Disclosures

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An investment in a syndicated real estate fund (the “INTERESTS”) is speculative and involves a high degree of risk. Prospective investors should carefully review and consider the risks as presented in the “Risk Factors.” Purchase of the Interests should be considered only by those persons who can afford to sustain a total loss of their investment.

 

The Interests offered by LeConte Capital will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), or applicable state securities laws, nor has the U.S. Securities and Exchange Commission or any state regulatory authority passed upon the accuracy or adequacy of the Interest or endorsed the merits of an offering. Any representation to the contrary is unlawful. The Interests offered are being made available pursuant to exemptions provided by Section 4(a)(2) of the Securities Act and Regulation D thereunder and certain state securities laws and regulations promulgated pursuant thereto. Such Interests may not be transferred without an effective registration statement under the Securities Act and any applicable state securities laws or an opinion of counsel acceptable to the Company and its counsel that such registration is not required.

 

An offering from LeConte Capital and the accompanying exhibits include forward-looking statements with respect to the anticipated future performance of the company and other events. Such forward-looking statements are based on various assumptions that may or may not prove to be correct. Accordingly, there can be no assurance that such statements will accurately predict the company’s actual performance.

 

RISK FACTORS

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Potential investors should be aware that an investment in the Company involves a high degree of risk. There can be no assurance that the rate of return objectives discussed herein will be realized or that there will be any return of capital invested in the Company. In addition to the other information in this Subscription Agreement, prospective investors should carefully consider the risks described below before purchasing the Membership Interests. If any of the following risks occur, the Company’s business could be materially harmed, and its financial condition and results of operation could be materially and adversely affected. As a result, an investor in the Company could lose all or part of its investment.

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-         Nature of Investment. An investment in the Company requires a long-term commitment with no certainty of return. There is a possibility that the Company will bear a significant loss of capital, and investors should not subscribe for a Membership Interest unless they can readily afford to lose their entire investment in the Company. Even if the investments are successful, they may not produce significant cash flow to the investors for a period of years. There can be no assurance that the Company’s investment objectives will be achieved or that there will be any return of capital.

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-        Risks Related to Due Diligence. In conducting customary due diligence with respect to the Property and the Project, the Manager will rely on resources available to it and, in some cases, information provided by third parties. There can be no assurance such due diligence processes will uncover all relevant facts or that any investment will be successful.

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-        Projections. In preparing the Offering Materials, the Manager has relied upon projections developed internally or by third parties concerning the future performance and cash flow of the Project. Projections are inherently uncertain and subject to factors beyond the control of the Manager. The inaccuracy of certain assumptions, the failure to satisfy certain financial requirements and the occurrence of unforeseen events could impair the ability of the Company to realize projected values and/or cash flow.

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-         Risks of Real Estate Market. The ability of the Company to achieve its investment objectives will be highly dependent on the real estate market generally and the short-term rental market specifically. Real estate historically has experienced significant fluctuations and cycles in value, and changes in specific market conditions for development projects may result in reductions in the value of the Company’s investments. The value of the Company’s investment will depend on many factors beyond the control of the Company, including: (i) changes in general or local economic conditions; (ii) changes in supply of, or demand for, competing properties in the area surrounding the Project; (iii) changes in interest rates; (iv) the promulgation and enforcement of governmental laws and regulations, including laws and regulations relating to land-use and zoning restrictions, environmental protection and occupational safety; (v) unavailability of mortgage funds that may render the sale of a property difficult; (vi) the financial condition of renters, buyers and sellers of properties; (vii) changes in real estate tax rates and other operating expenses; (viii) the imposition of rent controls; (ix) energy and supply shortages; (x) various uninsured or uninsurable risks; and (xi) acts of God and natural disasters. In addition, general economic conditions in the United States, as well as conditions of domestic and international financial markets, may adversely affect operations of the Company.

