As noted above, the
conflictscompensation committee discharges the Board of Directors’ responsibilities relating to the compensation of our executive
officers, even though they do not receive any compensation directly from us. Our executive officers are officers and/or employees of, or hold an indirect ownership interest in, our advisor, sponsor and/or their affiliates and our executive officers are compensated by these entities, in part, for their services to us or our subsidiaries. See “– Reportofficers. The members of the
Conflicts Committee – Certain Transactionscompensation committee are Mr. McWilliams, Mr. Nolan and Mr. Wirta, with
Related Persons” for a discussionMr. Nolan serving as chair of the
fees paid to our advisor, sponsorcompensation committee. Messrs. Nolan and
their affiliates.Report of the Conflicts Committee
Review of Our Policies
This conflicts committee has reviewed our policies and determined that they are in the best interest of our stockholders. Set forth below is a discussion of the basis for that determination.
Offering Policy. On July 20, 2016, we commenced our reasonable best efforts offering of up to 100 million shares of our Class C common stock, including 10 million shares pursuant to our distribution reinvestment plan (the “Registered Offering”). On August 11, 2017, we began offering up to 100 million shares of our Class S common stock exclusively to non-U.S. Persons as defined in Rule 903 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to an exemption from the registration requirements of the Securities Act and in accordance with Regulation S of the Securities Act (together with the “Registered Offering,” the “Offerings”). We believe the continuation of the Offerings is in the best interest of our stockholders as we continue to raise sufficient funds to acquire a diverse portfolio of real estate investments to meet our stated investment objectives. We reimburse our sponsor for organizational and offering expenses up to 3.0% of the gross proceeds raised from the Offerings, including dividend reinvestment proceeds but excluding upfront commissions and fees on the sale of Class S shares.
Through the year ended December 31, 2017, we had raised approximately $90,582,077 through the Offerings and the reimbursable offering costs of $2,723,462 represented approximately 3% of the capital raised.
Acquisition and Investment Policies. We have invested substantially all of the net proceeds from the Offerings in a diverse portfolio of real estate investments and we continue to seek to make additional real estate investments.
We primarily invest, directly or indirectly through investments in non-affiliated entities, in single-tenant income-producing corporate properties, which are leased to creditworthy tenants under long-term net leases. While our focus is on single tenant net leased properties, we plan to diversify our portfolio by geography, investment size and investment risk with the goal of acquiring a portfolio of income-producing real estate investments that provides attractive and stable returns to our stockholders through a relatively predictable and stable current stream of income from properties with the potential for long-term capital appreciation in the value.
Borrowing Policies.We may incur indebtedness in the form of bank borrowings, purchase money obligations to the sellers of properties, and publicly or privately placed debt instruments or financing from institutional investors or other lenders. We may obtain a credit facility or separate loans for each acquisition. Our indebtedness may be unsecured or may be secured by mortgages or other interests in our properties. We may use borrowing proceeds to finance acquisitions of new properties, to pay for capital improvements, repairs or buildouts, to refinance existing indebtedness, to fund repurchases of our shares or to provide working capital. To the extent we borrow on a short-term basis, we may refinance such short-term debt into long-term, amortizing mortgages once a critical mass of properties has been acquired and to the extent such debt is available at terms that are favorable to the then in-place debt.
There is no limitation on the amount we can borrow for the purchase of any individual property. Our aggregate borrowings, secured and unsecured, must be reasonable in relation to our net assets, and we intend to utilize up to 50% leverage in connection with our acquisition strategy. Our charter limits our borrowings to 50% of our net assets (where “net assets” is equal to our total assets (other than intangibles) at cost before deducting depreciation or other non-cash reserves less total liabilities), unless any excess borrowing is approved by a majority of this conflicts committee and is disclosed to our stockholders in our next quarterly report, along with the justification for such excess. For the year ended December 31, 2017, our leveraged properties borrowings, excluding borrowings outstanding under our revolving credit facility used in connection with our initial acquisition of properties, were approximately 41.0% of our net assets.
We may borrow amounts from our advisor or its affiliates if such borrowings are approved by a majority of our directors, including a majority of this conflicts committee, not otherwise interested in the transaction, as being fair, competitive, commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties under the circumstances.
