UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

☑
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission file number: 000-55006

MACKENZIE REALTY CAPITAL, INC.
(Exact Name of Registrant as Specified in its Charter)

Maryland
  
45-4355424
(State or Other Jurisdiction of Incorporation or Organization)
  
(IRS Employer Identification No.)

89 Davis Road, Suite 100
Orinda, California
   94563
(Address of Principal Executive Offices)
  
(Zip Code)

Registrant’s Telephone Number, Including Area Code: (925) 631-9100

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
Name Of Each Exchange On Which Registered
None
None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.0001 per share par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☑

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☑   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☑
Smaller reporting company ☑
Emerging growth company ☐
  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.   ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ☐  No ☑

There is no established market for the registrant’s share of common stock. The registrant closed the public offering of its shares of common stock in October 2020. The last offering price at which the registrant issued shares in its public offering was $10.25 per share. Since the registrant closed its public offering, it has continued to issue shares pursuant to its dividend reinvestment plan. The most recent price at which the registrant has issued shares pursuant to the dividend reinvestment plan was $9.23 per share.

The number of the issuer’s Common Stock outstanding as of September 28, 2022, was 13,295,626.16.



TABLE OF CONTENTS

PART I 
 
Page
Item 1.
1
Item 1A.
7
Item 1B.
19
Item 2.
19
Item 3.
19
Item 4.
19
 
 
 
PART II
 
 
Item 5.
20
Item 6.
22
Item 7.
22
Item 7A.
38
Item 8.
38
Item 9.
38
Item 9A.
38
Item 9B.
39
Item 9C.
39
 
 
 
PART III
 
 
Item 10.
40
Item 11.
43
Item 12.
44
Item 13.
44
Item 14.
45
 
 
 
PART IV
 
 
Item 15.
47
Item 16.
48

 

PART I

Item 1.
BUSINESS

Organization

MacKenzie Realty Capital, Inc. (the “Parent Company,” together with its subsidiaries as discussed below, the “Company,” “we,” “us,” or “our”) was an externally managed non-diversified real estate investment trust (“REIT”), as defined under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), that had elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “Investment Company Act”). As of December 31, 2020, we withdrew our election to be regulated as a BDC while continuing our REIT election for U.S. federal income tax purposes.

Withdrawal of our election to be regulated as a BDC did not affect our registration under Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”), and we will continue to file periodic reports on Form 10-K, Form 10-Q, and Form 8-K, as well as file proxy statements and other reports required under the Exchange Act. As a result of the withdrawal of our election to be regulated as a BDC, we are no longer treated as an investment company for purposes of applying accounting principles generally accepted in the United States of America (“GAAP”).

We are advised by MacKenzie Real Estate Advisers, LP (the “Real Estate Adviser”) as to our real estate investments and by MCM Advisers, LP (the “Investment Adviser”; together the “Real Estate Adviser” and the “Investment Adviser” are referred to as the “Advisers”) as to our securities portfolio. MacKenzie Capital Management, LP (“MacKenzie” or the “Administrator”) provides us with non-investment management services and administrative services necessary for us to operate.

We filed our initial registration statement in June 2012 with the Securities and Exchange Commission (“SEC”) to register the initial public offering (“IPO”) of 5,000,000 shares of our common stock. The IPO commenced in January 2014 and concluded in October 2016. We filed a second registration statement with the SEC to register a subsequent public offering of 15,000,000 shares of our common stock. The second offering commenced in December 2016 and concluded on October 28, 2019. We filed a third registration statement with the SEC to register a public offering of 15,000,000 shares of our common stock that was declared effective by the SEC on October 31, 2019. The third offering commenced shortly thereafter and ended on October 31, 2020.
 
On April 13, 2021, we filed a preliminary offering circular (the “Offering Circular”) pursuant to Regulation A with the SEC to sell up to $50,000,000 of shares of our Series A preferred stock at an initial offering price of $25.00 per share. The sale of shares pursuant to this offering began in November 2021 after the definitive version of the Offering Circular was qualified by the SEC on November 2, 2021.
 
The Parent Company’s wholly owned subsidiary, MRC TRS, Inc., (“TRS”) was incorporated under the general corporation laws of the State of California on February 22, 2016, and operates as a taxable REIT subsidiary. TRS started its operation on January 1, 2017, and the financial statements of TRS have been consolidated with the Parent Company’s consolidated financial statements beginning with the quarter ended March 31, 2017. On December 20, 2017, a wholly owned subsidiary of TRS, MacKenzie NY Real Estate 2 Corp. (“MacKenzie NY 2”), was formed for the purpose of making certain limited investments in New York companies, and its financial statements have been consolidated with the Parent Company beginning with the quarter ended March 31, 2021.

On May 20, 2020, we formed an operating partnership, MacKenzie Realty Operating Partnership, LP (the “Operating Partnership”) for the purpose of acquiring and consolidating our wholly-owned and majority-owned subsidiaries within an entity that is able to offer tax-advantaged solutions to certain sellers.

The Operating Partnership first entered into a Contribution Agreement with a group of entities referred to as the Addison Group, owners of Addison Property Owner, LLC (“Property Owner”). We own 100% of the Class B Limited Partnership units of the Operating Partnership. Property Owner owns a property known as Addison Corporate Center. On June 8, 2020, Addison Group exchanged its ownership in Property Owner for Class A Limited Partnership units of the Operating Partnership. Subsequent to the acquisition date, we redeemed substantially all of the remaining Class A Limited Partnership units by issuing to each Class A Limited Partner one share of our common stock for each Class A Unit.

1
In March 2021, we, together with our joint venture partners, formed two operating companies: Madison-PVT Partners LLC (“Madison”) and PVT-Madison Partners LLC (“PVT”), to acquire and operate two residential apartment buildings located in Oakland, California. We own 98.45% and 98.75% of equity units of Madison and PVT, respectively. The joint venture partners own the remaining 1.55% and 1.25% equity units of Madison and PVT, respectively, and also hold a carried interest in both companies.

On October 4, 2021, through the Operating Partnership, we acquired a 90% economic interest in Hollywood Hillview Owner, LLC (“Hollywood Hillview”), a Delaware limited liability company for approximately $7.78 million. The remaining 10% economic interest in Hollywood Hillview is owned by an unaffiliated third party, True USA, LLC. Hollywood Hillview owns 100% of the membership interests in PT Hillview GP, LLC (the “PT Hillview”).

On January 25, 2022, through the Operating Partnership, we acquired a 98% limited liability company interest in MacKenzie BAA IG Shoreline LLC (“MacKenzie Shoreline”), formed to acquire, renovate, and own the 84-unit multifamily building located at 1841 Laguna Street, Concord, CA. The joint venture partners own the remaining 2% of the limited liability company interest as well as a carried interest.

On April 1, 2022, we, and our newly formed, wholly owned subsidiary, FSP Merger Sub, Inc. (“Merger Sub”) entered into a reverse triangular merger agreement with FSP Satellite Place Corp. (“FSP Satellite”), pursuant to which the Merger Sub would be merged with and into FSP Satellite with FSP Satellite as the surviving entity, but renamed MacKenzie Satellite Place, Inc. (“MacKenzie Satellite”). On June 1, 2022, the merger closed, and MacKenzie Satellite became a wholly owned subsidiary of the Company, which in turn owns the Satellite Place building, a six-story Class “A” suburban office building containing approximately 134,785 rentable square feet of space located on approximately 10 acres of land in Duluth, GA. The former shareholders of FSP Satellite received cash with the exception of two shareholders who elected to receive common and preferred stock of the Company in the amount of $27,503 and $13,752, respectively. Subsequent to the completion of the merger, we have consolidated the financial statements of MacKenzie Satellite effective June 30, 2022.

On May 6, 2022, the Operating Partnership purchased 100% of the membership interests in eight limited liability companies and one parcel of entitled land from The Wiseman Company, LLC (“Wiseman”) for $17,325,000 and $3,050,000, respectively. The limited liability companies own the general partnership interests in eight limited partnerships, each of which own a Class A or B office property in Napa, Fairfield, or Woodland, California (the “Wiseman Properties”).  The membership interest purchase price is subject to adjustments and holdbacks as provided in the membership interest purchase agreement. As part of the purchase agreement, $4,650,000 of the purchase price was paid through the issuance of 206,666.67 Preferred Units of the Operating Partnership and $750,000 of the land purchase price was paid through the issuance of 77,881.62 Class A units of the Operating Partnership. The Preferred Units of the Operating Partnership are meant to mimic our Series A Preferred Shares, and the terms of such Units are described in the Partnership Unit Designation of the Series A Preferred Limited Partnership Units (Exhibit 4.2).  We have consolidated the financial statements of the eight limited liability companies (but not the Wiseman Properties themselves) effective June 30, 2022.

Wiseman is a full-service real estate syndicator, developer, broker, and property manager.  It was founded in 1979 and serves as the general partner for nine currently active partnerships owning the Wiseman Properties.  Concurrently with acquiring the general partnership interests in the Wiseman Properties, the Operating Partnership also negotiated the right to acquire the limited partnership interest in each Wiseman Property at pre-determined prices over the following two years.  Management believes this transaction is strategically important as it focuses the portfolio on our desired geographic area (Western United States) and creates a captive pipeline of properties which we can acquire when convenient over the next two years. Subsequently, on July 29, 2022, the Operating Partnership completed the acquisition of the limited partnership interest in First & Main, LP for total purchase price of $3,376,322, of which $2,711,377 was paid through issuance of 120,505.66 Preferred Units of the Operating Partnership.

Investment Objective

Our investment objective is to generate current income and capital appreciation through the acquisition of real estate assets and debt and equity real estate-related investments. Our Independent Directors (as defined in Part III, Item 10 of this Annual Report on Form 10-K) review our investment policies periodically, at least annually, to confirm that our policies are in the best interests of our stockholders. Each such determination and the basis thereof are contained in the minutes of our Board of Directors meetings.

We seek to accomplish our objective by rigorously analyzing the value of and risks associated with potential acquisitions, and, for up to 20% of our total assets, by acquiring real estate securities at significant discounts to their net asset value.

2
Our Corporate Information

Our offices are currently located at 89 Davis Road, Suite 100, Orinda, CA 94563 and our telephone number is (925) 631-9100 or (800) 854-8357.

Investment Strategy

Following withdrawal of our election to be regulated as a BDC in 2020, we have and intend to continue to invest in private companies that directly or indirectly own real property, and increase our control over our private investments, and to eventually consolidate those investments for financial reporting purposes. It will conduct many of our operations through the Operating Partnership. The withdrawal of our BDC election has also allowed us to expand our investment pool to include real, physical assets, as opposed to only investment securities. We believe that this expanded pool of potential investments allows access to risk-adjusted returns consistent with our investment objective, while allowing us to maintain our REIT status.

We engage in various investment strategies to achieve our overall investment objectives. The strategy we select depends upon, among other things, market opportunities, the skills and experience of the Advisers’ investment team and our overall portfolio composition. We generally seek to acquire assets that produce ongoing distributable income for investors, yet with a primary focus on purchasing such assets at a discount from what the Advisers estimates to be the actual or potential value of the real estate.

Our investment strategies since our inception have included making loans to or investments in previously syndicated projects that had encountered difficulties with occupancy, financing, tenant improvements or other cash needs. Since entering the recent recession, certain of our portfolio companies have encountered additional cash shortfalls, and, in one case so far, we have provided additional capital (Addison Corporate Center). We may encounter future opportunities to provide needed cash, and, in such cases, we will seek to consolidate the portfolio company into our financial statements, which is a key reason for dropping our BDC status.

When evaluating opportunities to buy properties, we look for opportunistic and value-add situations similar to our approach to targeting real estate securities, including unique situations and value-added opportunities. We evaluate the broader market, the property’s position in the market, the needs our capital can address, and the track record of the sponsor or operator bringing the opportunity to us.  We do not generally engage brokers, and the majority of our properties were acquired in “off market” transactions.

We invest in mid-market properties that may be overlooked by institutions.  We acquire mid-market properties that may be too small to attract most institutions, and where we believe we can create long-term value for our stockholders utilizing the following investment strategies.


 •
Value-Add. We invest in well-located properties with strong and stable cash flows in demographically attractive knowledge economic growth markets where we believe there exists significant potential for medium-term capital appreciation through renovation or redevelopment, to reposition the asset and drive future rental growth.


•
Opportunistic. We invest in properties available at opportunistic prices (i.e., at prices we believe are below those available in an otherwise efficient market) that exhibit some characteristics of distress, such as operational inefficiencies, significant deferred capital maintenance or broken capital structures providing an opportunity for a substantial portion of total return attributable to appreciation in value.


•
Invest-to-Own. We may invest in the development of properties in target markets where we believe we can capture significant development premiums upon completion. We generally use a mezzanine loan or convertible preferred equity structure which provides income during the development stage and/or the ability to capture development premiums at completion by exercising our conversion rights to take ownership.

We intend to continue our historical activities related to tender offers for shares of non-traded REITs in order to boost our short-term cash flow and to support our distributions, subject to the constraint that such securities will not exceed 20% of our portfolio. We believe this niche strategy will allow us to pay distributions that are supported by cash flow rather than paying back investors’ capital, although there can be no assurance that some portion of any distribution is not a return of capital. This strategy can boost cash-flow in two ways: (1) most such non-traded REITs pay regular cash distributions (even though COVID-19 prompted some to temporarily stop or cut back the distributions); and (2) when such non-traded REIT shares are liquidated or sold, we may realize a profit from having purchased the shares at a discount to the underlying net asset value.

3
Types of Investments

We target real estate-related investments which may include equity interests in LLCs, tenancies-in-common, mortgages, loans, bonds, other real estate-related investment entities, or direct ownership of real property. Since dropping our BDC status, we intend to purchase primarily majority interests in properties or companies that own properties so that we can consolidate them into our financial statements. We may purchase non-controlling interests, but we intend that such investments will constitute less than 20% of our portfolio. We do not invest in general partnerships or other entities that do not afford limited liability to their security owners. However, limited liability entities in which we invest may hold interests in general partnerships, joint ventures, or other non-limited liability entities.

Investment Selection

Our Adviser’s investment team is responsible for all aspects of our investment process. The current members of the investment team are Glen Fuller, Chip Patterson, Robert Dixon, Angche Sherpa, and Christine Simpson. The investment strategy involves a team approach, whereby potential transactions are screened by various members of the investment team.

Our process for acquiring targeted real estate typically involves three steps: (i) identifying assets of the type we may be interested in acquiring; (ii) evaluating the assets to estimate their value or potential value to us, and (iii) either acquiring such assets directly or through our network of real estate partners. Different circumstances may require different procedures, or different combinations of procedures, and we adjust our acquisition strategy to fit the circumstances. Nonetheless, the typical stages of our investment selection process are as follows:

Deal Generation/Origination

We source investments through long-standing relationships with real estate operators, developers, industry contacts, brokers, commercial and investment bankers, entrepreneurs, services providers such as lawyers and accountants, as well as current and former clients, portfolio companies and investors. Our Adviser’s goal is to establish relationships with successful operators with proven track records in each region in which we operate, and to grow and deepen those relationships as they prove successful.

Screening

In screening potential investments, the Adviser’s investment team utilizes a value-oriented investment philosophy and commits resources to managing downside exposure.

Due Diligence

In conducting due diligence, the Adviser uses publicly available information as well as information from its relationships with former and current management teams, investors, consultants, competitors and investment bankers.

Our Adviser’s due diligence typically includes:


 •
review of operating history, appraisals, market reports, vacancies, deferred maintenance;

•
review of historical and prospective financial information and regulatory disclosures;

•
research relating to the property’s management, industry, markets, products and services and competitors;

•
verification of collateral; and

•
appraisals or opinions of value by third party advisers.

Upon the completion of due diligence and a decision to proceed with an investment, the investment professionals leading the investment present the investment opportunity to the Adviser’s investment team, which then determines whether to pursue the potential investment. Additional due diligence with respect to any investment may be conducted on our behalf by attorneys and independent accountants prior to the closing of the investment, as well as other outside third-party advisers, as appropriate. Any fees and expenses incurred by the Adviser to oversee due diligence investigations undertaken by third parties are subject to reimbursement by us, if not otherwise reimbursed, which reimbursements are in addition to any management or incentive fees payable by us under the advisory agreements.

4
Monitoring

Our Adviser monitors our investments on an ongoing basis. Our Adviser has several methods of evaluating and monitoring the performance and value of the assets in which we invest, which include the following:


 •
Assessment of success in adhering to business plans and compliance with covenants;

•
Periodic and regular contact with property management, to discuss financial position, requirements and accomplishments;

•
Comparisons to other properties in the geographic area or sector, if any;

•
Attendance at and participation in our board meetings; and

•
Review of monthly and quarterly consolidated financial statements and financial projections for properties.

Valuation Procedures

Valuation of Investments:

We determine our net asset value consistent with GAAP. Securities for which market quotations are readily available on an exchange will be valued at the closing price on the day closest to the valuation date. Where a security is traded but in limited volume, we may instead utilize the weighted average closing price of the security over the prior 10 trading days. To value securities that do not trade on a national exchange, we may use published secondary market trading information.

Securities for which reliable market data are not readily available or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Adviser or Board of Directors, does not accurately measure fair value, which we expect will represent a substantial portion of our portfolio, are valued as follows: (i) the securities are initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminary valuation conclusions are documented and discussed with our senior management; and (iii) the Board of Directors reviews these preliminary valuations and, where appropriate and necessary, valuations by third-party valuation firms, and uses such valuations, as adjusted by the Board if appropriate, to determine the fair value of the securities.

Securities for which market data are not readily available or for which a pricing source does not accurately measure value may include the following:


 •
private placements and restricted securities that do not have an active trading market;

•
securities whose trading has been suspended or for which market quotes are no longer available;

•
debt securities that have recently gone into default and for which there is no current market;

•
securities whose prices are stale;

•
securities affected by significant events; and

•
securities that the Adviser believes were priced incorrectly.

Valuation of Real Property:

When property is owned directly, the valuation process includes a full review of the property financial information.  An Argus model is created using all known data such as current rent rolls, escalators, expenses, market data in the area where the property is located, cap rates, discount rates, mortgages, interest rates, and other pertinent information.  We estimate future leasing and costs associated, generally over a ten-year period, to determine the fair value of the property.  Once the fair value is determined, and reviewed by the board, a determination of impairment is made and documented. In addition, once per year, in preparation of net asset value, we obtain a third-party appraisal on directly owned properties.

Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our consolidated financial statements.

5
Staffing

We do not currently have any employees. Our day-to-day investment operations are managed by the Adviser. Our Adviser may hire additional investment professionals, based upon its needs. We also entered into an administration agreement with MacKenzie (the “Administration Agreement”), under which we reimburse MacKenzie for our allocable portion of overhead and other expenses incurred by it in performing its obligations, including rent, the fees and expenses associated with performing compliance functions, and the compensation of our chief financial officer, our chief compliance officer (or “CCO”), and any administrative support staff. We have also retained MacKenzie as our transfer agent and have been reimbursing MacKenzie for certain software development costs.

Compliance with governmental laws and regulations, including those relating to environmental matters

On December 31, 2020, we withdrew our election to be regulated as a BDC under the 1940 Act. Thus, we are no longer regulated as a BDC and are no longer subject to the regulatory provisions of the 1940 Act. However, as we operate as a REIT and own real estate properties, we are required to comply with various governmental laws and regulations, including the Exchange Act and those relating to environmental matters.

Environmental Matters

We have invested, and expect to continue to invest, in real property assets, which are subject to laws and regulations relating to the protection of the environment and human health and safety. Environmental laws and regulations may impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. This liability could be substantial. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such property as collateral for future borrowings.

Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our tenant companies’ operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply, and that may subject us to liability in the form of fines or damages for noncompliance. Any material expenditures, fines, or damages we must pay will reduce our ability to make distributions.

Other Regulations

State and federal laws in this area are constantly evolving, and we intend to monitor these laws and take commercially reasonable steps to protect ourselves from the impact of these laws, including where deemed necessary, obtaining environmental assessments of properties that we acquire; however, we will not obtain an independent third-party environmental assessment for every property we acquire. In addition, any such assessment that we do obtain may not reveal all environmental liabilities or whether a prior owner of a property created a material environmental condition not known to us. The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims would materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution.

Board Approval of the Investment Advisory Agreement

Our investment advisory, advisory management, and administrative services agreements were approved by our Board of Directors in January 2021 (the “Investment Advisory Agreement,” the “Advisory Management Agreement,” and the “Administration Agreement,” respectively, or, collectively, the “Advisory Agreements”). Such approvals were made on the basis of an evaluation satisfactory to our Board of Directors including a consideration of, among other factors, (i) the nature, quality, and extent of the advisory and other services to be provided under the agreements, (ii) the investment performance of the personnel who manage REITs with objectives similar to ours, to the extent available, (iii) comparative data with respect to advisory fees or similar expenses paid by other REITs with similar investment objectives, to the extent available and (iv) information about the services to be performed and the personnel performing such services under each of the agreements.

Our internet address is www.mackenzierealty.com

6
Item 1A.
RISK FACTORS

An investment in our common stock and preferred stock involves substantial risks. In addition to the other information contained in our Registration Statements and Offering Circulars, and any accompanying supplements thereto, stockholders should consider carefully the following information regarding our common and preferred stock. The risks set out below may not be the only risks we face but are the material risks of which we are presently aware. If any of the following risks are realized, our business, financial condition and results of operations could be materially and adversely affected. In such case the price of our common stock and preferred stock could decline, and stockholders may lose all or part of their investment.

Risks Related to Investing in Real Estate

Real estate investments are subject to risks particular to real property, including:


 •
Adverse changes in national and local economic and market conditions, including the credit and securitization markets;

•
Changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

•
Takings by condemnation or eminent domain;

•
Real estate conditions, such as an oversupply of or a reduction in demand for real estate space in the area;

•
The perceptions of tenants and prospective tenants of the convenience, attractiveness and safety of our properties;

•
Competition from comparable properties;

•
The occupancy rate of our properties;

•
The ability to collect all rent from tenants on a timely basis;

•
The effects of any bankruptcies or insolvencies of major tenants;

•
The expense of re-leasing space;

•
Changes in interest rates and in the availability, cost and terms of mortgage funding;

•
The impact of present or future environmental legislation and compliance with environmental laws;

•
Acts of war or terrorism, including the consequences of terrorist attacks;

•
Acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses; and

•
Cost of compliance with the Americans with Disabilities Act.

If any of these or similar events occur, it may reduce our return from an affected property or investment and reduce or eliminate our ability to make distributions to stockholders.

The market for real estate investments is highly competitive.

Identifying attractive real estate investment opportunities, particularly in the multi-family residential real estate sector, is difficult and involves a high degree of uncertainty. Furthermore, the historical performance of a particular property or market is not a guarantee or prediction of the property’s or market’s future performance. There can be no assurance that we will be able to locate suitable acquisition opportunities in our target markets, achieve our investment goal and objectives, or fully deploy for our cash.

Because of the recent growth in demand for real estate investments, there may be increased competition among investors to invest in the same asset classes as we do. This competition may lead to an increase in the investment prices or otherwise less favorable investment terms. If this situation occurs with a particular investment, our return on that investment is likely to be less than the return it could have achieved if it had invested at a time of less investor competition for the investment. For this and other reasons, the Adviser is under no restrictions concerning the timing of investments.

Investments in real estate-related assets can be speculative.

Investments in real estate-related assets can involve speculative risks and always involve substantial risks. No assurance can be given that the Adviser will be able to execute the investment strategy or that stockholders in the company will realize their investment objectives. No assurance can be given that our stockholders will realize a substantial return (if any) on their investment or that they will not lose their entire investment in us.

7
Our investments may be concentrated.

We expect to diversify our investments, and do not expect to concentrate on any single investment. However, our investments may nonetheless result in significant concentration in a single investment, especially in our initial stages of operation, or in a group of investments in one or more target markets. If such an investment experienced a material adverse event, or if investments in a particular target market experienced material adverse event specific to that particular market, we and our stockholders would likely be significantly and adversely affected.

We may be subject to the risk of liability and casualty loss as the owner of an investment.

It is expected that the Adviser will maintain or cause to be maintained insurance against certain liabilities and other losses for an investment, but the insurance obtained will not cover all amounts or types of loss. There is no assurance that any liability that may occur will be insured or that, if insured, the insurance proceeds will be sufficient to cover the loss.

There are certain categories of loss that may be or may become uninsurable or not economically insurable, such as earthquakes, floods and hazardous waste. Further, if losses arise from hazardous substance contamination that cannot be recovered from a responsible party, the financial viability of the affected investment may be substantially impaired. It is possible that we will acquire an investment with known or unknown environmental problems that may adversely affect our investments.

We could be exposed to environmental liabilities with respect to investments to which we take title.

In the course of our business, and taking title to properties, we could be subject to environmental liabilities with respect to such properties. In such a circumstance, we may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. If we become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

We may be adversely affected by unfavorable economic changes in the specific geographic areas where our investments are concentrated.

We expect that our investments will be located throughout the United States. Our largest concentration of investments are in California, Arizona, and Connecticut. Adverse conditions (including business layoffs or downsizing, industry slowdowns, changing demographics and other factors) in the areas where our investments are located and/or concentrated, including any cities or towns within such target States, and local real estate conditions (such as oversupply of, or reduced demand for, office, industrial, retail or multifamily properties) may have an adverse effect on the value of our investments. A material decline in the demand or the ability of tenants to pay rent, or the general market for sales of multi-family properties in such geographic areas may result in a material decline in our cash available for distribution to our stockholders.

Our success is materially dependent on attracting qualified tenants.

We will not collect revenue for a property while it is vacant and we will be responsible for all utility costs and maintenance services until we are able to lease it. Our success is dependent on the financial stability of tenants in the aggregate. If we cannot rent our properties or our tenants default on our leases or fail to comply with the terms of our leases, our operations, financial performance, and the quality and value of our properties could be negatively impacted.

We may not be able to re-lease or renew leases at the investments held by us on terms favorable to us or at all.

We are subject to risks that upon expiration or earlier termination of the leases for our properties that such properties may not be re-leased or, if re-leased, the terms of the renewal or re-leasing (including the costs of required renovations or concessions to tenants) may be less favorable than current lease terms. Any of these situations may result in extended periods where there is a significant decline in revenues or no revenues generated by an investment. If we are unable to re-lease or renew leases for all or substantially all of our investments, or if the rental rates upon such renewal or re-leasing are significantly lower than expected, and if our reserves for these purposes prove inadequate, or if we are required to make significant renovations or concessions to tenants as part of the renewal or re-leasing process, we will experience a reduction in net income and may be required to reduce or eliminate distributions to our stockholders.

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The bankruptcy, insolvency or diminished creditworthiness of our tenants under their leases or delays by our tenants in making rental payments could seriously harm our operating results and financial condition.

We will lease our properties to tenants, and we receive rents from our tenants during the terms of their respective leases. A tenant’s ability to pay rent is often initially determined by the creditworthiness of the tenant and the income of the tenant. However, if a tenant’s credit deteriorates or a tenant’s income deteriorates, the tenant may default on its obligations under its lease and the tenant may also become bankrupt. The bankruptcy or insolvency of our tenants or other failure to pay is likely to adversely affect the income produced by our real estate investments. Any bankruptcy filings by or relating to one of our tenants could bar us from collecting pre-bankruptcy debts from that tenant or its property, unless we receive an order permitting us to do so from the bankruptcy court. A tenant bankruptcy could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. If a tenant files for bankruptcy, we may not be able to evict the tenant solely because of such bankruptcy or failure to pay. A court, however, may authorize a tenant to reject and terminate its lease with us. In such a case, our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease. In addition, certain amounts paid to us within 90 days prior to the tenant’s bankruptcy filing could be required to be returned to the tenant’s bankruptcy estate. In any event, it is highly unlikely that a bankrupt or insolvent tenant would pay in full amounts it owes us under its lease. In other circumstances, where a tenant’s financial condition has become impaired, we may agree to partially or wholly terminate the lease in advance of the termination date in consideration for a lease termination fee that is likely less than the agreed rental amount. If a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any unsecured claim we hold against a bankrupt entity may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. We may recover substantially less than the full value of any unsecured claims, which would harm our financial condition.

We may not obtain audited results of operation of individual investments.

In some cases, we will not obtain audited operating statements regarding the prior operations of an investment. In such case, we will rely on unaudited financial information provided by the sellers of the investments. Thus, it is possible that information relied upon by us with respect to the acquisition of some of the investments may not be accurate at the time that we acquire such investment.

Significant restrictions on transfer and encumbrance of investments are expected.

The terms of any mortgage or other debt financing for an investment are expected to prohibit the transfer or further encumbrance of that investment or any interest in that investment except with the lender’s prior consent, which consent each lender is expected to be able to withhold. The relative illiquidity of the investments may prevent or substantially impair our ability to dispose of an investment at times when it may be otherwise advantageous for us to do so. If we were forced to immediately liquidate some or all of our investments, the proceeds are likely to result in a significant loss, if such a liquidation is possible at all.

We may not obtain appraisals or reports.

We typically may not obtain independent third-party appraisals or valuations of an investment, or other reports with respect to an investment, before we invest in such investment. If we do not obtain such third-party appraisals or valuations, there can be no assurance that an investment’s value will exceed its cost or that any sale or other disposition of such investment will result in a profit. Third-party appraisals and other reports may be prepared for lenders, in which case we typically will try to obtain a copy of such appraisals and reports for review, as well as reliance letters from the third-party preparers to allow us to rely on appraisals and reports. To the extent we do not obtain such other reports or reliance letters before investing in an investment, the risk of investing in such investment may be increased.

Risks Related to Our Financial Position

We are subject to risks associated with debt and capital stock issuances, and such issuances may have consequences to holders of shares of our securities.

If we were to raise additional capital through the issuance of equity securities, we could dilute the interests of holders of shares of our current outstanding securities.

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Further, we may incur indebtedness in the future to finance our operations. Such indebtedness could result in important consequences to holders of our preferred shares, including subjecting us to covenants restricting our operating flexibility, increasing our vulnerability to general adverse economic and industry conditions, limiting our ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements, requiring the use of a portion of our cash flow from operations for the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund working capital, acquisitions, capital expenditures and general corporate requirements, and limiting our flexibility in planning for, or reacting to, changes in our business and our industry.

If we pay distributions from sources other than our cash flow from operations, we will have fewer funds available for investments and stockholders’ overall return will be reduced.

Although our distribution policy is to use our cash flow from operations to make distributions, we are permitted to pay distributions from any source, including offering proceeds, borrowings, or sales of assets. We have not placed a cap on the use of proceeds to fund distributions.

Risks Related to Our Business Strategy

Many of the factors that can affect the availability and timing of cash distributions to stockholders are beyond our control, and a change in any one factor could adversely affect our ability to pay future distributions.

There can be no assurance that future cash flow will support distributions at the rate that such distributions are paid in any particular distribution period.

To the extent that we make payments or reimburse certain expenses to our Adviser pursuant to our Advisory Agreements, our cash flow and therefore our ability to make distributions from cash flow, as well as cash flow available for investment, will be negatively impacted.

Under Maryland law, we may issue our own securities as stock dividends in lieu of making cash distributions to stockholders. We may issue securities as stock dividends in the future. This may dilute current stockholders’ equity in us and may reduce the value of stockholders’ investment.

We may change our targeted investments without shareholder consent.

Our Adviser may change our targeted investments and asset allocation at any time without the consent of our shareholders, which could result in our making investments that are different from, and possibly riskier than, the investments described in Item 1 hereof. A change in our targeted investments may increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could adversely affect the value of our securities and our ability to make distributions to stockholders. Furthermore, a change in our asset allocation could result in our making investments in asset categories different from those described in this Annual Report.

The ability of our Board of Directors to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.

Our Charter provides that our Board of Directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders.

Our Business Strategy has, as of yet, had limited testing. Our Business Strategy may not produce the results expected. As a consequence, the value of your shares may decrease over time and you may lose your entire investment.
 
Our strategy now focuses more on the acquisition of real property assets as opposed to securities, which strategy has had limited testing by us and may not produce profitable or favorable results.  If our strategy fails to produce sufficient income and/or returns to cover our expenses, we could lose invested capital.
 
