Bluerock Multifamily Reopens and Raises Another Eyebrow
I wrote late last year about Bluerock Multifamily Trust.   It had to suspend the sale of its shares in November until it restated its past financial statements and filed them in a post-effective amendment with the SEC.  In mid-January, the REIT re-filed is past financial statements and the SEC declared the REIT effective again on January 31, 2011.

On January 26th, Bluerock Multifamily filed an 8-K, which is a filing that a public entity has to make when it has a material event, which disclosed that one of the entities through which it owns its properites had entered into a $500,000 line of credit agreement with an affiliate of Bluerock Multifamily.  Text from the 8-K is below:

On January 20, 2011, BEMT Meadowmont, LLC, a wholly owned subsidiary of our operating partnership (“BEMT Meadowmont”) entered into an agreement with Bluerock Special Opportunity + Income Fund II, an affiliate of our sponsor (“SOIF II”) for a line of credit represented by a promissory note (the "Note").  Under the terms of the Note, BEMT Meadowmont may borrow, from time to time, up to $500,000, for general working capital.  The Note has a six-month term from the date of the first advance and matures on July 20, 2011.  It bears interest compounding monthly at a rate of 30-day LIBOR + 5.00%, subject to a minimum rate of 7.00%, annualized.  Interest on the loan will be paid on a current basis from cash flow distributed to us from BR Meadowmont JV Member, LLC (the “Meadowmont JV Member"). The Note may be prepaid in whole or in part at any time or from time to time without penalty. The Note is secured by a pledge of our indirect membership interest in the Meadowmont Property and a pledge of our direct membership interest in the Meadowmont JV Member.

I can't think of another instance where a separate single-purpose entity obtained its own working capital line of credit away from the parent entity.  Not that it's wrong, it is just not that common.  Working capital needs of single purpose entities are typically paid from property revenue.  Is the property not generating sufficient revenue to sustain itself?  You can't tell from the filing.   It is common for real estate funds to own their investments indirectly through separate entities. These are typically single-purpose entities that own nothing but the underlying property.

The line of credit poses several issues that bear watching.  The affiliated entity that made the loan to the property is a private fund that is paying an 8% distribution.  (It also has an equity investment in the property.)   The same entity made a loan to Bluerock Multifamily at a 7% interest rate so the REIT could acquire the property, and now it made a working capital loan at a 7% interest rate.  If the entity keeps making loans at 7%, and has offering and operating fees to overcome, how can it pay 8% to its investors over the long term?  Bluerock Multifamily is paying a 7% distribution.  It has borrowed money to fund its equity investments in its properties, and now a property in which it invested is borrowing money for working capital, both of which would take away money from distributions.   I will be looking at this REIT's ability to pay its distribution when it releases its 10-K in a month or so.

Here is some additional information on Bluerock Multifamily's ownership in the property that obtained the working capital loan:

Bluerock Multifamily owns the apartment complex with two affiliates and a third party and one of the affiliates loaned money to the REIT to allow the REIT to make its equity investment in the property.  If it sounds complicated, it is.  Here is the ownership description from the REIT's re-stated 10-Q:

We invested $1.52 million to acquire a 32.5% equity interest in BR Meadowmont Managing Member, LLC (the “Meadowmont Managing Member JV Entity”) through a wholly owned subsidiary of our operating partnership, BEMT Meadowmont, LLC (“BEMT Meadowmont”).  BEMT Co-Investor invested $1.17 million to acquire a 25% interest and BEMT Co-Investor II invested $1.98 million to acquire the remaining 42.5% interest in the Meadowmont Managing Member JV Entity.  BEMT Meadowmont, BEMT Co-Investor and BEMT Co-Investor II are co-managers of the Meadowmont Managing Member JV Entity.  Under the terms of the operating agreement for the Meadowmont Managing Member JV Entity, certain major decisions regarding the investments of the Meadowmont Managing Member JV Entity require the unanimous approval of the Company (through BEMT Meadowmont), BEMT Co-Investor and BEMT Co-Investor II.  If the Company, BEMT Co-Investor and BEMT Co-Investor II are not able to agree on a major decision or at any time after April 9, 2013, any party may initiate a buy-sell proceeding.  Additionally, any time after April 9, 2013, any party may initiate a proceeding to force the sale of the Meadowmont Managing Member JV Entity’s interest in the Meadowmont JV Entity (defined below) to a third party, or, in the instance of the non-initiating parties’ rejection of a sale, cause the non-initiating parties to purchase the initiating party’s interest in the Meadowmont Managing Member JV Entity.

The Meadowmont Managing Member JV Entity contributed $4.65 million of equity capital to acquire a 50% equity interest in Bell BR Meadowmont JV, LLC (the “Meadowmont JV Entity”).  A Bell Partners Inc. affiliate that is unaffiliated with the Company, Fund III Meadowmont Apartments, LLC (“Bell”), invested $4.65 to acquire the remaining 50% interest in the Meadowmont JV Entity.  The Meadowmont Managing Member JV Entity and Bell are co-managers of the Meadowmont JV Entity. The Meadowmont JV Entity is the sole owner of Bell BR Meadowmont, LLC, a special-purpose entity that holds title to the Meadowmont Property (“BR Meadowmont”).  Under the terms of the operating agreement of the Meadowmont JV Entity, decisions with respect to the joint venture or the Meadowmont Property are made by unanimous approval of the managers.  Further, to the extent that the Meadowmont Managing Member JV Entity and Bell are not able to agree on certain major decisions, either party may initiate a buy-sell proceeding.  Additionally, any time after April 9, 2013, either party may initiate a proceeding to force the sale of the Meadowmont Property to a third party, or, in the instance of the non-initiating party’s rejection of a sale, cause the non-initiating party to purchase the initiating party’s interest in the Meadowmont JV Entity.

As a result of the structure described above, the Company holds a 16.25% indirect equity interest, BEMT Co-Investor holds a 12.5% indirect equity interest and BEMT Co-Investor II holds a 21.25% indirect equity interest in the Meadowmont Property (50% in the aggregate), and Bell holds the remaining 50% indirect equity interest.  The Company, BEMT Co-Investor, BEMT Co-Investor II and Bell will each receive current distributions from the operating cash flow generated by the Meadowmont Property in proportion to these respective percentage equity interests.

If you find this Byzantine ownership structure confusing, so do I.  The addition of a working capital loan just added to Bluerock Multifamily's complexity.