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Cottonwood Multifamily Opportunity Fund

Filed: 30 Apr 21, 3:29pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 1-K

ANNUAL REPORT

 

 

ANNUAL REPORT PURSUANT TO REGULATION A OF THE SECURITIES ACT OF 1933

For the fiscal year ended December 31, 2020

 

 

COTTONWOOD MULTIFAMILY OPPORTUNITY FUND, INC.

(Exact name of registrant as specified in its charter)

 

 

Commission File Number: 024-10730

 

Maryland 38-4006444

(State or other jurisdiction

of incorporation)

 

(IRS Employer

Identification No.)

 

1245 Brickyard Road, Suite 250, Salt Lake City, Utah 84106
(Address of principal executive offices) (ZIP Code)

(801) 278-0700

(Registrant’s telephone number, including area code)

 

 

Common Stock

(Title of each class of securities issued pursuant to Regulation A)

 

 

 


Cottonwood Multifamily Opportunity Fund, Inc.

ANNUAL REPORT ON FORM 1-K

For the Year Ended December 31, 2020

TABLE OF CONTENTS

 

ITEM 1. BUSINESS   1 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   2 
ITEM 3. DIRECTORS AND OFFICERS   6 
ITEM 4. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS   7 
ITEM 5. INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS   7 
ITEM 6. OTHER INFORMATION   7 
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS   F- 1 
ITEM 8. EXHIBITS  


Item 1.

Business

The Company

Cottonwood Multifamily Opportunity Fund, Inc. is a Maryland corporation formed to invest in and/or make mezzanine loans or preferred equity investments in multifamily construction and development projects. The use of the terms the “Company”, “we”, “us”, or “our” in this report refer to Cottonwood Multifamily Opportunity Fund, Inc. and its subsidiaries, unless the context indicates otherwise.

Cottonwood Capital Property Management II, LLC acts as our sponsor, property manager and asset manager. We have no employees and are substantially reliant on Cottonwood Capital Property Management II, LLC and its resources to implement our business strategy. Our sponsor is a subsidiary of Cottonwood Residential O.P., LP (“CROP”) and has experience in operating multifamily construction and development projects. Cottonwood Residential II, Inc. (“CRII”) is the sole general partner of CROP, its operating partnership, and makes all decisions on behalf of CROP. CRII is controlled by its board of directors consisting of Daniel Shaeffer, Chad Christensen, Gregg Christensen, Jonathan Gardner and Phillip White. On January 26, 2021, CRII and CROP entered into an Agreement and Plan of Merger with Cottonwood Communities, Inc. (“CCI”), a publicly registered non-traded REIT sponsored by CRII, Cottonwood Communities O.P., LP (“CCOP”), the operating partnership of CCI, and Cottonwood Communities GP Subsidiary, LLC (“Merger Sub”), a wholly owned subsidiary of CCI, pursuant to CRII would be merged with and into Merger Sub and CCOP would be merged with and into CROP. If approved by the stockholders and the unitholders of CRII and CROP, as applicable, and the other closing conditions are met or waived, the mergers will result in CCI, as the general partner of CROP, controlling our sponsor, property manager and asset manager. CCI is controlled by its five member board of directors, two of the members of which are Daniel Shaeffer and Chad Christensen. The mergers are not expected to result in a change of the management or operations of our portfolio.

We operate under the direction of our board of directors, the members of which are accountable to us and our shareholders as fiduciaries. Our board of directors is responsible for the management and control of our affairs. We have three members of our board who are officers and board members of CRII. As a result, we do not have independent management. The board of directors has the right, with input from our investment committee, to make decisions regarding investments by our operating partnership. We do not have an outside advisor, and we do not plan to engage an advisor.

In November 2017, we commenced an offering of $50.0 million in shares of our common stock at a purchase price of $10.00 per share through an offering qualified as a “Tier 2” offering pursuant to Regulation A under the Securities Act (the “Offering”). We completed the Offering in August 2019 after raising the full offering amount.

We may, in our board of directors’ sole discretion, elect to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended (the “Code”) but are not required to do so.

Investment Strategy

We have invested through joint ventures with CROP and affiliated executives, which we refer to as the Cottonwood Joint Ventures. The Cottonwood Joint Ventures may in turn enter into joint ventures with third party developers or a developer affiliated with CROP (an “Affiliated Developer”), which we refer to as the Development Joint Ventures.

See Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Our Investments” for more information concerning the current status of our investments.

Investment Objectives

Our investment objectives are to:

 

  

preserve, protect and return invested capital;

 

  

realize capital appreciation in the value of our investments over the long term, and;

 

  

pay cash distributions to stockholders from our investments or upon stabilization of our properties.

Our board of directors may revise our investment policies without the approval of our shareholders.

 

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Risk Factors

We face risks and uncertainties that could affect us and our business as well as the real estate industry generally. These risks are outlined under the heading “Risk Factors” contained in our offering circular, which may be updated from time to time by our future filings under Regulation A. In addition, new risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our financial performance. These risks could result in a decrease in the value of our common shares.

One of the most significant risks and uncertainties facing the Company and the real estate industry generally continues to be the effect of the novel coronavirus (COVID-19) pandemic. The extent to which the COVID-19 pandemic impacts our operations and those of our development projects remains uncertain and cannot be predicted with confidence, and will depend on the ultimate scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. As a result of shutdowns, quarantines or actual viral health issues, construction and completion of our development projects may be delayed or we may incur additional costs beyond those assumed in determining our estimated net asset value. During the year ended December 31, 2020, we did not experience significant disruptions in the construction of our development projects from the COVID-19 pandemic.

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Statements

This Annual Report on Form 1-K contains forward-looking statements. You can generally identify forward-looking statements by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. You should not rely on these forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our actual results, performance and achievements may be materially different from those expressed or implied by these forward-looking statements.

Except as otherwise required by federal securities laws, we do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Our Investments

As of December 31, 2020, we had investments in two development projects through two separate Cottonwood Joint Ventures:

 

Project Name

  

Property Location

  Units to be
Built
  Net Rentable
Square Feet
  

Estimated Completion

  Investment at
12/31/20
  Joint
Venture
Interest
 Dated
Contracted

Park Avenue

  Salt Lake City, UT  234  167,130  Fourth Quarter 2021  $16,767,159  77.1% 8/10/2018

Cottonwood on Broadway

  Salt Lake City, UT  254  207,642  Second Quarter 2022  $22,390,053  81.2% 8/6/2019

We are required to commit up to a total of $15.8 million and $23.2 in capital for the development of Park Avenue and Cottonwood on Broadway, respectively. Unfunded amounts will be drawn as needed to complete the projects.

Park Avenue

The total development cost of the Park Avenue project is expected to be approximately $57,600,000, of which approximately $20,600,000 will be funded by capital contributions from CROP, CREDE (a third party co-developer), and us through the Park Avenue Joint Venture. Prior to October 1, 2020, executives of CROP invested $2,800,000 in the project through CW Investor at Sugar House, LLC (“Park Avenue Investor”), the entity through which we funded our investment in the Park Avenue Joint Venture. The executives used loans from CROP to fund their investment in Park Avenue Investor. On October 1, 2020, CROP settled the loans with its executive officers in exchange for the rights to a 5% preferred return and capital interest in Park Avenue Investor, thereby increasing its ownership in the project. Each executive that had participated in the $2,800,000 investment retains a residual interest in Park Avenue Investor allowing them to participate in the residual profits of the project.

