An investment in the Fund involves a number of significant risks. The risk factors set forth below are those that, at the date of this Memorandum, the Managing Member deem to be the most significant. The following is not intended to be a complete description or an exhaustive list of risks. Other factors ultimately may affect an investment in the Fund in a manner and to a degree not now foreseen. Prospective investors should carefully consider, in addition to the matters set forth elsewhere in this Memorandum, the factors discussed below. An investment in the Fund should form only a part of a complete investment program, and an investor must be able to bear the loss of its entire investment. Prospective investors should also consult with their own financial, tax and legal advisors regarding the suitability of this investment.
General Investment Risks: The Fund’s success depends on the Managing Member’s ability to implement its investment strategy. Any factor that would make it more difficult to execute timely investments, such as a significant lessening of liquidity in a particular market, may also be detrimental to profitability. No assurance can be given that the investment strategies to be used by the Fund will be successful under all or any market conditions.
The Fund may increase its cash position to up to 100% of its assets when the Managing Member deems it prudent or when a defensive position is warranted in light of market conditions.
Investment Risks: All investments involve the risk of a loss of capital. The Managing Member believes that the Fund’s investment program and its research and risk-management techniques moderate this risk through the careful selection of investments. No guarantee or representation is made that the Fund’s investment program will be successful, and investment results may vary substantially over time.
General Risks of the Real Estate Industry: The Fund will invest directly in real estate. The direct ownership of real estate includes many risks including: declines in the value of real estate, general and local economic conditions, unavailability of mortgage funds, overbuilding, extended vacancies of properties, increased competition, increases in property taxes and operating expenses, changes in zoning laws, losses due to costs of cleaning up environmental problems, liability to third parties for damages resulting from environmental problems, casualty or condemnation losses, changes in neighborhood values and the appeal of properties to buyers, tenants, changes in interest rates, etc. An economic downturn could have a material adverse effect on the real estate markets, which in turn could result in the Fund not achieving its investment objectives.
Real property investments are subject to varying degrees of risk. The yields available from investments in real estate depend on the amount of income and capital appreciation generated by the related properties. Income and real estate values may also be adversely affected by such factors as applicable laws, interest rate levels and the availability of financing. The performance of the economy in each of the regions in which the real estate owned by the Fund is located will impact the income from such properties and their underlying values. The financial results of major local employers also may have an impact on the cash flow and value of certain properties.
Real Estate Development Risks: The Fund will engage in real estate development. As a result, the Fund will be subject to the risks normally associated with development activities. Such risks include risks relating to the availability and timely receipt of zoning and other regulatory approvals, the cost and timely completion of construction (including risks beyond the control of the Fund, such as adverse weather or labor conditions or material shortages) and the availability of both construction and permanent financing on favorable terms. These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent completion of development activities once undertaken, any of which could have an adverse effect on the financial condition and results of operations of the Fund.
Environmental Considerations: In connection with the ownership (direct or indirect), operation, management and development of real properties that may contain hazardous or toxic substances, the Fund may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, may be potentially liable for removal or remediation costs, as well as governmental fines and liabilities for injuries to persons and property and other costs. The existence of any such material environmental liability could have a material adverse effect on the results of operations and cash flow of the Fund.
Multifamily/Residential Properties: The value and successful operation of a multifamily and residential property may be affected by a number of factors, such as the location of the property, the ability of management to provide adequate maintenance and insurance, the types of services provided by the property, the level of mortgage rates, the presence of competing properties, the relocation of tenants to new projects with better amenities, adverse economic conditions in the locale, the amount of rent charged, and the oversupply of units due to new construction.
Single Tenant Properties: Certain properties held by the Fund may be occupied by only one tenant or derive a majority of their rental income from one tenant. The success of such properties will thereby be materially dependent on the financial stability of such tenants. In the event of a default by any such tenant, the Fund may experience delays in enforcing its legal rights and may incur substantial costs in protecting its investment and re-letting the property. If a single tenant lease is terminated or an existing tenant elects not to renew a lease upon its expiration, there is no assurance that the Fund will be able to lease the property for the rent previously received or sell the property without incurring a loss.