Except as set forth in our charter regarding debt limits, we may re-evaluate and change our debt strategy and policies in the future without a stockholder vote. Factors that we could consider when re-evaluating or changing our debt strategy and policies include then-current economic and market conditions, the relative cost of debt and equity capital, any acquisition opportunities, the ability of our properties to generate sufficient cash flow to cover debt service requirements and other similar factors. Further, we may increase or decrease our ratio of debt to equity in connection with any change of our borrowing policies.
Creditworthiness of Tenants Policies. In the course of making real estate investment decisions, we and the Board assess the creditworthiness of the tenants that lease the properties we intend to purchase. Tenant creditworthiness is an important investment criterion, as it provides a barometer of relative risk of tenant default. Tenant creditworthiness analysis is just one element of due diligence which we intend to perform when considering a property purchase; and the weight we intend to ascribe to tenant creditworthiness is a function of the results of other elements of due diligence.
We do not systematically analyze tenant creditworthiness on an ongoing basis, post-acquisition. Many leases limit our ability as landlord to demand on recurring bases non-public tenant financial information. It is our policy and practice, however, to monitor public announcements regarding our tenants, as applicable, and tenant payment histories.
Leasing Policies.We expect, in most instances, to acquire single tenant properties with existing net leases. “Net” leases means leases that typically require tenants to pay all orMcWilliams, representing a majority of the operating expenses, including real estate taxes, special assessmentsmembers of the compensation committee, are “Independent Directors” as defined by our charter and salesare “independent” as defined by the New York Stock Exchange and use taxes, utilities, insurance, common area maintenance charges,applicable rules of the SEC. The compensation committee is responsible for recommending, establishing, overseeing and building repairs relateddirecting the Company’s executive officer and director compensation philosophy, policies and programs, approving the compensation to be paid by the Company to the property, in additionCompany’s executive officers and making recommendations to the lease payments. We anticipate that most of our acquisitions will have lease terms of five to 15 years at the time of the property acquisition, and we may acquire properties under which the lease term has partially expired. We also may acquire properties with shorter lease terms if the property is located in a desirable location, is difficult to replace, or has other significant favorable real estate attributes.
Disposition Policies. We generally intend to hold each property we acquire for an extended period. However, we may sell a property at any time if, in our judgment, the sale of the property is in the best interests of our stockholders. The determination of whether a particular property should be sold or otherwise disposed of will generally be made after consideration of relevant factors, including prevailing economic conditions, other investment opportunities and considerations specific to the condition, value and financial performance of the property. In connection with our sales of properties, we may lend the purchaser all or a portion of the purchase price. In these instances, our taxable income may exceed the cash received in the sale.
We may sell assets to third parties or to affiliates of our advisor. All transactions between us and our advisor and its affiliates must be approved by a majority of this conflicts committee.
We did not sell any real estate investments during the year ended December 31, 2017.
Policy Regarding Transactions with Related Persons. This conflicts committee is required to review and approve all transactions between us and our advisor, any of our officers or directors or any of their affiliates. Prior to entering into a transaction with a related party, a majority of the conflicts committee must conclude that the transaction is fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties. In addition, our Code of Business Conduct and Ethics requires our employees and directors to be scrupulous in avoiding any action or interest that conflicts with, or gives the appearance of a conflict with, our interests. Our employees and directors are required to report potential and actual conflicts to the Compliance Officer, currently our chief financial officer, or directly to the conflicts committee, as appropriate.
Certain Transactions with Related Persons
The conflicts committee has reviewed the material transactions between our affiliates and us since the beginning of 2016, as well as any such currently proposed material transactions. Set forth below is a description of such transactions and the conflict committee’s report on their fairness.
Since January 1, 2017, we have entered into the following agreements with our advisor and sponsor:
| · | In January 2017, we entered into an Amended and Restated Advisory Agreement in which (i) our advisor agreed to pay 50% of the pro rata portion of its asset management fee and its subordinated participation fee attributable to “Large Investors” who purchase 100,000 or more shares ($1,000,000) in our Registered Offering; and (ii) revisions were made to provide greater specificity as to the reimbursable items payable to our sponsor and organization and offering expenses in the Registered Offering. |
| · | On February 8, 2017, we entered into a Non-Solicitation Agreement with our advisor and sponsor in which we agreed not to solicit the employment of any employee of our advisor or sponsor during the 12-month period following any termination of or failure to annually renew the Amended and Restated Advisory Agreement. |
| · | Effective August 11, 2017, we entered into a Second Amended and Restated Advisory Agreement to reflect the following amendments: (i) updates to the duties of our advisor, (ii) an expansion of the definition of “Large Investors” to encompass investors with aggregate subscriptions or purchases for at least $1,000,000 in one or more securities offerings sponsored by our sponsor and to allow us to include as Large Investors clients of one or more financial advisors whose clients collectively meet the foregoing requirement, and (iii) revisions to the terms of compensation payable to the advisor, including reducing to one-third the rebate paid by the advisor to Large Investors with respect to the pro rata portion of its subordinated participation fee, and a reduction in the applicable percentage used to calculated the subordinated participation fee from 40% to 30%. |
During 2016, the Company had invested $3,643,518 for 364,352 shares in Rich Uncles Real Estate Investment Trust I, an affiliated entity, constituting a 4.3% interest in such entity as of March 31, 2018.