 

2


Park Avenue will include a mix of studio, one-bedroom, and two-bedroom units and have a fitness center, clubhouse, and resort-style pool and lounge area. See Note 3 of the consolidated financial statements for further discussion regarding this structure.

Cottonwood on Broadway

The total development cost of the Cottonwood on Broadway project is expected to be approximately $76,300,000, of which approximately $31,700,000 will be funded by capital contributions from CROP and us through a joint venture (the “Broadway Joint Venture”). Prior to October 1, 2020, the executives invested $1,714,000 in the Broadway Joint Venture as members. The executives used loans from CROP to fund their investment in the Broadway Joint Venture. On October 1, 2020, CROP settled the loans with its executive officers in exchange for the rights to a 5% preferred return and capital interest in the Broadway Joint Venture, thereby increasing its ownership in the project. Each executive that had participated in the $1,714,000 investment retains a residual interest and supplemental return in the Broadway Joint Venture allowing them to participate in the residual profits of the project.

Cottonwood on Broadway will include a mix of studio, one-bedroom, and two-bedroom units and have a fitness center, clubroom, and a roof-top resort-style pool. See Note 3 of the consolidated financial statements for further discussion regarding this structure.

Results of Operations

For the year ended December 31, 2020, we had net losses of $830,032, primarily from asset management fees and other general and administrative expenses offset by interest income earned on cash received from our Offering. We expect asset management fees and other general and administrative expenses to increase in future periods as a result of more capital being deployed, offset by income from our development projects as they are placed into service.

During 2019, we had losses of $71,703 from asset management fees and other general and administrative expenses.

Our results of operations for the year ended December 31, 2020, are not indicative of those expected in future periods as we entered into our second joint venture in August 2019 and our projects are currently under development.

Liquidity and Capital Resources

We obtain the capital required to invest in multifamily construction and development projects and multifamily development-related assets and conduct our operations from the proceeds of the Offering, from capital provided by our joint venture partners, from secured or unsecured financings from banks and other lenders, and from any undistributed funds from our operations.

The Park Avenue Joint Venture and Broadway Joint Venture have non-revolving, senior secured construction loan facilities of $37,000,000 and $44,625,000, respectively, for the construction of their projects that will be drawn upon as needed. As of December 31, 2020, the Park Avenue Joint Venture had drawn approximately $8,361,000 and the Broadway Joint venture had drawn none.

We may leverage individual assets up to 50% to 70% of the cost of such assets. We may leverage a particular asset in an amount that is greater or lesser than the foregoing, in the board of directors’ sole discretion. However, we expect the debt financing for our entire portfolio to be no more than 70% of the cost of our tangible assets (before deducting depreciation or other non-cash reserves). Our charter does not limit us from incurring debt.

We may make an election to be taxed as a REIT under the Code. To maintain our qualification as a REIT, we will be required to make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (computed without regard to the dividends-paid deduction and excluding net capital gain). Our board of directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board of directors deems relevant. We have not established a minimum distribution level. If we do not elect to be taxed as a REIT, we will not be required to make a minimal level of distributions.

We expect that our board of directors may declare distributions once we begin to generate cash from operations or in anticipation of generating cash from operations from completed multifamily construction and development projects. We do not intend to pay distributions during the early stages of our existence if we initially acquire multifamily construction and development projects with the proceeds from our Offering. If the majority of our initial assets are construction and development

 

3


projects and we do pay distributions during the early stage of our existence or from time to time during our operational stage, we expect to declare such distributions in anticipation of cash flow from operations of completed projects or sales of our properties and we will pay these distributions in advance of our actual receipt of these funds. In these instances, we may look to third party borrowings to fund our distributions.

Trends and Key Information Affecting our Performance

Overview

We believe that factors impacting the prime United States renter demographic such as delayed major life decisions, increased levels of student debt and tight credit standards in the single-family home mortgage market continue to support the value proposition for owning multifamily apartment communities. In addition, we believe the residential real estate market is well positioned to withstand many of the conceivable adverse impacts of COVID-19 as housing is a basic need, rather than a discretionary expense.

Nonetheless, the extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including additional actions taken to contain COVID-19 or treat its impact, among others. As a result of shutdowns, quarantines or actual viral health issues, construction and completion of our development projects may be delayed or we may incur additional costs beyond those assumed in determining our estimated net asset value. Market fluctuations may affect our ability to obtain necessary funds for our operations from current lenders or new borrowings. In addition, we may be unable to obtain financing for the acquisition of investments on satisfactory terms, or at all. As a result, our business and financial results could be materially and adversely impacted.

The Greater Salt Lake Area Multifamily Market

Utah’s lower costs of doing business, which include lower tax rates, tax incentives, and more affordable real estate and labor, have helped encourage companies with existing presences to expand and new companies to enter the area. A significant portion of the metro’s job growth comes from an array of high-paying, white-collar employers in info-tech, finance, and professional services.

Sustained job growth drove Salt Lake’s unemployment rate down to around 2% at the end of 2019. Job losses sustained during business closures related to the pandemic drove unemployment up to just over 11% in April. Jobs are being added back and people rehired, which brought unemployment down to approximately 3.5% as of December 2020.

The financial and technology industries have seen considerable growth over the past several years, seeing gains of around 20% since 2011. There are more than 6,000 tech and software companies located in the Salt Lake City and Provo markets, including Overstock.com, Adobe, and Qualtrics, Pluralsight and Domo. Major financial employers include Zions Bank, Wells Fargo, Discover Financial Services, Goldman Sachs and American Express.

The presence of Salt Lake City International airport and the convention center, along with being the gateway to numerous ski resorts and national parks, are driving factors in the leisure and hospitality sector in the Salt Lake metro. The coronavirus continues to have a significant impact on travel and group events, especially the tourism and retail industries. More than 30,000 leisure and hospitality jobs were shed from February to April in 2020, and as of December, only around 60% had been regained.

Many construction projects are keeping the sector growing, including the $4.1 billion Salt Lake International Airport expansion. The first phase opened in the fall of 2020 and the second phase is expected to open in 2024. Once complete, the airport will be able to support 34 million visitors per year.

According to the 2020 U.S. Census, Utah’s population grew by 18.4% over the past decade, making it the fastest-growing state in the United States.

 

4


Critical Accounting Policies

The preparation of financial statements in accordance with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. Such judgments are based on our management’s experience, our historical experience and the industry. We consider these policies critical because we believe that understanding these policies is critical to understanding and evaluating our reported financial results. Additionally, these policies may involve significant management judgments and assumptions, or require estimates about matters that are inherently uncertain. These judgments will affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.

We consider variable interest entities to be a critical accounting policy. See Note 2 to our financial statements in “Item 7. Financial Statements” for a discussion on variable interest entities.