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-         Risks of Engaging in Development Activities. The ability of the Company to achieve its investment objectives will be dependent on the performance of the Project. The Project will be subject to various risks, including those set forth above in Risks of Real Estate Market and the risk that there may be unanticipated delays in the construction of the Project due to factors beyond the control of the Company. These factors may include: (i) strikes; (ii) adverse weather; (iii) changes in building plans and specifications; (iv) labor and material shortages; (v) supply chain disruptions; and (vi) increases in the costs of labor and materials. Delays in completing the Project will cause increased costs and corresponding delays in the receipt of operating income and, consequently, the distribution of any cash flow by the Company with respect to the Project. In addition, the estimated costs and schedules of developing and constructing buildings and related landscaping may be affected by changes in construction plans and specifications or by other unforeseen events, any of which may cause additional expenses to be incurred, which likely will be borne by the Company.

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-         Unfavorable Changes in Market and Economic Conditions. Local and national conditions may significantly affect occupancy, rental rates, and the operating performance of the Project. The risks that may adversely affect conditions in the local market include:

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(i) economic downturn that causes corporate restructurings, layoffs and significant job losses, industry slowdowns and other factors that adversely affect the local, regional and national economy;

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(ii) an oversupply of, or a reduced demand for, short-term rental homes;

 

(iii) a decline in employment or lack of employment growth;

 

(iv) the inability or unwillingness of short-term renters to pay rent increases;

 

(v) laws regulating short-term rental housing, that could prevent the Company from operating in such a manner set forth in the Operating Agreement

 

(vi) raising rents sufficiently to offset increases in operating costs; and

 

(vii) economic conditions that could cause an increase in operating expenses, such as increases in interest expense, property taxes, utilities, compensation of on-site associates and routine maintenance.

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-         Additional Risks Associated with Short-Term Rental Properties. Vacancy risks can be greater for short-term properties than it is for residential properties. In addition, any economic downturn, including increased unemployment rates, may cause the short-term rental industry to experience a significant decline in business due to a reduction in renters. Further, changes in various laws, ordinances, and regulations could affect short-term rental properties.

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-         Compliance with Laws Benefiting Persons with Disabilities May Result in Significant Costs. If a Project is required to be in compliance with the Americans with Disabilities Act of 1990 (the “ADA”) or other similar federal, state, and local laws, the Company may be required to pay for improvements to effect compliance with the ADA or such other laws. Under the ADA, all places intended to be used by the public must meet certain federal requirements related to access and use by persons with disabilities. The ADA and other laws could require removal of access barriers at significant cost and could result in the imposition of governmental fines, governmental orders to correct any non-complying feature or awards of damages to private litigants. In addition, changes in governmental rules and regulations or enforcement policies affecting the use and operation of the properties, including changes to building codes and fire and life-safety codes, may occur. State and federal laws in this area are constantly evolving and could evolve to place a more significant cost or burden on the Company as an owner of the property.

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-        Rent Control and Other Changes in or Non-Compliance with Applicable Laws. The Project must be built and operated in compliance with numerous federal, state, and local laws and regulations, some of which may conflict with one another or be subject to limited judicial or regulatory interpretations. Recently there has been heightened scrutiny of short-term rental housing for compliance with the requirements of the ADA, and an increasing number of substantial enforcement actions and private lawsuits have been brought against short-term rental homes to ensure compliance with these requirements. Noncompliance with the ADA could result in fines, awards of damages to private litigants, payment of attorneys’ fees and other costs to plaintiffs, substantial litigation costs, and substantial remediation costs. These laws and regulations may include zoning laws, building codes, landlord/tenant laws, and other laws generally applicable to business operations. Noncompliance with laws could expose the Company to liability.

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Lower rent growth or significant unanticipated expenditures may result from the Company’s need to comply with changes in (i) laws imposing remediation requirements and the potential liability for environmental conditions existing on the property or the restrictions on discharges or other conditions, (ii) rent control or rent stabilization laws or other residential landlord/tenant laws, or (iii) other governmental rules and regulations or enforcement policies affecting the development, use and operation of short-term rental properties, including changes to building codes and fire and life-safety codes.

