Item
1. Business
General
We
are a New York-based real estate finance company that specializes in originating, servicing and managing a portfolio of first mortgage
loans. We offer short-term, secured, non-banking loans (sometimes referred to as “hard money” loans), which we may renew
or extend on, before or after their initial term expires, to real estate investors to fund their acquisition, renovation, rehabilitation
or improvement of properties located in the New York metropolitan area, including New Jersey and Connecticut, and in Florida. We are
organized and conduct our operations to qualify as a real estate investment trust for federal income tax purposes (“REIT”).
We have qualified for taxation as a REIT beginning with our taxable year ended December 31, 2014. For reasons discussed below, our restated
certificate of incorporation restricts the acquisition and ownership of our capital stock to 4.0% of our outstanding shares of capital
stock, by value or number of shares, whichever is more restrictive.
In
order to maintain our qualification for taxation as a REIT, we are required to distribute at least 90% of our REIT taxable income to
our shareholders each year. To the extent we distribute less than 100% of our taxable income to our shareholders (but more than 90%)
we will maintain our qualification for taxation as a REIT, but the undistributed portion will be subject to regular corporate income
taxes. As a REIT, we may also be subject to federal excise taxes and minimum state taxes. We also intend to operate our business in a
manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940, as amended (the “Investment
Company Act”). In addition, in order for us to qualify for taxation as a REIT, not more than 50% in value of our outstanding common
shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code of 1986, as amended
(the “Code”) to include certain entities) at any time during the last half of each taxable year, and at least 100 persons
must beneficially own our stock during at least 335 days of a taxable year of 12 months, or during a proportionate portion of a shorter
taxable year. To help ensure that we meet the tests, our restated certificate of incorporation restricts the acquisition and ownership
of our capital stock. The ownership limitation is fixed at 4.0% of our outstanding shares of capital stock, by value or number of shares,
whichever is more restrictive. Assaf Ran, our Chief Executive Officer is exempt from this restriction.
The
properties securing the loans are generally classified as residential or commercial real estate and, typically, are not income producing.
Each loan is secured by a first mortgage lien on real estate. In addition, each loan is personally guaranteed by the principal(s) of
the borrower, which guarantee may be collaterally secured by a pledge of the guarantor’s interest in the borrower. The face amount
of the loans we originated in the past seven years ranged from $30,000 to a maximum of $2.85 million. Our lending policy limits the maximum
amount of any loan to the lower of (i) 9.9% of the aggregate amount of our loan portfolio (not including the loan under consideration)
and (ii) $3 million. Our loans typically have a maximum initial term of 12 months and bear interest at a fixed rate of 8% to 14% per
year. In addition, we usually receive origination fees or “points” ranging from 0% to 2% of the original principal amount
of the loan as well as other fees relating to underwriting and funding the loan. Interest is always payable monthly, in arrears. In the
case of acquisition financing, the principal amount of the loan usually does not exceed 75% of the value of the property (as determined
by an independent appraiser) and in the case of construction financing, it is typically up to 80% of construction costs.
Since
commencing our business in 2007, we have never foreclosed on a property and none of our loans have ever gone into default, although sometimes
we have renewed or extended the term of a loan to enable the borrower to avoid premature sale or refinancing of the property. When we
renew or extend a loan, we generally receive additional “points” and other fees.
Our
executive officers are experienced in hard money lending under various economic and market conditions. Loans are originated, underwritten
and structured by our Chief Executive Officer, assisted by our Chief Financial Officer, and then managed and serviced principally by
our Chief Financial Officer and our internal team. A principal source of new transactions has been repeat business from prior customers
and their referral of new business. We also receive leads for new business from real estate brokers and mortgage brokers and a limited
amount of advertising.
Our
primary business objective is to grow our loan portfolio while protecting and preserving capital in a manner that provides for attractive
risk-adjusted returns to our shareholders over the long term through dividends. We intend to achieve this objective by continuing to
selectively originate, fund loans secured by first mortgages on residential real estate held for investment located in the New York metropolitan
area, including New Jersey and Connecticut, and in Florida, and to carefully manage and service our portfolio in a manner designed to
generate attractive risk-adjusted returns across a variety of market conditions and economic cycles. We believe that current market dynamics
specifically the demand/supply imbalance for relatively small real estate loans, presents opportunities for us to selectively originate
high-quality first mortgage loans and we believe that these market conditions should persist for a number of years. We have built our
business on a foundation of intimate knowledge of the New York metropolitan area real estate market combined with a disciplined credit
and due diligence culture that is designed to protect and preserve capital. We believe that our flexibility and ability to structure
loans that address the needs of our borrowers without compromising our standards on credit risk, our expertise, our intimate knowledge
of the New York metropolitan area real estate market and our focus on newly originated first mortgage loans, has defined our success
until now and should enable us to continue to achieve our objectives.
The
Market Opportunity
Real
estate investment is a capital-intensive business that relies heavily on debt capital to acquire, develop, improve, construct, renovate
and maintain properties. We believe that the demand for relatively small loans to acquire, renovate or improve residential real estate
held around the New York metropolitan area, including New Jersey and Connecticut, and in Florida markets presents a compelling opportunity
to generate attractive returns for an established, well-financed, non-bank lender like us. We have competed successfully in these markets
notwithstanding the fact that many traditional lenders, such as banks and other institutional lenders, also service this market. Our
primary competitive advantage is our ability to approve and fund loans quickly and efficiently. In this environment, characterized by
a supply-demand imbalance for financing and increasing asset values, we believe we are well positioned to capitalize and profit from
these industry trends.
We
believe there is a significant market opportunity for a well-capitalized “hard money” real estate finance company to originate
attractively priced loans with strong credit fundamentals. Particularly around the New York metropolitan area where real estate values
are relatively stable and substandard properties are being improved, rehabilitated and renovated, we believe there are many opportunities
for a “hard money” lender providing capital for these purposes to small scale developers. We further believe that our flexibility
to structure loans to suit the particular needs of our borrowers and our ability to close quickly make us an attractive alternative to
banks and other large institutional lenders for small real estate developers and investors.
Our
Business and Growth Strategies
Our
objective is to protect and preserve capital in a manner that provides for attractive risk-adjusted returns to our shareholders over
the long term, principally through dividends. We intend to achieve this objective by continuing to focus exclusively on selectively originating,
servicing and managing a portfolio of short-term real estate loans secured by first mortgages on real estate located in the New York
metropolitan area, including New Jersey and Connecticut, and in Florida, that are designed to generate attractive risk-adjusted returns
across a variety of market conditions and economic cycles. We believe that our ability to react quickly to the needs of borrowers, our
flexibility in terms of structuring loans to meet the needs of borrowers, our intimate knowledge of the New York metropolitan area real
estate market, our expertise in “hard money” lending and our focus on newly originated first mortgage loans, should enable
us to achieve this objective. Nevertheless, we will remain flexible in order to take advantage of other real estate related opportunities
that may arise from time to time, whether they relate to the mortgage market or, if we determine that it is in our best interest, to
make direct or indirect investments in real estate.
Our
strategy to achieve our objective includes the following:
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capitalize
on opportunities created by the long-term structural changes in the real estate lending market and the continuing demand for liquidity
in the real estate market; |
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take
advantage of the prevailing economic environment as well as economic, political and social trends that may impact real estate lending
currently and in the future as well as the outlook for real estate in general and particular asset classes; |
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remain
flexible in order to capitalize on changing sets of investment opportunities that may be present in the various points of an economic
cycle; and |
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operate
so as to qualify for taxation as a REIT and for an exemption from registration under the Investment Company Act. |
In
furtherance of these strategies, we have a credit line agreement with Webster Business Credit Corporation (“Webster”), Flushing
Bank (“Flushing”), and Mizrahi Tefahot Bank Ltd. (“Mizrahi”) whereby Webster, Flushing and Mizrahi have extended
us a $32.5 million credit line.
Our
Competitive Strengths
We
believe our competitive strengths include:
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Experienced
management team. Our management team has successfully originated and serviced a portfolio of real estate mortgage loans generating
attractive annual returns under varying economic and real estate market conditions. We expect that the experience of our management
team will provide us with the ability to effectively deploy our capital in a manner that we believe will provide for attractive risk-adjusted
returns but with a focus on capital preservation and protection. |
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Long-standing
relationships. A significant portion of our business comes from repeat customers with whom we have long-standing relationships. These
customers are also a referral source for new borrowers. As long as these customers remain active real estate investors they provide
us with an advantage in securing new business and help us maintain a pipeline to attractive new opportunities that may not be available
to many of our competitors or to the general market. |
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Knowledge
of the market. Our intimate knowledge of the real estate markets in the geographic areas in which we operate enhances our ability
to identify attractive opportunities and helps distinguish us from many of our competitors. |
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Disciplined
lending. We seek to maximize our risk-adjusted returns, and preserve and protect capital, through our disciplined and credit-based
approach. We utilize rigorous underwriting and loan closing procedures that include numerous checks and balances to evaluate the
risks and merits of each potential transaction. We seek to protect and preserve capital by carefully evaluating the condition of
the property, the location of the property, and the creditworthiness of the guarantors. |
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Vertically-integrated
loan origination platform. We manage and control the loan process from origination through closing with our own personnel and independent
legal counsel and appraisers, with whom we have long relationships, who together constitute a highly experienced team in credit evaluation,
underwriting and loan structuring. We also believe that our procedures and experience allow us to quickly and efficiently execute
opportunities we deem desirable. |
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Structuring
flexibility. As a relatively small, non-bank real estate lender, we can move quickly and have much more flexibility than traditional
lenders to structure loans to suit the needs of our clients. Our ability to customize financing structures to meet borrowers’
needs is one of our key business strengths. |
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No
legacy issues. Unlike many of our competitors, we are not burdened by distressed legacy real estate assets. We do not have a legacy
portfolio of lower-return or problem loans that could potentially dilute the attractive returns we believe are available in the current
liquidity-challenged environment and/or distract and monopolize our management team’s time and attention. We do not have any
adverse credit exposure to, and we do not anticipate that our performance will be negatively impacted by, previously purchased assets. |
Our
Real Estate Lending Activities
Our
real estate lending activities involve originating, funding, servicing and managing short-term loans (i.e.: loans with an initial term
of not more than one year), secured by first mortgage liens on real estate property located in the New York metropolitan area, including
New Jersey and Connecticut, and in Florida, held for investment or resale. Generally, borrowers use the proceeds from our loans for one
of three purposes: (i) to acquire and renovate existing residential (single, one or two family) real estate properties; (ii) to acquire
vacant real estate and construct residential real properties; and (iii) to purchase and hold income producing properties. Our mortgage
loans are structured to fit the needs and business plans of the borrowers. Revenue is generated primarily from the interest borrowers
pay on our loans and, to a lesser extent, loan fee income generated on the origination and extension of loans.
Most
of our loans are funded in full at the closing. However, our loan portfolio includes a number of construction loans, which are only partially
funded at closing. At December 31, 2021, our unfunded commitment was approximately $7.21 million. At December 31, 2020, our unfunded
commitment was approximately $4.60 million. Advances under construction loans are funded against requests supported by all required documentation
as and when needed to pay contractors and other costs of construction. In the case of construction loans, the borrower will either deliver
multiple notes or one global note for the entire commitment. In either case, interest only accrues on the funded portion of the loan.
In
general, our strategy is to service and manage the loans we originate until they are paid. However, there have been a few instances where
we have either used loans as collateral, or sold participating interests in loans. At December 31, 2021, most of our loans are secured
by properties located around the New York metropolitan area. Most of the properties we finance are residential, although on occasion
they are classified as commercial. However, in all instances the properties are held only for investment by the borrowers. Most of these
properties do not generate any cash flow.
The
typical terms of our loans are as follows:
Principal
amount – In the last seven years, a minimum of $30,000 to a maximum of $2.85 million. Our lending policy limits the maximum
loan amount to the lower of (i) 9.9% of the aggregate amount of our loan portfolio (not including the loan under consideration) and (ii)
$3 million.
Loan-to-Value
Ratio - Up to 75%, and/or up to 80% of construction costs.
Interest
rate - Most of the loans in our portfolio have a fixed rate of typically 8% to 14%.
Term
- Generally, one year with early termination in the event of a sale of the property or a refinancing. We entertain requests for granting
extensions under certain conditions.