Recent Developments

Subsequent to December 31, 2020, we have contributed approximately $3,539,000 to the Cottonwood on Broadway Joint Venture in accordance with the approved draw schedules.

On January 22, 2021, we contributed $3,250,000 for a 62.55% interest in Block C JV, a joint venture that owns land and plans to develop a multifamily apartment community located in a qualified opportunity zone in Millcreek, Utah.

 

5


Item 3.

Directors and Officers

We operate under the direction of our board of directors. The board of directors is responsible for the management and control of our affairs. The current board members are Daniel Shaeffer, Chad Christensen and Gregg Christensen. The current Chief Executive Officer is Daniel Shaeffer, the current Chairman of the Board and President is Chad Christensen and the current Chief Legal Officer is Gregg Christensen.

Investment Committee

We have established an investment committee that will be charged with identifying and investigating potential investment opportunities for us. The investment committee will analyze and approve any investment to be made by us. The investment committee has three committee members and is comprised of Daniel Shaeffer, Chad Christensen, and Gregg Christensen. The investment committee may request information from third parties in making its recommendations.

Executive Officers and Directors

The following table shows the names and ages of our current directors and executive officers and the positions held by each individual:

 

Name (1)

  

Positions

  

Age (2)

  

Term of Office

Daniel Shaeffer

  Chief Executive Officer, Director and Investment Committee Member  50  

May 2016 to Present (3)

November 2017 to Present (4)

Chad Christensen

  President, Chairman of the Board, Director and Investment Committee Member  48  

May 2016 to Present (3)

November 2017 to Present (4)

Gregg Christensen

  Chief Legal Officer, Secretary, Director and Investment Committee Member  52  

May 2016 to Present (3)

November 2017 to Present (4)

Susan Hallenberg

  Chief Financial Officer  53  May 2016 to Present (3)

 

(1)

The address of each director and executive officer listed is 1245 Brickyard Road, Suite 250, Salt Lake City, Utah 84106.

(2)

As of March 31, 2021.

(3) 

The current directors and executive officers were appointed on May 31, 2016.

(4) 

The current investment committee members were appointed on November 14, 2017.

Biographical information regarding our executive officers and directors can be found in our offering circular which can be found  here.

Compensation of Executive Officers

As described above, certain of the executive officers of CROP also serve as our executive officers. Each of these individuals receive compensation for his or her services, including services performed for us on behalf of our sponsor and its affiliates. As executive officers of our sponsor, these individuals will manage our day-to-day affairs, oversee the review, selection and recommendation of investment opportunities, service acquired investments and monitor the performance of these investments to ensure that they are consistent with our investment objectives. Although we will indirectly bear some of the costs of the compensation paid to these individuals, through fees we pay to our sponsor, we do not intend to pay any compensation directly to these individuals. More information regarding the compensation of our officers and directors and our sponsor can be found in our offering circular here.

 

6


Item 4.

Security Ownership of Management and Certain Securityholders

The following table sets forth the beneficial ownership of our common shares as of April 26, 2021, for each person or group that holds more than 10% of our common shares, for each executive officer and for the executive officers as a group. To our knowledge, each person that beneficially owns our common shares has sole voting and disposition power with regards to such shares.

Unless otherwise indicated below, each person or entity has an address in care of our principal executive offices at 1245 Brickyard Road, Suite 250, Salt Lake City, Utah 84106.

 

Name of Beneficial Owner(1)

  Number of Shares
Beneficially Owned
   Percent of All
Shares
 

Daniel Shaeffer(2)

   1,000            

Chad Christensen(2)

   1,000            

Gregg Christensen(2)

   1,000            

Susan Hallenberg

   —      —   

All executive officers as a group

   1,000            

 

*

Less than 1% of all shares.

(1) 

Under SEC rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power”, which includes the power to dispose of or to direct the disposition of such security. A person also is deemed to be a beneficial owner of any securities which that person has a right to acquire within 60 days. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which he or she has no economic or pecuniary interest.

(2)

CROP owns 1,000 shares of our common stock. CROP is managed by its general partner, Cottonwood Residential II, Inc. Cottonwood Residential II, Inc. is managed by its board of directors, which currently consists of Daniel Shaeffer, Chad Christensen, Gregg Christensen, Jonathan Gardner and Philip White. The board of directors of Cottonwood Residential II, Inc., as the general partner of CROP, has the voting and investment control of the shares of our common stock held by CROP.

 

Item 5.

Interest of Management and Others in Certain Transactions

See Note 6 to our financial statements in “Item 7. Financial Statements” for information regarding related party transactions as of December 31, 2021.

 

Item 6.

Other Information

Net Asset Value

On April 29, 2021, our board of directors determined the value of our shares of common stock at $10.64 per share based on the Company’s net asset value as of March 31, 2021. The net asset value of the Company was determined with the assistance of a third-party valuation firm, and included metrics such as cash flows, capitalization rates, loan balances, interest rates, percentage of completion, and financial projections for the development projects as well as other assets and obligations of the Company.

As with any valuation methodology, the methodologies used to value the shares of our common stock are based upon a number of estimates and assumptions that may not be accurate or complete. In particular, projections for development projects involve a high degree of subjectivity due to uncertainties with respect to future events affecting timing of completion and associated costs, as well as economic conditions that may impact income and expenses at the time of lease up. Accordingly, different parties using different assumptions and estimates could derive a different estimated net asset value per share of the Company’s common stock, and these differences could be significant.

In addition, the value of the Company’s shares will fluctuate over time in response to developments related to the performance of individual projects in the portfolio and the management of those projects, the real estate and finance markets and due to other factors, including COVID-19. These risks are not priced into our most recent estimated value per share which speaks only as of March 31, 2021.

 

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Item 7.

Cottonwood Multifamily Opportunity Fund, Inc.

Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

Table of Contents

 

Independent Auditors’ Report

   F- 1 

Consolidated Financial Statements

  

Consolidated Balance Sheets as of December 31, 2020 and 2019

   F- 2 

Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019

   F- 3 

Consolidated Statements of Equity for the Years Ended December  31, 2020 and 2019

   F- 4 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019

   F- 5 

Notes to Consolidated Financial Statements

   F- 6 


Independent Auditors’ Report

The Board of Directors and Stockholders

Cottonwood Multifamily Opportunity Fund, Inc.:

We have audited the accompanying consolidated financial statements of Cottonwood Multifamily Opportunity Fund, Inc. and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2020 and 2019, and the related consolidated statements of operations, equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cottonwood Multifamily Opportunity Fund, Inc. and its subsidiaries as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Denver, Colorado

April 30, 2021

 

F- 1


Cottonwood Multifamily Opportunity Fund, Inc.