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Due diligence by our Adviser may not reveal all of the liabilities associated with such investments and may not reveal other weaknesses in such investments, which could lead to investment losses.

Because we intends to purchase real estate at below-market-prices, there may not be enough time to investigate the condition of any particular investment.

Before making an investment, our Adviser will assess the strengths and weaknesses of a target investment property. The Adviser will also consider other factors and characteristics that are material to the performance of the investment. Such other factors may include the pricing trends for similar properties in the area where the target investment property is located.

In making such assessments and otherwise conducting customary due diligence, our Adviser relies on resources available to it and, in some cases, an investigation by third parties. There can be no assurance that our Adviser’s due diligence process will uncover all relevant facts or that any investment will be successful.

Our investments may include rehabilitating distressed real estate and such rehabilitation may not result in higher asset values.

In many of our intended but yet unidentified real estate acquisitions, the property value is diminished, and real estate may require significant rehabilitation. We intend to perform such rehabilitation from time to time to increase the rental rates for an acquired property.

When coupled with the limited time to perform due diligence on any particular investment, cash may be used to rehabilitate a property where the cost of rehabilitation is not justified and will not result in increased asset valuation.

Lack of diversification in numbers or types of investments increases our dependence on individual investments.

Our investment strategy depends in large part on acquiring a diversified portfolio based on the number of properties or investments we acquire relative to our total assets. Such diversification reduces the risk that a default or other problem with any single property or investment will have a material negative impact on our earnings.

If, due to factors such as lack of adequate capital, or the unavailability of suitable investment opportunities, we acquire relatively few properties or acquire properties or investments that are significant (in terms of capital invested) to our overall asset size, our portfolio could become concentrated, increasing the risk of loss to stockholders if a default or other problem arises.

Alternatively, property sales may reduce the aggregate amount of our property investment portfolio in value or number. As a result, our portfolio could become more concentrated, thereby reducing the benefits of diversification by factors such as geography, property type, tenancy, or other measures. While we intend to endeavor to grow and diversify our portfolio through additional property acquisitions, we may never reach a significant size to achieve true portfolio diversity.

Our Board of Directors has approved very broad investment guidelines for our Adviser and will not approve each investment and financing decision made by our Adviser unless required by our investment guidelines.

Our Adviser is authorized to follow very broad investment guidelines established by our Board of Directors. Our Board of Directors will periodically review our investment guidelines and our portfolio of assets but will not, and will not be required to, review all of our proposed investments, except in limited circumstances as set forth in our investment policies.

Our Adviser has great latitude within the broad parameters of our investment guidelines in determining the types and amounts of assets in which to invest on our behalf, including making investments that may result in returns that are substantially below expectations or result in losses, which would materially and adversely affect our business and results of operations, or may otherwise not be in the best interests of our stockholders. Transactions entered into by our Adviser may be costly, difficult or impossible to unwind by the time they are reviewed by our Board of Directors.

Because stockholders will be unable to evaluate the merits of these operational and investment guidelines, they will have to rely entirely on the ability of our Adviser and Board of Directors to formulate and follow these operational and investment guidelines.

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Even though our Adviser will be providing real estate advisory services, our Adviser is not a licensed asset manager nor is our Adviser a licensed real estate advisor.

Our Adviser provides real estate advisory services on a best-effort basis. Because our Adviser is not a licensed professional advisor and is not a licensed real estate manager, our Adviser does not maintain errors and omissions insurance that we could turn to in the event our Adviser provides improper investing advice. Should improper investment actions be taken by our Adviser, the value of our shares will likely decline.

Our investments will be carried at estimated fair value as determined by our Adviser and there may be uncertainty as to the value of these investments.

Substantially all of our investments are illiquid and not publicly traded. To determine our net asset value, our Adviser estimates the fair value of our assets in conjunction with our external valuation experts.

Because such valuations are inherently uncertain, our value may fluctuate over short periods of time, and may be based on numerous estimates and assumptions, our determinations of fair value of our investments are inherently speculative and subject to errors. The value of our shares could be adversely affected if our determinations regarding the fair value of these investments are materially higher than the values that we ultimately realize upon their disposal.

We, through our Adviser, are often required to make a number of judgments in applying accounting policies, and different estimates and assumptions in the application of these policies could result in changes to our reporting of financial condition and results of operations.

Various valuation estimates are used in the preparation of our consolidated financial statements, including estimates related to asset and liability valuations (or potential impairments) and various receivables. Often these estimates require the use of market data values that may be difficult to assess, as well as estimates of future performance or receivables collectability that may be difficult to accurately predict. While we have identified those accounting policies that are considered critical and have procedures in place to facilitate the associated judgments, different assumptions in the application of these policies could result in material changes to our consolidated financial condition and results of operations.

Risks Related to Our Organization and Corporate Structure

Our Charter permits our Board of Directors to issue stock with terms that may subordinate the rights of common stockholders or preferred shareholders or discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.

Our Charter permits our Board of Directors to issue up to 80,000,000 shares of common stock and 20,000,000 preferred shares. Our Board of Directors is permitted, subject to certain restrictions set forth in our Charter, to authorize the issuance of shares of common stock and preferred stock without stockholder approval. Further, our Board of Directors may classify or reclassify any unissued shares of common or preferred stock into other classes or series of stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms or conditions of redemption of the stock and may amend our Charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series that we have authority to issue without stockholder approval. Thus, our Board of Directors could authorize us to issue shares of preferred stock ranking senior to our common stock with respect to distribution rights upon our liquidation, dissolution or winding up or with terms and conditions that could have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction such as a merger, tender offer or sale of all or substantially all of our assets, that might provide a premium price for holders of our common stock.

Risks Related to Conflicts of Interest

The Advisory Agreements with our Adviser and MacKenzie were not negotiated on an arm’s-length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third party.

Our executive officers, including one of our directors, are executives of our Adviser and MacKenzie. Our Advisory Agreements were negotiated between related parties and their terms, including fees payable to our Adviser, may not be as favorable to us as if it had been negotiated with an unaffiliated third party. In addition, we may choose not to enforce, or to enforce less vigorously, our rights under the Advisory Agreements because of our desire to maintain our ongoing relationship with the Adviser and its affiliates.

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We may have conflicts of interest with our Adviser and other affiliates, which could result in investment decisions that are not in the best interests of our stockholders.

There are numerous conflicts of interest between our interests and the interests of our Adviser and its respective affiliates, including conflicts arising out of allocation of personnel to our activities, allocation of investment opportunities between us and investment vehicles affiliated with our Adviser, purchase or sale of properties, including from or to investment entities affiliated with our Adviser, and fee arrangements with our Adviser that might induce our Adviser to make investment decisions that are not in our best interests. Examples of these potential conflicts of interest include, but are not limited to:


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Competition for the time and services of personnel that work for us and our affiliates;

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Compensation payable by us to our Adviser and its affiliates for their various services, which may not be on market terms and is payable, in some cases, whether or not our stockholders receive distributions;

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The possibility that our Adviser, its officers and their respective affiliates will face conflicts of interest relating to the purchase and leasing of properties and other investments, and that such conflicts may not be resolved in our favor, thus potentially limiting our investment opportunities, impairing our ability to make distributions and adversely affecting the trading price of our stock;

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The possibility that if we acquire properties from investment entities affiliated with our Adviser or its affiliates, the price may be higher than we would pay if the transaction were the result of arm’s-length negotiations with a third party;

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The possibility that our Adviser will face conflicts of interest, some of whose officers are also our officers and two of whom are directors of ours, resulting in actions that may not be in the long-term best interests of our stockholders;

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Our Adviser has considerable discretion with respect to the terms and timing of our acquisition, disposition and leasing transactions;

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The possibility that we may acquire or merge with our Adviser, resulting in an internalization of our management functions; and

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The possibility that the competing demands for the time of our Adviser, its affiliates and our officers may result in them spending insufficient time on our business, which may result in our missing investment opportunities or having less efficient operations, which could reduce our profitability and result in lower distributions to stockholders.

Any of these and other conflicts of interest between us and our Adviser could have a material adverse effect on the returns on our investments, our ability to make distributions to stockholders and the trading price of our stock.

Our Adviser, its officers and their respective affiliates will face conflicts of interest relating to the purchase and leasing of real estate investments, and such conflicts may not be resolved in our favor.

Conflicts caused by our Adviser may severely curtail our investment opportunities, impair our ability to make distributions and reduce the value of stockholders’ investment in us. Our Adviser also advises other clients and such clients may compete with us for investments. Our Advisers have policies in place to deal with such potential conflicts, but such policies may result in other clients buying assets that may be in our best interest to purchase.

Our Adviser, and the personnel it provides are not exclusively dedicated to management of our business.

If the competing demands for the time of our Adviser, its key personnel, its affiliates and our officers result in them spending insufficient time on our business, we may miss investment opportunities or have less efficient operations, which could reduce our profitability and result in lower distributions to stockholders.

We have not adopted any specific conflicts of interest policies, and, therefore, other than in respect of the restrictions placed on our Advisers in the Advisory Agreements, we will be reliant upon the good faith of our Adviser, officers and directors in the resolution of any conflict.

We do not have a policy that expressly restricts any of our directors, officers, stockholders or affiliates, including our Advisers and their officers and employees, from having a pecuniary interest in an investment in or from conducting, for their own account, business activities of the type we conduct. This may mean that our ability to access the best investments may be curtailed, which could result in greater than expected operating expense, losses and reduced distributions to our shareholders.

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Risks Associated with Debt Financing

We expect to use mortgage and other debt financing to acquire properties or interests in properties and otherwise incur other indebtedness, which increases our expenses and could subject us to the risk of losing properties in foreclosure if our cash flow is insufficient to make loan payments.

We are permitted to acquire real properties and other real estate-related investments, including entity acquisitions, by assuming either existing financing secured by the asset or by borrowing new funds. In addition, we may incur or increase our mortgage debt by obtaining loans secured by some or all of our assets to obtain funds to acquire additional investments or to pay distributions to our stockholders. We also may borrow funds if necessary to satisfy the requirement that we distribute at least 90% of our annual “REIT taxable income,” or otherwise as is necessary or advisable to assure that we maintain our qualification as a REIT for federal income tax purposes.

There is no limit on the amount we may invest in any single property or other asset or on the amount we can borrow to purchase any individual property or other investment. If we mortgage a property and have insufficient cash flow to service the debt, we risk an event of default which may result in our lenders foreclosing on the properties securing the mortgage.

If we cannot repay or refinance loans incurred to purchase our properties, or interests therein, then we may lose our interests in the properties secured by the loans we are unable to repay or refinance.

High mortgage rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire, our cash flow from operations and the amount of cash distributions we can make.

To qualify as a REIT, we will be required to distribute at least 90% of our annual taxable income (excluding net capital gains) to our stockholders in each taxable year, and thus our ability to retain internally generated cash is limited.

Accordingly, our ability to acquire properties or to make capital improvements to or remodel properties will depend on our ability to obtain debt or equity financing from third parties or the sellers of properties. If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the debt becomes due or of being unable to refinance on favorable terms. If interest rates are higher when we refinance the properties, our income could be reduced. We may be unable to refinance properties. In the case of some of our fixed-rate debt, after the initial fixed rate period, the interest rate may increase.  If any of these events occurs, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to stockholders and may hinder our ability to raise capital by issuing more stock or borrowing more money.

Some of our mortgage loans may have “due-on-sale” provisions, which may impact the manner in which we acquire, sell and/or finance our properties.

In purchasing properties subject to financing, we may obtain financing with “due-on-sale” and/or “due-on-encumbrance” clauses. Due-on-sale clauses in mortgages allow a mortgage lender to demand full repayment of the mortgage loan if the borrower sells the mortgaged property. Similarly, due-on-encumbrance clauses allow a mortgage lender to demand full repayment if the borrower uses the real estate securing the mortgage loan as security for another loan. In such event, we may be required to sell our properties on an all-cash basis, which may make it more difficult to sell the property or reduce the selling price.

If we are required to make payments under any “bad boy” carve-out guaranties that we may provide in connection with certain mortgages and related loans, our business and financial results could be materially adversely affected.

In obtaining certain nonrecourse loans, we may provide standard carve-out guaranties. These guaranties are only applicable if and when the borrower directly, or indirectly through agreement with an affiliate, joint venture partner or other third party, voluntarily files a bankruptcy or similar liquidation or reorganization action or takes other actions that are fraudulent or improper (commonly referred to as “bad boy” guaranties). Although we believe that “bad boy” carve-out guaranties are not guaranties of payment in the event of foreclosure or other actions of the foreclosing lender that are beyond the borrower’s control, some lenders in the real estate industry have recently sought to make claims for payment under such guaranties. In the event such a claim were made against us under a “bad boy” carve-out guaranty following foreclosure on mortgages or related loan, and such claim were successful, our business and financial results could be materially adversely affected.

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Interest-only indebtedness may increase our risk of default and ultimately may reduce our funds available for distribution to our stockholders.

We may finance our property acquisitions using interest-only mortgage indebtedness. During the interest-only period, the amount of each scheduled payment will be less than that of a traditional amortizing mortgage loan. The principal balance of the mortgage loan will not be reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal during this period. After the interest-only period, we will be required either to make scheduled payments of amortized principal and interest or to make a lump-sum or “balloon” payment at maturity. These required principal or balloon payments will increase the amount of our scheduled payments and may increase our risk of default under the related mortgage loan. If the mortgage loan has an adjustable interest rate, the amount of our scheduled payments also may increase at a time of rising interest rates. Increased payments and substantial principal or balloon maturity payments will reduce the funds available for distribution to our stockholders because cash otherwise available for distribution will be required to pay principal and interest associated with these mortgage loans.

Leveraging an investment allows a lender to foreclose on that investment.

Lenders to an investment, even non-recourse lenders, are expected in all instances to retain the right to foreclose on that investment if there is a default in the loan terms. If this were to occur, we would likely lose our entire investment in that investment.

Availability of financing and market conditions will affect the success of the company.

Market fluctuations in real estate financing may affect the availability and cost of funds needed in the future for investments. In addition, credit availability has been restricted in the past and may become restricted again in the future. Restrictions upon the availability of real estate financing or high interest rates for real estate loans could adversely affect the investments and our ability to execute its investment goals.

Risks Related to Compliance and Regulation

We may not be successful in availing ourselves of the Investment Company Act exclusion, and even if we are successful, the exclusion would impose limits on our operations, which could adversely affect our operations.

The Investment Company Act requires that any issuer that is beneficially owned by 100 or more persons and that is engaged “primarily… in the business of investing, reinvesting, or trading in securities” or “in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40 per centum of the value of such issuer’s total assets” to be registered as required under the Investment Company Act. We believe that, because we are primarily purchasing the real estate assets directly or through wholly owned subsidiaries, the ownership of these assets will not be deemed to be investment securities for purposes of the Investment Company Act. We anticipate that the assets will either qualify as “real estate assets” for purposes of the Investment Company Act, not be considered investment securities for purposes of the Investment Company Act, or will comprise less than 40% of our portfolio of assets (in fact, intended to be less than 20%). As a result, we expect to be exempt from the Investment Company Act’s requirements, and does not intend to register under the Investment Company Act. If we do not qualify for the real estate exemption, we will attempt to qualify for a different exemption from the Investment Company Act.

Even though we intend to conduct our operations so that we will not be required to register as an investment company under the Investment Company Act, the SEC may disagree with our approach. Consequently, the SEC may require us to register under the Investment Company Act thus requiring us to adjust our investment strategy. Any such adjustment in our strategy could have a material adverse effect on us. We have not asked the staff of the SEC for confirmation of our analysis under the Investment Company Act, although we did disclose our plan to withdraw our election to be treated as a BDC (and therefore to no longer be an investment company) and to lower our portfolio of investment securities to below 20% of our total assets. In the event we are required to register under the Investment Company Act, the returns to the stockholders will likely be significantly reduced.

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Risks Related to Our Taxation as a REIT

Our failure to qualify as a REIT would result in higher taxes and reduced cash available for stockholders.

We intend to continue to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. Our initial and continued qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, and stockholder ownership requirements on a continuing basis. Our ability to satisfy some of the asset tests depends upon the fair market values of our assets, some of which are not able to be precisely determined and for which we will not obtain independent appraisals.

If we were to fail to qualify as a REIT in any taxable year, and certain statutory relief provisions were not available, we would be subject to U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to stockholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution.

Unless entitled to relief under certain Internal Revenue Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT. In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our securities.

Failure to remain qualified as a REIT would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders.

We have elected to be taxed as a REIT under the federal income tax laws commencing with our taxable year ended December 31, 2014. We believe that we have and will continue to operate in a manner qualifying us as a REIT for our taxable year ended December 31, 2021 and intend to continue to so operate.

However, we cannot assure the stockholders that we will remain qualified as a REIT. Moreover, our qualification and taxation as a REIT depend upon our ability to meet on a continuing basis, through actual annual operating results, certain qualification tests set forth in the federal tax laws. Tax counsel will not review our compliance with those tests on a continuing basis. Accordingly, no assurance can be given that our actual results of operations for any particular taxable year will satisfy such requirements.

If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because:


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we would not be able to deduct distributions paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates;

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we could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and

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unless we are entitled to relief under certain U.S. federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.

In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our securities.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments.

To maintain our qualification as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our capital stock. In order to meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.

In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer.

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In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flows.

Even if we remain qualified as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes.

The stock ownership limit imposed by the Internal Revenue Code for REITs and our Charter may inhibit market activity in our stock and may restrict our business combination opportunities.

In order for us to maintain our qualification as a REIT under the Internal Revenue Code, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) at any time during the last half of each taxable year. Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year for each taxable year.

Our Charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT.

Unless exempted by the Board of Directors, no person may own more than 9.8% of the aggregate value of the outstanding shares of our stock or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding our preferred shares. The Board of Directors may not grant such an exemption to any proposed transferee whose ownership in excess of 9.8% of the value of our outstanding shares or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding our preferred shares, would result in the termination of our status as a REIT. These ownership limits could delay or prevent a transaction or a change in our control that might be in the best interest of our stockholders.

Distributions payable by REITs do not qualify for the reduced tax rates available for some distributions.

The maximum tax rate applicable to “qualified distribution income” payable to U.S. stockholders that are taxed at individual rates is 20%. Distributions payable by REITs, however, generally are not eligible for the reduced rates on qualified distribution income. The more favorable rates applicable to regular corporate qualified distributions could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay distributions, which could adversely affect the value of the shares of REITs.

The prohibited transactions tax may subject us to tax on our gain from sales of property and limit our ability to dispose of our properties.

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property other than foreclosure property, held primarily for sale to customers in the ordinary course of business.

Although we intend to acquire and hold all of our assets as investments and not for sale to customers in the ordinary course of business, the IRS may assert that we are subject to the prohibited transaction tax equal to 100% of net gain upon a disposition of real property.

Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, not all of our prior property dispositions qualified for the safe harbor and we cannot assure the stockholders that we can comply with the safe harbor in the future or that we have avoided, or will avoid, owning property that may be characterized as held primarily for sale to customers in the ordinary course of business.

17
Failure to make required distributions would subject us to U.S. federal corporate income tax.

We intend to continue to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. In order to remain qualified as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the distributions paid deduction and excluding any net capital gain, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under the Code.

We may be unable to generate sufficient revenue from operations, operating cash flow or portfolio income to pay our operating expenses, and our operating expenses could rise, diminishing our ability and to pay distributions to our stockholders.

As a REIT, we are generally required to distribute at least 90% of our REIT taxable income, determined without regard to the distributions paid deduction and not including net capital gains, each year to our stockholders. To qualify for the tax benefits accorded to REITs, we intend to continue to make distributions to our stockholders in amounts such that we distribute all or substantially all our net taxable income each year, subject to certain adjustments.

However, our ability to make distributions may be adversely affected by the risk factors described herein. Our ability to make and sustain cash distributions is based on many factors, including the return on our investments, the size of our investment portfolio, operating expense levels, and certain restrictions imposed by Maryland law.

Some of the factors are beyond our control and a change in any such factor could affect our ability to pay future distributions. No assurance can be given as to our ability to pay distributions to our stockholders. In the event of a downturn in our operating results and financial performance or unanticipated declines in the value of our asset portfolio, we may be unable to declare or pay annual distributions or make distributions to our stockholders. The timing and amount of distributions are in the sole discretion of our Board of Directors, which considers, among other factors, our earnings, financial condition, debt service obligations and applicable debt covenants, REIT qualification requirements and other tax considerations and capital expenditure requirements as our Board of Directors may deem relevant from time to time.

Risk Related to the Current COVID-19 Pandemic

The current COVID-19 pandemic, or the future outbreak of other highly infectious or contagious diseases, has and could continue to materially and adversely impact or disrupt our financial condition, results of operations, cash flows and performance.

Our operating results depend, in large part, on generating revenues from leases to residential or commercial tenants, which in turn requires tenants to generate sufficient income to pay their rents in a timely manner. The market and economic challenges created by the COVID-19 pandemic, and measures implemented to prevent its spread, may adversely affect our operations and, as a result, our ability to make distributions to our stockholders or to realize appreciation in the value of our investments. The spread of COVID-19 could result in further increases in unemployment, and tenants that experience deteriorating financial conditions as a result of the pandemic may be unwilling or unable to pay rent in full on a timely basis. In some cases, the companies in which we have invested may have to restructure tenants’ rent obligations, and they may not be able to do so on terms as favorable to us as those currently in place. Numerous state, local, federal, and industry-initiated efforts may also affect property owners’ ability to collect rent or enforce remedies for the failure to pay rent. This may lead to reduction or cancellation of distributions, which will in turn effect our ability to pay our expenses and to pay distributions to our shareholders. We may continue to experience material reductions in our operating revenue due to the current pandemic or future outbreaks or variants.

An outbreak of disease or similar public health threat, such as the coronavirus, could adversely affect our and our tenants’ financial condition and operations.

A local, regional, national or international outbreak of a contagious disease, including COVID-19, MERS, SARS, H1N1 influenza virus, avian flu or any other similar illness, could decrease the willingness of customers to patronize our tenants’ retail facilities, discourage residents from renting in our multi-family communities, cause shortages of employees to staff our tenants’ operations, interrupt supplies from third parties upon which our tenants rely, cause us or our tenants to temporarily close one or more of our properties, result in governmental regulation adversely impacting our or our tenants’ businesses and otherwise have a material adverse effect on our business, financial condition and results of operations. Such adverse effect could be rapid and unexpected.

18
Item 1B.
UNRESOLVED STAFF COMMENTS

None.

Item 2.
PROPERTIES

We currently own and manage two commercial real estate properties: Addison Corporate Center located in Windsor, CT and Satellite Place located in Duluth, GA. We also own and manage four residential apartments: Commodore Apartments and Pon De Leo Apartments, located in Oakland, CA, Hollywood Property located in Los Angeles, CA, and Shoreline Apartment Homes located in Concord, CA.

The details of the properties are discussed under Item 7 Properties.

Item 3.
LEGAL PROCEEDINGS

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us.

Item 4.
MINE SAFETY DISCLOSURES

Not applicable.

19
PART II

Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our securities are currently not listed on any exchange, and we do not intend to list our securities on any securities exchange until at least 2024. Therefore, we do not expect a public market for them to develop in the foreseeable future. Therefore, a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, if at all.

Our public offering to sell our shares of common stock terminated in October 2020.

Holders

As of September 28, 2022, we had 13,295,626.16 and 321,624.94 shares of common stock and preferred stock, respectively, outstanding, held by a total of 3,139 common stockholders and 163 preferred stockholders, respectively.

Distributions and Taxable Income

We typically pay quarterly distributions to stockholders to the extent that we have income from operations available. Our quarterly distributions, if any, will be determined by our Board of Directors after a review and distributed pro-rata to holders of our shares; we declare distributions on a monthly basis, but pay each quarter. Any distributions to our stockholders will be declared out of assets legally available for distribution. In no event are we permitted to borrow money to make distributions if the amount of such distribution would exceed our annual accrued and received revenues, less operating costs. Distributions in kind are not permitted, except as provided in our Charter.

We have elected to be treated as a REIT under the Code. As a REIT, we are not subject to federal income taxes on amounts that we distribute to the stockholders, provided that, on an annual basis, we distribute at least 90% of our REIT taxable income to the stockholders and meet certain other conditions. To the extent that we satisfy the annual distribution requirement but distribute less than 100% of the taxable income, we will either be subject to U.S. federal corporate income tax on our undistributed taxable income or 4% excise tax on catch-up distributions paid in the subsequent year. We are also subject to tax on built-in gains we realize during the first five years following REIT election.

We have a dividend reinvestment plan (“DRIP”) that provides for reinvestment of our dividends and other distributions on behalf of stockholders for any individual stockholder who elects to participate in the DRIP, provided that the DRIP is permitted by the state in which the stockholders resides. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions.

On March 31, 2020, after assessing the impacts of the COVID-19 pandemic, our Board of Directors unanimously approved the suspension of regular quarterly distributions to our stockholders. On May 10, 2021, the Board of Directors reinstated the quarterly distributions after reassessing our cash flow and intends to continue such distribution so long as it is supported by the previous quarter’s income, but may increase or decrease the distribution accordingly.

During the years ended June 30, 2022 and 2021, we issued 128,740.66 and 22,143.48 shares of our common stock, respectively, in connection with the DRIP. During the year ended June 30, 2022, we issued 36.70 shares of our preferred stock, in connection with the DRIP.

20
The following tables reflect the dividends per share that we have declared during the years ended June 30, 2022 and 2021:

   
Dividends
  
   
Common stock
    
Preferred stock
  
During the Quarter Ended
  
Per Share
    
Amount
    
Per Share
    
Amount
  
September 30, 2021
  
$
0.130
*
  
$
1,731,482
    
$
-
    
$
-
  
December 31, 2021
    
0.080
      
1,068,612
      
0.125
      
440
  
March 31, 2022
    
0.090
      
1,193,841
      
0.375
      
18,507
  
June 30, 2022
    
0.100
      
1,323,888
      
0.375
      
37,982
  
   
$
0.400
    
$
5,317,823
    
$
0.875
    
$
56,929
  

 
  
Dividends
  
During the Quarter Ended
  
Common stock
  
June 30, 2021
  
Per Share
    
Amount
  

 
$
0.050
    
$
664,714
  

*$0.06 per share dividend was declared for the quarter ended June 30, 2021.

Recent Sale of Unregistered Securities

As part of the merger agreement between our wholly owned subsidiary, Merger Sub, and FSP Satellite, the former shareholders of FSP Satellite received cash or shares of the Company, based upon their election. Upon closing of the merger on June 1, 2022, 3,172 units of common shares and 550 units of preferred shares of the Company were issued at a stated value of $10.25 and $25 per unit, respectively.

The private placement of our common shares was exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Regulation D thereunder.

Issuer Purchases of Equity Securities

The following table presents information with respect to our purchases of our common stock during the years ended June 30, 2022 and 2021:

Period
  
Total Number of Shares
Purchased
    
Average Price Paid Per
Share
    
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans
    
Maximum Dollar
Value of Shares That
May Yet Be Purchased
Under Publicly
Announced Plans
  
During the year ended June 30, 2022:
                        
December 1, 2021 through December 31, 2021
    
5,607.89
    
$
9.84
      
5,608
      
-
  
January 1, 2022 through February 28, 2022
    
14,951.24
*
  
$
7.20
      
-
      
-
  
March 1, 2022 through March 31, 2022
    
110,725.92
    
$
9.41
      
110,726
      
-
  
June 1, 2022 through June 30, 2022
    
63,695.00
*
  
$
8.96
      
-
      
-
  
 
    
194,980.05
              
116,334
      
-
  
 
                                
During the year ended June 30, 2021:
                                
April 22, 2021 through May 12, 2021
    
68,135.92
    
$
6.00
      
408,818
      
-
  
 
    
68,135.92
              
408,818
      
-
  

*Purchased through third-party auction as the highest bidder.

21
Item 6.
[RESERVED]

Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements by MacKenzie Realty Capital, Inc., its wholly owned subsidiaries MRC TRS, Inc. and MacKenzie Satellite Place, Inc. and, its majority owned subsidiaries; MacKenzie Realty Operating Partnership, LP, Madison-PVT Partners LLC and PVT-Madison Partners LLC (the “Company,” “we,” or “us”) contained herein, other than historical facts, may constitute “forward-looking statements.”  These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, stockholders can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,“ “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any anticipated results, levels of activity, performance or achievements expressed or implied by such forward-looking statements, including an economic downturn could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies; a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities; and interest rate volatility could adversely affect our results, particularly if we elect to use leverage as a part of our investment strategy. For a discussion of factors that could cause our actual results to differ from forward-looking statements contained herein, please see the discussion under the heading “Risk Factors” above.

We may experience fluctuations in our operating results due to a number of factors, including the effect of the withdrawal of our BDC election, the return on our equity investments, the interest rates payable on our debt investments, the default rates on such investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

Overview

Historically, we were an externally managed non-diversified closed-end management investment company that elected to be treated as a BDC under the 1940 Act, but we withdrew our election to be treated as a BDC on December 31, 2020. Our objective remains to generate both current income and capital appreciation through real estate-related investments. We have elected to be treated as a REIT under the Code and as a REIT, we are not subject to federal income taxes on amounts that we distribute to the stockholders, provided that, on an annual basis, we distribute at least 90% of our REIT taxable income to the stockholders and meet certain other conditions. To the extent that we satisfy the annual distribution requirement but distribute less than 100% of our taxable income, we will be subject to an excise tax on our undistributed taxable income. Our wholly owned subsidiary, MRC TRS, Inc. is subject to corporate federal and state income tax on its taxable income at regular statutory rates.

We are managed by the Advisers, and MacKenzie provides the non-investment management services and administrative services necessary for us to operate.

Authorization to Withdraw BDC Election

On October 23, 2020, holders of a majority of our outstanding common stock authorized our Board of Directors to withdraw our election to be regulated as a BDC under the Investment Company Act of 1940. We submitted the withdrawal to be effective with the SEC on December 31, 2020.

22
Withdrawal of our election to be regulated as a BDC did not affect our registration under Section 12(g) of the Exchange Act, and we continue to file periodic reports on Form 10-K, Form 10-Q, and Form 8-K, as well as file proxy statements and other reports required under the Exchange Act. As a result of the withdrawal of our election to be regulated as a BDC, we are no longer be treated as an investment company for purposes of applying the GAAP, which results in a significant change in our future financial statement presentation. The most notable changes to the format of our consolidated financial statements include the removal of the Consolidated Schedule of Investments and Financial Highlights and the consolidation of majority owned subsidiaries onto our financial statements. Exclusive of the Operating Partnership, our other equity investments, both public and private, are reported at fair value within our consolidated financial statements under provisions of GAAP. We intend to, where appropriate, provide supplemental non-GAAP information in order to enhance our investors’ overall understanding of our consolidated financial statements.

We undertook several steps to meet the requirements for withdrawal of our election to be regulated as a BDC, including (i) preparing a plan of operations in contemplation of such a change to our status, (ii) evaluating potential investments in real estate assets that will allow us to transition to direct real estate asset investments, (iii) reviewing the potential adjusted investment strategy with potential capital providers, and (iv) consulting with outside counsel as to the requirements for withdrawing our election as a BDC.

During that transition period, we liquidated much of our securities portfolio. As of June 30, 2022, our securities portfolio comprised less than 20% of our assets.

Investment Plan

Now that we are no longer a BDC, we generally seek to invest in real estate assets. We intend to invest at least 80% of our total assets in equity or debt in real estate assets. We can invest up to 20% of our total assets in investment securities of real estate companies. A real estate company is one that (i) derives at least 50% of its revenue from the ownership, construction, financing, management or sale of commercial, industrial or residential real estate and land; or (ii) has at least 50% of its assets invested in such real estate. We will not invest in general partnerships, joint ventures, or other entities that do not afford limited liability to their security holders. However, limited liability entities in which we invest may hold interests in general partnerships, joint ventures, or other non-limited liability entities. When purchasing securities, we generally favor purchasing securities issued by entities that have (i) completed the initial offering of their securities, (ii) operated for a period of at least two years, and typically more than five years, from the completion of their initial offering, and (iii) fully invested their capital in real properties or other real estate related investments.

