-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E1o3Q6mF0OyFMc83hsI1AsqX0jk/Z6vGUGqAN9sdnjX0fkMv6pVvG9h42Fk4oSJA 3aLLfhCdoKHEfTZVZx8tFQ== 0000950123-10-097482.txt : 20101028 0000950123-10-097482.hdr.sgml : 20101028 20101028163432 ACCESSION NUMBER: 0000950123-10-097482 CONFORMED SUBMISSION TYPE: S-11/A PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 20101028 DATE AS OF CHANGE: 20101028 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CM REIT, Inc. CENTRAL INDEX KEY: 0001451319 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 263764019 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-11/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-156434 FILM NUMBER: 101148584 BUSINESS ADDRESS: STREET 1: 1291 W. GALLERIA DRIVE STREET 2: SUITE 200 CITY: HENDERSON STATE: NV ZIP: 89014 BUSINESS PHONE: 866-659-3849 MAIL ADDRESS: STREET 1: 1291 W. GALLERIA DRIVE STREET 2: SUITE 200 CITY: HENDERSON STATE: NV ZIP: 89014 S-11/A 1 d65627a7sv11za.htm S-11/A sv11za
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As filed with the Securities and Exchange Commission on October 28, 2010
Registration No. 333-156434
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Amendment No. 7
to
 
Form S-11
FOR REGISTRATION
UNDER
THE SECURITIES ACT OF 1933
OF CERTAIN REAL ESTATE COMPANIES
 
CM REIT, INC.
(Exact Name of Registrant as specified in its Governing Instruments)
 
1291 W. Galleria Drive, Suite 200
Henderson, Nevada 89014
(866) 659-3849
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
 
Todd B. Parriott
Chief Executive Officer
CM REIT, Inc.
1291 W. Galleria Drive, Suite 200
Henderson, Nevada 89014
(866) 659-3849
(Name, Address, including zip code, and telephone number, including area code, of agent for service)
 
Copies to:
 
Bryan L. Goolsby
X. Lane Folsom
Locke Lord Bissell & Liddell LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201-6776
(214) 740-8000
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after this Registration Statement becomes effective.
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 of the Securities Act, check the following box: þ
 
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 o Smaller reporting company þ
(Do not check if a smaller reporting company)
 
CALCULATION OF REGISTRATION FEE
 
                         
            Proposed Maximum
 		    Proposed Maximum
 		     
Title of Each Class of
 		    Amount to be
 		    Offering Price
 		    Aggregate
 		    Amount of
Securities to be Registered     Registered     per Share     Offering Price     Registration Fee
Common Stock, $.01 par value(1)
    100,000,000     $10.00     $995,000,000(2)     $53,343.50(3)
                         
(1) Represents shares issuable both in the registrant’s primary offering and pursuant to the registrant’s distribution reinvestment plan.
(2) Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(o), promulgated under the Securities Act of 1933, as amended.
(3) $21,615 previously paid with initial filing on December 23, 2008, and the remainder previously paid with the filing of the second pre-effective amendment to the Registration Statement on August 27, 2009.
 
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 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 

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PROSPECTUS
CM REIT, INC.
100,000,000 Shares of Common Stock — Maximum Offering
At least 250,000 Shares of Common Stock — Minimum Offering
 
Of the 100,000,000 shares of common stock that we have registered, we are offering up to 90,000,000 shares to investors who meet our suitability standards and up to 10,000,000 shares to participants in our distribution reinvestment plan (DRIP).
 
This investment is speculative, and involves a high degree of risk. You should purchase shares only if you can afford a complete loss. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 21 for a discussion of risks relating to our common stock, including, among others:
 
 
  •  We are a blind pool REIT and have not identified any specific assets to acquire with the net proceeds of this offering. Accordingly, you will not have the opportunity to review the assets we will acquire with the net proceeds of this offering prior to your investment.
  •  We have not established a minimum distribution payment level, and we cannot assure you of our ability to make distributions to holders of our common stock (stockholders) in the future.
  •  A conflict of interest exists with respect to our dealer-manager, CM Securities, LLC, because our advisor owns our dealer-manager. Certain of our executive officers own the majority of the membership interests in our advisor and serve as officers of our advisor and our dealer-manager. You will not have the benefit of an independent due diligence review in connection with this offering.
  •  There is currently no public trading market for our common stock, and there is no assurance that one will develop. Therefore, you may not be able to sell your shares at a price equal to or greater than the offering price, or at all.
  •  Our results may suffer as a consequence of a conflict of interest arising out of our relationship with our advisor. We pay our advisor first-tier management compensation based on the amount of our invested assets and a second-tier management fee on our portfolio’s performance. Accordingly, our advisor may recommend riskier or more speculative investments regardless of their long-term performance in an effort to maximize its compensation.
  •  We have not commenced operations. Our total assets currently consist of approximately $200,000 in cash.
  •  If we fail to qualify or are disqualified as a REIT, we will be subject to taxation as a regular corporation and face substantial tax liability.
  •  A prior investment program advised by our advisor and whose loans were originated by our loan originator has been materially and adversely impacted by the disruptions in the real estate and credit markets and has experienced extremely high default and foreclosure rates.
  •  There may be delays in investing the proceeds of this offering and, therefore, delays in the receipt of any returns from such investments.
  •  We expect to borrow funds to make certain of our investments and may rely on bank lines of credit to fund a portion of our acquisitions. Such leverage could reduce our net income and our cash available for distributions or cause us to suffer losses. Under our articles of incorporation, we can incur debt in an amount up to 300% of our net assets or 75% of the cost of our assets.
  •  Our organizational documents permit us to pay distributions from any source, including offering proceeds. We have not established a cap on the use of proceeds to fund distributions. If we pay distributions from sources other than our cash flow from operations, we will have less funds available for investments and your overall return may be reduced. Until we have invested sufficient proceeds from this offering, we may use proceeds from borrowings to fund distributions in anticipation of cash flow to be received in later periods. We may also fund distributions from advances from our advisor or from our advisor’s deferral of its fees under the advisory agreement.
  •  We expect to begin reviewing liquidity options for our stockholders beginning five years from the commencement of our offering. If we do not list our shares of common stock on a national securities exchange by December 31, 2017, our charter requires our directors to seek stockholder approval to liquidate our assets.
  •  The investments we intend to make involve risks. Balloon payment loans are risky because repayment depends on the borrower’s ability to refinance the loan or sell the property.
  •  Because the dealer-manager is our affiliate, the sales commissions and dealer-manager fees we are paying were not negotiated at arm’s length.
 
                                 
    Price
 		  Selling
 		  Dealer-
 		  Net Proceeds
    to Public(1)   Commissions   Manager Fee   (Before Expenses)(2)
 
Primary Offering
  $ 10.00     $ .70     $ .30     $ 9.00  
Total Minimum
  $ 2,500,000.00     $ 175,000.00     $ 75,000.00     $ 2,250,000.00  
Total Maximum
  $ 900,000,000.00     $ 63,000,000.00     $ 27,000,000.00     $ 810,000,000.00  
Dividend Reinvestment Plan
                               
Per Share
  $ 9.50     $ 0.0     $ 0.0     $ 9.50  
Total Maximum
  $ 95,000,000.00     $ 0.0     $ 0.0     $ 95,000,000.00  
 
(1)  Assumes we sell shares at $10.00 per share and no shares are sold pursuant to our DRIP or otherwise discounted as provided in this prospectus.
(2)  Represents a 7.0% sales commission and 3.0% dealer-manager fee we will pay for sales of common stock. Our dealer-manager will not be paid any sales commissions or dealer-manager fees from sales of common stock under our DRIP.
 
The dealer-manager is a member of the Financial Industry Regulatory Authority (FINRA). The dealer-manager, which is an affiliate of ours, is not required to sell any specific number or dollar amount of shares, but will use its best efforts to sell the maximum number of securities offered, 90 million shares. The dealer-manager must sell the minimum number of securities offered, 250,000 shares if any are sold. A securities dealer may not complete a sale of our common stock to you until at least five business days after the date you receive a copy of the final prospectus. That securities dealer must also give you a confirmation of your purchase.
 
We expect to offer shares of common stock in our primary offering until     , 2012, unless extended by our board of directors.
 
Neither the Securities and Exchange Commission, the Attorney General of the State of New York nor any other state securities regulator 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. No one is authorized to make any statements about this offering different from those that appear in this prospectus. The use of forecasts in this offering is prohibited. Any representation to the contrary and any predictions, written or oral, as to the amount or certainty of any present or the future cash benefit or tax consequence which may flow from an investment in our common stock is not permitted.
The date of this prospectus is           , 2010

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This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. We will only accept subscriptions from people who meet the suitability standards described in this prospectus. You should also be aware that the description of our company contained in this prospectus was accurate as of          . We will amend or supplement this prospectus if there is a material change in our affairs.
 
Prior to the time we sell at least 250,000 shares of our common stock, your subscription payments will be placed in an account held by our escrow agent and will be held in trust for your benefit, until the minimum offering is achieved. If we are not able to sell at least 250,000 shares by          , which is one year from the effective date of this prospectus, we will terminate this offering and your funds in the escrow account, including interest thereon at a floating rate (currently     % per year), will be returned to you within 10 business days. No charges will be deducted from the escrow funds.
 
These securities have been registered with the Securities Commissioner of the State of Louisiana. The Securities Commissioner, by accepting registration, does not in any way endorse or recommend the purchase of any of these securities.
 
The Attorney General of the State of New York has not passed on or endorsed the merits of this offering. Any representation to the contrary is unlawful.


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SUITABILITY STANDARDS AND HOW TO SUBSCRIBE
 
Suitability Standards
 
The shares of common stock offered through this prospectus are suitable only as a long-term investment for persons of adequate financial means who have no need for liquidity in this investment. Initially, there is not expected to be any public market for the shares, which means that it may be difficult to sell shares. See the “Description of Capital Stock — Transfer Restrictions” for a description of the transfer restrictions. As a result, we have established minimum suitability standards which require investors to have either (1) a net worth (not including home, furnishings, and personal automobiles) of at least $70,000 and an annual gross income of at least $70,000, or (2) a net worth (not including home, furnishings, and personal automobiles) of at least $250,000. Our suitability standards also require that a potential investor (a) can reasonably benefit from an investment in us based on such investor’s overall investment objectives and portfolio structuring, (b) is able to bear the economic risk of the investment based on the prospective stockholder’s overall financial situation, and (c) has an apparent understanding of (1) the fundamental risks of the investment, (2) the risk that such investor may lose the entire investment, (3) the lack of liquidity of our shares, (4) the background and qualifications of our advisor, and (5) the tax consequences of the investment.
 
The foregoing suitability standards must be met by the investor who purchases the shares. If the investment is being made for a fiduciary account (such as an IRA, Keogh Plan, or corporate pension or profit-sharing plan), the beneficiary, the fiduciary account, or any donor or grantor that is the fiduciary of the account who directly or indirectly supplies the investment funds must meet such suitability standards.
 
Several states have established suitability requirements that are more stringent than the standards that we have established and described above. Shares will be sold to investors in these states only if investors represent that they meet the special suitability standards set forth below. In each case, these special suitability standards exclude from the calculation of net worth the value of the investor’s home, home furnishings and personal automobiles.
 
  •  Alabama — In addition to meeting the applicable minimum suitability standards set forth above, an Alabama resident may not invest more than 10% of his or her net worth, exclusive of his or her home, home furnishings and automobile, in this offering and in other similar real estate programs sponsored by CM Group or its affiliates.
 
  •  Kentucky, Oregon, Massachusetts, Michigan, Missouri and Pennsylvania — In addition to meeting the applicable minimum suitability standards set forth above, your investment may not exceed 10% of your liquid net worth, which may be defined as the remaining balance of cash and other assets easily converted to cash after subtracting the investor’s total liabilities from total assets.
 
  •  California and Massachusetts — In addition to meeting the applicable minimum suitability standards set forth above, an investment in us is limited to investors who have: (i) a liquid net worth of not less than $100,000 and a gross annual income of not less than $75,000; or (ii) a net worth of $250,000, exclusive of their home, home furnishings and automobile. In addition, a California resident may not invest more than ten percent (10%) of his or her net worth in this offering.
 
  •  Iowa — In addition to meeting the applicable minimum suitability standards set forth above, an investment in us is limited to investors who have: (i) a liquid net worth of not less than $100,000 and a gross annual income of not less than $70,000; and (ii) a net worth of $100,000, exclusive of their home, home furnishings and automobile, or a net worth of $350,000, exclusive of their home, home furnishings and automobile. In addition, the Iowa Securities Bureau requires that an investor’s aggregate investment in our securities and similar direct participation investments should not exceed 10% of the investor’s liquid net worth. For these purposes, “liquid net worth” is defined as that portion of net worth that consists of cash, cash equivalents and readily marketable securities.
 
  •  Kansas and Massachusetts — In addition to meeting the applicable minimum suitability standards set forth above, the Office of the Kansas Securities Commissioner and the Massachusetts Securities Division recommend that an investor’s aggregate investment in our securities and similar direct participation


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  investments should not exceed 10% of the investor’s liquid net worth. For these purposes, “liquid net worth” is defined as that portion of net worth that consists of cash, cash equivalents and readily marketable securities.
 
  •  Maine — Investors must have either (a) net worth of at least $250,000 or (b) an annual gross income of at least $70,000 and a minimum net worth of at least $70,000. The investor’s maximum investment in us and our affiliates cannot exceed 10% of the Maine investor’s net worth.
 
  •  Nebraska — In addition to meeting the applicable minimum suitability standards set forth above, an investment in us is limited to investors who have: (i) a liquid net worth of not less than $100,000 and a gross annual income of not less than $70,000; and (ii) a net worth of $100,000, exclusive of their home, home furnishings and automobile, or a net worth of $350,000, exclusive of their home, home furnishings and automobile. In addition, the Nebraska Department of Banking and Finance requires that an investor’s aggregate investment in our securities and similar direct participation investments should not exceed 10% of the investor’s liquid net worth. For these purposes, “liquid net worth” is defined as that portion of net worth that consists of cash, cash equivalents and readily marketable securities.
 
  •  Ohio — In addition to meeting the applicable minimum suitability standards set forth above, your investment in us and our affiliates may not exceed 10% of your liquid net worth, which may be defined as the remaining balance of cash and other assets easily converted to cash after subtracting the investor’s total liabilities from total assets.
 
  •  Tennessee — Tennessee residents’ investment must not exceed ten percent (10%) of their liquid net worth. In addition to the applicable minimum suitability standards set forth above, an investment in us is limited to investors who have (i) a minimum annual gross income of $100,000 and a minimum net worth of $100,000; or (ii) a minimum net worth of $500,000 exclusive of home, home furnishings and automobile.
 
In addition, the following states have established the following recommendations for investors in their states. Shares will be sold to investors in these states only if investors represent that they meet the special recommendations set forth below.
 
  •  Pennsylvania Investors — Because the minimum offering is less than $100 million, you are cautioned to carefully evaluate the program’s ability to fully accomplish its stated objectives and to inquire as to the current dollar volume of program subscriptions. Pursuant to the requirements of the Commissioner of Securities of the State of Pennsylvania, we will place all Pennsylvania investor subscriptions in escrow until we have received total subscriptions of at least $50,000,000, or for a period of 120 days, whichever is shorter.
 
If we have not received total subscriptions of at least $50,000,000 by the end of the escrow period, we must:
 
  •  Return the Pennsylvania investors’ funds within 15 calendar days of the end of the escrow period, or
 
  •  Notify the Pennsylvania investors in writing by certified mail or any other means whereby receipt of delivery is obtained within 10 calendar days after the end of the escrow period, that the Pennsylvania investors have a right to have their investment returned to them. If such an investor requests the return of such funds within 10 calendar days after receipt of notification, we must return such funds within 15 calendar days after receipt of the investor’s request.
 
No interest is payable to an investor who requests a return of funds at the end of the initial 120-day escrow period. Any Pennsylvania investor who requests a return of funds at the end of any subsequent 120-day escrow period will be entitled to receive interest earned, if any, for the time that the investor’s funds remain in escrow commencing with the first day after the initial 120-day escrow period.
 
In addition, under the laws of certain states, investors may transfer their shares only to persons who meet similar standards, and we may require certain assurances that such standards are met. Investors should read carefully the requirements in connection with resales of our shares as set forth in our articles of incorporation and as summarized under “Description of Capital Stock — Transfer Restrictions.”


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In purchasing shares, custodians or trustees of employee pension benefit plans or IRAs may be subject to the fiduciary duties imposed by the Employee Retirement Income Security Act of 1974, as amended, or ERISA, or other applicable laws and to the prohibited transaction rules prescribed by ERISA and related provisions of the Internal Revenue Code. See “ERISA Considerations.” In addition, prior to purchasing shares, the trustee or custodian of an employee pension benefit plan or an IRA should determine that such an investment would be permissible under the governing instruments of such plan or account and applicable law. For information regarding “unrelated business taxable income,” see “U.S. Federal Income Tax Considerations — Taxation of Tax-Exempt Stockholders.”
 
In order to ensure adherence to the suitability standards described above, requisite suitability standards must be met, as set forth in the Subscription Agreement in the form attached hereto as Appendix C. In addition, our Sponsor and the broker-dealers that are members of FINRA who are engaged by the dealer-manager to sell shares referred to as participating broker-dealers, have the responsibility to make every reasonable effort to determine that the purchase of shares is a suitable and appropriate investment for an investor. In making this determination, our Sponsor and the participating broker-dealers will rely on relevant information provided by the investor, including information as to the investor’s age, investment objectives, investment experience, income, net worth, financial situation, other investments, and any other pertinent information. See “Plan of Distribution — Subscription Procedures.” Executed subscription agreements will be maintained in our records for six years.
 
How To Subscribe
 
An investor who meets the suitability standards described above may subscribe for shares by completing and executing the subscription agreement and delivering it to a participating broker-dealer, together with a check for the full purchase price of the shares subscribed for, payable to CM REIT, Inc., except that until the minimum offering is achieved, checks shall be made payable to “UMB Bank, N.A., as escrow agent for CM REIT, Inc.” See “Plan of Distribution — Subscription Procedures.” Certain participating broker-dealers who have “net capital,” as defined in the applicable federal securities regulations, of $250,000 or more may instruct their customers to make their checks for shares subscribed for payable directly to the participating broker-dealer. Care should be taken to ensure that the subscription agreement is filled out correctly and completely. Partnerships, individual fiduciaries signing on behalf of trusts, estates, and in other capacities, and persons signing on behalf of corporations and corporate trustees may be required to obtain additional documents from participating broker-dealers. Any subscription may be rejected by us in whole or in part, regardless of whether the subscriber meets the minimum suitability standards.
 
Certain participating broker-dealers may permit investors who meet the suitability standards described above to subscribe for shares by telephonic order to the participating broker-dealer. This procedure may not be available in certain states. See “Plan of Distribution — Subscription Procedures.”
 
A minimum investment of 250 shares ($2,500) is required. IRAs, Keogh plans, and pension plans also must make a minimum investment of at least 100 shares ($1,000). Following an initial subscription, any investor may make additional purchases in increments of one share.
 
You should rely only on the information contained in this document. We have not authorized anyone to provide you with information that is different. This document may be used only where it is legal to sell these securities.


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QUESTIONS AND ANSWERS ABOUT THE OFFERING
 
Q: What is CM REIT, Inc.?
 
A: CM REIT, Inc., referred to as CM REIT or CMR, is a Maryland corporation that intends to elect to be taxed as a REIT commencing with its tax year ended December 31, 2010. We were formed in November 2008 primarily to acquire and make investments in acquisition, development, construction and commercial mortgage loans and non-agency residential mortgage loans. We also intend to make a limited number of opportunistic investments in commercial real property to take advantage of attractive investment opportunities. We may also invest in real estate-related debt securities and equity securities of other real estate-related companies. Our day-to-day operations and selection of investments are externally managed by our advisor, CM Group, LLC, which we refer to as CM Group, subject to the direction and oversight of our board of directors.
 
Q: What is a REIT?
 
A: In general, a REIT is a company that:
 
  •  combines the capital of many investors to, among other things, invest in qualified REIT real estate assets;
 
  •  offers benefits of a diversified portfolio under professional management;
 
  •  typically is not subject to federal corporate income taxes on taxable income that is distributed to its stockholders, thereby substantially eliminating the “double taxation” (taxation at both the corporate and stockholder levels) that generally results from investments in a corporation; and
 
  •  must pay distributions to investors of at least 90% of its taxable income.
 
Q: What kind of offering is this?
 
A: We are offering up to 100 million shares of our common stock on a “best efforts” basis, including shares issued through our dividend reinvestment plan.
 
Q: How does a “best efforts” offering work?
 
A: When shares are offered to the public on a “best efforts” basis, no underwriter, broker-dealer or other person has a firm commitment or obligation to purchase any of the shares. Therefore, we are not guaranteeing that any minimum number of shares will be sold. We are offering a minimum of 250,000 shares and a maximum of 100 million shares, including shares purchased through our dividend reinvestment plan. Prior to the time we sell at least 250,000 of our shares, your subscription payments will be placed in an account held by our escrow agent and will be held in trust for your benefit until the minimum offering is achieved. If we are not able to sell at least 250,000 shares by          , which is one year from the effective date of this prospectus, we will terminate this offering and your funds in the escrow account, including interest thereon at a floating rate (currently     % per year), will be returned to you within 10 business days following the termination date. None of the purchases of shares of common stock by our officers, directors and affiliates will count toward the calculation of the minimum offering. If you choose to purchase stock in this offering, you will need to complete a subscription agreement, in the form attached to this prospectus as Appendix C, and pay for the shares at the time you subscribe. If you purchase our shares after the minimum offering amount is sold, the transfer agent will hold your funds, along with those of other similar subscribers, until such time as you are admitted as a stockholder. Generally, we admit stockholders on the day of acceptance of their subscription, which will be within seven days after receipt thereof.
 
Q: How long will the offering last?
 
A: This offering will not last beyond          (two years after the effective date of this prospectus), unless we decide to extend the offering for an additional year until not later than          . Under rules promulgated by the SEC, should we decide to register a follow-on offering, we may extend this offering up to an additional 180 days beyond          . If we decide to continue our primary offering beyond two years from the date of this prospectus, we will provide that information in a prospectus supplement. We may continue to offer shares under our dividend reinvestment plan beyond two years from the date of this prospectus until we have sold 10 million shares through the reinvestment of distributions. In many states, we will need to renew the registration statement to continue the offering beyond one year from the date of this prospectus. In addition, we reserve the right to terminate this offering for any other reason at any time.


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Q: Who can buy shares?
 
A: Anyone who receives this prospectus can buy shares provided that they meet the suitability standards described elsewhere in this prospectus.
 
Q: Who might benefit from an investment in our shares?
 
A: An investment in our shares may be beneficial for you if you meet the minimum suitability standards described in this prospectus, seek to diversify your personal portfolio with a REIT investment focused on real estate-related loans, commercial real estate-related debt securities and select real estate equity investments, seek to receive current income, seek to preserve capital and are able to hold your investment for a time period consistent with our liquidity strategy. On the other hand, we caution persons who require immediate liquidity or guaranteed income, or who seek a short-term investment, that an investment in our shares will not meet those needs.
 
Q: Are there any risks involved in an investment in the shares?
 
A: You should read the “Risk Factors” section of this prospectus for a discussion of material risks that you should consider before you invest in our common stock. An investment in our shares involves significant risks, including the following:
 
  •  We have not identified any specific assets to acquire with the net proceeds of this offering. Accordingly, you will not have the opportunity to review the assets we will acquire with the net proceeds of this offering prior to your investment.
 
  •  We have not established a minimum distribution payment level and we cannot assure you of our ability to make distributions to our stockholders in the future.
 
  •  A conflict of interest exists with respect to our dealer-manager, because our advisor owns our dealer-manager. Our chief executive officer indirectly owns a majority of the membership interests in our advisor and serves as an officer of our advisor and our dealer-manager. You will not have the benefit of an independent due diligence review in connection with this offering.
 
  •  There is currently no public trading market for our common stock, and there is no assurance that one will develop. Therefore, you may not be able to sell your shares at a price equal to or greater than the offering price, or at all.
 
  •  Our results may suffer as a consequence of a conflict of interest arising out of our relationship with our advisor. Our chief executive officer indirectly owns a majority of our advisor and serves as officer of our advisor. We pay our advisor a first-tier management fee based on the amount of our invested assets and a second-tier management fee based on our portfolio’s performance. Accordingly, our advisor may recommend riskier or more speculative investments regardless of their long-term performance in an effort to maximize its compensation. The agreement between us and our advisor (the advisory agreement) pursuant to which our advisor acts as our advisor and provides specified services to us provides for substantial compensation to our advisor.
 
  •  Our advisor also serves as an advisor to Desert Capital REIT, Inc., which we refer to as Desert Capital, which has investment objectives similar to ours.
 
  •  We have not commenced operations. Our total assets currently consist of approximately $200,000 in cash.
 
  •  If we fail to qualify or are disqualified as a REIT, we will be subject to tax as a regular corporation and face substantial tax liabilities.
 
  •  There may be delays in investing the proceeds of this offering and, therefore, delays in the receipt of any returns from such investments.
 
  •  We expect to borrow funds to make certain of our investments and may rely on bank lines of credit to fund a portion of our acquisitions. Such leverage could reduce our net income and our cash available for distributions or cause us to suffer losses. Under our articles of incorporation, we can incur debt in an amount up to 300% of our net assets or 75% of the cost of our assets. We currently do not have a credit facility or line of credit in place, and given current market conditions, we may not be able to obtain a credit facility or line of credit.


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  •  Our organizational documents permit us to pay distributions from any source, including offering proceeds. We have not established a limit on the amount of net offering proceeds we may use to fund distributions. If we pay distributions from sources other than our cash flow from operations, we will have less funds available for investments and your overall return may be reduced. Until we have invested sufficient proceeds from this offering, we may use proceeds from borrowings to fund distributions in anticipation of cash flow to be received in later periods. We may also fund distributions from advances from our advisor or from our advisor’s deferral of its fees under the advisory agreement.
 
  •  There are risks associated with each of the investments we intend to make. Balloon payment mortgage loans are risky because repayment depends on the borrower’s ability to refinance the loan or sell the property.
 
  •  Many of the loans in which we intend to invest will be non-investment grade and risky because they have been and will be made to borrowers with limited credit histories, which increases the risk that the borrower will not be able to repay the principal at maturity.
 
  •  We do not have any limitations in our charter documents on the types of investments we may acquire. Therefore, our investments may not be diversified among the various categories we are targeting, which include acquisition, development, construction and commercial mortgage loans, non-agency residential mortgage loans, commercial real property, real estate-related debt securities and equity securities of other real estate-related companies.
 
  •  The dealer-manager, who is our affiliate, will be paid sales commissions equal to 7.0% of the proceeds of this offering, plus a dealer-manager fee of 3.0% of such proceeds. These commissions and fees were not negotiated at arm’s length.
 
Q: Is there any minimum required investment?
 
A: Yes. Generally, individuals must initially invest at least $2,500 and IRA, Keogh or other qualified plans must initially invest at least $1,000. Thereafter, you may purchase additional shares in $10.00 increments. These minimum investment levels may vary from state to state, so you should carefully read the more detailed description of the minimum investment requirements appearing elsewhere in this prospectus.
 
Q: After I subscribe for shares, can I change my mind and withdraw my money?
 
A: Once you have subscribed for shares and we have deposited the subscription price, your subscription is irrevocable, unless we elect to permit you to revoke your subscription. A securities dealer may not complete a sale of common stock to you until at least five business days after you receive a copy of the final prospectus.
 
Q: If I buy shares in the offering, how can I sell them?
 
A: At the time you purchase shares, they will not be listed for trading on any national securities exchange or over-the-counter market. In fact, we expect that there will not be any public market for the shares when you purchase them, and we cannot be sure whether one will ever develop. As a result, you may find that if you wish to sell your shares, you may not be able to do so at a price equal to or greater than the offering price, or at all.
 
Subject to then existing market conditions, we expect to begin reviewing options for providing liquidity to our stockholders beginning five years from the commencement of our offering. While we expect to seek a liquidity transaction in this time frame, there can be no assurance that a suitable transaction will be available or that market conditions for a transaction will be favorable during that time frame. Our board of directors has the discretion to consider a liquidity transaction at any time if it determines such event to be in our best interests. A liquidity transaction could consist of a sale of our assets, a sale or merger of the company, a listing of our shares on a national securities exchange or a similar transaction. Some types of liquidity transactions require, after approval by our board of directors, approval of our stockholders. If we do not list our shares of common stock on a national securities exchange by December 31, 2017, our charter requires that we seek stockholder approval of the liquidation of the company. If we sought and failed to obtain stockholder approval of our liquidation, our charter would not require us to list or liquidate, and we could continue to operate as before. If we sought and obtained stockholder approval of our liquidation, we would begin an orderly sale of our properties and other assets. The precise timing of such sales would take account of the prevailing real estate and financial markets, the economic conditions in the submarkets where our properties are located and the federal income tax consequences to our stockholders. In making the decision to apply for listing of our shares, our directors will try to determine whether listing our shares or liquidating our assets will result in greater value for stockholders.


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One of the factors our board of directors will consider when making this determination is the liquidity needs of our stockholders. In assessing whether to list, our board of directors would likely solicit input from financial advisors as to the likely demand for our shares upon listing. If, after listing, the board of directors believed that it would be difficult for stockholders to dispose of their shares, then that factor would weigh against listing. However, this would not be the only factor considered by the board of directors. If listing still appeared to be in the best long-term interest of our stockholders, despite the prospects of a relatively small market for our shares upon the initial listing, the board may still opt to list our shares of common stock in keeping with its obligations under Maryland law. The board of directors would also likely consider whether there was a large pent-up demand to sell our shares when making decisions regarding listing. The degree of participation in our DRIP and the number of requests for repurchase under the share repurchase program at this time could be an indicator of stockholder demand to liquidate their investment.
 
If we list the shares, we expect that you will be able to sell your shares in the same manner as other listed stocks.
 
Q: Do you have a share redemption program?
 
A: Yes, we provide a redemption program under which we redeem shares, subject to certain limitations. Our board of directors may amend, suspend, or terminate our redemption plan at any time upon 15 days prior notice. If you are able to have your shares redeemed, depending on the timing of the redemption, it will likely be at a price that is less than the price you paid for the shares. Please see “Share Redemption Plan” for more information regarding this plan.
 
Q: Do you have a reinvestment plan through which I can reinvest my distributions in additional shares?
 
A: Yes. We have adopted a distribution reinvestment plan (DRIP) in which investors can reinvest their distributions in additional shares at a price of $9.50. The terms of the plan may, however, be amended or terminated by our board of directors upon 30 days prior written notice to our plan participants.
 
Q: What will you do with the proceeds from this offering?
 
A: Our use of proceeds will depend somewhat on the number of shares sold in the offering. If we only sell the minimum number of shares, we plan to use approximately 85% of the proceeds of this offering to make investments, and the balance will be used to pay fees and expenses in connection with this offering. The payment of these fees will not reduce the amount of your invested capital which is calculated by multiplying the total number of shares of common stock you acquire by the issue price. If we sell all 90 million shares, which excludes shares issued through our DRIP, we plan to use approximately 88.5% of the proceeds to make investments. Many of the expenses associated with the offering are fixed, so that the more shares we sell, the higher the portion of the proceeds available for investment by us. If we only sell the minimum number of shares, CM Group will initially pay many of our expenses because our actual expenses will greatly exceed $125,000. If we sell additional shares, we will use up to 1.5% of the additional proceeds to reimburse CM Group partially for these expenses. In addition, we are prohibited by FINRA rules from incurring offering expenses in excess of 15% of the proceeds of the offering. Because the actual expenses incurred will greatly exceed $375,000 (15% of the minimum offering amount of $2.5 million), we are required to cap our expenses at 15%. If, however, the maximum offering amount of $900 million, which excludes proceeds of our DRIP, is raised, our total offering expenses are estimated at $103.5 million, which is approximately 11.5% of the offering proceeds (excluding our DRIP). Your initial invested capital amount will be $10 per share.
 
We expect that our loan origination agreement with CM Capital Services, LLC, referred to as CM Capital Services will provide us a pipeline of investment opportunities. Accordingly, we expect that proceeds received from this offering generally will be invested in mortgage loans or other real estate-related investments within 30 days of receipt. As a result, we do not expect to experience the significant short-term dilution that can result from investing offering proceeds in short-term investments that do not earn as high a return as we expect to earn on our mortgage loan or other real estate-related investments, because we are able to invest the proceeds promptly.
 
Assuming all 90 million shares are sold in this offering, we expect to have approximately $796.5 million of net offering proceeds available for investment in mortgage loans and other real estate-related assets. If the minimum number of shares is sold in this offering, we expect to have approximately $2.1 million of net offering proceeds available for investment.
 
Q: If I buy shares, will I receive distributions and, if so, how often?
 
A: We intend to make regular cash distributions to our stockholders. The amount of distributions will be determined by the board of directors and typically will depend on the amount of net cash from operations


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(which includes interest income from borrowers under mortgage loans, less expenses paid), current and projected cash requirements, tax considerations, our general financial condition and other factors. However, in order to remain qualified as a REIT, we must make distributions equal to at least 90% of our REIT taxable income each year. Distributions, if any, will be made monthly. The board of directors may in the future change our policy so that distributions will be paid quarterly. We may make distributions from sources other than cash flow from operations, including offering proceeds.
 
Q: Are distributions I receive taxable?
 
A: Yes. Generally, distributions that you receive will be considered ordinary income to the extent they are from current and accumulated earnings and profits; however, we expect a portion of your distributions will be considered return of capital for tax purposes. These amounts will not be subject to tax immediately but will instead reduce the tax basis of your investment. This in effect defers a portion of your tax until you have exhausted the tax basis of your investment, your investment is sold or we are liquidated, at which time the gain should, generally, be taxable as a capital gain assuming that you hold your shares as a capital asset. However, because each investor’s tax implications are different, we suggest you consult with your tax advisor. Dividends that United States individual stockholders receive from a REIT generally are not eligible for the 15% U.S. federal income tax rate except to the extent that such dividends are attributable to dividends that the REIT received from taxable corporations. Certain other limited circumstances can result in the taxation of dividends at the 15% U.S. federal income tax rate as discussed under “U.S. Federal Income Tax Considerations — Taxation of Taxable United States Stockholders” and “— Distributions Generally.”
 
Q: When will I get my tax information?
 
A: Your Form 1099 tax information will be mailed by January 31 of each year.
 
Q: If I buy shares, will I be liable for the acts or obligations of CMR?
 
A: No. Because CM REIT is a corporation, as a stockholder you are not generally liable for its obligations and the amount of your potential loss is limited to the price you pay for our shares.
 
Q: What fees will CMR pay as part of this offering?
 
A: We will pay the dealer-manager a selling commission of 7.0% of aggregate gross proceeds, a dealer-manager fee of 3.0% of aggregate gross proceeds and will reimburse our advisor, its affiliates and related parties for other organization and offering expenses of up to 1.5% of the aggregate gross proceeds. If the maximum offering amount is sold, we will pay $63.0 million in selling commissions, $27.0 million in dealer-manager fees and up to $13.5 million in organization and offering expense reimbursements. We will not pay any of these commissions or fees for shares issued under the DRIP. We will pay the advisor a first-tier management fee calculated as a percentage of average invested assets. We will also pay the advisor a second-tier management fee based on the amount of our taxable REIT income, the amount of which cannot be reasonably estimated due to the uncertainty of 10-year U.S. Treasury yields and net interest margin. We will also reimburse our advisor for any out-of-pocket expenses. We also pay our non-employee directors an annual retainer of $15,000 and additional fees based on the number of meetings attended and chairmanships of various committees. See “Plan of Distribution — Compensation of Dealer-Manager and Participating Broker-Dealers” and “The Advisor — Compensation and Expenses” for a more complete description of these fees.
 
Q: What is your relationship to Desert Capital REIT, Inc.?
 
A: Desert Capital REIT, Inc., which we refer to as Desert Capital, is a separate REIT from us. However, we have a common sponsor and advisor, CM Group, and all of our officers and three of our directors are also officers or directors of Desert Capital. Our loan originator and servicer, CM Capital Services, also originated and serviced loans and acts as asset manager for Desert Capital.
 
Q: Are there conflicts of interest between CMR and other related parties?
 
A: Yes. The majority of the membership interests in our advisor, CM Group, are owned directly or indirectly by three of our directors including our Chief Executive Officer and our Chief Financial Officer. We pay our advisor a second-tier management fee based on our net income. In evaluating potential investment opportunities and in evaluating other operating strategies, an undue emphasis by our advisor on the maximization of our net income at the expense of other criteria, such as preservation of capital, in order to earn higher compensation, could result in an increased risk to the value of our portfolio. In addition, Desert Capital is our affiliate, and has the same advisor as we do. Our advisor may have a conflict of interest in allocating management time between us and Desert Capital and other programs that it advises in the future. CM Capital Services, the company that originates and services our acquisition, development, construction and commercial mortgage loans, is owned by our advisor, and also acts as asset manager for Desert Capital. Residential Capital, the company that originates our non-agency residential mortgage


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loans, is majority owned by our Chief Executive Officer and Chairman of the Board. One of our directors also has an ownership interest in Residential Capital. In addition, the dealer-manager is an affiliate of ours and is owned by our advisor. Our Chief Executive Officer is also an officer, and registered principal of the dealer-manager. These relationships may create conflicts in connection with the fulfillment by the dealer-manager of its due diligence obligations under the federal securities laws. Although the dealer-manager will examine the information in the prospectus for accuracy and completeness, the dealer-manager is an affiliate of ours and will not make an independent review of the company or the offering. Accordingly, investors do not have the benefit of such independent review. See “Conflicts of Interest” and “Certain Relationships and Related Transactions, and Director Independence” for a more complete description of conflicts of interest, and “Other CM Group-Sponsored Programs” for a description of other CM Group clients with whom we may compete for investment opportunities.
 
Q: Will affiliates of CMR receive loan origination and servicing fees?
 
A: Yes. Our advisor identifies loans originated by both affiliated and non-affiliated mortgage brokers, including CM Capital Services and Residential Capital, both related parties that will solicit new borrowers to originate loans for us. A loan origination fee is paid by the borrower of each mortgage loan directly to the entity originating the loan. Accordingly, CM Capital Services and Residential Capital will be paid loan origination fees (points) by the borrowers on the loans that they originate. We are not entitled to receive any part of the origination fees; however, we will charge and receive commitment fees in connection with some of our loans. In addition, CM Capital Services or another affiliate of our advisor services our mortgage loans for us pursuant to our loan servicing agreement and is paid servicing fees for its services. The servicing fee that CM Capital Services or such other affiliate, as the case may be, receives for each loan is comprised of a spread of up to 100 basis points between the interest rate that is paid by the related borrower on the loan and the interest rate we receive as the lender on the loan. The servicing fee will vary per loan and will be mutually determined by our advisor and CM Capital Services, or such other affiliate, as the case may be.
 
Q: If we foreclose on a property, will asset management fees be paid to affiliates of CMR?
 
A: If a loan becomes non-performing and we take ownership of the property securing the loan, in lieu of the up to 100 basis point servicing fee that was previously paid by the borrower of the loan, we will pay, CM Capital Services an asset management fee equal to 1% of the original loan amount per annum.
 
Q: Who can help answer questions?
 
A: If you have more questions about the offering or if you would like additional copies of this prospectus, you should contact your registered representative or our dealer-manager:
 
CM Securities, LLC
1291 W. Galleria Drive, Suite 210
Henderson, Nevada 89014
(888) 942-9292
 
Q: Will I be notified of how my investment is doing?
 
A: Yes. We will provide you with periodic updates on the performance of your investment with us, including:
 
  •  quarterly financial reports;
 
  •  an annual report;
 
  •  an annual Internal Revenue Service Form 1099-DIV, if required; and
 
  •  supplements to this prospectus.
 
In our discretion and with your consent, if necessary, we will provide this information to you via U.S. mail or other courier, facsimile, electronic delivery or posting on our website at www.cmreit.com.


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SUMMARY
 
This summary highlights selected information contained elsewhere in this prospectus. You should read this entire prospectus carefully, including the section titled “Risk Factors” and our financial statements and the notes thereto before making an investment in our common stock. As used in this prospectus, “company,” “we,” “our,” and “us” refer to CM REIT, Inc., except where the context otherwise requires. For a description of capitalized terms that are not defined, please see the “Definitions” section of this prospectus.
 
CM REIT, Inc.
 
Our Company
 
CM REIT, Inc. is a Maryland corporation which intends to elect to be taxed as a REIT for federal tax purposes commencing with its tax year ended December 31, 2010. Our address is 1291 W. Galleria Drive, Suite 200, Henderson, Nevada 89014 and our telephone number is (866) 659-3849. Information regarding our company is also available on our website at www.cmreit.com.
 
Our Business
 
We believe there is a significant market opportunity to make mortgage loans to homebuilders, developers and homebuyers, and owners of real property whose financing needs are typically not met by traditional mortgage lenders. The restrictive underwriting standards or lead time required by traditional mortgage lenders, such as commercial banks, results in some potential borrowers being unable to obtain such financing, or unwilling to complete the time consuming process often required by traditional lenders. Moreover, the contraction of credit markets and the banking system over the past several years has resulted in declining lending volume. This combined with the tightening credit standards of traditional financing sources have created a more compelling opportunity. In addition, we believe that the dislocations in the credit markets have severely constrained the availability of liquidity and will continue to create opportunities to acquire select assets from motivated sellers at substantial discounts to their intrinsic values. We believe these conditions will provide us with the opportunity to purchase commercial real estate properties and real estate-related debt and equity securities at favorable risk-adjusted rates.
 
We intend to create a diversified portfolio of real estate-related loans, commercial real estate-related debt securities and select real estate equity investments. We intend to focus our investing activities on, and use the proceeds of this offering principally for, loans to homebuilders, developers and homebuyers, and owners of real property with financing needs that are not met by traditional mortgage lenders. We expect that up to approximately 80% of our portfolio will consist of short-term mortgage loans consisting of acquisition, development, construction and commercial mortgage loans to both local and national developers and homebuilders. We also expect to invest in non-agency residential mortgage loans to provide niche financing to borrowers that otherwise have limited financing sources. We expect that up to approximately 10% of our portfolio will consist of non-agency residential mortgage loans. We also intend to make a limited number of opportunistic investments in commercial real property to take advantage of attractive investment opportunities. We may also acquire real estate-related debt securities, such as commercial mortgage-backed securities and collateralized debt obligations related to real estate, and equity securities of other real estate-related companies. We expect that up to approximately 20% of our portfolio will consist of commercial real property, real estate-related debt securities and equity securities of other real estate-related companies. We may execute our investment strategy by acquiring individual assets or portfolios of assets, other mortgage REITs or companies with similar investment objectives.
 
Our principal investment objectives are to pay attractive and consistent distributions to our stockholders, preserve, protect and enhance our assets and ultimately provide our stockholders with liquidity of their investment. Our focus will emphasize payment of current returns to investors and the preservation of invested capital, with a lesser emphasis on seeking capital appreciation from our investments. We intend to use leverage to enhance total returns to our stockholders. To the extent available, we expect to employ leverage to finance our portfolio that will not exceed 50% of the aggregate cost of our assets. Following our offering period, the growth of our portfolio will depend on our access to external sources of capital. The growth of our business will also depend on our ability to locate suitable investments to keep our capital fully deployed at favorable rates. We


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expect that our portfolio will be concentrated in the Western United States, where we believe we possess requisite skills and market knowledge.
 
Within our investment policies, our advisor will have substantial discretion with respect to the selection of specific investments and the purchase and sale of our assets subject to the limitations in our charter and oversight of our board of directors. Our board of directors may revise our investment policies, which we describe below, without the approval of our stockholders. Our board of directors will review our investment policies at least annually to determine whether our policies are in the best interests of our stockholders.
 
We expect that after we have invested the proceeds of this offering, the majority of our investment portfolio (up to approximately 80% of our portfolio) will consist of acquisition, development, construction and commercial mortgage loans. Our mortgage loan investments may consist of loans that we wholly own or in trust deed mortgage loans that we own with other lenders. The majority of our investments in this category are expected to be short-term (12-24 months) mortgage loans that are balloon mortgage loans with fixed interest rates. A substantial portion of these mortgage loans will consist of interest-carry loans, meaning we will provide the borrower with sufficient financing to enable it to make the interest payments during the term of the loan. All of our mortgage loans are expected to be within the loan-to-value ratios set forth later under “Business — Underwriting Criteria — Acquisition, Development, Construction and Commercial Mortgage Loans.” Initially, we expect that the majority of these types of mortgage loans will be identified by CM Capital Services pursuant to our loan origination agreement. We do not currently have a contractual arrangement with any other mortgage originator for the purpose of acquiring these types of mortgage loans, although we also plan to fund or acquire mortgage loans directly from originators and from entities holding mortgage loans originated by others. Our asset acquisition policy limits the amount and type of mortgage loans we may acquire.
 
We intend to invest a portion of our portfolio (up to approximately 10% of our portfolio) in non-agency residential mortgage loans. We define non-agency residential mortgage loans as first lien mortgage loans for residential dwellings in which we are the first lien holder, as further described under “Business — Our Investment Types — Non-agency Residential Mortgage Loans.” Non-agency residential mortgage loans may range in principal amount from $50,000 to $2 million with fixed or variable interest rates, based on the terms and conditions that reflect the type of loan and the inherent risk associated therewith. Non-agency residential mortgage loans are expected to be within the loan-to-value ratios set forth under “Business — Underwriting Criteria — Non-agency Residential Mortgage Loans.” Initially, we anticipate that the majority of the non-agency residential mortgage loans that we fund will be identified by Residential Capital and serviced by an affiliate of our advisor or a third party servicer. We do not currently have a contractual arrangement with any originator for the purpose of acquiring non-agency residential mortgage loans, although we may also acquire non-agency residential mortgage loans directly from other mortgage brokers or originators and from entities holding non-agency residential mortgage loans. Our asset acquisition policy limits the amount and type of non-agency residential mortgage loans we may acquire.
 
The non-agency residential mortgage loans in which we intend to invest will generally be classified in one of the following categories: condo/hotel, foreign nationals, asset-based stated income and jumbo. We will not invest in non-agency residential mortgage loans in favor of any one borrower in excess of $2.0 million. We expect that each non-agency residential mortgage loan in our portfolio will be full recourse against the property that secures it.
 
Each of the mortgage loans we fund will be secured by a first priority lien filed and recorded with the applicable county recorder’s office. We will obtain an independent appraisal, sales comparables, or other accepted valuation methodology for each property securing each of our mortgage loan investments. From time to time, we may be required to foreclose on the real estate serving as collateral for a mortgage loan due to the loan obligations not being met by the borrower. Upon the sale of any of our properties by our advisor or any affiliate of our advisor, we will pay sales commissions or disposition fees to any of such persons in amounts no greater than the lesser of one-half of the brokerage commission paid or an amount equal to 3% of the contractual sales price; provided, that the amount paid when added to all other sales commissions paid to any unaffiliated parties in connection with the sale, does not exceed the lesser of the competitive real estate commission or an amount equal to 6% of the contractual sales price.


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We expect that no more than 20% of our portfolio will be concentrated in any individual submarket in the Western United States, which has suffered severely from the recessionary economic environment and has experienced some of the highest delinquency and foreclosure rates in the United States resulting in market illiquidity and sharply declining real estate values. This concentration may increase the risk of defaults on our mortgage loans if the real estate or economic conditions in any such particular submarket or the Western United States, in general, decline further.
 
Our Advisor and Executive Officers
 
Our day-to-day operations will be externally managed by our advisor, CM Group, subject to the direction and oversight of our board of directors. CM Group was established in 2007, and its predecessor company was established in 2003. Our advisor had four full-time employees at December 31, 2009, and its wholly-owned subsidiary, CM Capital Services, had 56 employees. Our advisor will perform all the duties of our advisor under the advisory agreement. However, our advisor may elect to have others undertake some or all of those duties at any time and in its sole discretion. Our advisor also acts as the advisor to our affiliates, Desert Capital and CM Equity, LLC. In addition, CM Notes Manager, LLC, a wholly owned subsidiary of CM Capital Services, a wholly owned subsidiary of our advisor, is the advisor to CM Notes Program I, LLC, which we refer to as CM Notes.
 
Our advisor’s management team has experience in managing a mortgage REIT through its experience in serving as the advisor to Desert Capital since December 2003. While our strategy is different than Desert Capital’s, we do intend to invest in some mortgage loans that are similar to those invested in by Desert Capital. Specifically, Desert Capital historically invested in acquisition, development, construction and commercial mortgage loans, so we anticipate that our advisor’s experience acquiring and managing these types of investments will be beneficial to us. Desert Capital funded 506 mortgage loans comprised of the following loan types, based on outstanding principal balance:
 
Acquisition and development loans — 74.6%
Construction loans — 19.9%
Commercial property loans — 5.4%
Residential loans — .1%
 
All of Desert Capital’s loans were originated by CM Capital Services, the originator and servicer of our acquisition and development, construction and commercial loans. Prior to 2007, Desert Capital experienced minimal defaults and had not foreclosed on any loans. However, commencing in 2007 with the collapse of the sub-prime residential mortgage market and subsequent disruption in the credit markets, Desert Capital’s borrowers became unable to obtain refinancing or liquidate the collateral securing their loans, resulting in their inability to repay the mortgage loans owing to Desert Capital, which caused Desert Capital’s default rate to increase dramatically. The default rate for loans originated by CM Capital Services in 2008 and 2007 was 87.54% and 86.11%, respectively. See “Business — Underwriting Criteria” and “Prior Performance Summary — Prior Investment Programs.”
 
Our investment strategy is broader than Desert Capital’s as it also includes investing in non-agency residential mortgage loans, opportunistic commercial real property and real estate-related debt and equity securities. Desert Capital did not invest directly in non-agency residential mortgage loans, commercial real property or real estate-related debt and equity securities. Our advisor does not have any prior experience investing in those types of investments. In accordance with our asset acquisition policy, we will not acquire any mortgage loans or other investments, directly or indirectly, from Desert Capital or any of our other affiliates, other than pursuant to our loan origination arrangements with CM Capital Services and Residential Capital. See “Our Operating Policies and Investment Policies — Asset Acquisition Policy.”


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The following diagram sets forth the relationships between us, our advisor, the dealer-manager, our executive officers and three of our directors.
 
(Flow Chart)
* CM Group is also the advisor to or manager of Desert Capital, CM Equity, LLC and CM Notes Manager, LLC.
 
The Advisory Agreement
 
We will enter into an advisory agreement with our advisor prior to commencing this offering. Pursuant to the advisory agreement, our advisor will generally implement our business strategy, be responsible for our day-to-day operations and perform services and activities relating to our assets and operations in accordance with the terms of the advisory agreement. Our advisor’s services for us can be divided into the following three primary activities:
 
  •  Asset Management — our advisor will advise us with respect to, arrange for and manage the acquisition, financing, management and disposition of, our investments.


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  •  Liability Management — our advisor will evaluate the credit risk of our investments and arrange borrowing strategies.
 
  •  Capital Management — our advisor will coordinate our capital raising activities.
 
In conducting these activities, our advisor will advise us on the formulation of, and explanation of, our operating strategies and policies, arrange for our acquisition of assets, monitor the performance of our assets, arrange for various types of financing, and provide administrative and managerial services in connection with our operations. At all times in the performance of these activities, our advisor will be subject to the direction and oversight of our board of directors.
 
See “— Benefits to Affiliates” for a summary of fees payable to our advisor.
 
Conflicts of Interest
 
CM Group, as our advisor, will experience conflicts of interest in connection with the management of our business affairs, including the following:
 
  •  The second-tier management fee, which is based on our net income, may create an incentive for our advisor to recommend investments with greater income potential, which may be relatively more risky than would be the case if its compensation from us did not include a component based on our financial performance.
 
  •  Three of our directors and our two executive officers, are part owners, officers, employees or members of, or otherwise affiliated with, our advisor.
 
  •  Our advisor owns CM Capital Services, currently our only loan origination source for acquisition, development, construction and commercial mortgage loans.
 
  •  In the event that one of our loans becomes non-performing and we take ownership of the property, we will pay an asset management fee to CM Capital Services in the amount of 1% of the original loan amount, which in certain instances, may be higher than the servicing fee that was being paid to CM Capital Services by the borrower, which may create an incentive for CM Capital Services to originate riskier loans for us.
 
  •  Our advisor must determine how to allocate investment opportunities among us and any other investment programs that it sponsors, some of which may have similar investment objectives to ours.
 
  •  Our advisor owns our dealer-manager.
 
  •  Our advisor will have to allocate its time among us, Desert Capital, CM Equity, CM Notes, and other business activities in which it is involved.
 
  •  Todd Parriott, our Chief Executive Officer and the Chief Executive Officer of CM Group and G. Steven Dawson, one of our directors and managing director of CM Group, indirectly own Residential Capital, currently our only loan origination source for non-agency residential mortgage loans.
 
The advisory agreement does not limit or restrict the right of our advisor or any of its affiliates from engaging in any business or rendering services to any other person, including, without limitation, the purchase of, or rendering advice to others purchasing or making investments that meet our investment guidelines. However, our advisor has agreed that for as long as it is our exclusive advisor pursuant to the advisory agreement, it will not sponsor any other mortgage REIT (other than Desert Capital) that invests primarily in mortgage loans for the acquisition of, development of and construction of real estate in the Las Vegas, Nevada area, without first obtaining the approval of a majority of our directors who are not associated and have not been associated within the last two years, directly or indirectly, with us or our advisor (independent directors). Accordingly, our executive officers and officers and employees of our advisor will have to allocate their time between us and the other programs sponsored by CM Group and activities in which they are involved. Currently, CM Group is the advisor to one public real estate investment program, Desert Capital, which invested in some of the same types of mortgage loans that are similar to the loans in which we intend to invest, but is no longer actively making investments. In addition, CM Notes Manager, LLC, an indirect wholly owned subsidiary of CM


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Group, is managing CM Notes, an active real estate investment program whose investment activity will end prior to December 31, 2010. Our advisor and the advisor to Desert Capital and the manager of CM Notes will have in common the same initial executive officers and managers. It is intended that our executive officers and the officers and employees of our advisor will devote the necessary time to us to fulfill their respective duties to us and our advisor.
 
In addition, we may compete with other existing and/or future programs sponsored by CM Group, including CM Notes, for the acquisition of investments. In such event, the executive officers of our advisor, its affiliates and related parties, including the members of the investment committee of our advisor, who are executive officers and managers of other CM Group entities or who support principal activities of CM Group and its affiliates, must determine which CM Group-sponsored program or other entity should make any particular investment.
 
Two of our executive officers and three of our directors are also officers and directors of Desert Capital, and have obligations to Desert Capital similar to their obligations to us. See “Risk Factors — Risks Related to Our Advisor and Conflicts of Interest”, “Other CM Group-Sponsored Programs” and “Conflicts of Interest” sections of this prospectus for a detailed discussion of the various conflicts of interest relating to your investment and the risks associated with such conflicts, as well as the policies that we have established to resolve or mitigate a number of these potential conflicts.
 
Compensation to Our Advisor and Affiliates
 
We are an externally advised company and as such, although we have a board of directors and executive officers responsible for our management, we have no paid employees. Three of our directors and all of our executive officers are employed by, and receive compensation from, affiliates of our advisor. Our advisor is responsible for managing our day-to-day affairs and will be paid management fees, which are based on the value of the assets we own at any particular time and our net income, as long as it is providing services to us under the advisory agreement. Our advisor is not entitled to receive a termination fee upon the termination of the advisory agreement. The total compensation we pay to our advisor is limited under our articles of incorporation to an amount determined at least annually by our independent directors to be reasonable in relation to the nature and quality of services performed. Our advisor and its affiliates are not entitled to any compensation in connection with the acquisition or disposition of our assets, other than disposition fees or brokerage commissions. CM Capital Services and Residential Capital will receive origination fees that are paid by the borrowers on the mortgage loans and trust deed mortgage loans that we acquire from them. CM Capital Services receives a servicing fee on the loans that it services for us that is comprised of the spread between the interest rate we receive as the lender on the loan and the interest rate that is paid by the related borrower. We do not pay CM Capital Services or Residential Capital any fees for loan origination.
 
The following table summarizes the compensation and reimbursements we contemplate paying to our advisor, dealer-manager and other affiliates and related parties, including amounts to reimburse their costs in providing services and for amounts advanced on our behalf. For additional information concerning compensation paid to our advisor and other affiliates and related parties, see the section of this prospectus entitled “Our Advisor — Compensation and Expenses.” In addition, for information concerning compensation to our independent directors, see “Management of the Company — Compensation of Directors.”
 
The compensation payable to our advisor is subject to the terms and conditions of our advisory agreement, which must be renewed on an annual basis. As a result, such amounts may be increased or decreased in future renewals of the advisory agreement. The terms of our Dealer-Manager Agreement are not expected to change during this offering; however, in the event we determine to have additional equity offerings in the future, the terms of any future agreement, if any, could vary from the terms described below. Therefore, although this represents compensation and reimbursements we expect to pay to our advisor, dealer-manager and other affiliates and related parties in connection with the sale of assets and investment of the proceeds from this offering, there is no assurance our costs for these and/or other future services will


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remain unchanged throughout our duration. In addition, because these figures cannot be precisely calculated at this time, the actual fees payable may be less than or exceed these estimates.
 
         
Type of
 		      Estimated Amount
Compensation
 		      for Minimum/Maximum
and Recipient
 
Method of Computation
 
Offering(1)
 
Fees Paid in Connection with Our Offering
Selling Commissions to our dealer-manager and participating broker-dealers   We will pay our dealer-manager selling commissions of 7.0% of aggregate gross proceeds from sales of shares. Our dealer-manager will reallow all of the 7% selling commissions to participating broker-dealers with respect to shares they sell.   $175,000/$63,000,000(2)
         
Dealer-Manager Fees to our dealer-manager and participating broker-dealers   We will pay our dealer-manager a dealer-manager fee of 3.0% of aggregate gross proceeds from sales of shares. Our dealer-manager may reallow a portion of the dealer-manager fee to any participating broker-dealer with respect to shares it sells(4).   $75,000/$27,000,000(3)
         
Reimbursement of Other Organization and Offering Expenses to our advisor, its affiliates and related parties   To date, our advisor has paid organization and offering expenses on our behalf. We will reimburse our advisor and its affiliates for actual expenses in connection with our formation and this offering, including certain salaries and non-transaction based compensation paid to employees of our advisor and its affiliates for performing services for us and bona fide, itemized and detailed due diligence expenses incurred by the dealer-manager and participating broker-dealers(5). We will reimburse these expenses only to the extent that the reimbursement would not cause the selling commissions, the dealer-manager fee and the other organization and offering expenses borne by us to exceed 15% of gross offering proceeds as of the date of the reimbursement.   $125,000/$13,500,000
 
Fees Paid in Connection with the Acquisition of
Properties, Loans or Other Real Estate-
Related Investments
         
Acquisition Fee to our advisor and its affiliates   We do not anticipate paying any acquisition fees to our advisor or its affiliates in connection with the acquisition of our investments. However, if we do pay acquisition fees to our advisor or any of its affiliates for services in connection with the selection, evaluation, structure and purchase of an investment, the fee will be usual and customary for services rendered and not exceed an amount equal to 6% of the cost of the investment acquired by us, or in the case of a loan, 6% of the funds advanced.   Amount is dependent upon our results of operations and is not determinable at this time.
         
Reimbursement of Acquisition Expenses to our advisor, its affiliates and related parties   We will reimburse our advisor and its affiliates and related parties for actual expenses incurred in connection with the selection, evaluation, structure and purchase of making loans and other real estate-related investments, whether or not acquired. Acquisition expenses may include, without limitation, legal fees and expenses, travel and communications expenses, costs of appraisals, nonrefundable option payments on property not acquired, accounting fees and expenses, title insurance premiums and the costs of performing due diligence. The total of all acquisition fees and acquisition expenses shall be reasonable, and shall not exceed an amount equal to 6% of the contract price of the property, or in the case of a loan, 6% of the funds advanced.   Amount is dependent upon our results of operations and is not determinable at this time(6).


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Type of
 		      Estimated Amount
Compensation
 		      for Minimum/Maximum
and Recipient
 
Method of Computation
 
Offering(1)
 
Origination Fee
to CM Capital Services and Residential Capital 		  Up to 500 basis points of loan amount and is paid by the borrower.   Amount is not determinable at this time.
 
Fees Paid in Connection with our Operations
         
Management Fees to our advisor   First tier management compensation of 1% per annum of the first $200 million of our average invested assets, plus 0.8% per annum of our average invested assets in excess of $200 million during such fiscal year, calculated on a monthly basis and payable monthly in arrears; and second tier management compensation of a specified percentage of the amount our REIT taxable net income, before deducting certain management compensation, net operating losses and certain other items, exceeds a return based on the 10 year U.S. Treasury rate plus 1%. The percentage for this calculation is the weighted average of the following percentages based on our average invested assets for the period: 20% for the first $200 million of our average invested assets; and 10% of our average invested assets in excess of $200 million calculated and paid on a monthly basis and subject to annual reconciliation.   Amount of first tier management fee for the minimum offering amount is estimated to be $21,250 (assuming no debt financing to purchase investments) and approximately $85,000 (assuming debt financing equal to 75% of our total assets) and for the maximum offering amount is estimated to be $6,772,000 (assuming no debt financing to purchase investments) and approximately $25,888,000 (assuming debt financing equal to 75% of the cost of our total assets). Amount of second tier management fee is dependent upon our results of operations and is not determinable at this time.
         
Out-of-Pocket
Expense
Reimbursement
to our advisor,
its affiliates
and related parties 		  Reimbursement of actual out-of-pocket expenses incurred in connection with our administration on an on-going basis includes reimbursement of expenses incurred in contracting with third parties to provide services to us or on our behalf, such as legal fees, accounting fees, consulting fees, trustee fees, appraisal fees, insurance premiums, commitment fees, brokerage fees, ad valorem and property taxes, costs of foreclosure, maintenance, repair and improvement of property and premiums for insurance. Also includes reimbursement for travel and related expenses incurred in connection with performing business and bona fide due diligence activities for or on our behalf, including, without limitation, travel and expenses incurred in connection with the purchase, financing, refinancing, sale or other disposition of any of our assets or other investments. Such fees and expenses will only be reimbursed if a detailed and itemized invoice is provided. Except for salaries, reimbursable as other organization and offering expenses, we do not reimburse our advisor for employment expenses of the personnel employed by our advisor (including our officers who are also employed by our advisor).   (6)

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Type of
 		      Estimated Amount
Compensation
 		      for Minimum/Maximum
and Recipient
 
Method of Computation
 
Offering(1)
 
Servicing Fee
to CM Capital
Services 		  Up to 100 basis points of the loan amount and is paid by the borrower.   Amount is not determinable at this time.
Asset Management Fee to CM Capital Services   If a loan becomes non-performing and we take ownership of a property as a result of a workout or foreclosure of a loan, in lieu of the servicing fee that was previously paid by the borrower, we will pay CM Capital Services an asset management fee equal to 1% of the original loan amount per annum.   Amount is not determinable at this time.
 
Fees Paid in Connection with Sales or Liquidation
Disposition Fee
to CM Capital
Services 		  If we take ownership of a property as a result of a workout or foreclosure of a loan, or otherwise sell a property, in consideration for substantial assistance in connection with the sale of such property (including a sale of all of our properties), we will pay a disposition fee upon the sale of such property in an amount no greater than the lesser of one-half of the brokerage commission paid or an amount equal to 3% of the contractual sales price. If we pay a disposition fee to CM Capital Services, we may also pay a disposition fee to another third party. However, the amount paid to CM Capital Services when added to all other disposition fees paid to any unaffiliated parties in such a capacity in connection with the sale, may not exceed the lesser of the competitive real estate commission or an amount up to 6% of the contractual sales price.   Amount is not determinable at this time as it is dependent upon amount of assets sold.
 
 
(1) The estimated minimum dollar amounts are based on the sale of the minimum of 250,000 shares to the public. The estimated maximum dollar amounts are based on the sale of the maximum of 90,000,000 shares to the public in the primary offering. No sales commissions or dealer-manager fees are payable as a result of sales of shares under our DRIP.
 
(2) Commissions may be reduced for discounts or waived as further described in the “Plan of Distribution” section of this prospectus; however, for purposes of calculating the estimated maximum selling commissions in this table, we have not assumed any such discounts or waivers.
 
(3) The dealer-manager fees may be reduced for discounts or waived as further described in the “Plan of Distribution” section of this prospectus; however, for purposes of calculating the estimated maximum dealer-manager fees in this table, we have not assumed any such discounts or waivers.
 
(4) In addition, out of its dealer-manager fee, our dealer-manager may reimburse participating broker-dealers for distribution and marketing-related costs and expenses, such as costs associated with attending or sponsoring conferences, technology costs and other marketing costs and expenses.
 
(5) We will reimburse our dealer-manager for actual, bona fide, itemized and detailed due diligence expenses incurred by it or other participating broker-dealers in connection with this offering. Reimbursement is contingent upon receipt by our dealer-manager of a detailed invoice or similar itemized statement from the participating broker-dealer that demonstrates the actual due diligence expenses incurred. Our dealer-manager will reallow such reimbursements to the applicable participating broker-dealer.
 
(6) All out-of-pocket expenses incurred on our behalf will be reimbursed in accordance with the terms of the advisory agreement and pursuant to an agreed upon budget. We and our advisor will agree on a budget, including estimated out-of-pocket expenses. Any individual cost or expense exceeding $100,000 not reflected in our budget must be approved by our board of directors.

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Prior Investment Programs
 
The predecessor of our sponsor, CM Group, previously sponsored Desert Capital. Desert Capital raised approximately $175.4 million in its two public offerings, excluding the DRIP, and approximately $12.4 million in DRIP shares. Desert Capital is not currently conducting an offering or actively making investments. As of December 31, 2009, Desert Capital had funded 506 mortgage loans with an aggregate principal amount of $344.3 million, all of which were originated by CM Capital Services, the originator and servicer of our acquisition and development, construction and commercial loans. During 2004 through 2006, Desert Capital had minimal defaulted loans, which were loans that were 90 days or more past due or with respect to which foreclosure proceedings had been commenced. Prior to 2007, Desert Capital had not foreclosed on any loans. However, commencing in 2007 with the collapse of the sub-prime residential mortgage market and subsequent disruption in the credit markets, Desert Capital’s borrowers became unable to obtain refinancing or liquidate the collateral securing their loans, resulting in their inability to repay the mortgage loans owing to Desert Capital, which caused Desert Capital’s default rate to increase dramatically. The default rate for loans originated by CM Capital Services in 2008 and 2007 was 87.54% and 86.11%, respectively. The increase in non-performing loans materially and adversely impacted Desert Capital’s financial condition and operating results by both reducing income and increasing its provision for loan losses. The reduction in income has caused Desert Capital to have insufficient funds to be able to honor stockholder requests to repurchase their shares and caused it to suspend the payment of distributions. The increase in non-performing loans and reduction in income has also caused Desert Capital’s recurring cash flow to be insufficient to cover its general operating expenses. As a result, Desert Capital’s primary strategy for generating cash flow and resolving its non-performing loans and real estate owned assets includes sales of foreclosed properties, potentially including being required to sell assets at unfavorable prices. Despite the difficult market, Desert Capital’s advisor, CM Group, and its servicer, CM Capital Services, resolved a number of defaulted loans and foreclosure properties in 2008 and 2009 and continue to work toward further resolutions of its non-performing loans and foreclosure properties. At December 31, 2009, Desert Capital’s estimated equity available (total assets less total liabilities divided by total shares outstanding) per common share was $1.47, which estimate was based solely on Desert Capital’s audited financial statements and was not a representation, warranty or guarantee that Desert Capital or its stockholders, upon liquidation, would actually realize the estimated value per share. The “Prior Performance Summary” section of this prospectus contains a discussion of Desert Capital’s performance to date. Certain financial data relating to CM Group’s affiliates, and prior real estate programs is also provided in the “Prior Performance Tables” in Appendix D to this prospectus. The prior performance of our sponsor and its affiliates’ previous real estate programs may not be indicative of our ultimate performance and, thus, you should not assume that you will experience financial performance and returns comparable to those experienced by investors in our sponsor’s and its affiliates’ prior programs. You may experience a small return or no return on, or may lose some or all of, your investment in our shares.


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The Offering
 
Offering Size Minimum — $2.5 million
 
Maximum — $995 million
 
$900 million of common stock to be offered to investors meeting certain suitability standards and up to $95 million of common stock available to investors who purchased their shares in this offering and who choose to participate in our DRIP.
 
Minimum Investments Individuals — $2,500 — Additional shares may be purchased in $10 increments.
 
IRA, Keogh and other qualified plans — $1,000 — Additional shares may be purchased in $10 increments.
 
The amounts apply to most potential investors, but minimum investments may vary from state to state.
 
Suitability Standards Net worth (not including home, furnishings and personal automobiles) of at least $70,000 and annual gross income of at least $70,000; or net worth (not including home, furnishings and personal automobiles) of at least $250,000.
 
Suitability standards vary from state to state.
 
Distribution Policy Consistent with our objective of qualifying as a REIT, we expect to pay regular distributions and distribute at least 90% of our REIT taxable income. Generally, our policy is to pay distributions from cash flow from operations. However, we can give no assurance that we will pay distributions solely from our funds from operations in the future, especially during the period when we are raising capital and have not yet acquired a substantial portfolio of income-producing investments. If the cash available to us is insufficient to pay such distributions, we may obtain the necessary funds by borrowing funds, issuing new securities, or selling assets. We may make distributions from other sources, including from offering proceeds. Although our distribution policy is not to use the proceeds of this offering to make distributions, our organizational documents permit us to pay distributions from any source, including offering proceeds. We have not established a cap on the amount of proceeds that we may use to fund distributions. If we pay distributions from sources other than our cash flow from operations, we will have less funds available for investments and your overall return may be reduced. In addition, paying distributions from sources other than cash flow from operations may reduce the amount of distributions that we make in the future and may serve to dilute later investors. Such distributions would constitute a return of capital, which will have the effect of reducing the basis of your investment in our stock. In order to provide additional funds to pay distributions to our stockholders before we have acquired a substantial portfolio of income-producing investments, we may fund such distributions from advances from our advisor or from our advisor’s deferral of its fees under the advisory agreement.


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Our Advisor CM Group is our advisor and will administer our day-to-day operations and select our investments, subject to the oversight and direction of our board of directors.
 
Estimated Use of Proceeds If we sell only the minimum offering amount of 250,000 shares, approximately 85% of the offering proceeds will be available to make investments. If we sell all 90 million shares (excluding the DRIP shares), approximately 88.5% of the net offering proceeds will be available to make investments. The balance will be used to pay fees and expenses in connection with the offering, some of which are fixed regardless of the size of the offering. We are prohibited by FINRA rules from incurring offering expenses in excess of 15% of the proceeds of the offering. Because the actual expenses incurred will greatly exceed $375,000 (15% of the minimum offering amount of $2.5 million), we are required to cap our expenses at 15%. If the maximum offering amount of $900 million is raised, the total estimated organization and offering expenses of $103.5 million will constitute approximately 11.5% of the offering proceeds.
 
Our Reinvestment Plan We have adopted a DRIP which allows stockholders to have the full amount of their distributions reinvested in additional shares that may be available at a price of $9.50 per share. We have registered 10 million shares of our common stock for this purpose. We have attached the DRIP as Appendix A to this prospectus.
 
