This FAQ is not a complete overview of the offering and does not contain all of the information that investors should consider before investing in the units. Investors should request a copy of our PPM (Private Placement Memorandum) and read it thoroughly and carefully, including the “Risk Factors” and “Conflicts of Interest” sections. To receive a copy of the PPM, please contact us.
Investors purchasing equity units shall become “Limited Partners or Equity Unit Holders.” Subject to performance of the Fund and after paying interest and principal payments to any senior lenders (“Credit Facility” or “Facility”), certain Fund Expenses, the Management Fee to Private Capital USA and interest to Note Holders and any Credit Facilities, Limited Partners will receive a Preferred Return of 8%, paid monthly. Limited Partners will also divide with the Fund Manager on a monthly basis any Excess Distributable Cash Flow (“EDCF”) with 80% of this amount going to Limited Partners and 20% going to the Fund Manager.
The Preferred Return shall be Noncumulative, meaning that any shortfall in a given month shall not carryforward. However, the Fund Manager’s portion of the EDCF shall be subject to a Clawback for up to six (6) consecutive months after any shortfall of the Preferred Return (see “Fund Manager EDCF Clawback” in the “Summary of Terms” section). Based on comprehensive financial modeling performed by the Fund Manager, the projected overall return to Limited partners is estimated to be between 10% and 12% over the life of the Fund; however, these returns are not guaranteed. Limited Partners will be issued K-1’s annually.
Investors lending money to the Fund will be issued Notes and shall become “Note Holders.” Note Holders will be lenders to the Fund on a Pari Passu basis and have a blanket secured interest in the Fund Assets. This secured interest will be in a senior position except in circumstances where individual Fund Assets have been or are being pledged to any Credit Facility. Note Holders will be issued Notes at interest rates which will vary from time to time, according to prevailing interest rates, and initially averaging 7.5%, depending on investment amount and maturity of the Note.
The Fund intends to have multiple tiers of rates based on the amount of money lent by the Note Holder and duration of the maturity date. These tiers (including amounts, maturities and rates) may change from time to time at the prevailing interest rate and terms defined on the Note Schedule for a given period. Notes may be purchased at any time during the month, subject to approval by the Fund Manager, at the interest rate and terms defined for that period on the Note Schedule. The Fund may prepay the outstanding principal balance and interest to any Note Holder at any time without penalty. Interest to Note Holders shall be paid monthly. Note Holders shall be issued a 1099 annually.
The Fund expects to maintain a Note Holder balance to total Limited Partner equity ratio of 1:4. This ratio, which shall exclude debt associated with any Credit Facility, will undoubtedly fluctuate from time to time and may be higher or lower than this ratio. The actual ratio maintained by the Fund at any given point in time shall be determined in the sole discretion of the Fund Manager.
$50,000 per unique Investor is the minimum investment, which amount may be adjusted in the sole discretion of the Fund Manager. There is no set ceiling on the amount of investment from each Investor and it shall be at the discretion of the Fund Manager.
The Fund Manager intends to invest up to $200,000 during the first year, along with a portion of its EDCF into units and/or Notes of the Fund on an ongoing basis as long as the Fund is not in liquidation. Inasmuch as the Fund Manager will need to monitor its ongoing cash flow, fund its operations, and keep adequate reserves, investing a portion of its EDCF in the Fund is not a requirement in the Fund Managers Agreement. However, the Fund Manager’s goal and intent is to accumulate over time a sizeable investment in units and/or Notes of the Fund, Pari Passu to all other Investors in whichever instrument is owned.
The Fund Manager recognizes that one of the main concerns of Investors is what would happen in the event the Fund Manager (or its “Key Man”) is not available to manage the Fund for whatever reason. Therefore, we have proactively attempted to address and mitigate this concern as much as we possibly can, including the following:
The Fund Manager (Key Man) shall not be permitted to resign except with sixty (60) days’ written notice to the Limited Partners.
Limited Partners may elect a replacement Fund Manager with majority vote. If no new Key Man can be determined and authorized by the Limited Partners, the Fund shall proceed with an orderly liquidation of its assets. The Limited Partnership Agreement contains a provision for termination and liquidation of the Fund upon the occurrence of any event necessitating a decision to wind down the Fund’s operations.
Many well-developed best practices for corporate governance have been established and promoted by leading organizations in the fund industry. The Fund Manager believes in adhering to industry best practices as much as possible in terms of Fund governance, oversight, transparency and communication with Investors. While the Fund Manager has the flexibility to modify its practices over time to meet the needs of the Fund, we have endeavored to incorporate as many of the best practices as possible in the way in which we manage the Fund. Among others, we accomplish this objective in the following ways:
The Fund will be audited by outside CPAs on an annual basis.