Prepayments
- Borrower may prepay the loan at any time beginning three months after the funding date and in some instances, we waive prepayment
fees.
Covenants
- To timely pay all interest on the loan and to maintain hazard insurance with respect to the property.
Events
of default - Include: (i) failure to comply with the loan terms; (ii) breach of a covenant.
Payment
terms - Interest only is payable monthly in arrears. Principal is due in a “balloon” payment at the maturity date.
Escrow
- None.
Reserves
- None.
Security
- The loan is evidenced by a promissory note, which is secured by a first mortgage lien on the real property owned by the borrower.
In addition, each loan is guaranteed by the principals of the borrower, which may be collaterally secured by a pledge of the guarantor’s
interest in the borrower.
Fees
and Expenses - Borrowers generally pay an origination fee equal to 0% to 2% of the loan amount. If we agree to extend the term of
the loan, we usually collect the same origination fee we charged on the initial funding of the loan. In addition, borrowers in some cases
also pay a processing fee, wire fee, bounced check fee and, in the case of construction loans, check requisition fee for each draw from
the loan. Finally, the borrower pays all expenses relating to obtaining the loan including the cost of a property appraisal, and all
title, recording fees and legal fees.
Operating
Data
The
decline in interest rates has adversely impacted our income and earnings. Recent market conditions, including interest rate reductions,
intense competition and slowing real estate markets in the areas we operate, have caused a reduction in our margins.
Our
loan portfolio
The
following table highlights certain information regarding our real estate lending activities for the periods indicated:
| |
Year Ended December 31, | |
($ in thousands) | |
2021 | | |
2020 | |
Loans originated | |
$ | 49,268 | | |
$ | 43,719 | |
Loans repaid | |
$ | 41,650 | | |
$ | 39,136 | |
Mortgage lending revenues | |
$ | 6,808 | | |
$ | 7,006 | |
Mortgage lending expenses | |
$ | 1,053 | | |
$ | 1,362 | |
Number of loans outstanding | |
| 131 | | |
| 128 | |
Principal amount of loans earning interest | |
$ | 65,715 | | |
$ | 58,098 | |
Average outstanding loan balance | |
$ | 502 | | |
$ | 454 | |
Percent of loans secured by New York metropolitan area properties, including in New Jersey and Connecticut (1) | |
| 95.42 | % | |
| 97.66 | % |
Weighted average contractual interest rate | |
| 9.53 | % | |
| 10.33 | % |
Weighted average term to maturity (in months) (2) | |
| 5.71 | | |
| 4.73 | |
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Calculated
based on the number of loans. |
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Without giving effect to
extension options. |
At
December 31, 2021 and 2020, no single loan, borrower or group of affiliated borrowers accounted for more than 10% of our loan portfolio.
The
following table sets forth information regarding the types of properties securing our mortgage loans outstanding at December 31, 2021
and 2020, and the interest earned in each category (dollars in thousands):
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2021 | | |
2020 | |
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Number of
Loans | | |
Interest
Earned | | |
Percentage | | |
Number of
Loans | | |
Interest Earned | | |
Percentage | |
| |
| | |
| | |
| | |
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Residential | |
| 120 | | |
$ | 3,406 | | |
| 89 | % | |
| 120 | | |
$ | 3,924 | | |
| 93 | % |
Commercial | |
| 6 | | |
| 289 | | |
| 7 | % | |
| 4 | | |
| 168 | | |
| 4 | % |
Mixed Use | |
| 5 | | |
| 150 | | |
| 4 | % | |
| 4 | | |
| 118 | | |
| 3 | % |
Total | |
| 131 | | |
$ | 3,845 | | |
| 100 | % | |
| 128 | | |
$ | 4,210 | | |
| 100 | % |
Our
Origination Process and Underwriting Criteria
We
primarily rely on our relationships with existing and former borrowers, real estate investors, real estate brokers, loan initiators,
and mortgage brokers to originate loans. Many of our borrowers are “repeat customers.” When underwriting a loan, the primary
focus of our analysis is the value of a property and the credit worthiness of the borrower and its principals. Prior to making a final
decision on a loan application we conduct extensive due diligence of the borrower and its principals. In terms of the property, we require
an assessment report and evaluation. We also order title, lien and judgment searches. In most cases, we will also make an on-site visit
to evaluate not only the property but the neighborhood in which it is located. Finally, we analyze and assess financial and operational
data provided by the borrower relating to its operation and maintenance of the property. In terms of the borrower and its principals,
we usually obtain third party credit reports from one of the major credit reporting services as well as personal financial information
provided by the borrower and its principals. We analyze all this information carefully prior to making a final determination. Ultimately,
our decision is based on our conclusions regarding the value of the property, which takes into account factors such as the neighborhood
in which the property is located, the current use and potential alternative use of the property, current and potential net income from
the property, the local market, sales information of comparable properties, existing zoning regulations, the creditworthiness of the
borrower and its principals and their experience in real estate ownership, construction, development and management. In conducting our
due diligence we rely, in part, on third party professionals and experts including appraisers, engineers, title insurers and attorneys.
Before
a loan commitment is issued, the loan must be reviewed and approved by our Chief Executive Officer. Our loan commitments are generally
issued subject to receipt by us of title documentation and title report, in a form satisfactory to us, for the underlying property. We
require a personal guarantee from the principal or principals of the borrower.
Our
Current Financing Strategies
Our
financing strategies are critical to the success and growth of our business. Our financing strategies at this time are limited to equity
and debt offerings, as well as lines of credit from banks. Our principal capital raising transactions have consisted of the following:
Credit
line. Currently, we have a credit line with Webster, Flushing, and Mizrahi pursuant to which we are eligible to borrow up to $32.5
million against assignments of mortgages and other collateral (the “Webster Credit Line”), as described in “Liquidity
and Capital Resources” below. The current interest rates under the Webster Credit Line equal (i) LIBOR plus a premium, which rate
aggregated 4.10%, including a 0.5% agency fee, as of December 31, 2021, or (ii) a Base Rate (as defined in the Amended and Restated Credit
Agreement) plus 2.25% plus a 0.5% agency fee, as chosen by the Company for each drawdown. (See Note 5 to the financial statements included
elsewhere in this Report.) As of December 31, 2021 and March 4, 2022, $15,645,970 and $22,275,972, respectively, was outstanding under
the Webster Credit Line.
Recent
public offering
On
July 9, 2021, we completed an underwritten public offering of 1,875,000 common shares at a public offering price of $7.20 per share.
The gross proceeds from the offering were $13.5 million and the net proceeds were approximately $12.4 million, after deducting our underwriting
discounts and commissions and offering expenses.
The
following table shows our capitalization, including our financing arrangements, and our loan portfolio as of December 31, 2021:
Capitalization ($ in thousands): | |
| |
Debt: | |
| | |
Line of credit | |
$ | 15,646 | |
Senior secured notes (net of deferred financing costs of $322) | |
| 5,678 | |
Total debt | |
| 21,324 | |
Other liabilities | |
| 2,496 | |
Capital (equity) | |
| 43,386 | |
Total sources of capital | |
$ | 67,206 | |
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Assets: | |
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Loans | |
$ | 65,715 | |
Other assets | |
| 1,491 | |
Total assets | |
$ | 67,206 | |
Competition
The
real estate finance market around the New York metropolitan area is highly competitive. We face competition for lending and investment
opportunities from a variety of institutional lenders and investors and many other market participants, including specialty finance companies,
mortgage/other REITs, commercial banks and thrift institutions, investment banks, insurance companies, hedge funds and other financial
institutions as well as private equity funds, family offices and high net worth individuals. Many of these competitors enjoy competitive
advantages over us, including greater name recognition, established lending relationships with customers, financial resources, and access
to capital. In addition, due to market conditions and intense competition in the market, we have begun to charge our customers lower
interest rates and origination fees charged on loans, which has resulted in our reduced revenues in 2021. We had also seen a lower demand
for new loans resulting from the COVID-19 pandemic.
Notwithstanding
the intense competition and some of our competitive disadvantages, we believe we have carved a niche for ourselves among small real estate
developers, owners and contractors throughout the New York metropolitan area because of our ability to structure each loan to suit the
needs of each individual borrower and our ability to act quickly. In addition, we believe we have developed a reputation among these
borrowers as offering reasonable terms and providing outstanding customer service. We believe our future success will depend on our ability
to maintain and capitalize on our existing relationships with borrowers and brokers and to expand our borrower base by continuing to
offer attractive loan products, remain competitive in pricing and terms, and provide superior service.
In
addition, we have also begun operating in the New Jersey, Connecticut and Florida markets. As we have not operated in those markets for
an extended period of time, we have faced competition from more established lenders, as well as some smaller lenders, in those markets.
Sales
and Marketing
We
do not engage any third parties for sales and marketing. Rather, we rely on our internal team to generate lending opportunities as well
as referrals from existing or former borrowers, brokers and bankers and advertising to generate lending opportunities. A principal source
of new transactions has been repeat business from prior customers and their referral of new leads.
Intellectual
Property
Our
business does not depend on exploiting or leveraging any intellectual property rights. To the extent we own any rights to intellectual
property, we rely on a combination of federal, state and common law trademarks, service marks and trade names, copyrights and trade secret
protection. We have registered some of our trademarks and service marks in the United States Patent and Trademark Office including “Manhattan
Bridge Capital”.
The
protective steps we have taken may not deter misappropriation of our proprietary information. These claims, if meritorious, could require
us to license other rights or subject us to damages and, even if not meritorious, could result in the expenditure of significant financial
and managerial resources on our part.
Employees
As
of December 31, 2021, we employed six employees. In addition, during 2021 we used outside lawyers and other independent professionals
to verify titles and ownership, to file liens and to consummate the transactions. Outside appraisers were used to assist management in
evaluating the worth of collateral, when deemed necessary by management. We also used construction inspectors as well as mortgage brokers
and deal initiators.
Regulation
Our
operations are subject, in certain instances, to supervision and regulation by state and federal governmental authorities and may be
subject to various laws and judicial and administrative decisions imposing various requirements and restrictions. In addition, we may
rely on exemptions from various requirements of the Securities Act of 1933, as amended (the “Securities Act”), the Exchange
Act, the Investment Company Act and ERISA. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance
by third-parties who we do not control.
Regulation
of Commercial Real Estate Lending Activities
Although
most states do not regulate commercial finance, certain states impose limitations on interest rates and other charges and on certain
collection practices and creditor remedies, and require licensing of lenders and financiers and adequate disclosure of certain contract
terms. We also are required to comply with certain provisions of, among other statutes and regulations, certain provisions of the Equal
Credit Opportunity Act that are applicable to commercial loans, The USA PATRIOT Act, regulations promulgated by the Office of Foreign
Asset Control and federal and state securities laws and regulations.
Investment
Company Act Exemption
Although
we reserve the right to modify our business methods at any time, we are not currently required to register as an investment company under
the Investment Company Act. However, we cannot assure you that our business strategy will not evolve over time in a manner that could
subject us to the registration requirements of the Investment Company Act.
Section
3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is or holds itself out as being engaged primarily,
or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the Investment
Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting,
owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value
of the issuer’s total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis, which we refer
to as the 40% test.
We
rely on the exception set forth in Section 3(c)(5)(C) of the Investment Company Act which excludes from the definition of investment
company “[a] ny person who is not engaged in the business of issuing redeemable securities, face-amount certificates of the installment
type or periodic payment plan certificates, and who is primarily engaged in one or more of the following businesses... (C) purchasing
or otherwise acquiring mortgages and other liens on and interests in real estate.” This exception generally requires that at least
55% of an entity’s assets be comprised of mortgages and other liens on and interests in real estate, also known as “qualifying
interests,” and at least another 25% of the entity’s assets must be comprised of real estate-type interests reduced by any
amount of qualifying interests that the entity holds in excess of the 55% minimum limit (with no more than 20% of the entity’s
assets comprised of miscellaneous assets). At the present time, we qualify for the exception under this section and our current intention
is to continue to focus on originating short term loans secured by first mortgages on real property. However, if, in the future, we do
acquire non-real estate assets without the acquisition of substantial real estate assets, we may be deemed to be an “investment
company” and be required to register as such under the Investment Company Act, which could have a material adverse effect on us.