Our Share Redemption Plan We have adopted a share redemption plan that allows our stockholders who hold shares for at least one year to request that we redeem their shares. If we have sufficient funds available to do so and if we choose, in our sole discretion, to redeem shares, the number of shares we may redeem in any calendar year and the price at which they are redeemed are subject to conditions and limitations, including:
 
If we elect to redeem shares, some or all of the proceeds from the sale of shares under our distribution reinvestment plan attributable to any quarter may be used to redeem shares presented for redemption during such quarter;
 
No more than 5% of the weighted average number of shares of our common stock outstanding during such 12-month period may be redeemed during such 12-month period; and
 
The price at which we redeem our shares of common stock will be determined by us. Subject to restrictions and limitations discussed herein, if we elect to redeem any shares, we may redeem shares (including fractional shares), from time to time, at the following prices:
 
(i) the lesser of (a) the estimated value of a share of our common stock, as determined by our board of directors or (b) 90.0% of the purchase price paid per share for stockholders who have owned those shares for at least one year; and
 
(ii) the lesser of (a) the estimated value of a share of our common stock, as determined by our board of directors or (b) 95.0% of the


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purchase price paid per share for stockholders who have owned those shares for at least two years.
 
Notwithstanding the foregoing, during any period in which we are engaged in a public offering, the redemption price will be (i) 90% of the purchase price paid per share for stockholders who have owned those shares for at least one year, or (ii) 95% of the purchase price per share for stockholders who have owned those shares for at least two years and in any event will be less than the price of shares offered in such public offering. During periods when we are not engaged in an offering, the estimated value of a share of our common stock, for purposes of redemption, will be the net asset value per share as of the end of the most recent fiscal quarter. Accordingly, the redemption prices paid to stockholders for shares of common stock redeemed by us during periods when we are not engaged in an offering may vary over time. Our board of directors has the ability, in its sole discretion, to amend or suspend the redemption plan or to waive any specific conditions if it is deemed to be in our best interest. Further, we have the right to waive the holding periods, the redemption prices and the first come, first served redemption requirements described herein, in the event of the death or permanent disability of a stockholder.
 
Investment Company Act Considerations
 
We do not intend to register as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”). Under Section 3(a)(1)(A) of the Investment Company Act, an issuer will be an “investment company” if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act an issuer is deemed to be an “investment company” if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. Excluded from the definition of “investment securities” are, among other things, U.S. government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.
 
We intend to create a diversified portfolio of real estate-related loans, commercial real estate-related debt securities and select real estate equity investments. We intend to focus our investing activities on, and use the proceeds of this offering principally for, loans to homebuilders, developers and homebuyers, and owners of real property with financing needs that are not met by traditional mortgage lenders. We expect that up to approximately 80% of our portfolio will consist of short-term mortgage loans consisting of acquisition, development, construction and commercial mortgage loans to both local and national developers and homebuilders. We also expect to invest in non-agency residential mortgage loans to provide niche financing to borrowers that otherwise have limited financing sources. We expect that up to approximately 10% of our portfolio will consist of non-agency residential mortgage loans. We also intend to make a limited number of opportunistic investments in commercial real property to take advantage of attractive investment opportunities. Our investments may also include real estate-related debt securities, such as commercial mortgage-backed securities and collateralized debt obligations related to real estate, and equity securities of other real estate-related companies. We expect that up to approximately 20% of our portfolio may consist of commercial real property, real estate-related debt securities and equity securities of other real estate-related companies.
 
We intend to rely on the exception from the definition of “investment company” provided by Section 3(c)(5)(C) of the Investment Company Act, which is available for issuers “primarily engaged in the


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business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” In addition to prohibiting the issuance of certain types of securities, the SEC’s staff’s position on Section 3(c)(5)(C) generally requires that at least 55% of an issuer’s assets must be comprised of mortgages and other liens on and interests in real estate, also known as “qualifying assets;” at least 80% of the issuer’s assets must be comprised of qualifying assets and a broader category of assets that we refer to as “real estate-related assets;” and no more than 20% of the issuer’s assets may be comprised of assets other than qualifying assets and real estate-related assets, which we refer to as “miscellaneous assets.”
 
Qualification for a Section 3(c)(5)(C) exemption from registration under the Investment Company Act will limit our ability to make certain investments. For example, these restrictions may limit our ability to invest directly in mortgage-backed securities that represent less than the entire ownership in a pool of mortgage loans, debt and equity tranches of securitizations and certain asset-backed securities and real estate companies or in assets not related to real estate. Although we intend to monitor our portfolio, there can be no assurance that we will be able to maintain an exemption from registration for our company.
 
To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon the definition of investment company and the exceptions to that definition, we may be required to adjust our investment strategy accordingly. Any additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen.
 
Our Tax Status
 
We intend to qualify and will elect to be taxed as a REIT under the REIT provisions of the Internal Revenue Code commencing with our taxable year ending December 31, 2010. Provided we continue to qualify as a REIT, we generally will not be subject to federal corporate income tax on taxable income that is distributed to our stockholders. REITs are subject to a number of organizational and operational requirements, including a requirement that they distribute at least 90% of their annual REIT taxable income. Although we do not intend to request a ruling from the IRS as to our REIT status, we have received an opinion of our counsel, Locke Lord Bissell & Liddell LLP, with respect to our qualification as a REIT. This opinion is based on a number of assumptions and representations about our ongoing business and investment activities and other matters. We cannot assure you that we will be able to comply with these assumptions and representations in the future. Furthermore, this opinion is not binding on the IRS or any court. Failure to qualify as a REIT would render us subject to U.S. federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and distributions to our stockholders would not be deductible. Even if we qualify for taxation as a REIT, we may be subject to federal, state and local taxes on our income and property. In connection with our election to be taxed as a REIT, our articles of incorporation impose restrictions on the transfer and ownership of our stock.
 
Restrictions on Ownership of Our Stock
 
In order to facilitate our qualification as a REIT, our articles of incorporation prohibit any stockholder from directly or indirectly (or actually or constructively) owning more than 9.8% of the outstanding shares of any class or series of our stock. Our board of directors may, in its discretion, grant an exemption from this limitation. We adopted this restriction to promote compliance with the provisions of the Internal Revenue Code which limit the degree to which ownership of a REIT may be concentrated.


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RISK FACTORS
 
You should carefully consider the following risk factors in conjunction with the other information in this prospectus before making an investment decision. Our business, financial condition or results of operations could be harmed by any of these risks. Similarly, these risks could cause the value of our common stock to decline and you might lose all or part of your investment. Our forward-looking statements in this prospectus are subject to the following risks and uncertainties. Our actual results could differ materially from those anticipated by our forward-looking statements as a result of the risk factors below.
 
Risks Related to the Offering
 
We do not have any operating history and might not be able to operate our business or implement our operating policies and strategies successfully.
 
We were formed in November 2008, and we do not have any operating history. Our total assets consist of approximately $200,000 in cash. The results of our operations will depend on many factors, including the availability of opportunities for the acquisition of mortgage loans, the level and volatility of interest rates, the status of credit markets generally, readily accessible short-and medium-term funding alternatives in the financial markets, the level of nonperforming loans in our portfolio, the number of properties we hold as a result of foreclosures, and general economic conditions. To be successful in this market, we must, among other things:
 
  •  identify and acquire investments that further our investment strategy;
 
  •  create awareness of the CM REIT name within the investment products market;
 
  •  establish and maintain our network of licensed securities brokers and other agents;
 
  •  attract, integrate, motivate and retain qualified personnel to manage our day-to-day operations;
 
  •  respond to competition both for investment opportunities and potential investors in us; and
 
  •  build and expand our operations structure to support our business.
 
Moreover, delays in investing the net proceeds of this offering may cause our performance to be weaker than other fully invested mortgage REITs pursuing comparable investment strategies. We are a blind pool REIT and you will not have the opportunity to evaluate the manner in which we invest or the economic merits of particular assets to be acquired. Furthermore, we face the risk that we might not successfully operate our business or implement our operating policies and strategies as described in this prospectus. You should not rely on the past performance of any other businesses of our officers, directors or other key personnel, or the officers, managers and other key personnel of our advisor and its affiliates, to predict our future results. In addition, we do not have any established financing sources, and we cannot assure you that we will raise sufficient capital to operate our business as planned. See “Cautionary Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
There is currently no public trading market for our common stock and there is no assurance that one will develop; therefore, you may not be able to sell your shares at a price equal to or greater than the offering price, or at all.
 
There is no current public market for our common stock, nor do we expect a public market to develop for our common stock. It will, therefore, be difficult for you to sell your shares promptly, or at all. In addition, the price received for any shares sold is likely to be less than the proportionate value of the assets we own. Therefore, you should purchase the shares only as a long-term investment. We do not know if we will ever apply to list our shares on a national securities exchange or over-the-counter market, or, if we do apply for listing, when such application would be made or whether it would be accepted. If our shares are listed, we cannot assure you a public trading market will develop. We cannot assure you that the price you would receive in a sale on a national securities exchange or over-the-counter market would be representative of the value of the assets we own or that it would equal or exceed the amount you paid for the shares. If our common stock is not listed on a national securities exchange or over-the-counter market by December 31, 2017, our charter


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requires that we seek stockholder approval of the liquidation of the company. We expect to list our shares or liquidate by December 31, 2017.
 
We cannot assure you of our ability to make the distributions to our stockholders required in order for us to qualify as a REIT in the future.
 
We intend to make regular distributions to our stockholders equal to at least 90% of our annual REIT taxable income. This, along with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code. We have not established a minimum distribution payment level and our ability to make distributions might be limited by the risk factors described in this prospectus. All distributions are made at the discretion of our board of directors and depend on our earnings, our financial condition, maintenance of our REIT status, available cash resources and such other factors as our board of directors may deem relevant from time to time. We cannot assure you that we will have the ability to make distributions to our stockholders in the future or we may pay distributions that represent a return of capital. For the purpose of determining taxable income, we may be required to accrue items treated as earned for tax purposes, but that we have not yet received. In addition, we may be required not to accrue as expenses for tax purposes some items that actually have been paid or some of our deductions might be disallowed by the Internal Revenue Service. Furthermore, distributions to our stockholders are subordinate to the payment of our debts and obligations. As a result, we could have taxable income in excess of funds available to distribute to our stockholders. If that occurs, we may have to borrow funds or liquidate some of our assets to make sufficient distributions and maintain our status as a REIT. We may make distributions from sources other than cash flow from operations, including offering proceeds. Any borrowings would have the effect of decreasing amounts available for future distributions. See “Distribution Policy.”
 
If we pay distributions from sources other than our cash flow from operations, we will have less funds available for investments, and your overall return may be reduced.
 
Our organizational documents permit us to make distributions from any source. Our organizational documents do not limit the amount of net proceeds from this offering that may be used to fund distributions. If we fund distributions from financings or the net proceeds from this offering, we will have less funds available for investments, and your overall return may be reduced. Further, to the extent distributions exceed cash flow from operations, a stockholder’s basis in our common stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize capital gain. See “Distribution Policy.”
 
If there are delays in investing the proceeds of this offering, then receipts from investments and our investment returns may be lower than anticipated.
 
We may delay investing the proceeds from this offering and, therefore, delay the receipt of any returns from such investments, due to our inability to find suitable investments. Until we invest the proceeds, our investment returns on offering proceeds will be limited to the rates of return available on short-term, highly liquid investments that provide appropriate safety of principal. We expect these rates of return, which affect the amount of cash available to make distributions to stockholders, to be lower than returns we would receive for investments in mortgage loans. See “Our Operating Policies and Investment Policies.”
 
The business and financial due diligence of CMR was conducted by our dealer-manager, which is our affiliate.
 
Our dealer-manager is our affiliate and a wholly-owned subsidiary of our advisor. Our Chief Executive Officer, Mr. Parriott is an officer and manager of our dealer-manager. As a result, you should not consider the dealer-manager’s due diligence investigation of us to be an independent review. The dealer-manager’s due diligence review may not have been as thorough as an investigation typically conducted by an unaffiliated third-party underwriter in connection with a securities offering, and might not have uncovered facts that would be important to a potential investor. See “Conflicts of Interest.”


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Our share redemption plan, which is the only current source of liquidity for our stockholders, may be amended or suspended at any time, leaving our stockholders unable to sell their shares.
 
There is no current public market for our common stock, nor do we expect a public market to develop for our common stock. To provide a limited amount of liquidity to our stockholders, we have adopted a share redemption plan, pursuant to which we may redeem shares of our common stock from our stockholders according to the terms thereof. However, all redemptions are in our sole and absolute discretion, and we are under to no obligation to redeem any shares of common stock under the redemption plan, and our board of directors may elect to amend or suspend the plan at any time. If the redemption plan is amended or suspended, this limited source of liquidity will no longer be available to our stockholders. See “Share Redemption Plan.”
 
Certain amounts of the proceeds of this offering will be paid to our affiliates.
 
The dealer-manager, who is our affiliate, will be paid sales commissions equal to 7.0% of the proceeds of this offering, plus dealer-manager fees of 3.0% of such proceeds. The amount of these fees was not determined on an arm’s-length basis. The dealer-manager will not receive any fees related to the sale of common stock pursuant to our DRIP. See “Estimated Use of Proceeds.”
 
We established the offering price on an arbitrary basis, so the price bears no relationship to any established valuation criteria.
 
Our board of directors determined the offering price of the shares of common stock and such price bears no relationship to any established criteria for valuing issued or outstanding shares. Our offering price may not be indicative of the price at which our shares would trade if they were listed on an exchange or actively traded by brokers, nor of the proceeds that a stockholder would receive if we were liquidated or dissolved. See “The Offering.”
 
The risk that we will not be able to accomplish our business objectives will increase if only the minimum number of shares are sold in this offering.
 
Our common stock is being offered on a “best efforts” basis and no underwriter, broker-dealer or other person has agreed to purchase any shares of our common stock offered hereby. This is the third public offering managed by our dealer-manager, or its predecessor, and it may not be able to solicit sufficient investors to sell the maximum number of shares we are offering. We are subject to the risk that all of the shares of our common stock offered hereby may not be sold. If we are only able to sell the minimum offering amount, we expect that we will only be able to make a minimal number of investments, the actual number of which cannot be determined because the amount of each investment that we make will depend on a number of factors, including with respect to a loan, the size of the loan, the quality of the collateral and the number of other lenders. As a result, we would have less diversification in terms of the number and types of investments we own and the geographic regions in which our investments are located. If our investments are not diversified, our operations and ability to pay distributions would be dependent on the success of a small number of investments. Therefore, if we are only able to sell a small number of shares in this offering, we may lack a diversified portfolio of investments, and our fixed operating expenses such as general and administrative expenses (as a percentage of gross income) would be higher and we would not achieve the benefits associated with a large, diversified mortgage portfolio.
 
Investors who invest in us at the beginning of our offering may realize a lower rate of return than later investors.
 
Because we have not identified any probable investments, there can be no assurances as to when we will begin to generate sufficient cash flow and make distributions. As a result, investors who invest in us before we sell the minimum number of shares of common stock or before we commence investing activities or generate significant cash flow may realize a lower rate of return than later investors. We expect to have little, if any, cash flow from operations available for distribution until we make investments.


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Your interest may be diluted if we issue additional shares.
 
Investors in this offering do not have preemptive rights to any shares issued by us in the future. Therefore, investors purchasing shares in this offering may experience dilution of their equity investment if we:
 
  •  sell shares in this offering or sell additional common shares in the future, whether publicly or privately;
 
  •  sell securities that are convertible into common shares;
 
  •  issue restricted shares to our officers or directors; or
 
  •  issue common stock upon the exercise of options.
 
Your interest may be diluted by the issuance of stock pursuant to our 2010 Stock Incentive Plan.
 
We have reserved 1,000,000 shares of our common stock for issuance to directors and consultants pursuant to the 2010 Stock Incentive Plan. Of this amount, 16,000 shares of restricted stock will be issued to our independent directors as compensation upon the consummation of this offering. Because investors in this offering do not have preemptive rights with respect to any shares we issue in the future, the issuance of shares under the 2010 Stock Incentive Plan will have a dilutive effect on equity investments made in this offering.
 
Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of distributions, may harm the value of our common stock.
 
In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock or common stock. Upon our liquidation, holders of our debt securities and shares of preferred stock, lenders with respect to other borrowings and all of our creditors will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings by us may dilute the holdings of our existing stockholders or reduce the value of our common stock, or both. Our preferred stock, if issued, would have a preference on distributions that could limit our ability to make distributions to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the value of our common stock and diluting their stock holdings in us.
 
Certain provisions of Maryland law and our articles of incorporation and bylaws could hinder, delay or prevent a change in control of CMR.
 
Certain provisions of Maryland law, our articles of incorporation and our bylaws have the effect of discouraging, delaying or preventing transactions that involve an actual or threatened change in control of CMR. These provisions include the following:
 
  •  Number of Directors, Board Vacancies, Term of Office.  Under our bylaws, we have elected to be subject to certain provisions of Maryland law which vest in our board of directors the exclusive right to determine the number of directors and the exclusive right, by the affirmative vote of a majority of the remaining directors, to fill vacancies on the board even if the remaining directors do not constitute a quorum. These provisions of Maryland law, which are applicable even if other provisions of Maryland law or the articles of incorporation or bylaws provide to the contrary, also provide that any director elected to fill a vacancy shall hold office until the next annual meeting of stockholders and until his or her successor is elected and qualified.
 
  •  Limitation on Stockholder-Requested Special Meetings.  Our articles of incorporation and bylaws provide that our stockholders have the right to call a special meeting only upon the written request of stockholders entitled to cast not less than 10% of all the votes entitled to be cast by the stockholders at such meeting.


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  •  Advance Notice Provisions for Stockholder Nominations and Proposals.  Our bylaws require no less than 120 nor more than 150 days advance written notice for stockholders to nominate persons for election as directors at, or to bring other business before, any meeting of stockholders. This bylaw provision limits the ability of stockholders to make nominations of persons for election as directors or to introduce other proposals unless we are notified in a timely manner prior to the meeting.
 
  •  Preferred Stock.  Under our articles of incorporation, our board of directors has authority to issue up to 15 million shares of preferred stock from time to time in one or more series and to establish the terms, preferences and rights of any such series of preferred stock, all without approval of our stockholders. We will not offer preferred stock to a promoter except on the same terms and conditions as that stock is offered to all other existing stockholders or to new stockholders.
 
  •  Ownership Limit.  In order to preserve our status as a REIT under the Internal Revenue Code, our articles of incorporation generally prohibit any single stockholder, or any group of affiliated stockholders, from beneficially owning more than 9.8% of our outstanding common or preferred stock unless our board of directors waives or modifies this ownership limit.
 
See “Certain Provisions of Maryland Law and of Our Articles of Incorporation and Bylaws.”
 
Restrictions on ownership of a controlling percentage of our capital stock might limit your opportunity to receive a premium on our stock.
 
For the purpose of preserving our REIT qualification, our articles of incorporation prohibit direct or constructive ownership by any person of more than 9.8% of the lesser of the total number or value of the outstanding shares of our common stock or more than 9.8% of the outstanding shares of our preferred stock. The constructive ownership rules in our articles of incorporation are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of the outstanding stock by an individual or entity could cause that individual or entity to own constructively in excess of 9.8% of the outstanding stock, and thus be subject to the ownership limit in our articles of incorporation. Any attempt to own or transfer shares of our common or preferred stock in excess of the ownership limit without the consent of our board of directors will be void, and will result in the shares being transferred by operation of law to a charitable trust. These provisions might inhibit market activity and the resulting opportunity for our stockholders to receive a premium for their shares that might otherwise exist if any person were to attempt to assemble a block of shares of our stock in excess of the number of shares permitted under our articles of incorporation. See “U.S. Federal Income Tax Considerations.”
 
Distribution payments are subordinate to payments on debt.
 
Distributions to our stockholders are subordinate to the payment of our debts and obligations. If we have insufficient funds to pay our debts and obligations, distributions to stockholders may be suspended pending the payment of such debts and obligations. See “Distribution Policy.” If we are required to suspend distributions to our stockholders, we would be unable to distribute annually at least 90% of our REIT taxable income to our stockholders and may fail to qualify for taxation as a REIT. If we fail to qualify as a REIT for any taxable year after electing REIT status, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. In addition, we will be subject to federal income tax on our taxable income at corporate rates. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax. For a discussion of the REIT qualification tests and other considerations relating to our election to be taxed as REIT, see “U.S. Federal Income Tax Considerations.”


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There may be significant fluctuations in our quarterly results, which makes it difficult to anticipate our performance from quarter to quarter.
 
We expect our quarterly operating results to fluctuate based on a number of factors, including, among others:
 
  •  interest rate changes;
 
  •  the volume and timing of our acquisitions or investments;
 
  •  the recognitions of gains or losses on sales;
 
  •  the level of competition in our market; and
 
  •  general economic conditions, especially those which affect the commercial mortgage market and real estate development.
 
As a result of these factors, results for any quarter should not be relied upon as being indicative of performance in future quarters.
 
Risks Related to Our Business and Operations
 
A prolonged economic slowdown, lengthy or severe recession or significant increase in interest rates could harm our business.
 
The risks associated with our business are more acute during periods of economic slowdown or recession because these periods are typically accompanied by illiquid credit markets and declining real estate values. As a lender willing to invest in riskier loans, rates of delinquencies, foreclosures and losses on our loans could be higher than those generally experienced by traditional commercial lenders during periods of economic slowdown or recession. We believe that problems in the sub-prime residential mortgage market have adversely affected the general economy and the availability of funds. Furthermore, problems experienced in U.S. credit markets since the summer of 2007 have reduced the availability of credit for many prospective borrowers. These problems may make it more difficult for our borrowers to obtain the anticipated re-financing necessary to pay our loans, which are typically balloon loans for which the entire principal amount is payable at maturity. Thus, an extended period of illiquidity in the credit markets could result in a material number of our loans that are not paid back on time. Any sustained period of increased delinquencies, defaults or foreclosures will likely have an adverse affect upon our ability to make mortgage loans, which could significantly harm our business, financial condition, liquidity and results of operations.
 
Continued volatile market conditions could harm our ability to acquire mortgage loans and financing to implement our investment strategy, which could have a material adverse effect on our business, results of operations and our ability to make distributions to you.
 
Further disruptions in the capital and credit markets could adversely affect our ability to acquire mortgage loans and financing, which could negatively impact our ability to implement our investment strategy. Our access to such financing could be limited to the extent that banks and other financial institutions continue to experience shortages of capital and liquidity.
 
If these disruptions in the capital and credit markets continue for a lengthy period, our access to liquidity could be significantly impacted. Prolonged disruptions could result in us taking measures to conserve cash until the markets stabilize or until funding for our business needs could be arranged. Such measures could include deferring investments, reducing or eliminating the number of shares redeemed under our share redemption program and reducing or eliminating distributions we make to you.
 
We believe the risks associated with our business are more severe during periods of economic slowdown or recession if these periods are accompanied by declining values in real estate. For example, a prolonged recession could negatively impact our investments as a result of defaults under our mortgage loans, lower demand for new homes, generally lower demand for rentable space, as well as potential oversupply of new


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homes and/or rentable space which could lead to increased concessions, tenant improvement expenditures or reduced prices and/or rental rates to maintain occupancies.
 
Declining real estate values would also likely reduce the level of new loan originations, since borrowers often use increases in the value of their existing properties to support the purchase of or investment in additional properties. Borrowers may also be less able to pay principal and interest on our loans if the real estate economy further weakens. Further, declining real estate values significantly increase the likelihood that we will incur losses on our mortgage loans in the event of default because the value of our collateral may be insufficient to cover our basis in the investment.
 
Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from investments in our portfolio as well as our ability to originate and/or sell loans. In addition, to the extent that the current volatile market conditions continue or worsen, they may negatively impact our ability to both acquire and potentially sell any mortgage loans we acquire at a price and with terms acceptable to us.
 
Recent disruptions in the financial markets and deteriorating economic conditions could adversely affect the values of our investments and our ongoing results of operations.
 
Turmoil in the capital markets has constrained equity and debt capital available for investment in commercial real estate, resulting in fewer buyers seeking to acquire commercial properties and consequent reductions in property values. Furthermore, the current state of the economy and the implications of future potential weakening of the economy in general and in the Las Vegas, Nevada area in particular, may negatively impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and declining values in our portfolio. The current downturn may impact our borrowers’ business operations directly, reducing their ability to repay the loans to us.
 
Liquidity in the global credit market has been significantly contracted by market disruptions, making it costly to obtain new lines of credit or refinance existing debt, assuming debt financing is available at all.
 
The occurrence of these events could have the following negative effects on us:
 
  •  the values of our investments could decrease below the amounts we paid for the investments;
 
  •  revenues from our loans could decrease due to borrower defaults and further declining property values; and
 
  •  we may not be able to obtain debt financing to finance our investments or refinance existing indebtedness on attractive terms or at all.
 
These factors could impair our ability to make distributions to our stockholders and decrease the value of your investment in us.
 
A prolonged recessionary economic environment in the Las Vegas, Nevada area could result in continued market illiquidity and further declining real estate values, which could have a material adverse effect on our business and results of operations and our ability to make distributions to you.
 
We expect that up to 20% of our investments will be concentrated in the Las Vegas, Nevada area, which has suffered severely from the recessionary economic environment and has experienced some of the highest delinquency and foreclosure rates in the United States resulting in market illiquidity and sharply declining real estate values. The Las Vegas economy is heavily dependent on the hotel, gaming and convention industry, which employs over one-quarter of Southern Nevada’s work force. In an economic downturn, consumer spending on discretionary items such as luxury goods, travel, gaming and other leisure activities such as recreation and spa activities generally decline as a result of lower consumer confidence levels which may result in disproportionately large reductions in expenditures on such items and activities. The reduced demand for discretionary items has had a disproportionate impact on the Las Vegas economy. A worsening of economic conditions in Las Vegas could have an adverse effect on our business, including reducing the


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demand for new financings, limiting the ability of borrowers to pay financed amounts and impairing the value of our collateral.
 
A prior program advised by our advisor and whose loans were originated by CM Capital Services, our loan originator, has been materially and adversely impacted by the disruptions in the real estate and credit markets and has experienced extremely high default and foreclosure rates.
 
Desert Capital is a public non-traded REIT advised by CM Group. Desert Capital was formed in December 2003 as a REIT specializing in financing of short-term mortgage loans. Desert Capital generally invested in 12- to 18- month, first and second lien mortgage loans, consisting of acquisition and development loans and construction loans to developers and builders of residential and commercial property. Due to market conditions since the fourth quarter of 2007, most of Desert Capital’s borrowers have defaulted on their loans owing to Desert Capital, which has caused Desert Capital to foreclose on almost all of the mortgage loans in its portfolio. Its first public offering commenced in July 2004 and its second public offering commenced in March 2006. Desert Capital is not currently conducting an offering or actively making investments. During 2009, Desert Capital foreclosed on properties securing 26 mortgage loans with an aggregate original principal amount of $70.2 million. These loans were impaired prior to foreclosure, so that the amount recorded on its balance sheet as real estate owned or real estate investments as a result of these foreclosures was $47.0 million. Of its remaining mortgage investments, all but $4.6 million with a carrying balance of $4.0 million were non-performing at June 30, 2010. All of Desert Capital’s loans were originated by CM Capital Services, the originator and servicer of our acquisition, development, construction and commercial loans. The default rate for loans originated by CM Capital Services in 2008 and 2007 was 87.54% and 86.11%, respectively. Desert Capital suspended payment of distributions in October 2008.
 
In addition, as a result of the increase in non-performing loans and the declining value of its real estate investments during 2008 and 2009, Desert Capital was unable to comply with the tangible net worth covenant contained in its $30.9 million junior subordinated notes causing an event of default to occur. In July 2009, the holders of its trust preferred securities that are backed by the junior subordinated notes accelerated the principal amount of the junior subordinated notes causing it to become immediately due and payable. In March 2010, Desert Capital entered into a standstill agreement with respect to its junior subordinated notes pursuant to which the holders of the trust preferred securities agreed not to exercise any rights or remedies to collect the debt provided that Desert Capital continues to make the quarterly interest payments due under the junior subordinated notes. To the extent Desert Capital is unable to comply with the terms of the standstill agreement, the holders of the trust preferred securities could exercise their rights and remedies to collect the debt, which would have a material adverse effect on Desert Capital. While our investment strategy is different than Desert Capital’s and includes investments in non-agency residential mortgage loans, real property and real estate-related debt and equity securities, we do intend to invest in 12- to 18- month, first lien mortgage loans, consisting of acquisition and development loans and construction loans to developers and builders of residential and commercial property that are similar to those invested in by Desert Capital. Because we intend to invest in loans similar to those in which Desert Capital invested, including, without limitation, loans originated by the same loan originator that originated loans for Desert Capital, continued and/or future market disruptions could adversely affect our business, results of operations and our ability to make distributions to you in the same way that such disruptions affected Desert Capital.
 
We have not yet identified any specific assets to purchase with the net proceeds of this offering and may be unable to invest a significant portion of such net proceeds on acceptable terms or at all, which could harm our financial condition and operating results.
 
As of the date of this prospectus, we are a blind pool REIT and have not identified any specific assets which we intend to acquire with the proceeds from this offering. As a result, you will not be able to evaluate the economic merits of any investments we make with the net proceeds of this offering prior to the purchase of your shares. You must rely on our and our advisor’s ability to evaluate our investment opportunities.
 
Until we identify and acquire real estate-related assets consistent with our investment guidelines, we intend temporarily to invest the balance of the net proceeds of this offering in readily marketable interest-bearing assets consistent with our intention to qualify as a REIT. We cannot assure you that we will be able to identify mortgage loans that meet our investment guidelines or that any investment that we make will


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produce a positive return on our investment. We may be unable to invest the net proceeds of this offering on acceptable terms or at all.
 
Defaults on the mortgage loans we expect to fund or acquire may reduce the value of our investment portfolio and may harm our results of operations.
 
The deterioration of the market for home mortgage loans and credit markets generally has had a detrimental effect on the ability of developers we expect to be our borrowers to sell properties that will be securing some of our loans. As a lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutions, the default rate on mortgage loans made by us could be higher than that of the real estate industry generally.
 
We intend to invest in uninsured and non-investment grade mortgage loans as part of our investment strategy. In order to grow our business, we may also invest in loans to borrowers who have a higher risk of not being able to repay their obligations on a timely basis. While holding these loans, we are subject to risks of borrower defaults, bankruptcies, fraud, losses and special hazard losses that are not covered by standard hazard insurance. For example, we do not require borrowers to obtain terrorism insurance. In the event of any default under mortgage loans held by us, we bear the risk of loss of principal and non-payment of interest and fees to the extent we are unable to sell or refinance the underlying property providing for mortgage collateral for an amount equal to the amount of the unpaid obligation. In addition, our attempts to foreclose on the underlying property may be subject to the legal impediments, including borrower bankruptcies, which could substantially delay our ability to sell the property. If a borrower does not repay its mortgage loan, we will incur legal and other costs related to any foreclosure or attempted enforcement of a guaranty, which costs may adversely impact our results of operations. Delays in the sale of property could affect the price we ultimately receive and during that period we may not be receiving any revenue from the property or the related mortgage loan. The longer we are required to hold the property, the greater the impact on our revenues. To the extent we suffer substantial losses with respect to our investments in mortgage loans, the value of our company and our common stock may decline. See “Business — Investment Strategy.”
 
If we become the owner of real estate as a result of a workout or foreclosure of a loan, we may incur additional obligations, which may reduce the amount of funds available for distribution to our stockholders.
 
Acquiring a property at a foreclosure sale may involve significant costs. If we foreclose on the collateral, we expect to obtain the services of a real estate broker and pay the broker’s commission in connection with the sale of the property. We may incur substantial legal fees and court costs in acquiring a property through contested foreclosure or bankruptcy proceedings. In addition, significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges, must be made on any property we own regardless of whether the property is producing any income.
 
Because the assets underlying the loans that we expect to acquire might experience periods of illiquidity, we might be prevented from liquidating our collateral at opportune times and prices, and our capital available to acquire new investments will be reduced.
 
If we are required to foreclose on the real estate securing our mortgage loans because of a default by the borrower in the payment of its indebtedness, we bear the risk of being unable to dispose of our collateral at advantageous times and prices or in a timely manner because real estate assets generally experience periods of illiquidity. The lack of liquidity might result from general economic conditions impacting the real estate and credit markets, low occupancy rates, high operating expenses, the early stage of development, the absence of a willing buyer or an established market for these assets, as well as legal or contractual restrictions on resale. If we are unable to sell our collateral at opportune times, our capital available to acquire new investments will be reduced and our ability to generate interest revenue will be limited. See “Business — Our Investment Types.”


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We expect to invest in non-investment grade loans, which have a higher risk of payment default, thereby increasing the risk to our revenues.
 
Many of the loans in which we expect to invest are non-investment grade loans made to borrowers with limited credit histories and are riskier than investment-grade loans because there is an increased possibility that the borrower will not be able to repay the principal at maturity. We expect that non-investment grade loans will comprise a majority of our investment portfolio. If the borrowers are unable to repay the loan at maturity, our revenues will decrease. See “Business — Investment Strategy.” If current economic trends impacting the real estate market continue, many of our borrowers may have difficulty repaying the principal of their loan at maturity.
 
A majority of our mortgage loan investments will be balloon mortgage loans, which have a higher risk of payment default than amortizing loans, thereby increasing the risk to our revenues.
 
Balloon payment loans, which typically provide for the repayment of all or substantially all of the principal at the maturity of the loan, are riskier than amortizing loans because the borrower’s repayment frequently depends on its ability to refinance the loan or sell the property at the maturity of the loan. We expect balloon mortgage loans to comprise a majority of our mortgage loan investment portfolio. Due to market conditions as of the date of this prospectus, borrowers typically are having more difficulty refinancing their loan or selling the property. If the borrowers are unable to refinance the loan or sell the property when the balloon payment is due, our revenues will decrease, and we may choose to initiate foreclosure proceedings, which are costly and involve risks. Balloon payment loans do not generate principal repayment to us through monthly repayment. See “Business — Balloon Payments.”
 
Because a substantial majority of our loans are expected to be interest-carry and non-amortizing, we may not realize that a loan is non-performing until the maturity date, and therefore may not make proper provision for loan losses or timely prepare a strategy for the non-performing loan, which may adversely affect our results of operations.
 
Up to 80% of the loans we make are expected to be interest-carry, which means that the loan balance includes an interest reserve amount. They are also expected to be non-amortizing, which means that no payment of principal is due until the maturity date. Because we have loaned the money to make the interest payments, and no principal payments are due during the term of the loan, we may not be able to determine that the borrower will be incapable of making the final payment until it is due at maturity. If we are slow to identify a non-performing loan, we will not be able to act as quickly to protect the collateral and otherwise minimize any loss due to the non-performing loan. Our delayed action may result in a material adverse effect on our results of operations if we incur a loss on the loan. We also may ultimately have more non-performing loans than we appear to at any given time because of our delay in identifying them.
 
Decreases in the value of the property underlying our mortgage loans might decrease the value of our assets.
 
The mortgage loans in which we plan to invest are secured by underlying real property interests. To the extent that the value of the property underlying our mortgage loans decreases, our security might be impaired, which might decrease the value of our assets. Since the fourth quarter of 2007, property values have been negatively impacted by the housing slowdown.
 
Commercial loans generally involve a greater risk of loss than residential loans. If a borrower defaults on its payment obligations to us, our results of operations will be harmed.
 
Commercial loans are considered to involve a higher degree of risk than residential loans because of a variety of factors, including generally larger loan balances, dependency for repayment on successful operation of the mortgaged property and tenant businesses operating on the property, and loan terms that include amortization schedules longer than the stated maturity which provide for balloon payments at stated maturity rather than periodic principal payments. The larger the number of risky loans we make, the greater the risk that borrowers will default and our results of operations will be harmed.


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We expect that a significant portion of the mortgage loans invested in by us will be either acquisition or development mortgage loans, which are highly speculative.
 
We expect that a significant portion of our assets will be mortgage loans for the acquisition or development of real estate, which will initially be secured by unimproved land. These types of loans are highly speculative, because:
 
  •  until disposition, the property does not generate separate income for the borrower to make loan payments;
 
  •  the completion of planned development may require additional development financing by the borrower, which may not be available;
 
  •  depending on the velocity or amount of lot sales to homebuilders, demand for lots may decrease causing the price of the lots to decrease;
 
  •  depending on the velocity or amount of lot sales to developers or homebuilders, demand for land may decrease causing the price of the land to decrease;
 
  •  there is no assurance that we will be able to sell unimproved land promptly if we are forced to foreclose upon it; and
 
  •  lot sale contracts are generally not “specific performance” contracts, and the borrower may have no recourse if a homebuilder elects not to purchase lots.
 
If in fact the land is not developed, the borrower may not be able to refinance the loan and, therefore, may not be able to make the balloon payment when due. If a borrower defaults and we foreclose on the collateral, we may not be able to sell the collateral for the amount owed to us by the borrower. In calculating our loan-to-value ratios for the purpose of determining maximum borrowing capacity, we use the estimated value of the property at the time of completion of the project, which increases the risk that, if we foreclose on the collateral before it is fully developed, we may not be able to sell the collateral for the amount owed to us by the borrower. See “Business — General.”
 
We expect to invest in construction loans, which are subject to the risk of failure of completion or failure of the subsequent sale of the completed project.
 
We expect that some of our assets will be mortgage loans for the construction of homes or commercial buildings on the real property securing the loans. These types of loans are subject to the risk that the home or building is not completed, or that the completed home or building is not sold or leased, prior to the maturity of our loan. In either case, if the borrower ultimately defaults on the loan, we may be required to find another contractor to complete the project and/or sell the finished project. If we are unable to complete the project or sell the completed project, we could lose a substantial portion of the principal of the applicable loan and our revenues will decline. See “Business — General.”
 
We have limited recourse with respect to non-agency residential mortgage loans that we make to foreign nationals.
 
Some of the non-agency residential mortgage loans we make may be to foreign nationals whose primary residence is outside the United States. If these individuals default on their mortgage loans, we may have limited recourse against them, as they may be difficult to locate and we may be unable to serve legal process on them.
 
A fire or other accident could occur in a single condo or hotel room that causes the entire building to be uninhabitable.
 
We experience greater risks in the condo/hotel mortgage loans that we provide because there is a higher likelihood of an accident occurring in a building containing numerous individuals. A fire or other accident in a single unit could in turn cause the entire building to be uninhabitable. Even if there is insurance on the building, it may not be enough to cover all of the losses as a result of a fire or other accident.


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Some of our non-agency residential mortgage loans may be made to individuals for a second home, thereby increasing the risk that our mortgage loan will not be paid.
 
We expect to make non-agency residential mortgage loans to some borrowers for their second home. Those borrowers may experience economic hardship that causes them to be unable to make the mortgage payment on both of their homes. As a result, they may stop making payments on the non-agency residential mortgage loan that we have extended to them and instead only make payments on their primary home. Their mortgage loan with us may therefore become non-performing, and our results of operations would be adversely affected.
 
Borrowers may use their property for rental purposes, making enforcement of the mortgage loan more difficult.
 
We allow borrowers to use their property for rental purposes. If that were to occur, we would have to rely on an unknown party to make their rental payments each month. If they do not make their payments, then our borrower in turn may stop making payments on the non-agency residential mortgage loan. Alternatively, the renter may timely pay the borrower, and the borrower may simply decide to use the rental income for purposes other than paying the mortgage loan he has with us. We may have difficulty enforcing our rights in this situation.
 
We may be subject to losses due to fraudulent and negligent acts on the part of mortgage loan applicants, mortgage brokers, other vendors and our employees.
 
When our advisor makes decisions regarding mortgage loans in which we will invest, the advisor will rely on information supplied by third parties, including the information contained in the loan application made by the applicant, property appraisal, title information and employment and income documentation. If a third party misrepresents any of this information and we do not discover the misrepresentation prior to funding the mortgage loan, the value of the mortgage loan may be significantly lower than anticipated. As a practical matter, we generally bear the risk of loss associated with the misrepresentation whether it is made by the loan applicant, the mortgage broker, another third party or one of our employees. A mortgage loan that is subject to a material misrepresentation is typically unsaleable or subject to repurchase if it is sold prior to detection of the misrepresentation. Although we may have rights against the person, or entities that made, or knew about, the misrepresentation, those persons and entities may be difficult to locate, and it is often difficult to collect from them any monetary losses that we have suffered.
 
Properties securing our non-agency residential mortgage loans may have construction problems, which causes the borrower to move out and default on his or her mortgage loan.
 
A property securing one of our non-agency residential mortgage loans may experience some type of construction problem that causes the borrower to leave the residence. If this occurs, the borrower may stop making payments on his mortgage loan, and the property could go into foreclosure, decreasing our cash flow and result of operations.
 
Our charter documents do not require a particular allocation of assets in our portfolio. Therefore, our investments may not be diversified among the various categories we are targeting. Any lack of diversity in our investments could increase the impact of defaults on our results of operations.
 
We expect that after we have invested the proceeds of this offering, mortgage loans will constitute the majority of our portfolio, broken down among acquisition loans, development loans, construction loans, and commercial property loans. We also expect that non-agency residential mortgage loans will constitute a part of our portfolio. Our charter documents do not require a particular allocation of assets in our portfolio. However, our advisor has discretion to allocate our assets among these and our other real estate-related investment categories in whatever percentages it determines is in our best interest. Our advisor may not achieve our targeted allocation, and our assets may be concentrated in one of these types of loans or other investment types. If our assets are not diversified among the categories of investments in which we intend to invest, we


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may be subject to increased risk if the category in which our assets are concentrated experiences disproportionate economic losses. See “Business — General.”
 
We rely on information provided to us by third parties which we cannot always verify in making our investment decisions. If any of these third parties makes an error or misrepresents information to us, we may make investments in assets that do not meet our standard investment criteria.
 
Our decisions about which mortgage loans to fund depend on several factors, such as a third party appraisal of the property involved and our analysis of the financial position of the borrower. If the appraiser makes an error in the appraisal, or the borrower or its accountant makes an error or a misrepresentation in the information provided to us, we will make our decision based on faulty information, which may lead us to invest in an asset which is not within our standard investment criteria. If such a mistake or misrepresentation leads us to make a loan to a higher-risk borrower than our typical borrowers, we may suffer an increased risk of default on the loan, and if in fact the loan is not repaid, our revenues will decline.
 
As a part of our loan underwriting criteria we may use an “as-if-developed” value of a property.
 
Many of our appraisals are prepared on an as-if developed basis, which approximates the post-construction value of the collateralized property assuming such property is developed. As-if-developed values on raw land loans or acquisition and development loans often dramatically exceed the immediate sales value and may include anticipated zoning changes and successful development by the purchaser upon which development is dependent on availability of financing. Such appraisals also do not account for significant delays or uncertainties regarding the completion of construction, which may be caused by cost overruns, permitting requirements, environmental issues and other material information. If the loan goes into default prior to completion of the project, the market value of the property may be substantially less than the appraised value. As a result, there may be less security than anticipated at the time the loan was originally made. If there is less security and a default occurs, we may not recover the full amount of our loan, thus reducing the amount of funds available to distribute.
 
New and proposed legislation and court rulings with respect to foreclosures and other lending practices could restrict our ability to produce mortgages loans, which could harm our revenues and profitability.
 
In response to the current high level of mortgage foreclosures existing in the United States, several states and cities are considering or have enacted laws, regulations or ordinances aimed at further regulating and in some cases restricting the ability of mortgage lenders and servicers to foreclose upon the real estate collateral securing the mortgage loan. The U.S. government is also considering legislative and regulatory proposals in this regard. Such new requirements may delay, restrict or increase the expense of foreclosing delinquent mortgage loans that we service. Continued enactment of such requirements could increase our compliance costs, reduce our fee income and inhibit our ability to realize upon collateral securing loans we own, all of which could harm our revenues, profitability and financial condition.
 
The mortgage origination business of many financial services firms is subject to special litigation and regulatory risks.
 
The laws and regulations of the various jurisdictions in which companies in the financial services industry conduct their mortgage lending business are complex, frequently changing and, in some cases, in direct conflict with each other. In particular, this business is subject to various laws, regulations and guidance that restrict non-prime loan origination or purchase activities. Some of these laws and regulations provide for assignee liability for warehouse lenders, whole loan buyers and securitization trusts. In addition, the downturn in the U.S. residential real estate market has resulted in increased regulatory scrutiny, and may result in increased complaints and claims, relating to non-prime mortgage origination practices, and further difficulties in the mortgage markets could result in increased exposure to liability, including possible civil and criminal liability, demands for indemnification or loan repurchases from purchasers of such loans (including securitization trusts), class action lawsuits or administrative enforcement actions. Furthermore, loans originated by a broker or other residential mortgage loan originator that is not properly licensed may be void or voidable.


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If the estimates or assumptions we use to value our assets or determine our allowance for loan losses prove to be incorrect, we may be required to write down assets or increase our allowance for loan losses.
 
In connection with the preparation of our financial statements, we are required to use estimates and make various assumptions in determining the fair values of mortgage loans that we carry on our balance sheet, and in determining our allowance for loan losses. These estimates and assumptions are based on a number of factors and considerations, which may include, depending on the particular asset being valued, our experience and expectations concerning discount rates, interest rates, credit spreads, market pricing for sales of similar assets, prepayment rates, servicing fees, rates of delinquencies and defaults on loans and loss recovery rates. A material difference between our estimates and assumptions and our actual experience may require us to write down the value of assets or increase our allowance for loan losses, which could adversely affect our results of operations or financial condition.
 
Our opportunistic commercial property-acquisition strategy involves a higher risk of loss than more conservative investment strategies.
 
Our strategy for acquiring properties may involve the acquisition of properties in markets that are depressed or overbuilt, and/or have high growth potential in real estate lease rates and sale prices. As a result of our investment in these types of markets, we will face increased risks relating to changes in local market conditions and increased competition for similar properties in the same market, as well as increased risks that these markets will not recover and the value of our properties in these markets will not increase, or will decrease, over time. For these and other reasons, we cannot assure you that we will be profitable or that we will realize growth in the value of our real estate properties, and as a result, our ability to make distributions to our stockholders could be affected. Our investment objective of acquiring distressed and undervalued properties involves more risk than comparable real estate programs that employ more conservative investment strategies.
 
We will be subject to risks incident to the ownership of real estate over which we will have no control.
 
An investment in our stock will be subject to certain risks and will depend on many factors generally incident to the ownership of real property over which we will have no control including: the continuing advantages of certain provisions of U.S. federal income tax laws, adverse general economic conditions, possible effects of inflation or deflation, environmental or zoning laws, inability to attract and retain tenants, adverse changes in local factors, such as an excessive supply of space in the area of the real property in which we acquire an interest, a change in the social and economic characteristics of the area, operating expenses which are subject to various contingencies, energy shortages and costs attributable thereto, governmental regulations, various uninsured risks, natural disasters, strikes and other events beyond our control and other factors affecting real estate values and the management capabilities of the on-site property managers.
 
Some of our investments may be dependent on tenants for revenue, and lease terminations could reduce our ability to make distributions to stockholders.
 
The success of some of our real property investments may be materially dependent on the financial stability of our tenants. A default by a significant tenant on its lease payments to us would cause us to lose the revenue associated with such lease and cause us to have to find an alternative source of revenue to meet mortgage payments and prevent a foreclosure if the property is subject to a mortgage. In the event of a tenant default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting our property. If significant leases are terminated, we cannot assure you that we will be able to lease the property for the rent previously received or sell the property without incurring a loss. Additionally, some of the loans that we make generally will relate to real estate. As a result, the borrower’s ability to repay the loan may be dependent on the financial stability of the tenants leasing the related real estate.


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We may be unable to secure funds for future tenant improvements, which could adversely impact our financial condition.
 
When tenants do not renew their leases or otherwise vacate their space, in order to attract replacement tenants, we may be required to expend substantial funds for tenant improvements and tenant refurbishments to the vacated space. If we have insufficient capital reserves, we will have to obtain financing from other sources. We intend to establish capital reserves on a property-by-property basis, as we deem necessary. In addition to any reserves we establish, a lender may require escrow of capital reserves in excess of our established reserves. If these reserves or any reserves otherwise established are designated for other uses or are insufficient to meet our cash needs, we may have to obtain financing from either affiliated or unaffiliated sources to fund our cash requirements. We cannot assure you that sufficient financing will be available or, if available, will be available on economically feasible terms or on terms acceptable to us. Moreover, certain reserves required by lenders may be designated for specific uses and may not be available for capital purposes such as future tenant improvements. Additional borrowing for capital purposes will increase our interest expense, and therefore our financial condition may be adversely affected.
 
Uninsured losses relating to real property or excessively expensive premiums for insurance coverage may adversely affect our financial condition.
 
We will attempt to ensure that all of our properties are adequately insured to cover casualty losses. The nature of the activities at certain properties we may acquire may expose us and our operators to potential liability for personal injuries and, in certain instances, property damage claims. In addition, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential terrorist acts could sharply increase the premiums we pay for coverage against property and casualty claims. Mortgage lenders generally insist that specific coverage against terrorism be purchased by commercial property owners as a condition for providing mortgage, bridge or mezzanine loans. It is uncertain whether such insurance policies will be available, or available at a reasonable cost, which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We cannot assure you that we will have adequate coverage for such losses. In the event that any of our properties incurs a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by the amount of any such uninsured loss. In addition, other than the capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured damaged property, and we cannot assure you that any such sources of funding will be available to us for such purposes in the future. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings.
 
If we set aside insufficient capital reserves, we may be required to defer necessary capital improvements.
 
If we do not have enough reserves for capital to supply needed funds for capital improvements throughout the life of the investment in a property and there is insufficient cash available from our operations, we may be required to defer necessary improvements to the property, which may cause the property to suffer from a greater risk of obsolescence or a decline in value, or a greater risk of decreased cash flow as a result of fewer potential residents being attracted to the property. If this happens, we may not be able to maintain projected rental rates for affected properties, and our results of operations may be negatively impacted.
 
The costs of compliance with environmental laws and other governmental laws and regulations may adversely affect our income and results of operations.
 
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Some of these laws and regulations


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may impose joint and several liability on tenants, owners or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent such property or to use the property as collateral for future borrowing.
 
Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us. We cannot assure you that future laws, ordinances or regulations will not impose any material environmental liability, or that the current environmental condition of our properties will not be affected by the operations of the tenants, by the existing condition of the land, by operations in the vicinity of the properties, such as the presence of underground storage tanks, or by the activities of unrelated third parties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations that we may be required to comply with, and that may subject us to liability in the form of fines or damages for noncompliance.
 
Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results.
 
Under various federal, state and local environmental laws, ordinances and regulations (including those of foreign jurisdictions), a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. The costs of removal or remediation could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could materially adversely affect our business, assets and results of operations.
 
Our costs associated with complying with the Americans with Disabilities Act may adversely affect our results of operations.
 
Any commercial properties we may acquire are generally expected to be subject to the Americans with Disabilities Act of 1990, as amended (Disabilities Act). Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. We will attempt to acquire properties that comply with the Disabilities Act or similar laws of foreign jurisdictions or place the burden on the seller or other third-party, such as a tenant, to ensure compliance with such laws. However, we cannot assure you that we will be able to acquire properties or allocate responsibilities in this manner. If we cannot, our funds used for compliance with these laws may adversely affect our results of operations.
 
The mortgage-backed securities in which we may invest are subject to the risks of the mortgage securities market as a whole and risks of the securitization process.
 
The value of mortgage-backed securities may change due to shifts in the market’s perception of issuers and regulatory or tax changes adversely affecting the mortgage securities market as a whole. Mortgage-backed securities are also subject to several risks created through the securitization process. Subordinate mortgage-backed securities are paid interest only to the extent that there are funds available to make


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payments. To the extent the collateral pool includes delinquent loans, there is a risk that the interest payment on subordinate mortgage-backed securities will not be fully paid. Subordinate mortgage-backed securities are also subject to greater credit risk than those mortgage-backed securities that are more highly rated.
 
Our investments in debt securities and preferred and common equity securities will be subject to the specific risks relating to the particular issuer of the securities and may involve greater risk of loss than secured debt financings.
 
Our investments in debt securities and preferred and common equity securities will involve special risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer. Issuers that are REITs and other real estate companies are subject to the inherent risks associated with real estate and real estate-related investments discussed in this prospectus. Issuers that are debt finance companies are subject to the inherent risks associated with structured financing investments also discussed in this prospectus. Furthermore, debt securities and preferred and common equity securities may involve greater risk of loss than secured debt financings due to a variety of factors, including that such investments are generally unsecured and may also be subordinated to other obligations of the issuer. As a result, investments in debt securities and preferred and common equity securities are subject to risks of (i) limited liquidity in the secondary trading market, (ii) substantial market price volatility resulting from changes in prevailing interest rates, (iii) subordination to the prior claims of banks and other senior lenders to the issuer, (iv) the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the issuer to reinvest redemption proceeds in lower yielding assets, (v) the possibility that earnings of the issuer may be insufficient to meet its debt service and distribution obligations and (vi) the declining creditworthiness and potential for insolvency of the issuer during periods of rising interest rates and economic downturn. These risks may adversely affect the value of outstanding debt securities and preferred and common equity securities and the ability of the issuers thereof to make principal, interest and/or distribution payments to us.
 
Our dependence on the management of other entities in which we invest may adversely affect our business.
 
We will not control the management, investment decisions or operations of the companies in which we may invest. Management of those enterprises may decide to change the nature of their assets, or management may otherwise change in a manner that is not satisfactory to us. We will have no ability to affect these management decisions and we may have only limited ability to dispose of our investments.
 
Many of our investments are illiquid and we may not be able to vary our portfolio in response to changes in economic and other conditions.
 
Certain of the securities that we may purchase in connection with privately negotiated transactions will not be registered under the relevant securities laws, resulting in a prohibition against their transfer, sale, pledge or other disposition except in a transaction that is exempt from the registration requirements of, or is otherwise in accordance with, those laws. Some of the mortgage-backed securities that we may purchase may be traded in private, unregistered transactions and are therefore subject to restrictions on resale or otherwise have no established trading market. The mezzanine and bridge loans we may purchase will be particularly illiquid investments due to their short life, their unsuitability for securitization and the greater difficulty of recoupment in the event of a borrower’s default. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited.
 
Declines in the market values of our investments may adversely affect periodic reported results of operations and credit availability, which may reduce earnings and, in turn, cash available for distribution to our stockholders.
 
A substantial portion of our assets will be classified for accounting purposes as “available-for-sale.” These investments are carried at estimated fair value and temporary changes in the market values of those assets will be directly charged or credited to stockholders’ equity without impacting net income on the income


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statement. Moreover, if we determine that a decline in the estimated fair value of an available-for-sale security below its amortized value is other-than-temporary, we will recognize a loss on that security on the income statement, which will reduce our earnings in the period recognized.
 
A decline in the market value of our assets may adversely affect us particularly in instances where we have borrowed money based on the market value of those assets. If the market value of those assets declines, the lender may require us to post additional collateral to support the loan. If we were unable to post the additional collateral, we may have to sell assets at a time when we might not otherwise choose to do so. A reduction in credit available may reduce our earnings and, in turn, cash available for distribution to stockholders.
 
Further, credit facility providers may require us to maintain a certain amount of cash reserves or to set aside unlevered assets sufficient to maintain a specified liquidity position, which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on equity. In the event that we are unable to meet these contractual obligations, our financial condition could deteriorate rapidly.
 
Market values of our investments may decline for a number of reasons, such as changes in prevailing market rates, increases in defaults, increases in voluntary prepayments for those investments that we have that are subject to prepayment risk, widening of credit spreads and downgrades of ratings of the securities by ratings agencies.
 
Some of our portfolio investments will be carried at estimated fair value as determined by us and, as a result, there may be uncertainty as to the value of these investments.
 
Some of our portfolio investments will be in the form of securities that are recorded at fair value but that have limited liquidity or are not publicly traded. The fair value of securities and other investments that have limited liquidity or are not publicly traded may not be readily determinable. We estimate the fair value of these investments on a quarterly basis. Because such valuations are inherently uncertain, may fluctuate over short periods of time and may be based on numerous estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. The value of our common stock could be adversely affected if our determinations regarding the fair value of these investments are materially higher than the values that we ultimately realize upon their disposal.
 
Delays in restructuring or liquidating non-performing debt-related securities could reduce the return on your investment.
 
Debt-related securities may become non-performing after acquisition for a wide variety of reasons. Such non-performing debt-related investments may require a substantial amount of workout negotiations and/or restructuring, which may entail, among other things, a substantial reduction in the interest rate and a substantial write-down of such loan or asset. However, even if a restructuring is successfully accomplished, upon maturity of such debt-related security, the borrower under the security may not be able to negotiate replacement “takeout” financing to repay the principal amount of the securities owed to us. We may find it necessary or desirable to foreclose on some of the collateral securing one or more of our investments. Intercreditor provisions may substantially interfere with our ability to do so. Even if foreclosure is an option, the foreclosure process can be lengthy and expensive as discussed above.
 
We may be required to repurchase loans that we have sold or to indemnify holders of CDOs we issue.
 
If any of the loans we originate or acquire and sell or securitize do not comply with representations and warranties that we make about certain characteristics of the loans, the borrowers and the underlying properties, we may be required to repurchase those loans (including from a trust vehicle used to facilitate a structured financing of the assets through CDOs) or replace them with substitute loans. In addition, in the case of loans that we have sold instead of retained, we may be required to indemnify persons for losses or expenses incurred as a result of a breach of a representation or warranty. Repurchased loans typically require a significant allocation of working capital to be carried on our books, and our ability to borrow against such


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assets may be limited. Any significant repurchases or indemnification payments could materially and adversely affect our financial condition and operating results.
 
We may not be able to acquire eligible investments for a CDO issuance or may not be able to issue CDO securities on attractive terms, either of which may require us to seek more costly financing for our investments or to liquidate assets.
 
We may use short-term financing arrangements to finance the acquisition of instruments until a sufficient quantity is accumulated, at which time we may refinance these lines through a securitization, such as a CDO issuance, or other long-term financing. As a result, we are subject to the risk that we will not be able to acquire, during the period that our short-term financing is available, a sufficient amount of eligible assets to maximize the efficiency of a CDO issuance. In addition, conditions in the capital markets may make the issuance of CDOs less attractive to us when we have accumulated a sufficient pool of collateral. If we are unable to issue a CDO to finance these assets, we may be required to seek other forms of potentially less attractive financing or otherwise to liquidate the assets. In addition, while we generally will retain the equity component, or below investment grade component, of such CDOs and, therefore, still have exposure to any investments included in such securitizations, our inability to enter into securitization transactions will increase our overall exposure to risks associated with ownership of such investments, including the risk of default under warehouse facilities, bank credit facilities and repurchase agreements discussed above.
 
Interest rate fluctuations may adversely affect the value of our assets.
 
Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Interest rate fluctuations present a variety of risks including the risk of a mismatch between our asset yields and the interest rates on our borrowings, which could reduce the value of our assets and our ability to incur additional indebtedness. In addition, volatile interest rate rates may adversely affect our borrowers’ ability to refinance and therefore repay the loans we made to them. Increases in the general level of interest rates can cause the fair market value of our fixed-rate investments to decline. We expect that some of our investments will be fixed-rate investments and will generally be more negatively affected by such increases than adjustable-rate investments. If unrealized losses in fair value occur, we will have to either reduce current earnings or reduce stockholders’ equity without immediately affecting current earnings. In either case, our net book value will decrease to the extent of any realized or unrealized losses in fair value. See “Our Operating Policies and Investment Policies — Asset/Liability Management Policy.”
 
We might experience reduced net interest income or a loss from holding fixed rate investments during periods of rising interest rates.
 
We may fund our investments with short-term borrowings pursuant to credit agreements with variable interest rates. During periods of rising interest rates, our costs associated with borrowings used to fund the investments are subject to increases while the income we earn from these assets remains substantially fixed. This would reduce and could eliminate the net interest spread between our investments and our borrowings used to make such investments, which would reduce our net interest income and could cause us to suffer a loss.
 
The geographic concentration of the properties underlying our investments may increase our risk of loss.
 
Our asset acquisition policy permits up to 20% of our average invested assets to be invested in any individual submarket. We intend that up to 20% of our investments may be in the Las Vegas, Nevada area. We also expect to invest in Arizona, California, Colorado, Florida, Missouri, Montana, Nevada, New Mexico, Oregon, Texas, Utah, Washington and Wyoming. As a result of our geographic concentration, we may experience more losses than if our investments were diversified. The Las Vegas economy is heavily dependent on the hotel, gaming and convention industry, which employs over one-quarter of Southern Nevada’s work force. In an economic downturn, consumer spending on discretionary items such as luxury goods, travel, gaming and other leisure activities such as recreation and spa activities generally decline as a result of lower


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consumer confidence levels which may result in disproportionately large reductions in expenditures on such items and activities. A worsening of economic conditions in Las Vegas could have an adverse effect on our business, including reducing the demand for new financings, limiting the ability of customers to pay financed amounts and impairing the value of our collateral. See “Our Operating Policies and Investment Policies — Asset Acquisition Policy.”
 
We may not be able to expand our operations into new geographic regions, which may cause us to incur expenses that do not result in increased revenues, which would reduce our results of operations.
 
Our officers have business experience in the Las Vegas, Nevada area. Their relationships with potential borrowers are strongest in Las Vegas. If we expand to other areas, there is no assurance that our officers will be able to develop the business contacts necessary for the business to be successful in such location. If we make capital expenditures to implement an expansion plan, and are not successful and do not generate revenue in the new geographical area, our results of operations may be reduced.
 
Our board of directors may change our operating policies and strategies without prior notice or stockholder approval and such changes could harm our business and results of operations and the value of our common stock.
 
Our board of directors has the authority to modify or waive certain of our current operating policies and our strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results and value of our stock. However, the effects might be to cause harm to our business, results of operations, and the value of our common stock. See “Cautionary Note Regarding Forward-Looking Statements.”
 
We depend on our key personnel, especially our Chairman of the Board, Chief Executive Officer, President and Chief Investment Officer, Todd Parriott, and the loss of any of our key personnel could severely and detrimentally affect our operations.
 
We depend on the diligence, experience and skill of our officers and the people working on behalf of our advisor for the selection, acquisition, structuring and monitoring of our mortgage loan investments and associated borrowings. In particular, we are dependent on Mr. Parriott to perform the advisor’s duties and if he is unable to do so, our results of operations will be negatively impacted. Mr. Parriott is the Chief Executive Officer of our advisor and is our Chairman of the Board, Chief Executive Officer, President and Chief Investment Officer. Mr. Parriott founded us and our advisor, and his continued service is critical to our overall operations and strategic direction. If Mr. Parriott is unable to perform our advisor’s duties, we may not be able to identify the same quantity or quality of investments. In addition, the relationships that Mr. Parriott and other personnel of our advisor have developed with existing and prospective developers of residential and commercial real estate are critically important to our business. We have not entered into employment agreements with our officers; however, Mr. Parriott and Ms. Riffe have entered into employment agreements with our advisor. We do not currently employ personnel dedicated solely to our business, and our officers are free to engage in competitive activities in our industry. The loss of any key person could harm our business, financial condition, cash flow and results of operations. See “Conflicts of Interest — Competition for Management Time.”
 
We depend on CM Capital Services to service our mortgage loans, and termination of our loan servicing agreement with CM Capital Services or poor performance by CM Capital Services could adversely affect our results of operations and our ability to make distributions to our stockholders.
 
We depend on CM Capital Services to service our mortgage loans. We currently do not have a back-up or subservicer to replace CM Capital Services in the event our servicing agreement is terminated or not renewed by either party, or if CM Capital Services performs poorly thereunder. We can not predict how long it would take to replace CM Capital Services as servicer or the cost that we may incur. Many borrowers require notices and reminders to keep their loans current and to prevent delinquencies and foreclosures. A substantial increase in our delinquency rate that results from any delay in locating a replacement servicer or from improper


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servicing could adversely affect the results of our operations. In addition, if we replaced CM Capital Services with a third party, as with any external service provider, we would be subject to the risks associated with inadequate or untimely services.
 
Our joint venture partners could take actions that decrease the value of an investment to us and lower your overall return.
 
We may enter into joint ventures with other CM Group-sponsored programs as well as third parties to acquire assets. Such investments may involve risks not otherwise present with other methods of investment, including, for example, the following risks:
 
  •  that our co-venturer, co-tenant or partner in an investment could become insolvent or bankrupt in which case our investment might become subject to the rights of the co-venturer or partner’s creditors and we may be forced to liquidate our investment before we otherwise would choose to do so;
 
  •  that such co-venturer, co-tenant or partner may at any time have economic or business interests or goals that are or that become inconsistent with our business interests or goals; which may cause us to disagree with our co-venturer or partner as to the best course of action with respect to the investment and which disagreement may not be resolved to our satisfaction; or
 
  •  that such co-venturer, co-tenant or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives which may cause us not to realize the return anticipated from our investment.
 
Any of the above might subject an investment to liabilities in excess of those contemplated and thus reduce our returns on that investment.
 
Moreover, if we determine to foreclose on the collateral underlying a non-performing investment, we may be required to obtain the cooperation of our co-venturer or partner to do so. We anticipate that we will co-invest with our affiliates in certain loans, in which case we expect to enter into an inter-creditor agreement that will define our rights and priority with respect to the underlying collateral. Our inability to foreclose on a property acting alone may cause significant delay in the foreclosure process, in which time the value of the property may decline.
 
Competition might prevent us from acquiring mortgage loans at favorable spreads over our borrowing costs which would harm our results of operations.
 
Our net income depends on our ability to acquire assets at favorable spreads over our borrowing and other operational costs. In acquiring assets, we compete with other REITs, savings and loan associations, banks, insurance companies, mutual funds, other lenders and other entities that purchase mortgage loans, many of which have greater financial resources than we do. As a result, we may not be able to acquire sufficient assets at favorable spreads over our borrowing and other operational costs, which would harm our results of operations. See “Summary — Our Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General.”
 
Insurance will not cover all potential losses on the underlying real properties and the absence thereof may impair our security and harm the value of our assets.
 
We will require that each of the borrowers under the mortgage loans that we acquire obtain comprehensive insurance covering the underlying real property, including liability, fire and extended coverage. There are certain types of losses, however, generally of a catastrophic nature, such as earthquakes, floods and hurricanes, that may be uninsurable or not economically insurable. We will not require borrowers to obtain terrorism insurance. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it infeasible to use insurance proceeds to replace a property if it is damaged or destroyed. Under such circumstances, the insurance proceeds, if any, might not be adequate to restore the economic value of the underlying real property, which might impair our security and decrease the value of our assets. See “Business — Our Investment types.”


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The liquidation of our assets may be delayed, which may delay the distribution of liquidation proceeds to our stockholders.
 
Because most of our loans are expected to be short-term, with 12-24 month maturities, we will generally hold our mortgage loan investments to maturity, except for our investments in non-agency residential mortgage loans. However, during the first ten years after commencement of this offering, to the extent we sell any mortgage loans or property acquired in foreclosure, we intend to use any proceeds from those sales not required to be distributed to stockholders to fund or acquire additional mortgage loans and repay outstanding indebtedness. If our shares are listed on a national securities exchange or over-the-counter market, we may reinvest the proceeds from any sales in mortgage loans for an indefinite period of time.
 
Neither our advisor nor our board of directors may be able to control the timing of the sale of our assets due to market conditions, and we cannot assure you that we will be able to sell our assets so as to return our stockholders’ aggregate invested capital, to generate a profit for the stockholders or to fully satisfy our debt obligations. If we take a purchase money obligation in partial payment of the sales price, we will realize the proceeds of the sale over a period of years. Further, any intended liquidation of our company may be delayed beyond the time of the sale of all of our assets until all mortgage loans expire or are sold, because we may have mortgage loans that have terms that do not expire before all of our assets are sold. See “Distribution Policy” and “Our Operating Policies and Investment Policies — General.”
 
We expect to depend on borrowings to purchase some of our assets and reach our desired amount of leverage. Continued adverse conditions in the capital markets could cause us to fail to obtain sufficient funding on favorable terms or at all, which would limit our ability to acquire assets and harm our results of operations.
 
We expect to depend on short-term borrowings to fund acquisitions of assets and reach our desired amount of leverage, which is 50% of the aggregate cost of our assets. Accordingly, our ability to achieve our investment and leverage objectives depends on our ability to borrow money in sufficient amounts and on favorable terms. We currently do not have a credit facility in place. Due to current market conditions, we cannot assure you if, or when, we will be able to obtain debt financing. We must be able to renew or replace our maturing short-term borrowings on a continuous basis. We expect to depend on a few lenders to provide the primary credit facilities for our investments in mortgage loans. If we cannot establish a credit facility, or once established, if our lenders do not allow us to renew our borrowings or if we cannot replace maturing borrowings on favorable terms or at all, we might have to sell our assets under adverse market conditions, which would harm our results of operations and may result in permanent losses. See “Our Operating Policies and Investment Policies.”
 
Failure to procure adequate capital and funding on favorable terms, or at all, would adversely affect our results and may, in turn, negatively affect our ability to distribute dividends to our stockholders.
 
We do not have any financing arrangements in place as of the date of this prospectus. As a result of the continued weakness in the broader mortgage market and the turmoil in the financial markets, our ability to obtain financing arrangements on acceptable terms, or at all, could be adversely affected. One or more of our prospective lenders may be unwilling or unable to provide us with funding on favorable terms, or at all, which could adversely affect our ability to operate our business in the manner described in this prospectus, to achieve profitability or to pay dividends to stockholders.
 
In addition, to the extent we obtain financing, we will be required to renew or replace our maturing short-term borrowings on a continuous basis to achieve our investment and leverage objectives. Prospective lenders may be unwilling or unable to renew or replace our maturing borrowings on favorable terms, or at all. If we cannot renew or replace maturing borrowings, we may have to sell our mortgage loans under adverse market conditions and may incur permanent capital losses as a result.
 
We cannot assure you that the capital markets will provide a source of financing for our assets. If our strategy is not viable, we will have to find alternative forms of financing for our assets which may not be available. Further, as a REIT, we are required to distribute annually at least 90% of our REIT taxable income,


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determined without regard to the deduction for dividends paid and excluding net capital gain, to our stockholders and are therefore not able to retain significant amounts of our earnings for new investments. We cannot assure you that any, or sufficient, funding or capital will be available to us in the future on terms that are acceptable to us. If we cannot obtain sufficient funding on acceptable terms, there may be a negative impact on our ability to make distributions to our stockholders. Moreover, our ability to grow will be dependent on our ability to procure additional funding. To the extent we are not able to raise additional funds through the issuance of additional equity or borrowings, our growth will be constrained.
 
Our leverage strategy increases the risks of our operations, which could reduce our net income and the amount available for distributions or cause us to suffer a loss.
 
We plan to borrow funds to make investments. We will incur this indebtedness by borrowing against a substantial portion of the market value of our assets. Our total indebtedness, however, is limited at 300% of our net assets (75% of the cost of our assets) by our articles of incorporation and will depend on our and our prospective lender’s estimate of the stability of our portfolio’s cash flow. We face the risk that we might not be able to meet our debt service obligations or a lender’s margin requirements from our income and, to the extent we cannot, we might be forced to liquidate some of our assets at disadvantageous prices. Our use of leverage amplifies the risks associated with other risk factors, which could reduce our net income and the amount available for distributions or cause us to suffer a loss. For example:
 
  •  A majority of our borrowings will be secured by our investments. A decline in the market value of the assets used to secure these debt obligations could limit our ability to borrow or result in lenders requiring us to pledge additional collateral to secure our borrowings. In that situation, we could be required to sell assets under adverse market conditions in order to obtain the additional collateral required by the lender. If these sales are made at prices lower than the carrying value of the assets, we would experience losses.
 
