Note 6 – Related Party Transactions

Allocated General and Administrative Expenses

In the future, the Company may receive an allocation of general and administrative expenses from the Manager that are either clearly applicable to or were reasonably allocated to the operations of the properties. There were no allocated general and administrative expenses from the Manager for the four months ended December 31, 2014.

Convertible Debenture

As discussed in Note 3 – “Property Acquisitions,” during the four months ended December 31, 2014, HFE USA, LLC loaned the Company $910,000 to finance a portion of the Asheville facility purchase price and pay closing costs.  Additionally, during the twelve months ended August 31, 2014, HFE USA, LLC loaned the Company $7,468,142 to assist in the acquisition of the Omaha facility and pay closing costs. The loans are classified as the Convertible Debenture totaling $8,378,142.  The Convertible Debenture is unsecured, bears interest at 8.0% per annum, payable monthly in arrears, and all unpaid interest and principal is due on September 9, 2015.  Interest is paid annually in arrears and is due on the last day of each calendar month thereafter. The Company may prepay the note at any time, in whole or in part.  HFE USA, LLC may elect to convert all or a portion of the outstanding principal amount of the note into shares of common stock in an amount equal to the principal amount of the note, together with accrued but unpaid interest, divided by $12.748.

 On July 17, 2014, HFE USA, LLC converted $2,932,040 of the principal and accrued interest under the Convertible Debenture into 230,000 shares of our unregistered common stock. Shares of our unregistered common stock issuable to HFE USA, LLC under the Convertible Debenture are subject to customary anti-dilution rights in the event of stock splits, stock dividends and similar corporate events.

As of December 31, 2014 and August 31, 2014, the outstanding principal balance of the Convertible Debenture was $5,446,102 and 4,536,102, respectively.  Interest expense on the Convertible Debenture was $142,436 and $91,468 for the four months ended December 31, 2014 and the twelve months ended August 31, 2014, respectively.

The Company analyzed the conversion option in the Convertible Debenture for derivative accounting treatment under ASC Topic 815, “Derivatives and Hedging,” and determined that the instrument does not qualify for derivative accounting. The Company therefore performed an analysis to determine if the conversion option was subject to a beneficial conversion feature and determined that the instrument does not have a beneficial conversion feature.  

Note Payable to Majority Shareholder

During the fiscal year ended August 31, 2014, HFE USA, LLC loaned $345,053 to the Company for general corporate purposes, of which the Company repaid $306,858 during that fiscal year.  As of December 31, 2014 and August 31, 2014, the note payable balance was $38,195.  The note payable is unsecured, due on demand, and non-interest bearing.

Due to Related Party, Net

As of December 31, 2014, the Company had a net related party payable balance of $330,768 that reflected $270,000 owed to the Manager by the Company for cumulative incurred but unpaid management fees and $103,683 for funds loaned to the Company by the Manager to be used by the Company for general corporate purposes.  These amounts are recorded net of $42,915 that the Manager owes the Company for funds paid by the Company related to the Asheville facility acquisition.  The net due to related party balance at August 31, 2014 was $213,000.

Management Agreement

On November 10, 2014, the Company entered into a Management Agreement, with an effective date of April 1, 2014, with Inter-American Management, LLC (the “Manager”), a Delaware limited liability company and an affiliate of the Company.  Under the terms of the Management Agreement, the Manager is responsible for designing and implementing our business strategy and administering our business activities and day-to-day operations. For performing these services, the Company will pay the Manager 8% of rental revenue for property management services and a base management fee equal to the greater of (a) 2.0% per annum of the Company’s net asset value (the value of the Company’s assets less the value of the Company’s liabilities), or (b) $30,000 per calendar month.  For the four months ended December 31, 2014 and the twelve months ended August 31, 2014, management fees of $120,000 and $150,000, respectively (since April 1, 2014), were incurred and expensed by the Company, due to the Manager, and remain unpaid as of December 31, 2014 and August 31, 2014. Additionally, during the four months ended December 31, 2014 and the twelve months ended August 31, 2014, the Company expensed $48,400 and $434,200, respectively, that was paid to the Manager related to the acquisition of the Asheville facility in September 2014 and the Omaha facility in June 2014, respectively.  This expense is included in the “General and Administrative Expense” line item in the accompanying Statements of Operations.