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Municipalities are increasingly considering or being urged by advocacy groups to consider rent control or rent stabilization laws and regulations or take other actions that could limit the Project’s ability to raise rents based solely on market conditions. Depending on the nature of such laws or regulations and the number of short-term rental properties subject to any such restriction on rent increases, the Company’s revenues and net income could be adversely affected.

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-         Occupancy levels and market rents may be adversely affected by national and local economic and market conditions, including, without limitation, new construction and excess inventory of short-term rental housing, increasing portions of single-family housing stock being converted to short-term rental use, short-term rental housing subsidized by the government, governmental regulations, slow or negative employment growth, changes in social preferences and the potential for geopolitical instability, all of which are beyond the Company’s control. Finally, the federal government’s policies can increase competition and possibly limit a property manager’s ability to raise rents. Consequently, the Company’s cash flow and ability to service debt and make distributions to Members could be reduced.

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-         Adverse Impacts of Increased Vacancy Rates or Decreased Rental Rates. There can be no assurance that occupancy levels will be maintained or that the Project will be substantially occupied. In addition, including initial short-term renting of the Project may be achievable only at decreased rental rates or with substantial rental concessions, both of which would adversely affect operating cash flow and returns to Members.

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-         Competitive Properties. The Project will compete with hotels, motels, condominiums, time-shares, and campgrounds in the area to attract renters, including other short-term rental homes that are available for rent. Competitive short-term rental housing in a particular area could adversely affect the Project’s ability to increase or maintain rental rates.

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-         Political and Other External Risks. The Project may be adversely affected by changes in political conditions or other events beyond the Company’s control. For example, a stock market downturn, the outbreak of hostilities involving the United States, or the death of a central political figure may significantly affect the Company’s investment results. Other factors, such as changes in federal or state tax laws, federal or state securities laws, bank regulatory policies, or accounting standards, may make corporate acquisitions less desirable. Similarly, legislative acts, rulemaking, adjudicatory or other activities of Congress, the U.S. Securities and Exchange Commission (the “SEC”), the Federal Reserve Board, the New York Stock Exchange, other exchanges and markets, the Financial Industry Regulatory Authority (“FINRA”) or other governmental or quasi-governmental bodies, agencies and regulatory organizations may make the business of the Company less attractive.

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-         Pandemics and Other Widespread Public Health Emergencies, Including COVID-19. Pandemics and other widespread public health emergencies, including outbreaks of infectious diseases, have resulted, and are resulting in market volatility and disruption, and future such emergencies have the potential to materially and adversely impact economic production and activity in ways that are impossible to predict, all of which may result in significant losses to the Company.

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-         Leverage and Interest Rates. The Manager anticipates the Project will be financed using approximately $1.84 million of debt. However, the terms and amounts of the financing for the Project have not been finalized, are subject to change up to the point of closing, and could differ materially from the terms described in the Offering Materials.

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Fluctuations in interest rates may adversely affect the performance of the Project. The use of borrowed funds to leverage investments involves a high degree of financial risk and can exaggerate the effect of any increase or decrease in the value of an investment and will increase the exposure of an investment to adverse economic factors, such as fluctuations in interest rates, downturns in the local economies of the Project, or deterioration in the condition of the Project. In addition, if the Project is unable to generate sufficient cash flow to meet principal and interest payments on such debt, it may be forced to default on such debt, which could result in additional expenses to the Project and/or forced liquidation of the Project at prices that may not reflect the full value thereof and may result in a total loss. In addition, the financing terms may restrict the funds available for distribution to the Company.

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-         Reliance on Key Persons. The success of the Company is substantially dependent on Nate Frederick and Gary McNally. Should either or both individuals become incapacitated or in some other way cease to participate in the Company, its performance could be adversely affected.

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-         Reliance on the Manager. The Company will be managed exclusively by the Manager. The Members will not have any right to participate in managing the Company’s business or affairs except as outlined in the Operating Agreement.

