☑		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2015
OR
☐		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Maryland		45-4355424
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)
1640 School Street Moraga, California		94556
(Address of Principal Executive Offices)		(Zip Code)

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

---

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	19
Item 2.	Properties	19
Item 3.	Legal Proceedings	19
Item 4.	Mine Safety Disclosures	19
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	20
Item 6.	Selected Financial Data	21
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 8.	Financial Statements and Supplementary Data	28
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	28
Item 9A.	Controls and Procedures	28
Item 9B.	Other Information	29
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	30
Item 11.	Executive Compensation	32
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	33
Item 13.	Certain Relationships and Related Transactions, and Director Independence	33
Item 14.	Principal Accountant Fees and Services	34
PART IV
Item 15.	Exhibits and Financial Statement Schedules	35
	Signatures

 

 

 

 

 

 

 

 

Item 1. BUSINESS

Organization

On February 28, 2013, we acquired the Legacy Portfolio from eight private funds (the "Legacy Funds") and commenced our operations. The Legacy Portfolio had a fair value, as determined by our Board of Directors, of approximately $6.92 million on February 28, 2013. As consideration for our acquisition of the Legacy Portfolio, we issued 692,217 Shares to the Legacy Funds, resulting in a net asset value ("NAV") per Share of $9.42 as of February 28, 2013. The acquisition of the Legacy Portfolio was a taxable transfer of assets, and, as a result, we took a tax basis in the assets acquired equal to the fair market value of our stock issued as consideration.

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 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. 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; 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 that we may invest in may in turn hold interests in general partnerships, joint ventures, or other non-limited liability entities. We generally consider 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) individual mortgages 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.

Investment Strategy

Our investment objective is to generate both current income and capital appreciation through debt and equity real estate-related investments. Our Independent Directors (as defined in Item 10 below) review our investment policies with sufficient frequency, but at least annually, to determine that the policies we are following 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.

 

We seek to accomplish our objective by rigorously analyzing the NAV of and risks associated with a potential security acquisition, and by adhering to a disciplined requirement that any security must be acquired at a significant discount to its NAV. 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). 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 significantly 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.

·

Purchases of small-cap REITs on the open market. We believe that small-capitalization REITs (typically less than $250 million) are largely ignored by institutional investors and by Wall Street analysts, and as a result they often trade for significant discounts to their NAV. While these REITs tend to be highly illiquid with very small trading volumes, our smaller size allows us to focus on these REITs and to purchase them in quantities that are meaningful for us. Similar to the shares of NTRs we purchase at discounts to NAV, we believe these acquisitions can provide superior risk-adjusted returns.

Our Corporate Information

Our offices are located at 1640 School Street, Moraga, California 94556, and our telephone number is (925) 631-9100 or (800) 854-8357.

Investments

We engage in various investment strategies in order 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

We target the following real estate-related investments.

·	Real Estate-Related Limited Partnerships. 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.

·	REITs. Corporations or trusts that are formed to own real property and are exempted from corporate income tax provided that 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, TICs, mortgages, loans, bonds, or any security whose underlying value derives from real estate. We 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 may invest may in turn hold interests in general partnerships, joint ventures, or other non-limited liability entities.

Targeted Securities

Our Adviser has advised on a significant number of investments in the real estate industry. We leverage this prior investing experience to continue to target attractive investments in the real estate industry. Securities to be acquired by us generally consist of the following:

·

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, min-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 generally acquire securities in one of two ways:

·

Securities Issued Previously Pursuant to a Registration Statement. 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.

·

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.

Investment Selection

Our Adviser's investment team is responsible for all aspects of our investment process. The current members of the investment team are C.E. Patterson, Glen Fuller, Chip Patterson, Robert Dixon, Paul Koslosky, 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-related securities typically involves three steps: (i) identifying securities of the type we may be interested in acquiring; (ii) evaluating the securities to estimate 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 particular circumstances. Nonetheless, the typical stages of our investment selection process are as follows:

Deal Generation/Origination

We source investments through long-standing relationships with 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 investment team supplements these lead generators by also utilizing broader marketing efforts, such as advertisements in real estate periodicals, newspapers and other publications, attendance at prospective borrower industry conventions, an active calling effort to smaller private equity firms and sponsors, web presence and search tools.

Screening

In screening potential investments, our Adviser's investment team utilizes the same value-oriented investment philosophy they employed in their work with the Legacy Funds and commits resources to managing downside exposure.

Due Diligence

Our Adviser conducts due diligence on prospective portfolio companies consistent with the approach its investment team adopted in their work with the Legacy Funds. In conducting due diligence, our 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:

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

·	research relating to the company's management, industry, markets, products and services and competitors;

·	verification of collateral; and

·	asset and business value appraisals by third party advisers.

Upon the completion of due diligence and a decision to proceed with an investment in a company, the investment professionals leading the investment present the investment opportunity to our 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 in connection with due diligence investigations undertaken by third parties is 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 our Investment Advisory Agreement with the Adviser.

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. The Adviser provides such managerial assistance on our behalf to portfolio companies that request this assistance.

Monitoring

Our Adviser monitors our portfolio companies on an ongoing basis. It monitors the financial trends of each portfolio company to determine if it is meeting its business plan and to assess the appropriate course of action for each company. Our Adviser has several methods of evaluating and monitoring the performance and fair value of our investments, which include the following:

·	Assessment of success in adhering to each portfolio company's business plan and compliance with covenants;

·	Periodic and regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor, to discuss financial position, requirements and accomplishments;

·	Comparisons to our other portfolio companies in the industry, if any;

·	Attendance at and participation in board meetings; and

·	Review of monthly and quarterly financial statements and financial projections for portfolio companies.

Valuation Procedures

We determine our NAV consistent with GAAP and the 1940 Act. 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 also use published secondary market trading information for securities that do not trade on a national exchange in order to value assets.

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 our Adviser or Board of Directors, does not represent fair value, which we expect will represent a substantial majority of the investments in 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 review the valuations determined by the Adviser and, where appropriate and necessary, a third-party valuation firm, and will use such valuations, as adjusted by the Board if appropriate, to determine the fair value of each investment in our portfolio.

The resources used to determine fair value for securities for which market data are 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 Investment Adviser believes were priced incorrectly.

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

 

Competition

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. Many of these entities have greater financial and managerial resources than we do, or may not be subject to comparable regulation. We believe we are able to compete with these entities primarily on the basis of the experience and contacts of our Adviser, our responsive and efficient investment analysis and decision-making processes, the investment terms we offer, and our willingness to make smaller investments. 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."

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, which we refer to as 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.

Item 1A. RISK FACTORS

Investing in our common stock involves a number of significant risks. In addition to the other information contained in the Registration Statement and any accompanying prospectus supplement, stockholders should consider carefully the following information regarding our common stock. The risks set out below may not be the only risks we face, but are the risks of which we are presently aware. If any of the following risk are realized, our business, financial condition and results of operations could be materially and adversely affected. In such case, our NAV and the price of our common stock could decline, and stockholders may lose all or part of their investment.

Risks Relating to Our Business and Structure

Our investment portfolio is recorded at fair value, with our Board of Directors having final responsibility for overseeing, reviewing and approving, in good faith, its estimate of fair value and, as a result, there will be uncertainty as to the value of our portfolio investments.

Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as determined by us in accordance with our written valuation policy. Our Board of Directors has final responsibility for overseeing, reviewing and approving, in good faith, our estimate of fair value. Typically, there is no public market for the securities of the privately held companies in which we invest. As a result, we value these securities quarterly at fair value based on input from management and our audit committee, with the oversight, review and approval of our Board of Directors.

The determination of fair value and consequently, the amount of unrealized gains and losses in our portfolio, are to a certain degree, subjective and dependent on a valuation process approved by our Board of Directors. Certain factors that may be considered in determining the fair value of our investments include external events, such as private mergers, sales and acquisitions involving comparable companies. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. Our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. Due to this uncertainty, our fair value determinations may cause our NAV on a given date to materially understate or overstate the value that we may ultimately realize on one or more of our investments. As a result, investors purchasing our common stock based on an overstated NAV would pay a higher price than the value of our investments might warrant. Conversely, investors selling Shares during a period in which the NAV understates the value of our investments receive a lower price for their Shares than the value of our investments might warrant.

We have limited operating history as a BDC.

As a result of our limited operating history as a BDC, we are subject to many of the business risks and uncertainties associated with recently formed businesses, including the risk that we do not achieve our investment objective and that the value of your investment could decline substantially.

Our financial condition and results of operations depend on our ability to effectively manage and deploy capital.

Our ability to achieve our investment objective depends on our ability to effectively manage and deploy capital, which depend, in turn, on our Adviser's ability to identify, evaluate and monitor, and our ability to finance and invest in, companies that meet our investment criteria.

Accomplishing our investment objective on a cost-effective basis is largely a function of our Adviser's handling of the investment process, its ability to provide competent, attentive and efficient services and our access to investments offering acceptable terms. In addition to monitoring the performance of our existing investments, our Adviser's investment team is also called upon, from time to time, to provide managerial assistance to some of our portfolio companies. These demands on their time may distract them or slow the rate of investment.

Even if we are able to grow and build upon our investment operations, any failure to manage our growth effectively could have a material adverse effect on our business, financial condition, results of operations and prospects. The results of our operations depend on many factors, including the availability of opportunities for investment, readily accessible short- and long-term funding alternatives in the financial markets and economic conditions. Furthermore, if we cannot successfully operate our business or implement our investment policies and strategies as described herein, it could negatively impact our ability to pay dividends.

We are dependent upon the Advisers' key personnel for our success.

We depend on the diligence, skill and network of business contacts of the investment professionals of the Adviser. The investment professionals at the Adviser evaluate, negotiate, structure, close and monitor our investments. Our success depends on the continued service of our investment team and the other senior investment professionals available to the Adviser. We cannot assure you that unforeseen business, medical, personal or other circumstances would not lead any of the members of the investment team to terminate their relationship with us, and we do not purchase any "key man" insurance to cover our Adviser's personnel. The loss of one or more of the investment team or other senior investment professionals who serve on the Adviser's investment team could have a material adverse effect on our ability to achieve our investment objectives as well as on our financial condition and results of operations. In addition, we can offer no assurance that our Adviser will continue indefinitely as our investment adviser.

The members of the Adviser's investment team are and may in the future become affiliated with entities engaged in business activities similar to those conducted by us, and may have conflicts of interest in allocating their time. We expect that the investment team dedicates a significant portion of their time to our activities; however, they are engaged in other business activities which could divert their time and attention in the future.

Our success depends on the ability of the Adviser to attract and retain qualified personnel in a competitive environment.

Our growth requires that the Adviser retains and attract new investment and administrative personnel in a competitive market. Its ability to attract and retain personnel with the requisite credentials, experience and skills depends on several factors including its ability to offer competitive wages, benefits and professional growth opportunities. Many of the entities, including investment funds (such as private equity funds and mezzanine funds) and traditional financial services companies, with which it competes for experienced personnel have greater resources than the Adviser has.

We are dependent on MacKenzie Capital Management's key personnel for our success.

