to operate the
Fund such that at all times more than 90% of the gross income of the Fund will
be derived from interest, real property rents (excluding rents which are
contingent on the profits of the lessees and rents from rental of personal
property) and gains from the sale of real property in an attempt to qualify for
the 90% qualifying income exception. Hence, even if the Fund were deemed to be a
publicly traded partnership, assuming the Fund is operated in accordance with
its stated investment objectives, it is more likely than not that the qualifying
income exception will be satisfied by the Fund and that the Fund will not be
treated as a corporation for federal income tax purposes.
<PAGE>
Managing Member
January 31, 2000
Page 8
The remaining summary of federal income tax consequences in this
Opinion assumes that the Fund will be classified as a "partnership" for federal
income tax purposes. Accordingly, if, as anticipated, the Fund is treated as a
partnership for federal income tax purposes, the Fund will not be treated as a
separate taxable entity subject to federal income tax, but instead each Member
will be required to report on such Member's federal income tax return for each
year a distributive share of the Fund's items of income, gain, loss, deduction
or credit for that year, without regard to whether any actual cash distributions
have been made to the Member.
3. Limitations on Deduction of Fund Loss.
-------------------------------------
The Managing Member anticipates that the Fund will produce taxable
income in each year of operations and that Unitholders generally will not be
allocated losses. There can, of course, be no assurance that such objective can
be achieved in any fiscal year of the Fund. Anticipated operating income may not
materialize due to reduced rental income with respect to the Properties or
increased or unanticipated expenses. Moreover, losses could arise upon the
disposition of any Properties at a loss that is in excess of taxable income from
operations in the year of such loss. The ability of a Unitholder to utilize any
losses in a year, should a loss be allocated to a Unitholder, is determined by
applying the following three limitations dealing with basis, at-risk and passive
losses. Because of the Fund's investment criteria of acquiring Properties on an
all-cash basis, without so-called "leverage," it is not expected that the Fund
will generate significant loss in excess of a Unitholder's basis or amount at
risk in the Fund (i.e., its Capital Contribution). Even where the basis and
at-risk rules do not limit losses allocated to the Unitholders, it is
anticipated, however, that the passive loss rules will apply to limit the
deductibility of any allocated loss.
(a) Basis Limitations.
-----------------
A Unitholder may not deduct his share of Fund losses and deductions in
excess of the adjusted basis of his Fund interest determined as of the end of
the taxable year. I.R.C. 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. 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. 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. 465(a). Members who are individuals, estates,
trusts and certain closely-held corporations are not allowed to deduct Fund
losses in excess of the amounts which such Members are considered to have "at
risk" at the close of the Fund's year. Id. A Member's amount "at risk" will
include the amount of his cash Capital Contribution to the Fund plus his
pro-rata share of "qualified nonrecourse financing" of the Fund, if any. I.R.C.
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. 465(b)(6). Unless and until the Fund incurs
<PAGE>
Managing Member
January 31, 2000
Page 9
any such financing, which is not expected, only the cash Capital Contribution of
a Unitholder will be taken into account when determining such Member's amount
"at risk." A Member's amount "at risk" is reduced by his allocable share of Fund
Net Loss and by Fund Distributions and increased by his allocable share of Fund
Net Income. Any deductions disallowed to a Member under this limitation may be
carried forward indefinitely and utilized in subsequent years to the extent that
the Member's amount "at risk" is increased in those years.
(c) Passive Loss Limitations; Passive Income.
----------------------------------------
The Code substantially restricts the ability of many taxpayers (includ-
ing individuals, estates, trusts, certain closely-held corporations and certain
personal service corporations) to deduct losses derived from so-called "passive
activities." I.R.C. 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. 469(c). Based on the above-cited authority, we
are of the opinion that it is more likely than not that a Unitholder's interest
in the Fund will be treated as a passive activity, for those Unitholders not
affiliated with or employed by the Managing Member, if such issue were
challenged by the IRS, litigated and judicially decided.
Generally, losses from passive activities are deductible only to the
extent of a taxpayer's income or gains from passive activities and will not be
allowed as an offset against other income, including salary or other
compensation for personal services, active business income and "portfolio
income," which includes nonbusiness income derived from dividends, interest,
royalties, annuities and gains from the sale of property held for investment.
I.R.C. 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.
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.
469(g). Under the Regulations, suspended losses derived from a specific Fund
Property would generally not be available to offset non-passive income or gain
following the sale of such Property (other than in liquidation of the Fund)
because similar real estate undertakings under common control and ownership of a
pass-through entity such as the Fund are generally aggregated into a single
"activity" for purposes of these rules; hence, the sale of a single Fund
property not in liquidation of the Fund would not be treated as a disposition of
the entire interest of a Unitholder in the passive activity.
In the case of entities which are deemed to be publicly traded partner-
ships, the Code provides that the passive activity loss rules are applied
separately with respect to items attributable to a publicly traded partnership.
I.R.C. 469(k). Accordingly, if the Fund were deemed to be a publicly traded
partnership, Fund Loss, if any, would be available only to offset future
non-portfolio income of the Fund. H.R. Rep. No. 495, 100th Cong., 1st Sess. 951,
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
in each year. To the extent that a Unitholder's share of the Fund's Net Income
constitutes income from a passive activity (as described above), such income may
<PAGE>
Managing Member
January 31, 2000
Page 10
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
Fun's Net Income will be net income or gain from a "passive activity," as
defined in Section 469 of the Code, which passive income can generally be offset
by a Unitholder's net losses and credits from other passive activities, if such
issue were challenged by the IRS, litigated and judicially decided. This opinion
does not apply to the income that is attributable to (i) the investment by the
Fund in liquid investments, such as certificates of deposit or money-market
funds prior to the investment in Properties, or to Distributions of Net Cash
Flow from Operations or Net Sales Proceeds to the Members, or (ii) the
investment, in interest bearing accounts or otherwise, of amounts held as
working capital, as security deposits, or in reserve. Such income described in
the preceding sentence constitutes, for purposes of Section 469, "portfolio
income" which cannot be offset by losses from passive activities. Moreover, if
the Fund is a "publicly traded partnership" within the meaning of Code Section
469(k), any income from the Fund cannot offset losses from other passive
activities and will be treated in a manner similar to portfolio income. You
should also be aware that the Treasury Department has been given broad authority
to issue Regulations defining income that does not constitute passive activity
income, and no assurance can be given that future Regulations promulgated under
Code Section 469, which could be applied to the Fund, will not treat Fund Net
Income as income that is not from a passive activity, thereby preventing any
setoff of such income against unrelated passive losses or credits. See, e.g.,
Treasury Decision 8175, 53 Federal Register 5686, 5695 (February 25, 1988)
(discussing the possibility of issuing prospective Regulations that could
characterize certain preferential income rights to partners of a partnership as
"portfolio," rather than "passive," income).
4. Allocation of Net Income and Net Loss.
-------------------------------------
Generally, partnership items of income, gain, loss, deduction and
credit are allocated among partners as set forth in the relevant partnership
agreement pursuant to Section 704(a) of the Code. Section 704(b) provides,
however, that if an allocation to a partner under the partnership agreement of
income, gain, loss, deduction or credit (or items thereof) does not have
"substantial economic effect," such allocation will instead be made in
accordance with the partner's interest in the partnership (determined by taking
into account all facts and circumstances).
The Fund has not received an advance ruling with respect to whether its
allocations of Net Income or Net Loss will be recognized for federal income tax
purposes, and the IRS may attempt to challenge the allocations of Net Income or
Net Loss made by the Fund, which challenge, if successful, could adversely
affect the Unitholders by changing their respective shares of taxable income or
loss.
The Regulations under Section 704(b) (the "Section 704(b) Regulations")
provide that in order to have "economic effect": (i) partners' capital accounts
must be determined and maintained in accordance with the Section 704(b)
Regulations; (ii) upon the liquidation of the partnership, liquidating
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
<PAGE>
Managing Member
January 31, 2000
Page 11
which such liquidation occurs, he must be unconditionally obligated to restore
the amount of such deficit balance to the partnership. Treas. Reg.
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. 1.704-1(b)(2)(ii)(d). In
determining whether an allocation causes or increases a deficit balance in a
partner's capital account, such partner's capital account must be reduced for
distributions that are reasonably expected to be made to such partner to the
extent they exceed offsetting increases to such partner's capital account that
are reasonably expected to occur during or prior to the partnership taxable
years in which distributions reasonably are expected to be made. Id. A
partnership agreement contains a qualified income offset provision if it
provides that a partner who unexpectedly receives an adjustment, allocation or
distribution which causes a deficit capital account balance will be allocated
items of income and gain (consisting of a pro-rata portion of each item of
partnership income, including gross income, and gain for such year) in an amount
and manner sufficient to eliminate the deficit balance as quickly as possible.
The Operating Agreement (which is the Fund's equivalent of a partner-
ship agreement) provides for the determination and maintenance of Capital
Accounts pursuant to the Section 704(b) Regulations and provides that
liquidation proceeds are to be distributed in accordance with Capital Accounts;
however, the Operating Agreement does not contain any provision requiring
Members having deficit Capital Accounts to restore the amount of such Capital
Account deficits upon liquidation. The Operating Agreement does, however,
contain a qualified income offset provision and a provision that prevents the
allocation of Net Loss to a Member where such an allocation would cause or
increase a deficit Capital Account. The qualified income offset provision in the
Operating Agreement provides that in the event that any Member receives an
adjustment, allocation or distribution described in Treasury Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6) which causes a deficit balance in such
Member's Capital Account, such Member will be allocated items of Net Income
(consisting of a pro-rata portion of each item of Fund Net Income, including
gross income) in an amount and manner sufficient to eliminate such deficit
balance as quickly as possible. Accordingly, no Member will be allocated items
of Net Loss which would cause his Capital Account to be reduced below zero in
any year. In addition, the Managing Member has represented that Fund
Distributions are not anticipated to reduce any Unitholder's Capital Account
balance below zero and that Distributions of Net Cash Flow from Operations and
Net Sales Proceeds should not have a material effect on a Unitholder's Capital
Account since such Distributions are anticipated to be matched by corresponding
allocations of Net Income to such Member.
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. 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
<PAGE>
Managing Member
January 31, 2000
Page 12
adjustments to the partner's capital account for any taxable year will not
differ substantially from the net adjustments which would have been made for
such year in the absence of such allocation and the total tax liability of the
partners for such year is less than it would have been in the absence of such
allocations. Id. The economic effect will also be presumed not to be substantial
where: (i) the partnership agreement provides for the possibility that the
allocation will be largely offset by one or more other allocations; (ii) the net
adjustments to the partners' capital accounts for the taxable years to which the
allocations relate will not differ substantially from the net adjustments which
would have been recorded in such partners' respective capital accounts for such
years if the original allocations and the offsetting allocations were not
contained in the partnership agreement; and (iii) the total tax liability of the
partners for such year is less than it would have been in the absence of such
allocations. With respect to the foregoing provision, the Section 704(b)
Regulations state that original allocations and offsetting allocations will not
be insubstantial if, at the time the allocations become part of the partnership
agreement, there is a strong likelihood that the offsetting allocations will
not, in large part, be made within five years after the original allocations are
made. The Section 704(b) Regulations further state that for purposes of testing
substantiality, the adjusted tax basis of partnership property will be presumed
to be the fair market value of such property, and adjustments to the adjusted
tax basis of partnership property (such as depreciation or cost recovery
deductions) will be presumed to be matched by corresponding changes in the
property's fair market value.
The allocations contained in the Operating Agreement are intended to
comply with the Treasury Regulations' test for having economic effect. The
Operating Agreement requires Capital Accounts to be properly maintained,
requires Distributions of proceeds from the liquidation of a Unitholder's or
Managing Member's interest in the Fund (whether or not in connection with the
liquidation of the Fund) to be made in accordance with the Unitholder's or
Managing Member's positive Capital Account balance, and contains a qualified
income offset provision (as well as a provision that prohibits Net Loss
allocations that would cause or increase a deficit Capital Account). Moreover,
the economic effect of the allocations should be substantial because the
economic and tax consequences of deductions representing paid or incurred
expenses will move in tandem.
Because of the lack of any significant borrowings by the Fund, it is
not anticipated that a Unitholder's Capital Account will be reduced below zero
by any Distributions of Net Cash Flow from Operations or Net Sales Proceeds, any
allocations of Net Loss, or any excess expected Distributions. Consequently, the
Unitholders should not be required by operation of the qualified income offset
provision to recognize gross income or Net Income in any year in excess of their
pro-rata share of Net Income. The Operating Agreement, in addition to meeting
the Treasury Regulations' test for allocations to have economic effect, contains
"minimum gain chargeback" provisions, although, due to the anticipated lack of
Fund-level indebtedness, it is not likely that any such chargebacks will arise.
Accordingly, it is our opinion that it is more likely than not that the
Operating Agreement will comply with the safe harbor provisions in the Treasury
Regulations under Code Section 704(b) and that the allocations of Net Income and
Net Loss set forth in the Operating Agreement more likely than not will have
substantial economic effect or will be otherwise treated as being in accordance
with the interests of the Unitholders and Managing Member in the Fund, if such
issue were challenged by the IRS, litigated and judicially decided. Further, the
allocations of deductions and losses set forth in the Operating Agreement more
likely than not will be treated as having substantial economic effect or as
being otherwise in accordance with the interests of the Unitholders and Managing
Member in the Fund to the extent that such allocations do not create a deficit
in any Unitholder's or the Managing Member's capital account balance, taking
into account all reasonably expected increases and decreases in such balance.
<PAGE>
Managing Member
January 31, 2000
Page 13
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. 1.704-1(b)(3)(i). In this regard, the Section
704(b) Regulations provide that a partner's interest in a partnership will be
determined by taking into account all facts and circumstances relating to the
economic arrangement of the partners, including: (i) the partners' relative
contributions to the partnership; (ii) the interests of the partners in economic
profits and losses (if different from that in taxable income or loss); (iii) the
interests of the partners in cash flow and other nonliquidating distributions;
and (iv) the rights of the partners to distributions of capital upon
liquidation. Id. 1.704-1(b)(3)(ii).
5. Tax Shelter Registration.
------------------------
Under Section 6111 of the Code, any entity deemed to be a "tax shelter"
as defined in Section 6111(c) is required to register with the IRS. For these
purposes, a "tax shelter" is defined as any investment with respect to which (i)
a person can reasonably infer from the representations made that the "tax
shelter ratio" for any investor may be greater than 2 to 1 as of the close of
any of the first five years ending after the date in which the investment is
offered for sale; and (ii) is either registered under federal or state
securities laws, sold pursuant to an exemption from such registration which
requires the filing of a notice with a federal or state securities agency or is
a substantial investment. The "tax shelter ratio" is determined by dividing the
investor's share of the aggregate deductions derived from the investment,
determined without regard to income or any limitations on the deductibility of
passive losses, by the amount of an investor's contributions.
The aggregate amount of the deductions potentially allowable to any of
the Members, including the Managing Member, in the offering of Units in the Fund
is not expected, and has not been represented in the Prospectus or any other
writing connected with the offering approved by the Managing Member, to exceed
an amount equal to twice any such Member's investment in the Fund in any of the
Fund's first five calendar years. In addition, the Managing Member has
represented that, in the absence of events which are unlikely to occur, the
aggregate amount of deductions derived from any Member's investment in the Fund,
determined without regard to income, will not exceed twice the amount of any
such Member's investment in the Fund as of the close of any year in the Fund's
first five calendar years. Further, even if the Fund were deemed to constitute a
tax shelter under Section 6111, the Regulations provide that the registration
requirements are suspended with respect to a tax shelter that qualifies as a
"projected income investment." Temp. Treas. Reg. 301.6111-1T, Q&A 57. The
Regulations define a "projected income investment" as a tax shelter that is not
expected to reduce the cumulative tax liability of any investor for any year
during the first five years ending after the date in which the investment is
offered for sale. A tax shelter is not expected to reduce the cumulative tax
liability of an investor for any year during the five year period only if (a) a
written financial projection or other written representation that is provided
the investor prior to sale of interests in the investment states (or leads a
reasonable investor to believe) that the investment will not reduce the
investor's tax liability with respect to any year in the five year period, and
(b) no written or oral projections or representations, other than those related
<PAGE>
Managing Member
January 31, 2000
Page 14
to circumstances that are highly unlikely to occur, state (or lead a reasonable
investor to believe) that the investment may reduce the cumulative tax liability
of any investor with respect to such years.