Uninsured Losses: Although the Fund intends to arrange for customary insurance coverage for the properties in which it holds an interest, such as comprehensive insurance, including liability, fire and extended coverage, there are certain types of losses (generally of a catastrophic nature, such as wars, terrorism, earthquakes and floods) that are either uninsurable or not economically insurable. Should any such uninsured risk occur or cause the destruction or damage of any property, or should a hazard insured against occur where the loss is in excess of insurance limits or should the insurance company be unable to pay the claim, both invested capital and potential profits could be lost.
No Assurance of Property Appreciation or Cash Distributions: There is no assurance that real estate investment properties will appreciate in value, maintain their present values, or be sold at a profit. The marketability and value of the properties will depend upon many factors beyond the control of the Managing Member. There is no assurance that there will be a ready market for these properties, since investments in real property are generally illiquid, nor is there any assurance that sufficient cash will be generated from operations to permit cash distributions to Members.
Limited Number of Investments: It is expected that the Fund will invest in a limited number of investments. A consequence of a limited number of investments is that the aggregate returns realized by the Members may be substantially adversely affected by the unfavorable performance of a small number of such investments.
Availability and Ability to Acquire Suitable Investments: The identification of attractive Fund investments is difficult and involves a high degree of uncertainty. While the Managing Member believes that many attractive investments of the type in which the Fund may invest are currently available, there can be no assurance that such investments will be available when the Fund commences investment operations, or that available investments will meet the Fund’s investment criteria. Although the Managing Member believes it can successfully execute the strategy of the Fund, there is no assurance that the Managing Member will be able to find suitable investments or, if found, that the Fund will be able to generate superior returns.
Illiquid Investments: The Fund is intended for long-term investors who can accept the risks associated with investing primarily in illiquid real estate investments. The Fund may invest in assets for which no liquid market exists or that are subject to legal or other restrictions of transfer. The Fund may not be able to sell assets when it desires to do so or to realize what it perceives to be their fair value in the event of a sale.
No Return for a Period of Years: Even if the Fund investments prove successful, they may not produce a realized return for Members for a period of years.
Lack of Diversification: The Fund is not subject to any restrictions with respect to investments in any geography or type of investment. The Fund may have a non-diversified portfolio and may have large amounts of Fund assets invested in a small number of investments. Such lack of diversification substantially increases market risks and the risk of loss associated with an investment in the Fund.
The Managing Member Methodology: Investment decisions of the Managing Member are on a discretionary basis using fundamental analysis and no assurance can be given that such investment strategies used by the Managing Member will be successful, or that losses could not occur.
Leverage: In order to raise additional cash for investment, the Fund may borrow money from banks and other sources and will pay interest thereon. Any investment gains made with the additional monies in excess of interest paid will cause the Net Asset Value of the Fund to rise faster than would otherwise be the case. On the other hand, if the investment performance of the additional investments purchased fails to cover their cost (including any interest paid on the money borrowed) to the Fund, the Net Asset Value of the Fund will decrease faster than would otherwise be the case. This is the speculative factor known as “leverage.”
Reliance on the Managing Member and no Authority by Members: All decisions regarding the management and affairs of the Fund will be made exclusively by the Managing Member. Accordingly, no person should invest in the Fund unless such person is willing to entrust all aspects of management of the Fund to the Managing Member. Members will have no right or power to take part in the management of the Fund. As a result, the success of the Fund for the foreseeable future depends solely on the abilities of the Managing Member.
Dependence on Key Personnel: The Managing Member is dependent on the services of the Principals and there can be no assurance that it will be able to retain the Principals, whose credentials are described under the heading “Management of the Fund.” The departure or incapacity of one or more of those individuals could have a material adverse effect on the Managing Member’s management of the investment operations of the Fund.
Changes in Investment Strategies: The Managing Member has broad discretion to expand, revise or contract the Fund’s business without the consent of the Members. The Fund’s investment strategies may be altered, without prior approval by the Members, if the Managing Member determines that such change is in the best interest of the Fund.
Discretionary Decision Making May Result in Missed Opportunities: The Fund’s investment strategies do involve some discretionary aspects. Discretionary decision-making may result in failure to capitalize on certain market trends or unprofitable investments in a situation where a strictly systematic approach might not have done so.