We depend on the skill, experience, and care of the professionals at MacKenzie to record, administer, and manage our business, including our stockholder records and financial records, preparing and filing reports to our stockholders and with the SEC and our tax returns. We cannot assure you that these key personnel will not terminate their relationship with MacKenzie. The loss of one or more of these professionals could have a material adverse effect on our ability to achieve our business objectives.

There are significant potential conflicts of interest respecting our Adviser's activities that could impact our investment returns.

The Adviser's investment team presently manages 55 private funds other than the Legacy Funds. In addition, our executive officers and directors, as well as the current and future members of our Adviser, may serve as officers, directors or principals of other entities that operate in the same or a related line of business as we do. Accordingly, they may have obligations to investors in those entities, the fulfillment of which obligations may not be in the best interests of us or our stockholders. Any affiliated investment vehicle formed in the future and managed by our Adviser or its affiliates may, notwithstanding different stated investment objectives, have overlapping investment objectives with our own and, accordingly, may invest in asset classes similar to those targeted by us. As a result, the Adviser may face conflicts in allocating investment opportunities between us and such other entities. It is possible that, in the future, we may not be given the opportunity to participate in investments made by investment funds managed by our Adviser or an investment manager affiliated with our Adviser. In any such case, when the Adviser identifies an investment, it will be forced to choose which investment fund should make the investment. The Adviser has an allocation policy designed to equitably distribute such investment opportunities consistent with the requirements of the 1940 Act.

If our Adviser forms other affiliates in the future, we may co-invest on a concurrent basis with such other affiliates, subject to compliance with our Charter, the 1940 Act, applicable regulations, regulatory guidance and our allocation procedures.

There are significant potential conflicts of interest respecting our Adviser's compensation that could impact our investment returns.

In the course of our investing activities, we pay recurring incentive fees to the Adviser and reimburses the Adviser for certain expenses it incurs. As a result, investors in our common stock invest on a "gross" basis and receive dividends on a "net" basis after expenses, resulting in a lower rate of return than an investor might achieve through direct investments. Even though the Adviser is not reimbursed for any performance-related compensation paid to its employees, there may be times when the management team of the Adviser has interests that differ from those of our stockholders.

There are significant potential conflicts of interest respecting our Administrator that could impact our investment returns.

Under the Administration Agreement with MacKenzie, MacKenzie granted us a royalty-free license to use the name "MacKenzie." Under the Administration Agreement, we have the right to use the "MacKenzie" name for so long as the Adviser or one of its affiliates remains our investment adviser. In addition, we pay MacKenzie, an affiliate of the Adviser, 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 compensation of MacKenzie's chief financial officer and any administrative support staff. These arrangements create conflicts of interest that our Board of Directors must continue to monitor.

There are significant potential conflicts of interest respecting related party transactions that could impact our investment returns.

In the ordinary course of business, we may enter into transactions with portfolio companies that may be considered related party transactions. Related party transactions carry with them the risk that their terms could benefit related parties, to our detriment. In order to ensure that we do not engage in any transactions with any persons affiliated with us that are prohibited by the 1940 Act, we have implemented certain written policies and procedures, described in our prospectus contained in the Registration Statement, under "Certain Relationships and Transactions."

The formula for our Adviser's incentive fee may encourage the Adviser to pursue speculative investments, use leverage when it may be unwise to do so, or refrain from deleveraging when it would otherwise be appropriate to do so.

The incentive fee payable by us to the Adviser may create an incentive for the Adviser to pursue investments on our behalf that are riskier or more speculative than would be the case in the absence of such compensation arrangement. The incentive fee payable to our Adviser is calculated based on a percentage of our return on invested capital. In addition, the base management fee is calculated on the basis of our "Managed Funds", including assets acquired through the use of leverage. This may encourage our Adviser to use leverage to increase the aggregate amount of and the return on our investments, even when it may not be appropriate to do so, and to refrain from de-levering when it would otherwise be appropriate to do so. Under certain circumstances, the use of leverage may increase the likelihood of default, which would impair the value of our common stock. In addition, the Adviser receives the incentive fee based, in part, upon net capital gains realized on our investments. This could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.

The incentive fee payable by us to the Adviser also may induce the Adviser to invest on our behalf in instruments that have a deferred interest feature, even if such deferred payments would not provide cash necessary to enable us to pay current dividends to our stockholders. Under these investments, we would accrue interest over the life of the investment but would not receive the cash income from the investment until the end of the term. Our net investment income used to calculate the income portion of our investment fee, however, includes accrued interest. Thus, a portion of this incentive fee would be based on income that we have not yet received in cash.

Investments in other investment companies may increase the fees and costs borne by our stockholders.

Although we do not currently expect to do so, we may invest, to the extent permitted by law, in the securities and instruments of other investment companies, including private funds, and, to the extent we so invest, will bear our ratable share of any such investment company's expenses, including management and performance fees. We will also remain obligated to pay management and incentive fees to the Adviser with respect to the assets invested in the securities and instruments of other investment companies. With respect to each of these investments, each of our stockholders will bear his or her share of the management and incentive fee of the Adviser as well as indirectly bearing the management and performance fees and other expenses of any investment companies in which we invest.

A general increase in interest rates will likely have the effect of making it easier for our Adviser to receive incentive fees, without necessarily resulting in an increase in our net earnings.

Any general increase in interest rates typically leads to higher investment returns on our investments. Accordingly, an increase in interest rates would make it easier for us to meet or exceed the incentive fee hurdle rate and may result in a substantial increase in the amount of incentive fees payable to our Adviser under the Advisory Agreement without any additional increase in relative performance on the part of our Adviser.

Our Adviser has the right to resign on 120 days' notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.

Our Adviser has the right, under the Advisory Agreement, to resign at any time upon not less than 120 days' written notice, whether we have found a replacement or not. If our Adviser resigns, we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 120 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay dividends are likely to be adversely affected and the market price of our Shares may decline. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by our Adviser and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our financial condition, business and results of operations.

Any failure on our part to maintain our status as a BDC would reduce our operating flexibility.

We have elected to be treated as a BDC under the 1940 Act. The 1940 Act imposes numerous constraints on the operations of BDCs. For example, BDCs must invest at least 70.0% of their gross assets in specified types of securities, primarily in private companies or thinly traded U.S. public companies, cash, cash equivalents, U.S. government securities and other high quality debt investments that mature in one year or less. Any failure to comply with the requirements imposed on BDCs by the 1940 Act could cause the SEC to bring an enforcement action against us and/or expose us to claims of private litigants. In addition, upon approval of a majority of our stockholders, we may elect to withdraw our status as a BDC. If we decide to withdraw our election, or if we otherwise fail to qualify, or maintain our qualification, as a BDC, we may be subject to the substantially greater regulation under the 1940 Act as a registered closed-end investment company. Compliance with such regulations would significantly decrease our operating flexibility, and could significantly increase our costs of doing business.

Regulations governing our operation as a BDC affect our ability to raise additional capital and the way in which we do so. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage.

Although we do not currently intend to borrow money for investment purposes, we may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as "senior securities," up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 200.0% of gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous. Also, any amounts that we use to service our indebtedness would not be available for dividends to our common stockholders. Furthermore, as a result of issuing senior securities, we would also be exposed to typical risks associated with leverage, including an increased risk of loss. If we issue preferred stock, the preferred stock would rank "senior" to common stock in our capital structure, preferred stockholders would have separate voting rights on certain matters and might have other rights, preferences, or privileges more favorable than those of our common stockholders, and the issuance of preferred stock could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for holders of our common stock or otherwise be in your best interest.

We have and may continue to sell common stock at a price below NAV under certain circumstances.

We may not generally issue and sell our common stock at a price below NAV per Share. We have, and may continue to, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current NAV per Share of our common stock if our Board of Directors determines that such sale is in the best interests of MRC and its stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our Board of Directors, closely approximates the market value of such securities (less any distributing commission or discount). If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, then the percentage ownership of our stockholders at that time will decrease, and you may experience dilution.

We may borrow money, which would magnify the potential for gain or loss on amounts invested and will increase the risk of investing in us.

The use of leverage magnifies the potential for gain or loss on amounts invested and, therefore, increases the risks associated with investing in our securities. We may borrow from and issue senior debt securities to banks, insurance companies and other lenders in the future. Holders of these senior securities would have fixed dollar claims on our assets that would be superior to the claims of our common stockholders, and we would expect such lenders to seek recovery against our assets in the event of a default. If the value of our assets decreases, leveraging would cause NAV to decline more sharply than it otherwise would have had we not leveraged. Similarly, any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could also negatively affect our ability to make dividend payments on our common stock. Leverage is generally considered a speculative investment technique. Our ability to service any debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. Moreover, as the management fee payable to our Adviser, are payable based on our Managed Funds, including those assets acquired through the use of leverage, the Adviser has a financial incentive to incur leverage which may not be consistent with our stockholders' interests. In addition, our common stockholders will bear the burden of any increase in our expenses as a result of leverage, including any increase in the management fee payable to the Adviser.

As a BDC, we are required to meet an asset coverage ratio, defined generally under the 1940 Act as the ratio of our gross assets (less all liabilities and indebtedness not represented by senior securities) to our outstanding senior securities, of at least 200.0% after each issuance of senior securities. If this ratio declines below 200.0%, we may not be able to incur additional debt and could be required by law to sell a portion of our investments to repay some debt when it is disadvantageous to do so, which could have a material adverse effect on our operations, and we may not be able to make distributions. The amount of any leverage that we employ would depend on our Adviser's and our Board of Directors' assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to obtain credit at all or on terms acceptable to us.

Any debt facility into which we may enter would likely impose financial and operating covenants that restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a REIT under the Code.

We may experience fluctuations in our quarterly results.

We could experience fluctuations in our quarterly operating results due to a number of factors, including our ability or inability to make investments in companies that meet our investment criteria, the interest rate payable on the debt securities we acquire, the level of portfolio dividend and fee income, 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.

Our Board of Directors is authorized to reclassify any unissued shares of common stock into one or more classes of preferred stock, which could convey special rights and privileges to its owners.

Under the Maryland General Corporation Law (or "MGCL") and our Charter, our Board of Directors is authorized to classify and reclassify any authorized but unissued shares of stock into one or more classes of stock, including preferred stock. Prior to issuance of shares of each class or series, the Board of Directors will be required by the MGCL and our Charter to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Thus, the Board of Directors could authorize the issuance of shares of preferred stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best interest. The cost of any such reclassification would be borne by our common stockholders. Certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock. For example, holders of preferred stock would vote separately from the holders of common stock on a proposal to cease operations as a BDC. In addition, the 1940 Act provides that holders of preferred stock are entitled to vote separately from holders of common stock to elect two preferred stock directors. We currently have no plans to issue preferred stock. The issuance of preferred shares convertible into shares of common stock may also reduce the net income and NAV per Share of our common stock upon conversion, provided, that we are only permitted to issue such convertible preferred stock to the extent we comply with the requirements of Section 61 of the 1940 Act, including obtaining common stockholder approval. These effects, among others, could have an adverse effect on your investment in our common stock.

Our Board of Directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.