Based upon the authority of the Regulations and the representations of
the Managing Member that, in the absence of events which are unlikely to occur,
the "tax shelter ratio" with respect to an investment in the Fund will not
exceed 2 to 1 for any investor as of the close of any year in the Fund's first
five calendar years, we are of the opinion that it is more likely than not the
Fund is not currently required to register as a tax shelter with the IRS under
Section 6111 of the Code prior to the offer and sale of the Units, if the issue
were challenged by the IRS, litigated and judicially decided.
6. Other [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 entity are "qualified
allocations." I.R.C. 168(h)(6). The allocations under the Operating Agreement
may not constitute "qualified allocations," and, therefore, it is possible,
although no opinion of Counsel is expressed, that real and personal property
will be treated as "tax-exempt use property" to be depreciated for tax purposes
using the straight-line method over 40-year and 12-year recovery periods,
respectively, resulting in less favorable timing with respect to depreciation or
amortization deductions of the
Fund.
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. 167(a).
<PAGE>
Managing Member
January 31, 2000
Page 15
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 organ-
izing the Fund, but at the election of the Fund certain qualified
"organizational expenses" may be amortized ratably over a period of not less
than 60 months. I.R.C. 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. 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. 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.
<PAGE>
Managing Member
January 31, 2000
Page 16
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. 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.]
While the types of income and gain which should be realized by the Fund
should not generally constitute UBTI within the meaning of Section 512(a) of the
Code, all or a portion of such income would constitute UBTI if the Fund were to
own property which is subject to "acquisition indebtedness." I.R.C. 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. 514(c)(1). The Fund's acquisitions of
Properties will be made on an all cash basis and the Operating Agreement
prohibits the Fund from borrowing funds in order to finance acquisitions of and
improvements to Properties.
If all or any portion of the Fund's income were to be characterized as
UBTI by reason of the "acquisition indebtedness" rules, the "dealer" status
rules (discussed at paragraph E below) or otherwise, a tax-exempt entity holding
Units would be required to report a portion of its pro-rata share of the Fund's
taxable income as UBTI. I.R.C. 514(a)(1). Moreover, a "charitable remainder
trust" qualifying for exemption from income taxation under Section 664 of the
Code would lose such exemption with respect to all of its income for a tax year
in which UBTI is derived from its ownership of Units and it would be required to
file an income tax return on Form 1041. A tax-exempt entity (other than a
charitable remainder trust) is required to file an Exempt Organization Business
Income Tax Return when its gross UBTI from all sources exceeds $1,000 in any
year and it is generally taxable on UBTI in excess of $1,000 in each year.
D. Sale 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.
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.
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. 1001(a). The adjusted basis of Fund Property will in general
<PAGE>
Managing Member
January 31, 2000
Page 17
be its original cost less depreciation and cost recovery allowances allowed to
the Fund with respect to such Property. I.R.C. 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. 1001(b).
Any excess of gains over losses realized by the Fund on sales of
capital assets (generally all property other than property held primarily for
sale in the ordinary course of a trade or business or Section 1231 property)
held for more than one year will be long-term capital gain. I.R.C. 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. 1221(1) and 512(b)(5)(B).
Whether property is held primarily fo 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. 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. 751(c). The Fund generally must report to the IRS the sale or exchange
of any Units where any portion of the consideration received in exchange for
such Unit is attributable to "unrealized receivables" of the Fund. I.R.C.
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. 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
<PAGE>
Managing Member
January 31, 2000
Page 18
share of the Fund's nonrecourse indebtedness, if any. Treas. Reg. 1.752-3. [No
opinion is expressed on this issue, since relevant facts cannot be determined
until a sale takes place.]
G. Capital Gains and Losses. The characterization of income or
------------------------
gain recognized by a Unitholder upon a sale of Properties by the Fund or a sale
of a Unit by a Unitholder as capital or ordinary income is relevant in
determining the rate at which such income is taxed and the extent to which a
Unitholder may deduct capital losses. Ordinary income is taxed to individuals at
a maximum federal marginal rate of 39.6%, while long-term capital gains of
individuals (on most capital assets held for more than one year) are taxed at a
maximum marginal rate of 20% (10% for taxpayers in the 15% rate bracket). To the
extent that any gain from the sale of real property by the Fund represents the
recapture of prior straight-line depreciation deductions by the Fund, the
capital gain attributable to depreciation from real estate held for more than
one year will be subjected to a maximum capital gains tax rate of 25%, rather
than the general 20% maximum long-term capital gain rate otherwise applicable.
These long-term capital gain rates also apply for purposes of computing a
Unitholder's alternative minimum tax. Unitholders are also cautioned that the
sale of a Unit may require the Unitholder to "look through" the Units sold, with
a portion of such sale possibly taxable as ordinary income under Code Section
751 (see "Sale of Units" in paragraph F above), and a portion of any long-term
capital gain generated on the sale of a Unit subjected to the higher 25% maximum
long-term capital gain rate applicable to straight-line real estate depreciation
recapture, although the position of the IRS on whether such a "look-through"
rule applies for real estate depreciation recapture is not entirely clear.
Capital losses generally may be used by individuals to offset capital gains and,
in addition, a maximum of $3,000 of ordinary income annually. The capital losses
not utilized by individuals in any year may be carried forward indefinitely to
succeeding years. [No opinion is expressed on this issue since the relevant
facts cannot be determined until the fund sells properties or an investor sells
units.]
H. Dissolution and Liquidation of the Fund. The dissolution and
---------------------------------------
liquidation of the Fund will involve the Distribution to the Members of the cash
remaining after the sale of its assets, if any, and after payment of all the
Fund's debts and liabilities. If a Member receives cash in excess of the basis
of his Units, such excess will be taxable as a gain. I.R.C. 731(a)(1). If a
Member were to receive only cash upon dissolution and liquidation, he would
recognize a loss to the extent, if any, that the adjusted basis of his Units
exceeded the amount of cash received. I.R.C. 731(a)(2). There are a number of
exceptions to such general rules, however, including but not limited to, (i) the
effect of a special basis election under Section 732(d) of the Code for a Member
who may have acquired his Fund interest within the two years prior to the
dissolution, and (ii) the effect of distributing one kind of property to some
Members and a different kind of property to others under Section 751(b) of the
Code. [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. 871(b).
After the Fund has acquired income-producing equity investments, the anticipated
activities of the Fund will likely constitute a U. S. trade or business and a
"permanent establishment" within the meaning of the Code and tax treaties
entered into with foreign jurisdictions ("Tax Treaties") and the income from
<PAGE>
Managing Member
January 31, 2000
Page 19
such investments (i.e., rents) will likely be deemed to be effectively connected
with that trade or business. Therefore, a foreign investor who becomes a
Unitholder in the Fund will be required to file a U.S. income tax return on
which he must report his distributive share of the Fund's items of income, gain,
loss, deduction and credit, and pay U.S. income taxes at regular U.S. income tax
rates on his share of any allocable income or gain. In addition, Section 1446 of
the Code (to the extent Section 1445 of the Code, discussed below, does not
apply) provides for U.S. withholding taxes on the effectively connected taxable
income allocated to such foreign investors.
Since a foreign investor who becomes a Unitholder in the Fund will
likely be considered to be engaged in a U.S. trade or business and to have a
permanent establishment in the United States, certain types of U.S. related
income from other business transactions of the foreign investor could also be
attributed to that trade or business or permanent establishment under the Code
or a Tax Treaty (e.g., rents from other U.S. real estate owned by such
investor). Furthermore, a foreign investor may be subject to tax on his
distributive share of the Fund's income and gain in his country of nationality,
residence or elsewhere. The method of taxation in such jurisdictions, if any,
may vary considerably from the U.S. tax system with respect to characterization
of the Fund and its income.
It should also be noted that a foreign investor's allocable share of
escrow earnings and interest income from funds placed in temporary investments
pending acquisition of income-producing equity investments will likely not be
considered to be income effectively connected with a U.S. trade or business, and
the foreign investor will not be deemed to be otherwise engaging in a U.S. trade
or business with respect to those investments. Accordingly, the Fund will
generally be obligated to withhold U.S. tax in the amount of 30% (or lower Tax
Treaty rate) of such investor's allocable share of the income derived from these
investments, unless a statutory exemption applies to the particular type of
income. I.R.C. 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. 897. Further, under Section 1445 of the
Code, a partnership is required to withhold tax equal to 34% of the foreign
investor's allocable share of the gain realized from the sale of partnership
real property (regardless of whether an actual distribution is made to such
investor). I.R.C. 1445(e)(1). The amount required to be withheld by a purchaser
of Units from a foreign investor is generally equal to 10% of the purchase price
paid for the Units. I.R.C. 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 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.
<PAGE>
Managing Member
January 31,2000
Page 20
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. 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. 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. 6662(d)(1).
Unless the understatement is attributable to a "tax shelter," the amount of an
understatement is reduced by any portion of such understatement which is
attributable to (a) the income tax treatment of any item shown on the return if
there is "substantial authority" for the taxpayer's treatment of such item on
his return or (b) any item with respect to which the taxpayer has a reasonable
basis and adequately discloses on his return the relevant facts affecting the
item's income tax treatment. I.R.C. 6662(d)(2). In the case of a "tax
shelter," which is defined in Section 6662(d)(2)(C)(ii) of the Code as a
partnership or other entity, plan or arrangement, a significant purpose of which
is the avoidance or evasion of federal income tax, this reduction in the
understatement only will apply in cases where, in addition to having
"substantial authority" for treatment of the item in question, the taxpayer
reasonably believed that the income tax treatment of that item was more likely
than not the proper treatment. I.R.C. 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
<PAGE>
Managing Member
January 31, 2000
Page 21
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. 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 investor, will be realized by an investor in the Fund. We
advise you further that the section of the Prospectus entitled "Federal Income
Tax Considerations" accurately reflects our opinion with respect to those
matters therein as to which an opinion is specifically attributed to us.
Consent is hereby given to the filing of this opinion as an exhibit to
the Registration Statement and to the references to this Firm under the captions
"Federal Income Tax Considerations" and "Legal Matters" in the Prospectus.
Very truly yours,
/S/ OPPENHEIMER WOLFF & DONNELLY LLP
<PAGE>
EXHIBIT "C"
- --------------------------------------------------------------------------------
Initial Purchase Additional Purchase U.S. CITIZEN
INVESTMENT |_| |_| |_| 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 |_| Roth IRA** |_| LLC**
OWNERSHIP |_|Community Property* |_| Trust** |_| Keogh (H.R. 10)**
check one |_|Joint Tenants* |_| Pension Plan** |_| Profit Sharing Plan*
|_|Tenants in Common* |_| IRA*** |_| Partnership**
|_| 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 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 Exact Name of Trust and Trustee, Custodian, Trust Officer
CUSTODIAL 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 represents and warrants
5 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
initial under "Who May Invest" or in a supplement to the
Prospectus as they pertain to the state of my primary
residence and domicile.
---- (c) I am purchasing the Units for my own account or for the
initial account or benefit of a member or members of my
immediate family or in a fiduciary capacity for the
account of another person or entity and not as an agent
for another.
---- (d) I am aware that there will be no public market for
initial Units, and accordingly, it may be impossible for me to
readily liquidate this investment in the Fund.
---- (e) I am purchasing the Units with the expectation of
initial deriving an economic profit from the Fund without
regard to any tax benefits of an investment in the
Fund.
---- (f) I understand that (i) the Operating Agreement contains
initial restrictions applicable to transfers of the Units; and
(ii) if I am a California initial 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 undersigned has the authority to enter into this subscription
agreement on behalf of the person(s) or entity registered in
SIGNATURES Sections 3 and/or 4 above.
6
Executed this day of at ,
----- ------- --------------------------------
City State
- --------------------------------------------------------------------------------
Signature Signature
(Investor, Trustee, (Investor, Trustee,
Custodian, Administrator) Custodian, Administrator)
-------------------------------------------------------------------------------
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 --------------------------------- ------------------------------
Broker/Dealer Firm (print or type) Registered Representative Name
AND REGISTERED
--------------------------------- ------------------------------
REPRESENTATIVE Main Office Address Registered Representative
Branch Office Address
--------------------------------- ------------------------------
7 City, State Zip City, State Zip
--------------------------------- ------------------------------
Dealer Code Telephone Number
--------------------------------- ------------------------------
Broker/Dealer Registered Representative Date
Authorized Signature Signature
- --------------------------------------------------------------------------------
PAYMENT During Escrow Impound After Termination of Escrow Impound,
make check payable to: make check payable to:
AND MAILING SCB ESCROW NO. 12563-GG FOR
8 CORNERSTONE REALTY FUND CORNERSTONE REALTY FUND, LLC
and mail to: and mail to:
Southern California Bank Preferred Partnership Services, Inc.
4100 Newport Place, Suite 130 39560 Stevenson Place, Suite 112
Newport Beach, CA 92660 Fremont, CA 94539
Attn: Gloria Garriott
- --------------------------------------------------------------------------------
ACCEPTANCE ----------------------------------------------------------------
9 Managing Member Authorized Signature Date
Subscription Agreement for members of Cornerstone Realty Fund, LLC
continued on reverse side of this signature page.
<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.
<PAGE>
<TABLE>
<CAPTION>
========================================= ==================================
<S> <C>
NO DEALER, SALESPERSON OR OTHER
PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY
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, $3,000,000
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 CORNERSTONE REALTY FUND, LLC
MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE FUND
OR THAT THE INFORMATION CONTAINED a California Limited
HEREIN IS CORRECT AS OF ANY TIME Liability Company
SUBSEQUENT TO THE DATE HEREOF.
THIS PROSPECTUS OMITS CERTAIN
INFORMATION CONTAINED IN THE 6,000 units of
REGISTRATION STATEMENT ON FILE WITH membership interest
THE SECURITIES AND EXCHANGE
COMMISSION. THE INFORMATION SO
OMITTED MAY BE OBTAINED FROM THE
PRINCIPAL OFFICE THE COMMISSION
IN WASHINGTON, D.C. UPON PAYMENT OF
THE FEE PRESCRIBED BY THE
COMMISSION, OR EXAMINED THERE
WITHOUT CHARGE.
TABLE OF CONTENTS
Prospectus Summary................1
Risk Factors......................5
Who May Invest....................9
Estimated Use of Proceeds........10
Management Compensation..........11
Fiduciary Responsibilities
of the Managing Member.........14
Management.......................15
Prior Performance................17
Conflicts of Interest............18
Investment Objectives and
Policies.........................21
Business.........................24
Summary of the Operating
Agreement......................29
Federal Income Tax
Considerations.................33
ERISA Considerations.............44
The Offering.....................46
How to Subscribe.................50
Your Representations and Warranties
in the Subscription Agreement..50
Supplemental Sales Material......51
Legal Matters....................51
Experts..........................51
Available Information............51
Additional Information...........52
Financial Statements.............53 PROSPECTUS
Prior Performance Tables.........54
UNTIL TERMINATION OF THIS OFFERING,
AND IN ANY EVENT UNTIL NINETY (90)
DAYS AFTER THE EFFECTIVE DATE OF
THIS PROSPECTUS, ALL DEALERS , 2000
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.
</TABLE>
========================================= ==================================
<PAGE>
PART II
INFORMATION REQUIRED IN PROSPECTUS
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:
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*
Mailing........................................................ $ 100,000*
Broker/Dealer and Investor Meetings............................ $ 255,000*
Miscellaneous.................................................. $ 55,000*
Total $ 882,110*
============
- ---------------
* 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 to
interest to the managing member and one (1) unit of membership interest to
Terry G. Roussel for $500. 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.