  •  A default under a mortgage loan that constitutes collateral for a loan could also result in an involuntary liquidation of the mortgage loan, including any cross-collateralized assets. This would result in a loss to us of the difference between the value of the mortgage loan upon liquidation and the amount borrowed against the mortgage loan. Distributions to our stockholders are subordinate to the payment of our debts and obligations. If we have insufficient funds to pay our debts and obligations, distributions to stockholders may be suspended pending the payment of such debts and obligations. This could result in our inability to distribute at least 90% of our annual REIT taxable income and possible loss of our status as a REIT.
 
  •  To the extent we are compelled to liquidate qualified REIT assets to repay debts, our compliance with the REIT rules regarding our assets and our sources of income could be negatively affected, which would jeopardize our status as a REIT.
 
  •  If we experience losses as a result of our leverage policy, such losses would reduce the amounts available for distribution to our stockholders.
 
If we fail to qualify as a REIT in any taxable year, and if the limited statutory relief provisions do not apply, we will be subject to U.S. federal income tax, including any applicable alternative minimum tax, and possibly increased state and local taxes, on our taxable income at regular corporate rates. Such taxation will reduce the cash available for distribution by us to our stockholders. Distributions to stockholders in any year in which we fail to qualify as a REIT will not be deductible by us and we will not be required to distribute any amounts to our stockholders. If we fail to qualify as a REIT, to the extent of our current and accumulated earnings and profits, distributions to our stockholders who are individuals generally will be taxable as dividends at preferential rates for the 2010 through 2011 tax years; and, subject to certain limitations of the Internal Revenue Code, corporate stockholders may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, we will also be disqualified from taxation as a REIT for the four taxable years following the year during which we lost our qualification. It is not possible to state whether in all circumstances we will be entitled to statutory relief. See “Business — Financing Strategy” and “Our Operating Policies and Investment Policies — Capital/Liquidity and Leverage Policies.”


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Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
 
When providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan agreements we enter may contain covenants that limit our ability to further mortgage a property or that limit our use of our cash flow from operations. These or other limitations would decrease our operating flexibility and our ability to achieve our operating objectives.
 
We may incur increased borrowing costs related to credit agreements that would harm our results of operations.
 
Any borrowing costs under credit agreements will be generally variable and correspond to short-term interest rates, such as LIBOR or a short-term Treasury index, plus or minus a margin. The margins on these borrowings over or under short-term interest rates may vary depending upon a number of factors, including, without limitation, the movement of interest rates and the availability of financing in the market.
 
We expect that most of our borrowings will be collateralized borrowings under credit agreements. If the interest rates on these credit agreements increase, our results of operations will be harmed and we may have losses. See “Our Operating Policies and Investment Policies.”
 
Possible market developments could cause our lenders to require us to pledge additional assets as collateral. If our assets are insufficient to meet the collateral requirements, we might be compelled to liquidate particular assets at inopportune times and at disadvantageous prices, which may cause us to experience losses.
 
Possible market developments, including a sharp or prolonged rise in interest rates or the current increasing market concern about the value or liquidity of one or more types of the mortgages in which we will invest, might reduce the market value of our portfolio, which might cause our lenders to require additional collateral. Any requirement for additional collateral might compel us to liquidate our assets at inopportune times and at disadvantageous prices, thereby harming our operating results. If we sell assets at prices lower than the carrying value of the assets, we would experience losses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”
 
Terrorist attacks and other acts of violence, civilian unrest or war may affect the markets in which we operate, our operations and our profitability.
 
Terrorist attacks and other acts of violence, civilian unrest or war may negatively affect our operations and your investment in our shares. We may acquire mortgage loans secured by real estate located in areas that are susceptible to attack. In addition, any kind of terrorist activity or violent criminal acts, including terrorist acts against public institutions or buildings or modes of public transportation (including airlines, trains or buses) could have a negative effect on our business. These events may directly impact the value of our assets through damage, destruction, loss or increased security costs. Our borrowers may not be able to obtain insurance against the risk of terrorism because it may not be available or may not be available on terms that are economically feasible. Further, even if they do obtain terrorism insurance, they may not be able to obtain sufficient coverage to fund any losses they may incur. Risks associated with potential acts of terrorism in the areas in which the properties securing our mortgage loans are located could sharply increase the premiums for coverage against property and casualty claims.
 
The consequences of any armed conflict are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or your investment. More generally, any terrorist attack, other act of violence or war, including armed conflicts, could result in increased volatility in, or damage to, the United States and worldwide financial markets and economy. They also could result in a continuation of the current economic uncertainty in the United States or abroad. Our revenues will be dependent upon the return of our investments which may be particularly vulnerable to uncertainty in the local economy. Increased economic volatility could adversely affect our borrowers’ ability to repay their loans to us and our ability to borrow


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money or issue capital stock at acceptable prices and have a material adverse effect on our business, results of operations, cash flows and financial condition and our ability to make distributions to you and the value of your investment.
 
Risks Related to Our Advisor and Conflicts of Interest
 
Our results may suffer as a consequence of a conflict of interest arising out of our relationship with our advisor. We pay our advisor a first-tier management fee based on the average amount of invested assets, and a second-tier management fee based on our portfolio’s performance. This arrangement may lead our advisor to recommend riskier or more speculative investments regardless of their long-term performance in an effort to maximize its compensation.
 
The first-tier management compensation fee we pay our advisor is based on the average amount of assets invested, which provides incentive for our advisor to invest our assets quickly, and possibly in riskier investments regardless of their performance. In addition to its first-tier management fee, our advisor earns a second-tier management fee for each fiscal month, equal to a specified percentage of the amount by which our net income, before deducting the second-tier management fee, net operating losses and certain other items, exceeds a return based on the 10 year U.S. Treasury rate plus 1%. The percentage for this calculation is the weighted average of the following percentages based on our average invested assets for the period:
 
  •  20% for the first $200 million of our average invested assets; and
 
  •  10% of our average invested assets in excess of $200 million.
 
Pursuant to the formula for calculating our advisor’s second-tier management compensation, our advisor shares in our profits but not in our losses. Consequently, as our advisor evaluates different mortgage loans and other investments for our account, there is a risk that our advisor will cause us to assume more risk than is prudent in an attempt to increase its second-tier management fee. Other key criteria related to determining appropriate investments and investment strategies, including the preservation of capital, might be under-weighted if our advisor focuses exclusively or disproportionately on maximizing its income. The advisory agreement was not negotiated at arm’s length and provides for substantial compensation to the advisor. See “The Advisor.”
 
Our advisor has significant influence over our affairs, and might cause us to engage in transactions that are not in our or our stockholders’ best interests.
 
In addition to managing us and having at least two of its designees as members of our board, our advisor provides advice on our operating policies and strategies. Our advisor may also cause us to engage in future transactions with it and its affiliates, subject to the approval of, or guidelines approved by, the independent directors. Our directors, however, rely primarily on information supplied by our advisor in reaching their determinations. Accordingly, our advisor has significant influence over our affairs, and may cause us to engage in transactions which are not in our best interest. See “The Advisor — Conflicts of Interest” and “Conflicts of Interest — Relationship with our Advisor.”
 
Our success will depend on the performance of our advisor and if our advisor or our board of directors makes inadvisable investment or management decisions, our operations could be impaired, potentially causing us to suffer a loss.
 
Our ability to achieve our investment objectives and to pay distributions to our stockholders is dependent upon the performance of our advisor in evaluating potential investments, selecting and negotiating mortgage loans, selecting borrowers, setting mortgage loan terms and determining financing arrangements. You will have no opportunity to evaluate the terms of individual transactions or other economic or financial data concerning our investments. You must rely entirely on the analytical and management abilities of our advisor and the oversight of our board of directors. If our advisor or our board of directors makes inadvisable investment or management decisions, our operations could be impaired, potentially causing us to suffer a loss. See “The Advisor — The Advisory Agreement.”


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Our advisor renders services to other entities, which could reduce the amount of time and effort that our advisor devotes to us.
 
The advisory agreement does not restrict the right of our advisor, any persons working on its behalf or any of its affiliates to carry on their respective businesses, including the rendering of advice to others regarding investments in mortgage loans that would meet our investment criteria. For example, our advisor also advises Desert Capital and CM Equity, and its indirect wholly owned subsidiary, CM Notes Manager, advises CM Notes. Mr. Parriott, our Chief Executive Officer, is also the Chief Executive Officer of Desert Capital, the President of our advisor, and the President of CM Capital Services. In addition, the advisory agreement does not specify a minimum amount of time that our advisor and its personnel must devote to managing our investments. The ability of our advisor to engage in these other business activities on behalf of other clients could reduce the time and effort it spends managing our portfolio to the detriment of our investment returns. See “Conflicts of Interest — Competition for Management Time.” Any failure by our advisor to spend sufficient time and efforts on managing our portfolio and otherwise fulfilling its duties as advisor would violate its fiduciary duty to us and our stockholders.
 
Our advisor will face conflicts of interest relating to the allocation of investment opportunities between us and its other clients, and such conflicts may not be resolved in our favor, meaning our advisor may offer us less attractive investment opportunities, lowering your overall return.
 
We rely on our advisor to identify suitable investment opportunities. CM Notes and other CM Group-sponsored entities will also rely on our advisor for investment opportunities. Many investment opportunities may be suitable for us as well as the other entities, because we may have similar investment objectives. Our advisor could direct attractive investment opportunities to other entities or even make such investments for its own account. Such allocation decisions could result in our investing in mortgage loans that provide less attractive returns, thus reducing the level of distributions we may be able to pay you. See “Conflicts of Interest — Allocation of Investment Opportunities.”
 
Our advisor is the advisor of Desert Capital, the manager of CM Equity and its indirect wholly owned subsidiary is the manager of CM Notes, and may not always be able to allocate investment opportunities on an equitable basis among us and its other clients.
 
Our advisor is the advisor of Desert Capital and the manager of CM Equity and its indirect wholly owned subsidiary is the manager of CM Notes. CM Notes makes investments in assets similar to those we are targeting. Our advisor, through its investment committee, will seek to equitably apportion among us and its other direct and indirect clients all investment opportunities of which it becomes aware. CM Group intends to allocate investments based on factors it deems relevant, such as each client’s underwriting criteria and cash available for investment. However, circumstances may arise, due to availability of capital or other reasons, when it is not possible for us to make an investment allocated to us. We cannot assure you that we will be able to invest in all investment opportunities of which our advisor becomes aware that may be suitable for us on an equitable basis or otherwise.
 
Our executive officers and some of our directors face conflicts of interest related to the positions they hold with our advisor and its affiliates, which could hinder our ability to successfully implement our business strategy and to make distributions to our stockholders.
 
Our executive officers and some of our directors are also part owners, officers and directors of our advisor, our dealer-manager or other affiliated entities. As a result, they owe fiduciary duties to these various entities and their stockholders and members, which fiduciary duties may from time to time conflict with the fiduciary duties that they owe to us and our stockholders. Their loyalties to these other entities could result in actions or inactions that are detrimental to our business, which could hinder the implementation of our business strategy and our investment opportunities. The taking of any such actions or inactions by our executive officers and directors that are detrimental to our business may result in a breach of their fiduciary duties to us and our stockholders. If we do not successfully implement our business strategy, we may be unable to generate the cash needed to make distributions to you and to maintain or increase the value of our assets.


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Our advisor may form other companies that will engage in businesses similar to ours, and may direct profitable investment opportunities to those other clients rather than us. We may not always be able to participate in investment opportunities on an equitable basis between us and such other companies.
 
Our advisor and its affiliates may engage in additional real estate-related activities in the future, including the activities in which we intend to engage, and may form new entities to engage in these activities. If new companies are formed for the purpose of engaging in the businesses in which we engage, CM Group intends to allocate investment opportunities among us, its other clients, and the new entities equitably. However, we cannot assure you that CM Group will allocate investment opportunities equitably. CM Group may direct more profitable investment opportunities to its other clients instead of to us, thereby harming our results of operations.
 
Certain of our directors’ loyalties to Desert Capital (and possibly to future CM Group-sponsored programs) could influence their judgment, resulting in actions that are not in our stockholders’ best interest or that result in a disproportionate benefit to another CM Group program at our expense.
 
Certain of our directors are also directors of Desert Capital and may in the future be directors of other CM Group-sponsored programs. The loyalties of these directors to other programs may influence their judgment when considering issues for us that may also affect such other programs, such as the following:
 
  •  Our board of directors will evaluate the performance of our advisor. If our advisor is not presenting a sufficient number of investment opportunities to us because it is presenting many opportunities to other programs, or if our advisor is giving preferential treatment to other programs, our board of directors may not be well suited to enforce our rights under the terms of the advisory agreement or to seek a new advisor.
 
  •  We could enter into a transaction with such other programs, such as a joint venture or joint financing arrangement. Decisions of our board of directors regarding the terms of these transactions may be influenced by its loyalties to such other programs.
 
  •  A decision of the board of directors regarding the timing of a debt or equity offering could be influenced by concerns that the offering would compete with an offering of another CM Group-Sponsored program.
 
We could also face similar conflicts if our advisor sponsors additional REITs. See “Conflicts of Interest” and “Other CM Group-Sponsored Programs.”
 
Certain of the principals of our advisor will face conflicts of interest relating to the extension and purchase of loans, and such conflicts may not be resolved in our favor.
 
Certain of the principals of our advisor are also principals, directors, officers and equity holders of other entities, including Desert Capital, CM Equity and CM Notes, and they may also in the future hold positions with, and interests in, other entities engaged in real estate activities. These multiple responsibilities may create conflicts of interest for these individuals if they are presented with opportunities that may benefit us and their other affiliates. These individuals may be incentivized to allocate opportunities to other entities rather than to us if they are more highly compensated based on investments made by other entities. In determining which opportunities to allocate to us and to their other affiliates, these individuals will consider the investment strategy and underwriting criteria of each entity. Because we cannot predict the precise circumstances under which future potential conflicts may arise, we intend to address potential conflicts on a case-by-case basis. There is a risk that our advisor will choose an investment for us that provides lower returns to us than a loan made by one of our affiliates. You will not have the opportunity to evaluate the manner in which any conflicts of interest involving the advisor and its affiliates are resolved before making your investment. For more information on these potential conflicts of interest, see “Conflicts of Interest” and “Other CM Group-Sponsored Programs.”


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Certain affiliates of our advisor will receive origination and servicing fees, which may create a conflict of interest that could encourage our advisor to cause us to invest in larger or riskier loans than we otherwise would.
 
Our advisor identifies loans originated by both affiliated and non-affiliated mortgage brokers, including CM Capital Services and Residential Capital, both related parties that will solicit new borrowers to originate loans for us. CM Capital Services, currently our only loan origination source for acquisition, development, construction and commercial mortgage loans, is owned by our advisor. Residential Capital, currently our only loan origination source for non-agency residential mortgage loans, is indirectly owned by Todd Parriott, our Chief Executive Officer and the Chief Executive Officer of CM Group, and by G. Steven Dawson, one of our directors and managing director of CM Group. A loan origination fee is paid by the borrower of each mortgage loan directly to the entity originating the loan. Accordingly, CM Capital Services and Residential Capital will be paid loan origination fees by the borrowers on the loans that they originate. This could create a conflict of interest because our advisor or its affiliates could profit from originating loans even if such loans are larger or more risky than are appropriate for us. In addition, CM Capital Services or another affiliate of our advisor services our mortgage loans pursuant to our loan servicing agreement and is paid servicing fees for its services. The servicing fee that CM Capital Services or such other affiliate, as the case may be, receives for each loan is comprised of a spread of up to 100 basis points between the interest rate that is paid by the related borrower on the loan and the interest rate we receive as the lender on the loan. If a loan becomes non-performing and we foreclose on the property securing the loan, we will pay, CM Capital Services an asset management fee equal to 1% of the original loan amount per annum. This could create a conflict of interest because CM Capital Services, an affiliate of our advisor, could profit from servicing risky loans, including non-performing loans. This may incentivize our advisor to cause us to invest in loans that have a higher degree of risk than if an affiliate of our advisor was not our loan originator and servicer.
 
We may be obligated to pay our advisor the second-tier management fee even if we incur a loss.
 
Pursuant to the advisory agreement, our advisor is entitled to receive the second-tier management fee for each month in an amount equal to a tiered percentage of the excess of our taxable income for that month (before deducting the second tier management fee, net operating losses and certain other items) above a threshold return for that month. The advisory agreement further provides that our taxable income for second-tier management fee purposes excludes net capital losses that we may incur in the month, even if such capital losses result in a net loss on our statement of operations for that quarter. Thus, we may be required to pay our advisor the second-tier management fee for a month even if there is a decline in the value of our portfolio or we incur a net loss for that month. See “The Advisor — Compensation and Expenses.”
 
We can not estimate with certainty the future aggregate fees and expense reimbursements that will be paid to our advisor under the advisory agreement.
 
Our advisor is entitled to substantial fees pursuant to the advisory agreement. Our advisor’s first-tier management fee is calculated as a percentage of our average invested assets. Our advisor’s second-tier management fee is calculated as a tiered percentage of our taxable income (before deducting certain items) in excess of a threshold amount of taxable income and is indeterminable in advance of a particular period. Because payments of first-tier management fee, second-tier management fee and expense reimbursements are determined at future dates based upon our then-applicable average invested assets, results of operations and actual expenses incurred by our advisor, such fees and expense reimbursements cannot be estimated with certainty. We can provide no assurance at this time as to the amount of any such first-tier management fee, second-tier management fee or expense reimbursements that may be payable to our advisor in the future. See “The Advisor — Compensation and Expenses.”
 
Our advisor’s liability is limited under the advisory agreement, and we have agreed to indemnify it against certain liabilities.
 
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declining to follow our advisor’s advice or recommendations. We are required to indemnify our advisor and its managers, officers and employees with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts or omissions of our advisor not constituting gross negligence, recklessness, willful misconduct or active fraud if all of the following conditions are met: (i) the party seeking indemnification has determined, in good faith, that the course of conduct that caused the loss or liability was in our best interest; (ii) the party seeking indemnification was acting on behalf of or performing services for us; (iii) the liability or loss was not the result of negligence or misconduct; and (iv) the indemnification is recoverable only out of our net assets and not from the common stockholders. See “The Advisor — Limits of Responsibility.”
 
If our advisor terminates the advisory agreement, we may not be able to find an adequate replacement advisor.
 
Our advisor may terminate the advisory agreement without cause or elect not to renew the agreement, without penalty on 60 days prior written notice to us. If our advisor terminates our agreement, we may not be able to find an adequate replacement advisor, or our delay in retaining an adequate replacement advisor may adversely affect our business operations. See “The Advisor — The Advisory Agreement” and “— Term.”
 
Risks Related to Legal and Tax Requirements
 
If we fail to qualify or are disqualified as a REIT, we will be subject to tax as a regular corporation and face substantial tax liability.
 
Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only a limited number of judicial or administrative interpretations exist. Accordingly, it is not certain we will be able to remain qualified as a REIT for U.S. federal income tax purposes. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, Congress or the IRS might change tax laws or regulations and the courts might issue new rulings, in each case potentially having retroactive effect, that could make it more difficult or impossible for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year, then:
 
  •  we would be taxed as a regular domestic corporation, which, among other things, means that we would be unable to deduct distributions to stockholders in computing taxable income and we would be subject to U.S. federal income tax on our taxable income at regular corporate rates;
 
  •  any resulting tax liability could be substantial, would reduce the amount of cash available for distribution to stockholders, and could force us to liquidate assets at inopportune times, causing lower income or higher losses than would result if these assets were not liquidated; and
 
  •  unless we were entitled to relief under applicable statutory provisions, we would be disqualified from treatment as a REIT for the subsequent four taxable years following the year during which we lost our qualification and, thus, our cash available for distribution to our stockholders would be reduced for each of the years during which we did not qualify as a REIT.
 
Even if we remain qualified as a REIT, we might face other tax liabilities that reduce our cash flow. Further, we might be subject to federal, state and local taxes on our income and property. Any of these taxes would decrease cash available for distribution to our stockholders. See “U.S. Federal Income Tax Considerations — Taxation of Our Company — General.”
 
Our management team has limited experience managing a REIT.
 
Our management team has experience managing a REIT since August 2004. Because of management’s limited REIT experience, we might not be able to successfully implement our operating and investment policies or comply with the Internal Revenue Code regulations that are applicable to us. See “Management of the Company — Business Experience of our Directors and Executive Officers.”


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Complying with REIT requirements might cause us to forego otherwise attractive opportunities.
 
In order to continue to qualify as a REIT for U.S. federal income tax purposes, we must satisfy tests concerning, among other things, our sources of income, the nature of our assets, the amounts we distribute to our stockholders and the ownership of our stock. We may also be required to make distributions to our stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with REIT requirements may cause us to forego opportunities we would otherwise pursue.
 
In addition, the REIT provisions of the Internal Revenue Code impose a 100% tax on income from “prohibited transactions.” Prohibited transactions generally include sales of assets that constitute inventory or other property held for sale in the ordinary course of a business, other than foreclosure property. This 100% tax could impact our ability to sell assets at otherwise opportune times if we believe such sales could be considered a prohibited transaction. See “U.S. Federal Income Tax Considerations — Income Tests,” “— Asset Tests,” and “— Annual Distribution Requirements.”
 
Complying with REIT requirements may force us to liquidate otherwise attractive investments.
 
In order to continue to qualify as a REIT, we must ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities generally cannot include more than 10% of the outstanding voting securities of any one issuer (other than a taxable REIT subsidiary) or more than 10% of the total vote or value of the outstanding securities of any one issuer (other than a taxable REIT subsidiary). In addition, generally, no more than 5% of the value of our assets can consist of the securities of any one issuer (other than a taxable REIT subsidiary). In the case of taxable REIT subsidiaries, no more than 25% of the value of our assets can consist of securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements, we must dispose of a portion of our assets within 30 days after the end of the calendar quarter in order to avoid losing our REIT status (subject to limited statutory relief) and suffering adverse tax consequences. See “U.S. Federal Income Tax Considerations — Asset Tests.”
 
Our investment in taxable REIT subsidiaries may exceed the statutory limit.
 
We will establish a wholly-owned subsidiary, which will elect to be treated as a taxable REIT subsidiary (TRS). The TRS will invest in, among other things, assets which we could not directly own due to the asset ownership restrictions of the Internal Revenue Code. We do not expect that the securities of TRS, combined with the securities of any other taxable REIT subsidiary, will at any time represent more than 25% of the value of our assets. However, in the event that they do, our status as a REIT would be jeopardized, and we would need to dispose of some or all of the securities or seek other statutory or regulatory relief. The consequences could include the disposal of an otherwise attractive investment, the payment of penalties and/or the loss of our REIT status. See “U.S. Federal Income Tax Considerations — Taxable REIT Subsidiaries,” and “— Asset Tests.”
 
Complying with REIT requirements may force us to borrow to make distributions to our stockholders.
 
As a REIT, we must distribute 90% of our annual taxable income (subject to certain adjustments) to our stockholders. From time to time, we might generate taxable income greater than our net income for financial reporting purposes from, among other things, amortization of capitalized purchase premiums, or our taxable income might be greater than our cash flow available for distribution to our stockholders. If we do not have other funds available in these situations, we might be unable to distribute 90% of our taxable income as required by the REIT rules. In that case, in order to preserve our status as a REIT, we would need to borrow funds, sell a portion of our assets potentially at disadvantageous prices or find another alternative source of funds. These alternatives could increase our costs or reduce our equity and reduce amounts available to invest in loans and other assets. See “U.S. Federal Income Tax Considerations — Annual Distribution Requirements.”


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Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act; if we become an unregistered investment company, we could not continue our business.
 
We do not intend to register as an investment company under the Investment Company Act of 1940, as amended. If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things:
 
  •  limitations on capital structure;
 
  •  restrictions on specified investments;
 
  •  prohibitions on transactions with affiliates; and
 
  •  compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses.
 
We intend to rely on the exception from the definition of “investment company” provided by Section 3(c)(5)(C) of the Investment Company Act, which is available for issuers “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” In addition to prohibiting the issuance of certain types of securities, to qualify for the Section 3(c)(5)(C) exception, the SEC staff generally requires an issuer to maintain at least 55% of its assets directly in qualifying assets, at least 80% of its assets in qualifying assets and real estate-related assets and no more than 20% of its assets in miscellaneous assets. Qualification for a Section 3(c)(5)(C) exemption from registration under the Investment Company Act will limit our ability to make certain investments. For example, these restrictions may limit our ability to invest directly in mortgage-backed securities that represent less than the entire ownership in a pool of mortgage loans, debt and equity tranches of securitizations and certain asset-backed securities and real estate companies or in assets not related to real estate. Although we intend to monitor our portfolio, there can be no assurance that we will be able to maintain an exemption from registration for our company. See “Our Operating Policies and Investment Policies — Investment Company Act Considerations.”
 
The method we use to classify our assets for purposes of the Investment Company Act will be based principally upon no-action positions taken by the SEC staff in the past. These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations we may face, and a number of these no-action positions were issued more than ten years ago and may be subject to change. Moreover, the SEC has not provided Investment Company Act guidance with respect to several types of assets in which we may invest. In the absence of any no-action position or other SEC guidance, we will rely on our view of what constitutes a qualifying asset and a real estate-related asset. Accordingly, no assurance can be given that the SEC staff will concur with our classification of our assets. In addition, the SEC staff may, in the future, issue further guidance that may require us to re-classify our assets for purposes of qualifying for an exception to or an exemption from regulation under the Investment Company Act. If we are required to re-classify our assets, we may no longer be in compliance with the exception from the definition of an “investment company” provided under Section 3(c)(5)(C) of the Investment Company Act.
 
A change in the value of any of our assets could cause us to be unable to maintain our Section 3(c)(5)(C) exception from the definition of “investment company” and negatively affect our ability to avoid regulation under the Investment Company Act. To avoid being required to register as an investment company under the Investment Company Act, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income- or loss-generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy.
 
If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement and a court could appoint a receiver to take control of us and liquidate our business.


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Rapid changes in the values of our assets may make it more difficult for us to maintain our qualification as a REIT or exemption from the Investment Company Act.
 
If the market value or income potential of our qualifying assets changes as compared to the market value or income potential of our non-qualifying assets, or if the market value or income potential of our assets that are considered “real estate-related assets” changes as compared to the market value or income potential of our assets that are not considered “real estate-related assets” we may need to modify our investment portfolio in order to maintain our REIT qualification or exemption from the Investment Company Act. If the decline in real estate asset values and/or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of any assets that we may own. We may have to make investment decisions that we otherwise would not make absent REIT and Investment Company Act considerations.
 
Misplaced reliance on legal opinions or statements by borrowers could result in a failure to comply with REIT income or assets tests.
 
When purchasing mortgage loans, we may rely on opinions of counsel for the borrower, or statements made in the underlying loan documents, for purposes of determining whether and to what extent those mortgage loans constitute REIT real estate assets for purposes of the REIT asset tests and produce income that qualifies under the REIT gross income tests. The inaccuracy of any such opinions or statements may adversely affect our REIT qualification and result in significant corporate-level tax. See “U.S. Federal Income Tax Considerations — Asset Tests.”
 
One-action rules may harm the value of the underlying property.
 
Several states have laws that prohibit more than one action to enforce a mortgage obligation, and some courts have construed the term “action” broadly. In such jurisdictions, if the judicial action is not conducted according to law, there may be no other recourse in enforcing a mortgage obligation, thereby decreasing the value of the underlying property.
 
We may be harmed by changes in various laws and regulations.
 
Changes in the laws or regulations governing our advisor or its affiliates may impair our advisor’s or its affiliates’ ability to perform services in accordance with the advisory agreement. Our business may be harmed by changes to the laws and regulations affecting our advisor or us, including changes to securities laws and changes to the Internal Revenue Code applicable to the taxation of REITs. New legislation may be enacted into law or new interpretations, rulings or regulations could be adopted, any of which could harm us, our advisor and our stockholders, potentially with retroactive effect.
 
Legislation was enacted that reduces the maximum tax rate of non-corporate taxpayers for capital gains (for taxable years ending on or after May 6, 2003 and beginning before January 1, 2011) and for dividends (for taxable years beginning after December 31, 2002 and beginning before January 1, 2011) to 15%. Generally, dividends paid by REITs are not eligible for the 15% U.S. federal income tax rate, with certain exceptions discussed at “U.S. Federal Income Tax Considerations — Taxation of Taxable United States Stockholders — Distributions Generally.” Although this legislation does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable treatment of regular corporate dividends could cause investors who are individuals to consider stocks of other corporations that pay dividends as more attractive relative to stocks of REITs. It is not possible to predict whether this difference in perceived relative value will exist, or what the effect will be on the market price of our common stock. See “U.S. Federal Income Tax Considerations — Capital Gain Distributions.”
 
Legal claims and regulatory risks and restrictions arise in the conduct of our business and the business of our affiliates.
 
In the ordinary course of our business and the business of our affiliates, we are subject to regulatory oversight and liability risk. As a result, from time to time, we and our affiliates are subject to routine


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examinations and audits by governmental and regulatory authorities such as the U.S. Internal Revenue Service, the SEC, FINRA, the state securities divisions of the states in which our offering is qualified and various other state and local authorities. To the extent that the findings of any such examinations or audits determine that deficiencies exist, we and/or our affiliates, as the case may be, may be required to take remedial action to address such deficiencies. To the extent that such deficiencies cannot be satisfactorily remediated, we and/or our affiliates may be subject to certain other claims, disputes, legal proceedings, audits and examinations by governmental and regulatory authorities. These types of proceedings may expose us and/or our affiliates to substantial monetary damages and legal defense costs, injunctive relief, criminal and civil penalties and the potential for regulatory restrictions on our businesses. The outcome of these matters could materially and adversely affect our business and/or the business of our affiliates.
 
We may incur excess inclusion income that would increase the tax liability of our stockholders.
 
In general, dividend income that a tax-exempt entity receives from us should not constitute unrelated business taxable income as defined in Section 512 of the Internal Revenue Code. If we realize excess inclusion income and allocate it to stockholders, this income cannot be offset by net operating losses. If the stockholder is a tax-exempt entity, then this income would be fully taxable as unrelated business taxable income under Section 512 of the Internal Revenue Code. If the stockholder is foreign, it would be subject to U.S. federal income tax withholding on this income without reduction pursuant to any otherwise applicable income-tax treaty.
 
We generally structure our borrowing arrangements in a manner designed to avoid generating significant amounts of excess inclusion income. Some types of tax-exempt entities, including voluntary employee benefit associations and entities that have borrowed funds to acquire their shares of our common stock, may be required to treat a portion of or all of the dividends they may receive from us as unrelated business taxable income. Finally, we may invest in equity securities of other REITs and it is possible that we might receive excess inclusion income from those investments. See “U.S. Federal Income Tax Considerations — Taxable Mortgage Pool Rules.”
 
Our rights and the rights of our stockholders to recover claims against our independent directors are limited, which could reduce your and our recovery against them if they negligently cause us to incur losses.
 
Maryland law provides that a director has no liability in that capacity if he performs his duties in good faith, in a manner he reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter provides that no independent director shall be liable to us or our stockholders for monetary damages and that we will generally indemnify them for losses unless they are grossly negligent or engage in willful misconduct. As a result, you and we may have more limited rights against our independent directors than might otherwise exist under common law, which could reduce your and our recovery from these persons if they act in a negligent manner. In addition, we may be obligated to fund the defense costs incurred by our independent directors (as well as by our other directors, officers, employees and agents) in some cases, which would decrease the cash otherwise available for distribution to you.
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains certain forward-looking statements. Forward-looking statements are those which are not historical in nature. They can often be identified by their inclusion of words such as “will,” “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend” and similar expressions. Any projection of revenues, earnings or losses, capital expenditures, distributions, capital structure or other financial terms is a forward-looking statement.
 
Our forward-looking statements are based upon our management’s beliefs, assumptions and expectations of our future operations and economic performance, taking into account the information currently available to us. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us,


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that might cause our actual results, performance or financial condition to be materially different from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. Some of the important factors that could cause our actual results, performance or financial condition to differ materially from expectations are:
 
  •  our limited operating history;
 
  •  your inability to review the assets that we will acquire with the net proceeds of this offering;
 
  •  economic conditions impacting the real estate market and credit markets;
 
  •  changes in interest rates;
 
  •  our ability to obtain debt financing on acceptable terms or at all;
 
  •  changes in the rate of construction in the markets in which we invest;
 
  •  potential impacts of our leverage policy on our net income and cash available for distribution;
 
  •  our board’s ability to change our operating policies and strategies without notice to you or stockholder approval;
 
  •  the number of our mortgage loans that become non-performing;
 
  •  our advisor’s motivation to recommend riskier investments in an effort to maximize its compensation under the advisory agreement; and
 
  •  our failure to remain qualified as a REIT.
 
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the events described by our forward-looking events might not occur. We qualify any and all of our forward-looking statements by these cautionary factors. Please keep this cautionary note in mind as you read this prospectus.
 
This prospectus contains market data, industry statistics and other data that have been obtained from, or compiled from, information made available by third parties. We have not independently verified their data.
 
ESTIMATED USE OF PROCEEDS
 
The table set forth below summarizes certain information relating to the anticipated use of offering proceeds by us, assuming that the minimum and the maximum offering is completed. These estimates and the figures set forth below represent our best estimate of intended sales results. If we sell the minimum number of shares we are offering we estimate that approximately 85% of the net offering proceeds, or approximately $8.50 per share, will be used to make investments. If we sell the maximum number of shares we are offering, we estimate that approximately 88.5% of the net offering proceeds, or approximately $8.85 per share, will be used to make investments. We expect that up to approximately 80% of our portfolio will consist of short-term mortgage loans, up to approximately 10% will consist of non-agency residential loans and up to approximately 20% will consist of commercial real property, real estate-related debt securities and equity securities of other real estate companies. See “Business — Our Investment Types” for a description thereof. The remainder of the offering proceeds will be used to pay offering expenses, including selling commissions and the dealer-manager fee. While the estimated use of proceeds set forth in the table below is believed to be reasonable, this table should be viewed only as an estimate of the use of proceeds that may be achieved. Our affiliates may purchase shares in the offering; however, their purchases will not count towards the minimum offering amount. We are a blind pool REIT because the proceeds of the offering will be used to acquire unspecified investments and


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investors will not have an opportunity to evaluate the economic merits of any of the investments we make with the net proceeds of this offering.
 
                                 
    Minimum Offering     Maximum Offering(1)  
    Amount     Percent     Amount     Percent  
 
OFFERING PROCEEDS TO THE COMPANY LESS:
  $ 2,500,000       100.0 %   $ 900,000,000       100.0 %
Selling Commission to Dealer-Manager
    175,000       7.0 %     63,000,000       7.0 %
Dealer-Manager Fee to Dealer-Manager
    75,000       3.0 %     27,000,000       3.0 %
Other Offering Expenses(2)(3)
    125,000       5.0 %     13,500,000       1.5 %
                                 
NET PROCEEDS TO THE COMPANY(4)(5)
  $ 2,125,000       85.0 %   $ 796,500,000       88.5 %
                                 
 
 
(1) Excludes 10 million shares of our common stock that may be sold pursuant to our DRIP.
 
(2) Includes all expenses (other than selling commissions and the dealer-manager fee) to be paid by us in connection with the formation of the company and the qualification and registration of the offering, and the marketing and distribution of shares, including, without limitation, total underwriting and brokerage discounts and commissions (including the fees of the underwriters’ attorneys), expenses for printing, engraving and amending registration statements or supplementing prospectuses, mailing and distributing costs, salaries of employees while engaged in sales activity, telephones and other telecommunications costs, all advertising and marketing expenses, charges of transfer agents, registrars, trustees, escrow holders, depositories and experts and fees, expenses and taxes related to the filing, registration and qualification of the sale of shares under federal and state laws, including taxes and fees and accountants’ and attorneys’ fees. Our advisor has agreed to reimburse us to the extent selling commissions, the dealer manager fee and other organization and offering expenses incurred by us exceed 15% of aggregate gross offering proceeds. See “Plan of Distribution.”
 
(3) We are prohibited by FINRA rules and NASAA guidelines from incurring total organization and offering expenses in excess of 15% of the proceeds of the offering. Because the actual expenses incurred will greatly exceed $375,000 (15% of the minimum offering amount of $2.5 million), we are required to cap our expenses at 15%. If we only sell the minimum offering amount, offering expenses in excess of 15.0% of gross proceeds will be paid by CM Group. If however, the maximum offering amount of $900 million is raised (which excludes amounts that may be raised under the DRIP), the estimated total offering expenses of $103.5 million will constitute approximately 11.5% of the offering proceeds. At the time when we have sold in excess of the minimum offering amount, any offering expenses in excess of 11.5% of gross proceeds will be paid by CM Group.
 
(4) We do not anticipate paying any acquisition fees in connection with the acquisition of our investments. However, if we ever do pay acquisition fees, they will be reasonable and will not exceed an amount equal to 6% of the cost of the investments acquired by us, or in the case of a loan, 6% of the funds advanced. We may incur customary acquisition expenses in connection with the acquisition or origination (or attempted acquisition or origination) of an asset.
 
(5) Offering proceeds designated for investments may also be used to repay debt borrowed in connection with such investments. Offering proceeds designated for investments temporarily may be invested in short-term, highly liquid investments with appropriate safety of principal. In addition, although our distribution policy is not to use the proceeds of this offering to make distributions, our organizational documents permit us to pay distributions from any source, including offering proceeds. We have not established a cap on the use of proceeds to fund distributions.


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DISTRIBUTION POLICY
 
We intend to accrue and pay distributions on a regular basis beginning no later than the first calendar quarter after the quarter in which we make our first real estate-related investment. In order that investors may generally begin receiving distributions immediately upon our acceptance of their subscription, we expect to authorize and declare distributions based on daily record dates that will be paid on a monthly basis.
 
In order to continue to qualify as a REIT for U.S. federal income tax purposes, among other things, we must make distributions each taxable year (not including any return of capital for U.S. federal income tax purposes) equal to at least 90% of our REIT taxable income, although our board of directors, in its discretion, may increase that percentage as it deems appropriate. Generally, income distributed will not be taxable to us under U.S. federal income tax laws if we comply with the provisions relating to qualification as a REIT. If the cash available to us is insufficient to pay such distributions, we may obtain the necessary funds by borrowing funds, issuing new securities, or selling assets. We may make distributions from sources other than our cash from operations, including offering proceeds. These methods of obtaining funds could affect future distributions by increasing operating costs. To the extent that distributions to stockholders exceed earnings and profits, such amounts constitute a return of capital for U.S. federal income tax purposes, although such distributions might not reduce stockholders’ aggregate invested capital. Distributions in kind will not be permitted, except for distributions of readily marketable securities; distributions of beneficial interests in a liquidating trust established for the dissolution of our company, and the liquidation of our assets in accordance with the terms of our articles of incorporation; or distributions of in-kind property as long as the directors (1) advise each stockholder of the risks associated with direct ownership of the property; (2) offer each stockholder the election of receiving in-kind property distributions; and (3) distribute in-kind property only to those stockholders who accept the directors’ offer. See “U.S. Federal Income Tax Considerations — Annual Distribution Requirements.”
 
Distributions are made at the discretion of our directors, depending primarily on net cash from operations (which includes interest income from borrowers under mortgage loans, less expenses paid), current and projected cash requirements, tax considerations, our general financial condition, and other factors, subject to the obligation of our directors to use their best efforts to cause us to qualify and remain qualified as a REIT for U.S. federal income tax purposes. We intend to increase distributions in accordance with increases in net cash from operations.
 
Generally, our policy is to pay distributions from cash flow from operations. However, we can give no assurance that we will pay distributions solely from our funds from operations in the future, especially during the period when we are raising capital and have not yet acquired a substantial portfolio of income-producing investments. Although our distribution policy is not to use the proceeds of this offering to make distributions, our organizational documents permit us to pay distributions from any source, including offering proceeds. We have not established a cap on the amount of proceeds that we may use to fund distributions. If we pay distributions from sources other than our cash flow from operations, we will have less funds available for investments and your overall return may be reduced. In addition, paying distributions from sources other than cash flow from operations may reduce the amount of distributions that we make in the future and may serve to dilute later investors. Such distributions would constitute a return of capital, which will have the effect of reducing the basis of your investment in our stock. In order to provide additional funds to pay distributions to our stockholders before we have acquired a substantial portfolio of income-producing investments, we may fund such distributions from advances from our advisor or from our advisor’s deferral of its fees under the advisory agreement.
 
We intend to make regular distributions to our stockholders. Distributions will be made to those stockholders who are stockholders as of the record date selected by our directors. Our board of directors expects to declare distributions on a monthly basis using the first day of the month as the record date. In order for an investor to receive a distribution, he or she must be a stockholder of record as of the record date. Therefore, newly admitted investors, or investors redeeming or transferring shares of common stock, will not receive a distribution for a record date as to which they are not considered a stockholder of record. We expect to declare and pay distributions monthly. However, in the future, our board of directors, in its sole discretion, may determine to declare or pay distributions on another basis, such as quarterly. We will send a notice accompanying each distribution notifying stockholders of the source(s), in dollar and percentage terms, of each


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distribution payment. The information in such notice accompanying distributions will be subject to adjustment based on our year-end results, and stockholders should rely on the tax information provided to them in a Form 1099 rather than in such notice. Stockholders may authorize us to provide such notices electronically by so indicating on your subscription agreement, or by sending us instructions in writing in a form acceptable to us to receive such periodic notices electronically. Unless stockholders elect in writing to receive such periodic updates electronically, all documents will be provided in paper form by mail. Stockholders must have internet access to use electronic delivery. While we impose no additional charge for this service, there may be potential costs associated with electronic delivery, such as on-line charges. Stockholders may revoke their consent for electronic delivery at any time and we will resume sending you a paper copy of the distribution notices.
 
SUMMARY OF REINVESTMENT PLAN
 
We have adopted a DRIP pursuant to which stockholders may elect to have the full amount of their cash distributions from us reinvested in additional shares of our common stock. The following discussion summarizes the principal terms of the DRIP. The DRIP is attached to this prospectus as Appendix A.
 
General
 
An independent agent, the reinvestment agent, which currently is DST Systems, Inc., acts on behalf of the participants in the DRIP. The reinvestment agent at all times will be registered as a transfer agent with the SEC. At any time that we are engaged in this offering, the reinvestment agent will invest all distributions attributable to shares of our common stock owned by participants in shares of our common stock at a price per share equal to $9.50. At any time that we are not engaged in this offering, the price per share purchased pursuant to the DRIP shall be the net asset value as of the end of the most recent fiscal quarter, until such time, if any, as listing of our common stock on a national securities exchange or trading of such shares in the over-the-counter market occurs. All shares of common stock available for purchase under the DRIP either are registered pursuant to this prospectus or will be registered under the Securities Act through a separate prospectus relating solely to the DRIP. Until this offering has terminated, shares of common stock will be available for purchase out of the additional 10 million shares registered with the SEC in connection with this offering. See “Plan of Distribution — General.” After the offering has terminated, we may either elect to register additional shares of common stock with the SEC for issuance pursuant to the DRIP, or allow the DRIP to terminate. The DRIP may be amended or supplemented by an agreement between the reinvestment agent and us at any time, including, but not limited to, an amendment to the DRIP to add a voluntary cash contribution feature or to substitute a new reinvestment agent to act as agent for the participants or to increase the administrative charge payable to the reinvestment agent, by mailing an appropriate notice at least 30 days prior to the effective date thereof to each participant at his or her last address of record; provided, however, that any such amendment must be approved by a majority of the independent directors. Such amendment or supplement shall be deemed conclusively accepted by each participant except those participants from whom we receive written notice of termination prior to the effective date thereof.
 
Stockholders who have received a copy of the final prospectus and participate in this offering can elect to participate in and purchase shares through the DRIP at any time and would not need to receive a separate prospectus relating solely to the DRIP. A person who becomes a stockholder otherwise than by participating in this offering may purchase shares of our common stock through the DRIP only after such person receives the current prospectus, updated as required.
 
Upon Listing, the shares to be acquired for the DRIP may be acquired either through the public market or directly from us pursuant to a registration statement relating to the DRIP, in either case at a per-share price equal to the then-prevailing market price on the national securities exchange or over-the-counter market on which the shares are listed at the date of purchase. In the event that, after Listing occurs, the reinvestment agent purchases shares on a national securities exchange or over-the-counter market through a registered broker-dealer, the amount to be reinvested shall be reduced by any brokerage commissions charged by such registered broker-dealer. In the event that such registered broker-dealer charges reduced brokerage commissions, additional funds in the amount of any


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such reduction shall be left available for the purchase of shares. We are unable to predict the effect which such a proposed Listing would have on the price of the shares acquired through the DRIP.
 
Investment of Distributions
 
Distributions will be used by the reinvestment agent, promptly following the payment date with respect to such distributions, to purchase shares of our common stock on behalf of the participants from us. All such distributions shall be invested in shares within 30 days after such payment date. Any distributions not so invested will be returned to participants.
 
Participants will not have the option to make voluntary contributions to the DRIP to purchase shares in excess of the amount of shares that can be purchased with their distributions. Our board of directors reserves the right, however, to amend the DRIP in the future to permit voluntary contributions to the DRIP by participants, to the extent consistent with our objective of qualifying as a REIT.
 
Participant Accounts, Fees and Allocation of Shares
 
For each participant, the reinvestment agent maintains a record which reflects for each month the distributions received by the reinvestment agent on behalf of such participant. We are responsible for all administrative charges and expenses charged by the reinvestment agent. Any interest earned on such distributions will be paid to us to defray certain costs relating to the DRIP.
 
The reinvestment agent uses the aggregate amount of distributions to all participants for each month to purchase shares of our common stock for the participants. If the aggregate amount of distributions to participants exceeds the amount required to purchase all shares then available for purchase, the reinvestment agent will purchase all available shares and will return all remaining distributions to the participants within 30 days after the date shares are purchased. The purchased shares are allocated among the participants based on the portion of the aggregate distributions received by the reinvestment agent on behalf of each participant, as reflected in the records maintained by the reinvestment agent. The ownership of the shares purchased pursuant to the DRIP is reflected on our books.
 
Subject to the provisions of our articles of incorporation relating to certain restrictions on and the effective dates of transfer, shares acquired pursuant to the DRIP will entitle the participant to the same rights and to be treated in the same manner as those purchased by the participants in the offering.
 
The allocation of shares among participants may result in the ownership of fractional shares, computed to four decimal places.
 
Reports to Participants
 
Within 60 days after the end of each fiscal quarter, the reinvestment agent mails to each participant a statement of account describing, as to such participant, the distributions reinvested during the quarter, the number of shares purchased during the quarter, the per share purchase price for such shares, the total administrative charge paid by us on behalf of each participant, and the total number of shares purchased on behalf of the participant pursuant to the DRIP. If we are not engaged in an offering and until such time, if any, as Listing occurs, the statement of account also will report the most recent fair market value of the shares, determined as described above.
 
Tax information for income earned on shares under the DRIP will be sent to each participant by us or the reinvestment agent at least annually.
 
Election to Participate or Terminate Participation
 
Any investor who purchases shares in this offering may become a participant in the DRIP by making a written election to participate on his subscription agreement at the time he subscribes for shares. Any other stockholder who receives a copy of this prospectus or a separate prospectus relating solely to the DRIP and who has not previously elected to participate in the DRIP may so elect at any time by written notice to our


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dealer-manager of such stockholder’s desire to participate in the DRIP. Participation in the DRIP will commence with the next distribution made after receipt of the participant’s notice, provided it is received at least 10 days prior to the record date for such distribution. Subject to the preceding sentence, the election to participate in the DRIP will apply to all distributions attributable to the month in which the stockholder’s election is effective and to all months thereafter, whether made (1) upon subscription or subsequently for stockholders who participate in this offering or (2) upon receipt of a current prospectus or a separate prospectus relating solely to the DRIP for stockholders who do not participate in this offering. Effective for any distribution, participants will be able to terminate their participation in the DRIP at any time without penalty by delivering written notice to our dealer-manager ten business days before the last day of the month or quarter to which such distribution relates.
 
A participant who chooses to terminate participation in the DRIP must give notice to our reinvestment agent, terminate his entire participation in the DRIP and will not be allowed to terminate in part. If a participant presents all or some of his Shares to the Company for redemption pursuant to the Company’s redemption plan and less than all of the participant’s Shares are redeemed, the participant will continue to be a participant in the DRIP unless he gives notice to our reinvestment agent of his intent to terminate his participation in the DRIP. If a participant terminates his participation, the reinvestment agent will send him a check in payment for the amount of any distributions in the participant’s account that have not been reinvested in shares of our common stock, and our record books will be revised to reflect the ownership records of his full shares and the value of any fractional shares standing to the credit of a participant’s account based on the market price of the shares. There are no fees associated with a participant’s terminating his interest in the DRIP. A participant in the DRIP who terminates his interest in the DRIP will be allowed to participate in the DRIP again upon receipt of the then current version of this prospectus or a separate current prospectus relating solely to the DRIP, by notifying the reinvestment agent and completing any required forms.
 
U.S. Federal Income Tax Considerations
 
Stockholders subject to federal taxation who elect to participate in the DRIP will incur a tax liability for distributions allocated to them even though they have elected not to receive their distributions in cash but rather to have their distributions held pursuant to the DRIP. Specifically, stockholders will be treated as if they have received the distribution from us and then applied such distribution to purchase shares in the DRIP. A stockholder designating a distribution for reinvestment will be taxed on the amount of such distribution as ordinary income to the extent such distribution is from current or accumulated earnings and profits. To the extent that distributions to stockholders exceed earnings and profits, such amounts constitute a return of capital for U.S. federal income tax purposes. To the extent that we have designated all or a portion of the distribution as a capital gain dividend, such designated portion of the distribution should be taxed as long-term capital gain to the stockholder.
 
Amendments and Termination
 
We reserve the right to renew, extend, or amend any aspect of the DRIP without the consent of stockholders, provided that notice of the amendment is sent to participants at least 30 days prior to the effective date thereof. We also reserve the right to terminate the DRIP for any reason, at any time, by 10 days prior written notice of termination to all participants.
 
SHARE REDEMPTION PLAN
 
Because there is currently no public secondary market for our common stock and it is anticipated that there will be no secondary market for our common stock for the foreseeable future during or after the offering, until the common stock is listed, or a secondary trading market for our shares otherwise develops, and in order to provide a limited amount of liquidity in respect of an investment in our common stock, we have adopted a share redemption plan, which we refer to as the redemption plan. The redemption plan is attached as Appendix B. Pursuant to the terms of the redemption plan, a stockholder who has held his or her common stock for more than one year may, subject to the conditions and limitations set forth below, present all or any portion of such common stock to us for redemption. At such time, the Company may, at its sole option and to


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the extent it has sufficient funds available, choose to redeem Shares presented for redemption for cash. All redemptions will be effected through the reinvestment agent that will be a registered broker-dealer or exempt from registration as a broker-dealer with the SEC and each state securities commission. All recordkeeping and other administrative functions required to be performed in connection with the redemption plan will be performed by the reinvestment agent.
 
All redemptions under the redemption plan are at our option, and subject to availability of funding therefor. We are under no obligation to make any redemptions at any time. Compliance by a stockholder with the terms of the redemption plan does not guarantee that we will redeem the shares. For purposes of funding the redemption plan, if the Company elects to redeem shares, proceeds from our DRIP for the applicable calendar quarter may be used by the reinvestment agent on our behalf to redeem shares of our common stock pursuant to the terms of the redemption plan. However, in accordance with applicable securities laws, at no time during any consecutive 12-month period would the number of shares redeemed by us under the redemption plan (if the Company elects to redeem shares) exceed 5% of the weighted average number of outstanding shares of our common stock during such 12-month period.
 
The price at which we redeem our shares of common stock will be determined by us. Subject to restrictions and limitations discussed herein, if the Company elects to redeem any shares, the Company may redeem shares (including fractional shares), from time to time, at the following prices:
 
(i) the lesser of (a) the estimated value of a share of our common stock, as determined by our board of directors or (b) 90.0% of the purchase price paid per share for stockholders who have owned those shares for at least one year; and
 
(ii) the lesser of (a) the estimated value of a share of our common stock, as determined by our board of directors or (b) 95.0% of the purchase price paid per share for stockholders who have owned those shares for at least two years.
 
Notwithstanding the foregoing, during any period in which we are engaged in a public offering, the redemption price will be (i) 90% of the purchase price paid per share for stockholders who have owned those shares for at least one year, or (ii) 95% of the purchase price per share for stockholders who have owned those shares for at least two years and in any event will be less than the price of shares offered in such public offering. During periods when we are not engaged in an offering, the estimated value of a share of our common stock, for purposes of redemption, will be the net asset value per share as of the end of the most recent fiscal quarter. Accordingly, the redemption prices paid to stockholders for shares of common stock repurchased by us during periods when we are not engaged in an offering may vary over time. Our board of directors will announce any price adjustment and the time period of its effectiveness through the filing of a Form 8-K or in another appropriate filing with the SEC describing the new terms and by providing written notices of the new terms with the next dividend distribution and by sending an acknowledgement to each stockholder who has submitted a redemption request.
 
For purposes of calculating the ownership periods set forth above, if a stockholder purchased shares for economic value from a prior stockholder (a “Resale”), the purchasing stockholder’s period of ownership for such shares shall commence on the date the purchasing stockholder purchased the shares from the prior stockholder which shall be deemed to be the date the shares are re-registered in the name of the purchasing stockholder by the reinvestment agent. For a transfer of ownership that is not considered a Resale, the stockholder’s period of ownership for such shares shall commence on the date of the acquisition of shares by the original stockholder.
 
With respect to redemption requests made in connection with shares acquired at multiple points in time, the pricing associated with the shares held for the longest period of time shall be applied first, until such time as all shares purchased at such point in time have been redeemed. At such time, pricing associated with the remaining shares then held for the next applicable longest period of time shall be applied, and so on.
 
Further, the Company has the right to waive the holding periods and redemption prices and the first come, first served redemption requirements described herein, in the event of the death or permanent disability of a stockholder (individually and collectively, “Exigent Circumstances”). If the Company determines to permit any such redemption, notwithstanding anything contained in the redemption plan to the contrary, the price at which


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the shares may be redeemed shall be the lesser of (a) the estimated value of a share of our common stock, as determined by our board of directors or (b)(i) 90% of the purchase price paid per share for stockholders who have owned those shares for less than one year, or (ii) 95% of the purchase price paid per share for stockholders who have owned those shares for at least one year. Notwithstanding the foregoing, during any period in which we are engaged in a public offering, in the event the Company determines to permit any redemption, the redemption price in the event of Exigent Circumstances will be (i) 90% of the purchase price paid per share for stockholders who have owned those shares for less than one year, or (ii) 95% of the purchase price paid per share for stockholders who have owned those shares for at least one year. In addition, the Company, in its sole discretion, may redeem such shares prior to the redemption of any other shares. Except for the holding periods, redemption prices and redemption timing, any shares redeemed pursuant to the exercise of this authority will be otherwise subject to the procedures and limitations set forth in the redemption plan. There is no assurance that there will be sufficient funds available for redemption or that the Company will exercise its discretion to redeem such shares and, accordingly, a stockholder’s shares may not be redeemed.
 
If the Company elects to redeem shares, we anticipate that, assuming sufficient funds are available, any redemptions of our common stock will be made within 30 days following the end of the calendar quarter in which the shares are presented, provided that the requisite redemption documents from the requesting stockholder are received by the reinvestment agent at least 15 business days prior to the end of the applicable calendar quarter.
 
We will engage a third party to conduct a Uniform Commercial Code (“UCC”) search to ensure that no liens or encumbrances are held against the shares presented for redemption. We will deduct $100 from the proceeds of the redemption to cover our costs for this search. Shares that are not subject to liens or encumbrances will be eligible for redemption following the completion of the UCC search. We will not redeem shares that are subject to liens or other encumbrances until the stockholder presents evidence that such liens or encumbrances have been removed.
 
If the funds made available for redemptions in any quarter exceed the amount needed to redeem the common stock for which redemption requests have been submitted, and the Company elects to redeem shares, we may carry any excess amount over to the next succeeding calendar quarter for use in addition to the amount of funds available for redemptions during that following calendar quarter unless the Company elects to use such amount for other corporate purposes.
 
If the funds available for redemptions in any quarter are insufficient to redeem all of the common stock for which redemption requests have been submitted, to the extent we redeem any shares at the end of the quarter, we plan to redeem the stock on a first come, first served basis at the end of each quarter; provided, however, with respect to shares being redeemed due to Exigent Circumstances, the Company, in its sole discretion, may waive the first come, first served requirements for the redemption of such shares and redeem such shares in full, to the extent funds are available, before any other shares are redeemed on a first come, first served basis at the end of each quarter. A stockholder whose entire request is not honored due to insufficient funds in that quarter or otherwise will be notified and can withdraw the redemption request or ask that the request to redeem the shares be honored at such time, if any, as the Company is redeeming shares and there are sufficient available funds. Stockholders will not relinquish their common stock to us until such time as we commit to redeem the shares. We make no guarantee that there will be sufficient funds to redeem the common stock for which a redemption request is received.
 
Our redemption plan is only intended to provide limited interim liquidity for our stockholders until a secondary market develops for the shares. No such market presently exists, and we cannot assure you that any market for your shares will ever develop. Neither our advisor, any member of our board of directors nor any of their affiliates will receive any fee on the redemption of shares by us pursuant to the redemption plan.
 
Shares redeemed by us will be retired and will not be available for reissuance. The redemption plan will terminate and we will not accept shares for redemption in the event that common stock is listed on a securities exchange. Additionally, our board of directors may, in its discretion, amend or suspend the redemption plan if it determines that to do so is in our best interest. If our board of directors amends or suspends the redemption


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plan, we will provide stockholders with at least 15 days advance notice of such amendment or suspension through a filing with the SEC.
 
The foregoing provisions regarding the redemption plan in no way limit our ability to purchase shares from stockholders by any other legally available means for any reason that the advisor, in its discretion, deems to be in our best interest.
 
BUSINESS
 
General
 
CMR is a Maryland corporation formed in November 2008 that will elect to be taxed as a REIT for federal income tax purposes commencing with its tax year ending December 31, 2010. CMR specializes in the financing of real estate projects. We intend to create a diversified portfolio of real estate-related loans, commercial real estate-related debt securities and select real estate equity investments. We intend to focus our investing activities on, and use the proceeds of this offering principally for, loans to homebuilders, developers and homebuyers, and owners of real property with financing needs that are not met by traditional mortgage lenders. The portfolio will include short-term mortgage loans consisting of acquisition, development, construction and commercial mortgage loans to both local and national developers and homebuilders. We also expect to use a portion of the proceeds of this offering to invest in non-agency residential mortgage loans to provide niche financing to borrowers that otherwise have limited financing sources. We also intend to make a limited number of opportunistic investments in commercial real property to take advantage of investment opportunities. We may also acquire real estate-related debt securities, such as commercial mortgage-backed securities and collateralized debt obligations related to real estate, and equity securities of other real estate-related companies. We may execute our investment strategy by acquiring individual assets or portfolios of assets, other mortgage REITs or companies with similar investment objectives.
 
Our principal investment objectives are to pay attractive and consistent distributions to our stockholders, preserve, protect and enhance our assets and ultimately provide our stockholders with liquidity of their investment. Our focus will emphasize payment of current returns to investors and the preservation of invested capital, with a lesser emphasis on seeking capital appreciation from our investments. We intend to use leverage to enhance total returns to our stockholders. To the extent available, we expect to employ leverage to finance our portfolio that will not exceed 50% of the aggregate cost of our assets. However, under our articles of incorporation, we may incur debt in an amount up to 300% of our net assets. Following our offering period, the growth of our portfolio will depend on our access to external sources of capital. The growth of our business will also depend on our ability to locate suitable investments to keep our capital fully deployed at favorable rates. We expect that our portfolio will be concentrated in the Western United States, where we believe we possess requisite skills and market knowledge.
 
Within our investment policies, our advisor will have substantial discretion with respect to the selection of specific investments and the purchase and sale of our assets subject to the limitations in our charter and oversight of our board of directors. Our board of directors may revise our investment policies, which we describe below, without the approval of our stockholders. Our board of directors will review our investment policies at least annually to determine whether our policies are in the best interests of our stockholders.
 
Investment Strategy
 
We believe there is a significant market opportunity to make mortgage loans to homebuilders, developers and homebuyers, and owners of real property whose financing needs are typically not met by traditional mortgage lenders. The restrictive underwriting standards or lead time required by traditional mortgage lenders, such as commercial banks, results in some potential borrowers being unable to obtain such financing, or unwilling to complete the time consuming process often required by traditional lenders. Moreover, the recent contraction of the banking system which has resulted in declining lending volume combined with the tightening credit standards of traditional financing sources have created a more compelling opportunity. As a non-conventional lender, we are more willing to invest in mortgage loans or projects that conventional lenders


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may not deem creditworthy, including acquisition of raw land, infrastructure development and non-agency residential mortgage loans. Because of the increased risks associated with our loan types, we expect that borrowers will be willing to pay us interest rates that are generally 500 to 1,000 basis points above the rates charged by conventional lenders. In other words, because the types of loans that we intend to make will be riskier than typical loans of these types, we will charge interest rates that are 5% to 10% higher than the rates charged by banks and insurance companies, for example. Our advisor identifies loans originated by both affiliated and non-affiliated mortgage brokers, including CM Capital Services and Residential Capital, both related parties that solicit new borrowers in those states in which they are licensed or otherwise qualified to originate loans. CM Capital Services is currently licensed or otherwise qualified in Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas and Utah. Residential Capital is currently licensed in Arizona, California, Colorado, Montana, Nevada, New Mexico and Wyoming. We may also purchase existing loans that were originated by unrelated third party lenders. Other than our loan origination agreement with CM Capital Services, we currently do not have agreements with any sources from which we expect to acquire mortgage loans.
 
In addition, we believe that the dislocations in the credit markets have severely constrained the availability of liquidity and will continue to create opportunities to acquire select assets from motivated sellers at substantial discounts to their intrinsic values. We believe these conditions will provide us with the opportunity to purchase commercial real estate properties and real estate-related debt and equity securities at favorable risk-adjusted rates.
 
Real Estate Market Outlook
 
Over the past several years, the capital and credit markets have experienced extreme volatility and disruption triggered by losses tied to the collapse of the sub-prime residential mortgage market. The effects of increased rates of delinquency, foreclosure and loss in residential mortgages have spread throughout the capital markets and have affected the global economy. Banks and other financial institutions have experienced severe shortages of capital and liquidity. These circumstances have adversely impacted the cost and availability of credit to borrowers across all market sectors. As a result of the ongoing credit market turmoil, debt financing has become less available and to the extent available, much more expensive. We cannot predict when these markets will stabilize although we do expect that the current volatility in the capital markets will continue during the near term which will cause continued volatility in the commercial and residential real estate, real estate finance and the structured finance markets.
 
We believe the disruption in the credit market will continue during the near term, however, in the event that market conditions do improve during the term of this offering, we believe there will be a continuing demand for alternative financing from borrowers that are unwilling or unable to obtain financing through traditional mortgage lenders and an opportunity for asset growth and value appreciation.
 
Financing Strategy
 
We generally expect to finance the acquisition of our mortgage loans with equity capital and, to the extent reasonably commercially available, borrowed funds. The amount of borrowing we employ will depend on, among other factors, the amount of our equity capital. Under our articles of incorporation, we may incur debt in an amount up to 300% of our net assets; however, once we have fully invested the proceeds of this offering, our desired amount of leverage is 100% of net assets, which equates to 50% of the aggregate cost of our assets. We expect to finance with short-term borrowings from time to time depending on market conditions at the time. We may also utilize long-term borrowings to the extent available on a cost effective basis. Due to current market conditions, we do not expect to have a credit facility in place at the consummation of the offering, and cannot assure you if or when we will be able to obtain debt financing. We anticipate that any future borrowings we incur will be collateralized, in whole or in part, by the loans on which we are the sole lender. We expect to use leverage to enhance total returns to our stockholders. Pursuant to our capital and leverage policy, we will seek to strike a balance between the under-utilization of leverage, which reduces potential returns to our stockholders, and the over-utilization of leverage, which increases risk by reducing our ability to meet our obligations to creditors during adverse market conditions.


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Our Investment Types
 
We intend to acquire a diversified portfolio of real estate-related loans, commercial real estate properties, commercial real estate-related debt securities and select real estate equity investments. We intend to invest in loans to homebuilders, developers and homebuyers, and owners of real property with financing needs that are not met by traditional mortgage lenders. We expect that when the proceeds of this offering are fully invested, up to approximately 80% of our portfolio will consist of short-term mortgage loans consisting of acquisition, development, construction and commercial mortgage loans to both local and national developers and homebuilders. We also expect to invest in non-agency residential mortgage loans to provide niche financing to borrowers that otherwise have limited financing sources. We expect that up to approximately 10% of our portfolio will consist of non-agency residential mortgage loans. We also intend to make a limited number of opportunistic investments in commercial real property to take advantage of attractive investment opportunities. We may also acquire real estate-related debt securities, such as commercial mortgage-backed securities and collateralized debt obligations related to real estate, and equity securities of other real estate-related companies. We expect that up to approximately 20% of our portfolio will consist of commercial real property, real estate-related debt securities and equity securities of other real estate-related companies. We expect our ability to execute our investment strategy to be enhanced by our access to CM Capital Services’ and Residential Capital’s loan origination capabilities.
 
Acquisition, Development, Construction and Commercial Mortgage Loans
 
We expect that after we have invested the proceeds of this offering, the majority of our investment portfolio will consist of acquisition, development, construction and commercial mortgage loans. Our mortgage loan investments may consist of loans that we wholly own or in trust deed mortgage loans that we own with other lenders. The majority of our investments are expected to be short-term (12-24 months) mortgage loans that are balloon mortgage loans with fixed interest rates. A substantial portion of these mortgage loans will consist of interest-carry loans, meaning we will provide the borrower with sufficient financing to enable it to make the interest payments during the term of the loan. All of our mortgage loans are expected to be within the loan-to-value ratios set forth under “— Underwriting Criteria — Acquisition, Development, Construction and Commercial Mortgage Loans.” Initially, we expect that the majority of these types of mortgage loans will be identified by CM Capital Services pursuant to our loan origination agreement. CM Capital Services will be paid loan origination fees (points) by the borrowers on the loans that it originates for us. The loan origination fees are paid to CM Capital Services in consideration for the underwriting and due diligence services it performs with respect to the loans it originates. We are not entitled to receive any part of these origination fees; however, we will charge and receive commitment fees in connection with some of our loans. We also plan to fund or acquire mortgage loans directly from originators and from entities holding mortgage loans originated by others. We do not currently have a contractual arrangement with any other mortgage originator for the purpose of acquiring these types of mortgage loans.
 
We will only invest in mortgage loans that are secured by first lien mortgages on real property. We expect that all of the mortgage loans in our portfolio will be full recourse against the real estate being financed. These loans will fall into the following categories: acquisition loans, development loans, construction loans and commercial property loans. Our asset acquisition policy limits the amount and type of mortgage loans that we may acquire. See “Our Operating Policies and Investment Policies — Asset Acquisition Policy.”
 
Set forth below is a description of the types of mortgage loans in which we plan to invest:
 
Acquisition of Raw and Unimproved Land.  Generally, we will invest in mortgage loans for the acquisition of raw and unimproved land with a principal amount of up to 65% of the appraised value of the property. Development or construction on land collateralizing these mortgage loans will be planned to commence within one year of our making the loan.
 
Development Loans.  Development loans enable borrowers to complete the basic infrastructure and development of their property prior to the construction of buildings or residences. Such development may include installing utilities, sewers, water pipes or streets. Generally, we will invest in development loans with a principal amount of up to 70% of the appraised value of the property or anticipated post-development value.


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Construction Loans.  Construction loans provide funds to allow commercial developers to make improvements or renovations to the property in order to increase the net operating income of the property so that it can be sold or may qualify for institutional refinancing. Generally, we will invest in construction loans with a principal amount of up to 75% of the appraised value of the property or anticipated post-construction value.
 
Commercial Loans.  Commercial loans provide funds to allow commercial borrowers to make improvements or renovations to an existing structure in order to increase the net operating income of the property so that it may qualify for institutional refinancing. Generally, we will invest in commercial property loans with a principal amount of up to 75% of the appraised value of the property.
 
Trust Deeds.  We may also invest in any of the foregoing types of mortgage loans with other lenders, as permitted by our investment policies, by providing funds for or purchasing a majority interest in a trust deed mortgage loan meeting our investment guidelines described above. We would be more likely to invest in a trust deed mortgage loan when, for example:
 
  •  we do not have sufficient funds to invest in an entire loan; or
 
  •  an originated trust deed mortgage loan fits within our investment guidelines but would constitute more than 10% of our average invested assets or otherwise be disproportionately large given our then existing portfolio.
 
We may also invest in trust deed mortgage loans not originated by CM Capital Services that meet the requirements below if we acquire a controlling interest, alone or with any of our affiliates, in such loan. A controlling interest enables us to direct or cause the direction of the management and policies of such loan, which includes the authority to:
 
  •  review all material contracts;
 
  •  cause a sale of the loan or our interest therein subject in certain cases to limitations imposed by the participation agreement among the parties;
 
  •  approve budgets and major capital expenditures;
 
  •  veto any sale of the loan, or alternatively, to receive a specified preference on sale or proceeds; 
 
  •  exercise a right of first refusal on any desired sale; and
 
  •  cause the foreclosure of the loan.
 
In the event of investment with an affiliate, the investment objectives of the participant will be substantially identical. There will be no duplicate fees. The compensation to the sponsors must be substantially identical, and the investment of each lender must be on substantially the same terms and conditions. Each lender will have a right of first refusal to buy the other’s interest if the co-lender decides to sell its interest.
 
In accordance with our asset acquisition policy, we will not acquire any mortgage loans or other investments, directly or indirectly, from Desert Capital or any of our affiliates, other than pursuant to our loan origination arrangements with CM Capital Services and Residential Capital. See “Our Operating Policies and Investment Policies — Asset Acquisition Policy.” In addition, we will not participate in joint ventures or partnerships with affiliates except as permitted by NASAA Guidelines.
 
We will acquire mortgage loans from CM Capital Services on a servicing released basis. However, we expect that CM Capital Services will service all of our mortgage loans that we acquire from CM Capital Services pursuant to our loan servicing agreement. CM Capital Services will receive a servicing fee for each mortgage loan that is comprised of a spread of up to 100 basis points between the interest rate that is paid by the related borrower on the loan and the interest rate we receive as the lender on the loan. The servicing fee will vary and will be mutually determined on a loan-by-loan basis by our advisor and CM Capital Services. In the event a loan becomes non-performing and we take ownership of the property as a result of a workout or foreclosure of a loan, in lieu of the servicing fee that was previously paid by the borrower, we will pay, CM Capital Services an asset management fee equal to 1% of the original loan amount per annum. We will not give CM Capital Services or


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any of its affiliates any consideration similar to rebates or give-backs or enter into reciprocal arrangements with CM Capital Services or its affiliates that might be entered into in lieu of participations.
 
Balloon Payment.  We anticipate that substantially all of the mortgage loans we invest in or purchase will require the borrower to make a “balloon payment” of the entire principal amount upon maturity of the loan. Balloon payment loans do not generate principal repayments to us through borrower monthly repayment. Generally borrowers are required to make monthly interest payments to us. However, we anticipate that up to 80% of our loan portfolio will consist of “interest-carry” loans, meaning we will provide the borrower with sufficient financing to enable it to make the interest payments. Most of our mortgage loans will be non-investment grade loans, and frequently will be made to borrowers with limited credit histories. We will require full recourse against the real estate being financed. We will require two years of tax returns and financial statements. We also will require a current credit report from at least one major credit reporting agency. However, a substantial period of time may elapse between the review of the credit report and financial statements of the borrower and the due date of the balloon payment. Therefore, there is no assurance that a borrower will have sufficient resources to make a balloon payment when due. Further, as a result of the “interest-carry” component of many of these loans, a borrower will be able to continue making interest payments in spite of experiencing substantial financial difficulties. To the extent that a borrower has an obligation to pay the mortgage loan principal in a large lump sum payment, its ability to repay the loan may be dependent upon market conditions, its ability to sell the property, obtain suitable refinancing or otherwise raise a substantial amount of cash. As a result, these loans involve a higher risk of default than loans where the principal is paid over the life of the loan at the same time as the interest payments.
 