Our Board of Directors has the authority to modify or waive our investment objective, current operating policies, investment criteria and strategies without prior notice and without stockholder approval. Our investment objective is not fundamental and may be changed without stockholder approval. Stockholders will receive notice within 60 days if the Board of Directors decides to change our investment objective. The principal investment strategies are not fundamental and may be changed without prior notice. We cannot predict the effect any changes to our current operating policies, investment criteria and strategies would have on our business, NAV, operating results and value of our stock. However, the effects might be adverse, which could negatively impact our ability to pay you dividends and cause you to lose all or part of your investment.

There is a risk that our stockholders may not receive dividends or that our dividends may not grow over time.

We may make dividends on a quarterly basis to our stockholders only out of assets legally available for distribution. Our assets would be "legally available" if, after giving effect to the dividend, (i) we would be able to pay any outstanding debt, and (ii) our total assets would be greater than the sum of our total liabilities plus the amount needed to satisfy any preferential rights upon dissolution held by any stockholders who have preferential rights on dissolution superior to those receiving the dividend, if we were to be dissolved at the time of distribution. Funding dividends by returning capital would decrease our assets actually invested according to our investment objectives, and borrowing to fund distributions would increase the risks associated with leverage as discussed elsewhere in this annual report.

We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. In addition, due to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions.

Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy.

We and our portfolio companies are subject to applicable local, state and federal laws and regulations. New legislation may be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types of investments we are permitted to make, any of which could harm us and our stockholders, potentially with retroactive effect. Additionally, any changes to the laws and regulations governing our operations relating to permitted investments may cause us to alter our investment strategy in order to avail ourselves of new or different opportunities. Such changes could result in material differences to our strategies and plans and may result in our investment focus shifting from the areas of expertise of our Adviser's investment team to other types of investments in which the investment team may have less expertise or little or no experience. Thus, any such changes, if they occur, could have a material adverse effect on our results of operations and the value of your investment.

We incur significant costs as a result of being a public company.

As a public company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Securities Exchange Act of 1934 ("1934 Act"), as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, and other rules implemented by the SEC.

An extended continuation of the disruption in the capital markets and the credit markets could impair our ability to raise capital and negatively affect our business.

As a BDC, we may need to raise additional capital for investment purposes. Without sufficient access to the capital markets or credit markets, we may be forced to curtail our business operations or we may not be able to pursue new business opportunities. Since the middle of 2007, the capital markets and the credit markets have experienced periodic volatility and disruption and, accordingly, there has been and may continue to be uncertainty in the financial markets in general. Ongoing disruptive conditions in the financial industry and the impact of new legislation in response to those conditions could restrict our business operations and could adversely impact our results of operations and financial condition.

If we are unable to renew or replace any debt facilities and consummate new facilities on commercially reasonable terms, our liquidity could be reduced significantly. If we are unable to repay amounts outstanding under any such facilities and are declared in default or are unable to renew or refinance these facilities, we would not be able to initiate significant originations or to operate our business in the normal course. These situations may arise due to circumstances that we may be unable to control, such as inaccessibility to the credit markets, a severe decline in the value of the U.S. dollar, a further economic downturn or an operational problem that affects third parties or us, and could materially damage our business. Moreover, we are unable to predict when economic and market conditions may become more favorable.

As a REIT, we are subject to a corporate level tax on certain built in gains embedded in certain assets if those assets are sold during the 10 year period following such election.

As a REIT, we are subject to a corporate level tax on certain built-in gains embedded in certain assets if those assets are sold during the 10-year period following conversion. Built-in gain assets are assets whose fair market value exceeds the REIT's adjusted tax basis at the time of conversion. In addition, a REIT may not have any earnings and profits accumulated in a non-REIT year. Thus, upon conversion to a REIT, the putative REIT is generally required to distribute to its stockholders all accumulated earnings and profits, if any. Such distribution would be taxable to the stockholders as dividend income, and, as discussed above, may qualify as QDI for non-corporate stockholders and for the dividends received deduction for corporate stockholders.

Loss of our status as a REIT would have significant adverse consequences.

If we lose our REIT status in any taxable year, we would be subject to federal income tax (including any applicable minimum tax) on our taxable income computed in the usual manner for corporate taxpayers without any deduction for distributions to our stockholders. Unless entitled to relief under specific statutory provisions, we would be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status, assuming we had previously been treated as a REIT. To renew our REIT qualification at the end of such a four-year period, we would be required to distribute all of our current and accumulated earnings and profits before the end of the period and the funds available for satisfying our obligations and for distribution to our stockholders could be significantly reduced. In addition, we would be subject to the built-in gain tax based upon the values at the time of REIT election.

As a REIT, we are required to make distributions, other than capital gain distributions, to our stockholders each year in the amount of at least 90.0% of our REIT taxable income. As a result, we may continue to need additional capital to make new investments. If additional funds are unavailable or not available on favorable terms, our ability to make new investments will be impaired.

As a REIT, we are required to distribute at least 90.0% of our REIT taxable income, and as such we may require additional capital to make new investments or carry existing investments. We may acquire additional capital from the issuance of securities senior to our common shares, including additional borrowings or other indebtedness or the issuance of additional securities. We may also acquire additional capital through the issuance of additional equity. However, we may not be able to raise additional capital in the future on favorable terms or at all. Unfavorable economic conditions could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. We may issue debt securities, other instruments of indebtedness or preferred stock, and we borrow money from banks or other financial institutions, which we refer to collectively as "senior securities." As a result of issuing senior securities, we will also be exposed to typical risks associated with leverage, including increased risk of loss. If we issue preferred securities which will rank "senior" to our common shares in our capital structure, the holders of such preferred securities may have separate voting rights and other rights, preferences or privileges more favorable than those of our common shares, and the issuance of such preferred securities could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for security holders or otherwise be in our best interest.

 

To the extent our ability to issue debt or other senior securities is constrained, we will depend on issuances of additional common shares to finance new investments. If we raise additional funds by issuing more of our common shares or senior securities convertible into, or exchangeable for, our common shares, the percentage ownership of our stockholders at that time would decrease, and you may experience dilution.

As a REIT, we may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.

Since we contemplate investing in real estate through partnerships and other REITs, we may have to recognize taxable income attributable to those investments prior to the time we receive cash distributions with respect to such investments. As indicated above, in order to benefit from REIT taxation, we need to distribute at least 90.0% of our REIT taxable income. If we do not receive cash representing such income at the same time as we recognize such income, we may have cash flow difficulties in order to make the required distributions necessary to benefit from REIT taxation.

We may in the future choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive.

We may in the future elect to pay dividends in our own stock, as opposed to cash. In such case or in the event you participate in the dividend reinvestment plan (our "DRIP"), you may be required to pay tax in excess of the cash you receive from us.

Risks Related to Our Investments

We have not yet identified the portfolio companies we will invest in using the additional proceeds of the IPO.

While we acquired the Legacy Portfolio before the IPO, and while we have acquired additional assets with proceeds raised so far in the IPO, we have not yet identified all of the additional potential investments for our portfolio that we will acquire with the proceeds of the IPO. As a result, you will be unable to evaluate any future portfolio company investments prior to purchasing our shares. Additionally, our Adviser will select our investments subsequent to the closing of the IPO, and our stockholders will have no input with respect to such investment decisions. These factors increase the uncertainty, and thus the risk, of investing in our Shares.

The achievement of our investment objectives cannot be guaranteed.

We may not be successful in locating real estate-related securities suitable for purchase. We may not be able to purchase securities at an acceptable price. Even if suitable securities are located at an acceptable price, our performance is affected by many factors that are beyond the control of our Adviser, including unpredictable economic and financial events. Accordingly, we do not guarantee our dividends or the return of your capital. For example, a review of the performance of prior funds sponsored by our Adviser reveals that not all such funds are successful, or will be successful, in producing their targeted returns.

The indirect ownership of real properties involves a number of risks.

Our investments are primarily in entities that directly or indirectly own real property, real estate joint ventures, or other real property-based investments. As a result, an investment in us is subject to all of the risks inherent in real estate investments. Among these are the following:

·	the operation of real property is subject to the general competitive conditions in the relevant real estate markets, which have suffered in the recent economic crisis;

·	downturns in local economies, overbuilding and other general economic conditions may adversely affect the operations of real property, especially with the current economic conditions;

·	indebtedness secured by a portfolio of real properties may bear a variable interest rate that could result in increased debt service payments (and reduced cash flow) if interest rates rise;

·	the lack or uncertainty of availability or high cost of financing, especially in current markets, may adversely affect the ability of the real estate owners to sell their properties and the terms of any such sales;

·

the availability and cost of financing or refinancing is uncertain, especially in current markets, and may adversely affect the ability of the real estate owners to sell their properties and the terms of any such sales (for example, some of the REITs in which previous funds have invested have struggled to refinance their existing indebtedness, resulting in a depressed stock price, and, in some cases, causing issuers to file for bankruptcy protection);

·	the real properties may be damaged and suffer losses which are not adequately insured;

·	property tax reform, rent control, and other regulatory and governmental action may adversely affect the value of the real properties; and

·	energy shortages and allocations and increased energy prices in the areas where the real properties are located may adversely affect their operations or otherwise reduce their value.

Investment in mortgage loans or issuers that own or originate mortgage loans involves a number of risks.

We may make investments in mortgage loans or in issuers that own or originate mortgage loans. As a result, an investment in MRC is subject to all of the risk inherent with mortgage loans. Among these are the following:

·

We are at risk of defaults by the borrowers on those mortgage loans. These defaults may be caused by many conditions beyond the control of us or our Adviser, including interest rate levels and local and other economic conditions affecting real estate values, including the turmoil in the credit markets that began in 2007 and has continued. Our Adviser will not know whether the values of the properties securing the mortgage loans will remain at the levels existing on the dates of origination of those mortgage loans. If the values of the underlying properties drop, our risk will increase because of the lower value of the security associated with such loans;

·

If an issuer in which we invest relies on originating, holding, or servicing mortgage loans for a significant portion of its income, defaults on such mortgage loans could impair the value of the issuer itself and consequently put our investment in such issuer at risk (for example, previous funds managed by our Adviser suffered losses investing in mortgage companies or originators);

·

Fixed-rate, long-term mortgage loans could yield a return that is lower than the then-current market rates if interest rates rise. If interest rates decrease, we could be adversely affected to the extent that mortgage loans are prepaid because we may not be able to generate equivalent returns upon reinvestment of the funds;

·	Declines in real estate values may induce mortgagors to voluntarily default on their loans, increasing the risk of foreclosure and loss of capital (for example, some of the hotel REITs have just "walked away" from the hotels they owned);

·	Issuers may file for bankruptcy if they cannot meet the demands of their debt service, and bankruptcy judges have wide latitude to modify the terms of indebtedness, which could result in lower than expected returns on our investment; and

·

Delays in liquidating defaulted mortgage loans could reduce our or an issuer's investment returns. If there are defaults under those mortgage loans, we or the issuer may not be able to repossess and sell the underlying properties quickly. The resulting time delay could reduce the value of our or the issuer's investment in the defaulted mortgage loans. An action to foreclose on a property securing a mortgage loan is regulated by state statutes and regulations and is subject to many of the delays and expenses of other lawsuits if the defendant raises defenses or counterclaims. Further, given the recent economic events, foreclosure actions may flood the courthouses, causing further delays in prosecuting such actions. In the event of default by a mortgagor, these restrictions, among other things, may impede our or an issuer's ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us or the issuer on the mortgage loan.