The conflicts committee believes that these arrangements with our advisor and sponsor are fair.
In addition, on September 13, 2017, this conflicts committee discussed and deliberated and ultimately approved the potential investment as a tenant-in-common with an affiliate of the sponsor and advisor on terms which are fair. We completed the acquisition of this 72.7% tenant-in-common interest in real estate property in Santa Clara, CA on September 28, 2017. The remaining 27.3% interest is owned by two special purpose limited liability companies that are controlled by a board member of our sponsor.
Relationship with our Sponsor and Advisor. Our sponsor pays for all of the organization and offering expenses we incur in connection with our Offerings. We reimburse our sponsor for those expenses they have paid out of the proceeds of the Offerings but not in excess of 3% of the gross offering proceeds that we receive from the sale of our shares, including dividend reinvestment proceeds.
Pursuant to our amended and restated advisory agreement with our advisor, our advisor provides day-to-day management of our business. Among the services provided by our advisor under the terms of the advisory agreement are the following:
| ● | accepting and executing any and all delegated duties from us as a general partner of our operating partnership; |
| ● | finding, presenting and recommending to us real estate investment opportunities consistent with our investment policies and objectives; |
| ● | structuring the terms and conditions of our investments, sales and co-ownerships; |
| ● | acquiring real estate investments on our behalf in compliance with our investment objectives and policies; |
| ● | arranging for financing and refinancing of our real estate investments; |
| ● | entering into leases and service contracts for our properties; |
| ● | reviewing and analyzing our operating and capital budgets; |
| ● | assisting us in obtaining insurance; |
| ● | generating an annual budget for us; |
| ● | reviewing and analyzing financial information for each of our assets and our overall portfolio; |
| ● | formulating and overseeing the implementation of strategies for the administration, promotion, management, operation, maintenance, improvement, financing and refinancing, marketing, leasing and disposition of our real estate investments; |
| ● | performing investor-relations services; |
| ● | maintaining our accounting and other records and assisting us in filing all reports required to be filed with the SEC, the IRS and other regulatory agencies; |
| ● | engaging in and supervising the performance of our agents, including our registrar and transfer agent; |
| ● | performing administrative and operational duties reasonably requested by us; |
| ● | performing any other services reasonably requested by us; and |
| ● | doing all things necessary to assure its ability to render the services described in the advisory agreement. |
Our advisor is subject to the supervision of the Board of Directors regarding the compensation of the non-employee members of the Company’s Board of Directors. The compensation committee fulfills these responsibilities primarily by carrying out the activities enumerated in the compensation committee charter. The compensation committee may form and only has suchdelegate authority to subcommittees as we may delegate to it as our agent. We initially entered into the advisory agreement with our advisor in connection with our Registered Offeringappropriate, and the agreement has been amended and restated at various times thereafter, most recently effective as of August 11, 2017. The advisory agreement has a one-year term, subject to an unlimited number of successive one-year renewals uponcompensation committee reviews the mutual consentrecommendations of the parties.
The advisory agreement entitles our advisor to specified fees upon the provision of certain servicesChief Executive Officer with regard to the investment of funds in real estate investments, the management of those investments, among other services, and the disposition of investments, and also entitles our advisor to reimbursement of organizational and offering costs incurred by our advisor or sponsor on behalfcompensation of the Company, such as expenses related toexecutive officers other than the Offerings, and certain costs incurred by our advisor or sponsor in providing services toChief Executive Officer. The compensation committee has the Company. In addition, our advisor is entitled to certain other fees, including an incentive fee upon achieving certain performance goals, as detailed in the advisory agreement.
Summarized below is information about the costs incurred by the Company pursuant to the advisory agreement for the year ended December 31, 2017.