Our investment objective is to generate current income and capital appreciation through the acquisition of real estate assets and debt and equity real estate-related investments. Our independent directors review our investment policies periodically, at least annually, to confirm that our policies are in the best interests of our stockholders. Each such determination and the basis thereof are contained in the minutes of our Board of Directors meetings.

We seek to accomplish our objective by rigorously analyzing the value of and risks associated with potential acquisitions, and, for up to 20% of our total assets, by acquiring real estate securities at significant discounts to their net asset value.

We intend to expand our investment strategy to include acquisition of distressed real properties. Like our other investments, we would expect to hold distressed properties and infuse funds as necessary to extract unrealized value.

We will engage in various investment strategies to achieve our overall investment objectives. The strategy we select depends upon, among other things, market opportunities, the skills and experience of the Adviser’s investment team and our overall portfolio composition. We generally seek to acquire assets that produce ongoing distributable income for investors, yet with a primary focus on purchasing such assets at a discount from what the Adviser estimates to be the actual or potential value of the real estate.

The Company’s investment strategies  include making loans to or investments in previously syndicated projects that had encountered difficulties with occupancy, financing, tenant improvements or encounter other cash needs. Since entering the recent recession, certain of our portfolio companies have encountered additional cash shortfalls, and, in some cases, we have provided additional capital to the extent that we now own the majority of the project. In such cases, we intend to consolidate the portfolio company into our financial statements, which is a key reason for dropping our BDC status.

We intend to continue our historical activities related to tender offers for shares of non-traded REITs in order to boost our short-term cash flow and to support our distributions, subject to the constraint that such securities will not exceed 20% of our portfolio. We believe this niche strategy will allow us to pay distributions that are supported by cash flow rather than paying back investors’ capital, although there can be no assurance that some portion of any distribution is not a return of capital.

23
Rental and Reimbursement

We generate rental revenue by leasing office space and apartment units to the building’s tenants. These tenant leases fall under the scope of Accounting Standards Codification (“ASC”) Topic 842, and are classified as operating leases. Revenues from such leases are recognized on a straight-line basis over the terms of the lease agreements.

Investment Income

We generate revenues in the form operating income, capital gains and dividends on dividend-paying equity securities or other equity interests that we acquire, in addition to interest on any debt investments that we hold. Further, we may generate revenue in the form of commitment, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. Any such fees are generated in connection with our investments and recognized as earned.

Expenses

Our primary operating expenses include the payment of: (i) advisory fees to our Advisers; (ii) our allocable portion of overhead and other expenses incurred by MacKenzie in performing its obligations under the Administration Agreement; and (iii) other operating expenses as detailed below. Our investment advisory fees compensate our Investment and Real Estate Adviser for their work in identifying, evaluating, negotiating, closing, monitoring and servicing our investments. Our expenses must be billed to and paid by us, except that MacKenzie may be reimbursed for actual cost of goods and services used by us and certain necessary administrative expenses. We will bear all other expenses of our operations and transactions, including:


 •
the cost of operating and maintaining real estate properties;

•
the cost of calculating our net asset value, including the cost of any third-party valuation services;

•
the cost of effecting sales and repurchases of our shares and other securities;

•
interest payable on debt, if any, to finance our investments;

•
fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing due diligence reviews of prospective investments and third-party advisory fees;

•
transfer agent and safekeeping fees;

•
fees and expenses associated with marketing efforts;

•
federal and state registration fees, any stock exchange listing fees in the future;

•
federal, state and local taxes;

•
independent directors’ fees and expenses;

•
brokerage commissions;

•
fidelity bond, directors and officers errors and omissions liability insurance, and other insurance premiums;

•
direct costs and expenses of administration and sub-administration, including printing, mailing, long distance telephone and staff;

•
fees and expenses associated with independent audits and outside legal costs;

•
costs associated with our reporting and compliance obligations under the 1934 Act, the 1940 Act and applicable federal and state securities laws; and

•
all other expenses incurred by either MacKenzie or us in connection with administering our business, including payments under the Administration Agreement that are based upon our allocable portion of overhead and other expenses incurred by MacKenzie in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the costs of compensation and related expenses of our chief compliance officer and our chief financial officer and any administrative support staff.

Critical Accounting Policies

Below is a discussion of the accounting policies and estimates that management considers critical in that they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our consolidated financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. In addition to the discussion below, our critical accounting policies are discussed in Note 2 of our consolidated financial statements, which are part of this Annual Report beginning on page F-1.

24
Use of Estimates

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported asset values, liabilities, revenues, expenses and unrealized gains (losses) on investments during the reporting period. Material estimates that are susceptible to change, and actual results could differ from those estimates.

Revenue Recognition

Rental revenue, net of concessions, which is derived primarily from lease contracts, which include rents that each tenant pays in accordance with the terms of each lease agreement, are recognized on a straight-line basis over the term of the lease, when collectability is determined to be probable.

Minimum rent, including rental abatements, lease incentives, and contractual fixed increases attributable to operating leases are recognized on a straight-line basis over the term of the related leases when collectability is probable. Amounts expected to be received in later years are recorded as deferred rent receivable. If the lease provides for tenant improvements, we determine whether the tenant improvements, for accounting purposes, are owned by the tenant or us. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that can be taken in the form of cash or a credit against the tenant’s rent) that is funded is treated as a lease incentive and amortized as a reduction of rental revenue over the lease term.

Tenant improvement ownership is determined based on various factors including, but not limited to:


 •
whether the lease stipulates how a tenant improvement allowance may be spent;

•
whether the lessee or lessor supervises the construction and bears the risk of cost overruns;

•
whether the amount of a tenant improvement allowance is in excess of market rates;

•
whether the tenant or landlord retains legal title to the improvements at the end of the lease term;

•
whether the tenant improvements are unique to the tenant or general purpose in nature; and

•
whether the tenant improvements are expected to have any residual value at the end of the lease.

In accordance with ASC Topic 842, we determine whether collectability of lease payments in an operating lease is probable. If we determine the lease payments are not probable of collection, we fully reserve for rent and reimbursement receivables, including deferred rent receivable, and recognizes rental income on cash basis.

Distributions received from investments are evaluated by management and recorded as dividend income or a return of capital (reduction of investment) on the ex-dividend date. Operational dividends or distributions received from portfolio investments are recorded as investment income. Distributions resulting from the sale or refinance of an investee’s underlying assets are compared to the estimated value of the remaining assets and are recorded as a return of capital or as investment income as appropriate.

Realized gains or losses on investments are recognized in the period of disposal, distribution, or exchange and are measured by the difference between the proceeds from the sale or distribution and the cost of the investment. Investments are disposed of on a first-in, first-out basis. Net change in unrealized gain (loss) reflects the net change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized gains or losses.

Variable Interest Entities

We evaluate the need to consolidate our investments in securities in accordance with ASC Topic 810, Consolidation (“ASC 810”). In determining whether we have a controlling interest in a variable interest entity and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the partners/members, as well as whether the entity is a variable interest entity for which we are the primary beneficiary.

25
Real Estate Assets, Capital Additions, Depreciation and Amortization

We capitalize costs, including certain indirect costs, incurred for capital additions, including redevelopment, development, and construction projects. We also allocate certain department costs, including payroll, at the corporate levels as “indirect costs” of capital additions, if such costs clearly relate to capital additions. We also capitalize interest, property taxes, and insurance during periods in which redevelopment, development, and construction projects are in progress. Cost capitalization begins once the development or construction activity commences and ceases when the asset is ready for its intended use. Repair and maintenance and tenant turnover costs are expensed as incurred. Repair and maintenance and tenant turnover costs include all costs that do not extend the useful life of the real estate asset. Depreciation and amortization expense are computed on the straight-line method over the asset’s estimated useful life. We consider the period of future benefit of an asset to determine its appropriate useful life and anticipate the estimated useful lives of assets by class to be generally as follows:
 
Buildings
16-45 years
   
Building improvements
1-15 years
   
Land improvements
5-15 years
   
Furniture, fixtures and equipment
3-11 years
   
In-place leases
1-10 years

Real Estate Purchase Price Allocations

In accordance with the guidance for business combinations, upon the acquisition of real estate properties, We evaluate whether the transaction is a business combination or an asset acquisition. If the transaction does not meet the definition of a business combination, we record the assets acquired, the liabilities assumed, and any non-controlling interest as of the acquisition date, measured at their relative fair values. Acquisition-related costs are capitalized in the period incurred and are added to the components of the real estate assets acquired. We assess the acquisition-date fair values of all tangible assets, identifiable intangible assets, and assumed liabilities using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis) and that utilize appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on several factors including historical operating results, known and anticipated trends, and market and economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it was vacant. Intangible assets include the value of in-place leases, which represents the estimated fair value of the net cash flows of leases in place at the time of acquisition, as compared to the net cash flows that would have occurred had the property been vacant at the time of acquisition and subject to lease-up. We amortize the value of in-place leases to expense over the remaining non-cancelable term of the respective leases, which is on average five years. Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require us to make significant assumptions to estimate market lease rates, property operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, prevailing interest rates, and the number of years the property will be held for investment. The use of inappropriate assumptions could result in an incorrect valuation of acquired tangible assets, identifiable intangible assets, and assumed liabilities, which could impact the amount of our net income (loss). Differences in the amount attributed to the fair value estimate of the various assets acquired can be significant based upon the assumptions made in calculating these estimates.

Impairment of Real Estate Assets

We continually monitor events and changes in circumstances that could indicate that the carrying value of our real estate and related intangible assets may not be recoverable. When indicators of potential impairment emerge, we assess whether we will recover the carrying value of the asset through its undiscounted future cash flows and its eventual disposition. Based on this assessment, if we do not believe that we will recover the carrying value of the real estate and related intangible assets, we will record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the real estate and related intangible assets.

26
Fair Value Measurements

GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of market price observables used in measuring investments at fair value. Market price is impacted by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observables and a lesser degree of judgment used in measuring fair value.

Investments measured and reported at fair value are classified and disclosed in one of the following categories:

Level I –            Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I are publicly traded equity securities. We do not adjust the quoted price for these investments even in situations where we hold a large position and a sale could reasonably impact the quoted price.

Level II –          Price inputs are quoted prices for similar financial instruments in active markets; quoted prices for identical or similar financial instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets. Investments which are generally included in this category are publicly traded equity securities with restrictions.

Level III –        Pricing inputs are unobservable and include situations where there is little, if any, market activity for the investment. Fair values for these investments are estimated by management using valuation methodologies that consider a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, financial condition, and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant judgment by management. Due to the inherent uncertainty of these estimates, these values may differ materially from the values that would have been used had an active market for these investments existed.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management’s assessment of the significance of a particular input to the fair value measurement, in its entirety, requires judgment and considers factors specific to the investment.

Valuation Procedures

Valuation of Investments:

Our consolidated financial statements include investments that are measured at their estimated fair values in accordance with GAAP. Our valuation procedures are summarized below:

Securities for which market quotations are readily available on an exchange will be valued at such price as of the closing price on the day closest to the valuation date. Where a security is traded but in limited volume, we may instead utilize the weighted average closing price of the security over the prior 10 trading days. We may value securities that do not trade on a national exchange by using published secondary market trading information. When doing so, we first confirm that GAAP recognizes the trading price as the fair value of the security.

Securities for which reliable market data are not readily available or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Adviser or Board of Directors, does not represent fair value, which we expect will represent a substantial portion of our portfolio, shall each be valued as follows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminary valuation conclusions are documented and discussed with our senior management; and (iii) the Board of Directors will discuss valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the Adviser and, where appropriate and necessary, the respective third‑party valuation firms. The recommendation of fair value will generally be based on the following factors, as relevant:


 •
the nature and realizable value of any collateral;

•
the portfolio company’s ability to make payments;

•
the portfolio company’s earnings and discounted cash flow;

•
the markets in which the issuer does business; and

•
comparisons to publicly traded securities.

27
Securities for which market data is not readily available or for which a pricing source is not sufficient may include the following:


 •
private placements and restricted securities that do not have an active trading market;

•
securities whose trading has been suspended or for which market quotes are no longer available;

•
debt securities that have recently gone into default and for which there is no current market;

•
securities whose prices are stale;

•
securities affected by significant events; and

•
securities that the Adviser believes were priced incorrectly.

Valuation of Real Property:

When property is owned directly, the valuation process includes a full review of the property financial information. An Argus model is created using all known data such as current rent rolls, escalators, expenses, market data in the area where the property is located, cap rates, discount rates, mortgages, interest rates, and other pertinent information.  We estimate future leasing and costs associated, generally over a ten-year period, to determine the fair value of the property.  Once the fair value is determined, and reviewed by the board, a determination of impairment is made and documented. In addition, once per year, in preparation of net asset value, we obtain a third-party appraisal on directly owned properties.

Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements will express the uncertainty of such valuations, and any change in such valuations, on our consolidated financial statements.

Assets and Liabilities Held for Sale
 
We classify long-lived assets or disposal groups to be sold as held for sale in the period in which all of the following criteria are met:
 

 •
Management, having the authority to approve the action, commits to a plan to sell the asset (disposal group);

•
The asset (disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (disposal groups);

•
An active program to locate a buyer and other actions required to complete the plan to sell the asset (disposal group) have been initiated;

•
The sale of the asset (disposal group) is probable, and transfer of the asset (disposal group) is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the asset or disposal group beyond one year;

•
The asset (disposal group) is being actively marketed for sale at a price that is reasonable in relation to its current fair value. The price at which a long-lived asset (disposal group) is being marketed is indicative of whether the entity currently has the intent and ability to sell the asset (disposal group). A market price that is reasonable in relation to fair value indicates that the asset (disposal group) is available for immediate sale, whereas a market price in excess of fair value indicates that the asset (disposal group) is not available for immediate sale; and

•
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
 
On the day that these criteria are met, we suspend depreciation on the investment properties held for sale, including depreciation for tenant improvements and additions, as well as on the amortization of acquired in-place leases. The investment properties and liabilities associated with those investment properties that are held for sale are classified separately on the consolidated balance sheets for the most recent reporting period and recorded at the lesser of the carrying value or fair value less costs to sell.

Portfolio Investment Composition

After the BDC status withdrawal on December 31, 2020, we began transforming our portfolio of investments in an orderly fashion into one comprised of controlled real estate investments (either wholly owned or controlled through voting securities).  As of June 30, 2022, we still owned various real estate limited partnerships and REITs that are listed in the “Investments, at fair value” in the table below. We also owned various investments in entities that own real estate which gave us enough control such that the investments are not securities for 1940 Act purposes, but not enough to consolidate the financials of such entities with our own; these are listed below as “Unconsolidated investments (non-securities), at fair value.”  As a result of the change in our status and applying the new basis of accounting, on the effective date of the termination of our status as a BDC, we recorded the fair value of the investments as the new carrying value of the investments. The following table summarizes the composition of our investments at fair value as of June 30, 2022 and 2021:

28
 
  
Fair Value
  
Investments, at fair value
  
June 30, 2022
    
June 30, 2021
  
3100 Airport Way South LP
  
$
330,000
    
$
283,750
  
5210 Fountaingate
    
6,820
      
30,574
  
American Healthcare REIT, Inc. – Class I
    
416,115
      
-
  
Benefit Street Partners Realty Trust, Inc.
    
-
      
2,693,265
  
Capitol Hill Partners, LLC
    
1,518,100
      
1,007,000
  
CBL & Associates Properties, Inc. - Preferred D
    
-
      
169,200
  
CIM Real Estate Finance Trust, Inc.
    
-
      
3,197,484
  
Citrus Park Hotel Holdings, LLC
    
5,000,000
      
5,000,000
  
CNL Healthcare Properties, Inc.
    
-
      
1,071,445
  
Coastal Realty Business Trust, REEP, Inc. - A
    
49,178
      
34,714
  
Corporate Property Associates 18 Global A Inc.
    
42,256
      
34,603
  
FSP 303 East Wacker Drive Corp. Liquidating Trust
    
-
      
773
  
FSP Energy Tower I Corp. Liquidating Trust
    
-
      
10,479
  
FSP Grand Boulevard Corp. Liquidating Trust (Residual)
    
-
      
4,597
  
FSP Satellite Place Corp.
    
-
      
2,867,911
  
Griffin-American Healthcare REIT III, Inc.
    
-
      
329,522
  
Griffin Capital Essential Asset REIT, Inc.
    
-
      
519,666
  
Healthcare Trust, Inc.
    
3,866,394
      
2,588,464
  
HGR Liquidating Trust
    
732
      
50,488
  
Highlands REIT Inc.
    
3,750,385
      
3,047,188
  
InvenTrust Properties Corp.
    
-
      
3,248,093
  
KBS Real Estate Investment Trust II, Inc.
    
1,010,350
      
1,788,593
  
KBS Real Estate Investment Trust III, Inc.
    
-
      
721,172
  
Lakemont Partners, LLC
    
806,290
      
817,770
  
Moody National REIT II, Inc.
    
15,969
      
19,240
  
New York City REIT, Inc Cl B
    
-
      
283,249
  
Phillips Edison & Company, Inc. (Phillips Edison Grocery Center REIT I)
    
-
      
6,131,261
  
Satellite Investment Holdings, LLC - Class B
    
-
      
4,745
  
Secured Income, LP
    
520,594
      
267,734
  
Sila Realty Trust, Inc.
    
-
      
1,366,105
  
SmartStop Self Storage REIT, Inc Class A
    
120,922
      
76,312
  
SmartStop Self Storage REIT, Inc Class T
    
9,885
      
6,239
  
Steadfast Apartment REIT
    
-
      
503
  
Strategic Realty Trust, Inc.
    
311,007
      
376,482
  
Summit Healthcare REIT, Inc.
    
1,973,211
      
1,747,701
  
The Parking REIT Inc.
    
-
      
113,516
  
Total
  
$
19,748,208
    
$
39,909,838
  

 
  
Fair Value
  
Unconsolidated investments (non-security), at fair value
  
June 30, 2022
    
June 30, 2021
  
1300 Main, LP
  
$
1,688,000
    
$
-
  
Bishop Berkeley, LLC
    
-
      
5,142,164
  
BP3 Affiliate, LLC
    
-
      
1,668,000
  
Britannia Preferred Members, LLC - Class 1
    
-
      
6,448,000
  
Britannia Preferred Members, LLC - Class 2
    
-
      
5,891,945
  
Dimensions28 LLP
    
19,512,036
      
11,449,296
  
First & Main, LP
    
2,237,000
      
-
  
Green Valley Medical Center, LP
    
3,010,000
      
-
  
Main Street West, LP
    
4,708,000
      
-
  
Martin Plaza Associates, LP
    
725,000
      
-
  
One Harbor Center, LP
    
4,162,000
      
-
  
Westside Professional Center I, LP
    
1,803,000
      
-
  
Woodland Corporate Center II, LP
    
-
      
-
  
Total
  
$
37,845,036
    
$
30,599,405
  

29
Properties

In addition to our investment securities, we currently own and manage two commercial real estate properties: Addison Corporate Center located in Windsor, CT and MacKenzie Satellite Place in Duluth, GA and four residential apartments: Commodore Apartments and Pon De Leo Apartments, located in Oakland, CA, the Hollywood Property located in Los Angeles, CA, and the Shoreline Apartments in Concord, CA. Addison Corporate Center and the Hollywood Property are owned through our subsidiary, the Operating Partnership, the Commodore Apartments are owned through our subsidiary Madison, the Pon De Leo Apartments are owned through our subsidiary PVT, and the Shoreline Apartments are owned through our subsidiary BAA-Shoreline and MacKenzie Satellite Place is owned directly.

Addison Corporate Center contains 605,502 square feet, of which approximately 185,000 square feet is office space and the remainder is designated as flex office/warehouse space. Addison Corporate Center serves as a collateral to a loan which matured on April 30, 2022. After the maturity, Addison Property Owner was unable to extend the loan and entered into a forbearance agreement with the lender on June 28, 2022. Pursuant to the forbearance agreement, the property is currently being marketed for sale. Accordingly, Addison Corporate Center is classified as an asset held for sale as of June 30, 2022. As of June 30, 2022, the property is occupied by 4 tenants. The following table shows the largest tenants and square footage occupied:

Largest Tenants
Business
Business
  
Square Ft. Occupied
    
Rent per annum
  
Lease
Expiration
Renewal
options
Triumph
Aircraft Design, Manufacturing, and Engineering
  
88,255
    
$
353,904
  
5/31/27
No
Belcan
Global Engineering and Consulting
  
66,072
    
$
1,185,332
  
9/30/29
No
Quest Diagnostics
Laboratory Services
  
65,459
    
$
1,243,721
  
10/31/25
1, 3 years

The following information pertains to lease expirations at Addison Corporate Center:

Year
  
Number of Leases Expiring
    
Total Area
    
Annual Rent
    
Percentage of Gross Rent
  
2025
    
2
      
70,164
    
$
1,330,952
      
47%
2027
    
1
      
88,255
    
$
353,904
      
12%
2029
    
1
      
66,072
    
$
1,185,332
      
41%


Satellite Place is a six story office building contains 143,785 square feet of rentable office area located in Duluth, Georgia. As of June 30, 2022, the property is approximately 53% occupied by 1 tenant as listed in below table.

Largest Tenants
Business
Business
  
Square Ft. Occupied
    
Rent per annum
  
Lease Expiration
Renewal
options
OS National, LLC
Title Services
    
71,085
    
$
1,307,253
  
12/31/29
2,5 years

The following information pertains to lease expirations at Satellite Place:

Year
  
Number of Leases Expiring
    
Total Area
    
Annual Rent
    
Percentage of Gross Rent
  
2029
    
1
      
71,085
    
$
1,307,253
      
100%

 
Commodore Apartments is a mid-rise apartment building built in 1912 and has 48 units. As of June 30, 2022, Commodore Apartment building is approximately 97.9% occupied. Pon De Leo Apartments is also a mid-rise apartment building built in 1929 and has 39 units. As of June 30, 2022, Pon Do Leo Apartment building is approximately 97.4% occupied.
 
30
Hollywood Property, located in Los Angeles, CA, is a mid-rise apartment building built in 1917 and has 53 units. The property contains approximately 37,000 square feet of net rentable apartment area and 8,560 square feet of retail space. All of the retail space is currently occupied by restaurants and nightclubs. The apartment units are 58.5% occupied as of June 30, 2022 as the property recently began` to add tenants after renovations. The property underwent extensive renovations in order to reposition the complex as a premier rental with significant rate increases over previous years. Virtually all of the renovations have been completed, with the final apartments scheduled to be finished as remaining tenants vacate. A grand opening for the public was held in early April and marketing of the newly renovated units began in late April.  Shoreline Apartments is a mid-rise apartment building built in 1967 and renovated in 2015 which has 84 units. As of June 30, 2022, Shoreline Apartments building is approximately 90.5% occupied.

The following table provides information regarding each of the residential properties:

Property Name
Sector
Location
  
Square
Feet
    
Units
    
Percentage Leased
    
Annual
Base Rent
    
Monthly Base Rent/Occupied Unit
  
Pon De Leo
Multi-Family Residential
Oakland, CA
    
36,654
      
39
      
97.4%
 
$
1,053,972
    
$
2,282
  
Commodore
Multi-Family Residential
Oakland, CA
    
31,156
      
48
      
97.9%
 
$
847,566
    
$
1,503
  
Hollywood Property
Multi-Family Residential
Los Angeles, CA
    
36,991
      
53
      
58.5%
 
$
759,263
    
$
2,041
  
Shoreline Apartments
Multi-Family Residential
Concord, CA
    
67,925
      
84
      
90.5%
 
$
1,899,480
    
$
2,082
  

Property Name
Sector
Location
  
Square
Feet
    
Units
    
Percentage Leased
    
Annual
Base Rent
    
Monthly Base Rent/Occupied Unit
  
Hollywood Property
Retail
Los Angeles, CA
    
8,560
    
1
      
100%

 
$
314,220
    
$
26,185
  

There are no present plans for the improvement or development of any property except for the Hollywood Property. Each property is being held for income production and increased occupancy and/or rental rates. We have property and liability insurance policies on all properties which we believe are adequate. The annual property taxes for Addison Corporate Center are estimated to be $1,035,068, for Commodore, $221,586, for Pon De Leo, $266,222, for Hollywood Property, $171,776, for Shoreline Apartments, $37,189 and for Satellite Place $16,409.

We also own a parcel of entitled land of approximately 3 acres located at the corner of Business Center Drive and Healthcare Drive in Fairfield, California. We plan to build a multi-family residential building on this land and are currently working on the design of the building.

The markets in which our properties (those consolidated and those that are not yet consolidated) operate are highly competitive, and each property faces unique competitive challenges based upon local economic, political, and legal factors. Our West coast multi-family properties, the Madison, and the Commodore, are generally restricted from raising rents by local rent control laws. Two of our unconsolidated investments in apartment properties, Lakemont Partners and Capitol Hill, are also subject to rent control. Rent control can result in average rents that are significantly below market, and this provides some buffer against declining rents in a recession. However, in order to encourage development, rent control usually does not apply to newer properties. Since older properties may be unable to raise rents as needed, they may be unable to make improvements that could allow them to compete with newer properties.

Our consolidated office properties, Addison Corporate Center and Satellite Place, are class B and Class A suburban office properties located in Windsor, Connecticut and Duluth, Georgia, respectively. Both properties must compete with every other office property in the market, as well as facing the uncertainty of workers returning to the office after COVID-19.

Our unconsolidated investment in a hotel property, Citrus Park Hotel, is a Courtyard by Marriott located in the Tampa/St. Petersburg market that competes for business and leisure travel. Citrus Park suffered a significant decline during 2020 as a result of a drastic reduction in business and leisure travel but is expected to recover as travel returns to normal.

31
Results of Operations

COVID-19 pandemic

Considerable uncertainty still surrounds the COVID-19 pandemic and its potential effects, and the extent of and effectiveness of any responses taken on a national and local level. However, measures taken to limit the impact of the COVID-19 pandemic, including social distancing and other restrictions on travel, congregation, and business operations have already resulted in significant negative economic impacts. In addition, some of the companies in which we have invested have cancelled their quarterly dividends and distributions for the current and future quarters. The long-term impact of the COVID-19 pandemic and any future outbreaks or variants on the United States and world economies remains uncertain, but may result in a world-wide economic downturn, the duration and scope of which cannot currently be predicted.

MacKenzie and our Advisers have taken numerous steps, and will continue to take further actions, to address the COVID-19 pandemic. They implemented business continuity plans and the management team is in place to respond to changes in the global environment quickly and effectively.

The situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response and assessing potential impacts to our financial position and operating results. This includes the evaluation and implementation of certain efforts to help us mitigate the impact that reduced revenues from distributions and capital events may have on our 2022 financial results. We are focusing on maintaining a strong balance sheet and liquidity position and searching for opportunistic investments. In anticipation of reduced revenues and uncertain future economic conditions, the Board of Directors had discontinued distributions starting March 2020 and share redemptions starting May 2020. However, after reassessing our cash flow, the Board of Directors resumed the share redemptions in March of 2021 and reinstated the quarterly distributions in May 2021. The Board intends to continue quarterly distributions so long as it is supported by the previous quarter’s income, but retains discretion to increase or decrease the distributions.

Due to the termination of our BDC status effective December 31, 2020, during the fiscal year ended June 30, 2021 (“Fiscal 2021”), we operated as a BDC for the period of July 1 through December 31, 2020 and as an operating REIT for the period of January 1, 2021 through June 30, 2021. Therefore, some of the operating results and cash flow activities for Fiscal 2021 have been discussed in two different periods; six months ended June 31, 2021 and six months ended December 31, 2020.

Comparison of the Fiscal Year Ended June 30, 2022 (“Fiscal 2022”) and Fiscal 2021

Rental and reimbursements revenues:

Rental and reimbursement revenues are generated from our commercial and residential real estate properties. During the year ended June 30, 2022, we generated $10.37 million in rental and reimbursements revenues, of which $8.08 million was generated from Addison Corporate Center, Hollywood Property, and Shoreline Apartments tenants, $2.16 million from the two residential apartments, and $0.13 million from the Satellite Place. During the year ended June 30, 2021, we generated $3.75 million in rental and reimbursements revenues, of which $3.08 million was generated from Addison Corporate Center tenants and $0.67 million from the two residential apartments. We acquired one commercial and two residential real estate properties during the year ended June 30, 2022, which resulted in higher rental revenues. We acquired two residential apartments on March 5, 2021; thus, we only generated four months of rental revenues during the year ended June 30, 2021. There were no rental revenues during the six months ended December 31, 2020 as we did not have any consolidated real estate properties.

Investment income:

Investment income was made up of dividends, distributions from operations, distributions from sales/capital transactions, interest, and other investment income. Total investment income for the year ended June 30, 2022 and 2021 was $4.91 million and $3.91 million, respectively. During the year ended June 30, 2022, we received $3.67 million of distributions from operations, sales, and liquidations as compared to $1.97 million during the year ended June 30, 2021. During the year ended June 30, 2022, we received dividends, interest, and other investment income of $1.24 million as compared to $1.94 million received during the year ended June 30, 2021. The increase in investment income is due to the increase in distributions from liquidated investments offset by the decrease in dividend income due to decrease in our investment portfolio since June 30, 2021. As of June 30, 2022, we have investments with total cost basis of $50.10 million as compared to $69.60 million as of June 30, 2021.

32
Expenses:

Our base management, portfolio structuring, and subordinated incentive fees were based on the investment advisory agreement that was effective through December 31, 2020, and, subsequent to December 31, 2020, based upon the base management and advisory fees under the advisory agreement that was effective January 1, 2021.

Asset management fee:

The asset management fees under the new advisory agreement for the year ended June 30, 2022 and six months ended June 30, 2021 was $2.73 million and $1.35 million, respectively. The base management fee under the previous advisory agreement for the six months ended December 31, 2020 was $1.34 million. The asset management fees are essentially on the same terms as the base management fees it was paying the Adviser prior to 2021, namely based upon a percentage of invested capital, which is equal to the amount calculated by multiplying the total number of outstanding shares, preferred shares, and partnership units issued by us by the price paid for each or the value ascribed to each in connection with their issuance. The total of these two fees for the year ended June 30, 3021 was $2.69 million as compared to $2.73 million for the year ended June 30, 2022. The increase of $0.04 million, or 1.49% was due to a slight increase in the invested capital by $8.22 million from $133.65 million as of June 30, 2021, to $141.87 million as of June 30, 2022.

Incentive management fee or subordinated incentive fee:

Under the Advisory Management Agreement, we pay an incentive management fee that is equal to 15% of all distributions once shareholders have received cumulative distributions equal to 6% from the effective date of the Agreement. Under the previous advisory agreement that was effective through December 31, 2020, the subordinated incentive fee had two components: a Capital Gains Fee and an Income Fee. The Capital Gains Fee was based on realized gains (including the distributions received from sales/capital transactions) and the Income Fee was based on net investment income. We did not incur any incentive management fee for the year ended June 30, 2022 and for the six months ended June 30, 2021. Similarly, there was neither Capital Gains Fee nor Income Fee for the six months ended December 31, 2020. This was because the cumulative net investment income and net realized gains were below the threshold of 7% of Contributed Capital.

Administrative cost and transfer agent reimbursements:

Costs reimbursed to MacKenzie for the year ended June 30, 2022 was $0.61 million as compared to $0.62 million for the year ended June 30, 2021. The slight decrease was due to a decrease in the allocable portion of overhead and other expenses incurred by MacKenzie in comparison to June 30, 2021, as a result of the decrease in our capital raising activities.

Transfer agent cost reimbursement paid to MacKenzie for the year ended June 30, 2022 and 2021 were $0.11 million and $0.12 million, respectively.

