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Item 1. Business

2020-09-21 compared with 2019-09-23 · 112 added, 98 removed, 108 unchanged (66% of the section changed)

MacKenzie Realty Capital, Inc.

(the “ Parent Company, ” together with its subsidiaries as discussed below, the “Company,” “ we, ” “ us, ” or “our”) is an externally managed non-diversified company

that has elected to be treated as a business development company (“ BDC ”) under the Investment Company Act of 1940 (the “ 1940 Act ”).

Our investment objective is to generate both current income and capital appreciation through

investments in real estate companies (as defined below).

We are advised by MCM Advisers, LP (the “ Adviser ” or “ MCM Advisers ”).

MacKenzie Capital Management, LP (“ MacKenzie ” or the “ Administrator ”) provides us with

non-investment management services and administrative services necessary for us to operate.

The Parent Company has 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 ").

The Parent Company filed its 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 its common

The IPO commenced in January 2014 and concluded in October 2016.

The Parent Company filed a second registration statement with the SEC to register a subsequent public offering of 15,000,000 shares of its common stock that was declared

effective by the SEC on December 20, 2016.

The offering commenced shortly thereafter and is ongoing.

(the “ Parent Company, ” together with its subsidiaries as discussed below, the “Company,” “ we, ” “ us, ” or “our”) is 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 has elected to be treated as a business development company (“ BDC ”) under the Investment Company Act of 1940

(the “ 1940 Act ”).

Our investment objective is to generate both current income and capital appreciation through investments in real estate companies (as defined below).

We are advised by MCM Advisers, LP (the “ Adviser ” or “ MCM

MacKenzie Capital Management, LP (“ MacKenzie ” or the “ Administrator ”) provides us with non-investment management services and administrative services necessary for us to operate.

IPO commenced in January 2014 and concluded in October 2016.

The Parent Company filed a second registration statement with the SEC to register a subsequent public offering of 15,000,000 shares of its common stock.

The second offering commenced in

December 2016 and concluded on October 28, 2019.

The Parent Company filed a third registration statement with the SEC to register a public offering of 15,000,000 shares of its common stock that was declared effective by the SEC on October 31, 2019.

The third offering commenced shortly thereafter and is continuing.

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

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, 2018.

Our investments generally range in size from $10,000 to $3 million.

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.

While we remain a BDC, our investments generally range in size from $10,000 to $3 million.

However, we may make smaller or larger investments from time to time on an opportunistic basis.

We focus primarily on real estate-related

We focus primarily on real

estate-related securities.

We purchase most of our securities (i) directly from existing security holders, (ii) through established securities markets, and (iii) in the case of unregistered, privately offered securities, directly from issuers.

We invest primarily

in debt and equity securities issued by U.S.

invest primarily in debt and equity securities issued by U.S.

companies that primarily own commercial real estate that are either illiquid or not listed on any exchange.

We generally seek to invest in interests of real estate-related limited partnerships and REITs.

Under normal market conditions, we invest at least 80% of our total assets in common stocks and other equity or debt

securities issued by real estate companies, including REITs and similar REIT-like entities.

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;

While we remain a BDC, we generally seek to invest in interests of real estate-related limited partnerships and REITs.

Under normal market conditions, we invest at least 80% of our total assets in common stocks and

other equity or debt securities issued by real estate companies, including REITs and similar REIT-like entities.

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.

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.

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

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.

We may also acquire or originate (i) loans secured by real property (i.e., we may originate such loans or we may purchase outstanding loans secured by real estate), (ii) securities of issuers that own mortgages

secured by income producing real property, and (iii) using no more than 20% of our available capital, securities of issuers that own assets other than real estate.

While we remain a BDC, we may also acquire or originate (i) loans secured by real property (i.e., we may originate such loans or we may purchase outstanding loans secured by real estate), (ii) securities of issuers

that own mortgages secured by income producing real property, and (iii) using no more than 20% of our available capital, securities of issuers that own assets other than real estate.

At our board meeting on August 28, 2020, our Board of Directors approved the proposal to withdraw of our BDC election, while continuing our REIT status.

Therefore, on October 23, 2020, our stockholders will be asked to

approve the withdrawal of our BDC election.

If this proposal is approved, the Company will, effective upon receipt by the SEC of the Company’s application for withdrawal, no longer be regulated as a BDC or subject to the regulatory provisions of the

Withdrawal of our election to be regulated as a BDC will 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, and file proxy statements and other reports required under the Exchange Act.

Following withdrawal of our election to be regulated as a BDC, the application and presentation of our financial statements under accounting principles generally

accepted in the United States of America (“GAAP”) could change.

The Company has undertaken several steps to meet the requirements for withdrawal of its election to be regulated as a BDC, including (i) preparing a plan of operations in contemplation of such a change to the status of

the Company, (ii) evaluating potential investments in real estate assets that will allow the Company 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 its election as a BDC.