If
we were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation
with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons
(as defined in the Investment Company Act), portfolio composition, including restrictions with respect to diversification and industry
concentration, and other matters.
Qualification
for exclusion from the definition of an investment company under the Investment Company Act will limit our ability to make certain investments.
In addition, complying with the tests for such exclusion could restrict the time at which we can acquire and sell assets.
Environmental
Laws
Our
borrowers, who own properties, may be subject to various environmental laws of federal, state and local governments. To the extent that
an owner of a property underlying one of our debt instruments becomes liable for removal costs, the ability of the owner to make payments
to us may be reduced, which in turn may adversely affect the value of the relevant mortgage asset held by us and our ability to make
distributions to our shareholders. To date, our borrowers’ compliance with existing laws has not had a material adverse effect
on our earnings and we do not have reason to believe it will have such an impact in the future. However, we cannot predict the impact
of unforeseen environmental contingencies or new or changed laws or regulations on the properties owned by our borrowers.
Available
information
We
make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports
filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (Exchange Act), as amended, free
of charge on our website at www.manhattanbridgecapital.com, as soon as reasonably practicable after they are electronically filed with
or furnished to the Securities and Exchange Commission. The information on our website is not incorporated by reference into this Report.
Item
1A. Risk Factors
The
following risk factors, among others, could affect our actual results of operations and could cause our actual results to differ materially
from those expressed in forward-looking statements made by us. These forward-looking statements are based on current expectations and
except as required by law we assume no obligation to update this information. You should carefully consider the risks described below
and elsewhere in this Report before making an investment decision. Our business, financial condition or results of operations could be
materially adversely affected by any of these risks. Our common stock is considered speculative and the trading price of our common stock
could decline due to any of these risks, and you may lose all or part of your investment. The following risk factors are not the only
risk factors facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may
also affect our business.
Summary
of Risk Factors
Our
business is subject to a number of risks, including risks that may adversely affect our business, financial condition and results of
operations. These risks are discussed more fully below and include, but are not limited to, risks related to:
Risks
Relating to Our Business
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the
impact of COVID-19 on our operations; |
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that
our loan origination activities, revenues and profits are limited by available funds; |
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the
competitive market and competition; |
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our
investment, leverage and financing strategies; |
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the
broad authority of our management team in making lending decisions and their importance to our business; |
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the
impact of interest rates on our borrowing and business and the requirement to meet covenants contained in our credit line facility; |
Risks
Related to Our Portfolio
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the
impact of overestimating loan yields or the value of collateral and interest rate fluctuations; |
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market
conditions for mortgages and mortgage-related assets; |
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extension
of existing loans; |
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potential
lender liability claims; |
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the
impact of the timing of prepayment of loans; |
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the
liquidity of our loan portfolio; |
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the
geographic concentration of our loan portfolio; |
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our
exposure to economic slowdowns or recessions; |
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our
ability to foreclose promptly as may be necessary; |
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potential
liability relating to environmental matters; |
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loan
defaults; |
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casualty
events occurring on properties securing our loans; |
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borrower
concentration; |
Risks
Related to Financing Transactions
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complying
with covenants in our existing credit line; |
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our
use of leverage; |
Risks
Related to REIT Status and Investment Company Act Exemption
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potential
challenges by the Internal Revenue Service (the “IRS”); |
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compliance
with REIT requirements, including REIT distribution requirements; |
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potential
tax liabilities and our reliance on tax and legal advice on our REIT status; |
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the
impact of our distributions and the tax impact of our dividend payments; |
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the
impact of the liquidation of our assets; |
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the
ownership restrictions set forth in our restated certificate of incorporation; |
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ability
to generate sufficient cash flow to make distributions; |
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the
impact of being deemed an investment company under the Investment Company Act; |
Risks
Related to Our Common Shares
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the
potential for our largest shareholder’s interests not aligning with those of our other shareholders; |
Risks
Related to Our Organization and Structure
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the
impact of certain provisions of New York law; |
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our
capital structure may prevent a change in control and the limited rights of shareholders to take action against our officers and
directors; |
Risks
Related to the Notes issued by MBC Funding II
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our
shareholders and noteholders may not have aligned interests; |
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the
restrictive covenants in the Indentures; |
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the
potential lack of protection against certain events that may impact the obligations under the Notes; |
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our
inherent conflict of interest with MBC Funding II; |
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the
potential lack of ability of the Indenture Trustee and Noteholders to enforce their rights; |
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the
impact of bankruptcy on us or MBC Funding II; |
General
Risk Factors
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the
impact of potential security breaches; |
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access
to financing; |
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the
limited trading and volatility in our common stock future events that may impact the price of our common stock; and |
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Risks
Related to Our Business
The
COVID-19 pandemic may adversely affect our business.
As
a result of the COVID-19 pandemic, we experienced a slow down in the deployment of capital and lower demand for new loans. To date, we
have not been materially impacted by the COVID-19 pandemic, but we will continue to closely monitor the impact of the COVID-19 pandemic
on all aspects of our business. If the COVID-19 pandemic worsens in the New York area in which we operate, the pandemic could materially
affect our financial and operational results.
The
extent to which the coronavirus impacts our business will depend on future developments, which are highly uncertain and cannot be predicted,
including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat
its impact, among others. We expect the significance of the COVID-19 pandemic, including the extent of its effect on our financial and
operational results, to be dictated by, among other things, its duration, the success of efforts to contain it and the impact of actions
taken in response. For instance, government action to provide substantial financial support to businesses could provide helpful mitigation
for us and certain of our borrowers; its ultimate impact, however, is not yet clear. While we are not able at this time to estimate the
future impact of the COVID-19 pandemic on our financial and operational results, it could be material.
Our
loan origination activities, revenues and profits are limited by available funds. If we do not increase our working capital, we will
not be able to grow our business.
As
a real estate finance company, our revenue and net income is limited to interest received or accrued on our loan portfolio. Our ability
to originate real estate loans is limited by the funds at our disposal. As of March 4, 2022, we had approximately $10.2 million of borrowing
availability under the Webster Credit Line. We intend to use the proceeds from the repayment of loans outstanding and the additional
borrowing capacity under the Webster Credit Line to originate real estate loans. Nevertheless, if demand for our mortgage loans increases,
we cannot assure you that we will be able to capitalize on this demand given the limited funds available to us to originate loans.
We
operate in a highly competitive market and competition may limit our ability to originate loans with favorable interest rates.
We
operate in a highly competitive market and we believe these conditions will persist for the foreseeable future as the financial services
industry continues to consolidate, producing larger, better capitalized and more geographically diverse companies with broad product
and service offerings. Thus, our profitability depends, in large part, on our ability to compete effectively. Our competition includes
mortgage/other REITs, specialty finance companies, savings and loan associations, banks, mortgage banks, insurance companies, mutual
funds, pension funds, private equity funds, hedge funds, institutional investors, investment banking firms, non-bank financial institutions,
governmental bodies, family offices and high net worth individuals. We may also compete with companies that partner with and/or receive
financing from the U.S. Government. Many of our competitors are substantially larger and have considerably greater financial, technical,
marketing and other resources than we do. In addition, larger and more established competitors may enjoy significant competitive advantages,
including enhanced operating efficiencies, more extensive referral networks, greater and more favorable access to investment capital
and more desirable lending opportunities. Several of these competitors, including mortgage REITs, have recently raised or are expected
to raise, significant amounts of capital, which enables them to make larger loans or a greater number of loans. Some competitors may
also have a lower cost of funds and access to funding sources that may not be available to us, such as funding from various governmental
agencies or under various governmental programs for which we are not eligible. In addition, some of our competitors may have higher risk
tolerances or different risk assessments, which could allow them to consider a wider variety of possible loan transactions or to offer
more favorable financing terms than we would. Finally, as a REIT and because we operate in a manner so as to be exempt from the requirements
of the Investment Company Act, we may face further restrictions to which some of our competitors may not be subject. As a result, we
may find that the pool of potential borrowers available to us is limited. We cannot assure you that the competitive pressures we face
will not have a material adverse effect on our business, financial condition and results of operations.
We
may change our investment, leverage, financing and operating strategies, policies or procedures without shareholder consent, which may
adversely affect the market value of our common shares and our ability to make distributions to shareholders.
We
may amend or revise our policies, including our policies with respect to growth strategy, operations, indebtedness, capitalization, financing
alternatives and underwriting criteria and guidelines, or approve transactions that deviate from our existing policies at any time, without
a vote of, or notice to, our shareholders. For example, we may decide that in order to compete effectively, we should relax our underwriting
guidelines and make riskier loans, which could result in a higher default rate on our portfolio. We may also decide to expand our business
focus to other targeted asset classes, such as participation interests in mortgage loans, mezzanine loans and subordinate interests in
mortgage loans. We could also decide to adopt investment strategies that include securitizing our portfolio, hedging transactions and
swaps. We may even decide to broaden our business to include acquisitions of real estate assets, which we may or may not operate. Finally,
as the market evolves, we may determine that the residential and commercial real estate markets do not offer the potential for attractive
risk-adjusted returns for an investment strategy that is consistent with our intention to remain qualified for taxation as a REIT and
to operate in a manner to remain exempt from registration under the Investment Company Act. If we believe it would be advisable for us
to be a more active seller of loans and/or interests thereon, we may determine that we should conduct such business through a taxable
REIT subsidiary or that we should cease to maintain our qualification for taxation as a REIT. These changes may increase our exposure
to interest rate risk, default risk, financing risk and real estate market fluctuations, which could adversely affect our business, operations
and financial conditions as well as the value of our securities and our ability to make distributions to our shareholders.
Management
has broad authority to make lending decisions. If management fails to generate attractive risk-adjusted loans on a consistent basis,
our revenue and income could be materially and adversely affected and the market price of a share of our common shares is likely to decrease.
Our
board of directors has given management broad authority to make decisions to originate loans. The only limitation imposed by the board
of directors is that no single loan may exceed the lower of (i) 9.9% of our loan portfolio (without taking into account the loan under
consideration) and (ii) $3 million. Within these broad guidelines, our Chief Executive Officer has the absolute authority to make all
lending decisions. Thus, management could authorize transactions that may be costly and/or risky, which could result in returns that
are substantially below expectations or that result in losses, which would materially and adversely affect our business operations and
results. Further, management’s decisions may not fully reflect the best interests of our shareholders. Our board of directors may
periodically review our underwriting guidelines but will not, and will not be required to, review all of our proposed loans. In conducting
periodic reviews, our board of directors will rely primarily on information provided to them by management.
Our
Chief Executive Officer and Chief Financial Officer are each critical to our business and our future success may depend on our ability
to retain them. In addition, as our business grows we will need to hire additional personnel.
Our
future success depends to a significant extent on the continued efforts of our founder, president and Chief Executive Officer, Assaf
Ran, and our Chief Financial Officer, Vanessa Kao. Mr. Ran generates most, if not all, of our loan applications, supervises all aspects
of the underwriting and due diligence process in connection with each loan, structures each loan and has absolute authority (subject
only to the maximum amount of the loan) as to whether or not to approve the loan. Ms. Kao services all loans in our portfolio. If Mr.
Ran is unable to continue to serve as our Chief Executive Officer on a full-time basis, we might not be able to generate sufficient loan
applications and our business and operations would be adversely affected. In addition, in the future we may need to attract and retain
qualified senior management and other key personnel, particularly individuals who are experienced in the real estate finance business
and people with experience in managing a mortgage REIT. If we are unable to recruit and retain qualified personnel in the future, our
ability to continue to operate and to grow our business will be impaired.
The
borrowings under the Webster Credit Line may, at our election, be tied to LIBOR interest rates. Changes in the method of determining
LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect interest rates on our current Webster Credit
Line or future indebtedness and may otherwise adversely affect our financial condition and results of operations.
In
July 2017, the Financial Conduct Authority, the authority that regulates LIBOR, announced that it intended to stop compelling banks to
submit rates for the calculation of LIBOR after 2021. LIBOR is currently expected to be phased out for pre-existing contracts by June
30, 2023. The Alternative Reference Rates Committee (“ARRC”) in the U.S. has proposed that the Secured Overnight Financing
Rate (“SOFR”) is the rate that represents best practice as the alternative to the U.S. dollar LIBOR for use in derivatives
and other financial contracts that are currently indexed to LIBOR. ARRC has proposed a paced market transition plan to SOFR from U.S.
dollar LIBOR and organizations are currently working on industry-wide and company-specific transition plans as relating to derivatives
and cash markets exposed to U.S. dollar LIBOR.