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-         No Assurance that the Company’s Return Objectives Will Be Achieved. While the principals of the Manager have substantial experience in making and managing real estate investments, there can be no assurance that the Company’s investment objectives will be achieved or that Members will recover all or any portion of their investment in the Company. The past or projected performance of LeConte Capital’s or McNally Properties’ prior investments is not indicative of the future results of such investments or the performance of the Company, and there can be no assurance that the projected returns will be achieved or that the Company will achieve results comparable to the past or projected performance of LeConte Capital’s or McNally Properties’ prior investments.

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-         Lack of Diversification. An investment in the Company does not provide geographic diversification or significant asset or product-type diversification.

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-         Failure to Make Capital Contributions. If an investor fails to pay when due installments of its Capital Commitment to the Company, and the contributions made by non-defaulting investors and borrowings by the Company are inadequate to cover the defaulted capital contribution, the Company may be unable to pay its obligations when due. As a result, the Company may be subjected to significant penalties that could materially adversely affect the returns to investors (including non-defaulting investors). If an investor defaults, it may be subject to various remedies as provided in the Operating Agreement, including redemption by the Company of all or any portion of the defaulting investor’s Membership Interest on terms and conditions unfavorable to such investor.

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-        Illiquidity of Membership Interests. The Membership Interests represent highly illiquid investments and should only be acquired by investors able to commit their funds indefinitely. Except under limited circumstances, Members may not withdraw from the Company. The Membership Interests are not registered under federal or state securities laws and may not be resold unless they are subsequently registered or an exemption from such registration is available. Transfers of Membership Interests are also subject to the approval of the Manager (which may be granted or denied at the Manager's sole discretion) and the satisfaction of certain other conditions. Members cannot expect to be able to liquidate their investment in the Company in case of an emergency.

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-         Limited Regulatory Review and Oversight. The Membership Interests will not be registered with the SEC or the securities agency of any state. The Membership Interests are being offered in reliance upon a private offering exemption from the registration provisions of the Securities Act and state securities laws applicable only to offers and sales to prospective investors meeting the suitability requirements set forth herein and in such laws. Since this is a nonpublic offering and, as such, is not registered under federal or state securities laws, prospective investors will not have the benefit of review by the SEC or any state securities agency. The terms and conditions of the offering may not comply with the guidelines and regulations established for securities offerings that are registered and qualified with those agencies.

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If the Company fails to comply with the requirements of available securities law exemptions, the Members may have the right to rescind their purchase of Membership Interests. If a number of Members successfully sought rescission, the Company would face severe financial demands that could adversely affect the Company as a whole and, thus, the investment in the Company by the remaining Members.

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Additionally, the Company is not regulated like a mutual fund. The Company will restrict the number of investors who may be admitted as Members or will otherwise conduct its operations to qualify for an exemption from the requirement of registering as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”). As a result, certain protections of the Investment Company Act will not be afforded to the Company or its Members. For example, as an unregistered investment pool, the Company will not be required to submit periodic reports to the SEC.

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-         Enhanced Scrutiny and Regulation of Private Investment Funds and the Financial Services Industries. Legal, tax, and regulatory changes could adversely affect the Company. The asset management industry's growth, the increasing size and reach of transactions, and the increased attention to private investment funds have prompted recent governmental and public attention to the asset management industry and its practices. Regulation generally and more specifically addressed to the asset management industry, including tax laws and regulations, could increase the cost of acquiring, holding, or divesting investments, the profitability of investments, and the cost of operating the Company. Additional regulation could also increase the risk of third-party litigation. The effect of any future regulatory change on the Company and the Manager could be substantial and adverse.

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-         Potential Mismatch Between Allocated Income and Distributions Received. The Manager is entitled to hold back funds from amounts that would otherwise be distributed to the Members to cover expenses already incurred by the Company and establish reserves for future expenses and contingencies. Consequently, a Member may be allocated income in excess of the distributions it receives in a taxable year.

