As filed with the Securities and Exchange Commission on August 12, 2011
Registration No. 333-      
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
 
 
Form S-11
FOR REGISTRATION
UNDER
THE SECURITIES ACT OF 1933 OF SECURITIES
OF CERTAIN REAL ESTATE COMPANIES
 
 
 
 
PEMBROOK REALTY CAPITAL LLC
(Exact Name of Registrant as Specified in Governing Instruments)
 
 
 
 
767 Third Avenue, 18th Floor
New York, NY 10017
(646) 388-5906
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
 
 
 
 
Stuart J. Boesky
Chief Executive Officer
767 Third Avenue, 18th Floor
New York, NY 10017
(646) 388-5906
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
 
 
 
 
Copies to:
 
     
Michael L. Lehr, Esq.
Dianne Coady Fisher, Esq.
Jason T. Simon, Esq.
Greenberg Traurig, LLP
2700 Two Commerce Square
2001 Market Street
Philadelphia, PA 19103
Phone: (215) 988-7800
Facsimile: (215) 988-7801
  Edward F. Petrosky, Esq.
Bartholomew A. Sheehan, Esq.
Sidley Austin LLP
787 7th Avenue
New York, NY 10019
Phone: (212) 839-5300
Facsimile: (212) 839-5599
 
 
 
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this Registration Statement.
 
If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
 
CALCULATION OF REGISTRATION FEE
 
             
      Proposed Maximum
     
      Aggregate
    Amount of
Title of Securities
    Offering
    Registration
Being Registered     Price (1)(2)     Fee (1)
Common Shares Representing Limited Liability Company
Interests, no par value
    $100,000,000     $11,610
             
 
(1) Estimated solely for the purpose of determining the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.
 
(2) Includes the offering price of common shares that may be purchased by the underwriters upon exercise of their overallotment option.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.
 


 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
Subject to Completion, Dated August 12, 2011
Pembrook Realty Capital LLC
 
          Common Shares
 
 
Pembrook Realty Capital LLC is a newly formed Delaware limited liability company that will focus primarily on investing in target assets on both a taxable and U.S. federally tax-exempt basis. Our target assets include taxable commercial real estate investments, such as commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities and preferred equity issued by entities that own commercial real estate, as well as U.S. federally tax-exempt multifamily mortgage revenue bonds. Upon completion of this offering and our formation transactions, we will own an initial portfolio of target assets consisting of 18 investments with an aggregate fair value of $209.7 million, a weighted average annual interest rate of approximately 8.56% and a weighted average yield to maturity of approximately 12.01% as of March 31, 2011.
 
We will be externally managed and advised by Pembrook Realty Capital Management LLC, or our Manager. Our Manager is an affiliate of Pembrook Capital Management, LLC, a private real estate investment firm that provides financing solutions to commercial real estate participants. The Pembrook Capital Management, LLC team that was primarily responsible for sourcing, underwriting, acquiring (through direct origination and secondary market opportunities), arranging for the financing of and managing our initial assets prior to this offering will be responsible, on behalf of our Manager, for performing similar functions for us in the future.
 
As a result of our formation transactions, each of the investors that is an owner of common or preferred interests in Pembrook Community Investors LLC (“PCI I”) or PCI Investors Fund II LLC (“PCI II,” and together with PCI I, the “Pembrook Funds”), including certain affiliates and related parties of Pembrook Capital Management, LLC, will exchange all of their interests in the Pembrook Funds for an aggregate of        of our common shares and           of our preferred shares. Each of the Pembrook Funds is advised by an affiliate of Pembrook Capital Management, LLC and will be merged into our company through our formation transactions.
 
This is our initial public offering and no public market currently exists for our common shares. We currently expect that the initial public offering price will be between $      and $      per share. We are offering common shares, as described in this prospectus. We intend to apply to list our common shares on the New York Stock Exchange (“NYSE”) under the symbol “PRC.”
 
We intend to be treated as a partnership for U.S. federal income tax purposes; accordingly, we do not expect to be subject to U.S. federal income tax. Instead, our common shareholders will be required to take into account their allocable share of our items of income, gain, loss, deduction and credit for our taxable year ending within or with their taxable year.
 
Investing in our common shares involves risks. See “Risk Factors” beginning on page 29 of this prospectus for a discussion of various risks you should consider in evaluating an investment in our common shares.
 
         
    Per Share   Total
 
Public offering price
  $                  $               
Underwriting discount
  $   $
Proceeds, before expenses, to Pembrook Realty Capital LLC
  $   $
 
The underwriters may purchase up to an additional           common shares from us at the public offering price, less the underwriting discount, within 30 days after the date of this prospectus to cover overallotments, if any.
 
Neither the Securities and Exchange Commission nor any state securities or other commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
Our common shares will be ready for delivery on or about          , 2011.
 
 
 
 
Deutsche Bank Securities
 
 
 
 
The date of this prospectus is          , 2011


 

 
PROSPECTUS SUMMARY
 
This summary highlights some of the information in this prospectus. It does not contain all of the information that you should consider before making a decision to invest in our common shares. You should read carefully the more detailed information set forth under “Risk Factors” and the other information included in this prospectus, including our historical and pro forma financial statements and related notes.
 
Except where the context suggests otherwise, the terms “our company,” “we,” “us” and “our” refer to Pembrook Realty Capital LLC, a newly formed Delaware limited liability company, together with its consolidated subsidiaries; “our Manager” refers to Pembrook Realty Capital Management LLC, a Delaware limited liability company, our external manager; “Pembrook Capital” refers to Pembrook Capital Management, LLC, together with its affiliates, including our Manager, but excluding us; “our predecessor” collectively refers to Pembrook Community Investors LLC, or PCI I, and PCI Investors Fund II LLC, or PCI II, and together with PCI I, the “Pembrook Funds;” and “our initial assets” and “our initial portfolio” refer to the 18 investments owned by the Pembrook Funds that we will acquire in connection with our formation transactions.
 
Unless indicated otherwise, the information in this prospectus assumes (1) our common shares to be sold in this offering are sold at $      per share, which is the mid-point of the price range set forth on the cover page of this prospectus, (2) the completion of our formation transactions described in this prospectus concurrently with the completion of this offering and (3) the underwriters do not exercise their overallotment option to purchase up to an additional          common shares.
 
Our Company
 
Our company is a newly formed Delaware limited liability company that will focus primarily on investing in target assets on both a taxable and U.S. federally tax-exempt basis. Our target assets include taxable commercial real estate investments, such as commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities and preferred equity issued by entities that own commercial real estate, as well as U.S. federally tax-exempt multifamily mortgage revenue bonds. For a description of our target assets, see “—Our Target Assets” below. Upon completion of this offering and our formation transactions, we will own an initial portfolio of target assets consisting of 18 investments with an aggregate fair value of $209.7 million, a weighted average annual interest rate of approximately 8.56% and a weighted average yield to maturity of approximately 12.01% as of March 31, 2011.
 
We will be externally managed and advised by Pembrook Realty Capital Management LLC, or our Manager, pursuant to the terms of a management agreement between us and our Manager. Our Manager is an affiliate of Pembrook Capital, a private real estate investment firm that provides financing solutions to commercial real estate participants. Through an origination and advisory agreement between our Manager and Pembrook Capital Management, LLC, our Manager will be able to draw upon the experience and expertise of Pembrook Capital’s management team. The Pembrook Capital team that was primarily responsible for sourcing, underwriting, acquiring (through direct origination and secondary market opportunities), arranging for the financing of and managing our initial assets prior to this offering will be responsible, on behalf of our Manager, for performing similar functions for us in the future.
 
Pembrook Capital was formed in 2006 by Stuart Boesky, our Chairman and Chief Executive Officer, with additional financial sponsorship from an affiliate of Mariner Partners, Inc., or collectively Mariner Partners, an alternative asset management firm. Mr. Boesky has more than


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32 years of experience in the commercial real estate industry, including 17 years as a former principal of Related Capital Company and eight years as Chief Executive Officer of Centerline Holding Company, or Centerline, which was formerly known as Charter Municipal Mortgage Acceptance Company. During Mr. Boesky’s tenure as Chief Executive Officer of Centerline from October 1997 to November 2005, Centerline generated a compound annual total pre-tax return to shareholders (including share price appreciation and distributions) of approximately 16.9%. By comparison, the National Association of Real Estate Investment Trusts, or NAREIT, index of mortgage REITs, the Standard & Poor’s S&P 500 Index and the Standard & Poor’s S&P SmallCap 600 Index had compound annual total pre-tax returns of approximately 12.0%, 5.5% and 9.7%, respectively, for the same period. At the time of Mr. Boesky’s departure from Centerline in November 2005, Centerline had approximately $19 billion of taxable and U.S. federally tax-exempt commercial real estate assets under management.
 
Pembrook Capital has 13 experienced investment professionals located in New York, Boston and Los Angeles. Members of the Pembrook Capital management team have significant experience and expertise in the major classes of commercial real estate, including multifamily, retail, office (including medical office buildings), hospitality and student housing. Through the Pembrook Funds, Pembrook Capital invests at various levels of the capital structure (including senior debt, mezzanine debt and preferred equity) of entities holding various types of commercial real estate and has employed investment strategies similar to those that we intend to employ in the future. Since 2007, Pembrook Capital has sourced and reviewed over $8 billion of commercial real estate investment opportunities, resulting in the acquisition by the Pembrook Funds of 29 investments with an aggregate purchase price of approximately $374.6 million, of which the 18 investments that had not been subsequently disposed of as of March 31, 2011 will be acquired by us in our formation transactions, as described under “—Our Structure and Formation” below.
 
  •  PCI I commenced operations in March 2007.  As of March 31, 2011, PCI I had made 20 investments with an aggregate purchase price of approximately $282.1 million, of which 13 investments with an aggregate fair value of approximately $133.9 million were outstanding as of March 31, 2011. From inception through March 31, 2011, PCI I generated an average annualized return to holders of common interests (net of fees) of approximately 9.3%.
 
  •  PCI II commenced operations in January 2010.  As of March 31, 2011, PCI II had made nine investments with an aggregate purchase price of approximately $92.6 million, of which eight investments with an aggregate fair value of approximately $75.8 million were outstanding as of March 31, 2011. From inception through March 31, 2011, PCI II generated an average annualized return to holders of common interests (net of fees) of approximately 9.3%.
 
The performance information for each of the Pembrook Funds represents each fund’s past performance. Past performance does not guarantee future results, and it may not be indicative of the future performance of our company.
 
In addition to common interests, the Pembrook Funds have issued three classes of perpetual preferred interests with an aggregate liquidation preference of approximately $99.0 million that are entitled to receive cumulative distributions at an effective annual floating rate equal to the three-month London interbank offered rate (“LIBOR”) plus a weighted average spread of 2.72%. Upon completion of our formation transactions, the common and preferred interests in the Pembrook Funds will be converted into common shares and three series of preferred shares, respectively, in our company. Currently, Pembrook Capital is paid an annual management fee by PCI I and PCI II equal to 2.0% and 1.5%, respectively, of the balance of the capital accounts of members holding common or preferred interests in the Pembrook Funds. In addition, Pembrook Capital is entitled to receive an annual incentive allocation equal


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to 20% of any capital appreciation attributable to the common interests of PCI I, subject to a “high water mark,” and 20% of any realized capital appreciation attributable to the common interests of PCI II, subject to a cumulative preferred return to the common interests of 8%. Pursuant to the management agreement, we will pay our manager a base management fee equal to     % of our shareholders’ equity per annum, which is lower than the base management fees currently paid to Pembrook Capital by the Pembrook Funds combined. In addition, our Manager will be entitled to receive an incentive fee only if a specified return is achieved, whereas Pembrook Capital is entitled to receive an annual incentive allocation with respect to any capital appreciation attributable to the common interests of PCI I, subject only to a “high water mark.” See “—Management Agreement” below for a discussion of the fees that will be payable under the management agreement.
 
Our investment objective is to generate attractive risk-adjusted returns for our shareholders over the long-term, primarily through quarterly distributions (a portion of which we expect will be excluded from gross income for U.S. federal income tax purposes) and, secondarily, through capital appreciation. We intend to achieve this objective by growing our initial portfolio through the selective acquisition of target assets designed to produce attractive returns across a variety of market conditions and economic cycles. When investing our capital, we will focus on the relative value of the various types of investments included within our target assets. We will also seek to capitalize on Pembrook Capital’s relationships within the commercial real estate industry and ability to source, analyze and originate financing for segments of the commercial real estate industry that we believe are underserved in the current credit market and capabilities for originating investments that generate taxable and U.S. federally tax-exempt income. Based on prevailing market conditions, our current expectation is that we will use approximately 50% of the net proceeds from this offering to acquire target assets that produce taxable income and approximately 50% to acquire target assets that produce income that is excludable from gross income for U.S. federal income tax purposes. However, the actual composition of the assets that we acquire with the net proceeds from this offering will depend upon prevailing market conditions at the time such net proceeds are invested.
 
We will commence investment operations upon completion of this offering. We intend to be treated as a partnership for U.S. federal income tax purposes. Partnerships are treated as pass-through entities for purposes of U.S. federal income taxation, and accordingly we do not expect to be subject to U.S. federal income taxation. Instead, our common shareholders will be required to take into account their allocable share of our items of income, gain, loss, deduction and credit for our taxable year ending within or with their taxable year. We also intend to operate our business in a manner that will exempt us from registration under the Investment Company Act of 1940, or the Investment Company Act.
 
Our Manager and Pembrook Capital
 
We will be externally managed and advised by our Manager. We expect to benefit from the relationships and experience of our Manager’s executive team and Pembrook Capital’s management team. Pursuant to the terms of a management agreement between our Manager and us, our Manager will provide us with our management team and appropriate support personnel. Pursuant to an origination and advisory agreement between our Manager and Pembrook Capital Management, LLC, our Manager will have access to the personnel and resources of Pembrook Capital necessary for the implementation and execution of our business strategy.
 
Our Chief Executive Officer and our other officers (other than          , our Chief Financial Officer) are executives of Pembrook Capital. We do not expect to have any employees other than our Chief Financial Officer. Pembrook Capital is not obligated to dedicate any of its


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executives or other personnel exclusively to us. In addition, none of Pembrook Capital, its executives or other personnel, including our executive officers supplied to us by Pembrook Capital, is obligated to dedicate any specific portion of its or their time to our business. Our Manager will at all times be subject to the supervision and oversight of our Board of Managers and has only such functions and authority as we delegate to it in the management agreement.
 
Pembrook Capital Management, LLC is a privately owned private equity firm controlled by Stuart Boesky. Pembrook Capital Management, LLC was founded in 2006 as a joint venture between Mr. Boesky and an affiliate of Mariner Partners to capitalize on Mr. Boesky’s 32 years of commercial real estate experience, including 17 years as a former principal of Related Capital Company and eight years as Chief Executive Officer of Centerline. During his career at Related Capital Company, Mr. Boesky was responsible for launching and directing the investment and management activities of a series of privately and publicly-owned entities that focused on investments that included, but were not limited to, our target assets. During his eight year tenure at Centerline from October 1997 to November 2005, Mr. Boesky oversaw the growth and transformation of Centerline from a tax-exempt multifamily construction and permanent portfolio lender to a full service commercial real estate financial services firm. At the time of his departure in 2005, Centerline was originating and acquiring approximately $4 billion of commercial real estate debt and equity assets annually. The majority of the assets that Centerline originated during Mr. Boesky’s tenure are similar to our target assets. Centerline had approximately $19 billion of assets under management as of September 30, 2005, just prior to Mr. Boesky’s departure.
 
Market Opportunities
 
We believe that the next several years will offer significant opportunities to invest in our target assets and participate in the ongoing recapitalization of the commercial real estate industry, due to a limited amount of capital available for investment in commercial real estate debt, a significant need to refinance maturing or defaulted debt and attractive fundamentals in the multifamily rental housing market.
 
We believe many investors that historically supplied capital to the commercial real estate industry, such as banks, insurance companies, finance companies and private investment funds, have determined to reduce or discontinue investment in commercial real estate. In addition, many private firms that traditionally invested in, or provided credit enhancement supporting the issuance of, federally tax-exempt multifamily mortgage revenue bonds are no longer active. In particular, we believe that uncertainty regarding the commercial real estate market, the reduced size of the securitization market, increased regulation and the financial challenges faced by many real estate investors who are addressing legacy investment issues have resulted in a shortage of capital available to invest in commercial real estate. Additionally, many regulated investors, such as banks and insurance companies, face more stringent capital requirements to support non-investment grade investments and have new limitations on their ability to engage in certain types of principal investing. Accordingly, we believe that the experience and expertise of Pembrook Capital’s management team in originating investments across the major commercial real estate classes will allow us to take advantage of a variety of potential market opportunities throughout the United States.
 
We believe that many outstanding commercial mortgage loans, including both those held on balance sheet by traditional lenders and those held in securitization trusts, will need to be refinanced, both as a result of scheduled maturities and borrower defaults under outstanding loans, which often result in the refinancing or restructuring of such loans. According to the Mortgage Bankers Association, at March 31, 2011, approximately $2.4 trillion of commercial mortgage debt, including approximately $0.8 trillion of multifamily mortgage debt, was outstanding in the United States, as shown in the charts below. According to Foresight


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Analytics, approximately $1 trillion of the outstanding commercial mortgage debt is scheduled to mature in the years 2011 through 2014.
 
     
Holders of Commercial Mortgage Debt Outstanding
As of March 31, 2011 ($ in billions) By Investor Type (Includes Multifamily Mortgage Debt)
  Holders of Multifamily Mortgage Debt Outstanding
As of March 31, 2011 ($ in billions) By Investor Type
     
(PIE CHART)   (PIE CHART)
 
 
Source: Mortgage Bankers Association, March 31, 2011
 
According to the Mortgage Bankers Association, the delinquency rate for commercial and multifamily mortgage debt at March 31, 2011 varied significantly by type of investor, with commercial mortgage-backed securities, or CMBS, the highest at 9.18%, banks and thrifts at 4.18%, Federal National Mortgage Association, or Fannie Mae, at 0.64%, Federal Home Loan Mortgage Corporation, or Freddie Mac, at 0.36% and life insurance company portfolios at 0.14%, as shown in the following chart:
 
(PIE CHART)
 
 
Note:  Delinquency rates are as of March 31, 2011. Delinquencies based on the outstanding principal amount. CMBS based on 30+ days delinquent; Life Insurance Companies, Fannie Mae and Freddie Mac based on 60+ days delinquent; and Banks & Thrifts based on 90+ days delinquent or in non-accrual.
Source: Mortgage Bankers Association 2011 Q1 Quarterly Data Book


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In addition, there has been a significant reduction in CMBS originations during the last several years, as indicated in the chart below. We believe that this reduction, combined with capital constraints among commercial banks and other sources of real estate investment, has increased the need for alternative sources of capital such as our company.
 
(PIE CHART)
 
 
Source: Commercial Mortgage Alert March 31, 2011
 
We expect that investing in new taxable and tax-exempt loans issued to refinance outstanding loans will be a significant component of our investment strategy, and that we will be able to acquire investments with attractive risk-adjusted yields and prudent underwriting standards that finance high-quality properties for experienced owners and developers.
 
We believe that multifamily housing is among the commercial real estate classes experiencing the strongest recovery in the United States from the global financial crisis. Additionally, we believe that long-term demographic shifts within the United States, as well as other economic and public policy trends, will stimulate demand for multifamily rental housing over the next several years, leading to an increase in occupancy and rental rates. According to the Mortgage Bankers Association, from 1987-1994 homeownership in the United States was approximately 64% among American families and never was above 65% or below 63%; however, from 1994-2003, the percentage of American families owning their homes increased significantly, rising to almost 70% in 2003. We believe that the proliferation of sub-prime mortgage lending during this period was a significant contributor to this increase. More conservative residential lending standards and reduced interest in homeownership, however, have recently caused a decline in the percentage of American families who own their homes, to approximately 67%. We believe that more stringent lending standards and changing housing preferences will cause the level of homeownership over time to trend towards its historical average of approximately 64% of American families, and increase the size of the U.S. tenant pool. By itself, the recent downward trend in homeownership has added almost four million renters to the marketplace between 2005 and 2010, according to the Joint Center for Housing Studies of Harvard University. Moreover, we believe that the rate of household formation by “echo boomers” (people born between 1986-2005), augmented by foreign born


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families, will be the primary driver of rental housing demand over the next decade, and that many new households will be more predisposed towards rental housing than prior generations. As a result of these trends, we believe that occupancy and rental rates will increase at multifamily properties, leading to an increased demand for capital to acquire, construct and improve multifamily housing. This type of capital has historically been provided by local, regional and national banks. However, as many traditional sources of capital have eliminated, or reduced, their participation in this market, we believe that we are well positioned to acquire both taxable commercial real estate debt obligations and federally tax-exempt multifamily mortgage revenue bonds through direct originations facilitated by Pembrook Capital, including our Manager, and secondary market purchases.
 
We intend to participate in the multifamily housing rental market primarily through the acquisition of federally tax-exempt multifamily mortgage revenue bonds that are issued by state and local housing finance agencies, or HFAs. HFAs issue bonds that produce income that is excludable from gross income for U.S. federal income tax purposes and that are secured by mortgages on multifamily properties to finance the acquisition and renovation, or new construction, of multifamily housing properties by private owners, where a specified percentage of the units will be set aside to rent to moderate and low-income families and, in some cases, specifically targeted toward elderly residents. Based on information from the Securities Data Company, we believe that in excess of $169 billion of federally tax-exempt multifamily mortgage revenue bonds were issued from 1980 to 2010, in annual amounts ranging from $1.6 billion to $19.9 billion.
 
While the use of federally tax-exempt multifamily mortgage revenue bonds has proven to be a critical component in providing affordable rental housing to moderate and lower income families, from the onset of the financial crisis in late 2007, key institutional providers of capital to this marketplace have either withdrawn completely or significantly reduced their activity levels. Certain specialty investment firms that had previously been highly active investors in such bonds have largely withdrawn from the marketplace. Many national banks largely withdrew from balance sheet lending on real estate, including federally tax-exempt multifamily mortgage revenue bonds. Finally, private sector bond insurers, who customarily insured bonds that were typically purchased by investment grade-focused municipal bond funds and retail investors, have also become inactive due to solvency and other balance sheet concerns. As a result of these and other factors, new issuance of federally tax-exempt multifamily mortgage revenue bonds declined from $5.6 billion in 2007 to $2.9 billion in 2009. We believe there is significant demand for capital from existing owners and developers of multifamily rental housing seeking to take advantage of favorable market trends.
 
While economic trends show signs of a stabilizing economy and debt availability has increased significantly over the last two years, we believe that the overall availability of debt investment remains limited. Additionally, many participants in the multifamily housing debt sector either reduced their participation in the sector or are considering selling some or all of their existing portfolio investments in order to meet their liquidity needs. We believe that this will create opportunities for us to participate in primary market transactions and to acquire existing federally tax-exempt multifamily mortgage revenue bonds from distressed holders at attractive yields in secondary market transactions.


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Our Competitive Strengths
 
Substantial Underwriting, Origination and Asset Management Experience, Expertise and Adaptability
 
We expect to benefit from the substantial experience of Pembrook Capital’s management team. Led by Stuart Boesky, our Chairman and Chief Executive Officer, five members of Pembrook Capital’s management team have worked or collaborated together for over ten years. Our Manager will provide us with access to origination, underwriting and asset management expertise that has been gained and developed over multiple real estate cycles. Pembrook Capital’s management team has successfully underwritten, originated, arranged financing for and managed various types of commercial real estate investments relating to the major classes of commercial real estate throughout a variety of interest rate, economic and credit environments. We believe that the familiarity of Pembrook Capital’s management team with numerous types of commercial real estate investments and the major commercial real estate classes will allow us to adjust the focus of our investment strategies from time to time in response to changing conditions.
 
Broad Base of Industry Relationships
 
Members of Pembrook Capital’s management team have actively invested in numerous types of real estate investments in the major commercial real estate classes over many years and have numerous long-standing relationships with developers and owners of commercial real estate, the real estate brokerage community, real estate service providers, and major commercial and investment banks, as well as federal, state and local governmental agencies, including Fannie Mae, Freddie Mac, the Department of Housing and Urban Development, or HUD, and the Federal Housing Administration, or FHA. We believe that these relationships will support the origination, management and financing activities undertaken by our Manager on our behalf.
 
Leaders in Federally Tax-Exempt Multifamily Mortgage Revenue Bonds
 
Our target assets include federally tax-exempt multifamily mortgage revenue bonds that finance the acquisition, construction or improvement of multifamily rental apartments. We believe that federally tax-exempt multifamily mortgage revenue bonds present attractive investment opportunities because of the improving fundamentals of the multifamily rental market and the U.S. federally tax-exempt nature of the interest income. Additionally, these bonds can often be financed on a secured basis with debt maturing at or about the same time as the bonds being financed (in general, up to 15 years), with no requirement that the financed bonds be marked-to-market or a specified loan-to-value ratio maintained. Based on prevailing market conditions, we expect to allocate approximately 50% of the net proceeds from this offering to acquire federally tax-exempt multifamily mortgage revenue bonds.
 
Members of Pembrook Capital’s management team have extensive experience in the federally tax-exempt multifamily mortgage revenue bond industry and have played leadership roles in the industry over the last two decades. From 1997 to 2006, members of Pembrook Capital’s management team, while at Centerline, originated and acquired approximately $2.9 billion of federally tax-exempt multifamily mortgage revenue bonds secured by approximately 400 properties, containing approximately 60,000 units of multifamily rental housing.
 
Diverse, Yield-Generating Initial Portfolio
 
Upon completion of our formation transactions and this offering, we will own a yield-generating initial portfolio consisting of 18 assets, including first mortgage loans, bridge loans,


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mezzanine loans, preferred equity and other commercial real estate finance instruments, with an aggregate outstanding principal amount of $218.2 million and a fair value of $209.7 million as of March 31, 2011. As of March 31, 2011, our initial assets had an annual weighted average annual interest rate of approximately 8.56%, a weighted average yield to maturity of approximately 12.01%, and a weighted average loan-to-value ratio, or LTV, at the time of loan origination of approximately 64.5% (excluding investments not directly secured by real estate).
 
The following tables set forth certain information about our initial portfolio, organized separately by geographic region and class, as of March 31, 2011:
 
                 
    As of March 31, 2011
    Outstanding
  % of Outstanding
    Principal Amount   Principal Amount
 
Region
               
New York
  $ 58,109,284       27 %
Mid-Atlantic
  $ 48,347,887       22 %
Florida
  $ 26,018,500       12 %
Southwest
  $ 19,896,294       9 %
Southeast/ Caribbean
  $ 17,466,042       8 %
California
  $ 16,392,525       8 %
Rocky Mountain
  $ 12,400,000       6 %
Other (investments in securities)
  $ 19,611,849       9 %
                 
Total
  $ 218,242,881       100 %*
 
* Percentages do not add up to 100% due to rounding.
 
                 
    As of March 31, 2011
    Outstanding
  % of Outstanding
    Principal Amount   Principal Amount
 
Class
               
Multifamily
  $ 67,575,653       31 %
Office
  $ 58,941,269       27 %
Hospitality
  $ 47,411,025       22 %
Retail
  $ 27,444,772       13 %
Student Housing
  $ 9,250,000       4 %
Other (investments in securities)
  $ 7,620,162       3 %
                 
Total
  $ 218,242,881       100 %
 
Favorable Capital Structure and Strong Balance Sheet
 
Upon completion of this offering and our formation transactions, we will have approximately $46.5 million of long-term indebtedness, representing approximately 0.24 times our total book value as of March 31, 2011. In addition, we will have perpetual preferred shares outstanding with an aggregate liquidation preference of $99.0 million, providing us with significant additional long-term capital. Our preferred shares will pay cumulative distributions at an annual floating rate equal to three-month LIBOR plus a weighted average spread of 2.72%, will not be mandatorily redeemable at any time and will remain outstanding indefinitely unless redeemed or otherwise purchased by us at our election. In addition, our Board of Managers has adopted a policy limiting the amount of our outstanding indebtedness to not more than two times the total book value of our outstanding equity (including our perpetual preferred shares); however, our actual indebtedness at any given time will vary. Our operating agreement will not contain any limit on the amount of indebtedness that we may incur, and we


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may change our leverage policy at any time in response to market conditions without the approval of our shareholders.
 
Alignment of Our Manager’s Interests
 
In connection with our formation transactions, certain affiliates and related parties of Pembrook Capital will receive an aggregate of           of our common shares upon the exchange of their membership interests in the Pembrook Funds. Pembrook Capital and each other party receiving common shares in connection with our formation transactions will agree not sell or otherwise transfer any of our common shares, subject to certain exceptions, for a period of 365 days after the date of this prospectus (subject to extension under certain circumstances), without the prior written consent of Deutsche Bank Securities Inc., or Deutsche Bank. In addition, upon completion of this offering, we will grant our Manager           restricted units exchangeable for our common shares upon vesting on a one-for-one basis. These restricted units will vest ratably on a quarterly basis over a three-year period, beginning on the first day of the calendar quarter following completion of this offering. Upon completion of our formation transactions and this offering, Pembrook Capital, including our Manager, and certain of its affiliates and employees will beneficially own approximately     % of our common shares on a fully diluted basis, assuming vesting of all restricted units exchangeable for common shares.
 
Our Investment Strategies
 
Our investment objective is to generate attractive risk-adjusted returns for our shareholders over the long-term, primarily through quarterly distributions (a portion of which we expect will be excluded from gross income for U.S. federal income tax purposes) and, secondarily, through capital appreciation, by investing in our target assets. Our investment strategies may include, without limitation, the following:
 
  •  originating and acquiring whole mortgage loans, bridge loans, mezzanine loans and preferred equity;
 
  •  originating and acquiring federally tax-exempt multifamily mortgage revenue bonds issued to finance the acquisition, improvement or construction of multifamily rental apartments;
 
  •  utilizing the asset level underwriting experience and market knowledge of Pembrook Capital’s management team to purchase assets at prices that we believe represent a discount to their realizable value;
 
  •  investing in assets secured by properties, especially those located in markets with high barriers to entry, such as high density urban locations, and/or markets with projected job growth and favorable supply and demand characteristics; and
 
  •  structuring investments with appropriate amounts of leverage that reflects the risk of the underlying asset’s cash flows, and attempting to match the rate and maturity of the financing with that of the investment itself.
 
In implementing our investment strategies, we intend to utilize the expertise of Pembrook Capital in identifying undervalued assets and securities, as well as its capabilities in transaction sourcing, underwriting, execution and asset management.
 
In an effort to capitalize on investment opportunities that may be present in various market environments, we may modify our investment strategies or emphasize investments at different levels of the capital structure or in assets secured by specific types of real estate. Our investment strategies may be modified from time to time, upon the recommendation of our


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Manager and approval by our Board of Managers, but without the approval of our shareholders.
 
Our Target Assets
 
We intend to invest primarily in mortgage loans and other debt instruments secured by commercial real estate located in the United States that are either originated by Pembrook Capital or purchased in the secondary market. We will seek to invest in assets where we believe that the value of the underlying real estate collateral exceeds the amount of our investment in the asset. We may invest in performing and non-performing assets, and, on a select basis, we may invest in assets with the goal of acquiring the underlying property. We will seek to invest in assets secured by types of commercial real estate with which Pembrook Capital’s management team has experience and that are located in markets that our Manager believes have favorable real estate fundamentals. We may also invest in preferred equity issued by entities that own commercial real estate.
 
Based on prevailing market conditions, our current expectation is that we will use approximately 50% of the net proceeds from this offering to acquire target assets that produce taxable income, such as first mortgage loans, bridge loans, mezzanine loans and preferred equity issued by entities that own commercial real estate, and approximately 50% to acquire federally tax-exempt multifamily mortgage revenue bonds, issued to acquire, construct or improve multifamily rental apartments, which produce income that is excludable from gross income for U.S. federal income tax purposes. However, there is no assurance that upon the completion of this offering we will not allocate the net proceeds in a different manner among our target assets. Our investment decisions will depend on prevailing market conditions and may change over time in response to opportunities available in different interest rate, economic and credit environments.
 
Our target assets will include the following types of instruments, which we refer to collectively as our “target assets”:
 
Taxable Commercial Loans, Other Commercial Real Estate Debt Investments and Preferred Equity
 
  •  Whole mortgage loans:  Loans that are secured by first mortgage liens on commercial real estate with maturities of generally three to ten years. Typically, these loans provide financing to commercial property developers and owners. Some whole mortgage loans are “participating,” and bear a stated rate of interest and entitle the holder to receive a percentage of the underlying property’s cash flow and/or a portion of any remaining sale or refinancing proceeds after payment of indebtedness.
 
  •  Bridge loans:  Loans that are secured by first mortgage liens on commercial real estate with maturities generally shorter than three years. Typically, these loans provide interim financing for the acquisition or repositioning of real estate, and the expectation is that they will be repaid with the proceeds from a conventional mortgage loan or other financing source.
 
  •  B-Notes:  Loans that are typically secured by a first mortgage lien on a commercial real estate asset or a group of related properties and subordinated to an A-Note that is secured by the same first mortgage lien on the same collateral. The subordination of the B-Note is typically accomplished through an inter-creditor agreement among the holders of the A-Notes and B-Notes.
 
  •  Mezzanine loans:  Loans that are typically made to a borrower and secured by a pledge of the borrower’s ownership interest in the property and/or the property-owning entity.


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  Mezzanine loans are subordinate to mortgage loans secured by first or second mortgage liens on the property and are senior to the borrower’s equity in the property.
 
  •  Construction or rehabilitation loans:  Loans that are secured by first mortgage liens on commercial real estate with maturities of generally one to two years. Typically, these loans provide financing for 40% to 60% of the total cost of the construction or rehabilitation of a property.
 
  •  CMBS:  CMBS are debt instruments secured by a mortgage loan on a single property or a pool of mortgage loans. We may invest in senior or subordinated CMBS. We may invest in investment grade and non-investment grade CMBS, as well as unrated CMBS.
 
  •  Preferred equity:  Preferred equity interests issued by entities that own commercial real estate that are junior to debt secured by the real estate but senior to common equity interests. In general, preferred equity interests, while having payment positions similar to subordinate debt, contain covenants and voting and control rights to protect their preferred equity status.
 
Federally Tax-Exempt Multifamily Mortgage Revenue Bonds
 
Federally tax-exempt multifamily mortgage revenue bonds, or revenue bonds, are bonds that are secured by first mortgage liens on multifamily rental apartments with maturities of generally three to 15 years. These bonds are typically issued by HFAs to finance the acquisition, improvement or construction of multifamily rental apartments, and the interest payments to investors may be excluded from gross income for U.S. federal income tax purposes. However, these bonds are not an obligation of any state or local government, agency or authority, and no state or local government, agency or authority is obligated to make any payment of principal or interest due on such bonds, nor is the taxing power of any state or local government pledged to secure the payment of principal or interest on such bonds. Each federally tax-exempt multifamily mortgage revenue bond, however, is generally secured by a first mortgage on all real and personal property included in the related property and an assignment of rents, and has limited recourse to the borrowers themselves. Interest payable on federally tax-exempt multifamily mortgage revenue bonds may bear interest at a fixed or floating rate and, in some instances, provide for the payment of additional contingent interest that is payable solely from available net cash flow generated by the financed property or the proceeds from any sale or refinancing of such property.
 
For a more detailed description of our target assets, see “Business-Our Target Assets” below.
 
Our Financing Strategy
 
We plan to finance our investments using diverse sources, including commercial bank financing (such as term loans and revolving credit facilities), securitizations, total return swaps, pooled match term financing, equity and debt issuances (including issuances of common shares and perpetual preferred shares), repurchase agreements and warehouse facilities, in addition to transaction or asset specific funding arrangements, in each case to the extent available to us. We intend to finance a portion of our federally tax-exempt multifamily mortgage revenue bond investments through tax-exempt portfolio financing programs that are currently provided by government-sponsored enterprises and certain banks. Through these programs, we intend to seek non-recourse financing that is predominately match funded with the financed assets and offers limited or no mark-to-market risk, such that changes in the market value of the financed assets due to changes in the credit markets will not result in margin calls for additional collateral or put rights on the part of the party providing the financing.


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Our Leverage Policies
 
We intend to prudently use debt and preferred equity to finance our investment activities. Under our operating agreement, the aggregate liquidation preference of our outstanding preferred shares, including the three series of preferred shares that we will issue to holders of preferred interests in the Pembrook Funds in our formation transactions, may not exceed the total book value of our outstanding common shares at the time of issuance of any preferred shares. In addition, our Board of Managers has adopted a policy limiting the amount of our outstanding indebtedness to not more than two times the total book value of our outstanding equity (including our perpetual preferred shares); however, our actual indebtedness at any given time will vary. Our operating agreement will not contain any limit on the amount of indebtedness that we may incur, and we may change our leverage policy at any time in response to market conditions without the approval of our shareholders.
 
Our Investment Guidelines
 
Our Board of Managers has adopted the following investment guidelines:
 
  •  our investments will be in our target assets;
 
  •  no investment shall be made that would cause us or any of our subsidiaries to be required to be registered as an investment company under the Investment Company Act;
 
  •  no investment shall be made that would cause us to be treated as an association or a publicly traded partnership taxable as a corporation, rather than a partnership, for purposes of federal income taxation;
 
  •  not more than 50% of our assets will be invested in any geographic region, as determined by our Board of Managers from time to time;
 
  •  not more than 50% of our assets will be invested in a single class of commercial real estate (excluding federally tax-exempt multifamily mortgage revenue bonds);
 
  •  not more than 25% of our assets will be invested with a single borrower;
 
  •  not more than 15% of our assets will be invested in any individual asset;
 
  •  until appropriate target assets are acquired, we may invest the net proceeds from this offering in interest-bearing, short-term securities that are rated investment grade and money market funds; and
 
  •  each investment requires the approval of a majority of our Manager’s Investment Committee; any investment in excess of $50 million requires the approval of a majority of our Board of Managers’ Investment Committee and a majority of our Manager’s Investment Committee; and any investment in excess of $100 million requires the approval of a majority of our Board of Managers, a majority of our Board of Managers’ Investment Committee and a majority of our Manager’s Investment Committee.
 
Each of these investment guidelines will be applied and tested at the time of an investment and subsequent changes will not result in a violation of the above guidelines. These investment guidelines may be changed from time to time or waived by our Board of Managers without the approval of our shareholders. In addition, both our Manager and a majority of our Board of Managers must approve any change in our investment guidelines that would modify or expand our target assets.