Our
Webster Credit Line, which expires on February 28, 2023, provides for interest rates that equal (i) LIBOR plus a premium, which rate
aggregated approximately 4.10%, including a 0.5% agency fee, as of December 31, 2021, or (ii) a Base Rate (as defined in the Amended
and Restated Credit Agreement) plus 2.25%, plus a 0.5% agency fee, as chosen by us for each drawdown. As such, changes in the method
of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect interest rates on the Webster
Credit Line or future indebtedness. We are monitoring this activity and evaluating the related risks, and any such effects of the transition
away from LIBOR may result in increased expenses, may impair our ability to refinance our indebtedness, or may result in difficulties,
complications or delays in connection with future financing efforts, any of which could adversely affect our financial condition and
results of operations.
Terrorist
attacks and other acts of violence or war may affect the real estate industry generally and our business, financial condition and results
of operations.
The
risk of terrorist attacks by extremist groups has risen dramatically over the last few years. Any future terrorist attacks, the anticipation
of any such attacks, and the consequences of any military or other response by the United States and its allies may have an adverse impact
on the U.S. financial markets and the economy in general. In addition, a significant terrorist attack in New York City could have a material
adverse impact on the New York real estate market, which, in turn, could make it more difficult for our borrowers to repay their loans.
We cannot predict the severity of the effect that any such future events would have on the U.S. financial markets, including the real
estate capital markets, the economy or our business. Any future terrorist attacks could adversely affect the credit quality of some of
our loan portfolio. We may suffer losses as a result of the adverse impact of any future terrorist attacks and these losses may adversely
impact our results of operations.
The
enactment of the Terrorism Risk Insurance Act of 2002, or the TRIA, and the subsequent enactment of the Terrorism Risk Insurance Program
Reauthorization Act of 2007, which extended TRIA through the end of 2020, which in turn was extended by the Terrorism Risk Insurance
Program Reauthorization Act of 2019 through the end of 2027 requires insurers to make terrorism insurance available under their property
and casualty insurance policies in order to receive federal compensation under TRIA for insured losses. However, this legislation does
not regulate the pricing of such insurance. The absence of affordable insurance coverage may adversely affect the general real estate
lending market, lending volume and the market’s overall liquidity and may reduce the number of suitable financing opportunities
available to us and the pace at which we are able to make loans. If property owners are unable to obtain affordable insurance coverage,
the value of their properties could decline and in the event of an uninsured loss, we could lose all or a portion of our investment.
Our
existing credit line has numerous covenants. If we are unable to comply with these covenants, or obtain necessary waivers, the outstanding
amount of the loan could become due and payable.
The
Webster Credit Line contains various covenants and restrictions that are typical for these kinds of credit facilities, including limiting
the amount that we can borrow relative to the value of the underlying collateral, maintaining various financial ratios and limitations
on the terms of loans we make to our customers. If we fail to meet or satisfy any of these covenants, or fail to obtain a waiver in the
event we do fail to meet or satisfy any of these covenants, we would be in default under our agreement with Webster, Flushing and Mizrahi,
and Webster, Flushing and/or Mizrahi could elect to declare outstanding amounts due and payable, terminate its commitments to us, require
us to post additional collateral and/or enforce their interests against existing collateral. Acceleration of our debt to Webster, Flushing
and/or Mizrahi could significantly reduce our liquidity or require us to sell our assets to repay amounts due and outstanding. This would
significantly harm our business, financial condition, results of operations and ability to make distributions and could result in the
foreclosure of our assets which secure our obligations, which could cause the value of our outstanding securities to decline. A default
could also significantly limit our financing alternatives such that we would be unable to pursue our leverage strategy, which could adversely
affect our returns.
Our
indebtedness could adversely affect our financial flexibility and our competitive position.
We
have, and expect that we will continue to have a significant amount of indebtedness. As of December 31, 2021, we had approximately $21.6
million of debt outstanding, consisting of the amounts outstanding under the Webster Credit Line and the balance of senior secured notes.
As of March 4, 2022, another $10.2 million was available under the recently amended Webster Credit Line. This level of indebtedness increases
the risk that we may be unable to generate cash sufficient to pay amounts due in respect of the indebtedness. Our indebtedness could
have other important consequences to you and significantly impact our business. For example, it could:
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make
it more difficult for us to satisfy our obligations; |
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increase
our vulnerability to adverse changes in general economic, industry and competitive conditions; |
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require
us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes; |
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limit
our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
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limit
our ability to make material acquisitions or take advantage of business opportunities that may arise; |
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expose
us to fluctuations in interest rates, to the extent our borrowings bear variable rates of interest; |
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place
us at a competitive disadvantage compared to our competitors that have less debt; |
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limit
our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution
of our business plan or other general corporate purposes on reasonable terms or at all; |
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reduce
the amount of surplus funds distributable by our subsidiary to us for use in our business, such as for the payment of indebtedness
and dividends to our shareholders; and |
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lead
us to elect to make additional investments in our subsidiary if their cash flow from operations is insufficient for them to make
payments on their indebtedness. |
We
may incur additional debt, which could exacerbate the risks associated with our leverage.
We
and our subsidiary may incur substantial additional indebtedness in the future. The covenants in the agreement governing the Webster
Credit Line may limit our ability and the ability of our subsidiary to incur additional indebtedness. To the extent that we are nevertheless
able to incur additional indebtedness or such other obligations, the risks associated with our indebtedness described above, including
our possible inability to service our debt, will increase.
Risks
Related to Our Portfolio
If
we overestimate the yields on our loans or incorrectly value the collateral securing the loan, we may experience losses.
Loan
decisions are typically made based on the credit-worthiness of the borrower and the value of the collateral securing the loan. We cannot
assure you that our assessments will always be accurate or the circumstances relating to a borrower or the collateral will not change
during the loan term, which could lead to losses and write-offs. Losses and write-offs could materially and adversely affect our business,
operations and financial condition and the market price of our securities.
Difficult
conditions in the markets for mortgages and mortgage-related assets as well as the broader financial markets have resulted in a significant
contraction in liquidity for mortgages and mortgage-related assets, which may adversely affect the value of the assets that we intend
to originate.
Our
results of operations will be materially affected by conditions in the markets for mortgages and mortgage-related assets as well as the
broader financial markets and the economy generally. Significant adverse changes in financial market conditions may result in a decline
in real estate values, jeopardizing the performance and viability of many real estate loans. As a result, many traditional mortgage lenders
may suffer severe losses and even fail. This situation may negatively affect both the terms and availability of financing for small non-bank
real estate finance companies. This could have an adverse impact on our financial condition, business and operations.
Loans
on which the maturity date has been extended may involve a greater risk of loss than traditional mortgage loans.
Borrowers
usually use the proceeds of a long-term mortgage loan or sale to repay our loans. We may therefore depend on a borrower’s ability
to obtain permanent financing or sell the property to repay our loan, which could depend on market conditions and other factors. Our
loans are also subject to risks of borrower defaults, bankruptcies, fraud, losses and special hazard losses that are not covered by standard
hazard insurance. In the event of a default, we bear the risk of loss of principal and non-payment of interest and fees to the extent
of any deficiency between the value of the mortgage collateral and the principal amount and unpaid interest of the loan. To the extent
we suffer such losses with respect to our loans, our enterprise value and the price of our securities may be adversely affected.
Interest
rate fluctuations could reduce our ability to generate income and may cause losses.
Our
primary interest rate exposures relate to the yield on our loan portfolio and the financing cost of our debt. Our operating results depend,
in part, on differences between the interest income generated by our loan portfolio net of credit losses and our financing costs. Thus,
changes in interest rates will affect our revenue and net income in one or more of the following ways:
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an
increase in the LIBOR rate (or any replacement) may impact our cost of borrowing under the Webster Credit Line; |
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our
operating expenses may increase; |
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our
ability to originate loans may be adversely impacted; |
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to
the extent we use our credit line or other forms of debt financing to originate loans, our borrowing costs would rise, reducing the
“spread” between our cost of funds and the yield on our outstanding mortgage loans, which tend to be fixed rate obligations; |
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a
rise in interest rates may discourage potential borrowers from refinancing existing loans or defer plans to renovate or improve their
properties; |
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a
drop in interest rates may reduce our revenues by requiring us to reduce the interest rates we charge potential borrowers; |
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borrower
default rates may increase; |
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property
values may be negatively impacted, making our existing loans riskier and new loans that we originate smaller; and |
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rising
interest rates could also result in reduced turnover of properties which may reduce the demand for new mortgage loans. |
Rising
interest rates may reduce our profitability and may cause losses.
Our
borrowings under the Webster Credit Line are subject to LIBOR, which has remained at historically low levels during 2021. In addition,
in the future we may enter into financing arrangements that may be determined by reference to floating rates, such as LIBOR (or any replacement
rate such as SOFR) or a Treasury index, and the amount of the cost of borrowing may depend on the level and movement of interest rates.
Interest rates have remained at relatively low levels on a historical basis and the U.S. Federal Reserve maintained the federal funds
target range at 0.0% to 0.25% for much of 2021. There can be no assurance, however, that LIBOR rates will not increase in 2022 or that
the Federal Reserve will not raise interest rates in 2022. In the event of an increase in interest rates, our borrowing costs would increase
which would adversely affect our results of operations and financial condition and may negatively impact our distributions to shareholders.
We
may be subject to “lender liability” claims. Our financial condition could be materially and adversely impacted if we were
to be found liable and required to pay damages.
In
recent years, a number of judicial decisions have upheld the right of borrowers to sue lenders on the basis of various evolving legal
theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has
either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of
control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders.
We cannot assure you that such claims will not arise or that we will not be subject to significant liability if a claim of this type
did arise.
An
increase in the rate of prepayment of outstanding loans may have an adverse impact on the value of our portfolio as well as our revenue
and income.
The
value of our loan portfolio may be affected by prepayment rates and a significant increase in the rate of prepayments could have an adverse
impact on our operating results. Prepayment rates cannot be predicted with certainty and no strategy can completely insulate us from
prepayment or other such risks. In periods of declining interest rates, prepayment rates on mortgage and other real estate-related loans
generally increase. Proceeds of prepayments received during such periods are likely to be reinvested by us in new loans yielding less
than the yields on the loans that were prepaid, resulting in lower revenues and possibly, lower profits. A portion of our loan portfolio
requires prepayment fees if a loan is prepaid. However, there can be no assurance that these fees will make us whole for the detriment
incurred by virtue of the prepayment.
The
lack of liquidity in our portfolio may adversely affect our business.
The
illiquidity of our loan portfolio may make it difficult for us to sell such assets if the need or desire arises. As a result, if we are
required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the outstanding loan balance.
The
geographic concentration of our loan portfolio may make our revenues and the values of the mortgages and real estate securing our portfolio
vulnerable to adverse changes in economic conditions around the New York metropolitan area.
Under
our current business model, we have one asset class — mortgage loans that we originate, service and manage — and we have
no current plans to diversify. Moreover, most of our collateral is located in a limited geographic area. At December 31, 2021, most of
our outstanding loans are secured by properties located in the New York metropolitan area. A lack of geographical diversification makes
our mortgage portfolio more sensitive to local and regional economic conditions. A significant decline around the New York metropolitan
area economy could result in a greater risk of default compared with the default rate for loans secured by properties in other geographic
locations. This could result in a reduction of our revenues and provision for loan loss allowances, which might not be as acute if our
loan portfolio were more geographically diverse. Therefore, our loan portfolio is subject to greater risk than other real estate finance
companies that have a more diversified asset base and broader geographic footprint. To the extent that our portfolio is concentrated
in one region and/or one type of asset, downturns relating generally to such region or type of asset may result in defaults on a number
of our assets within a short time period, which may reduce our net income and the value of our securities and accordingly reduce our
ability to make distributions to our shareholders.
A
prolonged economic slowdown, a lengthy or severe recession or declining real estate values could impair our investments and harm our
operations.