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-         Limited Liability and Indemnification of Manager and Affiliates. The Operating Agreement will provide that neither the Manager nor any officer, employee, agent, or affiliate of the Company or the Manager will be liable to the Company or the Members for any act or omission on its part, except for acts or omissions which are due to fraud, gross negligence or willful misconduct (collectively, “Non-Covered Conduct”). The Company will indemnify each such person for any loss or damage incurred by such person, except for Non-Covered Conduct. Such limited liability and indemnification may create a reduced sense of accountability on the part of the Manager and its affiliates with respect to actions on behalf of the Company and may limit the Members’ ability to recoup their investment in the Company by bringing actions against those parties.

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-         Environmental Risks. The Company may be exposed to the risk of loss from environmental claims arising with respect to real estate with environmental problems at the Project site. Additionally, changes in environmental laws or the environmental condition of an asset may create liabilities that did not exist at the time of an investment, and that could not have been foreseen.

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-         Availability of Insurance Against Certain Catastrophic Losses. It is expected that the Project Entities or the applicable property manager will obtain suitable comprehensive liability, fire, and extended coverage insurance with insured limits and policy specifications that are customary for similar properties. However, certain losses of a catastrophic nature, such as wars, natural disasters, terrorist attacks, or other similar events, may be either uninsurable or insurable at such high rates that maintaining such coverage would cause an adverse impact on the Company’s investment. In general, losses related to terrorism are becoming harder and more expensive to insure against. Most insurers are excluding terrorism coverage from their all-risk policies. In some cases, the insurers offer significantly limited coverage against terrorist acts for additional premiums, which can significantly increase casualty insurance costs for a property. As a result, not all investments may be insured against terrorism. The Company could lose both invested capital and anticipated profits if a significant uninsured loss occurs.

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-         Income Taxes. The Company intends to be classified as a partnership for federal, state, and local income tax purposes. Consequently, each Member will be taxable on such Member’s distributive share of any taxable income realized by the Company, regardless of whether the Company distributes sufficient cash to enable each Member to pay his or her resulting income tax liability. For state income tax purposes, a Member who is not a resident of the jurisdiction in which the Project is located may be subject to state income tax withholding by the Company.

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-         United States Federal Income Tax Risks. An investment in the Company entails significant tax risks, including (i) the possibility that certain deductions claimed by the Company may be disallowed and that any audit of the Company’s tax return may result in an audit of any Member’s tax return; (ii) the possibility that the Company may have taxable income allocable to Members in an amount greater than the cash available for distribution; and (iii) the possibility that future legislative, administrative or judicial interpretations of current law or future legislation will change the tax treatment of investors described herein.

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-         Delayed Schedules K-1. The Manager will provide a Schedule K-1 to each Member after the close of each fiscal year of the Company. If the Schedule K-1 in respect of the Company is unavailable by April 15 (or any other applicable deadline) of the following year, a Member may need to request an extension of time to file or may have to pay taxes based on an estimated amount.

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-         Passive Activity Losses. U.S. Investors (as defined below) who are not also classified as corporations for U.S. federal income tax purposes (a “Non-Corporate U.S. Partner”) (and certain closely held C-corporations and personal service corporations) are subject to certain limitations governing the deductibility of losses from “passive activities” against business income, salary income, and portfolio income (including, without limitation, interest, dividends, royalties, and gains from the Project). The Project will be considered a “passive activity” for Members for purposes of these rules. Special rules may, however, apply to investors who qualify as “real estate professionals.” For Members subject to these rules, interest on borrowed funds used to purchase an interest in the Company generally will be treated as a “passive activity” expense and subject to these limitations. In general, such interest will be deductible only to the extent of the taxpayer’s income from “passive activities” (including both its investment in the Company and other “passive activities”). These rules also limit the ability of such U.S. Investors to deduct any losses otherwise allocable to them from the Company. “Passive activity” expenses and losses that are not deductible in the year incurred, however, may be carried forward and may be able to be deducted in a future year in which the investor generates sufficient “passive activity” income (either from the Company or other passive activities) or disposes of such investor’s entire interest in the Company in a fully taxable transaction. For this purpose, a “U.S. Investor” means a person or entity that is (i) a citizen or resident of the United States as determined for U.S. federal income tax purposes; (ii) taxable as a corporation and created or organized in or under the laws of the United States or any political subdivision of the United States; (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source; or (iv) a trust, if a U.S. court can exercise primary supervision over the administration of the trust, provided that one or more U.S. persons have the authority to control all substantial decisions of the trust or the trust has validly made an election to be treated as a U.S. person under applicable U.S. Treasury regulations.