Collateral.  Each of the mortgage loans we fund will be secured by a first priority lien filed and recorded with the applicable county recorder’s office. We will obtain an independent appraisal, sales comparables, or other accepted valuation methodology for each property securing each of our mortgage loan investments. We will require full recourse against the real estate being financed. From time to time, we may be required to foreclose on the real estate serving as collateral for a mortgage loan. Upon the sale of any of our properties by our advisor or any affiliate of our advisor, in consideration for substantial assistance in connection with the sale of such property, we will pay sales commissions to any of such persons in amounts no greater than an amount that when added to all other disposition fees paid to unaffiliated parties in connection with the sale, does not exceed the lesser of the competitive real estate commission or an amount up to 3% of the contractual sales price.
 
Prepayment Penalties and Exit Fees.  We typically will not require prepayment penalties or exit fees for the loans in which we invest. Because of the short-term nature of the mortgage loans we intend to acquire, we should not have a substantial prepayment risk.
 
Escrow Conditions.  We will fund our mortgage loans through an escrow account held by a title insurance company, which will be subject to the following conditions:
 
  •  Title to the subject property must be free and clear of all liens and encumbrances.
 
  •  Borrowers must obtain title insurance coverage for all loans, with the title insurance policy naming us as the insured, and providing title insurance in an amount at least equal to the principal amount of the loan. Title insurance insures only the validity and priority of our deed of trust, and does not insure us against loss by other causes, such as diminution in the value of the property.
 
  •  Borrowers must obtain fire and casualty insurance for all loans secured by improved real property, naming us as loss payee in an amount sufficient to cover the replacement cost of improvements.
 
  •  All insurance policies, notes, deeds of trust or mortgages, escrow agreements, and any other loan documents for a particular transaction will name us as payee and beneficiary.
 
Construction Controls.  The development and construction loans we expect to fund or acquire will be initially fully funded, with the maximum borrowing capacity being established by an appraisal, comparable sales price, or other accepted valuation methodology to determine the completed value of the property. We will obtain an appraisal, sales comparables or other accepted valuation for every mortgage loan we fund. Once


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the amount of the mortgage loan has been established, the development or construction funds will be maintained by a third party construction control company in a separate trust account specific to the subject loan and will be disbursed upon the approval of the third party construction control company, which will monitor the progress of the construction process and release the funds as certain construction thresholds are reached. The vendors, suppliers and subcontractors of the borrower will submit invoices for services rendered or goods provided to the construction control company. Once the construction control company has confirmed the delivery of the goods or the satisfactory completion of the services, it will obtain a lien release from the billing party and approve payment of the invoice. At no time will the borrower have direct access to the committed funds.
 
Repayment of Mortgages on Sales of Properties.  We may require a borrower to repay a mortgage loan upon the sale of the mortgaged property rather than allow the buyer to assume the existing loan. We will require repayment if we determine that repayment appears to be advantageous to us based upon then-current interest rates, the length of time that the loan has been held by us, the creditworthiness of the buyer and our objectives. We will invest our net proceeds from any capital transaction in new investments, hold the net proceeds as cash, or distribute them to the stockholders. For these purposes, net proceeds also include the principal of a loan deemed to be repaid for tax purposes as a result of the nature of a loan modification or loan extension. Capital transactions include payments of principal, foreclosures and prepayments of mortgages, to the extent classified as a return of capital under the Internal Revenue Code, and any other disposition of a mortgage or property.
 
Non-agency Residential Mortgage Loans
 
We intend to invest a portion of our portfolio in non-agency residential mortgage loans. We define a non-agency residential mortgage loan as a first lien mortgage loan for a residential dwelling in which we are the first lien holder, as further described below. Non-agency residential mortgage loans may range in principal amount from $50,000 to $2 million with fixed or variable interest rates, based on the terms and conditions that reflect the type of loan and the inherent risk associated therewith. Non-agency residential mortgage loans are expected to be within our loan-to-value ratios set forth under “— Underwriting Criteria — Non-Agency Residential Mortgage Loans.” Initially, we anticipate that the majority of the non-agency residential mortgage loans that we fund will be identified by Residential Capital and serviced by an affiliate of our advisor or a third party. Residential Capital will be paid loan origination fees (points) by the borrowers on the loans that it originates for us. The loan origination fees are paid to Residential Capital in consideration for the underwriting and due diligence services it performs with respect to the residential loans it originates. We are not entitled to receive any part of the origination fees. We may also acquire non-agency residential mortgage loans directly from other mortgage brokers or originators and from entities holding non-agency residential mortgage loans. We do not currently have a contractual arrangement with any originator for the purpose of acquiring non-agency residential mortgage loans. Our asset acquisition policy limits the amount and type of non-agency residential mortgage loans we may acquire. See “Our Operating Policies and Investment Policies — Asset Acquisition Policy.”
 
We will acquire residential mortgage loans on a servicing released basis. However, we expect that an affiliate of our advisor or a third party servicer will service all of our residential mortgage loans. We expect that our residential loan servicer will receive a servicing fee for each residential mortgage loan that is comprised of spread up to 100 basis points between the interest rate that is paid by the related borrower on the loan and the interest rate we receive as the lender on the loan. The servicing fee will vary and will be mutually determined on a loan-by-loan basis by our advisor and the servicer. In the event a loan becomes non-performing and we foreclose on the property securing the loan, we will pay CM Capital Services or such other affiliate, as the case may be, an asset management fee equal to 1% of the original loan amount per annum. The servicer of our mortgage loans, will maintain a separate impound account for property taxes and insurance for each non-agency residential mortgage loan corresponding to the specific borrower in compliance with the rules and regulations of the U.S. Department of Housing and Urban Development. We anticipate that non-agency residential mortgage loans will be held and serviced for approximately 12 to 36 months before being “bundled” for sale. Once we have invested approximately $20 million in non-agency residential mortgage loans or have serviced a select group of non-agency residential mortgage loans in excess of 12 months, we will evaluate those mortgage loans to


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determine the attributable value of the asset based on the amount owed on the mortgage loan compared to fair market value and the performance of the loan to determine a premium price for a subsequent sale of the assets. Industry terminology used for this type of transaction is “bundling loans” with the intent to sell at a premium. We would expect to sell these bundles to financial institutions or private investors. Given current market conditions, currently few, if any, investors are interested in purchasing bundled loans. We may not be able to sell bundled loans if market conditions do not improve. We cannot predict when this market will re-emerge or when we may be able to sell any bundled loans, if ever.
 
The non-agency residential mortgage loans in which we intend to invest will generally fall into one of the following categories: condo/hotel, foreign nationals, asset-based stated income and jumbo. We will not invest in non-agency residential mortgage loans in favor of any one borrower in excess of $2 million. We expect that all of the non-agency residential mortgage loans in our portfolio will be full recourse against the property that secures the loan.
 
We expect to wholly own each of our non-agency residential mortgage loans, meaning that we will not participate in such a loan with another lender. The maximum loan amount will be established by an appraisal, comparable sales price, or other accepted valuation methodology. Once the loan amount has been established, the funds will be sent to a title company to process the title on the real property, and insure us as the first lien holder.
 
Non-agency Residential Mortgage Loan Payments.  We anticipate that borrowers will make monthly payments directly to the servicer, CM Capital Services, or another affiliate of our advisor, that include principal and interest or interest-only, as well as applicable property taxes and impound fees based on the terms and conditions of the loan agreement and the rules and regulations of the U.S. Department of Housing and Urban Development. A portion of the interest paid by the borrower will be retained by the servicer as the servicing fee. The servicer will also ensure that the portion of the payment for the impound account representing property taxes and insurance are properly allocated and applied to appropriate parties. The remainder of the payment will be forwarded to us. If a borrower becomes delinquent in making payments under the obligations set forth in the loan agreement we, as the first lien holder on the property, will take the appropriate measures, including but not limited to complying with applicable state regulations related to foreclosure, foreclosing on the property and taking ownership with the intent to sell the property.
 
Collateral.  Each of the mortgage loans we fund will be secured by a first priority lien filed and recorded with the applicable county recorder’s office. All real property collateral securing the mortgage loans we fund will be appraised by an independent third party. From time to time, we may be required to foreclose on the real estate serving as collateral for a nonconforming residential mortgage loan due to the loan obligations not being met by the borrower. Upon the sale of any of our properties by our advisor or any affiliate of our advisor, we will pay sales commissions to any of such persons in amounts no greater than the lesser of the competitive real estate commission or an amount up to 3% of the contractual sales price.
 
Prepayment Penalties.  Under the U.S. Department of Housing and Urban Development regulations we may impose a prepayment penalty equal to up to six months of regularly scheduled interest payments on non-agency residential mortgage loans with terms greater than five years.
 
Escrow Conditions.  We will fund nonconforming residential mortgage loans through an escrow account held by a title company, subject to the following conditions:
 
  •  Title to the subject property must reflect free and clear title with no liens or encumbrances.
 
  •  Borrowers must obtain title insurance coverage for the loan, with the title insurance policy naming us as the insured, and providing title insurance in an amount at least equal to the principal amount of the loan. Title insurance insures only the validity and priority of ownership, and does not insure us against loss by other causes, such as diminution in the value of the property.
 
  •  Borrowers must obtain fire and casualty insurance for all loans secured by real property, naming us as loss payee in an amount sufficient to cover the replacement cost of real property.
 
  •  All insurance policies, escrow agreements, and any other loan documents for a particular transaction will name us as payee and beneficiary.


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Investments in Commercial Real Property
 
We intend to make a limited number of investments in commercial real property to take advantage of attractive investment opportunities. We will seek to invest in commercial properties that offer opportunistic investment returns. We expect that the real estate-related debt investments described above, in particular investments in distressed debt, will, in certain circumstances, result in us owning real property as a result of a loan workout, foreclosure or similar circumstances. We intend to focus on properties that offer the opportunity for rental income growth and capital appreciation over the holding period. These properties may be existing or newly constructed properties or properties under development or construction. We will also seek to take advantage of the market conditions to acquire distressed properties from motivated sellers at substantial discounts to their intrinsic value. We will manage and dispose of any real property assets we acquire in the manner that our advisor determines is most advantageous to us.
 
Commercial Real Estate-Related Debt Securities
 
In addition to our primary focus on origination of and investments in acquisition, development, construction and commercial real estate loans and non-agency residential mortgage loans, we may also invest in commercial real estate-related debt securities such as commercial mortgage-backed securities (including distressed mortgage-backed securities), secured and unsecured debt issued by REITs and interests in other securitized vehicles that own real estate-related debt.
 
Commercial Mortgage-Backed Securities.  Commercial mortgage-backed securities, or CMBS, are securities that evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, these securities are subject to all of the risks of the underlying mortgage loans.
 
CMBS are generally pass-through certificates that represent beneficial ownership interests in common law trusts whose assets consist of defined portfolios of one or more commercial mortgage loans. They are typically issued in multiple tranches whereby the more senior classes are entitled to priority distributions from the trust’s income. Losses and other shortfalls from expected amounts to be received on the mortgage pool are borne by the most subordinate classes, which receive payments only after the more senior classes have received all principal and/or interest to which they are entitled. The credit quality of mortgage-backed securities depends on the credit quality of the underlying mortgage loans, the real estate finance market and the parties directly involved in the transaction.
 
Collateralized Debt Obligations.  CDOs are multiple class debt securities, or bonds, secured by pools of assets, such as mortgage-backed securities, B-Notes, mezzanine loans, REIT debt and credit default swaps. Like typical securities structures, in a collateralized debt obligation the assets are pledged to a trustee for the benefit of the holders of the bonds. We may invest in investment grade and non-investment grade CDO classes.
 
Ratings of Real Estate-Related Debt Securities.  For mortgage-backed securities and CDOs, the securitization process is governed by one or more of the rating agencies, including Fitch, Moody’s and Standard & Poor’s, who determine the respective bond class sizes, generally based on a sequential payment structure. Bonds that are rated from AAA to BBB by the rating agencies are considered “investment grade.” Bond classes that are subordinate to the BBB class are considered “non-investment” grade. The respective bond class sizes are determined based on the review of the underlying collateral by the rating agencies. The payments received from the underlying loans are used to make the payments on the securities. Based on the sequential payment priority, the risk of nonpayment for the AAA securities is lower than the risk of nonpayment for the non-investment grade bonds. Accordingly, the AAA class is typically sold at a lower yield compared to the non-investment grade classes that are sold at higher yields. We may invest in investment grade and non-investment grade classes.
 
Real Estate-Related Equity Investments
 
We may also invest in equity interests in mortgage REITs and other entities with investment objectives similar to ours. We may purchase the common or preferred stock of these entities or options to acquire their stock. We will target a public company that owns real estate-related loans, real estate-related debt securities and other real estate-related investments when we believe its stock is trading at a discount to that company’s net asset value. We will make investments in other entities only if they are not our affiliates, and no more than


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10% of the proceeds of this offering will be used for such purposes. We may eventually seek to acquire or gain a controlling interest in the companies we target.
 
We may make investments in other entities when we consider it more efficient to acquire an entity that already owns assets meeting our investment objectives than to acquire such assets directly. We may also participate with other entities in investments through joint ventures, limited liability companies, partnerships and other types of ownership or participations.
 
Other Possible Investments
 
Although we expect that most of our investments will be of the types described above, we may make other investments, such as investing in any government sponsored programs organized to stabilize the financial system for which we qualify and to the extent consistent with our investment objectives. In fact, we may invest in whatever types of interests in real estate- or debt-related assets that we believe are in our best interests. Although we can purchase any type of interest in real estate- or debt-related assets, our charter does limit certain types of investments. See “Our Operating Policies and Investment Policies — Certain Investment Limitations.”
 
Underwriting Criteria
 
Our advisor will continuously evaluate prospective investments, select the mortgage loans satisfying our investment strategy and underwriting criteria in which we will invest and make all investment decisions on our behalf, unless our advisory agreement provides otherwise. Our stockholders will not be entitled to act on any proposed investment. In making investment decisions, our advisor will evaluate the underlying loan-to-value ratio of the collateral, credit worthiness and assets of the borrowers.
 
Acquisition, Development, Construction and Commercial Mortgage Loans
 
In evaluating prospective mortgage loan investments, our advisor, through its wholly owned subsidiary, CM Capital Services, will conduct substantial due diligence and consider a number of investment guidelines including, without limitation, the following:
 
  •  We will fund the entire principal amount of the mortgage loan or acquire no less than a majority position in a trust deed mortgage loan.
 
  •  We expect to invest only in first lien mortgage loans.
 
  •  We will evaluate each mortgage loan based on specific loan-to-value (“LTV”) or loan-to-cost (“LTC”) ratios relating to the type of mortgage loan being made. The LTV ratio compares the total amount being borrowed to the value of the property as supported by an appraisal, comparable sales prices, or other accepted valuation methodology. The LTC compares the total amount being borrowed to the borrower’s cost basis in the subject property. We will obtain an appraisal, sales comparables or other accepted valuation methodology for every mortgage loan. We may also use other valuation methodologies in our valuation analysis. We do not intend to fund mortgage loans that have a LTV or LTC ratio greater than 80%.
 
     
Type of Collateral
 
Expected Maximum Loan-to-Value Ratio
 
Raw and unimproved land
  65%
Property under development
  70% (of anticipated post-development value)
Construction
  75% (of anticipated post-construction value)
Commercial property
  80% (of property value)
 
  •  We do not have a minimum net worth requirement for a prospective borrower; instead, we rely heavily on evaluating the strength of the borrower based on its experience, track record and reputation as a borrower in the subject community. The established strength of the borrower provides insight into a borrower’s ability to fulfill the proposed exit strategy and anticipated holding period necessary for a strategic disposition of the property.
 
  •  We expect that each of our mortgage loans will be full recourse against the real estate being financed.
 
  •  We require each prospective borrower to provide tax returns and financial statements for the prior two years in order for us to evaluate the strength of the borrower.


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  •  We expect income-producing properties will generally have a debt service coverage ratio of 1.05:1, which is typically achieved if the property has at least a 60% occupancy rate; however, we will not lend to any income-producing property that does not have sufficient occupancy to meet the applicable debt service requirements.
 
  •  We will analyze the property securing a potential investment for the likelihood of capital appreciation or depreciation.
 
  •  We require a review of the status and condition of the recorded title of the property.
 
  •  We will generally focus on geographic locations in the Western United States, which is where we believe we possess the requisite market knowledge, although we have no geographic limitations on the lending opportunities we will consider.
 
With respect to each mortgage loan we fund, we will loan the money directly to the borrower and the borrower will execute a note payable to us, or in the case of a trust deed mortgage loan, a master note payable to us and all other co-lenders with respect to that loan. Each of the trust deed mortgage loans that we invest in will be secured by the real estate that is either acquired, developed or constructed with the proceeds of the loan. We expect to generate revenues from the payments of interest on those loans made directly to us by the borrowers. Occasionally, CM Capital Services will temporarily fund trust deed mortgage loans for a period of time until it identifies the investors that will acquire the loan; therefore, we may also acquire interests in trust deed mortgage loans from CM Capital Services or a third party trust deed investor. We will acquire our investment from CM Capital Services or the third party trust deed investor, as the case may be, at par. CM Capital Services generates its income from origination fees and servicing fees paid by the borrowers under the loans it identifies. Accordingly, we will not pay any fees to CM Capital Services to fund all or a portion of any loan that we acquire from CM Capital Services.
 
We may invest in a mortgage loan with a higher loan-to-value ratio if the loan is supported by credit adequate to justify such higher ratio, including personal guarantees. Subject to the REIT requirements of the Internal Revenue Code, occasionally our collateral may include personal property as well as real property. We do not have specific requirements with respect to the projected income or occupancy levels of a property securing our investment in a particular loan. Our expected loan-to-value ratios do not apply to financing offered by us to the purchaser of any real estate acquired through foreclosure, or to refinance an existing development or construction loan that is in default when it matures. In those cases, we may accept any reasonable financing terms we deem to be in our best interest. Nevertheless, in no event at the time of funding will the loan-to-value ratio on any trust deed mortgage loan exceed 80% of the independently appraised completed value of the property. The target loan-to-value ratio for our mortgage loan portfolio as a whole is approximately 70%.
 
We will obtain an independent appraisal, sales comparables, or other accepted valuation methodology for each property securing each of our mortgage loan investments. Loan-to-value ratios are based on appraisals, sales comparables, or other accepted valuation methodologies at the time of funding and may not reflect subsequent changes in value. No appraisal, sales comparables, or other accepted valuation methodologies may be dated more than six months prior to the funding date of the loan. Copies of these appraisals, sales comparables, or other accepted valuation methodologies will be available for your review at our offices for a period of five years. The appraisals may be for the current estimate of the “as-if developed” value of the property, which approximates the post-construction value of the collateralized property assuming that such property is developed. Our advisor ensures that the mortgage companies that originate and manage our mortgage loans retain appraisers who are licensed or qualified as independent appraisers and are certified by or hold designations from one or more nationally recognized organizations.
 
A part of our business strategy is to provide financing or acquire loans made to acquirers or developers of real estate, mostly in the form of short-term, bridge loans, which necessitate underwriting standards that are more flexible than traditional mortgage lenders and a loan approval process that is faster than traditional lenders. Substantially all of our trust deed mortgage investments are expected to be “balloon payment” loans, which are loans requiring the payment of all principal at the maturity of the loan. Balloon payment loans are non-investment grade and, therefore, carry a higher risk of default. Balloon payment loans are also riskier than amortizing loans because the borrower’s repayment depends on its ability to refinance the loan or sell the property.


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We anticipate that substantially all of our acquisition, development, construction and commercial mortgage loans will consist of “interest-carry” mortgage loans, meaning we will provide the borrower with sufficient financing to enable it to make the interest payments during the term of the loan. We anticipate that in many cases we will make mortgage loans which are riskier than the mortgage loans made by commercial banks. However, in return we expect to receive a higher interest rate on our investments than more traditional lenders. We have instituted measures designed to mitigate the risks associated with our mortgage loans, such as imposing a lower loan-to-value ratio with respect to loans we determine to be more risky (thereby providing us with a larger equity cushion if real estate values decline). We intend to hold substantially all of our acquisition, development, construction and commercial mortgage loans to maturity. We may, however, periodically sell certain loans, or our portion of certain loans, if they no longer meet our investment criteria.
 
We intend to invest in the areas in which CM Capital Services is or becomes licensed or is otherwise qualified to originate mortgages, currently Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas and Utah.
 
Our advisor is seeking to expand its relationship with real estate developers and mortgage lenders in Nevada, as well as elsewhere in the United States. Through these expanded relationships, we expect to identify additional mortgage funding and investment opportunities.
 
We expect to benefit from our relationship with CM Capital Services and our access to its proven loan origination and servicing capabilities. Initially, we will be dependent on CM Capital Services’ ability to originate mortgage loans, because we have not identified another source from which we can acquire acquisition, development, construction and commercial mortgage loans. CM Capital Services has been originating and servicing loans since 1977. CM Capital Services has an investor pool consisting of approximately 4,000 investors, which provides funds directly to the borrowers for loans originated by CM Capital Services. Despite an extremely challenging economic environment, CM Capital Services identified and arranged for the funding of approximately $210 million in mortgage loans in 2007, approximately $44 million in 2008 and approximately $40.7 million in 2009. CM Capital Services’ network of borrowers and investors should provide us with a consistent pipeline of loans to fund. We expect to benefit from the experience and reputation of CM Capital Services and its proven ability to identify, value and originate a variety of acquisition opportunities for us. CM Capital Services will service our loans following our acquisition of the loans.
 
The loan origination and portfolio management teams at CM Capital Services have a diverse and concentrated breadth of experience within the real estate investment and management sectors. Collectively, prior to joining CM Capital Services, members of the portfolio management team oversaw a substantial number of real estate projects, including apartment and condominium projects and development of single family residential lots. Members of the team also managed the development of residential, office, retail, hotel and master planned communities. The team has industry relationships with key financial institutions, builders, developers, title companies and investors that are active in various aspects of the real estate industry.
 
CM Capital Services originated and serviced all of Desert Capital’s loans. As of December 31, 2009, Desert Capital had funded 506 mortgage loans with an aggregate principal amount of $344.3 million. The substantial majority of the loans made by Desert Capital consisted of short-term (12-18 months) acquisition and development and construction loans that were interest-carry balloon loans with geographic concentrations primarily in Southern Nevada. Balloon loans do not amortize over their term and as a result, in order to repay the loan at its maturity, the borrower must either be able to refinance the loan or sell the property for an amount that is sufficient to repay the loan. Prior to mid-2007, the credit markets were liquid, property values were stable or appreciating and Desert Capital’s borrowers were able to repay their loans. Prior to 2007, Desert Capital had experienced minimal defaults and had not foreclosed on any loans.
 
Commencing in 2007 with the collapse of the sub-prime residential mortgage market, banks and other financial institutions experienced severe shortages of capital and liquidity, which caused them to cease lending resulting in highly illiquid credit markets, which, among other things, adversely impacted the cost and availability of credit. The inability of would be home buyers to obtain loans to complete the purchase of homes and home builders to sell or refinance their housing projects resulted in an extremely high level of foreclosures, declining property values and ultimately, an illiquid real estate market. Because a substantial majority of Desert Capital’s loan portfolio consisted of short-term balloon loans, the severe disruption of the


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credit markets and declining values in the real estate markets disproportionately affected Desert Capital as the majority of its loan portfolio matured during 2007 and 2008. As a result of the market disruptions, its borrowers had no available source of refinancing or ability to sell the collateral securing the maturing loans at values exceeding the loan amounts, which resulted in their inability to repay the mortgage loans owing to Desert Capital, which caused Desert Capital’s default rate to increase dramatically. The default rate for loans originated by CM Capital Services in 2008 and 2007 was 87.54% and 86.11%, respectively. See “Prior Performance Summary — Prior Investment Programs.”
 
We intend to invest in loans similar to those in which Desert Capital invested and as a result, our business, results of operations and ability to make distributions to you could also be adversely affected by continued or future market disruptions that cause credit illiquidity or property values to decline further in the same manner that such conditions affected Desert Capital. Any sustained period of illiquidity and declining property values could negatively affect our mortgage loan investments and could cause us to incur substantial losses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Real Estate Market Outlook.”
 
Our overall investment strategy is different from Desert Capital’s, which should help mitigate against some of the risks to which Desert Capital was subject. Our investment strategy is broader and more diversified than Desert Capital’s as it also includes investing in non-agency residential mortgage loans, commercial real property, and real estate-related debt and equity securities. In addition, we do not intend to invest in second lien mortgage loans. We have also established additional investment guidelines to provide geographic and borrower diversification to our portfolio and to require board approval of all investments other than real estate-related loans. See “Our Operating Policies and Investment Policies — Asset Acquisition Policies.”
 
Despite the high default rate experienced with respect to loans originated by CM Capital Services, our advisor and CM Capital Services continue to believe that their loan origination and underwriting fundamentals are sound. Our advisor and CM Capital Services believe the high level of defaults experienced by Desert Capital was caused by illiquid credit and real estate markets which resulted in borrowers being unable to refinance their loans or sell their projects at reasonable values, and not by unsound underwriting. Accordingly, we have not materially changed our underwriting criteria from that used by Desert Capital, however, our investment selections must be made in light of the exit strategies that are available to us in the event of a borrower’s default given the current market conditions. The constraints imposed by the existing market conditions will accordingly affect the types and geographic location of mortgage loan investments that we will make.
 
In addition, because there are currently fewer qualified property buyers and lenders with respect to any given property, property appraisals in the current market conditions are likely to provide more conservative property values upon which to lend. Moreover, property values have reset at substantially lower levels than existed several years ago and loans being funded in the current market will likely be secured by properties whose values have stabilized at these lower levels. Accordingly, all other things being equal, a loan made in the current market conditions with a 70% loan-to-value ratio should be a relatively safer investment than a loan made several years ago with a 70% loan-to-value ratio. We believe that the severely constrained credit market provides us with an attractive opportunity to provide an alternative source of capital to borrowers that is not being met by the current market participants. We further believe that the current uncertain economic conditions will continue to create opportunities to acquire commercial real properties and select real estate-related debt and equity securities from motivated sellers at substantial discounts to their previous values.
 
Non-Agency Residential Mortgage Loans
 
In evaluating prospective non-agency loan investments, our advisor will consider the following investment guidelines:
 
  •  We will invest in fully amortizing or interest only non-agency loans originated under the terms of 15 and 30 year fixed, 2, 3 and 5 year fixed with adjustable rate mortgage (“ARM”), and 2, 3 and 5 year fixed interest only ARM loans.
 
  •  We will invest in loans secured by the following types of property: 1-unit attached and detached single family residence (“SFR”), planned unit development (“PUD”), low and high-rise condominiums and


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  condo/hotels (exposure in any one condo/hotel project is limited to a maximum of 20% of the total units and are only eligible as a second home or investment property) and properties up to 10 acres.
 
  •  We expect that non-agency mortgage loans will not exceed a maximum loan amount of $2 million per borrower, subject to exceptions with compensating factors that would require investment committee approval.
 
  •  We will evaluate each non-agency mortgage loan based on specific LTV ratios relating to the total amount being borrowed to the value of the property as supported by an appraisal, comparable sales prices, or other valuation methodologies and the risk assessed by the occupancy, debt-to-income ratio (“DTI”), FICO scores, reserves and cash down payment. We do not intend to fund non-agency residential mortgage loans that have a LTV ratio greater than 75%.
 
  •  We require a full uniform residential appraisal with interior and exterior inspection and photos of the property within 90 days prior to close of escrow (“COE”).
 
  •  We expect that each of our loans will be full-recourse to the assets of individual borrowers, except where prohibited by law.
 
  •  We require a review of the status and condition of the recorded title of the property.
 
  •  We will generally focus on geographic locations in the Western United States, which is where we believe we possess the requisite market knowledge, although we have no geographic limitations on the lending opportunities we will consider.
 
  •  We will invest in non-agency residential mortgage loans to the following eligible borrowers: U.S. citizens, resident aliens, non-permanent resident aliens and foreign nationals.
 
  •  We require non-agency residential mortgage loans to prospective borrowers to have a thorough documentation review to include, but not limited to:
 
  •  Borrower must have a minimum of a 24 month credit history (except foreign nationals) that meets the following criteria:
 
  •  credit report may not be more than 60 days old at COE;
 
  •  minimum of four outstanding sources of credit;
 
  •  collection amounts over $250 individual or $1,000 aggregate may be required to be paid;
 
  •  judgments and liens may be required to be paid; and
 
  •  bankruptcies and foreclosures must meet Fannie Mae and Freddie Mac guidelines.
 
  •  Borrower must provide the following income documentation:
 
  •  prior two years and current year financial statement;
 
  •  two years of employment history;
 
  •  last two paycheck stubs to cover most recent 30-day period;
 
  •  three months of bank statements and other documentation illustrating current financial holdings (i.e. IRA, mutual funds, stocks, etc.);
 
  •  documentation on all real property owned;
 
  •  bankruptcy filing, if applicable; and
 
  •  verbal verification of employment (“VOE”) prior to funding is required on all loans.
 
A part of our business strategy is to provide financing or acquire loans made to homebuyers, mostly in the form of monthly principal and interest loans, which necessitate underwriting standards that are more flexible than traditional mortgage lenders and a loan approval process that is faster than traditional lenders. With respect to each non-agency residential mortgage loan that we fund, we will loan the money directly to the borrower. The loans we invest in will be secured by the real property. We expect to generate revenues and, in some instances, reduce our capital investment from the payments of principal and/or interest on those loans made directly to our servicer by the borrower, and we will receive payments from the servicer after all


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applicable taxes, insurance and impound reserve fees are deducted. These underwriting criteria are based on current market conditions. As market conditions change, we may need to revise our criteria in order to remain competitive and satisfy market demand.
 
Our non-agency mortgage loan originator, Residential Capital generates its income from origination fees paid by the borrower under the loan processing agreement. Accordingly, we pay no fees to Residential Capital. We are not entitled to receive any part of these origination fees. We may also acquire loans from non-affiliated entities. We expect to benefit from our relationship with Residential Capital and our access to its proven loan origination capability. Initially, we will be dependent on Residential Capital’s ability to originate non-agency mortgage loans, because we have not identified another qualified source from which we can acquire these types of loans. Residential Capital has been identifying and originating home loans since 1995. Residential Capital has worked with thousands of homebuyers to provide competitive loan terms and services to meet the needs of homebuyers throughout the Western United States. Despite an extremely challenging economic environment, Residential Capital identified homebuyers and arranged for the financing through its institutional bank and investor resources of approximately $54.0 million in home loans in 2007, approximately $95.0 million in 2008 and approximately $67.0 million in 2009. Residential Capital’s network of loan officers and underwriters is expected to provide us with a pipeline of non-agency residential mortgage loans available to fund. Residential Capital will serve as the originator of borrowers seeking financing for non-agency residential mortgage loans offered under the guidelines outlined above. Residential Capital also originates loans for numerous local and national homebuilders throughout the Western United States. An affiliate of our advisor or other third party will service all of our residential mortgage loans.
 
We intend to invest in the areas in which Residential Capital is licensed to originate mortgages, specifically Arizona, California, Colorado, Montana, Nevada, New Mexico and Wyoming.
 
In many cases we may make non-agency residential mortgage loans which are riskier than typical non-agency residential mortgage loans made by traditional lenders. However, in return we will receive a higher interest rate on our investments than more traditional mortgage loans. We have instituted measures designed to mitigate the risks, such as imposing a lower loan-to-value ratio with respect to loans we determine to be more risky (thereby providing us with a larger equity cushion if real estate values decline), requiring high credit scores and adequate reserves at the time the loan closes. We do not anticipate that we will hold non-agency mortgage loans to maturity. We may periodically sell certain non-agency mortgage loans for a premium to institutional banks or investors.
 
We will receive an independent appraisal for each property securing one of our non-agency mortgage loans. Loans in excess of $650,000 may require a second appraisal. The value used to calculate the loan-to-value ratio is the lesser of the appraised value or the acquisition cost. No appraisal may be dated more than 90 days prior to the COE of the loan. Copies of these appraisals will be available for review at our offices for a period of five years. Our advisor ensures that all mortgage companies that originate our loans retain appraisers who are licensed or qualified as independent appraisers and are certified by or hold designations from one or more nationally recognized organizations. We require that each non-agency mortgage loan have a full uniform appraisal, to include an interior and exterior inspection with photos of the property. Property inspection waivers are not permitted.
 
Borrowers may include U.S. citizens, resident aliens and non-permanent resident aliens. Due to the risk associated with funding foreign national loans, we will observe the following guidelines for these loans:
 
  •  LTV/TLTV of 50% on all property types;
 
  •  foreign nationals without a social security number or tax identification must execute an IRS form W-8BEN (Certification of Foreign Status);
 
  •  a domestic credit report must be maintained on file;
 
  •  we will attempt to obtain a foreign credit report;
 
  •  two original bank reference letters from financial institutions in their country of origin (translated in English must be provided); and


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  •  foreign income may be used for qualification purposes only if the stability and continuance can be verified. Borrowers with diplomatic immunity are not eligible.
 
Asset-based stated income mortgage loans may not exceed an LTV of 65% with a debt to income ratio of a maximum of 40%. Additionally, the following requirements must be met:
 
  •  two years of work history in the same line of work with no gaps in employment;
 
  •  self-employed borrowers must document business existence for at least two years;
 
  •  stated income must be reasonable and consistent with employment and the amount to be financed;
 
  •  income stated on 1003 must be supported by assets reflecting a minimum balance of the greater of 50% of the borrower’s annual income or $200,000 in assets after COE;
 
  •  IRS Form 8821/4506T is required to be signed at COE to cover a two year period for the individual and the business;
 
  •  assets to support income may come from any combination of liquid assets (checking, savings, certificates of deposit, brokerage accounts and 401(k)s; and
 
  •  asset documentation requires three months of consecutive statements with all pages.
 
Additionally, we will make non-agency residential mortgage loans only to borrowers that have no more than a total of 20 properties. Loan-to-value ratios will not exceed 65% for borrowers financing an investment property who already have greater than 10 existing mortgages in their name. In addition, borrowers who own multiple non-owner occupied properties must provide two years of documentation evidencing of experience owning multiple investment properties.
 
It is our intention to allow for a one-time re-cast option, which effectively results in a re-writing of the original loan, on non-agency residential mortgage loans within the first 12 months of the loan at no less than $25,000. A re-cast is typically requested by a borrower who has purchased a new primary residence prior to selling his former primary residence, and anticipates the sale of his previous residence and would like to apply the gain of the previous residence to his new primary residence purchase. The borrower may request a re-cast form from our servicer. Once the form has been completed and a cashiers’ check has been received, the non-agency mortgage loan will be re-cast to reflect the revised principal amount owed and new payment based on the lower principal balance, thus reducing our capital exposure and LTV on the real property.
 
Our loans may be subject to regulation by federal, state and local authorities and subject to laws and judicial and administrative decisions imposing various requirements and restrictions, including, among other things, regulating credit granting activities, establishing maximum interest rates and finance charges, requiring disclosure to customers, governing secured transactions and setting collection, repossession and claims handling procedures and other trade practices.
 
All federal, state and local laws and regulations must be complied with, including the Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Flood Disaster Protection Act, Truth-in Lending and Fair Credit Reporting Act.
 
Resolution Strategy
 
Over the past several years, the capital and credit markets have experienced extreme volatility and disruption triggered by losses tied to the collapse of the sub-prime residential mortgage market. As a result of the credit concerns in the sub-prime residential mortgage market, banks and other financial institutions substantially reduced the availability of and increased the cost of debt capital for many companies which has resulted in market illiquidity. If these market conditions continue, despite adherence to our investment criteria, some of the mortgage loans we acquire may become non-performing. We may have to create a provision for loan losses that will negatively impact our results of operations, and any real estate that we own as a result of the foreclosure process may be impaired. In addition, we could be required to make additional cash outlays for


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an indefinite period of time, including payment of court costs and attorney fees and other expenses incidental to protecting these investments. These expenses could have an adverse effect on our operating cash flow.
 
Our advisor will work with CM Capital Services, our loan servicer, to evaluate any mortgage loan in our portfolio that becomes delinquent or non performing to identify any potential short-term and long-term issues and formulate a strategy to resolve any potential issues.
 
We will implement the following strategies with respect to any of our mortgage loans that become nonperforming and may revise our strategies as necessary.
 
  •  Sale of the Foreclosed Collateral — If we determine through a thorough review process that it is advantageous to sell the property that secured a nonperforming loan at a loss rather than to continue to hold the property and incur additional costs, we may sell the property for cash or finance the sale with a qualified buyer.
 
  •  New Borrower Assumption — If we can identify new qualified borrowers to assume the initial loan amount, we will convert the nonperforming loan into a performing loan.
 
  •  Joint Venture — We may contribute the real estate to an operating joint venture usually structured as a limited liability company (“LLC”) with other private investors in a loan or with a new investor to provide additional financing and development expertise to complete the project. Once the project is completed and sold, we will distribute the sales proceeds according to the joint venture agreement. This strategy may significantly reduce our ownership in the property.
 
  •  Holding the Property — If we are unable to implement any of the strategies discussed above, or if we determine that it may be advantageous to hold the property based upon local real estate market conditions, we will hold the property for an undetermined period of time. In most cases, this will be a temporary strategy, which at the appropriate time will be replaced with one of the other options.
 
We will evaluate each nonperforming loan on an individual basis in an effort to develop a strategy for maximizing the value given the unique characteristics of each loan. In some cases, we may believe that the assets collateralizing our nonperforming loans have greater value than current conditions imply. We will seek to minimize potential losses of any impaired loans and achieve the greatest capital realization with respect to each nonperforming loan.
 
As a collateral-based lender, one of our goals is to protect the value of the underlying collateral. If we foreclose on the collateral securing a nonperforming loan, we will become the owner of the property. We believe that with the experienced management team of our advisor and the depth of our knowledge of the real estate markets in which we will be operating, we would be positioned to hold these properties and realize their potential value and minimize our losses.
 
While pursuing any foreclosure action, we will evaluate each property on an individual basis in an effort to develop a strategy for maximizing the value of the property and limiting any losses. The carrying value of real estate owned would be assessed on a quarterly basis from updated appraisals, comparable sales values or purchase offers. It is not our intent to invest in real estate as a long-term investment.
 
Regulation
 
CM Capital Services, as the originator and servicer of mortgage loans, and Residential Capital, as the originator of our non-agency residential mortgage loans, are each regulated as a mortgage company and, therefore, are subject to extensive regulation by federal, state and local laws and governmental authorities. CM Capital Services and Residential Capital conduct their real estate mortgage businesses under licenses issued by the State of Nevada Mortgage Lending Division. Under applicable Nevada law, the division has broad discretionary authority over CM Capital Service’s and Residential Capital’s activities, including the authority to conduct periodic regulatory audits of all aspects of their operations. CM Capital Services is licensed or otherwise qualified to conduct its real estate mortgage business in Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas and Utah. Residential Capital is licensed to conduct its real estate business in Arizona, California, Colorado, Montana, Nevada, New Mexico and Wyoming.


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CM Capital Services and Residential Capital are each subject to the Equal Credit Opportunity Act of 1974, which prohibits creditors from discriminating against loan applicants on the basis of race, color, sex, age, or marital status, and the Fair Credit Reporting Act of 1970, which requires lenders to supply applicants with the name and address of the reporting agency if the applicant is denied credit. CMR is also subject to various other federal and state securities laws regulating the issuance and sale of securities, as well as RESPA.
 
Should we or our affiliates not adhere to the regulation to which we or they are subject, we and/or our affiliates could face potential disciplinary or other civil action that could have a material adverse effect on our business.
 
Competition
 
Our net income depends, in large part, on our ability to originate investments with spreads over our cost of capital. In originating these investments, we compete with other mortgage REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, private funds, other lenders, governmental bodies and other entities, many of which have greater financial resources and lower costs of capital available to them than we have. In addition, there are other mortgage REITs with asset acquisition objectives similar to ours, and others may be organized in the future, which may increase competition for the investments suitable for us. Competitive variables include market presence and visibility, size of loans offered and underwriting standards. To the extent that a competitor is willing to risk larger amounts of capital in a particular transaction or to employ more liberal underwriting standards when evaluating potential loans than we are, our investment volume and profit margins for our investment portfolio could be impacted. Our competitors may also be willing to accept lower returns on their investments and may succeed in buying the assets that we have targeted for acquisition. Although we believe that we are well positioned to compete effectively in each facet of our business, there is enormous competition in our market sector and there can be no assurance that we will compete effectively or that we will not encounter increased competition in the future that could limit our ability to conduct our business effectively.
 
Property
 
We are externally advised by CM Group and do not lease or own any property. We are located at 1291 W. Galleria Drive, Henderson, NV 89014.
 
Employees
 
We are externally advised by CM Group and have no employees.
 
Website Access to Our Periodic SEC Reports
 
The internet address of our corporate website is www.cmreit.com. We intend to make our periodic SEC reports including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and Section 16 filings available free of charge through our website as soon as reasonably practicable after they are filed electronically with the SEC. We may from time to time provide important disclosures to investors by posting them in the investor relations section of our website, as allowed by SEC rules. The information on our website is not a part of this prospectus.
 
Materials we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet website at www.sec.gov that contains our reports, proxy and information statements, and other information regarding our company that we file electronically with the SEC.


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OUR OPERATING POLICIES AND INVESTMENT POLICIES
 
General
 
Our primary investment objective is to obtain current income from the yield on our investments while (1) making attractive and consistent cash distributions; (2) preserving, protecting, and enhancing our assets; (3) qualifying as a REIT for U.S. federal income tax purposes; and (4) ultimately providing our stockholders with liquidity of their investment. The sheltering from tax of income from other sources is not one of our objectives. If we are successful in achieving our investment and operating objectives, our stockholders (other than certain tax-exempt entities) are likely to recognize taxable income in each year. While there is no order of priority intended in the listing of our objectives, stockholders should realize that our ability to meet these objectives may be severely handicapped by any lack of diversification of our investments and the lack of investment capital.
 
We intend to meet our objectives primarily through our investment policies by creating a diversified portfolio of real estate-related loans, commercial real estate-related debt securities and select real estate equity investments. We believe that we are most likely to achieve our investment objectives through the careful selection and underwriting of assets. When making an investment, we will emphasize the performance and risk characteristics of that investment, how that investment will fit with our portfolio mix and performance and risk management objectives and how the returns and risks of that investment compare to the returns and risks of available investment alternatives. Our board of directors has established the following four primary operating policies to implement our business strategies:
 
  •  asset acquisition policy;
 
  •  capital/liquidity and leverage policies;
 
  •  credit risk management policy; and
 
  •  asset/liability management policy.
 
Asset Acquisition Policy
 
Our asset acquisition policy provides guidelines for acquiring investments in order to maintain compliance with our overall investment strategy, which is to acquire a diversified portfolio of real estate-related loans, commercial real estate-related debt securities and select real estate equity investments. Our advisor has the authority to make all the decisions regarding our investments consistent with our investment guidelines and borrowing policies and subject to the limitations in our charter and the direction and oversight of our board of directors. With respect to investments in real estate-related loans, we have adopted investment and underwriting guidelines that our advisor must follow when acquiring such assets on our behalf without the approval of our board of directors. We expect to acquire only those mortgage loans which we believe our advisor has the necessary expertise to evaluate and manage, which we can readily finance, and which are consistent with our overall investment strategy and our asset acquisition policy. We will not purchase or lease assets in which our advisor, any of our directors or officers or any of their affiliates has an interest without a determination by the conflicts committee of our board of directors (consisting of our independent directors) not otherwise interested in the transaction that such transaction is fair and reasonable to us and at a price to us no greater than the cost of the asset to the affiliated seller or lessor, unless there is substantial justification for the excess amount and such excess is reasonable. Our board of directors will formally review at a duly called meeting our investment guidelines on an annual basis or more often as they deem appropriate. Changes to our investment guidelines must be approved by our board of directors.
 
Our advisor will focus on purchasing real estate-related loans that satisfy our investment criteria and acquisition policy. It will source our investments from direct or repeat customer relations, former and current partners, mortgage brokers and securitization or lending departments of financial institutions.
 
In selecting investments for us, our advisor will utilize its established investment and underwriting process, which focuses on ensuring that each prospective investment is being evaluated appropriately.


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If a potential investment meets our underwriting criteria, our advisor will review the proposed transaction structure, including security, reserve requirements, call protection and recourse provisions. Our advisor will evaluate the asset’s position within our overall capital structure and portfolio allocation in relation to our asset acquisition policy and guidelines. Our advisor will analyze each potential investment’s risk-return profile and review financing sources, if applicable, to ensure that the investment fits within the parameters of financing facilities and to ensure performance of the underlying real estate collateral.
 
In addition to the foregoing, our asset acquisition policy encompasses the following guidelines:
 
  •  After the proceeds of this offering have been fully invested, we expect that our portfolio allocation will consist of up to approximately 80% acquisition, development, construction and commercial mortgage loans, up to approximately 10% non-agency residential mortgage loans and up to approximately 20% commercial real property, real estate-related debt securities and equity securities of other real estate-related companies.
 
  •  After the proceeds of this offering have been fully invested, our investment in any single mortgage loan will not exceed 10% of our average invested assets.
 
  •  After the proceeds of this offering have been fully invested, our aggregate investment in mortgage loans made to any one borrower and its affiliates will not exceed 10% of our average invested assets.
 
  •  After the proceeds of this offering have been fully invested, our aggregate investment in any individual submarket will not exceed 20% of our average invested assets.
 
  •  Our board of directors must approve or will delegate to our advisor the authority, subject to certain parameters imposed by the board and the investment restrictions set forth in our articles of incorporation, to approve all investments other than investments in real estate-related loans. See “Our Operating Policies and Investment Policies — Certain Investment Limitations” below.
 
  •  Our board of directors must approve any investment in any real estate-related loan in excess of $15 million.
 
  •  We will seek to allocate our portfolio to comply with an exemption from the Investment Company Act of 1940, as amended.
 
  •  We will not acquire mortgage loans or other investments from Desert Capital or any of our other affiliates, directly or indirectly, other than pursuant to our loan origination arrangements with CM Capital Services and Residential Capital.
 
Capital/Liquidity and Leverage Strategy and Policies
 
We expect to employ a leverage strategy to increase our assets by borrowing against our existing assets and using the proceeds to acquire additional assets in an effort to increase the size of our portfolio and enhance potential returns to stockholders. We intend to borrow an amount equal to 100% of our net assets, which equates to 50% of the aggregate cost of our assets, although our borrowings may vary from time to time depending on market conditions and other factors deemed relevant by our advisor and our board of directors. We believe that this will leave an adequate capital base to protect against interest rate environments in which our borrowing costs might exceed the yield on our investments. Due to current market conditions, we cannot assure you if or when, we will be able to obtain debt financing. Our articles of incorporation in accordance with the NASAA Guidelines limit the amount of aggregate indebtedness we may incur to 300% of our net assets or 75% of the cost of our assets.
 
We will finance our assets with our equity capital and to the extent reasonably available, through borrowings under lines of credit, term loans and other collateralized financings that we hope to establish with commercial banks. We do not expect to enter into repurchase agreements. See “Business — Financing Strategy.” In the event we are able to borrow funds on acceptable terms, depending on the different costs of borrowing funds at different maturities, we intend to vary the maturities of our borrowed funds to attempt to produce lower borrowing costs. In general, we expect that our borrowings will be short-term except for borrowings the proceeds of which are used to finance the acquisition of real property. We may also utilize


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long-term borrowings including securitization structures to the extent available on a cost effective basis. We will actively manage, on an aggregate basis, both the interest-rate indices and interest-rate adjustment periods of our borrowings against the interest-rate indices and interest-rate adjustment periods related to our assets.
 
We expect that some of our future credit agreements will require us to deposit additional collateral in the event the market value of existing collateral declines, which may require us to sell assets to reduce our borrowings. We have designed our liquidity management policy to maintain an adequate capital base sufficient to provide required liquidity to respond to the effects under any borrowing arrangements of interest rate movements as described above. If we enter into any loan agreement, we will disclose the material terms of such agreement to the extent required by federal securities laws.
 
Credit Risk Management Policy
 
We will review and monitor credit and special hazard risk associated with each of our investments. See “Business — Underwriting Criteria.” In addition, we will seek to diversify our portfolio of assets to avoid undue geographic, issuer, industry and certain other types of concentration risk. See “Our Operating Policies and Investment Policies — Asset Acquisition Policy.” We will also attempt to reduce risk from sellers, borrowers and servicers by obtaining representations and warranties in the transaction documents with specific indemnity associated thereunder. Our advisor will monitor the overall portfolio risk in order to determine appropriate levels of provision for losses we may experience.
 
We will generally determine, at the time of purchase, whether or not an asset complies with our credit risk management policy guidelines, based upon the most recent information utilized by us. Such compliance is not expected to be affected by events subsequent to such purchase, such as changes in characterization, value or rating of any specific mortgage loans or economic conditions or events generally affecting any investments of the type held by us.
 
Asset/Liability Management Policy
 
Interest Rate Risk Management.  To the extent consistent with our election to qualify as a REIT, we will follow an interest rate risk management program intended to protect our portfolio of investments and related debt against the effects of major interest rate changes. Specifically, our interest rate management program is formulated with the intent to offset, to some extent, the potential adverse effects resulting from any rate adjustment limitations on our investments and the differences between interest rate adjustment indices and interest rate adjustment periods of our investments and any related borrowings.
 
Our interest rate risk management program encompasses a number of procedures, including the following:
 
  •  monitoring and adjusting, if necessary, the interest rate sensitivity of our investments compared with the interest rate sensitivities of our borrowings;
 
  •  attempting to structure our credit agreements to have a range of different maturities and interest rate adjustment periods; and
 
  •  actively managing, on an aggregate basis, the interest rate indices, interest rate adjustment periods, and gross reset margins of the mortgages underlying our investments compared to the interest rate indices and adjustment periods of our borrowings.
 
As a result, we expect to be able to adjust the average maturity/adjustment period of our borrowings on an ongoing basis by changing the mix of maturities and interest rate adjustment periods as borrowings mature or are renewed. Through the use of these procedures, we will attempt to reduce the risk of differences between interest rate adjustment periods of the mortgages underlying our investments and our related borrowings.
 
We do not expect to conduct hedging activities in connection with our portfolio management due to the expected short-term nature of our borrowings.
 
Prepayment Risk Management.  We do not expect to have significant prepayment risks associated with our investment portfolio due to the expected short term (12-24 months) of most of our loans that we intend to hold.


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Our bylaws require the independent directors to review our investment policies at least annually to determine that the policies are in the best interests of our stockholders. The determination will be set forth in the minutes of our board of director meetings along with the basis for the determination. Our directors (including a majority of the independent directors) have the right, without a stockholder vote, to alter our investment policies but only to the extent consistent with our investment objectives and investment limitations. See “Our Operating Policies and Investment Policies — Certain Investment Limitations” below.
 
Certain Investment Limitations
 
In addition to other investment restrictions imposed by our board of directors from time to time, our articles of incorporation provide for the following limitations on our investments, until such time as our shares are listed:
 
1. Not more than 10% of our total assets may be invested in unimproved real property or mortgage loans on unimproved real property. For purposes of this paragraph, “unimproved real property” does not include any real property under construction, under development, under contract for development or planned for development within one year.
 
2. We may not invest in commodities or commodity future contracts, other than futures contracts when used solely for hedging purposes in connection with our ordinary business of investing in real estate assets and mortgages.
 
3. We may not invest in or make mortgage loans unless an appraisal is obtained concerning the underlying property. In cases in which a majority of independent directors so determine, and in all cases in which the mortgage loan involves our advisor, sponsor, our directors, or any of our affiliates, such appraisal must be obtained from an independent expert concerning the underlying property. Such appraisal will be maintained in our records for at least five years, and will be available for inspection and duplication by any stockholder. In addition to the appraisal, a mortgagee’s or owner’s title insurance policy or commitment as to the priority of the mortgage or condition of the title must be obtained.
 
4. We may not make or invest in mortgage loans, including construction loans, on any one property if the aggregate amount of all mortgage loans outstanding on that property, including our loans, would exceed an amount equal to 85% of the appraised value of the property as determined by appraisal unless substantial justification exists because of the presence of other underwriting criteria. For purposes of this subsection, the “aggregate amount of all mortgage loans outstanding on the property, including our loans” will include all interest (excluding contingent participation in income and/or appreciation in value of the mortgaged property), the current payment of which may be deferred pursuant to the terms of such loans, to the extent that deferred interest on each loan exceeds 5% per annum of the principal balance of the loan.
 
5. We may not make or invest in any mortgage loans that are subordinate to the lien or other indebtedness of our advisor, our sponsor, any of our directors, or any of our affiliates.
 
6. We will not issue (a) equity securities redeemable solely at the option of the holder (except that stockholders may offer their common shares to us pursuant to our redemption plan); (b) debt securities unless the historical debt service coverage (in the most recently completed fiscal year), as adjusted for known charges, is sufficient to service that higher level of debt properly; (c) shares of our common stock on a deferred payment basis or under similar arrangements; or (d) options or warrants to our advisor, our directors, sponsor or any affiliate thereof except on the same terms as such options or warrants are sold to the general public. Options or warrants may be issued to persons other than our advisor, our directors, sponsor, or any affiliate thereof but not at an exercise price less than the fair market value of the underlying securities on the date of grant and not for consideration that in the judgment of the independent directors has a market value less than the value of such option or warrant on the date of grant. Options or warrants issuable to our advisor, our directors, sponsor, or any affiliate thereof shall not exceed 10% of the outstanding shares on the date of grant.
 
7. The maximum amount of leverage in relation to net assets will not exceed 300% or 75% of the cost of our assets, unless such excess is approved by a majority of our independent directors.
 
8. We will not operate so as to be classified as an “investment company” under the Investment Company Act of 1940, as amended.
 
9. We will not make any investment that we believe will be inconsistent with our objective of qualifying as a REIT.


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10. We will not invest in real estate contracts of sale unless such contracts of sale are in recordable form and appropriately recorded in the chain of title.
 
11. We will only engage in a roll-up transaction to the extent consistent with our articles of incorporation and NASAA Guidelines.
 
12. The consideration paid for real property acquired by us will ordinarily be based on the fair market value of the real property as determined by a majority of the directors. In cases in which a majority of the independent directors so determine, and in all cases in which the property is acquired from the advisor, a director, the sponsor or affiliates thereof, such fair market value must be determined by an independent appraiser selected by the independent directors.
 
13. We may not invest in equity securities that are not traded on a national securities exchange unless a majority of our directors (including a majority of the independent directors) not otherwise interested in the transaction approve such investment as being fair, competitive and commercially reasonable.
 
The foregoing limitations may not be modified or eliminated without the approval of the holders of a majority of our outstanding shares of our common stock.
 
Investment Company Act Considerations
 
We do not intend to register as an investment company under the Investment Company Act. Under the Investment Company Act, in relevant part, an issuer is an “investment company” if:
 
  •  under Section 3(a)(1)(A), it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; and
 
  •  under Section 3(a)(1)(C), it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the “40% test.” Excluded from the definition of “investment securities” are, among other things, U.S. government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.
 
We intend to create a diversified portfolio of real estate-related loans, commercial real estate-related debt securities and select real estate equity investments. We intend to focus our investing activities on, and use the proceeds of this offering principally for, loans to homebuilders, developers and homebuyers, and owners of real property with financing needs that are not met by traditional mortgage lenders. We expect that up to approximately 80% of our portfolio will consist of short-term mortgage loans consisting of acquisition, development, construction and commercial mortgage loans to both local and national developers and homebuilders. We also expect to invest in non-agency residential mortgage loans to provide niche financing to borrowers that otherwise have limited financing sources. We expect that up to approximately 10% of our portfolio will consist of non-agency residential mortgage loans. We also intend to make a limited number of opportunistic investments in commercial real property to take advantage of attractive investment opportunities. Our investments may also include real estate-related debt securities, such as commercial mortgage-backed securities and collateralized debt obligations related to real estate, and equity securities of other real estate-related companies. We expect that up to approximately 20% of our portfolio may consist of commercial real property, real estate-related debt securities and equity securities of other real estate-related companies.
 
We intend to rely on the exception from the definition of “investment company” provided by Section 3(c)(5)(C) of the Investment Company Act, which is available for issuers “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” In addition to prohibiting the issuance of certain types of securities, the SEC’s staff’s position on Section 3(c)(5)(C) generally requires that at least 55% of an issuer’s assets must be comprised of mortgages and other liens on and interests in real estate, also known as “qualifying assets;” at least 80% of the issuer’s assets must be comprised of qualifying assets and a broader category of assets that we refer to as “real estate-related assets;” and no more than 20% of the issuer’s assets may be comprised of assets other than qualifying


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assets and real estate-related assets, which we refer to as “miscellaneous assets.” We will measure our Section 3(c)(5)(C) exclusion on an unconsolidated basis.
 
We will classify our assets for purposes of the Investment Company Act, including our Section 3(c)(5)(C) exclusion, in large measure upon no-action positions taken by the SEC staff in the past. These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations we may face, and a number of these no-action positions were issued more than ten years ago. In addition, the SEC has not provided guidance with respect to several types of assets in which we may invest. In the absence of any no-action position or other SEC guidance, we will rely on our view of what constitutes a qualifying asset and a real estate-related asset. No assurance can be given that the SEC will concur with our classification of our assets. In addition, the SEC staff may, in the future, issue further guidance that may require us to re-classify our assets for purposes of the Investment Company Act. If we are required to re-classify our assets, we may no longer be in compliance with the exclusion from the definition of an investment company provided by Section 3(c)(5)(C) of the Investment Company Act.
 
For purposes of determining whether we satisfy the Section 3(c)(5)(C) exception from the definition of an investment company, we will classify the assets in which we invest generally as follows:
 
Commercial and Residential Real Estate Loans
 
First Mortgage Loans.  Consistent with SEC no-action letters, a first mortgage loan will be treated as a qualifying real estate asset provided that the loan is fully secured, i.e., the value of the real estate securing the loan is greater than the value of the note evidencing the loan. If the loan is not fully secured, the entire value of the loan will be classified as a real estate-related asset.
 
First Mortgage Trust Deeds.  A first mortgage trust deed is a short-term mortgage loan secured directly by a lien on real property. A typical trust deed has more than one lender with a direct interest in the mortgage loan. We will treat our trust deed investments as real estate-related assets. The SEC staff has not provided any guidance on the treatment of trust deed loans and accordingly, any future SEC guidance may permit or require us to adjust our trust deed investment strategy.
 
Mezzanine Loans.  A portion of our investments will consist of real estate loans secured by 100% of the equity securities of a special purpose entity that owns real estate, or mezzanine loans. Mezzanine loans will be treated as qualifying real estate assets so long as they are structured as “Tier 1” mezzanine loans in accordance with the criteria set forth in the Capital Trust, Inc. No-Action Letter (May 24, 2007).
 
Participations.  Consistent with no-action positions taken by the SEC staff, we will consider a participation interest in a whole mortgage loan, as a qualifying real estate asset only if: (i) we have a participation interest in a mortgage loan that is fully secured by real property; (ii) we have the right to receive our proportionate share of the interest and the principal payments made on the loan by the borrower, and our returns on the loan are based on such payments; (iii) we invest only after performing the same type of due diligence and credit underwriting procedures that we would perform if we were underwriting the underlying mortgage loan; (iv) we have approval rights in connection with any material decisions pertaining to the administration and servicing of the loan and with respect to any material modification to the loan agreements; and (v) in the event that the loan becomes non-performing, we have effective control over the remedies relating to the enforcement of the mortgage loan, including ultimate control of the foreclosure process, by having the right to: (a) appoint the special servicer to manage the resolution of the loan; (b) advise, direct or approve the actions of the special servicer; (c) terminate the special servicer at any time with or without cause; (d) cure the default so that the mortgage loan is no longer non-performing; and (e) purchase the senior loan at par plus accrued interest, thereby acquiring the entire mortgage loan.
 
Equity Participations.  Although the SEC staff has not taken a position with respect to equity participations, or kickers, we generally intend to treat equity participations in the same manner as the underlying loan to the extent the equity participation has the same access to, or foreclosure rights on, the real property securing the underlying loan. For instance, if the underlying loan is considered a qualifying real estate asset and the associated “kicker” has the same access to or foreclosure rights on the real property


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securing the underlying loan, the kicker will be treated similarly. If it does not, it will be treated as a real estate-related asset. If the SEC takes a position in the future that is contrary to our classification, we will modify our classification accordingly.
 
Fund-Level or Corporate-Level Debt.  If we provide financing to an entity that is primarily engaged in the real estate business, we intend to treat such loan as a real estate-related asset or a miscellaneous asset depending on the nature of the business and assets of the borrower.
 
Other Real Estate-Related Loans.  We will treat the other real estate-related loans described in this prospectus, i.e., bridge loans, construction loans, and defaulted mortgage loans, as qualifying real estate assets if such loans are fully secured by real estate. With respect to construction loans which are funded over time, we will consider the outstanding balance (i.e., the amount of the loan actually drawn) as a qualifying real estate asset. The SEC has not issued no-action letters specifically addressing construction loans which are funded over time. If the SEC takes a position in the future that is contrary to our classification, we will modify our classification accordingly.
 
Commercial Real Estate-Related Debt Securities
 
CMBS.  CMBS are securities backed by pools of loans secured by first or, less often, junior mortgages. Accordingly, we will treat CMBS as real estate-related assets.
 
CDOs.  We do not generally expect investments in CDOs to be qualifying real estate assets. To the extent we invest in CDOs backed by mortgage loans or other interests in real estate, we intend to treat them as real estate-related assets. However, we note that the SEC has not provided guidance with respect to CDOs and may in the future take a view different than or contrary to our analysis. To the extent that the SEC staff publishes guidance with respect to CDOs different than or contrary to our analysis, we may be required to adjust our strategy accordingly.
 
Publicly Traded REIT Securities.  Senior unsecured debt securities of publicly traded equity REITs are typically not considered qualifying real estate assets and will be treated as real estate-related assets.
 
Select Commercial Real Estate Equity Investments
 
Joint Venture Interests.  Consistent with SEC guidance, when measuring Section 3(c)(5)(C) compliance, we will calculate asset values on an unconsolidated basis which means that when assets are held through another entity that relies on Section 3(c)(5)(C) for its exception from the definition of “investment company,” we will treat the value of our interest in the entity as follows:
 
(i) If we own less than a majority of the voting securities of the entity, then we will treat the value of our interest in the entity as real estate-related assets if the entity engages in the real estate business, such as a REIT relying on Section 3(c)(5)(C), and otherwise as miscellaneous assets.
 
(ii) If we own a majority of the voting securities of the entity, then we will allocate the value of our interest in the entity among qualifying real estate assets, real estate-related assets and miscellaneous assets in proportion to the entity’s ownership of qualifying real estate assets, real estate-related assets and miscellaneous assets.
 
(iii) If we are the general partner or managing member of a entity, then (a) we will treat the value of our interest in the entity as in item (ii) above if we are actively involved in the management and operation of the venture and our consent is required for all major decisions affecting the venture and (b) we will treat the value of our interest in the entity as in item (i) above if we are not actively involved in the management and operation of the venture or our consent is not required for all major decisions affecting the venture.
 
Real Property
 
An investment in real property will be treated as a qualifying real estate asset.


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Other Investments
 
The treatment of any other investments as qualifying real estate assets and real estate-related assets will be based on the characteristics of the underlying collateral and the particular type of loan (including whether we have foreclosure rights with respect to those securities or loans that have underlying real estate collateral) and will be consistent with SEC guidance.
 
Qualification for an exemption from registration under the Investment Company Act will limit our ability to make certain investments. For example, these restrictions may limit our ability to invest directly in mortgage-backed securities that represent less than the entire ownership in a pool of mortgage loans, debt and equity tranches of securitizations and certain asset-backed securities and real estate companies or in assets not related to real estate. Although we intend to monitor our investment portfolio, there can be no assurance that we will be able to maintain an exemption from registration.
 
A change in the value of any of our assets could negatively affect our ability to maintain our exemption from regulation under the Investment Company Act. To maintain compliance with the exception under Section 3(c)(5)(C), we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional assets that we might not otherwise have acquired or may have to forego opportunities to acquire assets that we would otherwise want to acquire and would be important to our investment strategy.
 
To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon the definition of investment company and the exceptions to that definition, we may be required to adjust our investment strategy accordingly. Any additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen.
 
If we are required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), and portfolio composition, including restrictions with respect to diversification and industry concentration and other matters. Compliance with the Investment Company Act would, accordingly, limit our ability to make certain investments and require us to significantly restructure our business plan. We may be limited in our ability to make investments in and originate certain types of loans, equity securities, and other potential investments as set forth in our business plan. For additional discussion of the risks that we would face if we were required to register as an investment company under the Investment Company Act, see “Risk Factors — Risks Related to Legal and Tax Requirements.”


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
We are newly incorporated and have not commenced operations. Therefore, we do not have any results of operations to discuss. The following analysis of our financial condition should be read in conjunction with our financial statements and notes to those statements and the other financial data included elsewhere in this prospectus. This discussion may contain certain forward-looking statements. Forward-looking statements are those that are not historical in nature. They can often be identified by their inclusion of words such as “will,” “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend” and similar expressions. Any projection of revenues, earnings or losses, capital expenditures, distributions, capital structure or other financial terms is a forward-looking statement.
 
Our forward-looking statements are based upon our management’s beliefs, assumptions and expectations of our future operations and economic performance, taking into account the information currently available to us. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us, that might cause our actual results, performance or financial condition to be materially different from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. Some of the important factors that could cause our actual results, performance or financial condition to differ materially from expectations are:
 
  •  economic conditions impacting the real estate and credit markets;
 
  •  changes in interest rates;
 
  •  our ability to obtain debt financing on acceptable terms or at all;
 
  •  changes in the rate of construction in the markets in which we invest;
 
  •  potential impacts of our leverage policy and strategy;
 
  •  our advisor’s motivation to recommend riskier investments in an effort to maximize its management compensation under the advisory agreement; and
 
  •  our failure to qualify or remain qualified as a REIT.
 
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the events described by our forward-looking statements might not occur. We qualify any and all of our forward-looking statements by these cautionary factors. In addition, you should carefully review the risk factors described in the reports we file from time to time with the SEC.
 
General
 
We are a Maryland corporation formed in November 2008 as a REIT. We intend to create a diversified portfolio of real estate-related loans, commercial real estate-related debt securities and select real estate equity investments. We intend to focus our investing activities on, and use the proceeds of this offering principally for, loans to homebuilders, developers and homebuyers, and owners of real property with financing needs that are not met by traditional mortgage lenders. The portfolio will include short-term mortgage loans consisting of acquisition, development, construction and commercial mortgage loans to both local and national developers and homebuilders. We also expect to use a portion of the proceeds of this offering to invest in non-agency residential mortgage loans to provide niche financing to borrowers that otherwise have limited financing sources. We also intend to make a limited number of opportunistic investments in commercial real property to take advantage of investment opportunities. We may also acquire real estate-related debt securities, such as commercial mortgage-backed securities and collateralized debt obligations related to real estate, and equity securities of other real estate-related companies. We may execute our investment strategy by acquiring individual assets or portfolios of assets, other mortgage REITs or companies with similar investment objectives.


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Our principal investment objectives are to pay attractive and consistent distributions to our stockholders, preserve, protect and enhance our assets and ultimately provide our stockholders with liquidity of their investment. Our focus will emphasize payment of current returns to investors and the preservation of invested capital, with a lesser emphasis on seeking capital appreciation from our investments. Our business also depends on our ability to locate suitable investments to keep our capital fully deployed at favorable rates.
 
If we sell the minimum number of shares in this offering, we expect to invest approximately $2.125 million in our initial portfolio of mortgage loans. If we sell the maximum number of shares, we expect to invest approximately $796.5 million. We do not have a current commitment from any financial institution to provide us with a line of credit.
 
As of          , 2010 we have incurred $      of expenses in connection with the filing of the registration statement of which this prospectus is a part, and $      of such expenses have been paid by our advisor, which will be reimbursed by us from the proceeds of this offering, subject to the prohibition established by FINRA rules and NASAA Guidelines on incurrence of organization and offering expenses in excess of 15% of the proceeds of the offering. As a result, we may be unable to reimburse our advisor for all expenses it has incurred. In that case, our advisor would be required to absorb any expenses we are prohibited from paying. For example, if only the minimum offering amount of $2.5 million is raised, we would only be able to reimburse our advisor for $375,000 of the expenses incurred.
 
We intend to elect to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2010, thereby generally avoiding U.S. federal income taxes on our taxable income that we distribute currently to our stockholders. See “U.S. Federal Income Tax Considerations — Requirements for Qualification as a REIT.”
 
CM Group is our sponsor and our advisor. As our advisor, CM Group will manage our day-to-day operations and our portfolio of real estate-related loans, real estate-related debt securities and other real estate-related investments. CM Group also has the authority to make all of the decisions regarding our investments, subject to the limitations in our charter and the direction and oversight of our board of directors.
 
Real Estate Market Outlook
 
Over the past several years, the capital and credit markets have experienced extreme volatility and disruption triggered by losses tied to the collapse of the sub-prime residential mortgage market. The effects of increased rates of delinquency, foreclosure and loss in residential mortgages have spread throughout the capital markets and have affected the global economy. Economies throughout the world have experienced increased unemployment and a lack of consumer confidence due to the downturn in economic activity. Banks and other financial institutions have experienced severe shortages of capital and liquidity leading to the failure of several large financial institutions and additional failures of smaller financial institutions. Among other things, these circumstances have adversely impacted the cost and availability of credit to borrowers across all market sectors. As a result of the ongoing credit market turmoil, debt financing has become less available and to the extent available, much more expensive. Following a prolonged period of inactivity, transaction activity has slowly increased and some measure of liquidity has made its way into the market; however, the volume remains well below that seen prior to 2008.
 
Recently, there have been signs that the credit markets have begun to loosen as the global economy has shown signs of recovery and growth. These trends have only recently begun and an improvement in the credit market does not necessarily provide an indication of a general market recovery or the speed of any expected recovery. We cannot predict when the markets will stabilize although we do expect that the current volatility in the capital markets will continue during the near term which will cause continued volatility in the commercial and residential real estate, real estate finance and the structured finance markets.
 
The turmoil in the capital markets has constrained equity and debt capital available for investment in commercial and residential real estate, resulting in homebuilders and developers being unable to complete projects, fewer buyers seeking to acquire commercial and residential properties and lower property values across all property types. We believe that these market conditions provide us with a significant opportunity to


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provide local and national homebuilders, developers and homebuyers with an alternative source of capital. We further believe that the severely constrained availability of liquidity will create opportunities to acquire commercial real properties and select real estate-related debt and equity securities from motivated sellers at substantial discounts to their intrinsic values.
 
While these conditions may present opportunities, prolonged disruptions in the capital and credit markets could adversely affect our ability to obtain debt financing on attractive terms or at all, which could negatively impact our ability to implement our investment strategy. In addition, prolonged or future market disruptions and illiquidity could negatively impact our mortgage loan and other real estate-related investments as a result of rising borrower defaults, falling rental rates, decreased demand for commercial real estate space and further declining property values. Any sustained period of market disruptions and illiquidity could adversely affect both our net interest income from our investments as well as our ability to sell any properties that we may acquire through foreclosure or otherwise, which could cause us to incur substantial expenses and suffer material losses.
 