The Fund Manager will cause the Fund to have CPA prepared audited year-end financial statements and tax returns each year which will be available to Investors.
The Fund Manager will maintains a written Underwriting Manual which it will use to guide its investment decisions. This Underwriting Manual will be continually reviewed, discussed, revised and updated in the sole judgment and discretion of the Fund Manager.
The Fund Manager may be removed by a vote of the Limited Partners pursuant to the Limited Partnership Agreement and Fund Management Agreement, subject to reasonable compensation if it is without cause, during the life of the Fund. The Limited partners shall have the ability to elect a replacement Fund Manager.
The overall fee structure of the Fund has been designed in a way that attempts to align the Fund Manager’s interests with the Investors’ interests as much as possible.
Investor meetings will be held once per year to provide a forum for Investors to ask questions and be heard. Investors also have the ability (with a simple majority) to require the Fund Manager to convene a meeting at any time.
We encourage you to ask any questions pertaining to our governance standards.
The Fund shall receive as Fund Income 65% of all loan origination (and loan origination extension) fees (with the Fund Manager receiving the other 35%), 100% of any non-loan origination extension fees paid by a Borrower, 100% of any exit fees and/or prepayment penalty fees paid by a Borrower, any interest collected on Mortgage Loans, any interest collected on deposited funds or receivables owned by the Fund, any Redemption Fees collected, any rents collected on REO properties, and the net sale proceeds on the disposition of any Fund Asset.
In addition to the 2% Annual Management Fee, the Fund Manager will receive as income 35% of any loan origination (and loan origination extension) fees collected from Borrowers (with the Fund receiving the other 65%). The Fund Manager shall also receive 20% of the EDCF, subject to Clawback.
As hard as we may try to adhere to governance best practices, it is impossible to eliminate every conceivable potential conflict of interest between the Fund Manager and the Fund. Inasmuch as the Fund Manager has committed to making an investment in the Fund as an Equity Holder, a Note Holder, or both, and these investments are Pari Passu to other Investors, we believe any conflicts are at least somewhat mitigated in this regard. Nevertheless, there are a few that may be material. Please see the “CONFLICTS OF INTEREST” section for more details.
Investors who wish to purchase equity units must complete and sign the Subscription Agreement, the Entity Subscription if the Investor is other than an individual(s), the Investor Questionnaire, the Omnibus Signature page, the signature page to the Limited Partnership Agreement, and any other such documentation as is deemed appropriate by the Fund Manager, and send them together with a check or wire for the purchase price of the units to the Fund Manager.
The initial Unit Price shall be $1.00 and may fluctuate over the life of the Fund. The Fund may set the Unit Price periodically, based on the collective Stated Fair Market Value of the individual Fund Assets (if determinable). The Stated Value of each Fund Asset shall be determined by the Fund Manager in its sole discretion. The Fund Manager, however, shall establish and follow a methodology for determining the Stated Value of each Asset and may modify, alter or improve this methodology from time to time in its sole discretion. The Stated Value of the Fund Assets shall be used to assist in the determination of the Unit Price of the Equity Units as well as the Assets Under Management (AUM). For more information on the Stated Value, the Unit Price and the AUM, please see the section “Risks Specific to Equity Unit Holders.”
The units are restricted as to sale and transfer. Some of the factors that prevent Investors from transferring the units include:
No public market exists for the units, and one is not expected to develop;
Restrictions imposed by federal and state securities laws;
The application of the Investor suitability standards to the proposed transferees of the units;
Restrictions regarding the potential of the Fund to become a publicly traded entity; and
The necessity of obtaining the Fund Manager’s consent which may be withheld.
Subject to the Fund’s performance and sufficient cash flow, the Fund Manager intends to pay the Preferred Return, as well as the allocable portion of any EDCF (as the Fund Manager deems to be in the best interests of the Fund) to Equity Unit Holders on a monthly basis. Distributions will be in proportion to their respective Ownership Interests.
No, there are significant restrictions on the Redemption of equity units. Equity Unit Holders will be required to hold their units for a minimum of 39, 51, or 63 months (the “Lockup Period”) before they may request Redemption. Redemption requests for reasons of financial hardship or emergency during the Lockup Period may be considered on a case by case basis subject to a penalty (the “Redemption Fee”) of 5% of the then current Unit Price. The Fund Manager shall have no obligation to consider any hardship Redemption requests during the Lockup Period and shall be entitled to charge a higher or lower Redemption Fee. All Redemption Fees charged and collected will be considered income to the Fund.
