OFFERING CIRCULAR OREGON RESIDENTS ONLY
PRECISION FUND OREGON, L.P.
1
Up to $250,000,000 Limited Partnership Interest Units ("Units") at $1.00 per Unit
2
Minimum Investment: $25,000 (25,000 Units)
Precision Fund Oregon, L.P. a Delaware limited partnership (the "Fund"), the general partner of which is PacWest Funding, Inc., an Oregon corporation ("PacWest" or the "General Partner ") has been organized to acquire loans secured by deeds of trust encumbering real property, including, residential, commercial, multi-family, mixed use and unimproved properties. (See "Fund Business and Lending
- Lending Standards and Policies.") The General Partner is an Oregon licensed loan origination company which has been involved in loan origination, loan servicing and in the sale of fractionalized notes and real estate investment generally for over 20 years. PacWest has been sponsoring an Oregon intrastate offering of joint venture interests in loans similar to those which the Fund will acquire for several years (the "Joint Venture Offering").
Investors purchasing Units will become limited partners in the Fund ("Limited Partners") governed by the terms and conditions of the Sixth Amended and Restated Limited Partnership Agreement dated April 13, 2024 a copy of which is attached hereto as Exhibit A (the "Limited Partnership Agreement"). The General Partner believes that the loans secured by real property that it selects will generate sufficient income to permit the Fund to pay an annual return equal to 8.25% of a Limited Partner's Capital Contribution (the "Preferred Return"). An investment in the Fund is not liquid and is subject to substantial restrictions on transfer and withdrawal. (See "Terms of the Offering - Restrictions on Transfer" and "Summary of the Limited Partnership Agreement - Withdrawal Limitations.") Investors should not purchase Units unless they are able to hold the Units for an indefinite amount of time.
Investors have the option to receive monthly distributions of their share of income from Fund operations ("Income Option"), or to allow their proportionate share of Fund income to compound and be reinvested by the Fund for their accounts ("Growth Option") by participating in the Fund's Distribution Reinvestment Plan, which is attached as Exhibit C. (See "Terms of the Offering - Election to Receive Monthly Cash Distributions"). The Preferred Return will be taxed to the Limited Partners (other than tax-exempt entities) as ordinary income, regardless of whether it is distributed in cash or reinvested. (See "Federal Income Tax Considerations").
These securities are offered to bona fide residents of the state of Oregon who purchase solely for their own account for purposes of investment and not with a view toward resale or distribution.
This Offering has been registered with the Director of the Department of Consumer and Business Services of the State of Oregon pursuant to ORS 59.065 under the provision of OAR (Oregon Administrative Rules) 441-65-0020. Registration does not constitute an endorsement or recommendation by the Director. It is not a representation that the Director has passed upon or reviewed the accuracy or values claimed. Any representation to the contrary is a criminal offense.
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 THIS PROGRAM IS NOT PERMITTED.
These securities have not been registered under the federal Securities Act of 1933, as amended, in reliance upon the intrastate offering exemption provided by Section 28 of the Securities Act of 1933, as amended, and SEC Rule 147A. Nothing contained herein shall constitute a waiver of the Fund's right to claim any other available exemption under federal law.
THE FUND INVOLVES SIGNIFICANT RISKS, DESCRIBED IN DETAIL IN THIS OFFERING CIRCULAR ("Circular"). See
"Risk Factors" for certain factors investors should consider before investing. Significant risks include the following: (i) the Fund is a "blind pool" because the General Partner has not yet identified specific loans to be made or acquired by the Fund with the proceeds from the sale of new Units or with principal repayments received by the Fund and reinvested in loan investments selected by the General Partner; (ii) loans invested in by the Fund will not be insured by any government agency, instrumentality or entity; (iii) investment in Units is subject to substantial withdrawal restriction, and investors will have a limited ability to liquidate their investment in the Fund;
(iv) the transfer of Units is restricted and no public market for Units exists or is likely to develop; (v) the General Partner is entitled to various forms of compensation and is subject to certain conflicts of interest; and (vi) Limited Partners will have no right to participate in the management of the Fund and will have only limited voting rights. Terms not otherwise defined herein shall have the meanings ascribed in the Limited Partnership Agreement.
Price to Investors
Selling Commissions3
Net Proceeds to the Fund4
Per Unit
$1.00
0
$1.00
Total Maximum
$250,000,000.00
0
$250,000,000.00
General Partner: PacWest Funding, Inc. Attn: Kevin Simrin
4710 Village Plaza Loop, Suite 100
Eugene, Oregon 97401
(541) 485-2223
The date of this Circular is April 13, 2024
1 The General Partner may increase the maximum amount of this Offering at any time by amendment to this Offering Circular.
2 The minimum purchase is $25,000 (25,000 Units).
3 Units will be offered and sold by the General Partner or by its duly authorized agents and employees who will not receive compensation in connection with the sale of the Units. The General Partner, in its sole discretion, may arrange for Units to also be sold through registered securities broker-dealers. Any such agents, employees or broker-dealers will be paid selling commissions to be negotiated on a case-by-case basis. Any selling commissions would be paid by the General Partner, and shall not be an expense of the Fund, however no such sales have occurred to date. (See "Plan of Distribution.") There is no firm commitment from any third party to purchase or sell any of the Units.
4 "Net Proceeds to the Fund" are calculated before deducting ongoing offering expenses, including without limitation legal and accounting expenses, reproduction costs, selling expenses and filing fees.
THE UNITS ARE BEING OFFERED SOLELY TO BONA FIDE RESIDENTS OF THE STATE OF OREGON TO WHOM A COPY OF THIS CIRCULAR HAS BEEN DELIVERED BY THE GENERAL PARTNER. THIS CIRCULAR DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY WITH RESPECT TO ANY OTHER PERSON.
THE UNITS ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT, ANY APPLICABLE STATE SECURITIES LAWS AND THE LAWS OF ANY OTHER RELEVANT JURISDICTION. IN ADDITION, SUCH UNITS MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED, IN WHOLE OR IN PART, EXCEPT AS PROVIDED IN THE LIMITED PARTNERSHIP AGREEMENT REFERRED TO HEREIN. ACCORDINGLY, INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF AN INVESTMENT IN THE UNITS FOR AN INDEFINITE PERIOD. THERE WILL BE NO PUBLIC MARKET FOR THE UNITS, AND THERE IS NO OBLIGATION ON THE PART OF ANY PERSON TO REGISTER THE UNITS UNDER THE SECURITIES ACT, ANY STATE SECURITIES LAWS OR THE SECURITIES LAWS OF ANY OTHER JURISDICTION. INVESTMENT IN UNITS INVOLVES CERTAIN SIGNIFICANT INVESTMENT RISKS, INCLUDING RISKS OF LOSS OF CAPITAL OR AN INVESTOR'S ENTIRE INVESTMENT IN UNITS.
THE FUND WILL NOT BE REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940 (THE "INVESTMENT COMPANY ACT"). CONSEQUENTLY, INVESTORS WILL NOT BE AFFORDED THE PROTECTIONS OF THE INVESTMENT COMPANY ACT. THE GENERAL PARTNER OF THE FUND IS NOT REGISTERED AS AN INVESTMENT ADVISOR WITH THE SEC OR REGISTERED OR CERTIFIED AS AN INVESTMENT ADVISOR UNDER THE LAWS OF ANY STATE OR OTHER JURISDICTION AND POTENTIAL INVESTORS SHOULD CONSULT WITH THEIR OWN INDEPENDENT SECURITIES PROFESSIONALS TO DETERMINE THE SUITABILITY OF UNITS AND THE LOAN INVESTMENTS MADE BY THE FUND FOR THEIR OWN PERSONAL FINANCIAL SITUATION AND INVESTMENT OBJECTIVES.
THE INFORMATION CONTAINED IN THIS CIRCULAR SUPERSEDES ANY ADVERTISEMENTS OR SOLICITATION MATERIALS REGARDING THE FUND OR THIS OFFERING. THIS CIRCULAR IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE LIMITED PARTNERSHIP AGREEMENT OF THE FUND AND THE SUBSCRIPTION AGREEMENT RELATED THERETO. NO PERSON HAS BEEN AUTHORIZED REGARDING THIS OFFERING TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS CIRCULAR AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR THE GENERAL PARTNER. STATEMENTS IN THIS CIRCULAR ARE MADE AS OF THE DATE HEREOF UNLESS STATED OTHERWISE HEREIN, AND NEITHER THE DELIVERY OF THIS CIRCULAR AT ANY TIME, NOR ANY SALE HEREUNDER, SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME AFTER SUCH DATE.
COMPENSATION WILL BE PAID TO THE GENERAL PARTNER, WHICH HAS NOT BEEN DETERMINED BY ARM'S- LENGTH NEGOTIATION. THE GENERAL PARTNER IS ALSO SUBJECT TO CERTAIN CONFLICTS OF INTEREST. (SEE "RISK FACTORS," "COMPENSATION TO THE GENERAL PARTNER" AND "CONFLICTS OF INTEREST.")
PROSPECTIVE PURCHASERS SHOULD NOT REGARD THE CONTENTS OF THIS CIRCULAR OR ANY OTHER COMMUNICATION FROM THE FUND AS A SUBSTITUTE FOR CAREFUL AND INDEPENDENT TAX AND FINANCIAL PLANNING. EACH POTENTIAL INVESTOR IS ENCOURAGED TO CONSULT WITH HIS OR HER OWN INDEPENDENT LEGAL COUNSEL, ACCOUNT ANT AND OTHER PROFESSIONAL WITH RESPECT TO THE LEGAL AND TAX ASPECTS OF THIS INVESTMENT AND WITH SPECIFIC REFERENCE TO HIS OR HER OWN TAX SITUATION, PRIOR TO SUBSCRIBING TO UNITS.
RISK DISCLOSURE STATEMENT
The attorneys that prepared this Circular ("Attorneys") hereby disclaim any opinion or assurance of any nature whatsoever regarding the accuracy, completeness, reasonableness, timeliness or veracity of any of the assertions, representations or other information contained herein, whether qualitative or quantitative, or regarding the investment-worthiness of the Units. Any assertion or representation made herein, and all other information disclosed herein, whether qualitative or quantitative, was made or provided by the promoter. In connection with the preparation of these confidential offering documents, the attorneys have not been engaged to attest hereto, or to opine in respect hereof. Accordingly, the attorneys have not performed any analytical, confirmation, validation, verification or other procedures in respect of the assertions and representations contained herein, nor in respect of any of the other information disclosed herein, including any similar to those procedures undertaken by an independent certified public accountant in connection with an audit of the financial statements of an issuer of securities for purposes of rendering an opinion thereon. Consequently, potential investors, in deciding whether or not to invest in Securities, are cautioned not to ascribe any special significance whatsoever to this Circular by reason that attorneys have prepared this Circular.
iii
TABLE OF CONTENTS
SUMMARY OF THE OFFERING 1
FORWARD-LOOKING STATEMENTS 2
INVESTOR SUITABILITY STANDARDS 3
TERMS OF THE OFFERING 3
FUND BUSINESS AND LENDING 5
FUND PERFORMANCE 9
FUND MANAGEMENT AND LOAN SERVICING 9
USE OF PROCEEDS 10
COMPENSATION TO THE GENERAL PARTNER 11
THE GENERAL PARTNER AND AFFILIATES 12
RISK FACTORS 14
RESPONSIBILITIES OF THE GENERAL PARTNER 26
ERISA CONSIDERATIONS 26
CONFLICTS OF INTEREST 27
FEDERAL INCOME TAX CONSIDERA TIONS 28
TAX CONSIDERATIONS RELATED TO INVESTING IN A REAL ESTATE INVESTMENT TRUST 35
CERTAIN LEGAL ASPECTS OF THE FUND LOANS 41
SUMMARY OF LIMITED PARTNERSHIP AGREEMENT 43
LEGALMATTERS 46
PLAN OFDISTRIBUTION 46
ADDITIONAL INFORMATION AND UNDERTAKINGS 46
EXHIBITS:
Exhibit A-Sixth Amended and Restated Limited Partnership Agreement of Precision Fund Oregon, L.P.
Exhibit B-Subscription Agreement
Exhibit C-Distribution Reinvestment Plan
SUMMARY OF THE OFFERING
The following information is only a brief summary of the offering and is qualified in its entirety by the detailed information appearing elsewhere in this Circular. Potential investors should review this entire Circular before deciding to invest in the Units.
Fund Objectives: Precision Fund Oregon, L.P. is a Delaware limited partnership formed for investing in
loans secured by deeds of trust on real property. It was formerly known as The Oregon Fund, L.P. The Units offered hereby represent limited partnership interests in the Fund.
The Fund's objectives are to (1) provide the opportunity for the Limited Partners to earn income from interest paid by borrowers on loans owned by the Fund; (2) protect and preserve Fund capital; and (3) provide cash distributions to electing Limited Partners. There is no guaranty that each of these objectives will be met. (See "Risk Factors.")
The General Partner: PacWest Funding, Inc., 4710 Village Plaza Loop, Suite 100, Eugene, Oregon 97401.
Suitability Standards: Units will be sold exclusively to bona fide residents of the state of Oregon with an initial
minimum investment of $25,000 or 25,000 Units. Qualified investors admitted to the Fund will become Limited Partners. (See "Investor Suitability Standards.")
Capitalization: Maximum of $250,000,000 (subject to increase by the General Partner).
Mortgage Loan Portfolio: Loans acquired by the Fund will have been made to borrowers and secured by real estate
consisting of residential properties, apartment buildings, office buildings, commercial and industrial properties, unimproved land, as well as construction loans. Loans will be acquired while this offering continues. (See "Fund Business and Lending - Lending Standards and Policies.")
Compensation to the General Partner
and Affiliates: The General Partner will receive fees and other compensation. (See "Compensation to the General Partner.")
General Partner's Experience: The General Partner has substantial experience in the mortgage lending business. It is a
licensed mortgage origination company and will originate, process, underwrite, service and fund most, if not all, of the loans the Fund will acquire. The compensation that PacWest generates from loan origination will be paid for by the borrower, not the Fund. See ("The General Partner.")
Cash Distributions: Investors may choose either (1) monthly cash distributions of the Preferred Return, or (2)
to have the monthly Preferred Return to capital accounts pursuant to the Fund's Distribution Reinvestment Plan attached as attached as Exhibit C. This election, once made upon subscription for Units, may be revoked at any time. However, the General Partner, at his sole and absolute discretion, reserves the right to commence making cash distributions at any time to previously compounding ERISA investors for the Fund to remain exempt from the ERISA plan asset regulations. (See "ERISA Considerations" and "Summary of Limited Partnership Agreement.")
Withdrawal: Investors have no right to demand withdrawal of all or a portion of their investment for twelve (12) months following the date of the purchase of Units. Thereafter, withdrawals from the Fund will be subject to cash flow limitations and other withdrawal restrictions. The Fund may utilize money from new subscriptions to fund withdrawals. (See "Summary of Limited Partnership Agreement - Withdrawal Limitations" and "Risk Factors - Risks Related to Ownership of the Units.")
Restrictions on Transfers: There are substantial restrictions on transferability of Units under federal and state
securities laws and under the Limited Partnership Agreement. (See "Terms of Offering - Restrictions on Transfer" and "Risk Factors - Risks Related to Ownership of the Units.")
Side Letters: The General Partner may, without any further act, approval, or vote of any of the Limited Partners, enter into side letters or other similar arrangements with one or more Limited Partners that have the effect of establishing rights or altering, supplementing or modifying the terms of the Limited Partnership Agreement, including, the rights and terms which are more favorable to the recipients of such side letters (each, a "Side Letter").
Leveraging the Portfolio: The Fund may borrow funds from third-party lenders, investors and/or financial institutions
to fund the Fund's investments. These loans would be secured by the assets held by the Fund. In addition, the General Partner and/or the principals of the General Partner may, but shall not be required to, from time to time, guarantee such borrowing, but are not required to do so. In addition, the principals of the General Partner and the General Partner shall be indemnified by the Fund for all potential and actual claims arising out of, or in connection with, such borrowing. Leveraging amplifies risks and benefits and involves additional risks detailed later in this Circular. As of the date of this Circular the Fund has a line of credit for $5,000,000 with Umpqua Bank of which $2,135,000 is outstanding. (See "Risk Factors - Risks of Leveraging the Fund").
Real Estate Investment Trust: The Fund may establish a subsidiary which may elect to be taxed as a real estate investment
trust ("REIT" or "Sub-REIT") under the Internal Revenue Code Section 856, et seq., as amended, . In such an event, the Fund may make its investments through the Sub-REIT and may assign and/or transfer all or a portion of the Fund's assets to qualify and maintain an REIT structure and the subsidiary as a REIT status. Establishing and maintaining a REIT involves risks and benefits that are unique, which are detailed later in this Circular. (See "Risk Factors" and "Federal Income Tax Consideration - Real Estate Investment Trust").
Liquidity: The purchase of Units is an illiquid investment. There is no public market for Units, and none is expected to develop, and an investor's withdrawal of invested capital is limited by Fund cash flow and other restrictions. (See "Risk Factors - Risks Related to Ownership of the Units" and "Summary of the Limited Partnership Agreement - Withdrawal Limitations.")
Reports to Limited Partners: Monthly statements of account.
Risks: An investment in Units is subject to certain risks which should be carefully evaluated before an investment in Units is made. (See "Risk Factors.")
Conflicts of Interest: The Fund's business operations will be managed entirely by the General Partner, which is
subject to certain conflicts of interest. (See "Conflicts of Interest.")
Voting: Limited Partners will have no right to vote on matters concerning the Fund except as expressly granted in the Limited Partnership Agreement or required by law. All voting rights granted to Limited Partners in the Limited Partnership Agreement require the affirmative vote of Limited Partners representing a majority of the total outstanding Units. (See "Risk Factors - Risks Related to Ownership of the Units.")
FORWARD-LOOKING STATEMENTS
This Circular contains forward-looking statements within the meaning of federal securities law. Words such as "may," "will," "expect," "anticipate," "believe," "estimate," "continue," "predict," or other similar words, identify forward-looking statements. Forward-looking statements include statements regarding the General Partner's intent, belief, or current expectation about, among other things, trends affecting the markets in which the Fund will operate, its business, financial condition, and strategies. Although the Fund believes that the expectations reflected in these forward-looking statements are based on reasonable assumptions, forward-looking statements are not
guaranteeing of future performance and involve risks and uncertainties. Actual results may differ materially from those predicted in the forward-looking statements because of various factors, including those set forth in the "Risk Factors" section of this Circular. If any of the events described in "Risk Factors" occur, they could have an adverse effect on the Fund's business, financial condition, and results of operations. When considering forward-looking statements, prospective investors should keep these Risk Factors in mind as well as the other cautionary statements in this Circular. Prospective investors should not place undue reliance on any forward-looking statement. The Fund is not obligated to update forward-looking statements.
INVESTOR SUITABILITY STANDARDS
Units are being offered and sold in reliance upon the exemption from federal registration provided for under section 28 of the Securities Act of 1933 (the "Act") and Rule 147A issued by the Securities and Exchange Commission, thereunder. As such, Units will be sold only to bona fide Oregon residents and may be transferred only to Oregon residents greater than six months after they are acquired. An investment in the Units is suitable only for people who are seeking income, not capital appreciation and do not require a liquid investment. Redemptions are restricted by time periods and amount, and a secondary market for the Units is unlikely to develop.
Investors will also be required to provide additional documentation upon which the General Partner can verify such Investor's status as an Oregon resident and additional documentation as is deemed necessary by the General Partner to comply with the Act or any other state or federal securities laws applicable to this offering. Existing Limited Partners desiring to purchase additional Units must meet the suitability standards outlined herein at the time each additional purchase of Units is made.
It is the responsibility of the General Partner and its licensed salespersons to make every reasonable effort to determine that the purchase of an interest in the Fund is suitable and appropriate for each Limited Partner based on information provided by the Limited Partner regarding the Limited Partner's financial situation and investment objectives and any other relevant information known to the General Partner.
Additional Standards
Units may be acquired for investment purposes only, and not with a view to, or for resale in connection with, any further distribution thereof and purchaser must represent that they, either alone or with a joint owner have either income of the previous tax year of at least
$50,000 or net worth, either alone or combined with a joint owner of at least $70,000 and such investment in the Units does not constitute more than 20% of such investor's net worth.
TERMS OF THE OFFERING
This offering of Units is made to a limited number of qualified investors that meet the investor suitability standards set forth above. The Unit subscription price to each Limited Partner is $1.00 per Unit with a minimum subscription from each investor of $25,000, or 25,000 Units. Each Unit of investment represents a limited partnership interest in the Fund.
Subscription Agreements; Admission to Fund
Units may be purchased for a purchase price of $1.00 per Unit by completing the Subscription Agreement and Power of Attorney attached hereto as Exhibit B (the "Subscription Agreement") and delivering the executed Subscription Agreement to the General Partner. Subscriptions are payable in collected funds.
Subscription Agreement Representations and Warranties
The Subscription Agreement requires each potential investor to make certain representations and warranties upon which the General Partner will rely in accepting an investor's subscription. These include a warranty from each potential investor that:
The investor has received this Circular and the Sixth Amended and Restated Limited Partnership Agreement of Precision Fund Oregon, L.P.
The investor is a resident of the state of Oregon.
The investor is aware that there will be no public market for the Units, and none is expected to develop.
The investor, alone or with a spouse, has annual income of no less than $50,000 or net worth of no less than $70,000 and such investment in the Units does not constitute more than 20% of such investor's net worth; and
The investor has the power, capacity, and authority to make the investment.
The purpose of these warranties is to ensure that the investor fully understands the terms of the offering, the risks of an investment and that the investor is qualified and has the capacity to enter into the Subscription Agreement and invest in Units. In any claim or action against the Fund or the General Partner, the Fund or the General Partner may use the warranties in the Subscription Agreement as a defense or as a basis for seeking indemnity if the representations are false.
Subscriptions
Investors may purchase Units by completing and executing the Subscription Agreement and delivering the Subscription Agreement to the General Partner together with the purchase price payable for Units ("Subscriptions"). The minimum Subscription amount is $25,000 (i.e., one Unit); provided, however, that the General Partner may, in its sole discretion, accept Subscriptions in lesser amounts and may issue fractional Unit(s). Subscriptions will be accepted or rejected by the General Partner promptly after receipt. The General Partner reserves the right to reject any Subscription submitted for any reason. If accepted, an investor submitting a Subscription (a " Subscriber") will become a Limited Partner and the Subscriber's entire investment will be deposited into the Fund. (See "Use of Proceeds.") Until then, a Subscriber's subscription is irrevocable, and Subscription funds received by the General Partner may be held by it for the account of each Subscriber in a subscription account pending transfer into the Fund (the "Subscription Account"). Generally, investor's funds will be transferred from the subscription account into the Fund's operating account on a first-in, first-out basis; however, the General Partner reserves the right to admit non-ERISA plan investors before ERISA plan investors for the Fund to remain exempt from the application of the plan asset regulations issued by the Department of Labor in 1986. (See "ERISA Considerations.") The General Partner has the right to admit only a portion of an investor's subscription funds at any given time; however, in no case, except as otherwise provided herein, will the General Partner admit less than the required minimum investment by a Subscriber (i.e., $25,000). Only upon transfer of an investor's subscription funds from the subscription account into the Fund's operating account will an investor become a Limited Partner in the Fund. Upon admittance, an investor's subscription funds will be released to the Fund and Units will be issued.
Subscriptions are non-cancelable and irrevocable, and subscription funds are non-refundable for any reason, except with the consent of the General Partner.
