ITEM 1.01
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ENTRY INTO MATERIAL DEFINITIVE AGREEMENT
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The information in this
Report set forth under Item 2.03 is incorporated herein by reference.
The disclosure
below describes our investment in Nevadan. All figures provided below are approximate.
On October 13, 2016,
we, through our operating partnership, Bluerock Residential Holdings, L.P., a Delaware limited partnership, or our Operating Partnership,
through BRG Glenridge, LLC, a Delaware limited liability company and a wholly owned subsidiary of our Operating Partnership, or
BRG Glenridge, through BR Glenridge JV Member, LLC, a Delaware limited liability company and a wholly owned subsidiary of BRG Glenridge,
or BR JV Member, acquired a 90.0% limited liability company interest, or the BRG Glenridge Interest, in BR Carroll Glenridge JV,
LLC, a Delaware limited liability company, or BR Carroll JV Entity, which is the owner and holder of a 100% limited liability company
interest in BR Carroll Glenridge, LLC, a Delaware limited liability company, or Property Owner. Property Owner concurrently acquired
a 480-unit, multi-family community located in Atlanta, Georgia, or the Nevadan Property.
The material features
of the investment in the joint venture are described below. The related acquisition financing for the Nevadan Property and our
entry into certain guaranties under the loan documents are described under Item 2.03.
Following our investment
in the Nevadan Property, the organizational structure with respect to the ownership of the Nevadan Property is such that: (i) the
Nevadan Property is owned by Property Owner, (ii) Property Owner is wholly owned by BR Carroll JV Entity, (iii) and the BR Carroll
JV Entity is a joint venture entity owned 90.0% by BR JV Member and 10.0% by Carroll Co-Invest IV Glenridge, LLC, a Georgia limited
liability company, or Carroll Member.
BR Carroll JV Entity
BR JV Member initially
invested approximately $22.77 million to acquire the BRG Glenridge Interest, and the Carroll Member initially invested approximately
$2.53 million to acquire the remaining 10.0% equity interest in BR Carroll JV Entity. BR JV Member and the Carroll Member have
entered into a joint venture operating agreement for the BR Carroll JV Entity, or the JV Agreement. The JV Agreement contains terms,
conditions, and indemnities that are customary and standard for joint ventures in the real estate industry.
Management and
Major Decisions
BR JV Member is manager
of BR Carroll JV Entity, subject to oversight by a management committee, which is controlled by BR JV Member. Under the JV Agreement,
decisions of the management committee are subject to major decisions that are reserved to the members. These major decisions require
the consent of both members, and include, but are not limited to: (i) any capital transaction, including a refinancing or sale
of the Nevadan Property; (ii) admission of additional members, subject to certain permitted affiliate transfers; (iii) liquidation,
dissolution or termination of BR Carroll JV Entity or Property Owner; (iv) granting options, rights of first refusal, mortgages
and similar interests in the Nevadan Property; (v) selling or otherwise disposing of the Nevadan Property; (vi) acquiring real
property or other assets other than the Nevadan Property; (vii) taking actions that are reasonably likely to expose a party to
liability under a loan guaranty; (viii) instituting or settling legal claims in excess of $50,000; (ix) entering into any agreement
with an affiliated party; (x) amending, refinancing or replacing any financing to which BR Carroll JV Entity or Property Owner
is a party, or which encumbers the Nevadan Property; (xi) incurring any capital expenses in excess of $50,000 unless pursuant to
the approved annual business plan; (xii) making a loan to any member; (xiii) filing or initiating a bankruptcy or similar creditor
protection action of BR Carroll JV Entity or Property Owner; (xiv) terminating the Property Management Agreement (as defined below)
or declaring a default thereunder, subject to cure provisions, although BR JV Member has certain heightened remedial rights with
respect to a default by the Carroll-affiliated property manager; (xv) any amendment to the organizational documents of BR Carroll
JV Entity or Property Owner; or (xvi) making distributions to members other than in accordance with the JV Agreement.
We
refer to each of these herein as a JV Major Decision.
To the extent that
BR JV Member and Carroll Member are not able to agree on a JV Major Decision on or after October 14, 2018, either party may initiate
a buy-sell process compelling the other member to purchase the initiating party’s membership interest or sell to the initiating
party the non-initiating party’s membership interest. On or after October 14, 2018, either party may also initiate a process
to compel the sale of the Nevadan Property, and if the non-initiating party rejects the offer of sale, the initiating party may
put its membership interest in BR Carroll JV Entity to the non-initiating party.