Organizational and Offering Costs.Pursuant to the advisory agreement, we are obligated to reimburse our sponsor and its affiliates for organization and offering costs paid by our sponsor on behalf of the Company. We will reimburse our sponsor for organizational and offering expenses up to 3.0% of gross offering proceeds. Our sponsor and its affiliates will be responsible for any organizational and offering expenses to the extent they exceed 3.0% of gross offering proceeds. As of December 31, 2017, our sponsor has incurred organizational and offering expenses of $6,924,999 on behalf of the Company, which is in excess of 3.0% of the gross offering proceeds received by the Company. To the extent we have more gross offering proceeds from future stockholders, we will be obligated to reimburse our sponsor. As the amount of future gross offering proceeds is uncertain, the amount we are obligated to reimburse to our sponsor is uncertain. As of December 31, 2017, we have reimbursed our sponsor $2,707,517 in organizational and offering costs. Our maximum liability for organizational and offering costs through December 31, 2017 was $2,723,462, of which $15,945 was payable to our advisor as of December 31, 2017.
Investor Relations Payroll Expense Reimbursements from Sponsor. We employ investor personnel that answer inquiries from potential investors regarding the Company and/or the Registered Offering. The payroll expense associated with the investor relations personnel is reimbursed by our sponsor. The sponsor considers these payroll costs to be offering expenses.
Acquisition Fees. We pay our advisor a fee in an amount equal to 3.0% of our contract purchase price of its properties, as defined, as acquisition fees. The total of all acquisition fees and acquisition expenses shall be reasonable and shall not exceed 6.0% of the contract price of the property. However, a majority of the directors (including a majority of the independent directors) not otherwise interested in the transaction may approve fees in excess of these limits if they determine the transaction to be commercially competitive, fair and reasonable to the Company. Acquisition fees for the year ended December 31, 2017 were $3,661,684, of which $0 was payable to our advisor as of December 31, 2017. The total amount of acquisitions fees included $626,073 of acquisitions fees relating to an approximate 72.7% tenant-in-common interest in the Santa Clara property acquired on September 28, 2017.
Asset Management Fees. We pay to our advisor as compensation for the advisory services rendered to the Company a monthly fee in an amount equal to 0.1% of the Company’s total investment value, as defined (asset management fee), as of the end of the preceding month. The asset management fee shall be payable monthly on the last day of such month, or the first business day following the last day of such month. The asset management fee, which must be reasonable in the determination of the Company’s independent directors at least annually, may or may not be taken, in whole or in part as to any year, in the sole discretion of our advisor. All or any portion of the asset management fee not paid as to any fiscal year shall be deferred without interest and may be paid in such other fiscal year as our advisor shall determine.
Additionally, to the extent our advisor elects,authority, in its sole discretion, to defer all or any portionselect, retain and obtain the advice of a compensation consultant as necessary to assist with the execution of its monthly asset management fee, our advisor will be deemed to have waived, not deferred, that portion of its monthly asset management fee that is up to 0.025% of the total investment value of the Company’s assets. The total amount of asset management fees incurredduties and responsibilities set forth in the year ended December 31, 2017 was $872,281, of which $143,540 was waived. Total asset management fees payable at December 31, 2017 was $567,661.
Financing Coordination Fee. Other than with respect to any mortgage or other financing related to a property concurrent with its acquisition, if our advisor or an affiliate provides a substantial amount ofcompensation committee charter. The compensation committee charter is available in the services (as determined by a majority of the Company’s independent directors) in connection with the post-acquisition financing or refinancing of any debt that we obtain relative to a property, then we shall pay the advisor or such affiliate a financing coordination fee equal to 1.0% of the amount of such financing. Financing coordination fees for the year ended December 31, 2017 were $326,600, of which $0 was payable to our advisor as of December 31, 2017.
Property Management Fees. Our real estate properties are intended to be triple-net single tenant properties with limited, if any, property management responsibilities. However, if our advisor or its affiliates provides a substantial amount of property management services (as determined by a majority of the Company’s independent directors) for our properties, we will pay fees equal to 1.5% of gross revenues from the properties managed. We also will reimburse our advisor or any of its affiliates for property-level expenses that it pays or incurs on behalf of the Company, including salaries, bonuses and benefits of persons employed by our advisor or its affiliates except for the salaries, bonuses and benefits of persons who also serve as oneDocuments-Corporate Governance section of our executive officers. Our advisor or its affiliates may subcontractwebsite at www.modiv.com.