We do not participate in the management of the real estate owned by our portfolio companies.

The issuers of the securities held by us typically have exclusive management and control of the operation of their real estate portfolios, and we therefore typically rely exclusively on the management capabilities of such issuers, regardless of whether the Adviser agrees with the decisions of such issuers (though as a BDC, we offer to provide managerial assistance to our portfolio companies). If our Adviser decides that an action taken by an issuer is contrary to our interests, we may take legal action to protect our interests. We could be forced to bear the costs of a challenge or lawsuit, which could be substantial, and there can be no certainty that legal action undertaken to halt any such actions would be successful.

Information on our target securities may be difficult to obtain.

Complete and current information regarding securities to be acquired and properties owned by issuers of such securities (particularly properties which may be performing poorly) may in many cases (particularly in the case of securities of companies not registered with the SEC) not be available to our Adviser or, even if available, it may not be economical for our Adviser to obtain such information. As a result, we may purchase securities with less than complete information. Further, the information that is obtained may not be reliable.

Investments in publicly traded securities present market risks that are less prevalent with private securities.

Publicly traded investments such as REITs present certain market risks that are not present when investing directly in real estate or in private partnerships that own real estate. The trading price of public securities can change in response to various factors, not all of which relate to the real estate owned by the entities. A "bear market" can cause all publicly traded securities to trade at lower prices, even if the fundamental economic factors driving the value of real estate remain unchanged. If the trading price of a public entity is too adversely affected by such factors, it can be subject to takeover attempts by opportunistic investors who see the ability to acquire assets at below NAV. Because we may not likely be a significant holder of such securities, there may be little or nothing that we or our Adviser can do to prevent the sale of such entities at prices that are below the estimated NAV of the real estate owned by the entities, which would adversely affect our performance.

Investments in privately held securities may present more risks than investments in publicly held securities.

Privately held partnerships and companies, unlike public entities, are not required to file periodic reports with the SEC or state securities regulators. As a result, our Adviser's evaluation of a possible investment in a private entity may be based on incomplete or misleading information. In addition, as privately held entities generally have significantly fewer investors than public companies, a private issuer may be more concerned about a possible takeover by an investor such as us. The private issuer may therefore be more reluctant to approve a transfer of securities to us or admit us as a record owner, which would result in the loss of rights associated with record ownership, including voting rights.

Accurate valuation of illiquid real estate-related securities is difficult.

Our Adviser's techniques used to value our target securities necessarily involve reliance on both objective and subjective criteria and assumptions and predictions that may or may not be realized. As a result, despite our Adviser's analysis, there is no assurance that any particular investment is in fact be made by us on terms that reflect the true economic value of the securities purchased.

We compete with other entities and persons to purchase real estate-related securities.

The market for the real estate-related securities sought by us is limited and generally inefficient, and competition for these securities may reduce the availability and increase the prices of the securities. For example, in the previous two years, at least two new competitors have entered the marketplace buying some of the same type of securities that we intended to buy.

Lack of Diversification.

Some of our investments and target portfolio companies are private partnerships or other privately held entities that invest in only a single parcel of real property. Due to such issuers' lack of diversification, the value of their securities may be more volatile than securities issued by entities with larger, more diverse portfolios.

The hotel and lodging industry has unique risks.

We have invested, and may invest in, interests in hotel or lodging property portfolios. An investment in these securities is subject to the special risks inherent in investments in the hotel and lodging industry. Lodging properties are management and labor intensive and particularly susceptible to the impact of economic and other conditions outside the control of the portfolio managers. Also, compared to other types of properties, hotel maintenance typically involves maintenance of corresponding personal property such as furniture and supplies. As a result, hotels may be exposed to more fluctuations in costs and inflation, and be subject to more potential liability, from events such as property loss or theft, labor difficulties, supplier problems and personal injuries. Demand for particular accommodations and related hotel services may vary seasonally and may be affected by economic recessions, changes in travel patterns caused by airline schedules and strikes and other factors, including current economic conditions. To meet competition in the industry, to maintain franchise standards, or to maintain economic values, continuing expenditures must be made for modernizing, refurnishing, and maintaining existing facilities prior to the expiration of their anticipated useful lives. If such expenditures are not made, the value and profitability of the hotels may be diminished. In addition, inflationary pressures could increase operating expenses of the hotels, including energy costs, above expected levels, and have secondary effects upon occupancy rates in such hotels by increasing the expense or decreasing the availability of means of travel. All of the factors noted above may contribute to producing operating results of wider variation than for other types of properties.

We are susceptible to claims under Federal and state securities laws.

Due in part to the diverse and relatively risky nature of our acquisition procedures, we may be more susceptible to investigations, litigation, or other proceedings under securities laws. Any such investigation, litigation, or other proceeding undertaken by state or Federal regulatory agencies or private parties could necessitate the expenditure of material amounts of our capital for legal and other costs. Moreover, the dedication of human and capital resources of our Adviser and MacKenzie to such proceedings could limit MacKenzie's effectiveness in managing MRC, even if we are ultimately successful in its defense. If and to the extent that claims or suits for rescission are brought and successfully concluded for acts or omissions constituting offenses under Federal or applicable state securities laws, we could be materially and adversely affected, jeopardizing our ability to operate successfully.

Our purchase of securities may be subject to complex tender offer rules.

Because of the nature of the market for real estate-related securities, we expect to buy securities from time to time through tender offers. Federal securities laws impose a number of obligations and requirements upon a party who undertakes a tender offer. Sanctions and penalties could be imposed on us if we do not fully comply with these complex requirements. Further, because of the perceived hostile nature of tender offers, some issuers may respond by taking legal action against us and our affiliates. We could be forced to bear some of the costs of a suit, which could be substantial, and there can be no certainty that we would be successful in fighting such a suit. Likewise, we may participate in legal actions against issuers to force them to provide investor lists when their governing documents so require, but the issuers refuse to comply.

Issuers of securities we own may vote to change the structure of the portfolio company or propose a "roll-up."

In recent years, general partners of portfolio company targets have successfully consolidated several related limited partnerships into larger entities (these consolidations are sometimes referred to as "roll-ups"). The new entities have usually been in the form of infinite-life REITs or master limited partnerships, and often are listed to trade on one of the stock exchanges. In other cases, limited partners have been asked to approve the conversion of their partnership interests into common stock of a new corporation or into unsecured debentures. In most roll-ups to date, the sponsoring general partners used an estimated market price for shares of the new entity to determine the exchange value for the limited partnership units. Shares of the new entities may fall below the exchange value and historically have often traded substantially below the exchange value. If our Adviser decides that a roll-up proposed by a portfolio company is contrary to our interests, we may take legal action to protect our interests. We could be forced to bear the costs of a suit, which could be substantial, and there can be no certainty that legal action undertaken to halt a roll-up by a portfolio company would be successful.

Our Adviser may experience a substantial delay in identifying and locating suitable investments for us.

It may take time for our Adviser to identify suitable securities for investment. Moreover, once suitable securities are identified, a considerable delay may be experienced in consummating their purchase. In such event, corresponding delays would be experienced by us before distributions and allocations are received from our investments.

We may temporarily invest our cash reserves in volatile securities.

Our Adviser may at times make the decision to invest some of our cash reserves into publicly traded REITs as a means to earn better than money market rates. This action has risk associated with it as the market for such publicly traded assets may be volatile. In the past few years, some such investments made by other funds managed by our Adviser have declined dramatically in value, making it impossible to recover the cash reserves unless and until the market price of the securities returns to previous levels. In some cases, such issuers have ceased operations, resulting in a loss of capital for such funds.

We may use leverage, including margin accounts.

We may utilize short-term borrowing and may acquire securities or make distributions through use of brokerage margin account loan agreements. Utilization of margin loans involves the risk of losses greater than the equity involved. Any such borrowing is subject to the leverage limitations under the 1940 Act that are described above.

The FDIC deposit insurance limits may be exceeded.

Our cash deposits with banks are insured by the Federal Deposit Insurance Corporation up to $250,000 per account. We may at times exceed such limits in our deposit accounts, which could subject us to a loss of any amount over such limit if the deposit institution were to fail.

The tax consequences of an investment in us depends on the activities and reporting positions taken by the entities in which we invest.

We have little or no control over the reporting activities of the issuers of securities we buy. Accordingly, it is not possible to determine the potential tax consequences generated by an investment in us. Our Adviser typically does not prepare or review income tax information returns of the issuers of securities in which we invest. These issuers have made and will make a number of decisions on such tax matters as the expensing or capitalizing of particular items, the proper period over which capital costs may be depreciated or amortized, the allocation of acquisition costs between real property, improvements and personal property, and many other items. An IRS audit of an issuer's information return may result in the disallowance of certain deductions and may cause audits of your individual returns. An opinion of counsel generally is not available with respect to these issues, either because they involve factual determinations, or because they involve legal doctrines not fully developed under existing case law.

Our taxable gain or loss will likely be measured by the issuer's tax basis in the real property, rather than by our purchase price for its securities.

Some of our investments are and will be made through partnerships and other REITs. The Federal income tax basis of the real estate held by those entities may be based upon their purchase price paid, as opposed to the purchase price we paid to acquire those securities. Thus, there is a risk that we may have to report more income or gain on such entities disposition of its real estate than the amount of income or gain we would have reported if we purchased the real property directly.

An issuer of securities in which we invest could be deemed a "publicly traded partnership."

Some of our investments are and will be made through partnerships. If interests in a partnership are traded on an established exchange or readily tradable on a secondary exchange (or substantial equivalent) the partnership is treated as a publicly traded partnership. As such, the partnership might be treated as a C corporation, resulting in its income being subject to double level taxation. In addition, the real estate held within the partnership would no longer be taken into account in satisfying the REIT asset test.

We are currently in a period of capital markets disruption and we do not expect these conditions to improve in the near future.

The U.S. capital markets have experienced volatility and disruption for several years and the U.S. economy was recently in a period of recession. Disruptions in the capital markets have increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. We believe these conditions may continue for a prolonged period of time or worsen in the future. A prolonged period of market illiquidity may have an adverse effect on our business, financial condition and results of operations. Unfavorable economic conditions could also increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could limit our investment originations, limit our ability to grow and negatively impact our operating results.

The lack of liquidity in our investments may adversely affect our business.

We invest in many companies whose securities are not publicly traded, and whose securities are subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of these investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. As a result, we do not expect to achieve liquidity in our investments in the near-term. Our investments are usually subject to contractual or legal restrictions on resale or are otherwise illiquid because there is usually no established trading market for such investments. The illiquidity of most of our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.

Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.

Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as "follow-on" investments, in order to (i) increase or maintain in whole or in part our equity ownership percentage; (ii) exercise warrants, options or convertible securities that were acquired in the original or a subsequent financing; or (iii) attempt to preserve or enhance the value of our investment. We may elect not to make follow-on investments or otherwise lack sufficient funds to make those investments. We have the discretion to make any follow-on investments, subject to the availability of capital resources. The failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we do not want to increase our concentration of risk, we prefer other opportunities, we are subject to BDC requirements that would prevent such follow-on investments, or the follow-on investment would affect our REIT tax status.