Additional Capital
Contributions
The JV Agreement provides
that either member may call for mandatory, protective additional capital contributions to protect BR Carroll JV Entity’s
interest in the Nevadan Property (e.g., payment of taxes, repair of the property following uninsured damage, payment of insurance
premiums), prevent a default under any financing (e.g., payment of debt service following an operating shortfall, reserves required
by the lender, a reduction in principal required by the lender to meet loan to value requirements), or for funds required to refinance
the Nevadan Property when the current financing has matured or will mature in the near future (e.g., commitment fees, loan application
fees, equity infusions to meet market loan to value requirements). The JV Agreement further provides that the management committee
may call for capital contributions as reasonably determined to be necessary to effect an investment or expenditure for the Nevadan
Property, BR Carroll JV Entity or Property Owner.
Distributions
Pursuant to the provisions
of the JV Agreement, distributions will be made as follows: (a) first, to the members in accordance with their ownership percentages
until BR JV Member and Carroll Member each has received an internal rate of return of 10% and a return on its capital contributions
equal to a 1.35 multiple thereof; and (b) second, (i) if a Carroll Change Event (as defined in the JV Agreement) has occurred,
to the members in accordance with their ownership percentages, (ii) if a Carroll Change Event has not occurred, (x) an amount equal
to 30% to Carroll Member and an amount equal to 70% to BR JV Member until BR JV Member has actually received and realized through
distributions the greater of a 15% internal rate of return and a return on its capital contributions equal to a 1.5 multiple thereof,
and then, (y) an amount equal to 40% to Carroll Member and an amount equal to 60% to BR JV Member.
For the first 24
months of the Property Management Agreement (as defined below), if distributable funds for any quarter are insufficient to
provide BR JV Member and Carroll Member with a cash-on-cash return on their capital contributions equal to, when determined
on a quarterly basis and annualized, nine percent, or the Minimum Return, a portion of the Property Management Fee (as
defined below), equal to 16.67% of the Property Management Fee, will be withheld and distributed to BR JV Member and
Carroll Member, in accordance with their membership interests, up to the amount necessary to satisfy the Minimum Return for
BR JV Member and Carroll Member for such quarter. Any portion of the Property Management Fee withheld, as described above,
will accrue and be cumulative. Such portion of the Property Management Fee will be paid from distributable funds in excess of
the Minimum Return for any subsequent quarter until repaid in full.
Indirect Ownership
Interests in the Nevadan Property
As a result of the
structure described above, we hold a 90.0% indirect equity interest in the Nevadan Property and the Carroll Member holds the remaining
10.0% indirect equity interest.
The Nevadan Property
The
Nevadan Property is a 480-unit, multi-family community located at 5501 Glenridge Drive NE, Atlanta, Georgia 30342.
The property is located in Fulton County and is part of the Atlanta Metropolitan Statistical Area. It was built in 1990
and features one-, two- and three-bedroom units averaging 1,095 square feet and average monthly rents of $1,033 per occupied
unit. The Nevadan Property features a
large clubhouse and amenity area. Community amenities include a resort style swimming pool with a poolside grill and lounge
area, a 24-hour fitness center, two lighted tennis courts and underground parking. The interiors of the units feature
kitchens equipped with sheet vinyl flooring, formica countertops, frost free refrigerators with icemakers, electric range,
and dual basin stainless steel sinks. Select units have a wood burning fireplace, vaulted ceilings, or a private balcony or
patio.
The business plan
of the BR Carroll JV Entity is to grow cash flow at the Nevadan Property through enhanced property management, a modest
value-add renovation to unit interiors and improving the exterior curb appeal, amenities and common areas.
The
Nevadan Property is managed by Carroll Management Group, LLC, an unaffiliated entity, or Property Manager, under
a property management agreement, or the Property Management Agreement. The property management fee is 3.0% of annual
gross cash revenues, or the Property Management Fee, payable monthly. Property Manager is also entitled to a construction
management fee equal to 5.0% of any expenses incurred in connection with the original capital expenditure plan, as shown
in Exhibit G to the Property Management Agreement. For capital improvements beyond those set forth on Exhibit G to the
Property Management Agreement, compensation for such capital improvements shall be agreed to in advance by Property Owner and
the Property Manager.
The total
purchase price paid for the Nevadan Property was $68.25 million, which gives effect to a credit received from the seller in
the amount of $1.25 million, based on arm’s length negotiations between an affiliate of Carroll Member and
the unaffiliated seller of the Nevadan Property. In evaluating the Nevadan Property as a potential investment, a variety
of factors were considered, including overall valuation of net rental income, expected capital expenditures,
submarket demographics, community features and amenities, location, price per unit and occupancy.