Property operating and maintenance expenses:

Operating and maintenance expenses mainly consists of real estate taxes, utilities, repair and maintenance, cleaning, landscape, security, property management fees, insurance, and various other administrative expenses incurred in the operation of our commercial and residential real estate assets. During the year ended June 30, 2022, we incurred operating and maintenance expenses of $6.16 million, of which $5.09 million mainly were incurred in the operation of Addison Corporate Center, Hollywood Property and Shoreline Apartments, $1.01 million were incurred in the operation of two residential apartments and $0.06 million were incurred in the operation of Satellite Place. During the six months ended June 30, 2021, we incurred operating and maintenance expenses of $2.33 million, of which $2.14 million were mainly incurred in the operation of Adison Corporate Center. Operating and maintenance expenses incurred in the operation of two residential apartments were $0.19 million since the properties were acquired and in operation for only four months during the year ended June 30, 2021. We did not have such expenses during the six months ended December 31, 2020 as it did not own and operate any real estate assets as of December 31, 2020.

33
Depreciation and amortization:

During the year ended June 30, 2022, we recorded depreciation and amortization of $4.54 million, of which $3.88 million was the depreciation and amortization of real estate and intangible assets we owned through the Operating Partnership. $0.59 million of the total was related to the depreciation and amortization of real estate assets and intangibles owned through Madison and PVT. $0.07 million of the total was related to the depreciation and amortization of real estate assets and intangibles owned through MacKenzie Satellite. During the six months ended June 30, 2021, we recorded depreciation and amortization of $2.19 million, of which $1.60 million was the depreciation and amortization of real estate and intangible assets it owned through the Operating Partnership. $0.59 million of the total related to the depreciation and amortization of real estate assets and intangibles owned through Madison and PVT. We did not have such expenses during the six months ended December 31, 2020 as it did not own and operate any real estate assets as of December 31, 2020.

During the six months ended December 31, 2020, we had deferred offering costs amortization of $0.34 million, which was related to offering costs incurred by us on our third public offering that terminated in October 2020. The remaining unamortized balance of those deferred offering costs were fully amortized in October 2020 after the termination of the offering. Therefore, there was no such amortization during year ended June 30, 2022.

Interest expense:

Interest expense for the year ended June 30, 2022 was $2.35 million, of which $1.87 million was incurred on the notes payable associated with Addison Corporate Center, Hollywood Property and Shoreline Apartments, $0.46 million was incurred on the two mortgage notes payable associated with the two residential apartments, and $0.02 million was incurred on short sale fees. Interest expense for the six months ended June 30, 2021 was $0.64 million, of which $0.49 million was the interest expense incurred on the notes payable associated with Addison Corporate Center and $0.15 million was the interest expense on the two mortgage notes payable associated with the two residential apartments. We did not incur any interest expense during the six months ended December 31, 2020 as it did not have any notes payable outstanding as of December 31, 2020.

Other operating expenses:

Other operating expenses include professional fees, directors’ fees printing and mailing, and other general and administrative expenses. Other operating expenses for the year ended June 30, 2022 and 2021, were $1.35 million and $1.03 million, respectively. The increase in other operating expenses is due to two reasons: (i) an acquisition of new properties: Hollywood Property, Shoreline Apartments, and Satellite Place, resulting in larger amount of general and administrative operating expenses during the year ended June 30, 2022, and (ii) the two existing properties, Pon De Leo and Commodore reporting full year of operation during year ended June 30, 2022,  compared to less than four months of operation during the year ended June 30, 2021 as the properties were acquired in March 2021.

Net realized gain on sale of investments:

During the year ended June 30, 2022, we had a realized gain of $7.35 million as compared to $1.75 million during the year ended June 30, 2021. Total realized gains for the year ended June 30, 2022, were realized from sale of three publicly traded REIT securities with total realized gains of $0.11 million and sixteen non-traded REIT securities with net realized gain of $9.13 million offset by a realized loss of $1.89 million from four limited partnership interest. Total realized gains for the year ended June 30, 2021, were realized from sales of seventeen publicly traded REIT securities with total realized gains of $1.89 million and four non-traded REIT securities with net realized gain of $0.04 million offset by a realized loss of $0.18 million from two limited partnership interest.

Net unrealized gain (loss) on investments:

During the year ended June 30, 2022, we recorded net unrealized gains of $8.87 million, which were net of $0.38 million of unrealized gain reclassification adjustment. The reclassification adjustments are the accumulated unrealized gains or losses as of the end of prior period that are realized during the current period. Accordingly, the net unrealized gains for the year ended June 30, 2022 were $9.25 million, resulted from fair value appreciations of $7.19 million from limited partnership interests, $2.04 million from non-traded REIT securities, $0.01 million from investment trust, and $0.01 million from publicly traded securities. The unrealized gain from non-traded REIT securities includes $2.56 million of unrealized gain recorded on the FSP Satellite shares that we owned prior to June 30, 2021.

For the year ended June 30, 2021, net unrealized gains and losses are discussed in two periods; six months ended June 30, 2021 as a REIT and six months ended December 31, 2020 as a BDC.

34
During the six months ended June 30, 2021, we recorded net unrealized gains of $0.94 million and did not have any reclassification adjustments as the accumulated unrealized gains and losses as of December 31, 2020 on all investments were recorded as carrying value adjustments due to the termination of our BDC status. The reclassification adjustments are the accumulated unrealized gains or losses as of the end of prior period that are realized during the current period. Accordingly, the net unrealized gains for the six months ended June 30, 2021, resulted from fair value appreciations of $1.47 million from non-traded REIT securities partly offset by fair value depreciations of $0.52 million from limited partnership interests and $0.01 million from publicly traded securities.

During the six months ended December 31, 2020, we recorded net unrealized losses of $10.14 million, which were net of $0.81 million of unrealized gains reclassification adjustments. The reclassification adjustments are the accumulated unrealized gains or losses as of the end of prior period that are realized during the current period. Accordingly, the net unrealized losses excluding the reclassification adjustment for the six months ended December 31, 2020, were $9.33 million, which resulted from fair value depreciation of $7.32 million from limited partnership interests, $1.36 million from non-traded REIT securities, and $0.65 million from publicly traded REIT securities. The large decrease in fair value of partnership interests was mainly due to the decline in the underlying property value of the Operating Partnership before consolidation resulting from unfavorable leasing activities as a result of the COVID-19 pandemic.

Income tax provision (benefit):

The Parent Company has elected to be treated as a REIT for tax purposes under the Code and, as a REIT, is not subject to federal income taxes on amounts that it distributes to the stockholders, provided that, on an annual basis, it distributes at least 90% of its REIT taxable income to the stockholders and meets certain other conditions. To the extent that it satisfies the annual distribution requirement but distributes less than 100% of its taxable income, it is either subject to U.S. federal corporate income tax on its undistributed taxable income or 4% excise tax on catch-up distributions paid in the subsequent year.

The Parent Company satisfied the annual dividend payment and other REIT requirements for the tax year ended December 31, 2021. Therefore, it did not incur any tax expense or excise tax on its income from operations during the quarterly periods within the tax year 2021. Similarly, for the tax year 2022, we believe the Parent Company paid the requisite amounts of dividends during the year and met other REIT requirements such that it will not owe any income taxes. Therefore, the Parent Company did not record any income tax provisions during any fiscal periods within the tax year 2022.

TRS, MacKenzie NY 2, and MacKenzie Satellite are subject to corporate federal and state income tax on its taxable income at regular statutory rates. However, as of June 30, 2022, they did not have any taxable income for tax years 2021 or 2022. Therefore, TRS, MacKenzie NY 2, and MacKenzie Satellite did not record any income tax provisions during any fiscal period within the tax year 2021 and 2022.

The Operating Partnership is a limited partnership and its wholly owned subsidiaries, the Addison Property Owner and MacKenzie Shoreline, are a limited liability companies. Accordingly, all income tax liabilities of these three entities flow through to their partners, which is the Company. Therefore, no income tax provisions are recorded for these three entities.

Liquidity and Capital Resources

Capital Resources

We offered to sell up to 5 million shares under our first public offering and up to 15 million shares each under our second and third public offerings. As of June 30, 2022, we raised total gross proceeds of $119.10 million from the issuance of shares under the three public offerings, $42.46 million from our first public offering, which concluded in October 2016, $67.99 million from the second public offering, which concluded in October 2019, and $8.65 million from our third public offering, which concluded in October 2020. In addition, we have raised $12.55 million from the issuance of shares under the DRIP. Of the total capital raised from the public offerings as of June 30, 2022, we have used $11.65 million to repurchase shares under our share repurchase program. In November 2021, the SEC qualified our offering statement pursuant to Regulation A to sell up to $50,000,000 of shares of our Series A preferred stock at an initial offering price of $25.00 per share. We raised $2.96 million pursuant to the Offering Circular as of June 30, 2022. We plan to fund future investments with the net proceeds raised from our preferred equity offering and any future offerings of securities and cash flows from operations, as well as interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. We may also fund a portion of our investments through borrowings from banks and issuances of senior securities. While we were a BDC, we did not borrow money on a long-term basis or issue debt securities at the Company level; however, now that our BDC status is withdrawn, we may borrow money within the underlying companies in which we have majority ownership. In addition, from time to time we may draw on the margin line of credit on a temporary basis to bridge our investment purchases and sales or capital raising.

35
We intend to utilize leverage to enhance the total returns of our portfolio, and we expect to have greater flexibility in raising debt capital, following the withdrawal of our BDC election. Historically, we have only been able to access leverage at attractive costs through a credit facility.

We also expect to have greater flexibility in issuing securities with common equity participation features (such as warrants and convertible notes) and/or additional classes of stock (such as preferred) in order to facilitate capital formation now that we are no longer subject to the restrictions of the 1940 Act.

Our aggregate borrowings (if any), secured and unsecured, are expected to be reasonable in relation to our net assets and will be reviewed by the Board of Directors at least quarterly. The maximum amount of such borrowing will no longer be limited by the 1940 Act.

We used the funds raised from our public offerings to invest in portfolio companies, paying cash distributions to holders of our common stock (from investment income and realized capital gains), and paying operating expenses.

We finished the year ended June 30, 2022, with cash and cash equivalents, restricted cash, and receivables of $9.99 million, and approximately $4.57 million of current liabilities. Because of our strong liquidity and the liquidity preservation measures taken by the board, we are currently capable of meeting all of  our obligations and continue  our operations for the foreseeable future. We intend to continue to qualify as a REIT and to meet the associated testing requirements, including paying out at least 90% of  our taxable income.

Cash Flows:

Fiscal 2022:

For the year ended June 30, 2022, we experienced a net increase in cash of $1.24 million. During this year, we generated cash of $4.62 million from our operating activities, $28.79 million from our financing activities and used $32.17 million in our investing activities.

The net cash inflow of $4.62 million from operating activities resulted from $10.48 million of rental revenues and $4.91 million of investment income offset by $10.77 million of cash used in operating expenses.

The net cash outflow of $32.17 million from investing activities resulted from real estate acquisitions through our subsidiaries of $63.24 million and purchases of equity investments of $24.87 million offset by cash inflows of $33.69 million from sale of investments and $22.25 million from distributions received from our investments that are considered return of capital.

The net cash inflow of $28.79 million from financing activities resulted from note payable proceeds received of $34.45 million for financing the real estate acquisitions, $2.94 million proceeds from issuance of preferred stock, $1.07 million of capital contributions received from the non-controlling interest holders, and $0.09 million proceeds from capital pending acceptance offset by payments on existing note payable of $3.96 million, payments of dividends of $2.82 million, redemption of common stock of $1.43 million, payments of deferred finance cost of $0.83 million, payments of syndication cost amounting to $0.71 million, and capital distributions to non-controlling interests holders amounting to $0.01 million.

Fiscal 2021

Due to the termination of our BDC status effective December 31, 2020, for the fiscal year 2021, we operated as a BDC for the period of July 1, 2020 through December 31, 2020 and as an operating REIT for the period of January 1, 2021 through June 30, 2021. Therefore, the Fiscal 2021 year-to-date cash flow activities have been discussed in two different periods; six months ended June 30, 2021 and six months ended December 31, 2020.

Six months ended June 30, 2021(As an Operating REIT):

For the six months ended June 30, 2021, we experienced a net decrease in cash of $6.40 million. During this period, we generated cash of $0.97 million from our operating activities, $14.05 million from our financing activities and used $21.42 million in our investing activities.

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The net cash inflow of $0.97 million from operating activities resulted from $3.74 million of rental revenues and $2.03 million of investment income offset by $4.80 million of cash used in operating expenses.

The net cash outflow of $21.42 million from investing activities resulted from real estate acquisitions through our subsidiaries of $28.62 million and purchases of equity investments of $9.30 million offset by cash inflows of $10.50 million from sale of investments and $6.00 million from distributions received from our investments that are considered return of capital.

The net cash inflow of $14.05 million from financing activities resulted from note payable proceeds of $15.13 million received for financing the real estate acquisitions, and $0.20 million of capital contributions received from the non-controlling interest holders offset by payments on existing note payable of $0.41 million, redemption of common stock of $0.41 million, distributions to stockholders of $0.46 million.

Six months ended December 31, 2020 (As a BDC):

For the six months ended December 31, 2020, we experienced a net increase in cash of $5.20 million. During this period, we generated cash of $3.14 million from our operating activities, $1.93 million from investing activities and $0.13 million from our financing activities.

The net cash inflow of $3.14 million from operating activities resulted from $10.94 million from distributions received from our investments that are considered return of capital and $5.26 million from sales and liquidations of investments offset by $12.69 million of cash used in purchasing investments and $0.37 million used in operating expenses, net of investment income.

The net cash inflow of $1.93 million from investing activities resulted from the consolidation of the Operating Partnership as of December 31, 2020.

The net cash inflow of $0.13 million from financing activities resulted from the sale of shares under our third public offering with gross proceeds of $0.14 million (net of $0.09 million of decrease in capital pending acceptance) offset by cash outflows of $0.01 million from payments of selling commissions and fees.

Material Cash Obligations

We have entered into two contracts under which we have material future commitments: (i) the Advisory Management Agreement, under which the Real Estate Adviser serves as our adviser, and (ii) the Administration Agreement, under which MacKenzie furnishes us with certain non-investment management services and administrative services necessary to conduct our day-to-day operations. Each of these agreements is terminable by either party upon proper notice. Payments under the Advisory Management Agreement in future periods will be (i) a percentage of the value of our Invested Capital; (ii) Acquisition Fees, and (iii) incentive fees based on our performance above specified hurdles. Payments under the Administration Agreement will occur on an ongoing basis as expenses are incurred on our behalf by MacKenzie. However, if MacKenzie withdraws as our administrator, it will be liable for any expenses we incur as a result of such withdrawal.

Borrowings

We do not have any current plans to borrow money at the Parent Company level. In the event that we do so borrow, we would expect to be subject to various customary covenants and restrictions on our operations, such as covenants which would (i) require us to maintain certain financial ratios, including asset coverage, debt to equity and interest coverage, and a minimum net worth, and/or (ii) restrict our ability to incur liens, additional debt, merge or sell assets, make certain investments and/or distributions or engage in transactions with affiliates. While we do not have any plans to borrow money at the Parent Company level, we borrow money within the underlying companies in which we have majority ownership. As of June 30, 2022, total loan outstanding at the underlying companies amounted to $68,422,234, of which $19,604,382 was the loan associated with Addison Corporate Center that was being held for sale as of June 30, 2022.

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Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our portfolio primarily consists of equity and debt investments in smaller U.S. companies that primarily own commercial real estate that are either illiquid or not listed on any exchange, and our investments are considered speculative in nature. As a result, we are subject to risk of loss which may prevent our stockholders from achieving price appreciation, dividend distributions and a return of their capital. At June 30, 2022, financial instruments that subjected us to concentrations of market risk consisted principally of equity investments, which represented approximately 32% of our total assets as of that date. As discussed in Note 4 – Investments, to our consolidated financial statements, these investments primarily consist of securities in companies with no readily determinable market values and as such are valued in accordance with our fair value policies and procedures. Our investment portfolio also includes shares of publicly traded REITs, which are valued at recently quoted trading prices. Our investment strategy represents a high degree of business and financial risk due primarily to the general illiquidity of our investments. We may make short-term investments in cash equivalents, U.S. government securities and other high-quality investments that mature in one year or less, pending investments in portfolio companies made according to our principal investment strategy.

Item 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements and notes to the consolidated financial statements are set forth beginning on page F-1 in this Annual Report on Form 10-K and are incorporated herein by reference.

Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A.
CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the 1934 Act) as of the end of the period covered by this report as required by paragraph (b) of Rule 13a-15 or 15d-15 of the 1934 Act. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed by us in the reports we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rules 13a-15(f) and 15d-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP.

Our internal control over financial reporting includes those policies and procedures that:

1.
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and the dispositions of our assets;
2.
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and Board of Directors; and
3.
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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Our management’s assessment of the effectiveness of our internal control system as of June 30, 2022, was based on the framework for effective internal control over financial reporting described in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, as of June 30, 2022, our system of internal control over financial reporting was effective at the reasonable assurance level.

This annual report does not include an attestation report of our independent registered public accounting firm regarding control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street and Consumer Protection Act, which exempts non-accelerated filers from the auditor attestation requirement of section 404 (b) of the Sarbanes-Oxley Act.

Changes in Internal Control over Financial Reporting
 
There have been changes to our internal control over financial reporting (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that occurred during the year ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Item 9B.
OTHER INFORMATION

None.

Item 9C.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not applicable.

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PART III

Item 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Board of Directors and Executive Officers

Our business and affairs are managed under the direction of our Board of Directors. Accordingly, our Board provides broad supervision over our affairs, including supervision of the duties performed by the Adviser and MacKenzie. Certain employees of MacKenzie are responsible for our day-to-day operations. The names, ages and addresses of our Directors and specified executive officers, together with their principal occupations and other affiliations during the past five years, are set forth below. Each Director and officer holds office for a one-year term to which he or she is elected and until his successor is duly elected and qualifies, or until he resigns or is removed in the manner provided by law. Our Board consists of a majority of “Independent Directors” under the New York Stock Exchange independence standards. The address for all officers and Directors is 89 Davis Road, Suite 100, Orinda CA 94563. None of our Directors or officers serves as a director for any other company which (i) has a class of securities registered under section 12 of the 1934 Act, (ii) is subject to section 15(d) of the 1934 Act, or (iii) is registered as an investment company under the 1940 Act, and we only have one investment portfolio. There are no understandings or arrangements between us and any officer or director pursuant to which they attained their position, there are no family relationships between any officers or directors other than as set forth below.

Board of Directors
Name and
Age
Position(s)
Held with
Us
Term of
Office and
Length of
Time Served
Principal Occupation(s) During Past 5 Years
Charles “Chip” Patterson†, 51
Chairman of
the Board
 
Since 2019
Mr. Chip Patterson, an MRC Executive Officer since May of 2012, is managing director, general counsel, and senior vice president of MCMA and the Manager, and a director of their general partner, and a beneficial owner of all three companies, all since 2005. Mr. Patterson graduated magna cum laude from the University of Michigan Law School with a J. D. degree and with high distinction and Phi Beta Kappa from the University of California at Berkeley with a B. A. degree in Political Science. Prior to joining the Manager in July 2003, he was a securities and corporate finance attorney with the national law firm of Davis Wright Tremaine LLP. Prior to law school, Chip Patterson taught physics, chemistry, and math at the high school level for three years. He also has prior experience in sales, retail, and banking, and is a licensed California Real Estate Broker.
Tim Dozois, 60
 Director
Since 2012
Mr. Dozois was Vice President, Secretary and Corporate Counsel for Pendrell Corporation, a NASDAQ listed company specializing in intellectual property solutions, from June of 2010 until early 2018. He is now sole owner of Conseiller LLC. From January 1996 until March of 2010, Mr. Dozois was an equity partner of Davis Wright Tremaine LLP, a Seattle-based national law firm, where he specialized in private securities work and structured financings, with an emphasis on the acquisition, financing and management of real property assets. He has nearly 30 years of experience supporting leading corporations in securities law compliance, mergers, acquisitions, and real estate acquisition, financing, and management. Mr. Dozois received his B. S. in Financial Management from Oregon State University and his J. D. from the University of Oregon School of Law, where he was Order of the Coif.
Tom Frame, 80
 Director
Since 2012
Mr. Frame was a co-founder of TransCentury Property Management and solely founded Paradigm Investment Corporation. TransCentury began in May of 1973 and has syndicated and managed over 10,000 residential units. During the last 35 years, Mr. Frame has been a principal in the acquisition, financing, restoration, and sale of over $500,000,000 in residential and commercial real estate. Paradigm was founded in June 1986 to sponsor and manage private, closed end “mutual funds”. The last of the funds successfully liquidated in December of 2000. Mr. Frame received a BA degree from the University of Kansas in Mathematics in June 1964, a Juris Doctor degree from the San Francisco Law School in June 1975, and an MBA with honors from Pepperdine University in April 1986. Mr. Frame is currently managing his own investments which include residential units, commercial property, and a portfolio of securities.

†As a principal of both MacKenzie and the Adviser, Mr. Patterson is not an Independent Director.
Executive Officers

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Our current officers are listed in the chart below. The address for all officers is 89 Davis Road, Suite 100, Orinda, CA 94563.

Name and
Age
Position(s)
Held with
Us
Term of
Office and
Length of
Time Served
Principal Occupation(s) During Past 5 Years
Robert Dixon, 51
Chief
Executive
Officer and
President
Since 2012
Robert E. Dixon has been the senior vice president and chief investment officer of MacKenzie and the Adviser since 2005, and a director of their general partner, and a beneficial owner of all three companies since 2005. Robert Dixon served as an officer and director of Sutter Holding Company, Inc. from March 2002 until 2005. Mr. Dixon has been president of Sutter Capital Management since its founding. Mr. Dixon received his Master of Business Administration degree from Cornell University in 1998 and has held the Chartered Financial Analyst designation since 1996. Mr. Dixon received his bachelor’s degree in economics from the University of California at Los Angeles in 1992.
Angche Sherpa, 41
Chief
Financial
Officer
Since 2021
Mr. Sherpa was appointed to Chief Financial Officer in July 2021 after the retirement of the predecessor officer Mr. Paul Koslosky. He has been employed by MacKenzie since 2012. Prior to his appointment, he was Director of Accounting and Financial Reporting of MacKenzie. Mr. Sherpa graduated from San Francisco State University in 2006 with a Bachelor of Science degree in Business Administration (Accounting) with honors. He obtained his CPA license from California Board of Accountancy in January 2011. Prior to joining MacKenzie, he worked as staff auditor from 2007 through 2008 and senior auditor from 2009 through 2012 at a national public accounting firm Moss Adams LLP. During his career at Moss Adams, he led various audit teams involved in auditing financial services companies including private equity, asset management and real estate investment companies.
Glen Fuller, 49
Chief
Operating
Officer
Since 2012
Mr. Fuller has been senior vice president and secretary of MacKenzie since 2000 and the Adviser since 2000, and a director of their general partner, and a beneficial owner of all three companies since 2000. Prior to becoming senior vice president of MacKenzie, he was with MacKenzie for two years as a portfolio manager and research analyst. Prior to joining MacKenzie, Mr. Fuller spent two years running the over the counter trading desk for North Coast Securities Corp. (previously Morgan Fuller Capital Group) with responsibility for both the proprietary and retail trading desks. Mr. Fuller was also the registered options principal and registered municipal bond principal for North Coast Securities Corp. , a registered broker-dealer. Mr. Fuller previously held his NASD Series 7, general securities registration. Mr. Fuller has a Bachelor of Arts in Management.
Chip Patterson,
51
General
Counsel and
Secretary
Since 2012
Mr. Patterson is a managing director and general counsel of MCMA and our Manager, where he has been employed since 2003. He is a director of their general partner and a beneficial owner of all three companies. Chip Patterson graduated magna cum laude from the University of Michigan Law School with a J. D. degree and with high distinction and Phi Beta Kappa from the University of California at Berkeley with a B. A. degree in Political Science. Prior to joining the Manager in July 2003, he was a securities and corporate finance attorney with the national law firm of Davis Wright Tremaine LLP. Prior to law school, Chip Patterson taught physics, chemistry, and math at the high school level for three years. He also has prior experience in sales, retail, and banking, and is a licensed California Real Estate Broker.
Jeri Bluth,
47
Chief
Compliance
Officer
Since 2012
Ms. Bluth has been the Chief Compliance Officer for MacKenzie and the Adviser since 2009. She owns a beneficial interest in each MacKenzie and the Adviser. Mrs. Bluth oversees compliance for all the funds advised by the Adviser, and she oversees our compliance with our Code of Ethics, Bylaws, Charter, and applicable rules and regulations. Mrs. Bluth began her career with MacKenzie Patterson Fuller, Inc. in July of 1996 in the Investor Services Department. During Mrs. Bluth’s career with MacKenzie, she graduated from St. Mary’s College of California in June 2001, with a Bachelor of Arts degree in Business Management.

41
Christine Simpson,
57
Chief Portfolio Manager
Since 2012
Mrs. Simpson has been employed by MacKenzie and its affiliates since 1990, and has been the Adviser’s Senior Vice President of Research and Trading since 2005. Mrs. Simpson is responsible for handling the day-to-day operations of The Adviser’s research department. During Mrs. Simpson’s career with MacKenzie, she graduated: with a Bachelor of Arts degree in Business Management from St. Mary’s College of California in October 2004 (with honors), with a Master of Science degree in Financial Analysis and Investment Management in September 2006, and a Master’s in Business Administration in June 2008.

Code of Ethics

We have adopted a Code of Ethics which applies to, among others, our senior officers, including our Chief Executive Officer and Chief Financial Officer, as well as all of our officers, directors and employees. Our Code of Ethics requires that all employees and directors avoid any conflict, or the appearance of a conflict, between an individual’s personal interests and our interests. Pursuant to our Code of Ethics, each employee and director must disclose any conflicts of interest, or actions or relationships that might give rise to a conflict, to our Chief Compliance Officer. Our Audit Committee is charged with approving any waivers under our Code of Ethics. A copy of the Code, as amended from time to time, has been posted to the “Corporate Documents” section of our web site at http://www.mackenziecapital.com/sec-filings.

Audit Committee

The Board of Directors has established an Audit Committee in accordance with 1934 Act §3(a)(58)(A). The Audit Committee operates under a Charter approved by our Board of Directors, which contains the responsibilities of the Audit Committee. The Audit Committee’s responsibilities include establishing guidelines and making recommendations to our Board of Directors regarding the valuation of our loans and investments, selecting our independent registered public accounting firm, reviewing with such independent registered public accounting firm the planning, scope and results of their audit of our consolidated financial statements, pre‑approving the fees for services performed, reviewing with the independent registered public accounting firm the adequacy of internal control systems, reviewing our annual consolidated financial statements and periodic filings and receiving our audit reports and consolidated financial statements. The Audit Committee is currently composed of Messrs. Dozois and Frame, both of whom are Independent Directors as described under Item 13 below. Mr. Dozois serves as chairman of the Audit Committee. We have determined that Mr. Dozois is a “financial expert” as defined by SEC rules.

Nominating and Corporate Governance Committee

The nominating and corporate governance committee operates under a Charter approved by our Board of Directors. The members of the nominating and corporate governance committee are Messrs. Dozois and Frame, both of whom are Independent Directors. Mr. Frame serves as chairman of the nominating and corporate governance committee. The nominating and corporate governance committee is responsible for selecting, researching and nominating directors for election by our stockholders, selecting nominees to fill vacancies on the Board of Directors or a committee thereof, developing and recommending to the Board of Directors a set of corporate governance principles and overseeing the evaluation of the Board of Directors and our management. The nominating and corporate governance committee currently does not consider nominees recommended by our stockholders.

The nominating and corporate governance committee seeks candidates who possess the background, skills and expertise to make a significant contribution to the Board of Directors, our operations, and our stockholders. In considering possible candidates for election as a director, the nominating committee takes into account, in addition to such other factors as it deems relevant, the desirability of selecting directors who:


 •
are of high character and integrity;


•
are accomplished in their respective fields, with superior credentials and recognition;


•
have relevant expertise and experience upon which to be able to offer advice and guidance to management;


•
have sufficient time available to devote to our affairs;


•
are able to work with the other members of the Board of Directors and contribute to our success;


•
can represent the long‑term interests of our stockholders as a whole; and

42

 •
are selected such that the Board of Directors represents a range of backgrounds and experience.

The nominating and corporate governance committee has not adopted a formal policy with regard to the consideration of diversity in identifying director nominees. In determining whether to recommend a director nominee, the nominating and corporate governance committee considers and discusses diversity, among other factors, with a view toward the needs of the Board of Directors as a whole. The nominating and corporate governance committee generally conceptualizes diversity expansively to include, without limitation, concepts such as race, gender, national origin, differences of viewpoint, professional experience, education, skill and other qualities that contribute to the Board of Directors, when identifying and recommending director nominees. The nominating and corporate governance committee believes that the inclusion of diversity as one of many factors considered in selecting director nominees is consistent with the nominating and corporate governance committee’s goal of creating a Board of Directors that best serves our needs and the interests of our stockholders.

Compensation Committee

We do not have a compensation committee because our executive officers do not receive any direct compensation from us.

Item 11.
EXECUTIVE COMPENSATION

We do not have a compensation committee because our executive officers do not receive any direct compensation from us.

Compensation of Directors

Our Independent Directors received an annual retainer of $28,000 for fiscal years up to June 30, 2021; the annual retainer was increased to $48,000 per year beginning July 1, 2021, because the directors approved of our discontinuing directors’ liability insurance due to the exorbitant cost. They also receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting in person and $500 for each telephonic meeting, and also receive $500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the Audit Committee receives an annual fee of $1,000 and each chairman of any other committee receives an annual fee of $1,000 for their additional services, if any, in these capacities. No compensation is expected to be paid to directors who are non-independent directors.

The following table details the compensation accrued to Directors fees during Fiscal 2022. We maintain no pension, equity participation, or retirement plans for our Directors. However, both Independent Directors have been investing a portion of their compensation into our Shares beginning this fiscal year, and have stated that they intend to continue to do so.

Name & Position
  
Fiscal 2022 Fees (1)
    
Fiscal 2021 Fees (1)
  
Chip Patterson (Chairman of the Board of Directors)
  
$
-
    
$
-
  
Tim Dozois (Independent Director)
    
53,500
      
35,000
  
Tom Frame (Independent Director)
    
53,500
      
35,000
  
Total Fees
  
$
107,000
    
$
70,000
  

(1)
Consists only of directors’ fees and does not include reimbursed expenses.

Compensation of Executive Officers

None of our officers receives direct compensation from us. We have not compensated our executive officers in any of the last two fiscal years. We do not provide any bonus, stock options, stock appreciation rights, non-equity incentive plans, non-qualified deferred compensation or pension benefits to our executive officers. Further, we have no agreements with any officer pertaining to change in control payments. All of our officers and staff are employed by MacKenzie or the Adviser, which pay all of their cash compensation.

Compensation Committee Interlocks and Insider Participation

We do not have a separate compensation committee utilized to determine the appropriate compensation payable to our executive officers and Directors. The Audit Committee, however, is responsible for, among other things, annually reviewing and approving the compensation policies for our Directors.

43
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

As of September 28, 2022, to our knowledge, there were no persons that beneficially owned more than five percent of our voting securities.

The following table shows the amount of our common stock beneficially owned and based on a total of 13,295,626.16 shares of our common stock outstanding on September 28, 2022, as of that date, by (1) each of our directors and nominees for director, (2) our executive officers and (3) all directors and executive officers as a group. To our knowledge, no other person owns more than 5% of our common stock. The number of shares beneficially owned by each entity, person, director or executive officer is determined under the rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has the sole or shared voting power or investment power and also any shares that the individual has the right to acquire within 60 days of September 28, 2022, through the exercise of any instrument. Unless otherwise indicated, each person has the sole investment and voting power, or shares such powers with his spouse, with respect to the shares set forth in the table. Unless known otherwise by us, the beneficial ownership information is based on each beneficial owner’s most recent Form 3, Form 4, Form 5, Schedule 13D or Schedule 13G, as applicable. With respect to the Executive Officers listed below, they are limited partners of MPF Successors, LP, as well as officers of its general partner, which owns 51,003.50 shares in us, and Mr. Sherpa owns 1,466.81 shares directly. Mr. C. E. Patterson and his spouse are the sole beneficial owners of 10,182.26 shares owned in a personal holdings limited partnership, and the executive officers below are also in control of its general partner. Thus, they are all deemed to have voting and dispositive control over such shares and the number of shares owned below is the number of shares owned by MPF Successors, LP and the personal holding partnership. The address of each beneficial owner is 89 Davis Road, Orinda, CA 94563.