II-1
<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.
3.4 Amendment to Articles of Organization of the Fund
filed January 26, 2000.
4.1 Subscription Agreement and Power of Attorney whereby
a purchaser agrees to purchase units and adopts the
provisions of the operating agreement, included
in the prospectus as Exhibit "C" and incorporated
herein by reference.
5.1 Opinion of Counsel with respect to thelegality of
the securities being registere, including consent to
the use of such opinion in the egistration 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 Southern California Bank.
23.2 Consent of Ernst & Young LLP
II-2
<PAGE>
UNDERTAKINGS
- ------------
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933 (the
"Act"); (ii) to reflect on the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) To send to each member at least on an annual basis a detailed statement
of any transactions with the managing member or its affiliates, and of fees,
commissions, compensation and other benefits paid, or accrued to the managing
member or its affiliates for the fiscal year completed, showing the amount paid
or accrued to each recipient and the services performed;
(5) To provide to the unitholders the financial statements required by Form
10-K for the first full fiscal year of operations of the fund;
(6) To file a sticker supplement pursuant to Rule 424(c) under the Act
during the distribution period describing each property not identified in the
prospectus at such time as there arises a reasonable probability that such
property will be acquired and to consolidate all such stickers into a
post-effective amendment filed at least once every three months, with the
information contained in such amendment provided simultaneously to the existing
unitholders; each sticker supplement will disclose all compensation and fees
received by the managing member and its affiliates in connection with any such
acquisition, the post-effective amendment shall include audited financial
statements meeting the requirements of Rule 3-14 of Regulation S-X only for
properties acquired during the distribution period; and
(7) To file, after the end of the distribution period, a current report on
Form 8-K containing the financial statements and any additional information
required by Rule 3-14 of Regulation S-X, to reflect each commitment (i.e., the
signing of a binding purchase agreement) made after the distribution period
involving the use of 10% or more (on a cumulative basis) of the net proceeds of
the offering and to provide the information contained in such report to the
unitholders at least once each quarter after the distribution period of the
offering has ended.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registration
pursuant to the foregoing provision, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this amendment No. 1 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 January
31, 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/S/ TERRY G. ROUSSEL Director of Cornerstone Ventures, Inc. January 31,2000
- ------------------
Terry G. Roussel
/S/ JAMES V. CAMP Director of Cornerstone Ventures, Inc. January 31,2000
- -------------------
James V. Camp
</TABLE>
II-4
<PAGE>
<PAGE>
EXHIBIT 1.1
CORNERSTONE {INDUSTRIAL PROPERTIES INCOME AND GROWTH FUND I} [REALTY FUND], LLC
FORM OF
DEALER-MANAGER AGREEMENT
Private Investors Equity Group
23279 Park Basilico
Calabasas, California 91302
Dear Sirs:
Cornerstone {Industrial Properties Income and Growth Fund I} [Realty
Fund], LLC, a California limited liability company (the "Fund"), and its
managing member, Cornerstone Industrial Properties, a California limited
liability company (the "Managing Member"), propose to offer and sell to selected
persons or entities acceptable to the Managing Member, upon the terms and
subject to the conditions set forth in the enclosed Prospectus, up to {40,000}
[100,000] units of limited liability company interest ("Units") aggregating a
maximum of {$20,000,000} [$50,000,000], and to enter into the Operating
Agreement in the form included in such Prospectus as Exhibit "A" ("Operating
Agreement") [with such persons or entities].
The Fund hereby invites you, {Pacific Cornerstone Financial Incorporated}
[Private Investors Equity Group], a California corporation ("Dealer Manager"),
to become the Dealer Manager in connection with the offer and sale of the Units.
By your acceptance hereof, you agree to act in such capacity and to use {your
best} [commercially reasonable] efforts to find purchasers for the Units in
accordance with the terms and conditions of the Prospectus and this Agreement{.
You agree to use your best}[, but with no obligation or understanding, express
or implied, that you are making a commitment to purchase or sell the Units. You
agree to use commercially reasonable] efforts to find purchasers of Units both
directly and indirectly through a selling group consisting of participating
brokers ("Participating Brokers") with whom you shall contract pursuant to a
Participating Broker Agreement substantially in the form attached as Attachment
1 hereto or such other form as may be requested by a Participating Broker
provided the consent of the Managing Member is obtained for the use of such
form.
Accompanying this Agreement is a copy of the Prospectus and the
Supplemental Material (as hereinafter defined) prepared by the Fund for use in
conjunction with the offer and sale of the Units. You are not authorized to use
any solicitation material other than that referred to in this section, which
material has been furnished by the Fund.
1. Representations and Warranties of the Fund and the Managing
Member.
The Fund and the Managing Member, jointly and severally,
represent and warrant to Dealer Manager and Participating Brokers that:
(a)The Fund is a limited liability company duly organized under
the laws of the State of California, is validly existing as a limited liability
company under such laws and has power and authority to conduct business as
described in the Prospectus under the laws of the State of California and every
other jurisdiction in which it conducts business or owns or leases property.
(b)The Fund has prepared and filed with the Securities and
Exchange Commission ("SEC") a Registration Statement on Form S-11 ("Registration
1
<PAGE>
Statement") and may have prepared and filed amendments thereto for the offer and
sale of the Units together with a Prospectus to be used in connection with the
offer and sale of the Units to persons and entities which are residents of the
States of ___________________________ only. Copies of the Registration Statement
and amendments thereto, if any, will be made available to Dealer Manager upon
request. The Registration Statement, including the Prospectus, financial
statements and exhibits and all amendments, if any, as of the time when the
Registration Statement became effective ("Effective Date") and the Prospectus
included therein, is referred to herein as the "Prospectus".
(c)The SEC has not issued any order preventing or suspending the
use of the Prospectus, and no proceedings for that purpose have been instituted
or are pending before or threatened by the SEC.
(d)From the Effective Date and at all times subsequent thereto up
to and including the Termination Date (as defined in Section 3 below), the
Registration Statement and the Prospectus, and all amendments or supplements
thereto, have fully complied with and will fully comply with the provisions of
the Securities Act of 1933, as amended (the "Act") and the published rules and
regulations thereunder and have not contained and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; provided,
however, that none of the representations and warranties in this subparagraph
shall apply to statements in, or omissions from, the Registration Statement or
the Prospectus or any amendment thereof or supplement thereto based upon and in
conformity with written information furnished to the Fund by Dealer Manager or
on Dealer Manager's behalf specifically for use with reference to Dealer Manager
in the preparation of the Registration Statement or the Prospectus or any such
amendment or supplement.
(e)All additional written, audio or audio-visual material,
including an investment summary, {CD Rom,} audio tape, video tape and internet
site prepared by the Fund for use in conjunction with the offer or sale of the
Units ("Supplemental Material") will be distributed by the Fund and the Managing
Member only in full compliance with the requirements of the Act (including,
without limitation, the requirement that such Supplemental Material not be
delivered to any prospective purchaser unless accompanied or preceded by a
Prospectus), and at the time the Registration Statement is declared effective
and at all times subsequent thereto up to and including the Termination Date,
such Supplemental Material has not contained and will not contain any untrue
statement of material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(f)The Fund will obtain an opinion of Oppenheimer Wolff &
Donnelly LLP confirming that the Fund will be classified as a partnership
subject to subchapter K of the Internal Revenue Code of l986, as amended, and
not as an association taxable as a corporation for federal income tax purposes.
The conditions on which the opinion will be issued will be met at the time of
such issuance and will continue to exist.
(g)The accountants who have certified or shall certify the
financial statements filed and to be filed with the SEC as part of the
Registration Statement and the Prospectus are independent certified public
accountants, as required by the Act and the rules and regulations thereunder.
(h)Subsequent to the respective dates as of which information is
given in the Prospectus and up to and including the Termination Date, and except
as contemplated by or reflected in the Prospectus or an amendment or supplement
to the Prospectus, (i) neither the Managing Member nor the Fund have incurred or
will have incurred any liabilities or obligations, direct or contingent, not in
the ordinary course of business, or entered into any transaction not in the
ordinary course of business {and}[,] (ii) neither the Managing Member nor the
Fund has become or will have become a party to any legal or governmental
proceedings which may result in any material adverse change in condition
2
<PAGE>
(financial or other) of the Managing Member or the Fund[, and (iii) there has
not been any material adverse change in the condition, financial or otherwise,
of the Managing Member or the Fund, or in the earnings, affairs or business
prospects of the Managing Member or the Fund, whether or not arising in the
ordinary course of business. ]{.}
{(i) The balance sheet}[(i) The balance sheets] (including the
related notes) of the [Fund and] Managing Member set forth in the Prospectus
fairly {presents} [present] the [respective] financial {position} [positions] of
the [Fund and] Managing Member at the {date} [respective dates] thereof. {The}
[Each of the] balance {sheet} [sheets] has been prepared in accordance with
generally accepted accounting principles.
(j)There are no contracts or other documents required to be filed
by the Act or the rules and regulations thereunder as exhibits to the
Registration Statement which have not been so filed.
(k)The sale of the Units has been duly and validly authorized by
the Fund, and when subscriptions for the Units have been accepted by the
Managing Member as contemplated in the Prospectus, the Units will represent
valid membership interests in the Fund and will conform to the description
thereof contained in the Prospectus.
(l)The liability of each member of the Fund {based upon current
law} will be limited to the amount actually paid by each such member to the
Fund, and each such member will not be subject to personal liability for the
debts, obligations or liabilities of the Fund, by reason of being such a member,
beyond such amount except in the event of the member's participation in tortious
conduct or the member's agreement to be personally liable for the debts,
obligations or liabilities of the Fund.
(m)The person or persons who have signed this Agreement on behalf
of the Fund and the Managing Member and the person or persons who have signed
the Operating Agreement on behalf of the Managing Member are duly authorized to
so sign, and this Agreement and the Operating Agreement are valid, legal, and
binding agreements of the Fund and the Managing Member enforceable in accordance
with their respective terms, except as such enforceability may be limited by
bankruptcy, insolvency or similar laws affecting the rights of creditors
generally.
(n)The Managing Member is a limited liability company organized
under the laws of the State of California and is validly existing as a limited
liability company under such laws. The Managing Member has power and authority
to conduct business as described in the Prospectus under the laws of the State
of California, and every other jurisdiction in which it conducts business or
owns or leases property.
(o)At all times subsequent to the date of this Agreement and up
to and including the Termination Date, the representations and warranties made
in this Section l will be true and correct with the same effect as if they had
been made on and as of such time, except as may subsequently be disclosed in
writing to the Dealer Manager.
[(p) The execution and delivery of this Agreement, the incurrence
of the obligations herein set forth and the consummation of the transactions
contemplated herein and in the Prospectus will not violate, or constitute a
breach of, or default under, any instrument by which either the Managing Member
or the Fund is bound, or any law, order, rule or regulation applicable to the
Managing Member or the Fund of any court or any governmental body or
administrative agency having jurisdiction over the Managing Member or the Fund.
(q)No closing will take place unless and until funds in respect
of subscriptions for an aggregate of at least 6,000 Units, acceptable to the
Managing Member, have been received by the Fund and payment for such Units has
been deposited in the Escrow Account and classified as "cleared funds" by the
Escrow Agent.
3
<PAGE>
(r)Prior to accepting any subscription for Units, the Managing
Member will review the file memoranda or other records maintained by Dealer
Manager substantiating the suitability of the subscribers to purchase Units, and
will have reasonable grounds to believe and will in fact believe that the
subscribers meet the suitability standards as set forth in the Prospectus or as
required by law and will reject the subscriptions of any subscribers whom the
Managing Member does not have reasonable grounds to believe or does not in fact
believe meet said suitability standards.]
2. Sale of the Units.
A subscription agreement ("Subscription Agreement") must be
completed by each person desiring to purchase Units, or, at Dealer Manager's or
Participating Broker's option, by Dealer Manager or Participating Broker on
behalf of each such person, and returned by Dealer Manager or Participating
Broker together with any other documents that may be required under state
securities laws or by the Managing Member, to the Managing Member at 4590
MacArthur Blvd., Suite 610, Newport Beach, California 92660, Attention: Terry G.
Roussel. The Dealer Manager or Participating Broker shall ascertain that the
Subscription Agreement has been properly completed in full and signed by the
prospective purchaser prior to its return.
All subscription checks shall be made payable to the order of SCB
ESCROW NO. 12563-GG FOR CORNERSTONE {FUNDI} [REALTY FUND until the Minimum
Subscription Date (as hereinafter defined) and thereafter all subscription
checks shall be made payable to CORNERSTONE REALTY FUND, LLC]. If Dealer Manager
or Participating Broker receives a check not conforming to the foregoing
instructions, Dealer Manager and/or Participating Broker must return such check
directly to the subscriber not later than the end of the next business day
following its receipt. [On or before the Minimum] Subscription [Date,] checks
conforming to the foregoing instructions shall be transmitted by Dealer Manager
or Participating Broker for deposit directly to Southern California Bank
("Escrow Agent"), at 4100 Newport Place, Suite 130, Newport Beach, California
92660 by the end of the next business day following receipt by Dealer Manager or
Participating Broker. [Following the Minimum Subscription Date, checks
conforming to the foregoing instructions shall be transmitted by Dealer Manager
or Participating Broker for deposit directly to the Fund, at 4590 MacArthur
Blvd., Suite 610, Newport Beach, CA 92660 by the end of the next business day
following receipt by Dealer Manager or Participating Broker.] In the event
Dealer Manager's or Participating Broker's final internal supervisory review is
conducted at a different location, then checks must be transmitted to Dealer
Manager's or Participating Broker's final review office by the end of the next
business day following receipt by Dealer Manager or Participating Broker and
Dealer Manager's or Participating Broker's final review office must in turn by
the end of the next business day following receipt by it, transmit the check for
deposit directly to the Escrow Agent [on or before the Minimum Subscription Date
or to the Fund after the Minimum Subscription Date].
Upon receipt of the Subscription Agreement, the Managing Member,
on behalf of the Fund, will determine promptly (and in any event within ten (10)
days after such receipt) whether it wishes to accept the proposed purchaser as a
member in the Fund, it being understood that the Managing Member reserves the
right to reject the tender of any Subscription Agreement and to reject all
tenders after the Termination Date. Should the Managing Member determine to
accept the tender of the Subscription Agreement, the Managing Member will
promptly advise Dealer Manager or Participating Broker of such action. Should
the Managing Member determine to reject the tender it will promptly notify in
writing the prospective purchaser, Dealer Manager and Participating Broker, if
any, of such determination and will promptly return the tendered Subscription
Agreement and instruct the Escrow Agent to return the purchase price of the
Units directly to the prospective purchaser [if the determination is made on or
before the Minimum Subscription Date or the Fund will return the purchase price
of the Units directly to the prospective purchaser is the determination is made
after the Minimum Subscription Date].
4
<PAGE>
All payments received on or prior to the Minimum Subscription
Date, except as hereinafter provided, from purchasers of Units shall be
transmitted directly to the Escrow Agent and deposited in an escrow account (the
"Escrow Account") with Escrow Agent. Such funds may be temporarily invested in
bank savings accounts, bank or money market accounts, bank short-term
certificates of deposit of U.S. banks having a net worth of $100 million, or
short-term U.S. government issued or guaranteed obligations. Prior to the
Minimum Subscription Date, the Fund will have no right to obtain any funds from
the Escrow Agent. Funds for Units purchased on or before the Minimum
Subscription Date shall be made available to the Fund, or its order, by the
Escrow Agent, on the Minimum Subscription Date.
{Nothing} [Except as set forth in Section 1(r), nothing]
contained in this Section 2 shall be construed to impose upon the Managing
Member the responsibility of assuring that prospective purchasers meet the
suitability standards contained in the Prospectus and the Subscription Agreement
or to relieve Dealer Manager and Participating Brokers of the responsibility of
complying with the Conduct Rules of the National Association of Securities
Dealers, Inc. ("NASD").
