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Form 8-K Bluerock Residential For: Dec 29

January 5, 2018 5:14 PM EST

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): December 29, 2017

 

Bluerock Residential Growth REIT, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Maryland   001-36369   26-3136483
(State or other jurisdiction
of incorporation or organization)
 

(Commission File Number)

 

 

(I.R.S. Employer

Identification No.)

         

712 Fifth Avenue, 9th Floor

New York, NY 10019

(Address of principal executive offices)
 
(212) 843-1601
(Registrant’s telephone number, including area code)
 
None
(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

 

Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

 

 

 

 

 

 

 

ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.

 

Flagler Village Property

 

As previously disclosed in the Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on December 24, 2015 by Bluerock Residential Growth REIT, Inc., a Maryland corporation (the “Company”), on December 18, 2015, the Company, through a wholly-owned subsidiary of our operating partnership, Bluerock Residential Holdings, L.P., a Delaware limited partnership (the “Operating Partnership”), made an initial investment to acquire an 89.5% common equity interest in BR Flagler JV Member, LLC, a Delaware limited liability company (“BR Flagler JV Member”). BR Flagler JV Member is a joint venture entity that owns a majority interest in BR ArchCo Flagler Village JV, LLC, a Delaware limited liability company (the “Flagler Village JV”), which owns, through wholly-owned subsidiaries, a 100% interest in an assemblage of land totaling 3.7 acres for development of a 6-story, 385-unit urban, wrap-style apartment project in the Flagler Village neighborhood of Fort Lauderdale, Florida (the “Flagler Property”). The remaining 10.5% common equity interest in BR Flagler JV Member was owned by Bluerock Special Opportunity + Income Fund II, LLC, a Delaware limited liability company and an affiliate of the Company’s former external manager (“Fund II”).

 

On December 29, 2017, 89.0% of the Company’s common equity interest in BR Flagler JV Member was redeemed in exchange for a mezzanine loan by the Company to BR Flagler JV Member in the original principal amount of approximately $53.6 million (the “Flagler Loan”), inclusive of approximately $27.3 million of incremental funding. Also on December 29, 2017, Fund II made an additional common equity investment in BR Flagler JV Member in the amount of approximately $2.8 million, and Bluerock Special Opportunity + Income Fund III, LLC, a Delaware limited liability company and an affiliate of the Company’s former external manager (“Fund III”), made a common equity investment in BR Flagler JV Member in the amount of approximately $409,000. As a result of these transactions, the Company now owns an indirect 0.5% common equity interest in BR Flagler JV Member, Fund II owns a 93.03% common equity interest in BR Flagler JV Member, and Fund III owns a 6.47% common equity interest in BR Flagler JV Member. The Company (through a wholly-owned subsidiary of our Operating Partnership), Fund II, and Fund III have entered into an amended and restated joint venture operating agreement for BR Flagler JV Member reflecting the structure described above and otherwise containing terms, conditions, and indemnities that are customary and standard for joint ventures in the real estate industry.

 

The Flagler Loan was made pursuant to a Loan and Security Agreement and a Secured Promissory Note, and is secured by a pledge of BR Flagler JV Member’s membership interest in the Flagler Village JV pursuant to a Control Agreement (the Secured Promissory Note, Loan and Security Agreement, and Control Agreement, collectively, the “Flagler Loan Documents”). The Flagler Loan has a five-year term and requires payment of interest on a current basis at the rate of fifteen percent (15%) per annum.  Included in the amount of the Flagler Loan is an approximately three-year interest reserve. In addition, BR Flagler JV Member granted to the Company a right of first offer to purchase the Flagler Property or BR Flagler JV Member’s membership interests in the Flagler Village JV. Pursuant to the Loan and Security Agreement, at any time until the earlier of (a) the closing of construction financing for the development of the Flagler Property, or (b) March 31, 2018, BR Flagler JV Member has the right to cause the Company to convert its rights under the Flagler Loan Documents into an approximately 89.5% common membership interest in BR Flagler JV Member.