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THE INCOME TAX LAWS APPLICABLE TO THE COMPANY AND TO INVESTORS THEREIN ARE EXTREMELY COMPLEX. EACH INVESTOR IS STRONGLY URGED TO CONSULT WITH THEIR PROFESSIONAL ADVISORS AS TO THE FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE AND OWNERSHIP OF THE MEMBERSHIP INTERESTS.

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-         Unrelated Business Taxable Income. The Company cannot guarantee that it will eliminate or minimize UBTI of any Member, or any of a Member’s direct or indirect members or participants, nor that it will minimize the realization of income that would be UBTI if a Member, or any of a Member’s direct or indirect members or participants, were subject to the provisions of Sections 511 through 514 of the Code. It is possible that a significant portion of the Company’s income may be treated as UBTI with respect to such Members.

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-         Employee Benefit Plans. In considering an investment in the Company, the fiduciary of an employee benefit plan should consider, among other things, the possibility that the assets of the Company could be deemed to be the “plan assets” of such benefit plan. If any assets of the Company were deemed to be “plan assets” of employee plans whose assets were invested in the Company, certain provisions of Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and Section 4975 of the Internal Revenue Code of 1986, as amended (the “Code”) would generally extend to investments made by the Company. This would result in, among other things, the possibility that certain transactions that the Company might enter into as part of its investment strategy might constitute prohibited transactions under ERISA and the Code, and the Company might not be able to pursue its investment strategy.

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-         Forward-Looking Statements. Certain statements contained in this Subscription Agreement and the attachments hereto constitute “forward-looking statements” that can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “intend,” “continue” or “believe” or the negatives thereof or other variations thereon or other comparable terminology. Due to various risks and uncertainties, including those set forth above, actual events or results or the Company's actual performance may differ materially from those reflected or contemplated in such forward-looking statements.

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-         Potential Conflicts of Interest. An investment in the Company and the activities thereof will be subject to certain potential conflicts of interest:

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(i) Management of the Company. The principals of the Manager will devote such time to managing the Company that they, in their sole discretion, deem necessary to carry out the operations of the Company effectively. The principals of the Manager are also expected to work on projects for its affiliates, and conflicts of interest may arise in allocating management time, services, or functions among such affiliates.

 

(ii) Conflicts in Management. As the manager of the Company, the managing member of LeConte Capital is an affiliate of McNally Properties; the Manager may have conflicts of interest in carrying out its obligations and exercising its authority with respect to each of these entities and in managing the Project generally. There can be no guarantee that such conflicts will be resolved in favor of the Company or the Members.

 

(iii) Multiple Projects. The principals of the Manager participate in the management of other entities with projects similar to the Company’s and may devote significant time in the future to the management of such existing and future entities. Except as otherwise expressly provided in the Company's Operating Agreement, these persons will not be restricted with respect to any other such activities, and it is anticipated that each will undertake other such activities. This could result in significant conflicts between their duties to the Manager, the Company, and these other interests. Neither the Company nor any of the Members will have any rights in or to such other activities, investments, or any profits derived therefrom.

 

(iv) Diverse Membership. The Members may include taxable and tax-exempt entities, as well as persons or entities organized in various jurisdictions and that otherwise may have conflicting investment, tax, or other interests. As a result, conflicts of interest may arise in connection with, among other things, the nature of the investment made by the Company, the structuring or characterization of the investment, and the timing of realizations of the investment. Decisions made by the Manager with respect to the foregoing may be more beneficial for one type of Member than for another type of Member. In making such decisions, the Manager will consider the Company's investment objectives as a whole, not the investment, tax, or other objectives of any Member individually.

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