Consolidated Balance Sheets

 

   December 31, 
   2020  2019 

Assets

   

Investments in joint ventures

  $39,151,967 $20,649,443

Cash and cash equivalents

   9,778,328  30,994,032

Related party receivables

   332  4,505

Other assets

   45,938  52,702
  

 

 

  

 

 

 

Total assets

  $48,976,565 $51,700,682
  

 

 

  

 

 

 

Liabilities and equity

   

Liabilities

   

Accounts payable and accrued liabilities

  $160 $14,803

Related party payables

   7,045  75,760
  

 

 

  

 

 

 

Total liabilities

   7,205  90,563

Commitments and contingencies (Note 7)

   

Equity

   

Preferred stock, $0.01 par value; 100,000,000 shares authorized, no shares issued and outstanding

   —     —   

Common stock, $0.01 par value, 1,000,000,000 shares authorized; 5,001,000 shares issued and outstanding at both December 31, 2020 and December 31, 2019

   50,010  50,010

Additional paid in capital

   49,959,990  49,959,990

Accumulated deficit

   (1,040,640  (210,769
  

 

 

  

 

 

 

Total equity

   48,969,360  49,799,231

Noncontrolling interests - affiliated executives

   —     1,810,888
  

 

 

  

 

 

 

Total equity and noncontrolling interests

   48,969,360  51,610,119
  

 

 

  

 

 

 

Total liabilities, equity and noncontrolling interests

  $48,976,565 $51,700,682
  

 

 

  

 

 

 

See accompanying notes to consolidated financial statements

 

F- 2


Cottonwood Multifamily Opportunity Fund, Inc.

Consolidated Statements of Operations

 

   Year Ended December 31, 
   2020  2019 

Revenues

   

Interest income

  $281,172 $605,372

Expenses

   

Asset management fee to related party

   (799,441  (513,106

General and administrative expenses

   (307,012  (163,613
  

 

 

  

 

 

 

Net operating losses

   (825,281  (71,347

Equity in losses

   (4,751  (494
  

 

 

  

 

 

 

Net loss

   (830,032  (71,841

Net loss attributable to noncontrolling interests - affiliated executives

   1,380  138
  

 

 

  

 

 

 

Net loss attributable to common stockholders

  $(828,652 $(71,703
  

 

 

  

 

 

 

See accompanying notes to consolidated financial statements

 

F- 3


Cottonwood Multifamily Opportunity Fund, Inc

Consolidated Statements of Equity

 

   Common Stock          
   Shares   Amount   Additional
Paid in
Capital
   Accumulated
Deficit
  Total
Stockholders’
Equity
  Noncontrolling
Interest -
Affiliated
Executives
  Total Equity 

Balance at December 31, 2018

   2,285,790  $22,858  $22,835,037  $(139,066 $22,718,829 $—    $22,718,829
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Issuance of common stock

   2,715,210   27,152   27,124,953   —     27,152,105  —     27,152,105

Noncontrolling interest contribution

   —      —      —      —     —     1,811,026  1,811,026

Net loss

   —      —      —      (71,703  (71,703  (138  (71,841
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2019

   5,001,000  $50,010  $49,959,990  $(210,769 $49,799,231 $1,810,888 $51,610,119
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Noncontrolling interest contribution

   —      —      —      —     —     988,974  988,974

Net loss

   —      —      —      (828,652  (828,652  (1,380  (830,032

Deconsolidation of Park Avenue Investor

   —      —      —      (1,219  (1,219  (2,798,482  (2,799,701
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2020

   5,001,000  $50,010  $49,959,990  $(1,040,640 $48,969,360 $—    $48,969,360
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

See accompanying notes to consolidated financial statements

 

F- 4


Cottonwood Multifamily Opportunity Fund, Inc

Consolidated Statements of Cash Flows

 

   Year Ended December 31, 
   2020  2019 

Operating activities

   

Net loss

  $(830,032 $(71,841

Adjustments to reconcile net income to net cash provided by operating activities:

   

Changes in operating assets and liabilities:

   

Other assets

   6,764  18,834

Accounts payable and accrued liabilities

   (14,643  14,803

Related party payables

   (64,542  45,781
  

 

 

  

 

 

 

Net cash provided by (used in) operating activities

   (902,453  7,577

Investing activities

   

Investment in joint ventures

   (21,302,225  (14,201,020
  

 

 

  

 

 

 

Net cash used in investing activities

   (21,302,225  (14,201,020

Financing activities

   

Issuance of common stock

   —     27,152,105

Contributions from affiliated executives

   988,974  1,811,026
  

 

 

  

 

 

 

Net cash provided by financing activities

   988,974  28,963,131

Net (decrease) increase in cash and cash equivalents

   (21,215,704  14,769,688

Cash and cash equivalents at beginning of period

   30,994,032  16,224,344
  

 

 

  

 

 

 

Cash and cash equivalents at end of period

  $9,778,328 $30,994,032
  

 

 

  

 

 

 

Supplemental schedule of noncash investing and financing activities

   

Deconsolidation of Park Avenue Investor

  $2,799,701 $—   

See accompanying notes to consolidated financial statements

 

F- 5


Cottonwood Multifamily Opportunity Fund, Inc.

Notes to Consolidated Financial Statements

Note 1 - Organization and Business

Cottonwood Multifamily Opportunity Fund, Inc. is a Maryland corporation formed to invest in and/or make mezzanine loans or preferred equity investments in multifamily construction and development projects. Substantially all our business is conducted through Cottonwood Multifamily Opportunity Fund O.P., LP (the “Operating Partnership”), a Delaware limited partnership. The Company is a limited partner and the sole member of the general partner of the Operating Partnership. As used herein, the term “Company”, “we”, “our” or “us” includes the Company, the Operating Partnership and its subsidiaries, unless the context indicates otherwise.

Cottonwood Capital Property Management II, LLC acts as our sponsor, property manager and asset manager. We have no employees and are substantially reliant on Cottonwood Capital Property Management II, LLC and its resources to implement our business strategy. Our sponsor is a subsidiary of Cottonwood Residential O.P., LP (“CROP”) and has experience in operating multifamily construction and development projects. Cottonwood Residential II, Inc. (“CRII”) is the sole general partner of CROP, its operating partnership, and makes all decisions on behalf of CROP.

On January 26, 2021, CRII and CROP entered into an Agreement and Plan of Merger with Cottonwood Communities, Inc. (“CCI”), a publicly registered non-traded REIT sponsored by CRII, Cottonwood Communities O.P., LP (“CCOP”), the operating partnership of CCI, and Cottonwood Communities GP Subsidiary, LLC (“Merger Sub”), a wholly owned subsidiary of CCI, pursuant to CRII would be merged with and into Merger Sub and CCOP would be merged with and into CROP. If approved by the stockholders and the unitholders of CRII and CROP, as applicable, and the other closing conditions are met or waived, the mergers will result in CCI, as the general partner of CROP, controlling our sponsor, property manager and asset manager. The mergers are not expected to result in a change of the management or operations of our portfolio.

In November 2017, we commenced an offering of $50.0 million in shares of our common stock at a purchase price of $10.00 per share through an offering qualified as a “Tier 2” offering pursuant to Regulation A under the Securities Act (the “Offering”). We completed the Offering in August 2019 after raising the full offering amount.

We have invested through joint ventures with CROP and affiliated executives, which we refer to as the Cottonwood Joint Ventures. As of December 31, 2020, we have two Cottonwood Joint Ventures, the Park Avenue Joint Venture and the Cottonwood on Broadway Joint Venture. The Park Avenue Joint Venture has in turn entered into a joint venture with a third-party developer and affiliate of CROP, which we refer to as the Development Joint Venture.