Further, while we expect that no more than 20% of our average invested assets will be concentrated in any individual submarket in the Western United States, this region has suffered severely from the recessionary economic environment and has experienced some of the highest delinquency and foreclosure rates in the United States resulting in market illiquidity and sharply declining real estate values. This concentration may increase the risk of defaults on our mortgage loans and other real estate-related assets if the real estate or economic conditions in any such particular submarket or the Western United States, in general, declines further or is prolonged.
 
We believe the disruption in the credit market will continue during the near term, however, in the event that market conditions do improve during the term of this offering, we believe there will be a continuing demand for alternative financing from borrowers that are unwilling or unable to obtain financing through traditional mortgage lenders and an opportunity for asset growth and value appreciation.
 
Critical Accounting Policies and Management Estimates
 
Upon consummation of the offering and our commencement of operations, we expect to follow the accounting policies set forth below. Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States, known as GAAP. These accounting principles require us to make some complex and subjective decisions and assessments. Our most critical accounting policies involve decisions and assessments, which could significantly affect our reported assets, liabilities and contingencies, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time made based upon information available to us at that time. We evaluate these decisions and assessments on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. We have identified our most critical accounting policies to be the following:
 
Use of Estimates.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may ultimately differ from those estimates.
 
Revenue Recognition.  Interest income on our mortgage investments will be recognized over the life of the investment and recorded on the accrual basis. Income recognition will be generally suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition will be resumed when the loan becomes contractually current and performance is demonstrated to be resumed.
 
Offering Costs.  Costs attributable to securities offerings will be charged against the proceeds of the offerings as a reduction to equity capital. These costs include legal and accounting fees to prepare the securities filing as well as the fees incurred in selling the securities, such as broker commissions.


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Mortgage Investments.  A majority of our mortgage investments are intended to be held to maturity and, accordingly will be carried at cost, net of any unamortized deferred fees and costs, and any allowance for loan losses.
 
Allowance for Loan Losses.  Management will monitor the delinquencies and defaults on the underlying mortgages and, if an impairment of the related mortgage loan is deemed to be other than temporary, the carrying value of the related mortgage loan will be reduced to fair value through a charge to the allowance for loan losses. An allowance for loan loss is reflected in our financial statements based upon an evaluation of known and inherent risks in our mortgage loans. The allowance will be based on our assessment of numerous factors affecting our portfolio of mortgage assets including, but not limited to, current and projected economic conditions, delinquency status, credit losses to date on underlying mortgages and any remaining credit protection. Loan loss estimates are reviewed periodically and adjustments are reported in earnings when they become known. Actual losses, if any, could ultimately differ from these estimates.
 
Impairment Policy.  Impaired loans are evaluated based on a discounted cash flow analysis, or, if the loan is considered collateral dependent, on the fair value of the collateral less costs to sell. A specific allowance is established as a component of the allowance for loan losses. Impairment on real estate owned is measured on a property-by-property basis on the fair value of the related collateral since all properties subject to this measurement are collateral dependent.
 
Income Taxes.  For our taxable year ending December 31, 2010, we intend to elect to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our ordinary taxable income to stockholders. As a REIT, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders. If we failed to qualify as a REIT in any taxable year, and if the limited statutory relief provisions do not apply, we would be subject to U.S. federal income tax, including any applicable alternative minimum tax, and possibly increased state and local taxes, on our taxable income at regular corporate rates. Such taxation would reduce the cash available for distribution by us to our stockholders. Distributions to stockholders in any year in which we fail to qualify as a REIT would not be deductible by us and we would not be required to distribute any amounts to our stockholders. If we fail to qualify as a REIT, to the extent of our current and accumulated earnings and profits, distributions to our stockholders who are individuals generally would be taxable as dividends at preferential rates for the 2010 tax year; and, subject to certain limitations of the Internal Revenue Code, corporate stockholders may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, we would also be disqualified from taxation as a REIT for the four taxable years following the year during which we lost our qualification. It is not possible to state whether in all circumstances we will be entitled to statutory relief. However, we intend to operate in the foreseeable future in such a manner so that we will qualify as a REIT for federal income tax purposes.
 
If we form a taxable REIT subsidiary, it will be subject to federal, state, and local taxes.
 
Liquidity and Capital Resources
 
We are dependent upon the net proceeds to be received from this offering to conduct our proposed activities. The funding required to purchase assets will be obtained from this offering and from any indebtedness that we may incur in the future. We have been initially capitalized with $200,000 from the sale of common stock to our advisor. For information concerning the anticipated use of the net proceeds from this offering, please see the “Estimated Use of Proceeds” section of this prospectus.
 
In order to qualify as a REIT and to avoid corporate-level tax on the income we distribute to our stockholders, we are required to distribute at least 90% of our REIT taxable income on an annual basis. Therefore, once the net proceeds we receive from this offering are substantially fully invested, we will need to borrow in order to grow our business and acquire additional assets. Our sources of funds will primarily be the net proceeds from this offering, operating cash flows and borrowings. Operating cash flows will principally consist of payments received upon maturities of mortgage loans. Liquidity may also be generated through lines


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of credit with commercial banks; however, we currently do not have a commitment from a financial institution to provide us with a credit facility. Due to current market conditions, we cannot assure you if or when we may be able to obtain debt financing. We believe that these cash resources will be sufficient to satisfy our immediate liquidity requirements, and we do not anticipate a need to raise funds from other than these sources within the next 12 months.
 
We currently have no outstanding debt. Depending on market conditions, we intend to borrow an amount equal to 100% of our net assets which equates to 50% of the aggregate cost of our assets, however, we may incur debt up to 300% of our net assets or 75% of the cost of our assets under the terms of our articles of incorporation. We expect to use short-term borrowings under lines of credit with commercial banks, depending on market conditions. However, we currently do not have any commitment from any financial institution to provide us with a credit facility. We may also utilize long-term borrowings including securitization structures to the extent available on a cost effective basis. Any indebtedness we incur will likely be subject to continuing covenants, and we will likely be required to make continuing representations and warranties in connection with such debt. Moreover, some or all of our debt may be secured by some or all of our assets. If we default in the payment of interest or principal on any such debt, breach any representation or warranty in connection with any borrowing or violate any covenant in any loan document, our lender may accelerate the maturity of such debt requiring us to repay immediately all outstanding principal. If we are unable to make such payment, our lender could foreclose on our assets that are pledged as collateral to that lender. The lender could also sue us or force us into bankruptcy. Any of these events would likely have a material adverse effect on the value of an investment in our common stock.
 
Our income calculated for tax purposes may differ from income calculated in accordance with GAAP. For example, we record a reserve for credit losses for GAAP purposes whereas only actual credit losses are deducted in calculating taxable income. The distinction between taxable income and GAAP income is important to our stockholders because distributions are declared on the basis of taxable income. While we generally will not be required to pay income taxes as long as we satisfy the REIT provisions of the Internal Revenue Code, each year we will be required to complete a U.S. federal income tax return wherein taxable income is calculated. This taxable income level will determine the minimum level of distributions we must pay to our stockholders.
 
Our advisory agreement with our advisor requires us to pay second-tier management compensation on a monthly basis to our advisor based on the application of the management fee compensation formula at the end of each month. For a description of this formula, please see the disclosure under the heading “The Advisor — Compensation and Expenses.” Because we will be paying out at least 90% of our REIT taxable income to stockholders on a quarterly basis, we may not have sufficient cash to pay our operating expenses, which would require us to borrow under our credit facility, if any, or sell assets to meet our obligations. In addition, it is possible that our liquidity may be further impaired if we generate substantial net income in the first three quarters of a fiscal year and have a significant drop off in the fourth quarter because our capital resources may be limited by the fact that we have overpaid our advisor for the year (through the first three quarters) and will not be reimbursed for the over payment until year-end. Nevertheless, our total annual operating expenses, including the total management compensation payable to the advisor, will not exceed the greater of 2% of average invested assets or 25% of our net income, unless specifically approved by our independent directors.
 
Quantitative and Qualitative Disclosures About Market Risk
 
Market risk refers to the risk of loss from adverse changes in the level of one or more market prices, rate indices or other market factors. We are exposed to market risk primarily from changes in interest rates which are very sensitive to a variety of factors including political, economic and other factors outside of our control.
 
Interest rate risk arises primarily as a result of our core business activities of acquiring mortgage loans and funding a portion of the purchases with borrowings and the associated asset and liability management required to match maturities of loans to funding sources. The principal objective of our asset and liability management is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of liquidity.


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The primary interest rate exposure to which we are subject relates to our mortgage loan portfolio. Any change in the general level of interest rates in the market can affect our net interest income and net income in either a positive or negative manner. Net interest income is the difference between the income earned from interest bearing assets less the expense incurred relating to interest bearing liabilities. Fluctuations in the interest rate environment can also affect our ability to acquire new loans, the value of our loans for sale portfolio and our ability to sell the loans held for sale and the related income associated with a sale. We expect that a majority of our mortgage loan portfolio will be comprised of fixed rate investments while all of the debt that we will have is expected to be variable rate debt.
 
In the event of a significant rising interest rate environment or prolonged economic downturn, defaults could increase and result in credit losses to us, which could adversely affect our liquidity and operating results. Further, such delinquencies or defaults could have an adverse effect on the spreads between interest-earning assets and interest-bearing liabilities.
 
We do not intend to use any derivative instruments to manage our interest rate exposure. Given the short time horizon of our anticipated investments and our related borrowings, we do not believe a hedging strategy is necessary. In addition, our actions are limited by rules with which REITs must comply.
 
OTHER CM GROUP-SPONSORED PROGRAMS
 
CM Group is our sponsor and our external advisor. When we refer to a “CM Group-sponsored” fund or program, we are referring to the private entities sponsored by CM Group for which CM Group or an affiliate thereof acts as advisor or manager, and to the public non-traded REIT, Desert Capital, that is currently being sponsored and externally advised by CM Group. We believe CM Group’s experience and that of the employees of CM Capital Services, its wholly-owned subsidiary, will allow us to execute our business model successfully.
 
Set forth below is a description of each of the current CM Group sponsored-programs.
 
Desert Capital
 
Desert Capital is a publicly registered non-traded REIT advised by CM Group. Desert Capital is a Maryland corporation formed in December 2003 to engage in the business of making short-term mortgage loans consisting of acquisition and development loans and construction loans to developers and builders of residential and commercial property. Desert Capital generally invested in 12- to 18- month, first and second lien mortgage loans. Desert Capital’s revenues were primarily generated from interest payments received from mortgage investments funded with its equity capital and borrowed funds. Desert Capital previously generated net income for distribution to its stockholders from the spread between interest income on its mortgage investments and the costs of financing the acquisition of these investments. Due to market conditions since the fourth quarter of 2007, most of Desert Capital’s borrowers defaulted on their loans owing to Desert Capital, which caused Desert Capital to foreclose on most of the mortgage loans in its portfolio. Its first public offering commenced in July 2004 and its second public offering commenced in March 2006. Desert Capital is not currently conducting an offering or actively making investments. During 2009, Desert Capital foreclosed on properties securing 26 mortgage loans with an aggregate original principal amount of $70.2 million. These loans were impaired prior to foreclosure, so that the amount recorded on its balance sheet as real estate owned or real estate investments as a result of these foreclosures was $47.0 million. During the six months ended June 30, 2010, Desert Capital foreclosed on three loans with an aggregate original principal amount of $2.9 million, and a fair value at the time of foreclosure of $1.4 million. Of its remaining mortgage investments, all but $4.6 million with a carrying balance of $4.0 million were non-performing at June 30, 2010. See “Prior Performance Summary — Prior Investment Programs.”
 
Pursuant to the terms of its charter, Desert Capital must list its shares of common stock on a national securities exchange or over the counter market or provide for a liquidity event for its stockholders on or before December 31, 2011. Management is evaluating alternatives, but given current market conditions, has not yet determined its strategy.


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CM Equity
 
CM Equity is a limited liability company formed to engage in the business of investing in, developing, co-developing, operating, owning and financing commercial and residential real estate projects located principally in the Western United States. CM Equity’s strategy was to make opportunistic investments in real estate projects, including distressed real estate projects, to take advantage of distressed conditions in the real estate and credit markets. CM Equity was unable to execute fully its investment strategy as a result of the negative impact of the difficult real estate and credit markets on its debt and equity raising efforts. As a result, CM Equity is no longer raising additional funds for investment. CM Equity is not a competitor for investments since it has terminated its investment program. CM Group is the manager of CM Equity.
 
CM Notes Program I
 
CM Notes is a limited liability company with targeted funds available for investment of up to $25 million. CM Notes raised approximately $1.3 million prior to the end of its offering period. CM Notes is wholly-owned by CM Capital Services, and managed by CM Notes Manager, LLC, a Delaware limited liability company and a wholly-owned subsidiary of CM Capital Services. CM Notes funded or invested in construction and development loans for single family residences in the greater Las Vegas, Nevada area. The loans were identified, originated and serviced by CM Capital Services. Each loan had a principal amount that did not exceed 75% of the completed value of the real estate, and had a term of six to nine months. CM Notes did not lend on projects for single family residences where the takeout value of the residence exceeded the existing Federal Home Loan Mortgage Corporation (Freddie Mac) limitation (currently $417,000 in the state of Nevada).
 
The offering period for CM Notes ended December 31, 2009 and all investment activity will end prior to the program’s December 31, 2010 maturity.
 
CM Capital Services
 
CM Capital Services, the company that originates and services our acquisition, development, construction and commercial mortgage loans, is wholly owned by CM Group, and also originates and services loans for Desert Capital. In addition to servicing on behalf of our affiliated companies, CM Capital Services originates and services loans for a private investor pool consisting of approximately 4,000 investors, which provides funds directly to the borrowers for loans originated by CM Capital Services. CM Capital Services identified and arranged for approximately $210.0 million in mortgage loans in 2007, approximately $44.0 million in 2008 and approximately $40.7 million in 2009. Typically, CM Capital Services does not itself directly invest in mortgage loans, although it may make a temporary investment to facilitate a loan closing, and then transfer the position to private investors once they are identified.
 
We compete for investment opportunities with the private investors that comprise CM Capital Services’ investor pool.
 
Future CM Group-Sponsored Programs
 
The description of CM Group-sponsored programs described herein is current as of the date of the prospectus which forms a part of this registration statement. CM Group may sponsor a new program, public or private, at any time. The only limitation on CM Group’s activities imposed by our advisory agreement is that CM Group will not sponsor any residential mortgage REIT that invests primarily in mortgages for the acquisition of, development of, and construction on real estate in the Las Vegas, Nevada area other than Desert Capital, unless otherwise approved by the majority of our independent directors.
 
Allocation of Investment Opportunities Among CM Group-Sponsored Programs
 
Our advisor employs an investment committee which meets regularly to review prospective investments for each of the CM Group-sponsored programs, currently CMR, CM Notes, CM Capital Services and Desert Capital. We expect that the investment committee will make decisions regarding investments by all of CM Group’s future clients as well. The investment committee is comprised of the officers of CM Group or certain of its affiliates. Currently, the committee is comprised of Todd Parriott, Stacy Riffe and Mark Taylor (Senior


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Vice president, Operations of the Company). As part of the investment allocation process, the investment committee will document its conclusions regarding each prospective investment, as well as take a formal vote regarding the undertaking of each investment by each CM Group client. Our secretary, Stacy Riffe, will maintain all supporting documentation for each potential investment reviewed and voted on by the Investment Committee.
 
Allocation of investments will be determined by the investment objectives and underwriting criteria of each client and the available capital of each client.
 
The investment committee will determine whether the investment opportunity is appropriate for private investors comprising CM Capital Services’ investor pool or for one of the CM Group-sponsored programs. While all of the CM Group-sponsored programs are involved in making real estate related investments, their business strategies differ somewhat from each other. For example, CMR will invest in acquisition, development, construction and commercial loans secured by first liens. CMR also intends to invest in non-agency residential mortgage loans, which none of the other current CM Group-sponsored programs are targeting. CM Notes invests in mortgage loans secured by single family residences with short-term investment time horizons, while CMR is targeting mortgage loans secured by a more diverse universe of collateral with the ability to acquire longer term investments.
 
Even with these differences in investment criteria and strategy, many investment opportunities that are suitable for us may also be suitable for other CM Group-sponsored programs. When CM Group directs an investment opportunity to any CM Group-sponsored program, it, in its sole discretion, will offer the opportunity to the program for which the investment opportunity is most suitable based on the following factors:
 
  •  the investment objectives and criteria of each program;
 
  •  the cash requirements of each program;
 
  •  the effect of the acquisition on diversification of each program’s investments;
 
  •  the policy of each program relating to leverage of properties;
 
  •  the anticipated cash flow of each program;
 
  •  the income tax effects of the purchase on each program;
 
  •  the size of the investment; and
 
  •  the amount of funds available to each program and the length of time such funds have been available for investment.
 
Within each product type, the underwriting criteria for each CM Group-sponsored program is the same. In the event that an investment opportunity becomes available that is equally suitable for us and one or more other programs, then our advisor may offer the investment opportunity to the entity that has had the longest period of time elapse since it was offered an investment opportunity. If a subsequent event or development, such as a delay in the closing of an investment, causes any such investment, in the opinion of our advisor, to become more appropriate for another program, our advisor may offer the investment to another program.
 
Our advisor’s success in generating investment opportunities for us and its fair allocation of opportunities among programs sponsored by our advisor are important criteria in the determination by our independent directors to continue or renew our annual advisory agreement with our advisor. It shall be a duty of our directors (including a majority of our independent directors) to ensure that the method for allocating investment opportunities described above is applied fairly to us.
 
Conflicts Committee
 
We have established a conflicts committee of our board of directors to ameliorate the risks created by certain conflicts of interest. The conflicts committee consists of all of the independent members of our board of directors. The approval of a majority of the members of the conflicts committee not otherwise interested in the transaction will be required prior to our entering into any related party transaction. For purposes of the


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conflicts committee, a related party transaction would include our acquisition of an asset from another CM Group affiliate, our sale of an asset to a CM Group affiliate, or our co-investing in any project with another CM Group affiliate. The identification of investment opportunities by CM Group, and the allocation of such opportunities to us, in the normal course of business, is not considered a related party transaction.
 
In accordance with NASAA Guidelines, our charter sets forth various matters that require the approval of a majority of our independent directors. For example, a majority of our independent directors must review the performance of our advisor annually, approve our operating expenses if they exceed the limits set forth in the NASAA Guidelines, approve any joint ventures we enter into with certain affiliated parties, and may terminate our advisor. Because our conflicts committee is comprised of all of our independent directors, the consideration of any matter that requires approval of a majority of the independent directors may be approved by a majority of the members of the conflicts committee not otherwise interested in the transaction in order to fulfill the approval requirement.
 
In addition, the board of directors in its sole and absolute discretion, may refer any matter it deems appropriate to the conflicts committee for its review and possible action thereon. The conflicts committee will review and approve specific matters that the board of directors believes may involve conflicts of interest to determine whether the resolution of the conflict of interest is fair and reasonable to CMR and to its shareholders.
 
Other Charter Provisions Relating to Conflicts of Interest
 
In addition to the creation of the conflicts committee, our charter contains many other restrictions relating to conflicts of interest including the following:
 
Advisor Compensation.  The conflicts committee will evaluate at least annually whether the compensation that we contract to pay to CM Group and its affiliates is reasonable in relation to the nature and quality of services performed and whether such compensation is within the limits prescribed by the charter. The conflicts committee will supervise the performance of CM Group and its affiliates and the compensation we pay to them to determine whether the provisions of our compensation arrangements are being carried out. This evaluation will be based on the following factors as well as any other factors deemed relevant by the conflicts committee:
 
  •  the amount of the fees and any other compensation, including stock-based compensation, paid to CM Group and its affiliates in relation to the size, composition and performance of our investments;
 
  •  whether the expenses incurred by us are reasonable in light of our investment performance, net assets, net income and the fees and expenses of other comparable unaffiliated REITs;
 
  •  the success of CM Group in generating appropriate investment opportunities;
 
  •  the rates charged to other companies, including other REITs, by advisors performing similar services;
 
  •  additional revenues realized by CM Group and its affiliates through their relationship with us, including whether we pay them or they are paid by others with whom we do business;
 
  •  the quality and extent of service and advice furnished by CM Group and its affiliates;
 
  •  the performance of our investment portfolio; and
 
  •  the quality of our portfolio relative to the investments generated by CM Group and its affiliates for their own account and for their other clients.
 
Under our charter, we can only pay CM Group or its affiliates a disposition fee in connection with the sale of an asset if it provides a substantial amount of the services in the effort to sell the asset and the commission does not exceed 3% of the sales price of the asset. Moreover, our charter also provides that the commission, when added to all other disposition fees paid to unaffiliated parties in connection with the sale, may not exceed the lesser of a competitive real estate commission or 6% of the sales price of the asset. To the extent this disposition fee is paid upon the sale of any assets other than real property, it will count against the


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limit on “total operating expenses” described below. We do not intend to sell assets to affiliates. However, if we do sell an asset to an affiliate, our organizational documents would not prohibit us from paying our advisor or its affiliates a disposition fee. Before we sell an asset to an affiliate, our charter would require that the conflicts committee conclude, by a majority vote, that the transaction is fair and reasonable to us and on terms and conditions no less favorable to us than those available from third parties.
 
Our charter also requires that any gain from the sale of assets that we may pay our advisor or an entity affiliated with our advisor be reasonable. Such an interest in gain from the sale of assets is presumed reasonable if it does not exceed 15% of the balance of the net sale proceeds remaining after payment to common stockholders, in the aggregate, of an amount equal to 100% of the original issue price of the common stock, plus an amount equal to 6% of the original issue price of the common stock per year cumulative. Our advisory agreement does not provide for the payment of incentive fees.
 
If we ever decided to become self-managed by acquiring entities affiliated with our advisor, our charter would require that the conflicts committee conclude, by a majority vote, that such internalization transaction is fair and reasonable to us and on terms and conditions no less favorable to us than those available from third parties.
 
Our charter also limits the amount of acquisition and origination fees and expenses we can incur to a total of 6% of the contract purchase price for the asset or, in the case of a loan we originate, 6% of the funds advanced. This limit may only be exceeded if the conflicts committee approves (by majority vote) the fees and expenses and finds the transaction to be commercially competitive, fair and reasonable to us.
 
Term of Advisory Agreement.  Each contract for the services of our advisor may not exceed one year, although there is no limit on the number of times that we may retain a particular advisor. The conflicts committee or our advisor may terminate our advisory agreement with CM Group without cause or penalty on 60 days’ written notice. Upon termination of the advisory agreement, CM Group would not be entitled to a termination fee.
 
Our Acquisitions.  We will not purchase or lease assets in which CM Group, any of our directors or officers or any of their affiliates has an interest without a determination by a majority of our directors (including a majority of our independent directors) not otherwise interested in the transaction that such transaction is fair and reasonable to us and at a price to us no greater than the cost of the asset to the affiliated seller or lessor, unless there is substantial justification for the excess amount. In no event may we acquire any such real property at an amount in excess of its current appraised value.
 
Mortgage Loans Involving Affiliates.  Our charter prohibits us from investing in or making mortgage loans in which the transaction is with CM Group, our directors or officers or any of their affiliates, unless an independent expert appraises the underlying property. We must keep the appraisal for at least five years and make it available for inspection and duplication by any of our stockholders. In addition, a mortgagee’s or owner’s title insurance policy or commitment as to the priority of the mortgage or the condition of the title must be obtained. Our charter prohibits us from making or investing in any mortgage loans that are subordinate to any mortgage or equity interest of CM Group, our directors or officers or any of their affiliates.
 
Other Transactions Involving Affiliates.  A majority of our directors (including a majority of our independent directors) not otherwise interested in the transaction must conclude that all other transactions between us and CM Group, any of our officers or directors or any of their affiliates, are fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties.
 
Limitation on Operating Expenses.  CM Group must reimburse us the amount by which our aggregate total operating expenses for the four fiscal quarters then ended exceed the greater of 2% of our average invested assets or 25% of our net income, unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors. “Average invested assets” means the average monthly book value of our assets during the 12-month period before deducting depreciation, bad debts or other non-cash reserves. “Total operating expenses” means all expenses paid or incurred by us, as determined under GAAP, that are in any way related to our operation, including advisory fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting,


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underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and stock exchange listing of our stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based on the gain from the sale of our assets; and (f) acquisition fees and origination fees, acquisition and origination expenses (including expenses relating to potential investments that we do not close), disposition fees on the sale of real property and other expenses connected with the acquisition, origination, disposition and ownership of real estate interests, loans or other property (other than disposition fees on the sale of assets other than real property), including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of property.
 
Repurchase of Our Shares.  Our charter prohibits us from paying a fee to CM Group or our directors or officers or any of their affiliates in connection with our repurchase of our common stock.
 
Loans.  We will not make any loans to CM Group or to our directors or officers or any of their affiliates. In addition, we will not borrow from these affiliates unless a majority of our directors (including a majority of our independent directors) not otherwise interested in the transaction approves the transaction as being fair, competitive and commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties. These restrictions on loans will only apply to advances of cash that are commonly viewed as loans, as determined by the board of directors. By way of example only, the prohibition on loans would not restrict advances of cash for legal expenses or other costs incurred as a result of any legal action for which indemnification is being sought nor would the prohibition limit our ability to advance reimbursable expenses incurred by directors or officers or CM Group or its affiliates.
 
Reports to Stockholders.  Our charter requires that we prepare an annual report and deliver it to our common stockholders within 120 days after the end of each fiscal year. Our directors are required to take reasonable steps to ensure that the annual report complies with our charter provisions. Among the matters that must be included in the annual report or included in a proxy statement delivered with the annual report are:
 
  •  financial statements prepared in accordance with GAAP that are audited and reported on by independent certified public accountants;
 
  •  The ratio of the costs of raising capital during the year to the capital raised;
 
  •  the aggregate amount of advisory fees and the aggregate amount of other fees paid to CM Group and any affiliates of CM Group by us or third parties doing business with us during the year;
 
  •  our total operating expenses for the year stated as a percentage of our average invested assets and as a percentage of our net income;
 
  •  a report from the conflicts committee that our policies are in the best interests of our common stockholders and the basis for such determination; and
 
  •  separately stated, full disclosure of all material terms, factors and circumstances surrounding any and all transactions involving us and our advisor, a director or any affiliate thereof during the year, which disclosure has been examined and commented upon in the report by the conflicts committee with regard to the fairness of such transactions.
 
Voting of Shares Owned by Affiliates.  Neither CM Group, our directors and officers nor any of their affiliates may vote their shares of common stock on matters submitted to a vote of the stockholders regarding (i) the removal of CM Group or any of these affiliates or (ii) any transaction between them and us. In determining the requisite percentage of shares necessary to approve a matter on which CM Group, our directors and officers and any of their affiliates may not vote, any shares of common stock owned by them shall not be included.
 
Ratification of Charter Provisions.  At or before our first meeting of our board of directors, our board of directors and the conflicts committee will have reviewed and ratified our charter by the vote of a majority of their respective members, as required by our charter.


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Transactions with Affiliates.  Our charter prohibits us from engaging in transactions with CM Group, any of our directors or any of our affiliates, except to the extent that each such transaction has, after disclosure of such affiliation, been approved or ratified by the affirmative vote of a majority of our directors (including a majority of the independent directors) not otherwise interested in the transaction and:
 
  •  The transaction is fair and reasonable to us.
 
  •  The terms and conditions of such transaction are not less favorable to us than those available from unaffiliated third parties.
 
  •  If an acquisition is involved, the total consideration is not in excess of the appraised value of the real property being acquired, directly or indirectly, as determined by an independent expert.
 
Our charter requires that the members of our conflicts committee not otherwise interested in the transaction approve every related party transaction in which we engage.
 
CONFLICTS OF INTEREST
 
Relationship with Our Advisor
 
Our advisor, CM Group, is majority owned by Todd Parriott, our Chief Executive Officer, Stacy M. Riffe, our Chief Financial Officer and G. Steven Dawson, all of whom are our directors. Our advisor will receive substantial fees from us, which were not negotiated at arm’s length. The second-tier management fee we pay our advisor is based on our net income. In evaluating mortgage loans and other assets for investment and in evaluating other operating strategies, an undue emphasis by our advisor on the maximization of our net income at the expense of other criteria, such as preservation of capital, in order to earn higher compensation, could result in an increased risk to the value of our portfolio. In addition, the asset management fee that we will pay to CM Capital Services in the event that one of our loans becomes non-performing and we take ownership of the property, may in certain instances be higher than the servicing fee that was being paid to CM Capital Services by the borrower, and thereby create an incentive for CM Capital Services to originate riskier loans for us in order to earn higher compensation. The riskier the investments in our portfolio, the greater the risk of payment defaults, which would decrease the funds we will have available to distribute to our stockholders. See “The Advisor — The Advisory Agreement.”
 
Fees payable to our advisor could influence its advice to us as well as the judgment of affiliates of CM Group, some of whom also serve as our executive officers and directors. Among other matters, these compensation arrangements could affect their judgment with respect to:
 
  •  the continuation, renewal or enforcement of our agreements with CM Group and its affiliates, including the advisory agreement and the dealer-manager agreement;
 
  •  public offerings of equity by us, which entitle CM Securities to dealer-manager fees and will likely entitle CM Group to increased management fees and CM Capital Services to increased loan origination and servicing fees;
 
  •  acquisitions of properties and others investments from other CM Group-sponsored programs, which might entitle affiliates of CM Group to fees in connection with its services for the seller;
 
  •  acquisitions of properties and other investments from third parties and originations of loans, which entitle CM Group to management fees; and
 
  •  borrowings to acquire properties and other investments and to originate loans, which borrowings will increase the management fees payable to CM Group.
 
For so long as our advisor is our exclusive advisor, it will not sponsor any mortgage REIT other than Desert Capital that invests primarily in mortgage loans for the acquisition of, development of and construction on real estate in the Las Vegas, Nevada area, without first obtaining the approval of a majority of our independent directors. However, our advisor and its affiliates may in the future enter into a number of relationships other than those governed by the advisory agreement, some of which may give rise to conflicts


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of interest between us and our advisor or its affiliates. For example, our advisor is also the manager of CM Equity and its indirect wholly owned subsidiary is the manager of CM Notes, each of which also made real estate related investments. These possible future relationships may create an incentive for our advisor to make investment decisions that are not in the long-term best interests of our stockholders, which may ultimately decrease the funds we will have available to distribute to our stockholders. In addition, the market in which we seek to make investments is characterized by rapid evolution of products and services and, thus, in the future there may be relationships between our advisor and its affiliates and us in addition to those described herein. Under the advisory agreement, the prior approval of a majority of our independent directors is required for each related party transaction between our advisor or its affiliates and us. In addition, our advisor is required to provide to our board on a quarterly basis a report of such transactions, including evidence sufficient to allow our board of directors to determine whether the terms of such transactions are fair. The members of our conflicts committee of our board of directors not otherwise interested in the transaction will approve any related party transactions.
 
The investment activity of CM Notes will end prior to December 31, 2010. Our advisor is not currently sponsoring another investment program that is actively making investments to compete with us, although we expect it to do so in the future. Other mortgage REITs and entities involved in making investments in real estate related assets sponsored by our advisor in the future may also compete with us to invest in the type of mortgage loans suitable for us to acquire. In addition, we also compete for investment opportunities with the private investors that comprise CM Capital Services’ investor pool. We rely on our advisor to identify suitable investment opportunities. Our advisor may be subject to conflicts of interest at such time as we wish to make a mortgage loan that also would be suitable for investment for another mortgage REIT or other entity sponsored by our advisor or for CM Capital Services’ private investor pool. We cannot be sure that our advisor would act in our best interests when deciding whether to allocate any particular investments to us. Allocation of investment opportunities will be made by our advisor’s investment committee, as set forth below under “— Allocation of Investment Opportunities.” The introduction of this sort of competition could affect the quality and quantity of our investments and, therefore, have an adverse affect on our net income. If the value of our investments and our net income are adversely affected, the funds we have available for distribution to our stockholders may be decreased.
 
Todd Parriott is our Chief Executive Officer, and the Chief Executive Officer and President of our advisor, CM Group. He and G. Steven Dawson, Managing Director of our advisor, also indirectly own 86% of Residential Capital. CM Capital Services is a wholly owned subsidiary of our advisor. We will not pay any fees directly to Residential Capital or CM Capital Services for presenting us with mortgage loan investment opportunities; however, the borrowers of these mortgage loans will pay fees to Residential Capital and CM Capital Services. Because Mr. Parriott and Mr. Dawson each has a financial interest in Residential Capital and indirectly in CM Capital Services, they may be incentivized to allocate a loan to us to fund, so that the loan will close and Residential Capital or CM Capital Services, as the case may be, will be entitled to collect its fee from the borrower.
 
Investors will not have the opportunity to evaluate the manner in which these conflicts of interest will be resolved before making their investment.
 
Our Directors’ Loyalties to Desert Capital and to other Existing and Future CM Group-Sponsored Programs
 
Certain of our directors are also directors of Desert Capital and may in the future be directors of other CM Group-sponsored programs. The loyalties of our directors to other programs may influence the judgment of our board when considering issues for us that may affect such other programs, such as the following:
 
  •  We could enter into a transaction with Desert Capital or another CM Group-sponsored program, such as a joint venture or joint financing arrangement. Decisions of our board of directors regarding the terms of these transactions may be influenced by its loyalties to Desert Capital or such other program. We have formed the conflicts committee which will approve related party transactions to protect against this conflict.


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  •  A decision of the board of directors regarding the timing of a debt or equity offering could be influenced by concerns that the offering would compete with an offering of another CM Group-sponsored program.
 
We could also face similar conflicts if CM Group or its affiliates sponsor additional REITs or other entities involved in making real estate related investments.
 
Allocation of Investment Opportunities
 
Our advisor employs an investment committee which meets regularly to review existing and prospective investments for each of its affiliates, currently CMR, CM Notes, CM Capital Services and Desert Capital. See “Other CM Group Sponsored Programs — Allocation of Investment Opportunities Among CM Group-Sponsored Programs” for a description of how investments will be allocated among CM Group clients.
 
Competition for Management Time
 
Mr. Parriott and Ms. Riffe are officers and employees of our advisor. They currently are engaged, and in the future will engage, in other business activities, including activities associated with affiliates. Our officers and directors will devote only as much of their time to our business as they, in their judgment, determine is reasonably required, which will be substantially less than their full time. These individuals may experience conflicts of interest in allocating management time, services, and functions among us, Desert Capital, CM Equity, CM Notes, CM Capital Services, the dealer-manager and other various entities, investor programs (public or private), and any other business ventures in which any of them are or may become involved. The other clients of the advisor may demand more management time than we do because of the current status of their business and investment portfolio. If these individuals do not spend sufficient time on our business activities, our results of operations may suffer and the funds we will have available for distribution to our stockholders may be decreased.
 
Relationship with Dealer-Manager
 
The dealer-manager is our affiliate and is owned by our advisor. Todd Parriott is also an officer and registered principal of the dealer-manager. These relationships may create conflicts in connection with the fulfillment by the dealer-manager of its due diligence obligations under the federal securities laws. Although the dealer-manager will examine the information in the prospectus for accuracy and completeness, the dealer-manager is our affiliate and will not make an independent review of us or the offering. Accordingly, investors do not have the benefit of such independent review. The participating broker-dealers, if any, are expected to make their own independent due diligence investigations. See “Risk Factors — Risks Related to the Offering — The business and financial due diligence of CMR was conducted by our dealer-manager, which is our affiliate.” The dealer-manager is not prohibited from acting in any capacity in connection with the offer and sale of securities offered by entities that may have some or all investment objectives similar to those of ours and may participate in other offerings sponsored by our advisor or one or more of our officers or directors.
 
Relationship with Our Accountant
 
Hancock Askew & Co., LLP, our independent registered public accounting firm, also provides accounting services for certain of our affiliates, including our advisor, Desert Capital, CM Capital Services, CM Securities and Residential Capital.
 
Relationship with Our Legal Counsel
 
Locke Lord Bissell & Liddell LLP, our outside corporate and securities legal counsel, also provides legal services for certain of our affiliates, such as our advisor, Desert Capital and CM Equity.


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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
Relationship with Our Advisor
 
The individuals named in the table set forth below have a relationship with both us and our advisor.
 
         
Name
 
Position with Our Advisor
 
Position with Us
 
Todd B. Parriott
  President, Chief Executive Officer, Manager, and Majority Owner   Chairman of the Board of Directors, Chief Executive Officer, President and Chief Investment Officer
G. Steven Dawson
  Managing Director and Manager, and Minority Owner   Director
Stacy M. Riffe
  Executive Vice President, Chief Financial Officer, and Minority Owner   Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director
 
Our advisor oversees our day-to-day operations including asset, liability and capital management. Our advisor will be compensated pursuant to the terms of the advisory agreement. See “The Advisor.”
 
Relationship with Our Dealer-Manager
 
CM Securities is the dealer-manager for this offering. Pursuant to the dealer-manager agreement, CM Securities will be paid selling commissions of 7.0% and a dealer-manager fee of 3.0% of our gross offering proceeds. See “Plan of Distribution — Compensation of Dealer-Manager and Participating Broker-Dealers.”
 
CM Securities is wholly owned by our advisor. Todd B. Parriott, our Chairman of the Board of Directors, Chief Executive Officer, President and Chief Investment Officer is also the Chief Executive Officer of the dealer-manager.
 
Loan Origination Agreement and Loan Servicing Agreement with CM Capital Services
 
Prior to the commencement of the offering, we will enter into a loan origination agreement with CM Capital Services and CM Group. During the term of the loan origination agreement, we will have a right to fund certain of the mortgage loans identified by CM Capital Services or any affiliate of CM Group or CM Capital Services that becomes engaged in the business of originating or brokering commercial loans. Allocation of investment opportunities originated by CM Capital Services or any other affiliate of CM Group will be made by our advisor’s investment committee, as set forth under “Conflicts of Interest — Allocation of Investment Opportunities.” We are not obligated to pay any fees or expenses to CM Capital Services or CM Group under the loan origination agreement. Any and all origination fees to be paid to CM Capital Services in respect of the mortgage loans it originates for us are paid by the borrowers of such mortgage loans. The origination fee payable to CM Capital Services by a borrower is a percentage of the loan amount. The total origination fees that will be paid to CM Capital Services in any year will depend on the amount of mortgage loans it originated and therefore it is not possible to calculate a reasonable estimate of the origination fees that will be paid to CM Capital Services in any given year. Todd Parriott, our Chief Executive Officer, is the Chief Executive Officer of CM Capital Services. CM Capital Services will service our loans.
 
Prior to the commencement of the offering, we will enter into a loan servicing agreement with CM Capital Services. During the term of the loan servicing agreement, CM Capital Services will perform the customary functions of a loan servicer, including collecting and recording payments, communicating with borrowers, investigating payment delinquencies, attempting to cure delinquencies, supervising foreclosures and maintaining accounting and other records relating to our mortgage loans. CM Capital Services will receive a servicing fee for each mortgage loan it services of up to a 100 basis points spread between the interest rate that is paid by the related borrower on the loan and the interest rate we receive as the lender on the loan. The servicing fee will vary per loan and will be mutually determined by our advisor and CM Capital Services. In


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the event a loan becomes non-performing and we take ownership of the property as a result of a workout or foreclosure of a loan, in lieu of the servicing fee that was previously paid by the borrower, we will pay, CM Capital Services an asset management fee equal to 1% of the original loan amount per annum. The total servicing and asset management fees that will be paid to CM Capital Services in any year will depend on the outstanding principal amount of mortgage loans in our loan portfolio during such year and therefore it is not possible to calculate a reasonable estimate of the servicing and asset management fees that will be paid to CM Capital Services in any given year. CM Capital Services will be required to service the mortgage loans in accordance with the terms of the loan servicing agreement for the entire term of the mortgage loan, unless the loan servicing agreement is earlier terminated by CM Capital Services or by us. In the event we sell a property, in consideration for substantial assistance in connection with the sale of such property, we will pay a disposition fee to CM Capital Services upon the sale of such property in an amount no greater than the lesser of one-half of the brokerage commission paid or an amount equal to 3% of the contractual sales price; provided that the amount when added to all other disposition fees paid to any unaffiliated parties in connection with the sale, does not exceed the lesser of the competitive real estate commission or an amount up to 6% of the contractual sales price.
 
Relationship with Residential Capital
 
We expect to fund certain of the mortgage loans identified by Residential Capital. We will not be obligated to pay any fees or expenses to Residential Capital. Any and all origination fees to be paid to Residential Capital in respect of the mortgage loans it originates for us will be paid by the borrowers of such mortgage loans. The origination fee payable to Residential Capital by a borrower is a percentage of the loan amount. The total origination fees that will be paid to Residential Capital in any year will depend on the amount of mortgage loans it originated and we funded and therefore it is not possible to calculate a reasonable estimate of the origination fees that will be paid to Residential Capital in any given year. Todd Parriott, our Chief Executive Officer, and G. Steven Dawson, one of our Directors, are the majority owners of Residential Capital.
 
Relationship with Preferred Trust
 
Certain members of CM Group own a majority of the equity interests in Preferred Trust Co., LLC, a Nevada limited liability company (“Preferred Trust”). Preferred Trust is in the business of acting as a custodian for qualified funds held within self-directed individual retirement accounts (“IRA accounts”) for individual IRA account holders and maintains such accounts as directed by such IRA account holders. Certain of CM REIT’s officers and directors are members or managers of Preferred Trust, including Todd Parriott who is a member and a manager of Preferred Trust. Preferred Trust is not a part of the CM Group of affiliated companies. CM Capital Services may refer holders of self-directed IRA accounts to Preferred Trust, and is entitled to $50 for each referral which leads to the establishment and maintenance of an IRA account with Preferred Trust. Holders of self-directed IRA accounts maintained at Preferred Trust may choose to invest in CMR, but Preferred Trust does not direct or give advice regarding investment decisions of the IRA account holders.
 
Preferred Trust may also act as a depository and maintain the trust accounts on behalf of the third party construction control company that will monitor and release the construction funds for the construction loans that we fund. See “Business — Our Investment Types — Acquisition, Development, Construction and Commercial Mortgage Loans.”
 
Approval of Related Party Transactions
 
We have appointed a conflicts committee of our board of directors, comprised of all of our independent directors, to approve any related party transactions in which we may engage in the future. The conflicts committee has not developed written procedures relating to its review and approval of such transactions, nor has it identified standards to be applied by it in connection with its review and approval. Our board of directors as a whole, including a majority of our independent directors, will approve the advisory agreement, the dealer-manager agreement, the loan origination agreement and servicing agreement with CM Capital Services.


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Independence of Directors and Committee Members
 
Our board has determined that each of the following directors has no material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us) and is independent within the meaning of NYSE director independence standards, as currently in effect: Messrs. Cinquini, Gilson, Holsomback and Simmons. The board has determined that Messrs. Parriott and Dawson and Ms. Riffe are not independent directors within the meaning of the NYSE director independence standards. Furthermore, the board has determined that each of the members of each of the audit, compensation and governance and nominating committees is independent.
 
OUR ADVISOR
 
General
 
Our advisor was established in 2007 by the management of Burton Management Company, Ltd., which was established in 2003. Currently, our advisor’s only clients other than us are Desert Capital, and CM Equity. In addition, its indirect wholly owned subsidiary acts as the advisor to CM Notes. Our advisor also owns CM Capital Services. Our advisor’s address is 1291 W. Galleria Drive, Suite 200, Henderson, Nevada 89014.
 
The Advisory Agreement
 
Services and Duties of the Advisor
 
Prior to the effectiveness of the registration statement of which this prospectus is a part, we will enter into an advisory agreement with our advisor pursuant to which our advisor is our sole advisor and generally implements our business strategy, is responsible for our day-to-day operations and performs services and activities relating to our assets and operations in accordance with the terms of the advisory agreement. Our advisor may elect to have other persons undertake some or all of those duties at any time and in its sole discretion. Our advisor is primarily involved in three activities:
 
  •  Asset Management — our advisor advises us with respect to, and arranges for and manages the acquisition, financing, management and disposition of, our investments.
 
  •  Liability Management — our advisor evaluates the credit risk of our investments and arranges appropriate borrowing and hedging strategies.
 
  •  Capital Management — our advisor coordinates our capital raising activities.
 
Subject at all times to the direction and oversight of our board of directors, our advisor performs the following services and other activities in accordance with the terms of the advisory agreement and, to the extent directed by our board of directors, performs similar services and other activities for any of our subsidiaries:
 
  •  serving as our advisor with respect to the formulation of investment criteria and the preparation of policy guidelines by our board of directors;
 
  •  assisting us in developing criteria for mortgage loan purchase commitments that are consistent with our long-term investment objectives and making available to us our advisor’s knowledge and experience with respect to mortgage loans;
 
  •  representing us in connection with the purchase, sale and commitment to purchase or sell investments that meet in all material respects our investment criteria, and managing our portfolio of investments;
 
  •  advising us and negotiating our agreements with third-party lenders for borrowings by us;
 
  •  making available to us statistical and economic research and analysis regarding our activities and the services performed for us by our advisor;
 
  •  investing or reinvesting any of our money in accordance with our policies and procedures;


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  •  providing the executive and administrative personnel, office space and services required in rendering services to us, in accordance with and subject to the terms of the advisory agreement;
 
  •  administering our day-to-day operations and performing and supervising the performance of such other administrative functions necessary to our management as may be agreed upon by our advisor and our board of directors, including the collection of our revenues and the payment of our debts and obligations from our accounts, and the maintenance of appropriate computer systems to perform such administrative functions;
 
  •  advising our board of directors in connection with policy decisions;
 
  •  evaluating and recommending hedging strategies to our board of directors and, upon approval by our board of directors, engaging in hedging activities on our behalf consistent with our status as a REIT;
 
  •  supervising our compliance with the REIT provisions of the Internal Revenue Code and our maintenance of our status as a REIT;
 
  •  qualifying and causing us to qualify to do business in all applicable jurisdictions and obtaining and maintaining all appropriate licenses;
 
  •  assisting us to retain qualified accountants and tax experts to assist in developing and monitoring appropriate accounting procedures and testing systems and to conduct quarterly compliance reviews as our board of directors may deem necessary or advisable;
 
  •  assisting us in our compliance with all federal, state and local regulatory requirements applicable to us in respect of our business activities, including preparing or causing to be prepared all financial statements required under applicable regulations and contractual undertakings and all reports, documents and filings, if any, required under the Exchange Act or other federal or state laws;
 
  •  assisting us in our compliance with federal, state and local tax filings and reports and generally enabling us to maintain our status as a REIT, including soliciting stockholders, as defined below, for required information to the extent provided in the REIT provisions of the Internal Revenue Code;
 
  •  assisting us in our maintenance of an exemption from the Investment Company Act and monitoring our compliance with the requirements for maintaining an exemption from the Investment Company Act;
 
  •  coordinating and managing the operations of any joint venture or co-investment interests held by us and conducting all matters with the joint venture or co-investment collaborators;
 
  •  advising us as to our capital structure and capital raising activities;
 
  •  handling and resolving all claims, disputes or controversies (including all litigation, arbitration, settlement or other proceedings or negotiations) in which we may be involved or to which we may be subject arising out of our day-to-day operations, subject to the approval of our board of directors;
 
  •  engaging and supervising, on behalf of us and at our expense, the following, without limitation: independent contractors to provide investment banking services, leasing services, mortgage brokerage services, securities brokerage services, other financial services, and such other services as may be deemed by our advisor or our board of directors to be necessary or advisable from time to time; and
 
  •  so long as our advisor does not incur additional costs or expenses, performing such other services as may be required from time to time for management and other activities relating to our assets as our board of directors shall reasonably request or our advisor shall deem appropriate under the particular circumstances.
 
Our advisor is required to manage our business affairs in general conformity with the policies approved by our board of directors and consistent with our advisor’s duties under the advisory agreement. Our advisor is required to prepare regular reports for our board of directors that review our acquisitions of assets, portfolio composition and characteristics, credit quality, performance and compliance with our investment policies and policies that will enable us to maintain our qualification as a REIT and prevent us from being deemed an investment company.


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From time to time, our board of directors will assess whether we should be internally managed. This assessment will be based on a number of factors deemed relevant by our board of directors, including our ability to attract and retain full-time employees and the costs and expenses related to becoming internally managed.
 
Term
 
Our initial advisory agreement has a one-year term that commences on          , 2010; however, pursuant to its terms, the agreement automatically renews for a period of one year unless terminated in accordance with the terms thereof.
 
Terminations by Us for Cause.  Our independent directors have the right to terminate the advisory agreement for cause, on a majority vote. “Cause” means a reasonable, good faith determination that our advisor was grossly negligent, acted with reckless disregard or engaged in willful misconduct or active fraud while discharging its material duties under the advisory agreement. The independent directors’ determination that cause exists must be based on findings of fact disclosed to our advisor. If the directors’ good faith determination that cause exists is based primarily on a finding of criminal activity or active fraud, we may terminate the advisory agreement immediately. If our directors’ good faith determination that cause exists is based primarily on findings other than criminal activity or fraud, we must give our advisor written notice disclosing the findings of the unaffiliated directors and allow our advisor a reasonable opportunity to cure the problem. If after 30 days the independent directors determine that cause continues to exist, then the independent directors may terminate the advisory agreement immediately by a majority vote. Upon such a termination, we will be obligated to pay our advisor all accrued and unpaid fees and expenses reimbursable under the advisory agreement.
 
Terminations Without Cause or Penalty.  Our advisor has the right to terminate the advisory agreement for any reason and without penalty by giving at least 60 days’ prior written notice to our board of directors. Upon such a termination, we will be obligated to pay our advisor all accrued and unpaid fees and expenses reimbursable under the advisory agreement.
 
Our independent directors have the right to terminate the advisory agreement without cause or penalty, by a majority vote, by giving at least 60 days’ prior written notice to our advisor. Upon such a termination, we will be required to pay our advisor all accrued and unpaid fees and expenses reimbursable under the advisory agreement.
 
Terminations by Our Advisor Upon a Change of Control.  Subject to exceptions specified in the advisory agreement, our advisor has the right to deliver a notice of termination of the advisory agreement within 90 days of a change of control of our company. A “change of control” for the purpose of the advisory agreement is deemed to occur on:
 
  •  the date of (a) any sale, lease, assignment, transfer or other conveyance of all or substantially all of our assets; (b) any consolidation or merger involving our company in which all of our stockholders immediately prior to the transaction, considered collectively, do not immediately following the transaction own shares of the surviving entity constituting at least a majority of the voting power of the surviving entity; (c) any capital reclassification or other recapitalization of our company in which any person or group that owned 30% or more of our voting power falls below that threshold or in which any person or group that owned less than 30% of our voting power rises above that ceiling; or (d) any liquidation, dissolution or winding up of our company; or
 
  •  the first date on which fewer than two of our directors are persons whose nomination to the board was supported by our advisor. Currently, the board seat of Messrs. Parriott and Dawson and Ms. Riffe are supported by our advisor. Our advisor has informed us that it will generally support the nomination of persons employed by, or affiliated with, our advisor. We intend to disclose in our proxy statements regarding the election of directors whether a candidate’s nomination is supported by our advisor.
 
Any notice of termination by our advisor following a change of control will be effective no less than 60 days after its date of delivery. If our advisor terminates the advisory agreement following a change of control, we will be required to pay our advisor all unpaid fees and expenses reimbursable under the advisory agreement.


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Compensation and Expenses
 
The following table presents a summary of certain compensation, fees and other benefits (including reimbursement of certain out-of-pocket expenses paid by our advisor to third parties pursuant to the advisory agreement) that our advisor and its affiliates may earn or receive from us. Our advisor and its affiliates are not entitled to any additional compensation in connection with the acquisition or disposition of our assets, including in the event we liquidate. Our advisor will continue to be paid its first tier and second tier management fee, which we refer to collectively as the management fee, as long as it is providing services to us under the advisory agreement. If we were to dispose of assets, the reduction in the amount of our average invested assets will impact the amount of the management fee, due to the formula used to calculate the fee. The total compensation we pay to our advisor is limited under our articles of incorporation to an amount determined at least annually by our independent directors to be reasonable in relation to the nature and quality of services performed. The total compensation paid to our advisor is limited to the management fee set forth below. Our Total Operating Expenses, including all management fees paid to our advisor, in any fiscal year will not exceed the greater of 2% of average invested assets or 25% of net income, unless specifically approved by our independent directors.
 
         
Type of
 		      Estimated Amount
Compensation
 		      for Minimum/Maximum
and Recipient
 
Method of Computation
 
Offering(1)
 
Fees Paid in Connection with Our Offering
         
Selling Commissions to our Dealer-manager and participating broker-dealers   We will pay our dealer-manager selling commissions of 7.0% of aggregate gross proceeds from sales of shares. Our dealer-manager will reallow all of the 7% selling commissions to participating broker-dealers with respect to shares they sell.   $175,000/$63,000,000(2)
         
Dealer-Manager Fees to our Dealer-manager and participating broker-dealers   We will pay our dealer-manager a dealer-manager fee of 3.0% of aggregate gross proceeds from sales of shares. Our dealer-manager may reallow a portion of the dealer-manager fee to any participating broker-dealer with respect to shares it sells(4).   $75,000/$27,000,000(3)
         
Reimbursement of Other Organization and Offering Expenses to our advisor, its affiliates and related parties   To date, our advisor has paid organization and offering expenses on our behalf. We will reimburse our advisor and its affiliates for actual expenses in connection with our formation and this offering, including certain salaries and non-transaction based compensation paid to employees of our advisor and its affiliates for performing services for us and bona fide, itemized and detailed due diligence expenses incurred by the dealer-manager and participating broker-dealers(5). We will reimburse these expenses only to the extent that the reimbursement would not cause the selling commissions, the dealer-manager fee and the other organization and offering expenses borne by us to exceed 15% of gross offering proceeds as of the date of the reimbursement. If we raise the maximum offering amount, we expect organization and offering expenses (other than selling commissions and the dealer-manager fee) to be $13,500,000 or 1.5% of gross offering proceeds.   $125,000/$13,500,000


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Type of
 		      Estimated Amount
Compensation
 		      for Minimum/Maximum
and Recipient
 
Method of Computation
 
Offering(1)
 
Fees Paid in Connection with the Acquisition of
Properties, Loans or Other Real Estate-
Related Investments
         
Acquisition Fee to our advisor and its affiliates   We do not anticipate paying any acquisition fees to our advisor or its affiliates in connection with the acquisition of our investments. However, if we do pay acquisition fees to our advisor or any of its affiliates for services in connection with the selection, evaluation, structure and purchase of an investment, the fee will be usual and customary for services rendered and not exceed an amount equal to 6% of the cost of the investment acquired by us, or in the case of a loan, 6% of the funds advanced.   Amount is dependent upon our results of operations and is not determinable at this time.
         
Reimbursement of Acquisition Expenses to our advisor, its affiliates and related parties   We will reimburse our advisor and its affiliates and related parties for actual expenses incurred in connection with the selection, evaluation, structure and purchase of making loans and other real estate-related investments, whether or not acquired. Acquisition expenses may include, without limitation, legal fees and expenses, travel and communications expenses, costs of appraisals, nonrefundable option payments on property not acquired, accounting fees and expenses, title insurance premiums and the costs of performing due diligence. The total of all acquisition fees and acquisition expenses shall be reasonable, and shall not exceed an amount equal to 6% of the contract price of the property, or in the case of a loan, 6% of the funds advanced.   Amount is dependent upon our results of operations and is not determinable at this time(6).
         
Origination Fee
to CM Capital Services and Residential Capital 		  Up to 500 basis points of loan amount and is paid by the borrower.   Amount is not determinable at this time.
 
Fees Paid in Connection with our Operations
         
Management Fees to our advisor   First tier management compensation of 1% per annum of the first $200 million of our average invested assets, plus 0.8% per annum of our average invested assets in excess of $200 million during such fiscal year, calculated on a monthly basis and payable monthly in arrears; and second tier management compensation of a specified percentage of the amount our REIT taxable net income, before deducting certain management compensation, net operating losses and certain other items, exceeds a return based on the 10 year U.S. Treasury rate plus 1%. The percentage for this calculation is the weighted average of the following percentages based on our average invested assets for the period: 20% for the first $200 million of our average invested assets; and 10% of our average invested assets in excess of $200 million calculated and paid on a monthly basis and subject to annual reconciliation.   Amount of first tier management fee for the minimum offering amount is estimated to be $21,250 (assuming no debt financing to purchase investments) and approximately $85,000 (assuming debt financing equal to 75% of our total assets) and for the maximum offering amount is estimated to be $6,772,000 (assuming no debt financing to purchase investments) and approximately $25,888,000 (assuming debt financing equal to 75% of the cost of our total assets). Amount of second tier management fee is dependent upon our results of operations and is not determinable at this time.

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Type of
 		      Estimated Amount
Compensation
 		      for Minimum/Maximum
and Recipient
 
Method of Computation
 
Offering(1)
 
Out-of-Pocket
Expense
Reimbursement
to our advisor,
its affiliates
and related parties 		  Reimbursement of actual out-of-pocket expenses incurred in connection with our administration on an on-going basis includes reimbursement of expenses incurred in contracting with third parties to provide services to us or on our behalf, such as legal fees, accounting fees, consulting fees, trustee fees, appraisal fees, insurance premiums, commitment fees, brokerage fees, ad valorem and property taxes, costs of foreclosure, maintenance, repair and improvement of property and premiums for insurance. Also includes reimbursement for travel and related expenses incurred in connection with performing business and bona fide due diligence activities for or on our behalf, including, without limitation, travel and expenses incurred in connection with the purchase, financing, refinancing, sale or other disposition of any of our assets or other investments. Such fees and expenses will only be reimbursed if a detailed and itemized invoice is provided. Except for salaries reimbursable as other organization and offering expenses, we do not reimburse our advisor for employment expenses of the personnel employed by our advisor (including our officers who are also employed by our advisor).   (6)
         
Servicing Fee
to CM Capital
Services 		  Up to 100 basis points of loan amount and is paid by the borrower.   Amount is not determinable at this time.
Asset Management Fee to CM Capital Services   If a loan becomes non-performing and we take ownership of a property as a result of a workout or foreclosure of a loan, in lieu of the servicing fee that was previously paid by the borrower, we will pay CM Capital Services an asset management fee equal to 1% of the original loan amount per annum.   Amount is not determinable at this time.
 
Fees Paid in Connection with Sales or Liquidation
Disposition Fee
to CM Capital
Services 		  If we take ownership of a property as a result of a workout or foreclosure of a loan, or otherwise sell a property, in consideration for substantial assistance in connection with the sale of such property (including a sale of all our properties), we will pay a disposition fee upon the sale of such property in an amount no greater than the lesser of one-half of the brokerage commission paid or an amount equal to 3% of the contractual sales price. If we pay a disposition fee to CM Capital Services, we may also pay a disposition fee to another third party. However, the amount paid to CM Capital Services when added to all other disposition fees paid to any unaffiliated parties in such a capacity in connection with the sale, may not exceed the lesser of the competitive real estate commission or an amount up to 6% of the contractual sales price.   Amount is not determinable at this time as it is dependent upon amount of assets sold.
 
 
(1) The estimated minimum dollar amounts are based on the sale of the minimum of 250,000 shares to the public. The estimated maximum dollar amounts are based on the sale of the maximum of 90,000,000 shares to the public in the primary offering. No sales commissions or dealer-manager fees are payable as a result of sales of shares under our DRIP.

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(2) Commissions may be reduced for discounts or waived as further described in the “Plan of Distribution” section of this prospectus; however, for purposes of calculating the estimated maximum selling commissions in this table, we have not assumed any such discounts or waivers.
 
(3) The dealer-manager fees may be reduced for discounts or waived as further described in the “Plan of Distribution” section of this prospectus; however, for purposes of calculating the estimated maximum dealer-manager fees in this table, we have not assumed any such discounts or waivers.
 
(4) In addition, out of its dealer-manager fee, our dealer manager may reimburse participating broker-dealers for distribution and marketing-related costs and expenses, such as costs associated with attending or sponsoring conferences, technology costs and other marketing costs and expenses.
 
(5) We will reimburse our dealer-manager for actual, bona fide, itemized and detailed due diligence expenses incurred by it or other participating broker-dealers in connection with this offering. Reimbursement is contingent upon receipt by our dealer-manager of a detailed invoice or similar itemized statement from the participating broker-dealer that demonstrates the actual due diligence expenses incurred. Our dealer-manager will reallow such reimbursements to the applicable participating broker-dealer.
 
(6) All out-of-pocket expenses incurred on our behalf will be reimbursed in accordance with the terms of the advisory agreement and pursuant to an agreed upon budget. We and our advisor will agree on a budget, including estimated out-of-pocket expenses. Any individual cost or expense exceeding $100,000 not reflected in our budget must be approved by our board of directors.
 
After commencement of this offering, our advisor must reimburse us the amount by which our aggregate total operating expenses for the four fiscal quarters then ended exceed the greater of 2% of our average invested assets or 25% of our net income, unless our board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors. “Average invested assets” means the average monthly book value of our assets during a specified period before deducting depreciation, bad debts or other non-cash reserves. “Total operating expenses” means all costs and expenses paid or incurred by us, as determined under GAAP, that are in any way related to our operation, including asset management fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and stock exchange listing of our stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) incentive fees paid in compliance with the NASAA Guidelines; (f) acquisition and origination fees, acquisition expenses, real estate commissions on the resale of real property and other fees and expenses connected with the acquisition, financing, disposition, management and ownership of real estate interests, loans or other property (other than commissions on the sale of assets other than real property), including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of property.
 
Management Fee.  The first-tier management fee is equal to 1% of the first $200 million of our average invested assets during each fiscal year, plus 0.8% of our average invested assets in excess of $200 million during such fiscal year. Our average invested assets is calculated as an average of the aggregate book value of our assets invested, directly or indirectly, in equity interests in and loans secured by real estate, before reserves for depreciation or bad debts or other similar non-cash reserves computed by taking the average of such values at the end of each month during the applicable period.
 
The second-tier management fee for each month (or lesser portion thereof) is an amount equal to the tiered percentage of the difference between our net income (which is our taxable income (including net capital gains, if any, and net capital losses, if any) before deducting the second-tier management fee, net operating losses arising from prior periods, and items permitted by the Internal Revenue Code when calculating taxable income for a REIT) for such fiscal quarter (or lesser portion thereof), and the threshold return for such fiscal quarter (or lesser portion thereof). The “tiered percentage” for this calculation is the weighted average of the following percentages based on our average invested assets for the period: (1) 20% for the first $200 million of average invested assets; and (2) 10% for our average invested assets in excess of $200 million. “Threshold return” means the amount of net income for the period that would produce an annualized return on our average gross offering proceeds equal to the 10-year U.S. Treasury rate (which is calculated by averaging the weekly average yield to maturity of the 10-year U.S. Treasury bond, as published by the Federal Reserve) for such month plus 1.0%. If


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at the end of a particular fiscal year or upon any termination of the advisory agreement, the aggregate of the second-tier management fee exceeds the tiered percentage of the difference of our net income for that fiscal year (or lesser portion thereof) less the threshold return for such year (or lesser portion thereof), then our advisor will pay us such amount at the time of such reconciliation at the end of the applicable fiscal year. Any such payments by our advisor will not exceed the amount of the second-tier management fee paid to our advisor under the advisory agreement for that fiscal year (or lesser portion thereof) and will be made only to the extent of the reconciliation amount for that fiscal year (or lesser portion thereof).
 
The management fee is paid monthly. The management fee is subject to the overall cap on our Total Operating Expenses. The management fee is intended to compensate our advisor for its costs in providing management services to us. Our advisor is expected to use the proceeds from its management fee in part to pay compensation to its officers and employees who have no right to receive cash compensation directly from us, even though some of them are also our officers.
 
Expense reimbursements.  Our advisor conducts due diligence with respect to potential investments and provides certain other services. Under the advisory agreement, our advisor is entitled to reimbursement for the fees and bona fide expenses attributable to providing such services incurred in contracting with third parties to provide services to us or on our behalf, such as legal fees, accounting fees, consulting fees, trustee fees, appraisal fees, insurance premiums, commitment fees, brokerage fees, ad valorem and property taxes, costs of foreclosure, maintenance, repair and improvement of property and premiums for insurance. Also includes reimbursement for travel and related expenses incurred in connection with performing business and due diligence activities for or on our behalf, including, without limitation, travel and expenses incurred in connection with the purchase, financing, refinancing, sale or other disposition of any of our assets or other investments. Such fees and expenses will only be reimbursed if a detailed and itemized invoice is provided. We do not reimburse the advisor for employment expenses of the personnel employed by the advisor (including our officers who are also employed by the advisor).
 
We rely on the personnel and resources of our advisor to conduct our operations. We reimburse our advisor for its costs and expenses for the items described below, and to perform due diligence tasks on assets purchased or considered for purchase by us and to perform certain other activities. Further, we reimburse our advisor for any expenses incurred in contracting with third parties for the master or special servicing of assets we acquire. Accordingly, a portion of the out-of-pocket expenses may be paid to our advisor’s affiliates in such capacities. The contracting for such engagements is conducted on commercially reasonable terms. Such arrangements may also be made using an income-sharing arrangement such as a joint venture. Expense reimbursement may be made as frequently as monthly.
 
Subject to the limitations set forth below, we pay all of our operating expenses except those specifically required to be borne by our advisor under the advisory agreement. The operating expenses required to be borne by our advisor include:
 
  •  most costs and expenses of its officers and employees;
 
  •  the costs of any salaries of any of our officers or directors who are affiliated with our advisor;
 
  •  all internal and overhead expenses of our advisor; and
 
  •  fees and expenses of third parties that are engaged by our advisor to perform services for us but for which our advisor is specifically not entitled to reimbursement under the advisory agreement, except that our board of directors may approve reimbursement to our advisor of our pro rata portion of the salaries, bonuses, health insurance, retirement benefits and similar employment costs for the time spent on our operations and administration other than for the provision of investment advisory services.
 
The expenses that we pay include:
 
  •  costs associated with the raising of capital and incurrence of debt;
 
  •  issuance and transaction costs associated with the acquisition, disposition and financing of investments;
 
  •  costs associated with our accounting systems;
 
  •  legal, independent accounting and auditing fees and expenses;


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  •  the compensation and expenses of our independent directors;
 
  •  the costs of printing and mailing proxy statements and reports to stockholders;
 
  •  costs incurred by employees of our advisor for travel on our behalf;
 
  •  costs associated with any computer software or hardware that is used solely for us;
 
  •  all insurance costs, including costs to obtain liability insurance to indemnify our directors and officers, our advisor and its employees and managers;
 
  •  the compensation and expenses of our custodian and transfer agent;
 
  •  the acquisition of assets;
 
  •  interest expense;
 
  •  taxes and license fees;
 
  •  non-cash costs;
 
  •  litigation expenses;
 
  •  the management fee; and
 
  •  extraordinary or non-recurring expenses.
 
Services for which we bear the expenses may be provided to us by affiliates of our advisor if it believes such services are of comparable or superior quality to those provided by third parties and can be provided at comparable cost. Our advisor is required under the advisory agreement to provide an annual report to our board of directors with respect to the engagement of third parties and fees and expenses paid to such third parties, and our board of directors will periodically review such engagements and our expense levels, the division of expenses between our advisor and us and reimbursements of expenses advanced by our advisor.
 
Our advisor is permitted to incur expenses on our behalf that are consistent with a budget that may, in the future, be approved by our board of directors, as amended from time to time, are consistent with the terms of the advisory agreement or are at the direction of our board. Nevertheless, our advisor must obtain the approval of our board for any expense item exceeding $100,000 in the aggregate, except as otherwise provided for in our budget. Our board of directors may modify this threshold from time to time in its discretion.
 
Unless otherwise provided in any resolution adopted by the board, we may reimburse our advisor, at the end of each fiscal quarter, for total operating expenses incurred by the advisor; provided, however that we will not reimburse our advisor at the end of any fiscal quarter for total operating expenses that, in the four consecutive fiscal quarters then ended, exceed the greater of 2% of average invested assets or 25% of our net income (which we refer to as the “2%/25% Guidelines”) for such year. Our independent directors have the fiduciary responsibility of limiting our total operating expenses to amounts that do not exceed the 2%/25% Guidelines unless they have made a finding that, based on such unusual and non-recurring factors that they deem sufficient, a higher level of expenses is justified.
 
Within 60 days after the end of any of our fiscal quarters for which there is an excess amount that the independent directors conclude was justified and reimbursable to the advisor, we will send to our stockholders a written disclosure of such fact, together with an explanation of the factors the independent directors considered in determining that such amount was justified. Any such finding and the reasons in support thereof will be reflected in the minutes of the meetings of the board. In the event that the independent directors do not determine that excess expenses are justified, the advisor will reimburse us the amount by which the expenses exceeded the 2%/25% Guidelines.
 
Conflicts of Interest
 
We are subject to conflicts of interest involving our advisor and its affiliates because, among other reasons:
 
  •  the second-tier management fee, which is based on our income, may create an incentive for our advisor to recommend investments with greater income potential, which may be relatively more risky than would be the case if its compensation from us did not include a component based on our income;


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  •  three of our directors and all of our executive officers are owners or employees of, or otherwise affiliated with, our advisor; and
 
  •  our advisor also provides advisory services for Desert Capital, which has investment objectives that are similar to ours, CM Equity, and its indirect wholly-owned subsidiary acts as the advisor to CM Notes.
 
For a more detailed discussion, see “Conflicts of Interest.”
 
The advisory agreement does not limit or restrict the right of our advisor or any of its affiliates from engaging in any business or rendering services of any kind to any other person, including the purchase of, or rendering advice to, others purchasing mortgage loans that meet our policies and criteria. However, our advisor has agreed that for as long as it is our exclusive advisor pursuant to the advisory agreement, it will not sponsor any mortgage REIT other than Desert Capital that invests primarily in mortgages for the acquisition of, development of and construction on real estate in the Las Vegas, Nevada area without first obtaining the approval of a majority of our independent directors.
 
Limits of Responsibility
 
Pursuant to the advisory agreement, our advisor has not assumed any responsibility other than to undertake the services called for thereunder and is not responsible for any decision by our board of directors to follow or not to follow its advice or recommendations. We cannot assure you that we would be able to recover any damages for claims we may have against our advisor. Although certain members, managers, officers, and employees of our advisor are also our officers and directors and, therefore, have fiduciary duties to us and our stockholders in that capacity, the members, managers, officers, and employees of our advisor, in their capacities as such, have no fiduciary duties to us. Our advisor shall have a fiduciary responsibility and duty to us and our stockholders.
 
We have agreed to indemnify our advisor and its managers, officers, employees and affiliates with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from any acts or omissions of our advisor or its employees made in the performance of our advisor’s duties under the advisory agreement. For such indemnification to be available, the indemnitee must have determined, in good faith, that the course of conduct which caused the loss or liability was in our best interests, the indemnitee must have been acting on behalf of or performing services for us, and the liability or loss must not be the result of negligence or misconduct by the indemnitee. The indemnification is recoverable only out of our net assets and not from our stockholders.


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MANAGEMENT OF THE COMPANY
 
We operate under the direction of our board of directors, the members of which are accountable to us and our stockholders as fiduciaries. The board is responsible for the management and control of our affairs. The board has retained CM Group to manage our day-to-day operations and our portfolio of real estate assets, subject to the board’s supervision. Because of the conflicts of interest created by the relationships among us, CM Group, and various affiliates, certain of the responsibilities of the board have been delegated to a committee that consists solely of independent directors. See “Conflicts of Interest.”
 
We will have four independent directors. An “independent director” is a person who meets the definition of an “independent director” as defined in Article IV of our articles of incorporation and in the NASAA Guidelines.
 