After the Lockup Period, Redemption requests will be considered on a first come, first served basis. An Equity Unit Holder shall be required to provide the Fund Manager a 60 day notice for any Redemption request and any Redemption actually provided shall be effective only as of the first day of a calendar month, following the 60 day notice, at the then current Unit Price as determined by the Fund Manager.
Any return of capital to the Fund from the disposition, sale or repayment of any Fund Asset may not be reinvested by the Fund in additional Assets unless and until any outstanding Redemption requests from Equity Unit Holders seeking to redeem units owned for more than the Lockup Period have been honored.
No Equity Unit Holder will be given priority for Redemption over any other Equity Unit Holder for any reason other than the date upon which the request was made. The Fund Manager may also choose to redeem all Equity Unit Holders Pari Passu even if there is a queue of requested Redemptions, and may redeem equity units Pari Passu at any time at the then current Unit Price in its sole discretion without penalty to the Fund Manager or the Fund.
Investors who wish to purchase a Note or Notes must complete and sign the Subscription Agreement, the Entity Subscription if the Investor is other than an individual(s), the Investor Questionnaire, the Omnibus Signature page, the signature page to the Secured Convertible Term Promissory Note Agreement, and any other such documentation as is deemed appropriate by the Fund Manager, and send them together with a check or wire for the purchase price of the units to the Fund Manager.
A Note Holder shall be required to provide a 60 day written notice to the Fund Manager of Note Holder’s desire to cash out and receive payment of outstanding principal and interest upon the Maturity Date (the “Cash Out Notice”). If the Note Holder does not provide the Cash Out Notice at least 60 days prior to the Maturity Date, the Note, upon the Maturity Date, will automatically extend at the Note Rate less 1% until the Note Holder either (i) executes a new Note based on the then current Note Schedule or (ii) provides a 60 day Cash Out Notice.
The Fund shall also have the right to continue to make interest payments on a monthly basis to the Note Holder at the existing Note Rate for up to 90 days beyond the Maturity Date, or up to 90 days beyond the date on which a Cash Out Notice is given, if such notice is given beyond the Maturity Date, whichever is later, without such continuation constituting an Event of Default.
Note Holders will not have the power to sell or transfer their Notes, except upon written consent of the Fund Manager. Since the Notes are offered only to Accredited Investors, it is not possible to freely allow the transfer of Notes unilaterally on the part of the Note Holder. The Fund Manager shall review any proposed transfer and may withhold its consent due to a violation or perceived violation of state or federal securities laws, ERISA laws, or for any reason in its sole discretion.
No. Each Note has a defined and specific maturity date. The granting or not of the early repayment request shall be determined in the sole discretion of the Fund Manager.
Interest on the Notes is paid monthly to the Note Holders, at the rate specified in each individual Note.
Equity Unit Holders shall have the option to receive any distributions either paid to them via check or ACH or to use these funds to automatically purchase additional units at the prevailing Unit Price. Note Holders shall have the option to receive their interest either paid to them via check or ACH or to use these funds to automatically add to their Note principal balance and thereby earn interest on an increasingly higher principal balance. Investors shall make such an election and may change this election with a 90 day notice to the Fund Manager and not more frequently than twice per year.
This is a private Offering which is being made only by delivery of a copy of this PPM. Both U.S. and foreign Investors may invest in the Fund. Each Investor in the Fund must be an “Accredited Investor” as such term is defined in Regulation D promulgated by the SEC under the Act. In addition, each Investor will be required to represent and warrant to the Fund and Fund Manager that it meets the requirements of the foregoing definition as such are detailed in the Subscription Agreement attached hereto. Some of the ways Investors can qualify are:
Having a net worth of at least $1,000,000, excluding the value of a primary residence; or
Having an adjusted gross income of at least $200,000 for the last 2 years (or $300,000 with a spouse); or
For entity Investors, having assets of at least $5,000,000, or all of the owners of the entity must otherwise be Accredited Investors.
These standards are imposed by the SEC and other state securities law administrators and by the Fund Manager, since there are risks associated with the investment in the units, including an Investor’s inability to easily liquidate the investment. The Fund Manager has the right to reject any potential Investor for not meeting the Investor suitability standards, or for any other reason in its sole discretion.