The Development Joint Venture is managed by the developer who will oversee the day to day development and management of the project. The Cottonwood Joint Ventures have the right to approve major decisions affecting the Development Joint Ventures. The terms of each agreement vary on a joint venture by joint venture basis.

We have made no mezzanine or preferred equity investments to date.

COVID-19

One of the most significant risks and uncertainties facing the Company and the real estate industry generally continues to be the effect of the ongoing public health crisis of the novel coronavirus (COVID-19) pandemic. We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including how the pandemic will impact the construction, related costs and the timing of completion of our development projects. During the year ended December 31, 2020, we did not experience significant disruptions in the construction of our development projects from the COVID-19 pandemic. The extent to which our results of operations or our overall value will be affected by the COVID-19 virus will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.

Note 2 - Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The consolidated financial statements are presented on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”) and include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

F- 6


Cottonwood Multifamily Opportunity Fund, Inc.

Notes to Consolidated Financial Statements

 

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.

Variable Interest Entities

The Company’s subsidiaries are variable interest entities (“VIEs”). VIEs are legal entities in which the equity investors do not have the characteristics of a controlling financial interest or the equity investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. All VIEs for which we are the primary beneficiary are consolidated. Qualitative and quantitative factors are considered in determining whether we are the primary beneficiary of a VIE, including, but not limited to, which activities most significantly impact economic performance, which party controls such activities, the amount and characteristics of our investments, the obligation or likelihood for us or other investors to provide financial support, and the management relationship of the property.

The Company consolidates the Operating Partnership. Control of the Park Avenue Joint Venture and Cottonwood on Broadway Joint Venture is shared equally between the members. We are not considered the primary beneficiary of these joint ventures as CROP controls the development of the projects. As a result, our investments in these joint ventures are recorded under the equity method of accounting on the consolidated financial statements.

Use of Estimates

We make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the consolidated financial statements as well as the amounts of revenues and expenses during the reporting periods. Actual amounts could differ from those estimates.

Organization and Offering Costs

Organization costs include all expenses incurred in connection with our formation, including but not limited to legal fees and other costs to incorporate the Company. Offering costs include all expenses incurred in connection with the Offering, including managing broker-dealer fees and selling commissions. All organization and offering costs are paid by our sponsor. We will not incur any liability for or reimburse our sponsor for any of these organizational and offering costs. Total offering costs incurred by our sponsor in connection with our Offering were approximately $6,143,000. Organizational costs incurred by our sponsor were not significant.

Investment in Joint Ventures

Under the equity method of accounting, our investments in joint ventures are stated at cost, adjusted for our share of net earnings or losses and reduced by distributions. Equity in earnings or losses is generally recognized based on our ownership interest in the earnings or losses of the joint ventures. For the purposes of presentation in the consolidated statements of cash flows, we follow the “look through” approach for classification of distributions from unconsolidated real estate assets. Under this approach, distributions are reported under operating cash flow unless the facts and circumstances of a specific distribution clearly indicate that it is a return of capital (e.g., a liquidating dividend or distribution of the proceeds from the entity’s sale of assets), in which case it is reported as an investing activity.

We assess potential impairment of investments in joint ventures whenever events or changes in circumstances indicate that the fair value of the investment is less than its carrying value. To the extent impairment has occurred, and is not considered temporary, the impairment is measured as the excess of the carrying amount of the investment over the fair value of the investment. We have not recognized impairment on any of our joint venture investments.

Cash and cash equivalents

We maintain our cash in demand deposit accounts at major commercial banks. Balances in individual accounts at times exceeds FDIC insured amounts. We have not experienced any losses in such accounts.

 

F- 7


Cottonwood Multifamily Opportunity Fund, Inc.

Notes to Consolidated Financial Statements

 

Income Taxes

We may elect to qualify as a real estate investment trust but are not required to make such an election. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our taxable income to stockholders. As a REIT, we would generally not be subject to federal corporate income tax on that portion of our taxable income that is currently distributed to stockholders.

If we fail to qualify as a REIT in any taxable year or determine not to be elect to be taxed as a REIT, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and, if we had elected to be taxed as a REIT but subsequently fail to qualify as a REIT, we generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially and adversely affect our net income and net cash available for distribution to stockholders.

We incurred cumulative net losses before income taxes of approximately $1,035,000 through December 31, 2020. We had a deferred tax asset of approximately $269,000 associated with these losses. The deferred tax asset is fully allowed for as we do not expect to realize the tax benefit due to the expectation that we will qualify for REIT status.

Note 3 - Investments in Joint Ventures

Park Avenue

The Park Avenue development is structured as follows (with wholly owned subsidiaries being excluded for simplicity):

 

LOGO

We record our investment in CW Investor at Sugar House, LLC (“Park Avenue Investor”) under the equity method of accounting. Prior to October 1, 2020, Park Avenue Investor was a consolidated entity owned by affiliated executives and us. The affiliated executives used loans from CROP to fund their investment in Park Avenue Investor. On October 1, 2020, we deconsolidated Park Avenue Investor as CROP became the primary beneficiary when it acquired the rights to a 5% preferred return and capital interest in Park Avenue Investor to settle the loans. CROP’s overall ownership in the project increased, while the affiliated executives retain a residual interest in Park Avenue Investor allowing them to participate in the residual profits of the project.

At December 31, 2019 the affiliated executives had contributed $1,811,026 to Park Avenue Investor. On October 1, 2020, the total contribution to Park Avenue Investor by the affiliated executives was $2,800,000. Their contributions and share of income were recorded as noncontrolling interest on the consolidated financial statements. The result of the deconsolidation of Park Avenue Investor on October 1, 2020 was the removal of the noncontrolling interest associated with the affiliated executives and associated income. No gain or loss was recognized on the change of control.

 

F- 8


Cottonwood Multifamily Opportunity Fund, Inc.

Notes to Consolidated Financial Statements

 

At December 31, 2020, we had invested $16,767,159 in Park Avenue Investor. Park Avenue Investor’s only asset was an equity method investment of $19,567,158 in the Park Avenue Joint Venture. Park Avenue Investor did not have operating activity or distributions for the year ended December 31, 2020.

At December 31, 2019, Park Avenue Investor had contributed $12,013,089 to the Park Avenue Joint Venture, of which $10,202,063 came from us. Summarized balance sheet information for the Park Avenue Joint Venture is as follows:

 

   December 31, 
   2020   2019 

Cash

  $38,621  $148,678

Development Costs

   32,196,512   16,418,610

Accounts Payable and Accrued Liabilities

   2,132,789   3,219,411

Construction Loan

   8,361,057   —   

The Park Avenue Joint Venture did not have operating activity or distributions for the year ended December 31, 2019.

