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:

 

 

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:

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.

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:

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.