If this proposal is approved, the Company expects to continue operating as a BDC for a period of time in which it focuses on identifying and investing in real estate assets.

During this transition period, the Company may liquidate some of its

securities portfolio.

The Company expects that it will elect to withdraw the election within 30 days of stockholder approval and will immediately begin to transition away from a securities portfolio.

By the end of the first year after withdrawal of

its election, the Company anticipates that its securities portfolio will comprise less than 20% of its assets.

Investment Strategy

Our investment objective is to generate current income and capital appreciation through debt and equity real estate-related investments.

Our Independent Directors (as defined in Part II, Item 10 of this Annual Report

on Form 10-K) review our investment policies with frequency, 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 net asset value (“ NAV ”) of and risks associated with potential security acquisitions, and by acquiring securities at significant discounts to

While we remain a BDC, our investment objective is to generate current income and capital appreciation through debt and equity real estate-related investments.

Our Independent Directors (as defined in Part II, Item 10

of this Annual Report on Form 10-K) review our investment policies with frequency, 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.

Although we may acquire any type of security by any method, we anticipate our acquisitions will generally be accomplished in the following ways:

Tender offers .

We acquire shares of non-traded REITs (" NTRs ") and other real estate companies via registered and non-registered tender offers (e.g., offers to purchase securities

directly from the existing holders).

We acquire shares of non-traded REITs (" NTRs ") and other real estate companies via registered and non-registered tender offers (e.g., offers to purchase securities directly from

the existing holders).

This is generally our preferred acquisition method, as it allows us to name the price at which we are willing to buy such securities.

By purchasing securities at significant discounts to NAV, we

believe we reduce the risk of a loss of capital due to a decline in NAV while increasing total returns when the discount is realized.

Also, by purchasing seasoned securities that are several years old, we reduce our anticipated holding

period and potentially increase our annualized rate of return.

By purchasing securities at significant discounts to NAV, we believe we reduce the

risk of a loss of capital due to a decline in NAV while increasing total returns when the discount is realized.

Also, by purchasing seasoned securities that are several years old, we reduce our anticipated holding period and potentially

increase our annualized rate of return.

Direct loans and private placements .

We may occasionally make direct loans to private real estate companies and arrange for private placements of equity issued directly to us by private real

estate companies.

We may occasionally make direct loans to private real estate companies and arrange for private placements of equity issued directly to us by private real estate

Purchases of small-cap REITs on the open market .

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Like shares of NTRs that we purchase at discounts to NAV, we believe these acquisitions can provide superior risk-adjusted returns.

Opportunistic property acquisitions .

If our stockholders approve the withdrawal of our BDC election, we may 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.

Our Corporate Information

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94556 in June 2018.

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 Adviser's

investment team and our overall portfolio composition.

We generally seek to acquire securities that produce ongoing distributable income for investors, yet with a primary focus on purchasing such securities at a discount from what the Adviser

estimates to be the actual value of the real estate underlying the securities.

While we remain a BDC, 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 Adviser's investment team and our overall portfolio composition.

We generally seek to acquire securities that produce ongoing distributable income for investors, yet with a primary focus on purchasing such securities at a discount from what

the Adviser estimates to be the actual value of the real estate underlying the securities.

Types of Investments

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Limited partnerships which may be public or private, and which were formed primarily to own real property.

They may actively operate the property, they

may develop the property, or they may passively own property operated by a third party.

Corporations or trusts that are formed to own real property and are exempted from federal corporate income tax if they distribute at least 90.0% of their net income in the form of

dividends to their stockholders.

They may actively operate the property, they may

develop the property, or they may passively own property operated by a third party.

Corporations or trusts that are formed to own real property and are exempted from federal corporate income tax if they distribute at least 90.0% of their net income in the form of dividends

to their stockholders.

Other Real Estate-Related Investments.

May include equity interests in LLCs, tenancies-in-common, mortgages, loans, bonds, or any security whose underlying value derives from real estate.

may invest in other real estate-related investment entities.

We do 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.

invest in other real estate-related investment entities or, if our shareholders approve the withdrawal of our BDC election, direct ownership of real property.

We do 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.

Targeted Securities

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Securities Issued by Owners of Real Property.

We acquire securities issued by limited partnerships, REITs or other investment entities that have invested directly or indirectly in real

property, real estate joint ventures, or other real property-based investments.

We buy securities issued by entities owning a variety of property types, including apartments, shopping centers, office buildings, nursing homes,

mini-warehouses, and hotels.

We acquire securities issued by limited partnerships, REITs or other investment entities that have invested directly or indirectly in real property, real

estate joint ventures, or other real property-based investments.

We buy securities issued by entities owning a variety of property types, including apartments, shopping centers, office buildings, nursing homes, mini-warehouses, and hotels.

Direct Real Property Obligations, Derivatives, and Other Securities.

We may also acquire (i) individual mortgages secured by real property (i.e., originate, or purchase outstanding loans

secured by real estate), (ii) securities of issuers that own mortgages secured by income-producing real property, and (iii) using no more than 20.0% of our capital available for investment, securities of issuers that own assets other

than real estate.