Our portfolio may lack diversification among portfolio companies, subjecting us to a risk of significant loss if one or more of these companies fail to perform.

Our portfolio may hold a limited number of portfolio companies. We do not have fixed guidelines for diversification, and our investments may be concentrated in relatively few companies. As our portfolio is less diversified than the portfolios of some larger funds, we are more susceptible to failure if a single investment fails. Similarly, the aggregate returns we realize may be significantly adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment.

We do not intend to concentrate our portfolio on any specific geographic area, however, we may be subjected to a risk of significant loss if there is a downturn in a particular area in which a number of our investments are concentrated.

We do not intend to concentrate our portfolio on any specific geographic areas. However, a downturn in any particular area in which we are invested could significantly impact the aggregate returns we realize. As of June 30, 2015, our investments in Northern California represented approximately 8.2% of the total fair value, our investments in Southern California represented approximately 10.0% of the total fair value, Oregon represented approximately 5.7% of the total fair value and our investments in Maryland represented approximately 4.5% of the total fair value. If a geographic area in which we have significant investments suffers from adverse business or economic conditions a material portion of our investment portfolio could be affected adversely, which, in turn, could adversely affect our financial position and results of operations.

We may not realize gains from our equity investments.

We may invest in warrants or other equity securities. Investments in equity securities involve a number of significant risks, including the risk of further dilution as a result of additional issuances, inability to access additional capital and failure to pay current dividends. Investments in preferred securities involve special risks, such as the risk of deferred distributions, credit risk, illiquidity and limited voting rights. In addition, we may from time to time make non-control, equity investments in portfolio companies. Our goal is ultimately to realize gains upon our disposition of such equity interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity interests. We often seek puts or similar rights to give us the right to sell our equity securities back to the portfolio company issuer. We may be unable to exercise these put rights for the consideration provided in our investment documents if the issuer is in financial distress.

Item 1B. Unresolved Staff Comments

None.

Item 2. PROPERTIES

Our principal executive office is located at 1640 School Street, Moraga, California 94556. We do not have any other physical properties that are materially important.

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.

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 for at least eight years following our IPO. 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.

We are currently offering shares of our common stock on a continuous basis at a current offering price of $10 per Share. We may not generally issue and sell our common stock at a price below NAV per Share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current NAV per Share of our common stock if our Board of Directors determines that such sale is in the best interests of MRC and our stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our Board of Directors, closely approximates the market value of such securities (less any distributing commission or discount).

Holders

As of September 22, 2015, we had 2,582,034.04 shares of common stock outstanding, held by a total of 497 stockholders.

Dividends and Taxable Income

We began paying quarterly dividends to our stockholders beginning with the quarter ended March 31, 2014, and to the extent that we have income from operations available, we distribute quarterly dividends to our stockholders. Our quarterly dividends, if any, will be determined by our Board of Directors after a quarterly review and distributed pro-rata to holders of our Shares. Any dividends to our stockholders will be declared out of assets legally available for distribution. In no event are we permitted to borrow money to make dividends if the amount of such dividend would exceed our annual accrued and received revenues, less operating costs. Dividends in kind are not permitted, except as provided in our Charter.

We qualified to be taxed as a REIT beginning with the tax year ended December 31, 2014, and made our REIT election in our 2014 tax return. As a REIT, we are required to distribute at least 90% of our REIT taxable income to the stockholders and meet certain other conditions.

Our current intention is to make any dividends in additional Shares under our DRIP out of assets legally available therefore, unless a stockholder elects to receive dividends in cash, or their participation in our DRIP is restricted by a state securities regulator. If one holds Shares in the name of a broker or financial intermediary, they should contact the broker or financial intermediary regarding their election to receive dividends in cash. We can offer no assurance that we will achieve results that will permit the payment of any cash dividends and, if we issue senior securities, we are prohibited from paying dividends if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if dividends are limited by the terms of any of our borrowings.

The following table reflects the cash dividends per Share that the Company has paid on its common stock during the year ended June 30, 2015.

		Dividends
During the Quarter Ended		Per Share				Amount
Three months ended September 30, 2014		$	0.300			$	255,442
Three months ended December 31, 2014		$	0.175			$	186,812
Three months ended March 31, 2015		$	0.175			$	233,445
Three months ended June 30, 2015		$	0.175			$	296,887

 

The following table reflects the cash dividends per Share that the Company has paid on its common stock during the year ended June 30, 2014.

		Dividends
During the Quarter Ended		Per Share				Amount
Three months ended September 30, 2013		$	-			$	-
Three months ended December 31, 2013		$	-			$	-
Three months ended March 31, 2014		$	-			$	-
Three months ended June 30, 2014		$	0.175			$	130,850

On August 5, 2015, the Company's Board of Directors approved a dividend of $0.30 per Share to the holders of record on June 30, 2015, paid on August 19, 2015.

 

Item 6. SELECTED FINANCIAL DATA

The selected financial data below reflects our operations for our fiscal years ended June 30, 2015 ("Fiscal 2015"), June 30, 2014 ("Fiscal 2014") and June 30, 2013 ("Fiscal 2013") and for the period from Inception (January 25, 2012) through June 30, 2012. The selected financial data have been derived from audited financial statements. The data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

														For the period from Inception (Jan 25, 2012) through June 30, 2012
		Year Ended June 30,
Statement of operations data:		2015				2014				2013
Investment income
Dividend and distribution income		$	532,036			$	597,847			$	77,011			$	-
Interest and other income			70,533				26,097				889				-
Total investment income			602,569				623,944				77,900				-
Operating expenses
Base management fee			495,285				233,599				72,822				-
Subordinated incentive fee			46,748				-				-				-
Administrative cost reimbursements			120,000				60,000				32,000				-
Organization costs			-				-				74,410				52,759
Amortization of deferred offering costs			35,402				389,423				-				-
Professional fees			145,597				121,387				-				-
Other general and administrative			122,699				110,122				10,249				182
Total operating expenses			965,731				914,531				189,481				52,941
Net investment loss			(363,162	)			(290,587	)			(111,581	)			(52,941	)
Net realized gain on sale of investments			1,578,081				632,703				56,219				-
Net unrealized gain on investments			1,803,714				192,524				120,065				-
Total net realized and unrealized gain on investments			3,381,795				825,227				176,284				-
Income tax (provision) benefit (note 2)			188,949				(373,580	)			-				-
Net increase in net assets resulting from operations		$	3,207,582			$	161,060			$	64,703			$	(52,941	)
Weighted average common Shares outstanding			1,541,525				763,813				269,268				36,000
Per Share data:
Net investment loss per Share		$	(0.24	)		$	(0.38	)		$	(0.41	)		$	(1.47	)
Net realized gain on sale of investments per Share		$	1.03			$	0.83			$	0.21			$	-
Net unrealized gain on investments		$	1.17			$	0.25			$	0.44			$	-
Net increase (decrease) in net assets resulting from operations per Share		$	2.08			$	0.21			$	0.24			$	(1.47	)
Dividend paid per Share		$	0.825			$	0.175			$	-			$	-
Statement of assets and liabilities data:		June 30, 2015				June 30, 2014				June 30, 2013				June 30, 2012
Investments at fair value		$	18,645,022			$	5,905,995			$	6,855,708			$	-
Cash and cash equivalents		$	4,297,086			$	3,522,751			$	262,806			$	161,069
Total assets		$	23,218,204			$	9,546,162			$	7,593,598			$	367,412
Total liabilities		$	879,765			$	781,373			$	299,666			$	60,353
Total net assets		$	22,338,439			$	8,764,789			$	7,293,932			$	307,059
Net asset value per Share at end of the year		$	10.17			$	9.81			$	10.02			$	8.53
Shares outstanding at end of the year			2,196,612.73				893,807.67				728,217.00				36,000.00

 

 

 

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

Statements by MacKenzie Realty Capital, Inc. 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, you 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. 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 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

We are an externally managed non-diversified closed-end management investment company that has elected to be treated as a BDC under the 1940 Act. Our objective is to generate both current income and capital appreciation through real estate-related investments. We qualified to be taxed as a REIT beginning with the tax year ended December 31, 2014, and made our REIT election in our 2014 tax return. As a REIT, we are not be 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.

We were formed to continue and expand the business of the Legacy Portfolio. The Legacy Portfolio had a fair value, as determined by our Board of Directors, of approximately $6.92 million on February 28, 2013, including approximately $6.45 million of debt and equity investments issued by 47 portfolio companies. As consideration for our acquisition of that portfolio, 692,217 Shares were issued to the Legacy Funds.

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

Investment Plan

Our investments are generally expected to 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 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. 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 80.0% 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 50.0% 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 50.0% of its assets invested in such real estate. 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 that we may invest in may in turn hold interests in general partnerships, joint ventures, or other non-limited liability entities. We generally consider 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 (i) individual mortgages 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 20.0% of our available capital, securities of issuers that own assets other than real estate.

Investment income

We generate revenues in the form of 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) base management fees and investment advisory fees (which include the Portfolio Structuring Fee) to our Adviser; (ii) our allocable portion of overhead and other expenses incurred by MacKenzie Capital Management in performing its obligations under the Administration Agreement; and (iii) other operating expenses as detailed below. Our investment advisory fees compensate our Investment Adviser for its work in identifying, evaluating, negotiating, closing, monitoring and servicing our investments. See "Investment Advisory Agreement." Our expenses must be billed to and paid by us, except that a sponsor may be reimbursed for actual cost of goods and services used by us and certain necessary administrative expenses. We bear all other expenses of our operations and transactions, including:

·	the cost of calculating our NAV, 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 Capital Management 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 Capital Management 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.

In addition, we incurred $550,000 of organization and offering expenses. Any additional amounts have been paid or will be paid by the Adviser.

Dividend Policy

We began paying quarterly dividends to our stockholders beginning with the quarter ended March 31, 2014, and to the extent that we have income from operations available, we intend to continue distributing quarterly dividends to our stockholders. Our quarterly dividends, if any, are determined by our Board of Directors after a quarterly review and distributed pro-rata to holders of our Shares. Any dividends to our stockholders are declared out of assets legally available for distribution. In no event are we permitted to borrow money to pay dividends if the amount of such dividend would exceed our annual accrued and received revenues, less operating costs. Dividends in kind are not permitted, except as provided in our Charter.

We qualified to be taxed as a REIT beginning with the tax year ended December 31, 2014, and made our REIT election in our 2014 tax return. As a REIT, we are required to distribute at least 90% of our REIT taxable income to the stockholders and meet certain other conditions. We can offer no assurance that we will achieve results that will permit the payment of cash dividends required by the Code and, to the extent that we issue senior securities, we are prohibited from paying dividends if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if dividends are limited by the terms of any of our borrowings.

Our current intention is to make any dividends in additional Shares under our DRIP to stockholders who have elected to participate in our DRIP unless participation in the DRIP is restricted by a state securities regulator.

Critical Accounting Policies

Our critical accounting policies are discussed in note 2 of our financial statements, which are part of this Annual Report beginning on page F-1.