3. Termination Date and Minimum Subscription Closing Date.
As used herein, the term "Termination Date" shall mean the
earliest to occur of (i) the date upon which subscriptions for the maximum
number of Units offered have been accepted by the Managing Member which date the
Managing Member shall designate by notice to Dealer Manager in writing; or (ii)
_____________, {2001} [2002]. The Managing Member may terminate the offering of
Units at any time for any reason by written notice to the Dealer Manager at
least two (2) business days prior to the date of termination.
As used herein, the term "Minimum Subscription Date" shall mean
the earlier of the date on which the Managing Member shall mail or otherwise
furnish to Dealer Manager notification that subscriptions and payments for an
aggregate of at least 6,000 Units have been received and accepted by the
Managing Member and deposited with the Escrow Agent. In the event that
subscriptions and payments for an aggregate of at least 6,000 Units shall not
have been received and accepted by the Managing Member on or prior to
____________, {2000} [2001, subject to Section 9], this Agreement will terminate
and neither the Fund nor the Managing Member shall have any further obligation
or liability hereunder to Dealer Manager or Participating Brokers. In the event
of such termination, all purchase payments deposited with the Escrow Agent shall
be returned to the subscribers and no selling commissions (as described below)
will be payable.
4. Compensation.
Except in such cases where the Dealer Manager grants a Volume
Discount (as defined in the Prospectus), for your services as Dealer Manager in
soliciting and obtaining purchasers of the Units, the Fund agrees to pay a
selling commission of {seven (7%) of the }[eight percent (8%) of the first
$3,000,000 of] gross offering proceeds realized from the sale of {each Unit
sold} [Units and seven percent (7%) of the gross offering proceeds realized from
the sale of each Unit sold thereafter]. All or a portion of these selling
commissions may be reallowed by Dealer Manager to Participating Brokers, as
compensation for their services in soliciting and obtaining subscribers for the
purchase of Units. An additional two percent (2%) of the gross offering proceeds
[less $30,000], all or a portion of which may be reallowed to Participating
Brokers, will be paid to the Dealer Manager as a marketing support fee for
marketing services, wholesaling fees, expense reimbursements, bonuses and
incentive compensation. An additional one percent (1%) of the gross offering
proceeds, all or a portion of which may be reallowed to Participating Brokers,
will be paid to the Dealer Manager as a non-accountable expense reimbursement
allowance. An additional one-half percent (1/2%) of the gross offering proceeds,
all or a portion of which may be reallowed to Participating Brokers, will be
paid to the Dealer Manager as a due diligence expense allowance. The selling
commissions, marketing support fee, non-accountable expenses allowance and due
diligence expense allowance will be paid as follows: (i) on or promptly
5
<PAGE>
following the Minimum Subscription Date, the Fund will pay the selling
commissions, marketing support fees, non-accountable expense allowance and due
diligence expense allowance payable with respect to the Units purchased on or
before the Minimum Subscription Date, and (ii) after the Minimum Subscription
Date, the Fund will pay the selling commissions, marketing support fees,
non-accountable expense allowance and due diligence expense allowance payable
with respect to Units purchased during the period commencing with the first
business day following the Minimum Subscription Date and ending on the
Termination Date unless otherwise agreed, no later than the 15th day of the
month with respect to purchases made through the end of the prior month. Subject
to the provisions of Section 8 below, in the event the offer and sale of Units
is terminated prior to the Minimum Subscription Date, you shall not be entitled
to any reimbursement for your due diligence expenses incurred in connection with
the offering of Units.
In the event the Managing Member gives you any advances of any
portion of the marketing support fee, non-accountable expense allowance or due
diligence expense allowance, the amount of the advance shall be deducted by the
Fund from amounts owed to Dealer Manager for selling commissions, marketing
support fees, non-accountable expense allowance or due diligence expense
allowance and such amount shall be promptly reimbursed to the Managing Member
[by the Fund].
No person will be entitled to a selling commission, marketing
support fee, non-accountable expense allowance or due diligence expense
allowance in any case in which it is determined that the solicitation or
obtaining of purchasers by such person was made in violation of the securities
laws of the United States or any state or other jurisdiction.
In addition to the foregoing compensation payable by the Fund,
the Managing Member may, but is not required to, pay the Dealer Manager an
annual soliciting dealer servicing fee of up to 15% of the Managing Member's
share of Net Cash Flow from Operations and Net Sales Proceeds. The Dealer
Manager may pay all or any part of any amount it receives to Participating
Brokers whose clients own Units.
5. Further Agreements of the Fund and the Managing Member.
(a)The Fund and the Managing Member, jointly and severally,
covenant and agree that they will pay or cause to be paid (i) all expenses and
fees in connection with the preparation, printing, filing, delivery and shipping
of the Registration Statement (including this Agreement and all other exhibits
to the Registration Statement), the Prospectus and any amendments or supplements
thereto and the Supplemental Material, (ii) filing fees, Fund counsel's fees and
expenses paid and incurred in connection with the registration and qualification
of the Units for offer and sale by Dealer Manager and Participating Brokers
under the Act and the securities or Blue Sky laws of the states in which offers
are to be made, and (iii) filing fees, Fund counsel's fees and expenses paid and
incurred in connection with the review by the NASD of the terms of the offering
of the Units.
(b)The Fund will advise Dealer Manager and Participating Brokers
promptly of the issuance of any stop order withdrawing the qualification for the
offer and sale of the Units or of the institution of any proceedings for that
purpose, and will use its best efforts to prevent the issuance of any such stop
order and to obtain as soon as possible the lifting thereof, if issued.
(c)If at any time when a Prospectus relating to the Units is
required to be delivered under the Act any event shall have occurred as a result
of which, in the opinion of counsel for the Fund, the Prospectus as amended or
supplemented includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend the Prospectus to comply
with the Act, the Fund promptly will prepare and file with the SEC an
appropriate amendment or supplement.
6
<PAGE>
(d)The Fund will deliver to Dealer Manager and Participating
Brokers from time to time without charge as many copies of the Prospectus (and,
in the event of an amendment or supplement to the Prospectus pursuant to the
provisions of this Agreement, of such amended or supplemented Prospectus) and
the Supplemental Material as Dealer Manager or Participating Brokers may
reasonably request, which Prospectus(s), as from time to time amended or
supplemented, and Supplemental Material the Fund authorizes Dealer Manager and
Participating Brokers to use in connection with the sale of the Units.
(e)The Fund will use its best efforts to register and qualify the
Units for sale under the laws of those states and other jurisdictions where it
is intended that offers and sales will be made and will comply to the best of
its ability with the laws of those states so as to permit the continuance of
sales of the Units thereunder. The Fund and the Managing Member, jointly and
severally, covenant and agree that neither the Fund nor the Managing Member, nor
any officer, manager or employee of either of them will make any offer or sale
of the Units unless such offer or sale is made in compliance with the Act and
the rules and regulations thereunder.
(f)The Managing Member and the Fund, jointly and severally, agree
to execute or cause to be executed all such certificates and other documents
required by and conforming to the Operating Agreement and to do or cause to be
done all such filing, recording, publishing and other acts as may be appropriate
to comply with the requirements of law for the operation of a foreign limited
liability company in all jurisdictions, other than California, where the Fund
shall desire to conduct business or own properties as the case may be.
6. Agreements of Dealer Manager.
(a)Dealer Manager covenants and agrees to comply, and to use {its
best} [commercially reasonable] efforts to cause the Participating Brokers to
comply, with any applicable requirements of the Act, and of the l934 Act, and
the published rules and regulations thereunder, and the Conduct Rules of the
NASD and, in particular, the Conduct Rules which require Dealer Manager (i) to
recommend the purchase of Units only when Dealer Manager has reasonable grounds
to believe that the investment is suitable for the investor, and that the
investor is in a financial position to sustain the risks inherent in the
investment including loss of investment and lack of liquidity, (ii) to maintain
certain files concerning the basis for Dealer Manager's determination of the
suitability of the investor, (iii) to determine the adequacy and accuracy of the
disclosure in the Prospectus, and (iv) to inform the prospective investor of all
pertinent facts relating to the liquidity and marketability of the investment
during the term of the investment. { Dealer Manager agrees not to, and to use
its best efforts to cause the Participating Brokers, not to execute any
transaction in a discretionary account without the prior written approval of the
transaction by the customer. In determining the adequacy of disclosed facts,
Dealer Manager shall, and shall use its best efforts to cause the Participating
Brokers to, obtain facts relating at a minimum to the following to the extent
relevant to the investment: (1)items of compensation; (2)physical properties;
(3)tax aspects; (4)financial stability and experience of the sponsor; (5)the
investment's conflicts and risk factors; and (6)appraisals and other pertinent
reports. Dealer Manager may only rely upon the results of an inquiry conducted
by another NASD member or members if: (x)Dealer Manager has reasonable grounds
to believe that such inquiry was conducted with due care; (y)the results of the
inquiry were provided to Dealer Manager with the consent of the NASD member or
members conducting or directing the inquiry; and (z)no NASD member that
participated in the inquiry is a sponsor of the investment or an affiliate of
such sponsor.} Dealer Manager also agrees not to deliver the Supplemental
Material to any person unless the Supplemental Material is accompanied or
preceded by the Prospectus. Dealer Manager confirms that Dealer Manager is
registered as a broker-dealer and is in good standing under the l934 Act. Dealer
Manager also confirms that Dealer Manager is a member in good standing of the
NASD. Dealer Manager agrees that Dealer Manager will reallow commissions only to
other broker-dealers who are members of the NASD or not subject to registration
pursuant to the Securities Exchange Act of l934.
7
<PAGE>
(b)Dealer Manager will not give any information or make any
representation in connection with the offering of the Units other than those
contained in the Prospectus and Supplemental Material furnished by the Managing
Member and the Fund. Dealer Manager agrees not to publish, circulate or
otherwise use any other advertisement or solicitation material. Dealer Manager
is not authorized to act as agent of the Fund or the Managing Member in any
connection or transaction, and Dealer Manager agrees not to act as such agent
and not to purport to do so without the prior written approval of the Managing
Member. Dealer Manager agrees that if and when the Managing Member supplies
Dealer Manager with copies of any supplement to the Prospectus, Dealer Manager
will affix such copies of such supplement to copies of the Prospectus already in
Dealer Manager's possession, and that thereafter Dealer Manager will only
distribute Prospectuses containing such supplement and that Dealer Manager will
accept subscriptions only from investors who have received a copy of the
Prospectus containing such supplement. Dealer Manager further agrees to comply
with all instructions from the Managing Member concerning the destruction of
out-dated Prospectuses and the use of supplemented or amended Prospectuses.
(c)Dealer Manager agrees to solicit purchases of Units only in
the States and other jurisdictions in which the Managing Member indicates that
such solicitation can be made and in which Dealer Manager has determined that
such solicitation can be made by Dealer Manager and in which Dealer Manager is
qualified to so act.
(d)Dealer Manager will not sell the Units pursuant to this
Agreement unless the Prospectus is furnished to the purchaser at least five (5)
business days prior to the execution of the Subscription Agreement and Power of
Attorney, or is sent to such person under circumstances that it would be
received by him five (5) business days prior to his execution of the
Subscription Agreement and Power of Attorney.
(e)Dealer Manager will use reasonable efforts to select investors
who Dealer Manager reasonably believes meet the investor suitability
requirements which are set forth in the Prospectus and Subscription Agreement
(Exhibit "C" to the Prospectus) and such additional individual state
requirements as are specified in the Subscription Agreement and which are
confirmed by the investors by payment of the purchase price for the Units
including that each investor be of legal age in the state of his or her
residence. Dealer Manager will, for a period of six years, maintain in Dealer
Manager's files a copy of the Subscription Agreement for each investor for whom
Dealer Manager acts as Dealer Manager.
(f)To the extent that information is provided to Dealer Manager
marked "For Broker-Dealer Use Only," Dealer Manager covenants and agrees not to
provide such information to prospective investors.
{(g) Dealer Manager shall take all action necessary to assure that its
computer-based systems are able to effectively process data including dates and
date sensitive functions. Dealer Manager represents and warrants that Dealer
Manager's ability to perform its obligations under this Agreement will be
unaffected by the transition to the Year 2000. Upon request, Dealer Manager
shall provide assurance acceptable to the Fund and Managing Member that Dealer
Manager's computer systems and software are or will be Year 2000 compliant on a
timely basis. Dealer Manager shall immediately advise the Fund and Managing
Member in writing of any material changes in Dealer Manager's Year 200 plan
timetable.
}7. Indemnification.
(a)Dealer Manager agrees to indemnify, defend and hold harmless
the Fund and the Managing Member from all losses, claims, demands, liabilities
and expenses, including reasonable legal and other expenses incurred in
defending such claims or liabilities, whether or not resulting in any liability
to the Fund or the Managing Member, which the Fund or the Managing Member may
incur in connection with the offer or sale of any Units{, either} by Dealer
8
<PAGE>
Manager pursuant to this {Agreement or any Participating Broker acting on the
Dealer Manager's behalf pursuant to the Participating Broker} Agreement which
arise out of or are based upon (i) an untrue statement or alleged untrue
statement of a material fact, or any omission or alleged omission of a material
fact, other than a statement or omission contained in the Prospectus, the
Registration Statement, or any state securities filing which was not based on
[written] information supplied to the Fund or the Managing Member by Dealer
Manager {or a Participating Broker}, or (ii) the breach by Dealer Manager {or
any Participating Broker acting on its behalf} of any of the terms and
conditions of this Agreement {or any Participating Broker Agreement}, including,
but not limited to, alleged violations of the Securities Act of 1933, as
amended; or (iii) the violation by Dealer Manager {or any Participating Broker}
of the NASD Conduct Rules.
(b)The Fund [and the Managing Member, jointly and severally,]
will indemnify[, defend,] and hold harmless the Dealer Manager, its affiliates,
and each of its officers, directors and employees, and each person, if any, who
"controls" the Dealer Manager (within the meaning of the 1933 Act) from and
against any and all losses, claims, [demands,] damages, liabilities, costs {or}
[and] expenses (including reasonable attorney's fees {), joint or several} [and
other expenses incurred in defending such claims or liabilities, whether or not
resulting in any liability to the Dealer Manager or any Participating Broker)],
to which the Dealer Manager, its affiliates, or any such officer or employee or
such controlling person may become subject, under the 1933 Act or any other
federal or state securities law or otherwise, insofar as such losses, claims,
[demands,] damages, liabilities, costs {or} [and] expenses (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in any
Prospectus or Supplemental Material or in information furnished pursuant to this
Agreement or otherwise by the Fund, {or its representatives, in each case taken
together with all other such documents and information,} [the Managing Member or
their respective representatives, ]or in any "blue sky" application or other
document filed under state securities laws or regulations (collectively, "Blue
Sky Documents"); (ii) the omission or alleged omission from the Prospectus or
Supplemental Material, [or] from information furnished pursuant to this
Agreement or otherwise by the Fund {or its representatives, in each case taken
together with all other such documents and information,}[, the Managing Member
or their respective representatives,] or from any Blue Sky Documents, of any
statement or information which is required to be stated therein or is necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; (iii) the making of an offer by the Fund {or its}[,
the Managing Member or their respective] affiliates, or anyone acting on behalf
of {it} [them], other than the Dealer Manager, of any interests or securities;
(iv) violations by the Fund or {any of its} [the Managing Member of any of their
respective] representations, warranties, covenants and agreements contained in
this Agreement; or (v) the failure of the offer and sale of the Units to be
registered or qualified for exemption from registration under any state
securities {of} [or] "blue sky" laws other than as a result of the
non-compliance by the Dealer Manager with its obligations hereunder; and the
Fund [and the Managing Member, jointly and severally,] will reimburse the Dealer
Manager for any legal or other expenses reasonably incurred by it, its
affiliates, or any such officer, director or employee or any such controlling
person in connection with investigating, defending or preparing to defend any
such loss, claim, damage, liability or action. The indemnity agreement in this
Section 7(b) shall be in addition to any liability which the Fund [or the
Managing Member] may otherwise have to {such} [the] Dealer Manager, its
affiliates, or any such officer or employee or any such controlling person.
