8-K: MacKenzie Realty Capital Secures $3 Million Loan with Stringent Terms for Non-Traded REIT Investments

MacKenzie Realty Capital, Inc. has entered into a secured promissory note agreement for up to $3.27 million with Streeterville Capital, LLC, backed by extensive collateral and subject to highly restrictive covenants.

Summary

• MacKenzie Realty Capital, Inc. (MKZR) secured a Note Purchase Agreement with Streeterville Capital, LLC for up to $3,270,000 in secured promissory notes.
• The initial funding on June 11, 2025, was $1,000,000 in cash, against an initial principal balance of $1,115,000.
• This initial note includes an Original Issue Discount (OID) of $90,000 and a Transaction Expense Amount of $25,000 for the investor's legal, accounting, and due diligence costs, both fully earned and non-refundable.
• The note carries an interest rate of 9% per annum, compounded daily, with a maturity date 18 months after the Purchase Price Date (December 11, 2026).
• Payments begin with interest-only for the first four months, followed by monthly payments of $93,000 plus accrued interest starting from the sixth month anniversary.
• The loan is secured by a Guaranty from MRC QRS, Inc. (a wholly-owned subsidiary), a first-position security interest in all of MRC QRS's assets (including equity interests in subsidiaries, REIT shares, intellectual property, and cash), and a pledge of 100% of MRC QRS's common stock by MacKenzie Realty Capital.
• Additional notes, ranging from $250,000 to $500,000, can be requested until December 31, 2025, subject to specific funding conditions, including maintaining the value of MRC QRS's REIT shares and cash above the outstanding note balance.
• Funds from subsequent notes must be used exclusively by MRC QRS for purchasing REIT shares or paying down debt incurred for REIT share purchases.
• The agreement includes numerous covenants, such as timely SEC filings, maintaining NASDAQ listing, and restrictions on 'Restricted Issuances' (e.g., variable-priced convertible securities) without investor consent.
• Trigger Events, including failure to pay, insolvency, or breach of covenants, can lead to a 5% or 15% increase in the Outstanding Balance per occurrence, up to three times for each type of event.
• Upon an Event of Default, the Outstanding Balance becomes immediately due and payable at a 'Mandatory Default Amount' and accrues interest at 22% per annum.
• The agreement mandates binding arbitration for all disputes in Salt Lake County, Utah, with a waiver of jury trial.

Sentiment

Score: 4

Explanation: The document describes a successful debt financing, which provides capital for the company's stated strategy. However, the terms of the loan, including high upfront costs (OID, transaction fees), a significant prepayment penalty, a monitoring fee, broad collateral, and highly restrictive covenants, are notably stringent and unfavorable to the borrower, indicating a potentially high cost of capital and limited financial flexibility. This suggests a slightly negative sentiment despite the positive framing by management.

Positives

• The company successfully secured $1,000,000 in initial funding, with access to an additional $2,270,000, providing capital for its stated business strategy.
• The loan enables MacKenzie Realty Capital to continue its strategy of purchasing non-traded REIT shares, which management states is profitable, strengthens the balance sheet, and increases cash flow.
• The company has a history of paying dividends every year since its inception, indicating a stable operational history.

Negatives

• The effective cost of the initial $1,000,000 funding is high, with an initial principal balance of $1,115,000, including a $90,000 Original Issue Discount and $25,000 in transaction expenses.
• A significant prepayment penalty of 107% of the Outstanding Balance applies if the note is prepaid within 90 days of the Purchase Price Date.
• A one-time 'Monitoring Fee' is charged on the 90-day anniversary if the note is outstanding, calculated as (Outstanding Balance / 0.93) Outstanding Balance, which is automatically added to the principal.
• The loan is secured by a broad range of assets of MRC QRS, Inc., a wholly-owned subsidiary, including all equity interests in its subsidiaries, REIT shares, intellectual property, and cash, significantly limiting the subsidiary's financial flexibility.
• The agreement imposes highly restrictive covenants, including prohibitions on 'Restricted Issuances' (e.g., variable-priced convertible debt) without the investor's prior written consent, which could hinder future financing options.
• Strict covenants also limit MRC QRS's ability to grant security interests, sell equity, or incur debt without the investor's consent, and restrict cash transfers to the parent company.
• The occurrence of 'Trigger Events' can lead to a substantial increase in the Outstanding Balance (5% or 15% per event), and 'Events of Default' result in an immediate acceleration of the loan at a 'Mandatory Default Amount' with a high default interest rate of 22% per annum.