Proprietary Nature of Investment Strategy: All documents and other information concerning the Fund’s portfolio of investments will be made available to the Fund’s auditors, accountants, attorneys and other agents in connection with the duties and services performed by them on behalf of the Fund. However, because the Managing Member’s investment techniques are proprietary, the Operating Agreement will provide that neither the Fund nor any of its auditors, accountants, attorneys or other agents will disclose to any person, including investors in the Fund, any of the investment techniques employed by the Managing Member in managing the Fund’s investments or the identity of specific investments held by the Fund at any particular time.
Limitations on the Managing Member’s Liability and Indemnification: The Operating Agreement provides that the Managing Member and its affiliates, shareholders, members, partners, managers, directors, officers and employees shall not be liable, responsible nor accountable in damages or otherwise to the Fund or any Member, or to any successor, assignee or transferee of the Fund or of any Member, for (i) any acts performed or the omission to perform any acts, within the scope of the authority conferred on the Managing Member by the Operating Agreement, except by reason of acts or omissions found by a court of competent jurisdiction upon entry of a final non-appealable judgment to have been made in bad faith or to constitute fraud, willful misconduct or gross negligence; (ii) performance by the Managing Member of, or the omission to perform, any acts on advice of legal counsel, accountants, or other professional advisors to the Fund; (iii) the negligence, dishonesty, bad faith, or other misconduct of any consultant, employee, or agent of the Fund, including an affiliate of the Managing Member, selected or engaged by the Managing Member with reasonable care and in good faith; or (iv) the negligence, dishonesty, bad faith, or other misconduct of any Person in which the Fund invests or with which the Fund participates as a partner, joint venturer, or in another capacity, which was selected by the Managing Member with reasonable care and in good faith. Furthermore, the Fund, in the Managing Member’s sole discretion, will indemnify and hold harmless the Managing Member and its affiliates, shareholders, members, partners, managers. directors, officers and employees and the legal representatives of any of them (an “Indemnified Party”), from and against any loss, liability, damage, cost or expense suffered or sustained by an Indemnified Party by reason of (i) any acts, omissions or alleged acts or omissions arising out of or in connection with the Fund, the Operating Agreement or any investment made or held by the Fund, including any judgment, award, settlement, reasonable attorneys’ fees and other costs or expenses incurred in connection with the defense of any actual or threatened action, proceeding, or claim, provided that such acts, omissions or alleged acts or omission upon which such actual or threatened action, proceeding or claim are based are not found by a court of competent jurisdiction upon entry of a final non-appealable judgment to have been made in bad faith or to constitute fraud, willful misconduct or gross negligence by such Indemnified Party, or (ii) any acts or omissions, or alleged acts or omissions, of any broker or agent of any Indemnified Party, provided that such broker or agent was selected, engaged or retained by the Indemnified Party with reasonable care. The Operating Agreement also provides that the Fund will, in the sole discretion of the Managing Member, advance to any Indemnified Party attorneys’ fees and other costs and expenses incurred in connection with the defense of any action or proceeding which arises out of such conduct.
Limited Reporting: The Fund will provide at least annual unaudited reports of Fund activity. As a result, Members will not be able to evaluate the Fund’s activity at shorter intervals. Additionally, as a result of side letter arrangements, questions, due diligence requests, meetings or other communications, certain Members may receive information that is not generally available or otherwise provided to other Members, which may affect such Members’ decision to request a withdrawal of their respective Capital Accounts or take other actions on the basis of such information.
No Operating History: The Fund is a recently formed entity and has no operating history upon which prospective investors can evaluate its likely performance. There can be no assurance that the Fund will achieve its investment objective.
Start-Up Periods: The Fund may encounter start-up periods during which it will incur certain risks relating to the initial investment of newly contributed assets. Moreover, the start-up periods also represent a special risk in that the level of diversification of the Fund’s portfolio may be lower than in a fully invested portfolio.
Risk of Loss: A Member could incur substantial, or even total, losses on an investment in the Fund. An investment in the Fund is only suitable for persons willing to accept this high level of risk.