A
prolonged economic slowdown, a recession or declining real estate values could impair the performance of our assets and harm our financial
condition and results of operations, increase our funding costs, limit our access to the capital markets or result in a decision by lenders
not to extend credit to us. Thus, we believe the risks associated with our business will be more severe during periods of economic slowdown
or recession because these periods are likely to be accompanied by declining real estate values. Declining real estate values are likely
to have one or more of the following adverse consequences:
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reduce
the level of new mortgage and other real estate-related loan originations since borrowers often use appreciation in the value of
their existing properties to support the purchase or investment in additional properties; |
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make
it more difficult for existing borrowers to remain current on their payment obligations; and |
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significantly
increase the likelihood that we will incur losses on our loans in the event of default because the value of our collateral may be
insufficient to cover our cost on the loan. |
Any
sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from
loans in our portfolio as well as our ability to originate new loans, which would materially and adversely affect our results of operations,
financial condition, liquidity and business and our ability to make distributions to our shareholders.
We
do not carry any loan loss reserves. If we are required to write-off all or a portion of any loan in our portfolio, our net income will
be adversely impacted. Loan loss reserves are particularly difficult to estimate in a turbulent economic environment.
Based
on our experience and our periodic evaluation of our loan portfolio, we have not deemed it necessary to create any loan loss reserves.
Thus, a loss with respect to all or a portion of a loan in our portfolio will have an immediate and adverse impact on our net income.
The valuation process of our loan portfolio requires us to make certain estimates and judgments, which are particularly difficult to
determine during a period in which the availability of real estate credit is limited and real estate transactions have decreased. These
estimates and judgments are based on a number of factors, including projected cash flows from the collateral securing our mortgage loans,
if any, loan structure, including the availability of reserves and recourse guarantees, likelihood of repayment in full at the maturity
of a loan, the relative strength or weakness of the refinancing market and expected market discount rates for varying property types.
If our estimates and judgments are not correct, our results of operations and financial condition could be severely impacted.
Our
due diligence may not reveal all of a borrower’s liabilities and may not reveal other weaknesses in its business.
Before
making a loan to a borrower, we assess the strength and skills of such entity’s management and other factors that we believe are
material to the performance of the loan. In making the assessment and otherwise conducting customary due diligence, we rely on the resources
available to us and, in some cases, services provided by third parties. This process is particularly important and subjective with respect
to newly organized entities because there may be little or no information publicly available about the entities. There can be no assurance
that our due diligence processes will uncover all relevant facts or that the borrower’s circumstances will not change after the
loan is funded. In either case, this could adversely impact the performance of the loan and our operating results.
Our
loans are usually made to entities to enable them to acquire, develop or renovate residential or commercial property, which may involve
a greater risk of loss than loans to individual owners of residential real estate.
We
make loans to corporations, partnerships and limited liability companies that are looking to purchase, renovate and/or improve residential
or commercial real estate held for resale or investment. More often than not, the property is under-utilized, poorly managed, or located
in a recovering neighborhood. These loans may have a higher degree of risk than loans to individual property owners with respect to their
primary residence or to owners of commercial operating properties because of a variety of factors. For instance, our borrowers usually
do not have the need to occupy the property, or an emotional attachment to the property as borrowers of owner-occupied residential properties
typically have, and therefore they do not always have the same incentive to avoid foreclosure. Similarly, in the case of non-residential
property, a majority of the properties securing our loans have little or no cash flow. If the neighborhood in which the asset is located
fails to recover according to the borrower’s projections, or if the borrower fails to improve the quality of the property’s
performance and/or the value of the property, the borrower may not receive a sufficient return on the property to satisfy the loan, and
we bear the risk that we may not recover some or all of our principal. Finally, there are difficulties associated with collecting debts
from entities that may be judgment proof. While we try to mitigate these risks in various ways, including by getting personal guarantees
from the principals of the borrower, we cannot assure you that these lending and credit enhancement strategies will be successful.
Volatility
of values of residential and commercial properties may adversely affect our loans and investments.
Residential
and commercial property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited
to, events such as natural disasters, including hurricanes and earthquakes, acts of war and/or terrorism and others that may cause unanticipated
and uninsured performance declines and/or losses to us or the owners and operators of the real estate securing our investment; national,
regional and local economic conditions, such as what we have experienced in recent years (which may be adversely affected by industry
slowdowns and other factors); local real estate conditions (such as an oversupply of housing, retail, industrial, office or other commercial
space); changes or continued weakness in specific industry segments; construction quality, construction cost, age and design; demographic
factors; retroactive changes to building or similar codes; and increases in operating expenses (such as energy costs). In the event of
a decline in the value of a property securing one of our loans, the borrower may have difficulty repaying our loan, which could result
in losses to us. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to
a borrower to repay our loans, which could also cause us to suffer losses.
Our
inability to promptly foreclose on defaulted loans could increase our costs and/or losses.
The
performance of first mortgage loans may depend on the performance of the underlying real estate collateral. In particular, mortgage loans
secured by property held for investment or resale are subject to risks of delinquency and foreclosure, and risks of loss that are greater
than similar risks associated with loans secured by owner-occupied residential properties. The ability of a borrower under a first mortgage
loan to repay a loan secured by an income-producing property typically depends primarily on the successful operation of such property
rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced,
the borrower’s ability to repay the loan is impaired and the borrower defaults, we may lose all or substantially all of our investment.
If the property is not income producing, as is the case with most of our loans, the risks are even greater. While we have certain rights
with respect to the real estate collateral underlying a first mortgage loan, and rights against the borrower and guarantor(s), in the
event of a default there are a variety of factors that may inhibit our ability to enforce our rights to collect the loan, whether through
a non-payment action against the borrower, a foreclosure proceeding against the underlying property or a collection or enforcement proceeding
against the guarantor. These factors include, without limitation, state foreclosure timelines and deferrals associated therewith (including
with respect to litigation); unauthorized occupants living in the property; federal, state or local legislative action or initiatives
designed to provide residential property owners with assistance in avoiding foreclosures and that serve to delay the foreclosure process;
government programs that require specific procedures to be followed to explore the refinancing of a residential mortgage loan prior to
the commencement of a foreclosure proceeding; and continued declines in real estate values and sustained high levels of unemployment
that increase the number of foreclosures and place additional pressure on the already overburdened judicial and administrative systems.
None
of our loans are funded with interest reserves and our borrowers may be unable to pay the interest accruing on the loans when due, which
could have a material adverse impact on our financial condition.
Our
loans are not funded with an interest reserve. Thus, we rely on the borrowers to make interest payments as and when due from other sources
of cash. Given the fact that most of the properties securing our loans are not income producing or even cash producing and most of the
borrowers are entities with no assets other than the single property that is the subject of the loan, some of our borrowers have considerable
difficulty servicing our loans and the risk of a non-payment or default is considerable. We depend on the borrower’s ability to
refinance the loan at maturity or sell the property for repayment. If the borrower is unable to repay the loan, together with all the
accrued interest, at maturity, our operating results and cash flows would be materially and adversely affected. Foreclosure of a mortgage
loan can be an expensive and lengthy process that could have a substantial negative effect on our anticipated return on the foreclosed
mortgage loan. In addition, in the event of the bankruptcy of the borrower, we may not have full recourse to the assets of the borrower,
or the assets of the borrower or the guarantor may not be sufficient to satisfy the debt.
Liability
relating to environmental matters may impact the value of properties that we may acquire or the properties underlying our investments.
Under
various U.S. federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain
hazardous substances released on its property. These laws often impose liability without regard to whether the owner or operator knew
of, or was responsible for, the release of such hazardous substances. The presence of hazardous substances may adversely affect an owner’s
ability to sell real estate or borrow using real estate as collateral. To the extent that an owner of a property underlying one of our
debt instruments becomes liable for removal costs, the ability of the owner to make payments to us may be reduced, which in turn may
adversely affect the value of the relevant mortgage asset held by us and our ability to make distributions to our shareholders. If we
acquire any properties by foreclosure or otherwise, the presence of hazardous substances on a property may adversely affect our ability
to sell the property and we may incur substantial remediation costs, thus harming our financial condition. The discovery of material
environmental liabilities attached to such properties could have a material adverse effect on our results of operations and financial
condition and our ability to make distributions to shareholders.
Defaults
on our loans may cause declines in revenues and net income.
Defaults
by borrowers could result in one or more of the following adverse consequences:
|
● |
a
decrease in interest income, profitability and cash flow; |
|
● |
the
establishment of or an increase in loan loss reserves; |
|
● |
write-offs
and losses; |
|
● |
an
increase in legal and enforcement costs, as we seek to protect our rights and recover the amounts owed; and |
|
● |
default
under our credit facilities. |
As
a result, we will have less cash available for paying our other operating expenses and for making distributions to our shareholders.
This would have a material adverse effect on the market value of our securities.
Our
revenues and the value of our portfolio may be negatively affected by casualty events occurring on properties securing our loans.
We
require our borrowers to obtain, for our benefit, all risk property insurance covering the property and any improvements to the property
collateralizing our loan in an amount intended to be sufficient to provide for the cost of replacement in the event of casualty. However,
the amount of insurance coverage maintained for any property may not be sufficient to pay the full replacement cost following a casualty
event. Furthermore, there are certain types of losses, such as those arising from earthquakes, floods, hurricanes and terrorist attacks,
that may be uninsurable or that may not be economically feasible to insure. Changes in zoning, building codes and ordinances, environmental
considerations and other factors may make it impossible for our borrowers to use insurance proceeds to replace damaged or destroyed improvements
at a property. If any of these or similar events occur, the amount of coverage may not be sufficient to replace a damaged or destroyed
property and/or to repay in full the amount due on loans collateralized by such property. As a result, our returns and the value of our
investment may be reduced.
Borrower
concentration could lead to significant losses, which could have a material adverse impact on our operating results and financial condition.
A
single borrower or a group of affiliated borrowers may account for more than 10% of our loan portfolio. A default by one borrower in
a group is likely to result in a default by the other borrowers in the group. Concentration of loans to one borrower or a group of affiliated
borrowers poses a significant risk, as default would have a material adverse impact on our operating results, cash flow, financial condition
and our ability to service our debt.
Risks
Related to Financing Transactions
Our
existing credit line has numerous covenants with which we must comply. If we are unable to comply with these covenants, the outstanding
amount of the loan could become due and payable and we may have to sell off a portion of our loan portfolio to pay off the debt.
We
have a $32.5 million credit line with Webster, Flushing and Mizrahi that expires on February 28, 2023. The Webster Credit Line contains
various covenants and restrictions that are typical for these kinds of credit facilities, including limiting the amount that we can borrow
relative to the value of the underlying collateral, maintaining various financial ratios and limitations on the terms of loans we make
to our customers. The Webster Credit Line imposes certain restrictions which may adversely impact our ability to grow and/or maintain
our qualification for taxation as a REIT. These limitations include the following:
|
● |
limit
our ability to pay dividends under certain circumstances; |
|
● |
limit
our ability to make certain investments or acquisitions; |
|
● |
limit
our ability to reduce liquidity below certain levels; |
|
● |
limit
our ability to redeem debt or equity securities; |
|
● |
limit
our ability to determine our operating policies and investment strategies; and |
|
● |
limit
our ability to repurchase our common shares, sell assets, engage in mergers or consolidations, grant liens and enter into transactions
with affiliates. |
If
we fail to meet or satisfy any of these covenants, we would be in default under our agreement with Webster, Flushing and Mizrahi and
they could elect to declare outstanding amounts due and payable, terminate its commitments to us, require us to post additional collateral
and/or enforce their interests against existing collateral. Acceleration of our debt to Webster, Flushing and/or Mizrahi could also make
it difficult for us to satisfy the requirements necessary to maintain our qualification for taxation as a REIT, significantly reduce
our liquidity or require us to sell our assets to repay amounts due and outstanding. This would significantly harm our business, financial
condition, results of operations and ability to make distributions and could result in the foreclosure of our assets which secure our
obligations, which could cause the value of our outstanding securities to decline. A default could also significantly limit our financing
alternatives such that we would be unable to pursue our leverage strategy, which could adversely affect our returns.