Election to Receive Monthly Cash Distributions
Upon subscription for Units, an investor must elect whether to receive the Preferred Return, paid monthly from the Fund or to allow his or her earnings to compound for the term of the Fund through the Distribution Reinvestment Plan. This election, once made, may be revoked by providing reasonable notice to, and upon approval of the General Partner. The General Partner reserves the right, at any time, to immediately commence making monthly cash distributions to ERISA plan investors who previously compounded earnings to ensure that the Fund remains exempt from the Plan Asset Regulations pursuant to the "significant participation" exemptions. (See "ERISA Considerations.")
Income allocable to investors who elect to compound their earnings will be retained by the Fund for investing in mortgage loans or other proper Fund purposes. Income from additional loans made by the Fund will be allocated among all Limited Partners; however, investors who compound may be credited an increasing proportionate share of Fund earnings compared to investors who receive monthly distributions because the capital accounts of those investors who compound may gradually increase. (See "Summary of Limited Partnership Agreement - Capital Account Maintenance.")
Use of Subscriptions to Pay Pending Withdrawal Requests
Subscription amounts transferred into the Fund may be utilized by the General Partner for any proper Fund purpose, including funding mortgage loan investments, creating appropriate reserves, or paying Fund expenses. Additionally, the General Partner may accept subscriptions to fulfill Limited Partners' withdrawal requests if at the time of receipt of a subscription there is a "waiting list" for withdrawals from the Fund. (See "Summary of Limited Partnership Agreement - Withdrawal Limitations" and "Risk Factors - Risks Related to Ownership of the Units.") Investors should ask the General Partner about the aggregate amount of the then-current waiting list for withdrawals and the anticipated waiting period (if any) if that information would be a factor in determining whether to invest in Units.
Restrictions on Transfer
The sale of Units in this offering has not been registered with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as amended (the "Securities Act"), and is being made in reliance upon the exemptions from such registration requirements provided for by Section 28 of the Securities Act and Rule 147A promulgated by the SEC. The Units cannot be resold to non-Oregon residents without registration under the Securities Act or pursuant to an exemption therefrom.
There is no public or trading market for the Units, and the General Partner does not anticipate that one will develop in the future. The General Partner does not anticipate registering the Units with the SEC to facilitate resales. Therefore, Investors must be prepared to hold the Units indefinitely, without the expectation of liquidity in this investment. (See "Risk Factors - Risks Related to Ownership of the Units.")
The Limited Partnership Agreement places the additional restriction that the General Partner must give its prior written consent, which may be withheld in the General Partner's sole discretion, to any sale, transfer or encumbrance of all or any part of an Interest in the Fund. Also, Investors have limited rights to withdraw from the Fund. (See "Summary of Limited Partnership Agreement.") Therefore, Investors needing access to their invested capital in the near term should not invest.
Real Estate Investment Trust Subsidiary
The Fund may establish a real estate investment trust ("REIT") which would be a subsidiary of the Fund ("Sub-REIT" ). The General Partner believes that establishing a REIT will provide substantial benefits to the Fund and the Limited Partners pursuant to the Tax Cuts and Jobs Act of 2017 (the "Tax Act") provided that the Sub-REIT qualifies and maintains its status as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). The General Partner believes that benefits include the deduction of Twenty Percent (20%) of qualifying business taxable income from federal income tax as well as possible elimination of potential unrelated business taxable income ("UBTI") to Limited Partners who may be subject to UBTI.
To commence the REIT operations and achieve the intended benefits associated with a REIT, the Fund intends to transfer or assign substantially all of the Fund's assets and liabilities to the Sub-REIT as of commencement of its operations. The commencement date of Sub-REIT will be determined upon General Partner's sole and absolute discretion. In addition, in the year immediately following commencement of operations, the Sub-REIT is required to be owned by 100 or more investors. The Fund expects to be the sole initial owner of the Sub-REIT until such a time as 100 or more investors become equity owners of the Sub-REIT. The Fund intends that the 100-shareholder requirement will be satisfied by selling a nominal interest in the form of preferred membership interests or units to investors who will become equity owners of the Sub-REIT. These 100 shareholders must be admitted to the Sub-REIT within Three Hundred and Thirty-Five (335) days from the date of election. The proceeds of sale may be distributed to the Fund and its Limited Partners as a return of capital or used by the Fund and/or Sub-REIT for their business purposes.
Upon commencement of operations of the Sub-REIT, it is expected that substantially all the loan related activity conducted by the Fund shall be conducted by the Sub-REIT. The Sub-REIT shall adhere to the loan purchase policies of the Fund and shall be governed by the same internal compliance procedures as applicable to the Fund. (See "Lending Standards and Policies" below).
The Sub-REIT is expected to rely upon the General Partner and its Affiliates, and their principals, officers, directors, managers, and other staff members, to direct the Sub-REIT's business activities and qualify for REIT tax treatment. Compensation to the General Partner (or other service provider) shall be identical to compensation payable by the Fund for similar services. Expenses related to the establishment of Sub-REIT will be paid by the Fund (See "Use of Proceeds").
Although the risks associated with Sub-REIT are generally like that of the Fund, there are unique and additional risks in establishing and maintaining a REIT that are detailed later in this Circular. (See "Risk Factors" and "Income Tax Considerations" below). Distributions payable to Limited Partners are not expected to be adversely affected because the Sub-REIT expects to comply with REIT tax rules that require distribution of substantially all of its net income to its equity holders. After tax returns to taxable Limited Partners who are individuals, trusts or estates, and subject to US federal income tax, are expected to be greater following commencement of operations by the Sub-REIT than would be the case if the Sub-REIT did not exist.
FUND BUSINESS AND LENDING
The Fund will engage in the business of acquiring loans represented by promissory notes that are secured by deeds of trust that encumber real estate located in Oregon or other states. The Fund may also purchase loans from third parties when, in the General Partner's
discretion, it is beneficial for the Fund to do so. All Fund loans will be selected by the General Partner pursuant to the guidelines set forth in the "Lending Standards and Policies" subsection below.
General
The General Partner will be responsible for selecting and arranging the loans acquired by the Fund. The loans acquired by the Fund will be primarily originated and funded by the General Partner. In addition to originating loans, the General Partner will also service the loans the Fund purchases and will receive compensation for managing and servicing the loans by retaining a portion of the interest that the borrower pays. The interest rate percentage retained for servicing a loan is equal to 10% of collected interest on loans. Example: If the borrowers Note is for 12% interest, when the General Partner receives the borrower's interest only payment, PacWest will receive 10% of the collected interest as a Management Fee and retain 10% of the collected interest as a servicing fee, distributing the remaining 9.6% annual interest to the Fund (See "Compensation to the General Partner" and "Conflicts of Interest.").Each of the promissory notes and deeds of trust evidencing Fund loans will be assigned to the Fund upon purchase of the loan. The Fund will earn income from the interest on such loans, and from the Fund's portion of other fees which may be charged to borrowers. (See "Compensation to the General Partner.")
The Fund may in some circumstances purchase loans which rely primarily on the value of the real property securing loans to protect its investment with less emphasis on the creditworthiness of the borrower. To determine the value of the real property, the General Partner, who will originate most if not all the loans acquired by the Fund, will obtain an evaluation to determine the fair market value of real property but no assurance can be given that such an analysis will in any or all cases, be and remain accurate. (See "Risk Factors - Risks Related to the Fund's Business.")
In some circumstances, the Fund may purchase undivided fractional interests in loans ("Fractional Interests") arranged by the General Partner on behalf of the Fund and other lenders rather than an entire loan; however, the Fund will only acquire Fractional Interests in loans that meet the standards set forth in the "Lending Standards and Policies" section, below. (See "Risk Factors - Risks Related to the Fund's Business" and "Conflicts of Interest.")
Lending Standards and Policies
General Standards for Mortgage Loans
The Fund, either alone or by participating with other lenders (including the General Partner or an affiliate of the General Partner), expects to engage in the business of acquiring or investing in loans secured by deeds of trust on real property located within or outside Oregon, including residential properties, commercial and industrial properties, mixed use properties and unimproved land. The Fund may invest in construction or rehabilitation loans that are underwritten based upon the completed value of the construction or rehabilitation. The Fund's loans will not be insured or guaranteed by any governmental agency or private entity. The Fund will select and underwrite loans for investment pursuant to the guidelines set forth below, which guidelines are designed to set standards for the quality of the real property security given for the loans.
Priority of Mortgages.
Loans will be secured by a first or junior deed of trust or mortgage (collectively referred to herein as a "deed of trust") on real property located in Oregon and throughout the United States. If a loan is secured by a first deed of trust, the deed of trust will be senior to all other recorded monetary liens other than liens for taxes or the assessments of special assessment districts to fund streets, utilities, or other public improvements. If a loan is secured by a junior deed of trust, the obligations secured by the senior lien(s) must not be in default at the time of the loan closing; however, loan proceeds may be used to cure defaults under the senior lien(s). Loans may also be secured by one or more additional deeds of trust encumbering other real property owned by the borrower or an affiliate of the borrower when, in the General Partner's reasonable judgment, such cross collateralization is necessary to meet the loan-to-value ratio requirements set forth herein.
Property Types.
Fund loans will be loans secured by commercial, residential, and industrial properties and may include, without limitation, apartment buildings, office buildings, warehouses and industrial complexes and small shopping centers. In addition, the Fund will purchase construction loans, and loans secured by residential properties. The Fund may also acquire loans secured by unimproved land.
Geographic Area of Lending Activity.
Fund acquired loans are expected to have been made and secured by properties primarily in Oregon. All such loans must satisfy the underwriting criteria described herein. (See "Risk Factors - Risks Related to the Fund's Business" and "Certain Legal Aspects of the Fund Loans - Foreclosure.")
Loan to Value Ratios.
Loan to value ratios are the percentage of the valuation of the property that is encumbered by a first trust deed or junior lienholder.
Chart 1.1 below shows that maximum anticipated loan to value ratio ("LTV") for loans when there are no other liens on the property except the Fund's loan at the time the loan was acquired.
Chart 1.1
Property Type
Target LTV Ratio
Maximum LTV Ratio
Residential business purpose loans
70-80%
80%
Commercial property
70-80%
80%
New construction or rehabilitation
70-80%
80%
In ground infrastructure on bare land
60%
60%
Unimproved bare land
50%
50%
The loan-to-value ratios for Fund loans may exceed the foregoing percentages if, in the General Partner's reasonable judgment, a higher loan amount is warranted by the circumstances of the loan, such as personal guaranties, prior loan history of borrower, improved market conditions, etc. The General Partner may acquire loans secured by junior liens, on behalf of the Fund.
The foregoing loan-to-value ratios will not apply to refinancing an existing loan that is in default at the time of maturity. In such cases, the General Partner, in its sole discretion, shall be free to accept any reasonable financing terms that it deems to be in the best interests of the Fund.
In determining the value of a property, the General Partner will use only third-party electronic valuation platforms, real estate broker's estimate of value or appraisers.
Although the General Partner may conduct cursory physical inspections of the property providing security, due to the costs involved in most cases, it will not obtain inspection reports from licensed civil engineers nor will it obtain environmental site assessments or otherwise conduct thorough environmental investigations to determine the existence of any toxic or hazardous substances, unless the loan is to be secured by commercial or industrial property. (See "Risk Factors - Risks Related to the Fund's Business.")
Terms of Loans.
Most loans will be for a period of one to 3 years, but in no event more than 30 years. Most loans will provide for monthly payments of interest only, with a "balloon" payment of principal payable in full at the end of the term.
Loan Documents.
Loans made by the General Partner, an Affiliate or a third party which is then purchased by the Fund, will contain loan documents and insurance policies which will name the initial payee of the loan (i.e., the General Partner, an Affiliate or a third party) as payee and beneficiary. Upon the Fund's purchase of all or a portion of such loan, the note and deed of trust, or such portion thereof, will be assigned to the Fund. All deeds of trust or assignments of the deed of trust will be duly recorded in the county where the property securing the loan is located and the note will be duly endorsed in favor of the Fund and trust deed assigned to the Fund.
Escrow Conditions.
Acquired loans will be funded utilizing a licensed title insurance or escrow company. The escrow agent will be instructed not to disburse any funds out of the escrow for purposes of funding the loan until the following conditions are met:
(a) Satisfactory title insurance coverage has been obtained for all loans, with the title insurance policy naming the original Lender and its successors and assigns as the insured and providing title insurance in an amount equal to the principal amount of the loan. Title insurance insures only the validity and priority of the deed of trust, and does not insure against loss because of factors such as diminution in the value of the security property, over-appraisals, borrower's defaults, etc.
(b) Satisfactory fire and casualty insurance have been obtained for all loans (except loans secured by unimproved land), which insurance shall name the Fund's servicer as loss payee in an amount at least equal to the replacement value of the improvements on the secured property. (See "Risks Factors- Risks Related to the Fund's Business) The General Partner does not intend to arrange for mortgage insurance which would afford some protection against loss if the Fund foreclosed on a loan and there was insufficient equity in the security property to repay all sums owed. Additionally, the General Partner will not require the borrower to carry separate liability insurance.
(c) All loan documents (notes, deeds of trust, etc.) and insurance policies will name the Fund's servicer as loss payee and beneficiary or additional loss insured, as applicable. When the Fund purchases loans, the Fund receives assignments of all beneficial interest in any documents related to each loan purchased. Fund investments in loans will not be held in the name of the General Partner or any other nominee.
No Loans to the General Partner.
No loans made to the General Partner or to its Affiliates or principal(s) will be acquired by the Fund. Loan Diversification.
No Fund loan (or Fund interest in a loan) will exceed 20% of total Fund assets at the time of acquisition. Credit Evaluations
The General Partner intends to strongly consider the income level and general creditworthiness of a borrower to determine the borrower's ability to repay the Fund loan according to its terms; however, on occasion such considerations may be subordinate to a determination that the borrower has sufficient equity in the secured property to satisfy the loan-to-value ratios described above. Loans purchased by the Fund may be made to borrowers who are in default under other obligations (e.g., to consolidate debts) or who do not have sources of income that would be sufficient to qualify for loans from other lenders such as banks or savings and loan associations.
Sale of Loans
The Fund expects to acquire mortgage loans and hold them for its own account. The Fund will not engage in real estate operations (other than those which may be required if, among other things, the Fund forecloses upon a property securing a mortgage loan and needs to manage the property until liquidation). The Fund does not presently intend to acquire mortgage loans primarily for the purpose of reselling such loans in the ordinary course of business. However, the Fund may occasionally sell mortgage loans (or fractional interests therein) when the General Partner determines that it is advantageous to the Fund to do so, based upon then current interest rates, the Fund's cash flow requirements, and the investment objectives of the Fund.
Leveraging the Portfolio
The Fund may borrow funds to purchase loans, or for any other purpose and may assign all or a portion of its loan as security for such loans. The Fund anticipates borrowing when the interest rate at which the Fund can borrow is significantly less than the rate that can be earned by the Fund when it acquires loans, giving the Fund the opportunity to earn profit as a "spread". For purposes of illustration, these transactions will typically be loans secured by one or a series of loans belonging to the Fund. Such a transaction involves certain elements of risk and also entails possible adverse tax consequences. (See "Risk Factors", "Income Tax Considerations", and "ERISA Considerations").
The General Partner may also elect to borrow funds from third party lenders, investors and/or financial institutions to finance the Fund's investments in loans. Leverage usually involves a third-party loan in which the Fund's entire asset portfolio may be provided as security to the lender for such loan(s). Such loans typically have terms and conditions that, if breached, can result in the borrower foreclosing on the Fund's assets. Leveraging involves additional risks that are detailed later in this Circular. (See "Risk Factors - Risks of Leveraging the Fund").
FUND PERFORMANCE
As of December 31, 2023, the Fund holds a whole or partial interest in 164 Loans in total aggregate amount of $103,554,773.27. Further, the total distributions made to Limited Partners since the Fund was formed on March 27, 2019 is $17,158,066.36.
Please refer to the table below for more details on the Fund's performance.
Number of Loans owned by the Fund
164
Number of Loans in which the Fund has a participation interest (owns less than all of the Loan)
10
Dollar amount of Loans outstanding
$103,554,773.27
Total distributions made to Limited Partners since inception
$17,158,066.36
Average rate of return, after risk reserve holdback, distributed to Limited Partners since inception1
7.72%
Percentage of Loans by dollar amount that are 1st trust deeds and/or mortgages
98.76%
Percentage of Loans by dollar amount that are 2nd trust deeds and/or mortgages
1.24%
Percentage of Loans by dollar amount secured by residential properties
42.19%
Percentage of Loans by dollar amount secured by non-residential properties
57.81%
Percentage of Loans by dollar amount that are home equity line of credit
0%
Number of Loans in Loss Mitigation2 (61+ days late)
28
Dollar volume of Lonas in Loss Mitigation2
$25,243,237.17
Dollar volume percent of Loans in Loss Mitigation2
24.38%
Number of foreclosed Loans in past 12 months
3
Dollar amount of foreclosed Loans in the past 12 months
$1,257,266.29
Dollar gains or losses on sales of foreclosed real estate in the past 12 months3
-$206,195.77
1The average rate of return is equal to the aggregate of interest payments on Loans outstanding within the distribution period, minus the aggregate of fees paid to the General Partner and any risk reserves attributed on those same loans, represented as an annualized rate of return. Past performance is no guarantee of future performance. Investment returns may vary, and investors should be aware that the investor may potentially lose all of his, her or its investment with the Fund. (See "Risk Factors").
2Loss Mitigation describes the status of a Loan when the General Partner has placed a delinquent borrower under 1) a payment plan to bring the Loan current or 2) payment forbearance or other modification of loan terms in order to restore the Loan to current status. Loss Mitigation is a strategy preferred by the General Partner when it believes the Fund will benefit more than if it pursued foreclosure.
3When the General Partner elects to foreclose on the collateral for a Loan, it evaluates whether the property should be sold or owned as a Fund owned rental property.
FUND MANAGEMENT AND LOAN SERVICING
General
The General Partner will have the sole authority to manage the affairs of the Fund, including the sole authority to: (i) identify and arrange loans and fractional interests to be purchased by the Fund; (ii) monitor and assess loan portfolio performance and set the Fund's accounting procedures; (iii) oversee loan servicing and make loan enforcement decisions; and (iv) otherwise direct the day-to-day operations of the Fund. Limited Partners will have limited rights to vote on or direct the actions of the Fund and must rely upon the General Partner to make decisions in the best interest of the Fund. (See "Risk Factors - Risks Related to the General Partner" and "Conflicts of Interest.")
Loan Origination and Servicing
The General Partner is an Oregon licensed loan origination company and has been originating loans in Oregon and elsewhere since 1997. (See, "The General Partner and Affiliates", "Compensation to the General Partner" and "Conflicts of Interest.")
PacWest will "service" Fund loans, which includes the collection of loan payments, performing administrative services regarding the loan and, if necessary, taking all actions the General Partner deems necessary to enforce the terms of the loan documents upon a default.
If the Fund purchases a fractional interest in a loan, the General Partner expects that it will service the loan on behalf of the Fund and the other fractional interest holders. To the extent the Fund invests in less than 50% of the total fractional interests outstanding in a loan, the Fund will be subject to additional risks not inherent in whole loans or loans in which the Fund holds a majority interest. (See "Risk Factors - Risks Relating to the Fund's Business.") Moreover, by acting as the servicing agent of both the Fund and the other co-lenders, the General Partner is subject to additional conflicts of interest whether or not the Fund holds a majority or minority interest in the loan. (See "Conflicts of Interest").
Fund Accounting
The General Partner shall, in consultation with the Fund's accountants, be responsible for determining the accounting policies and procedures of the Fund. In connection therewith, the General Partner will assess the Fund's portfolio at intervals determined by the General Partner to be reasonable considering current market conditions to account for or recognize any impairment to the loans comprising the Fund's portfolio or to otherwise comply with generally accepted accounting principles ("GAAP").
The General Partner has established a loss reserve to recognize over time the estimated losses on Fund loans and on the sale of properties securing Fund loans acquired through Foreclosure ("Loan Loss Reserve"). These potential losses are charged against monthly Fund income in an amount deemed necessary by the General Partner to accumulate an adequate Loan Loss Reserve considering existing loan losses and estimated loan losses identified periodically by the General Partner over the life of the Fund.
Loans are evaluated for various risk factors including, but not limited to, payment history, current economic conditions, collateral type, initial loan- to - value ratios, current estimated loan-to-value ratios and any other factor that might affect the full recoverability of a Fund loan balance. Delinquent loans are evaluated based upon the duration of the delinquency and the potential that the Fund will not collect all amounts due from a borrower under the loan through payment or through recovery of the full loan balance from the value of the secured property.
The Fund's accounting policy will be to stop accruing interest (for purposes of calculating earnings) on any loan that is delinquent for a period of between thirty and ninety days ("Non-Accrual Status"). Further payments received on Fund loans that have been placed on Non-Accrual Status will be accounted for by the Fund on a cash rather than accrual basis until loan payments are again brought current. If events or circumstances relating to a loan (on Non-Accrual Status or otherwise) cause the General Partner, in its reasonable judgment, to have serious doubts about the full recovery of the entire loan balance due from a borrower, the General Partner may categorize such loan as "impaired" (an "Impaired Loan"). In such an event, the General Partner will attempt to assess the potential loss that may be realized by the Fund resulting from the Impaired Loan and whether the Loan Loss Reserve should be increased to reflect that assessment.
If real estate is acquired by the Fund (an "REO Property") through foreclosure or by deed in lieu of foreclosure the REO Property will be initially established at its fair market value. If the General Partner determines that circumstances may make it more beneficial for the Fund to hold the REO Property until a better sales price may be obtained, the REO Property value will be recorded and carried at the lower of the REO Property's initial cost basis or its current fair market value less estimated costs of sale.
THE FUND'S ACCOUNTING POLICIES INCLUDING THOSE RELATED TO IMPAIRED LOANS, NON-ACCRUAL STATUS AND THE FUND'S LOAN LOSS RESERVE ARE MADE IN CONSULTATION WITH THE FUND'S ACCOUNTANTS IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PROCEDURES. THE GENERAL PARTNER MAY, IN CONSULTATION WITH THE FUND'S ACCOUNTANTS, REVISE ANY ACCOUNTING POLICY AT ANY TIME WITHOUT THE APPROVAL OF, OR NOTICE TO, ANY OF THE LIMITED PARTNERS.
USE OF PROCEEDS
The proceeds from this offering will be used to acquire loans secured by real property as described elsewhere in this Circular. The balance of the proceeds will be used for offering expenses, reserves for redemption and for working capital.
Estimated Use of Proceeds1
Amount
Percentage
Acquisition of loans
$ 250,000,000
100%
Total Estimated Use of Proceeds
$250,000,000
100%
1Does not include offering expenses consisting primarily of attorney fees (estimated to be between approximately $40,000 and $50,000) See "COMPENSATION TO THE GENERAL PARTNER").
COMPENSATION TO THE GENERAL PARTNER
The following summarizes the forms of compensation received by the General Partner. All of the amounts described below are payable regardless of the success or profitability of the Fund. None of the following compensation was determined by arm's length negotiations.
Form of Compensation to the General Partner Estimated Amounts or Method of Compensation
Reimbursement of Expenses: The General Partner has not received reimbursement for the organization costs of the Fund.
The General Partner, however, will be entitled to reimbursement for ongoing out- of-pocket operating expenses of the Fund, including legal, accounting, and other professional and third-party fees.