Each director will serve until the next annual meeting of stockholders and until his successor has been duly elected and qualified. The presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at any stockholder meeting constitutes a quorum. With respect to the election of directors, each candidate nominated for election to the board of directors must receive a plurality of the votes present, in person or by proxy, in order to be elected.
 
Although our board of directors may increase or decrease the number of directors, a decrease may not have the effect of shortening the term of any incumbent director. Any director may resign at any time or may be removed with or without cause by the stockholders upon the affirmative vote of at least a majority of all the votes entitled to be cast at a meeting called for the purpose of the proposed removal. The notice of the meeting will indicate that the purpose, or one of the purposes, of the meeting is to determine if the director shall be removed.
 
A vacancy created by an increase in the number of directors or the death, resignation, removal, adjudicated incompetence or other incapacity of a director will be filled by a vote of a majority of the remaining directors. As provided in our charter, nominations of individuals to fill the vacancy of a board seat previously filled by an independent director will be made by the independent directors.
 
Our directors are accountable to us and our stockholders as fiduciaries. This means that our directors must perform their duties in good faith and in a manner each director believes to be in our and our stockholders’ best interests. Further, our directors must act with such care as a prudent person in a similar position would use under similar circumstances, including exercising reasonable inquiry when taking actions. However, our directors and executive officers are not required to devote all of their time to our business and must only devote such time to our affairs as their duties may require. We do not expect that our directors will be required to devote a substantial portion of their time to us in discharging their duties.
 
In addition to meetings of the various committees of the board, which committees we describe below, we expect our directors to hold at least four regular board meetings each year. Our board has the authority to fix the compensation of all officers that it selects and may pay compensation to directors for services rendered to us in any other capacity.
 
Our general operating and investment policies are set forth in this prospectus. Our directors shall establish written policies on investments and borrowing as set forth in our articles of incorporation and in this prospectus and may establish further written policies on investments and borrowings and will monitor our administrative procedures, investment operations and performance to ensure that our executive officers and advisor follow these policies and that these policies continue to be in the best interests of our stockholders. Unless modified by our directors, we will follow the policies on operations and investments set forth in this prospectus.


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Our Directors and Executive Officers
 
The following table provides information regarding our directors and executive officers. Each of our directors and executive officers can be reached c/o CM REIT, Inc., 1291 W. Galleria Drive, Suite 200, Henderson, Nevada 89014.
 
             
Name
 
Age
 
Position
 
Todd B. Parriott
    39     Chairman of the Board, Chief Executive Officer, President and Chief Investment Officer
G. Steven Dawson
    52     Director
Stacy M. Riffe
    45     Director, Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director
Anthony D. Cinquini
    47     Independent Director Nominee*
Darin D. Gilson
    42     Independent Director Nominee*
Hunt C. Holsomback
    46     Independent Director Nominee*
Robert J. Simmons
    47     Independent Director Nominee*
 
 
* Each of these nominees has been elected by our stockholder effective on the date the registration statement of which this prospectus forms a part becomes effective.
 
Non-Employee Officers
 
We do not employ any of our executive officers. All of our executive officers are employees or officers of our advisor and are compensated by our advisor and do not receive compensation from us for services rendered to us. In their capacity as our officers, these non-employee officers perform only ministerial functions, such as executing contracts and filing reports with regulatory agencies. In their capacity as officers and employees of our advisor, they are expected to fulfill our advisor’s duties to us under the advisory agreement. We have no control over which persons our advisor assigns to our account. In their capacity as officers and employees of our advisor, such persons do not have fiduciary obligations to us or our stockholders.
 
Business Experience of Our Directors and Executive Officers
 
Set forth below is a brief account of the business experience and education of our directors and executive officers.
 
Todd B. Parriott.  Mr. Parriott is the Chairman of our board of directors, Chief Executive Officer, President, and Chief Investment Officer. Mr. Parriott was elected to our board of directors in November 2008. Mr. Parriott has served as the Chairman of the board of directors, Chief Executive Officer, President and Chief Investment Officer of Desert Capital since December 2003. Mr. Parriott served as the President of CM Capital Services from July 2001 until December 2003 and was re-elected as President in October 2005. Mr. Parriott currently serves as the Chief Executive Officer of and in supervisory capacities with CM Securities, the dealer-manager of our public offering. Mr. Parriott is a manager of and serves as President and Chief Executive Officer of CM Group, our advisor. Mr. Parriott graduated with a Bachelor of Science degree in Marketing from the University of Nevada, Las Vegas in 1994.
 
G. Steven Dawson.  Mr. Dawson was elected to our board of directors in November 2008. Mr. Dawson has served as a manager and managing director of CM Group, our advisor, since November 2007. He has been a private investor for his own account since September 2003 and from July 1990 to September 2003 he served as the Chief Financial Officer of Camden Property Trust (NYSE:CPT) and its predecessors. Camden is a large multifamily REIT based in Houston, Texas with apartment operations, construction and development activities throughout the United States. Mr. Dawson serves on the boards of Cohen & Co. (AMEX:COHN), a broker-dealer with fixed income and structured credit securities trading operations in the U.S., Europe and Asia (since December 2009) and Medical Properties Trust (NYSE:MPW), a hospital/healthcare REIT (since April 2004). Mr. Dawson previously served as a director of U.S. Restaurant Properties, Inc. (2000-2005), Trustreet Properties, Inc. (2000-2007), AmREIT (2000-2008), Sunset Financial Resources, Inc. (2005-2007), Alesco Financial Inc. (2007-2009) and Desert Capital (2004-2010). Mr. Dawson’s other private interests are mostly


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related to real estate, finance and financial services. Mr. Dawson holds a Bachelor of Business Administration degree from Texas A&M University, where he serves on the Real Estate Roundtable of the Mays Graduate School of Business.
 
Stacy M. Riffe.  Ms. Riffe was elected to our board of directors and was appointed as our Executive Vice President and Chief Financial Officer in November 2008. Ms. Riffe has also served as an officer of CM Group, our advisor, and Chief Financial Officer of Desert Capital since June 2008. Ms. Riffe oversees accounting and financial reporting, treasury, tax, compliance, human resources and information technology. From February 2007 through May 2008 she was the senior vice president of UDR, Inc., a NYSE-listed multi-family real estate investment trust, where she managed corporate tax, legal administration, and risk management and was the Corporate Compliance Officer. Additionally, she served as Chief Financial Officer of UDR’s taxable REIT subsidiary, RE3. From November 2006 through January 2007, Ms. Riffe was not employed. From September 2005 through October 2006, Ms. Riffe served as Chief Financial Officer and Secretary of Sunset Financial Resources, Inc., a NYSE-listed mortgage REIT, Where she was responsible for accounting, financial reporting, internal controls, tax compliance, human resources and information technology, and was appointed interim Chief Executive Officer to complete the merger of Sunset Financial Resources with Alesco Financial Inc. From March 2005 until September 2005, Ms. Riffe was not employed. From October 2002 until February 2005, Ms. Riffe held the position of Chief Financial Officer and secretary for U.S. Restaurant Properties Inc., an equity REIT that owned and leased properties to restaurants and convenience stores operators, where she was responsible for capital markets, corporate governance, SEC reporting and tax compliance. In February 2005, U.S. Restaurant Properties merged with CNL Restaurant Properties to form Trustreet Properties (NYSE: TSY). Ms. Riffe is also a director of Desert Capital. Ms. Riffe earned a Bachelor of Business Administration degree in Accounting from the University of Texas at Arlington and is a Certified Public Accountant.
 
Anthony D. Cinquini.  Mr. Cinquini is one of our independent director nominees. Since January 2001, he has been the Senior Managing Director of Red Capital Markets, Inc., is a member of Red Capital Group’s Executive Committee and heads its Newport Beach office. He is an investment banker specializing in Fannie Mae taxable and tax-exempt products, credit enhancement (of all types), and tax-exempt multifamily housing issues. He joined Red Capital Group’s predecessor entity in March 1993 as a Vice President and since that time has directed the origination, structuring and closing of over $7.3 billion representing over 495 separate transactions. As an established tax-exempt investment banker and lender for affordable housing, Mr. Cinquini has structured many different types of tax-exempt bond structures including new money, refunding, advance refunding, FHA, Fannie Mae, Freddie Mac, FHLB, mono-line bond insurance and letter of credit backed issues. He also maintains ongoing advisory, lending and investment banking relationships with many of the large national REITs as well as other national multi-family owners and operators. Mr. Cinquini has closed many multi-asset structured financings involving tax-exempt bonds and taxable financings as either lender, investment banker or both for Fannie Mae and Freddie Mac. Mr. Cinquini earned a Bachelor of Science degree in Business Administration from the University of Southern California with an emphasis on Real Estate and Finance.
 
Darin D. Gilson.  Mr. Gilson is one of our independent director nominees. He is a founding partner of Banyan Ventures, LLC, a unique venture development firm that was founded in February 2003 to help launch and scale early stage growth companies. As a Banyan partner, Mr. Gilson has led the firm’s real estate oriented projects, including the development of a destination club business which was acquired in March 2008 by Abercrombie & Kent, the global luxury travel company. From April 2009 to present, Banyan led the formation and oversight of a foreclosure acquisition fund, Spruce Real Estate Investments, LLC. . Prior to founding Banyan Ventures, Mr. Gilson served as the President and Chief Operating Officer of Campus Pipeline, Inc. from December 1998 to February 2003. Mr. Gilson helped grow Campus Pipeline from a backyard start-up company to a market leader in portal technology and services in the international higher education market. In November 2002, Mr. Gilson helped execute a successful acquisition of Campus Pipeline by SCT Corporation, which at the time was a NASDAQ-listed company. From August 1996 to December 1998, Mr. Gilson held the position of Associate at McKinsey & Company, the global management consulting firm, where his work focused on strategy and new business development. Mr. Gilson received


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Bachelors degrees in Economics and Political Science from the University of Utah and a Master of Business Administration in Strategic and Entrepreneurial Management from the Wharton School at the University of Pennsylvania, where he graduated a Palmer Scholar. Mr. Gilson has also served on the Board of Directors of Chapman Innovations, Inc. the producer of Carbonx textile products since April 2003.
 
Hunt C. Holsomback.  Mr. Holsomback is one of our independent director nominees. He is currently a Managing Director for Alvarez & Marsal Real Estate Advisory Services, LLC. He joined the firm in June, 2004 as a Senior Director and was promoted to Managing Director in December, 2005. He leads both the Strategy and Operations practice and the Construction Advisory Services practice. In his role of leader of the Strategy and Operations practice he assists clients with issues related to business processes, technology and systems, organizational design, regulatory compliance, risk management and strategic planning. The Construction Advisory Services practice focuses on overseeing construction projects for clients as an owners representative and also identifying opportunities to reduce risks associated with construction and development projects. Mr. Holsomback has 22 years of experience in providing real estate consulting and accounting services to clients, he worked for Ernst & Young LLP, Deloitte & Touche LLP, Coopers & Lybrand and Kenneth Leventhal & Co. prior to joining Alvarez & Marsal in June 2004. As it relates regulatory compliance, Mr. Holsomback has assisted numerous clients in complying with Sarbanes Oxley Act of 2002, evaluating variable interest entities, conducting risk assessments, documenting controls, policies and procedures, and designing and improving processes. Additionally, he has provided corporate real estate services to companies and entities whose core business is not real estate. These services have included risk assessments, lease audits, process audits, lease analysis and valuation, and lease restructuring. Mr. Holsomback earned a Bachelor of Business Administration degree in Accounting from Baylor University in Waco, Texas and is a licensed Certified Public Accountant in Texas and Colorado.
 
Robert J. Simmons.  Mr. Simmons is one of our independent director nominees. He is a partner and member of the Board of Managers of Bendigo Partners, a private investment and equity firm that focuses on participatory investment and operational consultation. He joined Bendigo Partners in January 2009. From April 2001 to December 2008. Mr. Simmons served in various positions, including Chief Financial Officer, at E*Trade Financial Corporation. Prior to that, Mr. Simmons served in a variety of corporate finance-related roles with Campus Pipeline, Inc., Iomega Corporation, and Oracle Corporation, after beginning his career with Bank of America, N.A. as a Corporate Banking Officer. Mr. Simmons received a Bachelor degree in International Business from the Marriott School of Management at Brigham Young University where he was a member of the Phi Kappa Phi National Honor Society and the Beta Gamma Sigma National Honor Society. Mr. Simmons also received a Master of Business Administration in Finance and Accounting from the J.L. Kellogg Graduate School of Management at Northwestern University.
 
Board of Directors
 
We currently have three directors. Upon the effectiveness of the registration statement of which this prospectus forms a part, we will have seven directors. Under our bylaws, the number of directors may be increased or decreased by the board, but may not be fewer than three nor more than 15. Any vacancy on our board of directors, whether resulting from the removal of a director or from an increase in the size of the board, may be filled only by a vote of our directors. Three of our directors are affiliated with our advisor and four of our directors will be independent, as defined in our articles of incorporation.
 
As defined by our articles of incorporation, the term “independent director” refers to a director who is not associated and has not been associated within the last two years, directly or indirectly, with us, our sponsor or our advisor. We have also adopted the director independence standards of the New York Stock Exchange, or NYSE.
 
Our articles of incorporation require that a majority of the members of our board of directors must at all times be independent directors, unless independent directors comprise less than a majority as a result of a board vacancy. Our bylaws also provide that all of the members of our audit committee, our compensation committee and our governance and nominating committee must be independent directors.
 
Our board considered the independence of each of our directors under our standard of independence. Our board affirmatively determined that each of Messrs. Cinquini, Gilson, Holsomback and Simmons have no material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a


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relationship with us) and are thus independent under our standard. A business or professional relationship shall be deemed “material” per se if the aggregate gross revenue derived by the independent director from the sponsor, advisor and affiliates exceeds 5% of either the director’s annual gross revenue, derived from all sources during either of the last two years or the director’s net worth on a fair market value basis.
 
Directors hold office until their successors are elected and qualified or they resign or are removed. All officers serve at the discretion of our board of directors.
 
Compensation of Directors
 
Directors who are also our executive officers or affiliated with our advisor receive no compensation for board service.
 
We plan to compensate our directors who are neither our executive officers nor affiliated with our advisor according to the following schedule:
 
         
Annual retainer fee
  $ 15,000  
Fee for each board meeting attended in person
    3,000  
Fee for each board meeting attended telephonically
    1,500  
Audit committee chairman retainer
    5,000  
Chairman retainer for other committees
    3,000  
Fee for each committee meeting attended in person
    1,000  
Fee for each committee meeting attended telephonically
    500  
 
Additionally, each non-officer director receives an annual award of 4,000 shares of common stock, which will vest pro rata over a three year period. We reimburse all of our directors for the expenses they incur in connection with attending board and committee meetings. We may, from time to time, in the discretion of the compensation committee of our board of directors, grant additional shares of our common stock to our directors.
 
Compensation Committee Interlocks and Insider Participation
 
Our compensation committee will be comprised of three directors. None of these individuals has at any time served as an officer of the company. None of our executive officers served as a director or member of the compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee.
 
Indemnification
 
Our articles of incorporation and bylaws provide for the indemnification of our directors and officers. Our agents may be indemnified to such extent as is authorized by our articles of incorporation, board of directors or our bylaws. Our articles of incorporation provide that indemnification of directors, officers, employees and agents against certain judgments, penalties, fines, settlements and reasonable expenses that any such person actually incurs in connection with any proceeding to which such person may be made a party by reason of serving in such positions, shall not be provided, unless all of the following conditions are met:
 
  •  The indemnitee has determined, in good faith, that the course of conduct which caused the loss or liability was in CMR’s best interests.
 
  •  The indemnitee was acting on behalf of or performing services for CMR.
 
  •  Such liability or loss was not the result of:
 
  •  negligence or misconduct, in the case that the indemnitee is a director (other than an independent director), officer, advisor or an affiliate of the advisor; or
 
  •  gross negligence or willful misconduct, in the case that the indemnitee is an independent director.
 
  •  Such indemnification or agreement to hold harmless is recoverable only out of CMR’s net assets and not from CMR’s stockholders.


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In addition, we will not provide indemnification for any loss, liability or expense arising from or out of an alleged violation of federal or state securities laws by such party unless one or more of the following conditions are met:
 
  •  there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the indemnitee;
 
  •  such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the indemnitee; or
 
  •  a court of competent jurisdiction approves a settlement of the claims against the indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the SEC and of the published position of any state securities regulatory authority in which CMR’s securities were offered or sold as to indemnification for violations of securities laws.
 
We have entered into indemnification agreements with each of our directors and executive officers, as well as our advisor and its officers, managers, employees and some of its affiliates. The indemnification agreements require, among other things, that we indemnify such persons, and advance to such persons all related expenses, subject to reimbursement if it is subsequently determined that indemnification is not permitted. Under these agreements, we must also indemnify and advance all expenses incurred by such persons seeking to enforce their rights under the indemnification agreements, and may cover our directors and executive officers under our directors’ and officers’ liability insurance. Although the form of indemnification agreement offers substantially the same scope of coverage afforded our directors and officers by our articles of incorporation, it provides greater assurance to our directors and officers and such other persons that indemnification will be available because, as a contract, it may not be modified unilaterally in the future by our board of directors or the stockholders to eliminate the rights it provides.
 
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
 
Board Committees and Meetings
 
Our board has a standing audit committee, compensation committee, governance and nominating committee and conflicts committee. Other committees may be established by our board of directors from time to time.
 
Audit Committee
 
Our audit committee will be comprised of Anthony Cinquini, Hunt Holsomback and Robert Simmons. All members of the audit committee will satisfy the independence requirements of the NYSE. Our board has also determined that:
 
  •  at least one member of our audit committee qualifies as an “audit committee financial expert,” as defined by the SEC; and
 
  •  all members of the audit committee are “financially literate,” within the meaning of NYSE rules, and “independent,” under the audit committee independence standards of the SEC.
 
Our audit committee operates pursuant to a written charter that is posted on our website at www.cmreit.com. Among other things, the audit committee charter calls upon the audit committee to:
 
  •  oversee the accounting and financial reporting processes and compliance with legal and regulatory requirements on behalf of our board of directors and report the results of its activities to the board;
 
  •  be directly and solely responsible for the appointment, retention, compensation, oversight, evaluation and, when appropriate, the termination and replacement of our independent auditors;


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  •  review the annual engagement proposal and qualifications of our independent auditors;
 
  •  prepare an annual report as required by applicable SEC disclosure rules;
 
  •  review the integrity, adequacy and effectiveness of our internal controls and financial disclosure process; and
 
  •  manage our relationship with our advisor under the advisory agreement.
 
Compensation Committee
 
Our compensation committee will be comprised of Anthony Cinquini, Hunt Holsomback and Robert Simmons each of which qualify as:
 
  •  “Independent directors” under the NYSE independence standards;
 
  •  “Non-employee directors” under Exchange Act Rule 16b-3; and
 
  •  “Outside directors” under Internal Revenue Code Section 162(m).
 
Our compensation committee has been delegated the authority by our board of directors to administer our 2010 Stock Incentive Plan and to make determinations regarding grants of restricted shares of common stock. Among other things, the compensation committee operates pursuant to a written charter that is posted on our website at www.cmreit.com and calls upon the compensation committee to:
 
  •  develop the overall compensation policies and the corporate goals and objectives, if any, relevant to the chief executive officer’s compensation from our company;
 
  •  evaluate the chief executive officer’s performance in light of those goals and objectives, if any;
 
  •  be directly and solely responsible for establishing the chief executive officer’s compensation level, if any, based on this evaluation;
 
  •  make recommendations to the board regarding the compensation of officers junior to the chief executive officer, incentive-compensation plans and equity-based plans; and
 
  •  produce an annual report on executive compensation for inclusion in our proxy statement, if required.
 
Because we do not currently intend to compensate our executive officers, we do not expect the compensation committee to be very active until our policies change.
 
Governance and Nominating Committee
 
Our governance and nominating committee was formed to establish and implement our corporate governance practices and to nominate individuals for election to the board of directors. The governance and nominating committee will be comprised of three independent directors, Anthony Cinquini, Darin Gilson and Robert Simmons.
 
Our governance and nominating committee operates pursuant to a written charter that is posted on our website at www.cmreit.com. Among other things, the committee charter calls upon the governance and nominating committee to:
 
  •  develop criteria for selecting new directors and to identify individuals qualified to become board members and members of the various committees of the board;
 
  •  select, or to recommend that the board select, the director nominees for the each annual meeting of stockholders and the committee nominees; and
 
  •  develop and recommend to the board a set of corporate governance principles applicable to the corporation.


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Conflicts Committee
 
Our conflicts committee was formed to approve any related party transactions in which we may engage in the future. The conflicts committee is comprised of all of our independent directors.
 
Corporate Governance
 
Code of Business Conduct and Ethics
 
Our board of directors has established a code of business conduct and ethics. Among other matters, the code of business conduct and ethics is designed to deter wrongdoing and to promote:
 
  •  honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
 
  •  full, fair, accurate, timely and understandable disclosure in our SEC reports and other public communications;
 
  •  compliance with applicable governmental laws, rules and regulations;
 
  •  prompt internal reporting of violations of the code to appropriate persons identified in the code; and
 
  •  accountability for adherence to the code.
 
Waivers to the code of business conduct and ethics will only be granted by the audit committee of the board. If the committee grants any waivers of the elements listed above to any of our officers, we expect to announce the waiver within five business days on the corporate governance section of our corporate website at www.cmreit.com. The information on that website is not a part of this prospectus.
 
Public Availability of Corporate Governance Documents
 
Our key corporate governance documents, including our code of business conduct and the charters of our audit committee, governance and nominating committee and compensation committee are available in print to any stockholder who requests them from our corporate secretary. The charters of our committees are also available on our website at www.cmreit.com.
 
Compensation of Executive Officers
 
All of our executive officers are employed by our advisor and are compensated by our advisor. We do not separately compensate our officers for their service as officers, nor do we reimburse our advisor for any portion of our officers’ compensation from our advisor, other than through the general fees we pay to our advisor under the advisory agreement (which are described under the caption “The Advisor — The Advisory Agreement — Compensation and Expenses”). In the future, our board or the compensation committee may decide to pay annual compensation or bonuses to one or more of our non-employee officers for their services as officers.
 
2010 Stock Incentive Plan
 
Before completing this offering, we will adopt the CM REIT, Inc. 2010 Stock Incentive Plan, which provides for the grant to our consultants and directors of stock options and restricted stock. We have reserved a total of 1 million shares of our common stock for issuance pursuant to the plan, subject to certain adjustments for changes in our capital structure, including by reason of stock dividends, stock splits, reverse stock splits, recapitalizations, reorganizations, mergers, consolidations, combinations, exchanges. Of this amount, 16,000 shares of restricted stock will be issued to our independent directors as compensation upon the consummation of this offering. See “— Restricted Stock” below for a description of these securities.
 
Purpose of the Plan
 
The purpose of the plan is to enable us to attract and retain well-qualified individuals to serve as consultants or as members of the board of directors through the use of incentives based upon the value of our


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common stock. Awards under the plan will be determined by the compensation committee of the board of directors, and may be made to our consultants or directors.
 
Administration of the Plan
 
The compensation committee of the board of directors will administer the plan. Each member of the compensation committee must be a non-employee director, as defined by Rule 16b-3 promulgated by the SEC under the Securities Exchange Act of 1934, as amended. Subject to the provisions of the plan, the compensation committee will have authority to select consultants or directors to receive awards, to determine the time or times of receipt, to determine the types of awards and the number of shares covered by the awards, to establish the terms, conditions and provisions of such awards, to determine the number and value of performance shares awarded and earned and to cancel or suspend awards. In making such award determinations, the compensation committee may take into account the nature of services rendered, if any by the director or consultant, his or her present and potential contribution to our success and such other factors as the committee deems relevant. The compensation committee is authorized to interpret the plan, to establish, amend and rescind any rules and regulations relating to the plan, to determine the terms and provisions of any agreements made pursuant to the plan and to make all other determinations that may be necessary or advisable for the administration of the plan.
 
Eligibility Under the Plan
 
The compensation committee will determine the directors and consultants who may receive awards under the plan.
 
Each non-employee director will receive 4,000 shares of restricted stock when the director is initially elected or appointed to the board of directors and will receive an additional grant of 4,000 shares of restricted stock at the close of each annual meeting. Such grants of restricted stock will vest pro rata over a three year period. All grants of restricted stock will become fully vested if service as a member of the board terminates by reason of death, disability or retirement.
 
Duration of Plan
 
The plan has a term of ten years, through December 31, 2020.
 
Types of Awards
 
Awards under the plan may be in the form of stock options (including incentive stock options that meet the requirements of Section 422 of the Internal Revenue Code and non-qualified options) and restricted stock.
 
Authorized Shares Available for Awards Under the Plan
 
The plan authorizes awards of a total of 1,000,000 shares of common stock. In addition, if any award under the plan otherwise distributable in shares of common stock expires, terminates or is forfeited or canceled, or settled in cash pursuant to the terms of the plan, such shares will again be available for award under the plan.
 
If there is a change in our outstanding common stock by reason of a recapitalization, merger, consolidation, combination, exchange of shares or other similar change, the aggregate number of shares with respect to which awards may be made under the plan, the terms and number of shares outstanding under any award, and the purchase price of a share under options, may be equitably adjusted by the compensation committee at its sole discretion. The compensation committee may also, in its sole discretion, make appropriate adjustment as to the kind of shares or other securities deliverable with respect to outstanding awards under the plan.
 
Stock Options
 
The plan authorizes the award of non-qualified stock options.


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Non-qualified options may be awarded under the plan with an exercise price of no less than 100% of the fair market value of our common stock on the date of the award.
 
In addition to allowing an optionee to pay cash to exercise options, or deliver stock certificates for previously-owned shares of our stock, the plan permits us to sell or withhold a sufficient number of shares to cover the amount of taxes required to be withheld.
 
The plan permits recipients of non-qualified stock options to transfer their vested options by gift to family members (or trusts or partnerships of family members). After transfer of an option, the optionee will remain responsible for tax payable upon the exercise of the option, and we retain the right to claim a deduction for compensation upon the exercise of the option.
 
Restricted Stock
 
The plan authorizes the compensation committee to grant shares of restricted stock to consultants or directors. A grantee will become the holder of shares of restricted stock free of all restrictions if he or she completes a required period of service following the award and satisfies any other conditions; otherwise, the shares will be forfeited. The grantee will have the right to vote the shares of restricted stock and, unless the committee determines otherwise, the right to receive dividends on the shares. The grantee may not sell or otherwise dispose of restricted stock until the conditions imposed by the committee have been satisfied.
 
Change of Control Events
 
In the event of a change in control, as defined in the plan, then all outstanding stock options and restricted stock will become fully exercisable and/or vested.
 
PRIOR PERFORMANCE SUMMARY
 
The information presented in this section represents the historical experience of Desert Capital, CM Equity and CM Notes, the only prior real estate programs sponsored or advised by affiliates of our sponsor, CM Group, and our chief executive officer, Todd B. Parriott. The following summary is qualified in its entirety by reference to the Prior Performance Tables, which may be found in Appendix D of this prospectus. Investors should direct their attention to the Prior Performance Tables for further information regarding the prior performance of Desert Capital, CM Equity and CM Notes. Furthermore, Desert Capital is subject to the information and reporting requirements of the Exchange Act, has filed periodic reports, proxy statements and Forms 10-K containing audited financial information for each year of operation with the SEC. These filings are available to you for free on the SEC’s website at www.sec.gov. We will also provide, upon request, for no fee, Desert Capital REIT, Inc.’s most recent Form 10-K filed with the SEC. We will provide the exhibits to such filing for a reasonable fee. Investors in our common stock should not assume that they will experience returns, if any, comparable to those experienced by investors in Desert Capital, CM Equity or CM Notes. Investors who purchase our common stock will not thereby acquire any ownership interest in Desert Capital, CM Equity or CM Notes.
 
The returns to our stockholders will depend in part on the mix of mortgage loans and other assets in which we invest. Because our portfolio is unlikely to mirror the portfolio of Desert Capital, the returns to our stockholders will vary from those generated by Desert Capital. You should not assume the past performance of Desert Capital or the past performance of Todd B. Parriott in his capacity as Chief Executive Officer of CM Group will be indicative of our future performance.
 
Prior Investment Programs
 
Burton Management Company, Ltd., which we refer to as Burton, led by Todd B. Parriott, our Chief Executive Officer, initially sponsored Desert Capital. CM Group became Desert Capital’s advisor in November 2007, and has the same management team as did Burton. Desert Capital had investment objectives generally similar to ours, which are to obtain current income through the receipt of payments on mortgage loans while making regular cash distributions, preserving, protecting, and enhancing our assets, qualifying as a


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REIT for U.S. federal income tax purposes and providing our stockholders with liquidity of their investment, either in whole or in part, through a listing or commencement of an orderly liquidation of our assets. Desert Capital has engaged in two public offerings.
 
Overview of Desert Capital
 
Desert Capital is a publicly registered non-traded REIT that is advised by CM Group. Desert Capital is a Maryland corporation formed in December 2003 to engage in the business of making short-term mortgage loans consisting of acquisition and development loans and construction loans to developers and builders of residential and commercial property. Desert Capital generally invested in 12- to 18- month, first and second lien mortgage loans. Its revenues were primarily generated from interest payments received from mortgage investments funded with its equity capital and borrowed funds. Desert Capital previously generated net income for distribution to its stockholders from the spread between interest income on its mortgage investments and the costs of financing the acquisition of these investments. It commenced its first public offering in July 2004 and its second public offering in March 2006 pursuant to which it raised approximately $187.8 million (including the DRIP). Desert Capital is not currently conducting an offering or actively making investments. As of December 31, 2009, Desert Capital had funded 506 mortgage loans with an aggregate principal amount of $344.3 million. In fiscal years 2007, 2006 and 2005, Desert Capital made cash distributions aggregating approximately $14.2 million, $10.9 million and $3.1 million, respectively, to its stockholders. Desert Capital made cash distributions aggregating approximately $5.8 million during the 2008 fiscal year and suspended the payment of distributions effective in November 2008. Desert Capital has not made any distributions since October 2008.
 
The ongoing turmoil in the capital markets has constrained equity and debt capital available for investment in commercial and residential real estate, resulting in homebuilders and developers being unable to complete projects, fewer buyers seeking to acquire commercial and residential properties and lower property values. The disruption in these markets directly impacted Desert Capital’s business because its investment portfolio initially consisted primarily of investments in acquisition and development, construction, and commercial property loans with terms of 12 to 18 months. Reflecting concern about the stability of the financial markets and the strength of counterparties, many lenders and institutional investors reduced or ceased providing funding to Desert Capital’s borrowers. In addition, land developers were forced to liquidate land inventory at prices significantly below the original purchase price in order to obtain cash needed for working capital purposes. This situation negatively impacted Desert Capital in two ways. First, developers sought other means of survival, including defaulting on their debt obligations. Second, developers began selling property at low prices, negatively impacting the value of surrounding properties, including properties in which Desert Capital has an interest. As real estate values continued to decline, many of Desert Capital’s borrowers declared bankruptcy or ceased operations. As a result of this confluence of events, all but one of its borrowers had defaulted on its obligations to Desert Capital at December 31, 2009, which in turn resulted in a substantial increase in Desert Capital’s non-performing loans in 2009. Prior to 2007, Desert Capital experienced minimal defaults and had not foreclosed on any loans. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. All of Desert Capital’s loans were originated by CM Capital Services, the originator and servicer of our acquisition, development, construction and commercial loans. The default rate for loans originated by CM Capital Services in 2008 and 2007 was 87.54% and 86.11%, respectively.
 
The high default rate and increase in non-performing loans materially and adversely impacted Desert Capital’s financial condition and operating results by both reducing interest income and increasing its provision for loan losses. The reduction in income has caused Desert Capital to have insufficient funds to be able to honor stockholder requests to repurchase their shares and caused it to suspend the payment of distributions. The increase in non-performing loans has also increased the size of Desert Capital’s real estate portfolio due to foreclosure activity, which has also increased its costs related to real estate ownership. These costs include property taxes, legal fees, insurance, maintenance costs and property management fees. During 2009, Desert Capital leveraged a portion of its assets in order to raise necessary operating capital to cover these increased real estate carrying costs. Because of the increase in its non-performing loans, Desert Capital’s recurring cash flow is not sufficient to cover its general operating expenses. As a result, Desert Capital’s primary strategy for generating cash flow and resolving its non-performing loans and real estate owned assets


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includes sales of foreclosed properties, potentially including being required to sell assets at unfavorable prices. In addition, as a result of the increase in non-performing loans and the declining value of its real estate investments during 2008 and 2009, Desert Capital was unable to comply with the tangible net worth covenant contained in its $30.9 million junior subordinated notes causing an event of default to occur. In July 2009, the holders of its trust preferred securities that are backed by the junior subordinated notes accelerated the principal amount of the junior subordinated notes causing it to become immediately due and payable. In March 2010, Desert Capital entered into a standstill agreement with respect to its junior subordinated notes pursuant to which the holders of the trust preferred securities agreed not to exercise any rights or remedies to collect the debt provided that Desert Capital continues to make the quarterly interest payments due under the junior subordinated notes. To the extent Desert Capital is unable to comply with the terms of the standstill agreement, the holders of the trust preferred securities could exercise their rights and remedies to collect the debt, which would have a material adverse effect on Desert Capital.
 
Despite the difficult market, CM Group, Desert Capital’s advisor, and CM Capital Services, its servicer, resolved a number of the defaulted loans in its portfolio during 2009, including the sale of property securing loans for proceeds of $355,000 and $2.8 million in real estate owned and investments in real estate for cash proceeds of $2.9 million. Desert Capital’s advisor and servicer continue to work toward further resolutions of its non-performing loans and foreclosure property. As Desert Capital seeks workout solutions for its non-performing loans, it may enter into forbearance or modification agreements with borrowers if they have the ability to do so; otherwise, Desert Capital will foreclose and take ownership of the property. During 2009, Desert Capital foreclosed on 26 mortgage loans with an aggregate original principal amount of $70.2 million. These loans were impaired prior to foreclosure, so the amount recorded on its balance sheet as real estate owned or real estate investments as a result of these foreclosures was $47.0 million. During the six months ended June 30, 2010, Desert Capital foreclosed on three loans with an aggregate original principal amount of $2.9 million, and a fair value at the time of foreclosure of $1.4 million. Of its remaining mortgage investments, all but $4.6 million with a carrying balance of $4.0 million were non-performing at June 30, 2010.
 
Following foreclosure of a property, Desert Capital makes a determination based on the facts specific to that property as to how to proceed. While there may be other alternatives, it has generally employed one of the following strategies to seek ultimate resolution of the investment:
 
  •  Sale of the Foreclosed Collateral — If it determines through a thorough review process that it is advantageous to sell the property that previously secured a non-performing loan at a loss rather than to continue to hold the property and incur additional costs related to property ownership, Desert Capital may sell the property for cash or finance the sale with a qualified buyer. During 2009, Desert Capital sold foreclosed properties with a carrying value of $2.5 million for total net proceeds of $2.4 million. During the six months ended June 30, 2010, Desert Capital sold foreclosed on properties for net proceeds of $1.6 million.
 
  •  Joint Venture  — It may contribute real estate assets to an operating joint venture usually structured as a limited liability company (“LLC”) with other private investors in a loan or with a new investor to provide additional financing and development expertise to complete the project. Once the project is completed and sold, Desert Capital will distribute the sales proceeds according to the LLC agreement. This strategy may significantly reduce its ownership in the property. During 2008, Desert Capital formed three joint ventures, each with the same partner, and contributed real estate with a carrying balance of $6.7 million into the joint ventures. During 2009, it sold 10 homes within one of its joint venture projects for cash proceeds of $475,000. During the six months ended June 30, 2010, Desert Capital sold homes and real estate within its joint ventures for cash proceeds of approximately $1.2 million.
 
  •  Hold the Property — If it is unable to implement any of the strategies discussed above, or if it determines that it may be advantageous to hold the property based upon local real estate market conditions, Desert Capital will hold the property for a period of time. This is a temporary strategy, which at the appropriate time will be replaced with one of the other strategies. In certain circumstances, holding the property is the best strategy while an exit strategy is developed and implemented.


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At December 31, 2009, Desert Capital’s estimated equity available (total assets less total liabilities divided by total shares outstanding) per common share was $1.47, which estimate was based solely on Desert Capital’s audited financial statements and was not a representation, warranty or guarantee that Desert Capital or its stockholders, upon liquidation, would actually realize the estimated value per share. Because Desert Capital suffered losses from operations and the cash flow from its operating activities was insufficient to meet its current obligations and debt payments, Desert Capital’s independent auditors qualified the audited financial reports for the year ended December 31, 2009 with an assumption that Desert Capital would continue as a going concern. Desert Capital’s management expects that the current state of the real estate and credit markets will continue to have an adverse effect on its operations throughout 2010. If Desert Capital continues to be unable to address its lack of liquidity it would not have adequate liquidity to fund its operations and would not be able to continue as a going concern.
 
Summary Information
 
Capital Raising
 
The total amount of funds raised from investors by Desert Capital from July 2004 through February 2008 was approximately $187.8 million. Desert Capital raised $133.2 million in its first public offering, which was conducted from July 2004 through March 2006. Desert Capital raised $54.6 million in its second public offering, which was conducted from March 2006 through February 2008. Desert Capital invested a total of $344.3 million (through December 2008) in mortgage loans. Desert Capital has approximately 3,900 stockholders. See Table I and Table II for more detailed information about Burton and CM Group’s experience in raising and investing funds and compensation paid to Burton, CM Group, CM Securities, the dealer manager for each of the offerings, and any preceding or current affiliates as the sponsor of these programs.
 
Investments
 
As of December 31, 2009, Desert Capital had funded 506 mortgage loans with an aggregate principal amount of $344.3 million. Of these 506 loans, 186 were entirely funded by Desert Capital and 320 were partially funded by Desert Capital. The average interest rate payable on these loans was 12.5% and the average term of the loans was 12 months. During 2004 through 2006, Desert Capital had minimal defaulted loans, meaning loans that are greater than 90 days past due or with respect to which foreclosure proceedings have been commenced, whichever comes first. Prior to 2007, Desert Capital had not foreclosed on any loans. However, commencing in 2007 with the collapse of the sub-prime residential mortgage market and subsequent volatility in the credit markets, Desert Capital’s borrowers became unable to repay their loans owing to Desert Capital, which caused a majority of Desert Capital’s loan portfolio to become defaulted loans. Through December 31, 2009, Desert Capital had foreclosed on 75 properties. The following table presents the aggregate value of loans held by Desert Capital as of December 31, 2009.
 
Desert Capital Portfolio, December 31, 2009
 
                         
            Portfolio as of
        Percent of Total
 		  December 31, 2009,
        Loans, Based on
 		  Based on
    Number of
 		  Outstanding
 		  Outstanding
Type of Loan
  Mortgage Loans   Principal Amount   Principal Amount
 
Acquisition and development loans
    6       99.96 %   $ 17,325,632  
Construction loans
    0       0 %     0  
Commercial property loans
    1       .04 %     7,422  
 
As of December 31, 2009, approximately 21.9% of the properties securing Desert Capital’s mortgage loans were located in Nevada, 35.4% in Arizona and 42.7% in Missouri. As of December 31, 2005, 2006, 2007 and 2008, outstanding principal balances were approximately $67.8 million, $150.8 million, $143.5 million and $90.3 million, respectively.
 
The table below illustrates Desert Capital’s default history for the years ended December 31, 2004, 2005, 2006, 2007, 2008 and 2009.


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Mortgage Loans Defaulted, Foreclosed Loans
 
                                                 
    2004   2005   2006   2007   2008   2009
 
Number of loans defaulted at beginning of year
    —       —       —       3       43       29  
Aggregate value
    —       —       —       4,501,000       38,735,657       83,725,113  
Additional defaults during year
    —       —       3       77       52       6  
Aggregate value
    —       —       4,501,000       65,808,033       99,616,531       477,822  
Defaulted properties/loans disposed of during year
    —       —       —       3       11       5  
Aggregate value
    —       —       —       4,501,000       8,725,249       16,205,400  
Defaulted loans reclassified to real estate owned and real estate investments
    —       —       —       34       55       25  
Aggregate value
    —       —       —       31,573,376       45,901,826       56,804,481  
Number of loans defaulted at end of year
    —       —       3       43       29       5  
Aggregate value
    —       —       4,501,000       38,735,657       83,725,113       11,193,054  
 
Loan Losses Including Provision for Loan Losses
 
                                                 
    2004   2005   2006   2007   2008   2009
 
Losses
    21,904       55,825       369,236       34,411,328       23,616,345       11,123,470  
 
Sales
 
During 2009, Desert Capital sold real estate that it acquired through foreclosure for $3.3 million. See Tables III and V for more detailed information as to the operating results of Desert Capital and sales or other disposals of properties by Desert Capital during the five years ending December 31, 2009.
 
Until the suspension of its dividend effective in November 2008, Desert Capital met its principal investment objective of providing current income. Desert Capital’s business has suffered from the current conditions in the credit markets as described under “Business.”
 
CM Equity
 
CM Equity is a non-public limited liability company managed by CM Group. CM Equity was formed in June 2007 to engage in the business of investing in, developing, co-developing, owning and financing commercial and residential real estate projects located principally in the Western United States. CM Equity’s strategy was to make opportunistic investments in real estate projects, including distressed real estate projects, to take advantage of distressed conditions in the real estate and credit markets. CM Equity was unable to execute fully its investment strategy as a result of the negative impact of the difficult real estate and credit markets on its debt and equity raising efforts. As a result, CM Equity is no longer raising additional funds for investment. CM Equity raised approximately $1.7 million from investors and invested approximately $1.5 million in mortgage loans and other real estate investments. CM Equity’s investment objectives were not the same as ours.
 
CM Notes Program I
 
CM Notes is a non-public limited liability company with targeted funds available for investment of up to $25.0 million. CM Notes is wholly-owned by CM Capital Services, and managed by CM Notes Manager, LLC, a Delaware limited liability company and a wholly-owned subsidiary of CM Capital Services. CM Notes funded or invested in construction and development loans for single family residences in the greater Las Vegas, Nevada area. The loans were identified, originated and serviced by CM Capital Services. Each loan had a principal amount that did not exceed 75% of the completed value of the real estate, and had a term of six to nine months. CM Notes did not lend on projects for single family residences where the takeout value of the


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residence exceeded the existing Federal Home Loan Mortgage Corporation (Freddie Mac) limitation (currently $417,000 in the state of Nevada).
 
The offering period for CM Notes Program I ended December 31, 2009 and all investment activity will end prior to the program’s December 31, 2010 maturity. CM Notes raised $1.3 million from investors and invested approximately $1.1 million in mortgage loans.
 
The Prior Performance Tables included in Appendix D to this prospectus set forth information as of the dates indicated regarding Desert Capital, CM Equity and CM Notes as to (1) experience in raising and investing funds (Table I); (2) compensation to the sponsor (Table II); (3) annual operating results of the prior programs (Table III); and (5) sales or disposals of property (Table V). Additionally, Table VI contained in Part II of the registration statement (which is not part of this prospectus) provides certain additional information relating to investments acquired by Desert Capital, CM Equity and CM Notes. Upon written request, we will furnish a copy of this table to you without charge. See “Where You Can Find More Information about CM REIT, Inc.”
 
U.S. FEDERAL INCOME TAX CONSIDERATIONS
 
The following is a summary of the material U.S. federal income tax consequences to an investor in our common stock. This summary is based on current law. The tax consequences related to an investment in our common stock may vary depending on an investor’s particular situation and this discussion does not purport to discuss all aspects of taxation that may be relevant to a holder of our common stock in light of his or her personal investment or tax circumstances, or to holders of our common stock subject to special treatment under the U.S. federal income tax laws. Investors subject to special treatment include, without limitation, insurance companies, financial institutions, broker-dealers, tax-exempt organizations, investors holding common stock as part of a conversion transaction, or a hedge or hedging transaction or as a position in a straddle for tax purposes, foreign corporations or partnerships, and persons who are not citizens or residents of the United States. In addition, the summary below does not consider the effect of any foreign, state, local or other tax laws that may be applicable to you as a holder of our common stock.
 
The information in this summary is based on the Internal Revenue Code, current, temporary and proposed Treasury Regulations promulgated under the Internal Revenue Code, the legislative history of the Internal Revenue Code, current administrative interpretations and practices of the IRS, and court decisions, all as of the date of this prospectus. The administrative interpretations and practices of the IRS upon which this summary is based include its practices and policies as expressed in private letter rulings that are not binding on the IRS, except with respect to the taxpayers who requested and received such rulings. Future legislation, Treasury Regulations, administrative interpretations and practices, and court decisions may affect the tax consequences contained in this summary, possibly on a retroactive basis. We have not requested, and do not plan to request, any rulings from the IRS concerning our tax treatment, and the statements in this prospectus are not binding on the IRS or a court. Thus, we can provide no assurance that the tax consequences contained in this summary will not be challenged by the IRS or sustained by a court if challenged by the IRS.
 
You are urged to consult your tax advisor regarding the specific tax consequences to you of (1) the acquisition, ownership and sale or other disposition of our common stock, including the federal, state, local, foreign and other tax consequences; (2) our election to be taxed as a REIT for U.S. federal income tax purposes; and (3) potential changes in applicable tax laws.
 
Taxation of Our Company — General
 
We will elect to become subject to tax as a REIT, for U.S. federal income tax purposes, commencing with the taxable year ending December 31, 2010. Our board of directors currently expects that we will operate in a manner that will permit us to qualify as a REIT for the taxable year ending December 31, 2010, and to maintain our qualification as a REIT in each taxable year thereafter. Beginning in the taxable year ending December 31, 2011, we will need to have 100 or more stockholders and not more than 50% of our stock can be owned by 5 or fewer individuals, as described in “— Requirements for Qualification as a REIT.” This


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treatment will permit us to deduct dividend distributions to our stockholders for U.S. federal income tax purposes, thus effectively eliminating the “double taxation” that generally results when a corporation earns income and distributes that income to its stockholders in the form of dividends.
 
We have obtained the opinion of Locke Lord Bissell & Liddell LLP, our special tax counsel, to the effect that our contemplated method of operation described in this prospectus and as represented by us will enable us to meet the requirements for qualification as a REIT under the Internal Revenue Code commencing with our taxable year ended December 31, 2010, and to continue to satisfy the requirements for such qualification. This opinion is based on various assumptions relating to our organization and operation and is conditioned upon certain representations made by us to our legal counsel. We were formed in November 2008, our total assets consist of approximately $200,000 in cash, and we do not have any operating history. Accordingly, even a small amount of disqualifying income could cause us to fail the gross income tests described below in “— Income Tests.” We intend to use the proceeds of this offering to acquire assets in the taxable year ending December 31, 2010 that will generate qualifying income sufficient to satisfy the gross income tests described below in “— Income Tests,” and the opinion of our counsel is based, among other things, on the assumption that we will acquire such assets and generate such qualifying income. The opinion of our counsel is not binding upon the IRS. Our continued qualification and taxation as a REIT will depend upon our ability to meet, on a continuing basis, distribution levels and diversity of stock ownership, and the various qualification tests imposed by the Internal Revenue Code as discussed below. This opinion is based on the law in effect on the date hereof which is subject to change, possibly retroactively.
 
There can be no assurance that we will qualify as a REIT in any particular taxable year, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations and the possibility of future changes in our circumstances. If we were not to qualify as a REIT in any particular year, we would be subject to U.S. federal income tax as a regular, domestic corporation, and our stockholders would be subject to tax in the same manner as stockholders of such corporation. In this event, we could be subject to potentially substantial income tax liability in respect of each taxable year that we fail to qualify as a REIT, and the amount of earnings and cash available for distribution to our stockholders could be significantly reduced or eliminated.
 
Even if we qualify for taxation as a REIT, however, we will be subject to U.S. federal income taxation as follows:
 
  •  We will be required to pay tax at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains.
 
  •  We may be required to pay the “alternative minimum tax” on our items of tax preference, if any.
 
  •  If we have (1) net income (including certain foreign currency gain) from the sale or other disposition of foreclosure property which is held primarily for sale to customers in the ordinary course of business or (2) other nonqualifying income from foreclosure property, we will be required to pay tax at the highest corporate rate on this income. In general, foreclosure property is property acquired through foreclosure after a default on a loan secured by the property or on a lease of the property.
 
  •  We will be required to pay a 100% tax on any net income (including certain foreign currency gain) from prohibited transactions. In general, prohibited transactions are sales or other taxable dispositions of property, other than foreclosure property, held for sale to customers in the ordinary course of business. Further, we will be required to pay a 100% tax in respect of amounts that are treated by us as rents from real property but are properly allocable or attributable under the Internal Revenue Code to services rendered by a taxable REIT subsidiary (see below) as well as deductible expense items paid to us by our taxable REIT subsidiary in excess of amounts that would be paid by an unrelated third party.
 
  •  If we fail to satisfy the 75% or 95% gross income tests, as described below, but have otherwise maintained our qualification as a REIT, we will be required to pay a 100% tax on an amount based upon the magnitude of the failure, intended to reflect our profitability.


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  •  If we fail to meet the requirements of any asset test for a particular quarter by more than the de minimis amount, as described below, we may be required to pay a tax equal to the greater of (1) $50,000 or (2) the amount determined under Treasury Regulations by multiplying the net income generated by the assets that caused the failure by the highest corporate tax rate.
 
  •  If we fail to satisfy any of the REIT qualification requirements except the gross income and asset tests, as described below, we may be required to pay a tax of $50,000 for each such failure in order to maintain our REIT status.
 
  •  We will be required to pay a 4% excise tax on the amount by which our annual distributions to our stockholders is less than the sum of (1) 85% of our ordinary income for the year; (2) 95% of our REIT capital gain net income for the year; and (3) any undistributed taxable income from prior periods.
 
  •  If we acquire an asset from a corporation that is not a REIT in a transaction in which the basis of the asset in our hands is determined by reference to the basis of the asset in the hands of the transferor corporation, and we subsequently sell the asset at a gain within 10 years, then we would be required to pay tax at the highest regular corporate tax rate on this gain to the extent (a) the fair market value of the asset exceeds (b) our adjusted tax basis in the asset, in each case, determined as of the date on which we acquired the asset. The results described in this paragraph assume that we will elect this treatment in lieu of an immediate tax when the asset is acquired.
 
  •  With respect to an equity interest in either a taxable mortgage pool or a residual interest in a real estate mortgage investment conduit (REMIC), the ownership of which is attributed to us, we will pay tax at the highest corporate rate on the amount of any excess inclusion income for the taxable year allocable to the percentage of our shares that are held by specified tax exempt organizations that are not subject to the tax on unrelated business taxable income.
 
Requirements for Qualification as a REIT
 
The Internal Revenue Code defines a REIT as a corporation, trust or association:
 
(1) That is managed by one or more trustees or directors;
 
(2) That issues transferable shares or transferable certificates of beneficial ownership to its owners;
 
(3) That would be taxable as a regular corporation, but for its election to be taxed as a REIT;
 
(4) That is not a financial institution or an insurance company under the Internal Revenue Code;
 
(5) That is owned by 100 or more persons;
 
(6) Not more than 50% in value of the outstanding stock of which is owned, actually or constructively, by five or fewer individuals (as defined in the Internal Revenue Code to also include some entities) during the last half of each year; and
 
(7) That meets other tests, described below, regarding the nature of its income and assets, and the amount of its distributions.
 
The Internal Revenue Code provides that conditions (1) through (4) must be met during the entire year and that condition (5) must be met during at least 335 days of a year of twelve months, or during a proportionate part of a shorter taxable year. Conditions (5) and (6) do not apply to the first taxable year for which an election is made to be taxed as a REIT. For purposes of condition (6), tax-exempt entities are generally treated as individuals, subject to a “look-through” exception for pension funds. As of the date of this prospectus, we do not satisfy conditions (5) and (6).
 
Our articles of incorporation provide for restrictions regarding ownership and transfer of our stock. These restrictions are intended to assist us in satisfying the share ownership requirements described in conditions (5) and (6) above. These restrictions, however, may not ensure that we will, in all cases, be able to satisfy the share ownership requirements described in conditions (5) and (6) above. If we fail to satisfy these share ownership requirements, our status as a REIT would terminate. If, however, we comply with the rules


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contained in applicable Treasury Regulations that require us to determine the actual ownership of our shares and we do not know, or would not have known through the exercise of reasonable diligence, that we failed to meet the requirement described in condition (6) above, we would not be disqualified as a REIT.
 
In addition, a corporation may not qualify as a REIT unless its taxable year is the calendar year. We have and will continue to have a calendar taxable year.
 
Ownership of a Partnership Interest
 
Treasury Regulations provide that if we are a partner in a partnership, we will be deemed to own our proportionate share of the assets of the partnership, and we will be deemed to be entitled to our proportionate share of the gross income of the partnership in both cases determined by our percentage interest in partnership capital. The character of the assets and gross income of the partnership generally retains the same character in our hands for purposes of satisfying the gross income and asset tests.
 
Taxable REIT Subsidiaries
 
REITs are permitted to own up to 100% of the shares in a corporation that elects to be treated as a taxable REIT subsidiary. In order to obtain taxable REIT subsidiary status, the corporation and the REIT must file a joint election with the IRS. A taxable REIT subsidiary pays tax at regular corporate income tax rates on any income it earns. Moreover, the Internal Revenue Code contains rules (including a limitation on interest deductions and rules requiring the imposition of taxes on the REIT at a rate of 100% on certain reallocated income and expenses) to ensure that contractual arrangements between a taxable REIT subsidiary and its beneficial owners are at arm’s length. Securities in taxable REIT subsidiaries will not qualify as real estate assets for the purposes of the 75% asset test described below. We will form CM REIT TRS, Inc. and file a joint election with the IRS to treat it as a taxable REIT subsidiary. In addition, we may form other taxable REIT subsidiaries.
 
Qualified REIT Subsidiaries
 
A qualified REIT subsidiary is a corporation, all of the stock of which is owned by a REIT. Under the Internal Revenue Code, a qualified REIT subsidiary is not treated as a separate corporation from the REIT. Rather, all of the assets, liabilities, and items of income, deduction, and credit of the qualified REIT subsidiary are treated as the assets, liabilities, and items of income, deduction, and credit of the REIT for purposes of the REIT income and asset tests described below. A qualified REIT subsidiary does not include a corporation that elects to be treated as a taxable REIT subsidiary.
 
Income Tests
 
We must meet two annual gross income requirements to qualify as a REIT. First, each year we must derive, directly or indirectly, at least 75% of our gross income, excluding gross income from prohibited transactions, from investments relating to real property or mortgages on real property, including rents from real property and mortgage interest, or from specified temporary investments. Second, each year we must derive at least 95% of our gross income, excluding gross income from prohibited transactions, from investments meeting the 75% test described above, or from dividends, interest and gain from the sale or disposition of stock or securities that do not constitute property held primarily for sale in the ordinary course of business. This test permits us to earn a significant portion of our income from traditional “passive” investment sources that are not necessarily real estate-related. For these purposes, the term interest generally does not include any interest of which the amount received depends on the income or profits of any person. An amount will generally not be excluded from the term interest, however, if such amount is based on a fixed percentage of gross receipts or sales. As a result of the 75% and 95% gross income tests, we generally are not permitted to earn more than 5% of our gross income from active sources, including brokerage commissions or other fees for services rendered. From time to time, we may receive this type of income. This type of income will not qualify for the 75% gross income test or the 95% gross income test, but is not expected to be significant and that income, together with other nonqualifying income, is expected to be at all times less than 5% of our annual gross income. While it is not anticipated that we will earn substantial amounts of


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nonqualifying income, if nonqualifying income exceeds 5% of our gross income, we could lose our status as a REIT. We may use one or more taxable REIT subsidiaries to engage in transactions that produce nonqualifying income. The gross income generated by these subsidiaries would not be included in our gross income. However, dividends we receive from these subsidiaries would be included in our gross income and qualify for the 95% gross income test.
 
Any amount includable in gross income by us with respect to a regular or residual interest in a real estate mortgage investment conduit is generally treated as interest on an obligation secured by a mortgage on real property for purposes of the 75% gross income test. If, however, less than 95% of the assets of a real estate mortgage investment conduit consist of real estate assets, we will be treated as receiving directly our proportionate share of the income of the real estate mortgage investment conduit, which would generally include non-qualifying income for purposes of the 75% gross income test. In addition, if we receive interest income with respect to a mortgage loan that is secured by both real property and other property and the principal amount of the loan exceeds the fair market value of the real property on the date we purchased the mortgage loan, interest income on the loan will be apportioned between the real property and the other property, which apportionment would cause us to recognize income that is not qualifying income for purposes of the 75% gross income test.
 
In general, and subject to the exceptions in the preceding paragraph, the interest, original issue discount, and market discount income that we derive from investments in mortgage loans and mortgage-backed securities will be qualifying interest income for purposes of both the 75% and the 95% gross income tests. It is possible, however, that interest income from a mortgage loan may be based in part on the borrower’s profits or net income, which would generally disqualify such interest income for purposes of both the 75% and the 95% gross income tests.
 
We may employ, to the extent consistent with the REIT provisions of the Internal Revenue Code, forms of securitization of our assets under which a sale of an interest in a mortgage loan occurs, and a resulting gain or loss is recorded on our balance sheet for accounting purposes at the time of sale. In a sale securitization, only the net retained interest in the securitized mortgage loans would remain on our balance sheet. Based on the REIT provisions of the Internal Revenue Code, we expect to conduct such sale securitizations through one or more taxable REIT subsidiaries formed for such purpose. To the extent consistent with the REIT provisions of the Internal Revenue Code, such entities could elect to be taxed as real estate mortgage investment conduits.
 
If we fail to satisfy one or both of the 75% or 95% gross income tests for any year, we may still qualify as a REIT if we are entitled to relief under the Internal Revenue Code. Generally, we may be entitled to relief if:
 
  •  Our failure to meet the gross income tests was due to reasonable cause and not due to willful neglect; and
 
  •  We file a schedule for the year in accordance with Treasury Regulations describing our items of gross income.
 
It is not possible to state whether in all circumstances we would be entitled to rely on these relief provisions. If these relief provisions did not apply to a particular set of circumstances, we would not qualify as a REIT. Even if these relief provisions were to apply, and we retained our status as a REIT, a tax would be imposed with respect to our income that did not meet the gross income tests. We may not always be able to maintain compliance with the gross income tests for REIT qualification despite periodically monitoring our income.
 
Foreclosure Property
 
Net income (including certain foreign currency gain) realized by us from foreclosure property is generally subject to tax at the maximum federal corporate tax rate. Foreclosure property includes real property and related personal property (1) that is acquired by us through foreclosure following a default on a loan secured by the property or on a lease of the property and (2) for which we make an election to treat the property as foreclosure property. We will not be able to treat any real property (or related personal property) as foreclosure


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property if at the time we made or entered into the loan or lease, we had an intent to foreclose or evict or knew or had reason to know that a default would occur.
 
Prohibited Transaction Income
 
Any net income (including certain foreign currency gain) realized by us from prohibited transactions is subject to a 100% tax. In general prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including mortgage loans, held as inventory or otherwise held primarily for sale to customers in the ordinary course of business. Whether property is held as inventory or primarily for sale to customers in the ordinary course of a trade or business depends on all the facts and circumstances surrounding the particular transaction. We could be subject to the 100% tax on prohibited transactions if we sell or securitize our loans in a manner that is treated as a sale of loans for U.S. federal income tax purposes. Although the Internal Revenue Code and the Treasury Regulations provide standards which, if met, would not result in prohibited transaction income, we may not be able to meet these standards in all circumstances.
 
Hedging Transactions
 
We may enter into hedging transactions with respect to one or more of our assets or liabilities. Our hedging transactions could take a variety of forms, including short sales, purchases of treasury options and futures, interest rate swaps, or caps and floors. To the extent that we enter into hedging transactions to reduce our interest rate risk on indebtedness incurred to acquire or carry real estate assets, any income, or gain from the disposition of hedging transactions (“qualified hedging income”) should be excluded from both the 95% gross income test and the 75% gross income test. Qualified hedging income also includes income recognized from a transaction primarily entered into to manage the risk of currency fluctuations with respect to any item of income or gain that would be qualifying income for the 95% gross income test or the 75% gross income test.
 
Asset Tests
 
At the close of each quarter of each year, we also must satisfy four tests relating to our assets.
 
First, at least 75% of the value of our total assets must be real estate assets, cash, cash items and government securities. For purposes of this test, real estate assets include real estate mortgages, real property, interests in other REITs and certain stock or debt instruments held for one year or less that are purchased with the proceeds of a stock offering or a long-term public debt offering.
 
Second, not more than 25% of our total assets may be represented by securities, other than those securities includable in the 75% asset class.
 
Third, of the investments included in the 25% asset class, the value of any one issuer’s securities that we hold may not exceed 5% of the value of our total assets, and we may not own more than 10% of the total voting power or more than 10% of the value of the outstanding securities of any issuer which is not a REIT, a qualified REIT subsidiary or a taxable REIT subsidiary.
 
Finally, no more than 25% of the value of a REIT’s total assets may be represented by securities of one or more taxable REIT subsidiaries.
 
We do not expect that the securities of the TRS, combined with the securities of any other taxable REIT subsidiary, will at any time represent more than 25% of the value of our assets.
 
We expect that any mortgage-backed securities, real property and temporary investments that we acquire, will generally be qualifying assets for purposes of the 75% asset test except to the extent that less than 95% of the assets of a real estate mortgage investment conduit in which we own an interest consists of real estate assets. Mortgage loans also will generally be qualifying assets for purposes of the 75% asset test to the extent that the principal balance of each mortgage loan does not exceed the value of the associated real property.
 
We anticipate that we may securitize all or a portion of the mortgage loans that we acquire, in which event we will likely retain certain of the subordinated and interest only classes of mortgage-backed securities


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that may be created as a result of such securitization. The securitization of mortgage loans may be accomplished through one or more of our taxable REIT subsidiaries, or qualified REIT subsidiaries and one or more real estate mortgage investment conduits. The securitization of the mortgage loans through one or more qualified REIT subsidiaries or taxable REIT subsidiaries (whether or not structured as real estate mortgage investment conduits) should not affect our qualification as a REIT or result in the imposition of corporate income tax under the taxable mortgage pool rules. However, in order to reduce the likelihood that we would be subject to a 100% tax on any gain from the sale of interests in real estate mortgage investment conduits, we expect to use our taxable REIT subsidiaries to form such real estate mortgage investment conduits and to sell interests therein.
 
After meeting the asset tests at the close of any quarter, we will not lose our status as a REIT if we fail to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values. In addition, if we fail to satisfy the asset tests because we acquire securities or other property during a quarter, we can cure this failure by disposing of sufficient nonqualifying assets within 30 days after the close of that quarter.
 
If we fail to meet the requirements of the 5% and 10% asset tests described above for a particular quarter, we will not lose our status as a REIT if the failure is due to ownership of assets the total value of which does not exceed the lesser of (1) 1% of the total value of our assets at the end of the quarter, or (2) $10,000,000. In either case, we must either (1) dispose of the assets within six months after the last day of the quarter in which the failure is identified (or a different period of time prescribed by the IRS), or (2) otherwise satisfy these tests within the relevant time period.
 
If we fail to meet the requirements of any asset test for a particular quarter by more than the de minimis amount described in the immediately preceding paragraph, we will not lose our status as a REIT if (1) after we identify the failure to satisfy the asset tests for a quarter, we file a schedule for the quarter in accordance with Treasury Regulations describing each asset that caused the failure (2) the failure was due to reasonable cause and not willful neglect, (3) we dispose of the assets described on the schedule within six months of the last day of the quarter in which we identified the failure or within some other time period prescribed by IRS or we otherwise satisfy the asset tests within the relevant time period, and (4) we pay a tax equal to the greater of (a) $50,000 or (b) the amount determined (pursuant to Treasury Regulations) by multiplying the net income generated by the assets in the schedule that caused the failure by the highest corporate tax rate.
 
We will monitor the status of the assets that we acquire for purposes of the various asset tests and we will manage our portfolio in order to comply with such tests.
 
Annual Distribution Requirements
 
To qualify as a REIT, we are required to distribute dividends, other than capital gain dividends, to our stockholders in an amount at least equal to the sum of (1) 90% of our REIT taxable income and (2) 90% of our after tax net income, if any, from foreclosure property, minus (3) the sum of certain items of noncash income. In general, REIT taxable income means taxable ordinary income without regard to the dividends paid deduction. In addition, if we dispose of any asset within 10 years of acquiring it from a taxable C corporation in a tax free reorganization or any other similar carry-over basis transaction, we may be required, under Treasury Regulations not yet promulgated, to distribute at least 90% of the after-tax built-in gain, if any, recognized on the disposition of the asset.
 
In order to satisfy the requirement that we distribute at least 90% of our REIT taxable income attributable to a particular taxable year in the form of dividends, we will use the following methods of distribution: (1) making regular dividends during the taxable year; (2) paying dividends that relate to the particular taxable year by January 31 of the following taxable year, provided we declare the dividends in the fourth quarter of the particular taxable year; and (3) paying dividends that relate to the particular taxable year on or before the first regular dividend after our declaration of such dividends, provided that we declare the dividend prior to the date that our tax return is due for the particular taxable year. The dividends paid under the third method are taxable in the year in which paid, even though these distributions relate to our prior year for purposes of our 90% distribution requirement. To the extent that we do not distribute all of our net capital gain or


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distribute at least 90%, but less than 100% of our REIT taxable income, we will be subject to tax at regular federal corporate tax rates.
 
From time to time we may not have sufficient cash or other liquid assets to meet the above distribution requirements due to timing differences between the actual receipt of cash and payment of expenses, and the inclusion of income and deduction of expenses in arriving at our taxable income. If these timing differences occur, in order to meet the REIT distribution requirements, we may need to arrange for short-term, or possibly long-term, borrowings, or pay dividends in the form of taxable stock dividends.
 
Under certain circumstances, we may be able to rectify a failure to meet a distribution requirement for a year by paying “deficiency dividends” to our stockholders in a later year, which may be included in our deduction for dividends paid for the earlier year. Thus, we may be able to avoid being subject to tax on amounts distributed as deficiency dividends. We will be required, however, to pay interest based upon the amount of any deduction claimed for deficiency dividends. In addition, we will be subject to a 4% excise tax on the excess of the required distribution over the amounts actually distributed if we should fail to distribute each year at least the sum of 85% of our ordinary income for the year, 95% of our capital gain income for the year, and any undistributed taxable income from prior periods.
 
Record Keeping Requirements
 
We are required to maintain records and request on an annual basis information from specified stockholders. This requirement is designed to disclose the actual ownership of our outstanding stock.
 
Failure to Qualify
 
If we fail to qualify for taxation as a REIT in any taxable year, and the relief provisions of the Internal Revenue Code described above do not apply, we will be subject to U.S. federal income tax, including any applicable alternative minimum tax, and possibly increased state and local taxes, on our taxable income at regular corporate rates. Such taxation will reduce the cash available for distribution by us to our stockholders. Distributions to stockholders in any year in which we fail to qualify as a REIT will not be deductible by us and we will not be required to distribute any amounts to our stockholders. If we fail to qualify as a REIT, to the extent of our current and accumulated earnings and profits, distributions to our stockholders who are individuals generally will be taxable at preferential rates, for the 2003 through 2010 tax years; and, subject to certain limitations of the Internal Revenue Code, corporate stockholders may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, we will also be disqualified from taxation as a REIT for the four taxable years following the year during which we lost our qualification. It is not possible to state whether in all circumstances we will be entitled to statutory relief.
 
Taxable Mortgage Pool Rules
 
An entity, or a portion of an entity, may be classified as a taxable mortgage pool under the Internal Revenue Code if :
 
  •  Substantially all of its assets consist of debt obligations or interests in debt obligations;
 
  •  More than 50% of those debt obligations are real estate mortgages or interests in real estate mortgages as of specified testing dates;
 
  •  The entity has issued debt obligations (liabilities) that have two or more maturities; and
 
  •  The payments required to be made by the entity on its debt obligations bear a relationship to the payments to be received by the entity on the debt obligations that it holds as assets.
 
Under the Treasury Regulations, if less than 80% of the assets of an entity (or a portion of an entity) consist of debt obligations, these debt obligations are considered not to comprise “substantially all” of its assets, and therefore the entity would not be treated as a taxable mortgage pool. Under the Internal Revenue Code and Treasury Regulations, it is possible for a portion of a REIT (as opposed to the entire REIT) to be classified as a taxable mortgage pool. This could occur, for example, if a qualified REIT subsidiary holds a


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pool of mortgages and uses that pool to issue two classes of pay-through debt. In that case, however, only the taxable income of that portion (and not the taxable income of the entire REIT) would be treated as a excess inclusion income.
 
Although we believe that we currently do not own any interests in any taxable mortgage pools, our future financing and securitization arrangements could give rise to us being considered to be, or to own an interest in, one or more taxable mortgage pools. Where an entity, or a portion of an entity, is classified as a taxable mortgage pool, it is generally treated as a taxable corporation for federal income tax purposes. In the case of a REIT, or a portion of a REIT, or a disregarded subsidiary of a REIT, that is a taxable mortgage pool, however, special rules apply. The taxable mortgage pool is not treated as a corporation that is subject to corporate income tax, and the taxable mortgage pool classification does not directly affect the tax status of the REIT. Rather, the consequences of the taxable mortgage pool classification would, in general, except as described below, be limited to the stockholders of the REIT.
 
A portion of our income from a taxable mortgage pool arrangement, which might be non-cash accrued income or “phantom” taxable income, could be treated as “excess inclusion income.” Excess inclusion income is an amount, with respect to any calendar quarter, equal to the excess, if any of (a) income allocable to the holder of the residual interest in a REMIC or an equity interest in a taxable mortgage pool over (b) the sum of an amount for each day in the calendar quarter equal to the product of (1) the adjusted issue price at the beginning of the quarter multiplied by (2) 120 percent of the long-term federal rate (determined on the basis of compounding at the close of each calendar quarter and properly adjusted for the length of such quarter). This income would nonetheless be subject to the distribution requirements that apply to us, and could therefore adversely affect our liquidity.
 
Moreover, our excess inclusion income would be allocated among our stockholders. A stockholder’s share of excess inclusion income (1) would not be allowed to be offset by any net operating losses otherwise available to the stockholder, (2) would be subject to tax as unrelated business taxable income in the hands of most types of stockholders that are otherwise generally exempt from U.S. federal income tax, and (3) would result in the application of U.S. federal income tax withholding at the maximum rate (30%), without reduction for any otherwise applicable income tax treaty, to the extent allocable to most types of foreign stockholders. To the extent that excess inclusion income is allocated to a tax-exempt stockholder that is not subject to unrelated business income tax (such as government entities), we will be taxable on this income at the highest applicable corporate tax rate. Excess inclusion income shall be allocated among the stockholders in proportion to dividends paid (determined without regard to any special allocation of the expense for any tax paid as set forth in the Internal Revenue Code) and we shall inform the stockholders (except certain tax-exempt stockholders that are not subject to unrelated business income tax) of the amount and character of excess inclusion income allocated to them.
 
REMIC Residual Interests
 
We would also have excess inclusion income if we held any REMIC residual interests. We do not anticipate holding such interests, however, other than through a taxable REIT subsidiary. Otherwise, the effect on our stockholders would be the same as described immediately above.
 
Taxation of Taxable United States Stockholders
 
When we use the term “United States stockholders,” we mean a holder of shares of our stock who is, for U.S. federal income tax purposes:
 
  •  A citizen or resident of the United States;
 
  •  A corporation or partnership, or other entity taxable as a corporation or partnership for U.S. federal income tax purposes, created or organized in or under the laws of the United States or of any state thereof or in the District of Columbia, unless Treasury Regulations provide otherwise;


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  •  An estate the income of which is subject to U.S. federal income taxation regardless of its source; or
 
  •  A trust whose administration is subject to the primary supervision of a United States court and which has one or more United States persons whom have the authority to control all substantial decisions of the trust.
 