Under
the terms of the agreement governing the Webster Credit Line, our borrowing capacity is limited to 70% of Eligible Mortgage Loans (as
defined). Moreover, Webster, in its discretion, may reduce this percentage. This borrowing limitation is determined, in part, by the
value of the real estate securing the loans in our portfolio. Thus, a general decline in real estate values or a change in the percentage
will adversely impact our ability to borrow under the Webster Credit Line and could even result in a situation where any amount in excess
of the borrowing limitation will become immediately due and payable. If we default and Webster accelerates the loan we would have to
repay the debt immediately with our working capital (i.e., proceeds from loan repayments), sell a portion of our loan portfolio
and use the proceeds to repay the debt or refinance with another lender. We cannot assure you that we would be able to replace the Webster
Credit Line on similar terms or on any terms. If we have to sell a portion of our loan portfolio, the amount we realize may be less than
the face amount of the loans sold, resulting in a loss. If we sell a portion of our portfolio or use proceeds from loan repayments to
pay the debt incurred pursuant to the Webster Credit Line, our opportunities to grow our business will be negatively impacted.
Our
use of leverage may adversely affect the return on our assets and may reduce cash available for distribution to our shareholders, as
well as increase losses when economic conditions are unfavorable.
We
do not have a formal policy limiting the amount of debt we incur and our governing documents contain no limitation on the amount of leverage
we may use. We may significantly increase the amount of leverage we utilize at any time without approval of our board of directors. In
addition, we may leverage individual assets at substantially higher levels. Incurring substantial debt could subject us to many risks
that, if realized, would materially and adversely affect us, including the risk that:
|
● |
our
cash flow from operations may be insufficient to make required payments of principal and interest on our outstanding indebtedness
or we may fail to comply with other covenants contained in the debt, which is likely to result in (i) acceleration of such debt (and
any other debt containing a cross-default or cross-acceleration provision) that we may be unable to repay from internal funds or
to refinance on favorable terms, or at all, (ii) our inability to borrow unused amounts under our financing arrangements, even if
we are current in payments on borrowings under those arrangements and/or (iii) the loss of some or all of our assets pledged or liened
to secure our indebtedness to foreclosure or sale; |
|
● |
our
debt may increase our vulnerability to adverse economic and industry conditions with no assurance that yields will increase with
higher financing costs; |
|
● |
we
may be required to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds
available for operations, future business opportunities, shareholder distributions or other purposes; and |
|
● |
we
are not able to refinance debt that matures prior to the asset it was used to finance on favorable terms, or at all. |
Our
board of directors may adopt leverage policies at any time without the consent of our shareholders, which could result in a portfolio
with a different risk profile.
Risks
Related to REIT Status and Investment Company Act Exemption
Our
investments in construction loans require us to make estimates about the fair value of land improvements that may be challenged by the
IRS.
We
may invest in construction loans, the interest from which would be qualifying income for purposes of the gross income tests applicable
to REITs, provided that the loan value of the real property securing the construction loan was equal to or greater than the highest outstanding
principal amount of the construction loan during any taxable year. For purposes of construction loans, the loan value of the real property
is generally the fair value of the land plus the reasonably estimated cost of the improvements or developments that secure the loan and
that are to be constructed from the proceeds of the loan. There can be no assurance that the IRS, will not challenge our estimates of
the loan values of the real property related to any construction loans in which we invest.
Complying
with REIT requirements may hinder our ability to maximize profits, which would reduce the amount of cash available to be distributed
to our shareholders. This could have a negative impact on the value of our securities.
In
order to maintain our qualification for taxation as a REIT, we must continually satisfy tests concerning among other things, the composition
of our assets, our sources of income, the amounts we distribute to our shareholders and the ownership of our capital stock. Specifically,
we must ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government
securities and qualified REIT real estate assets. The remainder of our investment in securities of any issuer (excluding those of our
taxable REIT subsidiaries and our qualified REIT subsidiaries) cannot include more than 10% of the outstanding voting securities of such
issuer, more than 10% of the total value of the outstanding securities of such issuer, or exceed more than 5% of the value of our assets.
If we fail to comply with these requirements, we must dispose of the portion of our assets in excess of such amounts within 30 days after
the end of the calendar quarter in order to maintain our qualification for taxation as a REIT and to avoid suffering other adverse tax
consequences. In such event, we may be forced to sell non-qualifying assets at less than their fair market value. In addition, we may
also be required to make distributions to shareholders at times when we do not have funds readily available for distribution or are otherwise
not optional for us. Accordingly, compliance with REIT requirements may hinder our ability to operate solely on the basis of maximizing
profits.
Our
failure to remain qualified for taxation as a REIT would subject us to U.S. federal income tax and applicable state and local taxes,
which would reduce the amount of cash available for distribution to our shareholders.
We
intend to continue to operate in a manner that will enable us to continue to remain qualified for taxation as a REIT as long as we believe
it is in the best interests of our shareholders. While we believe that we qualified for taxation as a REIT for the taxable year ended
December 31, 2021, we have not requested and do not intend to request a ruling from the IRS that we so qualified in 2021 or that we will
qualify in future years. The U.S. federal income tax laws and the Treasury Regulations promulgated thereunder governing REITs are complex.
In addition, judicial and administrative interpretations of the U.S. federal income tax laws governing REIT qualification are limited.
To qualify for taxation as a REIT, we must meet, on an ongoing basis, various tests regarding the nature of our assets and our income,
the ownership of our outstanding shares, and the amount of our distributions. Our ability to satisfy the asset tests depends on our analysis
of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which
we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset test requirements also depends on
our ability to successfully manage the composition of our income and assets on an ongoing basis. Thus, while we intend to operate so
that we will continue to qualify for taxation as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance
of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given that we will so qualify
for any particular year. These considerations also might restrict the types of assets that we can acquire in the future.
If
we fail to qualify for taxation as a REIT in any taxable year, and we do not qualify for certain statutory relief provisions, we would
be required to pay U.S. federal income tax on our taxable income, and distributions to our shareholders would not be deductible by us
in determining our taxable income. In such a case, we might need to borrow money or sell assets in order to pay our taxes. Our payment
of income tax would decrease the amount of our income available for distribution to our shareholders. Furthermore, if we fail to maintain
our qualification for taxation as a REIT, we no longer would be required to distribute substantially all of our taxable income to our
shareholders. In addition, unless we were eligible for certain statutory relief provisions, we could not re-elect to qualify for taxation
as a REIT until the fifth calendar year following the year in which we failed to qualify.
REIT
distribution requirements could adversely affect our ability to execute our business plan and may require us to incur debt or sell assets
to make such distributions.
In
order to qualify for taxation as a REIT, we must distribute to our shareholders, each calendar year, at least 90% of our REIT taxable
income (including certain items of non-cash income), determined without regard to the deduction for dividends paid and excluding net
capital gain. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our taxable income, we
are subject to U.S. federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax
on the amount, if any, by which our distributions in any calendar year are less than a minimum amount specified under U.S. federal income
tax laws. We intend to distribute our net income to our shareholders in a manner that will satisfy the REIT 90% distribution requirement
and avoid the 4% nondeductible excise tax.
Under
the terms of the agreement governing the Webster Line of Credit, we are prohibited from paying dividends with respect to our common shares
if at the time during the 90-day period before the payment of the dividend and the 90-day period following the payment of the dividend
we are within $500,000 of our maximum borrowing ability under the facility. Under these circumstances, we would have to choose to either
pay the dividend putting us in default under the Webster Credit Line and maintain our qualification for taxation as a REIT or not pay
the dividend and jeopardize our REIT status. In either case, there would be material adverse consequences to us and our shareholders.
Our
taxable income may substantially exceed our net income as determined by U.S. GAAP and differences in timing between the recognition of
taxable income and the actual receipt of cash may occur. For example, we may be required to accrue interest and discount income on mortgage
loans before we receive any payments of interest or principal on such assets. In addition, the Code requires that we accrue income no
later than when it is taken into account on applicable financial statements, even if financial statements take such income into account
before it would accrue under the original discount rules, the market discount rules, or other rules in the Code. Thus, we may be required
under the terms of the indebtedness that we incur, to use cash received from interest payments to make principal payment on that indebtedness,
with the effect that we will recognize income but will not have a corresponding amount of cash available for distribution to our shareholders.
As
a result of the foregoing, we may generate less cash flow than taxable income in a particular year and find it difficult or impossible
to meet the REIT distribution requirements in certain circumstances. In such circumstances, we may be required to: (i) sell assets in
adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be invested in future acquisitions,
capital expenditures or repayment of debt, (iv) make a taxable distribution of our shares as part of a distribution in which shareholders
may elect to receive shares or (subject to a limit measured as a percentage of the total distribution) cash or (v) use cash reserves,
in order to comply with the REIT distribution requirements and to avoid corporate income tax and the 4% nondeductible excise tax. Thus,
compliance with the REIT distribution requirements may hinder our ability to grow, which could adversely affect the value of our securities.
Even
if we remain qualified for taxation as a REIT, we may face tax liabilities that reduce our cash flow.
As
a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed
income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, franchise, property and
transfer taxes, including mortgage recording taxes. In addition, in order to meet the REIT qualification requirements, or to avoid the
imposition of a 100% tax that applies to certain gains derived by a REIT from sales of inventory or property held primarily for sale
to customers in the ordinary course of business, we may create “taxable REIT subsidiaries” to hold some of our assets. Any
taxes paid by such subsidiary corporations would decrease the cash available for distribution to our shareholders.
Our
qualification for taxation as a REIT may depend on the accuracy of legal opinions or advice rendered or given and the inaccuracy of any
such opinions, advice or statements may adversely affect our REIT qualification and result in significant corporate-level tax.
In
determining whether we qualify for taxation as a REIT, we may rely on opinions or advice of counsel as to whether certain types of assets
that we hold or acquire are deemed REIT real estate assets for purposes of the REIT asset tests and produce income which qualifies under
the gross income tests. The inaccuracy of any such opinions, advice or statements may adversely affect our qualification for taxation
as a REIT and result in significant corporate-level tax.
We
may choose to make distributions in shares of our capital stock, in which case you may be required to pay income taxes in excess of the
cash dividends you receive.
We
may distribute taxable dividends that are payable in cash and/or common shares at the election of each shareholder. Shareholders receiving
such dividends will be required to include the full amount of the dividend as ordinary income. As a result, shareholders may be required
to pay income taxes with respect to such dividends in excess of the cash portion of the dividend. Accordingly, shareholders receiving
a distribution of common shares may be required to sell those shares or may be required to sell other assets they own at a time that
may be disadvantageous in order to satisfy any tax imposed on the distribution they receive from us. If a shareholder sells the common
shares that he or she receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income
with respect to the dividend, depending on the market price of our common shares at the time of the sale. Furthermore, with respect to
certain non-U.S. shareholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or
a portion of such dividend that is payable in common shares, by withholding or disposing of some of the common shares in the distribution
and using the proceeds of such disposition to satisfy the withholding tax imposed. In addition, if a significant number of our shareholders
determine to sell our common shares in order to pay taxes owed on dividends, such sales may put downward pressure on the trading price
of our common shares.
Dividends
paid by REITs do not qualify for the reduced tax rates on dividend income from regular corporations, which could adversely affect the
value of our common shares.
Dividends
paid by REITs are not generally eligible for reduced rates applicable to “qualified” dividends paid by other corporations,
but are taxed at the same rate as ordinary income. However, for tax years beginning before 2026, REIT dividends paid to noncorporate
U.S. shareholders that meet specified holding requirement are generally taxed at an effective tax rate lower than applicable ordinary
income tax rates due to the availability of a deduction under the Code for specified forms of income from passthrough entities. More
favorable rates will nevertheless continue to apply to regular corporate “qualified” dividends, which may cause investors
who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks
of non-REIT corporations that pay dividends. This could have an adverse impact on the market price of our common shares.
Liquidation
of our assets may jeopardize our qualification for taxation as a REIT.
To
qualify for taxation as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled
to liquidate our assets to repay obligations to our lenders, we may be unable to comply with these requirements, thereby jeopardizing
our qualification for taxation as a REIT. In addition, we may be subject to a 100% tax on any gain realized from the sale of assets that
are treated as inventory or property held primarily for sale to customers in the ordinary course of business.
The
ownership restrictions set forth in our restated certificate of incorporation may not prevent five or fewer shareholders from owning
50% or more of our outstanding shares of capital stock causing us to lose our status as a REIT, which may inhibit market activity in
our common shares and restrict our business combination opportunities.