8. Effective Date and Termination.
Provided that at least one counterpart of this Agreement shall
then have been executed and delivered, this Agreement shall become effective at
12:00 noon, California time, of the first full business day following the
effective date of the Registration Statement or at such later time after the
Registration Statement becomes effective as the Managing Member shall first
release the Units for sale to the public. For the purpose of this section the
Units shall be deemed to have been released for sale to the public upon release
by the Managing Member of correspondence or other notification to Dealer Manager
indicating the effectiveness of the Registration Statement, whichever shall
first occur.
9
<PAGE>
Until the Minimum Subscription [Closing] Date, this Agreement may be
terminated by Dealer Manager at Dealer Manager's option by giving [written]
notice to the Fund and the Managing {Member} [Manager] if[: (a)] the Fund or the
Managing Member shall have become a defendant in any litigation which, in Dealer
Manager's opinion, may reasonably be expected to result in a judgment having
materially adverse consequences for the Fund or the Managing Member or there
shall have been, since the respective dates as of which information is given in
the Registration Statement or the Prospectus, any material adverse change in the
condition, financial or otherwise, of the Fund or the Managing Member, which
change in Dealer Manager's judgment shall render it inadvisable to proceed with
the delivery of the Units[, or (b) there shall have been any important change in
market levels, major catastrophe, substantial change in national, international
or world affairs, national calamity, postal strike, act of God, or other event
or occurrence which, in Dealer Manager's judgment will materially disrupt the
financial markets of the United States, or (c) trading in securities generally
on the New York Stock Exchange shall have been suspended or minimum prices shall
have been established on such Exchange by the Commission or by such Exchange, or
(d) a general banking moratorium shall have been declared by federal or state
authorities, or (e) the Managing Member has terminated the offering of Units as
provided in Section 2 hereof, or (f) the Fund or the Managing Member is in
breach of this Dealer Manager Agreement and has failed to cure such breach
within 30 days notice from Dealer Manager to the Fund or the Managing Member of
such breach].
Following the Minimum Subscription Date, this Agreement may be
terminated by Dealer Manager at Dealer Manager's option by giving notice to the
Fund and the Managing Member. In any case, {this} [his] Agreement will terminate
at the close of business on the Termination Date; provided, however, that all
fees payable to Dealer Manager under the terms and conditions hereof shall be
paid when due although this Agreement shall have theretofore been terminated.
{Any} [Except as otherwise provided in Section 9, any]
termination of this Agreement pursuant to this Section 8 shall be without
liability of the Fund and the Managing Member to Dealer Manager and without
liability on Dealer Manager's part to the Fund or the Managing Member.
9. Survival of Indemnities, Warranties and Representations.
The indemnity agreements contained in Section 7 hereof, and the
representations and warranties of the Fund and the Managing Member set forth in
Sections l and 5(f) hereof, shall remain operative and in full force and effect,
regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of the Fund, the Managing Member, Dealer
Manager or any controlling person referred to in Section 7, and shall survive
the delivery of and payment for the Units, and any successor of Dealer Manager
or the Fund or the Managing Member or of any such controlling person or any
legal representative of any such controlling person, as the case may be, shall
be entitled to the benefit of the respective indemnity agreements and
representations and warranties.
l0. Notices.
Except as in this Agreement otherwise provided, (a) whenever
notice is required by the provisions of this Agreement or otherwise to be given
to the Fund, or the Managing Member, such notice shall be in writing addressed
to the Fund or the Managing Member at 4590 MacArthur Blvd., Suite 610, Newport
Beach, California 92660, Attention: Terry G. Roussel, and (b) whenever notice is
required by the provisions of this Agreement or otherwise to be given to Dealer
Manager, such notice shall be in writing addressed to Dealer Manager at P.O. Box
8489, Calabasas, California 91372-8489. Any notice referred to herein may be
given in writing or by facsimile or telephone and if by facsimile or telephone
shall be immediately confirmed in writing. Notice (unless actual) shall be
effective upon mailing or facsimile transmission with confirmation of receipt,
as the case may be.
11. Persons Entitled To Benefit of Agreement.
10
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Except as provided in the next sentence, this Agreement is made
solely for the benefit of Dealer Manager, Participating Brokers, the Fund and
the Managing Member or controlling persons thereof, and their respective
successors and assigns, and no other person shall acquire or have any right by
virtue of this Agreement, and the term "successors and assigns," as used in this
Agreement, shall not include any purchaser, as such purchaser, of any of the
Units. The agreements of the Fund and the Managing Member specified in Section
{5(f)} [7(b)] are made also for the benefit of the purchasers of the Units and
such purchasers and their successors and assigns shall be entitled to the
indemnification therein provided.
12. Not a Separate Entity.
Nothing contained herein shall constitute the Dealer Manager and
Participating Brokers, or any of them, as an association, partnership,
unincorporated business or other separate entity.
<PAGE>
Please confirm your agreement to become Dealer Manager under the terms
and conditions herein set forth by signing and returning the enclosed duplicate
copy of this Agreement at once to the Managing Member at the address specified
in Section 10 above.
Very truly yours,
CORNERSTONE [REALTY FUND] {INDUSTRIAL PROPERTIES
INCOME AND GROWTH FUND I}, LLC,
a California limited liability company
By: CORNERSTONE INDUSTRIAL PROPERTIES, LLC
a California limited liability company
By: CORNERSTONE VENTURES, INC.,
its Operating {Partner} [Member
By:
--------------------------------
CORNERSTONE INDUSTRIAL PROPERTIES, LLC.,
a California limited liability company
By: CORNERSTONE VENTURES, INC.,
its Operating Member]
By:
-----------------------------
Terry G. Roussel, President
AGREED AND ACCEPTED:
PRIVATE INVESTORS EQUITY GROUP[,]
{[}a California corporation
{]} [By ]
--------------------------
{By }[Leonard Robbins, President]
{Dated: , 1999} [Dated: , 2000]
12
<PAGE>
<PAGE>
EXHIBIT 1.2
CORNERSTONE {INDUSTRIAL PROPERTIES INCOME AND GROWTH FUND I} [REALTY FUND], LLC
FORM OF
PARTICIPATING BROKER AGREEMENT
------------------------------
Dear Sirs:
Cornerstone {Industrial Properties Income and Growth Fund I} [Realty
Fund], LLC, a California limited liability company (the "Fund"), and its
managing member, Cornerstone Industrial Properties, a California limited
liability company ("Managing Member"), propose to offer and sell to selected
persons or entities acceptable to the Managing Member, upon the terms and
subject to the conditions set forth in the enclosed Prospectus, up to {40,000}
[100,000] units of limited liability company interests relating to the Fund
("Units") aggregating a maximum of {$20,000,000} [$50,000,000], in the minimum
number of five Units (two Units for Tax-Qualified Retirement Plans), and to
enter into the Operating Agreement in the form included in such Prospectus as
Exhibit "A" (the "Operating Agreement") with such persons or entities.
Private Investors Equity Group, {[}a California corporation {]}("Dealer
Manager")[,] has entered into a dealer manager agreement ("Dealer Manager
Agreement") with the Fund pursuant to which it has agreed to act as dealer
manager in connection with the offer and sale of the Units. Dealer Manager has
agreed to use {its best} [commercially reasonable] efforts to find purchasers of
Units both directly and indirectly through a selling group consisting of
participating brokers ("Participating Brokers").
Dealer Manager hereby invites you to become a Participating Broker in
connection with the offer and sale of the Units. By your acceptance hereof, you
agree to act in such capacity and to use your best efforts to find purchasers
for the Units in accordance with the terms of the Prospectus and this Agreement.
Accompanying this Agreement is a copy of the Prospectus and all
written, audio or audio-visual material, including an investment summary, {CD
Rom,} audio tape, video tape and internet site ("Supplemental Material")
prepared by the Fund for use in conjunction with the offer and sale of the
Units. You are not authorized to use any solicitation material other than that
referred to in this paragraph, which material has been furnished by the Fund.
1. Sale of the Units.
-----------------
A subscription agreement ("Subscription Agreement") must be
completed by each person desiring to purchase Units, or, at your option, by you
on behalf of each such person, and returned by you together with any other
documents that may be required under state securities laws or by the Managing
Member, to the Managing Member at 4590 MacArthur Blvd., Suite 610, Newport
Beach, California 92660, Attention: Terry G. Roussel. You shall ascertain that
the Subscription Agreement has been properly completed in full and signed by the
prospective purchaser prior to its return.
All subscription checks shall be made payable to the order of
SCB ESCROW NO. 12563-GG FOR CORNERSTONE {FUND I} [REALTY FUND until the Minimum
Subscription Date and thereafter all subscription checks shall be made payable
to CORNERSTONE REALTY FUND, LLC]. If you receive a check not conforming to the
foregoing instructions, you must return such check directly to the subscriber
not later than the end of the next business day following its receipt. [On or
before the Minimum] Subscription [Date,] checks conforming to the foregoing
instructions shall be transmitted by you for deposit directly to Southern
California Bank ("Escrow Agent"), at 4100 Newport Place, Suite 130, Newport
2
<PAGE>
Beach, California 92660 by the end of the next business day following receipt by
you. [Following the Minimum Subscription Date, checks conforming to the
foregoing instructions shall be transmitted by you for deposit directly to
Southern California Bank ("Escrow Agent"), at 4100 Newport Place, Suite 130,
Newport Beach, California 92660 by the end of the next business day following
receipt by you.] In the event your final internal supervisory review is
conducted at a different location, then checks must be transmitted to your final
review office by the end of the next business day following receipt by you and
your final review office must in turn, by the end of the next business day
following receipt by it, transmit the check for deposit directly to the Escrow
Agent [on or before the Minimum Subscription Date or to the fund after the
Minimum Subscription Date].
Upon receipt of the Subscription Agreement, the Managing
Member, on behalf of the Fund, will determine promptly (and in any event within
ten (10) days after such receipt) whether it wishes to accept the proposed
purchaser as a member in the Fund, it being understood that the Managing Member
reserves the right to reject the tender of any Subscription Agreement and to
reject all tenders after the Termination Date, in each case in its sole
discretion. Should the Managing Member determine to accept the tender of the
Subscription Agreement, the Managing Member will promptly advise you of such
action. Should the Managing Member determine to reject the tender, it will
promptly notify in writing the prospective purchaser and you of such
determination and will promptly return the tendered Subscription Agreement and
instruct the Escrow Agent to return the purchase price of the Units directly to
the prospective purchaser [if the determination is made on or before the Minimum
Subscription Date or the Fund will return the purchase price of the Units
directly to the prospective purchaser if the determination is made after the
Minimum Subscription Date].
All payments received prior to the Minimum Subscription Date,
except as hereinafter provided, from purchasers of Units shall be transmitted
directly to the Escrow Agent and deposited in an escrow account (the "Escrow
Account") with Escrow Agent. Such funds may be temporarily invested in bank
savings accounts, bank or money market accounts, bank short-term certificates of
deposit of U.S. banks having a net worth of $100 million, or short-term U.S.
government issued or guaranteed obligations. Prior to the Minimum Subscription
Closing Date, the Fund will have no right to obtain any funds from the Escrow
Agent. Funds for Units purchased on or before the Minimum Subscription Date
shall be made available to the Fund, or its order, by the Escrow Agent, on the
Minimum Subscription Closing Date.
Nothing contained in this Section 1 shall be construed to
impose upon the Managing Member the responsibility of assuring that prospective
purchasers meet the suitability standards contained in the Prospectus and the
Subscription Agreement or to relieve you of the responsibility of complying with
the Conduct Rules of the National Association of Securities Dealers, Inc.
("NASD").
2. Termination Date, Minimum Subscription Date and Minimum
--------------------------------------------------------------
Subscription Closing Date.
--------------------------
As used herein, the term "Termination Date" shall mean the
earliest to occur of (i) the date upon which subscriptions for the maximum
number of Units have been accepted by the Managing Member, which date the
Managing Member shall designate by notice to Dealer Manager in writing, or (ii)
____________, {2001} [2002]. The Managing Member may terminate the offering of
Units at any time for any reason by written notice to the Dealer Manager at
least two (2) business days prior to the termination date.
As used herein, the term "Minimum Subscription Date" or
"Minimum Subscription Closing Date" shall mean the date on which the Managing
Member shall mail or otherwise furnish to Dealer Manager notification that
subscriptions and payments for an aggregate of at least 6,000 Units have been
3
<PAGE>
received and accepted by the Managing Member and deposited with the Escrow
Agent. In the event that subscriptions and payments for at least 6,000 Units
shall not have been received and accepted by the Managing Member on or prior to
____________, {2000} [2001], this Agreement will terminate and neither the Fund
nor the Managing Member shall have any further obligation or liability hereunder
to Dealer Manager or Participating Brokers. In the event of such termination,
all purchase payments deposited with the Escrow Agent shall be returned to the
subscribers and no selling commissions (as described below) will be payable.
3. Compensation.
------------
Except in cases where the purchaser of Units receives a Volume
Discount as defined in the Prospectus, for your services as a Participating
Broker in soliciting and obtaining purchasers of Units, Dealer Manager shall
reallow to you from the selling commissions received from the Fund, only with
respect to prospective purchasers who are accepted as members of the Fund, a
selling concession of _____ % of the gross offering proceeds realized from the
sale of each Unit sold by you in accordance with the provisions of this
Agreement [until the Fund has sold $3,000,000 of Units and thereafter ___% of
the gross proceeds realized from the sale of each Unit sold by you in accordance
with the provisions of this Agreement]. [Dealer Manager shall reallow to you an
additional ___% of the gross offering proceeds realized from the sale of each
Unit sold by you as a marketing support fee for marketing services, expense
reimbursements, bonuses and incentive compensation. Dealer Manager shall reallow
to you an additional ___% of the gross offering proceeds realized from the sale
of each Unit sold by you as a non-accountable expense allowance. Dealer Manager
shall reallow to you an additional _____% of the gross offering proceeds
realized from the sale of each Unit sold by you as due diligence expense.] The
selling commissions, marketing support fee, non-accountable expense allowance
and due diligence expense allowance will be paid as follows: (i) on or promptly
following the Minimum Subscription Closing Date, the Fund will pay the selling
commissions, marketing support fees, non-accountable expense allowance and due
diligence expense allowance payable with respect to the Units purchased on or
before the Minimum Subscription Date, and (ii) after the Minimum Subscription
Closing Date, the Fund will pay the selling commissions, marketing support fees
and due diligence expense allowance payable with respect to Units purchased
during the period commencing with the first business day following the Minimum
Subscription Date and ending on the Termination Date unless otherwise agreed no
later than the 15th day of the month with respect to purchases made through the
end of the prior month.
In the event the Dealer Manager gives you any advance of any
portion of the marketing support fee, non-accountable expense allowance or due
diligence expense allowance, the amount of the advance shall be deducted by the
Fund from amounts owed to you for selling commissions, marketing support fees,
non-accountable expense allowance or due diligence expense allowance [by the
Fund].
No person will be entitled to a selling commission in any case
in which it is determined that the solicitation or obtaining of purchasers by
such person was made in violation of the securities laws of the United States or
any state or other jurisdiction or in violation of the requirements of Section 5
hereof.
In addition to the foregoing compensation payable by the Fund,
the Managing Member may, but is not required to, pay the Dealer Manager an
annual soliciting dealer servicing fee of up to 15% of the Managing Member's
share of Net Cash Flow from Operations and Net Sales Proceeds. The Dealer
Manager may, but is not required to, pay you all or any part of any amount it
receives with respect to your clients which own Units.