Management Fee: The General Partner will receive its compensation for managing the Fund by retaining Ten
Percent (10%) of the collected interest on loans acquired by the Fund. For example, if the Fund acquires a loan subject to a monthly interest payment of One Thousand Dollars ($1,000.00), when the payment is received from the borrower, the General Partner will retain One Hundred Dollars ($100.00) of the interest income. Such fees will be payable to the General Partner as payments are received from the borrower, generally scheduled to be monthly.
Servicing Fee: PacWest will receive compensation for servicing the Fund's loans by retaining a portion of the interest that the borrower pays. The amount retained by PacWest for servicing a loan is equal to 10% of the interest collected on loans. PacWest may also receive compensation from borrowers in the form of late fees, assumption, and loan modification fees.
Loan Origination Fees and
Processing Fees: Loan origination fees and loan processing fees are generally collected from borrowers by PacWest, an affiliate of the General Partner. Such fees and points average (in the aggregate) approximately Four Percent (4%) of the principal amount of each loan but could be as high as Six Percent (6%), depending on market conditions.
One Hundred Percent (100%) of the loan origination fees and loan processing fees shall be payable to PacWest. These fees consist of loan processing fees, underwriting fees, document preparation fees, escrow fees, disbursement fees, warehousing fees, administration fees, and other similar charges.
Sale of Real Estate to Affiliates: In the event the Fund becomes the owner of any real property by foreclosure or deed in
lieu of foreclosure of a loan, the Fund may sell such property to an Affiliate of the General Partner provided: (a) the General Partner has used its best efforts to sell any property at a fair price on the open market for at least ninety (90) days; (b) the property has been offered to the marketplace, including through Multiple Listing Service publication for a period of no less than ninety (90) days, (c) the net purchase price must be more favorable to the Fund than any third-party offer received, if any. If the above conditions have been met, an Affiliate of the General Partner may receive a real estate commission in connection with the sale.
Loan Extension/Renewal Fees: 1%-2% of the outstanding loan amount.
Other Potential Compensation: The General Partner may negotiate additional fees payable by borrowers on a case-by-case
basis including exit fees, shared income or equity appreciation payments on shared income and shared appreciation loans, if any. In such circumstances the General Partner will be entitled to retain all or a portion of such fees.
Compensation which may be received by the General Partner is illustrated in the following table:
Consideration to General Partner
Amount of Consideration
Purpose of Consideration
Timing of Payment
Management Fee1
10% of interest collected on loans owned by the Fund
Fund management
Monthly
Servicing Fee1
10% of interest collected on loans owned by the Fund
Servicing and administrating loans owned by the Fund
Monthly
Late Charges
Late fees paid by borrowers
Additional collection costs
involved in handling accounts in arrears
Upon payment of late charges
Loan Extension/Renewal Fees
1-2% of loan amount
Servicing costs associated with revising loan documents and negotiations with borrower
At time of loan modification
Carried Interest
50% of the Fund income after payment
of the Preferred Return
Incentive to maximize income
Annually
1The management and servicing fees are calculated as follows: assume the Fund acquires a loan bearing interest at 12 % per annum, the General Partner will receive a management fee equal to 1.2% per annum and a servicing fee equal to 1.2% per annum, reducing the Fund's interest received to 9.6% per annum assuming all payments are made on the loan.
THE GENERAL PARTNER AND AFFILIATES
The General Partner is PacWest Funding, Inc, an Oregon corporation, which will manage and direct the affairs of the Fund. Loans will be arranged and serviced, and the Fund assets will be managed by the General Partner.
Kevin Simrin has been in the real estate and mortgage business since 1989. Kevin, age 60, is the CEO of PacWest Funding Inc., a licensed loan origination company in the state of Oregon. Mr. Simrin, e, is a member of the American Association of Private Lenders and is a Certified Fund Manager (CFM). He is a Past President of the Eugene Association of Realtors. Mr. Simrin will oversee all activity of the General Partner. He has been selecting loans similar to those the Fund acquires for more than ten years, and for an affiliated company which has sponsored a private fund also acquiring loans secured by real property since 2018.
Affiliated Businesses
The General Partner will originate, process, underwrite and fund most, if not all, of the loans the Fund acquires. The compensation that PacWest generates from Loan origination is paid for by the borrower, not the Fund. In addition to originating loans, PacWest will also be servicing the loans the Fund owns. PacWest will receive its compensation for servicing the loans by retaining a portion of the interest that the borrower pays, and other fees as described above. (See the "Compensation to the General Partner").
The General Partner has sponsored an annual offering of joint venture interests which have been registered with the Oregon Department of Financial Regulation since May 7, 2009 (the "Joint Venture Offering").
The Joint Venture Offering currently offers up to $75,000,000 annually in an aggregate purchase price of percentage interests in various newly formed Oregon joint ventures (the "Joint Venture(s)") of which PacWest is the sponsor. Specific Joint Ventures have been formed to purchase and own deeds of trust (securing promissory notes made by owners of real property primarily in Oregon (the "Loan Properties"). The Loan Properties are selected by PacWest Funding, whom also serves as manager of each Joint Venture and receives compensation of approximately 2% to 3% of the annual interest rate percentage yield. PacWest is also responsible for servicing each Joint Venture's loan as described in a participation agreement by and among PacWest and the joint-ventures, whereby the holders of interests in each Joint Venture loan (including the Fund) pay any accrued but unpaid servicing fees pursuant to the assessment provisions provided in the loan servicing agreement entered into regarding the loan.
Kevin Simrin is the sole member of PacOne, LLC, an Oregon limited liability company which is the general partner of Pac One Fund, LP, a Delaware limited partnership which also acquires loans from the General Partner and is engaged in a business similar to that of the Fund.
Other Activities of the General Partner and Affiliates
The General Partner and its officers, employees and agents are not required to manage the Fund as their sole and exclusive function and will devote so much of their time to the business and affairs of the Fund as may, in their discretion, be necessary to conduct the affairs of the Fund for the benefit of the Fund and the Limited Partners. The General Partner and its managers, employees and agents may engage, and are engaged in other business activities, including any business within the securities and/or the insurance industry, regardless of whether such business is in competition with the Fund. For example, an affiliate of the General Partner sponsors a limited partnership with similar investment and business objectives as that of the Fund and the General Partner sponsors the Joint Venture Offering. Neither the Fund nor any of the Limited Partners shall have any rights in such independent ventures, and the General Partner and its managers, employees and agents are under no obligation, legal or otherwise, to offer the Fund or any Partner the opportunity of operating, managing or investing in any other enterprise or services.
IT SHOULD NOT BE ASSUMED THAT INVESTORS IN THE OFFERING COVERED BY THIS CIRCULAR WILL EXPERIENCE RETURNS, IF ANY, COMPARABLE TO THOSE EXPERIENCED BY INVESTORS IN ANY PRIOR OFFERINGS OF THE GENERAL PARTNER, THE PRINCIPALS OR THEIR AFFILIATES.
Indemnification
The Fund, its receiver, or its trustee will defend, indemnify, hold harmless, and pay all judgments and claims against the General Partner and any manager, partner, employee, affiliate or agent of the General Partner, and/or the legal representatives or controlling persons of any of them and any employee or agent of the General Partner, relating to any liability or damage incurred by reason of any act performed or omitted to be performed by the General Partner in connection with the business of the Fund, including reasonable attorneys' fees incurred by the General Partner in connection with the defense of any action based on any such act or omission (which attorneys' fees will be paid as incurred), including all such liabilities under federal and state securities laws (including the Securities Act of 1934, as amended) as permitted by law; provided, however, that the person whose act or omission caused the liability, loss or damage must have determined, in good faith, that such course of conduct was: (i) in the best interests of the Fund, and (ii) did not constitute fraud, gross negligence or willful misconduct. Any indemnification under the Limited Partnership Agreement shall be recoverable only from the assets of the Fund and not from the assets of the Partners. All judgments against the Fund and a person indemnified hereunder, wherein such person is entitled to indemnification, must first be satisfied from Fund assets before such person will be responsible for any such obligations.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING AN ISSUER PURSUANT TO THE FOREGOING PROVISIONS, THE GENERAL PARTNER HAS BEEN INFORMED 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 of any action by any Partners against the General Partner, including a partnership derivative suit, the Fund will indemnify, hold harmless, and pay all expenses of the General Partner, including reasonable attorneys' fees, incurred in the defense of such action if the General Partner is successful in such action.
Responsibilities of the General Partner
The General Partner is accountable to the Limited Partners to the limited extent as set forth in this Circular and the Limited Partnership Agreement. The General Partner will conduct the affairs of the Fund in the best interests of the Fund and of the Partners.
The General Partner will provide the Limited Partners with summary financial information on a monthly basis and more complete financial statements regarding matters affecting the Fund and each Limited Partner's Interests in accordance with the Limited Partnership Agreement. Each Limited Partner, at such Limited Partner's expense, shall have the right to inspect the Fund's business records during normal business hours as may be reasonably requested by such Limited Partner; provided, however, that the Fund shall not be obligated to provide access to any information that it reasonably and in good faith considers to be confidential information.
The General Partner shall take all actions necessary or appropriate for (i) the continuation of the Fund's valid existence as a limited partnership under the laws of the State of Delaware (and of each other jurisdiction in which such existence is necessary to protect the limited liability of the Partners or to enable the Fund to conduct the business in which it is engaged), and (ii) the accomplishment of the Fund's purposes, including acquiring and servicing loans and any undivided interest therein in accordance with the provisions of this Agreement and applicable laws and regulations.
Termination/Withdrawal of General Partner
The General Partner may only be removed upon an affirmative vote of the Limited Partners holding a majority of the aggregate Units at a meeting called expressly for such removal. The General Partner may be removed for cause for any one of the following reasons:
(i) illegal activity; (ii) fraud, dishonesty, act of moral turpitude or any other act or misconduct; or (iii) gross negligence. If the General Partner is removed it shall not receive any further fees as of the date of such removal but shall not affect its rights as a Partner and it shall continue to participate in any rights to distributions under the Limited Partnership Agreement. In such case, a new general partner may be appointed by Limited Partners holding a majority of the aggregate Units,
The General Partner may withdraw upon sixty (60) days prior written notice to the Partners. Upon such withdrawal, a majority of the aggregate Units must consent to elect a new general partner and to elect to continue the business of the Fund. Provided, however, the General Partner may resign and appoint a successor general partner without the requirement of such consent upon thirty days' notice to the Limited Partners. Substitution of a new general partner will be effective upon written acceptance of the duties and responsibilities under the Limited Partnership Agreement by the new general partner. The failure of the Partners to elect to continue the business of the Fund if the General Partner withdraws or to elect a new general partner as required by the Limited Partnership Agreement, or failure of the new general partner so elected to execute written acceptance of the duties and responsibilities of a general partner shall cause the termination and liquidation of the Fund.
Prospective investors should read the Limited Partnership Agreement attached hereto as Exhibit A. The Limited Partnership Agreement sets forth the specific provisions relating to the management of the Fund.
RISK FACTORS
Any investment in the Units involves a significant degree of risk and is suitable only for investors who have no need for liquidity in their investments or who can bear the loss of their entire investment. When analyzing this offering, prospective investors should carefully consider the following risks and other factors, in addition to those discussed under the captions "Compensation to the General Partner," "Conflicts of Interest," and "Federal Income Tax Considerations." If any of these risks actually occur, the business, financial condition and operating results of the Fund could be materially adversely affected.
Risks Related to the Fund's Business
The Fund will be in the lending business and subject to risks related to private money and high-yield mortgage loans.
The Fund may acquire loans to borrowers who are less creditworthy than those who can satisfy institutional lenders' credit requirements or who cannot satisfy institutional lenders' income documentation requirements. (See "Fund Business and Lending - Lending Standards and Policies.")
The Fund loans may also be made on an asset rather than credit basis. Such loans involve numerous risks, some of which include: (i) an increased risk of the non-availability of credit for a borrower to refinance a Fund loan at maturity; (ii) an increased risk of foreclosures in the area surrounding the secured property negatively affecting the value of the property securing a Fund loan; (iii) increased constraints on consumer credit affecting the ability of borrowers to sell residential property; and (iv) an increased risk of an abandonment of property by a borrower due to other financial problems or general market decline. The occurrence of any of these events for a borrower could lead to a default upon a Fund loan, potentially causing losses and extra costs to the Fund, which may lead to lower returns or losses for investors.
The Fund could suffer defaults on the loans in its portfolio and may have to foreclose on the underlying real estate collateral.
The Fund is in the business of lending money and, as such, takes the risk of defaults by borrowers. Most Fund loans will provide for relatively small monthly payments of interest with a large "balloon" payment of principal due at the end of the term. Most borrowers are unable to repay the principal amount of such loans out of their own funds and therefore must sell the real property security or refinance at maturity. A downturn in the real estate market, fluctuations in interest rates and the unavailability of mortgage funds could adversely affect the ability of borrowers to pay off or refinance their loans at maturity. If the real property security consists of undeveloped land, it may be more difficult for the borrower to sell or refinance its loan than if the real property security were improved real estate because undeveloped land is generally viewed as riskier and more speculative form of investment in real property security than improved real estate.
The Fund's loans typically do not satisfy the "Qualified Mortgage Rule" criteria and could expose the Fund to incur penalties or fees.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") created new restrictions on how creditors make loans and led to the creation of new ability-to-repay requirements ("ATR Requirements") and the Qualified Mortgage Rule (the "QM Rule"). The ATR Requirements require lenders to make a reasonable, good faith determination that a borrower has a reasonable ability to repay a mortgage before making a loan. To meet the ATR Requirements, lenders must comply with strict underwriting standards. Lenders that do not satisfy the underwriting standards set forth in the ATR Requirements could be liable for the borrower's finance charges, fees, and the borrower's legal fees, among other penalties. However, lenders meeting the requirements of the QM Rule avoid the necessity of proving compliance with the ATR Requirements and are presumed to have complied. A qualified mortgage that is not a "higher-priced" mortgage is conclusively presumed to comply with the ATR Requirements, while a "higher-priced" loan is favored with a rebuttable presumption of compliance. Because the Fund invests in Loans that generally do not satisfy the QM Rule, a borrower may contest the Fund's ATR Requirement determination as a defense to a foreclosure action and may cause the Fund to incur significant penalties and fees.
The real estate market may experience stagnation and declines in property values.
During the real estate market declines following the financial crisis, the most dramatic and well-publicized declines in property values (and the largest loan losses) occurred in the single-family residential sector; however, other property categories, including commercial and non-owner occupied residential, also experienced significant declines in value and a dramatic slow-down in sales. If the market value of property securing Fund loans declines significantly or declines below the amount of a Fund loan on such property, borrowers may have difficulty paying or refinancing the loan or selling the property, causing losses to the Fund and investors. Moreover, any lack of real estate sales volume in the market may affect the General Partner's ability to accurately value the Fund's assets to make withdrawal distributions, potentially resulting in excessive or deficient distributions to withdrawing Limited Partners.
A pandemic could seriously adversely impact and disrupt the Fund's financial condition and results of operations and may cause widespread disruptions and downturns in the U.S. and global economy.
The current outbreak of the novel coronavirus, or COVID-19, or the future outbreak of any other highly infectious or contagious diseases, could seriously adversely impact or cause disruption to the Fund's financial condition and results of operations. Further, the spread of the COVID-19 outbreak has caused severe disruptions in the U.S. and global economy, may further disrupt financial markets, and could potentially continue to create widespread business continuity issues.
The effects of COVID-19 or another pandemic on the Fund's ability to successfully operate or the underlying mortgage borrowers' ability to operate and continue to make mortgage payments could be adversely impacted due to, among other factors:
* disruptions in the continued service and availability of personnel, including the Fund's or the underlying mortgage borrowers' officers, management teams, operational personnel, income earning, and any of the commercial borrowers' or the Fund's ability to recruit, attract and retain skilled personnel. To the extent the Fund's or the underlying mortgage borrowers' management, personnel or income earning residents are impacted in significant numbers by the outbreak of a pandemic or epidemic disease and are not available or allowed to conduct work, the Fund's business and operating results may be negatively impacted;
* difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect the Fund's or the Fund's underlying mortgage borrowers' ability to access capital necessary to fund business operations, mortgage payments, or replace or renew maturing liabilities on a timely basis, and may adversely affect the valuation of financial assets and liabilities, any of which could affect the ability to meet liquidity and capital expenditure requirements or have a material adverse effect on business, financial condition, results of operations and cash flows;
* the Fund and the Fund's underlying mortgage borrowers' ability to operate in affected areas, or delays in the supply of products or services from the Fund's or the Fund's underlying mortgage borrowers' vendors that are needed to operate effectively;
* the Fund's underlying mortgage borrowers' inability to pay their mortgages or to obtain additional financing to meet their capital needs on favorable terms will have a material adverse effect on the Fund's business, financial condition, result of operations and cash flows; and
* the Fund and the Fund's underlying mortgage borrowers' failure to ensure business continuity in the event of a disruption.
COVID-19 and the current financial, economic, and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to the Fund's performance, financial condition, results of operations and cash flows. The same could hold true in the event of a future outbreak of a highly infectious or contagious disease.
Risks Related to Borrower's Financial Status
The General Partner will evaluate the creditworthiness of a borrower based on a review of financial information provided by the borrower, and by making other inquiries (e.g., running a credit check). However, this financial information and these inquiries will be given and made as of a specific point in time. The financial condition and/or credit status of the borrower could change thereafter.
If a loan is secured by hypothecated notes, the creditworthiness of the borrowers under the hypothecated notes may affect the value of the hypothecated notes as security. The Fund may not be able to obtain any credit information about the borrowers under hypothecated notes, or the amount of credit information that the Fund is able to obtain may be less than it would obtain while evaluating the creditworthiness of the primary borrower. The Fund will look principally to the payment history under a hypothecated note in deciding if it will accept the hypothecated note as security.
The Fund may not be able to obtain credit information about a borrower under a Note that the Fund is contemplating purchasing. As with hypothecated notes, the Fund will look principally to the payment history under the Note in deciding if it will purchase the Note.
If the Fund cannot collect all the principal and interest due on its loans, the Fund's ability to earn a profit or to fund withdrawals will be impaired.
The Fund's liquidity is dependent on, among other things, payments by borrowers of principal and interest on Fund loans. The General Partner will continually monitor the delinquency status of the Fund's loan portfolio and promptly institute collection activities on delinquent accounts, but these efforts may ultimately prove unsuccessful. Loan repayments are also likely to be affected by economic conditions in the real estate market. Any failure by the Fund, for any reason, to collect nearly the entire principal and interest on Fund loans may impair the Fund's ability to operate successfully and to make withdrawal distributions to requesting Limited Partners unless the net proceeds earned on the sale of the properties securing the loans are adequate to cover such amounts and can be realized on a timely basis.
Fund loans may be subject to the additional risks related to "due-on- further encumbrance" clauses.
Most first deeds of trust contain "due-on- further encumbrance" clauses permitting the holder to declare a default and accelerate a loan if the borrower executes an additional deed of trust on the secured property in favor of a junior lienholder. In such cases, a second mortgage loan purchased by the Fund would entitle the senior lienholder to commence foreclosure, which would jeopardize the Fund's investment. Such clauses are generally enforceable (except where the secured property consists of 1-4-unit residential property). If the Fund purchases a second mortgage loan, the General Partner generally will not have sought the prior written consent of the senior lienholder. This could place the Fund's investment at risk if the senior lienholder declares an event of default.
The Fund will be operating in a highly competitive business.
Due to the nature of the Fund's business, its profitability will depend to a large degree upon the future availability of secured loans. The Fund will compete with other private money lenders, institutional lenders and others engaged in the mortgage lending business, including banks and savings institutions, many of which have greater financial resources and experience than the Fund. If these companies increase their marketing efforts to include the Fund's market of borrowers, or if additional competitors enter these markets, the Fund may be forced to reduce its interest rates and fees to maintain or expand its market share. Any reduction in interest rates or fees charged could have an adverse impact on the Fund's liquidity and profitability.
A decline in the demand for, or increase in the risks of, real estate financing will impair the Fund's ability to purchase loans or could jeopardize repayment.
A variety of factors affect the demand for real estate financing, including, without limitation, economic cycles, demand for and availability of new development and construction, competitive pressures, the availability and cost of labor and materials, changes in costs associated with real estate ownership, changes in consumer preferences, demographic trends and the availability of mortgage financing. The Fund will be directly and materially affected by the same risks faced by borrowers as well as those inherent to the commercial and residential real estate development and construction industries. During the Great Recession, the U.S. experienced
significant deterioration in certain sectors of the real estate, credit, and mortgage markets. Any similar deterioration in the future may negatively impact on the Fund's ability to purchase suitable real estate loans. Any reduction in the cash flows, income of or financial condition of commercial and residential real estate borrowers because of any of the aforementioned factors or others may significantly impair their ability to repay the Fund, which would increase the possibility that delinquencies would occur, that the Fund would incur losses and that Limited Partners would lose some or all their investment in the Units.
A decline in real estate values will impair the collateral for Fund loans.
Declining real estate values or an increase in interest rates will increase the probability of a loss in the event of a borrower default on Fund loans. In the event of another significant deterioration of the real estate market, the value of the real estate or other collateral securing Fund loans may not, at any given time, be sufficient to satisfy the outstanding principal amount and accrued interest on such loans. If a borrower were to default, and if the collateral were insufficient, the Fund would suffer a loss and Limited Partners could lose some of or their entire investment.
The Fund expects to lend to credit-impaired borrowers, which may make its investment portfolio susceptible to high levels of default risk.
The Fund expects to lend money to borrowers that that do not meet ATR Requirements or the QM Rule, and accordingly are either unable or unwilling to obtain financing from traditional sources, such as commercial banks. Loans made to such individuals or entities may entail a high risk of delinquency and loss. Higher than anticipated delinquencies, foreclosures or losses will adversely affect the Fund's profitability and results of operations and may result in a loss of some or the entirety of the Limited Partners' investment in Units.
The purchase of a minority interest in a loan may affect the ability of the Fund to direct loan enforcement decisions.
The Fund may purchase undivided fractional interests in loans arranged by the General Partner on behalf of the Fund and other lenders. (See "Fund Management and Loan Servicing - Loan Brokerage and Servicing.") In such circumstances, the General Partner will service the loan as the agent of the Fund, as well as the other purchasers of interests in the loan and could be subject to additional conflicts of interests in determining the appropriate actions to take on behalf of all the lenders. (See "Conflicts of Interest").
The Fund may be assuming additional risk by leveraging its portfolio
The Fund may borrow funds from a third-party lender, investors, and/or financial institutions to acquire loans and properties. These loans may be secured by the loans held by the Fund. In order to obtain such a loan, the Fund may also assign part or its entire asset portfolio to the lender. Such borrowed money may bear interest at a variable rate, whereas the Fund may be making fixed rate loans. Therefore, if prevailing interest rates rise, the Fund's cost of money could exceed the income earned from that money, thus reducing the Fund's profitability or causing losses. Furthermore, leveraging the Fund may also result in the receipt of some taxable income by investors (such as ERISA plans) that are otherwise tax-exempt. (See "Federal Income Taxation Considerations").
The General Partner may enter into Side Letters which may provide favorable treatment from one investor over another.