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Investment Committees of Our Manager and Board of Managers
 
Our Manager has an Investment Committee which will initially be comprised of Mr. Boesky, the chairman of the committee, and the following other executive officers, Robert Hellman, John Garth, Patrick Martin, James Spound and Eugene Venanzi. Our Manager’s Investment Committee will meet periodically, at least every quarter, to discuss investment opportunities. Each of our investments will be proposed by the committee’s chairman and will require the approval of a majority of our Manager’s Investment Committee. Our Manager’s Investment Committee will review our investment portfolio and its compliance with our investment guidelines at least on a quarterly basis or more frequently as necessary.
 
Upon completion of this offering, our Board of Managers will form an Investment Committee that will be responsible for the supervision of our Manager’s compliance with our investment guidelines and the periodic review of our investment portfolio. Any investment in excess of $50 million requires the approval of a majority of this committee in addition to a majority of our Manager’s Investment Committee. Initially, this committee will consist of Stuart Boesky, Robert Hellman and          .
 
Summary Risk Factors
 
An investment in our common shares involves risks. You should consider carefully the risks discussed below and under the heading “Risk Factors” beginning on page 29 of this prospectus before making a decision to invest in our common shares. If any of these risks are realized, our business, financial condition, liquidity, results of operations and prospects, as well as our ability to make or sustain distributions to our shareholders, could be materially and adversely affected. In that case, the market price of our common shares could decline, and you may lose some or all of your investment.
 
  •  We are dependent on Pembrook Capital, including our Manager, and its key personnel, especially Mr. Boesky, who provide services to us through the management agreement and the origination and advisory agreement, and we may not find a suitable replacement for our Manager and/or Pembrook Capital if the management agreement and/or the origination and advisory agreement are terminated, or for these key personnel if they leave Pembrook Capital or otherwise become unavailable to us. Neither our Manager nor Pembrook Capital is required to make available any particular individual to us.
 
  •  There are various conflicts of interest in our relationship with Pembrook Capital, including our Manager, which could result in investment and other decisions that are not in the best interests of our shareholders.
 
  •  The management agreement with our Manager was not negotiated on an arm’s length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third party and may be costly and difficult to terminate.
 
  •  The incentive fee payable to our Manager under the management agreement is payable quarterly and is based on our Core Earnings (as defined herein) and, therefore, may cause our Manager to select riskier investments to increase its incentive compensation.
 
  •  Our Board of Managers will approve very broad investment guidelines for our Manager and will not approve each investment and financing decision made by our Manager unless required by our investment guidelines.
 
  •  Although we will own our initial assets because of our mergers with the Pembrook Funds, we have no prior independent operating history and may not be able to operate our business successfully or implement our investment strategies and guidelines and may encounter difficulty successfully complying with U.S. tax rules and other regulatory


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  requirements, including the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and NYSE rules, that will be applicable to us as a public company.
 
  •  Our Board of Managers may generally change our investment strategies or guidelines, financing strategy or leverage or other policies without shareholder approval (other than the provision in our operating agreement that the aggregate liquidation preference of all of our outstanding preferred shares will not exceed the total book value of our outstanding common shares at the time of issuance of any preferred shares).
 
  •  Although we will own our initial assets because of our mergers with the Pembrook Funds, we have not yet identified any specific new investments for our portfolio and, therefore, we may allocate the net proceeds from this offering to investments with which you may not agree.
 
  •  If our Manager overestimates the yields or incorrectly prices the risks of our investments, we may experience losses.
 
  •  In addition to the indebtedness we will acquire in connection with our formation transactions, we intend to incur additional debt in the future, which will subject us to increased risk of loss and may reduce cash available for distribution to our shareholders, and our governing documents contain no limitation on the amount of debt we may incur.
 
  •  Interest rate fluctuations could significantly harm our results of operations and cash flows and the market value of our investments.
 
  •  Hedging against interest rate exposure may fail to protect or could adversely affect us.
 
  •  Maintenance of our exemption from registration under the Investment Company Act imposes significant limits on our operations.
 
  •  Our failure to be treated as a publicly traded limited liability company taxed as a partnership would subject us to U.S. federal income tax and potentially state and local taxes, which would reduce the cash available for distribution to our shareholders.
 
Our Structure and Formation
 
Structure
 
We were formed as a Delaware limited liability company on July 21, 2011 to focus primarily on investing in our target assets on both a taxable and U.S. federally tax-exempt basis. Upon completion of this offering and our formation transactions, we will own an initial portfolio of target assets consisting of 18 investments with an aggregate fair value of $209.7 million, a weighted average annual interest rate of approximately 8.56% and a weighted average yield to maturity of approximately 12.01% as of March 31, 2011. We will be externally managed and advised by our Manager, pursuant to the terms of a management agreement between us and our Manager. We believe that we have been organized and intend to operate so that we have qualified, and will continue to qualify, to be treated for U.S. federal income tax purposes as a partnership and not as an association or a publicly traded partnership taxable as a corporation.
 
Formation Transactions
 
Immediately prior to the completion of this offering, we will engage in certain formation transactions which are designed to consolidate the ownership of our initial assets, facilitate this offering, acquire long-term indebtedness that financed certain of our initial assets and replicate the economic terms of preferred equity financing obtained by the Pembrook Funds.


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These formation transactions include the mergers of each of the Pembrook Funds into our company, pursuant to which all of the existing investors in the Pembrook Funds will receive equity interests in our company. We believe that the ongoing equity ownership in us by investors in the Pembrook Funds demonstrates their continued support of Pembrook Capital’s management team and our investment and growth strategies.
 
The significant elements of our formation transactions include:
 
  •  Pembrook Realty Capital LLC was formed as a Delaware limited liability company on July 21, 2011.
 
  •  PCI I will merge with and into Pembrook Realty Capital LLC. At the effective time of such merger, (i) each common interest in PCI I, including those held by entities in which members of Pembrook Capital’s management team own interests, will be converted into           common shares of our company, (ii) each Series A Preferred CRA Interest in PCI I will be converted into          shares of our Series A CRA Preferred Shares and (iii) and each Series B Preferred CRA Interest in PCI I will be converted into           shares of our Series B CRA Preferred Shares.
 
  •  PCI II will merge with and into Pembrook Realty Capital LLC. At the effective time of such merger, (i) each common interest in PCI II, including those held by entities in which members of Pembrook Capital’s management team own equity interests, will be converted into           common shares of our company, and (ii) each Series A Preferred CRA Interest in PCI II will be converted into           shares of our Series C CRA Preferred Shares.
 
In connection with the mergers described above, we will issue three series of preferred shares with an aggregate liquidation preference of $99.0 million that will replicate the economic terms of the preferred equity financing obtained by the Pembrook Funds. These preferred shares will pay cumulative distributions at an annual floating rate equal to three-month LIBOR plus a weighted average spread of 2.72%, will not be mandatorily redeemable at any time and will remain outstanding indefinitely unless redeemed or otherwise purchased by us at our election.
 
The following chart shows our anticipated structure after giving effect to this offering and our formation transactions, and it assumes no exercise of the underwriters’ overallotment option and vesting of all restricted units granted to our Manager in our formation transactions:
 


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As part of our formation transactions, we will acquire approximately $46.5 million of long-term indebtedness. Of this amount, approximately $16.0 million is comprised of term loans that accrued interest at a weighted average annual rate of 1-month LIBOR plus 3.69% as of March 31, 2011 and had a weighted average maturity of December 15, 2012. The remaining $30.5 million is comprised of repurchase agreements that bear interest at variable rates that reset weekly; as of March 31, 2011 this debt had a weighted average annual interest rate of 1.78%.


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Management Agreement
 
We will enter into a management agreement with our Manager effective upon the closing of this offering. Pursuant to the management agreement, our Manager will implement our business strategy and perform certain services for us, subject to oversight by our Board of Managers. Our Manager will be responsible for, among other duties, (1) performing all of our day-to-day functions, (2) determining our investment strategies and guidelines and financing strategy in conjunction with our Board of Managers, (3) sourcing, analyzing and executing investments, arranging for financings and asset sales, and (4) performing asset management duties. Our Manager will generally rely upon Pembrook Capital in the performance of these responsibilities. In addition, our Manager has an Investment Committee that will vote on each of our investment opportunities and that will oversee compliance with our investment strategies and guidelines and financing strategy.
 
The initial term of the management agreement will end      years after the closing of this offering, with automatic     -year renewal terms. Our independent managers will review our Manager’s performance annually and, following the initial term, the management agreement may be terminated annually upon the affirmative vote of at least two-thirds of our independent managers based upon: (1) our Manager’s unsatisfactory performance that is materially detrimental to us or (2) our determination that the management fees payable to our Manager are not fair, subject to our Manager’s right to prevent termination based on unfair fees by accepting a reduction of management fees agreed to by at least two-thirds of our independent managers. We will provide our Manager with     days prior written notice of such a termination. Upon such a termination, we will pay our Manager a termination fee equal to           times the sum of the average annual base management fee and incentive fee earned by our Manager during the     -month period prior to termination, calculated as of the end of the most recently completed calendar quarter, each as described in the table below. We may also terminate the management agreement at any time, including during the initial term, for cause, as defined in the management agreement, without payment of any termination fee. During the initial     -year term of the management agreement, we may not terminate the management agreement except for cause. Our Manager may terminate the management agreement if we become required to register as an investment company under the Investment Company Act, with such termination deemed to occur immediately before such event, in which case we would not be required to pay our Manager a termination fee. Our Manager may also decline to renew the management agreement by providing us with      days prior written notice, in which case we would not be required to pay a termination fee. Our Manager is entitled to a termination fee upon termination of the management agreement by us without cause or termination by our Manager if we materially breach the management agreement.
 
The following table summarizes the fees and expense reimbursements that we will pay to our Manager:
 
Base management fee      % of our shareholders’ equity per annum and calculated and payable quarterly in arrears. For purposes of calculating the management fee, our shareholders’ equity means: (a) the sum of (1) the net proceeds from all issuances of our equity securities since inception (including the common shares issued pursuant to our formation transactions), allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance, plus (2) our retained earnings at the end of the most


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recently completed calendar quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less (b) (1) any amount that we pay to repurchase any of our equity securities since inception, (2) any unrealized gains and losses and other non-cash items that have impacted shareholders’ equity as reported in our financial statements prepared in accordance with accounting principles generally accepted in the United States, or GAAP, and (3) one-time events pursuant to changes in GAAP, and certain non-cash items not otherwise described above, in each case after discussions between our Manager and our independent managers and approval by a majority of our independent managers. As a result, our shareholders’ equity, for purposes of calculating the base management fee, could be greater or less than the amount of shareholders’ equity shown on our financial statements. The base management fee is payable quarterly in cash.
 
Incentive fee Our Manager will be entitled to an incentive fee with respect to each calendar quarter (or part thereof that the management agreement is in effect) in arrears. The incentive fee will be an amount, not less than zero, equal to the difference between (1) the product of (x)     % and (y) the difference between (i) our Core Earnings for the previous 12-month period, and (ii) the product of (A) the weighted average of the issue price per common share of all of our public offerings and the common shares issued pursuant to our formation transactions multiplied by the weighted average number of all common shares outstanding (including any restricted units, any restricted common shares and other common shares underlying awards granted under our equity incentive plans) in the previous 12-month period, and (B)     %, and (2) the sum of any incentive fee paid to our Manager with respect to the first three calendar quarters of such previous 12-month period; provided, however,


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that no incentive fee is payable with respect to any calendar quarter unless Core Earnings for the 12 most recently completed calendar quarters is greater than zero.
 
“Core Earnings” is a non-GAAP measure and is defined as GAAP net income (loss) excluding non-cash equity compensation expense, the incentive fee, depreciation and amortization (to the extent that we foreclose on any properties underlying our target assets), any unrealized gains or losses or other non-cash items recorded in net income for the period in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss or in net income. For purposes of computing Core Earnings, tax-exempt interest received on our target assets, including federally tax-exempt multifamily mortgage revenue bonds, shall be grossed up to a taxable equivalent yield by dividing the interest received by (1-X), where “X” is equal to the then current highest marginal individual federal income tax rate. The amount will be adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between our Manager and our independent managers and after approval by a majority of our independent managers.
 
For purposes of calculating the incentive fee prior to the completion of a 12-month period following this offering, Core Earnings will be calculated on an annualized basis.
 
Partial payment of incentive fee in our common shares      % of each quarterly installment of the incentive fee will be payable in common shares and the remainder of the incentive fee will be payable in cash.
 
The number of common shares to be issued to our Manager will be equal to the dollar amount of the portion of the quarterly installment of the incentive fee payable in common shares divided by the average of the closing prices of our common shares on the NYSE for the five


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trading days prior to the date on which such quarterly installment is paid.
 
Expense reimbursement We will be required to reimburse our Manager in cash on a monthly basis for operating expenses related to us that are incurred by our Manager, including expenses relating to legal, accounting, due diligence and other services. Our reimbursement obligation is not subject to any dollar limitation.
 
We will not reimburse our Manager for the salaries and other compensation of its personnel.
 
Termination fee A termination fee will be payable upon termination of the management agreement (i) by us without cause or, following our Manager’s initial term, for its materially detrimental performance or determination that its management fees are not fair, or (ii) by our Manager if we materially breach the management agreement.
 
The termination fee will be equal to      times the sum of the average annual base management fee and incentive fee earned by our Manager during the     -month period prior to termination, calculated as of the end of the most recently completed calendar quarter.
 
Equity incentive plans Our equity incentive plans include provisions for grants of restricted common shares and other equity based awards to our officers, our Manager and any officers or personnel of Pembrook Capital who provide services to us. Concurrently with the completion of this offering, we will grant our Manager           restricted units. This award of restricted units will vest ratably on a quarterly basis over a  -year period beginning on the first day of the calendar quarter after we complete this offering. Once vested, the restricted units will be settled in common shares. Our Manager will be entitled to receive “distribution equivalents” with respect to these restricted units, whether or not vested, at the same time as any distributions are paid to our common shareholders.


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Origination and Advisory Agreement
 
Our Manager will enter into an origination and advisory agreement with Pembrook Capital Management, LLC effective upon the closing of this offering. Pursuant to this agreement, our Manager will be provided with access to, among other things, Pembrook Capital’s origination, underwriting, portfolio management, asset valuation, risk management, asset management and investment and other advisory services, as well as administration services addressing legal, compliance, investor relations and information technologies necessary for the performance of our Manager’s duties in exchange for a fee representing our Manager’s allocable cost for these services. Although the fee paid by our Manager pursuant to this agreement shall not constitute a reimbursable expense under the management agreement, the expenses incurred by Pembrook Capital (other than salaries of its employees) in providing such services shall be a reimbursable expense.
 
Conflicts of Interest and Related Policies
 
Management.  We are dependent on our Manager for our day-to-day management and do not have any independent officers or employees other than our Chief Financial Officer. Each of our executive officers other than our Chief Financial Officer is also an executive of Pembrook Capital. Our management agreement with our Manager was negotiated between related parties and its terms, including fees and other amounts payable, may not be as favorable to us as if it had been negotiated at arm’s length with an unaffiliated third party. In addition, each of our executive officers other than our Chief Financial Officer may in the future have significant responsibilities for other investment vehicles managed by Pembrook Capital. As a result, these individuals may not always be able to devote sufficient time to the management of our business. Further, when there are turbulent conditions in the real estate markets or distress in the credit markets, the attention of our Manager’s personnel and our officers and the resources of Pembrook Capital may also be required by the other investment vehicles managed by Pembrook Capital. In such situations, we may not receive the level of support and assistance that we may receive if we were internally managed.
 
Future Investment Opportunity Allocation Provisions.  Pursuant to a co-investment and allocation agreement among our Manager, Pembrook Capital Management, LLC and us, our Manager and Pembrook Capital Management, LLC have agreed that neither they nor any entity controlled by Pembrook Capital will sponsor or manage any publicly traded investment vehicle that invests primarily in our target assets described in “Business—Our Target Assets” other than us for so long as the management agreement is in effect. For the avoidance of doubt, Pembrook Capital (including our Manager) may sponsor or manage another publicly traded investment vehicle that invests generally in real estate assets but not primarily in our target assets, as well as a private investment vehicle that invests primarily in our target assets. Our Manager and Pembrook Capital Management, LLC have also agreed that for so long as the management agreement is in effect no entity controlled by Pembrook Capital will sponsor or manage a potential public competing vehicle or a private investment vehicle unless Pembrook Capital adopts a policy that either (i) provides for the fair and equitable allocation of investment opportunities among all such vehicles and us, or (ii) provides us the right to co-invest with such vehicles, in each case subject to the suitability of each investment opportunity for the particular vehicle and us and each such vehicle’s and our availability of cash for investment.
 
Exclusivity Provisions.  Pembrook Capital, including our Manager, is not currently subject to any exclusivity arrangements that would affect our Manager’s ability to perform its obligations under the management agreement or Pembrook Capital Management, LLC’s ability to perform its obligations under the origination and advisory agreement.


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Policy Regarding Investments Related to Properties That Are Owned By Affiliates Of Pembrook Capital or our Manager.  We expect our Board of Managers will adopt a policy that, among other things, permits us to (i) make investments in an entity in which Pembrook Capital is simultaneously making another debt or equity investment or (ii) acquire loans and investments with respect to properties owned by unaffiliated parties that may be managed by, or leased in whole or part to, Pembrook Capital or with respect to which an unaffiliated owner may have engaged Pembrook Capital to provide certain other services with respect to the property. In addition, we expect this policy to permit us to make loans and investments with respect to properties owned by unaffiliated parties for which Pembrook Capital may concurrently be engaged by the property owner to manage it or provide other services with respect to the property or which may concurrently agree to lease such property to it in whole or in part. Furthermore, to the extent that we have rights as a lender pursuant to the terms of any of our loans or investments to consent to an unaffiliated property owner’s engagement of a property manager or any other service provider, or to lease the property, this policy would permit us to provide consent to such a property owner seeking to engage, or lease property to, Pembrook Capital.
 
Transactions with Other Funds.  Upon completion of this offering and our formation transactions, Pembrook Capital, including our Manager, will not provide management, advisory or other services to funds or other entities other than us; however, in order to avoid any future actual or perceived conflicts of interest between us, Pembrook Capital (including our Manager), or any fund or other entity to be sponsored or managed by Pembrook Capital (including our Manager), which we refer to collectively as the Pembrook parties, the approval of a majority of our independent managers will be required to approve (i) any purchase of our assets by any of the Pembrook parties and (ii) any purchase by us of any assets of any of the Pembrook parties.
 
Limitations on Personal Investments.  Shortly after the consummation of this offering, we expect that our Board of Managers will adopt a policy with respect to any proposed investments by our managers or officers or the officers of our Manager or Pembrook Capital, which we refer to as the covered persons, in any of our target assets. We expect this policy to provide that any proposed investment by a covered person for his or her own account in any of our target assets will be permitted if the capital required for the investment does not exceed the lesser of (i) $5 million, or (ii) 1% of our total shareholder’s equity as of the most recent month end, which we refer to as the personal investment limit. To the extent that a proposed investment exceeds the personal investment limit, we expect that our Board of Managers will permit the covered person to make the investment only (i) upon the approval of a majority of our independent managers, or (ii) if the proposed investment otherwise complies with terms of any other related party transaction policy our Board of Managers may adopt in the future.
 
Our Tax Status
 
We believe that we have been organized and intend to operate so that we will qualify, and will continue to qualify, to be treated for U.S. federal income tax purposes as a partnership, and not as an association or a publicly traded partnership taxable as a corporation. In general, an entity that is treated as a partnership for U.S. federal income tax purposes is not subject to U.S. federal income tax at the entity level. Consequently, as a common shareholder, you will be required to take into account your allocable share of items of our income, gain, loss, deduction and credit for our taxable year ending within or with your taxable year, regardless of whether we make cash distributions on a current basis with which to pay any resulting tax. We believe that we will be treated as a publicly traded partnership. Publicly traded partnerships are generally treated as partnerships for U.S. federal income tax purposes as long as they satisfy certain income and other tests on an ongoing basis. We believe that we will satisfy those requirements and that we will be treated as a partnership for U.S. federal income tax purposes. See “Material U.S. Federal Income Tax Considerations.”


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Our Exemption Under Investment Company Act
 
We intend to conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the Investment Company Act. We expect to rely upon the exemption from registration as an investment company under the Investment Company Act pursuant to Section 3(c)(5)(C) of the Investment Company Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exemption generally requires that at least 55% of our or our subsidiaries’ assets, as applicable, must be comprised of qualifying real estate assets and at least 80% of each of their portfolios must be comprised of qualifying real estate assets and real estate-related assets under the Investment Company Act. We expect to rely on guidance published by the Securities and Exchange Commission (“SEC”) staff or on our analyses of guidance published with respect to other types of assets to determine which assets are qualifying real estate assets and real estate-related assets. To the extent that the SEC staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy accordingly. In addition, we may be limited in our ability to make certain investments and these limitations could result in the subsidiary holding assets we might wish to sell or selling assets we might wish to hold.
 
There can be no assurance that the laws and regulations governing our Investment Company Act status, including the Division of Investment Management of the SEC providing more specific or different guidance regarding these exemptions, will not change in a manner that adversely affects our operations. If we or our subsidiaries fail to maintain an exception or exemption from the Investment Company Act, we could, among other things, be required either to (i) change the manner in which we conduct our operations to avoid being required to register as an investment company, (ii) effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so, or (iii) register as an investment company, any of which could negatively affect the value of our common shares, the sustainability of our business model, and our ability to make distributions which could have an adverse effect on our business and the market price for our common shares.
 
See “BusinessOperating and Regulatory StructureInvestment Company Act Exemption” for a further discussion of the specific exemptions from registration under the Investment Company Act that our subsidiaries are expected to rely on and the treatment of certain of our targeted asset classes for purposes of such exemptions.
 
Qualification for exemption from registration under the Investment Company Act will limit our ability to make certain investments. See “Risk FactorsRisks Related to Our Organization and StructureMaintenance of our exemption from registration under the Investment Company Act imposes significant limits on our operations.”
 
Our Corporate Information
 
Our principal executive offices are located at 767 Third Avenue, New York, New York. Our telephone number is (646) 388-5906. Our website is www.pembrookfinancial.com. The information on our website is not a part of, and is not intended to form a part of or be incorporated by reference into, this prospectus.


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The Offering
 
Issuer Pembrook Realty Capital LLC, a newly formed Delaware limited liability company.
 
Common shares offered by us            shares (plus up to an additional          common shares that we may issue and sell upon the exercise of the underwriters’ overallotment option).
 
Common shares to be outstanding upon
completion of this offering and our
formation transactions
          shares.1
 
Use of proceeds We intend to invest the net proceeds from this offering in our target assets. We expect that our initial focus will be on investing in whole mortgage loans, federally tax-exempt multifamily mortgage revenue bonds, mezzanine loans, bridge loans and preferred equity. Based on prevailing market conditions, our current expectation is that we will use approximately 50% of the net proceeds from this offering to acquire target assets that produce taxable income and approximately 50% to acquire target assets that produce income that is excludable from gross income for U.S. federal income tax purposes. See “Use of Proceeds.”
 
Distribution policy We intend to make regular quarterly distributions to our common shareholders. Our intention is to make quarterly distributions to our common shareholders of at least 90% of our Core Earnings, less any incentive fee payable and without any gross-up for tax-exempt interest received, or “Adjusted Core Earnings,” over time. We plan to make our first distribution in respect of the period from the closing of this offering through          , 2011, which may be prior to the time that we have fully invested the net proceeds from this offering in our target assets. Although
 
 
1 Includes (a) an aggregate of           common shares to be issued to investors in the Pembrook Funds as part of our formation transactions, (b) an aggregate of           common shares to be granted to our four independent managers concurrently with the completion of this offering, and (c)          common shares that are issuable upon the vesting of the restricted units to be granted to our Manager concurrently with the completion of this offering. Excludes (i) an aggregate of           common shares currently reserved for issuance under our equity incentive plans in addition to our common shares underlying the aforementioned restricted units, and (ii) up to          common shares that we may issue and sell upon the exercise of the underwriters’ overallotment option.


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our initial assets only generate payments of taxable income, we expect that our investment portfolio in the future will generate both payments of taxable income and payments that are excludable from gross income for U.S. federal income tax purposes. Accordingly, since we intend to be treated as a partnership for U.S. federal income tax purposes, we expect that, over time, a portion of our allocations of income to our common shareholders will be excludable from gross income for U.S. federal tax purposes.
 
Any distributions we make to our common shareholders will be at the discretion of our Board of Managers and will depend upon, among other things, our actual and projected results of operations, liquidity and financial condition, the net interest and other income from our portfolio, our operating expenses, our financing and refinancing requirements, our working capital needs, the distribution requirements of our outstanding preferred shares, new investment opportunities, financing covenants and applicable law. For more information, see “Distribution Policy.”
 
Proposed NYSE symbol “PRC”
 
Risk factors Investing in our common shares involves risks. You should carefully read and consider the information set forth under “Risk Factors” and all other information in this prospectus before making a decision to invest in our common shares.


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Summary Selected Historical Financial Data
 
The following table sets forth summary selected financial and operating data on a historical combined basis for our predecessor. We have not presented historical information for Pembrook Realty Capital LLC because we have not had any activity since our formation, other than the issuance of common shares in connection with our formation and activity in connection with this offering, and because we believe that a discussion of the results of Pembrook Realty Capital LLC would not be meaningful.
 
You should read the following summary selected historical financial and operating data in conjunction with our predecessor’s historical combined financial statements and the related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus.
 
The historical combined balance sheet data as of December 31, 2010 and 2009 of our predecessor and the combined statements of operations data for each of the three years in the period ended December 31, 2010 of our predecessor have been derived from the historical audited combined financial statements of our predecessor included elsewhere in this prospectus. The historical combined balance sheet data as of March 31, 2011 and the combined statements of operations data for the three months ended March 31, 2011 and 2010 of our predecessor have been derived from the historical unaudited combined financial statements of our predecessor included elsewhere in this prospectus. In the opinion of the management of our company, the historical combined balance sheet data as of March 31, 2011 and the historical combined statements of operations data for the three months ended March 31, 2011 and 2010 include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the information set forth therein. Such interim financial data are not necessarily reflective of our financial condition or results of operations at December 31, 2011 or for the year ending December 31, 2011 or for any subsequent date or period, as applicable.


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    Pembrook Realty Capital Predecessor  
    Three
    Three
                   
    Months
    Months
                   
    Ended
    Ended
                   
    March 31,
    March 31,
    Year Ended December 31,  
    2011     2010     2010     2009     2008  
    (Unaudited)     (Unaudited)                    
 
Statement of Operations Data:
                                       
Revenue
                                       
Interest
  $ 4,136,459     $ 2,001,915     $ 10,869,589     $ 9,430,448     $ 14,075,609  
Other
    24,771                         116,450  
                                         
Total revenue
    4,161,230       2,001,915       10,869,589       9,430,448       14,192,059  
                                         
Expenses
                                       
Interest
    446,759       431,360       1,789,489       2,060,819       6,000,825  
Management fees
    769,334       491,976       2,388,677       1,741,883       1,382,710  
Professional fees
    215,559       163,255       506,274       296,205       298,239  
Other
    62,500       48,688       323,427       457,520       343,860  
                                         
Total expenses
    1,494,152       1,135,279       5,007,867       4,556,427       8,025,634  
                                         
Net operating revenue
    2,667,078       866,636       5,861,722       4,874,021       6,166,425  
                                         
Net realized and unrealized gain/(loss)
                                       
Realized gain/(loss) on loans and swap contracts
    (54,655 )     1,040       560,876       9,863       (2,267,106 )
Change in unrealized gain/(loss) on swap contracts
    211,868       128,650       425,897       581,452       (106,214 )
                                         
Total net realized and unrealized gain/(loss)
    157,213       129,690       986,773       591,315       (2,373,320 )
                                         
Net income before preferred interest distribution
  $ 2,824,291     $ 996,326     $ 6,848,495     $ 5,465,336     $ 3,793,105  
                                         
Preferred interest distribution
    (732,235 )     (553,683 )     (2,726,934 )     (2,735,112 )     (3,150,708 )
                                         
Net income allocable to common interests
  $ 2,092,056     $ 442,643     $ 4,121,561     $ 2,730,224     $ 642,397  
                                         
Balance Sheet Data (at period end):
                                       
Loans held for investment
  $ 200,722,719             $ 177,929,684     $ 113,099,770          
Securities held to maturity
    7,620,162               7,629,162       10,253,306          
Other equity securities
    9,900,000               9,900,000       9,900,000          
Total assets
    243,151,218               226,014,000       157,151,408          
Loans sold under agreements to repurchase
    30,547,684               30,592,335       37,835,602          
Loan payable
    16,000,000               10,000,000                
Payable for swap contracts
    657,974               989,014       1,366,073          
Total liabilities
    50,793,602               42,322,272       41,310,258          
Total members’ equity
    192,297,616               183,691,728       115,841,150          


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RISK FACTORS
 
Investing in our common shares involves risks. You should carefully consider the following risk factors and all other information contained in this prospectus before making a decision to purchase our common shares in this offering. If any of the following risks are realized, our business, financial condition, liquidity, results of operations and prospects, as well as our ability to make or sustain distributions to our shareholders, could be materially and adversely affected. In that case, the market price of our common shares could decline, and you may lose some or all of your investment.
 
Risks Related to Our Relationship with Pembrook Capital
 
We are dependent on Pembrook Capital, including our Manager, and its key personnel, especially Mr. Boesky, who provide services to us through the management agreement and the origination and advisory agreement, and we may not find a suitable replacement for our Manager and/or Pembrook Capital if the management agreement and/or the origination and advisory agreement are terminated, or for these key personnel if they leave Pembrook Capital or otherwise become unavailable to us.
 
We have no separate facilities and are completely reliant on our Manager. Our Chief Executive Officer and our other executive officers, other than our Chief Financial Officer, are executives of Pembrook Capital. Our Manager has significant discretion as to the implementation of our investment and operating policies and strategies. Accordingly, we believe that our success will depend to a significant extent upon the efforts, experience, diligence, skill and network of business contacts of the officers and senior managers of Pembrook Capital. Through our Manager, the officers and senior managers of Pembrook Capital will source, evaluate, negotiate, close and monitor our investments; therefore, our success will depend on their continued service. The departure of any of the officers or senior managers of Pembrook Capital could have a material adverse effect on us.
 
Our Manager is not obligated to dedicate any specific personnel exclusively to us. In addition, none of our officers other than our Chief Financial Officer or the officers of Pembrook Capital are obligated to dedicate any specific portion of their time to our business. Each of our executive officers other than our Chief Financial Officer may in the future have significant responsibilities for other investment vehicles managed by Pembrook Capital. As a result, these individuals may not always be able to devote sufficient time to the management of our business. Further, when there are turbulent conditions in the real estate markets or distress in the credit markets, the attention of our Manager’s personnel and our officers and the resources of Pembrook Capital may also be required by the other investment vehicles managed by Pembrook Capital. In such situations, we may not receive the level of support and assistance that we may receive if we were internally managed.
 
We will rely on the resources of Pembrook Capital, including our Manager, in the implementation and execution of our business strategy and we will depend on Pembrook Capital’s established operational platform, including its sourcing capabilities, diligence, risk monitoring abilities and technology platforms, to execute our business strategy. We will also have access to, among other things, Pembrook Capital’s information technology, office space, legal, marketing and other back office functions. However, we offer no assurance that our Manager will remain our investment manager or that we will continue to have access to the officers and senior managers of Pembrook Capital, including our Manager, or to Pembrook Capital’s operational platform. The initial term of our management agreement with our Manager, and the origination and advisory agreement between our Manager and Pembrook Capital Management, LLC, only extends until the           anniversary of the closing of this


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offering, with automatic     -year renewals thereafter. If the management agreement and the origination and advisory agreement are terminated and no suitable replacement is found to manage us, we may not be able to execute our business plan.
 
There are various conflicts of interest in our relationship with Pembrook Capital, including our Manager, which could result in investment and other decisions that are not in the best interests of our shareholders.
 
We are subject to conflicts of interest arising out of our relationship with Pembrook Capital, including our Manager. Specifically, Mr. Boesky, our Chief Executive Officer and the Chairman of our Board of Managers, and each of our executive officers other than our Chief Financial Officer is also an executive of Pembrook Capital. Our Manager and executive officers may have conflicts between their duties to us and their duties to, and interests in, Pembrook Capital. Pursuant to a co-investment and allocation agreement among our Manager, Pembrook Capital Management, LLC and us, our Manager and Pembrook Capital Management, LLC have agreed that neither they nor any entity controlled by Pembrook Capital will sponsor or manage any publicly traded investment vehicle that invests primarily in our target assets other than us for so long as the management agreement is in effect. Pembrook Capital (including our Manager) may sponsor or manage another publicly traded investment vehicle that invests generally in real estate assets but not primarily in our target assets, as well as a private investment vehicle that invests primarily in our target assets. Our Manager and Pembrook Capital Management, LLC have also agreed that for so long as the management agreement is in effect no entity controlled by Pembrook Capital will sponsor or manage a potential public competing vehicle or a private investment vehicle unless Pembrook Capital adopts a policy that either (i) provides for the fair and equitable allocation of investment opportunities among all such vehicles and us, or (ii) provides us the right to co-invest with such vehicles, in each case subject to the suitability of each investment opportunity for the particular vehicle and us and each such vehicle’s and our availability of cash for investment. If such a policy is adopted, our co-investment rights would likely be subject to, among other things, the determination by our Manager that the proposed investment is suitable for us. Since we would be subject to the judgment of our Manager in the application of our co-investment rights, we may not always be allocated a portion of each co-investment opportunity in our target assets. In addition, while we anticipate that our independent managers will periodically review the compliance of Pembrook Capital, including our Manager, with the co-investment provisions described above, if implemented, they will not approve each co-investment unless the amount of capital we invest in the proposed co-investment otherwise requires the review and approval of our independent managers pursuant to our investment guidelines To the extent that Pembrook Capital adopts an investment allocation policy in the future, we may nonetheless compete with these vehicles for investment opportunities sourced by Pembrook Capital. As a result, we may either not be presented with a particular opportunity or may have to compete with these vehicles to acquire a particular investment. Some or all of our executive officers, the members of the Investment Committee of our Manager and other key personnel of Pembrook Capital would likely be responsible for selecting investments for these vehicles and they may choose to allocate attractive investments to one or more of these vehicles instead of to us.
 
Shortly after the consummation of this offering, we expect that our Board of Managers will adopt a policy with respect to any proposed investments by the covered persons in any of our target assets. We expect this policy to provide that any proposed investment by a covered person for his or her own account in any of our target assets will be permitted if the capital required for the investment does not exceed the personal investment limit. To the extent that a proposed investment exceeds the personal investment limit, we expect that our Board of Managers will only permit the covered person to make the investment (i) upon the approval of a majority of our independent managers, or (ii) if the proposed investment otherwise complies with terms of any other related party transaction policy our Board of Managers may adopt in


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the future. Subject to compliance with all applicable laws, these individuals may make investments for their own account in our target assets which may present certain conflicts of interest not addressed by our current policies.
 
We will pay our Manager substantial base management fees regardless of the performance of our portfolio. Our Manager’s entitlement to a base management fee, which is not based upon performance metrics or goals, might reduce its incentive to devote its time and effort to seeking investments that provide attractive risk-adjusted returns for our portfolio. This, in turn, could hurt both our ability to make or sustain distributions to our shareholders and the market price of our common shares.
 
In addition to the fees payable to our Manager under the management agreement, Pembrook Capital may benefit from other fees paid to it in respect of our investments. Pembrook Capital may act as servicer for our investments or, if we seek to securitize our investments, Pembrook Capital may act as collateral manager. In any of these or other capacities, Pembrook Capital may receive fees for its role, but only if approved by a majority of our independent managers based on prevailing market rates.
 
In connection with our formation transactions, (i) certain affiliates and related parties of Pembrook Capital will receive an aggregate of           of our common shares in exchange for their ownership interests in the Pembrook Funds, and (ii) we will grant our Manager           restricted units that will vest ratably in quarterly installments over a     -year period beginning on the first day of the calendar quarter after we complete this offering. Once vested, the related restricted units will be settled in our common shares. Each party receiving common shares in connection with our formation transactions will agree that, for a period of 365 days after the date of this prospectus, they will not, without the prior written consent of Deutsche Bank, dispose of or hedge any of our common shares or securities convertible into or exchangeable or exercisable for our common shares, subject to certain exceptions and extension in certain circumstances. These parties, including our Manager, and such affiliates and related parties of Pembrook Capital, may sell any such common shares or securities at any time following the expiration of this lockup period. To the extent any affiliates or related parties of Pembrook Capital sells any such common shares or securities in the future, their interests may be less aligned with our interests.
 
The merger agreements between us and the Pembrook Funds were not negotiated on an arm’s length basis and their terms, including the number of common shares to be issued by us to investors in the Pembrook Funds, including affiliates of Pembrook Capital, in our formation transactions, may not be as favorable to us than if they were negotiated with an unaffiliated third party.
 
The merger agreements between us and the Pembrook Funds were negotiated between related parties, and we did not have the benefit of arm’s length negotiations of the type normally conducted with an unaffiliated third party and their terms, including the number of common shares to be issued by us to investors in the Pembrook Funds, including affiliates of Pembrook Capital, in our formation transactions, may not be as favorable to us. We have not obtained any independent third-party appraisals of our initial assets. As a result, the value of our common shares issued by us in our formation transactions in exchange for our initial assets may exceed their fair market value. In addition, the number of our common shares issued to the investors in the Pembrook Funds in our formation transactions will be based on a per share price equal to the mid-point of the price range set forth on the cover page of this prospectus; accordingly, such price may be less than the initial public offering price per share of our common shares, which would result in a greater number of common shares being issued to such investors than would have been the case if the initial public offering price per share was used.


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The management agreement with our Manager was not negotiated on an arm’s length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third party and may be costly and difficult to terminate.
 
Each of our executive officers other than our Chief Financial Officer is also an executive of Pembrook Capital. Our management agreement with our Manager was negotiated between related parties and its terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party.
 
Termination of the management agreement with our Manager without cause is difficult and costly. In addition, our independent managers will review our Manager’s performance and the management fees annually and, following the initial     -year term, the management agreement may be terminated annually upon the affirmative vote of at least two-thirds of our independent managers based upon: (1) our Manager’s unsatisfactory performance that is materially detrimental to us, or (2) a determination that the management fees payable to our Manager are not fair, subject to our Manager’s right to prevent termination based on unfair fees by accepting a reduction of management fees agreed to by at least two-thirds of our independent managers. Our Manager will be provided     days’ prior notice of any such termination. Additionally, upon such a termination, the management agreement provides that we will pay our Manager a termination fee equal to           times the sum of the average annual base management fee and incentive fee earned by our Manager during the  -month period prior to termination, calculated as of the end of the most recently completed calendar quarter. These provisions may increase the cost to us of terminating the management agreement and adversely affect our ability to terminate our Manager without cause.
 