4. Representations, Warranties and Covenants of Participating
--------------------------------------------------------------
Broker. The Participating Broker represents and warrants to
-------
and covenants to the Dealer Manager, the Fund and the Managing Member that:
4
<PAGE>
(a) It is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its formation. It has full power
and authority to act as a Participating Broker in connection with the offer and
sale of the Units, and to perform all of its obligations hereunder or
contemplated hereby or in the Prospectus, and is qualified to do business in
each jurisdiction in which such qualification is necessary to enable it to
perform such obligations or to so act as the Participating Broker.
(b) This Agreement has been duly authorized, executed and
delivered by it and constitutes the legal, valid and binding obligation of the
Participating Broker, enforceable against the Participating Broker in accordance
with its terms, subject, as to enforcement, to the availability of equitable
remedies and limitations imposed by bankruptcy, insolvency, reorganization and
other similar laws and related court decisions relating to or affecting
creditors' rights generally.
(c) It is (i) a registered broker-dealer under the Securities
Exchange Act of 1934, (ii) a member in good standing of the National Association
of Securities Dealers, Inc. ("NASD"), and (iii) registered as a broker-dealer in
each jurisdiction in which it is required to be registered as such in order to
offer and sell the Units in such jurisdiction.
(d) It has not violated any of the "bad boy" disqualification
provisions contained in the securities or "blue sky" laws of any jurisdiction in
which the Units may be offered.
(e) It will not make any written or oral statement with
respect to the Fund or the offering of Units that is materially inconsistent
with the statements in the Prospectus or Supplemental Material.
(f) It will periodically notify the Dealer Manager of the
jurisdictions in which the Units are being, or will be, offered by it, and will
periodically notify the Dealer Manager of the status of the offering conducted
pursuant to this Agreement.
(g) It will cease making offers and soliciting subscriptions
for Units if so requested by the Dealer Manager in order to comply with
applicable federal and state securities laws, and will forward to offerees for
execution and delivery such additional documents and instruments as the Dealer
Manager may reasonably require.
(h) It will: (i) maintain all representation letters,
questionnaires and other materials utilized by it to ascertain the satisfaction
of the above criteria by offerees and Investors, for a period of at least six
years from the date of the offering is completed; and (ii) make such material
available to the Dealer Manager upon its request.
(i) Before, during or after the offering, except with the
prior written consent of the Dealer Manager and except for internal-use only
purposes or for the delivery to its advisors, it has not duplicated and will not
duplicate any of the Supplemental Material or other similar selling
documentation furnished to it by the Dealer Manager, the Fund or Managing
Member.
(j) It has not paid or awarded, and will not pay or award,
directly or indirectly, any commission or other compensation to any person
engaged to render investment advice to a potential subscriber as an inducement
to advise the purchase of the Units, except as such commissions or other
compensation may be paid or awarded to it or reallowed by it in connection with
the sale of the Units as described in the Prospectus.
5. Agreements of Participating Broker.
----------------------------------
(a) You covenant and agree to comply with any applicable
requirements of the Act and of the 1934 Act, and the published rules and
5
<PAGE>
regulations thereunder, and the Conduct Rules of the NASD, and, in particular
the Conduct Rules which require you: (i) to recommend the purchase of Units only
when you have reasonable grounds to believe that the investment is suitable for
the investor, and that the investor is in a financial position to sustain the
risks inherent in the investment including loss of investment and lack of
liquidity, (ii) to maintain certain files concerning the basis for your
determination of the suitability of the investor, (iii) to determine the
adequacy and accuracy of the disclosure in the Prospectus, and (iv) to inform
the prospective investor of all pertinent facts relating to the liquidity and
marketability of the investment during the term of the investment. You agree you
shall not execute any transaction in a discretionary account without the prior
written approval of the transaction by the customer. In determining the adequacy
of disclosed facts, you shall obtain facts relating at a minimum to the
following to the extent relevant to the investment: (1) items of compensation;
(2) physical properties; (3) tax aspects; (4) financial stability and experience
of the sponsor; (5) the investment's conflicts and risk factors; and (6)
appraisals and other pertinent reports. You may only rely upon the results of an
inquiry conducted by another NASD member or members if: (x) you have reasonable
grounds to believe that such inquiry was conducted with due care; (y) the
results of the inquiry were provided to you with the consent of the NASD member
or members conducting or directing the inquiry; and (z) no NASD member that
participated in the inquiry is a sponsor of the investment or an affiliate of
such sponsor. You also agree not to deliver the Supplemental Material to any
person unless the Supplemental Material is accompanied or preceded by the
Prospectus. You confirm that you are registered as a broker-dealer and are in
good standing under the 1934 Act. You also confirm that you are a member in good
standing of the NASD.
(b) You will not give any information or make any
representation in connection with the offering of the Units other than those
contained in the Prospectus and Supplemental Material furnished by the Managing
Member and the Fund. You agree not to publish, circulate or otherwise use any
other advertisement or solicitation material. You are not authorized to act as
agent of the Fund or the Managing Member in any connection or transaction, and
you agree not to act as such agent and not to purport to do so without the prior
written approval of the Managing Member. You agree that if and when the Managing
Member supplies you with copies of any supplement to the Prospectus, you will
affix such copies of such supplement to copies of the Prospectus already in your
possession, and that thereafter you will only distribute Prospectuses containing
such supplement and that you will accept subscriptions only from investors who
have received a copy of the Prospectus containing such supplement. You further
agree to comply with all instructions from the Managing Member concerning the
destruction of out-dated Prospectuses and the use of supplemented or amended
Prospectuses.
(c) You agree to solicit purchases of the Units only in the
states and other jurisdictions in which the Managing Member indicates that such
solicitation can be made and in which you have determined that such solicitation
can be made by you and in which you are qualified to so act.
(d) You will not sell the Units pursuant to this Agreement
unless the Prospectus is furnished to the purchaser at least five (5) business
days prior to the mailing of the confirmation of sale, or is sent to such person
under circumstances that it would be received by him five (5) business days
prior to his receipt of a confirmation of the sale.
(e) You will use reasonable efforts to select investors who
you reasonably believe meet the investor suitability requirements which are set
forth in the Prospectus and Subscription Agreement (Exhibit "C" to the
Prospectus) and such additional individual state requirements as are specified
in the applicable Subscription Agreement, and which are confirmed by the
investors by payment of the purchase price for the Units including that each
individual or custodial investor be of legal age in the state of his or her
residency. You will, for a period of six years, maintain in your files a copy of
the Subscription Agreement for each investor for whom you act as Participating
Broker.
(f) To the extent that information is provided to you marked
"For Broker-Dealer Use Only", you covenant and agree not to provide such
information to prospective investors.
6
<PAGE>
{(g) You shall take all action necessary to assure that your
computer-based systems are able to effectively process data including dates and
date sensitive functions. You represent and warrant that your ability to perform
your obligations under this Agreement will be unaffected by the transition to
the Year 2000. Upon request, you shall provide adequate assurance acceptable to
Dealer Manager, the Fund and the Managing Member that your computer systems and
software are or will be Year 2000 compliant on a timely basis. You shall
immediately advise Dealer Manager, the Fund and the Managing Member in writing
of any material changes in your Year 2000 plan timetable.} [6. Indemnification.]
{6. Indemnification.}
[(a)] You agree to indemnify, defend and hold harmless the
Fund, the Managing Member and the Dealer Manager from all losses, claims,
demands, liabilities and expenses, including reasonable legal and other expenses
incurred in defending such claims or liabilities, whether or not resulting in
any liability to the Fund, the Managing Member or the Dealer Manager, which the
Fund, the Managing Member or the Dealer Manager may incur in connection with the
offer or sale of any Units by you pursuant to this Agreement which arise out of
or are based upon (1) an untrue statement or alleged untrue statement of a
material fact, or any omission or alleged omission of a material fact, other
than a statement or omission contained in the Prospectus, the Registration
Statement, or any state securities filing which was not based on information
supplied to the Fund, the Managing Member or the Dealer Manager by you, or (ii)
your breach of any of the terms and conditions of this Agreement, including, but
not limited to, alleged violations of the Securities Act of 1933, as amended; or
(iii) your violation of the NASD Conduct Rules.
[(b) The Fund and the Managing Member, jointly and severally,
will indemnify, defend and hold harmless you, your affiliates, and each of your
officers, directors and employees, and each person, if any, who "controls" you
(within the meaning of the 1933 Act) from and against any and all losses,
claims, demands, damages, liabilities, costs and expenses (including reasonable
attorney's fees and other expenses incurred in defending such claims or
liabilities, whether or not resulting in any liability to you, to which the you,
your affiliates, or any such officer or employee or such controlling person may
become subject, under the 1933 Act or any other federal or state securities law
or otherwise, insofar as such losses, claims, demands, damages, liabilities,
costs and expenses (or actions or proceedings in respect thereof) arise out of
or are based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in any Prospectus or Supplemental Material or in
information furnished pursuant to this Agreement or otherwise by the Fund, the
Managing Member or their respective representatives, or in any "blue sky"
application or other document filed under state securities laws or regulations
(collectively, "Blue Sky Documents"); (ii) the omission or alleged omission from
the Prospectus or Supplemental Material, or from information furnished pursuant
to this Agreement or otherwise by the Fund, the Managing Member or their
respective representatives, or from any Blue Sky Documents, of any statement or
information which is required to be stated therein or is necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; (iii) the making of an offer by the Fund, the Managing Member or
their respective affiliates, or anyone acting on behalf of them, other than you,
of any interests or securities; (iv) violations by the Fund or the Managing
Member of any of their respective representations, warranties, covenants and
agreements contained in this Agreement; or (v) the failure of the offer and sale
of the Units to be registered or qualified for exemption from registration under
any state securities or "blue sky" laws other than as a result of the
non-compliance by you with your obligations hereunder; and the Fund and the
Managing Member, jointly and severally, will reimburse you for any legal or
other expenses reasonably incurred by you, your affiliates, or any such officer,
director or employee or any such controlling person in connection with
investigating, defending or preparing to defend any such loss, claim, damage,
liability or action. The indemnity agreement in this Section 7(b) shall be in
addition to any liability which the Fund or the Managing Member may otherwise
have to you, your affiliates, or any such officer or employee or any such
controlling person.]
7
<PAGE>
7. Effective Date and Termination.
------------------------------
This Agreement shall become effective upon its execution and
delivery by Dealer Manager, the Fund and you.
Until the Minimum Subscription Closing Date, this Agreement
may be terminated by you or Dealer Manager at either of our option by giving
written notice to the other and the Fund and the Managing Member if: (a) the
Fund or the Managing Member shall have become a defendant in any litigation
which, in Dealer Manager's opinion, may reasonably be expected to result in a
judgment having materially adverse consequences for the Fund or the Managing
Member or there shall have been, since the respective dates as of which
information is given in the Registration Statement or the Prospectus, any
material adverse change in the condition, financial or otherwise, of the Fund or
the Managing Member, which change in Dealer Manager's or your judgment shall
render it inadvisable to proceed with the delivery of the Units, or (b) there
shall have been any important change in market levels, major catastrophe,
substantial change in national, international or world affairs, national
calamity, postal strike, act of God, or other event or occurrence which, in
Dealer Manager's or your judgment, will materially disrupt the financial markets
of the United States, or (c) trading in securities generally on the New York
Stock Exchange shall have been suspended or minimum prices shall have been
established on such Exchange by the Commission or by such Exchange, or (d) a
general banking moratorium shall have been declared by federal or state
authorities, or (e) the Managing Member has terminated the offering of Units as
provided in Section 2 hereof[, or (f) the Fund or the Managing Member is in
breach of this Agreement or the Dealer Manager Agreement and has failed to cure
such breach within 30 days notice from you or Dealer Manager to the Fund or the
Managing Member of such breach.].
Following the Minimum Subscription Closing Date, this
Agreement may be terminated by you or Dealer Manager at {our} [you or its]
option by giving written notice to the other and the Fund and the Managing
Member. In any case, this Agreement will terminate at the close of business on
the Termination Date; provided, however, that all fees payable to you under the
terms and conditions hereof shall be paid when due although this Agreement shall
have theretofore been terminated.
{Any} [Except as otherwise provided in Section 8, any]
termination of this Agreement pursuant to this Paragraph 7 shall be without
liability of Dealer Manager, the Fund and the Managing Member to you and without
liability on your part to Dealer Manager, the Fund or the Managing Member,
except with respect to compensation earned for accepted subscriptions.
8. Survival of Indemnities, Warranties and Representations.
-------------------------------------------------------
Your indemnity agreements contained in Section 6 hereof shall remain
operative and in full force and effect, regardless of any termination or
cancellation of this Agreement or any investigation made by or on behalf of you,
Dealer Manager, the Fund, the Managing Member, or any controlling person
thereof, and shall survive the delivery of and payment for the Units, and any
successor of the Fund, the Managing Member or the Dealer Manager or of any such
controlling person or any legal representative of any such controlling person,
as the case may be, shall be entitled to the benefit of your indemnity
agreements.
9. Notices.
-------
Except as otherwise provided in this Agreement, (a) whenever
notice is required by the provisions of this Agreement or otherwise to be given
to the Fund, or the Managing Member, such notice shall be in writing addressed
to the Fund or the Managing Member at 4590 MacArthur Boulevard, Suite 610,
Newport Beach, California 92660, Attention: Terry G. Roussel, (b) whenever
notice is required by the provisions of this Agreement or otherwise to be given
to Dealer Manager, such notice shall be in writing addressed to Dealer Manager
at P.O. Box 8489, Calabasas, California 91372-8489, and (c) whenever notice is
required by the provisions of this Agreement or otherwise to be given to you, at
8
<PAGE>
the address set forth on the last page of this Agreement. Any notice referred to
herein may be given in writing or by facsimile or telephone and if by telephone
shall be immediately confirmed in writing. Notice (unless actual) shall be
effective upon mailing or facsimile transmission with confirmation of receipt,
as the case may be.
{9} [10]. Persons Entitled To Benefit of Agreement.
----------------------------------------
Except as provided in the next sentence, this Agreement is
made solely for the benefit of you, the other Participating Brokers, Dealer
Manager, the Fund and the Managing Member or controlling persons thereof, and
their respective successors and assigns, and no other person shall acquire or
have any right by virtue of this Agreement, and the term "successors and
assigns," as used in this Agreement, shall not include any purchaser, as such
purchaser, of any of the Units. [The agreements of the Fund and the Managing
Member specified in Section 6(b) are also made for the benefit of the purchasers
of the Units and such purchasers and their successors and assigns shall be
entitled to the indemnification therein provided.
11] {10}. Not a Separate Entity.
---------------------
Nothing contained herein shall constitute you, Dealer Manager
or the other Participating Brokers, or any of them, as an association,
partnership, unincorporated business or other separate entity.
9
<PAGE>
Please confirm your agreement to become a Participating Broker
under the terms and conditions herein set forth by signing and returning the
enclosed duplicate copy of this Agreement at once to Dealer Manager at P.O. Box
8489, Calabasas, California 91372-8489.
Very truly yours,
PRIVATE INVESTORS EQUITY GROUP[,]
{[}a California corporation
{]} [By:]
-----------------------------------
{By:
Its:} [Leonard Robbins, President]
AGREED AND ACCEPTED:
(Name of Participating Broker) (Address of Participating Broker)
By:
Its:
Dated: , 1999
--------------------------------------
CORNERSTONE [REALTY FUND, LLC] {INDUSTRIAL PROPERTIES
INCOME AND GROWTH FUND I, LLC,}
a California limited liability company
By: CORNERSTONE INDUSTRIAL PROPERTIES, LLC
a California limited liability company
By: CORNERSTONE VENTURES, INC.,
its Operating Partner
By:
---------------------------------
Terry G. Roussel, President
[CORNERSTONE INDUSTRIAL PROPERTIES, LLC,
California limited liability company
By: CORNERSTONE VENTURES, INC.,
its Operating Partner
By:
------------------------------------
Terry G. Roussel, President] {OC: 79796 v03 3/30/99}
10
<PAGE>
EXHIBIT 3.3
State of California FILED
Bill Jones In the Office of Secretary of State
Secretary of State of the State of Califomia
AUG 18 1999
//BILL JONES, SECRETARY OF STATE
LIMITED LIABILITY COMPANY
CERTIFICATE OF AMENDMENT
A $30.00 flling fee must accompany this form
IMPORTANT - Read instructions before completing
this form. This Space For Filing Use Only
- --------------------------------------------------------------------------------
1. Secretary Of State File Number: 2. Name of Limited Liability Company:
199830110009 Cornerstone Industrial Properties Income
& Growth Fund I, LLC
- --------------------------------------------------------------------------------
3. Complete only the sections where information is being changed. Additional
pages may be attached if necessary.