The Fund may from time to time enter into Side Letters with various individual fund investors one or more Limited Partners which provide such Limited Partners(s) with additional and/or different rights (including, without limitation, with respect to access to information, incentive allocations, minimum investment amounts, and liquidity terms) than such Limited Partners(s) have pursuant to this Circular. As a result of such Side Letters, certain Limited Partners may receive additional benefits (including, but not limited to, reduced fee or incentive allocation obligations, the ability to withdraw Partnership Interests on shorter notice, and/or expanded informational rights) which other Limited Partners will not receive. For example, a Side Letter may permit a Limited Partners to withdraw Partnership Interests on less notice and/or at different times than other Limited Partners. As a result, should the Fund experience a decline in performance over a period of time, a Limited Partners that is party to a Side Letter that permits less notice and/or different withdrawal times may be able to withdraw Partnership Interests prior to other Limited Partners. The General Partner will not be required to notify any or all Limited Partners of any such Side Letters or any of the rights and/or terms or provisions thereof, nor will the General Partner be required to offer such additional and/or different rights and/or terms to any or all Limited Partners. The General Partner may enter into such Side Letters with any party as the General Partner may determine in its sole and absolute discretion at any time. Limited Partners will have no recourse against the Fund, the General Partner and/or any of their Affiliates in the event that certain Limited Partners receive additional and/or different rights and/or terms as a result of such Side Letters.
Risks Related to the Use of Borrowed Funds
The Fund plans on incurring mortgage and other indebtedness, which could result in material risk to investors if there is a default, including the loss of the real property.
Borrowings may increase the risks of owning Units. As of the date of this Circular, the Fund has drawn % of its $5,000,000 line of credit . If there is a shortfall between the cash flow generated by the Fund's properties and the cash flow needed to service indebtedness, then the amount available for distributions to Limited Partners will be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, the Fund could lose the property securing the loan that is in default, thus reducing the value of the Fund's portfolio. If any mortgages or other indebtedness contain cross-collateralization or cross-default provisions (which the general Partner will seek to avoid), a default on a single loan could affect multiple properties.
Additionally, when providing financing, a lender may impose restrictions that affect the Fund's distribution and operating policies and its ability to incur additional debt. The loan documents we enter may also contain covenants that limit the Fund's ability to further leverage a property.
As the Fund incurs indebtedness which may be needed for operations, it will correspondingly increase expenses which could result in a decrease in cash available for distribution to our stockholders.
Debt service payments decrease cash available for distribution. In the event the fair market value of the Fund's properties was to increase, we could incur more debt without a commensurate increase in cash flow to service the debt.
Debt financing, the degree of leverage and rising interest rates could reduce cash flow.
The Fund will use debt to allow it to make more investments than it otherwise could. The use of leverage presents an additional element of risk in the event that the cash flow from properties owned is insufficient to meet both debt payment obligations and the distribution requirements of the REIT provisions of the Code. In addition, rising interest rates would reduce cash flow by increasing the amount of interest due on any floating rate debt and on any fixed rate debt as it matures and is refinanced.
Risks Related to the Ownership of Real Property
The Fund's business entails risks related to the ownership of real property.
When the Fund acquires any equity in real property by foreclosure or otherwise, the Fund is exposed to the risks of liability incident to real property ownership or tenancy. Owners of real property may be subject to liability for injury to persons and property occurring on the real property or related to the activity conducted thereon, as well as liability for failure to comply with governmental regulations. In addition, there is no assurance that the Fund's owned properties will be profitable or that cash from operations will be available for distribution. Because real estate, like many other types of long-term investments, historically has experienced significant fluctuations and cycles in value, specific market conditions may result in occasional or permanent reductions in value of property interests. The marketability and value of the Fund's properties will depend upon many factors beyond the control of the General Partner and the Fund, including, without limitations: (1) changes in general or local economic conditions; (2) changes in supply or demand for competing properties in an area (e.g., as a result of over-building); (3) changes in interest rates; (4) the promulgation and enforcement of governmental regulations relating to land use and zoning restrictions, environmental protection, and occupational safety; (5) condemnation and other taking of property by the government; (6) unavailability of mortgage funds that may increase borrowing costs and/or render the sale of a property difficult; (7) unexpected environmental conditions; (8) the financial condition of tenants, ground lessees, ground lessors, buyers and sellers of properties; (9) changes in real estate taxes and any other operating expenses; (10) energy and supply shortages and resulting increases in operating costs or the costs of materials and construction; (11) various uninsured, underinsured or uninsurable risks (such as losses from terrorist acts), including risks for which insurance is unavailable at reasonable rates or with reasonable deductibles; and (12) imposition of rent controls.
The Fund may suffer from risks related to development, renovation and undeveloped property.
The General Partner anticipates that the Fund may invest primarily in existing properties that require varying degrees of development. In addition, some properties may be under construction or under contract to be developed or redeveloped. Properties that involve development or redevelopment will be subject to the general real estate risks described above and will also be subject to additional risks, such as unanticipated delays or excess costs due to factors beyond the control of the General Partner and the Fund. These factors may include (without limitation): (1) strikes; (2) adverse weather; (3) earthquakes and other "force majeure" events; (4) changes in building plans and specifications; (5) zoning, entitlement and regulatory concerns, including changes in laws, regulations, elected officials and government staff; (6) material and labor shortages; (7) increases in the costs of labor and materials; (8) changes in construction plans and specifications; (9) rising energy costs; (10) delays caused by the foregoing (which could result in unanticipated inflation, the
expiration of permits, unforeseen changes in laws, regulations, elected officials and government staff, and losses due to market timing of any sale that is delayed); and (11) delays in completing any development or renovation project will cause corresponding delays in the receipt of operating income and, consequently, the distribution of any cash flow by the Fund with respect to such property.
The Fund may suffer from uninsured losses.
The General Partner will require comprehensive title, fire, and casualty insurance (as applicable) on the properties securing the Fund's loans. At the General Partner's discretion, the General Partner may also require earthquake insurance, but will not generally do so. However, there are certain types of losses (generally of a catastrophic nature) which are either uninsurable or not economically insurable, such as losses due to war, floods, mudslides, or other acts of God. Should any such disaster occur, or if casualty insurance lapses through oversight, the Fund could suffer significant loan losses.
The industry in which the Fund will be active is not extensively regulated or supervised.
The investment practices of the Fund are not supervised or regulated by any federal or state authority, except to the extent that the lending and brokerage activities of the General Partner are subject to supervision or regulation by the Oregon Department of Consumer and Business Services. A return on a Limited Partner's investment is completely dependent upon the successful operation of the Fund's business. To the extent that the Fund does not operate successfully for any reason, its ability to return Limited Partners' investments and earn a profit is limited.
Lending laws and other laws and regulations applicable to the Fund's business may be amended in the future and affect the Fund's ability to operate.
The laws and regulations applicable to the Fund's offering of Units are subject to amendment by federal and state regulators and agencies. Changes in such laws and regulations that may result from future federal, state, or municipal actions, judicial decisions, or interpretations of existing laws and regulations could affect the ability of the Fund to operate under its current business plan. (See "Fund Business and Lending.") Following the 2008-2009 financial crisis, a great deal of new federal and state legislation was enacted to regulate the mortgage lending business far more closely. To date, most such legislation has been primarily focused on owner- occupied residential mortgage loans made for personal, family or consumer purposes.
There are risks of government action if the General Partner or the Fund does not comply with all applicable laws and regulations.
While the General Partner will use its best efforts to comply with applicable local, state, and federal lending regulations applicable, there is the possibility of governmental action to enforce any alleged violations of such lending laws which may result in legal fees, damage awards or fines and penalties.
The Fund may be responsible for environmental liabilities.
Under current federal and state law, the owner of real property contaminated with toxic or hazardous substances (including a mortgage lender that has acquired title through foreclosure) may be liable for all costs associated with any remedial action necessary to bring the property into compliance with applicable environmental laws and regulations. This liability may arise regardless of who caused the contamination or when it was caused.
The Fund does not and will not participate in the on-site management of any facility on the property to minimize the potential for liability for cleanup of any environmental contamination under applicable federal, state, or local laws. There can be no assurance that the Fund would not incur full recourse liability for the entire cost of any such removal and cleanup, or that the cost of such removal and cleanup would not exceed the value of the property. In addition, the Fund could incur liability to tenants and other users of the affected property, or users of neighboring property, including liability for consequential damages. The Fund would also be exposed to risk of lost revenues during any cleanup, and to the risk of lower lease rates or decreased occupancy if the existence of such substances or sources on the property becomes known. If the Fund fails to remove the substances or sources and clean up the property, it is possible that federal, state and/or local environmental agencies could perform such removal and cleanup and impose and subsequently foreclose liens on the property for the cost thereof. The Fund may find it difficult or impossible to sell the property prior to or following any such cleanup. The Fund could be liable to the purchaser thereof if the General Partner knew or had reason to know that such substances or sources existed. In such a case, the Fund could also be subject to the costs described above. If toxic or hazardous substances are present on real property, the owner may be responsible for the costs of removal or treatment of the substances. The owner may also incur liability to users of the property or users of neighboring property for bodily injury arising from exposure to such substances. If the Fund is required
to incur such costs or satisfy such liabilities, this could have a material adverse effect on Fund profitability. Additionally, if a borrower is required to incur such costs or satisfy such liabilities, this could result in the borrower's inability to repay its loan from the Fund.
Even if the Fund does not foreclose on a contaminated site, the mere existence of hazardous substances on the property may depress the market value of the property such that the loan is no longer adequately secured.
A lender's best protection against environmental risks is to thoroughly inspect and investigate the property before making or investing in a loan. The General Partner may take some precautions to avoid environmental problems but is not required to engage in any specific environmental review of the property. When deemed appropriate by the General Partner prior to making a loan, the Fund may engage a qualified environmental inspection firm to conduct an environmental review of the property (which may or may not include a Phase I or other level of environmental review). However, due to the nature of many types of environmental contamination, the possibility of the existence of toxic substances may not be apparent from a site visit, and the General Partner will generally not conduct any environmental review on properties not known or suspected to have environmental problems. Moreover, even if an environmental review is conducted, it may not reveal the extent or all types of contamination. As a result, it is possible that a security property could have toxic contamination not known to the General Partner at the time of making the subject loan.
The Fund may be subject to the additional risks associated with undeveloped land.
The property that secures a loan may consist of undeveloped land. For numerous reasons, undeveloped land is generally considered a riskier and more speculative form of security for a loan than is improved real estate. For example, before improvements can be constructed on undeveloped land the owner of the land may need to secure entitlements (e.g., zoning approvals, variances, and architectural approvals), undergo review of and obtain clearance on environmental impact issues (including, but not limited to issues concerning traffic, open space, school or transit impact, endangered species, wetlands, noise and air quality), obtain building permits, secure access and connections to necessary utilities, obtain construction financing, undertake and complete construction, and find buyers or tenants once the undeveloped land has been improved. Many of these risks are no longer an issue with improved real estate.
Moreover, it is likely that undeveloped land will not generate any income that can be used to pay the interest and/or principal owing under the loan or real property taxes assessed against the undeveloped land. Accordingly, the borrower must have other sources of income to make these payments. If hypothecated notes are secured by undeveloped land, then the borrowers under such hypothecated notes must also have other sources of income to make their payments under the hypothecated notes.
Even if the owner of undeveloped land intends to hold the undeveloped land for investment, rather than developing the land itself, any prospective purchaser of the undeveloped land will take these risks into account when it sets the purchase price. Additionally, it can take up to several years or more to market and sell undeveloped land. Due to this potentially protracted time frame, it may be difficult for the owner of undeveloped land to sell the undeveloped land in time to pay off the loan at maturity. Finally, most lenders are more reluctant to lend against undeveloped land than against improved real estate due to the risks and other matters described above. Due to these considerations, it may be more difficult for a borrower to sell or refinance the real property security to repay the loan, or for the borrowers under hypothecated notes to sell or refinance to repay the hypothecated notes.
In acknowledgment of these increased risks, the Fund will not purchase a loan secured by undeveloped land that exceeds 50% of the current fair market value of the undeveloped land. This does not, however, eliminate the risks described above. It merely provides the Fund with a greater equity cushion should the borrower default on a loan, but the Fund would still suffer a loss if the property value fell by almost half, which can easily occur with undeveloped land.
The Fund will face an ongoing risk of litigation.
The General Partner will act in good faith and use reasonable judgment in selecting borrowers and managing the loans. However, as a lender, the General Partner and the Fund are exposed to the risk of litigation by a borrower for any allegations by the borrower (warranted or otherwise) regarding the terms of the loans or the actions or representations of the General Partner in making, managing, or foreclosing on the loans. It is impossible for the General Partner to foresee what allegations may be brought by a specific borrower. The General Partner will use its best efforts to avoid litigation if, in the General Partner's judgment, the circumstances warrant an alternative resolution. If an allegation is brought and/or litigation is commenced against the Fund or the General Partner, the Fund will incur legal fees and costs to respond to the allegations and to defend any resulting litigation. If the Fund is required to incur such fees and costs, this could have an adverse effect on Fund profitability.
The Fund will not register as an "investment company" under the Investment Company Act of 1940.
The Fund will not be registered as an "investment company" under the Investment Company Act of 1940 (the "ICA") in reliance upon Sections 3(c)(5) thereof. Accordingly, Limited Partners will not receive the protections afforded by the ICA to investors in a registered investment company.
There may be unforeseen circumstances beyond the control of the General Partner that may adversely affect the Fund.
While the Fund has enumerated certain material risk factors herein, it is impossible to know all the risks which may arise in the future. In particular, Limited Partners may be negatively affected by changes in any of the following: (i)laws, rules and regulations; (ii) regional, national and/or global economic factors and/or real estate trends; (iii) the capacity, circumstances and relationships of partners of Affiliates, the Fund or the General Partner; (iv) general changes in financial or capital markets, including (without limitations) changes in interest rates, investment demand, valuations or prevailing equity or bond market conditions; or (v) the presence, availability or discontinuation of real estate and/or housing incentives.
The Fund continuously encounters changes in its operating environment, and the Fund may have fewer resources than many of its competitors to continue to adjust to those changes. The operating environment of the Fund is undergoing rapid changes, with frequent introductions of laws, regulations, competitors, market approaches, and economic impacts. Future success will depend, in part, upon the ability of the Fund to address the needs of its borrowers, sponsors and clients by adapting to those changes and providing products and services that will satisfy the demands of their respective businesses and projects. Many of the competitors have substantially greater resources to adapt to those changes. The Fund may not be able to effectively react to all of the changes in its operating environment or be successful in adapting its products, services and approach.
Risks Related to the General Partner
The loans in which the proceeds of this offering will be invested have not yet been identified, and Limited Partners will have no opportunity to review potential Fund loans. The General Partner will make all decisions with respect to the management of the Fund, including the determination as to what loans to purchase. Additionally, the Fund is dependent to a substantial degree on the continued services of the General Partner and its principals. In the event of the dissolution of the General Partner or the death, retirement or other incapacity of Mr. Simrin, the business and operations of the Fund may be adversely affected.
The Limited Partners will not have the ability to control the day-to-day operations of the Fund or to control the General Partner. It will be difficult to remove the General Partner.
The Limited Partners will not have a voice in the management decisions of the Fund and can exercise only a very limited amount of control over the General Partner. The Limited Partners have only the voting rights set forth in the Limited Partnership Agreement or required by Delaware law. A vote of a majority in interest of the Limited Partners (a "Partner Majority") is required to remove the General Partner. Because there may be a significant number of Limited Partners holding Units, and Limited Partners may have differing opinions with respect to a course of action to take respecting the Fund, it may be difficult, time consuming and costly to solicit adequate votes to remove the General Partner.
The General Partner is not required to devote its full time to the business of the Fund.
The General Partner is not required to devote its full time to the Fund's affairs, but only such time as the affairs of the Fund may reasonably require. The principal of the General Partner has ongoing business outside of and in addition to the business of the Fund, which will compete for the General Partner's time and resources.
No Assurance that Preferred Return will be Paid
There can be no assurance that the Fund will generate sufficient net income to permit the Preferred Return to be paid. Since the Units are equity, and not debt instruments, the Fund's ability to generate net income equal to 8.25% of Capital Contributions is critical to its ability to pay the Preferred Return.
The Fund selects loans for investment purposes on an ongoing basis subject to the lending standards and policies provided herein, which are subject to change. Accordingly, investors are relying on the General Partner to review and to make all Fund investment decisions.
The proceeds of this offering will be invested in loans which will be identified by the General Partner on an ongoing basis subject to the Fund's lending standards and policies. Accordingly, Limited Partners will have no opportunity to review potential Fund loans prior to acquisition. The General Partner will make all decisions with respect to the management of the Fund, including the determination as to what loans to make or purchase. Additionally, the Fund is dependent to a substantial degree on the continued services of the General Partner or certain of its principals. In the event of the dissolution of the General Partner or the death, retirement or other incapacity of Mr. Simrin or one or more of the key employees of the General Partner, the business and operations of the Fund may be adversely affected.
The General Partner is not registered or certified as an investment advisor and will not select mortgage loan investments based upon the interests of any Limited Partner.
The General Partner is not registered or certified as an investment advisor under the Investment Advisers Act of 1940 (the "IAA'') or the Oregon Securities Law (the "OSL") based upon the expectation that it is or will be exempt from such requirements. Accordingly, Limited Partners will not receive the benefits of any protections that might result from such certification/registration. Moreover, investment decisions made by the General Partner will be made based upon the investment objectives of the Fund, rather than those of any Limited Partner or group of Limited Partners. Investors should consult their own investment advisors or other investment professionals with respect to the suitability of an investment in the Fund and its underlying portfolio of mortgage loans as it relates to their own personal financial situation and investment risk profile.
The Joint Venture Offering, the Fund and/or the funds sponsored by an affiliate of the General Partner may be integrated under federal securities law subjecting the General Partner or the Fund to liability.
The various securities offerings sponsored by PacWest or its affiliates are each designed to be exempt from the registration provisions of the Securities Act of 1933, as amended, but there can be no assurance that the SEC would not take the position that each of the offerings, though individually exempt from the registration under the Securities Act of 1933 are part of a larger, unregistered offering thereby exposing the General Partner, and potentially the Fund, to regulatory action by the SEC and possibly to civil liability. Although the General Partner believes that the application of the above-described integration doctrine is not applicable to the sale of the Units due to safe harbors established by the SEC, there can be no such assurance.
The General Partner is subject to various conflicts of interest.
There are several areas in which the interests of the General Partner will conflict with those of the Fund, which should be carefully considered. (See "Conflicts of Interest.")
Limited Partners of the Fund will have no claim to the fees payable to the General Partner.
The Fund and its borrowers will pay certain fees and compensation to the General Partner. (See "Compensation to the General Partner.") These fees will be owed as incurred. Even if the Fund is unsuccessful in generating sufficient income to cover its operations, it will have no claim against the General Partner for a refund of such fees.
Neither the Fund nor the General Partner have audited financial statements.
The Fund does not have audited Financial Statements. While neither the Fund nor the General Partner have financial statements audited by outside auditors, the General Partner believes its financial statements are complete and accurate, and prepared in accordance with generally accepted accounting principles. However, absent the level of verification provided by an audit by a third-party independent accounting firm there can be no such assurance, although even audited financial statements are not a guarantee that a company's financial statements are free of fraud. Therefore, a decision to make an investment in the Fund must be based upon the information provided elsewhere in this Circular without financial statement information and therefore, the limited information provided herewith with which investors will make an investment decision may not completely or accurately represent the financial condition of the General Partner or the Fund. Furthermore, as a non-reporting SEC company, neither the Fund nor the General Partner are required to provide you with annual audited financial statements or quarterly unaudited financial statements, although investors will be provided with monthly account statements. (See "Additional Information and Undertakings").
Risks Related to Ownership of the Units
There is no market for the Units, and transfer of the Units could be severely restricted by law or market conditions.
There is no public market for the Units, and none is expected to develop in the future. Even if a potential buyer could be found, the transferability of Units is also restricted to Oregon residents for six months after acquisition by SEC Rule 147 (e) promulgated under the Securities Act of 1933, as amended, and by the provisions of the Limited Partnership Agreement. (See "Terms of the Offering - Restrictions on Transfer.") Any sale, transfer or encumbrance of Units also requires the prior written consent of the General Partner, which may be withheld in its sole discretion. Furthermore, Limited Partners will have only limited rights to redeem Units or withdraw from the Fund or to otherwise obtain the return of their invested capital. Therefore, all purchasers of Units must have the ability to withstand the economic risks of this investment with the understanding that their interest in the Fund may not be liquidated by resale, and should expect to hold their Units for an indeterminate period of time, and should understand that such inability to sell or withdraw "on demand" will subject an investment in Units to any losses the Fund may experience during such period.
Limited Partners will be subject to actions taken pursuant to the Limited Partnership Agreement.
The Limited Partners have only the voting rights set forth in the Limited Partnership Agreement or required by Delaware law and a vote of a Partner Majority is required to exercise such rights. Consequently, each Limited Partner will have no right to require or approve any action of the Fund or the General Partner that conflicts with the will of the Partner Majority and it may be difficult, time consuming and costly to solicit adequate votes to take any action because there may be a significant number of Limited Partners holding Units, and Limited Partners may have differing opinions and perspectives with respect to a course of action to take.
If the Fund cannot collect all the principal and interest due on its loans, the Fund's ability to earn a profit or to fund withdrawals will be impaired.
The Fund's liquidity is dependent on, among other things, payments by borrowers of principal and interest on Fund loans. The General Partner will continually monitor the delinquency status of the Fund's loan portfolio and promptly institute collection activities on delinquent accounts, but these efforts may ultimately prove unsuccessful. Loan repayments are also likely to be affected by economic conditions in the real estate market. The failure of the Fund to collect nearly all the principal and interest on Fund loans will affect the Fund's profitability and may substantially impair the Fund's ability to operate successfully.
The Fund will be taxed as a Partnership and the Limited Partners will be taxed as "Partners."
The Fund will elect to be treated as a partnership for federal income tax purposes. Schedule K-1 will be sent to Limited Partners no later than March 15 for the preceding tax year. Any favorable federal tax treatment presently available with respect to the Fund could be affected by any changes in tax laws that may result through future Congressional action, tax court or other judicial decisions, or interpretations of the Internal Revenue Service. IN VIEW OF THE FOREGOING, PROSPECTIVE LIMITED PARTNERS ARE URGED TO REVIEW THE "FEDERAL INCOME TAX CONSEQUENCES" SECTION CAREFULLY AND TO CONSULT THEIR OWN TAX COUNSEL.
The Units are not insured or guaranteed by any government agency or public entity or third party.
The Units are not debt instruments and therefore are not insured or guaranteed by the Federal Deposit Insurance Corporation (the "FDIC"), the Securities Investor Protection Corporation (the "SIPC") or any other governmental agency or any other public or private entity, in contrast to certificates of deposit or accounts offered by banks, savings and loan associations or credit unions. Limited Partners in the Fund will be dependent on the General Partner's ability to effectively manage the Fund's business to generate sufficient cash flow for the repayment of Limited Partners' capital and the generation of any profit. If Fund cash flow proves inadequate, investors could lose part or all their investments.
The timing of Fund loss recognition (if any) will be based on various factors, and losses will be allocated to Investors who purchased Units before the loss is recognized for accounting purposes even though the loss occurred earlier.
The Fund will accrue income over the course of a month (or other accounting period) and such income is allocated to Limited Partner's capital accounts over the course of that period. However, losses tend to be identified and recognized as the result of specific events, such as the placement of a loan on non-accrual status, and thus losses are allocated less frequently and at the end of an accounting period. As with most other investments, a purchaser may purchase Units before a loss has been recognized for accounting purposes, but once recognized, such loss will be allocated to the investor's Units as well as to the other Limited Partners of the Fund on the loss recognition date. In addition, under certain circumstances the General Partner may be aware that a loss could occur, such as upon a missed payment by a borrower, but the General Partner will not immediately recognize a loss because the Fund's policies may not require a default recognition until several payments are missed (for example, to allow a borrower time to cure the missed payments). Therefore, investors
should be aware that if any actual or potential losses exist before they purchase Units they may be recognized afterwards and could be allocated to their capital accounts.