Portfolio Investment Composition

The following table summarizes the composition of our investments at cost and fair value as of June 30, 2015 and 2014:

 

		June 30, 2015								June 30, 2014
Asset Type		Cost				Fair Value				Cost				Fair Value
Publicly Traded Company		$	3,851,842			$	3,411,454			$	1,595,485			$	1,698,515
Non Traded Company			6,763,831				8,838,025				180,101				257,584
LP Interest			5,246,418				5,642,367				2,587,115				2,680,542
Investment Trust			319,906				285,100				714,915				764,560
Note			346,723				468,076				515,791				504,794
Total		$	16,528,720			$	18,645,022			$	5,593,407			$	5,905,995

Determination of NAV

We determine the NAV of our investment portfolio each quarter (and as of each bi-monthly closing when our offering continues) by subtracting our total liabilities from the fair value of our gross assets. We conduct the valuation of our assets and determine our NAV consistent with GAAP and the 1940 Act, and report our NAV in our periodic reports filed with the SEC under the 1934 Act. Our valuation procedures are summarized above under the critical accounting policies section:

Our NAV as of June 30, 2015, was $10.17 per Share, compared to $9.81 per Share at June 30, 2014, a $0.36 per Share increase of approximately 3.7%. The net increase was due to increases resulting from (i) net realized gain on sale of investments of $1.03 per Share, (ii) net unrealized gain on investments of $1.17 per Share and (iii) income tax benefit of $0.12 per Share due to reversal of some of the Fiscal 2014 tax provisions in Fiscal 2015 as a result of REIT election beginning with tax year ending December 31, 2014. The increases in NAV were offset by decreases resulting from (i) net investment loss of $0.24 per Share (ii) dividend to stockholders of $0.63 per Share, which was calculated using the weighted average shares outstanding during the year ended June 30, 2015, and (iii) issuance of Shares, net of selling commissions and dealer manager fees, below NAV, resulting in decrease of $1.09 per Share.

Determination of Estimated Liquidation Value

Beginning with quarter ended March 31, 2015, we have provided an Estimated Liquidation Value ("ELV") of our Shares on a quarterly basis. Our ELV is a non-GAAP measure and is intended to provide to investors our estimate of the liquidation value of our securities portfolio. We believe this measure is useful to investors because many of our portfolio securities are illiquid. As a result, the GAAP exit pricing reflected in our NAV includes a significant illiquidity discount to the published NAV of those issuers' securities.

ELV is calculated based on the same methodology as NAV (which is calculated at the end of each fiscal quarter) but incorporates into that value assessment the published NAV of any of our portfolio securities, as opposed to the "exit pricing" for such securities. ELV includes the published NAV of a security only if such NAV is reported by a third party (usually the issuer) within a one-year period of the date of our quarterly or annual report, and there are no significant dispositions or acquisitions of the issuer's assets, or material changes in its operations, since the date of such valuation. If there is no published NAV, we use the GAAP exit pricing in the ELV.

Taking into account the published NAVs of the below issuers, our ELV per Share as of June 30, 2015, is $11.25 per Share, or $1.08 higher than our NAV per Share of $10.17.

The following table includes the portfolio companies whose published NAVs were included in the above methodology, the fair value pricing used in determining our NAV, their published NAVs, and the resulting increase in the Fund's ELV per Share as compared to our NAV per Share:

Security		GAAP fair value per unit				Published net asset value per unit				Resulting increase in ELV as compared to NAV per Share				NAV & ELV per Share
NAV per Share														$	10.17
Coastal Realty Business Trust, Series H2- A		$	3.98			$	5.20			$	0.03
InvenTrust Properties Corp.		$	2.84			$	4.00			$	0.45
KBS Real Estate Investment Trust, Inc.		$	3.12			$	4.52			$	0.13
Landmark Apartment Trust, Inc.		$	4.98			$	8.15			$	0.26
Rancon Realty Fund IV		$	400.00			$	671.97			$	0.13
Rancon Realty Fund V		$	201.95			$	289.68			$	0.05
SmartStop Self Storage, Inc.		$	13.16			$	13.75			$	0.03
Total increase in ELV compared to NAV per Share														$	1.08
ELV per Share														$	11.25

 

Limitations of Estimated Liquidation Value Per Share

As with any valuation methodology, the methodology used for our ELV was based upon a number of estimates and assumptions that may prove later to be inaccurate or incomplete. Further, different parties using different assumptions and estimates could derive a different ELV per Share, which could be significantly different from our ELV per Share. The ELV per Share does not represent the amount our Shares would trade at on a national securities exchange or the amount a stockholder would obtain if he or she tried to sell his or her Shares or if we liquidated our assets. ELV per Share does not take into account any incentive advisory fees that might be due to the Adviser, or any other expenses or fees involved in liquidating the portfolio.

Accordingly, with respect to the ELV per Share, we can give no assurance that:

Further, the difference between our GAAP NAV and ELV is the published per Share value of certain portfolio securities, and the issuers of those securities may have an incentive or tendency to make their published value as high as possible to make their performance appear better. Nonetheless, we believe the values published are likely to be realistic and that the resulting ELV for the Fund is valuable information for our investors to have.

The ELV of our Shares was calculated as of a particular point in time. The ELV of our Shares will fluctuate over time in response to, among other things, global economic issues that cause changes in real estate market fundamentals, capital market activities, and specific attributes of the properties and leases in the portfolios of the companies in which we have made investments.

Results of Operations

Investment income: Investment income primarily consists of dividend and distribution income and, interest and other income. For Fiscal 2015, total dividend and distribution income was $532,036 compared to $597,847 for Fiscal 2014. The decrease of $65,811 or 11% was primarily due to Fiscal 2014 income containing large non-recurring distributions of $372,427 from Post Street Renaissance Partners and Brown Palace. This decrease was offset by a total increase of $306,616 resulting from acquisition of new investments in Fiscal 2015 with cost basis of $17.6 million that provided dividend and distributions in Fiscal 2015 and an infrequent distribution from Secured Income, LP during Fiscal 2015.

Total interest and other income for Fiscal 2015 was $70,533 compared to $26,097 for Fiscal 2014. This increase of $44,436 or 170% was due to additional lending of $70,928 to BR Cabrillo during Fiscal 2015, BR Cabrillo earning full year of interest in Fiscal 2015 compared to only one quarter in Fiscal 2014, TTLC Note being reinstated on accrual status in Fiscal 2015 before the note was fully redeemed and reimbursement of legal fees incurred on Post Street Renaissance Partners during Fiscal 2015.

Operating Expenses: Total operating expenses for Fiscal 2015 and 2014 were $965,731 and $914,531, respectively. This increase of $51,200, or 5.6%, was due to increases in base management fee of $261,686, subordinated incentive fee of $46,748, administrative costs reimbursements of $60,000, professional fees of $24,210 and other general and administrative expenses of $12,577 offset by decrease in amortization of deferred offering costs of $354,021. The decrease in amortization of deferred offering cost was due to deferred offering cost of $424,825 being fully amortized as of the quarter ended September 30, 2014. The increases in administrative cost reimbursements, base management fee, professional fees and other general and administrative expenses were primarily due to the increases in capital contributions and investment activities since June 30, 2014. As of June 30, 2015, we have issued approximately 1.3 million additional Shares with approximately $13 million in gross capital since June 30, 2014. The increase in subordinated incentive fee (income fee) was a result of accruing an incentive fee during Fiscal 2015 that was deferred during Fiscal 2014. The fee was deemed earned as of June 30, 2015, for GAAP purposes in accordance with ASC 450, Contingencies, even though the fee was not payable to the Advisers until the Company has paid dividend to the stockholders equal to 7% per year of the contributed capital.

Net realized gain on sale of investments: Total realized gain on investments for Fiscal 2015 and 2014 were $1,578,081 and $632,703, respectively. This increase of $945,378, or 149%, was primarily due to increase in investment sales activities in Fiscal 2015 compared to Fiscal 2014. Investments with cost basis of $6.54 million was sold in Fiscal 2015, compared to sales of investments with cost basis of $2.46 million in Fiscal 2014.

Liquidity and Capital Resources

Capital Resources

We filed a Registration Statement on Form N-2 with the Securities and Exchange Commission to register the sale of 5,000,000 Shares, under which we seek to raise up to $50,000,000 in our IPO. As of June 30, 2015, we have sold 1,459,676 Shares at $10 per Share with gross proceeds of $14,581,401, net of $15,359 of volume discounts and issued 8,719.72 Shares under our DRIP at an average price of $9 per Share with gross proceeds of $78,484. We do not have any plans to issue any preferred equity. We plan to fund future investments with the net proceeds raised in the IPO 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; however, we do not have any current plans to borrow money. We are currently selling our Shares on a continuous basis at a price of $10 which may be below NAV per Share from time to time, as approved by our stockholders.

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 is limited by the 1940 Act.

Our primary uses of funds are investing in portfolio companies, paying cash dividends to holders of our common stock (primarily from investment income and realized capital gains), making payments to any lenders or senior security holders, and the payment of operating expenses. If we sell all of the Shares registered under the Registration Statement in the IPO, we expect to have raised cash resources of approximately $43.5 million.

Cash Flows:

For Fiscal 2015, we experienced a net increase in cash of $774,335. During this period, we generated $10,541,087 of cash from our financing activities and used $9,766,752 of cash in operating activities. Net cash outflow from operating activities was primarily due to purchase of investments of $17,555,986 and $409,520 of cash used for operating expenses, net of cash received from investment income. These operating activities cash outflows were offset by cash inflow of $8,120,686 and $78,068 from sales of investments and return of capital from our investments, respectively. Cash inflow from financing activities resulted from the sale of 1,294,097 Shares with gross receipts of $12,925,611, net of $15,359 of volume discount and an increase in capital pending acceptance of $208,050 as of June 30, 2015 compared to June 30, 2014. These inflows were offset by the payment of selling commissions and fees of $1,698,361 and stockholder dividends of $894,213, net of $78,373 of dividend reinvested in our DRIP.

Contractual Obligations

We have entered into two contracts under which we have material future commitments, the Advisory Agreement, under which the Adviser serves as our 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. Payments under the Advisory Agreement in future periods (after the up-front payment of the portfolio structuring fee during the IPO) are (i) a percentage of the value of our Managed Funds; and (ii) incentive fees based on our income and our performance above specified hurdles (except in the year of liquidation). 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 is liable for any expenses we incur as a result of such withdrawal.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Borrowings

We do not have any current plans to borrow money or issue preferred securities. 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. 

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our portfolio, as well as our future investments, primarily consists of equity and debt securities issued by smaller U.S. companies that primarily own commercial real estate that are either illiquid or not listed on any exchange, and our investments in these securities are considered speculative in nature. Our investments do and will often include securities that are subject to legal or contractual restrictions on resale that adversely affect the liquidity and marketability of such securities. 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, 2015, financial instruments that subjected us to concentrations of market risk consisted principally of equity investments, which represented approximately 81% of our total assets as of that date. As discussed in Note 3 to our financials statement ("Investments"), 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 strategy represents a high degree of business and financial risk due to the fact that portfolio company investments are generally illiquid and in small and middle market companies. 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. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our financial statements and financial statement schedules 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 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 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 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.