A. Limited Liability Company Name (End the name with the words "Limited
Liability Company," "Ltd. Liability Co." or the abbreviations "LLC" or
"L.L.C.")
Cornerstone MLilti-Tenant Industrial Business Parks Fund, LLC
B. The Limited Liability Company will be managed by (Check One):
( ) One Manager ( ) More Than One Manager
( ) Limited Liability Company Members
C. Amendment to text of the Articles of Organization:
D. Other matters to be included in this certificate may be set forth on
separate attached pages and are made a part of this certificate by
checking this box. Other matters may include a change in the latest
date on which the limited liability company is to dissolve or any
change in the events that will cause the dissolution. [ ]
- --------------------------------------------------------------------------------
4. Future Effective Date, if any: Month Day Year
- --------------------------------------------------------------------------------
5. Total number of pages attached, if any: -0-
6. Declaration: It is hereby declared that I am the person who executed this
instrument, which execution is my act and deed.
Cornerstone Industrial Properties,LLC,
// TERRY G. ROUSSEL Manager
- ------------------------ By: Cornerstone Ventures, Inc. Its Manager
Signature of Authorized ---------------------------------------
Person Type or Print Name and Title of Authorized
By: Terry G. Roussel, President
8/12/99
- -----------------------
Date
- --------------------------------------------------------------------------------
7. RETURN TO:
NAME Karen Nicolai Winnett, Esq. State of California
FIRM Oppenheimer Wolff & Donnelly LLP Bill Jones
ADDRESS 500 Newport Center Drive, Suite 700 Secretary of State
CITY/STATE Newport Beach, CA 92660
ZIP CODE
- --------------------------------------------------------------------------------
SEC/STATE (REV. 1/99) FORM LLC-2 - FILING FEE: $30-00
Approved by Secretary of State
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 3.4
State of California FILED
Bill Jones In the Office of Secretary of State
Secretary of State of the State of Califomia
January 26 2000
//BILL JONES, SECRETARY OF STATE
LIMITED LIABILITY COMPANY
CERTIFICATE OF AMENDMENT
A $30.00 flling fee must accompany this form
IMPORTANT - Read instructions before completing
this form. This Space For Filing Use Only
- --------------------------------------------------------------------------------
1. Secretary Of State File Number: 2. Name of Limited Liability Company:
199830110009 Cornerstone Realty Fund, LLC
- --------------------------------------------------------------------------------
3. Complete only the sections where information is being changed. Additional
pages may be attached if necessary.
A. Limited Liability Company Name (End the name with the words "Limited
Liability Company," "Ltd. Liability Co." or the abbreviations "LLC" or
"L.L.C.")
Cornerstone MLilti-Tenant Industrial Business Parks Fund, LLC
B. The Limited Liability Company will be managed by (Check One):
( ) One Manager ( ) More Than One Manager
( ) Limited Liability Company Members
C. Amendment to text of the Articles of Organization:
D. Other matters to be included in this certificate may be set forth on
separate attached pages and are made a part of this certificate by
checking this box. Other matters may include a change in the latest
date on which the limited liability company is to dissolve or any
change in the events that will cause the dissolution. [ ]
- --------------------------------------------------------------------------------
4. Future Effective Date, if any: Month Day Year
- --------------------------------------------------------------------------------
5. Total number of pages attached, if any: -0-
6. Declaration: It is hereby declared that I am the person who executed this
instrument, which execution is my act and deed.
Cornerstone Industrial Properties,LLC,
Manager
- ------------------------ By: Cornerstone Ventures, Inc. Its Manager
Signature of Authorized ---------------------------------------
Person Type or Print Name and Title of Authorized
By: Terry G. Roussel, President
- -----------------------
Date
- --------------------------------------------------------------------------------
7. RETURN TO:
NAME Karen Nicolai Winnett, Esq. State of California
FIRM Oppenheimer Wolff & Donnelly LLP Bill Jones
ADDRESS 500 Newport Center Drive, Suite 700 Secretary of State
CITY/STATE Newport Beach, CA 92660
ZIP CODE
- --------------------------------------------------------------------------------
SEC/STATE (REV. 1/99) FORM LLC-2 - FILING FEE: $30-00
Approved by Secretary of State
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 5.1
Oppenheimer Wolff & Donnelly LLP
500 Newport Center Drive
Suite 700
Newport Beach, California 92660
(949) {719} [823]-6000
(949) {719} [823]-6100 (Fax)
{__________________, 1999} [January 31, 2000]
Cornerstone [Realty Fund] {Industrial Properties Income and Growth Fund I}, LLC
4590 MacArthur Blvd.
Suite 610
Newport Beach, CA 92660
Re: Cornerstone {Industrial Properties Income and Growth Fund I}
[Realty Fund], LLC Legality of the Securities Being Registered
Gentlemen:
In connection with the registration of Units of limited liability
company interests of Cornerstone Realty Fund, LLC, a California limited
liability company (the "Fund") under the Securities Act of 1933, as amended, you
have requested our opinion as to whether the Units of limited liability company
interests, when issued, will be lawfully and validly issued, fully paid and
non-assessable.
For purposes of rendering this opinion, we have examined originals or
copies of the documents listed below. In conducting such examination, we have
assumed the genuineness of all signatures and the authenticity of all documents
submitted to us as originals and conformity to original documents of all
documents submitted to us as copies. The documents we have examined are:
1. The Form S-11 Registration Statement which was initially filed
by the Fund with the Securities and Exchange Commission on {March __}[April 20],
1999, as amended, (the "Registration Statement");
2. The Articles of Organization of the Fund filed on
October 28, 1998;
3[. The Limited Liability Company Certificate of Amendment filed
on August 18, 1999;
4. The Limited Liability Company Certificate of Amendment filed
on January 26, 2000; and
5]. The Operating Agreement of the Fund dated as of
January, 2000;
<PAGE>
{4. The form or Certificate of Limited Liability Company Units which is
to be issued to Members of the Fund.
}In addition, in rendering this opinion, we have relied upon your
representation that the Units of limited liability company interests will be
offered to the public in the manner and on the terms identified or referred to
in the Registration Statement.
Based upon and subject to the forgoing and the effect, if any, of the
matters discussed below, after having given due regard to such issues of law as
we deemed relevant, and assuming that (i) the Registration Statement becomes and
remains effective, and the prospectus which is part thereof, and the prospectus
delivery requirements with respect thereto, fulfill all of the requirements of
the Securities Act of 1933, as amended, throughout all periods relevant to this
opinion, (ii) all offers and sales of the Units of limited liability company
interest are made in a manner complying with the terms of the Registration
Statement, and (iii) all offers and sales of the Units of limited liability
company interests are in compliance with the securities laws of the states
having jurisdiction thereto, we are of the opinion that the Units of limited
liability company interests, when issued, will be lawfully and validly issued,
fully paid and non-assessable.
This opinion is furnished to you in connection with the registration of
Units of limited liability company interests in the Fund, is solely for your
benefit, and may not be relied on by, nor copies delivered to, any other person
or entity without our prior written consent by anyone other than you and the
investors in the Fund. Notwithstanding the preceding sentence we hereby consent
to the filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
/S/ OPPENHEIMER WOLFF & DONNELLY LLP
------------------------------------
<PAGE>
EXHIBIT 10.1
CORNERSTONE {industrial properties income and growth fund I} [realty FUND], LLC
ESCROW AGREEMENT
----------------
This Escrow Agreement ("Agreement") is entered into ____________ ,
{1999} [2000] by and among Southern California Bank (the "Escrow Agent"),
Cornerstone {Industrial Properties Income and Growth Fund I} [Realty Fund], LLC,
a California limited liability company (the "Fund") and {Pacific Cornerstone
Financial Incorporated} [Private Equity Investors Group], a California
corporation (the "Dealer Manager").
R E C I T A L S
---------------
A. The Fund proposes to offer up to {$20,000,000} [$50,000,000] of
limited liability company units ("Units") in the Fund, pursuant to a Prospectus
dated ____________ , {1999} [2000], as amended or supplemented from time to time
(the "Prospectus"), with a minimum investment required of five Units at $500 per
Unit (or two Units at $500 per Unit for tax-qualified retirement plans).
B. The Dealer Manager and others (collectively, the "Participating
Brokers") have been named as Participating Brokers in connection with the
proposed offering of the Units and are entitled to certain commissions and
selling expense allowances set forth in those certain selling agreements among
the Fund, the Participating Brokers and the Managing Member of the Fund,
Cornerstone Industrial Properties, LLC, a California limited liability company
("Managing Member").
C. In compliance with the Prospectus and each Selling Agreement, the
Fund proposes to establish an escrow fund with the Escrow Agent [for the
offering proceeds received prior to the Initial Closing Date (as hereafter
defined).
D. If]{.
D. The offering of Units will terminate no later than _________ __,
2001 (the "Offering Termination Date") and if} subscriptions for at least
$3,000,000 are not accepted by the Fund prior to _______________, {2000 (the}
[2001(the] "Minimum Offering Termination Date"), no Units in the Fund will be
sold.
E. The Escrow Agent has agreed to act as escrow agent in
connection with the proposed offering.
A G R E E M E N T
-----------------
It is agreed as follows:
1
<PAGE>
1. Incorporation of Recitals and General Provisions. The recitals
-------------------------------------------------
set forth above and the General Provisions attached hereto as Exhibit "A" shall
constitute and shall be deemed to be an integral part of this Agreement.
2. Escrow.
-----
2.1 Escrow Agent. For a period commencing on the date hereof and
-------------
terminating 15 days after the [Minimum] Offering Termination Date, the Escrow
Agent shall act as an escrow agent and shall receive and disburse the proceeds
from the sale of the Units in accordance with the terms of this Agreement. The
Escrow Agent hereby represents and warrants to each {Selling Agent}
[Participating Broker] that it is a "Bank" as such term is defined in Section
3(a)(6) of the Securities Exchange Act of 1934, as amended (the "Act").
2.2 Escrow Account. Commencing on the date hereof, the parties
---------------
shall establish an interest-bearing escrow account with the Escrow Agent (the
"Escrow Account"). The Participating Brokers will instruct subscribers to make
checks for subscriptions of Units payable to the order of the Escrow Agent. Any
checks received that are made payable to a party other than the Escrow Agent
shall be returned to the {Selling Agent} [Participating Broker] who submitted
the check.
3. Deposits into the Escrow Account. Proceeds from the sale of Units
--------------------------------
(the "Proceeds") shall be received by the Escrow Agent from the Participating
Brokers and deposited promptly in the Escrow Account; provided, however, that
Proceeds received by the Escrow Agent within 48 hours prior to a scheduled
Initial or Additional Closing Date (as hereinafter defined) may be held by the
Escrow Agent until such closing (but not longer than 48 hours) and, upon joint
instruction of the Managing Member and the Dealer Manager, deposited directly
into the Fund's account or returned to the subscriber(s).
4. Subscriber Information. Each{Selling Agent}[ParticipatinG Broker] shall
----------------------
provide the Escrow Agent with the name, address, social security number or
taxpayer identification number, and the amount to be deposited for each
subscriber whose funds are deposited with the Escrow Agent pursuant to Section 2
hereof. Such {SELLING AGENT} [PARTICIPATING BROKER] broker shall also notify the
Escrow Agent if a properly executed U.S. Treasury Department Form W-9 has not
been received from any subscriber whose funds are deposited with the Escrow
Agent.
5. Investment of Proceeds. The Escrow Agent shall invest all Proceeds
----------------------
deposited with it hereunder as directed by the Fund, in (i) Bank accounts, (ii)
Bank money-market accounts, (iii) short-term certificates of deposit of Banks
located in the United States, or (iv) short-term securities issued or guaranteed
by the U.S. government. The term "Bank" is defined in Section 3(a)(6) of the
Act. Such investments shall be made in a manner consistent with the requirement
that the Proceeds be available for delivery by the Escrow Agent at the times
described herein. After any reductions made in accordance with Section 11
hereof, income received from investment of the Proceeds shall be credited to the
subscribers in proportion to the amounts deposited with respect to each
subscriber and in proportion to the number of days the collected Proceeds from
each subscriber are held in the Escrow Account. Pursuant to the provisions of
this Agreement, Escrow Agent shall disburse all income earned (less any amounts
required to be withheld by the Escrow Agent under the applicable federal income
tax laws) directly to the Fund with respect to the Proceeds, and the Managing
Member shall determine and disburse to each subscriber his or her proportionate
share of such income computed as provided above. The Fund is aware that there
2
<PAGE>
may be a forfeiture of interest in the event of early withdrawal from an
interest bearing account of investment.
6. Initial Closing Date. The term "Qualifying Subscriptions" shall
---------------------
refer to all subscriptions which have been received by the Managing Member and
which the Managing Member intends to accept into the Fund. If Qualifying
Subscriptions have been received for at least $3,000,000 of Units on or before
the Minimum Offering Termination Date, the Managing Member shall notify the
Escrow Agent and by instructions (which may accompany such notice or be provided
subsequently) given at least 2 business days in advance, shall specify the
"Initial Closing Date" (which must be not more than 10 days after the Minimum
Offering Termination Date), the approximate amount of Qualifying Subscriptions
for the Fund to be accepted as of such Initial Closing Date, the identity of the
subscribers whose subscriptions are anticipated to be accepted as of the Initial
Closing Date, and the approximate amount of the Proceeds to be paid to the Fund
and to each {Selling Agent} [Participating Broker], respectively. On the Initial
Closing Date, the Escrow Agent, upon telephonic notice from the Managing Member
and the Dealer Manager that all contingencies for payment have been satisfied as
required by Rule 15c2-4 under the Act (which notice the Managing Member shall
promptly confirm in writing) shall pay to the Fund and each {Selling Agent}
[Participating Broker] the amounts specified by such notice, and shall
additionally pay to the Fund the interest earned on such Proceeds for
disbursement to subscribers pursuant to Section 5 hereof.
7{. 7. Additional Closing Dates. Thereafter, from time to time prior to
the Offering Termination Date, the Managing Member may notify the Escrow Agent
and, by instructions given at least 2 business days in advance of each, specify
Additional Closing Dates, the approximate amount of Qualifying Subscriptions for
such Fund to be accepted as of each Additional Closing Date, the identity of the
Subscribers whose subscriptions are anticipated to be accepted as of each
Additional Closing Date, and the approximate amount of the Proceeds to be paid
to the Fund and to the Participating Brokers, respectively. On each such
Additional Closing Date, the Escrow Agent, upon telephonic notice from the
Managing Member and the Dealer Manager that all contingencies for payment have
been satisfied as required by Rule 15c2-4 under the Act (which notice the
Managing Member promptly shall confirm in writing) shall pay to the Fund and
each Selling Agent the amounts specified by such notice, and shall additionally
pay to the Fund the interest earned on such Proceeds for disbursement to the
subscribers pursuant to Section 5 hereof.
8}. Rejected Subscriptions. From time to time, upon instructions from
-----------------------
the Managing Member identifying those subscribers whose subscriptions have been
rejected, the Escrow Agent shall return such funds to the subscribers so
identified with such interest as has been credited to them pursuant to Section 5
hereof. If the Managing Member rejects any subscription for which the Escrow
Agent has already collected funds, the Escrow Agent shall promptly issue a
refund check to the rejected subscriber. If the Managing Member rejects any
subscription for which the Escrow Agent has not yet collected funds but has
submitted the subscriber's check for collection, the Escrow Agent shall promptly
issue a check in the amount of the subscriber's check to the rejected subscriber
after the Escrow Agent has cleared such funds. If the Escrow Agent has not yet
submitted a rejected subscriber's check for collection, the Escrow Agent shall
promptly remit the subscriber's check directly to the subscriber.