 

Crescent Perimeter Property

 

On December 12, 2016, the Company, through a wholly-owned subsidiary of our Operating Partnership, made an initial investment to acquire a 99.9% common equity interest in BR Perimeter JV Member, LLC, a Delaware limited liability company (“BR Perimeter JV Member”). BR Perimeter JV Member is a joint venture entity that owns a majority interest in BR Crescent Perimeter Venture JV, LLC, a Delaware limited liability company (the “Crescent JV”), which is the sole member of BR Crescent Perimeter, LLC (“BR Crescent”), which owns, through a wholly-owned subsidiary, a 100% interest in a tract of real property located in Atlanta, Georgia for the development of a 320-unit, Class A apartment community to be known as Crescent Perimeter (the “Crescent Perimeter Property”). The remaining 0.1% common equity interest in BR Perimeter JV Member was owned by Fund III.

 

On December 29, 2017, 99.4% of the Company’s common equity interest in BR Perimeter JV Member was redeemed in exchange for a mezzanine loan by the Company to BR Perimeter JV Member in the original principal amount of approximately $20.6 million (the “Crescent Perimeter Loan”), inclusive of approximately $5.3 million of incremental funding. Also on December 29, 2017, Fund III made an additional common equity investment in BR Perimeter JV Member in the amount of approximately $2.4 million. As a result of these transactions, the Company now owns an indirect 0.5% common equity interest in BR Perimeter JV Member, and Fund III owns a 99.5% common equity interest in BR Perimeter JV Member. The Company (through a wholly-owned subsidiary of our Operating Partnership) and Fund III have entered into an amended and restated joint venture operating agreement for BR Perimeter JV Member reflecting the structure described above and otherwise containing terms, conditions, and indemnities that are customary and standard for joint ventures in the real estate industry.

 

 

 

 

The Crescent Perimeter Loan was made pursuant to a Loan and Security Agreement and a Secured Promissory Note, and is secured by a pledge of BR Perimeter JV Member’s membership interest in the Crescent JV pursuant to a Control Agreement. The Crescent Perimeter Loan has a four-year term and requires payment of interest on a current basis at the rate of fifteen percent (15%) per annum.  Included in the amount of the Crescent Perimeter Loan is an approximately 2.5-year interest reserve.

 

Vickers Village Property

 

On December 20, 2016, the Company, through a wholly-owned subsidiary of our Operating Partnership, made an initial investment to acquire a 99.9% common equity interest in BR Vickers Roswell JV Member, LLC, a Delaware limited liability company (“BR Vickers Roswell JV Member”). BR Vickers Roswell JV Member is a joint venture entity that owns a majority interest in BR Vickers Roswell JV, LLC, a Delaware limited liability company (the “Vickers JV”), which is the sole member of BR Vickers Roswell, LLC (“BR Vickers”), which owns, through a wholly-owned subsidiary, a 100% interest in a tract of real property located in the Roswell submarket of Atlanta, Georgia for the development of a 79-unit, Class A apartment community to be known as Vickers Village (the “Vickers Village Property”). The remaining 0.1% common equity interest in BR Vickers Roswell JV Member was owned by Fund III.

 

On December 29, 2017, 99.4% of the Company’s common equity interest in BR Vickers Roswell JV Member was redeemed in exchange for a mezzanine loan by the Company to BR Vickers Roswell JV Member in the original principal amount of approximately $9.8 million (the “Vickers Loan”), inclusive of approximately $1.1 million of incremental funding. Also on December 29, 2017, Fund III made an additional common equity investment in BR Vickers Roswell JV Member in the amount of approximately $1.1 million. As a result of these transactions, the Company now owns an indirect 0.5% common equity interest in BR Vickers Roswell JV Member, and Fund III owns a 99.5% common equity interest in BR Vickers Roswell JV Member. The Company (through a wholly-owned subsidiary of our Operating Partnership) and Fund III have entered into an amended and restated joint venture operating agreement for BR Vickers Roswell JV Member reflecting the structure described above and otherwise containing terms, conditions, and indemnities that are customary and standard for joint ventures in the real estate industry.

 

The Vickers Loan was made pursuant to a Loan and Security Agreement and a Secured Promissory Note, and is secured by a pledge of BR Vickers Roswell JV Member’s membership interest in the Vickers JV pursuant to a Control Agreement. The Vickers Loan has a three-year term and requires payment of interest on a current basis at the rate of fifteen percent (15%) per annum.  Included in the amount of the Vickers Loan is an approximately 1.5-year interest reserve.