Name and address of Beneficial Owner
  
Number of Common Shares
Beneficially Owned
    
Percent of Class
    
Number of Preferred
Shares Owned
    
Percent of Class
  
Independent Directors:
                        
Tim Dozois
    
5,086.08
      
*
      
4,469.13
      
1.4
%
Tom Frame
    
5,472.25
      
*
      
444.44
      
*
  
Interested Director:
                                
Charles “Chip” Patterson
    
61,185.76
      
*
                  
Executive Officers
                                
Robert Dixon
    
61,185.76
      
*
                  
Glen Fuller
    
61,185.76
      
*
                  
Chip Patterson
    
61,185.76
      
*
                  
Angche Sherpa
    
62,652.57
      
*
                  
Directors and Officers as a group (6 person)
    
73,210.90
      
*
                  

*
Represents less than 1% of the number of shares outstanding.

Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

We are managed by MacKenzie, which is owned by three sub-partnerships that are owned in varying percentages by MacKenzie and the Adviser employees and the extended family of Messrs. C. E. Patterson, Chip Patterson, Glen Fuller and Robert Dixon. The general partner of MacKenzie is MCM-GP, Inc., a California corporation owned by the same individuals. The majority of the beneficial interests of MacKenzie are owned by C. E. Patterson, Berniece A. Patterson, Robert Dixon, Glen Fuller, and Chip Patterson, in addition to other family members. Certain non-family employees of MacKenzie own non-controlling interests in MacKenzie that represent in the aggregate less than 10% of the equity in MacKenzie. MacKenzie manages all of our affairs except for providing investment advice.

44
We are advised by the Adviser, whose investment team members have an average of nearly 20 years of experience investing in real estate-related securities. The Adviser is registered with the SEC and is owned by the same beneficial owners and in the same proportions as MacKenzie. The Adviser is led by its investment team: Glen W. Fuller, who serves as Chief Operating Officer and Managing Director of the General Partner of MacKenzie and the Adviser; Chip Patterson, who serves as Managing Director and General Counsel, and Director of the General Partner of MacKenzie and the Adviser; Robert E. Dixon, who serves as Chief Investment Officer and Managing Director of the General Partner of MacKenzie and the Adviser; Angche Sherpa, who serves as Chief Financial Officer and Treasurer of the General Partner of MacKenzie and the Adviser; and Christine E. Simpson, who serves as Chief Portfolio Manager and Senior Vice President of Research for the General Partner of MacKenzie and the Adviser.

We have entered into two affiliated contracts — the Advisory Management Agreement, under which the Adviser serves as our real estate investment adviser, and the Administration Agreement, under which MacKenzie furnishes us with certain non-investment management services and administrative services necessary to conduct our day-to-day operations. Each of these agreements is terminable by either party upon proper notice. In Fiscal 2022 and 2021, Management fees accrued to the Adviser under the Advisory Management Agreement were $2,725,588 and $2,689,699, respectively. Administration fees accrued and payable under the Administration Agreement for Fiscal 2022 and 2021, were $609,600 and $620,800, respectively. Administration Agreement fees occur on an ongoing basis as expenses are incurred on our behalf by MacKenzie. However, if MacKenzie withdraws as our administrator, it is liable for any expenses we incur as a result of such withdrawal.

Related Party Transaction Approval

The 1940 Act extensively regulates conflicts of interests between BDCs, their directors, investment advisers and their affiliates, which has governed while we were registered as a BDC. For example, the 1940 Act and rules thereunder generally prohibit a BDC’s employees, officers, directors, investment adviser and their affiliates from (i) selling securities or property to the BDC, (ii) buying securities or property from the BDC, (iii) borrowing money or property from the BDC, or (iv) entering into joint transactions with the BDC or a company controlled by it. The 1940 Act further prohibits a wider group of persons affiliated with a BDC from entering into such transactions with a BDC unless approved by the BDC’s stockholders.

In order to ensure that we did not engage in any transactions with any persons affiliated with us that are prohibited by the 1940 Act, we implemented certain written policies and procedures whereby our executive officers screen each of our transactions for any possible affiliations between the issuer in which we invest, us, companies controlled by us and our executive officers and directors. We do not enter into any agreements unless and until we are satisfied that doing so does not violate our Charter or raise concerns under the 1940 Act or, if such concerns existed, we took appropriate actions to seek board review and exemptive or other relief for such transaction. Our Board of Directors review these procedures on an annual basis. There are no plans to eliminate or amend these procedures, regardless of the fact that we are no longer a BDC.

We have also adopted a Code of Ethics which applies to, among others, our senior officers, including our Chief Executive Officer and Chief Financial Officer, as well as all of our officers, directors and employees. Our Code of Ethics requires that all employees and directors avoid any conflict, or the appearance of a conflict, between an individual’s personal interests and our interests. Pursuant to our Code of Ethics, each employee and director must disclose any conflicts of interest, or actions or relationships that might give rise to a conflict, to our Chief Compliance Officer. Our Audit Committee is charged with approving any waivers under our Code of Ethics.

Director Independence

We have determined that both Messrs. Dozois and Frame are Independent Directors. In addition, although our shares are not listed for trading on any national securities exchange, a majority of our directors, and all of the members of the Audit Committee and the conflicts committee, are “independent” as defined by the New York Stock Exchange. The New York Stock Exchange standards provide that to qualify as an independent director, in addition to satisfying certain bright-line criteria, our Board of Directors must affirmatively determine that a director has no material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us). Our Board of Directors has affirmatively determined that Messrs. Dozois and Frame each satisfies the New York Stock Exchange independence standards.

Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES

The following table presents fees incurred for professional services rendered by Moss Adams LLP, our independent registered public accounting firm, with Public Company Accounting Oversight Board ID Number 659, for Fiscal 2022 and Fiscal 2021:

45
Fee Category
  
Fiscal 2022
    
Fiscal 2021
  
Audit Fees
  
$
214,400
    
$
128,100
  
Audit-Related Fees
    
-
      
-
  
Tax Fees
    
-
      
-
  
All Other Fees
    
-
      
7,500
  
Total Fees
  
$
214,400
    
$
135,600
  

Audit Fees were for professional services rendered for the audit of our consolidated financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by Moss Adams in connection with statutory and regulatory filings or engagements and include quarterly reviews and security counts.

Audit-Related Fees were for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees”. These services include accounting consultations in connection with acquisitions, consultations concerning financial accounting and reporting standards.

Tax Fees were for professional services for federal, state and international tax compliance, tax advice and tax planning and include preparation of federal and state income tax returns, and other tax research, consultation, correspondence and advice.

All Other Fees are for services other than the services reported above. These fees were incurred for their review of our registration statements.

The Audit Committee has concluded the provision of the non-audit services listed above is compatible with maintaining the independence of Moss Adams LLP. Moss Adams LLP did not bill the Adviser or MacKenzie, for any non-audit services in Fiscal 2022 and 2021.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm

The Audit Committee pre-approves all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.

46
PART IV

Item 15.
EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this Annual Report on Form 10-K:

1. The Consolidated Financial Statements listed in the Index to Consolidated Financial Statements on Page F-1

2. Consolidated Financial Statement Schedule: Schedule III- Real Estate Operating Properties and Accumulated Depreciation is set forth beginning on page S-1 hereof.

3. The Exhibits listed in the Exhibit Index below.

Exhibit No.
Description of Document
   
Contribution Agreement by and between MacKenzie Realty Operating Partnership, LP and the Addison Group, dated June 8, 2020 (incorporated by reference to the Registrant’s Form 8-K (File No. 814-00961), filed on June 9, 2020)
   
Membership Interest Purchase Agreement with The Wiseman Company, LLC, dated April 12, 2022 (incorporated by reference to the Registrant’s Form 8-K (File No. 000-55006), filed on April 18, 2022)
   
Articles of Amendment and Restatement (incorporated by reference to Registrant's Post-Effective Amendment No. 3 to Registrant’s Registration Statement on Form N-2 (File No. 333-181853), filed on May 14, 2014)
   
Series A Preferred Articles Supplementary (incorporated by reference to Registrant’s Form 1-A (File No. 000-55006), filed on April 12, 2021)
   
Second Amended & Restated Bylaws (incorporated by reference to Registrant’s Form 8-K (File No. 000-55006), filed on January 12, 2021)
   
Description of Securities
   
Partnership Unit Designation of the Series A Preferred Limited Partnership Units of MacKenzie Realty Operating Partnership, LP
   
Amended and Restated Investment Advisory Agreement with MCM Advisers, LP dated as of October 1, 2017 (incorporated by reference to Registrant’s Post-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File No. 333-212804), filed on November 9, 2017)
   
Amendment to the Amended and Restated Investment Advisory Agreement dated as of October 1, 2018 (incorporated by reference to Registrant’s Post-Effective Amendment No. 5 to the Registration Statement on Form N-2 (File No. 333-212804), filed on October 29, 2018)
   
Agreement of Limited Partnership of MacKenzie Realty Operating Partnership, LP, Dated May 20, 2020 (incorporated by reference to the Registrant’s Form 8-K (File No. 814-00961 filed on June 9, 2020)
   
Operating Agreement of PVT-Madison Partners LLC (incorporated by reference to Registrant’s Form 8K (File No. 000-55006), filed on March 11, 2021)
   
Operating Agreement of Madison-PVT Partners LLC (incorporated by reference to Registrant’s Form 8-K (File No. 000-55006), filed on March 11, 2021)
   
Form of Investment Adviser Introducing Agreement (pre-December 2016) (incorporated by reference to the Registration Statement on Form N-2(File No. 333-212804) filed on August 1, 2016)

47
Amended Administration Agreement with MacKenzie Capital Management, LP (incorporated by reference to Registrant’s Form 10-K (File No. 000-55006), filed on September 28, 2021)
   
Form of Investor Services Agreement with MacKenzie Capital Management, LP dated November 1, 2018 (incorporated by reference to Post-Effective Amendment No. 6 to the Registration Statement on Form N-2 (File No. 333-212804), filed on May 10, 2019)
   
Advisory Management Agreement (incorporated by reference to Registrant's Form 8K (File No. 000-55006), filed on January 27, 2021)
   
Amended And Restated Investment Advisory Agreement (incorporated by reference to Registrant’s Form 8K (File No. 000-55006), filed on January 27, 2021)
   
Operating Agreement by and between MacKenzie Realty Operating Partnership, LP and the Hollywood Hillview Owner LLC, dated October 4, 2021 (incorporated by reference to the Registrant’s Form 8-K (File No. 000-55006 filed on October 5, 2021)
   
Dividend Reinvestment Plan (incorporated by reference to Registrant’s Form S-3 (File No. 000-55006), filed on December 22, 2021)
   
Operating Agreement by and between MacKenzie Realty Operating Partnership, LP and the MacKenzie BAA IG Shoreline LLC, dated January 25, 2022 (incorporated by reference to the Registrant’s Form 8-K (File No. 000-55006 filed on May 20, 2022)
   
Operating Agreement of MacKenzie Satellite Place Corp (incorporated by reference to Registrant’s Form 8-K (File No. 000-55006), filed on June 3, 2022)
   
List of Subsidiaries of the Registrant
   
Section 302 Certification of Robert Dixon (President and Chief Executive Officer)
   
Section 302 Certification of Angche Sherpa (Treasurer and Chief Financial Officer)
   
Section 1350 Certification of Robert Dixon (President and Chief Executive Officer)
   
Section 1350 Certification of Angche Sherpa (Treasurer and Chief Financial Officer)
   
101.INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)*
   
101.SCH
Inline XBRL Taxonomy Extension Schema Documents*
   
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document*
   
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document*
   
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document*
   
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document*
   
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

* Filed Herewith

All other exhibits for which provision is made in the applicable regulations of the Securities and Exchange Commission are not required under the related instruction or are inapplicable and therefore have been omitted.

Item 16.
FORM 10-K SUMMARY

None.

48
TABLE OF CONTENTS

Index to Audited Consolidated Financial Statements  
   
Consolidated Financial Statements  
   
F-2
   
F-5
   
F-6
   
F-7
   
F-8
   
F-9
   
F-10
   
F-11
   
F-12
   
F-13
   
F-14
   
F-15

F-1
Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors
MacKenzie Realty Capital, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets (successor basis) as of June 30, 2022 and 2021, of Mackenzie Realty Capital, Inc., (the “Company”), the related consolidated statements of operations (successor basis), changes in equity (successor basis), and cash flows (successor basis) for the year ended June 30, 2022, the related consolidated statements of operations (successor basis), changes in equity (successor basis), and cash flows (successor basis) for the six months ended June 30, 2021, the related consolidated statements of operations (predecessor basis), changes in net assets (predecessor basis), and cash flows (predecessor basis) for the six months ended December 31, 2020, and the related notes and financial statement schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2022 and 2021, and the consolidated results of its operations (successor basis) and its cash flows (successor basis) for the year ended June 30, 2021, the consolidated results of its operations (successor basis) and its cash flows (successor basis) for the six months ended June 30, 2021, the consolidated results of its operations (predecessor basis) and its cash flows (predecessor basis) for the six months ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

F-2
Purchase Price Allocation for Acquisitions

As described in Notes 2 and 3 to the consolidated financial statements, the Company acquired certain real estate properties during the year ended June 30, 2022, that were accounted for as asset acquisitions. For each asset acquisition, the Company assesses the acquisition-date fair values of all tangible assets, identifiable intangible assets, and assumed liabilities using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis) which utilize appropriate discount and/or capitalization rates and other available market information to allocate the purchase price to land, buildings and identified intangible assets and liabilities. Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require the Company to make significant assumptions to estimate market lease rates, carrying costs during lease-up periods, discount rates, market absorption periods, prevailing interest rates, and the number of years the property will be held for investment.

The principal consideration for our determination that the fair value measurements used in the purchase price allocation of real estate acquisitions is a critical audit matter are (i) the significant judgment by management to determine the fair value measurements of tangible, intangible assets and liabilities to allocate the purchase price; (ii) significant auditor judgment, subjectivity and effort in evaluating audit evidence related to the significant assumptions used in the fair value measurement; (iii) the sensitivity of the respective fair values to the significant underlying assumptions. and (iv) use of professionals with specialized skill and knowledge to assist in performing the procedures and evaluating the audit evidence obtained.

The primary procedures we performed to address this critical audit matter included:

•
With the assistance of our valuation specialists, we evaluated the reasonableness of certain significant fair value inputs used in the purchase price allocations related to acquired real estate properties such as market lease rates, carrying costs during lease-up periods, capitalization rates, discount rates, market absorption periods and prevailing interest rates. The evaluation included comparison of Company assumptions to independently developed ranges using market data from industry transaction databases and published industry reports.

•
We evaluated the mathematical accuracy of the valuation models and performed procedures over the completeness and accuracy of the data provided by management.

Fair Value Measurements of Investments and Real Property Held for Sale

As disclosed in Note 2 and 4 to the consolidated financial statements, investments held by the Company have been classified as Level III investments as pricing inputs for these are unobservable and there is little, if any, market activity for such investments. As described in Note 2 and 5, real property held for sale is recorded at fair value less cost to sell at the date of meeting the held for sale criteria. Establishing fair values of investments and real property held for sale is inherently subjective and is often dependent upon significant estimates and modeling assumptions that are unobservable and generally requires the Company to establish the use of internal assumptions about future cash flows, including the cash flows of underlying real property, and appropriate risk-adjusted discount rates. Fair values inputs for investments classified as Level III are estimated by management using valuation methodologies that consider a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, and local market conditions. Fair value of real property held for sale uses a valuation model which includes critical inputs such as cap rates, discount rates and consideration of the market where the property is located. The inputs into the determination of fair value require significant judgment by management.

The principal consideration in our determination that the Level III fair value inputs used in the valuation of investments and real property held for sale is a critical audit matter are (i) the significant judgment by management to determine the fair value measurements; (ii) significant auditor judgment, subjectivity and effort in evaluating audit evidence related to the significant assumptions used in the fair value measurement; (iii) the sensitivity of the respective fair values to the significant underlying assumptions and (iv) use of professionals with specialized skill and knowledge to assist in performing the procedures and evaluating the audit evidence obtained.

F-3
The primary procedures we performed to address this critical audit matter included:

•
With the assistance of valuation specialists, we evaluated the reasonableness of the valuation methodology and significant assumptions used in management’s valuation models such as future cash flows, including the cash flows of underlying real property, risk-adjusted discount rates, cap rates, nature of the investment and local market conditions. The evaluation included comparison of the Company’s assumptions to market data from industry transaction databases and published industry reports.

•
For investments sold during the year or subsequent to year end, we evaluated management’s ability to reasonably estimate fair value by comparing management’s historical estimates to actual results from those sales.

•
We evaluated the mathematical accuracy of the valuation models and performed procedures over the completeness and accuracy of the data provided by management.

/s/ Moss Adams LLP

Campbell, California
September 28, 2022

We have served as the Company’s auditor since 2012.

F-4
MacKenzie Realty Capital, Inc.
Consolidated Balance Sheets (Successor Basis)

    June 30, 2022     June 30, 2021  
Assets
            
Real estate assets
            
Land
  
$
32,117,072
     $ 9,836,976  
Building, fixtures and improvements
    
64,182,548
       19,239,964  
Intangible lease assets
    
2,889,828
       484,148  
Less: accumulated depreciation and amortization
    
(1,768,130
)
     (595,915 )
Total real estate assets, net
    
97,421,318
       28,965,173  
Cash
    
7,400,163
       4,305,663  
Restricted cash
    
1,092,816
       -  
Investments, at fair value
    
19,748,208
       39,909,838  
Unconsolidated investment (non-security), at fair value
    
37,845,036
       30,599,405  
Investments income, rents and other receivables
    
1,499,214
       1,728,476  
Prepaid expenses and other assets
    
67,625
       131,123  
Assets held for sale, net
     17,490,581       32,913,349  
Total assets
  
$
182,564,961
     $ 138,553,027  
                 
Liabilities
                
Mortgage notes payable, net
  
$
68,370,415
     $ 38,693,330  
Deferred rent and other liabilities     443,014       196,145  
Dividend payable     1,419,913       -  
Accounts payable and accrued liabilities     2,938,689       59,512  
Stock redemption payable     348,051       -  
Below-market lease liabilities, net
    
1,063,579
       838,313  
Due to related entities
    
214,094
       1,926  
Contingent liability
    
2,715,000
       -  
Capital pending acceptance     85,000       -  
Liabilities held for sale     744,989       1,400,981  
Total liabilities
    
78,342,744
       41,190,207  
                 
Equity
                
Common stock, $0.0001 par value, 80,000,000 shares authorized; 13,253,571.98 and 13,316,426.79 shares
issued and outstanding as of June 30, 2022 and 2021, respectively.
   
1,325
       1,332  
Preferred stock, $0.0001 par value, 20,000,000 shares authorized, 119,416.91 shares issued and outstanding as of June 30, 2022
     12       -  
Capital in excess of par value
    
121,961,699
       120,408,505  
Accumulated deficit
    
(24,108,723
)
     (23,298,857 )
Total stockholders’ equity
    
97,854,313
       97,110,980  
Non-controlling interests
    
6,367,904
       251,840  
Total equity
    
104,222,217
       97,362,820  
                 
Total liabilities and equity
  
$
182,564,961
     $ 138,553,027  

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

F-5
MacKenzie Realty Capital, Inc.
Consolidated Statement of Operations (Successor Basis)

   
Year Ended
  
   
June 30, 2022
  
Revenue
      
Rental and reimbursements
  
$
10,369,174
  
         
Expenses
        
Property operating and maintenance
    
6,155,774
  
Depreciation and amortization
    
4,544,343
  
Asset management fees to related party (note 7)
    
2,725,588
  
Interest expense
    
2,354,442
  
Administrative cost reimbursements to related party (note 7)
    
609,600
  
General and administrative
    
560,521
  
Professional fees
    
686,064
  
Transfer agent cost reimbursements to related party (note 7)
    
106,401
  
Directors’ fees
    
107,000
  
Total operating expenses
    
17,849,733
  
         
Operating loss
    
(7,480,559
)
         
Other income (loss)
        
Dividend and distribution income from equity securities at fair value
    
2,388,788
  
Net unrealized gain on equity securities at fair value
    
1,435,073
  
Net income from equity method investments at fair value
    
9,960,895
  
Net realized gain from investments
    
7,349,159
  
Loss on disposal of fixed assets
     (247,303 )
Impairment loss on assets held for sale
     (9,126,461 )
         
Net income
    
4,279,592
  
Net loss attributable to non-controlling interests
    
285,294
  
Net income attributable to preferred stockholders
     (56,929 )
Net income attributable to common stockholders
  
$
4,507,957
  
         
Net income per share attributable to common stockholders
  
$
0.34
  
         
Weighted average common shares outstanding
    
13,340,164
  

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

F-6
MacKenzie Realty Capital, Inc.
Consolidated Statement of Operations (Successor Basis)

   
Six Months Ended
  
   
June 30, 2021
  
Revenue
      
Rental and reimbursements
  
$
3,745,115
  
         
Expenses
        
Property operating and maintenance
    
2,330,455
  
Depreciation and amortization
    
2,193,953
  
Asset management fees to related party (note 7)
    
1,354,323
  
Interest expense
    
637,691
  
Administrative cost reimbursements to related party (note 7)
    
310,400
  
General and administrative
    
139,326
  
Professional fees
    
136,750
  
Transfer agent cost reimbursements to related party (note 7)
    
61,600
  
Directors’ fees
    
34,000
  
Total operating expenses
    
7,198,498
  
         
Operating loss
    
(3,453,383
)
         
Other income
        
Dividend and distribution income from equity securities at fair value
    
925,948
  
Net unrealized gain on equity securities at fair value
    
1,685,130
  
Net income from equity method investments at fair value
    
354,921
  
Net realized gain from investments
    
737,332
  
         
Net income
    
249,948
  
Net loss attributable to non-controlling interests
    
14,209
  
Net income attributable to common stockholders
  
$
264,157
  
         
Net income per share attributable to common stockholders
   $
0.02
  
         
Weighted average common shares outstanding
    
13,332,536
  

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
F-7
MacKenzie Realty Capital, Inc.
Consolidated Statement of Operations (Predecessor Basis)

   
Six Months Ended
December 31, 2020
  
       
Investment income
      
Non-controlled/non-affiliated investments:
      
Dividend and operational/sales distributions
  
$
1,079,159
  
Interest and other income
    
899
  
Affiliated investments:
        
Dividend and operational/sales distributions
    
208,663
  
Controlled investments:
        
Dividend and operational/sales distributions
    
592,823
  
Total investment income
    
1,881,544
  
         
Operating expenses
        
Base management fee (note 7)
    
1,335,376
  
Amortization of deferred offering costs
    
342,015
  
Administrative cost reimbursements (note 7)
    
310,400
  
Professional fees
    
235,132
  
Printing and mailing
    
70,528
  
Transfer agent cost reimbursements (note 7)
    
61,600
  
Directors’ fees
    
36,000
  
Portfolio structuring fee (note 7)
    
6,679
  
Other general and administrative
    
31,665
  
Total operating expenses
    
2,429,395
  
         
Net investment loss
    
(547,851
)
         
Realized and unrealized gain (loss) on investments
        
Net realized gain (loss)
        
Non-controlled/non-affiliated investments
    
1,022,383
  
Affiliated investments
    
(6,057
)
Total net realized gain
    
1,016,326
  
Net unrealized loss
        
Non-controlled/non-affiliated investments
    
(2,005,301
)
Affiliated investments
    
(40,100
)
Controlled investments
    
(8,090,211
)
Total net unrealized loss
    
(10,135,612
)
         
Total net realized and unrealized loss on investments
    
(9,119,286
)
         
Net decrease in net assets resulting from operations
  
$
(9,667,137
)
         
Net decrease in net assets resulting from operations per share
  
$
(0.74
)
         
Weighted average common shares outstanding
    
13,020,208
  

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

F-8

MacKenzie Realty Capital, Inc.
Consolidated Statement of Changes in Equity (Successor Basis)

   
Comon stock
    
Preferred stock
                
Total
             
    Number of     Par     Number of     Par     Additional Paid-     Accumulated     Stockholders’     Non-controlling        
Year Ended June 30, 2022
  
Shares
    
Value
    
Shares
    
Value
    
in Capital
    
Deficit
    
Equity
    
  Interests
    
Total Equity
  
                                                       
Balance, June 30, 2021
    
13,316,426.79
    
$
1,332
      
-
    
$
-
    
$
120,408,505
    
$
(23,298,857
)
  
$
97,110,980
    
$
251,840
    
$
97,362,820
  
Contributions by non-controlling interest holders
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
1,071,584
      
1,071,584
  
Distributions to non-controlling interest holders
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(68,051
)
    
(68,051
)
Operating Partnership Class A units issued
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
750,000
      
750,000
  
Operating Partnership Preferred Units issued
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
4,650,000
      
4,650,000
  
Dividends to common stockholders
    
-
      
-
      
-
      
-
      
-
      
(5,317,823
)
    
(5,317,823
)
    
-
      
(5,317,823
)
Dividends to preferred stockholders
    
-
      
-
      
-
      
-
      
-
      
(56,929
)
    
(56,929
)
    
-
      
(56,929
)
Net income (loss)
    
-
      
-
      
-
      
-
      
-
      
4,564,886
      
4,564,886
      
(285,294
)
    
4,279,592
  
Operating Partnership Class A conversion to common stock
    
212.19
      
-
*
    
-
      
-
      
2,175
      
-
      
2,175
      
(2,175
)
    
-
  
Issuance of common stock
    
3,172.39
      
-
*
    
-
      
-
      
27,503
      
-
      
27,503
      
-
      
27,503
  
Issuance of preferred stock
    
-
      
-
      
119,380.21
      
12
      
2,957,518
      
-
      
2,957,530
      
-
      
2,957,530
  
Issuance of common stock through reinvestment of dividends
    
128,740.66
      
12
      
-
      
-
      
1,187,618
      
-
      
1,187,630
      
-
      
1,187,630
  
Issuance of preferred stock through reinvestment of dividends
    
-
      
-
      
36.70
      
-
*
    
826
      
-
      
826
      
-
      
826
  
Payment of selling commissions and fees
    
-
      
-
      
-
      
-
      
(847,167
)
    
-
      
(847,167
)
    
-
      
(847,167
)
Redemptions of common stock
    
(194,980.05
)
    
(19
)
    
-
      
-
      
(1,775,279
)
    
-
      
(1,775,298
)
    
-
      
(1,775,298
)
                                                                         
Balance, June 30, 2022
    
13,253,571.98
    
$
1,325
      
119,416.91
    
$
12
    
$
121,961,699
    
$
(24,108,723
)
  
$
97,854,313
    
$
6,367,904
    
$
104,222,217
  

*Amount is less than $1.

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

F-9
MacKenzie Realty Capital, Inc.
Consolidated Statement of Changes in Equity (Successor Basis)


                            Total
             
    Number of     Par     Additional Paid-     Accumulated     Stockholders’     Non-controlling        
Six Months Ended June 30, 2021
  
Shares
    
Value
    
in Capital
    
Deficit
    
Equity
    
Interests
    
Total Equity
  
                                           
Balance, December 31, 2020
    
13,362,419.23
    
$
1,336
    
$
120,613,042
    
$
(22,898,300
)
  
$
97,716,078
    
$
66,652
    
$
97,782,730
  
Contributions by non-controlling interest holders
    
-
      
-
      
-
      
-
      
-
      
200,000
      
200,000
  
Dividend to stockholders
    
-
      
-
      
-
      
(664,714
)
    
(664,714
)
    
(603
)
    
(665,317
)
Net income (loss)
    
-
      
-
      
-
      
264,157
      
264,157
      
(14,209
)
    
249,948
  
Issuance of common stock through reinvestment of dividends
    
22,143.48
      
2
      
204,275
      
-
      
204,277
      
-
      
204,277
  
Redemptions of common stock
    
(68,135.92
)
    
(6
)
    
(408,812
)
    
-
      
(408,818
)
    
-
      
(408,818
)
                                                         
Balance, June 30, 2021
    
13,316,426.79
    
$
1,332
    
$
120,408,505
    
$
(23,298,857
)
  
$
97,110,980
    
$
251,840
    
$
97,362,820
  

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

F-10
MacKenzie Realty Capital, Inc.
Consolidated Statement of Changes in Net Assets (Predecessor Basis)

   
Six Months Ended
  
   
December 31, 2020
  
Operations
      
Net investment loss
  
$
(547,851
)
Net realized gain
    
1,016,326
  
Net unrealized loss
    
(10,135,612
)
Net decrease in net assets resulting from operations
    
(9,667,137
)
         
Capital share transactions
        
Issuance of common stock
    
218,439
  
Issuance of common stock to redeem subsidiary’s non-controlling interest
    
3,957,115
  
Selling commissions and fees
    
(18,060
)
Non-controlling interest in consolidated subsidiary
    
66,652
  
Net increase in net assets resulting from capital share transactions
    
4,224,146
  
         
Total decrease in net assets
    
(5,442,991
)
         
Net assets at beginning of the period
    
103,225,721
  
         
Net assets at end of the period
  
$
97,782,730
  

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

F-11
MacKenzie Realty Capital, Inc.
Consolidated Statement of Cash Flows (Successor Basis)

   
Year Ended
  
Cash flows from operating activities:
   June 30, 2022  
Net income
  
$
4,279,592
  
Adjustments to reconcile net income to net cash from operating activities:
        
Net unrealized gain on equity securities at fair value
    
(1,435,073
)
Net income from equity method investments at fair value
    
(7,436,483
)
Net realized gain on investments
    
(7,349,159
)
Loss on disposal of fixed assets
    247,303  
Impairment loss on assets held for sale
    9,126,461  
Straight - line rent
    (19,166 )
Depreciation and amortization
    
4,544,343
  
Amortization of deferred financing costs
    23,146  
Accretion of market lease and other intangibles, net
    
(164,695
)
Changes in assets and liabilities:
        
Investments income, rent and other receivables
    
15,038
  
Prepaid expenses and other assets
    
250,345
  
Deferred rent and other liabilities
    
115,744
  
Accounts payable and accrued liabilities
    
2,354,321
  
Due to related entities
    
70,359
  
Net cash from operating activities
    
4,622,076
  
         
Cash flows from investing activities:
        
Proceeds from sale of investments
    
33,694,869
  
Investments in real estate assets
    
(63,241,731
)
Purchase of investments
    
(24,867,765
)
Return of capital distributions
    
22,250,314
  
Net cash from investing activities
    
(32,164,313
)
         
Cash flows from financing activities:
        
Proceeds from mortgage notes payable
    
34,454,689
  
Payments on mortgage notes payable
    
(3,963,948
)
Dividend to stockholders
    
(2,824,426
)
Payment of deferred financing costs
    (836,802 )
Proceeds from issuance of preferred stock
    2,943,778  
Payment of selling commissions and fees
    (705,770 )
Contributions by non-controlling interests holders
    
1,071,584
  
Distributions to non-controlling interests holders
    (12,183 )
Redemption of common stock
    (1,425,073 )
Capital pending acceptance
    85,000  
Net cash from financing activities
    
28,786,849
  
         
Net increase in cash and restricted cash
    
1,244,612
  
Cash and restricted cash at beginning of the year
    
7,753,553
  
Cash and restricted cash at end of the year
  
$
8,998,165
  
         
Cash at end of the year
  
$
7,400,163
  
Restricted cash at end of the year
    
1,092,816
  
Cash and restricted cash at end of the year classified as assets held for sale
     505,186  
Total cash, restricted cash and cash classified as held for sale at end of the year
  
$
8,998,165
  
         
Supplemental disclosure of non-cash financing activities and other cash flow information
       