{9} [8]. Failure to Meet Minimum Subscription. If Qualifying
-----------------------------------------
Subscriptions for at least $3,000,000 of Units have not been received by the
Minimum Offering Termination Date, then the Escrow Agent, upon instructions from
the Managing Member, shall promptly return all collected funds and uncollected
4
<PAGE>
checks and other instruments to the subscribers, with such interest as has been
credited to them pursuant to Section 5 hereof. Prior to the Initial Closing
Date, the Fund is aware and understands that it is not entitled to any funds
received into escrow and no amounts deposited in the Escrow Account shall become
the property of the Fund or any other entity, or be subject to the debts of the
Fund or any other entity.
{10} [9]. Notice of Extension or Termination of Offering. Upon final
termination of the offering, the Managing Member shall instruct Escrow Agent
pursuant to Section 6 as to the disposition of any remaining funds and interest
thereon.
{11} [10]. Fees. The Escrow Agent, for services rendered under this
----
Agreement, shall receive a fee as set forth on Exhibit "B" hereto. The fees of
the Escrow Agent shall be {deducted from the aggregate interest earned on the
Proceeds of the subscribers whose subscriptions are accepted} [paid by the Fund.
If Qualifying Subscriptions for at least $3,000,000 of Units have not been
received by the Minimum Offering Termination Date, then the fees of the Escrow
Agent shall be paid] by the Managing Member {prior to crediting the interest
earned to such subscribers pursuant to Section 5, and the Managing Member shall
pay on demand any unpaid portion of the Escrow Agent's fees}. In no event shall
the fees of the Escrow Agent be deducted from or otherwise offset against the
Proceeds (or interest earned thereon) of subscribers {whose subscriptions are
not accepted by the Managing Member.}[.]
{12} [11]. Resignation. The Escrow Agent shall have the right to resign
-----------
at any time and be discharged from its duties as escrow agent hereunder by
giving the Fund at least 30 days prior written notice thereof; provided,
however, that if the Escrow Agent shall exercise its right of resignation
hereunder, it shall receive as its fee for services rendered as escrow agent a
fee as provided in Section {11} [10] hereof.
{13} [12]. Duties and Responsibilities of Escrow Agent. The Escrow
----------------------------------------------
Agent shall have no duties or responsibilities other than those set forth herein
and shall:
(a) Be under no duty to enforce payment of any subscription
which is to be paid to and held by it hereunder;
(b) Be under no duty to accept funds, checks, drafts or
instruments for the payment of money from anyone other than the Participating
Brokers or the Managing Member or to give any receipt therefor except to the
Participating Brokers or the Managing Member;
(c) Be protected in acting upon any notice, request,
certificate, approval, consent or other paper believed by it to be genuine,
signed by the proper party or parties and in accordance with the terms of this
Agreement;
(d) Be deemed conclusively to have given and delivered any
notice required to be given or delivered hereunder if the same is in writing,
signed by any one of its authorized officers and mailed, by registered or
certified mail, in a sealed postpaid wrapper, addressed to the Fund at the
following address:
Cornerstone [Realty Fund] {Industrial Properties
Income and Growth Fund I}, LLC
4590 MacArthur Blvd.
Suite 610
Newport Beach, CA 92660
4
<PAGE>
(e) Be indemnified and held harmless by the Managing Member
from any and all claims made against it (including claims regarding the
disbursement of funds), or any and all expenses incurred by it (including
reasonable attorneys' fees), by reason of its acting or failing to act in
connection with any of the transactions contemplated hereby and against any loss
it may sustain in carrying out the terms of this Agreement, except such claims,
expenses or losses which are occasioned by its bad faith, negligence or willful
misconduct; and
(f) Not be liable for any forgeries or impersonations concern-
ing any documents to be handled by it.
{14} [13]. Disputes. If the Managing Member, the Participating Brokers,
or anyone else, disagree on any matter connected with this escrow, (i) Escrow
Agent will not have to settle the matter, (ii) Escrow Agent may wait for a
settlement by appropriate legal proceedings or other means Escrow Agent may
require, and in such event Escrow Agent will not be liable for interest or
damage, (iii) Escrow Agent will be entitled to such reasonable compensation for
services, costs and attorneys' fees as a court may award if Escrow Agent
intervenes in or is made a party to any legal proceedings, (iv) Escrow Agent
shall be entitled to hold documents and funds deposited in this escrow pending
settlement of the disagreement by any of the above means, and (v) Escrow Agent
shall be entitled to file an interpleader action and deposit any Proceeds or
property with an appropriate court.
{15} [14]. No Legal Advice. This transaction is an escrow and
Escrow Agent is an escrow holder only and as escrow holder Escrow Agent may not
give legal advice as to any conditions or requirements in this escrow.
{16} [15]. Notices to Escrow Agent. Any written notice required to be
given or delivered to the Escrow Agent shall be deemed conclusively given and
delivered hereunder if the written notice is mailed, by registered or certified
mail, in a sealed postpaid wrapper, addressed as follows:
Southern California Bank
4100 Newport Place
Suite 130
Newport Beach, CA 92660
Attn: Gloria Garriott
{17} [16]. Instructions; Copies of Notices. Any instructions or other
------------
communications to the Escrow Agent provided for herein shall be in writing, but
may be in telegraphic or telex form if promptly confirmed in writing. A copy of
this Agreement, or any amendment or addendum hereto, or closing statement or
document deposited in this escrow shall be furnished by Escrow Agent to those
persons outside of this escrow designated from time to time by the Fund.
5
<PAGE>
{18} [17]. Payments. All disbursements from the escrow account shall
--------
be made to the party concerned, by Escrow Agent's cashier's check to such
party's order or to deposit to such party's bank account. All checks, documents,
and correspondence shall be mailed to such party at the address given by the
Managing Member.
{19} [18]. Miscellaneous. Nothing in this Agreement is intended to
------------
or shall confer upon anyone other than the parties hereto any legal or equitable
right, remedy or claim. This Agreement shall be construed in accordance with the
laws of the State of California and may be modified only in writing.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed on the day and year first hereinabove written.
CORNERSTONE [REALTY FUND] {INDUSTRIAL PROPERTIES
INCOME AND GROWTH FUND I}, LLC,
a California limited liability company
By: CORNERSTONE INDUSTRIAL PROPERTIES, LLC,
a California limited liability company
By: CORNERSTONE VENTURES, INC.,
its Operating Partner
By: /s/ TERRY G ROUSSEL
---------------------------------
Terry G. Roussel, President
6
<PAGE>
{PACIFIC CORNERSTONE FINANCIAL INCORPORATED} [PRIVATE EQUITY INVESTORS GROUP],
a California corporation
By:
--------------------------------------------------
{Terry G. Roussel} [Leonard Robbins], President
ACKNOWLEDGED AND AGREED
SOUTHERN CALIFORNIA BANK
By:
-----------------------------
-6-
<PAGE>
GENERAL PROVISIONS
DEPOSITS - All funds received in escrow shall be deposited in an interest
- --------
bearing escrow account of Southern California Bank.
RESPONSIBILITY FOR DEPOSITED PROPERTY - Escrow Agent is not a party to, or bound
- -------------------------------------
by, any provisions contained in any agreements which may be deposited under,
evidenced by, or arise out of these instructions, and with respect thereto, acts
as a depository only and is not responsible or liable in any manner whatsoever
for the sufficiency, correctness, genuineness, or validity of any Property or
with respect to the form or execution of any agreements, or the identity,
authority or right of any person executing or depositing any property herein.
DEFAULTS - Escrow Agent shall not be required to take or be bound by notice of
- --------
any default of any person, including any Principal, or to take any action with
respect to such default whether or not such action involves any expense or
liability. These instructions shall not be subject to modification or rescission
except upon receipt by Escrow Agent (at the office named above) of written
instructions from each of the Principals or their successors in interest, and no
such rescission or modification shall be effective unless and until consented to
by Escrow Agent in writing.
NOTICES - Principals hereby indemnify and hold Escrow Agent harmless against any
- -------
loss, liability, damage, cost or expense, including reasonable attorneys' fees,
(a) related in any way to Escrow Agent's acting upon any notice, request,
waiver, consent, receipt or other paper or document believed by Escrow Agent to
be signed by Principals or any other proper person, and (b) incurred in
connection with any act or thing done hereunder.
EXERCISE OF JUDGMENT - Escrow Agent shell not be liable for any error of
- ----------------------
judgment or for any act done or step taken or omitted by it in good faith or for
any mistake of fact or law or for anything which Escrow Agent may do or refrain
from doing in connection herewith, except its own gross negligence or willful
misconduct. Escrow Agent shall have duties only to Principals, and no person or
entity shall be deemed a third party beneficiary of these instructions.
COUNSEL - Escrow Agent may consult with legal counsel in the event of any
- -------
dispute or question as to the construction of these instructions or Escrow
Agent's duties thereunder, and Escrow Agent shall incur no liability and shall
be fully protected in acting in accordance with the opinion and instructions of
counsel,
DISAGREEMENTS - In the event of any disagreement between the Principals, or any
- -------------
of them or any other person or persons whether or not named in these
instructions, and adverse claims or demands are made in connection with or for
any of the Property, Escrow Agent shall be entitled at its option to refuse to
comply with any such claim or demand so long as such disagreement shall
continue, and in so doing, Escrow Agent shall not be or become liable for
damages or interest to the Principals, or any of them, or to any other person or
persons for Escrow Agent's failure or refusal to comply with such conflicting or
adverse claims or demands. Escrow Agent shall be entitled to continue so to
refrain and refuse so to act until:
A-1
<PAGE>
a. the rights of the adverse claimants have been fully adjudicated in a
court assuming and having jurisdiction of the claimants and the Property; or
b. all differences shall have been adjusted by agreement, and Escrow
Agent shall have been notified thereof in writing by all persons deemed by
Escrow Agent, in its sole discretion, to have an interest therein.
In addition, Escrow Agent, in its sole discretion, may file a suit in
interpleader for the purpose of having the respective rights of all claimants
adjudicated, and may deposit with the court all of the Property deposited in
escrow; and the Principals agree to pay all costs and counsel fees incurred by
Escrow Agent in such action, such costs and fees to be included in the judgment
in any such action.
INDEMNITY - In consideration of this appointment by Escrow Agent, the Principals
- ---------
agree to indemnify and hold Escrow Agent harmless as to any liability incurred
by Escrow Agent to any person, firm or corporation by reason of its having
accepted same or in carrying out any of the terms hereof, and to reimburse
Escrow Agent for all its expenses, including among other things, counsel fees
and court costs incurred by reason of its position or actions taken pursuant to
these Escrow Instructions. The Principals hereby agree that the Escrow Agent
shall not be liable to any of them for any actions taken by Escrow Agent
pursuant to the terms hereof.
COURT ORDERS - Escrow Agent is hereby authorized, in its exclusive discretion,
- ------------
to obey and comply with all writs, orders, judgments or decrees issued by any
court or administrative agency affecting any money, documents or things held by
Escrow Agent, Escrow Agent shall not be liable to any of the parties hereto,
their successors, heirs or personal representatives by reason of Escrow Agent's
compliance with such writ, order, judgment or decree, notwithstanding if such
writ, order, judgment or decree is later reversed, modified, set aside or
vacated.
ATTORNEY'S FEES - If any action be brought to interpret or enforce these
- -----------------
instructions, or any part thereof, the Principals jointly and severally agree to
pay to Escrow Agent all Escrow Agent's attorney fees, accounting fees, special
and extra service fees and other costs related to such action.
CANCELLATION - In the event the escrow established hereby is cancelled, the
- ------------
Principals jointly and severally shall nevertheless pay to the Escrow Agent the
initial fee together with all costs end expenses of Escrow Agent, including
attorney fees. Notwithstanding anything in these instructions to the contrary,
Escrow Agent may, in its sole discretion, upon ten (10) days written notice to
any of the Principals, resign as Escrow Agent and shall be entitled to
reimbursement for those costs and expenses incurred to the date of such
resignation. Upon cancellation by the Principals or resignation by Escrow Agent,
after deducting Escrow Agent's fees, costs and expenses, the balance of any
funds or Property shall be returned to the respective Principals who shall have
deposited same.
FEES AND CHARGES - In the event that (a) Escrow Agent performs any services not
- ----------------
specifically provided for herein or (b) there is an assignment or attachment of
any interest in the subject matter of the escrow established hereby or any
modification thereof, or (c) any dispute or controversy arises hereunder, or (d)
Escrow Agent is named a party to, or intervenes in, any litigation pertaining to
this escrow or the subject matter thereof, Escrow Agent shall, in addition to
fees and charges for ordinary services, be reasonably compensated therefore and
reimbursed for all costs and expenses, including attorneys' fees, occasioned
thereby. Escrow Agent shall have a first lien on the Property for such
compensation and expenses, and the Principals agree jointly and severally to pay
the same for its ordinary services hereunder.
A-2
<PAGE>
Escrow Agent shall be entitled to an initial, non-refundable set-up fee
("initial fee") of $1,500.00, payable concurrently with its acceptance, and to
additional compensation for wire fees, messenger fees, $250.00 yearly hold-open
fee (due if escrow open over 1 year from the date of these instructions), and/or
any other reasonable and necessary out-of-pocket expenses incurred by Escrow
Agent.
The Principals understand that Escrow Agent will charge additional fees,
including premium hourly fees, for any services performed according to these
Escrow Instructions, or any modification or any service not specifically
provided therein, that involve concerted effort, employees working overtime,
expedited handling of any aspect of the Escrow, or other similar services.
SIGNATURES - These instructions may be executed in counterparts, each of which
- ----------
so executed shall be deemed as original, irrespective of the date of its
execution and delivery, and said counterparts together shall constitute one and
the same instrument.
A-3
<PAGE>
SOUTHERN CALIFORNIA BANK
SCHEDULE OF FEES
FOR
CORNERSTONE {INDUSTRIAL PROPERTIES INCOME AND GROWTH
FUND I} [REALTY FUND], LLC
Acceptance Fee (Non-Refundable)......................................$1,500.00
Additional Escrow Fees of $1.00 per $1,000.00 subscription funds
as received in escrow in excess of $1,500,000.00.{********}
Yearly Hold-Open Fee (due if escrow open over 1 year from
the date of these instructions)......................................$ 250.00
Wire fee, per wire...................................................$ 25.00
Disbursement fee, per check..........................................$ 15.00
Reasonable and customary charges for unscheduled services, including messenger
fees, federal express charges or other out-of pocket expense..........various
{********When subscription funds reach $10,000,000, theadditional escrow fee of
$1.00 per $1000.00 of fund deposited in escrow shall be waived.}
A-4
<PAGE>
EXHIBIT 23.1
SOUTHERN CALIFORNIA BANK
4100 Newport Place
Suite 130
Newport Beach, California 92660
January 31, 2000
Cornerstone Industrial Properties
4590 MacArthur Boulevard, Suite 610
Newport Beach, CA 92660
Re: Escrow Account No. 12563-GG
Cornerstone Realty Fund, LLC (the "Fund")
-----------------------------------------
Gentlemen:
Southern California Bank does hereby agree to be the Escrow Agent with
respect to the subject account. We further agree to release funds to Cornerstone
Industrial Properties, the Managing Member of the Fund, only in accordance with
the terms of the Escrow Agreement described in the Prospectus of the Fund.
Southern California Bank does hereby further agree to the use of its
name for the purpose of reference to it as Escrow Agent for the Fund in its
Registration Statement.
Very truly yours,
/S/SOUTHERN CALIFORNIA BANK
Exhibit 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 1, 2000, in the Registration Statement (Form
S-11 No. 33-76609) and related Prospectus of Cornerstone Realty Fund, LLC for
the registration of 100,000 units.
/S/ ERNST & YOUNG LLP
Newport Beach, California
February 1, 2000