The Fund is not required to set aside any funds to satisfy requests for withdrawals or redemptions from the Fund. A new investor's subscription may be used in whole or in part to fund withdrawals or redemptions.
The General Partner will not create or contribute funds to a separate account to fund requests for withdrawal from the Fund and redemption of an investor's Units. Because funds are not set aside periodically to fund such withdrawals, Limited Partners must rely on cash flow from operations and funds from the sale of Units to satisfy withdrawal requests. Money received from the sale of Units may be used in whole or in part, at the discretion of the General Partner, to fund such withdrawal and redemption requests. To the extent cash flow from operations and the sale of Units is not sufficient to fund withdrawal requests received by the Fund at any time, a Unit which is unredeemed will remain subject to Fund operations, which may include Fund losses. Furthermore, an investor may be admitted to the Fund at a time when there is a waiting list to withdraw, making it likely that such investor will not be able to withdraw quickly upon being admitted and therefore will remain subject to the Fund's operating results, which may include losses.
Fluctuations in interest rates pose risks to the Fund's business.
Mortgage interest rates are subject to abrupt and substantial fluctuations, but the right of a Fund Limited Partner to withdraw capital from the Fund is subject to substantial restriction and Units are a relatively illiquid investment. If prevailing interest rates rise above the average interest rate being earned by the Fund's loan portfolio, investors may wish to liquidate their investment to take advantage of higher returns available from other investments but may be unable to do so.
The Limited Partnership Agreement does not contain provisions to protect investment in the Units.
The Units do not have the benefit of extensive protective provisions in the Limited Partnership Agreement. The provisions of the Limited Partnership Agreement are not designed to protect a Limited Partner's investment if there is a material adverse change in the Fund's financial condition or results of operations. For example, a Limited Partner's ability to withdraw from the Fund is limited. Therefore, the Limited Partnership Agreement provides very little protection of Limited Partners' investment.
The Limited Partnership Agreement does not contain provisions to protect investment in the Units.
Limited Partners do not have the benefit of extensive protective provisions in the Limited Partnership Agreement. The provisions of the Limited Partnership Agreement are not designed to protect a Limited Partner's investment if there is a material adverse change in the Fund's financial condition or results of operations. For example, a Limited Partner's ability to withdraw from the Fund is limited. Therefore, the Limited Partnership Agreement provides very little protection of Limited Partners' investment.
Limited Partners may be obligated to return certain impermissible distributions.
Limited Partners are not required to contribute any additional capital to the Fund beyond their investment to pay any debts of the Fund. Under Delaware law, however, limited partnerships, such as the Fund are prohibited from making distributions to their Limited Partners if following such distribution, the limited partnership would be unable to pay its debts or following such distribution the limited partnership's total liabilities would exceed its total assets. Limited Partners receiving such distributions may be obligated to return the distribution, but only if such Limited Partner had actual knowledge of the impropriety of the distribution at the time it was made. Consequently, to the extent that a return of a Limited Partner's capital contribution is deemed a distribution, a Limited Partner may be required under certain circumstances to return such distributions to the Fund to discharge the Fund's liabilities to creditors who extended credit to the Fund during the period such capital contribution was held by the Fund.
The Units are risky and speculative investments and if you cannot afford to lose your entire investment, you should not invest.
Prospective investors should be aware that the Units are risky and speculative investments suitable only for investors of adequate financial means. If you cannot afford to lose your entire investment, you should not invest in the Units. If the Fund accepts an investment, you should not assume that the Units are a suitable and appropriate investment for you.
There is no guaranty that monthly distributions of Fund income will be made. Investors that will sustain substantial economic hardship in the absence of monthly income distributions from the Fund should not invest.
An investor in the Fund may, upon purchasing Units, elect to have his or her share of Fund earnings distributed, however, neither the
amount of, nor the right to, such monthly distributions is guaranteed. Investors purchasing Units are only entitled to distributions equal to their pro-rata share of monthly net income to the extent cash is available for distribution. If the Fund is unable to generate sufficient accrued cash in any given month to distribute to Limited Partners, no distributions will be made. (See "Summary of Limited Partnership Agreement - Cash Distributions.") Consequently, investors that will rely on the monthly income received from the Fund to meet their monthly expenses or who will suffer substantial economic hardship in the absence of such income should not invest.
Investors have not been independently represented in the formation of the Fund.
Investors in the Fund have not been represented by independent counsel in its organization, and the attorneys who have performed services for the Fund have also represented the General Partner. Thus, conflicts of interest between the Fund and the General Partner may not have been addressed as vigorously as in an arms-length transaction. (See "Conflicts of Interest.")
Sale of Defaulted Loans or Real Estate Owned
In the event a Fund loan goes into default, or the Fund becomes the owner of any real property because of foreclosure on a Fund loan, the General Partner will arrange the sale of the loan or property for a price that will permit the Fund to recover the full amount of its invested capital plus accrued but unpaid interest and other charges, or so much thereof as can reasonably be obtained considering current market conditions. The General Partner will not receive any rebates, give-ups or any other benefit or enter into any reciprocal business arrangement from the sale of a property owned by the Fund which has been acquired after default or foreclosure.
Risks Related to Real Estate Investment Trust
Failure to Maintain REIT Qualification
The Fund may establish a REIT for United States federal income tax purposes through a subsidiary, through which the Fund may make investments. Qualification as a REIT involves the application of highly technical and complex provisions of the Code, for which there are only limited judicial or administrative interpretations, and the determination of various factual matters and circumstances not entirely within the REIT Subsidiary's control. If the REIT Subsidiary fails to maintain its qualification as a REIT in any taxable year, and certain relief provisions do not apply, the REIT Subsidiary would be subject to tax on its taxable income at regular corporate rates. In such an event, distributions by the REIT to the Fund or the Limited Partners would, to the extent of earnings and profits, be fully taxable to the Limited Partners as ordinary dividends. See "Federal Income Tax Consequences" below.
REIT Ownership Restrictions.
The governing documents of each REIT subsidiary in which the Fund invests, if any, will contain ownership restrictions that generally restrict the beneficial ownership of interests in a REIT such that not more than Fifty Percent (50%%) in value of the entity's outstanding shares may be owned, directly or indirectly (including through a partnership), by five or fewer individuals (as specially defined in the Code to include certain entities) at any time during the last half of any taxable year subsequent to the first year for which the entity's REIT qualification is effective. The purpose of the ownership restrictions is to assist in protecting and preserving a REIT's status as a REIT under the Code. For an entity to qualify as such under the Code, the ownership restrictions generally permit five persons to acquire (indirectly through the ownership of an interests in the Fund), up to a maximum of an aggregate of Fifty Percent (50%%) of the outstanding interests of a REIT and, thus, assist such REIT in protecting and preserving its status as a real estate investment trust under the Code.
If any person's ownership of interests in the Fund were to cause that person to indirectly own outstanding interests in a REIT in violation of the ownership restrictions or otherwise cause a REIT to fail to qualify as a REIT under the Code, the Fund's, as applicable, shares in such REIT would constitute "Excess Shares" to the extent necessary to cause compliance with the ownership restrictions or permit such REIT to retain its status as a REIT under the Code. If the Fund's shares in a REIT were to become Excess Shares as a result of the actions of any Limited Partner, the Fund's right to distributions with respect to those shares would be significantly reduced. Therefore, the organizational documents of the Fund contain provisions that generally reduce any such Limited Partner's distributions by the amount the Fund's, as applicable, distributions were reduced as a result of the Excess Shares provisions. Each Limited Partner will be
required to provide to the Fund such information as the General Partner may reasonably request to determine the effect of such Limited Partner's ownership of interests in the Fund on the ability of a REIT to qualify as a REIT under the Code.
REIT Tax and Legislative Risks Associated with REITs.
There can be no assurance that the REIT subsidiary's expected election to be taxed as a REIT for U.S. federal income tax purposes will be respected by the IRS for any given calendar tax year. If the Sub-REIT fails to qualify or fails to maintain its qualifications, it will be subject to tax on its taxable income at regular corporate rates. Although the Fund may, but is not obligated to hold certain REIT qualifying assets through a REIT subsidiary, there can be no assurance that U.S. federal laws and regulations pertaining to REIT subsidiaries will not change before any REIT subsidiary can be established and qualify, or, once established and qualified, that such laws and regulations would not have a retroactive effect on any or all such REIT subsidiaries. As a result of any such changes, it may be impracticable for the Fund and/or any such parallel investment vehicle to hold assets through a REIT subsidiary.
RESPONSIBILITIES OF THE GENERAL PARTNER
The General Partner is accountable to the Limited Partners to the limited extent as set forth in this Circular and the Limited Partnership Agreement. The General Partner will conduct the affairs of the Fund in the best interests of the Fund and of the Limited Partners.
The General Partner will provide the Limited Partners with information in regarding matters affecting the Fund and each Limited Partner's Units on an annual basis in accordance with the Limited Partnership Agreement. Each Limited Partner, at such Limited Partner's expense, shall have the right to inspect the Fund's business records during normal business hours as may be reasonably requested by such Limited Partner; provided, however, that the General Partner shall not be obligated to provide access to any information that it reasonably and in good faith considers to be confidential information.
The General Partner shall take all actions necessary or appropriate for (i) the continuation of the Fund's valid existence as a limited partnership under the laws of the State of Delaware (and of each other jurisdiction in which such existence is necessary to protect the limited liability of the Limited Partners or to enable the Fund to conduct the business in which it is engaged), and (ii) the accomplishment of the Fund's purposes, including acquiring and servicing loans and any undivided interest therein in accordance with the provisions of the Partnership Agreement and applicable laws and regulations. The General Partner has a fiduciary responsibility to the Fund for the safekeeping and use of all funds and Fund assets, whether or not the General Partner has possession or control of those funds or assets.
The Limited Partnership Agreement provides that the Fund shall indemnify the General Partner and its shareholders, officers, directors, employees and agents for any liability or loss (including attorneys' fees, which shall be paid as incurred), suffered by such party, and shall hold the General Partner harmless for any loss or liability suffered by the Fund, so long as a General Partner determined, in good faith, that the course of conduct which caused the loss or liability was in the best interests of the Fund, and such loss or liability did not result from the gross negligence or gross misconduct of the General Partner. Any such indemnification shall only be recoverable out of the assets of the Fund and not from Limited Partners. Notwithstanding the foregoing, the General Partner nor any of its Affiliates shall be indemnified for any liability imposed by judgment (including costs and attorneys' fees) arising from or out of a violation of state or federal securities laws associated with the offer and sale of Units. However, indemnification will be available for settlements and related expenses of lawsuits alleging securities law violations if a court approves the settlement and indemnification, and for expenses incurred in successfully defending such lawsuits if a court approves such indemnification. Such indemnification shall survive the termination of the Limited Partnership Agreement.
Limited Partners may have a more limited right of action than they would have absent these provisions in the Limited Partnership Agreement. A successful indemnification of the General Partner could deplete the assets of the Fund. Limited Partners who believe that a breach of the General Partner's fiduciary duty has occurred should consult with their own legal counsel.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974 ("ERISA") contains strict fiduciary responsibility rules governing the actions of "fiduciaries" of employee benefit plans. It is anticipated that some Limited Partners will be corporate pension or profit-sharing plans and Individual Retirement Accounts, or other employee benefit plans that are subject to ERISA. In any such case, the person making the investment decision concerning the purchase of Units will be a "fiduciary" of such plan and will be required to conform to ERISA's fiduciary responsibility rules. Persons making investment decisions for employee benefit plans (i.e., "fiduciaries") must discharge their duties with the care, skill, and prudence which a prudent person familiar with such matters would exercise in like circumstances. In evaluating whether the purchase of Units is a "prudent" investment under this rule, fiduciaries should consider each of the risk factors set forth above. Fiduciaries should also carefully consider the possibility and consequences of unrelated business taxable income (see "Federal Income Tax Considerations."), as well as the percentage of plan assets which will be invested in the Fund, insofar as the
diversification requirements of ERISA are concerned. An investment in the Fund is relatively illiquid, and fiduciaries must not rely on the ability to convert an investment in the Fund into cash to meet liabilities to plan participants who may be entitled to distributions.
The discussion of the ERISA fiduciary aspects and the ERISA and Code prohibited transaction rules contained in this Circular is not intended as a substitute for careful planning or advice from a qualified professional. The applicability of ERISA fiduciary rules and the ERISA or Code prohibited transaction rules to Investors may vary from one Investor to another, depending upon that Investor's situation. Accordingly, Investors should consult with their own attorneys, accountants and other personal advisors as to the effect of ERISA and the Code on their situation of a purchase and ownership of the Units and as to potential changes in the applicable law.
The Fund will limit subscriptions for Units from ERISA plan investors such that, immediately after each sale of Units, ERISA plan investors will hold less than 25% of the total outstanding partnership interests in the Fund.
Fiduciaries of plans subject to ERISA are required to determine annually the fair market value of the assets of such plans as of the close of any such plan's fiscal year. Although the General Partner will provide annually upon the written request of a Limited Partner an estimate of the value of the Units based upon, among other things, outstanding mortgage investments, it may not be possible to value the Units adequately from year to year, because there will be no market for them.
CONFLICTS OF INTEREST
The following is a list of the important areas in which the interests of the General Partner will conflict with those of the Fund. The Limited Partner must rely on the general fiduciary standards which apply to a general partner of a limited partnership to prevent unfairness by the General Partner and/or its Affiliates in a transaction with the Fund. (See "Responsibilities of the General Partner.") Except as may arise in the normal course of the relationship, there are no transactions presently contemplated between the Fund and its General Partner or Affiliates other than those listed below.
Fees Payable to PacWest
None of the compensation set forth under "Compensation to the General Partner" was determined by arm's length negotiations. The origination and processing fees charged to borrowers by PacWest will average approximately 4% of the principal amount of each loan but may range as high as 6%. Any increase in such charges will have a direct, adverse effect upon the interest rates that borrowers will be willing to pay the Fund, thus reducing the overall rate of return to Limited Partners. Conversely, if PacWest reduces the origination and processing fees, a higher rate of return might be obtained for the Fund and the Limited Partners. This conflict of interest will exist with every Fund loan transaction, and Limited Partners must rely upon the General Partner to protect their interests. To partially resolve this conflict, PacWest has agreed that the origination and processing fees to be received by it relating to each loan arranged for the Fund will not exceed 6% of the total loan amount.
PacWest will earn the largest portion of its compensation from these origination and processing fees that it collects at loan closing, which are not affected by whether the Fund's loan proves to be a good investment. Therefore, PacWest may be motivated to close loans that are risky or otherwise not in the best interests of the Fund, to earn its fees. Limited Partners must rely on the good faith of the General Partner to protect their interests in this regard.
Other Funds or Businesses
PacWest has been sponsoring Joint Venture Offering since 2009 and Pac One Fund, LP., a Delaware limited partnership which acquires and owns loans secured by real estate since 2018. In addition, PacWest, Mr. Simrin or other affiliated entities may sponsor other limited partnerships or other entities whose investment objectives are similar to those of the Fund. It is possible that these other partnerships and investors will have funds to invest at the same time as the Fund. There exists conflicts of interest on the part of the General Partner between the Fund and the other partnerships or investors with which it is affiliated at such a time. The General Partner will decide which loans are appropriate purchase by the Fund or by such other partnerships and investors after consideration of all relevant factors, including the size of the loan, portfolio diversification, and amount of funds available for investment. There can be no assurance that the General Partner will select loans for the Fund that will form as well as or superior to those selected by other affiliated entities.
There is an inherent conflict of interest between the General Partner in its capacity of Servicer of the Fund's loans and the Fund. The Servicer's motivation is to collect fees whereas the Fund is motivated by capital preservation or appreciation of the collateral. To the extent servicing fees are high, a borrower may be more likely to default. Accordingly, the Fund would prefer to have servicing fees as low as possible and it is in the General Partner, as the Servicer's, interest for its fees to be as high as the market will bear.
There is also a potential conflict of interest where the General Partner, through an affiliated entity has arranged a separate, unrelated loan to the same borrower (or his successor in interest), and/or secured a separate unrelated loan by the same property as the property which secures the loan owned by the Fund. In such an instance, it is possible that a borrower may seek concessions relating to a default or delinquency on one loan owned by an affiliate of the General Partner. This may create a conflict of interest for the General Partner as between the interest of the Fund and the interest of the affiliate. Furthermore, the General Partner may at times choose default remedies related to a separate, potentially unrelated loan to the same borrower, including default remedies involving collateral that may secure more than one unrelated loan, that could cause ramifications detrimental to the borrower's ability to service its obligations relative to a loan owned by the Fund, or otherwise impact the collateral securing the loan owned by the Fund in a manner that is detrimental to the Fund.
The General Partner and Affiliates may engage for their own account, or for the account of others, in other business ventures, like that of the Fund or otherwise, and neither the Fund nor any Limited Partner shall be entitled to any interest therein.
The Fund will not have independent management and it will rely on the General Partner and Affiliates, shareholders, officers, directors, employees, and agents for the operation of the Fund. The General Partner will devote only so much time to the business and affairs of the Fund as is reasonably required. The General Partner will have conflicts of interest in allocating management time, services and functions between the Joint Venture Offering, the Fund, an offering directed exclusively to accredited investors of which an Affiliate is general partner established in 2018 and any future partnerships which it may organize as well as other business ventures in which it may be involved. The General Partner believes it has sufficient staff to be fully capable of discharging its responsibilities to all such entities.
Lack of Independent Legal Representation
The Fund has not been represented by independent legal counsel to date. The use by the General Partner and the Fund of the same counsel in the preparation of this Circular and the organization of the Fund has resulted in the lack of independent review. Prospective investors must rely on their own legal counsel for legal advice relating to this investment.
Sale of Defaulted Loans or Real Estate Owned to Affiliates
In the event a Fund loan goes into default or the Fund becomes the owner of any real property because of foreclosure on a Fund loan, the General Partner's will arrange the sale of the loan or property for a price that will permit the Fund to, if possible, recover its invested capital (or so much thereof as can reasonably be obtained considering current market conditions) plus accrued but unpaid interest as well as other charges, To facilitate such a sale, the General Partner may arrange a sale to persons or entities controlled by or affiliated with the General Partner (e.g., to another entity formed by the General Partner or its affiliates). The General Partner will be subject to conflicts of interest in arranging such sales because it will represent both parties to the transaction. For example, the Fund and the affiliated buyer will have conflicting interests in determining the purchase price and other terms and conditions of sale. The General Partner's decision will not be reviewed by any independent person.
The General Partner shall undertake to resolve these conflicts by setting a purchase price for each defaulted loan or property that is not less than any of the following:
(i) a third-party value valuation of such loan or property, if any, at the time of sale.
(ii) the amount of any third party offers already received, if any; and
(iii) the total amount of the Fund's investment in the property which shall be calculated as follows: the unpaid principal amount of the Fund's loan; accrued unpaid interest through the date of foreclosure, if any; expenditures made to protect the Fund's interest in the property such as payments to senior lienholders and for insurance and taxes; all costs of foreclosure and other loan enforcement actions (including attorneys' fees); and any advances made by the General Partner on behalf of the Fund for any of the foregoing.
A portion of the purchase price may be paid by the affiliate executing a promissory note in favor of the Fund, secured by a deed of trust on the property being sold. The total loan-to-value ratio for the property (including the Fund's note and any senior liens) is not expected to exceed eighty percent (80%) of the purchase price of the property. The note will otherwise contain terms and conditions comparable to those that would be contained in notes executed by third parties.
FEDERAL INCOME TAX CONSIDERATIONS
THE DISCUSSION HEREIN IS FOR INFORMATIONAL PURPOSES ONLY AND IS A DISCUSSION PRIMARILY OF THE U.S. TAX CONSEQUENCES TO PROSPECTIVE LIMITED PARTNERS. EACH PROSPECTIVE LIMITED PARTNER SHOULD
CONSULT ITS PROFESSIONAL TAX ADVISOR WITH RESPECT TO THE TAX ASPECTS OF AN INVESTMENT IN THE FUND. TAX CONSEQUENCES MAY VARY DEPENDING UPON THE PARTICULAR STATUS OF A PROSPECTIVE LIMITED PARTNER.
Neither the Fund nor the General Partner has sought a ruling from the U.S. Internal Revenue Service (the "IRS") or any other U.S. federal, state or local agency with respect to any of the tax issues affecting the Fund nor has either obtained an opinion of counsel with respect to any tax issues.
This summary of certain aspects of the Federal income tax treatment of the Fund is based upon the Internal Revenue Code of 1986, as amended (the "Code"), judicial decisions, Treasury Regulations (the "Regulations") and rulings in existence on the date hereof, all of which are subject to change. This summary does not discuss the impact of various proposals to amend the Code which could change certain of the tax consequences of an investment in the Fund. The discussion contained herein is not a full description of the complex tax rules involved and is based upon existing laws, judicial decisions and administrative regulations, rulings, and practices, all of which are subject to change, retroactively as well as prospectively. A decision to invest in the Fund should be based upon an evaluation of the merits of the investment program, and not upon any anticipated U.S. tax benefits. Additionally, the following discussion is based, in part, on the recently enacted Tax Cuts and Jobs Act, H.R.1, which became effective as of January 1, 2018 (the "Tax Act"). The Tax Act, including the provisions relating to entities treated as partnerships, is new and complex. The discussion about the Tax Act in this Circular may not be complete and potential investors are urged to consult their individual tax advisors to understand how the Tax Act will apply to them with respect to an investment in the Fund.
Classification of the Fund as a Partnership
Subject to the discussion set forth below, a business (such as the Fund) that has two or more partners and that is not organized as a corporation under federal or state law will generally be classified as a partnership for U.S. federal income tax purposes. The General Partner has received an opinion from counsel that 1) the Fund is more likely than not to be taxed as a partnership and not as an association for federal income tax purposes and, 2) the issuance and sale of the Units against payment for such Units will have been duly authorized by all necessary action by the Partnership, that the Units will be validly issued and, under Delaware law, purchasers of the Units will have no obligation to make further payments for their purchase of Units solely by reason of their ownership of the Units or their status as limited partners.
An entity that would otherwise be classified as a partnership for U.S. federal income tax purposes may nonetheless be taxable as a corporation if it is a publicly traded partnership (a "PTP"). For this purpose, a partnership is "publicly traded" if its interests are traded on an established securities market or are readily tradable in a secondary market (or the substantial equivalent thereof). The General Partner intends to operate the Fund, however, so that the Units will not be traded on an established securities market nor readily tradable in a secondary market and, therefore, the Fund should not be treated as a PTP taxable as a corporation.
Taxation of Limited Partners
Assuming the Fund is treated as a "partnership" for federal income tax purposes, the Fund as an entity will not be directly subject to any federal income taxes. The Fund will, however, file information returns for each tax year setting forth the income, gains, items of tax preference, losses, deductions, and credits of the Fund. The Fund will provide tax information to the Limited Partners for use in the preparation of their individual federal income tax returns. Each Limited Partner will be required to report on his individual income tax return his allocable share of the Fund's taxable income, gains, items of tax preference, losses, deductions, and credits for the taxable year of the Fund ending within or with his own tax year. The requirement that a Limited Partner include in his gross income his share of the Fund's income, gains and items of tax preference does not depend upon the Fund's making distributions of cash or property to the Limited Partners. Therefore, a Limited Partner may incur tax liability if the Fund has income, even though no cash distribution is made to the Limited Partner.