During the initial     -year term of the management agreement, we may not terminate the management agreement except for cause.
 
Our Manager is only contractually committed to serve us until the           anniversary of the closing of this offering. Thereafter, the management agreement is renewable for     -year terms; provided, however, that our Manager may terminate the management agreement at the end of any term upon      days’ prior notice. If the management agreement is terminated and no suitable replacement is found to manage us, we may not be able to execute our business plan.
 
Pursuant to the management agreement, our Manager will not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of our Board of Managers in following or declining to follow its advice or recommendations. Our Manager maintains a contractual, as opposed to a fiduciary, relationship with us. Under the terms of the management agreement, our Manager, its officers, managers, members and personnel, any person controlling or controlled by our Manager and any person providing sub-advisory services to our Manager will not be liable to us, any subsidiary of ours, our managers, our shareholders or any subsidiary’s shareholders or partners for acts or omissions performed in accordance with and pursuant to the management agreement, except because of acts constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their duties under the management agreement. In addition, we have agreed to indemnify our Manager, its officers, managers, members and personnel, any person controlling or controlled by our Manager and any person providing sub-advisory services to our Manager with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts or omissions of our Manager not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of duties, performed in good faith in accordance with, and pursuant to, the management agreement.


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The incentive fee payable to our Manager under the management agreement is payable quarterly and is based on our Core Earnings and, therefore, may cause our Manager to select riskier investments to increase its incentive compensation.
 
Our Manager is entitled to receive incentive compensation based upon our achievement of targeted levels of Core Earnings. In evaluating investments and strategies, the opportunity to earn incentive compensation based on Core Earnings may lead our Manager to place undue emphasis on maximizing Core Earnings at the expense of other criteria, such as preservation of capital, in order to achieve higher incentive compensation. Investments with higher yield potential are generally riskier or more speculative than investments with lower yield potential. This could result in increased risk to the value of our investment portfolio.
 
The conflicts of interest policy we will adopt may not adequately address all of the conflicts of interest that may arise with respect to our investment activities and also may limit the allocation of investments to us.
 
In order to avoid any actual or perceived conflicts of interest with Pembrook Capital, including our Manager, we will adopt a conflicts of interest policy prior to the closing of this offering to specifically address some of the conflicts relating to our investment opportunities. Although under this policy the approval of a majority of our independent managers will be required to approve (i) any purchase of our assets by Pembrook Capital and (ii) any purchase by us of any assets of Pembrook Capital, there is no assurance that this policy will be adequate to address all of the conflicts that may arise or will address such conflicts in a manner that results in the allocation of a particular investment opportunity to us or is otherwise favorable to us. In addition, competing Pembrook Capital vehicles may in the future participate in some of our investments, possibly at a more senior level in the capital structure of the underlying borrower and related real estate than our investment. Our interests in such investments may also conflict with the interests of these vehicles in the event of a default or restructuring of the investment. Participating investments will not be the result of arm’s length negotiations and will involve potential conflicts between our interests and those of the other participating vehicles in obtaining favorable terms. Since our executive officers other than our Chief Financial Officer are also executives of Pembrook Capital, the same personnel may determine the price and terms for the investments for both us and these vehicles and there can be no assurance that any procedural protections, such as obtaining market price indications or other evidence of fair market value, will prevent the consideration we pay for these investments from exceeding their fair market value or ensure that we receive terms for a particular investment opportunity that are as favorable as those available from an independent third party.
 
Our Board of Managers will approve very broad investment guidelines for our Manager and will not approve each investment and financing decision made by our Manager unless required by our investment guidelines.
 
Our Manager will be authorized to follow very broad investment guidelines. Our Board of Managers will periodically review our investment guidelines and our investment portfolio but will not, and will not be required to, review all of our proposed investments, except any investment in excess of $100 million, although any investment in excess of $50 million requires the approval of a majority of our Board of Manager’s Investment Committee. In addition, in conducting periodic reviews, our Board of Managers may rely primarily on information provided to it by our Manager. Furthermore, our Manager may use complex strategies, and transactions entered into by our Manager may be costly, difficult or impossible to unwind by the time they are reviewed by our Board of Managers. Our Manager will have great latitude within the broad parameters of our investment guidelines in determining the types and amounts of target assets it may decide are attractive investments for us, which could result in investment returns that are substantially below expectations or that result in losses,


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which would materially and adversely affect our business, financial condition, liquidity, results of operations, prospects, the market price of our common shares and our ability to make or sustain distributions to our shareholders.
 
Risks Related to Our Company
 
We have no prior independent operating history and may not be able to operate our business successfully or implement our investment strategies and guidelines and may encounter difficulty successfully complying with U.S. tax rules and other regulatory requirements, including the Sarbanes-Oxley Act and NYSE rules, that will be applicable to us as a public company.
 
We were formed in July 2011 and have no prior independent operating history. We currently have no assets and will commence operations only upon completion of this offering, at which time our assets will consist of those assets currently held by the Pembrook Funds that will be merged with us in our formation transactions and the net proceeds from this offering. We cannot assure you that we will be able to operate our business successfully or implement our investment guidelines and strategies as described in this prospectus. The results of our operations depend on several factors, including the availability of opportunities for the acquisition of target assets, the level and volatility of interest rates, the availability of adequate short and long-term financing, conditions in the financial markets and general economic conditions.
 
In addition, as a public company, we will be required to comply with certain regulatory requirements, including the Sarbanes-Oxley Act and NYSE rules. We cannot assure you that we will be able to successfully execute our business strategies as a public company or comply with regulatory requirements applicable to public companies.
 
Because Pembrook Capital has no experience operating within the complex rules and regulations required for a publicly traded limited liability company to qualify to be treated as a partnership, and not as a corporation, for U.S. federal income tax purposes, we cannot assure you that we will be able to qualify or remain qualified as a partnership for U.S. federal income tax purposes. Our failure to qualify or remain qualified as a partnership for U.S. federal income tax purposes would result in a material reduction in cash flow and after-tax returns for our common shareholders and thus would result in a substantial reduction in the value of our common shares. See “-Risks Related to Federal Income Tax.”
 
We will be subject to the requirements of the Sarbanes-Oxley Act, which may be costly and challenging.
 
Our management will be required to deliver a report that assesses the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act, as of December 31 of the year following the year in which the registration statement of which this prospectus forms a part becomes effective. Section 404 of the Sarbanes-Oxley Act also requires our independent registered public accounting firm to deliver an attestation report on the effectiveness of our internal control over financial reporting in conjunction with its opinion on our audited financial statements as of the same date. Internal controls are intended to allow management in the normal course of performing its functions to prevent or detect misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis; a significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for our


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financial reporting. Substantial work on our part is required to implement appropriate processes, document the system of internal control over key processes, assess their design, remediate any deficiencies identified and test their operation. This process is expected to be both costly and challenging. We cannot give any assurances that material weaknesses or significant deficiencies will not be identified in connection with our compliance with the Sarbanes-Oxley Act. The existence of any material weakness would preclude a conclusion by us and our independent registered public accounting firm that we maintained effective internal control over financial reporting. We may be required to devote significant time and incur significant expense to remediate any material weaknesses or significant deficiencies that may be discovered and may not be able to remediate any material weaknesses or significant deficiencies in a timely manner. The existence of any material weakness or significant deficiency in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause shareholders to lose confidence in the reliability of our reported financial information, all of which could lead to a substantial decline in the market price of our common shares.
 
In connection with the audit of our predecessor’s combined financial statements, Grant Thornton LLP, our independent registered public accounting firm, identified the following material weaknesses in our predecessor’s internal control over financial reporting: (i) a lack of the necessary resources and expertise in our predecessor’s accounting function, resulting in the use of inaccurate information in the preparation of our predecessor’s combined financial statements and related disclosures, and the failure to correct such inaccuracies during our predecessor’s review process; and (ii) incomplete and omitted disclosures in the notes to our predecessor’s combined financial statements, which are required by GAAP. Additionally, our auditor identified our predecessor’s lack of formal written policies and procedures relating to the analysis of its investments for impairment and the lack of an audit committee and an internal audit function as significant deficiencies.
 
Prior to completion of this offering, we have not been required to operate in compliance with the requirements of the Sarbanes-Oxley Act. We will be required to design and implement additional controls in order to comply with these requirements and remediate our predecessor’s material weaknesses and significant deficiencies. We intend to bring our operations into compliance with Section 404 the Sarbanes-Oxley Act by December 31, 2012, but there can be no assurance that such compliance will be achieved or maintained.
 
Our Board of Managers may generally change our investment strategies or guidelines, financing strategy or leverage or other policies without shareholder approval.
 
Our Board of Managers may change any of our investment strategies or guidelines, financing strategy or leverage policy with respect to investments, acquisitions, growth, operations, indebtedness, capitalization and distributions at any time without shareholder approval, which could result in an investment portfolio with a different risk profile than contemplated in this prospectus. A change in our investment strategies or guidelines may increase our exposure to interest rate risk, default risk and real estate market fluctuations. Furthermore, a change in our asset allocation could result in our making investments in asset classes that are different from those described in this prospectus. These changes could materially and adversely affect our business, financial condition, liquidity, results of operations, prospects, the market price of our common shares and our ability to make or sustain distributions to our shareholders. We may not, however, change the provision of our operating agreement that limits the aggregate liquidation preference of our outstanding preferred shares to not more than the total book value of our outstanding common shares at the time of issuance of any preferred shares without the approval of at least a majority of our preferred shares.


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We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common shares and our ability to make or sustain distributions to our shareholders.
 
Our business is highly dependent on communications and information systems of Pembrook Capital. Any failure or interruption of Pembrook Capital’s systems could cause delays or other problems in our securities trading activities, which could have a material adverse effect on our operating results and negatively affect the market price of our common shares and our ability to make or sustain distributions to our shareholders.
 
The past performance of the Pembrook Funds may not be representatives of our future results or returns to our common shareholders.
 
The performance information for each of the Pembrook Funds presented in this prospectus represents each Fund’s past performance. Past performance does not guarantee future results, and it may not be indicative of the future performance of our company or the returns to our common shareholders.
 
The increasing number of proposed U.S. federal, state and local laws may affect certain mortgage-related assets that we intend to acquire and could increase our cost of operations.
 
Legislation has been proposed which, among other provisions, could hinder the ability of a servicer to foreclose promptly on defaulted mortgage loans or would permit limited assignee liability for certain violations in the mortgage loan origination process. We cannot predict whether or in what form the U.S. Congress or the various state and local legislatures may enact legislation affecting our operations. We will evaluate the potential impact of any initiatives which, if enacted, could affect our practices and results of operations. We are unable to predict whether U.S. federal, state or local authorities will enact laws, rules or regulations that will require changes in our practices in the future, and any such changes could materially and adversely affect our business, financial condition, liquidity, results of operations, prospects, the market price of our common shares and our ability to make or sustain distributions to our shareholders.
 
Compliance with changing regulations relating to corporate governance and public disclosure will result in increased compliance costs and pose challenges for us and our Manager.
 
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the rules and regulations promulgated thereunder, the Sarbanes-Oxley Act, SEC regulations and the NYSE rules, have created uncertainty for public companies and significantly increased the compliance requirements, costs and risks associated with operating as a public company. Our Manager will need to devote significant time and we will need to devote substantial financial resources for us to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.
 
Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us and, more generally, the financial services and mortgage industries. Additionally, we cannot predict whether there will be additional proposed laws or reforms that would affect us, whether or when such changes may be adopted, how such changes may be interpreted and enforced or


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how such changes may affect us. However, the costs of complying with any additional laws or regulations could materially and adversely affect our business, financial condition, liquidity, results of operations, prospects, the market price of our common shares and our ability to make or sustain distributions to our shareholders.
 
Our risk management efforts may not be effective.
 
We could incur substantial losses and our operations could be disrupted if we are unable to effectively identify, manage, monitor and mitigate financial risks, such as credit risk, interest rate risk, liquidity risk and other market-related risks, as well as operational risks related to our operations, assets and liabilities. Our risk management policies, procedures and techniques may not be sufficient to identify all of the risks to which we are exposed, mitigate the risks we have identified or to identify additional risks to which we may become subject in the future.
 
Inadvertent errors could subject us to financial loss, litigation or regulatory action.
 
Personnel of Pembrook Capital, contractors used by Pembrook Capital or other third parties with whom we have relationships may make inadvertent errors that could subject us to financial losses, claims or enforcement actions. These types of errors could include, but are not limited to, mistakes in executing, recording or reporting our transactions. Inadvertent errors expose us to the risk of material losses until the errors are detected and remedied prior to the incurrence of any loss. The risk of errors may be greater for business activities that are new for us or have non-standardized terms.
 
If our reputation, the reputation of Pembrook Capital, or the reputation of counterparties with whom we associate is harmed, our business may be materially and adversely affected.
 
Our business is subject to significant reputational risks. If we fail, or appear to fail, to address various issues that may affect our reputation, our business could be materially and adversely affected. We may also be materially and adversely affected by reputational issues facing Pembrook Capital. Issues could include real or perceived legal, accounting or regulatory violations or be the result of a failure in governance, risk management, technology or operations. Similarly, market rumors and actual or perceived association with one or more counterparties whose reputation may be under question could materially and adversely affect our business. Claims of misconduct, wrongful termination, adverse publicity, conflict of interests, ethical issues or failure to protect private information could also cause significant reputational damage. Such reputational damage could result not only in an immediate financial loss, but could also result in a loss of business relationships, the ability to raise capital and the ability to execute our business plan.
 
A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could materially and adversely affect our target assets.
 
We believe the risks associated with our operations will be more severe during periods of economic slowdown or recession, especially if these periods are accompanied by declining real estate values. Declining real estate values will likely reduce the level of new bond originations since borrowers often use appreciation in the value of their existing properties to support the purchase of additional properties. Borrowers may also be less able to pay principal and interest on our investments if the value of real estate weakens. In addition, adverse changes in the real estate market increase the probability of default, as the incentive of the borrower to retain and protect equity in the property declines. Furthermore, declining real estate values significantly increase the likelihood that we will incur losses on our investments in the event of default because the value of our collateral may be insufficient to cover amounts owed by the related borrower or the cost of financing such investment. Any sustained period


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of increased payment delinquencies, foreclosures or losses could materially and adversely affect both our net interest income from our investments as well as our ability to acquire, finance and sell our target assets, which would have a material and adverse effect on our business, financial condition, liquidity, results of operations and prospects, our ability to make or sustain distributions to our shareholders, and the market price of our common shares.
 
Terrorist attacks and other acts of violence or war may affect the real estate industry generally and our business, financial condition, liquidity, results of operations and prospects.
 
The terrorist attacks on September 11, 2001 disrupted the U.S. financial markets, including the real estate capital markets, and negatively impacted the U.S. economy in general. Any future terrorist attacks, the anticipation of any such attacks, the consequences of any military or other response by the U.S. and its allies, and other armed conflicts could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and worldwide financial markets and economy. The economic impact of these events could also adversely affect the credit quality of some of our loans and securities and the properties underlying our investments.
 
We may suffer losses as a result of the adverse impact of any future attacks and these losses may adversely impact our performance and may cause the market price of our common shares to decline or be more volatile. A prolonged economic slowdown, a recession or declining real estate values could impair the performance of our investments and harm our business, financial condition, liquidity, results of operations and prospects, increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. We cannot predict the severity of the effect that actual or even potential future terrorist attacks would have on us. Losses resulting from these types of events may not be fully insurable.
 
In addition, the events of September 11th created significant uncertainty regarding the ability of real estate owners of high profile assets to obtain insurance coverage protecting against terrorist attacks at commercially reasonable rates, if at all. With 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 the TRIA through the end of 2014, insurers must make terrorism insurance available under their property and casualty insurance policies, but 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 investment opportunities available to us and the pace at which we are able to make investments. If the properties underlying our investments are unable to obtain affordable insurance coverage, the value of our investments could decline, and in the event of an uninsured loss, we could lose all or a portion of an investment.
 
Risks Related to Our Investments
 
We have not yet identified any specific new investments for our portfolio and, therefore, we may allocate the net proceeds from this offering to investments with which you may not agree.
 
We have not yet identified any specific new investments for our portfolio and, thus, you will not be able to evaluate the manner in which the net proceeds from this offering will be invested or the economic merit of our future investments before making a decision to purchase our common shares in this offering. As a result, we may use the net proceeds from this offering to invest in investments with which you may not agree. Additionally, our


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investments will be selected by our Manager and our shareholders will not have input into such investment decisions. Both of these factors will increase the uncertainty, and thus the risk, of investing in our common shares. The failure of our Manager to apply these net proceeds effectively or find attractive investments that meet our investment objective in a timely manner could result in unfavorable returns and could cause a material and adverse effect on our business, financial condition, liquidity, results of operations and prospects, our ability to make or sustain distributions to our shareholders, and the market price of our common shares.
 
Our Manager intends to conduct due diligence with respect to each investment opportunity and suitable investment opportunities may not be available within our contemplated time frame. Even if opportunities are available, there can be no assurance that our Manager’s due diligence processes will uncover all relevant facts or that any investment will be consummated on attractive terms in a timely manner, or at all. Until appropriate target assets are acquired, we may invest the net proceeds from this offering in interest-bearing, short-term securities that are rated investment grade and money market funds. These investments are expected to provide a lower net return than we will seek to achieve from investments in our target assets.
 
We cannot assure you that we will be able to identify target assets that meet our investment objective, that we will be successful in consummating any investment opportunities we identify or that one or more investments we may make using the net proceeds from this offering will yield attractive risk-adjusted returns. Our inability to do any of the foregoing, or any delay in doing so, could result in unfavorable returns and could cause a material and adverse effect on our business, financial condition, liquidity, results of operations and prospects, our ability to make or sustain distributions to our shareholders, and the market price of our common shares.
 
The lack of liquidity in our investments may adversely affect us.
 
Many of the securities we purchase will not be registered under the relevant securities laws, resulting in a prohibition against their transfer, sale, pledge or their disposition except in a transaction that is exempt from, or not subject to, the registration requirements of those laws. In addition, certain investments such as B-Notes, mezzanine loans and bridge and other loans, although not covered by the securities laws, are also particularly illiquid investments due to their short life, their potential unsuitability for securitization and the greater difficulty of recovery in the event of a borrower’s default. As a result, we expect many of our investments will be illiquid, and if we seek to sell all or a portion of our portfolio quickly, we may realize significantly less than the price we paid for the relevant investments and any such sale could require an extended period of time. Further, we may face other restrictions on our ability to sell an investment in a business entity to the extent that we or our Manager has, or could be attributed with, material, non-public information regarding such business entity. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited, which could materially and adversely affect us.
 
Our investments may be concentrated and will be subject to risk of default.
 
While we intend to diversify our portfolio of investments in the manner described in this prospectus, we are not required to observe specific diversification criteria, except as set forth in the investment guidelines adopted by our Board of Managers. Therefore, our investments in our target assets may at times be concentrated in certain property types that are subject to higher risk of foreclosure, be secured by properties concentrated in a limited number of geographic locations or be in properties owned by a few individuals or entities. For example, as of March 31, 2011 approximately 27%, 22% and 12% of the outstanding principal amount of our initial portfolio was secured by properties located in New York City, the Mid-Atlantic region


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and Florida, respectively. Downturns in the economy in these areas or any other area where properties related to a significant portion of our investments are located may result in defaults on a number of our investments within a short time period, which may materially and adversely affect our results of operations, liquidity and financial condition, our ability to make or sustain distributions to our shareholders and the market price of our common shares. Also, to the extent that our investments are concentrated in a few borrowers, the financial distress or failure of any single borrower could have a material adverse effect on us.
 
We operate in a highly competitive market for investment opportunities and competition may limit our ability to acquire desirable investments in our target assets and could also affect the pricing of these assets.
 
We operate in a highly competitive market for investment opportunities. Our financial success depends, in large part, on our ability to acquire our target assets at attractive prices. In acquiring our target assets, we will compete with a variety of institutional investors, including real estate investment trusts (“REIT”), specialty finance companies, public and private funds (potentially including other vehicles managed by Pembrook Capital), commercial and investment banks, commercial finance and insurance companies and other financial institutions. Many of our competitors are substantially larger and have considerably greater financial, technical, marketing and other resources than we do. Some competitors may have a lower cost of funds than our cost of funds and access to funding sources that may not be available to us. Many of our competitors are not subject to the operating constraints associated with maintenance of an exemption from the Investment Company Act. 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 investments and establish more relationships than us. Furthermore, competition for investments in our target assets may lead to an increase in the pricing of such assets, which may further limit our ability to generate attractive risk-adjusted returns. We cannot assure you that the competitive pressures we face will not have a material and adverse effect on our business, financial condition, liquidity, results of operations or prospects, the ability to make or sustain distributions to our shareholders or the market price of our common shares. Also, as a result of this competition, desirable investments in our target assets may be limited in the future and we may not be able to take advantage of attractive investment opportunities from time to time, as we can provide no assurance that we will be able to identify and make attractive investments that are consistent with our investment objective.
 
If our Manager overestimates the yields or incorrectly prices the risks of our investments, we may experience losses.
 
Our Manager will value our potential investments based on yields and risks, taking into account estimated future losses on our investments and the underlying collateral, and the estimated impact of these losses on expected future cash flows and returns. Our Manager’s loss estimates may not prove accurate, as actual results may vary from estimates. In the event that our Manager underestimates the asset level losses relative to the price we pay for a particular investment, we would likely experience losses with respect to such investment.
 
Investments in non-conforming and non-investment grade rated loans or securities involve increased risk of loss.
 
Many of our investments will not conform to conventional loan standards applied by traditional lenders and either will not be rated or will be rated as non-investment grade by the rating agencies. The non-investment grade ratings for these investments typically result from the overall leverage, the lack of a strong operating history for the properties underlying the investments, the borrowers’ credit histories, the properties’ underlying cash flow or other


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factors. There are no limits on the percentage of unrated or non-investment grade rated assets we may hold in our investment portfolio. As a result, these investments will have a higher risk of default and loss than investment grade rated assets. Any loss we incur may materially and adversely affect our results of operations, liquidity and financial condition, the ability to make or sustain distributions to our shareholders and the market price of our common shares.
 
Any credit ratings assigned to our investments will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded.
 
Some of our investments may be rated by Moody’s Investors Service, Fitch Ratings, or S&P, DBRS, Inc. or Realpoint, LLC. Any credit ratings on our investments are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any such ratings will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. If rating agencies assign a lower-than-expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of our investments in the future, the value of these investments could significantly decline, which would adversely affect the value of our investment portfolio and could result in losses upon disposition or the failure of borrowers to satisfy their debt service obligations to us.
 
Our commercial mortgage loans and the mortgage loans underlying any CMBS investments we may make will be subject to the ability of the commercial property owner to generate net income from operating the property as well as the risks of delinquency and foreclosure.
 
As of March 31, 2011, our initial portfolio included 15 commercial mortgage loans (which includes mezzanine loans and bridge loans) with an aggregate outstanding principal amount of approximately $195.7 million. We also intend to invest in federally tax-exempt multifamily mortgage revenue bonds secured by first mortgage liens on multifamily rental properties and CMBS in the future. While there are no such tax-exempt bonds or CMBS in our initial portfolio, we intend to invest in such assets in the future.
 
Commercial mortgage loans are secured by multifamily or other commercial properties and are subject to risks of delinquency and foreclosure, and risks of loss that may be greater than similar risks associated with loans made on the security of single-family residential property. The ability of a borrower to repay a loan secured by an income-producing commercial property typically is dependent primarily upon 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 may be impaired. Net operating income of an income-producing property can be adversely affected by, among other things,
 
  •  tenant mix;
 
  •  success of tenant businesses;
 
  •  property management decisions;
 
  •  property location, condition and design;
 
  •  competition from comparable types of properties;
 
  •  changes in laws that increase operating expenses or limit rents that may be charged;
 
  •  changes in national, regional or local economic conditions and/or specific industry segments, including the credit and securitization markets;
 
  •  declines in regional or local real estate values;
 
  •  declines in regional or local rental or occupancy rates;


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  •  increases in interest rates, real estate tax rates and other operating expenses;
 
  •  costs of remediation and liabilities associated with environmental conditions;
 
  •  the potential for uninsured or underinsured property losses;
 
  •  changes in governmental laws and regulations, including fiscal policies, zoning ordinances and environmental legislation and the related costs of compliance; and
 
  •  acts of God, terrorist attacks, social unrest and civil disturbances.
 
Principal and interest payments on federally tax-exempt multifamily mortgage revenue bonds are typically made solely from payments on the mortgage loan originated with the proceeds from the issuance of such bonds and payments on the mortgage loans are, in turn, typically made solely from revenues generated by the mortgaged property. If a multifamily property is unable to generate sufficient revenues to meet operating expenses, mortgage payments and capital expenditures, it is likely that the related bond will default. Under such circumstances, our remedies, as a bond owner, are limited. If we acquire the underlying property by foreclosing on the mortgage loan, we will be subject to all of the risks normally associated with the operation of such property as described above, and there is no assurance that any recovery will be sufficient to pay in full amounts owed to us on the bond.
 
In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our results of operations, liquidity and financial condition, the ability to make or sustain distributions to our shareholders and the market price of our common shares. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy process, which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan.
 
Investments we may make in CMBS will generally be subject to losses.
 
Following the consummation of our formation transactions and this offering, we may acquire CMBS. In general, losses on a mortgaged property securing a mortgage loan included in a securitization will be borne first by the equity holder of the property, then by a cash reserve fund or letter of credit, if any, then by the holder of a mezzanine loan, if any, then by the “first loss” subordinated security holder (generally, the “B-Piece” buyer) and then by the holder of a higher-rated security. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit or mezzanine loans, and any classes of securities junior to those in which we invest, we will not be able to recover all of our investment in the securities we purchase. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline, less collateral will be available to satisfy interest and principal payments due on the related mortgage-backed securities. The prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns or individual borrower developments.


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We will not control the special servicing of the mortgage loans included in any CMBS in which we may invest in senior classes and, in such cases, the special servicer may take actions that could materially and adversely affect our interests.
 
With respect to the CMBS in which we may invest, overall control over the special servicing of the related underlying mortgage loans will be held by a “directing certificateholder” or a “controlling class representative,” which is appointed by the holders of the most subordinate class of CMBS in a series. Since we may acquire senior classes of CMBS, we will not have the right to appoint the directing certificateholder. In connection with the servicing of the specially serviced mortgage loans, the related special servicer may, at the direction of the directing certificateholder, take actions with respect to the specially serviced mortgage loans that could materially and adversely affect our interests.
 
Many of our loans will not be fully amortizing, and we will be subject to the risk that the borrower will not be able to refinance the loan at maturity or sell the property for an amount sufficient to meet the borrower’s obligation to us.
 
Many of our loans will not be fully amortizing, meaning that they may have a significant principal balance, or “balloon” payment, due at maturity. Mortgage loans with a balloon payment involve a greater risk to a lender than fully amortizing loans, because the ability of a borrower to make a balloon payment typically will depend upon its ability to either fully refinance the loan or to sell the property securing the loan at a price sufficient to permit the borrower to make the balloon payment. The ability of a borrower to effect a refinancing or sale will be affected by a number of factors, including the value of the property, the level of available mortgage rates at the time of sale or refinancing, the borrower’s equity in the property, the financial condition, liquidity and operating history of the property and the borrower, tax laws, prevailing economic conditions and the availability of credit for loans secured by the specific type of property.
 
No assurance can be given that the IRS will not successfully challenge the exclusion from gross income for U.S. federal income tax purposes of the interest payable on our multifamily mortgage revenue bonds.
 
Opinions of Counsel Not Binding on IRS.  We intend to invest directly (or indirectly through residual interests created through securitization programs) in federally tax-exempt multifamily mortgage revenue bonds that we believe generate income excludable from gross income for U.S. federal income tax purposes. In connection with the original issuance or any subsequent reissuance of each such bond, an opinion will be delivered by legal counsel that, based on the law in effect on the date of original issuance or reissuance, interest on such revenue bond is excludable from gross income for U.S. federal income tax purposes, except with respect to any revenue bond (other than a revenue bond, the proceeds from which are loaned to a charitable organization described in Section 501(c)(3) of the Internal Revenue Code, or the Code) during any period in which it is held by a “substantial user” of the property financed with the proceeds from such revenue bond or a “related person” of such a “substantial user.” In the case of a participating interest bond (i.e., a bond that entitles a holder to additional contingent interest that is payable solely from the cash flow from, and proceeds upon sale of, the property securing such bond), such opinion typically assumes, in certain cases in reliance on another legal opinion, that such participating interest bond constitutes debt for federal income tax purposes. Each opinion will be subject to customary assumptions and qualifications and will speak only as of the date it was delivered. However, an opinion of counsel has no binding effect upon the IRS, and no assurance can be given that the conclusions reached by counsel will not be contested by the IRS, or, if contested, that the opinion of counsel will be sustained by a court. We may choose to contest any adverse determinations by the IRS on this issue, however any such contest will result in the incurrence


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of additional expenses by us. In purchasing such federally tax-exempt multifamily mortgage revenue bonds, we will assume the continuing correctness of the opinions of bond counsel or special tax counsel relating to the exclusion from gross income for U.S. federal income tax purposes of interest on the multifamily mortgage revenue bonds and will not independently verify whether any events or circumstances have occurred since the date such opinions were rendered that could adversely affect the conclusions set forth therein.
 
“Substantial User” Limitation.  Interest on a revenue bond owned by us or our subsidiaries, other than a bond the proceeds of which are loaned to a charitable organization described in Section 501(c)(3) of the Code, will not be excluded from gross income during any period in which we or our subsidiaries are a “substantial user” of the facilities financed with the proceeds of such revenue bond or a “related person” to a “substantial user.” A “substantial user” generally includes any underlying borrower and any person or entity who uses the financed facilities on other than a de minimis basis. We would be a “related person” to a “substantial user” for this purpose if, among other things, (i) the same person or entity owned more than a 50% interest in both us and in the facilities financed with the proceeds of a bond owned by us or one of our subsidiaries, or (ii) if we owned a partnership or similar equity interest in the owner of a property financed with the proceeds of a bond. In the event that the entity which owns a property securing our investment financed with the proceeds of a revenue bond owned by us were to acquire any of our shares, the IRS, if it became aware of such ownership, could take the position that the substantial user and related person rules require that the interest income on such revenue bond allocable to all of our investors, be included in gross income for U.S. federal income tax purposes. Greenberg Traurig has advised us that in its opinion such a result is not supported by the Code and treasury regulations; however, there can be no assurance that the IRS would not take such a position.
 
Ongoing Requirements.  The Code establishes certain requirements which must be met subsequent to the issuance of federally tax-exempt multifamily mortgage revenue bonds for interest on such revenue bonds to remain excludable from gross income for U.S. federal income tax purposes. Among these continuing requirements are restrictions on the investment and use of the revenue bond proceeds and, for revenue bonds the proceeds from which are loaned to a charitable organization described in Section 501(c)(3) of the Code, the continued exempt status of such borrower. In addition, the continuing requirements include federal and sometimes local tenant income restrictions and compliance with rules pertaining to arbitrage. Each issuer of the revenue bonds, as well as each of the underlying borrowers, will covenant to comply with certain procedures and guidelines designed to ensure satisfaction of the continuing requirements of the Code. Failure to comply with these continuing requirements of the Code may cause the interest on such bonds to be includable in gross income for U.S. federal income tax purposes retroactively to the date of issuance, regardless of when such noncompliance occurs.
 
Reissuance Risk.  Properties underlying our revenue bonds may experience financial difficulties from time to time, which could cause certain of our revenue bonds to go into default. Were that to occur, we might take remedial action such as, among other things, entering into a work-out or forbearance agreement with the owner of the property or exercising our rights with respect to the collateral securing such revenue bond, including the commencement of foreclosure proceedings. The execution and delivery of a forbearance agreement could, under certain circumstances, result in a significant modification (i.e., “reissuance”) of the revenue bond for U.S. federal income tax purposes. The reissuance of a revenue bond generally does not, in and of itself, cause the interest on such revenue bond to be includable in the gross income of the holder thereof for U.S. federal income tax purposes. However, if a revenue bond is treated as reissued and the appropriate federal tax information return, a Form 8038, has not been timely filed or a late filing has not been accepted by the IRS, interest on such revenue bond could be includable in the gross income of the holder thereof


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for U.S. federal income tax purposes from and after the reissuance date. In addition, if a participating interest revenue bond is treated as reissued, there can be no assurance that such revenue bond would continue to be characterized as debt, as described below, insofar as the facts and circumstances underlying such characterization may have changed.
 
The IRS may disagree with our exclusion from gross income of some payments relating to participating interest bonds and determine that such payments are appropriately included in gross income for U.S. federal income tax purposes.
 
In addition to making regularly scheduled payments of principal and interest, some of the federally tax-exempt multifamily mortgage revenue bonds in which we invest may be participating interest bonds that provide for the payment of additional contingent interest payable solely from the cash flow from, and proceeds upon sale of, the property securing such bond. A participating interest bond may raise an issue as to whether the relationship between us and the obligor is that of debtor and creditor or whether we are engaged in a partnership or joint venture with the obligor. If the IRS were to determine that a participating interest bond represented or contained an equity investment in the property securing such bond, all or part of the interest on such bond could be viewed as a taxable return on such investment and would not qualify as tax-exempt interest for U.S. federal income tax purposes. In certain instances, legal opinions relating to participating interest bonds may provide that the characterization of the bonds as debt is not free from doubt and that all or a portion of the interest on such bonds, including “contingent interest” and “deferred interest,” may not be treated as interest for state and federal law, but that it is more likely than not that such interest is interest for state and federal law purposes or otherwise similarly limited. We may receive an opinion of counsel relating to a participating interest bond to the effect that, based upon assumptions described in such opinion, which assumptions included the fair market value of the securing property upon completion and economic projections and guarantees, the participating interest bond “would” be treated as debt for U.S. federal income tax purposes. The implicit corollary of such an opinion is that the participating interest bond will not constitute the following: (i) an equity interest in the underlying borrower; (ii) an equity interest in a venture between the underlying borrower and us; or (iii) an ownership interest in the property securing such bond. Although we will assume the continuing correctness of opinions relating to any participating interest bonds and will treat all interest received with respect to such bonds as tax-exempt income, there can be no assurance that such opinions or the related assumptions are correct, such treatment would not be challenged by the IRS, or that intervening facts and circumstances have changed the assumptions and basis for providing such opinions.
 
Investing in multifamily mortgage revenue bonds issued on behalf of charities raises additional risks.
 
We may acquire revenue bonds that are issued on behalf of non-profit organizations described in Section 501(c)(3) of the Code which finance low income multifamily properties or facilities for the elderly. Because an allocation of a state’s volume cap is not needed for these revenue bonds, they may be more readily available than revenue bonds which require an allocation of volume cap. However, because charities are not profit-motivated, they may not operate properties as efficiently as for-profit owners. Many charities are thinly capitalized and are unable to invest significant amounts of equity into affordable multifamily properties acquired by them. This may increase the likelihood of default because the charity (i) may not have the capital required to operate and maintain the property if the cash flow expected to be generated by rental income is less than expected or (ii) may be more willing to abandon a


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property experiencing financial difficulty because its investment is minimal. In addition, investing in revenue bonds issued on behalf of charities is subject to other risks, including:
 
  •  changes in governmental sponsorship of subsidized programs;
 
  •  because charities must charge “affordable rents,” cash flow to pay debt service on revenue bonds may be diminished;
 
  •  subsidization of indigent persons who use their facilities, which may reduce the cash flow available to pay debt service on revenue bonds secured by such facilities;
 
  •  the possibility that a charity’s status as an exempt organization could be revoked or the possibility that the property is sold to a person which is not an exempt organization that is described in Section 501(c)(3) of the Code, for example, as a result of a foreclosure sale, thereby resulting in the interest on the revenue bonds issued for the benefit of such charity becoming includable in gross income for purposes of federal income taxation from the date of issue of the respective revenue bond; and
 
  •  the inability of the owner of the revenue bond to recover sufficient value in the event of a default and subsequent foreclosure, because of the loss of the benefit of the tax-exempt financing and, in some cases, real estate tax abatements, unless the project is promptly resold to another qualifying non-profit organization.
 
There may be negative effects of requirements with respect to rent restrictions and permissible income of occupants of properties securing revenue bonds that we may acquire.
 
The properties securing federally tax-exempt multifamily mortgage revenue bonds that we may acquire are subject to certain federal, state and/or local requirements with respect to the permissible income of their tenants. The low income housing tax credits, or LIHTC, program and, often, state or local law establish a rent ceiling for some or all tenants. In addition, pursuant to the Code, all of the properties securing revenue bonds that we may acquire are required to have at least 20% (and in the case of low income properties owned by most charities, up to 75%) of the units reserved for occupancy by low or moderate income persons or families. Accordingly, rents must be charged on such portions of the units at a level to permit such units to be continuously occupied by low or moderate income persons or families. As a result, such rents may not be sufficient to cover all operating costs with respect to such units and debt service on the related revenue bond. In such event, the rents on the remaining units may have to be higher than they would otherwise be and may. therefore, exceed competitive rents, which may adversely affect the occupancy rate of a property securing an investment and the developer’s ability to service its debt.
 
In general, there is less information available about municipal bonds, including the federally tax-exempt multifamily mortgage revenue bonds that we intend to acquire, than other types of fixed income investments, and this lack of information makes it more difficult to value such investments.
 
We intend to invest in federally tax-exempt multifamily mortgage revenue bonds. In general, the amount of information available about municipal bonds, such as the federally tax-exempt multifamily mortgage revenue bonds that we will seek to acquire, is less than is available for other types of fixed income investment. The terms of the federally tax-exempt multifamily mortgage revenue bonds that we intend to invest in will, in many cases, be the product of direct negotiations between our Manager and the borrower. Such investments are typically significantly less liquid than other types of fixed income investments. Due to the limited information available regarding the municipal bond market and the customized terms of many of our expected investments, it is very difficult for our Manager to accurately value


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federally tax-exempt multifamily mortgage revenue bonds. This difficulty in valuation could cause us either to retain a bond for longer than we should or liquidate a bond sooner than we should, resulting in losses to us. In addition, for purposes of federal income taxation, market discount on a tax-exempt bond in excess of a specified de minimis amount accrues as taxable ordinary income. Bonds held by us may lose value to the point that they would be market discount obligations in the hands of a subsequent purchaser. In such a situation, if we were to sell such bonds, it is likely that we would suffer a significant loss or, perhaps, not be able to liquidate such bonds. Therefore, our investments in these types of bonds involves a greater dependency on the analytical abilities of our Manager than would be the case with investments in sectors of the bond market where information is more widely available. If our Manager fails to accurately analyze trends and risks in the municipal market, our results of operations, liquidity and financial condition, the ability to make or sustain distributions to our shareholders and the market price of our common shares could be materially and adversely affected.
 