Risks

• **Default Risk**: The company faces significant default risk due to numerous and stringent covenants, including maintaining timely SEC filings, NASDAQ listing, specific asset valuations, and restrictions on future financing activities and subsidiary operations.
• **Increased Indebtedness and Cost**: Failure to meet covenants or other trigger events can lead to a rapid increase in the Outstanding Balance and a high default interest rate (22% per annum), significantly increasing the company's debt burden.
• **Loss of Collateral**: In the event of default, the investor has broad rights to seize and dispose of the extensive collateral, including all assets of MRC QRS, Inc. and the common stock of MRC QRS, potentially leading to a significant loss of company assets.
• **Limited Financial Flexibility**: The restrictive covenants, particularly those related to 'Restricted Issuances' and the operations of MRC QRS, could severely limit the company's ability to raise capital or conduct business operations in the future.
• **Valuation Risk of REIT Shares**: The ability to draw additional notes is contingent on the value of REIT shares held by MRC QRS, exposing the company to market fluctuations in these illiquid assets.
• **Arbitration and Legal Costs**: The mandatory binding arbitration provisions, while potentially faster than litigation, could still incur significant legal fees and costs, especially if the company is deemed the 'losing party'.

Future Outlook

The company intends to continue its business strategy of investing in non-traded REIT shares, with the new $3 million facility providing flexibility for these ongoing investments. The company may request additional notes up to the aggregate principal amount of $3.27 million until December 31, 2025, subject to specific funding conditions related to the value of its REIT shares and cash holdings.

Management Comments

• "Purchasing non-traded REIT shares has been a business strategy that we have utilized for many years which is profitable, strengthens our balance sheet, and increases our cash flow."
• "This $3 million facility provides us the flexibility to continue to invest by purchasing non-traded REITs."
• "I am grateful for the understanding of this investment strategy and support we are receiving from the institutional investor."

Industry Context

MacKenzie Realty Capital, Inc. operates as a West Coast-focused REIT, with a stated strategy of investing at least 80% of its total assets in real property (targeting 50% multifamily and 50% boutique class A office) and up to 20% in illiquid real estate securities, specifically non-traded REIT shares. This financing directly supports its niche strategy of acquiring non-traded REITs, exemplified by its recent tender offers for Starwood Real Estate Income Trust, Inc. shares at a discount to their estimated net asset value. This indicates a focus on opportunistic investments within the broader real estate investment trust sector, leveraging illiquid assets for potential returns.

Comparison to Industry Standards

• NA

Corporate Governance

Stakeholder Impact

• **Shareholders**: The loan provides capital for the company's investment strategy, which management claims is profitable and strengthens the balance sheet. However, the highly restrictive and potentially costly terms of the loan, including broad collateral and stringent covenants, could dilute shareholder value if the company struggles to meet its obligations or if future financing options are limited. The potential for rapid increase in outstanding balance and high default interest could negatively impact equity.
• **Employees**: No direct impact mentioned, but the company's financial health and strategic direction, influenced by this financing, could indirectly affect job security and growth opportunities.
• **Customers/Suppliers**: No direct impact mentioned.
• **Creditors**: Existing creditors might view the extensive collateralization of MRC QRS's assets and the strict covenants as potentially increasing their risk exposure, as a significant portion of the company's and its subsidiary's assets are now pledged to Streeterville Capital, LLC.
• **Management**: Management is now operating under highly restrictive financial covenants, which will require careful adherence to avoid triggering penalties or defaults, potentially increasing operational complexity and risk.

Next Steps

• The Company may request additional secured promissory notes from Streeterville Capital, LLC in amounts between $250,000 and $500,000 until December 31, 2025, subject to specific funding conditions.
• MRC QRS, Inc. is directed to use the purchase price for any subsequent notes exclusively for the purchase of Starwood Real Estate Income Trust, Inc. or other Investor-approved REIT shares, or for paying down debt incurred for such purchases.
• The Company will make monthly interest payments for the first four months, followed by monthly payments of $93,000 plus accrued interest starting from the sixth month anniversary until the note is paid in full.
• The Company must ensure timely filing of all required reports with the SEC and maintain adequate current public information to comply with Rule 144 of the 1933 Act.

Key Dates

Recommendation

Keywords

Secured Promissory Note, Debt Financing, Note Purchase Agreement, SEC Filing, 8-K, REIT, Non-Traded REITs, Corporate Debt, Collateral, Covenants, Original Issue Discount, MacKenzie Realty Capital, Streeterville Capital, Corporate Governance, Risk Management