Cottonwood on Broadway    

The Cottonwood on Broadway development is structured as follows (with certain wholly owned subsidiaries being excluded for simplicity):

 

LOGO

We record our investment in the Broadway Joint Venture under the equity method of accounting. Prior to October 1, 2020, the Broadway Joint Venture was owned by affiliated executives, CROP, and us. The affiliated executives used loans from CROP to fund their investment in the Broadway Joint Venture. At December 31, 2019, the affiliated executives had contributed $827,310 to the Broadway Joint Venture. On October 1, 2020, the total contribution to the Broadway Joint Venture by the affiliated executives was $1,714,000. On that date CROP obtained the rights to a 5% preferred return and capital interest in the Broadway Joint Venture to settle the loans, thereby increasing its ownership in the project. Each affiliated executive retained a residual interest and supplemental return in the Broadway Joint Venture allowing them to participate in the profits of the project.

 

F- 9


Cottonwood Multifamily Opportunity Fund, Inc.

Notes to Consolidated Financial Statements

 

At December 31, 2020 and 2019, we had contributed $22,390,053 and $8,636,847 in the Cottonwood on Broadway Cottonwood Joint Venture, respectively. Summarized balance sheet information for the Broadway Joint Venture is as follows:

 

   December 31, 
   2020   2019 

Cash

  $215,284  $220,471

Development Costs

   31,795,659   9,746,207

Accounts Payable and Accrued Liabilities

   5,707,553   609,354

The Broadway Joint Venture did not have any operating activity or distributions for the years ended December 31, 2020 and 2019.

Note 4 - Stockholders’ Equity

Our charter authorizes the issuance of up to 1,000,000,000 shares of common stock at $0.01 par value per share and 100,000,000 shares of preferred stock at $0.01 par value per share.

Voting Common Stock

Holders of our common stock are entitled to receive dividends when authorized by the board of directors, subject to any preferential rights of outstanding preferred stock. Holders of common stock are also entitled to one vote per share on all matters submitted to a shareholder vote, including election of directors to the board, subject to certain restrictions. As of December 31, 2020 and 2019, we had 5,001,000 shares of common stock issued and outstanding. Our sponsor owns 1,000 of the outstanding shares.

Preferred Stock

The board of directors is authorized, without approval of common shareholders, to provide for the issuance of preferred stock, in one or more classes or series, with such rights, preferences and privileges as the board of directors approves. No preferred stock was issued and outstanding as of December 31, 2020 and 2019.

Distributions

Distributions are determined by the board of directors based on our financial condition and other relevant factors. We expect to have little, if any, cash flows from operations until we have completed our developments and begun lease-up. Should cash flows from operations not cover distributions during the early stages of real estate investment or during the operational stages we may look to third party borrowings to fund distributions. We may also use funds from the sale of assets or from the maturity, payoff or settlement of debt investments for distributions not covered by operating cash.

Note 5 – Distributions

Park Avenue Investor

Cash from operations, until September 30, 2020, was to be distributed to the members in proportion to their percentage interest. After September 30, 2020, cash from operations is to be distributed to the members in proportion to their percentage interest; provided, however, for the percentage interest associated with affiliated executives and CROP, cash from operations shall be distributed (i) first, to CROP until CROP has received a 5% preferred return, (ii) second, to CROP as the holder of the capital interest until CROP’s net capital contribution is reduced to zero and (iii) thereafter, to the affiliated executives.

Subject to certain restrictions, cash from capital transactions shall be distributed first to the members in proportion to their net capital contributions until their net capital contributions are reduced to zero. The distribution for net capital contributions associated with affiliated executives and CROP shall be made to CROP to the extent of the net capital contribution. Thereafter, cash from capital transactions shall be distributed to the members in proportion to their percentage interests; provided, however, for the percentage interest associated with affiliated executives and CROP, cash from capital transactions shall be distributed (i) first, to CROP until CROP has received a 5% preferred return and its net capital contribution, if any, and (ii) thereafter, to the affiliated executives.

 

F- 10


Cottonwood Multifamily Opportunity Fund, Inc.

Notes to Consolidated Financial Statements

 

In the event that CROP does not receive a return of its applicable net capital contribution, then each affiliated executive shall contribute an amount equal to the shortfall up to 50% of the applicable net capital contribution for each affiliated executive in proportion to their residual interest, which shall then be distributed to CROP.

Park Avenue Joint Venture

Cash from operations or a capital event from the Park Avenue Joint Venture is to be distributed first to the members to provide a preferred return of 8% on invested capital. Cash will then be distributed 100% to the members until capital accounts are reduced to zero, then 25% to the development joint venture and 75% to the members until the members have received an additional 12% return on invested capital, then 35% to the development joint venture and 65% to the members until the members have received an additional 16% return on invested capital. Profits after the above distributions will then be allocated 50% to the development joint venture and 50% to the members (in proportion to the respective interests in the joint venture).

Taking into consideration the distributions above, the Development Joint Venture will receive a graded promotional interest of the profits of the Park Avenue Joint Venture which is subordinate to our receipt of an 8% preferred return. The Park Avenue Joint Venture will make allocations of income and loss so that the allocations are made in a similar manner to the distributions. Losses will be allocated to the Park Avenue Joint Venture partners and will not be passed through to our shareholders.

Cottonwood on Broadway Joint Venture

Cash from the Cottonwood on Broadway Joint Venture is to be distributed first to those who are members as of September 30, 2020 to provide a preferred return of 8% on invested capital through September 30, 2020. Second to those who are members as of October 1, 2020 in proportion to their accrued but unpaid 8% preferred return accrued after September 30, 2020 until those members have been distributed an amount equal to their 8% preferred return accrued after September 30, 2020, provided, however, for the interest associated with affiliated executives and CROP the 8% preferred return shall be distributed 5% to CROP and 3% to the affiliated executives. Third, to the members in proportion to their net capital contributions until their net capital contributions are reduced to zero. The distribution for net capital contributions associated with affiliated executives and CROP shall be made to CROP. Fourth 25% to CROP and 75% to members in proportion to their percentage interest until the members have received an additional 12% return on invested capital (the “First Promote”). The distribution for the percentage interest associated with affiliated executives and CROP, other than a developer promote, shall be made to the affiliated executives. Fifth, 35% to CROP and 65% to the members until the members have received an additional 16% return on invested capital (the “Second Promote”). The distribution for the percentage interest associated with affiliated executives and CROP, other than a developer promote, shall be made to the affiliated executives. Profits after the above distributions will then be allocated 50% to CROP and 50% to the affiliated executives. Thereafter, 50% to CROP (together with the First Promote and the Second Promote, collectively, (the “Developer Promote”) and 50% to the members in proportion to their percentage Interests, provided, with the distribution for the percentage interest associated with affiliated executives and CROP made to the affiliated executives.

Taking into consideration the distributions above, CROP and affiliated executives will receive a graded promotional interest of the profits of the Cottonwood on Broadway Joint Venture which is subordinate to our receipt of an 8% preferred return. The Cottonwood on Broadway Joint Venture will make allocations of income and loss so that the allocations are made in a similar manner to the distributions. Losses will be allocated to the Cottonwood on Broadway Joint Venture partners and will not be passed through to our shareholders.

Note 6 - Related Party Transactions

Our sponsor or its affiliates received compensation for services related to the Offering and will receive compensation for the acquisition, management and disposition of our assets, subject to review and approval of the board of directors. No fees were incurred by us in the years ended December 31, 2020 and 2019 except those noted below.