Any B-Notes that we may acquire may be subject to additional risks related to the privately negotiated structure and terms of the transaction, which may result in losses to us.
 
We may invest in B-Notes. There are no B-Notes in our initial portfolio. A B-Note is a loan that is typically (i) secured by a first mortgage lien on a commercial real estate asset or a group of related properties and (ii) subordinated to an A-Note that is secured by the same first mortgage lien on the same collateral. As a result, if a borrower defaults, there may not be sufficient funds remaining for B-Note holders after payment to the A-Note holders. However, because each transaction is privately negotiated, B-Notes can vary in their structural characteristics and risks. For example, the rights of holders of B-Notes to control the process following a borrower default may vary from transaction to transaction. Further, B-Notes typically are secured by a single property or group of related properties and involve the risks associated with significant concentration. Significant losses related to any B-Notes that we may acquire may materially and adversely affect our results of operations, liquidity and financial condition, ability to make or sustain distributions to our shareholders and the market price of our common shares.
 
Our mezzanine loan assets will involve greater risks of loss than senior loans secured by income-producing properties.
 
We intend to invest in mezzanine loans. As of March 31, 2011, there were seven mezzanine loans in our initial portfolio, with an aggregate outstanding principal amount of approximately $81.8 million. Mezzanine loans take the form of subordinated loans secured by second mortgages on the underlying property or loans secured by a pledge of the ownership interests of either the entity owning the property or a pledge of the ownership interests of the entity that owns the interest in the entity owning the property. These types of assets involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property because the loan may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt. As a result, we may not recover some or all of our investment. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the property and increased risk of loss of principal. Significant losses related to our mezzanine loans may materially and adversely affect our results of operations, liquidity and financial condition, the ability to make or sustain distributions to our shareholders and the market price of our common shares.


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Bridge loans will involve a greater risk of loss than traditional investment-grade mortgage loans with fully insured borrowers.
 
We intend to invest in bridge loans. As of March 31, 2011, there were four bridge loans in our initial portfolio, with an aggregate outstanding principal amount of approximately $70.5 million. We may acquire bridge loans secured by first mortgage liens on commercial real estate with maturities generally shorter than three years. Typically, these loans provide interim financing for the acquisition or repositioning of real estate. The typical borrower under a bridge loan has usually identified an undervalued asset that has been under-managed and/or is located in a recovering market. If the market 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 asset’s management and/or the value of the asset, the borrower may not receive a sufficient return on the asset to satisfy the bridge loan, and we bear the risk that we may not recover some or all of our investment.
 
In addition, borrowers usually use the proceeds from a conventional mortgage loan to repay a bridge loan. Bridge loans therefore are subject to the risks of a borrower’s inability to obtain permanent financing to repay the bridge loan. Bridge 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 any default under bridge loans held by us, 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 bridge loan. Significant losses with respect to our bridge loans may materially and adversely affect our results of operations, liquidity and financial condition, the ability to make or sustain distributions to our shareholders and the market price of our common shares.
 
Our initial portfolio currently contains one non-performing asset, which is a bridge loan with an outstanding principal amount of $16.4 million as of March 31, 2011. The performance of the collateral underlying this loan, the Fairfield Courtyard by Marriott hotel, was severely impacted during the recent recession and the consequential decline in business and leisure travel. We initially modified the terms of the loan in 2009 and then entered into subsequent discussions to modify the loan further, as the local market failed to recover fast enough to generate sufficient cash flow to cover property operations and debt service. In 2011, we reached an agreement with the borrower to market the property for sale while maintaining the borrower’s recourse guarantee. As of the date hereof, we are marketing the property for sale with the expectation that we will recover our investment in the loan. However, no assurance can be given that the property will be sold or that any sales proceeds and any guarantee payments will result in our receipt of our full investment in the loan.
 
Construction and rehabilitation loans involve an increased risk of loss.
 
We may invest in construction and rehabilitation loans. There are no construction or rehabilitation loans in our initial portfolio. If we fail to fund our entire commitment on a construction or rehabilitation loan or if a borrower otherwise fails to complete the construction or rehabilitation of a project, there could be adverse consequences associated with the loan, including: a loss of the value of the property securing the loan, especially if the borrower is unable to raise funds to complete or rehabilitate it from other sources; a borrower claim against us for failure to perform under the loan documents; increased costs to the borrower that the borrower is unable to pay; a bankruptcy filing by the borrower; and abandonment by the borrower of the collateral for the loan. The consequences may materially and adversely affect our results of operations, liquidity and financial condition, the ability to make or sustain distributions to our shareholders and the market price of our common shares.


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Risks of cost overruns and non-completion of construction or renovation, as the case may be, of the properties underlying any construction and rehabilitation loans we may acquire may result in significant losses.
 
The construction, renovation, refurbishment or expansion by a borrower of a mortgaged property involves risks of cost overruns and non-completion. Estimates of the costs of construction or improvements to bring an acquired property up to standards established for the market position intended for that property may prove inaccurate. Other risks may include costs exceeding original estimates, possibly making a project uneconomical, environmental risks and rehabilitation and subsequent leasing of the property not being completed on schedule. If the project is not completed in a timely manner, or if it costs more than expected, the borrower may experience a prolonged impairment of net operating income and may not be able to make payments on our investment, which could result in significant losses to us.
 
Insurance on mortgage loans and real estate securities collateral may not cover all losses.
 
There are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of war, that may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations and other factors, including terrorism or acts of war, also might make the insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed. Under these circumstances, the insurance proceeds received with respect to a property relating one of our investments might not be adequate to restore our economic position with respect to our investment. Any uninsured loss could result in the loss of cash flow from, and the asset value of, the affected property and the value of our investment related to such property.
 
We may experience a decline in the fair market value of our assets.
 
A decline in the fair market value of our assets may require us to recognize an “other-than-temporary” impairment against such assets under GAAP if we were to determine that, with respect to any assets in unrealized loss positions, we do not have the ability and intent to hold such assets to maturity or for a period of time sufficient to allow for recovery to the amortized cost of such assets. If such a determination were to be made, we would recognize unrealized losses through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair value of such assets on the date they are considered to be other-than-temporarily impaired. Such impairment charges reflect non-cash losses at the time of recognition; subsequent disposition of such assets could further affect our future losses or gains, as they are based on the difference between the sale price received and adjusted amortized cost of such assets at the time of sale.
 
If we classify any of our investments as held for sale, we will be required to record such investments at fair value and, as a result, there will be uncertainty as to the value of these investments.
 
Most of our portfolio investments will be in the form of securities and other investments that are not publicly traded. The fair value of securities and other investments that are not publicly traded may not be readily determinable. We will value these investments quarterly at fair value, as determined in accordance with ASC 820, Fair Value Measurements, which may include unobservable inputs. Because such valuations are subjective, the fair value of certain of our assets may fluctuate over short periods of time and our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our results of operations for a given period could be adversely affected if our determinations regarding the fair value of our investments are materially higher than the values that we ultimately realize upon their disposal.


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Liability relating to environmental matters may impact the value of properties that we may acquire upon foreclosure of the properties underlying our investments.
 
To the extent we foreclose on properties with respect to which we have extended mortgage loans, we may be subject to environmental liabilities arising from such foreclosed properties. 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 to borrow funds using real estate as collateral. To the extent that an owner of a property underlying one of our investments 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 investment held by us and may materially and adversely affect our results of operations, liquidity and financial condition, the ability to make or sustain distributions to our shareholders and the market price of our common shares.
 
If we foreclose on any properties underlying our investments, the presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs and other environmental liabilities. Such remediation costs and the discovery of material environmental liabilities attached to such properties could have a material adverse effect on us.
 
Risks Related to Sources of Financing
 
Our access to sources of financing may be limited and thus our ability to maximize our returns may be adversely affected.
 
We plan to finance investments in our target assets using diverse sources, including commercial bank financing (such as term loans and revolving credit facilities), securitizations, total return swaps, pooled match term financing, equity and debt issuances (including issuances of common shares and perpetual preferred shares), repurchase agreements and warehouse facilities, in addition to transaction or asset specific funding arrangements, in each case to the extent available to us.
 
Our access to sources of financing will depend upon a number of factors over which we have little or no control, including:
 
  •  general market conditions;
 
  •  the market’s view of the quality of our assets;
 
  •  the market’s perception of our growth potential;
 
  •  our current and potential future operating results and cash flows; and
 
  •  the market price of our common shares.
 
Dislocation or weakness in the capital and credit markets could adversely affect one or more private lenders and could cause lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing. In addition, if regulatory capital requirements imposed on our private lenders change, they may be required to limit, or increase the cost of, financing they provide to us. In general, this could reduce our liquidity and increase our financing costs or require us to seek to sell assets at an inopportune time or price, the success of which cannot be assured.


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To the extent structured financing arrangements become unavailable, as has happened in the past, this could limit borrowings under warehouse facilities and repurchase agreements that are intended to be refinanced by such financings. Consequently, depending on market conditions at the relevant time, we may have to rely more heavily on other forms of financing, such as additional 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 asset acquisition activities and/or dispose of assets, which could have a material adverse effect on us.
 
In addition to the indebtedness we will acquire in connection with our formation transactions, we intend to incur significant debt in the future, which will subject us to increased risk of loss and may reduce cash available for distribution to our shareholders, and our governing documents contain no limitation on the amount of debt we may incur.
 
Subject to market conditions and availability, we intend to incur significant debt, including through commercial bank financing (such as term loans and revolving credit facilities), securitizations, total return swaps, pooled match term financing, debt issuances, repurchase agreements and warehouse facilities, in addition to transaction or asset specific funding arrangements. The amount of debt that we incur will vary depending on our available capital, our ability to obtain and access attractive financing arrangements with lenders and the lenders’ and rating agencies’ estimate of the stability of our operating results and cash flows. Our governing documents contain no limitation on the amount of debt we may incur. Upon completion of this offering and our formation transactions, we will have approximately $46.5 million of long-term indebtedness. In the future we may significantly increase the amount of leverage we utilize at any time without approval of our shareholders. In addition, we may leverage individual assets at substantially higher levels. Incurring significant 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 of and interest on the debt 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 undrawn 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 to foreclosure or sale;
 
  •  our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that investment 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 investment it was used to finance on favorable terms, or at all.


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Interest rate fluctuations could significantly decrease our results of operations and cash flows and the market value of our investments.
 
Our primary interest rate exposures will relate to the interest income from our investments and our interest expense, as well as our interest rate swaps that we may utilize for hedging purposes. Changes in interest rates will affect our net interest income, which is the difference between the interest income we earn on our interest-earning investments and the interest expense we incur in financing these investments. A reduction in our net interest income could materially and adversely affect our results of operations, liquidity, and financial condition, the ability to make or sustain distributions to our shareholders and the market price of our common shares. An interest rate fluctuation resulting in our interest expense exceeding our interest income would result in an operating loss for us and impair our cash flows.
 
We expect that most of our interest expense will be determined by reference to floating rates, such as LIBOR or a Treasury index, plus a spread, the amount of which will depend on a variety of factors, including, without limitation: (i) for collateralized debt, the value and liquidity of the collateral, and for non-collateralized debt, our credit, (ii) the level and movement of interest rates and (iii) general market conditions and liquidity. We anticipate that, in most cases, for any period during which our investments are not match funded, the income from our floating rate investments will respond more slowly to interest rate fluctuations than our interest expense relating to such investments.
 
In a period of rising interest rates, our interest expense would likely increase, while any additional interest income we earn on our floating rate investments may not fully offset any such increase in interest expense. Additionally, the interest income we earn on our fixed rate investments would not increase, and the duration and weighted average life of such investments would increase and their market value would likely decrease. In a period of declining interest rates, interest income on our floating rate investments would likely decrease, while any decrease in our interest expense on our floating rate debt may not fully offset any such decrease in interest income. Additionally, the interest expense on our fixed rate debt would not change. These scenarios could adversely affect our operating results and cash flows.
 
Changes in the level of interest rates also may affect our ability to invest in investments, the value of our investments and our ability to realize gains from the disposition of investments. Changes in interest rates may also affect borrower default rates.
 
In the event non-recourse long-term securitizations of our taxable investments become available to us in the future, such structures may expose us to risks which could result in losses to us.
 
We may utilize non-recourse long-term securitizations of our investments in mortgage loans, especially loans originated by our Manager, if and when they become available in the future. Prior to any such financing, we may seek to finance these investments with relatively short-term facilities while we accumulate a portfolio. As a result, we would be subject to the risk that we would not be able to acquire, during the period that any short-term facilities are available, sufficient eligible assets to maximize the efficiency of a securitization. We also would bear the risk that we would not be able to obtain new short-term facilities or would not be able to renew any short-term facilities after they expire should we need more time to seek and acquire sufficient eligible assets for a securitization. In addition, adverse conditions in the capital markets, such as those that were experienced in the recent past may not permit a non-recourse securitization at any particular time or period of time or may make the issuance of any such securitization less attractive to us even when we do have sufficient eligible assets. While we would intend to retain the unrated equity component of securitizations and, therefore, still have exposure to any investments included in such securitizations, our inability


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to enter into such securitizations would increase our overall exposure to risks associated with direct ownership of such investments, including the risk of default. Our inability to refinance any short-term facilities would also increase our risk because borrowings thereunder would likely be recourse to us as an entity. If we are unable to obtain and renew short-term facilities or to consummate securitizations to finance our investments on a long-term basis, we may be required to seek other forms of potentially less attractive financing or seek to sell assets at an inopportune time or price, the success of which cannot be assured.
 
An insolvency or receivership of the securitization program sponsor could impair our ability to recover the federally tax-exempt multifamily mortgage revenue bonds and other collateral pledged by us in connection with a federally tax-exempt multifamily mortgage revenue bond securitization financing.
 
In the event the sponsor of a federally tax-exempt multifamily mortgage revenue bond securitization financing program becomes insolvent, it could be placed in receivership. In that situation, it is possible that we would not be able to recover the federally tax-exempt multifamily mortgage revenue bonds we pledged in connection with the bond securitization financing or that we would not receive all or any of the payments due from the sponsor on the residual interest held by us in such sponsor or other entity.
 
Financing our federally tax-exempt multifamily mortgage revenue bonds through securitization programs will subject us to certain risks.
 
Termination Risk.  The issuing entity of any securitization program formed to finance federally tax-exempt multifamily mortgage revenue bonds that we may acquire can terminate for a number of different reasons, including payment or other defaults, a determination that the interest on the revenue bonds is taxable, increases in short-term interest rates in excess of the interest paid on the underlying bonds, an inability to remarket the senior interests, an inability to obtain liquidity for the issuing entity, or in the case of rated revenue bonds, a ratings downgrade in the investment rating of the senior interests or a ratings downgrade of the liquidity provider for the issuing entity. In each such case, the issuing entity will be collapsed and the revenue bonds and other collateral held by the issuing entity will be sold. If the proceeds from the sale of the revenue bonds and the collateral are not sufficient to pay the principal amount of the senior interests with accrued interest and the other expenses, then we will be required, through our guarantee of the securitization program, to fund any such shortfall. As a result, we, as holder of the residual interest in the securitization program, may not only lose our investment in the residual interests but could also realize additional losses in order to fully repay obligations to the holders of the senior interests.
 
Interest Rate Risk.  We intend to finance some of the federally tax-exempt multifamily mortgage revenue bonds that we intend to acquire through securitization programs under which we deposit bonds in a securitization trust that sells senior interests, which bear interest at short-term floating rates, to third parties and issues a “residual interest” to us, entitling us to any cash flow that remains after the senior interests are paid in full. It is possible that the rates paid on the senior short-term floating rate interests could increase substantially, with the result that any residual cash flow payable to us could decline significantly or be eliminated and render this financing strategy uneconomical. Under such a scenario, the portion of our income that is excludable from gross income for U.S. federal income tax purposes could decrease significantly, with the result that the portion of any allocation that we make to our shareholders that is excludable from gross income for U.S. federal income tax purposes would also decrease significantly or be eliminated.
 
There are a number of securitization programs being utilized in the municipal bond market and, in general, the programs are highly leveraged and issue senior interests that bear interest at floating rates based on the Securities Industry and Financial Markets Association (“SIFMA”)


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Index. If the SIFMA Index rises to unexpected levels, the vast majority of such securitization programs would be adversely affected. A lengthy period of relatively high interest rates could result in the termination of many securitization programs and a serious liquidity crisis in the municipal markets, as many participants seek to sell bonds to unwind securitization programs. Under such circumstances, we may be forced to reduce the amount of leverage in or terminate our securitization programs by selling the related bonds. However, our ability to liquidate, de-lever and/or unwind our positions in securitization programs would be adversely affected by the liquidity crisis facing the sponsors of such programs and we could incur substantial losses.
 
In addition, securitization programs can terminate for several other reasons, including their scheduled maturity. Upon such termination, the underlying bonds are typically sold and, if interest rates have increased, we may suffer losses on the sales of our fixed rate bonds. Moreover, these losses may be exacerbated if the markets are unfavorable or unstable at such time. Although we intend to employ hedging strategies, our losses may not be offset by any related hedge. During the recent financial crises, many entities which have used such hedging strategies discovered that the values of the bonds and the related hedges did not always move in relation to each other as had been expected, and substantial losses were incurred. Additionally, when a securitization program is terminated, the holders of senior interests are generally entitled to receive a share of any gain realized upon the sale of the underlying bonds. If a bond were sold with a substantial gain—for example because interest rates had dropped significantly—we may suffer an economic loss on a related hedge that may not be fully offset by the gain, after paying the portion of such gain owed to holders of senior interests.
 
Tax Treatment of Residual Interest.  We intend to finance our position in federally tax-exempt multifamily mortgage revenue bonds through securitization programs, resulting in us holding residual interests, which entitle us to a share of the tax-exempt interest on the underlying bonds. The securitization vehicles that issue the residual interests will receive an opinion of legal counsel to the effect that the issuer should be classified as a partnership for U.S. federal income tax purposes and the holders of the residual interests would be treated as partners of such partnership. Consequently, holders of the residual interests would be entitled to treat their share of the tax-exempt income allocated to them as excludable from gross income for U.S. federal income tax purposes. However, it is possible that the IRS could disagree with those conclusions and an alternative characterization, such as the treatment of the senior interest holders in such securitization programs as lenders, could cause income from the residual interests to be treated as ordinary taxable income.
 
Our counsel has not passed upon and does not assume any responsibility for, but rather has assumed, the continuing correctness of the opinions of counsel relating to (i) the exclusion from gross income for U.S. federal income tax purposes of interest on any bonds owned or to be owned by us or held in any securitization in which we own a residual interest and (ii) the tax treatment of distributions on any residual interests. Our counsel has not independently verified whether any events or circumstances have occurred since the date such opinions were rendered that would adversely affect the conclusions set forth therein.
 
Remarketing Risk.  The senior interests in the securitization programs being supported by our equity collateral will bear interest at variable rates which are reset periodically by a remarketing agent to reflect current market conditions, the strength of the credit enhancement and liquidity support provider for the senior interests and the credit quality of the underlying bonds. If the underlying bonds in a securitization program experience adverse events, such as taxability or deterioration in credit, or if there occurs an adverse event in the general credit markets, lower liquidity levels in the markets, declining confidence in bonds or credit or liquidity provider rating changes, the rates on the senior interests could increase, perhaps substantially, reducing or even eliminating the cash flow available to us as holder of the residual interest. In some cases, the market for the senior interests could cease to exist,


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resulting in a mandatory tender of the senior certificates and the forced sale of the underlying bonds, most likely at a substantial loss to us. In addition, the third-party financial institution that sponsors the securitization program may raise the fees charged for remarketing the senior interests. As holder of the residual interests, we do not control who provides credit or liquidity support for the senior interests or the appointment or removal of the remarketing agent for the senior interests. Any of these events would adversely affect the returns on the residual interests held by us.
 
Any warehouse facilities that we may obtain in the future may limit our ability to acquire assets, and we may incur losses if the collateral is liquidated.
 
To the extent available, we intend to use warehouse facilities pursuant to which we would accumulate mortgage loans in anticipation of a securitization financing, which assets would be pledged as collateral for such facilities until the securitization transaction is consummated. In order to borrow funds to acquire assets under any future warehouse facilities, we expect that our lenders thereunder would have the right to review the potential assets for which we are seeking financing. We may be unable to obtain the consent of a lender to acquire assets that we believe would be beneficial to us and we may be unable to obtain alternate financing for such assets. In addition, no assurance can be given that a securitization structure would be consummated with respect to the assets being warehoused. If the securitization is not consummated, the lender could liquidate the warehoused collateral and we would then have to pay any amount by which the original purchase price of the collateral assets exceeds its sale price, subject to negotiated caps, if any, on our exposure. In addition, regardless of whether the securitization is consummated, if any of the warehoused collateral is sold before the consummation, we would have to bear any resulting loss on the sale. Currently, we have no warehouse facilities in place, and no assurance can be given that we will be able to obtain one or more warehouse facilities on favorable terms, or at all.
 
Repurchase agreements and commercial bank financing that we use to finance our assets may require us to provide additional collateral or pay down debt.
 
Upon completion of this offering and our formation transactions, we will have financing in place pursuant to term loans and repurchase agreements with an aggregate amount of approximately $46.5 million as of March 31, 2011, and in the future we may utilize additional repurchase agreements and/or other types of financing to finance our assets to the extent they are available on acceptable terms. There can be no assurance that we will be able to obtain one or more such agreements or facilities on favorable terms, or at all. Such financing arrangements involve the risk that the market value of the loans sold or pledged by us to the repurchase agreement counterparty or provider of the commercial bank financing may decline in value, in which case the lender may require us to provide additional collateral or to repay all or a portion of the funds advanced. We may not have the funds available to repay our debt at that time, which would likely result in defaults unless we are able to raise the funds from alternative sources, which we may not be able to obtain on favorable terms or at all. Posting additional collateral would reduce our liquidity and limit our ability to leverage our assets. If we cannot meet these requirements, the lender could accelerate our indebtedness, increase the interest rate on advanced funds and terminate our ability to borrow funds from them, which could materially and adversely affect us and our ability to implement our business plan. In addition, in the event that the lender files for bankruptcy or becomes insolvent, our loans may become subject to bankruptcy or insolvency proceedings, thus depriving us, at least temporarily, of the benefit of the assets securing our loans. Such an event could restrict our access to commercial bank financing and increase our cost of capital. The providers of repurchase agreement financing and commercial bank financing may also require us to maintain a certain amount of cash or set aside assets sufficient to maintain a specified liquidity position that would allow us to satisfy our collateral obligations. As a result, we may not be


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able to leverage our assets as fully as we would choose, which could reduce our return on assets. In the event that we are unable to meet these collateral obligations, our financial condition, liquidity and prospects could deteriorate rapidly.
 
Lenders may require us to enter into restrictive covenants relating to our operations.
 
Lenders (especially in the case of commercial bank financing) may impose restrictions on us that would affect our ability to incur additional debt, make certain investments or acquisitions, reduce liquidity below certain levels, make distributions to our shareholders, redeem debt or equity securities and impact our flexibility to determine our operating policies and investment strategies. For example, our loan documents may contain negative covenants that limit, among other things, our ability to repurchase our common shares, distribute more than a certain amount of our net income to our shareholders, employ leverage beyond certain amounts, 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 these agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and enforce their interests against existing collateral. We may also be subject to cross-default and acceleration rights and, with respect to collateralized debt, the posting of additional collateral and foreclosure rights upon default.
 
We may not be able to renew our total return swaps, which could adversely impact our financing strategy.
 
We may finance certain of our investments through the use of total return swaps, in which we agree to make payments to another party based on a set rate while that party agrees to make payments to us based on the total return of the investment. If we do, we may wish to renew many of the swaps, which are for specified terms (generally between three and five years), as they mature. However, there are a limited number of providers of such swaps, and there is no assurance the initial swap providers will choose to renew the swaps, and, if they fail to renew them, that we would be able to enter into new total return swaps with suitable replacement providers. Providers may choose not to renew our total return swaps for a number of reasons, including:
 
  •  increases in the provider’s cost of funding;
 
  •  insufficient volume of business with a particular provider;
 
  •  our desire to invest in a type of swap that the provider does not view as economically attractive due to changes in interest rates or other market factors; or
 
  •  our inability to agree with a provider on terms.
 
If one or more executives of Pembrook Capital, including our Manager, are no longer employed by Pembrook Capital, financial institutions may not provide future financing to us, which could materially and adversely affect us.
 
If financial institutions with which we finance our investments require that one or more of the executives of Pembrook Capital, including our Manager, continue to serve in such capacity and if one or more of these executives are no longer employed by Pembrook Capital, it may constitute an event of default and the financial institution providing such financing may have acceleration rights with respect to outstanding borrowings and termination rights with respect to our ability to finance our future investments with that institution. If we are unable to obtain financing for our accelerated borrowings and for our future investments under such circumstances, we could be materially and adversely affected.


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Risks Related to Hedging
 
We may enter into hedging transactions that could expose us to contingent liabilities in the future.
 
Part of our strategy will involve entering into hedging transactions that could require us to fund cash payments in certain circumstances (such as the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the hedging instrument). The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges. These economic losses could be significant and will be reflected in our operating results and cash flows, and our ability to fund these obligations will depend on our liquidity and access to capital at the time, and the need to fund these obligations could materially and adversely impact us.
 
Hedging against interest rate exposure may fail to protect or could adversely affect us.
 
We intend to pursue various hedging strategies to seek to reduce our exposure to adverse changes in interest rates. Our hedging activity will vary in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us because, among other things:
 
  •  interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;
 
  •  available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;
 
  •  due to a credit loss, the duration of the hedge may not match the duration of the related liability;
 
  •  the credit rating of the hedging counterparty owing money on the hedge may be withdrawn or downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and
 
  •  the hedging counterparty owing money on the hedge may default on its obligation to us.
 
In addition, we may fail to recalculate, readjust and execute hedges in an efficient and effective manner.
 
Any hedging activity in which we engage may materially and adversely affect us. Therefore, while we may enter into hedging transactions seeking to reduce interest rate risks, unanticipated changes in interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio positions or liabilities being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss.


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Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs that could result in significant losses.
 
The cost of using hedging instruments increases as the period covered by the instrument increases, and during periods of rising and volatile interest rates we may increase our hedging activity and thus increase our hedging costs. In addition, hedging instruments involve risk since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying hedging transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in its default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our commitments, if any, at the then current market price. Although generally we will seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty and we may not be able to enter into an offsetting contract in order to cover our risk. We cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in significant losses. Furthermore, to the extent that any hedging strategy involves the use of over-the-counter derivatives transactions, such a strategy would be affected by implementation of the various regulations adopted pursuant to the Dodd-Frank Act.
 
We may fail to qualify for hedge accounting treatment.
 
We intend to record derivative and hedging transactions in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, or ASC 815. Under these standards, we may fail to qualify for hedge accounting treatment for a number of reasons, including if we use instruments that do not meet the ASC 815 definition of a derivative (such as short sales), we fail to satisfy ASC 815 hedge documentation and hedge effectiveness assessment requirements or our instruments are not highly effective. If we fail to qualify for hedge accounting treatment, our operating results may suffer because losses on the derivatives that we enter into may not be offset by a change in the fair value of the related hedged transaction or item.
 
Risks Related to Our Common Shares
 
There is currently no trading market for our common shares and an active trading market may never develop, which could cause our common shares to trade at a discount and make it difficult for holders to sell our common shares.
 
Our common shares are newly-issued securities for which there is currently no trading market. We intend to apply to list our common shares on the NYSE under the symbol “PRC.” However, there can be no assurance that we will be approved for listing on the NYSE or that, if approved, an active trading market for our common shares will develop or, if one develops, be maintained. Accordingly, no assurance can be given as to the ability of our shareholders to sell their common shares when desired, or at all, or the price at which our shareholders may be able to sell their common shares.


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Some of the factors that could negatively affect the market price of our common shares include:
 
  •  our actual or projected operating results, financial condition, cash flows and liquidity, or changes in business strategy or prospects;
 
  •  actual or perceived conflicts of interest with Pembrook Capital, including our Manager, and individuals, including our executives;
 
  •  equity issuances by us, or share resales by our shareholders, or the perception that such issuances or resales may occur;
 
  •  accounting problems in financial statements issued and presented within this registration statement or to be issued and included in future filings that we make with the SEC or otherwise publish, as well as material weaknesses and significant deficiencies in our internal control over financial reporting;
 
  •  publication of research reports about us, the commercial real estate industry or the tax-exempt finance industry;
 
  •  changes in market valuations of similar companies;
 
  •  adverse market reaction to our financing strategy, leverage policy, distribution policy or indebtedness we incur in the future;
 
  •  additions to or departures of the senior managers of Pembrook Capital, including our Manager;
 
  •  speculation in the press or investment community;
 
  •  our failure to meet, or the lowering of, our earnings’ estimates or those of any securities analysts;
 
  •  our failure to maintain our exemption from the Investment Company Act;
 
  •  our failure to qualify as a publicly traded limited liability company taxed as a partnership;
 
  •  our failure to comply with applicable legal and regulatory requirements, including the requirements of the NYSE or the Sarbanes-Oxley Act;
 
  •  price and volume fluctuations in the stock market generally; and
 
  •  general market and economic conditions, including the current state of the credit and capital markets.
 
Market factors unrelated to our performance could also negatively impact the market price of our common shares. If we have begun to make distributions to our shareholders, 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 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 price 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.
 
Common shares eligible for future sale may have adverse effects on the market price of our common shares.
 
We are offering           of our common shares as described in this prospectus (excluding the underwriters’ overallotment option to purchase up to an additional           common


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shares). In addition, as part of our formation transactions, we will issue an aggregate of           of our common shares to investors in the Pembrook Funds. Our equity incentive plans will provide for grants of restricted common shares and other equity-based awards up to an aggregate of           of our common shares, including the awards to our Manager of           restricted units described in this prospectus concurrently with the completion of this offering. Pembrook Capital and each other party receiving common shares in connection with our formation transactions will agree that, for a period of 365 days after the date of this prospectus, they will not, without the prior written consent of Deutsche Bank, dispose of or hedge any of our common shares or securities convertible into or exchangeable or exercisable for our common shares, subject to certain exceptions and extension in certain circumstances as described elsewhere in this prospectus. Assuming no exercise of the underwriters’ overallotment option to purchase additional common shares and the vesting of the aforementioned restricted units, approximately     % of our common shares outstanding upon consummation of our formation transactions and this offering will be subject to lockup agreements. When this lockup period expires,          common shares, including common shares delivered upon settlement of restricted units vested at such time, will become freely eligible for sale, subject, in the case of common shares held by any of our affiliates, to the requirements of Rule 144 under the Securities Act of 1933, as amended (or the Securities Act), which are described under “Shares Eligible for Future Sale.”
 
In addition, we expect to grant parties who enter into lock-up agreements in connection with our formation transactions registration rights with respect to the resale of an aggregate of          common shares to be received by such parties in connection with our formation transactions. We also intend to file with the SEC a registration statement on Form S-8 covering the common shares issuable under our equity incentive plans. Common shares covered by such registration statement will be eligible for transfer or resale without restriction under the Securities Act, unless held by affiliates. The market price of our common shares may decline significantly upon the registration of additional common shares pursuant to registration rights granted in connection with our formation transactions or otherwise.
 
We cannot predict the effect, if any, of future issuances or resales of our common shares, or the availability of shares for future issuances or resales, on the market price of our common shares. The market price of our common shares may decline significantly when the lock-up agreements referred to above lapse. Issuances or resales of substantial amounts of common shares, or the perception that such issuances or resales could occur, may adversely affect the prevailing market price for our common shares.
 
Also, we may issue additional common shares in subsequent public offerings or private placements to fund new investments or for other purposes. We are not required to offer any such common shares to existing shareholders on a preemptive basis. Therefore, it may not be possible for existing shareholders to participate in such future share issuances, which may dilute the existing shareholders’ interests in us.
 
We have not established a minimum distribution payment level and we cannot assure you of our ability to make or sustain distributions to shareholders in the future.
 
Although we intend to make regular quarterly distributions to our common shareholders of at least 90% of our Adjusted Core Earnings over time, we have not established a minimum distribution payment level and our ability to make or sustain distributions in the future may be adversely affected by a number of factors, including the risk factors described in this prospectus. All distributions will be made at the discretion of our Board of Managers and will depend on our actual and projected results of operations, liquidity and financial condition, financing covenants, applicable law and other factors as our Board of Managers may deem


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relevant from time to time. We believe that a change in any one of the following factors could impair our ability to make or sustain distributions to our shareholders:
 
  •  our ability to make attractive investments on a consistent basis;
 
  •  our ability to finance our investments on favorable terms;
 
  •  margin calls or other expenses that reduce our cash flow;
 
  •  defaults in our 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.
 
Furthermore, under the Delaware Limited Liability Company Act, or the Delaware LLC Act, a limited liability company generally is not permitted to make a distribution if, after giving effect to the distribution, the liabilities of the company will exceed the value of the company’s assets.
 
As a result, no assurance can be given that we will be able to make distributions to our shareholders at any time in the future, including those we currently intend to make, 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, allocations that we make to our shareholders with respect to our taxable investments will generally be taxable to our shareholders as ordinary income. However, a portion of such allocations may be attributable to long- or short-term capital gains recognized by us. 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 may use a portion of the net proceeds from this offering to make quarterly distributions, which would, among other things, reduce our cash available for investing.
 
Prior to the time we have fully invested the net proceeds from this offering, we may fund any distributions we determine to make to our shareholders out of the net proceeds from this offering, which would reduce the amount of cash we have available for investing and other purposes. The use of these net proceeds for distributions would be dilutive to our financial results. In addition, funding our distributions from these net proceeds may constitute a return of capital to our investors, which would have the effect of reducing each shareholder’s basis in our common shares.
 
Future issuances of debt or preferred equity securities, which would rank senior to our common shares, may adversely affect the market price of our common shares.
 
We will acquire long-term indebtedness aggregating approximately $46.5 million as of March 31, 2011 and issue three series of preferred shares with an aggregate liquidation preference of $99.0 million in our formation transactions. This indebtedness and the preferred shares, as well as any future indebtedness we incur or preferred shares that we issue, will be senior to our common shares with respect to distributions and payments in connection with any voluntary or involuntary liquidation, dissolution or winding up of our company. In addition, our indebtedness and preferred shares will subject us to covenants restricting our operating flexibility, and may have rights, preferences and privileges more favorable than those of our common shares and may result in dilution to our common shareholders. We and, indirectly, our shareholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or preferred equity securities in the future will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount,


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timing or nature of our future capital-raising activities. Thus, our common shareholders will bear the risk of our future capital-raising activities reducing the market price of our common shares and diluting the value of their share holdings in us.
 
Risks Related to Our Organization and Structure
 
Maintenance of our exemption from registration under the Investment Company Act imposes significant limits on our operations.
 
We intend to conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the Investment Company Act. We expect to rely upon the exemption from registration as an investment company under the Investment Company Act pursuant to Section 3(c)(5)(C) of the Investment Company Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exemption generally requires that at least 55% of our or our subsidiaries’ assets, as applicable, must be comprised of qualifying real estate assets and at least 80% of each of their portfolios must be comprised of qualifying real estate assets and real estate-related assets under the Investment Company Act. We expect to rely on guidance published by the SEC staff or on our analyses of guidance published with respect to other types of assets to determine which assets are qualifying real estate assets and real estate-related assets. To the extent that the SEC staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy accordingly. In addition, we may be limited in our ability to make certain investments and these limitations could result in the subsidiary holding assets we might wish to sell or selling assets we might wish to hold.
 
There can be no assurance that the laws and regulations governing our Investment Company Act status, including the Division of Investment Management of the SEC providing more specific or different guidance regarding these exemptions, will not change in a manner that adversely affects our operations. If we or our subsidiaries fail to maintain an exception or exemption from the Investment Company Act, we could, among other things, be (i) required to change the manner in which we conduct our operations to avoid being required to register as an investment company, (ii) required to effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so, (iii) required to register as an investment company, (iv) subject to monetary penalties and injunctive relief in an action brought by the SEC, or (v) unable to enforce contracts with third parties and that third parties could seek to obtain rescission of transactions undertaken during the period it was established that we were an unregistered investment company, any of which could materially and adversely affect the market price of our common shares, the sustainability of our business model and our ability to make or sustain distributions to our shareholders.
 
Our operating agreement and management agreement contain provisions that may inhibit potential acquisition bids that shareholders may consider favorable, and the market price of our common shares may be lower as a result.
 
Our operating agreement contains provisions that have an anti-takeover effect and inhibit a change in our Board of Managers. These provisions include the following:
 
  •  allowing only our Board of Managers to fill newly-created manager vacancies;
 
  •  requiring advance notice for our shareholders to nominate candidates for election to our Board of Managers or to propose business to be considered by our shareholders at a meeting of shareholders;


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  •  our ability to issue additional securities, including, but not limited to, common shares, as well as preferred shares and debt securities that rank senior to our common shares, without approval by shareholders;
 
  •  the ability of our Board of Managers to amend our operating agreement without the approval of our shareholders except under certain specified circumstances; and
 
  •  limitations on the ability of shareholders to call special meetings of shareholders or to act by written consent.
 
Certain provisions of the management agreement also could make it more difficult for third parties to acquire control of us by various means, including limitations on our right to terminate the management agreement and a requirement that, under certain circumstances, we make a substantial payment to our Manager in the event of a termination.
 
Our rights and the rights of our shareholders to take action against our managers and our Manager are limited, which could limit your recourse in the event actions are taken that are not in your best interests.
 
Our operating agreement limits the liability of our managers to us and our shareholders for money damages, except for liability resulting from:
 
  •  any breach of the manager’s duty of loyalty to us or our shareholders;
 
  •  acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or
 
  •  any transaction from which the manager derived an improper personal benefit
 
We intend to enter into indemnification agreements with our managers and officers that will obligate us to indemnify them to the maximum extent permitted by Delaware law. In addition, our operating agreement authorizes us to obligate our company to indemnify our present and former managers and officers for actions taken by them in those capacities to the maximum extent permitted by Delaware law. Our operating agreement requires us to indemnify each present or former manager or officer, to the maximum extent permitted by Delaware law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to fund the defense costs incurred by our managers and officers. As a result, we and our shareholders may have more limited rights against our managers and officers than might otherwise exist absent the current provisions in our operating agreement or that might exist with other companies. See “Description of Shares—Operating Agreement—Limitations on Liability and Indemnification of Our Managers and Officers.”
 