Distributions Generally
 
The rate at which stockholders who are individuals are taxed on corporate dividends has been lowered for the 2003 through 2010 tax years, from a maximum of 38.6% (as ordinary income) to a maximum of 15% (the same as long-term capital gains), thereby substantially reducing, though not completely eliminating, the double taxation that has historically applied to corporate dividends. With limited exceptions, however, dividends received by stockholders from us or from other entities that are taxed as REITs will continue to be taxed at rates applicable to ordinary income, which will be as high as 35% through 2010.
 
Distributions out of our current or accumulated earnings and profits, other than capital gain dividends will be taxable to our United States stockholders as ordinary income. Provided we qualify as a REIT, our dividends will not be eligible for the dividends received deduction generally available to United States stockholders that are corporations. Dividends received from REITs are generally not eligible to be taxed at the preferential qualified dividend income rates applicable to individuals who receive dividends from taxable C corporations. An exception applies, however, and individual stockholders are taxed at such rates on dividends designated by and received from REITs, to the extent that the dividends are attributable to (1) income that the REIT previously retained in the prior year, and on which it was subject to corporate level tax; (2) dividends received by the REIT from taxable corporations; or (3) income subject to taxation from sales of appreciated property acquired from C corporations in carryover basis transactions.
 
To the extent that we make distributions in excess of our current and accumulated earnings and profits, our distributions will be treated as a tax-free return of capital to each United States stockholder, and will reduce the adjusted tax basis which each United States stockholder has in its shares of stock by the amount of the distribution, but not below zero. Distributions in excess of a United States stockholder’s adjusted tax basis in its shares will be taxable as capital gain, provided that the shares have been held as capital assets, and will be taxable as long-term capital gain if the shares have been held for more than one year. Dividends we declare in October, November or December of any year and pay to a stockholder of record on a specified date in any of those months will be treated as both paid by us and received by the stockholder on December 31 of that year, provided we actually pay the dividend by January of the following year. Stockholders may not include in their own income tax returns any of our net operating losses or capital losses.
 
Capital Gain Distributions
 
Distributions designated as net capital gain dividends will be taxable to our United States stockholders as capital gain income to the extent that they do not exceed our actual net capital gain for the taxable year, without regard to the period for which a United States stockholder has held his shares. Corporate stockholders may be required to treat up to 20% of some capital gain dividends as ordinary income. Long-term capital gains are generally taxable at maximum federal rates of 15% (through 2010) in the case of stockholders who are individuals, and 35% for corporations. Capital gains attributable to the sale of depreciable real property held for more than 12 months are subject to a 25% maximum U.S. federal income tax rate for taxpayers who are individuals, to the extent of previously claimed depreciation deductions.
 
Retention of Net Capital Gains
 
We may elect to retain, rather than distribute as a capital gain dividend, our net capital gains. If we make this election, we would pay tax on such retained capital gains. In such a case, our stockholders would generally:
 
  •  Include their proportionate share of our undistributed net capital gains in their taxable income;


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  •  Receive a credit for their proportionate share of the tax paid by us; and
 
  •  Increase the adjusted basis of their stock by the difference between the amount of their capital gain and their share of the tax paid by us.
 
Passive Activity Losses and Investment Interest Limitations
 
Distributions we make, and gain arising from the sale or exchange by a United States stockholder of our shares, will not be treated as passive activity income. As a result, United States stockholders will not be able to apply any “passive losses” against income or gain relating to our stock. Distributions we make, to the extent they do not constitute a return of capital, generally will be treated as investment income for purposes of computing the investment interest limitation.
 
Dispositions of Stock
 
If you are a United States stockholder and you sell or dispose of your shares of stock, you will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount of cash and the fair market value of any property you receive on the sale or other disposition and your adjusted tax basis in the shares of stock. This gain or loss will be capital gain or loss if you have held the stock as a capital asset, and will be long-term capital gain or loss if you have held the stock for more than one year. In general, if you are a United States stockholder and you recognize loss upon the sale or other disposition of stock that you have held for six months or less, the loss you recognize will be treated as a long-term capital loss to the extent you received distributions from us which were required to be treated as long-term capital gains.
 
Generally, the redemption of shares by us will result in recognition of ordinary income by the stockholder unless the stockholder completely terminates or substantially reduces his or her interest in us. A redemption of shares for cash will be treated as a distribution that is taxable as a dividend to the extent of our current or accumulated earnings and profits at the time of the redemption under Section 302 of the Internal Revenue Code unless the redemption (1) results in a “complete termination” of the stockholder’s interest in us under Section 302(b)(3) of the Internal Revenue Code, (2) is “substantially disproportionate” with respect to the stockholder under Section 302(b)(2) of the Internal Revenue Code, or (3) is “not essentially equivalent to a dividend” with respect to the stockholder under Section 302(b)(1) of the Internal Revenue Code. Under Section 302(b)(2) of the Internal Revenue Code a redemption is considered “substantially disproportionate” if the percentage of the voting stock of a corporation owned by a stockholder immediately after the redemption is less than 80% of the percentage of the voting stock owned by that stockholder immediately before the redemption.
 
In determining whether the redemption is not treated as a dividend, shares considered to be owned by a stockholder by reason of certain constructive ownership rules set forth in Section 318 of the Internal Revenue Code, as well as shares actually owned, must generally be taken into account. A distribution to a stockholder will be “not essentially equivalent to a dividend” if it results in a “meaningful reduction” in the stockholder’s interest in us. The Internal Revenue Service has published a ruling indicating that a redemption which results in a reduction in the proportionate interest in a corporation (taking into account constructive ownership rules) of a stockholder whose relative stock interest is minimal (an interest of less than 1% should satisfy this requirement) and who exercises no control over the corporation’s affairs should be treated as being “not essentially equivalent to a dividend.”
 
If the redemption is not treated as a dividend, the redemption of the shares for cash will result in taxable gain or loss equal to the difference between the amount of cash received and the stockholder’s tax basis in the shares redeemed. This gain or loss would be capital gain or loss if the shares were held as a capital asset and would be long-term capital gain or loss if the holding period for the shares exceeds one year.
 
Newly enacted legislation requires certain United States stockholders who are individuals, estates or trusts to pay a 3.8% tax on, among other things, dividends on and capital gains from the sale or other disposition of shares of stock for taxable years beginning after December 31, 2012. United States stockholders should


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consult their tax advisors regarding the effect, if any, of this legislation on their ownership and disposition of shares of our stock.
 
Backup Withholding and Information Reporting
 
We report to our United States stockholders and the IRS the amount of dividends paid during each calendar year, and the amount of any tax withheld. Under the backup withholding rules, a stockholder may be subject to backup withholding with respect to dividends paid unless the holder is a corporation or comes within other exempt categories and, when required, demonstrates this fact, or provides a taxpayer identification number or social security number, certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. A United States stockholder, that does not provide us with the correct taxpayer identification number or social security number may also be subject to penalties imposed by the IRS. Backup withholding is not an additional tax. Any amount paid as backup withholding will be creditable against the stockholder’s income tax liability. In addition, we may be required to withhold a portion of capital gain distributions to any stockholders who fail to certify their non-foreign status.
 
Taxation of Tax-Exempt Stockholders
 
The IRS has ruled that amounts distributed as dividends by a REIT do not constitute unrelated business taxable income when received by a tax-exempt entity. Based on that ruling, provided that a tax-exempt stockholder has not held its shares as debt financed property within the meaning of the Internal Revenue Code and the shares are not otherwise used in a unrelated trade or business, dividend income on our stock and income from the sale of our stock should not be unrelated business taxable income to a tax-exempt stockholder. Generally, debt financed property is property, the acquisition or holding of which was financed through a borrowing by the tax-exempt stockholder.
 
For tax-exempt stockholders which are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from U.S. federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Internal Revenue Code, respectively, income from an investment in our shares will constitute unrelated business taxable income unless the organization is able to properly claim a deduction for amounts set aside or placed in reserve for certain purposes so as to offset the income generated by its investment in our shares. These prospective investors should consult their tax advisors concerning these set aside and reserve requirements.
 
Notwithstanding the above, however, a portion of the dividends paid by a pension-held REIT may be treated as unrelated business taxable income as to any pension trust which:
 
  •  Is described in Section 401(a) of the Internal Revenue Code;
 
  •  Is tax-exempt under Section 501(a) of the Internal Revenue Code; and
 
  •  Holds more than 10%, by value, of the equity interests in the REIT.
 
Tax-exempt pension funds that are described in Section 401(a) of the Internal Revenue Code are referred to below as “qualified trusts.”
 
A REIT is a pension held REIT if:
 
  •  It would not have qualified as a REIT but for the fact that Section 856(h)(3) of the Internal Revenue Code provides that stock owned by a qualified trust shall be treated, for purposes of the 5/50 rule, as owned by the beneficiaries of the trust, rather than by the trust itself; and
 
  •  Either at least one qualified trust holds more than 25%, by value, of the interests in the REIT, or one or more qualified trusts, each of which owns more than 10%, by value, of the interests in the REIT, holds in the aggregate more than 50%, by value, of the interests in the REIT.


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The percentage of any REIT dividend treated as unrelated business taxable income is equal to the ratio of:
 
  •  The gross income from the unrelated business earned by the REIT, less direct expenses relating to this gross income, treating the REIT as if it were a qualified trust and therefore subject to tax on unrelated business taxable income, to
 
  •  The total gross income of the REIT less direct expenses relating to this gross income.
 
  •  A de minimis exception applies where the percentage is less than 5% for any year. As a result of the limitations on the transfer and ownership of stock contained in our articles of incorporation, we do not expect to be classified as a pension-held REIT but there can be no assurance that this will always be the case.
 
Taxation of Non-United States Stockholders
 
The rules governing U.S. federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships, and other foreign stockholders (non-United States stockholders) are complex and no attempt will be made herein to provide more than a summary of such rules.
 
Prospective non-United States stockholders should consult their tax advisors to determine the impact of foreign, federal, state and local tax laws with regard to an investment in our common stock and of our election to be taxed as a REIT including any reporting requirements.
 
Distributions to non-United States stockholders that are not attributable to gain from sales or exchanges by us of United States real property interests and are not designated by us as capital gain dividends or retained capital gains will be treated as dividends of ordinary income to the extent that they are made out of our current or accumulated earnings and profits. Such distributions will generally be subject to a withholding tax equal to 30% of the distribution unless an applicable tax treaty reduces or eliminates that tax. However, if income from an investment in our stock is treated as effectively connected with the non-United States stockholder’s conduct of a United States trade or business, the non-United States stockholder generally will be subject to U.S. federal income tax at graduated rates, in the same manner as United States stockholders are taxed with respect to such distributions (and also may be subject to the 30% branch profits tax in the case of a non-United States stockholder that is a corporation). We expect to withhold United States income tax at the rate of 30% on the gross amount of any distributions made to a non-United States stockholder unless (1) a lower treaty rate applies and any required form, such as Form W-8BEN, evidencing eligibility for that reduced rate is filed by the non-United States stockholder with us or (2) the non-United States stockholder files a Form W-8ECI with us claiming that the distribution is effectively connected income.
 
Any portion of the distributions paid to non-United States stockholders that is treated as excess inclusion income from a real estate mortgage investment conduit will not be eligible for exemption from the 30% withholding tax or a reduced treaty rate. In addition, if Treasury Regulations are issued allocating our excess inclusion income from non-real estate mortgage investment conduits among our stockholders, some percentage of our distributions would not be eligible for exemption from the 30% withholding tax or a reduced treaty withholding tax rate in the hands of non-United States stockholders.
 
Distributions in excess of our current and accumulated earnings and profits will not be taxable to a stockholder to the extent that such distributions do not exceed the adjusted basis of the stockholder’s stock, but rather will reduce the adjusted basis of such shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a non-United States stockholder’s stock, such distributions will give rise to tax liability if the non-United States stockholder would otherwise be subject to tax on any gain from the sale or disposition of its stock, as described below. Because it generally cannot be determined at the time a distribution is made whether or not such distribution will be in excess of current and accumulated earnings and profits, the entire amount of any distribution normally will be subject to withholding at the same rate as a dividend. However, amounts so withheld are refundable to the extent it is subsequently determined that such distribution was, in fact, in excess of our current and accumulated earnings and profits.


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We are also required to withhold 10% of any distribution in excess of our current and accumulated earnings and profits.
 
For any year in which we qualify as a REIT, distributions that are attributable to gain from sales or exchanges of a United States real property interest, which includes certain interests in real property, but generally does not include mortgage loans or mortgage-backed securities, will be taxed to a non-United States stockholder under the provisions of the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). Under FIRPTA, distributions attributable to gain from sales of United States real property interests are taxed to a non-United States stockholder as if such gain were effectively connected with a United States business. Non-United States stockholders thus would be taxed at the normal capital gain rates applicable to United States stockholders (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). Distributions subject to FIRPTA also may be subject to the 30% branch profits tax in the hands of a non-United States corporate stockholder. We are required to withhold 35% of any distribution that is or can be designated by us as a United States real property capital gains dividend. The amount withheld is creditable against the non-United States stockholder’s FIRPTA tax liability.
 
Gain recognized by a non-United States stockholder upon a sale of our stock generally will not be taxed under FIRPTA if we are a domestically controlled REIT, which is a REIT in which at all times during a specified testing period less than 50% in value of the stock was held directly or indirectly by non-United States persons. No assurance can be given that we are or will remain a domestically controlled REIT.
 
Gain not subject to FIRPTA will be taxable to a non-United States stockholder if (1) the non-United States stockholder’s investment in the stock is effectively connected with a United States trade or business, in which case the non-United States stockholder will be subject to the same treatment as United States stockholders with respect to such gain or (2) the non-United States stockholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and other conditions are met, in which case the nonresident alien individual will be subject to a 30% tax on the individual’s capital gains. If the gain on the sale of the stock were to be subject to taxation under FIRPTA, the non-United States stockholder would be subject to the same treatment as United States stockholders with respect to such gain (subject to applicable alternative minimum tax, a special alternative minimum tax in the case of nonresident alien individuals, and the possible application of the 30% branch profits tax in the case of non-United States corporations). A similar rule will apply to capital gain dividends to which FIRPTA does not apply.
 
Newly enacted legislation may impose withholding taxes on certain types of payments made to “foreign financial institutions” and certain other non-U.S. entities. Under this legislation, the failure to comply with additional certification, information reporting and other specified requirements could result in withholding tax being imposed on payments of dividends and sales proceeds to United States stockholders who own shares of our stock through foreign accounts or foreign intermediaries and certain Non-United States stockholders. The legislation imposes a 30% withholding tax on dividends on, and gross proceeds from the sale or other disposition of, shares of our stock paid to a foreign financial institution or to a foreign non-financial entity, unless (i) the foreign financial institution undertakes certain diligence and reporting obligations or (ii) the foreign non-financial entity either certifies it does not have any substantial United States owners or furnishes identifying information regarding each substantial United States owner. There is an exception for certain amounts that are treated as effectively connected with a United States trade or business, such as gain from the disposition of a United States real property interest. If the payee is a foreign financial institution, it generally must enter into an agreement with the United States Treasury requiring, among other things, that it undertake to identify accounts held by certain United States persons or United States-owned foreign entities, annually report certain information about such accounts, and withhold 30% on payments to account holders whose actions prevent it from complying with these reporting and other requirements. The legislation applies to payments made after December 31, 2012. Prospective investors should consult their tax advisors regarding this legislation.
 
Withholding Tax and Information Reporting on Disposition of REIT Stock
 
The payment of proceeds from the disposition of common stock to or through a United States office of a broker will be subject to information reporting and backup withholding, unless the beneficial owner furnishes


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to the broker the appropriate documentation upon which the beneficial owner certifies, under penalties of perjury, among other things, its status as a non-United States stockholder or otherwise establishes an exemption and provided the broker does not have actual knowledge or reason to know that the beneficial owner is a United States stockholder.
 
The payment of proceeds from the disposition of common stock to or through a non-United States office of a broker generally will not be subject to backup withholding and information reporting, except as noted below.
 
In the case of proceeds from a disposition of common stock paid to or through a non-United States office of a broker that is:
 
  •  A United States person;
 
  •  A controlled foreign corporation for U.S. federal income tax purposes; or
 
  •  A foreign person 50% or more of whose gross income from a specified period is effectively connected with a United States trade or business; then
 
information reporting, but not backup withholding, will apply unless the broker has documentary evidence in its files that the owner is a non-United States stockholder and other conditions are satisfied, or the beneficial owner otherwise establishes an exemption, and the broker has no actual knowledge to the contrary.
 
The sale of common stock outside of the United States through a non-United States broker will also be subject to information reporting if the broker is a foreign partnership and at any time during its tax year:
 
  •  One or more of its partners are United States persons, as defined for U.S. federal income tax purposes, who in the aggregate hold more than 50% of the income or capital interests in the partnership; or
 
  •  The foreign partnership is engaged in a United States trade or business.
 
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a non-United States stockholder can be refunded or credited against the non-United States stockholder’s U.S. federal income tax liability, if any, provided that the required information is furnished to the IRS in a timely manner.
 
Each prospective holder of common stock should consult that holder’s own tax adviser with respect to the information and backup withholding requirements.
 
Possible Legislative or Other Actions Affecting REITs
 
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the United States Treasury Department. Changes to the tax law, which may have retroactive application, could adversely affect us and our investors. It cannot be predicted whether, when, in what forms, or with what effective dates, the tax law applicable to us or our investors will be changed.
 
State, Local and Foreign Taxation
 
We may be required to pay state, local and foreign taxes in various state, local and foreign jurisdictions, including those in which we transact business or make investments, and our stockholders may be required to pay state, local and foreign taxes in various state, local and foreign jurisdictions, including those in which they reside. Our state, local and foreign tax treatment may not conform to the U.S. federal income tax consequences summarized above. In addition, your state, local and foreign tax treatment may not conform to the U.S. federal income tax consequences summarized above. You should consult your tax advisor regarding the effect of state, local and foreign tax laws on an investment in our common stock.


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ERISA CONSIDERATIONS
 
The following is a summary of material considerations arising under ERISA and the prohibited transaction provisions of Section 4975 of the Internal Revenue Code that may be relevant to prospective investors. This discussion does not purport to deal with all aspects of ERISA or the Internal Revenue Code that may be relevant to particular investors in light of their particular circumstances.
 
A PROSPECTIVE INVESTOR THAT IS AN EMPLOYEE BENEFIT PLAN SUBJECT TO ERISA, A TAX-QUALIFIED RETIREMENT PLAN, AN IRA, OR A GOVERNMENTAL, CHURCH, OR OTHER PLAN THAT IS EXEMPT FROM ERISA IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER APPLICABLE PROVISIONS OF ERISA, THE INTERNAL REVENUE CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE SHARES BY SUCH PLAN OR IRA.
 
Fiduciary Duties and Prohibited Transactions
 
In considering an investment in our common stock, a fiduciary of a profit-sharing, pension, stock bonus plan, or individual retirement account (IRA), including a plan for self-employed individuals and their employees or any other employee benefit plan subject to the prohibited transaction provisions of ERISA and/or the Internal Revenue Code or the fiduciary responsibility provisions of ERISA, should consider (1) whether the ownership of our common stock is in accordance with the documents and instruments governing such plan; (2) whether the ownership of our common stock is consistent with the fiduciary’s responsibilities and satisfies the requirements of Part 4 of Subtitle B of Title I of ERISA (where applicable) and, in particular, the diversification, prudence and liquidity requirements of Section 404 of ERISA; (3) ERISA’s prohibitions on improper delegation of control over, or responsibility for, plan assets and ERISA’s imposition of co-fiduciary liability on a fiduciary who participates in, permits (by action or inaction) the occurrence of, or fails to remedy a known breach of duty by another fiduciary; (4) the need to value the assets of the ERISA plan annually; and (5) whether the acquisition, holding or transfer of the common stock will constitute a non-exempt prohibited transaction under ERISA or Section 4975 of the Internal Revenue Code.
 
In addition to the imposition of fiduciary standards, ERISA and Section 4975 of the Internal Revenue Code prohibit a wide range of transactions between an ERISA Plan, an IRA, or certain other plans (collectively, a “Plan”) and persons who have certain specified relationships to the Plan (“parties in interest” within the meaning of ERISA and “disqualified persons” within the meaning of the Internal Revenue Code). Thus, a Plan fiduciary or person making an investment decision for a Plan also should consider whether the acquisition or the continued holding of the shares might constitute or give rise to a direct or indirect prohibited transaction.
 
Plan Assets
 
The fiduciary standards and prohibited transaction rules of ERISA and the Internal Revenue Code apply to transactions with a Plan and also to transactions with the “plan assets” of the Plan. The “plan assets” of a Plan include the Plan’s interest in an entity in which the Plan invests and, in certain circumstances, the assets of the entity in which the Plan holds such interest. The term “plan assets” is not specifically defined in ERISA or the Internal Revenue Code, nor, as of the date hereof, has it been interpreted definitively by the courts in litigation. On November 13, 1986, the United States Department of Labor, the governmental agency primarily responsible for administering ERISA, adopted a final regulation (the “DOL Regulation”) setting out the standards it will apply in determining whether an equity investment in an entity will cause the assets of such entity to constitute “plan assets.” The DOL Regulation applies for purposes of both ERISA and Section 4975 of the Internal Revenue Code.
 
Under the DOL Regulation, if a Plan acquires an equity interest in an entity, which equity interest is not a “publicly-offered security,” the Plan’s assets generally would include both the equity interest and an undivided interest in each of the entity’s underlying assets unless certain specified exceptions apply. The DOL Regulation defines a publicly-offered security as a security that is “widely held,” “freely transferable,” and either part of a class of securities registered under Section 12(b) or 12(g) of the Exchange Act, or sold


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pursuant to an effective registration statement under the Securities Act (provided the securities are registered under the Exchange Act within 120 days after the end of the fiscal year of the issuer during which the offering occurred). The shares are being sold in an offering registered under the Securities Act and have been registered under Section 12(g) of the Exchange Act.
 
The DOL Regulation provides that a security is “widely held” only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. However, a class of securities will not fail to be “widely held” solely because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer’s control. While we believe that the shares are “widely held”, we cannot assure you that the shares will be held by 100 or more independent investors.
 
The DOL Regulation provides that whether a security is “freely transferable” is a factual question to be determined on the basis of all the relevant facts and circumstances. The DOL Regulation further provides that when a security is part of an offering in which the minimum investment is $10,000 or less, as is the case with this offering, certain restrictions ordinarily will not affect, alone or in combination, the finding that such securities are freely transferable. The Company believes that the restrictions imposed under the Articles of Incorporation on the transfer of the common stock are limited to restrictions on transfer generally permitted under the DOL Regulation and are not likely to result in the failure of the common stock to be “freely transferable.” See “Description of Capital Stock — Common Stock.” The DOL Regulation only establishes a presumption in favor of a finding of free transferability and, therefore, no assurance can be given that the Department of Labor and the U.S. Treasury Department would not reach a contrary conclusion with respect to the common stock.
 
Assuming that the shares continue to be “widely held” and will be “freely transferable,” the Company believes that the shares will be publicly-offered securities for purposes of the DOL Regulation and that the assets of the Company will not be deemed to be “plan assets” of any Plan that invests in the shares. If the shares do not qualify as publicly-offered securities under the DOL Regulations, the assets of the Company may be deemed the assets of any Plan that invests in the shares. In that event, transactions involving the Company and either parties in interest or disqualified persons with respect to an investing Plan might be prohibited under ERISA or the Internal Revenue Code, and could subject such disqualified persons to excise taxes and impose other liabilities on Plan fiduciaries, unless relief is available under an applicable statutory or administrative exemption.
 
Governmental Plans
 
Although federal, state and local governmental pension plans are not subject to ERISA, applicable provisions of federal and state law may restrict the type of investments such a plan may make or otherwise have an impact on such a plan’s ability to invest in the shares. Accordingly, state and local governmental pension plans considering an investment in the Company should consult with their counsel regarding their proposed investment in the Company.
 
Minimum Distribution Requirements
 
Potential investors who intend to purchase shares in their IRAs, and any trustee of an IRA or other fiduciary of a retirement plan considering an investment in the shares, should take into consideration the limited liquidity of an investment in the shares as it relates to applicable minimum distribution requirements under the Internal Revenue Code for the IRA or other retirement plan. If the shares are still held in the IRA or retirement plan and our properties have not yet been sold at such time as mandatory distributions are required to commence to the IRA beneficiary or qualified plan participant, Section 401(a)(9) of the Internal Revenue Code will likely require that a distribution in kind of the common stock be made to the IRA beneficiary or qualified plan participant. Any such distribution in kind of shares must be included in the taxable income of the IRA beneficiary or qualified plan participant for the year in which the shares are received at the then current fair market value of the shares without any corresponding cash distributions with which to pay the income tax liability arising out of any such distribution. The fair market value of any such distribution in kind


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will be only an estimated value per shares and there can be no assurance that such estimated value could actually be realized by a shareholder unless a public market for the shares exists at that time.
 
Annual Valuation
 
Within 90 days following the close of each of our fiscal years, each stockholder that is a Plan will be furnished with an annual statement of share valuation to enable it to file annual reports required by ERISA as they relate to its investment in us. For any period during which we are making a public offering of shares, the statement will report an estimated value of each share at the then public offering price per share. If no public offering is ongoing, and until our shares have been listed for trading on a stock exchange, the statement will report an estimated value of each share, based on (i) appraisal or valuation updates performed by us based on a review of the existing appraisal, sales comparables or other accepted valuation methodology for each property and lease of each property, focusing on a re-examination of the capitalization rate applied to the rental stream to be derived from that property, and (ii) a review of the outstanding loans and other investments, focusing on a determination of present value by a re-examination of the capitalization rate applied to the stream of payments due under the terms of each loan and other investments. We may elect to deliver such reports to all stockholders. Stockholders will not be forwarded copies of appraisals, sales comparables or other valuation methodologies or updates. In providing such reports to stockholders, neither us nor our affiliates thereby make any warranty, guarantee or representation that (i) we or our stockholders, upon liquidation, will actually realize the estimated value per share or (ii) our stockholders will realize the estimated net asset value if they attempt to sell their shares.
 
Fiduciaries of ERISA plans and IRAs should consult with and rely upon their own advisors in evaluating the consequences under the fiduciary responsibility and prohibited transaction provisions of ERISA and the Internal Revenue Code of an investment in common stock in light of their own circumstances.
 
DESCRIPTION OF CAPITAL STOCK
 
The following summary highlights selected material information about our capital stock, as described in our articles of incorporation and bylaws. You should refer to our articles of incorporation and our bylaws for a full description. You can obtain copies of our articles of incorporation and our bylaws and every other exhibit to our registration statement. Please see “Where You Can Find More Information about CM REIT, Inc.”
 
General
 
Our articles of incorporation provide that we may issue up to 101,000,000 shares of our common stock, $0.01 par value per share, and 15,000,000 shares of our preferred stock, $0.01 par value per share. As of December 18, 2008, we had 20,000 shares of our common stock issued and outstanding, no shares of our preferred stock issued and outstanding and one record holder of our common stock.
 
Under Maryland law, stockholders generally are not liable for the corporation’s debts or obligations.
 
Common Stock
 
According to the legal opinion we have received from Locke Lord Bissell & Liddell LLP, all shares of our common stock offered hereby will be duly authorized and, upon receipt by us of the full consideration therefor will be validly issued, fully paid and non-assessable. Subject to the preferential rights of any other class or series of stock and to the provisions of our articles of incorporation regarding the restrictions on transfer of stock, holders of shares of our common stock are entitled to receive dividends on such stock if, as and when authorized and declared by our board of directors out of assets legally available therefor and to share ratably in our assets legally available for distribution to our stockholders in the event of our liquidation, dissolution or winding up after payment of or adequate provision for all our known debts and liabilities.
 
Subject to the provisions of our articles of incorporation regarding the restrictions on ownership and transfer of stock and the terms of any other class or series of our stock, each outstanding share of our common


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stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors and, except as provided with respect to any other class or series of our stock, the holders of such shares of our common stock possess the exclusive voting power. There is no cumulative voting in the election of our directors.
 
Holders of shares of our common stock have no preference, conversion, exchange, sinking fund, or redemption rights and have no preemptive rights to subscribe for any of our securities. Subject to the provisions of our articles of incorporation regarding the restrictions on ownership transfer of stock, shares of our common stock have equal dividend, liquidation and other rights.
 
Under the Maryland General Corporation Law, or MGCL, a Maryland corporation generally cannot dissolve, amend its articles of incorporation, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business unless approved by the affirmative vote of stockholders holding at least two-thirds of the shares entitled to vote on the matter, unless a lesser percentage (but not fewer than a majority of all of the votes entitled to be cast by the stockholders on the matter) is set forth in the corporation’s articles of incorporation. Our articles of incorporation provide that any such action shall be effective and valid if taken or authorized by our stockholders by the affirmative vote of the holders of a majority of all the votes entitled to be cast on the matter.
 
Our articles of incorporation authorize our board of directors to reclassify any unissued shares of our common stock into other classes or series of classes of our stock, to establish the number of shares in each class or series and to set the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption for each such class or series.
 
Our board of directors has authorized the issuance of shares of our capital stock without certificates. We expect that, until our shares are listed on a national securities exchange, we will not issue shares in certificated form. Information regarding restrictions on the transferability of our shares that, under Maryland law, would otherwise have been required to appear on our share certificates will instead be furnished to our stockholders upon request and without charge. We maintain a stock ledger that contains the name and address of each stockholder and the number of shares that the stockholder holds. With respect to uncertificated stock, we will continue to treat the stockholder registered on our stock ledger as the owner of the shares until the new owner delivers a properly executed form to us, which form we will provide to any registered holder upon request.
 
Preferred Stock
 
Our articles of incorporation authorize our board of directors to classify any unissued shares of preferred stock and to reclassify any previously classified but unissued shares of any series of preferred stock previously authorized by our board of directors without stockholder approval. Prior to issuance of shares of each class or series of preferred stock, our board is required by the MGCL and our charter to fix the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each such class or series. Thus, our board could authorize the issuance of shares of preferred stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for holders of our common stock or otherwise be in their best interest. As of the closing of this offering, no shares of our preferred stock will be outstanding and we have no present plans to issue any preferred stock. We will not offer preferred stock to a promoter except on the same terms and conditions as that stock is offered to all existing stockholders or new stockholders.
 
Power to Issue Additional Shares of Our Common Stock and Preferred Stock
 
We believe that the power of our board of directors to issue additional authorized but unissued shares of our common stock or preferred stock and to classify or reclassify unissued shares of our common or preferred stock and thereafter to cause us to issue such classified or reclassified shares of stock will provide us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs which might arise. The additional classes or series, as well as our common stock, are available for issuance without further


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action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although our board of directors has no intention at the present time of doing so, it could authorize us to issue a class or series that could, depending upon the terms of such class or series, delay, defer or prevent a transaction or a change in control of us that might involve a premium price for holders of our common stock or otherwise be in their best interest.
 
Transfer Restrictions
 
Our articles of incorporation, subject to certain exceptions, contain certain restrictions on the number of shares of our stock that a person may own. Our articles of incorporation contain a stock ownership limit which will prohibit any person from acquiring or holding, directly or indirectly, shares of stock in excess of 9.8% of the lesser of the total number or value of any class of our stock. Our board of directors, in its sole discretion, may exempt a person from the stock ownership limit. However, our board of directors may not grant such an exemption to any person whose ownership, direct or indirect, of in excess of 9.8% of the lesser of the number or value of the outstanding shares of our stock would result in us being “closely held” within the meaning of Section 856(h) of the Internal Revenue Code or otherwise would result in us failing to qualify as a REIT. The person seeking an exemption must represent to the satisfaction of our board of directors that it will not violate the aforementioned restriction. The person also must agree that any violation or attempted violation of any of the foregoing restriction will result in the automatic transfer of the shares of stock causing such violation to the trust (as defined below). Our board of directors may require a ruling from the IRS or an opinion of counsel, in either case in form and substance satisfactory to our board of directors in its sole discretion, in order to determine or ensure our status as a REIT.
 
Our articles of incorporation further prohibit:
 
  •  any person from beneficially or constructively owning shares of our stock that would result in us being “closely held” under Section 856(h) of the Internal Revenue Code or otherwise cause us to fail to qualify as a REIT; and
 
  •  any person from transferring shares of our stock if such transfer would result in shares of our stock being owned by fewer than 100 persons.
 
Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of our stock that will or may violate any of the foregoing restrictions on transferability and ownership, or any person who would have owned shares of our stock that resulted in a transfer of shares to the trust in the manner described below, will be required to give notice immediately to us and provide us with such other information as we may request in order to determine the effect of such transfer on us.
 
If any transfer of shares of our stock occurs which, if effective, would result in any person beneficially or constructively owning shares of our stock in excess or in violation of the above transfer or ownership limitations, then that number of shares of our stock the beneficial or constructive ownership of which otherwise would cause such person to violate such limitations (rounded to the nearest whole share) shall be automatically transferred to a trust for the exclusive benefit of one or more charitable beneficiaries, and the prohibited owner shall not acquire any rights in such shares. Such automatic transfer shall be deemed to be effective as of the close of business on the business day prior to the date of such volatile transfer. Shares of stock held in the trust shall be issued and outstanding shares of our stock. The prohibited owner shall not benefit economically from ownership of any shares of stock held in the trust, shall have no rights to dividends and shall not possess any rights to vote or other rights attributable to the shares of stock held in the trust. The trustee of the trust shall have all voting rights and rights to dividends or other distributions with respect to shares of stock held in the trust, which rights shall be exercised for the exclusive benefit of the charitable beneficiary. Any dividend or other distribution paid prior to the discovery by us that shares of stock have been transferred to the trustee shall be paid by the recipient of such dividend or distribution to the trustee upon demand, and any dividend or other distribution authorized but unpaid shall be paid when due to the trustee. Any dividend or distribution so paid to the trustee shall be held in trust for the charitable beneficiary. The prohibited owner shall have no voting rights with respect to shares of


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stock held in the trust and, subject to Maryland law, effective as of the date that such shares of stock have been transferred to the trust, the trustee shall have the authority (at the trustee’s sole discretion):
 
  •  to rescind as void any vote cast by a prohibited owner prior to the discovery by us that such shares have been transferred to the trust; and
 
  •  to recast such vote in accordance with the desires of the trustee acting for the benefit of the charitable beneficiary. However, if we have already taken irreversible corporate action, then the trustee shall not have the authority to rescind and recast such vote.
 
Within 20 days after receiving notice from us that shares of our stock have been transferred to the trust, the trustee shall sell the shares of stock held in the trust to a person, designated by the trustee, whose ownership of the shares will not violate any of the ownership limitations set forth in our charter. Upon such sale, the interest of the charitable beneficiary in the shares sold shall terminate and the trustee shall distribute the net proceeds of the sale to the prohibited owner and to the charitable beneficiary as follows. The prohibited owner shall receive the lesser of:
 
  •  the price paid by the prohibited owner for the shares or, if the prohibited owner did not give value for the shares in connection with the event causing the shares to be held in the trust (e.g., a gift, devise or other such transaction), the market price, as defined in our charter, of such shares on the day of the event causing the shares to be held in the trust; and
 
  •  the price per share received by the trustee from the sale or other disposition of the shares held in the trust, in each case reduced by the costs incurred to enforce the ownership limits as to the shares in question. Any net sale proceeds in excess of the amount payable to the prohibited owner shall be paid immediately to the charitable beneficiary.
 
If, prior to the discovery by us that shares of our stock have been transferred to the trust, such shares are sold by a prohibited owner, then:
 
  •  such shares shall be deemed to have been sold on behalf of the trust; and
 
  •  to the extent that the prohibited owner received an amount for such shares that exceeds the amount that such prohibited owner was entitled to receive pursuant to the aforementioned requirement, such excess shall be paid to the trustee upon demand.
 
In addition, shares of our stock held in the trust shall be deemed to have been offered for sale to us, or our designee, at a price per share equal to the lesser of:
 
  •  the price per share in the transaction that resulted in such transfer to the trust (or, in the case of a devise or gift, the market price at the time of such devise or gift); and
 
  •  the market price on the date we, or our designee, accept such offer.
 
We have the right to accept such offer until the trustee has sold the shares of stock held in the trust. Upon such a sale to us, the interest of the charitable beneficiary in the shares sold shall terminate and the trustee shall distribute the net proceeds of the sale to the prohibited owner.
 
All certificates representing shares of our common stock and preferred stock, if issued, will bear a legend referring to the restrictions described above.
 
Every owner of more than 1% (or such lower percentage as required by the Internal Revenue Code or the related regulations) of all classes or series of our stock, including shares of our common stock, within 30 days after the end of each fiscal year, shall be required to give written notice to us stating the name and address of such owner, the number of shares of each class and series of our stock which the owner beneficially owns and a description of the manner in which such shares are held. Each such owner shall provide to us such additional information as we may request in order to determine the effect, if any, of such beneficial ownership on our status as a REIT and our status under the DOL plan asset regulations and to ensure compliance with the stock ownership limits. In addition, each stockholder shall upon demand be required to provide to us such information as we may reasonably request in order to determine our status as a REIT and our status under the


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DOL plan asset regulations and to comply with the requirements of any taxing authority or governmental authority or to determine such compliance. We may request such information after every sale, disposition or transfer of our common stock prior to the date a registration statement for such stock becomes effective.
 
These ownership limits could delay, defer or prevent a change in control or other transaction of us that might involve a premium price for the common stock or otherwise be in the best interest of the stockholders.
 
Transfer Agent and Registrar
 
The transfer agent and registrar for our common stock is DST Systems, Inc. Its mailing address is 430 West 7th Street, Kansas City, Missouri 64105. Their telephone number is          .
 
CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR
ARTICLES OF INCORPORATION AND BYLAWS
 
The following summary highlights selected material provisions of Maryland law and our articles of incorporation and bylaws and may not contain all of the information that is important to you. You should refer to Maryland law, including the MGCL, and to our articles of incorporation and our bylaws for a full description. Copies of our articles of incorporation and our bylaws are filed as exhibits to the registration statement of which this prospectus is a part. You can also obtain copies of our articles of incorporation and our bylaws and every other exhibit to our registration statement. Please see “Where You Can Find More Information about CM REIT, Inc.” Our articles of incorporation were ratified by unanimous consent of our board of directors, including our independent directors, on          , 2010.
 
Board of Directors
 
Our bylaws provide that the number of directors may be established, increased or decreased by our board of directors but may not be fewer than three nor more than 15. Any vacancy on our board may be filled only by a majority of the remaining directors, even if such a majority constitutes fewer than a quorum. Our articles of incorporation provide that a majority of our board of directors must be independent directors.
 
Holders of shares of our common stock will not have the right to cumulative voting in the election of directors. Consequently, at each annual meeting of stockholders, the holders of a majority of the shares of our common stock present in person or by proxy will be able to elect all of the successors of the directors. A quorum is a majority of our outstanding shares of common stock.
 
Removal of Directors
 
Our articles of incorporation provide that a director may be removed at any time by the affirmative vote of at least a majority of the votes entitled to be cast by our stockholders generally in the election of our directors. Also, our election in our articles of incorporation to be subject to certain provisions of Maryland law which vest in our board of directors the exclusive right to fill vacancies on our board will prevent stockholders, even if they are successful in removing incumbent directors, from filling the vacancies created by such removal with their own nominees.
 
Limitation of Liability and Indemnification
 
The MGCL permits a Maryland corporation to include in its articles of incorporation a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages. Our articles of incorporation contain a provision which eliminates such liability if the director or officer meets all requirements for indemnification. To the extent that the MGCL conflicts with the provisions set forth in the NASAA Guidelines, the NASAA Guidelines will control, unless the provisions of the MGCL are mandatory under Maryland law.
 
Our articles of incorporation and bylaws obligate us to indemnify any person who is or was a party to, or is threatened to be made a party to, any threatened or pending proceeding by reason of the fact that such


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person is or was a director or officer of our company, or while a director or officer of our company is or was serving, at our request, as a director, officer, partner or trustee of another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise. Our articles of incorporation and bylaws also require us to indemnify our advisor acting as our agent. The indemnification provided for in our articles of incorporation and bylaws shall include expenses (including attorney’s fees), judgments, fines and amounts paid in settlement and any such expenses may be paid or reimbursed by us in advance of the final disposition of any such proceeding.
 
The MGCL requires a corporation (unless its articles of incorporation provides otherwise, which our articles of incorporation do not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he is made a party by reason of his service in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that:
 
  •  the act or omission of the director or officer was material to the matter giving rise to the proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty;
 
  •  the director or officer actually received an improper personal benefit in money, property or services; or
 
  •  in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.
 
However, under the MGCL, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses.
 
In compliance with NASAA Guidelines, our articles of incorporation limit our indemnification of our directors and advisor and their affiliates, and provide that we will provide indemnification only if all of the following conditions have been met:
 
  •  the indemnitee has determined, in good faith, that the course of conduct that caused the loss or liability was in our best interests;
 
  •  the indemnitee was acting on our behalf or performing services for us; and
 
  •  the liability or loss was not the result of negligence or misconduct, if the indemnitee is a director (other than an independent director), the advisor or an affiliate of the advisor or gross negligence or willful misconduct, if the indemnitee is an independent director.
 
In addition, we will not provide indemnification for any loss, liability or expenses arising from or out of an alleged violation of federal or state securities laws unless one or more of the following conditions are met:
 
  •  there has been a successful adjudication on the merits of each count involving alleged material securities law violations as to the indemnitee;
 
  •  the claims have been dismissed with prejudice on the merits; or
 
  •  a court approves a settlement of the claims against the indemnitee and finds that indemnification of the settlement and the related costs should be made, after having been advised of the position of the SEC and the published position of any state securities regulatory authority as to indemnification for violations of securities laws.
 
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of any legal action for which indemnification is being sought, and provide that we will only advance funds if all of the following conditions have been met:
 
  •  the proceeding relates to acts or omissions with respect to the performance of duties or services on behalf of us;
 
  •  the indemnitee provides us with written affirmation of the indemnitee’s good faith belief that the indemnitee has met the standard of conduct necessary for indemnification by us;
 
  •  the legal proceeding was initiated by a third party who is not a stockholder or, if by a stockholder of the company acting in his or her capacity as such, a court of competent jurisdiction approves such advancement; and
 
  •  the indemnitee provides us with a written agreement to repay the amount paid or reimbursed by us, together with the applicable legal rate of interest thereon, if it is ultimately determined that the indemnitee did not comply with the requisite standard of conduct and is not entitled to indemnification.
 
Business Combinations
 
Under the MGCL, certain “business combinations” (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and any “interested stockholder” or any affiliate of an interested stockholder are prohibited for five years after the most recent date on which a person or entity becomes an interested stockholder. An interested stockholder is any person or entity who beneficially owns 10% or more of the voting power of the corporation’s shares, or any affiliate of such a person or entity, or any person or entity that was the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock of the corporation at any time within the two-year period prior to the date in question, or any affiliate of such a person or entity. After the five-year period has elapsed, any such business combination must be recommended by our board of directors and approved by the affirmative vote of at least (1) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and (2) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom (or with whose affiliate) the business combination is to be effected, unless, among other conditions, the corporation’s common stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its shares. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by our board of directors prior to the time that the interested stockholder becomes an interested stockholder.
 
Our board of directors has adopted a resolution which provides that any business combination between us and any other person is exempted from the provisions of the business combination act, provided that the business combination is first approved by our board of directors. This resolution, however, may be altered or repealed in whole or in part at any time. If this resolution is repealed, or our board of directors does not otherwise approve a business combination, the statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
 
Control Share Acquisitions
 
The MGCL provides that “control shares” of a Maryland corporation acquired in a “control share” acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares of stock owned by the acquiror, by officers or by directors who are employees of the corporation. “Control shares” are voting shares of stock which, if aggregated with all other such shares of stock previously acquired by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power:
 
  •  one-tenth or more, but less than one-third;
 
  •  one-third or more, but less than a majority; or


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  •  a majority or more of all voting power.
 
Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A “control share acquisition” means the acquisition of control shares, subject to certain exceptions.
 
A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses), may compel our board of directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the question at any stockholders’ meeting.
 
If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then, subject to certain conditions and limitations, the corporation may redeem any or all of the control shares (except those for which voting rights have previously been approved) for fair value determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of such shares are considered and not approved. If voting rights for control shares are approved at a stockholders’ meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.
 
The control share acquisition statute does not apply:
 
  •  to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction; or
 
  •  to acquisitions approved or exempted by our charter or bylaws.
 
Section 12 of our bylaws exempts from the control share acquisition statute any and all acquisitions by any person of our shares of stock. We cannot assure you that such provision will not be amended or eliminated at any time in the future.
 
Amendment to our Articles of Incorporation
 
Except as provided below, our articles of incorporation may be amended only if approved by our stockholders by the affirmative vote of the holders of not fewer than a majority of all of the votes entitled to be cast on the matter.
 
Dissolution
 
Our dissolution must be approved by our stockholders by the affirmative vote of not fewer than the holders of a majority of all of the votes entitled to be cast on the matter.
 
Meetings of Stockholders; Advance Notice of Director Nominations and New Business
 
Annual Meetings.  We will have annual meetings of stockholders for the purpose of electing directors and conducting other business that properly comes before the meeting. Our bylaws provide that with respect to an annual meeting of stockholders, director nominations and stockholder proposals may be made only:
 
  •  pursuant to our notice of the meeting;
 
  •  at the direction of our board of directors; or
 
  •  by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in our bylaws.
 
For nominations or other proposals to be properly brought before an annual meeting of stockholders by a stockholder, the stockholder must have given timely notice in writing to our corporate secretary and any such proposal must otherwise be a proper matter for stockholder action.


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To be timely, a stockholder’s notice must be delivered to our corporate secretary at our principal executive offices not earlier than the close of business on the 150th calendar day nor later than the close of business on the 120th calendar day prior to the first anniversary of the date of mailing of the notice for the preceding year’s annual meeting; except that in the event that the date of the annual meeting is more than 30 calendar days before or after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 150th calendar day prior to such annual meeting and not later than the close of business on the later of the 120th calendar day prior to such annual meeting or the tenth calendar day following the calendar day on which we first make a public announcement of the date of such meeting.
 
A stockholder’s notice must set forth:
 
  •  as to each person whom the stockholder proposes to nominate for election or reelection as a director, the name, age, business address and residence address of such individual, the class, series and number of any shares of our stock that are beneficially owned by such individual, the date such shares were acquired and the investment intent of such acquisition and all other information relating to such person that is required to be disclosed in solicitation of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A of the Exchange Act, including such person’s written consent to be named as a nominee and serving as a director if elected;
 
  •  as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business to be brought before the meeting, the reasons for proposing such business at the meeting, and any material interest in such business of such stockholder and of any such stockholder’s affiliates and of any person who is the beneficial owner, if any, of such stock; and
 
  •  as to the stockholder giving notice and each beneficial owner, if any, of such stock, the name and address of such stockholder, as they appear on the company’s stock ownership records, and the name and address of each beneficial owner of such stock, and the class and number of shares of stock of the company which are owned of record or beneficially by each such person.
 
Special Meetings.  Special meetings of our stockholders may be called only by our President, the Chief Executive Officer, or a majority of our board of directors, or a majority of our independent directors, unless otherwise required by law. Special meetings of our stockholders shall also be called by our secretary upon the written request of stockholders entitled to cast at least a 10% of all votes entitled to be cast at such meeting. The date, time and place of any special meetings will be set by our board of directors. Our bylaws provide that with respect to special meetings of our stockholders, only the business specified in our notice of meeting may be brought before the meeting, and nominations of persons for election to our board of directors may be made only:
 
  •  pursuant to our notice of the meeting;
 
  •  by or at the direction of our board of directors; or
 
  •  provided that our board of directors has determined that directors shall be elected at such meeting, by a stockholder who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in our bylaws.
 
Liability of Stockholders
 
We are a Maryland corporation. All shares that are acquired by stockholders and for which full consideration is paid therefor shall be fully-paid and non-assessable. As a stockholder in a corporation, generally you are not personally liable on account of any of the contractual obligations undertaken by us.
 
Anti-Takeover Effect of Certain Provisions of Maryland Law, our Bylaws and Board Resolutions
 
If the applicable resolution of our board of directors exempting us from the business combination provisions, and the applicable provisions in our bylaws exempting us from the control share acquisition provisions of the MGCL are rescinded, the business combination provisions and the control share acquisition


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provisions of the MGCL, the provisions of our articles of incorporation on removal of directors and the advance notice provisions of our bylaws and certain other provisions of our articles of incorporation and bylaws and the MGCL could delay, defer or prevent a change in control of us or other transactions that might involve a premium price for holders of our common stock or otherwise be in their best interest.
 
PRINCIPAL STOCKHOLDERS
 
The following table presents information known to us regarding the beneficial ownership of our common stock. In accordance with SEC rules, each listed person’s beneficial ownership includes:
 
  •  all shares the investor actually owns (of record or beneficially);
 
  •  all shares over which the investor has or shares voting or dispositive control (such as in the capacity as a general partner of an investment fund); and
 
  •  all shares the investor has the right to acquire within 60 days (such as upon exercise of options that are currently vested or which are scheduled to vest within 60 days).
 
Except as otherwise noted, information is given as of          , 2010 on an actual basis and as adjusted to reflect the sale of our common stock in this offering. The table presents information regarding:
 
  •  each of our named executive officers;
 
  •  each of our directors;
 
  •  all of our directors and executive officers as a group; and
 
  •  each stockholder known to us to own beneficially more than 5% of our common stock.
 
Except as otherwise noted, the beneficial owners named in the following table have sole voting and investment power with respect to all shares of our common stock shown throughout as beneficially owned by them, subject to community property laws, where applicable.
 
                                 
    Beneficial Ownership
 		    Beneficial Ownership
 		 
    Before Offering     After Offering  
    Number     Percent(1)     Number     Percent(2)  
 
Five Percent or More Stockholders
                               
CM Group, LLC
1291 W. Galleria Drive, Suite 200
Henderson, Nevada 89014
    20,000       100 %     20,000       *  
Directors and Executive Officers(3)
                               
Todd B. Parriott
    0       *       0       *  
G. Steven Dawson
    0       *       0       *  
Stacy M. Riffe
    0       *       0       *  
Anthony D. Cinquini
    0       *       0       *  
Hunt C. Holsomback
    0       *       0       *  
Darin D. Gilson
    0       *       0       *  
Robert J. Simmons
    0       *       0       *  
                                 
All directors and executive officers as a group (7 persons)
    0       0 %     0       0 %
 
 
*  Holdings represent less than 1% of all shares outstanding.
 
(1) Assumes that the listed person does not sell any shares of our common stock prior to the completion of this offering. Calculated using 20,000 shares of our common stock outstanding as of          , 2010.


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(2) Assumes that the listed person does not sell any shares of our common stock prior to the completion of this offering. Calculated using 20,000 shares of our common stock outstanding as of          , 2010, plus the 100,000,000 shares that may be issued by us in this offering.
 
(3) The address of each of our officers and directors is c/o CM REIT, Inc., 1291 W. Galleria Drive, Suite 200, Henderson, Nevada 89014.
 
REPORTS TO STOCKHOLDERS
 
We will furnish each stockholder with our annual report within 120 days following the close of each fiscal year. These annual reports will contain the following:
 
  •  financial statements, including a balance sheet, statement of operations, statement of stockholders’ equity and statement of cash flows, prepared in accordance with GAAP, which are audited and reported on by independent certified public accountants;
 
  •  the ratio of the costs of raising capital during the period to the capital raised;
 
  •  the aggregate amount of advisory fees and the aggregate amount of other fees paid by us to our advisor and any affiliate or related party of our advisor, including fees or charges paid to our advisor and any affiliate or related party of our advisor by third parties doing business with us;
 
  •  our Total Operating Expenses, stated as a percentage of the Average Invested Assets (the average of the aggregate book value of our assets, for a specified period before deducting depreciation, bad debts or other non-cash reserves, computed by taking the average of such values at the end of each month during such period) and as a percentage of our net income;
 
  •  a report from our independent directors that the policies being followed by us are in the best interests of our stockholders and the basis for such determination;
 
  •  separately stated, full disclosure of all material terms, factors and circumstances surrounding any and all transactions involving us and our directors, our advisor and any affiliate occurring during the year for which the annual report is made, and the independent directors will be specifically charged with a duty to examine and comment in the report on the fairness of such transactions; and
 
  •  distributions to our stockholders for the period, identifying the source of such distributions.
 
Within 90 days following the close of each of our fiscal years, each stockholder that is a Plan will be furnished with an annual statement of share valuation to enable it to file annual reports required by ERISA as they relate to its investment in us. For any period during which we are making a public offering of shares, the statement will report an estimated value of each share at the then public offering price per share. If no public offering is ongoing, and until our shares are listed for trading on a stock exchange, the statement will report an estimated value of each share, based on (i) appraisal or valuation updates performed by us based on a review of the existing appraisal, sales comparables or other accepted valuation methodology for each property and lease of each property, focusing on a re-examination of the capitalization rate applied to the rental stream to be derived from that property, and (ii) a review of the outstanding loans and other investments, focusing on a determination of present value by a re-examination of the capitalization rate applied to the stream of payments due under the terms of each loan and other investment. We may elect to deliver such reports to all stockholders. Stockholders will not be forwarded copies of appraisals, sales comparables or other valuation methodologies or updates. In providing such reports to stockholders, neither us nor our affiliates thereby make any warranty, guarantee or representation that (i) we or our stockholders, upon liquidation, will actually realize the estimated value per share or (ii) our stockholders will realize the estimated net asset value if they attempt to sell their shares.
 
Under the Securities Act, we must update this prospectus upon the occurrence of certain events, such as property acquisitions. We will file updated prospectuses and prospectus supplements with the SEC. We are also subject to the informational reporting requirements of the Exchange Act, and accordingly, we will file annual reports, quarterly reports, proxy statements and other information with the SEC. In addition, we will


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provide you directly with periodic updates, including prospectuses, prospectus supplements, quarterly reports and other information.
 
Our federal income tax return (and any applicable state income tax returns) will be prepared by the accountants regularly retained by us. Required tax information will be mailed to our stockholders following the end of our fiscal year. A specific reconciliation between GAAP and income tax information will not be provided to the stockholders; however, such reconciling information will be available for inspection and review by any interested stockholder at our principal office.
 
PLAN OF DISTRIBUTION
 
General
 
We are offering a maximum of 90 million shares at a purchase price of $10.00 per share. In addition, we have registered 10 million shares available to stockholders purchasing shares in this offering who elect to participate in our dividend reinvestment plan and who receive a copy of the final prospectus or a separate prospectus for the dividend reinvestment plan. Prior to the conclusion of this offering, if any of the 10 million shares remain after meeting anticipated obligations under the reinvestment plan, we may decide to sell a portion of those shares in this offering. Any participation in our reinvestment plan by a person who becomes a stockholder otherwise than by participating in this offering will require solicitation under this prospectus or a separate prospectus. See “Summary of Reinvestment Plan.” Our board of directors may determine to engage in future offerings of common stock of up to the number of unissued authorized shares of common stock available following termination of this offering.
 
A minimum investment of 250 shares ($2,500) is required. IRAs, Keogh plans, and pension plans must make a minimum investment of at least 100 shares ($1,000). Any investor who makes the required minimum investment may purchase additional shares in increments of one share.
 
We are publicly offering a minimum of $2,500,000 in shares and a maximum of $900,000,000 in shares of our common stock on a “best efforts” basis through CM Securities, our dealer-manager. Because this is a “best efforts” offering, CM Securities must use only its best efforts to sell the shares in our primary offering and has no firm commitment or obligation to purchase any of our shares. Shares of our common stock sold in the primary offering are being offered at $10.00 per share. All shares offered in the primary offering are subject to discounts available for certain categories of purchasers as described below. We are also offering up to $100,000,000 in shares issuable pursuant to our distribution reinvestment plan. Any shares purchased pursuant to our distribution reinvestment plan will be sold at $9.50 per share. We will consider our offering stage complete when we are no longer publicly offering equity securities in a continuous offering, whether through this offering or follow-on public offerings.
 
We expect to offer the $900,000,000 in shares in our primary offering over a two-year period. If we have not sold all of the primary offering shares within two years, we may continue this offering until          , 2013. Under rules promulgated by the SEC, in some circumstances we could continue our primary offering until as late as          , 2013. If we decide to continue our primary offering beyond two years from the date of this prospectus, we will provide that information in a prospectus supplement. We may continue to offer shares under our distribution reinvestment plan beyond these dates until we have sold $100,000,000 in shares through the reinvestment of distributions. In many states, we will need to renew the registration statement or file a new registration statement to continue the offering beyond one year from the date of this prospectus. We may terminate this offering at any time.
 
Our dealer-manager, CM Securities, is a newly formed company with no operating history. Prior to the effectiveness of this offering, CM Securities will be a securities broker-dealer registered with the SEC and a member firm of FINRA. The principal business of CM Securities will be to sell the securities offered by programs sponsored by CM Group. CM Securities is owned and controlled by CM Group. For additional information about our dealer-manager, including information related to its affiliation with us and our advisor, see “Conflicts of Interest — Relationship with our Dealer-Manager”


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Minimum Offering
 
No shares will be sold and this offering will terminate unless subscriptions for at least $2,500,000 have been obtained within one year after the date of this prospectus. If the minimum offering is sold, we may, in our sole discretion, and without prior notice to the subscribers, elect to extend the offering for up to one additional year thereafter, subject to extension as discussed above. Subscription proceeds will be placed in escrow with UMB Bank, N.A., as escrow agent, until such time as subscriptions representing $2,500,000 in shares have been received and accepted by us. Shares purchased by our executive officers and directors, our dealer-manager and our advisor or its affiliates will not count toward the minimum offering requirements. Different escrow procedures apply for Pennsylvania and Tennessee subscribers. See “— Special Notice to Pennsylvania and Tennessee Investors.” During the period in which we hold subscription payments in escrow, interest earned thereon will be allocated among subscribers on the basis of the respective amounts of their subscriptions and the number of days that such amounts were on deposit. Subscribers may not withdraw funds from the escrow account. Subscription amounts, with any interest earned thereon and without deductions for fees and expenses, will be returned to subscribers in the event that subscriptions aggregating at least $2,500,000 are not received by us within one year after the commencement of this offering. We will bear all the expenses of the escrow, and, as such, the amount to be returned to any subscriber will not be reduced for costs.
 
We have no right to extend the period in which the minimum offering requirements must be met. If we meet the minimum offering requirements within one year after the date of this prospectus, initial subscribers will be admitted as stockholders and the funds held in escrow (including all interest earned on the escrowed funds) will be transferred to us.
 
The proceeds from the sale of our shares of common stock to New York residents are held in trust for the benefit of investors and are used only for the purposes set forth in this prospectus. Before they are applied, funds may be placed in short-term interest bearing investments, including obligations of, or obligations guaranteed by, the U.S. government or bank money market accounts or certificates of deposit of national or state banks that have deposits insured by the Federal Deposit Insurance Corporation which can be readily sold or otherwise disposed of for cash.
 
Compensation of Dealer-Manager and Participating Broker-Dealers
 
Except as provided below, CM Securities will receive selling commissions of 7% of the gross offering proceeds from shares sold in our primary offering. CM Securities will also receive 3% of the gross primary offering proceeds as compensation for acting as the dealer-manager. We will not pay any selling commissions or dealer-manager fees for shares sold under our distribution reinvestment plan.
 
As our dealer-manger, CM Securities provides certain wholesaling, sales, promotional and marketing assistance services to us in connection with the distribution of the shares offered pursuant to this prospectus. No additional fees beyond the dealer-manager fee of 3.0% of the gross proceeds of this offering will be paid to the dealer-manager for these services. Our dealer-manager will sell shares offered pursuant to this prospectus at the retail level. No additional commissions beyond the selling commissions of 7% of the gross offering proceeds from shares sold in this offering will be paid to the dealer-manager for its retail sales of our shares.


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We also expect our dealer-manager to authorize other broker-dealers that are members of FINRA, which we refer to as participating broker-dealers, to sell our shares at the retail level. In the event of the sale of shares by such participating broker-dealers, our dealer- manager will reallow its selling commissions in the amount of 7.0% of the gross offering proceeds to such participating broker-dealers with respect to the shares they sell. Our dealer-manager will not reallow any selling commissions to participating broker-dealers in connection with retail sales made by the dealer-manager. In connection with the sale of shares, certain registered representatives associated with our dealer-manager may perform functions related to obtaining and maintaining a network of participating broker-dealers to sell our shares for which they will receive compensation. This wholesaling compensation will be paid by our dealer-manager out of its own resources (including selling commissions and dealer-manager fees received by it in connection with the sale of our common stock).
 
In addition, our dealer-manager, in its sole discretion pursuant to separately negotiated agreements, may reallow to participating broker-dealers a portion of its dealer-manager fee as a marketing fee. The marketing fee may be paid to any particular participating broker-dealer based on factors including, but not limited to, the number of shares sold by the participating broker-dealer, the amount of marketing assistance and the level of marketing support provided by a participating broker-dealer and due diligence expenses incurred, and the extent to which similar fees are reallowed to participating broker-dealers in similar offerings being conducted during the offering period. Our dealer-manager may also reimburse such participating broker-dealers out of a portion of its dealer-manager fee for distribution and marketing-related costs and expenses associated with the offering and the facilitation of the marketing of our shares. These costs and expenses may include fees and costs associated with attending or sponsoring conferences, investor and broker-dealer sales and training meetings, broker-dealer bona fide training and educational meetings and technology costs associated with the offering. Any such meetings will be conducted by us, our dealer-manager and/or participating broker-dealers in accordance with rules promulgated by FINRA.
 
Our dealer-manager may also provide out of its dealer-manager fee, non-cash incentives for registered representatives of our dealer-manager and participating broker-dealers that in no event will exceed the limits set forth in FINRA Rule 2310(c)(2). Pursuant to this rule, non-cash incentives may include: a de minimis amount of gifts (currently $100 per person, per year), an occasional meal or ticket to a sporting or entertainment event and payment or reimbursement of costs of attending bona fide training and education meetings. We expect that such non-cash incentives will consist primarily of meals consumed after or in connection with retail conferences or other meetings between registered representatives of participating broker-dealers and registered persons associated with CM Securities. These incentives will not be preconditioned on achieving sales targets. In connection with the retail conferences and other meetings related to wholesaling services, the non-cash incentives may consist of the payment or reimbursement of costs incurred by registered representatives of our dealer-manager in connection with attending retail conferences or other meetings related to wholesaling services, including travel, meals and lodging costs, as well as costs for an occasional meal purchased by the registered representatives of our dealer-manager, which is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target. In the event other incentives are provided to registered representatives of our dealer-manager or participating broker-dealers, those incentives will be paid in cash and made only through our dealer-manager or the participating broker-dealers rather than to the registered representatives. Costs incurred in connection with such sales incentives, if any, will be considered underwriting compensation in connection with this offering.
 
The table below sets forth the nature and estimated amount of all items viewed as “underwriting compensation” by FINRA, assuming we sell all of the shares offered hereby. To show the maximum amount of dealer-manager and participating broker-dealer compensation that we may pay in this offering, this table assumes that all shares are sold through distribution channels associated with the highest possible selling commissions and dealer-manager fees.


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Dealer-Manager and
Participating Broker-Dealer Compensation
 
         
Selling commissions (maximum)
  $ 63,000,000  
Dealer manager fee (maximum)
  $ 27,000,000  
         
Total
  $ 90,000,000  
         
 
Subject to the cap on organization and offering expenses described below, we will also reimburse the dealer-manager for actual, bona fide, itemized and detailed due diligence expenses incurred by it or participating broker-dealers in connection with their due diligence review of our company. Reimbursement is contingent upon receipt by our dealer-manager of a detailed invoice or similar itemized statement from the participating broker-dealer that demonstrates the actual due diligence expenses incurred. We estimate this expense reimbursement will be a maximum of approximately $1,300,000.
 
Under the rules of FINRA applicable to this offering, total underwriting compensation in this offering, including selling commissions, the dealer-manager fee, wholesaling compensation, expenses relating to sales services, due diligence expenses, and any non-cash incentives (excluding reimbursement for accountable bona fide invoiced due diligence expenses), may not exceed 10% of our gross proceeds from our primary offering. In addition to the limits on underwriting compensation, FINRA and many states also limit our total organization and offering expenses to 15% of gross offering proceeds. After the termination of the primary offering and again after termination of the offering under our distribution reinvestment plan, our advisor has agreed to reimburse us to the extent the organization and offering expenses (including selling commissions and the dealer-manager fee) incurred by us exceed 15% of our gross proceeds from the applicable offering. However, we expect our total organization and offering expenses (other than selling commissions and the dealer-manager fee) to be approximately 1.5% of our gross offering proceeds, assuming we raise the maximum offering amount.
 
To the extent permitted by law and our charter, we will indemnify the participating broker-dealers and the dealer-manager against some civil liabilities, including certain liabilities under the Securities Act and liabilities arising from breaches of our representations and warranties contained in the dealer-manager agreement.
 
We may also sell shares at a discount to the primary offering price through the following distribution channels in the event that the investor:
 
  •  pays a broker a single fee, e.g., a percentage of assets under management, for investment advisory and broker services, which is frequently referred to as a “wrap fee;”
 
  •  has engaged the services of a registered investment adviser with whom the investor has agreed to pay compensation for investment advisory services or other financial or investment advice (other than a registered investment adviser that is also registered as a broker-dealer who does not have a fixed or “wrap fee” feature or other asset fee arrangement with the investor); or
 
  •  is investing through a bank acting as trustee or fiduciary.
 
If an investor purchases shares through one of these channels in our primary offering, we will sell the shares at a 7% discount, or at $9.30 per share, reflecting that selling commissions will not be paid in connection with such purchases. We will receive substantially the same net proceeds for sales of shares through these channels. Neither the dealer-manager nor its affiliates will compensate any person engaged as a financial advisor by a potential investor as an inducement for such financial advisor to advise favorably for an investment in us.
 
If an investor purchases shares in the offering net of commissions through a registered investment adviser with whom the investor has agreed to pay compensation for investment advisory services or other financial or investment advice and if in connection with such purchase the investor must also pay a broker-dealer for custodial or other services relating to holding the shares in the investor’s account, we will reduce the aggregate purchase price of the investor’s shares by the amount of the annual custodial or other fees paid to the broker-dealer in an amount up to $250. Each investor will receive only one reduction in purchase price for such fees


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and this reduction in the purchase price of our shares is only available for the investor’s initial investment in our common stock. The investor must include the “Request for Broker Dealer Custodial Fee Reimbursement Form” with his or her subscription agreement to have the purchase price of the investor’s initial investment in shares reduced by the amount of his or her annual custodial fee and the investor must include support for the amount of his or her annual custodial fee with the subscription agreement.
 
Shares Purchased by Affiliates and Participating Broker-Dealers
 
In addition, each of the following may purchase shares in our primary offering at a discount as the purchase price for such shares shall be $9.00 per share reflecting the fact that selling commissions in the amount of $0.70 per share and dealer manager fees in the amount of $0.30 per share will not be payable in connection with such sales:
 
  •  registered principals or representatives of our dealer-manager or a participating broker-dealer (and immediate family members of any of the foregoing persons); and
 
  •  our employees, officers and directors or those of our advisor, or the affiliates of any of the foregoing entities (and the immediate family members of any of the foregoing persons or entities), any Plan established exclusively for the benefit of such persons or entities, and, if approved by our board of directors, joint venture partners, consultants and other service providers.
 
For purposes of the foregoing, “immediate family members” means such person’s spouse, parents, children, brothers, sisters, grandparents, grandchildren and any such person who is so related by marriage such that this includes “step-” and “-in-law” relations as well as such persons so related by adoption. In addition, participating broker-dealers contractually obligated to their clients for the payment of fees on terms inconsistent with the terms of acceptance of all or a portion of the selling commissions and dealer-manager fees may elect not to accept all or a portion of such compensation. In that event, such shares shall be sold to the investor at a per share purchase price, net of all or a portion of the selling commissions and dealer-manager fees. All sales must be made through a registered broker-dealer participating in this offering, and investment advisers must arrange for the placement of sales accordingly. The net proceeds to us from such sales made net of commissions and dealer-manager fees will be substantially the same as the net proceeds we receive from other sales of shares. Our advisor and its affiliates are expected to hold their shares purchased as stockholders for investment and not with a view towards distribution.
 
All investors in this offering will be deemed to have contributed the same amount per share to us whether or not the investor receives a discount. Accordingly, for purposes of distributions, investors who purchase shares net of commissions will receive higher returns on their investment in us as compared to investors who do not purchase shares net of commissions.
 
Subscription Procedures
 
Procedures Applicable to All Subscriptions
 
In order to purchase shares, the subscriber must complete and execute the subscription agreement in the form attached to this prospectus as Appendix C. Any subscription for shares must be accompanied by a check payable to CM REIT, Inc., except that until the minimum offering is achieved, checks shall be made payable to “UMB Bank, N.A., as escrow agent for CM REIT, Inc.” Further, until we have raised the minimum offering amount and broken escrow, completed subscription agreements and payments should be sent by your broker-dealer or registered investment advisor, as applicable, to the escrow agent, UMB Bank, N.A., at the address set forth in the subscription agreement. Once we have raised $2,500,000 and broken escrow, you should make your check payable to “CM REIT, Inc.,” except that Pennsylvania and Tennessee investors should follow the instructions below under “— Special Notice to Pennsylvania and Tennessee Investors.” If the participating broker-dealer’s internal supervisory procedures must be conducted at the same location at which subscription documents and checks are received from subscribers, during the escrow period, the participating broker-dealer will transmit such subscription documents and checks to our escrow agent no later than noon of the next


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business day following its receipt thereof, and thereafter to us or such other account or agent as we may direct. If the participating broker maintains a branch office, and, pursuant to a participating broker’s internal supervisory procedures, final internal supervisory review is conducted at a different location, the branch office will transmit the subscription documents and check to the office of the participating broker conducting such internal supervisory review by noon of the next business day following the receipt of the subscription documents by the branch office. Additionally, in these cases, the participating broker-dealer will review the subscription documents and subscriber’s check to ensure their proper execution and form and, if they are acceptable, transmit the subscription documents and check to our escrow agent or to us or such other account or agent as we may direct, as applicable, by noon on the next business day after the subscription documents and check are received by such other office of the participating broker-dealer. Subscriptions will be effective only upon their acceptance by us, and we reserve the right to reject any subscription in whole or in part. After we have raised the minimum offering amount, subscription payments will be deposited into a special account in our name until such time as we have accepted or rejected the subscriptions. If accepted, funds will be transferred into our general account.
 
Each subscription will be accepted or rejected by us within seven days after its receipt, and no sale of shares shall be completed until at least five business days after the date on which the subscriber receives a final copy of this prospectus. If a subscription is rejected, the funds will be returned to the subscriber within ten business days after the date of such rejection, without interest and without deduction. The subscription price of each share is payable in full upon execution of the subscription agreement. A subscriber whose subscription is accepted will be sent a confirmation of his or her purchase. If any check is not paid upon presentment, or if we are not in actual receipt of clearing house funds or cash, certified or cashier’s check, or the equivalent in payment for the shares within 15 days of sale, we reserve the right to cancel the sale without notice.
 
Our sponsor, the dealer-manager and each participating broker-dealer who sells shares on behalf of us have the responsibility to make every reasonable effort to determine that the purchase of shares is appropriate for an investor and that the requisite suitability standards are met. See “Suitability Standards and How to Subscribe — Suitability Standards.” In making this determination, our sponsor, the dealer-manager or the participating broker-dealers will rely on relevant information provided by the investor, including information as to the investor’s age, investment objectives, investment experience, income, net worth, financial situation, other investments, and any other pertinent information. Each investor should be aware that determining suitability is the responsibility of the participating broker-dealer.
 