Property Management Fee

After stabilization of a project, our sponsor will provide property management services and receive a fee of 3.5% of the annual gross revenues of each property managed for these services, prorated for any partial year. The Park Avenue agreement also has a floor of $8,000 per month.

 

F- 11


Cottonwood Multifamily Opportunity Fund, Inc.

Notes to Consolidated Financial Statements

 

Lease-up Fee

Our sponsor will receive for its services in leasing-up a property a lease-up fee in an amount equal to 3.5% of projected stabilized revenues until such time as the project reaches stabilization, commencing two months before the opening of a temporary leasing office on the site.

Development Fees

For services provided in developing Park Avenue, CROP receives an amount equal to one-third of 3% of hard costs. For the years ended December 31, 2020 and 2019, development fees received by CROP for the Park Avenue project were $127,533 and $85,022, respectively.

For services provided in developing Cottonwood on Broadway, an affiliate of the sponsor is entitled to a fee of 5% of the project budget multiplied by our ownership percentage of the joint venture. This fee is paid entirely by us. For the years ended December 31, 2020 and 2019, development fees received by Cottonwood Capital Property Management II, LLC for the Cottonwood on Broadway project were $1,170,426 and $97,535, respectively.

The development fees incurred to date have been capitalized.

Cost Savings Development Fee

Should the Park Avenue development be completed below the budgeted hard costs, CROP will receive one-fourth of the project cost savings, up to 1.5% of the project budgeted cost.

General Contractor Fees

For general contracting services provided in developing Cottonwood on Broadway, an affiliate of the sponsor is entitled to a fee of 5% of budgeted hard costs for the project multiplied by our ownership percentage of the joint venture. This fee is paid entirely by us. For the years ended December 31, 2020 and 2019 we paid $188,908 and $15,742, respectively, in general contractor fees to Cottonwood Capital Property Management II, LLC. The general contractor fees incurred to date have been capitalized.

Construction Management Fees

For services in supervising any renovation or construction project in excess of $5,000 in or about the projects after stabilization, the Property Manager shall be entitled to a fee equal to 5% of the cost of the amount (including related professional services) that is expended. This fee is generally not payable for routine maintenance expenditures. No construction management fee will be paid in connection with the development of a project.

Asset Management Fee

Our sponsor receives an annual asset management fee of 0.75% of project costs during development and 0.75% of gross assets thereafter, defined initially as the gross book value of our assets and subsequently as the gross asset value once net asset value is established. This fee is paid by us. The asset management fee incurred in 2020 and 2019 was $799,441 and $513,106, respectively.

Distributions and Promotional Interests from Cottonwood Joint Ventures

CROP is a member of the Park Avenue Investor, Park Avenue Joint Venture, and Cottonwood on Broadway Joint Venture and will receive distributions and allocations of profits in an amount that exceeds its proportional share of capital contributions to these entities. As outlined above, CROP may receive a promotional interest of the profits of each Cottonwood Joint Venture in exchange for identifying investment opportunities for us.

Distributions and Promotional Interests from Development Joint Ventures

CROP serves as a co-general partner of the development joint venture for Park Avenue and will receive a portion of the promoted interest.

 

F- 12


Cottonwood Multifamily Opportunity Fund, Inc.

Notes to Consolidated Financial Statements

 

Property Management Corporate Service Fee

Upon lease up, our sponsor will allocate a flat fee each month to the Park Avenue Joint Venture and Cottonwood on Broadway Joint Venture which is intended to fairly allocate the overhead costs incurred by our sponsor and its affiliated entities with respect to the management of all assets. This fee may vary each month and be dependent on the number of assets managed and the actual overhead expenses incurred. Our sponsor will have the right to retain any excess between actual costs and the amount of the fee charged.

Loan Coordination Fee

Our sponsor may receive for its services in making or acquiring and disposing a development-related mezzanine loan or arranging for and disposing a preferred equity investment a loan coordination fee in an amount equal to (i) upon origination of the investment, 1.0% of the principal amount of the mezzanine loan or face value of the preferred equity, and (ii) upon disposition of the investment, 1.0% of the principal amount of the mezzanine loan or face value of the preferred equity.

Fees from Other Services

We may retain third parties, including certain affiliates of our sponsor, for necessary services relating to investments or operations, including construction services, resident indemnification, utility management, internet and television services, and vendor verification and other similar operational matters. Any fees paid to affiliates of our sponsor for any such services will not reduce the management fee. Any such arrangements will be at market terms and rates.

Note 7 - Commitments and Contingencies

Economic Dependency

Under various agreements, we have engaged or will engage our sponsor to provide certain services that are essential to us, including asset management services and other administrative responsibilities that include accounting services and investor relations. As a result of these relationships, we are dependent upon our sponsor. In the event that our sponsor is unable to provide us with the respective services, we would be required to find alternative providers of these services.

Liquidity Strategy

Our board of directors will try to determine which liquidity strategy would result in the greatest value for shareholders. A liquidity event will occur no later than June 30, 2025, which may be extended for two one-year periods in the sole discretion of the board of directors and an additional two one-year periods by a majority vote of the shareholders. If no extension is approved an orderly sale of our assets will begin within a one-year period from the decision not to extend. If all extensions are approved the final termination date would be December 31, 2029. The precise timing of sales would take account of the prevailing real estate finance markets and the debt markets generally as well as the federal income tax consequences to shareholders.

In the event that a listing occurs on or before the termination date, we will continue perpetually unless dissolved pursuant to a vote of the shareholders or any applicable provision of the Maryland General Corporation Law. A listing shall mean the commencement of trading of the Company’s common stock on any securities exchange registered as a national securities exchange under Section 6 of the Securities Exchange Act of 1934, as amended, any over the counter exchange or, as determined in the sole discretion of the board of directors, any similar exchange that offers sufficient trading to offer similar liquidity to the shareholders. A listing shall also be deemed to occur on the effective date of a merger in which the consideration received by the shareholders is securities of another entity that are listed on any securities exchange registered as a national securities exchange under Section 6 of the Securities Exchange Act of 1934, as amended, any over the counter exchange or, as determined in the sole discretion of our board of directors, any similar exchange that offers sufficient trading to offer similar liquidity to the shareholders.

 

F- 13


Cottonwood Multifamily Opportunity Fund, Inc.

Notes to Consolidated Financial Statements

 

Right of First Refusal

If we or CROP desire to transfer all or a portion of membership interests in a joint venture, the non-transferring member shall have the option to purchase the transferring member’s membership interest on the same terms the transferring member intends to sell its interest to a third-party.

Note 8 - Subsequent Events

We evaluate subsequent events up until the date the consolidated financial statements are issued. We determined that no events have occurred subsequent to December 31, 2020 that would require disclosure or recognition in the consolidated financial statements other than as mentioned below.

We have contributed approximately $3,539,000 to the Cottonwood on Broadway Joint Venture in accordance with the approved draw schedules.

On January 22, 2021, we contributed $3,250,000 for a 62.55% interest in Block C JV, a joint venture that owns land and plans to develop a multifamily apartment community located in a qualified opportunity zone in Millcreek, Utah.

 

F- 14


Item 8.