Our management agreement with our Manager requires us to indemnify our Manager and its affiliates against any and all claims and demands arising out of claims by third parties caused by acts or omissions of our Manager and its affiliates not constituting bad faith, willful misconduct, gross negligence or reckless disregard of our Manager’s duties under the management agreement.
 
Due to the liability limitations contained in our operating agreement and our indemnification arrangements with our managers and officers and our Manager, our and our shareholders’ rights to take action against our managers and officers and our Manager are limited, which could limit your recourse in the event actions are taken that are not in your best interests.


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Our operating agreement contains provisions that make removal of our managers difficult, which could make it difficult for our shareholders to effect changes to our management.
 
Our operating agreement provides that a manager may only be removed for cause upon the affirmative vote of holders of two-thirds of the votes entitled to be cast in the election of managers. Vacancies may be filled only by a majority of the remaining managers in office, even if less than a quorum. These requirements make it more difficult to change our management by removing and replacing managers and may prevent a change in control of our company that is in the best interests of our shareholders.
 
Risks Related to Federal Income Tax
 
If we fail to satisfy the “qualifying income exception” under the tax rules for publicly traded partnerships, all of our income will be subject to an entity-level tax.
 
We intend to operate so that we qualify as a partnership, and not as an association or a publicly traded partnership taxable as a corporation, for U.S. federal income tax purposes. In general, if a partnership is “publicly traded” (as defined in the Code), it will be treated as a corporation for U.S. federal income tax purposes. A publicly traded partnership will, however, be treated as a partnership, and not as a corporation, for U.S. federal income tax purposes, so long as (1) at least 90% of its gross income for each taxable year constitutes “qualifying income” within the meaning of Section 7704(d) of the Code and (2) it would not be included in the definition of a regulated investment company, or RIC, under Section 851(a) of the Code if it were a domestic corporation (which generally applies to entities required to register under the Investment Company Act). We refer to this exception as the “qualifying income exception.” Qualifying income generally includes rents, dividends, interest (to the extent such interest is neither derived from the “conduct of a financial or insurance business” nor based, directly or indirectly, upon “income or profits” of any person), and capital gains from the sale or other disposition of stocks, bonds and real property. Qualifying income also includes other income derived from the business of investing in, among other things, stocks and securities.
 
If we fail to satisfy the “qualifying income exception” described above, we would be treated as a corporation for U.S. federal income tax purposes. In that event, items of income, gain, loss, deduction and credit would not pass through to our common shareholders and such shareholders would be treated for U.S. federal (and certain state and local) income tax purposes as shareholders in a corporation. We would be required to pay income tax at regular corporate rates on all of our taxable income. In addition, we would likely be liable for state and local income and/or franchise taxes on all of our income. Distributions to common shareholders would constitute ordinary dividend income taxable to such shareholders to the extent of our earnings and profits, and these distributions would not be deductible by us in computing our taxable income. Additionally, distributions paid to non-U.S. common shareholders would be subject to U.S. federal withholding taxes at the rate of 30% (or such lower rate provided by an applicable tax treaty). Thus, if we were treated as a corporation, such treatment would result in a material reduction in cash flow and after-tax returns for our common shareholders and thus would result in a substantial reduction in the value of our common shares.
 
Our common shareholders will be subject to U.S. federal income tax on their share of our taxable income, regardless of whether or when they receive any cash distributions from us, and may recognize income in excess of our cash distributions.
 
We intend to operate so as to qualify, for U.S. federal income tax purposes, as a partnership and not as an association or a publicly traded partnership taxable as a corporation.


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Our common shareholders will be subject to U.S. federal income taxation and, in some cases, state and local income taxation, on their allocable share of our items of income, gain, loss, deduction, and credit, regardless of whether or when they receive cash distributions. Although we do not intend to invest in any foreign entities, if we do, our common shareholders may be subject to foreign taxation on their allocable share of our items of income, gain, loss, deduction and credit, regardless of whether or when they receive cash distributions. In addition, certain of our assets may produce taxable income without corresponding distributions of cash to us or produce taxable income prior to or following the receipt of cash relating to such income. Consequently, it is possible that the U.S. federal income tax liability of shareholders with respect to their respective allocable shares of our earnings in a particular taxable year could exceed the cash distributions we make to shareholders with respect to that taxable year, thus requiring out-of-pocket tax payments by shareholders. Furthermore, if we did not make cash distributions with respect to a taxable year, our common shareholders will still have a tax liability attributable to their allocation of our taxable income for that taxable year.
 
Certain tax risks may affect our performance and returns on our capital.
 
In order for distributions on our federally tax-exempt multifamily mortgage revenue bonds to our common shareholders to be excludable from gross income for purposes of federal income taxation, we must be treated as a partnership for U.S. federal income tax purposes and our common shares must be treated as equity interests in such partnership. We will receive at closing an opinion from Greenberg Traurig, LLP to the effect that (i) we should be classified, for U.S. federal income tax purposes, as a partnership, and not as an association or publicly traded partnership taxable as a corporation, (ii) we should not be treated as a taxable mortgage pool, (iii) our common shareholders should be treated as partners in such partnership for U.S. federal income tax purposes and (iv) assuming the opinions set forth in clauses (i)-(iii) are correct, the allocations with respect to tax-exempt interest on our federally tax-exempt multifamily mortgage revenue bonds paid by us to our common shareholders should be excludable from gross income for purposes of federal income taxation. It must be emphasized that the opinion of Greenberg Traurig speaks as of the date issued and will be based on various assumptions and representations relating to our organization, operations, assets, activities and income, including that all factual representations and statements set forth in all relevant documents, records and instruments are true and correct, and that we, at all times, have operated and will continue to operate in accordance with the method of operation described in our organizational documents and this prospectus, and is conditioned upon factual representations and covenants regarding our organization, assets, income, and present and future conduct of our activities and operations, and assumes that such representations and covenants are accurate and complete. Moreover, a legal opinion is a statement of the best professional judgment of the opining law firm, is not binding upon the IRS, which frequently challenges positions set forth in legal opinions, or the courts, and is not a guaranty that the IRS will not assert a contrary position with respect to such issue or that a court will not sustain such a position asserted by the IRS. There is limited statutory, administrative and judicial authority addressing certain aspects of the treatment of instruments similar to our common shares for U.S. federal income tax purposes. No advance rulings have been sought from the IRS regarding any matter discussed in this prospectus. Each common shareholder will agree by accepting common shares to treat our common shares as a partnership interest for U.S. federal income tax purposes. However, the IRS might attempt to treat our common shares for U.S. federal income tax purposes as our debt. If our common shares were treated as debt, distributions made to shareholders, including distributions of federally tax exempt income, would be includible in gross income as taxable interest income. We have no obligation to redeem our common shares and our common shareholders have no right to require us to


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redeem or repurchase our common shares in the event that our common shares are ultimately determined to be characterized as debt for U.S. federal income tax purposes.
 
The ability of our common shareholders to deduct certain expenses incurred by us may be limited.
 
We believe that the expenses incurred by us, including base management fees and incentive fees paid to our Manager, will generally not be treated as “miscellaneous itemized deductions” and will be deductible as ordinary trade or business expenses. In general, “miscellaneous itemized deductions” may be deducted by a common shareholder that is an individual, estate or trust only to the extent that such deductions exceed, in the aggregate, 2% of such holder’s adjusted gross income. In addition, “miscellaneous itemized deductions” are also not deductible in determining the alternative minimum tax liability of a common shareholder. There are also limitations on the deductibility of itemized deductions by individuals whose adjusted gross income exceeds a specified amount, adjusted annually for inflation. Although we believe that our expenses will not be treated as “miscellaneous itemized deductions,” there can be no assurance that the IRS will not successfully challenge that treatment. In that event, a holder’s inability to deduct all or a portion of such expenses could result in an amount of taxable income to such holder with respect to us that exceeds the amount of cash actually distributed to such holder for the year.
 
Our common shareholders may recognize a greater taxable gain (or a smaller tax loss) on a disposition of our common shares than expected because of the treatment of our debt under the partnership tax accounting rules.
 
We expect to incur debt for a variety of reasons, including for acquisitions as well as other purposes. Under partnership tax accounting principles (which apply to us), our debt is generally allocable to our common shareholders, who will realize the benefit of including their allocable share of our debt in the tax basis of their common shares. A holder’s tax basis in our common shares will be adjusted for, among other things, distributions of cash and allocations of our losses, if any. At the time a common shareholder sells its shares, the holder’s amount realized on the sale will include not only the sales price of the shares but also such holder’s portion of our debt allocable to those shares (which is treated as proceeds from the sale of those shares). Depending on the nature of our activities after having incurred the debt, and the utilization of the borrowed funds, a later sale of our common shares could result in a larger taxable gain (or a smaller tax loss) than anticipated.
 
Tax-exempt common shareholders will likely recognize significant amounts of “unrelated business taxable income,” the amount of which may be material.
 
An organization that is otherwise exempt from U.S. federal income tax is nonetheless subject to taxation with respect to its “unrelated business taxable income,” or UBTI. Because we have incurred “acquisition indebtedness” with respect to certain securities we hold (either directly or indirectly through subsidiaries that are treated as partnerships or are disregarded for U.S. federal income tax purposes), a proportionate share of a holder’s income from us with respect to such securities will be treated as UBTI. Accordingly, tax-exempt common shareholders will likely recognize significant amounts of UBTI. For certain types of tax-exempt entities, the receipt of any UBTI might have adverse consequences. Tax-exempt common shareholders are strongly urged to consult their tax advisors regarding the tax consequences of owning our common shares.


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There can be no assurance that the IRS will not assert successfully that some portion of our income is properly treated as effectively connected income with respect to non-U.S. common shareholders.
 
While it is expected that our method of operation will not result in the generation of significant amounts of income treated as effectively connected with the conduct of a U.S. trade or business with respect to non-U.S. common shareholders, there can be no assurance that the IRS will not assert successfully that some portion of our income is properly treated as effectively connected income with respect to such non-U.S. holders. To the extent our income is treated as effectively connected income, non-U.S. holders generally would be required to (i) file a U.S. federal income tax return for such year reporting their allocable portion, if any, of our income or loss effectively connected with such trade or business and (ii) pay U.S. federal income tax at graduated U.S. tax rates on any such income. Additionally, we would be required to withhold tax (currently at a rate of 35%) on a non-U.S. holder’s allocable share of any effectively connected income. Non-U.S. holders that are corporations also would be required to pay branch profits tax at a 30% rate (or lower rate provided by applicable treaty). To the extent our income is treated as effectively connected income, it may also be treated as nonqualifying income for purposes of the qualifying income exception.
 
If the IRS challenges our election to mark our assets to market for U.S. federal income tax purposes, the taxable income allocated to our common shareholders would be adjusted (possibly retroactively) and our ability to provide tax information on a timely basis could be negatively affected.
 
We intend to qualify as a trader in securities and may elect to mark-to-market our positions in securities that we hold as a trader, in accordance with Section 475(f) of the Code. There are limited authorities under Section 475(f) of the Code as to what constitutes a trader for U.S. federal income tax purposes. Under other sections of the Code, the status of a trader in securities depends on all of the facts and circumstances, including the nature of the income derived from the taxpayer’s activities, the frequency, extent and regularity of the taxpayer’s securities transactions, and the taxpayer’s investment intent. Therefore, there can be no assurance that we will qualify as a trader in securities eligible for the mark-to-market election. We will not receive an opinion from counsel or a ruling from the IRS regarding our qualification as a trader in connection with this offering. If our eligibility for, or our application of, the mark-to-market election were successfully challenged by the IRS, in whole or in part, it could, depending on the circumstances, result in retroactive (or prospective) changes in the amount of taxable income recognized by us and allocated to our common shareholders. An inability to utilize the mark-to-market election might also have an adverse effect on our ability to provide tax information to you on a timely basis. The IRS could also challenge any conventions that we use in computing, or in allocating among our common shareholders, any gain or loss resulting from the mark-to-market election. See “Material U.S. Federal Income Tax Considerations—Taxation of Our Common Shareholders—Allocation of Profits and Losses.”
 
In addition, if we make the election, we intend to take the position that our mark-to-market gain or loss, and any gain or loss on the actual disposition of marked-to-market assets, should be treated as ordinary income or loss. However, because the law is unclear as to the treatment of assets that are held for investment, and the determination of which assets are held for investment, the IRS could take the position that the mark-to-market gain or loss attributable to certain assets should be treated as capital gain or loss and not as ordinary gain or loss. In that case, we will not be able to offset our non-cash ordinary income with any resulting capital losses from such assets, which could increase the amount of our non-cash taxable income.


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The IRS may challenge our allocations of income, gain, loss, deduction and credit.
 
Our operating agreement provides for the allocation of income, gain, loss, deduction and credit among the our common shareholders. The rules regarding partnership allocations are complex. It is possible that the IRS could successfully challenge the allocations in the operating agreement and reallocate items of income, gain, loss, deduction and credit in a manner which reduces benefits or increases income allocable to our common shareholders. See “Material U.S. Federal Income Tax Considerations—Taxation of Our Common Shareholders—Allocation of Profits and Losses.”
 
The IRS Schedules K-1 we will provide will be significantly more complicated than the IRS Forms 1099 provided by REITs and regular corporations, and our common shareholders may be required to request an extension of time to file their tax returns.
 
Our common shareholders are required to take into account their allocable share of items of our income, gain, loss, deduction and credit for our taxable year ending within or with their taxable year. We will use reasonable efforts to furnish our common shareholders with tax information (including IRS Schedule K-1) as promptly as possible, which describes their allocable share of such items for our preceding taxable year. However, we may not be able to provide our common shareholders with tax information on a timely basis. Because our common shareholders will be required to report their allocable share of each item of our income, gain, loss, deduction, and credit on their tax returns, tax reporting for our common shareholders will be significantly more complicated than for shareholders in a REIT or a regular corporation. In addition, delivery of this information to our common shareholders will be subject to delay in the event of, among other reasons, the late receipt of any necessary tax information from an investment in which we hold an interest. It is therefore possible that, in any taxable year, our common shareholders will need to apply for extensions of time to file their tax returns.
 
Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available, and which is subject to potential change, possibly on a retroactive basis. Any such change could result in adverse consequences to the our common shareholders.
 
The U.S. federal income tax treatment of our common shareholders depends in some instances on determinations of fact and interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. The U.S. federal income tax rules are constantly under review by persons involved in the legislative process and the IRS, resulting in changes in and revised interpretations of established concepts. Also, the IRS pays close attention to the proper application of tax laws to partnerships and investments in foreign entities. The present U.S. federal income tax treatment of an investment in our common shares may be modified by administrative, legislative or judicial interpretation at any time, and any such action may affect investments and commitments we have previously made. We and our common shareholders could be adversely affected by any such change in, or any new tax law, regulation or interpretation. Our operating agreement permits our Board of Managers to modify (subject to certain exceptions) the operating agreement from time to time, without the approval of our common shareholders. These modifications may address, among other things, certain changes in U.S. federal income tax regulations, legislation or interpretation. In some circumstances, such revisions could have an adverse impact on some or all of our common shareholders. Moreover, we intend to apply certain assumptions and conventions in an attempt to comply with applicable rules and to report income, gain, deduction, loss and credit to our common shareholders in a manner that reflects their distributive share of our items, but these assumptions and conventions may not be in compliance with all aspects of applicable tax requirements. It is possible that the IRS will assert successfully that the conventions and


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assumptions we use do not satisfy the technical requirements of the Code and/or Treasury regulations and could require that items of income, gain, deduction, loss or credit be adjusted or reallocated in a manner that adversely affects our common shareholders.
 
If, for U.S. federal income tax purposes, we were classified as a taxable mortgage pool within the meaning of Section 7701(i) of the Code, we would be taxable as a corporation.
 
A taxable mortgage pool is an entity (i) substantially all of the assets of which consist of debt obligations and more than 50% of such debt obligations consists of real estate mortgages, (ii) which is an obligor of debt with two or more maturities and (iii) under the terms of the debt obligations under clause (ii), payments bear a relationship to payments on the debt obligations described in clause (i). The IRS has the authority to treat certain equity interests in an issuer as debt for purposes of the taxable mortgage pool rules. We believe that we should not be treated as a taxable mortgage pool because all of our common shares will have the same maturity and there is no relationship between the timing of payments on our investments and the timing of distributions in respect of our common shares. There is no assurance, however, that the IRS will not contend that we constitute a taxable mortgage pool that should be taxed as a corporation.
 
If in any taxable year we were treated as a taxable mortgage pool taxable as a corporation for U.S. federal income tax purposes, our income and deductions would be reported only on our tax return rather than being passed through to our common shareholders and we would be required to pay income tax at corporate rates on any portion of our net income that did not constitute tax-exempt income. In this regard, a portion of our tax-exempt income may be included in determining our AMT liability. The imposition of any such tax would reduce the amount of cash available to be distributed to our common shareholders. In addition, distributions from us to our common shareholders would be ordinary dividend income to such shareholders to the extent of our current and accumulated earnings and profits, which would include our tax-exempt income as well as any other taxable income we might have.
 
Proposed tax legislation, if enacted, could limit our ability to conduct investment management or advisory or other activities in the future.
 
Proposed tax legislation has been introduced in Congress that is intended to prevent publicly traded partnerships from conducting investment management or advisory activities without the imposition of corporate income tax. One version of this proposed legislation would prevent a publicly traded partnership from qualifying as a partnership for U.S. federal income tax purposes if it conducts such activities either directly or indirectly through any entity in which it owns an interest, no matter how small or insignificant such activities are compared to the partnership’s other activities. Other versions of the legislation would mandate that any income from investment management or advisory activities be treated as non-qualifying income under the 90% qualifying income exception for publicly traded partnerships, which, in turn, would limit the amount of such income that a publicly traded partnership could derive other than through corporate subsidiaries. It has also been reported that the Obama Administration may propose that any publicly traded partnership with revenues from any source in excess of $50 million be taxed as a corporation. It is unclear which legislation, if any, ultimately will be enacted. It also is uncertain whether such legislation, if enacted, would apply retroactively to dates specified in the original proposals or prospectively only. If such legislation is enacted, depending on the form it takes, it could limit our ability to engage in investment management and advisory or other activities in the future or otherwise affect our business strategy. Were we to be taxed as a corporation the return to our shareholders would be materially impaired because of the imposition of tax at both the entity and shareholder levels. Investors should consult their own tax advisors regarding the likelihood that the proposed legislation will be enacted and, if enacted, the form it is likely to take.


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FORWARD-LOOKING STATEMENTS
 
We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans, strategies and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, we intend to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking:
 
  •  the factors referenced in this prospectus, including those set forth under the caption “Risk Factors;”
 
  •  use of net proceeds from this offering;
 
  •  our business and investment strategies;
 
  •  our ability to obtain financing arrangements on favorable terms, or at all;
 
  •  financing and advance rates for our target assets;
 
  •  our expected leverage;
 
  •  general volatility of and economic conditions in the markets in which we invest;
 
  •  our expected investments;
 
  •  availability of investment opportunities in our target assets on favorable terms, or at all;
 
  •  mismatches of terms between our target assets and our borrowings used to fund such investments;
 
  •  changes in interest rates and the market value of our target assets;
 
  •  changes in prepayment rates on our target assets;
 
  •  rates of default or decreased recovery rates on our target assets;
 
  •  effects of hedging instruments on our target assets;
 
  •  the degree to which our hedging strategies may or may not protect us from interest rate volatility;
 
  •  changes in governmental regulations, tax law and rates, and similar matters;
 
  •  our ability to maintain our exemption from registration under the Investment Company Act;
 
  •  availability of qualified personnel;
 
  •  our ability to make distributions to our shareholders in the future;
 
  •  our understanding of our competition; and
 
  •  market trends in our industry, interest rates, real estate values, the debt and equity markets or the general economy.
 
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these factors are described in this prospectus under the


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headings “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” If a change occurs, our business, financial condition, liquidity, results of operations, prospects, plans, strategies, objectives and ability to make or sustain distributions to our shareholders may vary materially from those expressed in, or contemplated by, our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


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USE OF PROCEEDS
 
We are offering           of our common shares in this offering (excluding the underwriters’ overallotment option to purchase up to an additional           common shares). We estimate that the net proceeds we will receive from selling common shares in this offering will be approximately $      million, after deducting the underwriting discount and other estimated offering expenses payable by us (or $      million, if the underwriters exercise their overallotment option in full).
 
We intend to use all the net proceeds from this offering to acquire target assets in accordance with our investment objective and strategies described in this prospectus. See “Business—Our Investment Strategies.” Based on prevailing market conditions, our current expectation is that we will use approximately 50% of the net proceeds from this offering to acquire target assets that produce taxable income, such as first mortgage loans, bridge loans, mezzanine loans and preferred equity issued by entities that own commercial real estate, and approximately 50% to acquire federally tax-exempt multifamily mortgage revenue bonds, issued to acquire, construct or improve multifamily rental apartments, and that produce income that is excludable from gross income for U.S. federal income tax purposes. However, there is no assurance that upon the completion of this offering we will not allocate the net proceeds from this offering in a different manner among our target assets. Our decisions will depend on prevailing market conditions and may change over time in response to opportunities available in different interest rate, economic and credit environments. Until appropriate target assets are acquired, we may invest the net proceeds from this offering in interest-bearing, short-term securities that are rated investment grade and money market funds. These investments are expected to provide a lower net return than we will seek to achieve from our target assets.


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DISTRIBUTION POLICY
 
Our intention is to make quarterly distributions to our common shareholders of at least 90% of our total Adjusted Core Earnings over time. In declaring our distributions, our Board of Managers will take into account, among other things, our actual and projected results of operations, liquidity and financial condition, the net interest and other income from our portfolio, our operating expenses, our financing and refinancing requirements, our working capital needs, the distribution requirements of our outstanding preferred shares, new investment opportunities, financing covenants and applicable law. In particular, we may deviate from our distribution policy when we believe it is prudent to do so for liquidity management purposes, during financial crises or extreme market dislocations, or in order to take advantage of what we deem to be extraordinary investment opportunities. Furthermore, our preferred shares restrict, and it is possible that some of our future financing arrangements could contain provisions prohibiting or otherwise restricting, our ability to make distributions to our shareholders. See “Description of Shares—Preferred Shares.” In addition, our ability to make distributions is subject to certain restrictions under the Delaware LLC Act. Under the Delaware LLC Act, a limited liability company generally is not permitted to make a distribution if, after giving effect to the distribution, the liabilities of the company will exceed the value of the company’s assets. Shareholders generally will be subject to U.S. federal income tax (and any applicable state and local taxes) on their respective allocable shares of our net taxable income regardless of the timing or amount of distributions we make to our shareholders.
 
We plan to make our first distribution in respect of the period from the closing of this offering through     , 2011, which may be prior to the time that we have fully invested the net proceeds from this offering in our target assets. Although our initial assets only generate payments of taxable income, we expect that our investment portfolio in the future will generate both payments of taxable income and payments that are excludable from gross income for U.S. federal income tax purposes. Accordingly, since we intend to be treated as a partnership for U.S. federal income tax purposes, we expect that, over time, a portion of our allocations will be excludable from gross income for federal tax purposes.
 
The declaration of distributions to our shareholders and the amount of any such distributions will be at the discretion of our Board of Managers, and we cannot assure you that we will make or sustain any distributions to our shareholders, in accordance with our present intention or otherwise.
 
For U.S. federal income tax purposes, any distributions that we make will be treated as distributions from a partnership and will be taxed as described in “Material U.S. Federal Income Tax Considerations—Taxation of Our Common Shareholders—Treatment of Distributions” below.


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CAPITALIZATION
 
The following table sets forth (1) the historical capitalization of our predecessor at March 31, 2011, and (2) our capitalization at March 31, 2011, as adjusted to reflect the effect of (i) the sale of           common shares in this offering at an assumed initial public offering price of $      per share (which is the mid-point of the price range set forth on the cover of this prospectus), after deducting the underwriting discount and other estimated offering expenses payable by us, and (ii) the consummation of our formation transactions. You should read this table together with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our predecessor’s historical combined financial statements and notes thereto included elsewhere in this prospectus.
 
                 
    At March 31, 2011  
    Historical     As Adjusted (1)(2)  
    (Unaudited)  
 
Debt:
               
Long-term debt
  $ 46,547,684     $    
                 
Total debt
  $ 46,547,684     $    
Members’ equity
               
Common interests
  $ 93,297,616     $  
Preferred interests
    99,000,000        
                 
Total members’ equity
  $ 192,297,616     $  
                 
Shareholders’ equity:
               
Common shares, no par value;          shares authorized; no shares outstanding, historical;          shares outstanding, as adjusted
  $     $    
Series A CRA Preferred Shares, no par value; shares authorized; no shares outstanding, historical; shares outstanding, as adjusted
             
Series B CRA Preferred shares, no par value; shares authorized; no shares outstanding, historical; shares outstanding, as adjusted
             
Series C CRA Preferred shares, no par value; shares authorized; no shares outstanding, historical; shares outstanding, as adjusted
             
                 
Total shareholders’ equity
  $     $    
Total capitalization
  $ 238,845,300     $    
                 
 
(1) Does not include (i) any common shares that may be issued pursuant to the underwriters’ overallotment option to purchase up to additional common shares; and (ii)           common shares that we sold to Pembrook Capital at $      per share in connection with our formation, because we will repurchase these shares at their issue price shortly before the completion of this offering. Includes           restricted units that will be granted to our Manager concurrently with the completion of this offering.
 
(2) Upon the consummation of our formation transactions, the existing preferred interests in the Pembrook Funds will be converted into these series with an aggregate liquidation preference of $99.0 million that will replicate the economic terms of the preferred equity financing obtained by the Pembrook Funds.


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SELECTED HISTORICAL FINANCIAL DATA
 
The following table sets forth selected financial and operating data on a historical combined basis for our predecessor. We have not presented historical information for Pembrook Realty Capital LLC because we have not had any activity since our formation, other than the issuance of common shares in connection with our formation and activity in connection with this offering, and because we believe that a discussion of the results of Pembrook Realty Capital LLC would not be meaningful.
 
You should read the following selected historical financial and operating data in conjunction with our predecessor’s historical combined financial statements and the related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus.
 
The historical combined balance sheet data as of December 31, 2010 and 2009 of our predecessor and the combined statements of operations data for each of the three years in the period ended December 31, 2010 of our predecessor have been derived from the historical audited combined financial statements of our predecessor included elsewhere in this prospectus. The historical combined balance sheet data as of December 31, 2008 and 2007 and the combined statements of operations data for the year ended December 31, 2007 have been derived from the unaudited combined financial statements of our predecessor not included in this prospectus. The historical combined balance sheet data as of March 31, 2011 and the combined statements of operations data for the three months ended March 31, 2011 and 2010 of our predecessor have been derived from the historical unaudited combined financial statements of our predecessor included elsewhere in this prospectus. In the opinion of the management of our company, the historical combined balance sheet data as of March 31, 2011 and the combined statements of operations data for the three months ended March 31, 2011 and 2010 include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the information set forth therein. Such interim financial data are not necessarily reflective of our financial condition or results of operations at December 31, 2011 or for the year ending December 31, 2011 or for any subsequent date or period, as applicable.
 


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    Pembrook Realty Capital Predecessor  
    Three
    Three
                         
    Months
    Months
                         
    Ended
    Ended
                         
    March 31,
    March 31,
    Year Ended December 31,  
    2011     2010     2010     2009     2008     2007  
    (Unaudited)     (Unaudited)                       (Unaudited)  
 
Statement of Operations Data:
                                               
Revenue
                                               
Interest
  $ 4,136,459     $ 2,001,915     $ 10,869,589     $ 9,430,448     $ 14,075,609     $ 6,927,566  
Other
    24,771                         116,450        
                                                 
Total revenue
    4,161,230       2,001,915       10,869,589       9,430,448       14,192,059       6,927,566  
                                                 
Expenses
                                               
Interest
    446,759       431,360       1,789,489       2,060,819       6,000,825       4,578,670  
Management fees
    769,334       491,976       2,388,677       1,741,883       1,382,710        
Professional fees
    215,559       163,255       506,274       296,205       298,239       138,190  
Other
    62,500       48,688       323,427       457,520       343,860       174,861  
                                                 
Total expenses
    1,494,152       1,135,279       5,007,867       4,556,427       8,025,634       4,891,721  
                                                 
Net operating revenue
    2,667,078       866,636       5,861,722       4,874,021       6,166,425       2,035,845  
                                                 
Net realized and unrealized gain/(loss)
                                               
Realized gain/(loss) on loans and swap contracts
    (54,655 )     1,040       560,876       9,863       (2,267,106 )     (1,825 )
Change in unrealized gain/(loss) on swap contracts
    211,868       128,650       425,897       581,452       (106,214 )     (1,752,031 )
                                                 
Total net realized and unrealized gain/(loss)
    157,213       129,690       986,773       591,315       (2,373,320 )     (1,753,856 )
                                                 
Net income before preferred interest distribution
  $ 2,824,291     $ 996,326     $ 6,848,495     $ 5,465,336     $ 3,793,105     $ 281,989  
                                                 
Preferred interest distribution
    (732,235 )     (553,683 )     (2,726,934 )     (2,735,112 )     (3,150,708 )      
                                                 
Net income allocable to common interests
  $ 2,092,056     $ 442,643     $ 4,121,561     $ 2,730,224     $ 642,397     $ 281,989  
                                                 
Balance Sheet Data (at period end):
                                    (unaudited )     (unaudited )
Loans held for investment
  $ 200,722,719             $ 177,929,684     $ 113,099,770     $ 126,112,534     $ 163,628,599  
Securities held to maturity
    7,620,162               7,620,162       10,253,306       12,701,931       14,961,051  
Other equity securities
    9,900,000               9,900,000       9,900,000       9,900,000       9,900,000  
Total assets
    243,151,218               226,014,000       157,151,408       164,231,892       195,152,514  
Loans sold under agreements to repurchase
    30,547,684               30,592,335       37,835,602       53,775,124       151,767,137  
Loan payable
    16,000,000               10,000,000                    
Payable for swap contracts
    657,974               989,014       1,366,073       1,922,680        
Total liabilities
    50,853,602               42,322,272       41,310,258       61,270,966       154,333,985  
Total members’ equity
    192,297,616               183,691,728       115,841,150       102,960,926       40,818,529  

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion in conjunction with the “Selected Historical Financial Information,” the historical combined financial statements and related notes of our predecessor, “Risk Factors” and “Business” included elsewhere in this prospectus. The statements in this discussion regarding expectations of our future results of operations, liquidity and financial condition and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and “Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by any forward-looking statements. As used in this section, unless the context otherwise requires, “we,” “us,” “our” and “our company” mean our predecessor for the periods presented and Pembrook Realty Capital LLC and its consolidated subsidiaries upon completion of this offering and our formation transactions.
 
Overview
 
We were formed as a Delaware limited liability company on July 21, 2011 to focus primarily on investing in our target assets on both a taxable and U.S. federally tax-exempt basis. Our target assets include taxable commercial real estate investments, such as commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities and preferred equity issued by entities that own commercial real estate, as well as U.S. federally tax-exempt multifamily mortgage revenue bonds. Upon completion of this offering and our formation transactions, we will own an initial portfolio of target assets consisting of 18 investments with an aggregate fair value of $209.7 million, a weighted average annual interest rate of approximately 8.56% and a weighted average yield to maturity of approximately 12.01% as of March 31, 2011.
 
We will be externally managed and advised by our Manager, pursuant to the terms of a management agreement between us and our Manager. Our Manager is an affiliate of Pembrook Capital, a private real estate investment firm that provides financing solutions to commercial real estate participants. Through an origination and advisory agreement between our Manager and Pembrook Capital Management, LLC, our Manager will be able to draw upon the experience and expertise of Pembrook Capital’s management team. The Pembrook Capital team that was primarily responsible for sourcing, underwriting, acquiring (through direct origination and secondary market opportunities), arranging for the financing of and managing our initial assets prior to this offering will be responsible, on behalf of our Manager, for performing similar functions for us in the future.
 
We believe that we have been organized and intend to operate so that we have qualified, and will continue to qualify, to be treated for U.S. federal income tax purposes as a partnership and not as an association or a publicly traded partnership taxable as a corporation.
 
Our investment objective is to generate attractive risk-adjusted returns for our shareholders over the long-term, primarily through quarterly distributions (a portion of which we expect will be excluded from gross income for U.S. federal income tax purposes) and, secondarily, through capital appreciation. We intend to achieve this objective by growing our initial portfolio through the selective acquisition of target assets designed to produce attractive returns across a variety of market conditions and economic cycles.
 
We believe that the next several years will offer significant opportunities to invest in our target assets and participate in the ongoing recapitalization of the commercial real estate industry, due to a limited amount of capital available for investment in commercial real estate debt, a significant need to refinance maturing or defaulted debt and attractive fundamentals in the multifamily rental housing and select commercial markets.


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We will commence investment operations upon completion of this offering. We intend to be treated as a partnership for U.S. federal income tax purposes. Partnerships are treated as pass-through entities for purposes of U.S. federal income taxation, and accordingly we do not expect to be subject to U.S. federal income taxation. Instead, our common shareholders will be required to take into account their allocable share of our items of income, gain, loss, deduction and credit for our taxable year ending within or with their taxable year. 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.
 
Critical Accounting Policies
 
Our financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We believe that all of the estimates and assumptions upon which our financial statements are based were reasonable at the time made, based upon information available to us at that time. In accordance with SEC guidance, the following discussion summarizes the accounting policies that apply to our operations that we believe to be most critical to an investor’s understanding of our financial results and condition and require complex management judgment and the use of estimates and assumptions. This summary should be read in conjunction with a more complete discussion of our accounting policies included in Note 2 to the historical combined financial statements of our predecessor included elsewhere in this prospectus. Our most critical accounting policies relate to the valuation of our assets, impairments, revenue recognition, Manager compensation, hedging and income taxes. Each of these items may involve estimates that will require management to make judgments that are subjective in nature. We will rely on our Manager’s experience and analysis of historical and current market data in order to arrive at what we believe to be reasonable estimates. Different estimates and assumptions could result in materially different reported amounts.
 
The following is a summary of our critical accounting policies:
 
Loans Held for Investment
 
Loans held for investment typically include whole mortgage loans, bridge loans, B-Notes, mezzanine loans and construction or rehabilitation loans that are secured by various types of real estate (except for mezzanine loans, which are secured by a pledge of the borrower’s ownership interest in the property and/or the property-owning entity). We generally intend to hold our loans to maturity and, accordingly, carry them at cost, net of unamortized costs, fees and discounts unless such loan or investment is deemed to be impaired. Loans are considered to be impaired when it is probable that, based upon current information and events, we will be unable to collect all amounts due under the contractual terms of the loan agreement or the value of the underlying collateral and guarantees, when applicable, are expected to be less than the carrying value of the loans held for investment.
 
We may invest in instruments that entitle us to receive a percentage of the securing property’s cash flow and/or a portion of any remaining sale or refinancing proceeds after payment of indebtedness. At the inception of each such investment, management must make the subjective determination whether such investment should be accounted for as a loan, a joint venture or an interest in real estate.
 
Impairment
 
The reserve for possible loan losses in connection with loans held for investment reflects management’s estimate of the allowance for possible credit losses inherent in the loan


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portfolio as of the balance sheet date. The reserve is increased to the level that management estimates to be adequate considering delinquencies, loss experience, collateral quality and guarantees. Other factors considered relate to geographic trends and product diversification, the size of the portfolio and current economic conditions. Based on the facts and circumstances of the individual loans being evaluated for impairment, loan specific valuation allowances are established for the excess carrying value of the loan over either: (1) the present value of the expected future cash flows discounted at the loan’s effective interest rate, (2) the estimated fair value of the loan’s underlying collateral together with any other credit support including, but not limited to, recourse guarantees if the loan is in the process of foreclosure or otherwise collateral dependent, or (3) the loan’s observable market price. The allowance for each loan will be maintained at a level we believe is adequate to absorb probable losses. At December 31, 2010 and 2009, the Company did not have any reserve for possible loan losses.
 
Securities
 
From time to time, we will designate a security as held to maturity or available for sale or trading, depending on ability and intent. Securities available for sale or trading will be reported at fair value, while securities held to maturity will be reported at amortized cost. We do not anticipate that we will elect the fair value option for any qualifying financial assets or liabilities that are not otherwise required to be carried at fair value in our financial statements.
 
Net unrealized gains and losses on trading securities will be recognized through earnings, while net unrealized gains and losses on available for sale securities will be excluded from earnings and recognized as a component of accumulated other comprehensive income in shareholders’ equity. Our securities will also be evaluated to determine whether other-than-temporary impairments have occurred, and if so, the security will be written down to its fair value to establish a new cost basis and the related loss will be charged against earnings. Currently, none of our assets are traded in active markets or receive quoted prices on an ongoing basis; as a result, the valuation of such assets are likely to depend on the Level III valuation technique as described below.
 
Valuation of Financial Instruments
 
GAAP establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring financial instruments at fair values. GAAP establishes market based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy under GAAP are described below:
 
Level I—Quoted prices in active markets for identical assets or liabilities.
 
Level II—Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, credit risk and others.
 
Level III—Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period) unobservable inputs may be used.
 
Unobservable inputs reflect our own assumptions about the factors that market participants would use in pricing an asset or liability, and would be based on the best information available.
 
Any changes to the valuation methodology are to be reviewed by management to ensure the changes are appropriate. The methods we use may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore,


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while we anticipate that our valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. We use inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.
 
Revenue Recognition
 
Interest income is recognized on the accrual basis as it is earned from loans, investments and securities. Fees received in connection with loan commitments, net of related expenses incurred, are deferred until the loan is funded and are then recognized over the term of the loan as an adjustment to yield using the effective interest rate method, except on demand loans or revolving lines of credit and similar arrangements, in which case the straight-line method is applied to amortize such fees. Fees on commitments that expire unused are recognized at expiration. Exit fees are recognized as income when collection is reasonably assured.
 
In some cases, interest income may also include the amortization or accretion of premiums and discounts. This additional income, net of any direct costs incurred, will be deferred and accreted into interest income on an effective yield or “interest” method adjusted for actual prepayment activity over the life of the related loan, investment or security as a yield adjustment.
 
Income recognition will be suspended for investments when in the opinion of management a full recovery of income and principal becomes doubtful. Income recognition will be resumed when the investment becomes contractually current and performance is demonstrated to be resumed. For investments that provide for accrual of interest at specified rates which differ from current pay rates, interest income will be recognized on such investments at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible, based on the underlying collateral and operations and liquidity of the borrower. If management cannot make such determination regarding collectability, interest income above the current pay rate will be recognized only upon actual receipt.
 