If cash or other property is distributed to a Limited Partner, such distribution is applied first to reduce the Limited Partners adjusted basis in his Units, and any amounts of cash in excess of the adjusted basis in his Units will be treated as gain from a sale of the Units. If the Limited Partner has held his Units for longer than one year, such gain will be taxable as long-term capital gain unless the Limited Partner is deemed to be a "dealer" with respect to the Units and except to the extent of such Limited Partner's share of the Fund's "unrealized receivables" and "substantially appreciated inventory" as defined in Section 751 of the Code. It is unlikely any significant gain on the sale of the Units would be deemed to be attributable to an unrealized receivable or substantially appreciated inventory and, therefore, constitute ordinary income. Any decrease in a Limited Partner's share of Fund liabilities will be treated as a distribution of cash to such Limited Partner.
Tax Basis in Limited Partnership Units
The tax basis of a Limited Partner's Units limits the Fund losses a Limited Partner is permitted to deduct and is used in determining the gain or loss a Limited Partner recognizes on distributions in complete or partial disposition of his Units. As a general rule, the tax basis of a Limited Partner in his Units will be determined by the amount of cash contributed to the Fund or his cost basis in the Units. Such basis will be increased by the Limited Partner's distributive share of Fund income, his proportionate share of any liabilities with respect to which such Limited Partner bears the economic risk of loss ("Recourse Liabilities"), and his proportionate share of any liabilities with respect to which no Limited Partner bears the economic risk of loss ("Nonrecourse Liabilities".)
Taxation of Undistributed Fund Income
Under the laws pertaining to federal income taxation of partnerships, no federal income tax is paid by the Fund as an entity. Each individual partner reports on his federal income tax return his distributive share of Fund income, gains, losses, deductions, and credits, regardless of if any actual distribution is made to such partner during a taxable year. Each individual partner may deduct his distributive share of Fund losses, if any, to the extent of the tax basis of his Units at the end of the Fund year in which the losses occurred. The characterization of an item of profit or loss will usually be the same for the partner as it was for the Fund. Since individual partners will be required to include Fund income in their personal income without regard to whether there are distributions of Fund income, such investors will become liable for federal and state income taxes on Fund income even though they have received no cash distributions from the Fund with which to pay such taxes.
Distributions of Income
To the extent cash distributions exceed the current and accumulated earnings and profits of the Fund, they will constitute a return of capital, and each Limited Partner will be required to reduce the tax basis of his Units by the amount of such distributions and to use such adjusted basis in computing gain or loss, if any, realized upon the sale of Units. Such distributions will not be taxable to Limited Partners as ordinary income or capital gain until there is no remaining tax basis, and, thereafter, will be taxable as gain from the sale or exchange of the Units.
Property Held Primarily for Sale, Potential Dealer Status
The Fund has been organized to invest in loans primarily secured by deeds of trust on real property. However, if the Fund were at any time deemed for federal tax purposes to be holding one or more Fund loans primarily for sale to customers in the ordinary course of business (a "dealer"), any gain or loss realized upon the disposition of such loans would be taxable as ordinary gain or loss rather than as capital gain or loss. The federal income tax rates for ordinary income are higher than those for capital gains. In addition, income from sales of loans to customers in the ordinary course of business would also constitute unrelated business taxable income to any investors which are tax-exempt entities. Under existing law, if real property is held primarily for sale to customers in the ordinary course of business must be determined from all the relevant facts and circumstances. The Fund intends to make and hold the Fund loans for investment purposes only, and to dispose of Fund loans, by sale or otherwise, at the discretion of the General Partner and as consistent with the Fund's investment objectives. It is possible that, in so doing, the Fund will be treated as a "dealer" in mortgage loans, and that profits realized from such sales will be considered unrelated business taxable income to otherwise tax-exempt investors in the Fund.
Tax Returns
Annually, the Fund will provide the Limited Partners (but not assignees of Limited Partners unless they become substituted Limited Partners) sufficient information from the Fund's informational tax return for the Limited Partners to prepare their individual federal, state, and local tax returns, including Schedule K-1. The Fund's informational tax returns will be prepared by certified public accountants selected by the General Partner.
Trade or Business Income
The Fund will report its income as being derived from the trade or business of mortgage lending, not as "portfolio income." The General Partner believes this is the proper characterization, but there can be no assurance that it will not be challenged by the Internal Revenue Service. If the Fund is deemed to be engaged in the trade or business of lending money, its income allocable to that business will generally be characterized as non-passive income, against which passive losses from other sources may not be offset. This is true even though its net losses allocable to that activity (or that portion of Limited Partners' loss on the sale of a unit that is allocable to the Fund's mortgage lending business) will be treated as passive activity losses. If the Fund is not considered engaged in a trade or business of lending money, then income and loss from its mortgage lending activities will be considered portfolio income and loss. In either case, Limited Partners will not be permitted to offset passive losses from other activities against Limited Partners' share of that portion of
income. Under Section 469 of the Code, the Fund's income will not be passive income against which passive losses from other sources may be offset.
Deductibility of Partnership Investment Expenditures and Certain Other Expenditures
Following the enactment of the Tax Act, no miscellaneous itemized deductions are allowed for taxable years beginning after December 31, 2017, and before January 1, 2026. Many, if not all, of the expenses incurred by the Fund in connection with its investment activities may be treated as miscellaneous itemized deductions and, therefore, until January 1, 2026, may not be deductible by Limited Partners. Commencing January 1, 2026, and assuming the suspension of miscellaneous itemized deductions isn't made permanent or at least extended, investment expenses (e.g. investment advisory fees) paid or incurred for the production of income of an individual, trust or estate would be deductible subject to the following limitations.
First, investment expenses would be deductible only to the extent they exceed 2% of adjusted gross income. In addition, an individual with an adjusted gross income in excess of a specified amount would be further restricted in deducting such investment expenses. Under such provision, there would be a limitation on the deductibility of investment expenses in excess of 2% of adjusted gross income to the extent such excess expenses (along with certain other itemized deductions) exceed the lesser of (i) 3% of the excess of the individual's adjusted gross income over the specified amount or (ii) 80% of the amount of certain itemized deductions otherwise allowable for the taxable year. Moreover, such investment expenses are miscellaneous itemized deductions which would not be deductible by a non- corporate taxpayer in calculating its alternative minimum tax liability.
The 2% floor on the deductibility of investment expenses and the non-deductibility of such expenses for alternative minimum tax purposes also apply, in modified form, to estates and trusts. The consequences of these limitations will vary depending upon the personal tax situation of each taxpayer, and each Limited Partner is advised to consult his, her, or its own tax advisor with respect to the application of these limitations to that Limited Partner.
Whether or not the Fund's general and administrative expenses are subject to the above limitations as investment expenses, they should (except to the extent they may be allocated to a passive activity subject to the rules of section 469 of the Code) constitute "investment expenses," which will reduce a Limited Partner's "net investment income" for purposes of the limitation on the deductibility of investment interest under section 163(d) of the Code.
Organization Expenses, Syndication Expenses; Start-Up Expenditures
Section 709 of the Code generally prohibits any Limited Partner from deducting any amounts paid or incurred to organize the Fund or to promote the sale of (or to sell) an interest in the Fund. Instead, Section 709 generally permits the Fund to amortize such organization expenses ratably over a period of not less than 180 months. Such organization expenditures include those (i) incurred incident to the creation of the Fund, (ii) chargeable to the capital account, and (iii) of a character which, if expended incident to the creation of a partnership having an ascertainable life, would be amortized over such life. The Fund presently intends to amortize qualifying organization expenditures over a 180-month period. Notwithstanding, these organizational expenses are treated as miscellaneous itemized deductions and, according to the Tax Act, will not be deductible by Limited Partners.
Expenses connected with the promotion or sale of interests in a partnership, known as syndication fees, are not deductible by the Fund or the Limited Partners and are not eligible for the 180-month amortization as is the case for organizational expenses. Syndication fees include such expenditures connected with the issuing and marketing of interests in a partnership such as sales commissions, certain professional fees, selling expenses and printing costs. Regulation Sections 1.709-1 and 1.709-2 make it clear that the definition of syndication costs includes counsel fees related to securities law advice, certain accountants' fees, brokerage fees and registration fees. The allocation of certain expenses between organization costs and syndication costs is a question of fact and the General partner will use reasonable judgment in claiming amortization deductions for a portion of the organizational expenses. The IRS may, however, contest such deductions.
Section 195 of the Code provides that no deduction is allowed for start-up expenditures. However, taxpayers may similarly amortize startup expenditures over a period of not less than 180 months. Start-up expenditures include amounts paid or incurred in connection with investigating the creation or acquisition of an active trade or business or paid or incurred in connection with any activity engaged in for profit and for the production of income prior to the day on which the active trade or business begins, in anticipation of the activity becoming an active business. Similarly, with organizational expenses, such start-up expenses are treated as miscellaneous itemized deductions and, according to the Tax Act, will not be deductible by the Limited Partners.
Application of Rules for Income and Losses from Passive Activities
Generally, a taxpayer's deductions from passive activities may be used to reduce the taxpayer's tax liability in a given taxable year only to the extent of income from passive activities. A passive activity includes: (a) one which involves the conduct of a trade or business in
which the taxpayer does not materially participate; or (b) in general, any rental activity. In general, a taxpayer will be treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a regular, continuous, and substantial basis. In general, an interest as a limited partner in a general partner managed limited partnership will be treated as an interest in which such limited partner does not materially participate. For this reason, it is anticipated that these restrictions on the use of losses from passive activities will apply to any tax loss generated by the Fund. The passive activity rules apply to individuals (including limited partners, members, and S corporation shareholders), estates, trusts, personal service corporations and closely held corporations (that is corporations more than 50 percent of the stock of which is owned by five or fewer individuals).
To the extent that a taxpayer's aggregate losses from all passive activities exceed the taxpayer's aggregate income from all such activities in a given taxable year, the taxpayer has a "passive activity loss" for such year. Such a loss may be carried forward to successive taxable years until fully used against income from passive activities in such years; however, such losses may not be carried back to prior years.
When a taxpayer disposes of its entire interest in a passive activity in a transaction in which all of the gain or loss realized on such disposition is recognized, any loss from that activity that was disallowed by the passive loss rules will cease to be treated as a passive loss, and any loss on such disposition will not be treated as arising from a passive activity. Such losses will be allowed as deductions against income in the following order: (i) gain recognized on such disposition; (ii) net income or gain for the taxable year from all passive activities; and (iii) any other income or gain.
Application of Basis Limitations on Losses of the Fund
The amount of any loss of the Fund that a Limited Partner is entitled to include in its income tax return is limited to its adjusted tax basis in its Units as of the end of the Fund's taxable year in which such loss occurred. Generally, a Limited Partner's adjusted tax basis for its Units is equal to the amount paid for such Units, increased by the sum of (i) its share of the Fund's liabilities, as determined for federal income tax purposes, and (ii) its distributive share of the Fund's realized income and gains, and decreased (but not below zero) by the sum of (i) distributions (including decreases in its share of the Fund's liabilities) made by the Fund to such Limited Partner and (ii) such Limited Partner's distributive share of the Fund's realized losses and expenses.
Application of "At-Risk" Limitations on Losses of the Fund
The amount of any losses (otherwise allowable for the year in question) that may be deducted by individuals, and certain corporations, in connection with activities that are part of a trade or business or that are engaged in the production of income, cannot exceed the aggregate amount with respect to which such taxpayer is "at risk" in such activity at the close of the tax year. A Limited Partner generally will be considered "at risk" to the extent of the cash and adjusted basis of other property contributed to a partnership, as well as any borrowed amounts contributed to a partnership with respect to which such Limited Partner has personal liability for payment from the Limited Partner's own assets. An obligation to make an additional capital contribution is not treated as a cash contribution until payment is actually made to the partnership. If at the end of a taxable year a Limited Partner's amount "at risk" has been reduced below zero, the deficit amount "at risk" is recaptured and must be included in gross income in that year. The amount recaptured is treated in future years as if it were a deduction suspended by the "at risk" provisions. To the extent that Limited Partner's amount "at risk" is increased above zero in a subsequent year, this additional deduction may be allowable at such time.
Application of Excess Business Losses Limitations on Losses of the Fund. Pursuant to the Tax Act and for tax years beginning after December 31, 2017, and before January 1, 2026, if a non-corporate taxpayer incurs an "excess business loss" then this loss shall be disallowed and treated as a net operating loss and carried forward to subsequent tax years. For these purposes, Section 461(l) of the Code generally defines "excess business loss" as the amount by which the taxpayer's aggregate deductions attributable to the taxpayer's trades or businesses exceeds the sum of the aggregate gross income and or gains attributable to those trades or businesses plus an additional $250,000 (or $500,000 in the case of married individuals filing joint returns). As mentioned above, there are several other loss limitation rules (e.g., passive loss limitation, at-risk loss limitation, and basis limitation). Section 461(l) of the Code specifically provides that the "excess business loss" is applied after the application of the passive loss limitation rules. It is not yet clear whether and how the at-risk limitation and/or the basis limitation will affect the calculation.
Capital Gain and Capital Losses
In general, a Limited Partner's allocable share of the capital gains allocated to the Fund from the sale or exchange of a "capital asset" and net gain from the sale or exchange of certain property used in a trade or business and which capital asset or property is held for more than one year, if any, should be eligible for long-term capital gain treatment (any such gain or net gain, "Long-Term Capital Gain"). Further, under current law, an individual Limited Partner would generally be able to deduct his or her allocable share of the Fund's capital losses for a tax year against his or her, including his or her allocable share of the Fund's, capital gains for such year and then against up to $3,000 ($1,500 for a married individual filing a separate return) of his or her ordinary income for such year. An individual Limited Partner would then be able to carry forward indefinitely (although not carry back) any remaining non-deducted capital losses for possible deduction in later taxable years. For corporate taxpayers, all net capital gains, whether long-term or short-term, are taxed at
the corporation's regular tax rate. For such taxpayers, capital losses may only offset capital gains, but unused capital losses may be carried backwards and forwards to other years, subject to certain limitations.
Tax Rates; Additional 3.8% U.S. Federal Tax on "Net Investment Income"
Under the Tax Act, the tax rates for individuals were revised commencing in 2018. Such tax rates expire on December 31, 2025, unless they are otherwise extended or made permanent by Congress.
Under the Tax Act, there are seven ordinary income tax brackets for individuals: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The 10% tax bracket applies to single taxpayers with taxable income of not more than $9,525, to married taxpayers who are filing jointly with taxable income of not more than $19,050, to married taxpayers who are filing separately with taxable income of not more than $9,525, and to taxpayers who are heads of households with taxable income of not more than $13,600. The 12% tax bracket applies to single taxpayers with taxable income of more than $9.525 but not more than $38,700, to married taxpayers who are filing jointly with taxable income of more than $19,050 but not more than $77,400, to married taxpayers who are filing separately with taxable income of more than $9,525 but not more than $38,700, and to taxpayers who are heads of households with taxable income of more than $13,600 but not more than $51,800. The 22% tax bracket applies to single taxpayers with taxable income of more than $38,700 but not more than
$82.500, to married taxpayers who are filing jointly with taxable income of more than $77,400 but not more than $165,000, to married taxpayers who are filing separately with taxable income of more than $38,700 but not more than $82,500, and to taxpayers who are heads of households with taxable income of more than $51,800 but not more than $82,500. The 24% tax bracket applies to single taxpayers with taxable income of more than $82,500 but not more than $157,500, to married taxpayers who are filing jointly with taxable income of more than $165,000 but not more than $315,000, to married taxpayers who are filing separately with taxable income of more than $82,500 but not more than $157,500, and to taxpayers who are heads of households with taxable income of more than $82,500 but not more than $157,500. The 32% tax bracket applies to single taxpayers with taxable income of more than $157,500 but not more than
$200,000, to married taxpayers who are filing jointly with taxable income of more than $315,000 but not more than $400,000, to married taxpayers who are filing separately with taxable income of more than $157,500 but not more than $200,000, and to taxpayers who are heads of households with taxable income of more than $157,500 but not more than $200,000. The 35% tax bracket applies to single taxpayers with taxable income of more than $200,000 but not more than $500,000, to married taxpayers who are filing jointly with taxable income of more than $400,000 but not more than $600,000, to married taxpayers who are filing separately with taxable income of more than $200,000 but not more than $500,000, and to taxpayers who are heads of households with taxable income of more than
$200,000 but not more than $500,000. The 37% tax bracket applies to single taxpayers with taxable income above $500,000, to married taxpayers who are filing jointly with taxable income above $600,000, to married taxpayers who are filing separately with taxable income above $500,000, and to taxpayers who are heads of households with taxable income above $500,000.
Under the Tax Act, Long-Term Capital Gain recognized by, and/or allocable to, an individual taxpayer in a taxable year: (a) is taxed at a rate of 20% if the individual has taxable income of over $425,800 for single taxpayers (or: (i) $479,000 for married taxpayers filing jointly, (ii) $452,400 for taxpayers who are heads of household, and (iii) $239,500 for married taxpayers filing separately); (b) 15% for single taxpayers with taxable income between $38,000 and $425,800 for single taxpayers (or: (i) between $77,200 and $479,000 for married taxpayers filing jointly, (ii) between $51,700 and $452,400 for taxpayers who are heads of household, and (iii) between $38,600 and $239,500 for married taxpayers filing separately); and (c) 0% for all other taxpayers. However, the Long-Term Capital Gain is taxed at a rate of 25% for any such gain that constitutes "unrecaptured section 1250 gain" - generally, the amount of previously-claimed real property depreciation deductions "recaptured" in any direct or indirect sale or other taxable disposition of such real property. Also, under current law, the ordinary income and short-term capital gain recognized by (and allocated to) an individual are subject to U.S. federal income tax rates from a 10% to a maximum 37%, depending on the individual's filing status and taxable income.
In addition, for taxable years beginning after December 31, 2012, individuals (other than non-resident aliens) are subject to an additional 3.8% United States federal tax on the lesser of (i) their net investment income, and (ii) the excess of their adjusted gross income (determined with certain modifications on account of certain foreign earned income and related deductions) over a threshold amount of
$250,000 in the case of a taxpayer filing a joint return or a surviving spouse, $125,000 in the case of a married taxpayer filing a separate return, and $200,000 in all other cases. A similar 3.8% United States federal tax will be imposed on certain trusts and estates in respect of the lesser of their undistributed net investment income and the excess of their adjusted gross income over a prescribed threshold. Net investment income is determined under prescribed rules, including special rules relating to income from passive trades or businesses, trades, or businesses of trading in financial instruments or commodities, and in respect of dispositions of interests in partnerships and S corporations.
Alternative Minimum Tax
The Code provides for an alternative minimum tax for non-corporate taxpayers which is imposed to the extent that such tax exceeds the taxpayer's regular income tax liability. Alternative minimum taxable income is equal to regular taxable income determined with certain modifications. Among the modifications are the non-deductibility of certain itemized amounts and other items otherwise deductible (or partially deductible) for purposes of determining regular taxable income, and the addition to regular taxable income of certain tax
preference items. The application of the alternative minimum tax to a Limited Partner cannot be predicted without a thorough consideration of all aspects of the Limited Partner's tax situation. Therefore, it is the responsibility of each Limited Partner to consult with his/her own tax advisor to determine the impact, if any, which the alternative minimum tax might have on an investment in the Fund.
Tax Audits; Partnership Representative
The General Partner will act as the "partnership representative" of the Fund. The partnership representative will have the authority, subject to certain restrictions, to act on behalf of the Fund in connection with any administrative or judicial review of items of the Fund's income, gain, loss, deduction, or credit.
A tax return preparer may not sign a return without itself incurring a penalty unless either in its view each position taken on such return is more likely than not to be sustained if challenged by the IRS or such position is separately disclosed on the return. The Fund may adopt positions that require such disclosure, which may increase the likelihood the IRS will examine the Fund's tax returns or may forego otherwise valid reporting positions to avoid such disclosure, which may increase the tax payable by a Limited Partner.
Legislation was recently enacted that significantly changes the rules for U.S. federal income tax audits of partnerships. Such audits will continue to be conducted at the partnership level, however, unless a partnership qualifies for and affirmatively elects an alternative procedure, any adjustments to the amount of tax due (including interest and penalties) will be payable by the partnership. Under the alternative procedure, if elected, a partnership would issue information returns to persons who were Limited Partners in the audited year, who would then be required to take the adjustments into account in calculating their own tax liability, and the partnership would not be liable for the adjustments. If the Fund is able to and in fact elects the alternative procedure for a given adjustment, the amount of taxes for which such persons will be liable will be increased by any applicable penalties and a special interest charge.
There can be no assurance that the Fund will be eligible to make such an election or that it will, in fact, make such an election for any given adjustment. If the Fund does not or is not able to make such an election, then (1) the then current Limited Partners, in the aggregate, could indirectly bear income tax liabilities in excess of the aggregate amount of taxes that would have been due had the Fund elected the alternative procedure, and (2) a given Limited Partner may indirectly bear taxes attributable to income allocable to other Limited Partners or former Limited Partners, including taxes (as well as interest and penalties) with respect to periods prior to such Limited Partner's ownership of Units in the Fund. Accordingly, it is possible that a Limited Partner will bear tax liabilities unrelated to its ownership of Units in the Fund. Amounts available for distribution to Limited Partners may be reduced as result of the Fund's obligations to pay any taxes associated with an adjustment.
The partnership representative of the Fund will be the only person with the authority to act on behalf of the Fund with respect to audits and certain other tax matters and may decide not to elect (or may be unable to elect) the alternative procedure for any particular adjustment. In addition, the Fund and each Limited Partner will be bound by the actions taken by the partnership representative on behalf of the Fund during any audit or litigation proceeding concerning U.S. federal income taxes.
State and Local Taxation
In addition to the U.S. federal income tax consequences described above, prospective Limited Partners should consider potential state of Oregon and local tax consequences of an investment in the Fund. State and local laws often differ from Federal income tax laws with respect to the treatment of specific items of income, gain, loss, deduction, and credit. A Limited Partner's distributive share of the taxable income or loss of the Fund generally will be required to be included in determining its reportable income for state and local tax purposes in the jurisdiction in which it is a resident.
Prospective Limited Partners should consult with their own advisors as to the applicability of such rules in jurisdictions which may require or impose a filing requirement.
Unrelated Business Taxable Income
Units may be offered and sold to certain tax-exempt entities (such as qualified pension or profit-sharing plans) that otherwise meet the investor suitability standards described elsewhere in this Circular. (See "Investor Suitability Standards.") Such tax-exempt entities generally do not pay federal income taxes on their income unless they are engaged in a business which generates "unrelated business taxable income," as that term is defined by Section 513 of the Code. Under the Code, tax exempt purchasers of Units may be deemed to be engaged in an unrelated trade or business due to interest income earned by the Fund. Interest income (which will constitute the primary source of Fund income) does not constitute an item of unrelated business taxable income, except to the extent it is derived from "debt-financed property," however, since the Fund will not utilize borrowed funds for the purpose of making or investing in loans,
interest earned on Fund loans should not constitute unrelated business taxable income and investors that are otherwise exempt from federal and state income taxes should not realize interest income earned by the Fund.
Rents from real property and gains from the sale or exchange of property are also excluded from unrelated business taxable income, unless the property is held primarily for sale to customers or is acquired or leased in certain manners described in Section 514(c)(9) of the Code. Therefore, unrelated business taxable income may also be generated if the Fund operates or sells at a profit any property that has been acquired through foreclosure on a Fund loan, but only if such prope1ty (I) is deemed to be held primarily for sale to customers, or (2) is acquired from or leased to a person who is related to a tax-exempt investor in the Fund.