Issuance of the Operating Partnership Class A units for the purchase of real estate assets (Note 5)
  $ 750,000  
Issuance of the Operating Partnership Preferred units for the purchase of investments (Note 5)
  $ 4,650,000  
Issuance of common stock for merger of FSP Satellite Place Corp. (Note 1)
  $ 27,503  
Issuance of preferred stocks for merger of FSP Satellite Place Corp. (Note 1)
  $ 13,752  
Fair value of subsidiary’s units owned prior to the merger date
  $ 5,424,296  
Issuance of common stock through reinvestment of dividends
  
$
1,187,630
  
Issuance of preferred stock through reinvestment of dividends
  $ 826  
Cash paid for interest
  
$
2,248,232
  

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

F-12
MacKenzie Realty Capital, Inc.
Consolidated Statement of Cash Flows (Successor Basis)

   
Six Months Ended
  
Cash flows from operating activities:
  
June 30, 2021
  
Net income
  
$
249,948
  
Adjustments to reconcile net income to net cash from operating activities:
        
Net unrealized gain on equity securities
    
(1,685,130
)
Net income from equity method investments at fair value
    
745,562
  
Net unrealized gain on investments
    
(737,332
)
Depreciation and amortization
    
2,193,953
  
Accretion of market lease and other intangibles, net
    
(35,187
)
Changes in assets and liabilities:
        
Investment income, rent and other receivables
    
(252,735
)
Prepaid expenses and other assets
    
569,221
  
Deferred rent and other liabilities
    
285,850
  
Accounts payable and accrued liabilities
    
340,292
  
Due to related entities
    
(703,660
)
Net cash from operating activities
    
970,782
  
Cash flows from investing activities:
        
Proceeds from sale of investments
    
10,506,662
  
Investments in real estate
    
(28,623,637
)
Purchase of investments
    
(9,303,745
)
Return of capital distributions
    
6,001,052
  
Net cash from investing activities
    
(21,419,668
)
Cash flows from financing activities:
        
Proceeds from mortgage notes payable
    
15,125,000
  
Payments on mortgage notes payable
    
(406,215
)
Dividend to stockholders
    
(461,040
)
Repurchase of common stock
    
(408,818
)
Capital contributions by non-controlling interest holders
    
200,000
  
Net cash from financing activities
    
14,048,927
  
Net decrease in cash and restricted cash
    
(6,399,959
)
Cash and restricted cash at beginning of the period
    
14,153,512
  
Cash and restricted cash at end of the period
  
$
7,753,553
  
         
Cash at end of the period
  
$
4,305,663
  
Cash and restricted cash at end of the period classified as assets held for sale
     3,447,890  
Total cash, restricted cash and cash classified held for sale at end of the period
  
$
7,753,553
  
Supplemental disclosure of non-cash investing activities and other cash flow information
        
Issuance of common stock through reinvestment of dividends
  
$
204,277
  
Cash paid for interest
  
$
605,018
  

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

F-13
MacKenzie Realty Capital, Inc.
Consolidated Statement of Cash Flows (Predecessor Basis)

   
Six Months Ended
December 31, 2020
  
Cash flows from operating activities:
      
Net decrease in net assets resulting from operations
  
$
(9,667,137
)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash from operating activities:
        
Proceeds from sale of investments, net
    
5,204,853
  
Return of capital
    
11,486,835
  
Purchase of investments
    
(12,685,590
)
Net realized gain on investments
    
(1,016,326
)
Net unrealized loss on investments
    
10,135,612
  
Amortization of deferred offering costs
    
342,015
  
Changes in assets and liabilities:
        
Investment income, rent and other receivable
    
(447,398
)
Due from related entities
    
(150,866
)
Other assets
    
65,129
  
Payment of deferred offering costs
    
(36,578
)
Accounts payable and accrued liabilities
    
(48,028
)
Due to related entities
    
(40,083
)
Net cash from operating activities
    
3,142,438
  
         
Cash flows from investing activities:
        
Cash acquired through consolidation of subsidiary
    
1,932,088
  
Net cash from investing activities
    
1,932,088
  
         
Cash flows from financing activities:
        
Proceeds from issuance of common stock
    
218,439
  
Payment of selling commissions and fees
    
(9,107
)
Change in capital pending acceptance
    
(87,739
)
Net cash from financing activities
    
121,593
  
         
Net increase in cash and cash equivalents
    
5,196,119
  
Cash, cash equivalents and restricted cash at beginning of the period
    
8,957,393
  
Cash, cash equivalents and restricted cash at end of the period
  
$
14,153,512
  
         
Cash and cash equivalents at end of the period
  
$
12,539,943
  
Restricted cash at end of the period
    
1,613,569
  
Total cash, cash equivalents and restricted cash at end of the period
  
$
14,153,512
  
         
Non-cash investing and financing activities:
        
Issuance of the Company’s common stocks to redeem subsidiary’s non-controlling interests
  
$
3,957,115
  
         
Supplemental Disclosures:
        
Carrying value of a subsidiary’s consolidated assets, liabilities and net assets:
        
Assets:
        
Real estate assets
  
$
30,196,471
  
Cash and restricted cash
  
$
1,932,088
  
Rents and other receivable
  
$
197,760
  
Other assets
  
$
837,133
  
Liabilities:
        
Mortgage note payable
  
$
23,974,545
  
Accounts payable and accrued liabilities
  
$
943,805
  
Due to affiliates
  
$
150,866
  
Net assets
  
$
8,094,236
  

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

F-14
MacKenzie Realty Capital, Inc.
Notes to Consolidated Financial Statements
June 30, 2022

NOTE 1 – PRINCIPAL BUSINESS AND ORGANIZATION

MacKenzie Realty Capital, Inc. (the “Parent Company” together with its subsidiaries as discussed below, the “Company,” “we,” “us,” or “our”) was incorporated under the general corporation laws of the State of Maryland on January 25, 2012. We were formerly a non-diversified, closed-end investment company that elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (“1940 Act”). We withdrew our election to be treated as a BDC on December 31, 2020. We have elected to be treated as a real estate investment trust (“REIT”) as defined under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). We are authorized to issue 100,000,000 shares, of which (i) 80,000,000 are designated as common stock, with a $0.0001 par value per share; and (ii) 20,000,000 are designated as preferred stock, with a $0.0001 par value per share. We commenced our operations on February 28, 2013, and our fiscal year-end is June 30.

We filed our initial registration statement in June 2012 with the Securities and Exchange Commission (“SEC”) to register the initial public offering of 5,000,000 shares of our common stock. The initial public offering commenced in January 2014 and concluded in October 2016. We filed a second registration statement with the SEC to register a subsequent public offering of 15,000,000 shares of our common stock. The second offering commenced in December 2016 and concluded on October 28, 2019. We filed a third registration statement with the SEC to register a public offering of 15,000,000 shares of our common stock that was declared effective by the SEC on October 31, 2019. The third offering commenced shortly thereafter and expired on October 31, 2020.

On October 23, 2020, holders of a majority of our outstanding common stock authorized our Board of Directors to withdraw our election to be regulated as a BDC under the 1940 Act. The withdrawal was effective with the SEC on December 31, 2020, when we filed the appropriate form with the SEC.

The Parent Company’s wholly owned subsidiary, MRC TRS, Inc., (“TRS”) was incorporated under the general corporation laws of the State of California on February 22, 2016 and operates as a taxable REIT subsidiary. MacKenzie NY Real Estate 2 Corp., (“MacKenzie NY 2”), a wholly owned subsidiary of TRS, was formed for the purpose of making certain limited investments in New York companies. The financial statements of TRS and MacKenzie NY 2 have been consolidated with the Parent Company.

On May 20, 2020, we formed an operating partnership, MacKenzie Realty Operating Partnership, LP (the “Operating Partnership”) for the purpose of acquiring and operating real estate assets. As of June 30, 2022, we own all limited partnership units of the Operating Partnership except for 89,722.28 Class A Limited Partnership units and 206,666.67 preferred units, which would be entitled to receive, at liquidation of the Operating Partnership, 89,722.28 common shares of the Company (stated value of $10.25 per share) and $5,166,666.75 (stated value of $25 per share) in liquidation preference, respectively, which are approximately 10.48% of the Operating Partnership’s total capital outstanding.

In March 2021, we, together with our joint venture partners, formed two operating companies: Madison-PVT Partners LLC (“Madison”) and PVT-Madison Partners LLC (“PVT”), to acquire and operate two residential apartment buildings located in Oakland, California. We own 98.45% and 98.75% of equity units of Madison and PVT, respectively. The joint venture partners own the remaining 1.55% and 1.25% equity units of Madison and PVT, respectively, and also hold a carried interest in both companies. We are the controlling majority owner of both companies; therefore, effective March 31, 2021, we have consolidated the financial statements of these companies.

On April 13, 2021, we filed a preliminary offering circular (the “Offering Circular”) pursuant to Regulation A with the SEC to sell up to $50,000,000 of shares of our Series A preferred stock at an initial offering price of $25.00 per share. The sale of shares pursuant to this offering began in November 2021 after the definitive version of the Offering Circular was qualified by the SEC on November 2, 2021.

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On October 4, 2021, through the Operating Partnership, we acquired a 90% economic interest in Hollywood Hillview, a Delaware limited liability company, to acquire and operate a multifamily building located in Los Angeles, California. The remaining 10% economic interest in Hollywood Hillview is owned by an unaffiliated third party, True USA, LLC. Hollywood Hillview owns 100% of the membership interests in PT Hillview GP, LLC (the “PT Hillview”). We are the controlling majority owner of Hollywood Hillview; therefore, effective December 31, 2021, we have consolidated the financial statements of Hollywood Hillview.



On January 25, 2022, through the Operating Partnership, we acquired a 98% limited liability company interest in MacKenzie BAA IG Shoreline LLC (“MacKenzie Shoreline”), formed to acquire, renovate, and own the 84-unit multifamily building located at 1841 Laguna Street, Concord, CA. The joint venture partners own the remaining 2% of the limited liability company interest as well as a carried interest. We are the controlling majority owner of the MacKenzie Shoreline; therefore, effective June 30, 2022, we have consolidated the financial statements of MacKenzie Shoreline.



On April 1, 2022, we, and our newly formed, wholly owned subsidiary, FSP Merger Sub, Inc. (“Merger Sub”) entered into a reverse triangular merger agreement with FSP Satellite Place Corp. (“FSP Satellite”), pursuant to which the Merger Sub would be merged with and into FSP Satellite with FSP Satellite as the surviving entity, but renamed MacKenzie Satellite Place, Inc. (“MacKenzie Satellite”). On June 1, 2022, the merger closed, and MacKenzie Satellite became a wholly owned subsidiary of us, which in turn owns the Satellite Place building, a six-story Class “A” suburban office building containing approximately 134,785 rentable square feet of space located on approximately 10 acres of land in Duluth, GA. The former shareholders of FSP Satellite received cash or shares of the Company, based upon their election. All former shareholders of FSP Satellite holders elected to be paid in cash with the exception of two shareholders who elected to receive common and preferred stocks in the amount of $27,503 and $13,752, respectively. Subsequent to the completion of the merger, we have consolidated the financial statements of MacKenzie Satellite effective June 30, 2022.



On May 6, 2022, the Operating Partnership purchased 100% of the membership interests in eight limited liability companies and one parcel of entitled land from The Wiseman Company, LLC (“Wiseman”) for $17,325,000 and $3,050,000, respectively. The limited liability companies own the general partnership interests in eight limited partnerships, each of which own a Class A or B office property in Napa, Fairfield, or Woodland, California (the “Wiseman Properties”). The membership interest purchase price is subject to adjustments and holdbacks as provided in the membership interest purchase agreement. As part of the purchase agreement, $4,650,000 of the purchase price was paid through the issuance of 206,666.67 Preferred Units of the Operating Partnership and $750,000 of the land purchase price was paid through the issuance of 77,881.62 Class A units of the Operating Partnership. Further details of this acquisition are discussed in Note 5. We have consolidated the financial statements of the eight limited liability companies(but not the Wiseman Properties themselves) effective June 30, 2022.


Wiseman is a full-service real estate syndicator, developer, broker, and property manager.  It was founded in 1979 and serves as the general partner for nine currently active partnerships owning the Wiseman Properties.  Concurrently with acquiring the general partnership interests in the Wiseman Properties, the Operating Partnership also negotiated the right to acquire the limited partnership interest in each Wiseman Property at pre-determined prices over the following two years.  Management believes this transaction is strategically important as it focuses the portfolio on our desired geographic area (Western United States) and creates a captive pipeline of properties which we can acquire when convenient over the next two years. Subsequently, on July 29, 2022, the Operating Partnership completed the acquisition of the limited partnership interest in First & Main, LP for total purchase price of $3,376,322, of which $2,711,377 was paid through issuance of 120,505.66 Preferred Units of the Operating Partnership.



We are externally managed by MacKenzie Capital Management, LP (“MacKenzie”) under the administration agreement dated and effective as of February 28, 2013 (the “Administration Agreement”). MacKenzie manages all of our affairs except for providing investment advice. MCM Advisers, LP (the “Investment Adviser”) advises us in our assessment, acquisition, and divestiture of securities under the advisory agreement amended and restated effective January 1, 2021 (the “Amended and Restated Investment Advisory Agreement”). MacKenzie Real Estate Advisers, LP (the “Real Estate Adviser”; together, the “Investment Adviser” and the “Real Estate Adviser” may be referred to as “Adviser” or “Advisers” as appropriate) advises us in our assessment, acquisition, and divestiture of real estate assets. We pursue a strategy focused on investing primarily in real estate assets, and to a lesser extent (intended to be less than 20% of our portfolio) in illiquid or non-traded debt and equity securities issued by U.S. companies generally owning commercial real estate. These companies are likely to be non-traded REITs, small-capitalization publicly traded REITs, public and private real estate limited partnerships, and limited liability companies.


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As of June 30, 2022, we have raised approximately $139.29 million, including proceeds from our dividend reinvestment plan (“DRIP”) of approximately $12.55 million. Of the shares issued by us in exchange for the total capital raised as of June 30, 2022, approximately $11.65 million worth of shares have been repurchased under our share repurchase program. We have raised $2.96 million pursuant to the Offering Circular as of June 30, 2022.

CHANGE IN STATUS

Prior to the termination of our status as a BDC, we recorded our investment in real estate securities at fair value and recorded the changes in the fair value as an unrealized gain or loss. As a result of the termination of our status as a BDC, we are no longer subject to fair value accounting requirements. However, we have elected the fair value option (see Note 2) to recognize and measure our investments in certain limited partnerships, limited liability companies and corporations that otherwise would have been required to be recognized and measured using the equity method of accounting. Therefore, we continue to record the changes in fair value of these investments in the consolidated statement of operations. We also continue to recognize and measure our equity securities including investments in publicly traded securities at fair value with changes in fair value recorded in the consolidated statement of operations.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation Policy


The accompanying consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-K and Regulation S-X. We follow the accounting principles generally accepted in the United States of America (“GAAP”) and includes the accounts of our wholly owned consolidated subsidiaries and majority-owned controlled subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

 

Prior to the termination of our status as a BDC, we were an investment company under the Financial Accounting Standards Board (“FASB”) ASC 946. Under the 1940 Act rules, regulations pursuant to Article 6 of Regulation S-X and ASC 946, subject to certain inapplicable exceptions, we were precluded from consolidating portfolio company investments, including those in which we had a controlling interest, unless the portfolio company was an investment company. Therefore, our portfolio company investments, including those in which we had a controlling interest, were carried on the consolidated balance sheets at fair value with changes to fair value recognized as “Net unrealized gain (loss)” on the consolidated statement of operations until the investment was realized, usually upon exit, resulting in any gain or loss on exit being recognized as a realized gain or loss. However, in the event that any controlled subsidiary exceeded the tests of significance set forth in Rules 3-09 or 4-08(g) of Regulation S-X, we included required financial information for such subsidiary in the notes or as an attachment to our consolidated financial statements.

 

As a result of the termination of our status as a BDC, we are no longer an investment company under the FASB ASC 946. We discontinued applying the guidance in ASC 946 and began to account for the change in status prospectively by accounting for our investments in accordance with other U.S. GAAP as of the date of the change in status.

Our financial statements for the period subsequent to the termination of our BDC status are prepared on a consolidated basis to include the financial position, results of operations, and our cash flows and of our wholly owned and majority-owned subsidiaries. This change in status and the application of different accounting principles makes it difficult to compare consolidated financial statements for 2022 and 2021. As such, for the year ended June 30, 2022, the consolidated statements of operations, changes in equity and cash flows have been presented as they would be for a REIT (on a “successor basis”). For the year ended June 30, 2021, the consolidated statements of operations, changes in net assets (referred to as “equity” effective June 30, 2021) and cash flows have been presented in two separate statements. For the six months ended December 31, 2020, the consolidated statements of operations have been presented as they would be for an investment company (on a “predecessor basis”) and for the six months ended June 30, 2021 as they would be for a REIT (on a “successor basis”). The consolidated balance sheets at June 30, 2022 and 2021, have been presented on the successor basis.
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Certain prior period information has been reclassified to conform to the prior year end presentation. The reclassification has no effect on our consolidated balance sheet or the consolidated statement of operations as previously reported.

Use of Estimates

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported asset values, liabilities, revenues, expenses and unrealized gains (losses) on investments during the reporting period. Material estimates that are susceptible to change, and actual results could differ from those estimates.

Variable Interest Entities

We evaluate the need to consolidate our investments in securities in accordance with ASC 810. In determining whether we have a controlling interest in a variable interest entity and whether to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the partners, as well as whether the entity is a variable interest entity for which we are the primary beneficiary. Refer to Note 6 for additional information.

Assets and Liabilities Held for Sale

We classify long-lived assets or disposal groups to be sold as held for sale in the period in which all of the following criteria are met:

•
Management, having the authority to approve the action, commits to a plan to sell the asset (disposal group);
•
The asset (disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (disposal groups);
•
An active program to locate a buyer and other actions required to complete the plan to sell the asset (disposal group) have been initiated;
•
The sale of the asset (disposal group) is probable, and transfer of the asset (disposal group) is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the asset or disposal group beyond one year;
•
The asset (disposal group) is being actively marketed for sale at a price that is reasonable in relation to its current fair value. The price at which a long-lived asset (disposal group) is being marketed is indicative of whether the entity currently has the intent and ability to sell the asset (disposal group). A market price that is reasonable in relation to fair value indicates that the asset (disposal group) is available for immediate sale, whereas a market price in excess of fair value indicates that the asset (disposal group) is not available for immediate sale; and
•
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
 
On the day that these criteria are met, we suspend depreciation on the investment properties held for sale, including depreciation for tenant improvements and additions, as well as on the amortization of acquired in-place leases. The investment properties and liabilities associated with those investment properties that are held for sale are classified separately on the consolidated balance sheets for the most recent reporting period and recorded at the lesser of the carrying value or fair value less costs to sell. The prior period investment properties and liabilities associated with those investment properties that are classified as held for sale have been classified separately as assets and liabilities held for sale on the consolidated balance sheet as of June 30, 2021 for comparative purpose. Refer to Note 5.

Cash and Restricted Cash

Our cash represents balances held in current bank accounts and restricted cash includes escrow accounts for real property taxes, insurance, capital expenditures and tenant improvements, debt service and leasing costs held by lenders, and cash pledged as collateral for securities sold short. These balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to certain limits. At times, the cash balances held in financial institutions by us may exceed these insured limits.

Restricted cash is subject to a legal or contractual restrictions as to withdrawal or use, including restrictions that require the funds to be used for a specified purpose and restrictions that limit the purpose for which the funds can be used. We consider cash pledged as collateral for securities sold short to be restricted cash.

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Investments Income Receivable

Investment income represent dividends, distributions, and sales proceeds recognized in accordance with our revenue recognition policy but not yet received as of the date of the consolidated financial statements. The amounts are generally fully collectible as they are recognized based on completed transactions. We monitor and adjust our receivables, and those deemed to be uncollectible are written-off only after all reasonable collection efforts are exhausted. We have determined that all investments income receivable balances outstanding as of June 30, 2022 and 2021, are collectible and do not require recording any uncollectible allowance.

Rents and Other Receivables

We will periodically evaluate the collectability of amounts due from tenants and maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under lease agreements. We exercise judgment in establishing these allowances and considers payment history and current credit status of tenants in developing these estimates. We have determined that all rent receivable balances outstanding as of June 30, 2022 and 2021, are collectible and do not require recording any uncollectible allowance.

Capital Pending Acceptance

We conduct closings for new purchases of our common stock twice per month and admits new stockholders effective beginning the first of each month. Subscriptions are effective only upon our acceptance. Any gross proceeds received from subscriptions which are not accepted as of the period-end are classified as capital pending acceptance in the consolidated balance sheets. As of June 30, 2022, capital pending acceptance was $85,000. As of June 30, 2021, there was no capital pending acceptance.

Organization and Deferred Offering Costs

Organization costs include, among other things, the cost of legal services pertaining to the organization and incorporation of the business, incorporation fees, and audit fees relating to the public offerings and the initial statement of assets and liabilities. These costs are expensed as incurred. Offering costs include, among other things, legal fees and other costs pertaining to the preparation of the registration statements and pre- and post-effective amendments. While we were a BDC, offering costs were capitalized as deferred offering costs as incurred by us and subsequently amortized to expense over a twelve-month period. Any deferred offering costs that had not been amortized upon the expiration or earlier termination of an offering were accelerated and expensed upon such expiration or termination. The offering costs incurred by us on the Offering Circular to sell the Series A preferred stock have been classified as a reduction of equity.

Income Taxes and Deferred Tax Liability

The Parent Company has elected to be treated as a REIT for tax purposes under the Code and as a REIT, is not subject to federal income taxes on amounts that it distributes to the stockholders, provided that, on an annual basis, it distributes at least 90% of its REIT taxable income to the stockholders and meets certain other conditions. To the extent that it satisfies the annual distribution requirement but distributes less than 100% of its taxable income, it is either subject to U.S. federal corporate income tax on its undistributed taxable income or 4% excise tax on catch-up distributions paid in the subsequent year.

The Parent Company satisfied the annual dividend payment and other REIT requirements for the tax year ended December 31, 2021. Therefore, it did not incur any tax expense or excise tax on its income from operations during the quarterly periods within the tax year 2021. Similarly, for the tax year 2022, we believe the Parent Company paid the requisite amounts of dividends during the year and met other REIT requirements such that it will not owe any income taxes. Therefore, the Parent Company did not record any income tax provisions during any fiscal periods within the tax year 2022.

TRS, MacKenzie NY 2 and MacKenzie Satellite are subject to corporate federal and state income tax on their taxable income at regular statutory rates. However, as of June 30, 2022, they did not have any taxable income for tax years 2021 or 2022. Therefore, TRS, MacKenzie NY 2 and MacKenzie Satellite did not record any income tax provisions during any fiscal period within the tax year 2021 and 2022.

The Operating Partnership is a limited partnership and its subsidiaries; Addison Property Owner, LLC (the “Addison Property Owner”), Hollywood Hillview Owner, LLC (“Hollywood Hillview”) and MacKenzie BAA IG Shoreline LLC (“MacKenzie Shoreline”) are limited liability companies. Madison and PVT are also limited liability companies. Accordingly, all income tax liabilities of these entities flow through to their partners, which ultimately is the Company. Therefore, no income tax provisions are recorded for these entities.

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The Company and its subsidiaries follow ASC 740, Income Taxes (“ASC 740”), to account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax liabilities attributable to the net unrealized investment gain (losses) on existing investments. In estimating future tax consequences, we consider all future events, other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized as income or expense in the period of enactment. In addition, ASC 740 provides guidance for recognizing, measuring, presenting, and disclosing uncertain tax positions in the financial statements. As of June 30, 2022 and 2021, there were no uncertain tax positions. Management’s determinations regarding ASC 740 are subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof.

Subsequent Events

Subsequent events are events or transactions that occur after the date of the consolidated statements of assets and liabilities but before the date the consolidated financial statements are available to be issued. Subsequent events that provide additional evidence about conditions that existed at the date of the consolidated statements of assets and liabilities are considered in the preparation of the consolidated financial statements presented herein. Subsequent events that occur after the date of the consolidated statements of assets and liabilities that do not provide evidence about the conditions that existed as of the date of the consolidated statements of net assets are considered for disclosure based upon their significance in relation to our consolidated financial statements taken as a whole.

Fair Value of Financial Instruments

Fair value estimates are made at discrete points in time based on relevant information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. We believe that the carrying amounts of our financial instruments, consisting of cash, restricted cash, investments income, rent and other receivables, prepaid expenses and other assets, mortgage notes payable, accounts payable and accrued liabilities, below-market lease liabilities, net, deferred rent and other liabilities and due to related entities, approximate the fair values of such items based on their nature, terms, and interest rates.

Revenue Recognition

Rental revenue, net of concessions, which is derived primarily from lease contracts, which include rents that each tenant pays in accordance with the terms of each lease agreement, are recognized on a straight-line basis over the term of the lease, when collectability is determined to be probable.

Minimum rent, including rental abatements, lease incentives, and contractual fixed increases attributable to operating leases are recognized on a straight-line basis over the term of the related leases when collectability is probable. Amounts expected to be received in later years are recorded as deferred rent receivable. If the lease provides for tenant improvements, we determine whether the tenant improvements, for accounting purposes, are owned by the tenant or the Company. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that can be taken in the form of cash or a credit against the tenant’s rent) that is funded is treated as a lease incentive and amortized as a reduction of rental revenue over the lease term.

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Tenant improvement ownership is determined based on various factors including, but not limited to:

  •
whether the lease stipulates how a tenant improvement allowance may be spent;
  •
whether the lessee or lessor supervises the construction and bears the risk of cost overruns;
  •
whether the amount of a tenant improvement allowance is in excess of market rates;
  •
whether the tenant or landlord retains legal title to the improvements at the end of the lease term;
  •
whether the tenant improvements are unique to the tenant or general purpose in nature; and
  •
whether the tenant improvements are expected to have any residual value at the end of the lease.

In accordance with ASC Topic 842, we determine whether collectability of lease payments in an operating lease is probable. If we determine the lease payments are not probable of collection, we fully reserve for rent and reimbursement receivables, including deferred rent receivable, and recognizes rental income on cash basis.

Distributions received from investments are evaluated by management and recorded as dividend income or a return of capital (reduction of investment) on the ex-dividend date. Operational dividends or distributions received from portfolio investments are recorded as investment income. Distributions resulting from the sale or refinance of an investee’s underlying assets are compared to the estimated value of the remaining assets and are recorded as a return of capital or as investment income as appropriate.

Realized gains or losses on investments are recognized in the period of disposal, distribution, or exchange and are measured by the difference between the proceeds from the sale or distribution and the cost of the investment. Investments are disposed of on a first-in, first-out basis. Net change in unrealized gain (loss) reflects the net change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized gains or losses.

Dividends and Distributions

Dividends (and distributions, if any) to common stockholders are recorded on the date of declaration. The amount, if any, to be paid as a quarterly dividend (or distribution, if any) is approved quarterly by the Board of Directors and is generally based upon management’s estimate of our earnings for the quarter.

Fair Value Measurements

GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of market price observables used in measuring investments at fair value. Market price is impacted by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observables and a lesser degree of judgment used in measuring fair value.

Investments measured and reported at fair value are classified and disclosed in one of the following categories:

  Level I –
Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I are publicly traded equity securities. The Company does not adjust the quoted price for these investments even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.

  Level II –
Price inputs are quoted prices for similar financial instruments in active markets; quoted prices for identical or similar financial instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets. Investments which are generally included in this category are publicly traded equity securities with restrictions.

  Level III –
Pricing inputs are unobservable and include situations where there is little, if any, market activity for the investment. Fair values for these investments are estimated by management using valuation methodologies that consider a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, financial condition, and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant judgment by management. Due to the inherent uncertainty of these estimates, these values may differ materially from the values that would have been used had an active market for these investments existed.

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In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management’s assessment of the significance of a particular input to the fair value measurement, in its entirety, requires judgment and considers factors specific to the investment.

Valuation Procedures

Valuation of Investments:

Our consolidated financial statements include investments that are measured at their estimated fair values in accordance with GAAP. Our valuation procedures are summarized below:

Securities for which market quotations are readily available on an exchange will be valued at such price as of the closing price on the day closest to the valuation date. Where a security is traded but in limited volume, we may instead utilize the weighted average closing price of the security over the prior 10 trading days. We may value securities that do not trade on a national exchange by using published secondary market trading information. When doing so, we first confirm that GAAP recognizes the trading price as the fair value of the security.

Securities for which reliable market data are not readily available or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Adviser or Board of Directors, does not represent fair value, which we expect will represent a substantial portion of our portfolio, shall each be valued as follows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminary valuation conclusions are documented and discussed with our senior management; and (iii) the Board of Directors will discuss valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the Adviser and, where appropriate and necessary, the respective third‑party valuation firms. The recommendation of fair value will generally be based on the following factors, as relevant:


•
the nature and realizable value of any collateral;

•
the portfolio company’s ability to make payments;

•
the portfolio company’s earnings and discounted cash flow;

•
the markets in which the issuer does business; and

•
comparisons to publicly traded securities.

Securities for which market data is not readily available or for which a pricing source is not sufficient may include the following:


•
private placements and restricted securities that do not have an active trading market;

•
securities whose trading has been suspended or for which market quotes are no longer available;

•
debt securities that have recently gone into default and for which there is no current market;

•
securities whose prices are stale;

•
securities affected by significant events; and

•
securities that the Adviser believes were priced incorrectly.


Valuation of Real Property:



When property is owned directly, the valuation process includes a full review of the property financial information.  An Argus model is created using all known data such as current rent rolls, escalators, expenses, market data in the area where the property is located, cap rates, discount rates, mortgages, interest rates, and other pertinent information.  We estimate future leasing and costs associated, generally over a ten-year period, to determine the fair value of the property.  Once the fair value is determined, and reviewed by the board, a determination of impairment is made and documented. In addition, once per year, we obtain a third-party appraisal on directly owned properties.
 
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements will express the uncertainty of such valuations, and any change in such valuations, on our consolidated financial statements.

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Equity Securities

We have minority and non-controlling equity investments in various limited partnerships and non-traded entities, which do not have readily determinable fair values. We do not have controlling interests in these entities. Thus, these investments have been recorded as investments in equity securities in accordance with ASC Topic 321, Investments – Equity Securities, and measured at fair value. The changes in the fair value of these investments are recorded in the consolidated statement of operations.

Equity Method Investments with Fair Value Option Election

We elected the fair value option of accounting for the investments listed below that would have otherwise been recorded under the equity method of accounting. The primary purpose of electing the fair value option was to enhance the transparency of our financial condition. Changes in the fair value of these investments, which are inclusive of equity in income, are recorded in the consolidated statement of operations during the period such changes occur. The below list of investments would have been accounted for under the equity method if the fair value method had not been elected and have been included in investments in the consolidated balance sheets as of June 30, 2022 and 2021:

Investee
Legal Form
Asset Type
  
% Ownership
 
Fair Value as of
June 30, 2022
  
5210 Fountaingate, LP
Limited Partnership
LP Interest
    
9.92%
 
$
 6,820  
Capitol Hill Partners, LLC
Limited Liability Company
LP Interest
    
23.33%
    1,518,100  
Citrus Park Hotel Holdings, LLC
Limited Liability Company
LP Interest
    
35.27%
    5,000,000  
Dimensions 28, LLP
Limited Partnership
LP Interest
    
90.00%
    19,512,036  
Lakemont Partners, LLC
Limited Liability Company
LP Interest
    
17.10%
    806,290  
Secured Income L.P.
Limited Partnership
LP Interest
    
6.57%
   
520,594
  
 
 
 
                
 Total
 
 
          
$
27,363,840
  

Investee
Legal Form
Asset Type
  
% Ownership
    
Fair Value as of
June 30, 2021
  
FSP Satellite Place
Corporation
Non Traded Company
    
35.60%

 
$
2,867,911
  
5210 Fountaingate, LP
Limited Partnership
LP Interest
    
9.92%

   
30,574
  
Bishop Berkeley, LLC
Limited Liability Company
LP Interest
    
69.03%

   
5,142,164
  
BP3 Affiliate, LLC
Limited Liability Company
LP Interest
    
12.51%

   
1,668,000
  
Britannia Preferred Members, LLC - Class 1
Limited Liability Company
LP Interest
    
26.99%

 
6,448,000
  
Britannia Preferred Members, LLC - Class 2
Limited Liability Company
LP Interest
    
40.28%

   
5,891,945
  
Capitol Hill Partners, LLC
Limited Liability Company
LP Interest
    
25.93%

 
1,007,000
  
Citrus Park Hotel Holdings, LLC
Limited Liability Company
LP Interest
    
35.27%

   
5,000,000
  
Dimensions 28, LLP
Limited Partnership
LP Interest
    
90.00%

   
11,449,296
  
Lakemont Partners, LLC
Limited Liability Company
LP Interest
    
17.02%

   
817,770
  
Secured Income L.P.
Limited Partnership
LP Interest
    
6.57%

   
267,734
  
                     
Total
              
$
40,590,394
  

F-23
Unconsolidated Investments (Non-security) at Fair Value
 
These are equity method investments that do not meet the consolidation requirements under ASC 810. Under the 1940 Act, these investments are considered “voting securities” as opposed to “investment securities”. Therefore, we listed these equity method investments separately from rest of the equity method investments at fair value in the consolidated balance sheets. As of June 30, 2022, our investment in 1300 Main, LP, First & Main, LP, Dimensions 28, LLP, Green Valley Medical Center, LP, Main Street West, LP, Martin Plaza Associates, LP, One Harbor Center, LP, Westside Professional Center I, LP and Woodland Corporate Center II, LP are considered to be voting securities under the 1940 Act. As of June 30, 2021, our investments in Bishop Berkeley, LLC, BP3 Affiliate, LLC, Britannia Preferred Members, LLC - Class 1 and Class 2, and Dimensions 28, LLP were considered to be voting securities under the 1940 Act. Therefore, these investments were shown as unconsolidated investments (non-security), at fair value in the consolidated balance sheets. For GAAP purposes, these investments have been recorded under the equity method investments, for which we have elected the fair value option as discussed above.