Income or expense related to swap contracts and/or repurchase agreements will be recognized as accrued or incurred.
 
Hedging Instruments and Hedging Activities
 
In the normal course of business, we may use a variety of hedging instruments to manage, or hedge, interest rate risk. The most common will be interest rate swap agreements, interest rate cap agreements and options on interest rate swaps, or swaptions. We will apply the provisions of GAAP to account for these hedging instruments. GAAP requires an entity to recognize all derivatives as either assets or liabilities on its balance sheet and to measure those instruments at fair value. Additionally, the fair value adjustments will affect other comprehensive income in shareholders’ equity (until the hedged item is recognized in earnings) if the derivative instrument qualifies as a hedge for accounting purposes. If the derivative instrument does not qualify as a hedge for accounting purposes, the fair value adjustment will be recorded in our statement of operations. Furthermore, the fair values of the interest rate derivatives at inception are their original cost. Changes in the fair value of the interest rate derivatives are recognized in earnings as interest expense.
 
We expect to enter into hedging instruments, including interest rate swap agreements, interest rate cap agreements, swaptions, financial futures, options, floors, forward sales or other financial instruments that we deem appropriate, in order to mitigate our interest rate risk. These hedging instruments must be effective in reducing our interest rate risk exposure in


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order to qualify for hedge accounting. When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, all changes in the fair value of the instrument are marked-to-market with changes in value included in our statement of operations for each period until the hedging instrument matures or is settled. As stated above, any derivative instrument used for risk management that does not meet the hedging criteria is marked-to-market with the changes in value included in net income.
 
Derivatives will be used for hedging purposes related to our financing activities, rather than speculation. We will rely on quotations from a third party to determine these fair values (Fair Value Level 1 measurements). If our hedging activities do not achieve our desired results, our earnings may be adversely affected.
 
Manager Compensation
 
Currently, Pembrook Capital is paid an annual management fee by PCI I and PCI II equal to 2.0% and 1.5%, respectively, of the balance of the capital accounts of members holding common or preferred interests in the Pembrook Funds. In addition, Pembrook Capital is entitled to receive an annual incentive allocation equal to 20% of any capital appreciation attributable to the common interests of PCI I, subject to a “high water mark,” and 20% of any realized capital appreciation attributable to the common interests of PCI II, subject to a cumulative preferred return to the common interests of 8%.
 
Upon the consummation of our formation transactions, the management agreement will provide for the payment to our Manager of: (i) a base management fee equal to    % of our shareholders’ equity per annum and calculated and payable quarterly and arrears; and (ii) an incentive fee with respect to each calendar quarter as more fully described in this prospectus. Under certain circumstances, we will be obligated to pay our Manager a termination fee. See “Our Manager and the Management Agreement—Management Agreement” for a discussion of the calculation of the base management fee and any incentive fee, as well as the termination fee and the circumstances under which a termination fee will be payable. The base management fee, the incentive fee and any termination fee will be accrued and expensed during the period in which they are earned by our Manager.
 
Stock Based Compensation
 
Prior to the completion of this offering, we will adopt equity incentive plans to provide incentive compensation to attract and retain qualified managers, officers, advisors, consultants and other personnel, including our Manager and its affiliates and personnel of our Manager and its affiliates, and any joint venture affiliates of ours. See “Management—Equity Incentive Plans.” Awards granted under the plans will generally require service-based vesting over a period of years subsequent to the grant date and resulting equity-based compensation expense measured at the fair value of the award on the date of grant will be recognized as an expense in the financial statements over the vesting period.
 
We will account for stock-based compensation in accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification ASC 718 which establishes accounting and disclosure requirements using fair value based methods of accounting for stock-based compensation plans. Compensation expense related to grants of stock and stock options will be recognized over the vesting period of such grants based on the estimated fair value on the grant date. Stock compensation awards granted to our Manager and certain employees of the manager’s affiliates will be accounted for in accordance with Financial Accounting Standards Board Accounting Standards Codification ASC 505 which requires us to measure the fair value of the equity instrument using the stock prices and other measurement assumptions as of the earlier of either the date at which a performance


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commitment by the counterparty is reached or the date at which the counterparty’s performance is complete.
 
Income Taxes
 
We believe that we have been organized and intend to operate so that we have qualified, and will continue to qualify, to be treated for U.S. federal income tax purposes as a partnership and not as an association or a publicly traded partnership taxable as a corporation. In general, an entity that is treated as a partnership for U.S. federal income tax purposes is not subject to U.S. federal income tax at the entity level. We believe that we are treated, and will continue to be treated, as a publicly traded partnership. Publicly traded partnerships are generally treated as partnerships for U.S. federal income tax purposes as long as they satisfy certain income and other tests on an ongoing basis. See “Material U.S. Federal Income Tax Considerations.”
 
We follow the provisions of the Financial Accounting Standards Board (“FASB”) relating to accounting for uncertainty in income taxes which clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements, which is applicable to all open tax years.
 
Recent Accounting Pronouncements
 
In July 2010, FASB ASC Accounting Standards Update (“ASU”) 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” was issued and expands disclosures about the credit quality of financing receivables and the allowance for credit losses, requiring such disclosures be presented on a disaggregated basis, either by portfolio segment, which is defined as the level at which an entity determines its allowance for credit losses, or by class, which is defined on the basis of the initial measurement attribute, the risk characteristics, and the method for monitoring and assessing credit risk. The new and amended disclosures that relate to information as of the end of a reporting period are effective for public entities for the annual reporting period ending on or after December 15, 2010. The implementation of ASU 2010-20 is not anticipated to have a material impact on our financial statements.
 
In January 2011, FASB issued ASU 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20,” which temporarily deferred the effective date in ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” in respect of disclosures related to troubled debt restructuring until FASB finalized ASU 2010-20 (see above). ASU 2010-20 requires companies to provide disaggregated levels of disclosure by portfolio segment and class to enable users of the financial statement to understand the nature of loan.
 
In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. ASU 2011-02 clarifies whether loan modifications constitute troubled debt restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 is effective for the first interim and annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. We are assessing the impact of ASU 2011-02 on our financial condition, results of operations and disclosures.
 
In April 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. In a typical repurchase agreement transaction, an entity transfers financial assets to a counterparty


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in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. FASB Accounting Standards Codification (Codification) Topic 860, Transfers and Servicing, prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets. The amendments to the Codification in this ASU are intended to improve the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets. The guidance in the ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. We are assessing the impact of ASU 2011-03 on our financial condition, results of operations and disclosures.
 
Results of Operations
 
Comparison of the Three Month Period Ended March 31, 2011 to the Three Month Period Ended March 31, 2010
 
Net operating revenue
 
Net operating revenue was $2.7 million for the three month period ended March 31, 2011 compared to $0.9 million for the three month period ended March 31, 2010. Net operating revenue consists primarily of interest income less total expenses. The increase in net operating revenue resulted from an increase in investments and the corresponding increase in interest earned on investments made during the period, partially offset by an increase in expenses, as discussed below.
 
Interest Income
 
Interest income was $4.1 million for the three month period ended March 31, 2011 as compared to $2.0 million for the three month period ended March 31, 2010. Interest income includes payments received and accrued on our investments. The increase in interest income is principally due to an increase in investments between periods and an increase in the interest rate applicable to more recent investments compared to earlier investments.
 
Interest Expense
 
Interest expense was $0.4 million for each of the three month periods ended March 31, 2011 and 2010. Interest expense includes payments made on our repurchase agreements and other financing used to finance our investments.
 
Management Fees
 
Management fees were $0.8 million for the three month period ended March 31, 2011 as compared to $0.5 million for the three month period ended March 31, 2010. Management fees consist of base and incentive fees payable to the manager of our predecessor. Management fees are directly related to the amount of capital invested in our company, and the increase in management fee expense reflects an increase in invested capital. During the three month periods ended March 31, 2011 and 2010, our predecessor did not pay any incentive fees. These management fees reflect those paid by our predecessor. Upon completion of this offering, we will enter into a management agreement with our Manager, and thereafter will pay our Manager the fees specified in such agreement. See “Our Manager and the Management Agreement—Management Agreement.”


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Professional Fees
 
Professional fees were $0.2 million for the three month period ended March 31, 2011, largely unchanged from the three month period ended March 31, 2010. Following completion of this offering, we will incur significant general and administrative expenses, including management fees, professional fees and other corporate level activity associated with operating as a public company. Specifically, in addition to the fee payable to our Manager, we will incur compensation costs related to our Chief Financial Officer, legal, accounting and other expenses related to corporate governance, public reporting and compliance with various provisions of the Sarbanes-Oxley Act. As a public company, we anticipate incurring additional office, audit, accounting, and legal fees, that are not currently determinable. Such costs may be material. Since we have not operated previously as a publicly traded company, there can be no assurance that our general and administrative expense will not significantly exceed our current estimates.
 
Net realized and unrealized gain/(loss)
 
We record gains and losses on investments only as realized and gains and losses on financial instruments (swap contracts) as both realized and unrealized. Total net realized and unrealized gain for the three months ended March 31, 2011 was $0.2 million compared to total net realized and unrealized gain of $0.1 million for the three months ended march 31, 2010. The change in unrealized gain on swap contracts for the three month period ended March 31, 2011 of $0.2 million compared to $0.1 million for the three month period ended March 31, 2010 relates to the changes in interest rates affecting such contracts.
 
Comparison of the Year Ended December 31, 2010 to the Year Ended December 31, 2009
 
Net Operating Revenue
 
For 2010 we had net operating revenue of $5.9 million compared to $4.9 million for 2009. The increase in net operating revenue resulted from an increase in investments and the corresponding increase in interest earned on investments made during the period, partially offset by an increase in expenses, as discussed below.
 
Interest Income
 
Interest income increased to $10.9 million in 2010 from $9.4 million in 2009, primarily reflecting an increase in loans held for investment to $177.9 million in 2010 from $113.1 million in 2009. The increase in interest revenue during the year was partially offset by a decline in interest due to the amortization of principal of one our securities held to maturity. During 2010, we made six new loans, one of which was sold, with the proceeds, net of the incentive fee payable, being reinvested in new loans.
 
Interest Expense
 
Interest expense decreased to $1.8 million for 2010 compared to $2.1 million for 2009. Interest expense declined due to a reduction in the number of repurchase agreements and lower interest rates charged on our repurchase agreements.
 
Management Fees
 
Management fees increased to $2.4 million for 2010 compared to $1.7 million in 2009. The increase is directly due to an increase in contributed capital and assets under management as we continued to invest in new loans. These management fees reflect those paid by our predecessor. Upon completion of this offering, we will enter into a management agreement


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with our Manager, and thereafter will pay our Manager the fees specified in such agreement. See “Our Manager and the Management Agreement—Management Agreement.”
 
Professional Fees
 
Professional fees increased to $0.5 million in 2010 compared to $0.3 million in 2009. This increase was mostly due to greater due diligence costs associated with an increase in new loan investments. Other expenses, primarily general and administrative expenses, declined moderately to $0.3 million from $0.4 million.
 
Net realized and unrealized gain/(loss)
 
Total net realized and unrealized gain for 2010 was $1.0 million compared to total net realized and unrealized gain of $0.6 million for 2009. A realized gain of $0.6 million recorded for 2010 represents gains on swap contracts used to manage our interest rate, compared to a de minimus gain on swap contracts for 2009; the change in unrealized gain on swap contracts for 2010 of $0.4 million compared to $0.6 million for 2009 relates to the changes in interest rates affecting such contracts.
 
Comparison of the Year Ended December 31, 2009 to the Year Ended December 31, 2008
 
Net Operating Revenue
 
For 2009, net operating revenue was $4.9 million compared to $6.2 million in 2008. The decrease in net operating revenue resulted from a decrease in investments and the corresponding decrease in interest earned on investments made during the period, partially offset by a decrease in expenses, as discussed below.
 
Interest Income
 
Interest income decreased for 2009 to $9.4 million from $14.1 million in 2008. The decrease is largely due to our sale of assets and a reduction in the amount of leverage used in making our investments. The resulting effect was to reduce the size of our outstanding loan balances and thereby lead to a reduction in the amount of interest income we received on the remaining assets as well as the corresponding interest expense. Furthermore, during 2008, the LIBOR rate on which our floating rate loans are based dropped precipitously, thereby reducing the amount of interest income we received.
 
Interest Expense
 
Interest expense decreased to $2.1 million in 2009 compared to $6.0 million in 2008 directly as a result of our aggressive approach to reduce the amount of debt, primarily repurchase agreements, used to finance our investments and a substantial decline in the index upon which the interest rate on our variable rate debt is based.
 
Management Fees
 
Management fees increased to $1.7 million for 2009 from $1.4 million in 2008. Management fees are directly tied to the amount of capital contributed from members, which increased in 2009 as we continued to invest in new loans. These management fees reflect those paid by our predecessor. Upon completion of this offering, we will enter into a management agreement with our Manager, and thereafter will pay our Manager the fees specified in such agreement. See “Our Manager and the Management Agreement—Management Agreement.”


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Professional Fees
 
Professional fees for 2009 did not change from 2008. Other expenses increased moderately to $0.5 million in 2009 compared to $0.3 million in 2008.
 
Net realized and unrealized gain/(loss)
 
Total net realized and unrealized gain for 2009 was $0.5 million compared to total net realized and unrealized loss of $2.4 million for 2008. There was de minimus gain recorded for 2009 on swap contracts used to manage our interest rates, compared to a $2.3 million loss on swap contracts for 2008; the change in unrealized gain on swap contracts for 2009 of $0.6 million compared to $0.1 million loss for 2009 relates to the changes in interest rates affecting such contracts.
 
Related Party Transactions
 
In connection with this offering, we will engage in certain formation transactions which are designed to consolidate the ownership of our initial assets, facilitate this offering, acquire long-term indebtedness that financed certain of our initial assets and replicate the economic terms of preferred equity financing obtained by the Pembrook Funds. These formation transactions include the mergers of each of the Pembrook Funds into our company, pursuant to which all of the existing investors in the Pembrook Funds will receive equity interests in our company. See “Structure and Formation of our Company.” The merger agreements among us and the Pembrook Funds were negotiated between related parties, and we did not have the benefit of arm’s length negotiations of the type normally conducted with an unaffiliated third party and their terms, including the number of common shares to be issued by us to investors in the Pembrook Funds, including affiliates Pembrook Capital, in our formation transactions, may not be as favorable to us. See “Risk Factors—Risks Related to Our Relationship with Pembrook Capital—The merger agreements between us and the Pembrook Funds were not negotiated on an arm’s length basis and their terms, including the number of common shares to be issued by us to investors in the Pembrook Funds, including affiliates of Pembrook Capital, in our formation transactions, may not be as favorable to us than if they were negotiated with an unaffiliated third party.”
 
We will enter into a management agreement with our Manager effective upon the closing of this offering. Pursuant to the management agreement, our Manager will implement our business strategy and perform certain services for us, subject to oversight by our Board of Managers. The management agreement provides for the payment to our Manager of (i) a base management fee equal to     % of our shareholders’ equity per annum and calculated and payable quarterly and in arrears; and (ii) an incentive fee with respect to each calendar quarter as more fully described in this prospectus. Under certain circumstances we will be obligated to pay our Manager a termination fee. See “Our Manager and the Management Agreement—Management Agreement” and “Risk Factors—Risks Related to Our Relationship with Pembrook Capital—The management agreement with our Manager was not negotiated on an arm’s length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third party and may be costly and difficult to terminate.”
 
We will also enter into indemnification agreements, a registration rights agreement, a license agreement and a co-investment and allocation agreement with related parties. See “Certain Relationships and Related Transactions—Indemnification and Limitation of Managers’ and Officers’ Liability,—Registration Rights Agreement,—“Pembrook” License Agreement and—Co Investment and Allocation Agreement.”


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Liquidity and Capital Resources
 
Liquidity is a measurement of our ability to meet potential cash requirements for our business, including ongoing commitments, repay borrowings, fund and maintain our assets and operations and make distributions to our common and preferred shareholders. We will require significant cash to purchase additional target assets, repay principal and interest on our borrowings, make distributions to our common and preferred shareholders and fund our operations. Our primary sources of funds for liquidity will consist of the net proceeds from this offering, payments of principal and interest we receive on our investments, net proceeds from periodic offerings of preferred shares, unused capacity under our current borrowing arrangements and other financing arrangements we intend to enter into, including an expected line of credit we are currently negotiating with a financial institution, sales of investments and future equity and debt capital raises. We expect that our primary sources of future financing will include commercial bank financing (such as term loans and revolving credit facilities), securitizations, total return swaps, pooled match term financing, equity and debt issuances (including issuances of common shares and perpetual preferred shares), repurchase agreements and warehouse facilities, in addition to transaction or asset specific funding arrangements, in each case to the extent available to us. We believe these identified sources of funds will be adequate for the purpose of meeting our short-term and long-term liquidity needs.
 
While we generally intend to hold our investments as long-term investments, certain of our assets may be sold in order to manage our interest rate risk and liquidity needs, meet other operating objectives and adapt to market conditions. The timing and impact of future sales of our assets, if any, cannot be predicted with any certainty. Since we expect that our assets will generally be financed in part with bank credit facilities (including term loans and revolving facilities), warehouse facilities, securitizations and other secured and unsecured forms of borrowing, we expect that a significant portion of the proceeds from sales of our assets (if any) and scheduled amortization will be used to repay balances under these financing sources and will not be available for distribution.
 
As part of our formation transactions, we will:
 
  •  Issue three series of preferred shares with an aggregate liquidation preference of $99.0 million that will replicate the economic terms of the preferred equity financing obtained by the Pembrook Funds. These preferred shares will pay cumulative distributions at an annual floating rate equal to three-month LIBOR plus a weighted average spread of 2.72%, will not be mandatorily redeemable at any time and will remain outstanding indefinitely unless redeemed or otherwise purchased by us at our election.
 
  •  Acquire approximately $46.5 million of long-term indebtedness. Of this amount, approximately $16.0 million is comprised of term loans that accrued interest at a weighted average annual rate of 1-month LIBOR plus 3.69% as of March 31, 2011 and had a weighted average maturity of December 15, 2012. The remaining $30.5 million is comprised of repurchase agreements that bear interest at variable rates that reset weekly; as of March 31, 2011 this debt had a weighted average annual interest rate of 1.78%.


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The following table provides additional information regarding the indebtedness that we will acquire as part of our formation transactions:
 
                                         
        Outstanding
                         
    Underlying
  Principal at
    Annual Interest Rate at
                   
Financing Type
 
Collateral
  March 31, 2011     March 31, 2011   Amortization   Payment   Maturity     Extensions  
 
Term Loan
  Heritage Hunt   $ 10,000,000     3.74%
(1-month
LIBOR+3.5%)
  Interest only   Monthly     11/1/2012       2 6-months*  
Term Loan
  Boulder Office     6,000,000     4.24%
(1-month
LIBOR+4.0%)
  Interest only   Monthly     2/1/2013       2 6-months*  
Repurchase Agreement
  AIMCO CRA Preferred Stock     6,100,288     1.26%   Put   Quarterly     3/31/2015       N/A  
Repurchase Agreement
  Seneca Special Obligation Bonds     4,662,264     1.24%   Put   Semi-
annual
    12/1/2013       N/A  
Repurchase Agreement
  Courtyard Marriott/ Oakwood     13,422,669     2.45%   Put   Monthly     9/1/2012       N/A  
Repurchase Agreement
  Shopping Center Sweetwater Cove     6,362,463     1.25%   Put   Monthly     10/1/2013       N/A  
                                         
Total
      $ 46,547,684                              
                                         
 
 
* Maturity may be extended at our option upon the payment of a fee equal to 0.25% of the principal amount, assuming that we are then in compliance with the covenants under the applicable loan agreement.
 
Sources and Uses of Cash
 
As of December 31, 2010, we had $28.6 million of cash and cash equivalents, compared to $22.2 million at December 31, 2009 and $14.1 million at December 31, 2008.
 
Cash flows from Operating Activities
 
Net cash flow provided by operating activities totaled $0.1 million for the year ended December 31, 2010. Net income of $6.8 million was due largely to interest income of $10.9 million offset by interest expense of $1.8 million, management fees of $2.4 million, and gains on swap contracts of $1.0 million. In addition, changes in operating assets and liabilities resulted in net cash outflow of $6.8 million.
 
Net cash flow provided by operating activities totaled $5.1 million for the year ended December 31, 2009. Net income of $5.5 million was due largely to interest income of $9.4 million offset by interest expense of $2.1 million, management fees of $1.7 million, and gains on swap contracts of $0.6 million. In addition, changes in operating assets and liabilities resulted in net cash outflow of $0.4 million.
 
Net cash flow provided by operating activities totaled $1.4 million for the year ended December 31, 2008. Net income of $3.8 million was due largely to interest income of $14.1 million offset by interest expense of $6.0 million, management fees of $1.4 million, and losses on swap contracts of $2.4 million. In addition, changes in operating assets and liabilities resulted in net cash outflow of $2.4 million.
 
Cash flows from Investing Activities
 
Net cash flow used in investing activities totaled $62.1 million for the year ended December 31, 2010 due primarily to the acquisition of $138.6 million in loans held for investment, which was partially offset by loan paydowns of $73.9 million. In addition, $2.6 million was generated from securities held to maturity.
 
Net cash flow provided by investing activities totaled $15.5 million for the year ended December 31, 2009 due primarily to loan paydowns of $13.0 million. In addition, $2.4 million was generated from securities held to maturity.
 
Net cash flow used in investing activities totaled $38.3 million for the year ended December 31, 2008 due primarily to loan paydowns of $66.7 million, which was partially offset


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by the acquisition of $30.7 million in loans held for investment. In addition, $2.3 million was generated from securities held to maturity.
 
Cash flows from Financing Activities
 
Net cash flow provided by financing activities totaled $63.8 million for the year ended December 31, 2010 due primarily to capital contributions of $44.9 million and $21.0 million from common interest and preferred interest members, respectively, and proceeds from a loan payable of $10.0 million. These were offset by cash flows of $2.0 million for capital distributions, $2.7 million in preferred interest distributions, and $7.2 million in loans sold under repurchase agreements.
 
Net cash flow used in financing activities totaled $8.5 million for the year ended December 31, 2009 due primarily to $2.7 million in preferred interest distributions and $15.9 million in loans sold under repurchase agreements. These were offset by capital contributions of $10.2 million from common interest members.
 
Net cash flow used in financing activities totaled $39.6 million for the year ended December 31, 2008 due primarily to $3.2 million in preferred interest distributions and $98.0 million in loans sold under repurchase agreements. These were offset by capital contributions of $16.0 million and $45.5 million from common interest and preferred interest members, respectively.
 
Contractual Obligations
 
The following table sets forth our contractual obligations as of December 31, 2010.
 
                                         
    Amount of Obligation or Commitment Expiration per Period        
          Less than
                More than
 
Obligations and Commitments
  Total     1 Year     1 to 3 Years     3 to 5 Years     5 Years  
 
Term Loans
  $ 10,000,000       $0     $ 10,000,000       $0       $0  
Repurchase Agreements
  $ 30,592,335       $0     $ 30,592,335       $0       $0  
                                         
Total
  $ 40,592,335       $0     $ 40,592,335       $0       $0  
 
Since December 31, 2010, we have entered into one term loan in the original principal amount of $6.0 million, with an initial term that matures in February 2013 and an annual interest rate of LIBOR plus 4.0%.
 
Off-Balance Sheet Arrangements
 
As of March 31, 2011, we had no off-balance sheet arrangements, and we do not expect to have any upon completion of this offering. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide additional funding to any such entities.
 
Distributions
 
Our intention is to make quarterly distributions to our common shareholders of at least 90% of our Adjusted Core Earnings over time. Core Earnings is a non-GAAP financial measure. We calculate Core Earnings as GAAP net income (loss) excluding non-cash equity compensation expense, any unrealized gains, losses or other non-cash items recorded in net income for the period, regardless of whether such items are included in other comprehensive income or loss or in net income over time. “Adjusted Core Earnings” is also a non-GAAP financial measure and equals Core Earnings less any incentive fees and without any gross-up


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for tax-exempt interest received. Any distributions will be at the sole discretion of our Board of Managers. In declaring any distributions, our Board of Managers will take into account, among other things, our actual and projected results of operations, liquidity and financial condition, the net interest and other income from our portfolio, our operating expenses, our financing and refinancing requirements, our working capital needs, the distribution requirements of our outstanding preferred shares and new investment opportunities. In addition, our preferred shares restrict, and it is possible that some of our future financing arrangements could contain provisions prohibiting or otherwise restricting, our ability to make distributions to common shareholders, and our ability to make distributions is subject to certain restrictions under the Delaware LLC Act.
 
Quantitative and Qualitative Disclosures About Market Risk
 
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, real estate values and other market based risks. We anticipate that our primary market risks will be real estate risk, credit risk, interest rate risk and market value risk. We will seek to manage these risks while, at the same time, seeking to provide an opportunity to our common shareholders to realize attractive risk-adjusted returns over the long-term through ownership of our common shares.
 
Real Estate Risk
 
Commercial real estate assets, such as our target assets, and real estate values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as an oversupply); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay mortgage loans securing our investments, which could also cause us to suffer losses. To the extent that our portfolio is concentrated in any one region or type of asset, downturns relating generally to such region or type of asset may result in defaults on a number of our investments within a short time period, which may reduce our net income and the value of our common shares and accordingly reduce our ability to make or sustain distributions to our shareholders. As of March 31, 2011 approximately 27%, 22% and 12% of the outstanding principal amount of our initial portfolio was secured by properties located in New York City, the Mid-Atlantic region and Florida, respectively, and while all of the underlying collateral was performing consistent with the loan obligations, economic downturns in these regions could have a material adverse effect on our operations. Also, to the extent that our investments are concentrated in a few owners the financial failure of any single owner could have a materially adverse affect on our operations.
 
Credit Risk
 
We are subject to varying degrees of credit risk in connection with our investments. We have exposure to credit risk on the mortgage assets and underlying mortgage loans in our portfolio as well as other assets. In general, the primary source of principal and interest payments on our investments is the revenues generated by, or the net proceeds from the sale or refinancing of, properties securing our investments. If a property is unable to sustain net revenues or generate sale or refinancing proceeds at a level necessary to pay current debt service obligations to us a default may occur. Our Manager will seek to manage credit risk by performing pre-acquisition due diligence procedures and through use of non-recourse financing (when available and appropriate), which limits our exposure to credit losses to the specific pool of assets that are subject to the non-recourse financing. In addition, with respect


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to any particular investment, our Manager’s investment team will evaluate, among other things, relative valuation, supply and demand trends, yield curves, delinquency and default rates, recovery of various sectors and age of collateral.
 
Interest Rate Risk
 
Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our investments and our related financing arrangements. In general, we expect to finance the acquisition of our target assets through commercial bank financing (such as term loans and revolving credit facilities), securitizations, total return swaps, pooled match term financing, equity and debt issuances (including issuances of common shares and perpetual preferred shares), repurchase agreements and warehouse facilities, in addition to transaction or asset specific funding arrangements, in each case to the extent available to us. We may mitigate interest rate risk through utilization of hedging instruments, primarily interest rate swap agreements, interest rate cap agreements and options on interest rate swaps (or swaptions). Interest rate swap agreements are intended to serve as a hedge against future interest rate increases on our borrowings. We may also invest in more loans that bear interest at floating rates when acceptable to borrowers.
 
Interest Rate Effect On Net Interest Income
 
Our operating results depend in large part on differences between the income earned on our investments and our cost of borrowing and hedging activities. The cost of our borrowings is generally based on prevailing market interest rates. In a period of rising interest rates, our interest expense would likely increase, while any additional interest income we earn on our floating rate investments may not fully offset any such increase in interest expense. Additionally, the interest income we earn on our fixed rate investments would not increase, and the duration and weighted average life of such investments would increase and their market value would likely decrease. In addition, rising interest rates may adversely affect borrower default rates. In a period of declining interest rates, interest income on our floating rate investments would likely decrease, while any decrease in our interest expense on our floating rate debt may not fully offset any such decrease in interest income. Additionally, the interest expense on our fixed rate debt would not change. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could materially and adversely affect our liquidity and results of operations.
 
Market risk includes risks that derive from changes in interest rates, equity prices and other market changes that affect market sensitive instruments. Our primary market risk exposure is to changes in interest rates on our variable rate financing arrangements. As of March 31, 2011, we had $46.5 million of total floating rate long-term debt outstanding with a weighted average interest rate of 2.52% per annum. As of March 31, 2011, we had $99.0 million of preferred equity outstanding with an effective average annual floating distribution rate equal to three-month LIBOR plus a weighted average spread of 2.72%. If market rates of interest on our variable rate financing arrangements outstanding as of March 31, 2011 were to increase by 1.0%, or 100 basis points, interest expense would decrease future earnings and cash flows by approximately $1.5 million annually. However, this would be partially offset by gains of $0.4 million on our variable rate investments, or loans held for investment, which totaled $38.1 million as of March 31, 2011. In addition, although we do not currently have any existing contractual hedging arrangement, we could in the future enter into derivative transactions to hedge the risk of rising interest rates.
 
Our interest rate risk objectives are to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives,


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we manage our exposure to fluctuations in market interest rates through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable. We may enter into derivative financial instruments, such as interest rate swaps or caps, to mitigate our interest rate risk or to effectively lock the interest rate on a portion of our variable rate debt. We do not intend to enter into derivative or interest rate transactions for speculative purposes.
 
The following table provides information about our financial instruments that are sensitive to changes in interest rates, including mortgage obligations and lines of credit. For variable rate financing arrangements outstanding as of March 31, 2011 after giving effect to our formation transactions, the following table presents principal repayments and related weighted average annual or distribution rates by contractual maturity for our debt and the aggregate liquidation preference of our preferred shares (assuming they are not redeemed or purchased by us at our option) and the related average annual distribution rate:
 
                                                         
                                        Total/
 
Variable Rate Financing Arrangements
  2011     2012     2013     2014     2015     Thereafter     Weighted Average  
 
                                                         
Term Loans
  $ 0     $ 10,000,000     $ 6,000,000     $ 0     $ 0     $ 0     $ 16,000,000  
                                                         
Wtd. Avg. Variable Interest Rate
    N/A       3.7400 %     4.2400 %     N/A       N/A       N/A       3.9275 %
                                                         
Repurchase Agreements
  $ 0     $ 13,422,669     $ 11,024,728     $ 0     $ 6,100,288     $ 0     $ 30,547,684  
                                                         
Wtd. Avg. Variable Interest Rate
    N/A       2.4487 %     1.2485 %     N/A       1.2600 %     N/A       1.7782 %
                                                         
Perpetual Preferred Shares
  $ 0     $ 0     $ 0     $ 0     $ 0     $ 99,000,000     $ 99,000,000  
                                                         
Wtd. Avg. Distribution Rate
    LIBOR + 2.72 %     LIBOR + 2.72 %     LIBOR + 2.72 %     LIBOR + 2.72 %     LIBOR + 2.72 %     LIBOR + 2.72 %     LIBOR + 2.72 %
                                                         
                                                         
Total
  $ 0     $ 23,422,669     $ 17,024,788     $ 0     $ 6,100,288     $ 99,000,000     $ 145,547,684  
 
The foregoing table reflects variable rate financing arrangements outstanding as of March 31, 2011 and does not consider variable rate financing arrangements, if any, incurred or repaid after that date. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during future periods, prevailing interest rates, and our hedging strategies at that time.
 
Interest Rate Mismatch Risk
 
We may fund a portion of our acquisition of variable-rate assets with borrowings that are based on LIBOR, while the interest rates on these assets may be indexed to LIBOR or another index rate, such as the one-year Constant Maturity Treasury, or CMT, index, the Monthly Treasury Average, or MTA, index or the 11th District Cost of Funds Index, or COFI. Accordingly, any increase in LIBOR relative to one-year CMT, MTA or COFI rates will generally result in an increase in our borrowing costs that is not matched by a corresponding increase in the interest earnings on these assets. Any such interest rate index mismatch could adversely affect our profitability, which may negatively impact distributions to our common shareholders. To mitigate interest rate mismatches, we may utilize the hedging strategies discussed above.
 
Our analysis of risks is based on our Manager’s experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of decisions by our management may produce results that differ significantly from the estimates and assumptions used in our models and the projected results shown in this prospectus.


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Market Value Risk
 
The fair value of our assets fluctuates due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the fair value of fixed rate assets would be expected to decrease; conversely, in a decreasing interest rate environment, the fair value of fixed rate assets would be expected to increase. As market volatility increases or liquidity decreases, the fair value of our assets may be adversely impacted. We will report any trading securities at fair value and recognize related net unrealized gains and losses in earnings. We will report available for sale securities at fair value, with net unrealized gains and losses excluded from earnings and recognized as a component of accumulated other comprehensive income in shareholders’ equity. If we are unable to readily obtain independent pricing to validate our estimated fair value measurements, the fair value gains or losses recorded in gains and losses (in the case of trading securities) or in other comprehensive income (in the case of available for sale securities) may be materially adversely affected. We generally intend to hold our loans to maturity and, accordingly, report them at cost, net of unamortized costs, fees and discounts unless such loan is deemed to be impaired. Securities held to maturity are reported at amortized cost. Accordingly, changes in the fair value of our loans held for investment and securities held to maturity will not be recorded on our statement of operations until such time as any impairment charges are recognized in other comprehensive income.
 
Inflation Risk
 
A significant portion of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance significantly more than inflation does. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Furthermore, our financial statements are prepared in accordance with GAAP and any distributions we may make to our shareholders will be determined by our Board of Managers based primarily on our Adjusted Core Earnings; in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.


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STRUCTURE AND FORMATION OF OUR COMPANY
 
Structure
 
We were formed as a Delaware limited liability company on July 21, 2011 to focus primarily on investing in our target assets on both a taxable and U.S. federally tax-exempt basis. Upon completion of this offering and our formation transactions, we will own an initial portfolio of target assets consisting of 18 investments with an aggregate fair value of $209.7 million, a weighted average annual interest rate of approximately 8.56% and a weighted average yield to maturity of approximately 12.01% as of March 31, 2011. We will be externally managed and advised by our Manager, pursuant to the terms of a management agreement between us and our Manager. We believe that we have been organized and intend to operate so that we have qualified, and will continue to qualify, to be treated for U.S. federal income tax purposes as a partnership and not as an association or a publicly traded partnership taxable as a corporation.
 
Formation Transactions
 
Immediately prior to the completion of this offering, we will engage in certain formation transactions which are designed to consolidate the ownership of our initial assets, facilitate this offering, acquire long-term indebtedness that financed certain of our initial assets and replicate the economic terms of preferred equity financing obtained by the Pembrook Funds. These formation transactions include the mergers of each of the Pembrook Funds into our company, pursuant to which all of the existing investors in the Pembrook Funds will receive equity interests in our company. We believe that the ongoing equity ownership in us by investors in the Pembrook Funds demonstrates their continued support of Pembrook Capital’s management team and our investment and growth strategies.
 
The significant elements of our formation transactions include:
 
  •  Pembrook Realty Capital LLC was formed as a Delaware limited liability company on July 21, 2011.
 
  •  PCI I will merge with and into Pembrook Realty Capital LLC. At the effective time of such merger, (i) each common interest in PCI I, including those held by entities in which members of Pembrook Capital’s management team own equity interests, will be converted into           common shares of our company, (ii) each Series A Preferred CRA Interest in PCI I will be converted into           shares of our Series A CRA Preferred Shares and (iii) and each Series B Preferred CRA Interest in PCI I will be converted into           shares of our Series B CRA Preferred Shares. In connection with the consummation of such merger, the former holders of common interests in PCI I will automatically be admitted as common members of our company, the former holders of Series A Preferred CRA Interests in PCI I will automatically be admitted as Series A preferred members of our company and the former holders of Series B CRA Interests in PCI II will automatically be admitted as Series B preferred members of our company.
 
  •  PCI II will merge with and into Pembrook Realty Capital LLC. At the effective time of such merger, (i) each common interest in PCI II, including those held by entities in which members of Pembrook Capital’s management team own interests, will be converted into           common shares of our company, and (ii) each Series A Preferred CRA Interest in PCI II will be converted into           shares of our Series C CRA Preferred Shares. In connection with the consummation of such merger, the former holders of common interests in PCI II will automatically be admitted as common members of our company and the former holders of Series A Preferred CRA Interests in PCI II will automatically be admitted as Series C preferred members of our company.


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In connection with the mergers described above, we will issue three series of preferred shares with an aggregate liquidation preference of $99.0 million that will replicate the economic terms of the preferred equity financing obtained by the Pembrook Funds. These preferred shares will pay cumulative distributions at an annual floating rate equal to three-month LIBOR plus a weighted average spread of 2.72%, will not be mandatorily redeemable at any time and will remain outstanding indefinitely unless redeemed or otherwise purchased by us at our election.
 
The following chart shows our anticipated structure after giving effect to this offering and our formation transactions, and it assumes no exercise of the underwriters’ over allotment option and vesting of all restricted units granted to our Manager in our formation transactions:
 
(PERFORMANCE GRAPH)
 
As part of our formation transactions, we will acquire approximately $46.5 million of indebtedness. Of this amount, approximately $16.0 million is comprised of term loans that accrued interest at a weighted average annual rate of 1-month LIBOR plus 3.69% as of March 31, 2011 and had a weighted average maturity of December 15, 2012. The remaining $30.5 million related to repurchase agreements that accrued interest at variable rates that reset weekly; as of March 31, 2011 this debt had a weighted average annual interest rate of 1.78%.


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The following table provides additional information regarding the indebtedness that we will acquire as part of our formation transactions:
 
                                         
        Outstanding
  Annual Interest Rate at
               
    Underlying
  Principal at
  March 31,
               
Financing Type
 
Collateral
  March 31, 2011   2011   Amortization   Payment   Maturity   Extensions
 
Term Loan
  Heritage Hunt   $ 10,000,000     3.74%
(1-month LIBOR+3.5%)
  Interest only   Monthly     11/1/2012       2 6-months*  
Term Loan
  Boulder Office   $ 6,000,000     4.24%
(1-month LIBOR+4.0%)
  Interest only   Monthly     2/1/2013       2 6-months*  
Repurchase Agreement
  AIMCO Perpetual Preferred Series A   $ 6,100,288     1.26%   Put   Quarterly     3/31/2015       N/A  
Repurchase Agreement
  Seneca
National Ind. Capital Improv. Bonds
  $ 4,662,264     1.24%   Put   Semi-annual     12/1/2013       N/A  
Repurchase Agreement
  Courtyard by Marriott Hotel/Oakwood Shopping Center   $ 13,422,669     2.45%   Put   Monthly     9/1/2012       N/A  
Repurchase Agreement
  Sweetwater Cove Apartments   $ 6,362,463     1.25%   Put   Monthly     10/1/2013       N/A  
                                         
Total Outstanding Debt
      $ 46,547,684                              
                                         
 
 
* Maturity may be extended at our option upon the payment of a fee equal to 0.25% of the principal amount, assuming that we are then in compliance with the covenants under the applicable loan agreement.