Our management's assessment of the effectiveness of our internal control system as of June 30, 2015, 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, 2015, 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 the Company's independent registered public accounting firm regarding control over financial reporting. Management's report was not subject to attestation by the company's 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 controls over financial reporting

There have been no changes in our internal control over financial reporting (identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the 1934 Act) during Fiscal 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. OTHER INFORMATION

None.

 

 

 

 

 

 

 

 

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. The Director who is an "interested person" (as defined in the 1940 Act) is referred to as an "Interested Director," a director who is not an Interested Director is referred to herein as an "Independent Director." The address for all officers and Directors is 1640 School Street, Moraga, California 94556. None of our Directors or officers serve 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.

Directors

† As a principal of both MacKenzie and the Adviser, Mr. Patterson is an Interested Director.

Executive Officers

Our current officers are listed in the chart below. As affiliated persons of MacKenzie and/or the Adviser, the officers are "interested persons," as that term is defined in Section 2(a)(19) of the 1940 Act. The address for all officers is 1640 School Street, Moraga, California 94556.

Section 16(a) Beneficial Ownership Reporting Compliance

Pursuant to Section 16(a) of the 1934 Act, our officers and directors and persons beneficially owning 10% or more of our common stock (collectively, "reporting persons") must file reports on Forms 3, 4 and 5 regarding changes in their holdings of our equity securities with the SEC. Based solely upon a review of copies of these reports sent to the Secretary of MRC and/or written representations from reporting persons that no Form 5 was required to be filed with respect to Fiscal 2015, we believe that all Forms 3, 4, and 5 required to be filed by all reporting persons have been properly and timely filed with the SEC.

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.

The Codes of Ethics can be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (202) 942-8090. The Codes of Ethics are also available on the EDGAR database on the SEC's internet site at www.sec.gov, and, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the SEC's Public Reference Section, Washington, D.C. 20549-0102.

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 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 financial statements and periodic filings and receiving our audit reports and financial statements. The audit committee is currently composed of Messrs. Dozois and Frame, neither of whom is an "interested person" of ours as that term is defined in Section 2(a)(19) of the 1940 Act. Mr. Dozois serves as chairman of the audit committee.

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 receive an annual retainer of $20,000. 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 "interested persons" as that term is defined in 1940 Act §2(a)(19).

The following table details the compensation accrued to Directors fees during Fiscal 2015, Fiscal 2014 and Fiscal 2013. We maintain no pension, equity participation or retirement plans for our Directors.

 

Name & Position		Fiscal Year 2015 Fees (1)				Fiscal Year 2014 Fees (1)				Fiscal Year 2013 Fees (1)
C.E. "Pat" Patterson		$	-			$	-			$	-
Tim Dozois			24,250				23,000				1,500
Tom Frame			24,250				23,000				1,500
Total Fees		$	48,500			$	46,000			$	3,000

⁽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 three fiscal years. We do not provide any of 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.

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

The following table contains ownership information, as of September 22, 2015, for our common stock for those persons who, directly or indirectly, own, control or hold with the power to vote, 5% or more of our common stock, and all of our officers and directors, as a group. Each of the owners is located at 1640 School Street, Moraga, California 94556. The percentage ownership is based on 2,582,034.04 Shares of common stock outstanding as of September 22, 2015.

Title of Class	Name of Beneficial Owner	Nature of Beneficial Ownership	Shares Owned	Percent of Class
Common Stock	MPF Flagship Fund 9, LLC	Directly held	143,730	5.6%
Common Stock	MP Value Fund 7, LLC	Directly held	139,220	5.4%
Common Stock	All officers and directors as a group (6 persons)	Indirectly held	10,000	0.4%

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 minority 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.

We are advised by the Adviser, whose investment team members have an average of nearly 19 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: C.E. Patterson, Founder and Managing Director of the General Partner of MacKenzie and the Adviser; 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; Paul F. Koslosky, 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 Agreement, under which the Adviser serves as our 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. Payments under the Investment Advisory Agreement in future periods (after the up-front payment of the Portfolio Structuring Fee) are (i) a percentage of the value of our Managed Funds; and (ii) incentive fees based on our income and our performance above specified hurdles (except in the year of liquidation). In Fiscal 2015 and 2014, Management fees accrued and payable to the Adviser under the Advisory Agreement were $542,033 and $233,599, respectively. Administration fees accrued and payable under the Administration Agreement for Fiscal 2015 and 2014, were $120,000 and $60,000. 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.

The 1940 Act extensively regulates conflicts of interests between BDCs, their directors, investment advisers and their affiliates. 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 do not engage in any transactions with any persons affiliated with us that are prohibited by the 1940 Act, we have 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 exist, we have taken 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.

Our directors have been divided into two groups — interested directors and Independent Directors. An interested director is an "interested person" as defined in 1940 Act §2(a)(19). Our only interested director is C.E. "Pat" Patterson. Our independent directors are Tim Dozois and Tom Frame.

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES:

The following table presents fees incurred for professional services rendered by Moss Adams, MRC's independent registered public accounting firm, for Fiscal 2015, Fiscal 2014 and Fiscal 2013:

Fee Category		Fiscal Year 2015 Fees				Fiscal Year 2014 Fees				Fiscal Year 2013 Fees
Audit Fees		$	74,500			$	77,500			$	70,500
Audit-Related Fees			-				-				-
Tax Fees			-				-				-
Total Fees		$	74,500			$	77,500			$	70,500

Audit Fees were for professional services rendered for the audit of our financial statements and review of the interim 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 MRC's 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. We paid Moss Adams, LLP $10,000 during Fiscal 2014 for their review of the Registration Statement. However, the entire amount was reimbursed by the Adviser under the Advisory Agreement. We did not pay any fees for such other services in Fiscal 2015.

 

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 either Fiscal 2015 or Fiscal 2014.

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.

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

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

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

2.	The Exhibits listed in the Exhibit Index below.

  

 

      

Exhibit No. 1		Description of Document
3(i)		Articles of Amendment and Restatement (incorporated by reference to Registrant's Post-Effective Amendment No. 1 to the Registration Statement on Form N-2, filed on August 2, 2013)
3(ii)		First Amended and Restated Bylaws (incorporated by reference to Registrant's Pre-Effective Amendment No. 2 to the Registration Statement on Form N-2, filed on July 19, 2013)
10.1		Investment Advisory Agreement with MCM Advisers, LP dated February 28, 2013 (incorporated by reference to Registrant's Post-Effective Amendment No. 2 to the Registration Statement on Form N-2, filed on September 5, 2013)
10.2		Amendment to Investment Advisory Agreement (incorporated by reference to Registrant's Post-Effective Amendment No. 4 to the Registration Statement on Form N-2 filed on August 6, 2014)
10.3		Form of Investment Adviser Introducing Agreement (incorporated by reference to Registrant's Post-Effective Amendment No. 2 to the Registration Statement on Form N-2, filed on September 5, 2013)
10.4		Marketing Services Agreement with ARI Financial Services, Inc. (incorporated by reference to Registrant's Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2, filed on May 30, 2013)
10.5		Marketing Services Agreement with Arete Wealth Management, LLC  (incorporated by reference to Registrant's Quarterly Report on Form 10-Q filed on May 9, 2014)
10.6		Form of Amended Marketing Services Agreement with Arete Wealth Management, LLC  (incorporated by reference to Registrant's Post-Effective Amendment No. 4 to the Registration Statement on Form N-2 filed on August 6, 2014)
10.7		Form of Sales Agent Agreement (incorporated by reference to Registrant's Post-Effective Amendment No. 2 to the Registration Statement on Form N-2, filed on September 5, 2013)
10.8		Form of Amended Sales Agent Agreement (incorporated by reference to Registrant's Post-Effective Amendment No. 4 to the Registration Statement on Form N-2 filed on August 6, 2014)
10.9		Form of Sales Agent Agreement (for use after August 6, 2014) (incorporated by reference to Registrant's Post-Effective Amendment No. 4 to the Registration Statement on Form N-2 filed on August 6, 2014)
10.10		Form of Investor Services Agreement with ACS Securities Services, Inc. (incorporated by reference to Registrant's Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2, filed on May 30, 2013)
10.11		Form of Administration Agreement with MacKenzie Capital Management, LP (incorporated by reference to Registrant's Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2, filed on May 30, 2013)
14		Code of Ethics for Principal Executive Officer and Principal Financial Officer ("Officer Code") (incorporated by referenced to Registrant's Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2, filed on May 30, 2013)
31.1		Section 302 Certification of Robert Dixon (President and Chief Executive Officer)
31.2		Section 302 Certification of Paul Koslosky (Treasurer and Chief Financial Officer)
32.1		Section 1350 Certification of Robert Dixon (President and Chief Executive Officer)
32.2		Section 1350 Certification of Paul Koslosky (Treasurer and Chief Financial Officer)

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.

 

 

 

 

 

Index to Audited Financial Statements

 

 

Report of Independent Registered Public Accounting Firm	F-2
Statements of Assets and Liabilities as of June 30, 2015 and 2014	F-3
Schedule of Investments as of June 30, 2015	F-4
Schedule of Investments as of June 30, 2014	F-5
Statements of Operations for the Years Ended June 30, 2015, 2014, and 2013	F-6
Statements of Changes in Net Assets for the Years Ended June 30, 2015, 2014, and 2013	F-7
Statements of Cash Flows for the Years Ended June 30, 2015, 2014, and  2013	F-8
Notes to Financial Statements	F-9

 

 

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

MacKenzie Realty Capital, Inc.

We have audited the accompanying statement of assets and liabilities of MacKenzie Realty Capital, Inc. (a Maryland corporation) (the "Company"), including the schedule of investments, as of June 30, 2015 and 2014, and the related statements of operations, changes in net assets and cash flows for the years ended June 30, 2015, 2014, and 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MacKenzie Realty Capital, Inc. as of June 30, 2015 and 2014, the results of its operations and its cash flows for the years ended June 30, 2015, 2014, and 2013, in conformity with accounting principles generally accepted in the United States of America.

/s/ Moss Adams

San Francisco, California

September 22, 2015

Part I. FINANCIAL INFORMATION

MacKenzie Realty Capital, Inc.

Statements of Assets and Liabilities

 

 

		June 30, 2015				June 30, 2014
Assets
Investments, at fair value (cost of $16,528,720 and $5,593,407, respectively)		$	18,645,022			$	5,905,995
Cash and cash equivalents			4,297,086				3,522,751
Accounts receivable			87,689				12,869
Other assets			188,407				69,145
Deferred offering costs (net of accumulated amortization of $424,825 and $389,423, respectively)			-				35,402
Total assets		$	23,218,204			$	9,546,162
Liabilities
Accounts payable and accrued liabilities		$	18,045			$	58,378
Income tax payable			-				160,362
Capital pending acceptance			588,250				380,200
Due to related entities			228,803				57,915
Deferred tax liability			44,667				124,518
Total liabilities			879,765				781,373
Net assets
Common stock, $0.0001 par value, 80,000,000 shares authorized; 2,196,612.73 and 893,807.67 shares issued and outstanding, respectively			220				89
Capital in excess of par value			20,061,251				8,591,878
Retained earnings			2,276,968				172,822
Total net assets		$	22,338,439			$	8,764,789
Net asset value per Share		$	10.17			$	9.81

 

 

 

 

 

 

 

The accompanying Notes to Financial Statements are an integral part of these financial statements.