The trustee of any trust that purchases Units in the Fund should consult with his or her tax advisors regarding the requirements for exemption from federal income taxation and the consequences of failing to meet such requirements, in addition to carefully considering the fiduciary responsibilities of a trustee with respect to such matters as investment diversification and the prudence of investments.
Taxable Mortgage Pool Rules
Notwithstanding the check-the-box provisions, the IRS may still reclassify certain partnerships as corporations for federal income tax purposes, if they meet the definition of a "taxable mortgage pool" under Internal Revenue Code Section 7701(i)(2)(A). A taxable mortgage pool is any entity 1) whose assets consist substantially of debt instruments, 2) who is the obligor under debt obligations with two or more maturities, and 3) where there is a relationship between the debt instruments and the debt obligations of the entity. The issue of what constitutes debt obligations with two or more maturities is unclear. The regulations state that "[T]he purpose of section 770l(i) is to prevent income generated by a pool of real estate mortgages from escaping Federal income taxation when the pool is used to issue multiple class mortgage-backed securities." The LLC has only one class of Units. A literal reading of this provision could lead to the conclusion that the LLC would not be reclassified as a taxable mortgage pool and taxed as a corporation. However, due to the lack of clarity with respect to this provision, there is no assurance (and no opinion of any kind can be given) that the IRS would not attempt to tax the LLC as a corporation and not a partnership. Any such taxation would have an adverse effect on the LLC and the return an Investor would receive on their investment in the Fund.
TAX CONSIDERATIONS RELATED TO INVESTING IN A REAL ESTATE INVESTMENT TRUST
This summary assumes that the Fund will be treated as being engaged in the ordinary course of a trade or business as a result of its lending activities outside of REIT Subsidiaries. There can be no assurance in this regard, however, and materially different tax consequences may result if the Fund is instead treated as investing in securities and not being engaged in a trade or business (which treatment is expected if the Fund conducts all its lending activities through one or more REIT Subsidiaries).
Under current U.S. federal income tax law, most miscellaneous investment expenses are not deductible by non-corporate taxpayers. Accordingly, a non-corporate Limited Partner's share of fees paid to the General Partner and most other Fund expenses will not be deductible. Limited Partners that are corporations for U.S. federal income tax purposes are not subject to this deduction disallowance rule, but such deduction disallowance rule does apply to individual shareholders of S corporation Limited Partners.
Non-corporate investors (and certain closely held and personal service corporations) are subject to limitations on using losses from passive business activities to offset active business income, compensation income, and portfolio income (e.g., interest, dividends, capital gains from portfolio investments and royalties). The Fund's distributive share of income or losses from an investment in equity securities of a flow-through entity engaged in business (which amounts are not expected to be material for the Fund), or the Fund's income or losses to the extent that it is engaged in a trade or business, generally will be treated as passive activity income or losses. Accordingly, a Limited Partner will be subject to the passive activity loss limitations on the use of any such losses, and such losses, together with any other passive activity losses generated by such other investments made by the Limited Partner, can generally be used only to offset the Fund's passive activity income allocable to such Limited Partner and any other passive activity income generated by such other investments. Income and gain of the Fund not treated as passive activity income generally will be treated as portfolio income, and a Limited Partner generally will not be able to use passive activity losses to offset such portfolio income from the Fund. Under the business interest expense limitation described below, additional limitations on deductibility may apply to the extent that any portion of a passive activity loss consists of interest expense incurred by the underlying business.
If the Fund is not treated as engaged in a U.S. trade or business, interest on any amount borrowed by a Limited Partner (other than a corporation) to purchase an interest in the Fund or to make a capital contribution to the Fund generally will be "investment interest" and subject to a limitation on deductibility. In general, investment interest is deductible only to the extent of the taxpayer's "net investment income." For this purpose, "net investment income" generally includes net income from the Fund and other income from property held for investment (other than, in each case, income treated as business income). However, qualified dividend income, as defined under
Section 1(h)(11)(B) of the Code, and long-term capital gain is excluded from the definition of net investment income unless the taxpayer makes a special election to treat such dividend income or capital gain as ordinary. The Fund does not expect to generate material amounts of qualified dividend income or long-term capital gain. Interest that is not deductible in the year incurred because of the investment interest limitation may be carried forward and deducted in a future year in which the taxpayer has sufficient investment income.
If the Fund is deemed to be engaged in a trade or business, or if the Fund holds an investment in equity securities of an issuer that is a partnership, limited liability company or other flow-through entity engaged in a trade or business (a "Flow-Through Investment"), a
U.S. Member's allocable share of the net business interest expense (i.e., the excess of business interest expense over business interest income, which is not expected to be material for the Fund) attributable to the Fund or the Flow-Through Investment generally will be deductible by such U.S. Member only to the extent that such interest expense does not exceed 30 percent of the U.S. Member's allocable share of the applicable entity's "adjusted taxable income" for the applicable taxable year. A flow-through entity's adjusted taxable income generally means its ordinary taxable business income computed without reduction for any business interest expense, and, for taxable years beginning before January 1, 2022, without reduction for any depreciation, amortization or depletion. Interest that is not deductible in the year incurred because of the business interest limitation may be carried forward and deducted in a future year in which the taxpayer has sufficient adjusted taxable income. This limitation may increase the tax liability of U.S. Members attributable to flow- through investments and the tax liability of corporate entities in which the Fund directly or indirectly invests, potentially decreasing the after-tax returns of the Fund and its investors.
In addition, to the extent that a non-corporate Limited Partner's allocable share of a loss attributable to the Fund or a Flow-Through Investment is otherwise available for use after application of the passive loss limitations, such loss may be treated as an "excess business loss." A non-corporate U.S. Member may use an excess business loss to offset other income only up to a specified dollar amount (initially two hundred fifty thousand dollars ($250,000), or five hundred thousand dollars ($500,000) in the case of married taxpayers), which will be adjusted for inflation. Any disallowed excess business loss generally will be added to the U.S. Member's net operating loss and may be carried over to future years. The deductibility of net operating loss carryforwards is subject to further limitations.
Certain non-corporate Limited partners may be eligible for a deduction equal to a portion of the income allocated to them that is generated by the Fund (to the extent it is engaged in a trade or business) or a Flow-Through Investment. In general, a U.S. taxpayer other than a corporation is entitled to a deduction equal to 20 percent of the taxpayer's "qualified business income," subject to certain limitations. "Qualified business income" is the sum of the taxpayer's income from qualified REIT dividends, qualified trades or businesses and qualified publicly traded partnership income, but generally excludes capital gains and other dividend income. Although many types of business are qualified trades or businesses, various types of service-related businesses are ineligible (including, for example, services in the fields of health, law, consulting, financial services and investment management). With respect to each taxable year, the 20 percent deduction is subject to a cap based on a percentage of the wages paid or capital invested with respect to the applicable qualified trade or business, although this cap does not apply with respect to REIT ordinary dividends and qualified publicly traded partnership income. Because of the foregoing limitations and the complexity associated with determining the amount of qualified business income and the applicable deduction limitations, there can be no assurances that any of the Fund's income will be qualified business income or that (if a portion of the Fund's income does constitute qualified business income) the Fund will be able to provide information sufficient to enable individual U.S. Members to calculate their deductions with respect to such income.
REIT Matters
The Fund may, but is not obligated to, hold certain investments through the REIT-Sub. The REIT-Sub is expected to satisfy the requirements for taxation as a REIT under the applicable provisions of the Code. No assurance can be given, however, that those requirements will be met.
If the requirements are met, then the REIT-Sub that invests primarily in real estate and that otherwise would be treated for U.S. federal income tax purposes as a corporation is allowed a deduction for dividends paid to its owners. This treatment substantially eliminates the "double taxation" at both the corporate and owner levels that generally results from the use of corporations. However, the REIT-Sub would be subject to tax in certain circumstances even if it qualified as a REIT. For example, the REIT-Sub would be subject to tax at normal corporate rates upon any taxable income or capital gain not distributed to its shareholders and would be subject to an additional 4% four percent (4%) excise tax if it failed to make certain required distributions for a calendar year. The REIT-Sub also would be subject to a one hundred percent (100%) tax on a portion of its gross income if it failed to meet certain gross income tests for a taxable year and nonetheless maintained its qualification as a REIT because other requirements were met. So long as the REIT-Sub qualifies as a REIT, it will be subject to a tax of one hundred percent (100%) on net income from any "prohibited transaction," which is a sale of property held primarily for sale to customers in the ordinary course of a trade or business, unless the REIT-Sub holds the property for at least two (2) years and satisfies other requirements relating to the number of properties sold in a year, their tax bases and the cost of improvements made to the properties. For the REIT-Sub to qualify as a REIT, a number of requirements must be met including certain
requirements on share ownership, tests relating to the nature of a REIT's assets, tests relating to the sources of a REIT's gross income, a requirement that a REIT make sufficient annual distributions to its shareholders (other than capital gain dividends) and other requirements and limitations with respect to prohibited transactions and foreclosure property. If the REIT-Sub fails to qualify for taxation as a REIT in any taxable year and relief provisions do not apply, then the REIT-Sub will be subject to tax on its taxable income at regular corporate rates.
REIT Matters - Tax-Exempt U.S. Members
The Fund may, but is not obligated to, make certain investments through one or more REIT Subsidiaries as determined by the General Partner in its sole discretion. Each REIT Subsidiary is expected to satisfy the requirements for taxation as a REIT under the applicable provisions of the Code. No assurance can be given, however, that those requirements will be met.
The IRS has issued a revenue ruling in which it held that amounts distributed by a REIT to a tax-exempt employees' pension trust do not constitute UBTI. Based upon the ruling, the analysis in the ruling and the statutory framework of the Code, distributions by the REIT-Sub to the Fund should not constitute UBTI to tax-exempt Limited Partners, provided that the Fund has not financed the acquisition of its interest in the REIT Subsidiary with "acquisition indebtedness" within the meaning of the Code, that the interests of the Fund held by the tax-exempt Limited Partners are not debt financed with acquisition indebtedness and are not otherwise used in an unrelated trade or business of the tax-exempt Limited Partner, that the REIT Subsidiary does not qualify as a "pension-held REIT," and that the REIT Subsidiary, consistent with present intent, does not hold a residual interest in a real estate mortgage investment conduit or taxable mortgage pool. For these purposes, a "pension-held REIT" is defined as a REIT if the REIT would not have qualified as a REIT but for the provisions of the Code which look through a pension trust qualifying under Section 401(a) of the Code in determining ownership of stock of a REIT and at least one qualified pension trust holds more than Twenty-Five Percent (25%) by value of the interests of the REIT (directly or indirectly) or one or more qualified pension trusts (each owning more than a Ten Percent (10%) interest by value in the REIT) hold in the aggregate more than Fifty Percent (50%) by value of the interests in the REIT (directly or indirectly).
General Tax Consequences Relating to REITs
The Fund may, but is not obligated to, utilize one or more REITs for investments that are made in assets that are suitable for, as determined by the General Partner in its sole discretion, a REIT under applicable provisions of the Code. The General Partner believes that each investment in such assets will meet the requirements for taxation as a REIT, and it intends to monitor compliance on an ongoing basis. No assurance can be given, however, that these requirements will be met.
If the requirements are met, then a REIT that invests primarily in real estate and that otherwise would be treated as a corporation for
U.S. federal income tax purposes is allowed a deduction for dividends paid to its owners. This treatment substantially eliminates the "double taxation" at both the corporate and owner levels that generally results from the use of corporations. However, a REIT would be subject to tax in certain circumstances even if it qualified as a REIT. For example, a REIT would be subject to tax at normal corporate rates upon any taxable income or capital gain not distributed to its shareholders and would be subject to an additional 4% four percent (4%) excise tax if it failed to make certain required distributions for a calendar year. A REIT also would be subject to a 100% tax on a portion of its gross income if the REIT failed to meet the seventy-five percent (75%) or ninety-five percent (95%) gross income tests, which are discussed below, for a taxable year and nonetheless maintained its qualification as a REIT because other requirements were met. So long as a REIT qualifies as a REIT, it will be subject to a tax of one hundred percent (100%) on net income from any "prohibited transaction," which is a sale of property held primarily for sale to customers in the ordinary course of a trade or business, unless the REIT holds the property for at least two years and satisfies other requirements relating to the number of properties sold in a year, their tax bases and the cost of improvements made to the properties. If a REIT fails to qualify for taxation as a REIT in any taxable year and relief provisions do not apply, then the REIT will be subject to tax on its taxable income at regular corporate rates. To qualify as a REIT, the requirements described below must be met.
Share Ownership Test.
Shares of a REIT must be held by a minimum of one hundred (100) persons for at least Three Hundred and Thirty-Five (335) days in each taxable year or a proportional number of days in any short taxable year after the first taxable year of the REIT. In addition, at all times during the second half of each taxable year after the first taxable year of the REIT, no more than Fifty Percent (50%) in value of the shares may be owned, directly or indirectly and by applying constructive ownership rules, by five or fewer individuals, which for this purpose includes some tax-exempt entities (e.g., private foundations).
The governing documents for the REIT Sub will contain certain restrictions on the actual and constructive ownership of such REIT's shares (taking into account certain attribution rules under the Code), which restrictions are intended to assist a REIT in satisfying certain
of the share ownership requirements applicable to a REIT under the Code. In addition to the restrictions on direct and indirect transfers contained in a REIT's governing documents, Limited Partners may be required to provide the Fund with notice of certain indirect transfers of equity interests in such REIT, which notice requirements are intended to assist a REIT in satisfying certain of the Code's share ownership requirements applicable to such REIT. If a transfer of an interest in the Fund or of any direct or indirect ownership interest in a Limited Partner causes shares of a REIT held by the Fund to be converted into "Excess Shares" pursuant to the REIT's governing documents, then the transferee of the interest in the Fund or the Limited Partner may be subject to adverse consequences, including being required to repay certain distributions received by it from the Fund that are attributable to the "Excess Shares" and having its right to certain future distributions reduced.
Asset Tests.
At the close of each quarter of its taxable year, a REIT must satisfy tests relating to the nature of its assets determined in accordance with generally accepted accounting principles. Where a REIT invests in a partnership or limited liability company taxed as a partnership or disregarded entity, the REIT will be deemed to own a proportionate share of the partnership's, limited liability companies or disregarded entity's assets. First, at least Seventy-Five Percent (75%) of the value of total assets must be represented by interests in real property, interests in mortgages on real property, shares in other real estate investment trusts, cash, cash items, government securities and qualified temporary investments. Second, although the remaining Twenty-Five Percent (25%) of the value of total assets generally may be invested without restriction, a REIT is prohibited from owning securities representing more than Ten Percent (10%) of either the vote or value of the outstanding securities of any issuer other than a qualified REIT subsidiary, another REIT or a taxable REIT subsidiary. Further, no more than Twenty Percent (20%) of the value of the total assets of a REIT may be represented by securities of one or more taxable REIT subsidiaries, and no more than Five Percent (5%) of the value of the total assets of a REIT may be represented by securities of any non-government issuer other than a taxable REIT subsidiary.
A REIT will not lose its status as a REIT for failing to satisfy the Five Percent (5%) or Ten Percent (10%) asset tests in any quarter if the failure is due to the ownership of assets the total value of which does not exceed the lesser of (i) One Percent (1%) of the total value of the REIT's assets at the end of the quarter for which the measurement is done and (ii) Ten Million Dollars ($10,000,000), provided that, in either case, the REIT either disposes of the assets within Six (6) months after the last day of the quarter in which the REIT identifies the failure (or another time period prescribed by the U.S. Treasury), or otherwise meets the requirements of those rules by the end of that period. If a REIT fails to meet any of the asset test requirements for a quarter and that failure exceeds the de minimis threshold described above, the REIT may still qualify as a REIT if the REIT were entitled to relief provisions under the Code. These relief provisions generally will be available if:
(1) following the REIT's identification of the failure, the REIT files a schedule with a description of each asset that caused the failure, in accordance with regulations prescribed by the U.S. Treasury;
(2) the failure was due to reasonable cause and not to willful neglect;
(3) the REIT disposes of the assets within six (6) months after the last day of the quarter in which the identification occurred or another time period prescribed by the U.S. Treasury (or the requirements of the rules are otherwise met within that period); and
(4) the REIT pays a tax equal to the greater of (1) Fifty Thousand Dollars ($50,000) and (2) the amount determined (pursuant to regulations prescribed by the U.S. Treasury) by multiplying the net income generated by the assets that caused the failure for the particular quarter by the highest applicable corporate tax rate.
Gross Income Tests.
There are currently two separate percentage tests relating to the sources of the gross income that must be satisfied for each taxable year. For purposes of these tests, where a REIT invests in a partnership or limited liability company taxed as a partnership or disregarded entity, the REIT will be treated as receiving its share of the income and loss of the partnership, limited liability company or disregarded entity, and the gross income of the partnership, limited liability company or disregarded entity will retain the same character in the hands of the REIT as it has in the hands of the partnership, limited liability company or disregarded entity. The two tests are as follows:
The 75% Test.
At least Seventy-Five Percent (75%) of the gross income for the taxable year must be "qualifying income." Qualifying income generally includes, among other things, rents from real property (with some exceptions), interest on obligations secured by mortgages, and certain gains on the sales of property.
The 95% Test.
In addition to deriving Seventy-Five Percent (75%) of its gross income from, among other things, the sources listed above, at least Ninety-Five Percent (95%) of a REIT's gross income for the taxable year must be derived from the above-described qualifying income, or from dividends, interest or gains from the sale or disposition of stock or other securities that are not dealer property.
Even if a REIT fails to satisfy one or both of the Seventy-Five Percent (75%) or the Ninety-Five Percent (95%) gross income tests for any taxable year, the REIT may still qualify as a REIT for the year if the REIT is entitled to relief under provisions of the Code. These relief provisions will generally be available if:
(1) the failure to comply was due to reasonable cause and not due to willful neglect; and
(2) following the REIT's identification of the failure, the REIT files a schedule with a description of each item of gross income that caused the failure in accordance with regulations prescribed by the U.S. Treasury.
If these relief provisions apply, however, the REIT would nonetheless be subject to a special tax upon the greater of the amount by which the REIT fails either the Seventy-Five Percent (75%) or Ninety-Five Percent (95%) gross income test for that year.
Annual Distribution Requirements.
To qualify as a REIT, a REIT is required to make distributions, other than capital gain dividends, to its shareholders each year in an amount at least equal to the sum of Ninety Percent (90%) of the REIT's taxable income, computed without regard to the dividends paid deduction and REIT net capital gain, plus Ninety Percent (90%) of the net income after tax, if any, from foreclosure property, minus the sum of some items of excess non-cash income. A REIT is permitted, with respect to undistributed net long-term capital gains it received during the taxable year, to designate in a notice mailed to shareholders within Sixty (60) days of the end of the taxable year, or in a notice mailed with its annual report for the taxable year, the amount of those gains that its shareholders are to include in their taxable income as long-term capital gains.
These distributions generally must be paid in the taxable year to which they relate, or in the following taxable year if declared before a REIT timely files its tax return for the year and if paid with or before the first regular dividend payment after such declaration (in order to avoid the Four Percent (4%) excise tax, such amounts must be paid by January 30). For distributions to be counted for this purpose and to give rise to a tax deduction by the REIT, they must not be "preferential dividends." A dividend is not a preferential dividend if it is pro rata among all outstanding shares of stock within a particular class and is in accordance with the preferences among different classes of stock as set forth in the REIT's governing documents.
If a REIT distributes at least Ninety Percent (90%), but less than One Hundred Percent (100%), of its "REIT taxable income," as adjusted, it will be subject to tax at ordinary corporate tax rates on the retained portion. A REIT may elect to retain, rather than distribute, its net long-term capital gains and pay tax on those gains. In this case, the REIT could elect to have its owners include their proportionate share of undistributed long-term capital gains in income and receive a corresponding credit for their share of the tax paid by the REIT. The holders of interests in the REIT would then increase the adjusted basis of their interests by the difference between the designated amounts of capital gains from the REIT that they include in their taxable income and the tax paid on their behalf by the REIT with respect to that income.
To the extent that a REIT has available net operating losses carried forward from prior tax years, those losses may, in part, reduce the amount of distributions that it must take to comply with the REIT distribution requirements. However, those losses will generally not affect the character, in the hands of stockholders, of any distributions that are actually made by the REIT, which are generally taxable to stockholders to the extent that the REIT has current or accumulated earnings and profits.
It is possible that a REIT, from time to time, may not have sufficient cash to meet the distribution requirement due to timing differences between (i) the actual receipt of cash, including receipt of distributions from its subsidiaries, and (ii) the inclusion of items in income by the REIT for U.S. federal income tax purposes. If such timing differences occur, then to meet the distribution requirement might require short-term, or possibly long-term, borrowings, or to pay dividends in the form of taxable in-kind distributions of property, subject to the restrictions contained in the REIT's governing documents. If a REIT fails to meet the Ninety Percent (90%) distribution requirement as a result of an adjustment to its tax returns by the Service, the REIT may retroactively cure the failure by paying a "deficiency dividend," plus applicable penalties and interest, within a specified period.
In addition to the distributions necessary to maintain REIT status, if a REIT should fail to distribute during each calendar year at least
the sum of (i) Eighty-Five Percent (85%) of its REIT ordinary income for such year, (ii) Ninety-Five Percent (95%) of its REIT capital gain net income for such year and (iii) any undistributed taxable income from prior periods, it would be subject to a 4%Four Percent (4%) excise tax on the excess of such required distribution over the sum of (a) the amounts actually distributed and (b) the amounts of income retained on which it has paid corporate income tax.
Prohibited Transactions.
Net income derived from a prohibited transaction is subject to One Hundred Percent (100%) excise tax. The term "prohibited transaction" generally includes a sale or other disposition of property (other than foreclosure property) that is held primarily for sale to customers in the ordinary course of a trade or business (or "dealer property"). The Fund intends to conduct the operations of any REIT so that no asset owned by such REIT, or its pass-through subsidiaries will be held for sale to customers and that a sale of any such asset will not be in the ordinary course of such REIT's business. Whether property is held "primarily for sale to customers in the ordinary course of a trade or business" depends, however, on the particular facts and circumstances. No assurance can be given that any property sold by any REIT will not be treated as property held for sale to customers or that any REIT can comply with certain safe harbor provisions of the Code that would prevent the imposition of the One Hundred Percent (100%) excise tax. The One Hundred Percent (100%) tax does not apply to gains from the sale of property that is held through a taxable REIT subsidiary or other taxable corporation, although that income will be subject to tax in the hands of that corporation at regular corporate tax rates.
Foreclosure Property.
Foreclosure property is real property and any personal property incident to the real property (i) that is acquired by a REIT as the result of the REIT having bid on the property at foreclosure, or having otherwise reduced the property to ownership or possession by agreement or process of law, after there was a default (or default was imminent) on a lease of the property or a mortgage loan held by the REIT and secured by the property, (ii) for which the related loan or lease was acquired by the REIT at a time when default was not imminent or anticipated, and (iii) for which the REIT makes a proper election to treat the property as foreclosure property. REITs generally are subject to tax at the maximum corporate rate (currently Twenty-One Percent (21%)) on any net income from foreclosure property, including any gain from the disposition of the foreclosure property, other than income that would otherwise be qualifying income for purposes of the Seventy-Five Percent (75%) gross income test. Any gain from the sale of property for which a foreclosure property election has been made will not be subject to the One Hundred Percent (100%) excise tax on gains from prohibited transactions described above, even if the property would otherwise constitute inventory or dealer property in the hands of the selling REIT.