We may also acquire (i) individual mortgages secured by real property (i.e., originate, or purchase outstanding loans secured by

real estate), (ii) securities of issuers that own mortgages secured by income-producing real property, and (iii) using no more than 20.0% of our capital available for investment, securities of issuers that own assets other than real estate.

We generally acquire securities in one of two ways:

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In general, we seek to acquire securities originally registered by the issuer with the SEC.

These target securities are

typically public limited partnership interests and shares in REITs issued by national real estate syndicators and companies.

These issuers typically have hundreds or thousands of limited partners or stockholders and own numerous real

property assets.

These target securities are typically

public limited partnership interests and shares in REITs issued by national real estate syndicators and companies.

These issuers typically have hundreds or thousands of limited partners or stockholders and own numerous real property assets.

Securities Issued in Private Transactions.

We may acquire securities that are or were privately placed by issuers that (i) are limited partnerships, REITs, or other real estate-related

entities, (ii) have sold their securities in private offerings to only a limited number of investors who have met suitability standards that are generally higher than those imposed by public partnerships, and (iii) have invested in only

a single parcel or a few parcels of real property.

We may acquire securities that are or were privately placed by issuers that (i) are limited partnerships, REITs, or other real estate-related entities, (ii)

have sold their securities in private offerings to only a limited number of investors who have met suitability standards that are generally higher than those imposed by public partnerships, and (iii) have invested in only a single parcel or a

few parcels of real property.

Investment Selection

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their value to us, and (iii) either acquiring securities on national markets or locating securities holders who may be interested in selling such securities on secondary markets.

Different circumstances may require different procedures, or

different combinations of procedures, and we adjust our acquisition strategy to fit the circumstances.

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:

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

Our Adviser's due diligence typically includes:

Adviser's due diligence typically includes:

review of historical and prospective financial information and regulatory disclosures;

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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 by the prospective borrower,

which reimbursements are in addition to any management or incentive fees payable by us under the advisory agreement amended and restated effective October 1, 2017, and subsequently amended October 23, 2018 (the "Investment Advisory Agreement”).

reimbursements are in addition to any management or incentive fees payable by us under the advisory agreement amended and restated effective October 1, 2017, and subsequently amended October 23, 2018 (the " Investment Advisory Agreement ”).

Managerial Assistance

As a BDC, we offer, and must provide upon request, significant managerial assistance to our portfolio companies.

This assistance could involve, among other things, monitoring the operations of our portfolio

companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance.

We may also receive fees for these services.

We offer and provide significant managerial assistance to our portfolio companies, and must continue to do so while we remain a BDC.

This assistance could involve, among other things, monitoring the operations of our

portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance.

We may receive fees for these services.

The Adviser provides

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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.

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:

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and any change in such valuations, on our consolidated financial statements.

We compete for investments with other BDCs and investment funds (including private equity funds).

Additionally, because competition for investment opportunities generally has increased among alternative investment

vehicles, such as hedge funds, those entities have begun to make non-traditional investments, including investments in real estate companies.

As a result of these new entrants, competition for investment opportunities in real estate-related

companies may intensify.

While we remain a BDC, we compete for investments with investment funds (including private equity funds).

Additionally, because competition for investment opportunities generally has increased among alternative

investment vehicles, such as hedge funds, those entities have begun to make non-traditional investments, including investments in real estate companies.

As a result of these new entrants, competition for investment opportunities in real estate and

real estate-related companies may intensify.

Many of these entities have greater financial and managerial resources than we do or may not be subject to comparable regulation.

We believe the experience and contacts of the Adviser, our responsive and efficient

investment analysis and decision-making processes, the investment terms we offer, and our willingness to make smaller investments allows us to successfully compete with these competitors.

For additional information concerning the competitive risks

we face, see "Risk Factors — Risk Relating to Our Business and Structure — We may face increasing competition for investment opportunities."

We believe the experience and contacts of the Adviser, our responsive and

efficient investment analysis and decision-making processes, the investment terms we offer, and our willingness to make smaller investments allows us to successfully compete with these competitors.

For additional information concerning the

competitive risks we face, see "Risk Factors — Risk Relating to Our Business and Structure — We may face increasing competition for investment opportunities."

We do not currently have any employees.

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Such approvals were made in

accordance with, and on the basis of an evaluation satisfactory to our board of directors as required by Section 15(c) of the 1940 Act and applicable rules and regulations thereunder, 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 investment portfolios with objectives similar to ours, to the extent available, (iii)

comparative data with respect to advisory fees or similar expenses paid by other BDCs 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.

quality, and extent of the advisory and other services to be provided under the agreements, (ii) the investment performance of the personnel who manage investment portfolios with objectives similar to ours, to the extent available, (iii) comparative

data with respect to advisory fees or similar expenses paid by other BDCs 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

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business