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BUSINESS
 
Our Company
 
Pembrook Realty Capital LLC is a newly formed Delaware limited liability company that will focus primarily on investing in target assets on both a taxable and U.S. federally tax-exempt basis. Our target assets include taxable commercial real estate investments, such as commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities and preferred equity issued by entities that own commercial real estate, as well as U.S. federally tax-exempt multifamily mortgage revenue bonds. For a description of our target assets, see “—Our Target Assets” below. Upon completion of this offering and our formation transactions, we will own an initial portfolio of target assets consisting of 18 investments with an aggregate fair value of $209.7 million, a weighted average annual interest rate of approximately 8.56% and a weighted average yield to maturity of approximately 12.01% as of March 31, 2011.
 
We will be externally managed and advised by Pembrook Realty Capital Management LLC, or our Manager, pursuant to the terms of a management agreement between us and our Manager. Our Manager is an affiliate of Pembrook Capital, a private real estate investment firm that provides financing solutions to commercial real estate participants. Through an origination and advisory agreement between our Manager and Pembrook Capital Management, LLC, our Manager will be able to draw upon the experience and expertise of Pembrook Capital’s management team. The Pembrook Capital team that was primarily responsible for sourcing, underwriting, acquiring (through direct origination and secondary market opportunities), arranging for the financing of and managing our initial assets prior to this offering will be responsible, on behalf of our Manager, for performing similar functions for us in the future.
 
Pembrook Capital was formed in 2006 by Stuart Boesky, our Chairman and Chief Executive Officer, with additional financial sponsorship from an affiliate of Mariner Partners, Inc., or collectively Mariner Partners, an alternative asset management firm. Mr. Boesky has more than 32 years of experience in the commercial real estate industry, including 17 years as a former principal of Related Capital Company and eight years as Chief Executive Officer of Centerline Holding Company, or Centerline, which was formerly known as Charter Municipal Mortgage Acceptance Company. During Mr. Boesky’s tenure as Chief Executive Officer of Centerline from October 1997 to November 2005, Centerline generated a compound annual total pre-tax return to shareholders (including share price appreciation and distributions) of approximately 16.9%. By comparison, the National Association of Real Estate Investment Trusts, or NAREIT, index of mortgage REITs, the Standard & Poor’s S&P 500 Index and the Standard & Poor’s S&P SmallCap 600 Index had compound annual total pre-tax returns of approximately 12.0%, 5.5% and 9.7%, respectively, for the same period. At the time of Mr. Boesky’s departure from Centerline in November 2005, Centerline had approximately $19 billion of taxable and U.S. federally tax-exempt commercial real estate assets under management.
 
Pembrook Capital has 13 experienced investment professionals located in New York, Boston and Los Angeles. Members of the Pembrook Capital management team have significant experience and expertise in the major classes of commercial real estate, including multifamily, retail, office (including medical office buildings), hospitality and student housing. Through the Pembrook Funds, Pembrook Capital invests at various levels of the capital structure (including senior debt, mezzanine debt and preferred equity) of entities holding various types of commercial real estate and has employed investment strategies similar to those that we intend to employ in the future. Since 2007, Pembrook Capital has sourced and reviewed over $8 billion of commercial real estate investment opportunities, resulting in the acquisition by the Pembrook Funds of 29 investments with an aggregate purchase price of


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approximately $374.6 million, of which the 18 investments that had not been subsequently disposed of as of March 31, 2011 will be acquired by us in our formation transactions.
 
  •  PCI I commenced operations in March 2007. As of March 31, 2011, PCI I had made 20 investments with an aggregate purchase price of approximately $282.1 million, of which 13 investments with an aggregate fair value of approximately $133.9 million were outstanding as of March 31, 2011. From inception through March 31, 2011, PCI I generated an average annualized return to holders of common interests (net of fees) of approximately 9.3%.
 
  •  PCI II commenced operations in January 2010. As of March 31, 2011, PCI II had made nine investments with an aggregate purchase price of approximately $92.6 million, of which eight investments with an aggregate fair value of approximately $75.8 million were outstanding as of March 31, 2011. From inception through March 31, 2011, PCI II generated an average annualized return to holders of common interests (net of fees) of approximately 9.3%.
 
The performance information for each of the Pembrook Funds represents each fund’s past performance. Past performance does not guarantee future results, and it may not be indicative of the future performance of our company.
 
In addition to common interests, the Pembrook Funds have issued three classes of perpetual preferred interests with an aggregate liquidation preference of approximately $99.0 million that are entitled to receive cumulative distributions at an effective average annual floating rate equal to three-month LIBOR plus a weighted average spread of 2.72%. Upon completion of our formation transactions, the common and preferred interests in the Pembrook Funds will be converted into common shares and three series of preferred shares, respectively, in our company. Currently, Pembrook Capital is paid an annual management fee by PCI I and PCI II equal to 2.0% and 1.5%, respectively, of the balance of the capital accounts of members holding common or preferred interests in the Pembrook Funds. In addition, Pembrook Capital is entitled to receive an annual incentive allocation equal to 20% of any capital appreciation attributable to the common interests of PCI I, subject to a “high water mark,” and 20% of any realized capital appreciation attributable to the common interests of PCI II, subject to a cumulative preferred return to the common interests of 8%. Pursuant to the management agreement, we will pay our manager a base management fee equal to     % of our shareholders’ equity per annum, which is lower than the base management fees currently paid to Pembrook Capital by the Pembrook Funds combined. In addition, our Manager will be entitled to receive an incentive fee only if a specified return is achieved, whereas Pembrook Capital is entitled to receive an annual incentive allocation with respect to any capital appreciation attributable to the common interests of PCI I, subject only to a “high water mark.” See “Our Manager and the Management Agreement — Management Agreement — Management Fees, Incentive Fees and Expense Reimbursements” below for a discussion of the fees that will be payable under the management agreement.
 
We also expect to benefit from Pembrook Capital’s relationship with Mariner Partners, which as of May 1, 2011 had, together with its associated advisors, approximately 160 professionals (including Pembrook Capital personnel) with offices in New York, Rowayton (Connecticut), Boston, Tokyo, Seoul and London. Pursuant to the operating agreement of Pembrook Capital Management, LLC, Mariner Partners is obligated to provides Pembrook Capital with a range of support services, including bookkeeping, tax reporting, accounting, information technology, human resources, compliance, in-house counsel and such other services as Pembrook Capital may from time to time reasonably request. Pembrook Capital is obligated to pay Mariner Partners a fee for such services equal to the standard rates that Mariner Partners charges related entities for such services. We believe that the rates charged by Mariner Partners are less than the rates that we would pay to obtain such services from


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unaffiliated third parties. We will reimburse our Manager for the amounts paid by it to Mariner Partners for the portion of these services allocated to us.
 
Our investment objective is to generate attractive risk-adjusted returns for our shareholders over the long-term, primarily through quarterly distributions (a portion of which we expect will be excluded from gross income for U.S. federal income tax purposes) and, secondarily, through capital appreciation. We intend to achieve this objective by growing our initial portfolio through the selective acquisition of target assets designed to produce attractive returns across a variety of market conditions and economic cycles. When investing our capital, we will focus on the relative value of the various types of investments included within our target assets. We will also seek to capitalize on Pembrook Capital’s relationships within the commercial real estate industry and ability to source, analyze and originate financing for segments of the commercial real estate industry that we believe are underserved in the current credit market and capabilities for originating investments that generate taxable and U.S. federally tax-exempt income. Based on prevailing market conditions, our current expectation is that we will use approximately 50% of the net proceeds from this offering to acquire target assets that produce taxable income and approximately 50% to acquire target assets that produce income that is excludable from gross income for U.S. federal income tax purposes. However, the actual composition of the assets that we acquire with the net proceeds from this offering will depend upon prevailing market conditions at the time such net proceeds are invested.
 
We will commence investment operations upon completion of this offering. We intend to be treated as a partnership for U.S. federal income tax purposes. Partnerships are treated as pass-through entities for purposes of U.S. federal income taxation, and accordingly we do not expect to be subject to U.S. federal income taxation. Instead, our common shareholders will be required to take into account their allocable share of our items of income, gain, loss, deduction and credit for our taxable year ending within or with their taxable year. We also intend to operate our business in a manner that will exempt us from registration under the Investment Company Act.
 
Market Opportunities
 
We believe that the next several years will offer significant opportunities to invest in our target assets and participate in the ongoing recapitalization of the commercial real estate industry, due to a limited amount of capital available for investment in commercial real estate debt, a significant need to refinance maturing or defaulted debt and attractive fundamentals in the multifamily rental housing market.
 
We believe many investors that historically supplied capital to the commercial real estate industry, such as banks, insurance companies, finance companies and private investment funds, have determined to reduce or discontinue investment in commercial real estate. In addition, many private firms that traditionally invested in or provided credit enhancement supporting the issuance of, federally tax-exempt multifamily mortgage revenue bonds are no longer active. In particular, we believe that uncertainty regarding the commercial real estate market, the reduced size of the securitization market, increased regulation and the financial challenges faced by many real estate investors who are addressing legacy investment issues have resulted in a shortage of capital available to invest in commercial real estate. Additionally, many regulated investors, such as banks and insurance companies, face more stringent capital requirements to support non-investment grade investments and have new limitations on their ability to engage in certain types of principal investing. Accordingly, we believe that the experience and expertise of Pembrook Capital’s management team in originating investments across the major commercial real estate classes will allow us to take advantage of a variety of potential market opportunities throughout the United States.


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We believe that many outstanding commercial mortgage loans, including both those held on balance sheet by traditional lenders and those held in securitization trusts, will need to be refinanced, both as a result of scheduled maturities and borrower defaults under outstanding loans, which often result in the refinancing or restructuring of such loans. According to the Mortgage Bankers Association, at March 31, 2011, approximately $2.4 trillion of commercial mortgage debt, including approximately $0.8 trillion of multifamily mortgage debt, was outstanding in the United States, as shown in the charts below. According to Foresight Analytics, approximately $1 trillion of the outstanding commercial mortgage debt is scheduled to mature in the years 2011 through 2014.
 
     
Holders of Commercial Mortgage Debt Outstanding
As of March 31, 2011 ($ in billions) By Investor Type
(Includes Multifamily Mortgage Debt)
  Holders of Multifamily Mortgage Debt Outstanding
As of March 31, 2011 ($ in billions) By Investor Type
     
(PERFORMANCE GRAPH)   (PERFORMANCE GRAPH)
 
 
Source: Mortgage Bankers Association, March 31, 2011
 
According to the Mortgage Bankers Association, the delinquency rate for commercial and multifamily mortgage debt at March 31, 2011 varied significantly by type of investor, with CMBS the highest at 9.18%, banks and thrifts at 4.18%, Fannie Mae at 0.64%, Freddie Mac at 0.36% and life insurance company portfolios at 0.14%, as shown in the following chart:
 
(PERFORMANCE GRAPH)


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Note: Delinquency rates are as of March 31, 2011. Delinquencies based on the outstanding principal amount. CMBS based on 30+ days delinquent; Life Insurance Companies, Fannie Mae and Freddie Mac based on 60+ days delinquent; and Banks & Thrifts based on 90+ days delinquent or in non-accrual.
 
Source: Mortgage Bankers Association 2011 Q1 Quarterly Data Book
 
In addition, there has been a significant reduction in CMBS originations during the last several years, as indicated in the chart below. We believe that this reduction, combined with capital constraints among commercial banks and other sources of real estate investment, has increased the need for alternative sources of capital such as our company.
 
(PERFORMANCE GRAPH)
 
 
Source: Commercial Mortgage Alert March 31, 2011
 
We expect that investing in new taxable and tax-exempt loans issued to refinance outstanding loans will be a significant component of our investment strategy, and that we will be able to acquire investments with attractive risk-adjusted yields and prudent underwriting standards that finance high-quality properties for experienced owners and developers.
 
We believe that multifamily housing is among the commercial real estate classes experiencing the strongest recovery in the United States from the global financial crisis. Additionally, we believe that long-term demographic shifts within the United States, as well as other economic and public policy trends, will stimulate demand for multifamily rental housing over the next several years, leading to an increase in occupancy and rental rates. According to the Mortgage Bankers Association, from 1987-1994 homeownership in the United States was approximately 64% among American families and never was above 65% or below 63%; however, from 1994-2003, the percentage of American families owning their homes increased significantly, rising to almost 70% in 2003. We believe that the proliferation of sub-prime mortgage lending during this period was a significant contributor to this increase. More conservative residential lending standards and reduced interest in homeownership, however, have recently caused a decline in the percentage of American families who own their homes, to approximately 67%. We believe that more stringent lending standards and changing housing preferences will cause the level of homeownership over time to trend towards its


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historical average of approximately 64% of American families, and increase the size of the U.S. tenant pool. By itself, the recent downward trend in homeownership has added almost four million renters to the marketplace between 2005 and 2010, according to the Joint Center for Housing Studies of Harvard University. Moreover, we believe that the rate of household formation by “echo boomers” (people born between 1986-2005), augmented by foreign born families, will be the primary driver of rental housing demand over the next decade, and that many new households will be more predisposed towards rental housing than prior generations. As a result of these trends, we believe that occupancy and rental rates will increase at multifamily properties, leading to an increased demand for capital to acquire, construct and improve multifamily housing. This type of capital has historically been provided by local, regional and national banks. However, as many traditional sources of capital have eliminated, or reduced, their participation in this market, we believe that we are well positioned to acquire both taxable commercial real estate debt obligations and federally tax-exempt multifamily mortgage revenue bonds through direct originations facilitated by Pembrook Capital, including our Manager, and secondary market purchases.
 
We intend to participate in the multifamily housing rental market primarily through the acquisition of federally tax-exempt multifamily mortgage revenue bonds that are issued by state and local housing finance agencies, or HFAs. HFAs issue bonds that produce income that is excludable from gross income for U.S. federal income tax purposes and that are secured by mortgages on multifamily properties to finance the acquisition and renovation, or new construction, of multifamily housing properties by private owners, where a specified percentage of the units will be set aside to rent to moderate and low-income families and, in some cases, specifically targeted toward elderly residents. Based on information from the Securities Data Company, we believe that in excess of $169 billion of federally tax-exempt multifamily mortgage revenue bonds were issued from 1980 to 2010, in annual amounts ranging from $1.6 billion to $19.9 billion.
 
While the use of federally tax-exempt multifamily mortgage revenue bonds has proven to be a critical component in providing affordable rental housing to moderate and lower income families, from the onset of the financial crisis in late 2007, key institutional providers of capital to this marketplace have either withdrawn completely or significantly reduced their activity levels. Certain specialty investment firms that had previously been highly active investors in such bonds have largely withdrawn from the marketplace. Many national banks largely withdrew from balance sheet lending on real estate, including federally tax-exempt multifamily mortgage revenue bonds. Finally, private sector bond insurers, who customarily insured bonds that were typically purchased by investment grade-focused municipal bond funds and retail investors, have also become inactive due to solvency and other balance sheet concerns. As a result of these and other factors, new issuance of federally tax-exempt multifamily mortgage revenue bonds declined from $5.6 billion in 2007 to $2.9 billion in 2009. We believe there is significant demand for capital from existing owners and developers of multifamily rental housing seeking to take advantage of favorable market trends.
 
While economic trends show signs of a stabilizing economy and debt availability has increased significantly over the last two years, we believe that the overall availability of debt investment remains limited. Additionally, many participants in the multifamily housing debt sector either reduced their participation in the sector or are considering selling some or all of their existing portfolio investments in order to meet their liquidity needs. We believe that this will create opportunities for us to participate in primary market transactions and to acquire existing federally tax-exempt multifamily mortgage revenue bonds from distressed holders at attractive yields in secondary market transactions.


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Our Competitive Strengths
 
Substantial Underwriting, Origination and Asset Management Experience, Expertise and Adaptability
 
We expect to benefit from the substantial experience of Pembrook Capital’s management team. Led by Stuart Boesky, our Chairman and Chief Executive Officer, five members of Pembrook Capital’s management team have worked or collaborated together for over ten years. Our Manager will provide us with access to origination, underwriting and asset management expertise that has been gained and developed over multiple real estate cycles. Pembrook Capital’s management team has successfully underwritten, originated, arranged financing for and managed various types of commercial real estate investments relating to the major classes of commercial real estate, throughout a variety of interest rate, economic and credit environments. We believe that the familiarity of Pembrook Capital’s management team with numerous types of commercial real estate investments and the major commercial real estate classes will allow us to adjust the focus of our investment strategies from time to time in response to changing conditions.
 
Broad Base of Industry Relationships
 
Members of Pembrook Capital’s management team have actively invested in numerous types of real estate investments in the major commercial real estate classes over many years and have numerous long-standing relationships with developers and owners of commercial real estate, the real estate brokerage community, real estate service providers, and major commercial and investment banks, as well as federal, state and local governmental agencies, including Fannie Mae, Freddie Mac, the Department of Housing and Urban Development, or HUD, and the Federal Housing Administration, or FHA. We believe that these relationships will support the origination, management and financing activities undertaken by our Manager on our behalf.
 
Leaders in Federally Tax-Exempt Multifamily Mortgage Revenue Bonds
 
Our target assets include federally tax-exempt multifamily mortgage revenue bonds that finance the acquisition, construction or improvement of multifamily rental apartments. We believe that federally tax-exempt multifamily mortgage revenue bonds present attractive investment opportunities because of the improving fundamentals of the multifamily rental market and the U.S. federally tax-exempt nature of the interest income. Additionally, these bonds can often be financed on a secured basis with debt maturing at or about the same time as the bonds being financed (in general, up to 15 years), with no requirement that the financed bonds be marked-to-market or a specified loan-to-value ratio maintained. Based on prevailing market conditions, we expect to allocate approximately 50% of the net proceeds from this offering to acquire federally tax-exempt multifamily mortgage revenue bonds.
 
Members of Pembrook Capital’s management team have extensive experience in the federally tax-exempt multifamily mortgage revenue bond industry and have played leadership roles in the industry over the last two decades. While at Centerline, Mr. Boesky and other members of Pembrook Capital’s management team developed a program designed to minimize the number of intermediaries involved in executing multifamily tax-exempt mortgage revenue bond financings and thereby increase their efficiency. From 1997 to 2006, members of Pembrook Capital’s management team, while at Centerline, originated and acquired approximately $2.9 billion of federally tax-exempt multifamily mortgage revenue bonds secured by approximately 400 properties, containing approximately 60,000 units of multifamily rental housing.


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Diverse, Yield-Generating Initial Portfolio
 
Upon completion of our formation transactions and this offering, we will own a yield-generating initial portfolio consisting of 18 assets, including first mortgage loans, bridge loans, mezzanine loans, preferred equity and other commercial real estate finance instruments, with an aggregate outstanding principal amount of $218.2 million and a fair value of $209.7 million as of March 31, 2011. As of March 31, 2011, our initial assets had an annual weighted average annual interest rate of approximately 8.56%, a weighted average yield to maturity of approximately 12.01% and a weighted average loan-to-value ratio, or LTV, at the time of loan origination of approximately 64.5% (excluding investments not directly secured by real estate). As of March 31, 2011, the weighted average annual interest/distribution rate of financing on our initial assets (including debt and preferred shares) was approximately 2.86% and the weighted average annual interest rate of our initial portfolio was approximately 8.56%.
 
Favorable Capital Structure and Strong Balance Sheet
 
Upon completion of this offering and our formation transactions, we will have approximately $46.5 million of long-term indebtedness, representing approximately 0.24 times our total book value as of March 31, 2011. In addition, we will have perpetual preferred shares outstanding with an aggregate liquidation preference of $99.0 million, which provides us with significant additional long-term capital. Our preferred shares will pay cumulative distributions at an annual floating rate equal to three-month LIBOR plus a weighted average spread of 2.72%, will not be mandatorily redeemable at any time and will remain outstanding indefinitely unless redeemed or otherwise purchased by us at our election. Under our operating agreement, the aggregate liquidation preference of our outstanding preferred shares, including the three series of preferred shares that we will issue to holders of preferred interests in the Pembrook Funds in our formation transactions, may not exceed the total book value of our outstanding common shares at the time of issuance of any preferred shares. In addition, we will seek to limit the amount of outstanding indebtedness we incur to not more than two times the total book value of our outstanding equity (including our perpetual preferred shares); however, our actual indebtedness at any given time will vary. Our operating agreement will not contain any limit on the amount of indebtedness that we may incur, and we may change our leverage at any time in response to market conditions without the approval of our shareholders.
 
Alignment of Our Manager’s Interests
 
In connection with our formation transactions, certain affiliates and related parties of Pembrook Capital will receive an aggregate of           of our common shares upon the exchange of their membership interests in the Pembrook Funds. Pembrook Capital and each other party receiving common shares in connection with our formation transactions will agree not sell or otherwise transfer any of our common shares, subject to certain exceptions, for a period of 365 days after the date of this prospectus (subject to extension under certain circumstances), without the prior written consent of Deutsche Bank. In addition, upon completion of this offering, we will grant our Manager          restricted units exchangeable for our common shares upon vesting on a one-for-one basis. These restricted units will vest ratably on a quarterly basis over a three-year period, beginning on the first day of the calendar quarter following completion of this offering. Upon completion of our formation transactions and this offering, Pembrook Capital, including our Manager, and certain of its affiliates and employees will beneficially own approximately     % of our common shares on a fully diluted basis, assuming vesting of all restricted units exchangeable for common shares.


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Our Investment Strategies
 
Our investment objective is to generate attractive risk-adjusted returns for our shareholders over the long-term, primarily through quarterly distributions (a portion of which we expect will be excluded from gross income for U.S. federal income tax purposes) and, secondarily, through capital appreciation, by investing in our target assets. Our investment strategies may include, without limitation, the following:
 
  •  originating and acquiring whole mortgage loans, bridge loans, mezzanine loans and preferred equity;
 
  •  originating and acquiring federally tax-exempt multifamily mortgage revenue bonds issued to finance the acquisition, improvement or construction of multifamily rental apartments;
 
  •  utilizing the asset level underwriting experience and market knowledge of Pembrook Capital’s management team to purchase assets at prices that we believe represent a discount to their realizable value;
 
  •  investing in assets secured by properties, especially those located in markets with high barriers to entry, such as high density urban locations, and/or markets with projected job growth and favorable supply and demand characteristics; and
 
  •  structuring investments with appropriate amounts of leverage that reflects the risk of the underlying asset’s cash flows, and attempting to match the rate and maturity of the financing with that of the investment itself.
 
In implementing our investment strategies, we intend to utilize the expertise of Pembrook Capital in identifying undervalued assets and securities, as well as its capabilities in transaction sourcing, underwriting, execution and asset management. Our Manager’s Investment Committee, which will be chaired by Mr. Boesky and will also include the following other executive officers, Robert Hellman, John Garth, Patrick Martin, James Spound and Eugene Venanzi, will make acquisition, financing and asset management decisions on our behalf. These decisions will generally be based upon our Manager’s view of the current and future economic environment, its outlook for real estate in general and the particular asset class and, finally, its assessment of the risk-reward profile derived from internally-developed underwriting and cash flow analysis.
 
In an effort to capitalize on investment opportunities that may be present in various market environments, we may modify our investment strategies or emphasize investments at different levels of the capital structure or in assets secured by specific types of real estate. Our investment strategies may be modified from time to time, upon the recommendation of our Manager and approval by our Board of Managers, but without the approval of our shareholders.
 
Our Target Assets
 
We intend to invest primarily in mortgage loans and other debt instruments secured by commercial real estate located in the United States that are either originated by Pembrook Capital or purchased in the secondary market. We will seek to invest in assets where we believe that the value of the underlying real estate collateral exceeds the amount of our investment in the asset. We may invest in performing and non-performing assets, and, on a select basis, we may invest in assets with the goal of acquiring the underlying property. We will seek to invest in assets secured by types of commercial real estate with which Pembrook Capital’s management team has experience and that are located in markets that our Manager believes have favorable real estate fundamentals. We may also invest in preferred equity issued by entities that own commercial real estate.


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Based on prevailing market conditions, our current expectation is that we will use approximately 50% of the net proceeds from this offering to acquire target assets that produce taxable income, such as first mortgage loans, bridge loans, mezzanine loans and preferred equity issued by entities that own commercial real estate, and approximately 50% to acquire federally tax-exempt multifamily mortgage revenue bonds, issued to acquire, construct or improve multifamily rental apartments, which produce income that is excludable from gross income for U.S. federal income tax purposes. However, there is no assurance that upon the completion of this offering we will not allocate the net proceeds in a different manner among our target assets. In addition, our Board of Managers may change our investment strategies or guidelines, including the types of target assets in which we invest, without shareholder approval. Our investment decisions will depend on prevailing market conditions and may change over time in response to opportunities available in different interest rate, economic and credit environments.
 
Our target assets will include the following types of instruments, which we refer to collectively as our “target assets”:
 
Taxable Commercial Loans, Other Commercial Real Estate Debt Investments and Preferred Equity
 
Whole mortgage loans.  Loans that are secured by first mortgage liens on commercial real estate with maturities of generally three to ten years. Typically, these loans provide financing to commercial property developers and owners. Some whole mortgage loans are “participating,” and bear a stated rate of interest and entitle the holder to receive a percentage of the underlying property’s cash flow and/or a portion of any remaining sale or refinancing proceeds after payment of indebtedness. In some cases, we may originate and fund a first mortgage loan with the intention of selling a senior interest therein, or an A-Note, and retaining the subordinated interest, or a B-Note, or mezzanine loan tranche. Additionally, to the extent we extend the maturity of a whole mortgage loan or otherwise modify its terms, we may receive an extension or modification fee. We may invest in whole mortgage loans either through direct origination or through secondary market purchases.
 
Bridge loans.  Loans that are secured by first mortgage liens on commercial real estate with maturities generally shorter than three years. Typically, these loans provide interim financing for the acquisition or repositioning of real estate, and the expectation is that they will be repaid with the proceeds from a conventional mortgage loan or other financing source. Additionally, to the extent we extend the maturity of a bridge loan or otherwise modify its terms, we may receive an extension or modification fee. We believe that providing bridge loans may lead to other investment opportunities with the same borrower, including conventional mortgage loans and mezzanine loans. We may invest in whole mortgage loans either through direct origination or through secondary market purchases.
 
B-Notes.  Loans that are typically secured by a first mortgage lien on a commercial real estate asset or a group of related properties and subordinated to an A-Note that is secured by the same first mortgage lien on the same collateral. The subordination of the B-Note is typically accomplished through an inter-creditor agreement among the holders of the A-Notes and B-Notes. B-Notes are subject to more credit risk with respect to the underlying mortgage collateral than the corresponding A-Note. We may invest in B-Notes either through direct negotiation with the party that originated the mortgage loan or through secondary market purchases.
 
Mezzanine loans.  Loans that are typically made to a borrower and secured by a pledge of the borrower’s ownership interest in the property and/or the property owning entity. Mezzanine loans are subordinate to mortgage loans secured by first or second mortgage liens on the property and are senior to the borrower’s equity in the property. Upon any default, a


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mezzanine lender can foreclose on the borrower’s ownership interest in the property and succeed to ownership of the property, subject to the senior rights of the holders of the mortgage loan secured by the property. Additionally, to the extent we extend the maturity of a mezzanine loan or otherwise modify its terms, we may receive an extension or modification fee. We may invest in mezzanine loans either through direct origination or through secondary market purchases.
 
Construction or rehabilitation loans.  Loans that are secured by first mortgage liens on commercial real estate with maturities of generally one to two years. Typically, these loans provide financing for 40% to 60% of the total cost of the construction or rehabilitation of a property. We also may acquire participations in construction or rehabilitation loans on commercial properties. In some instances, these loans may entitle the lender to a specified percentage of the underlying property’s net operating income or gross revenues, as well as a portion of any remaining sale or refinancing proceeds after payment of indebtedness.
 
CMBS.  CMBS are debt instruments secured by a mortgage loan on a single property or a pool of mortgage loans. We may invest in senior or subordinated CMBS. We may invest in investment grade and non-investment grade CMBS, as well as unrated CMBS.
 
We may invest in CMBS that will yield high current interest income and where we consider the return of principal to be likely. Payments on CMBS depend on the timely payment of interest and principal on the underlying mortgage loans, and defaults by the borrowers under such loans may ultimately result in deficiencies and defaults on the CMBS. In the event of a default by the issuer of the CMBS, the trustee for the benefit of the holders of CMBS has recourse only to the underlying pool of mortgage loans and, if an underlying mortgage loan is in default, to the property securing such loan. After the trustee has exercised all of the rights of a lender under a defaulted mortgage loan and the related mortgaged property has been liquidated, no further remedy will be available. However, holders of senior classes of CMBS will be protected to a certain degree by the structural features of the securitization transaction within which such CMBS were issued, such as the subordination of the junior classes of the CMBS. We may acquire CMBS from private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage bankers, commercial banks, finance companies, investment banks and other entities.
 
Preferred Equity.  Preferred equity interests issued by entities that own commercial real estate, that are junior to debt secured by the real estate but senior to common equity interests. In general, preferred equity interests, while having payment positions similar to subordinate debt, contain covenants and voting and control rights to protect their preferred equity status.
 
Federally Tax-Exempt Multifamily Mortgage Revenue Bonds
 
Federally tax-exempt multifamily mortgage revenue bonds are bonds that are secured by first mortgage liens on multifamily rental apartments with maturities of generally three to 15 years. These bonds are typically issued by HFAs to finance the acquisition, improvement or construction of multifamily rental apartments, and the interest payments to investors may be excluded from gross income for U.S. federal income tax purposes. However, these bonds are not an obligation of any state or local government, agency or authority, and no state or local government, agency or authority is obligated to make any payment of principal or interest due on such bonds, nor is the taxing power of any state or local government pledged to secure the payment of principal or interest on such bonds. Each federally tax-exempt multifamily mortgage revenue bond, however, is generally secured by a first mortgage on all real and personal property included in the related property and an assignment of rents, and has limited recourse to the borrowers themselves. Interest payable on federally tax-exempt multifamily mortgage revenue bonds may bear interest at a fixed or floating rate and, in some instances, provide for the payment of additional contingent interest that is payable solely from available


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net cash flow generated by the financed property or the proceeds from any sale or refinancing of such property.
 
We expect to provide financing primarily through a direct bond purchase program. Under a direct bond purchase program, an investor, such as us, works jointly (through our Manager) with the property owner and the bond issuer to structure and purchase the bonds. As compared to the more commonplace public offering of municipal securities, a direct bond purchase program allows for a streamlined and cost effective bond issuance and sale. As a direct bond purchaser, we expect to benefit from our Manager’s direct negotiations with the key parties of the financing and, thereby, eliminate several categories of transaction costs, including public offering, distribution and commission expenses, bond rating expenses, certain legal expenses and credit enhancement fees. Property owners are often willing to pay a higher interest rate on bonds structured under a direct bond purchase program, because they save substantially on both upfront bond issuance costs and ongoing credit enhancement fees.
 
In certain instances, property owners/developers who seek federally tax-exempt bond financing do so in conjunction with the sale of LIHTCs, authorized under Section 42 of the Code, which raises equity capital for the property owning partnership. Unlike bonds, the use of LIHTCs creates a per unit maximum rent that the property owner can charge based upon a federal policy that a low-to-moderate income family should not pay more than 30% of its income (adjusted for family size) for rent and utility expenses. Maximum rent levels are established yearly once HUD releases median income data for each metropolitan statistical area. Depending on the area, the maximum LIHTC rent level may be above, at or below market rent levels. LIHTCs represent an institutional investment product that are most commonly sold to banks, insurance companies and other large public companies who become limited partners in the property owning partnership. Notwithstanding the rent restrictions attached to LIHTCs, the institutional ownership of these properties, as well as the substantial equity investments that these institutional partners make in the properties, often create attractive risk adjusted mortgage lending opportunities through the acquisition of the bonds.
 
Our Financing Strategy
 
We plan to finance our investments using diverse sources, including commercial bank financing (such as term loans and revolving credit facilities), securitizations, total return swaps, pooled match term financing, equity and debt issuances (including issuances of common shares and perpetual preferred shares), repurchase agreements and warehouse facilities, in addition to transaction or asset specific funding arrangements, in each case to the extent available to us.
 
Match Funded Commercial Bank Financing.  In an effort to minimize refinancing risk and reduce the impact of changing interest rates on our results of operations and cash flows, Pembrook Capital, including our Manager, will seek to “match fund” our financing with the assets being financed with borrowings supplied by commercial banks (i.e. matching the maturities, interest rate indices and re-pricing dates of the financing with the asset being financed).
 
Securitizations.  We intend to seek to enhance the returns on our commercial mortgage loan investments, especially loans that we originate, through securitization transactions. To the extent available, we intend to securitize and sell to third-parties senior securities backed by a loan, while retaining the junior securities in our investment portfolio. We expect to see interest in the credit markets for such financing at reasonable cost of fund levels that would generate a positive net spread and enhance returns for investors in such securitizations.
 
We intend to finance a portion of our federally tax-exempt multifamily mortgage revenue bond investments through tax-exempt portfolio financing programs that are currently provided by government-sponsored enterprises and certain banks. Through these programs, we intend


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to seek non-recourse financing that is predominately match funded with the financed assets and offers limited or no mark-to-market risk, such that changes in the market value of the financed assets due to changes in the credit markets, will not result in margin calls for additional collateral or put rights on the part of the party providing the financing. Generally, these types of financings are most efficiently accomplished when collateralized by pools of federally tax-exempt multifamily mortgage revenue bonds with an aggregate principal amount of $75 million or greater; accordingly, we intend to use alternative forms of financing, which may be on less advantageous terms, until such time as we accumulate a sufficient amount of investments to execute a portfolio financing. We believe that bonds represent the only long-term mortgage backed class of investment that can be financed with these advantageous terms.
 
Total Return Swaps.  We intend to finance a portion of our investments through total return swaps, where we agree to make payments to a financial institution based on a set rate, which may be fixed or variable, and the financial institution agrees to make payments to us based on the total return of an underlying asset.
 
Perpetual Preferred Equity.  We intend to issue additional perpetual preferred equity, represented by existing or new series or classes of preferred shares, in connection with our financing activities. Such preferred shares may, at the discretion of our Board of Managers, have characteristics similar to indebtedness, and to the extent our investments produce cash flow in excess of the distribution requirements of our preferred shares and our other obligations, the excess will accrue to the benefit of our common shareholders. However, unlike debt, such preferred shares will not be secured by our assets, will not require specified collateral maintenance requirements and the failure to pay a distribution on such shares would not be an event of default causing acceleration (however, in general, we will be unable to make distributions to our common shareholders at any time we have distribution arrearages with respect to our preferred shares). We believe that preferred equity is an attractive source of capital that will allow us to operate with less debt, reducing the risks inherent therewith, and will assist us in seeking to produce attractive risk-adjusted returns for our shareholders. Upon completion of this offering and our formation transactions, we will have outstanding preferred shares with an aggregate liquidation amount of $99.0 million, that pay cumulative distributions at an annual floating rate equal to three-month LIBOR plus a weighted average spread of 2.72%. Over time, as our portfolio grows, we will seek to issue additional existing or new series or classes of preferred shares.
 
We intend to issue one or more series or classes of preferred shares developed by members of our Manager’s management team that is designed to appeal to regulated U.S. depositary institutions. This type of preferred security, in addition to bearing a cumulative preferred cash distribution, allows a holder to claim certain benefits under the Community Reinvestment Act of 1977, as amended, which we refer to as the CRA. This product is designed to assist depositary institutions in meeting certain obligations to which they are subject under the CRA by financing assets that benefit the institution’s CRA assessment area.
 
Repurchase Agreements.  We also intend to use repurchase agreements as short-term financing to fund our investments. Under these agreements, we will sell securities and loans to a counterparty and agree to repurchase the same assets from the counterparty at a price equal to the original sales price plus accrued interest for the term. These agreements are typically accounted for as debt secured by the underlying collateral. During the term of a repurchase agreement, we are generally entitled to receive scheduled interest payments on the related securities and loans.
 
Warehouse Facilities.  Warehouse facilities are typically loans made to investors to acquire securities and loans that are pledged to the warehouse lender. The pool of assets in a warehouse facility typically must meet certain requirements, including maturity, average life, investment rating, agency rating, and sector diversity. There are also certain requirements


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relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge offs. Failure to comply with these requirements could result in either the need to post additional collateral or cancellation of the warehouse facility.
 
Commercial Bank Financing.  Financing provided by banks (such as term loans and revolving credit facilities), which may be collateralized or non-collateralized and may involve one or more lenders. Credit facilities typically have maturities ranging from two to five years and may accrue interest at either fixed or floating rates.
 
Our Leverage Policies
 
We intend to prudently use debt and preferred equity to finance our investment activities. Under our operating agreement, the aggregate liquidation preference of our outstanding preferred shares, including the three series of preferred shares that we will issue to holders of preferred interests in the Pembrook Funds in our formation transactions, may not exceed the total book value of our outstanding common shares at the time of issuance of any preferred shares. In addition, our Board of Managers has adopted a policy limiting the amount of our outstanding indebtedness to not more than two times the total book value of our outstanding equity (including our perpetual preferred shares); however, our actual indebtedness at any given time will vary. Our operating agreement will not contain any limit on the amount of indebtedness that we may incur, and we may change our leverage policy at any time in response to market conditions without the approval of our shareholders.
 
Initial Portfolio
 
Upon completion of our formation transactions and this offering, we will own a yield-generating initial portfolio consisting of 18 assets, including first mortgage loans, bridge loans, mezzanine loans, preferred equity and other commercial real estate finance instruments, with an aggregate outstanding principal amount of $218.2 million as of March 31, 2011. As of March 31, 2011, our initial assets had a weighted average annual interest rate of approximately 8.56%, a weighted average yield to maturity of approximately 12.01%, and a weighted average LTV ratio at the time of loan origination of approximately 64.5% (excluding investments not directly secured by real estate).
 
The members of the Pembrook Funds will receive an aggregate of          our common shares and        of our preferred shares in the mergers of the Pembrook Funds into us in connection with our formation transactions.
 