Lease Accounting Topic 842

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-02, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor, and parties to sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to facilitate assessment the amount, timing, and uncertainty of cash flows arising from leases.

In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”). ASU 2018-11 provides lessors with a practical expedient to not separate lease and non-lease components if both (i) the timing and pattern of revenue recognition for the non-lease component and the related lease component are the same and (ii) the combined single lease component would be classified as an operating lease. We adopted the practical expedient as of July 1, 2019, to account for lease and non-lease components as a single component in lease contracts where we or one of our subsidiaries is the lessor.

Our current portfolio consists of commercial office properties and residential apartment buildings whereby we generate rental revenue by leasing office space and apartment units to the building’s tenants. These tenant leases fall under the scope of Topic 842, and are classified as operating leases. Revenues from such leases are recognized on a straight-line basis over the terms of the lease agreements. Non-lease components of our leases are combined with the related lease components and accounted for as a single lease component under Topic 842. The balances of net real estate investments and related depreciation on our consolidated financial statements relate to assets for which we are the lessor.

Real Estate Assets, Capital Additions, Depreciation and Amortization

We capitalize costs, including certain indirect costs, incurred for capital additions, including redevelopment, development, and construction projects. We also allocate certain department costs, including payroll, at the corporate levels as “indirect costs” of capital additions, if such costs clearly relate to capital additions. We also capitalize interest, property taxes and insurance during periods in which redevelopment, development, and construction projects are in progress. Cost capitalization begins once the development or construction activity commences and ceases when the asset is ready for its intended use. Repair and maintenance and tenant turnover costs are expensed as incurred. Repair and maintenance and tenant turnover costs include all costs that do not extend the useful life of the real estate asset. Depreciation and amortization expense are computed on the straight-line method over the asset’s estimated useful life. We consider the period of future benefit of an asset to determine its appropriate useful life and anticipates the estimated useful lives of assets by class to be generally as follows:

Buildings
16 – 45 years
   
Building improvements
  1 – 15 years
   
Land improvements
  5 – 15 years
   
Furniture, fixtures and equipment
  3 – 11 years
   
In-place leases
  1 – 10 years

F-24
Real Estate Purchase Price Allocations

In accordance with the guidance for business combinations, upon the acquisition of real estate properties, we evaluate whether the transaction is a business combination or an asset acquisition. If the transaction does not meet the definition of a business combination, we record the assets acquired, the liabilities assumed, and any non-controlling interest as of the acquisition date, measured at their relative fair values. Acquisition-related costs are capitalized in the period incurred and are added to the components of the real estate assets acquired. We assess the acquisition-date fair values of all tangible assets, identifiable intangible assets, and assumed liabilities using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis) and that utilize appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on several factors including historical operating results, known and anticipated trends, and market and economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it was vacant. Intangible assets include the value of in-place leases, which represents the estimated fair value of the net cash flows of leases in place at the time of acquisition, as compared to the net cash flows that would have occurred had the property been vacant at the time of acquisition and subject to lease-up. We amortize the value of in-place leases to expense over the remaining non-cancelable term of the respective leases, which is on average five years. Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require us to make significant assumptions to estimate market lease rates, property operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, prevailing interest rates, and the number of years the property will be held for investment. The use of inappropriate assumptions could result in an incorrect valuation of acquired tangible assets, identifiable intangible assets, and assumed liabilities, which could impact the amount of our net income (loss). Differences in the amount attributed to the fair value estimate of the various assets acquired can be significant based upon the assumptions made in calculating these estimates.


Contingent Consideration in an Asset Acquisition

 

Contingent consideration recognized is included in the initial cost of the assets acquired. Subsequent changes in the recorded amount of contingent consideration will generally be recognized as an adjustment to the cost basis of the acquired assets, in accordance with ASC 323-10-35-14a and ASC 360-10-30-1. The subsequent changes will be allocated to the acquired assets based on their relative fair value at the date of acquisition.

Impairment of Real Estate Assets

We continually monitor events and changes in circumstances that could indicate that the carrying value of our real estate and related intangible assets may not be recoverable. When indicators of potential impairment emerge, our assesses whether we will recover the carrying value of the asset through its undiscounted future cash flows and its eventual disposition. Based on this assessment, if we do not believe that it will recover the carrying value of the real estate and related intangible assets, we will record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the real estate and related intangible assets. No impairment charges on assets held for use were recorded for the year ended June 30, 2022, and six months ended June 30, 2021. Impairment charges on assets held for sale are discussed in Note 5.

Gain on Dispositions of Real Estate Investments

Gains on sales of rental real estate are not considered sales to customers and will generally be recognized pursuant to the provisions of ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets (“ASC 610-20”), which applies to sales or transfers to noncustomers of nonfinancial assets or in substance nonfinancial assets that do not meet the definition of a business. Generally, our sales of real estate would be considered a sale of a nonfinancial asset as defined by ASC 610-20. ASC 610-20 refers to the revenue recognition principles under ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Under ASC 610-20, if we determine we do not have a controlling financial interest in the entity that holds the asset and the arrangement meets the criteria to be accounted for as a contract, we will dispose of the asset and recognize a gain or loss on the sale of the real estate when control of the underlying asset transfers to the buyer.

Reportable Segments

ASC 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. We have one reportable segment, income-producing real estate properties, which consists of activities related to investing in real estate. The real estate properties are geographically diversified throughout the United States, and we evaluate operating performance on an overall portfolio level.
 
F-25
Subsequent change in contingent consideration impacts the cost basis of acquired assets, which may also impact the income statement through subsequent accounting for the acquired asset. We are aware of diversity in practice regarding the subsequent treatment of the income statement effect of changes to the cost basis of the acquired assets. We generally believe the depreciation or amortization of these assets should be recognized as a cumulative “catch up” adjustment, as if the additional amount of consideration that is no longer contingent had been accrued from the outset of the arrangement.

NOTE 3 – INVESTMENTS IN REAL ESTATE
 
The following tables provide summary information regarding our operating properties, which are owned through our subsidiaries: the Operating Partnership, MacKenzie Satellite, Madison and PVT.
 
Consolidated Operating Properties

Property Name:
Addison Corporate Center
Commodore Apartments
Pon de Leo Apartments
Property Owner:
The Operating Partnership
Madison-PVT Partners LLC
PVT-Madison Partners LLC
Location:
Windsor, CT
Oakland, CA
Oakland, CA
Number of Tenants:
6
48
39
Year Built:
1980
1912
1929
Ownership Interest:
100%
100%
100%
 
 
 
 
Property Name:
Hollywood Property
Shoreline Apartments
Satellite Place
Property Owner:
The Operating Partnership
The Operating Partnership
MacKenzie Satellite Place Inc.
Location:
Hollywood, CA
Concord, CA
Duluth, GA
Number of Tenants:
16
76
1
Year Built:
1917
1968
2002
Ownership Interest:
100%
100%
100%
 
The following table presents the purchase price allocation of real estate assets acquired on October 4, 2021 based on asset acquisition accounting.

Property Name:
  
Hollywood Property
  
Acquisition Date:
  
October 4, 2021
  
Purchase Price Allocation
      
Land
  
$
8,704,595
  
Building
    
10,524,548
  
Site Improvements
    
30,436
  
Tenant Improvements
    
41,852
  
Furniture, Fixtures & Equipment
    
361,055
  
Lease In Place
    
204,346
  
Leasing Commissions
    
23,998
  
Total assets acquired
  
$
19,890,830
  

F-26
Table of Contents
The following table presents the purchase price allocation of real estate assets acquired on May 16, 2022 based on asset acquisition accounting.

Property Name:
  
Shoreline Apartments
  
Acquisition Date:
  
May 16, 2022
  
Purchase Price Allocation
      
Land
  
$
7,559,390
  
Building
    
17,859,545
  
Site Improvements
    
1,407,789
  
Furniture, Fixtures & Equipment
    
857,443
  
Lease In Place
    
552,950
  
Total assets acquired
  
$
28,237,117
  

The following table presents the purchase price allocation of real estate assets acquired on June 1, 2022 based on asset acquisition accounting.

Property Name:
  
Satellite Place
  
Acquisition Date:
  
June 1, 2022
  
Purchase Price Allocation
      
Land
  
$
2,966,129
  
Building
    
6,465,450
  
Site Imporvements
    
2,114,369
  
Tenant Improvements
    
2,136,966
  
Lease in Place
    
1,028,415
  
Leasing Commissions
    
436,799
  
Total assets acquired
  

15,148,128
  
 
        
Net leasehold asset (liability)
  

(517,865
)
 
        
Total assets acquired, net
  
$
14,630,263
  

The total depreciation expense of our operating properties for the year ended June 30, 2022 was $2,866,400. The total depreciation expense of our operating properties for the six months ended June 30, 2021 was $1,107,467. We did not incur depreciation expense during the six months ended December 31, 2020 as we did not own and operate any real estate assets as of December 31, 2020.

Operating Leases:
 
Our real estate assets are leased to tenants under operating leases that contain varying terms and expirations. The leases may have provisions to extend the lease agreements, options for early termination after paying a specified penalty and other terms and conditions as negotiated. We retain substantially all the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, we do not require a security deposit from tenants on our commercial real estate properties, depending upon the terms of the respective leases and the creditworthiness of the tenants. Even when required, security deposits generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of the security deposit. Security deposits received in cash related to tenant leases are included in other accrued liabilities in the accompanying consolidated balance sheets and were immaterial as of June 30, 2022 and 2021.
 
F-27
Table of Contents
The following table presents the components of income from real estate operations for the year ended June 30, 2022 and six months ended June 30, 2021:
 
 
  
Year Ended
    
Six Months Ended
  
 
  
June 30, 2022
    
June 30, 2021
  
 
            
Lease Income - Operating leases
  
$
8,783,327
    
$
3,141,111
  
Variable lease income (1)
    
1,585,847
      
604,004
  
 
  
$
10,369,174
    
$
3,745,115
  


(1)
Primarily includes tenant reimbursements for utilities and common area maintenance.

As of June 30, 2022, the future minimum rental income from our real estate properties under non-cancelable operating leases are as follows:

Year ended June 30,:
  
Rental Income
  
2023
  
$
3,111,256
  
2024
    
1,694,724
  
2025
    
1,727,946
  
2026
    
1,772,903
  
2027
    
1,819,230
  
Thereafter
    
5,591,966
  
Total
  
$
15,718,025
  

Lease Intangibles, Above-Market Lease Assets and Below-Market Lease Liabilities, Net
 
As of June 30, 2022 and 2021, our acquired lease intangibles, above-market lease assets, and below-market lease liabilities were as follows:
 
 
  
As of June 30, 2022
  
 
  
Lease Intangibles
    
Above-Market
Lease Asset
    
Below-Market
Lease Liabilities
  
 
                  
Cost
  
$
2,889,828
    
$
-
     $
1,455,317
  
Accumulated amortization
    
(586,168
)
    
-
      
(391,738
)
Total
  
$
2,303,660
    
$
-
     $
1,063,579
  
 
                        
Weighted average amortization period (years)
    
5.2
      
-
      
4.9
  
 
 
  
As of June 30, 2021
  
 
  
Lease Intangibles
    
Above-Market
Lease Asset
    
Below-Market
Lease Liabilities
  
 
                  
Cost
  
$
5,141,279
    
$
447,663
    
$
937,452
  
Accumulated amortization
    
(1,086,485
)
    
(63,952
)
    
(99,139
)
Total
  
$
4,054,794
    
$
383,711
    
$
838,313
  
 
                        
Weighted average amortization period (years)
    
3.1
      
3.5
      
3.4
  
 
F-28
Table of Contents
Our amortization of lease intangibles, above-market lease assets and below-market lease liabilities for the year ended June 30, 2022, were as follows:
 
 
  
Year Ended
  
 
  
June 30, 2022
  
 
  
Lease
Intangibles
    
Above-Market
Lease Asset
    
Below-Market
Lease Liabilities
  
Amortization
  
$
1,677,943
    
$
127,904
    
$
(292,599
)
 
Our amortization of lease intangibles, above-market lease assets and below-market lease liabilities for the six months ended June 30, 2021, were as follows:
 
 
  
Six Months Ended
  
 
  
June 30, 2021
  
 
  
Lease
Intangibles
    
Above-Market
Lease Asset
    
Below-Market
Lease Liabilities
  
Amortization
  
$
1,086,486
    
$
63,952
    
$
(99,139
)
 
We did not have lease intangibles as of December 31, 2020. Therefore, we did not have any amortization.
 
The following table provides the projected amortization expense and adjustments to revenue from tenants for intangible assets and liabilities for the next five years:

 
  
Year Ended June 30, :
  
 
  
2023
    
2024
    
2025
    
2026
    
2027
    
Thereafter
  
In-place leases, to be included in amortization
  
$
491,084
    
$
350,698
    
$
350,698
    
$
333,418
    
$
212,460
    
$
565,302
  
 
                                                
Above-market lease intangibles
  
$
-
    
$
-
    
$
-
    
$
-
    
$
-
    
$
-
  
Below-market lease liabilities
    
(335,985
)
    
(286,053
)
    
(134,237
)
    
(68,290
)
    
(68,290
)
    
(170,724
)
Total to be included in revenue from tenants
  
$
(335,985
)
  
$
(286,053
)
  
$
(134,237
)
  
$
(68,290
)
  
$
(68,290
)
  
$
(170,724
)

NOTE 4 – INVESTMENTS

The following table summarizes the composition of our equity method investments with fair value option election and other equity securities at fair value as of June 30, 2022 and 2021 (successor basis):

   
Fair Value
      Fair Value  
Asset Type
  
June 30, 2022
       June 30, 2021  
Publicly Traded Companies
  
$
-
     $ 169,200  
Non Traded Companies
    
11,517,226
       29,426,441  
Non Traded Company (Equity method investment with fair value option election)
    
-
       2,867,911  
GP Interests     18,333,000       -  
LP Interests
    
330,000
       288,494  
LP Interests (Equity method investment with fair value option election)
    
27,363,840
       37,722,483  
Investment Trust
    
49,178
       34,714  
Total
  
$
57,593,244
     $
70,509,243  

Our above total investments at fair value are disclosed in two separate lines as investments and unconsolidated investments (non-securities) in the consolidated balance sheets as of June 30, 2022 and 2021.
F-29
The following table presents fair value measurements of our investments as of June 30, 2022 and 2021, according to the fair value hierarchy (successor basis):

               As of June 30,2022
Asset Type
  
Total
    
Level I
    
Level II
    
Level III
  
Non Traded Companies
   $
11,517,226
     $
-
     $
-
     $
11,517,226
  
GP Interests     18,333,000       -       -       18,333,000  
LP Interests
    
27,693,840
      
-
      
-
      
27,693,840
  
Investment Trust
    
49,178
      
-
      
-
      
49,178
  
Total
  
$
57,593,244
    
$
-
    
$
-
    
$
57,593,244
  

                As of June 30,2021
Asset Type
  
Total
    
Level I
    
Level II
    
Level III
  
Publicly Traded Companies
  
$
169,200
    
$
169,200
    
$
-
    
$
-
  
Non Traded Companies
    
32,294,352
      
-
      
-
      
32,294,352
  
LP Interests
    
38,010,977
      
-
      
-
      
38,010,977
  
Investment Trust
    
34,714
      
-
      
-
      
34,714
  
Total
  
$
70,509,243
    
$
169,200
    
$
-
    
$
70,340,043
  

The following is a reconciliation of the beginning and ending balances for investments measured at fair value on a recurring basis using significant unobservable inputs (Level III of the fair value hierarchy) for the year ended June 30, 2022 (successor basis):

Balance at July 1, 2021
  
$
70,340,043
  
Purchases of investments
    
21,789,690
  
Transfers to Level I
    
(230,160
)
Fair value adjustment on FSP Satellite Corp. units owned prior to consolidation (Note 1)
     (3,106,018 )
Proceeds from sales, net
    
(33,218,158
)
Return of capital distributions
    
(11,807,238
)
Net realized gains
    
7,277,446
Net unrealized gains
    
6,547,639
  
Ending balance at June 30, 2022
  
$
57,593,244
  

The transfer of $230,160 of investments from Level III to Level I category during the year ended June 30, 2022 resulted from two of our investments converting from a non-traded REIT to publicly traded REIT. Transfers are assumed to have occurred at the beginning of the year.

For the year ended June 30, 2022, changes in unrealized gains, net included in earnings relating to Level III investments still held at June 30, 2022 were $8,698,216.
 
The following is a reconciliation of the beginning and ending balances for investments measured at fair value on a recurring basis using significant unobservable inputs (Level III of the fair value hierarchy) for the six months ended June 30, 2021 (successor basis):

Balance at December 31, 2020
  
$
68,877,889
  
Purchases of investments
    
8,830,765
  
Transfers to Level I
    
(229,879
)
Proceeds from sales, net
    
(1,922,780
)
Return of capital distributions
    
(6,001,052
)
Net realized losses
    
(160,108
)
Net unrealized gains
    
945,208
  
Ending balance at June 30, 2021
  
$
70,340,043
  

F-30
The transfers of $229,879 from Level III to Level I category during the six months ended June 30, 2021 resulted from one of our investments converting from a non-traded REIT to publicly traded REIT. Transfers are assumed to have occurred at the beginning of the period.

For the six months ended June 30, 2021, changes in unrealized gains, net included in earnings relating to Level III investments still held at June 30, 2021 were $945,208.
 
The following is a reconciliation of the beginning and ending balances for investments measured at fair value on a recurring basis using significant unobservable inputs (Level III of the fair value hierarchy) for the six months ended December 31, 2020 (predecessor basis):

Balance at July 1, 2020
  
$
86,460,491
  
Purchases of investments
    
13,448,477
  
Transfers to Level I     (1,900,470 )
Consolidation of the Operating Partnership
    (8,027,584 )
Proceeds from sales, net
    
(1,011,748
)
Return of capital
    
(11,486,835
)
Net realized gains
    
30,050
  
Net unrealized losses
    
(8,634,492
)
Ending balance at December 31, 2020
  
$
68,877,889
  

The transfer of $1,900,470 of investments from Level III to Level I category during the six months ended December 31, 2020 resulted from one of our investments converting from a non-traded REIT to publicly traded REIT. Transfers are assumed to have occurred at the beginning of the period.

For the six months ended December 31, 2020, changes in unrealized losses, net included in earnings relating to Level III investments still held at December 31, 2020 were $1,836,915.

The following table shows quantitative information about significant unobservable inputs related to the Level III fair value measurements used at June 30, 2022 (successor basis):

Asset Type
  
Fair Value
  
Primary Valuation
Techniques
  
Unobservable Inputs Used
  
Range
     Weighted Average
  
                         
Non Traded Companies
   $
1,011,081
  
Estimated Liquidation Value
  
Sponsor provided value
            
                      
Liquidity discount
    
25.0% - 75.0%

   
25.0%

Non Traded Companies
    
10,506,145
  
Market Activity
  
Secondary market industry publication
                
                      
Contracted purchase of security
                
                               
GP Interests     18,333,000   Market Activity   Contracted purchase price                
                               
LP Interests
    
21,550,730
  
Direct Capitalization Method
  
Capitalization rate
    
4.0% - 5.0%

   
4.2%

                      
Liquidity discount
    
15.0%

       
LP Interests
    
5,806,290
  
Discounted Cash Flow
  
Discount rate
    
6.3% - 9.0%

   
8.6%

LP Interests
    
6,820
  
Estimated Liquidation Value
  
Sponsor provided value
                
                      
Liquidity discount
    
12%

       
LP Interest     330,000   Market Activity         Secondary market industry publication                
                               
Investment Trust
    
49,178
  
Direct Capitalization Method
  
Capitalization rate
    
5.0%

       
                      
Liquidity discount
    
15.0%

       
   
$
57,593,244
                        

F-31
The following table shows quantitative information about significant unobservable inputs related to the Level III fair value measurements used at June 30, 2021 (successor basis):

Asset Type
  
Fair Value
  
Primary Valuation
Techniques
  
Unobservable Inputs Used
  
Range
    
Weighted Average
  
                         
Non Traded Company
  
$
2,867,911
  
Direct Capitalization Method
  
Capitalization rate
    
7.9%
    

 
                      
Liquidity discount
    
32.0%
    

 
Non Traded Companies
    
66,337
  
Estimated Liquidation Value
  
Sponsor provided value
              
                      
Liquidity discount
    
2.0% - 67.0%
      
53.6%

                 Bankruptcy filing
                
Non Traded Companies
    
29,360,104
  
Market Activity
  
Secondary market industry publication
                
                 Underlying property sales contract                
                 Acquisition cost                
                               
LP Interests
    
19,717,495
  
Direct Capitalization Method
  
Capitalization rate
    
3.5% - 7.5%
      
5.8%

                      
Liquidity discount
    
20.0% - 33.0%
      
20.9%

LP Interests
    
11,448,000
  
Discounted Cash Flow
  
Discount rate
    
9.0% - 20.0%
      
13.2%

                      
Discount term (months)
    
24
          
LP Interests
    
6,845,482
  
Estimated Liquidation Value
  
Sponsor provided value
                
                      
Underlying property sales contract
                
                      
Liquidity discount
    
5.0% - 46.19%
      
16.1%

                      
Appraisal
                
                               
Investment Trust
    
34,714
  
Direct Capitalization Method
  
Capitalization rate
     6.0%          
                  Liquidity discount     33.0%          
   
$
70,340,043
                        

Impact of COVID-19 Pandemic

The COVID-19 pandemic and related changes in tenant behavior have adversely impacted the fair value of our investments as of June 30, 2022 and 2021, and the values assigned as of this date may differ materially from the values that we may ultimately realize with respect to our investments. The impact of the COVID-19 pandemic may not yet be fully reflected in the valuation of our investments as our valuations, and particularly valuations of private investments and private companies, are inherently uncertain, may fluctuate over short periods of time and are often based on estimates, comparisons and qualitative evaluations of private information that is often from a time period earlier, generally two to three months, than the quarter for which we are reporting. Additionally, we may not have yet received information or certifications from our portfolio companies that indicate any or the full extent of declining performance or non-compliance with debt covenants, as applicable, as a result of the COVID-19 pandemic. As a result, our valuations at June 30, 2022 and 2021, may not show the complete or continuing impact of the COVID-19 pandemic and the resulting measures taken in response thereto. Accordingly, we may continue to incur additional net unrealized losses or may incur realized losses subsequent to June 30, 2022, which could have a material adverse effect on our business, financial condition and results of operations.

Summarized Financial Statements for Equity Method Investments (Fair Value Option)

Our investments in securities are generally in small and mid-sized companies in a variety of industries. In accordance with the Rule 8-03(b)(3) of Regulation S-X applicable for smaller reporting companies, we must determine which of our equity method investments measured at fair value under the Fair Value Option are considered “significant”, if any. Regulation S-X mandates the use of three different tests to determine if any of our investments are considered significant investments: the investment test, the asset test, and the income test. The rule requires summarized financial statements for any significant equity method investments in an annual and interim report if any of the three tests exceed 20%.

F-32
In addition to the SEC rules, ASC 323-10-50-3(c) requires summarized financial statements of its equity method investments, including those reported under the fair value option, if they are material individually or in aggregate. Our investment in Dimension 28, LLP was determined to be significant under the income test as of June 30, 2022. In addition, our equity method investments accounted under the fair value option were material in aggregate as of June 30, 2022. The summarized financial information of Dimension 28, LLP and aggregated summarized financial information of all equity method investees is as follows:

    Dimension 28, LLP
   
All Equity Method
Investee Aggregated
  
Total Assets
   $ 18,684,443     $
95,185,176
  
Total Liabilities
   $ 13,788,779     $
73,988,432
  
Total Equities
   $ 4,895,664     $
21,196,744
  
Total Revenues
   $ 3,075,016     $
13,139,175
  
Total Expenses
   $ 3,747,794     $
13,013,280
  
Total Net Income (Loss)
   $ (672,778 )   $
125,895
  

Unconsolidated Significant Subsidiaries

In accordance with SEC Rules 3-09 and 4-08(g) of Regulation S-X, we must determine which of our investments in securities are considered “significant subsidiaries”, if any. Regulation S-X mandates the use of three different tests to determine if any of our controlled investments are significant subsidiaries: the investment test, the asset test, and the income test. Rule 3-09 of Regulation S-X requires separate audited financial statements for any unconsolidated majority-owned subsidiary in an annual report if any of the three tests exceed 20%. Rule 4-08(g) of Regulation S-X requires summarized financial information in an annual report if any of the three tests exceeds 10%.

As of June 30, 2022 and 2021, none of our investments in securities was considered an unconsolidated significant subsidiary under the SEC rules described above.

NOTE 5 – ACQUISITIONS AND HELD FOR SALE
 
Acquisition of General Partnership Interests
 
We entered into a membership interest purchase agreement with The Wiseman Company LLC (“Wiseman”) on April 12, 2022, to acquire 100% of the membership interests in eight limited liability companies (“Management Companies”) owned by Wiseman. We assigned all our rights, title and obligations with respect to the membership interest purchase agreement to the Operating Partnership on May 5, 2022, and the purchase of these Management Companies closed on May 6, 2022. After the closing, the Operating Partnership became the sole member of the Management Companies. Accordingly, we have consolidated the financial statements of these Management Companies as of June 30, 2022. Each Management Company manages a property company limited partnership and is the sole general partner of each of the limited partnerships.
 
The following table presents the purchase price allocation of general partnership interests acquired on May 6, 2022:
 
General Partnership Interests
Management Companies
  
Total Purchase
Price
  
1300 Main, LP
1300 Main, LLC
  
$
1,688,000
  
First & Main, LP
First & Main, LLC
    
2,237,000
  
Green Valley Medical Center, LP
Green Valley Medical Center, LLC
    
3,010,000
  
Main Street West, LP
Main Street West, LLC
    
4,708,000
  
Martin Plaza Associates, LP
Martin Plaza, LLC
    
725,000
  
One Harbor Center, LP
One Harbor Center, LLC
    
4,162,000
  
Westside Professional Center I, LP
Westside Professional Center, LLC
    
1,803,000
  
Woodland Corporate Center II, LP
Woodland Corporate Center, LLC
    
-
  
Total
 
  
$
18,333,000
  
 
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Table of Contents
The acquisition of general partnership interests was made in exchange for cash, preferred units in the Operating Partnership, and, in some cases, a contingent liability as shown below:

General Partnership Interests
  
Number of
Preferred Units
issued
    
Amount of
Preferred Units
issued
    
Cash
Payments
    
Contingent
liability
    
Total
Purchase
Price
  
1300 Main, LP
    
-
    
$
-
    
$
1,688,000
    
$
-
    
$
1,688,000
  
First & Main, LP
    
99,422.22
      
2,237,000
      
-
      
-
      
2,237,000
  
Green Valley Medical Center, LP
    
-
      
-
      
2,410,000
      
600,000
      
3,010,000
  
Main Street West, LP
    
-
      
-
      
3,850,000
      
858,000
      
4,708,000
  
Martin Plaza Associates, LP
    
26,977.78
      
607,000
      
-
      
118,000
      
725,000
  
One Harbor Center, LP
    
80,266.67
      
1,806,000
      
1,571,000
      
785,000
      
4,162,000
  
Westside Professional Center I, LP
    
-
      
-
      
1,449,000
      
354,000
      
1,803,000
  
Woodland Corporate Center II, LP
    
-
      
-
      
-
      
-
      
-
  
Total
    
206,666.67
    
$
4,650,000
    
$
10,968,000
    
$
2,715,000
    
$
18,333,000
  

The Operating Partnership’s preferred units are issued with a $25 liquidation preference, but because Wiseman agreed to a 4-year “lock-up” we agreed to a discounted issuance price of $22.50 per unit.  Thus, the value of the preferred units listed above is $22.50 per unit.

Contingent Consideration

Pursuant to the membership interest purchase agreement, the purchase price paid at closing for the general partnership interests was reduced by 20% as of the closing date for the property companies that had not received fully executed and in force leases, the annualized scheduled rents of which are equal to or greater than the target scheduled rent as stated in the membership interest purchase agreement. This 20% holdback will be paid upon a property company reaching the stabilization threshold, reduced by stabilization costs, as defined in the membership interest purchase agreement. Management believes that it is probable that the stabilization thresholds will be reached for each of the property companies that did not meet this threshold at the acquisition date. Hence, the 20% holdback was considered as a contingent liability in the consolidated balance sheet as of June 30, 2022.

Debt Guaranty

The property companies have mortgage loans with various banks and the loans are guaranteed by Wiseman and its owner, Doyle Wiseman and his trust. The mortgage loans of 1300 Main, LP, One Harbor Center, LP, Martin Plaza Associates, LP, and Main Street West, LP are also guaranteed by the partnership’s general partner  as the co-guarantor.

On July 1, 2022, subsequent to Operating Partnership’s acquisition of the management companies, Wiseman’s owner, Doyle Wiseman and the Operating Partnership entered into an indemnity agreement whereby the Operating Partnership will indemnify Doyle Wiseman for any losses suffered by him through the default of a limited partnership on the mortgage secured by the property owned by the limited partnership. Historically, none of the limited partnerships has had any defaults on any mortgages and Doyle Wiseman has not had to satisfy any mortgage default through a guaranty. Furthermore, each of the limited partnerships is adequately capitalized, has sufficient cash flow from operations to service the mortgage notes and has not required Doyle Wiseman to provide any subordinated financial support to the limited partnerships. Therefore, we have not recorded any liability related to the guaranty on the mortgage loans as of June 30, 2022.
 
Acquisition of Land
 
The Operating Partnership acquired a parcel of entitled land of approximately 3 acres located at the corner of Business Center Drive and Healthcare Drive in Fairfield, California from Wiseman on May 6, 2022.
 
As part of the land acquisition, the Operating Partnership acquired all development agreements and rights, civil, design and building plans, right, benefits and privileges held by Wiseman. The total acquisition price of the land was $3,050,000, of which $750,000 was paid through the issuance 77,882 Class A units of the Operating Partnership.

F-34
Table of Contents
Assets and Liabilities Held for Sale

On June 28, 2022, the Addison Property Owner entered into a forbearance agreement for the sale of Addison Corporate Center with the lender of the note payable discussed in Note 9. As a result, the Addison Property Owner’s operations met the criteria to be classified as held for sale, which requires us to present the related assets and liabilities as separate line items in our consolidated balance sheets. We recorded these assets and liabilities at fair value less any costs to sell. Impairment loss recognized on assets held for sale amounted to $9,126,461 for the year ended June 30, 2022.