The Fund and/or any Special Purpose Vehicles(s) (SPVs) of the Fund may choose to borrow money from time to time from one or more Credit Facilities and may pledge one or more Fund Assets as collateral for any such borrowing, subject to the sole discretion of the Fund Manager. However, the Fund Manager will not provide any Facility with a first lien position on any (then) existing Fund Assets already encumbered by Note Holder interests for the specific purpose of acquiring cash to accommodate equity Redemption requests. Further, the Fund will not utilize a Facility in an amount in excess of 50% of the Fair Market Value of any Fund Asset (as determinable) at the time of procurement of that debt. Any Facility shall be nonrecourse to the limited partners. The Fund Manager, its Managing Director, and/or the Fund may agree to provide its Guaranty on any Facility but they/it are not required to do so. Any Facility will likely have covenants that affect the Fund, any SPV(s), and the Fund Manager. See “Risk Factors” for more discussion on this topic.
The following outlines the priority (“Waterfall”) for the distribution of cash from the Fund:
1. Interest and principal payments on any Credit Facility (depending on what collateral is pledged to a particular Facility);
2. Fund Expenses;
3. Fund Manager’s annualized 2% Management Fee (paid monthly) on total AUM as averaged on the first and last day calendar day of each month;
4. Note Holder interest, payable monthly;
5. Repayment of maturing Notes, if any;
6. Preferred Return to Equity Unit Holders, payable monthly;
7. Subject to the Clawback, any available EDCF to be split 80/20 between Equity Holders and the Fund Manager respectively at the end of each month.
The Fund Manager will not charge a commission or any load for the purchase of the units or Notes. However, the Fund or Fund Manager may be a party to an agreement which pays amounts to broker/dealers, financial advisors, or other licensed parties in connection with the sale of units or Notes. The Fund Manager shall endeavor to pay commercially reasonable commissions but shall retain sole discretion as to the actual commissions it pays. Any commission actually paid shall be considered a Fund Expense and thus borne by the Fund as a whole rather than specific to any particular Investor.
The Fund shall begin making its investments immediately once the minimum offering of $5,000,000 has been subscribed and received as summarized herein or as soon thereafter as is practicable in the judgment of the Fund Manager. The relative size of the initial Fund Assets may be smaller than in the future depending on the amount of capital available to the Fund. However, the Fund expects to raise capital on an ongoing basis and thus shall begin making investments immediately.
The Fund shall seek to raise a maximum total of up to $100,000,000 in Investor capital (Member and Note Holder capital combined), which amount may be increased in the sole discretion of the Fund Manager. The Fund Manager may or may not raise the full total during the life of the Fund. Subject to any limitations in the Limited Partnership and Fund Management Agreement, the Fund Manager shall be entitled to sell additional Equity Units and/or issue Notes at any time and on an ongoing basis so long as it does not exceed the Maximum Offering, which may be increased as described above. Upon reaching the Maximum Offering, if there are Redemption requests that are granted and/or Note Repayments that bring the Fund’s total capital below the Maximum Offering, the Fund Manager may again raise additional Investor capital and may do so at any time during the life of the Fund up to the Maximum Offering.
The Fund is an open-ended, “evergreen” fund with no set end date. The Fund Manager expects to purchase and sell Fund Assets on a frequent and ongoing basis and will continue to do so indefinitely or until the Fund Manager believes market conditions do not justify doing so. The Fund Manager generally intends to utilize the return of invested capital from the sale or repayment of Fund Assets to originate or acquire new Fund Assets rather than the return the capital to unit holders. However, the Fund Manager expects to manage the Fund’s investments and capital structure in such a manner as to attempt to provide a reasonable level of capability to accommodate Redemption requests given the relatively illiquid nature of real estate based investments in general.
If the Fund Manager deems it appropriate based on evolving market conditions and dynamics, the Fund Manager shall cease to originate and/or acquire new Fund Assets and shall proceed to distribute the capital of the Fund according termination and wind down until all Fund Assets have been liquidated. The Fund Manager may choose to return capital to the Equity and/or Note Holders at any time during the life of the Fund.
A copy of certain agreements shall be provided to prospective Investors when given the PPM. IN THE EVENT OF ANY CONFLICT BETWEEN ANY OF THE TERMS OF THE PPM AND THE LIMITED PARTNERSHIP, SECURED CONVERTIBLE TERM PROMISSORY NOTE, AND FUND MANAGEMENT AGREEMENTS, THE LIMITED PARTNERSHIP, SECURED CONVERTIBLE TERM PROMISSORY NOTE, AND FUND MANAGEMENT AGREEMENTS SHALL BE CONTROLLING.
The Fund will be treated as a limited partnership for federal income tax purposes. Investors considering a purchase of the units and/or Notes should consult their own tax advisor for advice on any personal tax consequences that may be associated with an investment in the units and/or Notes. Also see the “TAX ASPECTS OF THIS OFFERING.”