 

ITEM 8.01 OTHER EVENTS

 

The information included in Exhibit 99.1 (the “Tax Exhibit”) to this Current Report on Form 8-K provides a summary of additional material federal income tax considerations relevant to an investment in securities of the Company. The information in the Tax Exhibit amends in part the discussion under the heading “Material Federal Income Tax Considerations” contained in or incorporated by reference into any registration statement and any accompanying prospectuses, and the discussion under the heading “Additional Material Federal Income Tax Considerations” contained in any prospectus supplement, filed by the Company under the Securities Act of 1933, as amended, prior to the date of this Current Report on Form 8-K, and the Tax Exhibit shall be deemed incorporated by reference into each such registration statement, accompanying prospectus and prospectus supplement.

 

ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.

 

(d)       Exhibits.

 

Exhibit No. Description
   
99.1 Additional Material Federal Income Tax Considerations

 

 

 

 

 

 

SIGNATURE

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

  BLUEROCK RESIDENTIAL GROWTH REIT, INC.
     
Dated: January 5, 2018 By: /s/ Christopher J. Vohs
    Christopher J. Vohs
    Chief Financial Officer and Treasurer

 

 

 

 

Exhibit Index

 

 

 

Exhibit No. Description
   
99.1 Additional Material Federal Income Tax Considerations

 

 

 

 

 

 

Exhibit 99.1

 

ADDITIONAL MATERIAL FEDERAL INCOME TAX CONSIDERATIONS

 

The following is a summary of additional material federal income tax considerations with respect to the purchase, ownership and disposition of our securities. This summary supplements and updates, and should be read together with, the discussions contained in the applicable prior prospectus under the heading “Material Federal Income Tax Considerations” and in any applicable prior prospectus supplement under the heading “Additional Material Federal Income Tax Considerations,” and supersedes such discussions to the extent inconsistent with such discussions.

 

The Tax Cuts and Jobs Act

 

Enactment of the Tax Act

 

On December 22, 2017, President Trump signed into law H.R. 1, informally titled the Tax Cuts and Jobs Act, or the Tax Act. The Tax Act makes major changes to the Internal Revenue Code, as amended, or the Code, including several provisions of the Code that may affect the taxation of REITs and their security holders. The most significant of these provisions are described below. The individual and collective impact of these changes on REITs and their security holders is uncertain, and may not become evident for some period. Prospective investors should consult their tax advisors regarding the implications of the Tax Act on their investment.

 

Revised Individual Tax Rates and Deductions

 

The Tax Act creates seven income tax brackets for individuals ranging from 10% to 37% that generally apply at higher thresholds than current law. For example, the highest 37% rate applies to joint return filer incomes above $600,000, instead of the highest 39.6% rate that applies to incomes above $470,700 under pre-Tax Act law. The maximum 20% rate that applies to long-term capital gains and qualified dividend income is unchanged, as is the 3.8% Medicare tax on net investment income (see “Material Federal Income Tax Considerations — Taxation of Taxable U.S. Stockholders” in the applicable prospectus).

 

The Tax Act also eliminates personal exemptions, but nearly doubles the standard deduction for most individuals (for example, the standard deduction for joint return filers rises from $12,700 in 2017 to $24,000 upon the Tax Act’s effectiveness). The Tax Act also eliminates many itemized deductions, limits individual deductions for state and local income, property and sales taxes (other than those paid in a trade or business) to $10,000 collectively for joint return filers (with a special provision to prevent 2017 deductions for prepayment of 2018 taxes), and limits the amount of new acquisition indebtedness on principal or second residences for which mortgage interest deductions are available to $750,000. Interest deductions for new home equity debt are eliminated. Charitable deductions are generally preserved. The phaseout of itemized deductions based on income is eliminated.

 

The Tax Act does not eliminate the individual alternative minimum tax, but it raises the exemption and exemption phaseout threshold for application of the tax.

 

These individual income tax changes are generally effective beginning in 2018, but without further legislation, they will sunset after 2025.

 

Pass-Through Business Income Tax Rate Lowered through Deduction

 

Under the Tax Act, individuals, trusts, and estates generally may deduct 20% of “qualified business income” (generally, domestic trade or business income other than certain investment items) of a partnership, S corporation, or sole proprietorship. In addition, “qualified REIT dividends” (i.e., REIT dividends other than capital gain dividends and portions of REIT dividends designated as qualified dividend income, which in each case are already eligible for capital gain tax rates) and certain other income items are eligible for the deduction by the taxpayer. The overall deduction is limited to 20% of the sum of the taxpayer’s taxable income (less net capital gain) and certain cooperative dividends, subject to further limitations based on taxable income. In addition, for taxpayers with income above a certain threshold (e.g., $315,000 for joint return filers), the deduction for each trade or business is generally limited to no more than the greater of (i) 50% of the taxpayer’s proportionate share of total wages from a partnership, S corporation or sole proprietorship, or (ii) 25% of the taxpayer’s proportionate share of such total wages plus 2.5% of the unadjusted basis of acquired tangible depreciable property that is used to produce qualified business income and satisfies certain other requirements. The deduction for qualified REIT dividends is not subject to these wage and property basis limits. The deduction equates to a maximum 29.6% tax rate on REIT dividends. As with the other individual income tax changes, the deduction provisions are effective beginning in 2018. Without further legislation, the deduction would sunset after 2025.