The following tables set forth certain information about our initial portfolio, organized separately by geographic region and class, as of March 31, 2011:
 
                 
    As of March 31, 2011  
    Outstanding
    % of Outstanding
 
    Principal
    Principal
 
    Amount     Amount  
 
Region
               
New York
  $ 58,109,284       27 %
Mid-Atlantic
  $ 48,347,887       22 %
Florida
  $ 26,018,500       12 %
Southwest
  $ 19,896,294       9 %
Southeast/ Caribbean
  $ 17,466,042       8 %
California
  $ 16,392,525       8 %
Rocky Mountain
  $ 12,400,000       6 %
Other (investments in securities)
  $ 19,611,849       9 %
                 
Total
  $ 218,242,881       100 %*
 
* Percentages do not add up to 100% due to rounding.


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    As of March 31, 2011  
    Outstanding
    % of Outstanding
 
    Principal
    Principal
 
    Amount     Amount  
 
Class
               
Multifamily
  $ 67,575,653       31 %
Office
  $ 58,941,269       27 %
Hospitality
  $ 47,411,025       22 %
Retail
  $ 27,444,772       13 %
Student Housing
  $ 9,250,000       4 %
Other (investments in securities)
  $ 7,620,162       3 %
                 
Total
  $ 218,242,881       100 %
 
Diversification is a key part of our risk management strategy. We believe that our initial assets are diversified by asset type, type of property serving as collateral and region. As of March 31, 2011, no single asset represented more than 15% of the total fair value of our initial portfolio. The following table provides classification information, as of March 31, 2011, with respect to our initial assets, based on outstanding principal amount:
 
                                                             
          Outstanding
                            Maturity
    Yield to
 
Name
  Close Date     Principal Amount    
Asset Type
 
Region
 
Property Type
  Initial LTV     Interest Rate     Date     Maturity  
 
100 11th Avenue (1)
    7/1/10     $ 3,452,576     First Mortgage   New York   Condominium     48 %     14.00 %     7/1/12       10.45 %
                                                             
Aurora
    1/21/11     $ 5,000,000     Preferred Equity   New York   Condominium     63 %     12.00 %     3/1/14       12.25 %
                                                             
Courtyard by Marriott
Hotel (2)
    8/27/07     $ 16,392,525     Bridge   California   Hospitality     80 %     5.25 %     9/1/12       23.06 %
                                                             
Intercontinental Hotel Miami
Mezzanine A
    5/31/07     $ 13,009,250     Mezzanine   Florida   Hospitality     46 %     1.55 %     10/9/11       10.94 %
                                                             
Intercontinental Hotel Miami
Mezzanine B
    5/31/07     $ 13,009,250     Mezzanine   Florida   Hospitality     54 %     2.00 %     10/9/11       12.64 %
                                                             
Heritage Hunt
    10/13/10     $ 31,805,513     Bridge   Mid-Atlantic   Multifamily     65 %     13.00 %     11/1/12       13.19 %
                                                             
Bronx Portfolio
    3/25/11     $ 12,500,000     First Mortgage   New York   Multifamily     61 %     12.00 %     4/1/13       12.25 %
                                                             
Sweetwater Cove Apartments
    9/5/07     $ 9,917,564     Bridge   Southeast/ Caribbean   Multifamily     80 %     6.00 %     8/27/12       19.10 %
                                                             
AIMCO Perpetual Preferred
Series A (3)
    5/15/07     $ 9,900,000     Security   Various   Multifamily     N/A       1.56 %     N/A       6.43 %
                                                             
The Plaza at PPL Center L
    5/1/07     $ 4,703,284     Mezzanine   Mid-Atlantic   Office     85 %     8.50 %     12/1/16       6.79 %
                                                             
Keystone Summit Corporate
Park
    1/22/10     $ 11,839,090     Mezzanine   Mid-Atlantic   Office     74 %     14.00 %     1/22/15       10.61 %
                                                             
Chelsea Arts Mezzanine
Loan (4)
    1/18/08     $ 27,907,208     Mezzanine   New York   Office     58 %     13.00 %     10/15/11       11.76 %
                                                             
Boulder Office
    12/30/10     $ 12,400,000     Bridge   Rocky Mountain   Office     67 %     9.50 %     2/1/12       9.75 %
                                                             
Blackstone—EOP
Mezzanine (3)
    4/3/07     $ 2,091,687     Mezzanine   Various   Office     N/A       2.25 %     2/9/13       10.27 %
                                                             
Seneca National Ind. Capital
Improv. Bonds (3)
    5/17/07     $ 7,620,162     Security   Various   Financial     N/A       6.75 %     12/1/13       7.51 %
                                                             
Goodyear Portfolio
    10/29/10     $ 7,548,478     First Mortgage   Southeast/ Caribbean   Retail     61 %     6.45 %     12/1/15       6.61 %
                                                             
Oakwood Shopping
Center (5)
    6/28/07     $ 19,896,294     First Mortgage   Southwest   Retail     90 %     4.38 %     1/1/14       8.29 %
                                                             
55 John Street
    1/31/11     $ 9,250,000     Mezzanine   New York   Residential     75 %     12.00 %     12/1/16       12.25 %
                                                             
TOTAL
          $ 218,242,881             Weighted
Average
    64.5 %(6)     8.56 %             12.01 %
 
 
(1) Principal paid down as collateral (condominium units) are sold. Loan currently provides 14% yield maintenance.
 
(2) Loan is in forbearance; non-performing.
 
(3) Securities or treated as securities.
 
(4) Unpaid balance increases due to interest accrual and development advances.


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(5) Loan amortizes and guaranteed by entity with minimum net worth of $500 million.
 
(6) Excludes investments not directly secured by real estate.
 
Of the assets in our initial portfolio, we expect that the following two will have values in excess of 10% of our total assets upon the consummation of this offering.
 
Heritage Hunt.  In October 2010, the Pembrook Funds originated a $31.25 million first mortgage bridge loan for the refinancing of The Marque at Heritage Hunt Apartments, a Class A 200-unit multifamily complex with above-market amenities located in Gainesville, VA, a rapidly developing suburb located 35 miles southwest of Washington, DC. PCI I invested $15.5 million and PCI II invested $15.75 million. The loan term is two years, with two six-month extension options. The interest rate on the loan is 13%, of which 8% is current pay and 5% is accrual (compounded monthly). The Pembrook Funds received a 1% origination fee and the loan carries a 1% exit fee. The loan is subject to 12-month yield maintenance. An interest reserve of $1 million was established to cover any debt service shortfalls during the term of the loan. At closing, the property was 70% leased. As of March 31, 2011, the property was 72% leased. Rents average $18.21 per square foot, or $1,734 per month. Lease terms generally range from 3-12 months. The loan is current and all required insurance is in place.
 
Chelsea Arts Mezzanine Loan.  In January 2008, PCI I invested $12.75 million in a B-Note position secured by a mixed-use, art gallery/office property located in Manhattan, comprised of three contiguous buildings of approximately 195,000 square feet. The total loan commitment was $70.0 million, with $58.3 million funded at closing and $11.7 million available for future costs. At closing $45.0 million was syndicated to a senior lender, and PCI I and a participant retained $13.3 million as a junior participation. The other junior participant was obligated to furnish the future funding. In May 2010, PCI I’s investment was converted to a mezzanine loan with an outstanding balance of $17.2 million. The restructured mezzanine loan carries a total interest rate of 13%, of which 7% is current pay and 6% is accrual (compounded monthly). As of March 31, 2011, the property was 69.5% leased and rents averaged $41.64 per square foot. The loan is current and all required insurance is in place.
 
Our Investment Guidelines
 
Our Board of Managers has adopted the following investment guidelines:
 
  •  our investments will be in our target assets;
 
  •  no investment shall be made that would cause us or any of our subsidiaries to be required to be registered as an investment company under the Investment Company Act;
 
  •  no investment shall be made that would cause us to be treated as an association or a publicly traded partnership taxable as a corporation, rather than a partnership, for purposes of federal income taxation;
 
  •  not more than 50% of our assets will be invested in any geographic region, as determined by our Board of Managers from time to time;
 
  •  not more than 50% of our assets will be invested in a single class of commercial real estate (excluding federally tax-exempt multifamily mortgage revenue bonds);
 
  •  not more than 25% of our assets will be invested with a single borrower;
 
  •  not more than 15% of our assets will be invested in any individual asset;
 
  •  until appropriate target assets are acquired, we may invest the net proceeds from this offering in interest-bearing, short-term securities that are rated investment grade and money market funds; and


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  •  each investment requires the approval of a majority of our Manager’s Investment Committee; any investment in excess of $50 million requires the approval of a majority of our Board of Managers’ Investment Committee and a majority of our Manager’s Investment Committee; and any investment in excess of $100 million requires the approval of a majority of our Board of Managers, a majority of our Board of Managers’ Investment Committee and a majority of our Manager’s Investment Committee.
 
Each of these investment guidelines will be applied and tested at the time of an investment and subsequent changes will not result in a violation of the above guidelines. These investment guidelines may be changed from time to time or waived by our Board of Managers without the approval of our shareholders. In addition, both our Manager and a majority of our Board of Managers must approve any change in our investment guidelines that would modify or expand our target assets.
 
Investment Committees of Our Manager and Board of Managers
 
Our Manager has an Investment Committee which will initially be comprised of Mr. Boesky, the chairman of the committee, and the following other executive officers, Robert Hellman, John Garth, Patrick Martin, James Spound and Eugene Venanzi. Our Manager’s Investment Committee will meet periodically, at least every quarter, to discuss investment opportunities. Each of our investments will be proposed by the committee’s chairman and will require the approval of a majority of our Manager’s Investment Committee. Our Manager’s Investment Committee will review our investment portfolio and its compliance with our investment guidelines at least on a quarterly basis or more frequently as necessary.
 
Upon completion of this offering, our Board of Managers will form an Investment Committee that will be responsible for the supervision of our Manager’s compliance with our investment guidelines and the periodic review of our investment portfolio. Any investment in excess of $50 million requires the approval of a majority of this committee in addition to a majority of our Manager’s Investment Committee. Initially, this committee will consist of Stuart Boesky, Robert Hellman and           .
 
Investment Process
 
Through our Manager’s origination and advisory agreement with Pembrook Capital, we will have access to a dedicated acquisition team of experienced real estate professionals. This team is responsible for underwriting the market for the target assets, developing financial models to test sensitivities, structuring transactions and leading the due diligence process. These functions will align our interests with our shareholders in all aspects of the process, preserving accountability to drive performance. Our Manager’s acquisition team will hold regular meetings where they share their observations on the market activities and policy changes, review our investment strategies and discuss transactions of potential interest and updates on our investment pipeline.
 
Our investment process will include sourcing and screening investment opportunities, assessing investment suitability, conducting interest rate and prepayment analysis, evaluating cash flow and collateral performance, reviewing legal structure and servicer and originator information and investment structuring, as appropriate, to seek an attractive return commensurate with the risk we are bearing. Upon identification of an investment opportunity, the investment will be screened and monitored by our Manager to determine its impact on maintaining our exemption from registration under the Investment Company Act. We will seek to make investments in sectors where our Manager has strong core competencies and where we believe market risk and expected performance can be reasonably quantified.
 
Our Manager evaluates each one of our investment opportunities based on its expected risk-adjusted return relative to the returns available from other, comparable investments. In


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addition, we evaluate new opportunities based on their relative expected returns compared to comparable investments in our portfolio. The terms of any leverage available to us for use in funding an investment are also taken into consideration, as are any risks posed by illiquidity or correlations with other investments in our portfolio. Our Manager also develops a macro outlook with respect to each target asset by examining factors in the broader economy such as GDP, interest rates, unemployment rates and availability of credit, among other things. Our Manager also analyzes fundamental trends in the relevant target asset to adjust/maintain its outlook for that particular target asset. Our Manager conducts extensive diligence with respect to each target asset class by, among other things, examining and monitoring the capabilities and financial wherewithal of the parties responsible for the origination, administration and servicing of relevant target assets.
 
The procedures used by Pembrook Capital’s management team have been developed over many years of investing in a variety of commercial asset types and in various market conditions. When underwriting an investment, our Manager collects, reviews, and verifies all key documents and, upon, verification, if an acquisition is consummated, enters the relevant material in a proprietary monitoring system. Key elements of the underwriting and investment process include, expected case and downside scenario analysis of present and future cash flows , and verification of information in the borrower’s financial statements, including the value attributed to the borrower’s real estate holdings and other non-liquid assets relative to actual and contingent liabilities. The focus of the review process is to determine that the collateral will have adequate cash flow to support the loan at all times, using conservative parameters. Special consideration is paid to exit scenarios.
 
Risk Management
 
As part of our risk management strategy, our Manager will actively manage the financing, interest rate, credit, prepayment and convexity risks associated with holding a portfolio of our target assets.
 
Asset Management
 
We recognize the importance of intensive asset management in successful investing, and Pembrook Capital has a dedicated, in-house asset management group. Pembrook Capital’s asset management professionals provide not only investment oversight, but also critical input to the acquisition process. This interactive process coordinates underwriting assumptions with direct knowledge of local market conditions, costs and revenue expectations. These critical assumptions then become the operational benchmarks by which the asset managers are guided and evaluated in their on-going management responsibilities. For mortgage investments, annual budgets are reviewed and monitored quarterly for variance, and follow up and questions are directed by the asset manager back to the owner. We believe that intensive asset management can have a significant impact on the total return that may be earned on our investments. Accordingly, our Manager has weekly asset management meetings that are attended by senior management to review and discuss the performance of our portfolio, as set forth in weekly asset reports. Formal quarterly reports are also issued for internal review. Our Manager’s asset management group seeks to create value through careful asset-specific and market surveillance, rigid enforcement of loan and security rights, and timely sale of underperforming investments. One of the key components in the underwriting process is the evaluation of potential exit strategies. The asset management group monitors each investment and reviews the disposition strategy on a regular basis in order to realize appreciated values and maximize returns.


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Interest Rate Hedging
 
We intend to engage in a variety of interest rate management techniques that seek, on the one hand, to mitigate the economic effect of interest rate changes on the values of, and returns on, some of our assets, and, on the other hand, help us achieve our risk management objectives. We intend to utilize derivative financial instruments, including, among others, puts and calls on securities or indices of securities, interest rate swaps, interest rate caps, interest rate swaptions, exchange-traded derivatives, U.S. Treasury securities and options on U.S. Treasury securities and interest rate floors to hedge all or a portion of the interest rate risk associated with the financing of our portfolio. Specifically, we will seek to hedge our exposure to potential interest rate mismatches between the interest we earn on our investments and our borrowing costs caused by interest rate fluctuations. In utilizing leverage and interest rate hedges, our objectives will be to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a favorable spread between the yield on our assets and the cost of our financing. We will rely on our Manager’s expertise to manage these risks on our behalf.
 
Market Risk Management
 
Risk management is an integral component of our strategy to deliver returns for our shareholders. Because we will invest in commercial real estate mortgage loans and other debt investments, including CMBS, investment losses from prepayments, defaults, interest rate volatility or other risks may meaningfully reduce or eliminate funds available for distribution to our shareholders. In addition, because we will employ leverage in funding our portfolio, mismatches in the maturities of our assets and liabilities may create risk in the need to continually renew or otherwise refinance our liabilities. Our net interest margin will be dependent upon a positive spread between the returns on our portfolio and our overall cost of funding. To minimize the risks to our portfolio, we will actively employ portfolio-wide and asset-specific risk measurement and management processes in our daily operations.
 
Credit Risk
 
Through our investment strategies, we will seek to limit our credit losses and reduce our financing costs. However, we retain the risk of potential credit losses on all of the mortgage loans, other commercial real estate related debt investments, and the mortgage loans underlying the CMBS we may acquire. We seek to manage credit risk through our pre-acquisition due diligence process and through use of non-recourse financing, when and where available and appropriate, on a risk-adjusted basis, which limits our exposure to credit losses to the specific pool of mortgages that are subject to the non-recourse financing. In addition, with respect to any particular target assets, our Manager’s investment team evaluates, among other things, relative valuation, comparable analysis, supply and demand trends, shape of yield curves, prepayment rates, delinquency and default rates, recovery of various sectors and vintage of collateral.
 
Our investment guidelines place certain limits on our investment activity as described above under “—Our Investment Guidelines.” However, these investment guidelines will be applied and tested at the time of an investment and subsequent changes will not result in a violation of such guidelines; moreover, these investment guidelines may be changed from time to time or waived by our Board of Managers without the approval of our shareholders. Our investment decisions will depend on prevailing market conditions and may change over time in response to opportunities available in different interest rate, economic and credit environments. As a result, we cannot predict with certainty the percentage of our equity that will be invested in any individual asset or our target assets at any given time.


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Conflicts of Interest and Related Policies
 
Management.  We are dependent on our Manager for our day-to-day management and do not have any independent officers or employees other than our Chief Financial Officer. Each of our executive officers other than our Chief Financial Officer is also an executive of Pembrook Capital. Our management agreement with our Manager was negotiated between related parties and its terms, including fees and other amounts payable, may not be as favorable to us as if it had been negotiated at arm’s length with an unaffiliated third party. In addition, each of our executive officers other than our Chief Financial Officer may in the future have significant responsibilities for other investment vehicles managed by Pembrook Capital. As a result, these individuals may not always be able to devote sufficient time to the management of our business. Further, when there are turbulent conditions in the real estate markets or distress in the credit markets the attention of our Manager’s personnel and our officers and the resources of Pembrook Capital may also be required by the other investment vehicles managed by Pembrook Capital. In such situations, we may not receive the level of support and assistance that we may receive if we were internally managed.
 
Future Investment Opportunity Allocation Provisions.  Pursuant to a co-investment and allocation agreement among our Manager, Pembrook Capital Management, LLC and us, our Manager and Pembrook Capital Management, LLC have agreed that neither they nor any entity controlled by Pembrook Capital will sponsor or manage any publicly traded investment vehicle that invests primarily in our target assets described in “—Our Target Assets” other than us for so long as the management agreement is in effect. For the avoidance of doubt, Pembrook Capital (including our Manager) may sponsor or manage another publicly traded investment vehicle that invests generally in real estate assets but not primarily in our target assets, as well as a private investment vehicle that invests primarily in our target assets. Our Manager and Pembrook Capital Management, LLC have also agreed that for so long as the management agreement is in effect no entity controlled by Pembrook Capital will sponsor or manage a potential public competing vehicle or a private investment vehicle unless Pembrook Capital adopts a policy that either (i) provides for the fair and equitable allocation of investment opportunities among all such vehicles and us, or (ii) provides us the right to co-invest with such vehicles, in each case subject to the suitability of each investment opportunity for the particular vehicle and us and each such vehicle’s and our availability of cash for investment.
 
Exclusivity Provisions.  Pembrook Capital, including our Manager, is not currently subject to any exclusivity arrangements that would affect our Manager’s ability to perform its obligations under the management agreement or Pembrook Capital Management, LLC’s ability to perform its obligations under the origination and advisory agreement.
 
Policy Regarding Investments Related to Properties That Are Owned By Affiliates Of Pembrook Capital or our Manager.  We expect our Board of Managers will adopt a policy that, among other things, permits us to (i) make investments in an entity in which Pembrook Capital is simultaneously making another debt or equity investment or (ii) acquire loans and investments with respect to properties owned by unaffiliated parties that may be managed by, or leased in whole or part to, Pembrook Capital or with respect to which an unaffiliated owner may have engaged Pembrook Capital to provide certain other services with respect to the property. In addition, we expect this policy to permit us to make loans and investments with respect to properties owned by unaffiliated parties for which Pembrook Capital may concurrently be engaged by the property owner to manage it or provide other services with respect to the property or which may concurrently agree to lease such property to it in whole or in part. Furthermore, to the extent that we have rights as a lender pursuant to the terms of any of our loans or investments to consent to an unaffiliated property owner’s engagement of a property manager or any other service provider, or to lease the property, this policy would permit us to provide consent to such a property owner seeking to engage, or lease property to, Pembrook Capital.


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Transactions with Other Funds.  Upon completion of this offering and our formation transactions, Pembrook Capital, including our Manager, will not provide management, advisory or other services to funds or other entities other than us; however, in order to avoid any future actual or perceived conflicts of interest between us, Pembrook Capital (including our Manager), or any fund or other entity to be sponsored or managed by Pembrook Capital (including our Manager), which we refer to collectively as the Pembrook parties, the approval of a majority of our independent managers will be required to approve (i) any purchase of our assets by any of the Pembrook parties and (ii) any purchase by us of any assets of any of the Pembrook parties.
 
Limitations on Personal Investments.  Shortly after the consummation of this offering, we expect that our Board of Managers will adopt a policy with respect to any proposed investments by our managers or officers or the officers of our Manager or Pembrook Capital, which we refer to as the covered persons, in any of our target assets. We expect this policy to provide that any proposed investment by a covered person for his or her own account in any of our target assets will be permitted if the capital required for the investment does not exceed the lesser of (i) $5 million, or (ii) 1% of our total shareholder’s equity as of the most recent month end, which we refer to as the personal investment limit. To the extent that a proposed investment exceeds the personal investment limit, we expect that our Board of Managers will permit the covered person to make the investment only (i) upon the approval of a majority of our independent managers, or (ii) if the proposed investment otherwise complies with terms of any other related party transaction policy our Board of Managers may adopt in the future.
 
Policies With Respect to Certain Other Activities
 
If our Board of Managers determines that additional funding is required, we may raise such funds through additional offerings of equity or debt securities or the retention of cash flow (subject to provisions in the Code concerning distribution requirements applicable to limited liability companies treated as partnerships for tax purposes) or a combination of these methods. In the event that our Board of Managers determines to raise additional equity capital, it has the authority, without shareholder approval, to issue additional common shares or preferred shares (of existing or new series or classes) in any manner and on such terms and for such consideration as it deems appropriate, in its sole discretion, at any time.
 
In addition, to the extent available we intend to borrow money to finance the acquisition of our investments, we intend to use traditional forms of financing, including securitizations and other sources of private financing, including warehouse and commercial bank financing. We also may utilize structured financing techniques to create attractively priced non-recourse financing, which may offer an all-in borrowing cost that is lower than that provided by traditional sources of financing or long-term, floating rate financing. Our investment guidelines and our portfolio and leverage are periodically reviewed by our Board of Managers as part of their oversight of our Manager.
 
As of the date of this prospectus, we do not intend to offer equity or debt securities in exchange for property.
 
We may invest in the debt securities of REITs or other entities engaged in real estate operating or financing activities, but not for the purpose of exercising control over such entities.
 
Our Board of Managers may change any of these policies without prior notice to or vote of our shareholders.


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Operating and Regulatory Structure
 
Tax Requirements
 
We believe that we have been organized and intend to operate so that we will qualify, and will continue to qualify, to be treated for U.S. federal income tax purposes as a partnership, and not as an association or a publicly traded partnership taxable as a corporation. In general, an entity that is treated as a partnership for U.S. federal income tax purposes is not subject to U.S. federal income tax at the entity level. Consequently, as a common shareholder, you will be required to take into account your allocable share of items of our income, gain, loss, deduction and credit for our taxable year ending within or with your taxable year, regardless of whether we make cash distributions on a current basis with which to pay any resulting tax. We believe that we will be treated as a publicly traded partnership. Publicly traded partnerships are generally treated as partnerships for U.S. federal income tax purposes as long as they satisfy certain income and other tests on an ongoing basis. We believe that we will satisfy those requirements and that we will be treated as a partnership for U.S. federal income tax purposes. See “Material U.S. Federal Income Tax Considerations.”
 
Investment Company Act Exemption
 
We intend to conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the Investment Company Act. We expect to rely upon the exemption from registration as an investment company under the Investment Company Act pursuant to Section 3(c)(5)(C) of the Investment Company Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exemption generally requires that at least 55% of our or our subsidiaries’ assets, as applicable, must be comprised of qualifying real estate assets and at least 80% of each of their portfolios must be comprised of qualifying real estate assets and real estate-related assets under the Investment Company Act. We expect to rely on guidance published by the SEC staff or on our analyses of guidance published with respect to other types of assets to determine which assets are qualifying real estate assets and real estate-related assets. To the extent that the SEC staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy accordingly. In addition, we may be limited in our ability to make certain investments and these limitations could result in the subsidiary holding assets we might wish to sell or selling assets we might wish to hold.
 
There can be no assurance that the laws and regulations governing our Investment Company Act status, including the Division of Investment Management of the SEC providing more specific or different guidance regarding these exemptions, will not change in a manner that adversely affects our operations. If we or our subsidiaries fail to maintain an exception or exemption from the Investment Company Act, we could, among other things, be required either to (i) change the manner in which we conduct our operations to avoid being required to register as an investment company, (ii) effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so, or (iii) register as an investment company, any of which could negatively affect the value of our common shares, the sustainability of our business model, and our ability to make distributions which could have an adverse effect on our business and the market price for our common shares.
 
Competition
 
In seeking investments, we are subject to significant competition from many entities, including mortgage REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, financial institutions, governmental bodies and other entities. Many of our


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competitors are significantly larger than us, have greater resources and access to capital than we have and may have other advantages over us. In addition to existing companies, other companies may be organized for similar purposes, including companies focused on purchasing mortgage assets, as a result of current market conditions or otherwise. A proliferation of such companies may increase our competition and thereby adversely affect our performance and the market value of our common shares. 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 assets and establish more relationships than us.
 
In the face of this competition, we have access to Pembrook Capital’s professionals and their industry expertise, which may help us assess risks and determine appropriate pricing for certain potential assets. In addition, we believe that these relationships will enable us to compete more effectively for attractive asset acquisition opportunities than our competitors. However, we may not be able to achieve our business goals or expectations due to the competitive risks that we face.
 
Staffing
 
We will be externally managed by our Manager pursuant to the management agreement between our Manager and us. Our Chief Executive Officer and each of our other executive officers (other than           , our Chief Financial Officer) are executives of Pembrook Capital. We do not expect to have any employees other than our Chief Financial Officer. See “Our Manager and The Management Agreement—Management Agreement.”
 
Legal Proceedings
 
Neither we nor, to our knowledge, our Manager is currently subject to any legal proceedings that we or our Manager consider to be material.


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MANAGEMENT
 
Our Managers, Manager Nominees and Executive Officers
 
Currently, Mr. Boesky is our only manager. Upon completion of this offering, our Board of Managers is expected to be comprised of seven members,          of which will be executives of Pembrook Capital. Our managers will each be elected to serve a term of one year. We expect our Board of Managers to determine that each of the           manager nominees listed in the table below satisfy the listing standards for independence of the NYSE. Our operating agreement provides that a majority of the entire Board of Managers may at any time increase or decrease the number of managers. However, unless our operating agreement is amended, the number of managers may never be less one or more than 15.
 
The following sets forth certain information with respect to our managers, manager nominees, executive officers and other key personnel, as of August 1, 2011:
 
             
Name
 
Age
 
Position Held with Us
 
Stuart Boesky
    54     Chief Executive Officer and Chairman of our Board of Managers
Robert Hellman
    56     Manager Nominee, Chief Operating Officer and Director of Asset Management
  
          Manager Nominee
Adrian Corbiere
    66     Manager Nominee *
Ghebre Selassie Mehreteab
    62     Manager Nominee *
Jonathan Sobel
    44     Manager Nominee *
  
          Manager Nominee *
  
          Chief Financial Officer
Neil Bø
    44     Executive Vice President and Director of Investor Relations
John Garth
    53     Executive Vice President and Head of Commercial Products
Patrick Martin
    46     Executive Vice President and Co-Head of Multifamily Products
James Spound
    50     Executive Vice President and Co-Head of Multifamily Products
Eugene Venanzi
    38     Senior Vice President and Chief Credit Officer Commercial Products
 
 
* We expect our Board of Managers to determine that this manager is independent for purposes of the NYSE corporate governance listing requirements.
 
Set forth below is biographical information for our managers, manager nominees and executive officers.
 
Manager and Manager Nominees
 
Stuart Boesky is the Chairman of our Board of Managers and our Chief Executive Officer. He also serves as the Chief Executive Officer and a Manager of our Manager. Mr. Boesky has served as the Chief Executive Officer of Pembrook Capital Management, LLC since founding it in 2006. Prior to founding The Pembrook Group, Mr. Boesky was the Chief Executive Officer of Centerline, which, under Boesky’s leadership, was one of the nation’s leading commercial real estate financial services firms. Prior to joining Centerline, Mr. Boesky was a senior managing director and principal of Related Capital Company. Mr. Boesky has also practiced real estate and tax law with the Boston law firm Kaye Fialkow Richmond and Rothstein and the New York


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law firm Shipley & Rothstein. Prior to that, Mr. Boesky was a real estate consultant at the international accounting firm of Laventhol & Horwath. Mr. Boesky earned a Bachelor of Arts degree and graduated with high honors from Michigan State University, and received a Juris Doctor degree from Wayne State School of Law. He earned a Master of Laws degree in Taxation from Boston University School of Law. Mr. Boesky is a regular speaker at industry conferences and on television and has served as a member of the Board of Managers of the National Association of Affordable Housing Lenders. Mr. Boesky is also a founding member of the Leadership Forum on Pension Fund and Endowment Investments in Domestic Emerging Markets at the Joint Center for Housing Studies of Harvard University. Our Board of Managers has determined that Mr. Boesky should serve on our Board of Managers based on his extensive experience in the real estate industry and his familiarity with our target assets, as well as his public-company experience.
 
Robert Hellman is our Chief Operating Officer and Director of Asset Management, and is a member of our Board of Managers. He previously led the real estate practice for DLA, LLC, a regulatory, compliance and consulting company. Immediately prior to joining DLA, Mr. Hellman served as a Managing Director at Ackman-Ziff Real Estate Group, sourcing debt and equity for development and acquisitions. Prior to joining Ackman-Ziff, Mr. Hellman was a Senior Managing Director at Newmark Knight Frank, where he was a Principal of Newmark Capital Group and the firm’s Retail Financial Advisors. His client responsibilities at Newmark included investment sales, restructuring, and mergers and acquisitions services. Subsequent to Newmark, he formed Riverstreet Realty Advisors to provide real estate portfolio management, due diligence, financing, leasing and advisory services for performing and non-performing assets. Mr. Hellman began his real estate finance career at Lehman Brothers. During his 16 years with Lehman, Mr. Hellman served as President, Chief Executive Officer and/or Chief Financial Officer for several public real estate funds. Mr. Hellman earned a B.A. from Cornell University, a Master’s degree from Columbia University, and a J.D. from Fordham University. He is an adjunct professor at the New York University Schack Institute of Real Estate, has taught at the ICSC University of Shopping Centers and has lectured at the Cornell Graduate Program in Real Estate. His affiliations include: Urban Land Institute (full member): International Council of Shopping Centers; Cornell Real Estate Program Advisory Board; University Council of Cornell University; licensed New York real estate broker; board member of the New York chapter of the Turnaround Management Association; and New Jersey Bar Association. Our Board of Managers has determined that Mr. Hellman should serve on our Board of Managers based on his extensive experience in the real estate industry and his familiarity with our target assets.
 
Jonathan Sobel is the Managing Member of DTF Holdings, LLC, an investment manager for and advisor to entities affiliated with financial services entrepreneur Gerald Ford, including Pacific Capital Bank Corp, Hilltop Holdings, and the Ford related private equity funds. He is also the Managing Member of Six Sigma Auto Group, which owns the BMW, Audi, Porsche and Mini dealerships in Southampton, New York, as well as commercial real estate in the area. Prior to forming DTF and Six Sigma in 2009, Mr. Sobel was an employee of Goldman Sachs & Co. from 1987 to 2008, and was a Partner Managing Director from 1998 to 2008. While at Goldman Sachs, Mr. Sobel was Global Head of the Mortgage Department, Global Head of Money Markets, head of the firm’s Global Bank Group, and the Chief Risk Officer for Goldman Sachs Asset Management. Mr. Sobel was a member of Goldman Sachs’ Capital, Risk and Finance Committees. He is a Trustee of the Hospital for Special Surgery, the Whitney Museum, Dalton School, and the Public Art Fund. He is also a member of the Executive Committee for the Board of Visitors of Columbia College. Mr. Sobel has received Columbia College’s John Jay Award for Alumni Achievement and their Dean’s Award for service to the College. He holds an A.B. in Economics from Columbia. Our Board of Managers has determined that Mr. Sobel should serve on our Board of Managers based on his extensive experience in the real estate industry.


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Adrian Corbiere has served as Executive Vice President, Capital Markets Unit in Cohen Financial since May 2007. Prior to joining Cohen Financial, he was Senior Vice President, Multifamily Division at Freddie Mac from August 1999 to May 2007. Prior to that, he served in various positions with Allstate Insurance Company, The New England Insurance Company, Phoenix Home Life and CIGNA. He serves on the Commercial Board of Governors of the Mortgage Bankers Association. Mr. Corbiere received a Bachelor of Science from Lehigh University and holds a Masters Degree from the University of Hartford. Our Board of Managers has determined that Mr. Corbiere should serve on our Board of Managers based on his extensive experience in the real estate industry.
 
Ghebre Selassie Mehreteab is an advisor to foundations and financial institutions on affordable housing. Mr. Mehreteab served as Chief Executive Officer of the NHP Foundation, a non-profit corporation that owns and operates affordable multifamily housing in many cities across the United States, from its inception in 1989 until 2009. Previously Mr. Mehreteab was Vice President of the National Corporation for Housing Partnerships and a program officer at the Ford Foundation. Mr. Mehreteab currently serves on the Board of Directors of Douglas Emmett, Inc (NYSE: DEI), as well as on the audit and governance committees of that Board. Mr. Mehreteab is a board member of the Council on Foreign Relations. Mr. Mehreteab received his bachelor’s degree and LL.D. (honorary) from Haverford College. Our Board of Managers has determined that Mr. Mehreteab should serve on our Board of Managers based on his extensive experience in the real estate industry.
 
Executive Officers
 
For biographical information on Mr. Boesky, our Chief Executive Officer, and Mr. Hellman, our Chief Operating Officer and Director of Asset Management, see “Manager and Manager Nominees” above.
 
Neil Bø is our Executive Vice President and Director of Investor Relations. Mr. Bø was previously the President, and a partner, of Meridian Investments. Inc., a privately-owned NASD; SIPC Broker Dealer. Meridian focused on institutional tax-advantaged private placements and was a placement agent for Centerline. Prior to joining Meridian in 1997, Mr. Bø was a Vice President with The Boston Financial Group in the Institutional Tax Credit Division, in institutional sales and analysis. Mr. Bø earned a Bachelor of Science degree in Business Administration from Florida Institute of Technology, as well as a Master of Business Administration and a Master of Science in Information Systems from Boston University.
 
John Garth is our Executive Vice President and Head of Commercial Products. Mr. Garth was previously Chief Operating Officer of American Mortgage Acceptance Company, a publicly traded REIT managed by Centerline. Prior to joining Centerline, Mr. Garth was a senior originator at GMAC Commercial Mortgage Corp., where he specialized in structuring and distributing highly-structured, large-loan transactions involving B-Notes and mezzanine debt. Before joining GMAC in 1997, Mr. Garth spent 12 years in the real estate investment area of The Prudential Insurance Company of America. Mr. Garth earned a Bachelor of Science degree and a Master of Science degree in Civil Engineering from Tulane University, and a Master of Business Administration degree in Real Estate Finance from the Wharton School of the University of Pennsylvania.
 
Patrick Martin is our Executive Vice President and Co-Head of Multifamily Products. Previously, Mr. Martin was a Senior Managing Director of Centerline, and co-head of that firm’s Commercial Real Estate division. In that capacity, Mr. Martin oversaw Centerline’s commercial lending, equity investment and pension fund advisory practices, deploying over $2 billion in debt and equity in 2007. Mr. Martin also spent 14 years at the predecessor of Centerline’s affordable housing division, where he was instrumental in establishing the low income housing tax credit practice. During that time, he separately managed six joint venture


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development efforts under which the firm jointly acquired and rehabilitated over 1,800 residential units. Prior to joining Related Capital, Mr. Martin was a Financial Analyst for Colliers International in Montreal, Canada. Mr. Martin earned a Masters degree in Real Estate Investment and Development from New York University in 1992. He also earned a Bachelors degree in Business Administration from Concordia University in Montreal, Canada.
 
James Spound is our Executive Vice President and Co-Head of Multifamily Products. Previously, Mr. Spound was a Senior Managing Director of Centerline, and Co-head of that firm’s Commercial Real Estate division. Mr. Spound joined Centerline in 1998, where he helped establish that firm’s lending practice to serve the affordable housing industry. The initial program that Mr. Spound led for several years was a direct purchase program for tax-exempt debt. Mr. Spound also managed Centerline’s expansion into complementary debt programs for affordable housing, including government sponsored entity-related and mezzanine loans, in which it also became a market leader. Prior to joining Centerline, Mr. Spound spent 8 years as a public finance banker at Merrill Lynch & Co. and Wachovia Capital Markets. Previously, Mr. Spound was senior consultant at Kenneth Leventhal & Company focused on debt restructurings in the real estate industry, and a project manager at New York City’s Economic Development Corporation. Mr. Spound earned a Bachelor of Arts degree from Brown University and a Master of Science in Management from the Sloan School at the Massachusetts Institute of Technology.
 
Eugene Venanzi is our Senior Vice President and Chief Credit Officer Commercial Products. Prior to joining Pembrook Capital, he was a Director and Senior Underwriter at Fisher Brothers in New York, where he was involved in managing a $300 million high yield real estate investment fund. Previously, Mr. Venanzi worked at The Situs Companies, where he was a Director of Situs Realty Services in Tokyo, Japan and served as the Senior Underwriter for Credit Suisse Real Estate Finance, Asia Pacific. Prior to joining Situs, he worked as a Director and Senior Underwriter from 2000 to 2007 in the Commercial Real Estate Group at UBS Investment Bank in New York. Previously, Mr. Venanzi was a real estate consultant at Rosin & Associates in New York and worked for several years as an analyst in High Yield Corporate Finance at CIBC Wood Gundy and Chase Securities. Mr. Venanzi graduated cum laude from the School of Foreign Service at Georgetown University in 1996.
 
Corporate Governance—Board of Managers and Committees
 
Our business is managed by our Manager, subject to the supervision and oversight of our Board of Managers, which has established investment guidelines described under “Business—Our Investment Guidelines” for our Manager to follow in its day-to-day management of our business. A majority of our Board of Managers will be “independent,” as determined by the requirements of the NYSE and the regulations of the SEC. We expect that our managers will keep informed about our business by attending meetings of our Board of Managers and its committees and through supplemental reports and communications. Our independent managers will meet regularly in executive sessions without the presence of our corporate officers or non-independent managers.
 
Upon completion of this offering, our Board of Managers will form an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee and an Investment Committee and adopt charters for each of these committees. Each of these committees will have three managers and, except for the Investment Committee, will be composed exclusively of independent managers, as defined by the listing standards of the NYSE. Moreover, the Compensation Committee will be composed exclusively of individuals intended to be, to the extent provided by Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), non-employee managers and will, at such times as we are subject to S