In
order for us to qualify for taxation as a REIT, not more than 50% in value of our outstanding common shares may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each
taxable year, and at least 100 persons must beneficially own our stock during at least 335 days of a taxable year of 12 months, or during
a proportionate portion of a shorter taxable year. To help ensure that we meet the tests, our restated certificate of incorporation restricts
the acquisition and ownership of our capital stock. The ownership limitation is fixed at 4.0% of our outstanding shares of capital stock,
by value or number of shares, whichever is more restrictive. Assaf Ran, our Chief Executive Officer, is exempt from this restriction.
As of December 31, 2021, Mr. Ran owns 22.5% of our outstanding common shares. In addition, our board of directors may grant such an exemption
to such limitations in its sole discretion, subject to such conditions, representations and undertakings as it may determine. These ownership
limits could delay or prevent a transaction or a change in control of our company that might involve a premium price for shares of our
common shares or otherwise be in the best interest of our shareholders.
Legislative
or other actions affecting REITs could materially and adversely affect us and our shareholders.
The
rules dealing with U.S. federal, state, and local taxation are constantly under review by persons involved in the legislative process
and by the IRS, the U.S. Department of the Treasury, and other taxation authorities. Changes to the tax laws, with or without retroactive
application, could materially and adversely affect us and our shareholders. We cannot predict how changes in the tax laws might affect
us or our shareholders. New legislation, Treasury regulations, administrative interpretations or court decisions could significantly
and negatively affect our ability to remain qualified for taxation as a REIT or the tax consequences of such qualification.
We
may be unable to generate sufficient cash flows from our operations to make distributions to our shareholders at any time in the future.
As
a REIT, we are required to distribute to our shareholders at least 90% of our REIT taxable income each year. We intend to satisfy this
requirement through quarterly distributions of all or substantially all of our REIT taxable income in such year, subject to certain adjustments.
Our ability to make distributions may be adversely affected by a number of factors, including the risk factors described in this Report.
If we distribute proceeds from the sale of securities, which would generally be considered to be a return of capital for tax purposes,
our future earnings and cash available for distribution may be reduced from what they otherwise would have been. All distributions will
be made at the discretion of our board of directors and will depend on various factors, including our earnings, our financial condition,
our liquidity, our debt and preferred stock covenants, maintenance of our REIT qualification, applicable provisions of the New York Business
Corporation Law (“NYBCL”), and other factors as our board of directors may deem relevant from time to time. We believe that
a change in any one of the following factors could adversely affect our results of operations and impair our ability to pay distributions
to our shareholders:
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● |
how
we deploy the net proceeds from the sale of securities; |
|
● |
our
ability to make loans at favorable interest rates; |
|
● |
expenses
that reduce our cash flow; |
|
● |
defaults
in our asset portfolio or decreases in the value of our portfolio; and |
|
● |
the
fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates. |
A
change in any of these factors could affect our ability to make distributions. As a result, we cannot assure you that we will be able
to make distributions to our shareholders at any time in the future or that the level of any distributions we do make to our shareholders
will achieve a market yield or increase or even be maintained over time, any of which could materially and adversely affect us.
In
addition, distributions that we make to our shareholders will generally be taxable to our shareholders as ordinary income (subject to
the lower effective tax rates applicable to qualified REIT dividends via the deduction-without-outlay mechanism of Section 199A of the
Code, which is generally available to our noncorporate U.S. shareholders that meet specified holding requirement for taxable years before
2026). However, a portion of our distributions may be designated by us as long-term capital gains to the extent that they are attributable
to capital gain income recognized by us or may constitute a return of capital to the extent that they exceed our earnings and profits
as determined for tax purposes. A return of capital is not taxable, but has the effect of reducing the basis of a shareholder’s
investment in our common shares.
We
could be materially and adversely affected if we are deemed to be an investment company under the Investment Company Act.
We
intend to conduct our business in a manner that will qualify for the exception from the Investment Company Act set forth in Section 3(c)(5)(C)
of the Investment Company Act. The SEC generally requires that, for the exception provided by Section 3(c)(5)(C) to be available, at
least 55% of an entity’s assets be comprised of mortgages and other liens on and interests in real estate, also known as “qualifying
interests,” and at least another 25% of the entity’s assets must be comprised of additional qualifying interests or real
estate-type interests (with no more than 20% of the entity’s assets comprised of miscellaneous assets). Any significant acquisition
by us of non-real estate assets without the acquisition of substantial real estate assets could cause us to meet the definitions of an
“investment company.” If we are deemed to be an investment company, we could be required to dispose of non-real estate assets
or a portion thereof, potentially at a loss, in order to qualify for the Section 3(c)(5)(C) exception. We may also be required to register
as an investment company if we are unable to dispose of the disqualifying assets, which could have a material adverse effect on us.
Registration
under the Investment Company Act would require us to comply with a variety of substantive requirements that impose, among other things:
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limitations
on capital structure; |
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restrictions
on specified investments; |
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restrictions
on leverage or senior securities; |
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● |
restrictions
on unsecured borrowings; |
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● |
prohibitions
on transactions with affiliates; and |
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compliance
with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating
expenses. |
If
we were required to register as an investment company but failed to do so, we could be prohibited from engaging in our business, and
criminal and civil actions could be brought against us.
Registration
with the SEC as an investment company would be costly, would subject us to a host of complex regulations and would divert attention from
the conduct of our business, which could materially and adversely affect us. In addition, if we purchase or sell any real estate assets
to avoid becoming an investment company under the Investment Company Act, our net asset value, the amount of funds available for investment
and our ability to pay distributions to our shareholders could be materially adversely affected.
Risks
Related to Our Common Shares
Our
largest shareholder’s interests may not always be aligned with the interests of our other shareholders.
As
of December 31, 2021, Assaf Ran, our Chief Executive Officer, beneficially owned 22.5% of our outstanding shares. Thus, Mr. Ran currently
has and will continue to exercise significant control over all corporate actions. This concentration of ownership could have an adverse
impact on the market price of our common shares.
There
is limited trading in our common shares, which could make it difficult for you to sell your common shares.
Our
common shares are listed on The Nasdaq Capital Market. Average daily trading volume in our common shares was approximately 35,000 and
45,000 shares, respectively, in 2020 and in 2021. The lack of liquidity may make it more difficult for you to sell your common shares
when you wish to do so. Even if an active trading market develops, the market price of our common shares may be highly volatile and could
be subject to wide fluctuations.
Risks
Related to Our Organization and Structure
Certain
provisions of New York law could inhibit changes in control.
Various
provisions of the NYBCL may have the effect of deterring a third party from making a proposal to acquire us or of impeding a change in
control under circumstances that otherwise could provide the holders of our common shares with the opportunity to realize a premium over
the then-prevailing market price of our common shares. For example, we are subject to the “business combination” provisions
of the NYBCL that, subject to limitations, prohibit certain business combinations (including a merger, consolidation, share exchange,
or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities) between us and
an “interested shareholder” (defined generally as any person who beneficially owns 20% or more of our then outstanding voting
capital stock or an affiliate thereof for five years after the most recent date on which the shareholder becomes an interested shareholder).
After the five-year prohibition, any business combination between us and an interested shareholder generally must be recommended by our
board of directors and approved by the affirmative vote of a majority of the votes entitled to be cast by holders of outstanding shares
of our voting capital stock other than shares held by the interested shareholder with whom or with whose affiliate the business combination
is to be effected or held by an affiliate or associate of the interested shareholder. These provisions do not apply if holders of our
common shares receive a minimum price, as defined under the NYCBL, for their shares in the form of cash or other consideration in the
same form as previously paid by the interested shareholder for its common shares. They also do not apply to business combinations that
are approved or exempted by a board of directors prior to the time that the interested shareholder becomes an interested shareholder.
Our
authorized but unissued common and preferred shares may prevent a change in our control.
Our
restated certificate of incorporation authorizes us to issue up to 25,000,000 common shares and 5,000,000 preferred shares. As of March
4, 2022, we had 11,757,058 common shares issued and 11,494,945 common shares outstanding and no preferred shares issued or outstanding.
Our board of directors has the power and authority to create classes of common or preferred shares, with such rights and designations
as it deems appropriate or advisable, which rights and designations may be senior to or have a priority over the rights and designations
of any existing class of common or preferred shares. For example, our board of directors may establish a series of common or preferred
shares that could delay or prevent a transaction or a change in control that might involve a premium price for our common shares or otherwise
be in the best interest of our shareholders.
Our
rights and the rights of our shareholders to take action against our directors and officers are limited, which could limit your recourse
in the event of actions not in your best interests.
Our
restated certificate of incorporation limits the liability of our present and former directors to us and our shareholders for money damages
due to any breach of duty in such capacity, if a judgment or other final adjudication adverse to a present or former officer or director
establishes that his or her acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that
he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled or that his or
her acts violated Section 719 of the NYBCL. Section 719 of the NYBCL limits director liability to the following four instances:
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declarations
of dividends in violation of the NYBCL; |
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a
purchase or redemption by a corporation of its own shares in violation of the NYBCL; |
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distributions
of assets to shareholders following dissolution of the corporation without paying or providing for all known liabilities; and |
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making
any loans to directors in violation of the NYBCL. |
Our
restated certificate of incorporation and bylaws authorize us to indemnify our directors and officers for actions taken by them in those
capacities to the maximum extent permitted by the NYBCL. In addition, we may be obligated to pay or reimburse the defense costs incurred
by our present and former directors and officers without requiring a preliminary determination of their ultimate entitlement to indemnification.
Our
bylaws contain provisions that make removal of our directors difficult, which could make it difficult for our shareholders to effect
changes to our management.
Our
bylaws provide that a director may be removed by either the board of directors or by shareholders for cause. Vacancies may be filled
only by a majority of the remaining directors in office, even if less than a quorum, unless the vacancy occurred as a result of shareholder
action, in which case the vacancy must be filled by a vote of shareholders at a special meeting of shareholders duly called for that
purpose. These requirements make it more difficult to change our management by removing and replacing directors and may prevent a change
in control of our company that is in the best interests of our shareholders.
Risks
Related to the Notes issued by MBC Funding II
Shareholders’
interests may not always be aligned with the interests of the Noteholders.
Noteholders
do not have any voting rights with respect to us or MBC Funding II (other than as set forth in the Indenture) or the right to influence
management or day-to-day operations of MBC Funding II or of us. The interests of shareholders who do vote may be different or even in
opposition of those of creditors such as the Noteholders. For example, shareholders may place a higher priority on the long-term, as
opposed to short-term, performance of a company. Shareholders also tend to focus on building value and increasing stock price while creditors
are more interested in cash flow. As of the date of this Report, Mr. Ran beneficially owns 22.5%, of our outstanding common shares. Mr.
Ran is also the Chief Executive Officer and sole director of MBC Funding II. Thus, Mr. Ran currently has and will continue to exercise
control over all corporate actions of us and MBC Funding II.
The
Indenture contains restrictive covenants that may limit MBC Funding II’s operating flexibility and could adversely affect its financial
condition.
The
Indenture contains restrictive covenants that could adversely affect MBC Funding II’s operating flexibility as well as its financial
condition. For example, the Indenture requires MBC Funding II to maintain a specific debt coverage ratio at all times, specifically providing
that the aggregate outstanding principal balance of the mortgage loans held by us, together with our cash on hand, must always equal
at least 120% of the aggregate outstanding principal amount of the Notes at all times, as well as limits or prohibits its ability to:
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acquire
or dispose of assets; |
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merge
with another corporation; and |
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incur
additional secured and unsecured indebtedness. |
MBC
Funding II’s failure to comply with those covenants could result in an event of default which, if not cured or waived, could result
in the acceleration of the indebtedness evidenced by the Notes. In addition, a default by MBC Funding could serve as a default under
our existing Webster Credit Line. For example, defaults under the mortgage loans held by MBC Funding II could result in a violation of
the debt coverage ratio covenant. In that case, MBC Funding II is required to make monthly payments of principal on the Notes until such
debt coverage ratio covenant is in compliance. We cannot assure you that in that event MBC Funding II will be able to repay all the Notes
in full, or at all.