MacKenzie Realty Capital, Inc.

Schedule of Investments

June 30, 2015

 

Name					Asset Type		Shares/Units				Cost Basis				Total Fair Value				% of Net Assets
American Realty Capital Properties, Inc.					Publicly Traded Company			54,800.00			$	514,633			$	445,524				1.99
Ashford Hospitality Prime, Inc.					Publicly Traded Company			15,800.00				274,131				237,316				1.06
Ashford Hospitality Trust, Inc.					Publicly Traded Company			30,000.00				299,917				253,800				1.14
CBL & Associates Properties, Inc.					Publicly Traded Company			18,300.00				348,730				296,460				1.33
Equity Commonwealth					Publicly Traded Company			12,150.00				311,114				311,890				1.39
Lexington Realty Trust					Publicly Traded Company			49,300.00				528,497				418,064				1.87
Liberty Property Trust					Publicly Traded Company			5,500.00				195,750				177,210				0.79
One Liberty Properties, Inc.					Publicly Traded Company			9,000.00				206,110				191,520				0.86
Rouse Properties Inc					Publicly Traded Company			20,700.00				377,231				338,445				1.52
Senior Housing Properties Trust					Publicly Traded Company			9,000.00				201,135				157,950				0.71
Winthrop Realty Trust Shares of Beneficial Interest					Publicly Traded Company			38,500.00				594,594				583,275				2.61
Total Publicly Traded Company												3,851,842				3,411,454				15.27
Bluerock Residential Growth REIT, Inc. Class B2					Non Traded Company			1,429.61				17,211				18,099				0.08
Bluerock Residential Growth REIT, Inc. Class B3					Non Traded Company			1,429.61				15,781				18,099				0.08
FSP South 10th Street Corp. Liquidating Trust					Non Traded Company			0.25				152				130				-
Hines Real Estate Investment Trust, Inc.					Non Traded Company			2,692.31				13,569				12,949				0.06
InvenTrust Properties Corp.					Non Traded Company			853,577.92				2,128,695				2,424,161				10.85
KBS Real Estate Investment Trust, Inc.					Non Traded Company			205,831.73				322,025				642,195				2.87
Landmark Apartment Trust, Inc.					Non Traded Company			179,421.12				770,227				893,517				4.00
SmartStop Self Storage, Inc.					Non Traded Company			124,588.73				1,094,503				1,639,588				7.34
TIER REIT, Inc.					Non Traded Company			186,508.00				2,401,668				3,189,287				14.28
Total Non Traded Company			(1	)								6,763,831				8,838,025				39.56
Del Taco Income Properties IV					LP Interest			2,296.00				59,696				65,275				0.29
Del Taco Restaurant Properties I					LP Interest			591.00				443,823				492,172				2.20
Del Taco Restaurant Properties II					LP Interest			892.00				179,815				200,878				0.90
DRV Holding Company, LLC					LP Interest			500.00				500,000				552,785				2.47
El Conquistador Limited Partnership					LP Interest			2.00				80,976				47,107				0.21
Hotel Durant, LLC					LP Interest			7.10				577,299				366,106				1.64
Inland Land Appreciation Fund II, L.P.					LP Interest			210.97				8,667				30,956				0.14
MPF Pacific Gateway - Class B			(2	)	LP Interest			23.20				6,287				6,613				0.03
National Property Investors 6					LP Interest			7.00				145				151				-
Post Street Renaissance Partners Class A					LP Interest			9.10				16,981				20,336				0.09
Post Street Renaissance Partners Class D					LP Interest			21.60				105,623				130,036				0.58
Rancon Realty Fund IV					LP Interest			1,016.00				185,651				406,400				1.82
Rancon Realty Fund V					LP Interest			1,156.00				213,661				233,455				1.05
Resource Real Estate Investors 6, L.P.					LP Interest			35,100.00				180,990				175,501				0.79
Secured Income, LP					LP Interest			64,177.00				560,403				748,946				3.35
The Weatherly, LTD					LP Interest			60.00				672,000				672,000				3.01
The Weatherly Building, LLC					LP Interest			17.50				392,000				392,000				1.75
Uniprop Manufactured Housing Income Fund II, LP					LP Interest			53,202.00				237,401				276,118				1.24
VWC Savannah, LLC					LP Interest			8.25				825,000				825,532				3.70
Total LP Interest												5,246,418				5,642,367				25.26
Coastal Realty Business Trust, REEP, Inc. - A			(2	)	Investment Trust			72,320.00				73,555				96,909				0.44
Coastal Realty Business Trust, Series H2- A			(2	)	Investment Trust			47,284.16				246,351				188,191				0.84
Total Investment Trust												319,906				285,100				1.28
BR Cabrillo LLC Promissory Note					Note			346,723.32				346,723				468,076				2.10
Total Note												346,723				468,076				2.10
Total Investments											$	16,528,720			$	18,645,022				83.47

(1)	Investments primarily in non traded public REITs or their successors.

(2)	Investments in related parties.

 

The accompanying Notes to Financial Statements are an integral part of these financial statements.

MacKenzie Realty Capital, Inc.

Schedule of Investments

June 30, 2014

Name					Asset Type		Shares/Units				Cost Basis				Total Fair Value				% of Net Assets
Agree Realty Corporation					Publicly Traded Company			4,200.00			$	117,893			$	126,966				1.45
Apartment Investment and Management Company					Publicly Traded Company			3,888.00				115,163				125,466				1.43
Ashford Hospitality Prime, Inc.					Publicly Traded Company			12,800.00				224,201				219,648				2.51
Associated Estates Realty Corporation					Publicly Traded Company			4,000.00				69,920				72,080				0.82
CBL & Associates Properties, Inc.					Publicly Traded Company			5,000.00				95,057				95,000				1.08
CommonWealth REIT					Publicly Traded Company			8,450.00				213,363				222,404				2.54
Empire State Realty OP, L.P.					Publicly Traded Company			19,176.00				255,281				303,940				3.47
Empire State Realty OP, L.P. - Series 250					Publicly Traded Company			1,757.00				24,728				27,426				0.31
Empire State Realty OP, L.P. - Series 60					Publicly Traded Company			4,974.00				64,081				78,191				0.89
Empire State Realty Trust, Inc. Class A					Publicly Traded Company			4,832.00				64,217				79,728				0.91
FelCor Lodging Trust Incorporated					Publicly Traded Company			6,300.00				51,604				66,213				0.76
Lexington Realty Trust					Publicly Traded Company			10,800.00				123,452				118,908				1.36
Rouse Properties Inc					Publicly Traded Company			9,500.00				176,525				162,545				1.85
Total Publicly Traded Company												1,595,485				1,698,515				19.38
Apple Hospitality REIT, Inc.					Non Traded Company			21,539.39				116,937				194,931				2.22
BellaVista Capital, Inc.					Non Traded Company			123,987.00				49,595				49,595				0.57
Hines Real Estate Investment Trust, Inc.					Non Traded Company			2,692.31				13,569				13,058				0.15
Total Non Traded Company			(1	)								180,101				257,584				2.94
Brown Palace Hotel Associates, LP					LP Interest			0.25				1,913				1,932				0.03
Del Taco Income Properties IV					LP Interest			2,296.00				59,696				64,472				0.74
Del Taco Restaurant Properties I					LP Interest			417.00				306,918				330,798				3.77
Del Taco Restaurant Properties II					LP Interest			632.00				120,803				152,129				1.74
DRV Holding Company, LLC					LP Interest			500.00				500,000				500,000				5.70
El Conquistador Limited Partnership					LP Interest			2.00				80,976				94,754				1.08
Hotel Durant, LLC					LP Interest			7.10				577,299				367,461				4.19
Inland Land Appreciation Fund II, L.P.					LP Interest			210.97				8,667				26,234				0.30
Inland Land Appreciation Fund, L.P.					LP Interest			149.37				18,166				19,418				0.22
MPF Pacific Gateway - Class B			(2	)	LP Interest			23.20				6,287				6,264				0.07
National Property Investors 6					LP Interest			7.00				145				95				-
Post Street Renaissance Partners Class A					LP Interest			9.10				16,981				16,981				0.19
Post Street Renaissance Partners Class D					LP Interest			11.60				56,729				58,319				0.67
Rancon Realty Fund IV					LP Interest			997.00				179,266				312,659				3.57
Rancon Realty Fund V					LP Interest			1,150.00				212,541				245,629				2.80
Secured Income, LP					LP Interest			26,600.00				232,732				249,242				2.84
Uniprop Manufactured Housing Income Fund II, LP					LP Interest			47,304.00				207,996				234,155				2.67
Total LP Interest												2,587,115				2,680,542				30.58
Coastal Realty Business Trust, REEP, Inc.			(2	)	Investment Trust			72,320.00				73,555				90,400				1.03
Coastal Realty Business Trust, Secured Income			(2	)	Investment Trust			37,577.00				327,671				352,096				4.02
Coastal Realty Business Trust, Series H2			(2	)	Investment Trust			47,284.16				246,351				254,389				2.90
Coastal Realty Business Trust, Series L2			(2	)	Investment Trust			7,950.00				18,444				17,411				0.20
Coastal Realty Business Trust, Series Q			(2	)	Investment Trust			10.00				48,894				50,264				0.57
Total Investment Trust												714,915				764,560				8.72
BR Cabrillo LLC Promissory Note					Note							275,795				275,794				3.15
TTLC  Note					Note							239,996				229,000				2.61
Total Note												515,791				504,794				5.76
Total Investments											$	5,593,407			$	5,905,995				67.38

(1)	Investments primarily in non traded public REITs or their successors.

(2)	Investments in related parties.

 

The accompanying Notes to Financial Statements are an integral part of these financial statements.

MacKenzie Realty Capital, Inc.

Statements of Operations

 

		Year Ended June 30,
		2015				2014				2013
Investment income
Dividend and distribution income		$	532,036			$	597,847			$	77,011
Interest and other income			70,533				26,097				889
Total investment income			602,569				623,944				77,900
Operating expenses
Base management fee			495,285				233,599				72,822
Subordinated incentive fee			46,748				-				-
Administrative cost reimbursements			120,000				60,000				32,000
Organization costs			-				-				74,410
Amortization of deferred offering costs			35,402				389,423				-
Professional fees			145,597				121,387				-
Other general and administrative			122,699				110,122				10,249
Total operating expenses			965,731				914,531				189,481
Net investment loss			(363,162	)			(290,587	)			(111,581	)
Net realized gain on sale of investments			1,578,081				632,703				56,219
Net unrealized gain on investments			1,803,714				192,524				120,065
Total net realized and unrealized gain on investments			3,381,795				825,227				176,284
Income tax (provision) benefit (note 2)			188,949				(373,580	)			-
Net increase in net assets resulting from operations		$	3,207,582			$	161,060			$	64,703
Net increase in net assets resulting from operations per Share		$	2.08			$	0.21			$	0.24
Weighted average common Shares outstanding			1,541,525				763,813				269,268