The Fund anticipates that its REITs, if any, will not receive any income from foreclosure property that is not qualifying income for purposes of the Seventy-Five Percent (75%) gross income test; but, if any REIT receives any such income, it intends to make an election to treat the related property as foreclosure property.
Failure to Qualify.
If a REIT fails to qualify for taxation as a REIT in any taxable year and relief provisions do not apply, it will be subject to tax on its taxable income at regular corporate rates. Distributions to the Fund in any year in which a REIT fails to qualify as a REIT will not be deductible by such REIT, nor generally will distributions be required to be made by such REIT under the Code. In that event, to the extent of current and accumulated earnings and profits, all distributions to the Fund from such REIT will be taxable as ordinary income to the Limited Partners. Unless entitled to relief under specific statutory provisions, a REIT also will be disqualified from reelecting taxation as a REIT for the four taxable years following the year during which REIT qualification was lost.
If a REIT fails to satisfy one or more requirements for REIT qualification, other than the gross income and assets tests, each of which is subject to the cure provisions discussed above, the REIT may retain its status as a REIT if:
(1) the failure to qualify was due to reasonable cause and not due to willful neglect; and
(2) the REIT pays, in accordance with regulations prescribed by the U.S. Treasury and in the same manner as tax, a penalty of Fifty Thousand Dollars ($50,000) for each failure due to reasonable cause and not due to willful neglect.
U.S. Federal Income Tax Audits and Resulting Liabilities
A partnership (including the Fund) appoints one person (the "partnership representative") to act on its behalf in connection with IRS audits and related proceedings. The partnership representative's actions, including the partnership representative's agreement to adjustments of the Fund's income in settlement of an IRS audit of the Fund, will bind all Limited Partners. Pursuant to the Operating
Agreement, the General Partner or its delegate has been designated as the partnership representative.
In addition, U.S. federal income taxes (and any related interest and penalties) attributable to an adjustment to the Fund's income following an IRS audit or judicial proceeding will, absent an election by the Fund to the contrary, must be paid by the Fund in the year during which the audit or other proceeding is resolved, if such adjustment results in an increase in U.S. federal income tax liability. If an adjustment to the Fund's income following an IRS audit or judicial proceeding results in a reduction in U.S. federal income tax liability, the adjustment will flow through to the Limited Partners based on their interests for the year in which the audit or other proceeding is resolved. This could cause the economic burden of U.S. federal income tax liability (or the economic benefit of a favorable adjustment) arising on audit of the Fund to be borne by (or, in the case of a favorable adjustment, to benefit) Limited Partners based on their interests in the Fund in the year during which the audit or other proceeding is resolved, even though such tax liability (or benefit) is attributable to an earlier taxable year in which the interests or identity of some or all of the Limited Partners was different. The partnership tax audit rules also can cause the Fund's U.S. federal income tax liability arising on audit to be computed in less advantageous ways than the tax liability of the Limited Partners would be computed if the Fund had not been audited (for example, by applying the highest marginal U.S. federal income tax rates and potentially ignoring the tax-exempt status of certain Limited Partners). In calculating taxes imposed on the Fund with respect to audit adjustments, the Fund may be able to take into account certain applicable lower tax rates and the tax-exempt status of certain Limited Partners, which may require Limited Partners to provide certain information to the Fund (possibly including information about the owners of Limited Partners classified as partnerships). In addition, if elected by the partnership representative, alternative procedures may allow the Fund to avoid such entity-level U.S. federal income tax liability in some cases if certain conditions are satisfied. These alternative procedures may require Limited Partners (based on their interests in the Fund in the prior tax year under audit) to either file amended returns and pay any tax that would be due for the prior tax year under audit or adjust the tax liability reported on their income tax returns for the year in which the audit is resolved.
Any U.S. federal income taxes (and any related interest and penalties) paid by the Fund in respect of IRS audit adjustments at the Fund level will be allocated by the General Partner to, and will be borne by, the Limited Partners pursuant to the terms of the Limited Partnership Agreement.
CERTAIN LEGAL ASPECTS OF THE FUND LOANS
The Fund's loans will be secured by either a mortgage or a deed of trust. In some states, a mortgage is the form of security instrument used to secure a real property loan, while in other states a deed of trust is the form of security instrument used to secure a real property loan. A mortgage has two parties: a borrower called the "mortgagor", and the lender called the "mortgagee." The mortgagor gives the mortgagee a lien on the property as security for the loan or, in some states, the mortgagor conveys legal title of the property to the mortgagee until the loan is repaid but retains equitable title and the right of possession to the property so long as the loan is not in default. A deed of trust has three parties: a borrower-grantor called the "trustor," a third-party grantee called the "trustee," and a lender-creditor called the "beneficiary." The trustor grants the property, irrevocably until the debt is paid, "in trust, with power of sale" to the trustee to secure payment of the obligation. The trustee's authority is governed by law, the express provisions of the deed of trust and the directions of the beneficiary.
Foreclosure
How the Fund will enforce its rights under a mortgage or deed of trust or with respect to hypothecated notes will depend on the laws of the state in which the property is situated. Depending on local laws, a lender may be able to enforce its mortgage or deed of trust by judicial foreclosure or by non-judicial foreclosure through the exercise of a power of sale. Local laws will also dictate, among other things, the amount of time and costs associated with a judicial or non-judicial foreclosure sale, whether or not a lender would be entitled to recover a deficiency judgment (i.e., the resulting shortfall if the proceeds from the sale of the property are not sufficient to pay the debt) from the borrower, either concurrently with or following a judicial or non-judicial sale, whether there are limits as to the amount of this deficiency judgment, and whether the borrower would have a right to redeem the property following a judicial or non-judicial sale.
A judicial foreclosure is a public sale of property conducted under an order of the court of the state in which the property is located, with the sales proceeds being applied to satisfy the underlying debt. A judicial foreclosure is subject to most of the delays and expenses of other lawsuits and can take up to several years to complete, depending on how busy the local courts are.
In contrast, a non-judicial foreclosure is a private sale of the property, conducted by the trustee, in the case of a deed of trust, following the giving of appropriate notice and the expiration of appropriate cure periods. It is generally cheaper and quicker to conduct a non- judicial foreclosure than to conduct judicial foreclosure.
A lender would typically undertake a judicial foreclosure when the lender seeks to obtain a deficiency judgment. In some states, a lender is not entitled to recover a deficiency judgment if the lender forecloses non-judicially. Some states also limit the amount of deficiency that can be recovered from a borrower following a judicial foreclosure sale to the difference between the amount of the debt owing to the lender and the higher of (i) the successful sales price bid at the foreclosure sale, or (ii) the fair market value of the property at the time of foreclosure (a so-called "fair value limitation"). Moreover, some states provide that a borrower and/or junior lienholder has a right to redeem the property during a specified period following a judicial foreclosure sale by paying to the successful bidder an amount equal to the successful sales price bid at the foreclosure sale and the costs of the foreclosure sale. This right of redemption can depress the amount bid at a judicial foreclosure sale because the successful bidder would have to take the property subject to the borrower's and/or the junior lienholder's right of redemption.
If a lender elects to undertake a non-judicial foreclosure sale it would, in many states, forego the right to obtain a deficiency judgment. However, real property that is sold through a non-judicial foreclosure sale is, in many states, not subject to a right of redemption.
In summary, whether a lender would pursue a judicial or a non-judicial foreclosure, and the extent and nature of other remedies available to a lender against a borrower about a real property secured loan, will depend on the laws of the state in which the real property is located. If a borrower were to default under a loan, the General Partner, as the loan servicer, would evaluate the applicable laws and consider the enforcement practices typically undertaken by commercial lenders in the state in which the property is located before commencing enforcement actions.
Other Loan Enforcement Issues
Other matters, such as litigation instituted by a defaulting borrower or the operation of the federal bankruptcy laws, may have the effect of delaying enforcement of the lien of a defaulted loan and may in certain circumstances reduce the amount realizable from sale of a foreclosed property. Where a loan is secured by hypothecated notes, the bankruptcy of a borrower under a hypothecated note can impair the value of the hypothecated note as security.
In some instances, a loan may not only be secured by real property security but also guaranteed by a third-party guarantor. Limited Partners should be aware that, depending on local laws, a guarantor may have defenses that would impair the ability of the lender to enforce its guaranty. For example, in some states if a loan obligation is modified without the guarantor's consent, the guarantor may be exonerated from all or part of its obligations under the guaranty. Other states may require that a lender first exhaust all its remedies against the borrower and real property security and only then can seek any resulting deficiency from the guarantor. A guarantor may, under some local laws, be able to waive some of these defenses in advance provided that the waivers are sufficiently explicit.
Special Considerations for Junior Encumbrances
The Fund is permitted to acquire loans secured by a junior deed of trust (i.e., a loan secured by one or more senior liens). If the Fund does invest in a junior loan, however, there are certain additional considerations applicable to junior deeds of trust or mortgages (i.e., junior encumbrances). In addition to the general considerations concerning trust deeds and mortgages discussed above, by its very nature, a junior encumbrance is less secure than more senior ones. Only the holder of a first trust deed or mortgage is permitted to bid in the amount of his credit at his foreclosure sale; junior lienholders must bid cash at a first trust deed or mortgage foreclosure sale. (At a junior lienholder's foreclosure sale, a junior lienholder may bid the amount of his credit.) Accordingly, a junior lienholder (such as the Fund) would need to protect its security interest in the secured property by taking over all obligations of the borrower with respect to senior loans and then keep such obligations current while it forecloses on its junior lien. If the senior loan is a large one, paying current debt service to the senior lender could deplete all the Fund's cash reserves. Moreover, if the senior loan has matured or is accelerated, the Fund may be compelled to pay it off in full.
As a long-term solution, a junior lienholder would need to commence its own foreclosure action and arrange either (a) to find a purchaser for the property at a purchase price that will recoup the junior lienholder's interest, (b) to refinance the senior loan, or (c) to pay off the senior encumbrances in full and thereby become the senior lienholder (or the owner of the property free and clear of liens). The Fund's inability to achieve any of these solutions in a timely manner will result in severe investment losses to the Fund. This was a common occurrence during the 2007-2008 housing market slump.
The standard deed of trust or mortgage used by most institutional lenders, like the one that will be used by the General Partner, confers on the beneficiary the right both to receive all proceeds collected under any hazard insurance policy and all awards made relating to any condemnation proceedings, and to apply such proceeds and awards to any indebtedness secured by the deed of trust, in such order as the beneficiary may determine. Thus, in the event improvements on the property are damaged or destroyed by fire or other casualty, or in the event the property is taken by condemnation, the beneficiary under the underlying first deed of trust or mortgage will have the
prior right to collect any insurance proceeds payable under a hazard insurance policy and any award of damages in connection with the condemnation, and to apply the same to the indebtedness secured by the first deed of trust or mortgage before any such proceeds are applied to repay the Fund's loan.
Prepayment Charges
Loans purchased by the Fund may provide for prepayment charges to be imposed on the borrowers in the event of certain early payments on the loans. In the event prepayment charges are imposed, however, any prepayment charges collected on loans will be retained by the Fund. Prepayment penalties are generally enforceable as an alternative performance or option on the part of the borrower, and in some situations may be enforceable even where the prepayment results from acceleration upon default.
SUMMARY OF LIMITED PARTNERSHIP AGREEMENT
The following is a summary of the Amended and Restated Limited Partnership Agreement for the Fund and is qualified in its entirety by the terms of the Agreement itself. Potential investors are urged to read the entire Agreement, which is set forth as Exhibit A to this Circular.
Rights and Liabilities of Limited Partners
The rights, duties and powers of Limited Partners are governed by the Amended and Restated Limited Partnership Agreement and Sections 15611, et seq. of the Delaware Corporations Code (the Delaware Revised Limited Partnership) and the discussion herein of such rights, duties and powers is qualified in its entirety by reference to such Agreement and Act.
Investors who become Limited Partners in the Fund in the manner set forth herein will not be responsible for the obligations of the Fund. They will be liable, however, to the extent of any deficit in their capital accounts upon dissolution and may also be liable for any return of capital plus interest, if necessary, to discharge liabilities existing at the time of such return. Any cash distributed to Limited Partners may constitute, wholly or in part, return of capital.
Limited Partners will have no control over the management of the Fund, except that a Partner Majority may, without the concurrence of the General Partner, take the following actions: (a) amend the Limited Partnership Agreement; (b) approve or disapprove the sale of all or substantially all the assets of the Fund; or, (c) remove and replace the General Partner. The approval of a Partner Majority is also required to elect a new general partner to continue the business of the Fund after the General Partner ceases to be a general partner. Limited Partners representing 10% of the limited partnership interests may call a meeting of the Fund.
Capital Contributions
Units in the Fund will be sold in Units of $1.00, and no person may acquire less than 25,000 Units without the consent of the General Partner. (For purposes of meeting this minimum investment requirement, a person may combine purchases individually with those purchased by his or her spouse and for his or her ERISA plan, IRA, rollover-IRA, pension, or profit-sharing plan to meet the $25,000 minimum)
Profits and Losses
Profits and losses of the Fund will be allocated first to Limited Partners to the extent of the Preferred Return and any additional net income will be divided equally between the General Partner and the Limited Partners according to their respective outstanding capital accounts. Upon transfer of Units (if permitted under the Limited Partnership Agreement and applicable law), profit and loss will be allocated to the transferee beginning with the next succeeding calendar month.
Cash Distributions
Cash distributions of the Preferred Return will be made only to those Limited Partners who make the written election, upon subscription for Units, to receive such distributions. Other Limited Partners will receive credits to their capital accounts in amounts equal to their respective allocable shares of Fund income, which results in a compounding effect on their earnings. Limited Partners may not change their elections to begin compounding earnings after subscribing for Units unless this offering of Units continues to be qualified with the Department of Consumer and Business Services Division of Financial Regulation.
As a result, the percentage of Units of non-electing Limited Partners (including voting rights and shares of future income) may increase
due to the compounding effect of crediting income to their capital accounts, while the percentage of Units of Limited Partners who receive cash distributions will decrease during the term of the Fund.
Capital Account Maintenance
The General Partner will establish a capital account for each Limited Partner which will, upon admission to the Fund, be credited with the amount paid by such Limited Partner for the purchase of Units. Thereafter, Limited Partners' capital account balance will be increased by: (i) the Limited Partners' pro rata share of any net profits earned by the Fund in such month; and (ii) any additional capital contributions made by a Limited Partner during such month through the purchase of additional Units.
Limited Partners' capital account balance will be reduced by (i) the Limited Partner's pro rata share of any Fund losses incurred in such month; (ii) the amount of cash distributions made to a Limited Partner (but only in the case of Limited Partner's electing monthly income distributions); and (iii) the amount of any withdrawal distributions made to a Limited Partner in such month (if any).
In the event any interest in the Fund is transferred, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest.
Accounting and Reports
The Limited Partners shall also be provided with such detailed information as is reasonably necessary to enable them to complete their own tax returns by the March 15th date after the end of the year.
Restrictions on Transfer
A transferee may not become a substitute Limited Partner without the consent of the General Partner, which may be withheld in its sole discretion. A transferee who does not become a substituted Limited Partner has no right to any information regarding the Fund or to inspect the Fund books but is entitled only to the share of income or return of capital to which the transferor would be entitled.
General Partner's Interest
The General Partner may withdraw and retire from the Fund at any time upon not less than sixty days' written notice to all Limited Partners and appoint a successor general partner upon 180 days' notice to the Limited Partners. Upon such withdrawal and retirement, the General Partner is not entitled to any termination or severance payment from the Fund but shall be paid its then-outstanding capital account balance, provided such payment does not result in the Fund's insolvency or create liquidity issues as determined by the successor General Partner. In that event the Fund will issue the departing General Partner with a note representing the balance in its Capital Account. The General Partner may also sell and transfer its General Partner's interest in the Fund (including all powers and authorities associated therewith) for such price as it shall determine in its sole discretion, and neither the Fund nor the Limited Partners will have any interest in the proceeds of such sale.
Term of Fund
The term of the Fund will commence upon the filing of the Certificate of Limited Partnership with the Office of the Secretary of State of Delaware and will continue until dissolved as provided in the Limited Partnership Agreement, or by operation of law.
Winding Up
The Fund will not terminate immediately upon the occurrence of an event of dissolution but will continue until its affairs have been wound up. Upon dissolution of the Fund, the General Partner will wind up the Fund's affairs by liquidating the Fund's assets as promptly as is consistent with obtaining the fair current value thereof, either by sale to third parties or by collecting loan payments under the terms of the loan. All funds received by the Fund shall be applied to satisfy or provide for Fund debts and the balance shall be distributed to partners in accordance with the terms of the Limited Partnership Agreement.
Withdrawal Limitations
A Limited Partner has no right to withdraw from the Fund or to obtain a return of all or any portion of the sums paid for the purchase of Units (or reinvested earnings with respect thereto) for a minimum of 12 months after such Units are purchased. Withdrawal payments will be made subject to certain limitations on the amount withdrawn per quarter and available cash flow as discussed herein. A Limited
Partner may initiate a withdrawal (or partial withdrawal) from the Fund by giving written notice to the General Partner ("Notice of Withdrawal"). Additionally, a Limited Partner may give Notice of Withdrawal during the 12-month minimum investment period, but the Fund is not required to return any sums to a withdrawing Limited Partner, however, will consider withdrawal requests based on undue hardship.
Exceptions to Limitations on Withdrawal
Notwithstanding the foregoing, the Fund may give priority to the return of the capital accounts of certain Limited Partners and may return such capital accounts prior to the expiration of the minimum 12-month investment period, under the following circumstances:
First, upon the death of the sole beneficiary of a corporate pension or profit-sharing plan, Individual Retirement Account or other employee benefit plan subject to ERISA or upon the death of a Limited Partner (the "Deceased Investor"), the return of such Deceased Investor's capital account shall have priority over the return of other withdrawing Limited Partners' Capital Accounts and may be returned prior to the expiration of such 12-month minimum investment period. Accordingly, if the administrator, executor or other personal representative of the estate of the Deceased Investor gives the General Partner Notice of Withdrawal on or before the last day of the month immediately preceding the last month of a given calendar quarter, the entire capital account of the Deceased Investor will be returned on the last day of such calendar quarter disregarding the 12-month minimum investment period. Notwithstanding the foregoing, if the Deceased Investor's capital account exceeds $25,000, then such capital account shall be returned in quarterly installments not to exceed $25,000 until the entire capital account has been returned in full.
Second, the General Partner, in its sole and absolute discretion, will have the right, at any given time, to immediately return all or a portion of the capital account of one or more ERISA plan investors (the "ERISA Plan Investors") to ensure that the Fund remains exempt from the Plan Asset Regulations. (See "ERISA Considerations.") The return of such ERISA Plan Investors' capital accounts shall have priority over the return of all other withdrawing Limited Partners' capital accounts, including those of Deceased Investors, and may be returned prior to the expiration of such 12-month minimum investment period.
Return of Capital Account
The amount that a withdrawing Limited Partner will receive from the Fund is determined by the Limited Partner's capital account. A capital account is a sum calculated for tax and accounting purposes and may be greater than or less than the fair market value of the Limited Partner's interest in the Fund. The fair market value of a Limited Partner's interest in the Fund will generally be irrelevant in determining amounts to be paid upon withdrawal, except to the extent that the current fair market value of the Fund's loan portfolio is realized by sales of existing loans (which sales will not be made in the ordinary course of the Fund's business).
The return of a withdrawing Limited Partner's capital account is subject to the following limitations:
(1) The Fund will not establish a reserve from which to fund withdrawals, and accordingly, the Fund's capacity to return a Limited Partner's capital account is restricted to the availability of Fund cash flow in any given calendar quarter. For this purpose, cash flow shall be deemed available only after all current Fund expenses have been paid (including compensation to the General Partner and Affiliates) and adequate provision has been made for maintaining adequate reserves and for the payment of all monthly cash distributions on a pro rata basis which must be paid to Limited Partners who elected to receive such distributions upon subscription for Units.
(2) In the sole and absolute discretion of the General Partner, to ensure that the Fund remains exempt from the ERISA plan asset regulation, the Fund may apply available cash flow to return all or a portion of the capital accounts of ERISA Plan Investors.
(3) The Fund will first apply any available cash flow to return the capital accounts of Deceased Investors, subject to a
$25,000 limit per Deceased Investor per calendar quarter.
(4) The Fund is not required to liquidate any mortgage loans prior to maturity to liquidate the capital account of a withdrawing Limited Partner but is expected to distribute whatever cash flow is available to all Limited Partners who have requested withdrawal and provided proper notice on a first come first served basis.
(5) Except as otherwise provided by clause (3) above, distributions of capital accounts to withdrawing Limited Partners are initially limited to 25% of a Limited Partner's Capital Account balance per calendar quarter.
(6) Finally, except upon the winding up and termination of the Fund, the General Partner will not, within any one calendar year, liquidate the lesser of 10% of the aggregate Fund Capital Accounts outstanding at the beginning of that calendar year, or $500,000.
Withdrawal requests will be processed quarterly on a first come first served basis.
During the period that a Limited Partner's capital account is being liquidated: (1) the Limited Partner will also receive monthly distributions of his/her allocable share of earnings in respect of his/her limited partnership interest, as if the Limited Partner had elected to receive monthly distributions upon subscribing for Units; and (2) the withdrawing Limited Partner's capital account will remain subject to reduction by reason of any loan losses that are recognized by the Fund during the withdrawal period.
LEGAL MATTERS
The General Partner has retained legal counsel to advise it and the Fund regarding the preparation of this Circular and the Limited Partnership Agreement, as well as the offer and sale of the Units offered hereby. Such counsel has not been retained to provide legal services regarding the drafting of any loan documents for Fund loans, the negotiation or closing of any loans or the servicing or enforcement of any loans, nor has it represented the interests of the Limited Partners regarding the Units offered hereby. Investors purchasing Units that wish to obtain the benefit of review by legal counsel on their behalf must retain their own attorneys to do so.
PLAN OF DISTRIBUTION
Units will be offered and sold by the General Partner or by its duly authorized agents and employees, who will receive no commission or other remuneration regarding the sale of the Units. Additionally, the General Partner, in its sole discretion, may arrange for Units also to be sold through registered securities broker-dealers. Any such agents, employees or broker-dealers will be paid selling commissions to be negotiated on a case-by-case basis. These selling commissions will be paid by the General Partner and are not an expense of the Fund. There is no firm commitment from any third party to purchase any Units, and there is no assurance that the maximum amount (or the increased maximum amount) of this offering will be received.
ADDITIONAL INFORMATION AND UNDERTAKINGS
The General Partner undertakes to make available to each offeree every opportunity to obtain any additional information from the Fund or the General Partner necessary to verify the accuracy of the information contained in this Circular, including underwriting criteria used in the General Partner's selection of loans in its portfolio to the extent that it possesses such information or can acquire it without unreasonable effort or expense. This additional information includes, without limitation, all the organizational documents of the Fund, information regarding past mortgage lending experience of the General Partner and all other documents or instruments relating to the operation and business of the Fund which are material to this offering and the transactions contemplated and described in this Circular.
EXHIBIT A
Sixth Amended and Restated Limited Partnership Agreement
[Attached]
EXHIBIT B
Subscription Agreement
[Attached]
EXHIBIT C
Distribution Reinvestment Plan
[Attached]