 

 

 

 

Net Operating Loss Modifications

 

Net operating loss (“NOL”) provisions are modified by the Tax Act. The Tax Act limits the NOL deduction to 80% of taxable income (before the deduction). It also generally eliminates NOL carrybacks for individuals and non-REIT corporations (NOL carrybacks did not apply to REITs under prior law), but allows indefinite NOL carryforwards. The new NOL rules apply to losses arising in taxable years beginning in 2018.

 

Maximum Corporate Tax Rate Lowered to 21%; Elimination of Corporate Alternative Minimum Tax

 

The Tax Act reduces the 35% maximum corporate income tax rate to a maximum 21% corporate rate, and reduces the dividends-received deduction for certain corporate subsidiaries. The Tax Act also permanently eliminates the corporate alternative minimum tax. These provisions are effective beginning in 2018.

 

Limitations on Interest Deductibility; Real Property Trades or Businesses Can Elect Out Subject to Longer Asset Cost Recovery Periods

 

The Tax Act limits a taxpayer’s net interest expense deduction to 30% of the sum of adjusted taxable income, business interest, and certain other amounts. Adjusted taxable income does not include items of income or expense not allocable to a trade or business, business interest or expense, the new deduction for qualified business income, NOLs, and for years prior to 2022, deductions for depreciation, amortization, or depletion. For partnerships, the interest deduction limit is applied at the partnership level, subject to certain adjustments to the partners for unused deduction limitation at the partnership level. The Tax Act allows a real property trade or business to elect out of this interest limit so long as it uses a 40-year recovery period for nonresidential real property, a 30-year recovery period for residential rental property, and a 20-year recovery period for related improvements described below. For this purpose, a real property trade or business is any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operating, management, leasing, or brokerage trade or business. We believe this definition encompasses our business and thus will allow us the option of electing out of the limits on interest deductibility should we determine it is prudent to do so. Disallowed interest expense is carried forward indefinitely (subject to special rules for partnerships). The interest deduction limit applies beginning in 2018.

 

Maintains Cost Recovery Period for Buildings; Reduced Cost Recovery Periods for Tenant Improvements; Increased Expensing for Equipment

 

For taxpayers that do not use the Tax Act’s real property trade or business exception to the business interest deduction limits, the Tax Act maintains the current 39-year and 27.5-year straight line recovery periods for nonresidential real property and residential rental property, respectively, and provides that tenant improvements for such taxpayers are subject to a general 15-year recovery period. Also, the Tax Act temporarily allows 100% expensing of certain new or used tangible property through 2022, phasing out at 20% for each following year (with an election available for 50% expensing of such property if placed in service during the first taxable year ending after September 27, 2017). The changes apply, generally, to property acquired after September 27, 2017 and placed in service after September 27, 2017.

 

Like Kind Exchanges Retained for Real Property, but Eliminated for Most Personal Property

 

The Tax Act continues the deferral of gain from the like kind exchange of real property, but provides that foreign real property is no longer “like kind” to domestic real property. Furthermore, the Tax Act eliminates like kind exchanges for most personal property. These changes are effective generally for exchanges completed after December 31, 2017, with a transition rule allowing such exchanges where one part of the exchange is completed prior to December 31, 2017.

 

International Provisions: Modified Territorial Tax Regime

 

The Tax Act moves the United States from a worldwide to a modified territorial tax system, with provisions included to prevent corporate base erosion. We currently do not have any foreign subsidiaries or properties, but these provisions could affect any such future subsidiaries or properties.

 

Other Provisions

 

The Tax Act makes other significant changes to the Code. These changes include provisions limiting the ability to offset dividend and interest income with partnership or S corporation net active business losses. These provisions are effective beginning in 2018, but without further legislation, will sunset after 2025.

 

 



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