The following table presents information related to the major classes of assets and liabilities that were classified as held for sale in our consolidated balance sheets:

 
  
June 30, 2022
    
June 30, 2021
  
 
            
Assets
            
Real estate assets
            
Land
  
$
6,456,615
    
$
6,456,615
  
Building, fixtures and improvements
    
19,108,041
      
19,108,041
  
Intangible lease assets
    
5,154,568
      
5,104,794
  
Less: accumulated depreciation and amortization
    
(5,112,309
)
    
(1,661,988
)
Total real estate assets, net
    
25,606,915
      
29,007,462
  
Cash
    
505,186
      
528,185
  
Restricted cash
    
-
      
2,919,705
  
Investments income, rents and other receivables
    
490,239
      
256,849
  
Due from related entities
    
401
      
-
  
Prepaid expenses and other assets
    
14,301
      
201,148
  
Allowance for impairment of assets held for sale
    
(9,126,461
)
    
-
  
Total assets
  
$
17,490,581
    
$
32,913,349
  
 
                
Liabilities
                
Deferred rent and other liabilities
  
$
410,908
    
$
542,033
  
Accounts payable and accrued liabilities
    
334,081
      
858,937
  
Due to related entities
    
-
      
11
  
Total liabilities
  
$
744,989
    
$
1,400,981
  

We determined that the operations included in the table above did not meet the criteria to be classified as discontinued operations under the applicable guidance.

NOTE 6 – VARIABLE INTEREST ENTITIES

A variable interest in a variable interest entity (VIE) is an investment or other interest that will absorb portions of the VIE’s expected losses and/or receive portions of the VIE’s expected residual returns. Our variable interests in VIEs include limited partnership interests. VIEs sometimes finance the purchase of assets by issuing limited partnership interests that are either collateralized by or indexed to the assets held by the VIE.

The enterprise with a controlling financial interest in a VIE is known as the primary beneficiary and consolidates the VIE. We determine whether we are the primary beneficiary of a VIE by performing an analysis that principally considers: (a) which variable interest holder has the power to direct activities of the VIE that most significantly impact the VIE’s economic performance; (b) which variable interest holder has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE; (c) the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders; (d) the VIE’s capital structure; (e) the terms between the VIE and its variable interest holders and other parties involved with the VIE; and (f) related-party relationships. We reassess our evaluation of whether an entity is a VIE when certain reconsideration events occur. We reassess our determination of whether it is the primary beneficiary of a VIE on an ongoing basis based on current facts and circumstances.

F-35
Nonconsolidated VIEs

As of June 30, 2022 and 2021, six and eleven of our unconsolidated VIEs, respectively, include interests in limited partnerships and limited liability companies. We have determined that it is not the primary beneficiary of these entities because the managing partner or member of each of these entities has the power to direct the activities that most significantly affect the VIE’s economic performance. Accordingly, these VIEs have not been consolidated with us, and they have been reported as investments at fair value in the June 30, 2022 and 2021, consolidated balance sheets.

The table below presents a summary of the nonconsolidated VIEs in which we hold variable interests:

Total Nonconsolidated VIEs
  
As of June 30, 2022
     As of June 30, 2021  
Fair value of investments in VIEs
   $ 27,693,840    
$
38,006,233
  
Carrying value of variable interests - assets
   $ 19,304,856    
$
38,529,875
  
Maximum Exposure to Loss:
                
Limited Partnership Interest
   $ 19,304,856    
$
38,529,875
  

Our exposure to the obligations of VIEs is generally limited to the carrying value of the limited partnership interests in these entities.

NOTE 7 – RELATED PARTY TRANSACTIONS

Advisory Agreements Effective Through December 31, 2020:

Under the Amended and Restated Investment Advisory Agreement, we paid the Adviser a fee for its services consisting of three components - a portfolio structuring fee, a base management fee, and a subordinated incentive fee.

The portfolio structuring fee was for the Adviser’s initial work performed in identifying, evaluating, and structuring the acquisition of assets. The fee equaled 3.0% of the gross invested capital (“Gross Invested Capital”), which equals the number of shares issued, multiplied by the offering price of the shares sold ($10.00, regardless of whether or not shares were issued with volume or commission discounts), plus any borrowed funds. These services were performed on an ongoing basis in anticipation of deploying new capital, generally within 15 days of the receipt of capital.  Therefore, this fee was expensed in the period the capital was accepted.

The base management fee was calculated based on our Gross Invested Capital plus any borrowing for investment purposes. The base management fees ranged from 1.5% to 3.0%, depending on the level of Gross Invested Capital.

The subordinated incentive fee had two parts—income and capital gains. The incentive fee components (other than during liquidation) were designed so that neither the income incentive fee nor the capital gains incentive fee was payable to the Adviser unless our stockholders had first received dividends at a rate of at least 7.0% per annum for the relevant measurement period (a fiscal quarter, for the income incentive fee; a fiscal year, for the capital gains incentive fee).

The income incentive fee (the “Income Fee”) was calculated and payable quarterly in arrears as follows: (i) the sum of preliminary net investment income for each fiscal quarter since the effective date of the Amended and Restated Investment Advisory Agreement (October 1, 2017) exceeding 7% of the “Contributed Capital” (which equals the number of shares issued multiplied by the maximum public offering price at the time such shares were sold, regardless of whether or not shares were issued with volume or commission discounts or through the DRIP, as such amount is computed from time to time) on an annualized basis up to 8.75% of Contributed Capital;  and (ii) 20.0% of our preliminary net investment income for each fiscal quarter after the effective date exceeding 8.75% of Contributed Capital at an annualized rate; minus (iii) the sum of all previously paid income incentive fees since the effective date, plus (iv) any incremental income incentive fee payable resulting from the reanalysis after calculation of the capital gains incentive fee.

F-36
The capital gains incentive fee (the “Capital Gains Fee”) was calculated and payable in arrears as of the end of each fiscal year as follows: (i) the sum of all “capital gains” (calculated as net realized capital gains less unrealized capital depreciation) for each fiscal year after the effective date exceeding 7% of the Contributed Capital on an annualized basis up to 8.75% of Contributed Capital, which thresholds were reduced by (but not below zero) the cumulative preliminary net investment income for each fiscal quarter since the effective date (or, increased, in the case of negative cumulative preliminary net investment income);  and (ii)  20.0% of all capital gains for each fiscal quarter after the effective date exceeding  8.75% of Contributed Capital at an annualized rate, which threshold was reduced by (but not below zero) the cumulative preliminary net investment income for each fiscal quarter since the effective date (or, increased, in the case of negative cumulative preliminary net investment income); minus (iii) the sum of all previously paid income incentive fees since the effective date and prior to the end of such fiscal year; less (iv) the aggregate amount of all capital gains incentive fees paid in prior fiscal years ending after the effective date. To the extent that such calculation would result in a capital gains incentive fee that exceeds 20% of all realized capital gains for the measurement period, the capital gains incentive fee was capped so that under no circumstance would it have exceeded 20% of the realized capital gains for the measurement period.

Advisory Agreements Effective January 1, 2021:

As discussed in Note 1, on January 26, 2021, our Board of Directors approved, effective January 1, 2021, two advisory agreements, an Advisory Management Agreement with the Real Estate Adviser and the Amended and Restated Investment Advisory Agreement with the Investment Adviser.

The terms of the Advisory Management Agreement with the Real Estate Adviser provide that we will continue to pay an Asset Management Fee on essentially the same terms as it was paying the Investment Adviser prior to 2021, namely based upon a percentage of Invested Capital (3% of the first $20 million, 2% of the next $80 million, and 1.5% over $100 million). Invested Capital is equal to the amount calculated by multiplying the total number of outstanding shares, preferred shares, and the partnership units (units in our operating partnership issued by us and held by persons other than us) issued by us by the price paid for each or the value ascribed to each in connection with their issuance. The Advisory Management Agreement also provides for a 2.5% Acquisition Fee on new (non-security) purchases, subject to certain limitations designed to eliminate incentives to “churn” our assets. The new Advisory Management Agreement also provides for an incentive management fee that is equal to 15% of all distributions once shareholders have received cumulative distributions equal to 6% from the effective date of the Agreement. We will not pay any Property Management Fees, Debt Financing Fees, or Disposition Fees to the Real Estate Adviser.

The Investment Adviser will receive an annual fee equal to $100 for providing the investment advice to us as to our securities portfolio under the Amended and Restated Investment Advisory Agreement.

During the year ended June 30, 2022, we incurred the asset management fees of $2,725,588.

During the six months ended June 30, 2021, we incurred the asset management fees of $1,354,323 and asset acquisition fees of $343,750 under the new advisory agreement with the Real Estate Adviser. The asset acquisition fees were paid on the real estate acquisitions of Madison and PVT.

During the six months ended December 31, 2020, we incurred the base management fees of $1,335,376 and portfolio structuring fees of $6,679 under the previous advisory agreement with the Investment Adviser.

F-37
The asset management and base management fees mentioned above were based on the following quarter ended Invested Capital segregated in two columns based on the annual fee rate:

Asset/Base Management Fee Annual %
  
3.0%

 
2.0%

 
1.5%

 
Total Invested
Capital
  
                               
For the Year Ended June 30, 2022
                              
Quarter ended:
                              
September 30, 2021
  
$
20,000,000
    
$
80,000,000
    
$
33,927,634
    
$
133,927,634
  
December 31, 2021
   $
20,000,000
     $
80,000,000
     $
34,242,127
     $
134,242,127
  
March 31, 2022
   $
20,000,000
     $
80,000,000
     $
35,848,952
     $
135,848,952
  
June 30, 2022
   $
20,000,000
     $
80,000,000
     $
41,870,274
     $
141,870,274
  
                                 
For the Year Ended June 30, 2021
                                
Quarter ended:
                                
September 30, 2020
  
$
20,000,000
    
$
80,000,000
    
$
28,769,486
    
$
128,769,486
  
December 31, 2020
   $
20,000,000
     $
80,000,000
     $
33,997,317
     $
133,997,317
  
March 31, 2021
   $
20,000,000
     $
80,000,000
     $
34,120,859
     $
134,120,859
  
June 30, 2021
   $
20,000,000
     $
80,000,000
     $
33,648,965
     $
133,648,965
  

During the year ended June 31, 2022, and six months ended June 30, 2021, we did not incur or accrue any incentive management fee under the new Advisory Management Agreement.

Similarly, we did not accrue Income Fee or Capital Gains Fee for the six months ended December 31, 2020, under the previous advisory agreement with the Investment Adviser.

Property Management and Leasing Services:
 
On May 6, 2022, the Real Estate Adviser's newly formed wholly owned subsidiary, Wiseman Company Management, LLC, purchased the property management and leasing services rights from Wiseman. Therefore, effective the acquisition date, Wiseman Company Management has been providing the property management and leasing services to the eight property limited partnerships in accordance with the pre-existing agreements. There have been no changes to any of the management services agreements with the property limited partnerships since the acquidition of the property management service rights.

Organization and Offering Costs Reimbursement:

As provided in the previous advisory agreement with the Investment Adviser and the prospectus of us, offering costs incurred and paid by us in excess of $1,650,000 on the third public offering were reimbursed by the Investment Adviser except to the extent that 10% in broker fees are not incurred (the “broker savings”). In such case, the broker savings were available to be paid by us for marketing expenses or other non‑cash compensation. Total offering costs incurred on the third public offering as of the termination date of October 31, 2020 were $624,188 which were below the reimbursement threshold. Therefore, there were no amounts reimbursable from the Investment Adviser as of the offering termination date.

The third public offering terminated on October 31, 2020. Therefore, the remaining deferred offering costs that had not been amortized as of the termination date were fully expensed as of December 31, 2020.

As provided in  the Offering Circular, offering costs incurred and paid by us in excess of $550,000 in connection with the offering will be reimbursed by the Investment Adviser except to the extent that 10% in broker fees are not incurred. In such case, the broker savings were available to be paid by us for marketing expenses or other non-cash compensation. As of June 30, 2022, we have incurred $600,130 of offering costs on our Offering Circular to sell the preferred stock, of which $501,917 relates to syndication cost paid by Mackenzie on behalf of us in connection with the preferred stock offering. The total offering costs incurred as of June 30, 2022, is $21,841 in excess of the total offering cost reimbursement threshold including the broker savings. Therefore, the $21,841 excess will be reimbursed by the Investment Adviser and is netted against due to related entities in the consolidated balance sheet.

F-38
Administration Agreement:

Under the Administration Agreement, we reimburse MacKenzie for its allocable portion of overhead and other expenses it incurs in performing its obligations under the Administration Agreement, including furnishing us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities, as well as providing us with other administrative services, subject to the independent directors’ approval. In addition, we reimburse MacKenzie for the fees and expenses associated with performing compliance functions, and its allocable portion of the compensation of our Chief Financial Officer, Chief Compliance Officer, Director of Accounting and Financial Reporting, and any administrative support staff.

Effective November 1, 2018, transfer agent services are also provided by MacKenzie and the costs incurred by MacKenzie in providing the services are reimbursed by us. No fee (only cost reimbursement) is being paid by us to MacKenzie for this service.

The administrative cost reimbursements for the year ended June 30, 2022 was $609,600. The administrative cost reimbursements for the six months ended June 30, 2021 and December 31, 2020, were both $310,400. Transfer agent services cost reimbursement for the year ended June 30, 2022 was $106,401. Transfer agent services cost reimbursements for the six months ended June 30, 2021 and December 31, 2020, were both $61,600.

The table below outlines the related party expenses incurred for the year ended June 30, 2022, six months ended June 30, 2021, and six months ended December 31, 2020, and unpaid as of June 30, 2022, and June 30, 2021.

 
  
Year Ended
    
Six Months Ended
    
Six Months Ended
    
Unpaid as of
  
Types and Recipient
  
June 30, 2022
    
June 30, 2021
    
December 31, 2020
    
June 30, 2022
    
June 30, 2021
  
 
                              
Asset management fees- the Real Estate Adviser
  
$
2,725,588
    
$
1,354,323
    
$
-
    
$
-
    
$
-
  
Base management fees- the Investment Adviser
    
-
      
-
      
1,335,376
      
-
      
-
  
Asset acquisition fees- the Real Estate Adviser (3)
    
793,919
      
343,750
      
-
      
-
      
-
  
Portfolio structuring fees- the Investment Adviser
    
-
     
-
     
6,679
     
-
      
-
  
Administrative cost reimbursements- MacKenzie
    
609,600
      
310,400
      
310,400
      
-
      
-
  
Transfer agent cost reimbursements - MacKenzie
    
106,401
      
61,600
      
61,600
      
-
      
-
  
Organization & Offering Cost (2) - MacKenzie
    
480,076
      
-
      
46,136
      
141,397
      
-
  
Other expenses (1)- MacKenzie and Subsidiary’s GP’s
    
-
      
-
      
-
      
72,697
      
1,926
  
 
                                        
Due to related entities                           $ 214,094     $ 1,926  

(1)
Expenses paid by MacKenzie and General Partner of a subsidiary on behalf of us and subsidiary.
(2)
Offering costs paid by MacKenzie - discussed in Note 7 under organization and offering costs reimbursements.
(3)
Asset acquisition fees paid to the Real Estate Adviser were capitalized as a part of the real estate basis in accordance with our policy.

Affiliated Investments:

Coastal Realty Business Trust (“CRBT”):

CRBT is a Nevada business trust whose trustee is MacKenzie. Each series of the trust has its own beneficiaries and own assets. We own two series of CRBT and is the only beneficiary of such series. Under the terms of the agreement, there are no redemption rights to any of the series participants. We and TRS are the sole beneficiaries of the following series as of June 30, 2022 and 2021:

•
CRBT, REEP, Inc.--A, which has an ownership interest in one of three general partners of a limited partnership which owns one multi-family property located in Frederick, Maryland.

F-39
NOTE 8 – MARGIN LOANS

We have a brokerage account through which it buys and sells publicly traded securities. The provisions of the account allow us to borrow on certain securities held in the account and to purchase additional securities based on the account equity (including cash). Amounts borrowed are collateralized by the securities held in the account and bear interest at a negotiated rate payable monthly. Securities pledged to secure margin balances cannot be specifically identified as a portion of all securities held in a brokerage account are used as collateral. As of June 30, 2022 and 2021, we had no margin credit available for cash withdrawal or the ability to purchase in additional securities. Accordingly, as of June 30, 2022 and 2021, there was no amount outstanding under this short-term credit line.

NOTE 9 – MORTGAGE NOTES PAYABLE AND DEBT GUARANTY

Addison Property Owner Note Payable

Addison Property Owner is the obligor under a note payable to Wells Fargo Bank, NA (the “Lender”) in the original loan amount of $32,000,000 at an interest rate of LIBOR plus 3.75%. The loan originally matured on November 1, 2019, and is secured by the properties owned by Addison Property Owner.

On June 8, 2020, as part of the Contribution Agreement, we agreed to guarantee the loan and the maturity date of the loan was extended to April 30, 2021, with an option to further extend the maturity date to April 30, 2022. In April 2021, we exercised the option and extended the loan maturity date to April 30, 2022. The principal balance of the loan immediately prior to the Loan Modification Agreement was $25,827,107. The new loan principal amount due under the modified agreement was $24,404,257, and the interest rate was modified to be equal to the Federal Funds Rate plus 3.75%. The outstanding loan amounts as of June 30, 2022 and 2021, were $19,604,382 and $23,568,330, respectively. The loan requires payments only of interest through the maturity date; however, certain provisions of the loan agreement allow the lender to apply excess cash flow during a cash trap period to the principal balance.

Under the Loan Modification Agreement and Replacement Guaranty, we guaranteed only the “Recourse Obligations” under the loan, which are triggered only if the guarantor of the loan engages in “Bad Boy Acts” (such as fraud, intentional misrepresentation, willful misconduct, waste, conversion, intentional failure to pay taxes or maintain insurance, filing for bankruptcy, etc.). As of June 30, 2022 and 2021, we have not recorded any debt guaranty obligation because (i) the Addison Property Owner was current on the loan payments, (ii) we believe the Addison Property Owner has sufficient cash flow to meet its monthly payments, and (iii) we have not engaged in inappropriate actions that would give rise to a guaranty obligation.

On April 30, 2022, the notes payable matured and Addison Property Owner was unable to extend the loan. On June 28, 2022, Addison Property Owner entered into a forbearance agreement with the Lender.

As of June 30, 2022, Addison Corporate Center is being marketed for sale in accordance with all the conditions set forth in the forbearance agreement. In addition, effective June 28, 2022, on monthly basis the lender will collect all cash revenues from Addison Corporate Center and deduct funds sufficient to satisfy monthly accrued interest at the default rate, any outstanding fees and costs incurred by the lender. The excess cash will be made available to the borrower for the payment of previously approved budgeted operating expenses. Any funds remaining thereafter will be applied towards the unpaid loan principal balance.

Madison and PVT Notes Payable

On February 26, 2021, Madison and PVT obtained mortgage loans from First Republic Bank in the amounts of $6,737,500 and $8,387,500, respectively, both at a fixed interest rate of 3.0% per annum through April 1, 2026. Effective May 1, 2026, interest rates will be the average of the twelve most recently published yields on U.S. Treasury securities adjusted a constant maturity of one year as published by the Federal Reserve System in the Statistical Release H.15 plus 2.75% per annum. The loans were obtained to finance the acquisition of the Commodore Apartments and Pon De Leo Apartments, which are located in Oakland, California. The loans mature on April 1, 2031 and are cross-collateralized by both properties owned by Madison and PVT. The loan requires interest only monthly payments through April 1, 2026 and beginning May 1, 2026 monthly payments of principal and interests are due based on 360 months of amortization period. The remaining unpaid principal balance is due at maturity date. Accordingly, as of June 30, 2022 and 2021, the outstanding loan amounts for both years were $6,737,500 and $8,387,500, on the Madison and PVT mortgage loans, respectively.
F-40
PT Hillview Notes Payable
 
On October 4, 2021, PT Hillview entered into a loan agreement with Ladder Capital Finance in the amount of $17,500,000. The annual interest rate shall equal to the greater of (i) a floating rate of interest equal to 5.5% plus LIBOR, and (ii) 5.75%. The loan was obtained to finance the acquisition of Hollywood Property. The loan matures on October 6, 2023 and can be extended for two successive 12 month terms (the “Maturity Date”) and is secured by the Hollywood Property. The loan requires interest-only monthly payments with the principal balance due at maturity date. Interest is due based on a 360-day amortization period. As of June 30, 2022, the outstanding loan amounted to $16,804,689.
 
We (along with three other principals of True USA) guaranteed: (1) the “Recourse Obligations” as defined in the loan agreement, which are triggered only if the borrower of the loan engages in “Bad Boy Acts” (such as fraud, intentional misrepresentation, willful misconduct, waste, conversion, intentional failure to pay taxes or maintain insurance, filing for bankruptcy, ADA noncompliance, and environmental contamination, etc.), (2) a “Debt Service and Carry Guaranty” under the loan, which guarantees the payment of interest on the loan and other “Basic Carrying Costs”, and (3) a “Guaranty of Completion” guaranteeing that the redevelopment work contracted to be performed will be completed as agreed. We were comfortable issuing such guarantees because the loan provides for a substantial “Carrying Costs” reserve and for the full funding of the construction contract, which is subject to a guaranteed maximum price.

MacKenzie Shoreline Notes Payable
 
On May 6, 2021, MacKenzie Shoreline entered into a loan agreement with Pacific Premier Bank, or order, in the amount of $17,650,000. The annual interest rate shall be 3.65% for the first 60 months, and a variable interest rate based on a 6-month CME Term Secured Overnight Financing Rate plus a margin of 3.00 percentage points, for months thereafter until maturity. The loan was obtained to finance the acquisition of Shoreline Apartments. The loan matures on June 1, 2032 and is secured by Shoreline Apartments. The loan requires interest only monthly payments through June 30, 2027, and beginning July 1, 2027, monthly payments of principal and interests are due based on 360 months of amortization period. As of June 30, 2022, the outstanding loan amounted to $17,650,000.

NOTE 10 – EARNINGS PER SHARE

Basic earnings per share is computed using the weighted average number of shares outstanding. Diluted earnings per share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to potentially diluted securities. The following table sets forth the computation of basic and diluted earnings per share for year ended June 30, 2022, six months ended June 30, 2021 and six months ended December 31, 2020:

   
Year Ended
    
Six Months Ended
    
Six Months Ended
  
   
June 30, 2022
    
June 30, 2021
    
December 31, 2020
  
   
(Successor Basis)
    
(Successor Basis)
    
(Predecessor Basis)
  
                   
Net income (loss) attributable to common stockholders
  
$
4,507,957
    
$
264,157

 
$
(9,667,137
)
                         
Basic and diluted weighted average common shares outstanding
    
13,340,164.03
      
13,332,535.70
      
13,020,208.16
  
                         
Basic and diluted earnings per share
  
$
0.34
    
$
0.02

 
$
(0.74
)

NOTE 11 – SHARE OFFERINGS AND FEES

During the year ended June 30, 2022, we issued 128,741 common shares with total gross proceeds of $1,187,630 under the DRIP. In March 2022, we issued 212 common shares at $10.25 per share to the Class A unit holders of the Operating Partnership. The Class A units of the Operating Partnerships are convertible to our common share on 1:1 basis. In addition, we also issued 3,172 units of common shares at $8.67 per share pursuant to the FSP Satellite merger as discussed in Note 1.

During the year ended June 30, 2021, we issued 21,720 shares with gross proceeds of $218,439. For the year ended June 30, 2021, we incurred selling commissions and fees of $18,060. In addition to the shares sold through our public offering, in October 2020, we issued 504,091.15 shares at $7.85 per share, which was the most recent NAV at the time of the issuance, to the Class A unit holders of the Operating Partnership as discussed in Note 1.

F-41
During the year ended June 30, 2022, we issued 119,380 preferred shares with gross proceeds of $2,957,530 and incurred syndication costs of $847,167 in relation to preferred shares offering. For the year ended June 30, 2022, we issued 36.70 preferred shares with total gross proceeds of $826 under the DRIP.

NOTE 12 – SHARE REPURCHASE PLAN

During the year ended June 30, 2022, we repurchased our own shares through our Share Repurchase Program and through third-party auctions as noted in the below table:
 
Period
  
Total Number
of Shares Repurchased
    
Average Repurchase
Price
Per Share
    
Total Repurchase
Consideration
  
During the year ended June 30, 2022
                  
 December 22, 2021
    
5,607.89
    
$
9.84
    
$
55,188
  
 January 6, 2022 through March 31, 2022
    
125,677.16
    
$
9.15
    
$
1,149,490
  
 June 1, 2022 through June 30, 2022
    
63,695.00
    
$
8.96
    
$
570,620
  
 
    
194,980.05
            
$
1,775,298
  
 
On May 11, 2020, after assessing the impacts of the COVID-19 pandemic, our Board of Directors suspended our Share Repurchase Program. As a result, we did not repurchase any shares during the nine months ended March 31, 2021. We resumed the Share Repurchase Program on March 19, 2021.
 
During the year ended June 30, 2021, we repurchased our own shares through our Share Repurchase Program and through third-party auctions as noted in the below table:
 
Period
  
Total Number
of Shares Repurchased
    
Repurchase Price
Per Share
    
Total Repurchase
Consideration
  
During the year ended June 30, 2021:
                  
April 22, 2021 through May 12, 2021
    
68,135.92
    
$
6.00
    
$
408,818

NOTE 13 – STOCKHOLDER DIVIDENDS

On March 31, 2020, after assessing the impacts of the COVID-19 pandemic, our Board of Directors unanimously approved the suspension of regular quarterly dividends to our stockholders. On May 10, 2021, the Board of Directors resumed the quarterly dividends after reassessing our cash flow.

The following table reflects the dividends per share that we have declared on our common stock and preferred stock during the year ended June 30, 2022:

 
  
Dividends
  
 
  
Common stock
    
Preferred stock
  
During the Quarter Ended
  
Per Share
    
Amount
    
Per Share
    
Amount
  
September 30, 2021
  
$
0.130
*
  
$
1,731,482
    
$
-
    
$
-
  
December 31, 2021
    
0.080
      
1,068,612
      
0.125
      
440
  
March 31, 2022
    
0.090
      
1,193,841
      
0.375
      
18,507
  
June 30, 2022
    
0.100
      
1,323,888
      
0.375
      
37,982
  
 
  
$
0.400
    
$
5,317,823
    
$
0.875
    
$
56,929
  

* $0.06 per share dividend was declared for the quarter ended June 30, 2021.

During the year ended June 30, 2022, we paid total dividends of $4,012,882 of which $1,188,456 has been reinvested under our DRIP. Dividends declared during the quarter ended June 30, 2022, were paid on July 29, 2022.

F-42
Total distributions declared by the Operating Partnership for the Class A unit holders during the year ended June 30, 2022, was $9,985 (which was $0.40 per unit), of which $723 ($0.06 per unit) was related to distributions declared for the quarter ended June 30, 2021.
 
Total distributions declared by the Operating Partnership for the preferred unit holders during the year ended June 30, 2022 was $51,667 (which was 0.25 per unit).

On June 28, 2022, we declared the Series A Preferred stock quarterly dividend of $0.375 per share payable at the rate of $0.125 per month for holders of record as of July 31, 2022, August 31, 2022, and September 30, 2022. Subsequently, on September 6, 2022, we declared the Series A Preferred stock quarterly dividend of $0.375 per share payable at the rate of $0.125 per month for holders of record as of October 31, 2022, November 30, 2022, and December 31, 2022. The preferred stock dividend declared on June 28, 2022, will be paid on or about October 15, 2022, and the preferred stock dividend declared on September 6, 2022, will be paid on or about January 15, 2023.

On September 6, 2022, we also declared the common stock quarterly dividend of $0.105 per share for the quarter ended September 30, 2022. The common stock dividend declared on September 6, 2022 will be paid on or about October 30, 2022, to record holders as of September 30, 2022.

The following table reflects the dividends per share that we have declared on our common stock during the six months ended June 30, 2021:

 
  
Dividends
  
During the Quarter Ended
 
Per Share
    
Amount
  
June 30, 2021
  
$
0.050
    
$
664,714
  

Of the total dividends paid during the six months ended June 30, 2021, $204,277 has been reinvested under our DRIP.

F-43
MacKenzie Realty Capital, Inc.
Schedule III- Real Estate Properties and Accumulated Depreciation
June 30, 2022

 
  
 
        
Initial Costs
    
Subsequent Acquisition
    
Subsequent Disposal
    
       
Property:
  
Acquisition Date
  
Encumbrances at
June 30, 2022
    
Land
    
Building &
Improvements
    
Land
    
Building &
Improvements
    
Land
    
Building &
Improvements
    
Gross Amount Carried at
June 30, 2022
    
Accumulated
Depreciation
  
 
  
 
                                                      
Commodore Apartment Building
  
March 5, 2021
   $
6,737,500
     $
5,519,963
     $
7,488,715
     $
-
     $
69,845
     $
-
     $
-
     $
13,078,523
     $
(337,899
)
The Park View Building
  
March 5, 2021
    
8,387,500
      
4,317,013
      
11,751,249
      
-
      
81,820
      
-
      
-
      
16,150,082
      
(439,891
)
Hollywood Property
  
October 4, 2021
    
16,042,852
      
8,704,577
      
12,747,047
      
-
      
1,499,327
      
-
      
(297,017
)
    
22,653,934
      
(254,084
)
Shoreline Apartments
  
May 16, 2022
    
17,598,181
      
7,559,390
      
20,124,777
      
-
      
-
      
-
      
-
      
27,684,167
      
(98,057
)
Satellite Place
  
June 1, 2022
    
-
      
2,966,129
      
10,716,785
      
-
      
-
      
-
      
-
      
13,682,914
      
(52,031
)
WW Land
  
May 6, 2022
    
-
      
3,050,000
      
-
      
-
      
-
      
-
      
-
      
3,050,000
      
-
  
 
  
    
  
$
48,766,033
 *  
$
32,117,072
    
$
62,828,573
    
$
-
    
$
1,650,992
    
$
-
    
$
(297,017
)
  
$
96,299,620
    
$
(1,181,962
)

*
Excludes the note payable on property held for sale as of June 30, 2022.

A summary of activity for real estate and accumulated depreciation for the year ended June 30, 2022 and 2021:

 
  
Year Ended June 30,
  
Real Estate
  
2022
    
2021
  
Balance at the beginning of the year
  
$
54,641,596
    
$
-
  
Additions - acquisitions
    
67,519,697
      
54,641,596
  
Disposals
    
(297,017
)
    
-
  
Reclassified to assets held for sale
    
(25,564,656
)
    
-
  
Balance at the end of the year
  
$
96,299,620
    
$
54,641,596
  
 
                
Accumulated Depreciation
                
Balance at the beginning of the year
  
$
1,107,466
    
$
-
  
Depreciation expense
    
2,866,400
      
1,107,466
  
Disposals
    
(49,711
)
    
-
  
Reclassified to assets held for sale *2
    
(2,742,193
)
    
-
  
Balance at end of the year
  
$
1,181,962
    
$
1,107,466
  

*2
Excludes $2,370,116 of accumulated amortization associated with acquired intangible assets reclassified as held for sale.

S-1
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
MACKENZIE REALTY CAPITAL, INC.
 
(Registrant)
   
 
By: 
 /s/ Robert Dixon  
 
Robert Dixon
 
Chief Executive Officer
   
 
Date:
 September 28, 2022  
   
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
Title
Date
     
/s/ Robert Dixon
Chief Executive Officer
September 28, 2022
Robert Dixon
(Principal Executive Officer)
  
     
/s/ Angche Sherpa
Chief Financial Officer
September 28, 2022
Angche Sherpa
(Principal Financial and Accounting Officer)
  
     
/s/ Chip Patterson
Director
September 28, 2022
Chip Patterson
    
     
/s/ Tim Dozois
Director
September 28, 2022
Tim Dozois
    
     
/s/ Tom Frame
Director
September 28, 2022
Tom Frame
    

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