Exhibits

 

Exhibit
Number

  

Description

1.1  MANAGING BROKER-DEALER AGREEMENT, INCORPORATED BY REFERENCE TO EXHIBIT 1.1 ON FORM  1-A/A (FILE NO. 024-10730) FILED NOVEMBER 16, 2017.
1.2  FORM OF SOLICITING DEALER AGREEMENT, INCORPORATED BY REFERENCE TO EXHIBIT 1.2 ON FORM  1-A/A (FILE NO. 024-10730) FILED NOVEMBER 16, 2017.
2.1  SECOND ARTICLES OF AMENDMENT AND RESTATEMENT, INCORPORATED BY REFERENCE TO EXHIBIT  2.1 ON FORM 1-U (FILE NO. 24R-00118) FILED DECEMBER 28, 2017.
2.2  BYLAWS, INCORPORATED BY REFERENCE TO EXHIBIT 2.2 ON FORM 1-A/A (FILE NO. 024-10730) ON NOVEMBER 16, 2017.
4.1  FORM OF SUBSCRIPTION AGREEMENT AND ISRAELI INVESTOR QUESTIONNAIRE, INCORPORATED BY REFERENCE TO EXHIBIT 4.1 ON FORM 1-A/A (FILE NO. 024-10730) ON NOVEMBER 16, 2017.
6.1  LIMITED PARTNERSHIP AGREEMENT OF OPERATING PARTNERSHIP, INCORPORATED BY REFERENCE TO EXHIBIT 6.1 ON FORM 1-A/A (FILE NO. 024-10730) ON NOVEMBER 16, 2017.
6.2  LIMITED LIABILITY COMPANY AGREEMENT OF GENERAL PARTNER OF OPERATING PARTNERSHIP, INCORPORATED BY REFERENCE TO EXHIBIT 6.2 ON FORM 1-A/A (FILE NO. 024-10730) ON NOVEMBER 16, 2017.
6.3  ASSET MANAGEMENT AGREEMENT, INCORPORATED BY REFERENCE TO EXHIBIT 6.3 ON FORM 1-A/A (FILE NO. 024-10730) ON NOVEMBER 16, 2017.
6.4  FORM OF PROPERTY MANAGEMENT AGREEMENT, INCORPORATED BY REFERENCE TO EXHIBIT  6.4 ON FORM 1-A/A (FILE NO. 024-10730) ON NOVEMBER 16, 2017.
6.5  THREE-PARTY AGREEMENT, INCORPORATED BY REFERENCE TO EXHIBIT 6.5 ON FORM 1-A/A (FILE NO. 024-10730) ON NOVEMBER 16, 2017.
6.6  COTTONWOOD SUGAR HOUSE, LLC AGREEMENT AND AMENDMENTS, INCORPORATED BY REFERENCE TO EXHIBIT 6.1 ON FORM 1-U (FILE NO. 24R-00118) FILED AUGUST 16, 2018.
6.7  PURCHASE AND SALE AGREEMENT, INCORPORATED BY REFERENCE TO EXHIBIT 6.2 ON FORM 1-U (FILE NO. 24R-00118) FILED AUGUST 16, 2018.
6.8  DEVELOPMENT SERVICES AGREEMENT, INCORPORATED BY REFERENCE TO EXHIBIT 6.3 ON FORM 1-U (FILE NO. 24R-00118) FILED AUGUST 16, 2018.
6.9  LOAN AGREEMENT EXECUTED BY AND BETWEEN CW SUGAR HOUSE, LLC, AND REGIONS BANK, INCORPORATED BY REFERENCE TO EXHIBIT 6.9 ON FORM 1-SA (FILE NO. 24R-00118) FILED SEPTEMBER 27, 2019.
6.10  PROMISSORY NOTE BETWEEN CW SUGAR HOUSE, LLC AND REGIONS BANK, INCORPORATED BY REFERENCE TO EXHIBIT 6.10 ON FORM 1-SA (FILE NO. 24R-00118) FILED SEPTEMBER 27, 2019.
6.11  AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF CW BROADWAY JV, LLC, INCORPORATED BY REFERENCE TO EXHIBIT 6.11 ON FORM 1-SA (FILE NO. 24R-00118) FILED SEPTEMBER 27, 2019
6.12  LOAN AGREEMENT EXECUTED BY AND AMONG CW BROADWAY JV, LLC, PNC BANK, NATIONAL ASSOCIATION, PNC CAPITAL MARKETS LLC, AND THE LENDERS PARTY THERETO, INCORPORATED BY REFERENCE TO EXHIBIT 6.12 TO THE COMPANY’S ANNUAL REPORT ON FORM 1-K, FILED ON MAY 22, 2020.
6.13*  Amended and Restated Limited Liability Company Agreement of CW Block C, LLC and related amendments
6.14*  Purchase Agreement between CW Block C, LLC and Cottonwood Multifamily Opportunity Fund, Inc. dated January 14, 2021
6.15*  Purchase and Assignment Agreement between Cottonwood Capital Management, Inc. and Cottonwood Multifamily Opportunity Fund, Inc. dated January 14, 2021
9.1  LETTER FROM ERNST & YOUNG LLP TO THE SECURITIES AND EXCHANGE COMMISSION DATED APRIL  17, 2020, INCORPORATED BY REFERENCE TO EXHIBIT 9.1 ON FORM 1-U (FILE NO. 24R-00118) FILED APRIL 17, 2020
15.1  PRIOR PERFORMANCE TABLES, INCORPORATED BY REFERENCE TO EXHIBIT 15.1 ON FORM 1-A POS (FILE NO. 024-10730) ON NOVEMBER 27, 2018.

 

 

*

Filed herewith


SIGNATURES

Pursuant to the requirements of Regulation A, the issuer has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Salt Lake City, Utah, on April 30, 2021.

COTTONWOOD MULTIFAMILY OPPORTUNITY FUND, INC.

 

By: 

/s/ Daniel Shaeffer

 Daniel Shaeffer, Chief Executive Officer

We, the undersigned officers and directors of Cottonwood Multifamily Opportunity Fund, Inc., hereby severally constitute Daniel Shaeffer our true and lawful attorney with full power to him to sign for us and in our names in the capacities indicated below, the Annual Report filed herewith and any and all amendments to said Annual Report and generally to do all such things in our names and in our capacities as officers and directors to enable Cottonwood Multifamily Opportunity Fund, Inc. to comply with the provisions of the Securities Act of 1933, Regulation A promulgated thereunder and all requirements of the SEC, hereby ratifying and confirming our signature as they may be signed by our said attorney to said Annual Report and any and all amendments thereto.

This Annual Report has been signed by the following persons in the capacities and on the dates indicated.

 

Name

  

Title

 

Date

/s/ Daniel Shaeffer

  Chief Executive Officer and Director April 30, 2021
Daniel Shaeffer   

/s/ Chad Christensen

  President, Chairman of the Board and Director April 30, 2021
Chad Christensen   

/s/ Gregg Christensen

  Executive Vice President, Secretary, General Counsel and Director April 30, 2021
Gregg Christensen 

/s/ Susan Hallenberg

  Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) April 30, 2021
Susan Hallenberg