The
limited covenants in the Indenture and the terms of the Notes will not provide protection against significant events that could adversely
impact MBC Funding II’s obligations under the Notes.
Neither
the Indenture nor the Notes require MBC Funding II to maintain any financial ratios or specific levels of net worth, revenues, income,
cash flow or liquidity and, accordingly, do not protect the Noteholders in the event that MBC Funding II experiences significant adverse
changes in its financial condition or results of operations or protect your interest as a Noteholder. For example, during the term of
the Notes, the true value of the mortgage loans held by MBC Funding II may fluctuate based on a number of factors including interest
rates on the loans relative to prevailing market rates, as well as the solvency and credit-worthiness of the borrower. However, as long
as the borrowers are not in default of their obligations, MBC Funding II will not be deemed to be in default of the debt coverage ratio
covenant in the Indenture.
As
the controlling shareholder of MBC Funding II, we have an inherent conflict of interest and we may not always act in the best interests
of the Noteholders.
We
have absolute control over MBC Funding II. We own all of its stock and its Chief Executive Officer and sole director is our largest shareholder,
Chief Executive Officer and Chairman of our board of directors. Subject to the requirements set forth in the Indenture, we will determine
which mortgage loans MBC Funding II will purchase from us and any additional mortgage loans that we will transfer to MBC Funding II in
order to meet the debt coverage ratio requirement set forth in the Indenture. In addition, we will decide whether MBC Funding II should
extend the term of any mortgage loan in its portfolio that becomes due. Finally, we will decide how MBC Funding II should reinvest the
principal payments on existing loans and the terms of any new mortgage loans that MBC Funding II will make. In making these decisions
we may be conflicted by our obligations to our shareholders and our obligations to the Noteholders. We cannot assure you that the decisions
we ultimately make will be in the best interest of the Noteholders.
Various
provisions in the Indenture restrict the ability of the Indenture Trustee and the Noteholders to enforce their rights against us in the
event MBC Funding II defaults on its obligations under the Notes.
We
have guaranteed MBC Funding II’s obligations under the Notes and we have secured that guaranty with a pledge of 100% of the issued
and outstanding shares of MBC Funding II. However, if MBC Funding II is in default of its obligations to the Noteholders, the value of
MBC Funding II may be less than the amount due to the Noteholders. Under the Indenture, if an event of default occurs, the Indenture
Trustee, at the written direction of the holders of at least 50% of the principal amount of the Notes then outstanding, must declare
the unpaid principal and all accrued but unpaid interest on the Notes to be immediately due and payable. In addition, pursuant to the
terms of an Inter-creditor Agreement entered into by the Indenture Trustee and Webster, neither the Indenture Trustee nor the Noteholders
can exercise their rights under the guaranty until the Webster Credit Line has been paid in full except in connection with their exercise
of remedies under the Pledge Agreement. Furthermore, under our agreement with Webster, we are prohibited from making any payment, direct
or indirect (whether for interest, principal, as a result of any redemption or repayment at maturity, on default, or otherwise), on the
Notes so long as there are any unpaid balances on the Webster Credit Line. Although the Webster Credit Line matures and is fully payable
on February 28, 2023, we are not prohibited from renewing, extending or increasing the amount of the Webster Credit Line or replacing
it with a new credit facility provided by a different lender, which may insist on the same restriction. Thus, upon a default by MBC Funding
II, the Noteholders may never have full recourse to us under our guaranty.
If
a bankruptcy petition were filed by or against us or MBC Funding II, Noteholders may receive less than the outstanding balance on the
Notes.
If
a bankruptcy case were filed by or against us or MBC Funding II under the U.S. Bankruptcy Code, the Noteholders may receive, on account
of their claims related to the Notes, less than they would be entitled to under the terms of the Indenture.
An
active public trading market for the Notes may not develop.
The
Notes are currently listed on the NYSE American and trade under the symbol “LOAN/26”. However, we cannot assure that a more
active trading market for the Notes will develop. If a more active trading market does not develop the Noteholders may not be able to
sell their Notes for the price they want at the time they want. The liquidity of any such market will depend upon various factors, including:
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the
number of Noteholders; |
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the interest
of securities dealers in making a market for the Notes; |
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the overall
market for debt securities; |
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our financial
performance and prospects; and |
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the prospects
for companies in our industry generally. |
We
cannot assure the Noteholders that they will be able to sell the Notes if they wish to do so or, even if they can sell their Notes that
they will recover their entire investment.
MBC
Funding II may not be able to make the required payments of interest and principal on the Notes.
MBC
Funding II’s ability to make payments of principal and interest on the Notes is subject to general economic conditions and financial,
business and other factors affecting their mortgage loan portfolio, many of which are beyond their control. We cannot assure that MBC
Funding II will have sufficient funds available when necessary to make any required payments of interest or principal under the Notes,
including payments in connection with a redemption of Notes, whether upon a change of control. MBC Funding II’s failure to make
payments of interest or principal when due could result in an event of default and would give the Indenture Trustee and the Noteholders
certain rights against MBC Funding II. MBC Funding II’s sole source of revenue and cash flow will be payments of interest and principal
they receive with respect to their mortgage loan portfolio. To the extent the interest payments received by MBC Funding II exceed the
payments required to be made to the Noteholders, and both prior to and after giving effect to the distribution of funds to us, MBC Funding
II is in compliance with the debt coverage ratio and no default or event of default exists or would occur as a result of such distribution,
MBC Funding II plans to distribute those excess funds to us. If MBC Funding II is unable to generate sufficient cash flow to service
the debt evidenced by the Notes, they will be in default of its obligations under the Notes.
MBC
Funding II is not obligated to contribute to a sinking fund to retire the Notes and the Notes are not guaranteed by any governmental
agency.
MBC
Funding II is not obligated to contribute funds to a sinking fund to repay principal or interest on the Notes upon maturity or default.
The Notes are not certificates of deposit or similar obligations of, or guaranteed by, any depositary institution. Further, no governmental
entity insures or guarantees payment on the Notes if MBC Funding II does not have enough funds to make principal or interest payments.
General
Risk Factors
Security
breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation
to suffer.
In
the ordinary course of our business, we may acquire and store sensitive data on our network, such as our proprietary business information
and personally identifiable information of our prospective and current borrowers. The secure processing and maintenance of this information
is critical to our business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable
to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks
and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of
information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory
penalties, disruption to our operations and the services we provide to customers or damage our reputation, which could materially and
adversely affect us.
Our
access to financing may be limited and, thus, our ability to maximize our returns may be adversely affected.
Our
ability to grow and compete may depend on our ability to borrow money to leverage our loan portfolio and to build and manage the cost
of expanding our infrastructure to manage and service a larger loan portfolio. In general, the amount, type and cost of any financing
that we obtain from another financial institution will have a direct impact on our revenue and expenses and, therefore, can positively
or negatively affect our financial results. The percentage of leverage we employ will vary depending on our assessment of a variety of
factors, which may include the anticipated liquidity and price volatility of our existing portfolio, the potential for losses and extension
risk in our portfolio, the gap between the duration of our assets and liabilities, the availability and cost of financing, our opinion
as to the creditworthiness of our financing counterparties, the health of the U.S. economy and commercial mortgage markets, our outlook
for the level, slope, and volatility of interest rates, the credit quality of our borrowers and the collateral underlying our assets.
Our
access to financing will depend upon a number of factors, over which we have little or no control, including:
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general
market conditions; |
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the
market’s view of the quality of our assets; |
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the
market’s perception of our growth potential; |
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our
eligibility to participate in and access capital from programs established by the U.S. Government; |
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our
current and potential future earnings and cash distributions; and |
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the
market price of our common shares. |
Continuing
weakness in the capital and credit markets could adversely affect our ability to secure financing on favorable terms or at all. In general,
this could potentially increase our financing costs and reduce our liquidity or require us to sell loans at an inopportune time or price.
We
cannot assure you that we will always have access to structured financing arrangements when needed. If structured financing arrangements
are not available to us we may have to rely on equity issuances, which may be dilutive to our shareholders, or on less efficient forms
of debt financing that require a larger portion of our cash flow from operations, thereby reducing funds available for our operations,
future business opportunities, cash distributions to our shareholders and other purposes. We cannot assure you that we will have access
to such equity or debt capital on favorable terms (including, without limitation, cost and term) at the desired times, or at all, which
may cause us to curtail our lending activities and/or dispose of loans in our portfolio, which could negatively affect our results of
operations.
The
market prices of our common shares may be adversely affected by future events.
Market
factors unrelated to our performance could also negatively impact the value of our securities, including the market price of our common
shares. One of the factors that investors may consider in deciding whether to buy or sell our common shares is our distribution rate
as a percentage of our share price relative to market interest rates. If market interest rates continue to increase, prospective investors
may demand a higher distribution rate or seek alternative investments paying higher dividends or interest. As a result, interest rate
fluctuations and conditions in the capital markets can affect the market value of our common shares. For instance, if interest rates
rise, it is likely that the market price of our common shares will decrease as market rates on interest-bearing securities increase.
Other factors that could negatively affect the market price of our common shares include:
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our
actual or projected operating results, financial condition, cash flows and liquidity, or changes in business strategy or prospects; |
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the
impact of COVID-19; |
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actual
or perceived conflicts of interest with individuals, including our executive officers; |
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equity
issuances by us, or share resales by our shareholders, or the perception that such issuances or resales may occur; |
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actual
or anticipated accounting problems; |
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changes
in our earnings estimates or publication of research reports about us or the real estate industry; |
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changes
in market valuations of similar companies; |
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adverse
market reaction to any increased indebtedness we incur in the future; |
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additions
to or departures of our key personnel; |
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speculation
in the press or investment community; |
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● |
our
failure to meet, or the lowering of, our earnings’ estimates or those of any securities analysts; |
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increases
in market interest rates, which may lead investors to demand a higher distribution yield for our common shares, would result in increased
interest expenses on our debt; |
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decreases
in market interest rates, which will increase competition in the market for loans and may require use to lower our interest rates
and fees for loans we originate; |
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changes
in the credit markets; |
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failure
to maintain our qualification for taxation as a REIT or exemption from the Investment Company Act; |
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actions
by our shareholders; |
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price
and volume fluctuations in the stock market generally; |
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general
market and economic conditions, including the current state of the credit and capital markets; |
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sales
of large blocks of our common shares; |
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sales
of our common shares by our executive officers, directors and significant shareholders; and |
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restatements
of our financial results and/or material weaknesses in our internal controls. |
The
price of our common shares is volatile, and purchasers of our common shares could incur substantial losses.
Historically,
the price at which our common shares trade on The Nasdaq Capital Market has been extremely volatile and seemingly unrelated to our operating
performance. In 2020, the range was $2.54 to $6.48. In 2021, the range was $4.89 to $8.05. These broad market fluctuations may adversely
affect the trading price of our common shares. Class action litigation has often been instituted against companies whose securities have
experienced periods of volatility in market price. Any such litigation brought against us could result in substantial costs, which would
hurt our financial condition and results of operations, divert management’s attention and resources.
Common
shares eligible for future sale may have adverse effects on our share price.
We
cannot predict the effect, if any, the exercise of our outstanding warrants or the future sale of the common shares issuable upon the
exercise of warrants would have on the market price of our common shares. The market price of our common shares may decline significantly
when the restrictions on resale lapse. Sales of substantial amounts of common shares or the perception that such sales could occur may
adversely affect the prevailing market price for our common shares.
We
may, from time-to-time, issue common shares and securities convertible into, or exchangeable or exercisable for, common shares to attract
or retain key employees or in public offerings or private placements to raise capital. We are not required to offer any such shares or
securities to existing shareholders on a preemptive basis. Therefore, it may not be possible for existing shareholders to participate
in such future share or security issuances, which may dilute the existing shareholders’ interests in us.
Future
offerings of debt or equity securities, which would rank senior to our common shares, may adversely affect the market price of our common
shares.
If
we decide to issue debt or equity securities in the future, which would rank senior to our common shares, it is likely that they will
be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any convertible
or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common
shares and may result in dilution to owners of our common shares. We and, indirectly, our shareholders, will bear the cost of issuing
and servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions
and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders
of our common shares will bear the risk of our future offerings reducing the market price of our common shares and diluting the value
of their stock holdings in us.