Our sponsor, the dealer-manager and each participating broker-dealer shall maintain records of the information used to determine that an investment in the shares is suitable and appropriate for an investor for at least six years.
 
Subscribers will generally be admitted as stockholders on the day of acceptance of their subscriptions.
 
Procedures Applicable to Non-Telephonic Orders
 
Each participating broker-dealer receiving a subscriber’s check (where, pursuant to such participating broker-dealer’s internal supervisory procedures, internal supervisory review must be conducted at the same location at which subscription documents and checks are received from subscribers), will deliver such checks to the transfer agent no later than the end of the next business day following receipt by the participating broker-dealer except that, in any case in which pursuant to a participating broker-dealer’s internal supervisory procedures, final internal supervisory review is conducted at a different location, checks will be transmitted by the end of the next business day following receipt by the participating broker-dealer to the office of the participating broker-dealer conducting such final internal supervisory review. The final review office will in turn by the end of the next business day following its receipt transmit such checks for deposit to the transfer agent, if the subscription documents and subscriber’s check are properly executed and in proper form.


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Procedures Applicable To Telephonic Orders
 
Certain participating broker-dealers may permit investors to subscribe for shares by telephonic order to the participating broker-dealer. There are no additional fees associated with telephonic orders. Subscribers who wish to subscribe for shares by telephonic order to the participating broker-dealer may complete the telephonic order either by delivering a check in the amount necessary to purchase the shares to be covered by the subscription agreement to the participating broker-dealer or by authorizing the participating broker-dealer to pay the purchase price for the shares to be covered by the subscription agreement from funds available in an account maintained by the participating broker-dealer on behalf of the subscriber. A subscriber must specifically authorize the registered representative and branch manager to execute the subscription agreement on behalf of the subscriber and must already have made or have agreed to make payment for the shares covered by the subscription agreement.
 
To the extent that customers of any participating broker-dealer wish to subscribe and pay for shares with funds held by or to be deposited with those firms, then such firms shall, subject to Rule 15c2-4(a) promulgated under the Exchange Act, either (1) upon receipt of an executed subscription agreement or direction to execute a subscription agreement on behalf of a customer, forward the offering price for the shares covered by the subscription agreement on or no later than the end of the next business day following receipt or execution of a subscription agreement by such firms to the transfer agent (except that, in any case in which pursuant to a participating broker-dealer’s internal supervisory procedures, final internal supervisory review is conducted at a different location, checks will be transmitted by the end of the next business day following receipt by the participating broker-dealer to the office of the participating broker-dealer conducting such final internal supervisory review; the final review office will in turn by the end of the next business day following its receipt transmit such checks for deposit to the transfer agent, if the subscription documents and subscriber’s checks are properly executed and in proper form); or (2) solicit indications of interest in which event (a) such participating broker-dealers must subsequently contact the customer indicating interest to confirm the interest and give instructions to execute and return a subscription agreement or to receive authorization to execute the subscription agreement on the customer’s behalf; (b) such participating broker-dealers must mail acknowledgments of receipt of orders to each customer confirming interest on the business day following such confirmation; (c) such participating broker-dealers must debit accounts of such customers on the fifth business day (the “debit date”) following receipt of the confirmation referred to in (a); and (d) such participating broker-dealers must forward funds to the transfer agent in accordance with the procedures and on the schedule set forth in clause (1) of this sentence. If the procedure in clause (2) is adopted, subscribers’ funds are not required to be in their accounts until the debit date.
 
Investors, however, who are residents of Alabama, Arizona, California, Florida, Iowa, Kansas, Maine, Michigan, Mississippi, Missouri, Nebraska, New Mexico, North Carolina, Oregon, South Dakota, Texas or Washington must complete and sign the subscription agreement in order to subscribe for shares and, therefore, may not subscribe for shares by telephone. Representatives of participating broker-dealers who accept telephonic orders will execute the subscription agreement on behalf of investors who place such orders. All investors who telephonically subscribe for shares will receive, with confirmation of their subscription, a second copy of the final prospectus.
 
Residents of Oklahoma who telephonically subscribe for shares will have the right to rescind such subscriptions within 10 days from receipt of the confirmation. Such investors who do not rescind their subscriptions within such ten-day period shall be deemed to have assented to all of the terms and conditions of the subscription agreement.
 
Additional Subscription Procedures
 
Investors who have questions or who wish to place orders for shares by telephone or to participate in the reinvestment plan should contact their participating broker-dealer. Certain participating broker-dealers do not permit telephonic subscriptions or participation in the reinvestment plan. The form of subscription agreement for certain participating broker-dealers who do not permit telephonic subscriptions or participation in the reinvestment plan differs slightly from the form attached hereto as Appendix B, primarily in that it will


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eliminate one or both of these options. Alabama, Nebraska, Ohio and Tennessee residents are not eligible to participate in the Automatic Investment Program.
 
Escrow Arrangements
 
The escrow agreement between us and the escrow agent, UMB Bank, N.A. provides that escrowed funds will be invested by the bank in bank accounts, including interest-bearing savings accounts and bank money market accounts, in short-term certificates of deposit issued by a bank, or in short-term securities directly or indirectly issued or guaranteed by the United States government. After the minimum offering has been sold, such subscription funds will be released to us upon our direction and following our delivery to the escrow agent of an affidavit stating that the minimum offering has been timely raised. The interest, if any, earned on subscription proceeds will be payable to subscribers only if the minimum number of shares are not sold in the offering and the offering is terminated. Otherwise, any interest earned will become property of the company.
 
Special Notice to Pennsylvania and Tennessee Investors
 
In addition to the foregoing, pursuant to the requirements of the Commissioner of Securities of the State of Pennsylvania, we will place and hold all Pennsylvania investor subscriptions in escrow until we have received total subscriptions of at least $50,000,000, or for a period of 120 days, whichever is shorter. If we have not received total subscriptions of at least $50,000,000 by the end of the escrow period, we must:
 
  •  Return the Pennsylvania investors’ funds within 15 calendar days of the end of the escrow period, or
 
  •  Notify the Pennsylvania investors in writing by certified mail or any other means whereby receipt of delivery is obtained within 10 calendar days after the end of the escrow period, that the Pennsylvania investors have a right to have their investment returned to them. If such an investor requests the return of such funds within 10 calendar days after receipt of notification, we must return such funds within 15 calendar days after receipt of the investor’s request.
 
No interest is payable to an investor who requests a return of funds at the end of the initial 120-day escrow period. Any Pennsylvania investor who requests a return of funds at the end of any subsequent 120-day escrow period will be entitled to receive interest earned, if any, for the time that the investor’s funds remain in escrow commencing with the first day after the initial 120-day escrow period.
 
In addition to the foregoing, pursuant to the requirements of the Securities Division of the State of Tennessee, we will place and hold all Tennessee investor subscriptions in escrow until we have received total subscriptions of at least $10,000,000. If we have not received total subscriptions of at least $10,000,000 by the end of the escrow period, we will promptly return all funds held in escrow for the benefit of Tennessee investors. Purchases by persons affiliated with us or our advisor will not count toward the Tennessee minimum.
 
Determination of the Offering Price
 
The offering price per share was determined by us in our sole discretion based upon the price which we believe investors would pay for the shares, the fees to be paid to our advisor and its affiliates, as well as estimated fees to third parties, the expenses of this offering and the funds we believed should be available to invest in mortgage loans and other permitted investments. There is no public market for the shares on which to base market value. In addition, we did not take into account the value of the underlying assets in determining the price per share.
 
LEGAL MATTERS
 
The validity of the shares of our common stock to be sold in this offering and the description of U.S. federal income tax consequences will be passed upon for us by Locke Lord Bissell & Liddell LLP, Dallas, Texas.
 
 
The balance sheets as of December 31, 2009 and 2008 included in this prospectus have been so included in reliance upon the report of Hancock Askew & Co., LLP, independent registered public accounting firm, upon the authority of such firm as experts in accounting and auditing in giving such report.


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SUPPLEMENTAL SALES MATERIALS
 
In addition to this prospectus, we may utilize certain sales material in connection with the offering of the shares, although only when accompanied by or preceded by the delivery of this prospectus. In certain jurisdictions, some or all of such sales material may not be available. This material may include information relating to this offering, property brochures and articles and publications concerning real estate. In addition, the sales material may contain certain quotes from various publications without obtaining the consent of the author or the publication for use of the quoted material in the sales material.
 
The offering of shares is made only by means of this prospectus. Although the information contained in such sales material will not conflict with any of the information contained in this prospectus, such material does not purport to be complete, and should not be considered a part of this prospectus or the registration statement of which this prospectus is a part, or as incorporated by reference in this prospectus or said registration statement or as forming the basis of the offering of the shares.
 
WHERE YOU CAN FIND MORE INFORMATION ABOUT CM REIT, INC.
 
We have filed a registration statement on Form S-11, including exhibits and schedules filed with the registration statement of which this prospectus is a part, with the SEC under the Securities Act with respect to the shares of our common stock to be sold in this offering. This prospectus does not contain all of the information set forth in the registration statement and exhibits and schedules to the registration statement. For further information with respect to our company and the shares to be sold in this offering, reference is made to the registration statement, including the exhibits and schedules to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document referred to in this prospectus are not necessarily complete and, where that contract is an exhibit to the registration statement, each statement is qualified in all respects by reference to the exhibit to which the reference relates. Our SEC filings, including our registration statement, are available to you for free on the SEC’s website at www.sec.gov. Copies of the registration statement, including the exhibits and schedules to the registration statement, also may be examined without charge at the public reference room of the SEC, 100 F Street, N.E., Room 1580, Washington, DC 20549. Information about the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0300. Copies of all or a portion of the registration statement can be obtained from the public reference room of the SEC upon payment of prescribed fees.
 
As a result of this offering, we will become subject to the information and reporting requirements of the Exchange Act, and will file periodic reports, proxy statements and will make available to our stockholders annual reports containing audited financial information for each year and quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information. We will send a copy of any of these filings, our articles of incorporation and bylaws without charge to any stockholder who submits a written request to CM REIT, Inc., 1291 W. Galleria Drive, Suite 200, Henderson, Nevada 89014, Attn: Corporate Secretary.
 
We also maintain a website at www.cmreit.com, where there may be additional information about our business, but the contents of that site are not incorporated by reference in or otherwise a part of this prospectus.
 
DEFINITIONS
 
“Acquisition Expenses” means any and all expenses incurred by us, our advisor or any affiliate in connection with the selection, evaluation, acquisition, origination or development of any of our assets, whether or not acquired or originated, as applicable, including, without limitation, legal fees and expenses, travel and communications expenses, costs of appraisals, nonrefundable option payments on properties or other investments not acquired, accounting fees and expenses, title insurance premiums and the costs of performing due diligence.
 
“Acquisition Fee” means the total of all fees and commissions paid by any party to any party in connection with making or investing in mortgage loans or the purchase, development or construction of property by us. Included in the computation of such fees or commissions shall be any real estate commission, selection fee,


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development fee, construction fee, nonrecurring management fee, loan fees or points or any fee of a similar nature, however designated. Excluded shall be development fees and construction fees paid to persons not affiliated with our Sponsor in connection with the actual development and construction of a project.
 
“Advisor” means CM Group, LLC, a limited liability company organized under the laws of the State of Delaware, or any successor advisor to the Company, or any person responsible for directing or performing the day-to-day business affairs of the Company, including a person to which an advisor subcontracts substantially all such functions.
 
“Affiliate” means (1) any person or entity directly or indirectly through one or more intermediaries controlling, controlled by, or under common control with another person or entity; (2) any person or entity directly or indirectly owning, controlling, or holding with power to vote 10% or more of the outstanding voting securities of another person or entity; (3) any officer, director, partner, or trustee of such person or entity; (4) any person 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled or held, with power to vote, by such other person; and (5) if such other person or entity is an officer, director, partner, or trustee of a person or entity, the person or entity for which such person or entity acts in any such capacity.
 
“Average Invested Assets” are for any period, the average of the aggregate book value of our assets invested, directly or indirectly, before deducting reserves for depreciation or bad debts or other similar non-cash reserves computed by taking the average of such values at the end of each month during any given period.
 
“Competitive Real Estate Commission” means a real estate or brokerage commission paid for the purchase or sale of a property which is reasonable, customary and competitive in light of the size, type and location of such property.
 
“Independent directors” means our directors who are not associated and have not been associated within the last two years, directly or indirectly, with our Sponsor or our advisor. A director shall be deemed to be associated with our Sponsor or advisor if he or she:
 
  •  owns an interest in the Sponsor, advisor, or any of their affiliates; or
 
  •  is employed by the Sponsor, advisor or any of their affiliates; or
 
  •  is an officer or director of the Sponsor, advisor or any of their affiliates; or
 
  •  performs services, other than as a director, for us; or
 
  •  is a director for more than three REITs organized by our Sponsor or advised by our advisor; or
 
  •  has any material business or professional relationship with the Sponsor, advisor, or any of their affiliates.
 
For the purposes of determining whether or not the business or professional relationship is material, the gross revenue derived by the prospective independent director from our Sponsor and advisor and affiliates shall be deemed material per se if it exceeds 5% of the prospective independent director’s:
 
  •  annual gross revenue, derived from all sources, during either of the last two years; or
 
  •  net worth, on a fair market value basis.
 
An indirect relationship shall include circumstances in which a director’s spouse, parents, children, siblings, mothers- or fathers-in-law, sons- or daughters-in-law, or brothers- or sisters-in-law is or has been associated with our Sponsor, advisor, any of their affiliates, or us.
 
“Independent expert” means a person with no material current or prior business or personal relationship with the advisor or affiliates who is engaged to a substantial extent in the business of rendering opinions regarding the value of assets of the type held by us.
 
“Leverage” means our aggregate amount of indebtedness for money borrowed (including purchase money mortgage loans) outstanding at any time, both secured and unsecured.


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“Net assets” means total assets (other than intangibles) at cost before deducting depreciation or other non-cash reserves less total liabilities, calculated at least quarterly on a basis consistently applied.
 
“Net income” means our taxable income, including net capital gains and net capital losses, and before deducting the incentive compensation fee, any net operating loss deductions arising from losses in prior periods and any items the Internal Revenue Code permits to be deducted when calculating taxable income for a REIT. For the purpose of calculating the limit on our Total Operating Expenses, Net Income shall exclude the gain from the sale of our assets.
 
“Operating expenses” includes all costs and expenses incurred by us, except those borne by the advisor, including, but not necessarily limited to, (1) issuance and transaction costs associated with the acquisition, disposition and financing of investments; (2) legal, independent accounting and auditing fees and expenses; (3) the compensation and expenses of our independent directors; (4) the costs of printing and mailing proxies and reports to stockholders; (5) costs incurred by employees of our advisor for travel on behalf of us; (6) costs associated with any computer software or hardware that is used solely for us; (7) costs to obtain liability insurance to indemnify our directors and officers, our advisor and its employees and directors; (8) the compensation and expenses of our custodian and transfer agent; (9) all bona fide expenses incurred in connection with due diligence; (10) the accumulation of mortgage loans; (11) the raising of capital and incurrence of debt; (12) the acquisition of assets; (13) interest expenses; (14) taxes and license fees; (15) non-cash costs; (16) litigation; (17) the first-tier and second-tier management fee; and (18) extraordinary or non-recurring expenses.
 
“Ownership Limit” means, with respect to shares of common stock and preferred stock, the percent limitation placed on the ownership of common stock and preferred stock by any one Person (as defined in our Articles of Incorporation). As of the initial date of this Prospectus, the Ownership Limit is 9.8% of the outstanding common and preferred stock.
 
“Plan” means ERISA plans, IRAs, or certain other plans.
 
“Preferred stock” means any class or series of preferred stock that may be issued in accordance with the terms of our articles of incorporation and applicable law.
 
“Qualified Plans” means qualified pension, profit-sharing, and stock bonus plans, including Keogh plans and IRAs.
 
“Roll-Up” means a transaction involving the acquisition, merger, conversion or consolidation either directly or indirectly of the company and the issuance of securities of a Roll-Up Entity. Such term does not include:
 
  •  a transaction involving securities of the company that have been for at least 12 months listed on a national securities exchange or traded through the National Association of Securities Dealers Automated Quotation National Market System; or
 
  •  a transaction involving the conversion to corporate trust or association form of only the company if, as a consequence of the transaction there will be no significant adverse change in any of the following:
 
  •  shareholders’ voting rights;
 
  •  the term of existence of the company;
 
  •  sponsor or advisor compensation; and
 
  •  the company’s investment objectives.
 
“Roll-Up Entity” means a partnership, REIT, corporation, trust, or other entity that would be created or would survive after the successful completion of a proposed Roll-Up transaction.
 
“Shareholders” means the registered holders of our common stock.
 
“Sponsor” means any person directly or indirectly instrumental in organizing, wholly or in part, us or any person who will control, manage or participate in the management of us, and any affiliate of such person. Not included is any person whose only relationship with us is as that of an independent property manager of


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our assets, and whose only compensation is as such. Sponsor does not include wholly independent third parties such as attorneys, accountants and underwriters whose only compensation is for professional services. A person may also be deemed our Sponsor by:
 
  •  taking the initiative, directly or indirectly, in founding or organizing our business or enterprise; either alone or in conjunction with one or more other persons;
 
  •  receiving a material participation in us in connection with the founding or organizing of our business, in consideration of services or property, or both services and property;
 
  •  having a substantial number of relationships and contacts with us;
 
  •  possessing significant rights to control our properties;
 
  •  receiving fees for providing services to us which are paid on a basis that is not customary in the industry; or
 
  •  providing goods or services to us on a basis which was not negotiated at arms length with us.
 
The sponsor of the Company is CM Group, LLC.
 
“Total Operating Expenses” means aggregate expenses of every character paid or incurred by the company as determined under generally accepted accounting principles, including advisors’ fees, but excluding:
 
  •  the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses, and tax incurred in connection with the issuance, distribution, transfer, registration and stock exchange listing of the company’s shares;
 
  •  interest payments;
 
  •  taxes;
 
  •  non-cash expenditures such as depreciation, amortization and bad debt reserves;
 
  •  incentive fees paid in compliance with North American Securities Administrators Association, Inc. Guidelines; and
 
  •  acquisition fees, acquisition expenses, real estate commissions on resale of property and other expenses connected with the acquisition, disposition and ownership of real estate interests, mortgage loans, or other property (such as the costs of foreclosure, insurance premiums, legal services, maintenance repair and improvement of property).


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The following financial statements and schedules are filed as part of this report:
 
         
Annual
       
    F-2  
    F-3  
    F-4-F-8  
Quarterly
       
Balance Sheet
    F-9  
Note to Balance Sheet
    F-10  


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Board of Directors
CM REIT, Inc.
Henderson, Nevada
 
We have audited the accompanying balance sheets of CM REIT, Inc. (the Company) as of December 31, 2009 and 2008. These balance sheets are the responsibility of the management of CM REIT, Inc. Our responsibility is to express an opinion on the balance sheets based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheets are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheets, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audits provide a reasonable basis for our opinions.
 
In our opinion, the balance sheets referred to above presents fairly, in all material respects, the financial position of CM REIT, Inc. as of December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.
 
Respectfully submitted,
 
/s/ Hancock Askew & Co., LLP
 
Savannah, Georgia
April 20, 2010


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CM REIT, INC.
 
 
                 
    December 31,
 		    December 31,
 		 
    2009     2008  
ASSETS
Cash and cash equivalents
  $ 200,000     $ 200,000  
                 
Total assets
  $ 200,000     $ 200,000  
                 
LIABILITIES AND STOCKHOLDER’S EQUITY
Total Liabilities:
  $ —     $ —  
Commitments and contingencies
               
Stockholder’s equity:
               
Preferred stock, $0.01 par value; 15,000,000 shares authorized and issuable
    —       —  
Common stock, $0.01 par value; 100,000,000 shares authorized; 20,000 shares issued and outstanding
    200       200  
Additional paid-in capital
    199,800       199,800  
                 
Total stockholder’s equity
    200,000       200,000  
                 
Total liabilities and stockholder’s equity
  $ 200,000     $ 200,000  
                 
 
The accompanying notes are an integral part of these balance sheets.


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CM REIT, INC.
 
 
Note 1.  Organization
 
CM REIT, Inc. (the Company) was formed on November 20, 2008 as a Maryland corporation and intends to qualify as a real estate investment trust (REIT) commencing with our tax year ending December 31, 2010. We sold 20,000 shares of our common stock to CM Group, LLC (formerly known as Sandstone Equity Investors, LLC) on December 18, 2008, the capitalization date. Our fiscal year end is December 31.
 
We are newly incorporated, have not commenced operations and do not own any investments. We were organized to finance real estate projects. We intend to create a diversified portfolio of real estate property mortgage loans to developers, homebuilders, and homebuyers with financing needs that are not met by traditional mortgage lenders. The portfolio will be concentrated in the Western United States, where we believe we possess requisite skills and market knowledge. The majority of the portfolio will include short-term mortgage loans consisting of acquisition, development, construction and commercial mortgage loans to both local and national developers and homebuilders. We also expect to invest a portion of the portfolio in non-agency residential mortgage loans to provide niche financing to borrowers that otherwise have limited financing sources. We may also invest in real estate-related debt securities and equity securities of other real estate related companies.
 
We intend to offer to the public, pursuant to a registration statement to be filed with the Securities and Exchange Commission (SEC), up to $900,000,000 of our common stock in our primary offering and up to $100,000,000 of our common stock pursuant to our distribution reinvestment plan (the Offering). Prior to the time we sell at least 250,000 or $2,500,000 of our shares, subscription payments will be placed in an account held by our escrow agent. If we are not able to sell at least 250,000 shares within one year from the effective date of the registration statement, we will terminate the offering and funds in the escrow account will be returned to the investors with interest.
 
We expect that our investment portfolio will primarily consist of acquisition, development, construction and commercial mortgage loans and non-agency residential mortgage loans. We may also acquire real estate-related debt securities, such as commercial mortgage-backed securities and collateralized debt obligations related to real estate, and equity securities of other real estate-related companies. We will derive our revenues primarily from interest payments received from mortgage investments funded with our equity capital and borrowed funds, if any. Our principal investment objective is to pay attractive and consistent distributions to our stockholders, preserve, protect and enhance our assets and ultimately provide our stockholders with liquidity of their investment. Our focus will emphasize payment of current returns to investors and the preservation of invested capital, with a lesser emphasis on seeking capital appreciation from our investments. The growth of our business will depend on our access to external sources of capital. Our profitability will depend on being able to obtain financing at a reasonable cost while still generating an attractive risk-adjusted return on the mortgage loans we acquire using the proceeds of our financings. The growth of our business will also depend on our ability to locate suitable investments to keep our capital fully deployed at favorable rates.
 
We are externally managed and advised by CM Group, LLC (CM Group or Advisor), a related party. CM Group will oversee all aspects of our operations. We will have no employees.
 
Note 2.   Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accounts are maintained and the financial statements have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.


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CM REIT, INC.
 
NOTES TO BALANCE SHEETS — (Continued)
 
Note 2.   Summary of Significant Accounting Policies (Continued)
 
Use of Estimates
 
The preparation of the balance sheets in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the balance sheets and accompanying notes. Actual results could differ from those estimates.
 
Cash and Cash Equivalents
 
We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash equivalents may include cash and short-term investments. There are no restrictions on the use of our cash balances.
 
Organizational and Offering Costs
 
Organizational and offering costs have been incurred by the Advisor on our behalf. In accordance with our offering agreements, such costs are not a liability of the Company until the Company has raised in excess of the minimum $2.5 million in capital. Under the terms of the agreement to be executed with the Advisor, upon the sale of shares of common stock to the public, we will be obligated to reimburse the Advisor for organizational and offering costs subject to limitations as outlined in the agreement. The amount of the reimbursement to the Advisor for cumulative organizational and offering costs (other than selling commissions and the dealer-manager fees) is limited to a maximum amount of 5.0% of the aggregate gross proceeds from the sale of the minimum number of shares of common stock, and 1.5% of gross proceeds raised thereafter. Such costs shall include accounting, printing and other offering expenses, including marketing, a portion of certain salaries and other direct expenses of the Advisor’s employees. Any such reimbursement will not exceed actual expenses incurred by the Advisor. Organizational costs will be recorded as an expense when we have an obligation to reimburse the Advisor. Offering costs related to raising capital from equity will be offset as a reduction of capital raised in stockholder’s equity. Through December 31, 2009, our advisor has incurred actual costs of approximately $584,000 on our behalf.
 
We have entered into an agreement with our legal counsel whereby their fee for legal services provided in connection with our organization and initial public offering will be $1.8 million. Such amount shall be billed and become payable upon the effectiveness of our registration statement with the Securities and Exchange Commission and raising the minimum $2.5 million in capital. These costs will be offset as a reduction of capital raised in stockholder’s equity when the above conditions are satisfied.
 
Income Taxes
 
We intend to elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), beginning with the taxable year ending December 31, 2010. In order to maintain our qualification as a REIT, we are required to, among other things, distribute at least 90% of our REIT taxable income to our stockholders and meet certain tests regarding the nature of our income and assets. As a REIT, we will not be subject to federal income tax with respect to the portion of our income that meets certain criteria and is distributed annually to stockholders. We intend to operate in a manner that allows us to meet the requirements for taxation as a REIT. Many of these requirements, however, are highly technical and complex. If we were to fail to meet these requirements, we could be subject to federal income tax on our taxable income at regular corporate rates. We would not be able to deduct distributions paid to stockholders in any year in which we fail to qualify as a REIT. We will also be disqualified for the four taxable years following the year during which qualification was lost unless we are entitled to relief under specific statutory provisions.


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CM REIT, INC.
 
NOTES TO BALANCE SHEETS — (Continued)
 
Note 2.   Summary of Significant Accounting Policies (Continued)
 

Income Taxes (Continued)
 
Concentration of Credit Risk
 
At December 31, 2009 and December 31, 2008, we had cash on deposit in the amount of $200,000. At times during and after the proposed capital raising transaction, our cash balance may exceed insured limits.
 
Note 3.   Capitalization
 
Under our Articles of Incorporation, we have the authority to issue 115,000,000 shares, consisting of 100,000,000 shares of common stock and 15,000,000 shares of preferred stock. All shares of such stock have a par value of $0.01 per share. On December 18, 2008 (capitalization), CM Group purchased 20,000 shares of our common stock for total cash consideration of $200,000 to provide the Company’s initial capitalization. Our board of directors is authorized to amend our charter, without the approval of the stockholders, to alter the aggregate number of authorized shares of capital stock or the number of shares of any class or series that we have authority to issue.
 
Distribution Reinvestment Plan
 
Effective with the pending offering, we plan to adopt a distribution reinvestment plan (DRIP) that will allow stockholders to have cash otherwise distributable invested in additional shares of our common stock at a price equal to $9.50 per share while such offering is ongoing. If no public offering of shares is ongoing, the price will be equal to the net asset value of the shares determined by our board of directors in its sole discretion, based on quarterly appraisal updates of the Company’s assets until such time, if any, as listing of the Company’s common stock on a national securities exchange or trading of such shares in the over-the-counter market occurs.
 
Share Redemption Plan
 
Effective with the pending offering, we plan to adopt a redemption plan whereby a stockholder who has held common stock for more than one year may, with appropriate notice to the reinvestment agent, present all or any portion of his or her common stock to us for redemption. All redemptions under the redemption plan are at our option and subject to available funding; therefore, we are under no obligation to make any redemptions at any time. For purposes of funding the redemption plan, at our option, all proceeds from our DRIP for the applicable calendar quarter may be used by the reinvestment agent on our behalf to redeem shares of our common stock pursuant to the terms of the redemption plan. However, at no time during any consecutive 12-month period would the number of shares redeemed by us under the redemption plan exceed 5% of the weighted average number of outstanding shares of our common stock during such 12-month period.
 
If the Company elects to redeem any shares of its common stock under the redemption plan, the Company may redeem shares of its common stock that are presented for redemption at the following prices: (i) the lesser of (a) the estimated value of a share of common stock, as determined by the Company’s board of directors or (b) 90.0% of the purchase price paid per share of common stock for stockholders who have owned those shares for at least one year; and (ii) the lesser of (a) the estimated value of a share of common stock, as determined by the Company’s board of directors or (b) 95.0% of the purchase price paid per share of common stock for stockholders who have owned those shares for at least two years.
 
Notwithstanding the foregoing, during periods in which the Company is engaged in a public offering of its common stock, the redemption price will be (i) 90% of the purchase price paid per share of common stock for stockholders who have owned those shares for at least one year, or (ii) 95% of the purchase price per share of common stock for stockholders who have owned those shares for at least two years and in any event will be less than the then current offering price paid for the shares in the offering. During periods in which the Company is not engaged in a public offering, the estimated value of a share of common stock for purposes of


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CM REIT, INC.
 
NOTES TO BALANCE SHEETS — (Continued)
 
Note 3.   Capitalization (Continued)
 

Share Redemption Plan (Continued)
 
redemption will be the net asset value per share as determined by the Company’s board of directors as of the end of the most recent fiscal quarter.
 
In the event of the death or permanent disability of a stockholder, if the Company determines to permit any redemption of such stockholder’s shares, the price at which the shares may be redeemed shall be the lesser of (a) the estimated value of a share of common stock, as determined by the Company’s board of directors or (b)(i) 90% of the purchase price paid per share of common stock for stockholders who have owned those shares for less than one year, or (ii) 95% of the purchase price per share of common stock for stockholders who have owned those shares of common stock for at least one year. Notwithstanding the foregoing, during any period in which the Company is engaged in a public offering, the redemption price in the event of a stockholder’s death or disability will be (i) 90% of the purchase price paid per share of common stock for stockholders who have owned those shares for less than one year, or (ii) 95% of the purchase price paid per share of common stock for stockholders who have owned those shares of common stock for at least one year. Our board of directors may, in its discretion, amend or suspend the repurchase plan if it determines that to do so is in our best interest.
 
Note 4.   Related Party Arrangements
 
The Advisor and certain affiliates of the Advisor will receive fees and compensation in connection with the Company’s public offering and the management of the Company’s investments.
 
Advisory Agreement
 
We will pay our Advisor a management fee for the services it provides pursuant to the advisory agreement with the Company that entitles it to first-tier management compensation, second-tier management compensation, and reimbursement of expenses. The annual first-tier management compensation is 1% of the first $200 million of gross average invested assets plus 0.8% of the gross average invested assets in excess of $200 million, to be paid monthly. The second-tier management compensation is a tiered percentage of the amount of our net income (taxable income) excluding provision for loan loss and capital losses, before deducting second-tier compensation less a threshold return, which is the net income that would produce an annualized return on our average invested assets equal to the 10-year U.S. Treasury rate plus 1.0%. The tiered percentage is the weighted average of 20% of the first $200 million of average invested assets and 10% of the excess over $200 million of average invested assets. The second-tier management compensation is calculated monthly and any positive monthly amount is paid by us, along with the first-tier management compensation, within 15 days of receipt of the computations.
 
Advisory Agreement
 
The Company will reimburse the Advisor for all expenses paid or incurred by the Advisor in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse the Advisor for any amount by which its operating expenses (including the asset management fee) for each fiscal year exceeds the greater of: (A) 2% of its average invested assets; or (B) 25% of its net income determined without reduction for any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of the Company’s assets for that period. Notwithstanding the above, the Company may reimburse the Advisor for expenses in excess of this limitation if a majority of the independent directors determines that such excess expenses are justified.


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CM REIT, INC.
 
NOTES TO BALANCE SHEETS — (Continued)
 
Note 4.   Related Party Arrangements (Continued)
 

Advisory Agreement (Continued)
 
Dealer-Manager Agreement
 
CM Securities, a related party, is the dealer-manager of our offering of common stock and directs and oversees the sale of our equity securities. The dealer-manager agreements provide that the dealer-manager receive a fee of 3% of aggregate gross proceeds and sales commissions of 7% of aggregate gross proceeds based on the number of shares of common stock it sells. The dealer-manager contracts with third party broker-dealers to increase sales of equity securities and compensates them out of the sales commissions and marketing support fees it receives from us. Because our Advisor, CM Group, owns the dealer-manager, it is our affiliate.
 
Loan Origination Agreements
 
We will enter into a loan origination agreement with CM Capital Services, LLC, which is a related party through common officers or ownership by certain of our officers. We are not obligated to pay any fees or expenses to this related party under the loan origination agreement.
 
Note 5.   Commitments and Contingencies
 
In the ordinary course of business, we may become subject to litigation or claims. We are not subject to any material litigation nor, to our knowledge, is any material litigation threatened against the Company.
 
Note 6.   Economic Dependency
 
We will be dependent on the Advisor for certain services that are essential to the Company, including the sale of our common stock, asset acquisition and disposition decisions and other general and administrative responsibilities. In the event that the Advisor is unable to provide such services, we would be required to find alternative service providers.
 
Note 7.   Subsequent Events
 
We evaluated subsequent events through April 20, 2010, the date the financial statements were available to be issued. Events or transactions occurring after December 31, 2009 but prior to April 20, 2010, that provided additional evidence about conditions that existed at December 31, 2009, have been recognized in the financial statements for the period ended December 31, 2009.


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CM REIT, INC.
 
BALANCE SHEETS
 
                 
    June 30,
 		    December 31,
 		 
    2010     2009  
    (Unaudited)        
ASSETS
Cash and cash equivalents
  $ 200,000     $ 200,000  
                 
Total assets
  $ 200,000     $ 200,000  
                 
LIABILITIES AND STOCKHOLDER’S EQUITY
Total Liabilities:
  $ —     $ —  
Commitments and contingencies
               
Stockholder’s equity:
               
Preferred stock, $0.01 par value; 15,000,000 shares authorized and issuable
    —       —  
Common stock, $0.01 par value; 100,000,000 shares authorized; 20,000 shares issued and outstanding
    200       200  
Additional paid-in capital
    199,800       199,800  
                 
Total stockholder’s equity
    200,000       200,000  
                 
Total liabilities and stockholder’s equity
  $ 200,000     $ 200,000  
                 
 
The accompanying notes are an integral part of these balance sheets.


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CM REIT, INC.
 
NOTE TO BALANCE SHEET (UNAUDITED)
 
Note 1.  Summary of Significant Accounting Policies
 
 Basis of Presentation
 
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and rules of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the financial statements and the related management’s discussion and analysis of financial condition filed on Form S-11/A, filed on April 22, 2010, for the fiscal year ended December 31, 2009. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The consolidated balance sheet at December 31, 2009 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
 
 Organizational and Offering Costs
 
Organizational and offering costs have been incurred by the Advisor on our behalf. In accordance with our offering agreements, such costs are not a liability of the Company until the Company has raised in excess of the minimum $2.5 million in capital. Under the terms of the agreement to be executed with the Advisor, upon the sale of shares of common stock to the public, we will be obligated to reimburse the Advisor for organizational and offering costs subject to limitations as outlined in the agreement. The amount of the reimbursement to the Advisor for cumulative organizational and offering costs (other than selling commissions and the dealer-manager fees) is limited to a maximum amount of 5.0% of the aggregate gross proceeds from the sale of the minimum number of shares of common stock, and 1.5% of gross proceeds raised thereafter. Such costs shall include accounting, printing and other offering expenses, including marketing, a portion of certain salaries and other direct expenses of the Advisor’s employees. Any such reimbursement will not exceed actual expenses incurred by the Advisor. Organizational costs will be recorded as an expense when we have an obligation to reimburse the Advisor. Offering costs related to raising capital from equity will be offset as a reduction of capital raised in stockholder’s equity. From inception through June 30, 2010, our Advisor has incurred actual costs of approximately $636,000 on our behalf.


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REINVESTMENT PLAN
 
CM REIT, Inc., a Maryland corporation (the “Company”), adopted a Reinvestment Plan (the “Reinvestment Plan”) on the terms and conditions set forth below.
 
1. Reinvestment of Distributions.  DST Systems, Inc., the agent (the “Reinvestment Agent”), for participants (the “Participants”) in the Reinvestment Plan, will receive all cash distributions made by the Company with respect to shares of common stock of the Company (the “Shares”) owned by each Participant, which are subject to the Reinvestment Plan including all Shares acquired by the Reinvestment Agent through the application of such distributions pursuant to the terms of the Reinvestment Plan (collectively, the “Distributions”). The Reinvestment Agent will apply such Distributions as follows:
 
(a) Prior to the termination of the Company’s initial public offering (the “Initial Offering”) of the Shares reserved for issuance under the Reinvestment Plan pursuant to the Company’s registration statement on Form S-11 (File No. 333-      ), the Reinvestment Agent will invest Distributions in Shares acquired from the managing dealer or participating brokers for the Initial Offering at $9.50 per Share.
 
(b) After the Initial Offering, the Reinvestment Agent will purchase Shares from any additional shares which the Company elects to register with the Securities and Exchange Commission (the “SEC”) for the Reinvestment Plan, at a per Share price equal to the net asset value of the Shares determined by the Company’s board of directors in its sole discretion, based on quarterly appraisal or other valuation updates of the Company’s assets until such time, if any, as listing of the Company’s common stock on a national securities exchange or trading of such shares in the over-the-counter market occurs. Upon Listing, the current reinvestment agent may purchase Shares either through such market or directly from the Company pursuant to a registration statement relating to the Reinvestment Plan, in either case at a per Share price equal to the then-prevailing market price on the national securities exchange or over-the-counter market on which the Shares are listed at the date of purchase by the current reinvestment agent. In the event that, after Listing occurs, the current reinvestment agent purchases Shares on a national securities exchange or over-the-counter market through a registered broker-dealer, the amount to be reinvested shall be reduced by any brokerage commissions charged by such registered broker-dealer. In the event that such registered broker-dealer charges reduced brokerage commissions, additional funds in the amount of any such reduction shall be left available for the purchase of Shares.
 
(c) For each Participant, the Reinvestment Agent will maintain a record which shall reflect for each month the Distributions received by the Reinvestment Agent on behalf of such Participant. The Reinvestment Agent will use the aggregate amount of Distributions to all participants for each month to purchase Shares for the participants. If the aggregate amount of Distributions to participants exceeds the amount required to purchase all Shares then available for purchase, the Reinvestment Agent will purchase all available Shares and will return all remaining Distributions to the participants within 30 days after the date such purchase is made. The purchased Shares will be allocated among the participants based on the portion of the aggregate Distributions received by the Reinvestment Agent on behalf of each Participant, as reflected in the records maintained by the Reinvestment Agent. The ownership of the Shares purchased pursuant to the Reinvestment Plan shall be reflected on the books of the Company.
 
(d) Distributions shall be invested by the Reinvestment Agent in Shares promptly following the payment date to the extent Shares are available.
 
(e) The allocation of Shares among participants may result in the ownership of fractional Shares, computed to four decimal places.
 
(f) Distributions attributable to Shares purchased on behalf of the participants pursuant to the Reinvestment Plan will be reinvested in additional Shares in accordance with the terms hereof.
 
(g) No certificates will be issued to a Participant for Shares purchased on behalf of the Participant pursuant to the Reinvestment Plan except to participants who make a written request to the Reinvestment


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Agent, which request will be forwarded to the Company. A written confirmation of share investment may be requested from the Reinvestment Agent at any time. Participants in the Reinvestment Plan will receive statements of account in accordance with Section 7 hereof.
 
2. Election to Participate.  Any stockholder who participates in a public offering of Shares and who has received a copy of the related final prospectus included in the Company’s registration statement filed with the SEC may elect to participate in and purchase Shares through the Reinvestment Plan at any time by written notice to the Company and would not need to receive a separate prospectus relating solely to the Reinvestment Plan. A person who becomes a stockholder otherwise than by participating in a public offering of Shares may purchase Shares through the Reinvestment Plan only after receipt of a separate prospectus relating solely to the Reinvestment Plan. Participation in the Reinvestment Plan will commence with the next distribution made after such Participant’s notice was received, provided it is received at least ten days prior to the record date for such distribution. Subject to the preceding sentence, regardless of the date of such election, a stockholder will become a Participant in the Reinvestment Plan effective on the first day of the month following such election, and the election will apply to all Distributions attributable to the month in which the stockholder’s election becomes effective and to all fiscal quarters thereafter. A Participant who has terminated his participation in the Reinvestment Plan pursuant to Section 11 hereof will be allowed to participate in the Reinvestment Plan again upon receipt of a current version of a final prospectus relating to participation in the Reinvestment Plan which contains, at a minimum, the following: (i) the minimum investment amount; (ii) the type or source of proceeds which may be invested; and (iii) the tax consequences of the reinvestment to the Participant, by notifying the Reinvestment Agent and completing any required forms.
 
3. Distribution of Funds.  In making purchases for participants’ accounts, the Reinvestment Agent may commingle Distributions attributable to Shares owned by participants in the Reinvestment Plan.
 
4. Proxy Solicitation.  The Reinvestment Agent will distribute to participants proxy solicitation material received by it from the Company which is attributable to Shares held in the Reinvestment Plan. The Reinvestment Agent will vote any Shares that it holds for the account of a Participant in accordance with the Participant’s written instructions. If a Participant gives a proxy to person(s) representing the Company covering Shares registered in the Participant’s name, such proxy will be deemed to be an instruction to the Reinvestment Agent to vote the full Shares in the Participant’s account in like manner. If a Participant does not direct the Reinvestment Agent as to how the Shares should be voted and does not give a proxy to person(s) representing the Company covering these Shares, the Reinvestment Agent will not vote said Shares.
 
5. Absence of Liability.  None of the Company, the advisor or the Reinvestment Agent shall have any responsibility or liability as to the value of the Shares, any change in the value of the Shares acquired for the Participant’s account, or the rate of return earned on, or the value of, the interest-bearing accounts, in which Distributions are invested. None of the Company, the advisor, or the Reinvestment Agent shall be liable for any act done in good faith, or for any good faith omission to act, including, without limitation, any claims of liability (a) arising out of the failure to terminate a Participant’s participation in the Reinvestment Plan upon such Participant’s death prior to receipt of notice in writing of such death and the expiration of 15 days from the date of receipt of such notice and (b) with respect to the time and the prices at which Shares are purchased for a Participant. NOTWITHSTANDING THE FOREGOING, LIABILITY UNDER THE FEDERAL SECURITIES LAWS CANNOT BE WAIVED. Similarly, the Company, the advisor and the Reinvestment Agent have been advised that in the opinion of certain state securities commissioners, indemnification is also considered contrary to public policy and therefore unenforceable.
 
6. Suitability.
 
(a) Within 60 days prior to the end of each fiscal year, CM Securities, LLC (“CM Securities”) will mail to each Participant a participation agreement (the “Participation Agreement”), in which the Participant will be required to represent that there has been no material change in the Participant’s financial condition and confirm that the representations made by the Participant in the Subscription Agreement (a form of which shall be attached to the Participation Agreement) are true and correct as of the date of the Participation Agreement, except as noted in the Participation Agreement or the attached form of Subscription Agreement.


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(b) Each Participant will be required to return the executed Participation Agreement to CM Securities within 30 days after receipt. In the event that a Participant fails to respond to CM Securities or return the completed Participation Agreement on or before the fifteenth (15th) day after the beginning of the fiscal year following receipt of the Participation Agreement, the Participant’s Distributions for the first month of that year will be sent directly to the Participant and no Shares will be purchased on behalf of the Participant for that month and, subject to (c) below, any month thereafter, until CM Securities receives an executed Participation Agreement from the Participant.
 
(c) If a Participant fails to return the executed Participation Agreement to CM Securities prior to the end of the second month for any year of the Participant’s participation in the Reinvestment Plan, the Participant’s participation in the Reinvestment Plan shall be terminated in accordance with Section 11 hereof.
 
(d) Each Participant shall notify CM Securities in the event that, at any time there is any material inaccuracy of any during his participation in the Reinvestment Plan, change in the participant’s financial condition or representation under the Subscription Agreement.
 
(e) For purposes of this Section 6, a material change shall include any anticipated or actual decrease in net worth or annual gross income or any other change in circumstances that would cause the Participant to fail to meet the suitability standards set forth in the Company’s prospectus.
 
7. Reports to participants.  Within 60 days after the end of each fiscal quarter, the Reinvestment Agent will mail to each Participant a statement of account describing, as to such Participant, the Distributions received during the quarter, the number of Shares purchased during the quarter, the per Share purchase price for such Shares, the total administrative charge to such Participant, if any, and the total Shares purchased on behalf of the Participant pursuant to the Reinvestment Plan. Each statement shall also advise the Participant that, in accordance with Section 6(d) hereof, he is required to notify CM Securities in the event that there is any material change in his financial condition or if any representation under the Subscription Agreement becomes inaccurate. Tax information for income earned on Shares under the Reinvestment Plan will be sent to each participant by the Company or the Reinvestment Agent at least annually.
 
8. Administrative Charges, Commissions, and Plan Expenses.  The Company shall be responsible for all administrative charges and expenses charged by the Reinvestment Agent. Any interest earned on Distributions will be paid to the Company to defray costs relating to the Reinvestment Plan. Additionally, in connection with any Shares purchased from the Company both prior to and after the termination of a public offering of the Shares, the Company will not pay to any selling commissions or other fees and expenses.
 
9. No Drawing.  No Participant shall have any right to draw checks or drafts against his account or give instructions to the Company or the Reinvestment Agent except as expressly provided herein.
 
10. Taxes.  Taxable participants may incur a tax liability for Distributions made with respect to such Participant’s Shares, even though they have elected not to receive their Distributions in cash but rather to have their Distributions held in their account under the Reinvestment Plan.
 
11. Termination.
 
(a) A Participant may terminate his participation in the Reinvestment Plan at any time by written notice to the Company. Effective for any Distribution, such notice must be received by Company at least ten business days prior to the last day of the month or quarter to which such Distribution relates.
 
(b) The Company or the Reinvestment Agent may terminate a participant’s individual participation in the Reinvestment Plan, and the Company may terminate the Reinvestment Plan itself at any time by ten days’ prior written notice mailed to a Participant, or to all participants, as the case may be, at the address or addresses shown on their account or such more recent address as a Participant may furnish to the Company in writing.
 
(c) After termination of the Reinvestment Plan or termination of a Participant’s participation in the Reinvestment Plan, the Reinvestment Agent will send to each Participant (i) a statement of account in accordance with Section 7 hereof, and (ii) a check for the amount of any Distributions in the Participant’s


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account that have not been reinvested in Shares. The record books of the Company will be revised to reflect the ownership of record of the Participant’s full Shares and the value of any fractional Shares standing to the credit of a Participant’s account based on the market price of the Shares. Any future Distributions made after the effective date of the termination will be sent directly to the former Participant.
 
12. Notice.  Any notice or other communication required or permitted to be given by any provision of this Reinvestment Plan shall be in writing and addressed if to the Company, to Investor Relations Department, CM Securities, 1291 W. Galleria Drive, Suite 200, Henderson, Nevada 89014, or if to the Reinvestment Agent, to DST Systems, Inc., 430 West 7th Street, Kansas City, Missouri 64105, or such other addresses as may be specified by written notice to all participants. Notices to a Participant may be given by letter addressed to the Participant at the Participant’s last address of record with the Company. Each Participant shall notify the Company promptly in writing of any change of address.
 
13. Amendment.  The terms and conditions of this Reinvestment Plan may be amended or supplemented by an agreement between the Reinvestment Agent and the Company at any time, including, without limitation, an amendment to the Reinvestment Plan to substitute a new Reinvestment Agent to act as agent for the participants or to increase the administrative charge payable to the Reinvestment Agent, by mailing an appropriate notice at least 30 days prior to the effective date thereof to each Participant at his last address of record; provided, that any such amendment must be approved by a majority of the independent directors of the Company and further provided that no such amendment shall remove the right of a Participant to terminate his participation in the Reinvestment Plan. Such amendment or supplement shall be deemed conclusively accepted by each Participant except those participants from whom the Company receives written notice of termination prior to the effective date thereof.
 
14. Governing Law.  THIS REINVESTMENT PLAN AND A PARTICIPANT’S ELECTION TO PARTICIPATE IN THE REINVESTMENT PLAN SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MARYLAND APPLICABLE TO CONTRACTS TO BE MADE AND PERFORMED ENTIRELY IN SAID STATE; PROVIDED, HOWEVER, THAT CAUSES OF ACTION FOR VIOLATIONS OF FEDERAL OR STATE SECURITIES LAWS SHALL NOT BE GOVERNED BY THIS SECTION 14.


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SHARE REDEMPTION PLAN
 
CM REIT I, Inc., a Maryland corporation (the “Company”), adopted a Share Redemption Plan (the “Redemption Plan”) on the terms and conditions set forth below.
 
1. Redemption of Shares.  DST Systems, Inc., the agent (the “Reinvestment Agent”), for each stockholder participant in the Redemption Plan, will redeem shares of common stock of the Company (the “Shares”) owned by each stockholder, in accordance with the terms of this Redemption Plan upon instruction received by the Company. All recordkeeping and other administrative functions required to be performed in connection with the Redemption Plan will be performed by the Reinvestment Agent. All redemptions of Shares are at the Company’s option, and the Company is under no obligation to redeem any Shares.
 
2. Holding Period.  Except in the case of Exigent Circumstances (herein after defined), in order to be eligible to present Shares for redemption, the stockholder must have acquired the Shares at least one year prior to presentment for repurchase. For purposes of calculating the ownership periods set forth herein, if a stockholder purchased shares for economic value from a prior stockholder (a “Resale”), the purchasing stockholder’s period of ownership for such shares shall commence on the date the purchasing stockholder purchased the shares from the prior stockholder, which shall be deemed to be the date the shares are re-registered in the name of the purchasing stockholder by the Reinvestment Agent. For a transfer of ownership that is not considered a Resale, the stockholder’s period of ownership for such shares shall commence on the date of the acquisition of shares by the original stockholder.
 
With respect to redemption requests made in connection with shares acquired at multiple points in time, the pricing associated with the shares held for the longest period of time shall be applied first, until such time as all shares purchased at such point in time have been redeemed. At such time, pricing associated with the remaining shares then held for the next applicable longest period of time shall be applied, and so on.
 
3. Number of Shares.  A stockholder may present all or any portion of his Shares for redemption.
 
4. Amount of Shares to be Redeemed.
 
(a) If the Company elects to redeem Shares, the conditions and limitations described herein would apply. The full amount of the proceeds from the sale of Shares under the reinvestment plan (the “DRIP”) attributable to any calendar quarter may be used to redeem Shares presented for redemption during such quarter.
 
(b) At no time during any consecutive 12-month period will the number of shares redeemed by the Company under the Repurchase Plan exceed 5% of the weighted average number of outstanding shares of the Company’s common stock during such 12-month period.
 
(c) Notwithstanding anything to the contrary in this Redemption Plan, no Shares shall be redeemed under the Redemption Plan on any date upon which the Company pays any dividend or other distribution with respect to the Shares.
 
(d) If the funds made available for redemptions in any quarter exceed the amount needed to redeem the common stock for which redemption requests have been submitted, the Company may, in its sole discretion, carry over any excess amount to the next succeeding calendar quarter for use in addition to the amount of funds available for redemptions during that calendar quarter unless the Company elects to use such amount for other corporate purposes.
 
(e) If the funds available for redemptions in any quarter are insufficient to redeem all of the common stock for which redemption requests have been submitted, to the extent the Company redeems any Shares at the end of a quarter, the Company will redeem the Shares on a first come, first served basis at the end of each quarter; provided, however, with respect to Shares being redeemed due to Exigent Circumstances, the Company, in its sole discretion, may waive the first come, first served requirements for the redemption of such Shares and redeem such Shares in full, to the extent funds are available, before any other Shares are redeemed the Company is redeeming shares and at the end of each quarter. A stockholder whose entire request is not honored, due to


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insufficient available funds in that quarter or otherwise, will be notified and can withdraw the redemption request or ask that the request to redeem the Shares be honored at such time, if any, as the Company is redeeming shares and there are sufficient available funds. In that case, the redemption request will be retained and those Shares will be redeemed, again on a first come, first served basis, at the end of the next quarter to the extent the Company elects to redeem Shares and there are sufficient funds available. Alternatively, a stockholder whose Shares are not redeemed may withdraw his or her redemption request.
 
(f) The Company has the right to waive the holding periods and redemption prices and the pro rata redemption requirements described herein, in the event of the death or permanent disability of a stockholder (individually and collectively, “Exigent Circumstances”). If the Company determines to permit any such redemption, notwithstanding anything contained in this Redemption Plan to the contrary, the price at which the Shares may be redeemed shall be the lesser of (a) the estimated value of a Share, as determined by the Company’s board of directors or (b)(i) 90% of the purchase price paid per Share for stockholders who have owned those Shares for less than one year, or (ii) 95% of the purchase price per share for stockholders who have owned those Shares for at least one year. Notwithstanding the foregoing, during any period in which the Company is engaged in a public offering, in the event the Company determines to permit any redemption, the redemption price in the event of Exigent Circumstances will be (i) 90% of the purchase price paid per Share for stockholders who have owned those Shares for less than one year, or (ii) 95% of the purchase price paid per Share for stockholders who have owned those Shares for at least one year. In addition, the Company, in its sole discretion, may redeem such Shares prior to the redemption of any other Shares. Except for the holding periods, redemption prices and redemption timing, any Shares redeemed pursuant to the exercise of this authority will be otherwise subject to the procedures and limitations set forth in this Redemption Plan. There is no assurance that there will be sufficient funds available for redemption or that the Company will exercise its discretion to redeem such Shares and, accordingly, a stockholder’s Shares may not be redeemed.
 
(g) The Company’s board of directors, in its sole discretion, may suspend implementation of, terminate or amend our share redemption program at any time it determines that such suspension, termination or amendment is in our best interest. Our board may also reduce the number of shares purchased under the share redemption program if it determines the funds otherwise available to fund our share redemption program are needed for other purposes. These limitations apply to all redemptions, including redemptions sought upon Exigent Circumstances.
 
5. Redemption Price.
 
(a) Subject to restrictions and limitations discussed herein, if the Company elects to redeem any Shares, the Company may redeem Shares (including fractional Shares), from time to time, at the following prices:
 
(i) the lesser of (a) the estimated value of a Share, as determined by the Company’s board of directors or (b) 90.0% of the purchase price paid per Share for stockholders who have owned those Shares for at least one year; and
 
(ii) the lesser of (a) the estimated value of a Share, as determined by the Company’s board of directors or (b) 95.0% of the purchase price paid per share for stockholders who have owned those Shares for at least two years.
 
(b) Notwithstanding the foregoing, during periods in which the Company is engaged in an offering, the redemption price will be (i) 90% of the purchase price paid per Share for stockholders who have owned those Shares for at least one year, or (ii) 95% of the purchase price per Share for stockholders who have owned those Shares for at least two years and in any event will be less than the then current offering price paid for the Shares in the offering. During periods in which the Company is not engaged in an offering, the estimated value of a Share for purposes of redemption will be the net asset value per Share as of the end of the most recent fiscal quarter.
 
(c) Upon the Reinvestment Agent’s receipt of notice for redemption of Shares, the redemption price will be based on such terms as the Company shall determine. As set forth in this Section 5, the redemption price for Shares of the Company’s common stock will be based on the length of time such Shares have been held


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and the price for which such Shares were issued, which amount will never exceed the then-current offering price of the Company’s common stock.
 
(d) Any adjustment of the redemption price and the time period of its effectiveness will be announced through the filing of a Form 8-K or other appropriate filing with the Securities and Exchange Commission (the “SEC”) describing the new terms and the provision of a written notice of the new terms circulated with the next dividend distribution.
 
6. Procedures.
 
(a) A stockholder who wishes to have his or her Shares redeemed must mail or deliver a written request to the Reinvestment Agent on a redemption form provided by the Company, executed by the stockholder, its trustee or authorized agent. The redemption form can be obtained by a stockholder by calling the Reinvestment Agent, the Company, the stockholder’s financial advisor or by accessing the Company’s website. The Reinvestment Agent at all times will be registered or exempt from registration as a broker-dealer with the Securities and Exchange Commission and each state securities commission. Within five Business Days (as defined below) following the Reinvestment Agent’s receipt of the stockholder’s written request that is not a redemption form, the Reinvestment Agent will forward to such stockholder the redemption form necessary to effect the redemption. The Reinvestment Agent will effect such redemption for the calendar quarter, provided that it receives the properly completed redemption form relating to the Shares to be redeemed from the stockholder at least 15 business days prior to the last day of the current calendar quarter and has sufficient funds available to redeem the Shares. The effective date of any redemption will be the last date during a quarter during which the Reinvestment Agent receives the properly completed redemption form; provided, however, no redemption shall be effective on any date upon which the Company pays any dividend or other distribution with respect to the Shares and, if necessary, the effective date of any such redemption shall be delayed to the next business day on which no such dividend or other distribution is paid to comply with this proviso. As a result, the Company anticipates that, assuming sufficient funds are available, redemptions will be paid no later than 30 days after the monthly determination of the availability of funds for redemption. “Business day” means any day except Saturday, Sunday, or any day commercial banks are closed in Kansas City, Missouri pursuant to federal or state law.
 
(b) The Company will engage a third-party to conduct a Uniform Commercial Code (the “UCC”) search to ensure that no liens or encumbrances are held against the Shares presented for redemption. The Company will deduct $100 from the proceeds of the redemption to cover the costs of this search. Shares that are not subject to liens or encumbrances will be eligible for redemption following the completion of the UCC search. The Company will not redeem shares that are subject to liens or other encumbrances until the stockholder presents evidence that such liens or encumbrances have been removed.
 
(c) The Participant will surrender his stock certificate, if any, to the Reinvestment Agent upon the repurchase.
 
7. Nature of Redeemed Shares.  Shares that are redeemed in accordance with this Redemption Plan will be retired and will not be available for reissuance.
 
8. Absence of Liability.  None of the Company, the Company’s advisor, or the Reinvestment Agent shall be liable for any act done in good faith, or for any good faith omission to act, including, without limitation, any claims of liability with respect to the time and the prices at which Shares are redeemed. NOTWITHSTANDING THE FOREGOING, LIABILITY UNDER THE FEDERAL SECURITIES LAWS CANNOT BE WAIVED. Similarly, the Company, the Company’s advisor and the Reinvestment Agent have been advised that in the opinion of certain state securities commissioners, indemnification is also considered contrary to public policy and therefore unenforceable.
 
9. Administrative Charges, Commissions, and Plan Expenses.  The Company shall be responsible for all administrative charges and expenses charged by the Reinvestment Agent.
 
10. Termination.  The Company may terminate the Redemption Plan at any time upon at least 15 days advance notice by making public disclosure of such termination via a Form 8-K or other appropriate filing with the SEC. The Redemption Plan will be automatically terminated, without any further action being taken,


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upon the listing of the Shares on a national exchange or over-the-counter market listing of the Company’s Shares. The Company will terminate the Redemption Plan if a secondary market for the Company’s Shares develops.
 
11. Notice.  Any notice or other communication required or permitted to be given by any provision of this Redemption Plan shall be in writing and, if to the Company, addressed to Investor Relations Department, CM Securities, or, if to the Reinvestment Agent, to DST Systems, Inc., 430 West 7th Street, Kansas City, Missouri 64105, or such other addresses as may be specified by written notice to all participants. Notices to a Participant may be given by letter addressed to the Participant at the Participant’s last address of record with the Company. Each Participant shall notify the Company promptly in writing of any change of address.
 
12. Amendment.  The terms and conditions of this Redemption Plan may be amended or suspended by the Company’s board of directors at any time if it determines that to do so is in the Company’s best interest. Such amendment shall be deemed conclusively accepted by each stockholder. If the board of directors amends or suspends the Redemption Plan, the Company will provide stockholders with at least 15 days advance notice of such amendment or suspension by disclosing such change on a filing with the SEC, such as a Form 8-K.
 
13. Governing Law.  THIS REDEMPTION PLAN SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MARYLAND APPLICABLE TO CONTRACTS TO BE MADE AND PERFORMED ENTIRELY IN SAID STATE; PROVIDED, HOWEVER, THAT CAUSES OF ACTION FOR VIOLATIONS OF FEDERAL OR STATE SECURITIES LAWS SHALL NOT BE GOVERNED BY THIS SECTION 13.


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PRIOR PERFORMANCE TABLES
 
The following prior performance tables provide information relating to Desert Capital REIT, Inc. (“Desert Capital”), CM Equity LLC (“CM Equity”) and CM Notes Program I, LLC (“CM Notes” and together with Desert Capital and CM Equity, the “Prior Investment Programs”), the only prior real estate investment programs sponsored by our sponsor, CM Group, LLC and its affiliates and Todd B. Parriott, our Chief Executive Officer. Desert Capital has investment objectives similar to ours. None of the Prior Investment Programs was a prior program of CM REIT, Inc. This offering is our first public offering.
 
This information should be read together with the summary information included in the “Prior Performance Summary” section of this prospectus, which includes a description of the Prior Investment Programs. The tables below provide information on the performance of Desert Capital, a public company which has conducted two public offerings, CM Equity and CM Notes. All of the following prior performance tables are unaudited.
 
THE INCLUSION OF THE TABLES DOES NOT IMPLY THAT WE WILL MAKE INVESTMENTS COMPARABLE TO THOSE REFLECTED IN THE TABLES OR THAT INVESTORS IN OUR SHARES WILL EXPERIENCE RETURNS COMPARABLE TO THE RETURNS EXPERIENCED IN THE PROGRAM REFERRED TO IN THE TABLES. IF YOU PURCHASE OUR SHARES, YOU WILL NOT ACQUIRE ANY OWNERSHIP IN ANY OF THE PROGRAMS TO WHICH THE TABLES RELATE.
 
The following tables are included herein:
 
     
TABLE I
  Experience in Raising and Investing Funds
TABLE II
  Compensation to Sponsor
TABLE III
  Operating Results of Prior Programs
TABLE V
  Sales or Disposals of Properties
 
Table IV which would provide certain information on programs which have concluded operations, is not included herein because none of the Prior Investment Programs, sponsored by CM Group and its affiliates, and Todd B. Parriott, our Chief Executive Officer has concluded operations.
 
Additional information relating to the acquisition of properties by Desert Capital is contained in Table VI, which is included in Part II of the registration statement of which this prospectus is a part, which we have filed with the Securities and Exchange Commission.
 
Additional information regarding Desert Capital is available in the Forms 10-K filed by Desert Capital with the Securities and Exchange Commission for the fiscal years ended December 31, 2004, 2005, 2006, 2007, 2008 and 2009. Copies of any and all such information will be provided to prospective investors at no charge upon request.
 
We have concluded that Desert Capital has investment objectives similar to ours. Our conclusion was based primarily on the investment objectives to obtain current income through the receipt of payments on mortgage loans while making regular cash distributions, preserving, protecting, and enhancing assets, qualifying as a REIT and liquidity through either the listing of the common shares or an orderly liquidation of assets.


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TABLE I
 
EXPERIENCE IN RAISING AND INVESTING FUNDS (ON A PERCENTAGE BASIS)(1)(2)
 
Table I provides a summary of the experience of our sponsor in raising and investing funds for prior real estate programs. Information is presented for offerings that have closed. Information is provided as to the manner in which the proceeds of the offerings have been applied. Also set forth is information pertaining to the timing and length of the offering and the time period over which the proceeds have been invested. Information is provided as of December 31, 2009. Past performance is not necessarily indicative of future performance.
 
                                 
    Desert Capital REIT, Inc.       CM Notes
    First Offering   Second Offering   CM Equity, LLC   Program I, LLC
 
Dollar amount offered
  $ 200,000,000 (1)   $ 202,500,000 (1)   $ 50,000,000     $ 25,000,000  
Dollar amount raised (100 percent)
    133,178,041 (3)     54,648,122 (4)     1,674,340       1,300,000  
Less offering expenses:
                               
Selling commissions and discounts retained by affiliates
    8.7 %     7.8 %     6.4 %     3.6 %
Organizational expenses
    —       —       —       —  
Marketing and offering expenses
    1.9 %     .5 %     4.6 %     7.3 %
Reserves
                               
Percent available for investment
    89.4 %     91.7 %     89.0 %     89.1 %
Acquisition Costs
                               
Prepaid items and fees related to purchase of property
    —       —       —       —  
Cash down payment
    —       —       —       —  
Acquisition fees
    —       —       —       —  
Loan costs
    —       —       —       —  
Proceeds from mortgage financing
    —       —       —       —  
Total funds invested in mortgage loans
    89.4 %     91.7 %     89.0 %     89.1 %
Date offering began
    7/2004       3/2006       6/2007       1/7/2009  
Length of offering (in months)
    20       23       26       12  
Months to invest 90 percent of amount available for investment (measured from beginning of offering)(5)
    1       1       1       1  
 
 
(1) Excludes shares registered for issuance under the dividend reinvestment plan.
 
(2) Percentages are of total dollar amounts raised.
 
(3) Includes $2,812,858 issued under the reinvestment plan.
 
(4) Includes $9,591,637 issued under the reinvestment plan.
 
(5) Generally, funds are invested within 30 days of receipt.


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TABLE II
 
COMPENSATION TO SPONSOR
 
Table II summarizes the amount and type of compensation paid to Burton Management Company, Ltd., CM Group, LLC and its affiliates, including CM Securities, the dealer-manager, related to Prior Investment Programs that have conducted offerings which have closed. All figures are as of December 31, 2009.
 
                                 
    Desert Capital REIT, Inc.       CM Notes
Type of Compensation
  First Offering   Second Offering   CM Equity, LLC   Program I, LLC
 
Date offering commenced
    7/16/2004       3/22/2006       6/2007       1/7/2009  
Dollar amount raised
  $ 133,178,041 (1)   $ 54,648,122 (2)   $ 1,674,340     $ 1,300,000  
Amount paid to sponsor and affiliates from proceeds of offering:
                               
Underwriting fees
    —       —       —          
Acquisition fees
    —       —       —          
— real estate commissions
    —       —       —          
— advisory fees
    —       —       —          
— other
    —       —       —          
Other(3)
    11,660,188       4,266,958       106,434       —  
Total amount paid to sponsor
                               
Dollar amount of cash generated from operations before deducting payments to sponsor:
    11,432,945       26,589,841       (138,341 )     (33,608 )
Amount paid to sponsor from operations:
                               
Loan servicing fees
    —       —       —       —  
Partnership management fees
    —       —       —       —  
Reimbursements
    —       —       —       —  
Leasing commissions
    —       —       —       —  
Management fees under Advisory Agreement
    1,296,925       7,693,016       19,950       —  
Dollar amount of property sales and refinancing before deducting payments to sponsor
                               
— cash
    —       —       —       —  
— notes
    —       —       —       —  
Amount paid to sponsor from property sales and refinancing:
                               
Real estate commissions
    —       —       —       —  
Incentive fees
    —       —       —       —  
Other
    —       —       —       —  
Loan origination fees paid to CM Capital Services by borrowers(4)
    —       344,811       —       —  
 
 
(1) Includes $2,812,858 issued under the dividend reinvestment plan.
 
(2) Includes $9,591,637 issued under the dividend reinvestment plan.
 
(3) Selling commissions and discounts retained by affiliates.
 
(4) Based on an average loan origination fee of 3.07%.


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TABLE III
 
OPERATING RESULTS OF PRIOR PROGRAMS
 
Table III summarizes the operating results of Prior Investment Programs that have closed. All figures are as of December 31 of the year indicated except as noted otherwise. Desert Capital’s REIT, Inc.’s audited financial statements are included in its Form 10-K filed with the Securities and Exchange Commission.
 
                                         
    Desert Capital REIT, Inc.
    2005   2006   2007   2008   2009
 
Gross Revenues
  $ 15,435,930     $ 29,659,558     $ 32,584,501     $ 8,513,233     $ 2,498,883  
Profit on sale of properties
    —       —       —       —       —  
Less: Operating expenses
    8,155,072       12,307,468       49,655,871       42,378,346       52,437,996  
Interest expense
    941,709       2,669,710       4,017,764       3,125,741       2,609,256  
Depreciation
    143,668       434,668       748,092       485,739       466,825  
Net Income — GAAP Basis
    6,195,481       14,247,712       (21,837,226 )     (37,476,593 )     (53,016,194 )
Taxable Income
    4,117,450       13,277,140       12,799,829       (20,849,735 )     (16,395,000 )
 — from operations
    4,117,450       13,277,140       12,799,829       (20,849,735 )     (16,395,000 )
 — from gain on sale
    —       —       —       —       —  
Cash generated from operations
    4,577,108       9,361,500       17,735,767       3,371,571       (8,814,000 )
Cash generated from sales
    —       —       —       —       —  
Cash generated from refinancing
    —       —       —       —       —  
Cash generated from operations, sales and refinancing
    4,577,108       9,361,500       17,735,767       3,371,571       (8,814,000 )
Less: Cash distributions to investors
                                       
— from operating cash flow
    3,068,025       10,880,736       14,230,562       5,838,501       —  
— from sales and refinancing
    —       —       —       —       —  
— from other
    —       —       —       —       —  
Cash generated (deficiency) after cash distributions
    1,509,083       (1,519,236 )     3,505,205       (2,466,930 )     (8,814,000 )
Less: Special Items (not including sales and refinancing)
    —       —       —       —       —  
Cash generated (deficiency) after cash distributions and special items
    1,509,083       (1,519,236 )     3,505,205       (2,466,930 )     (8,814,000 )
Tax and Distribution Data Per $1000 Invested
                                       
Federal Income Tax Results:
                                       
Ordinary income (loss)
    47       87       69       (111 )     —  
— from operations
    47       87       69       (111 )     —  
— from recapture
    —       —       —       —       —  
Capital gain (loss)
    —       —       —       —       —  
Cash Distributions to Investors
                                       
Source (on a GAAP basis)
                                       
— Investment income
    35       71       76       31       —  
— Return of capital
    —       —       —       —       —  
Source (on cash basis)
                                       
— Sales
    —       —       —       —       —  
— Refinancing
    —       —       —       —       —  
— Operations
    35       71       76       31       —  
— Other
    —       —       —       —       —  
Total distributions on cash basis
    35       71       76       31       —  
Amounts (in percentage terms) remaining invested in program properties at the end of the last year reported in the Table
    —       —       —       —       80 %


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TABLE III
 
OPERATING RESULTS OF PRIOR PROGRAMS — (Continued)
 
                         
    CM Equity, LLC  
    2007     2008     2009  
 
Gross Revenues
  $ 23,007     $ 13,922     $ 107,013  
Profit on sale of properties
    —       —       —  
Less: Operating expenses
    27,801       1,172,700       329,850  
Interest expense
    25,725       219,203       11,110  
Depreciation
    —       —       —  
Net Loss — GAAP Basis
    (30,519 )     (1,377,981 )     (233,947 )
Taxable Income
    —       —       —  
 — from operations
    —       —       —  
 — from gain on sale
    —       —       —  
Cash generated from operations
    (9,419 )     (138,552 )     (10,320 )
Cash generated from sales
    —       —       —  
Cash generated from refinancing
    —       —       —  
Cash generated from operations, sales and refinancing
    (9,419 )     (138,552 )     (10,320 )
Less: Cash distributions to investors
                       
— from operating cash flow
    —       —       —  
— from sales and refinancing
    —       —       —  
— from other
    —       —       —  
Cash generated (deficiency) after cash distributions
    (9,419 )     (138,552 )     (10,320 )
Less: Special Items (not including sales and refinancing)
    —       —       —  
Cash generated (deficiency) after cash distributions and special items
    (9,419 )     (138,552 )     (10,320 )
Tax and Distribution Data Per $1000 Invested
                       
Federal Income Tax Results:
                       
Ordinary income (loss)
    —       —       —  
— from operations
    —       —       —  
— from recapture
    —       —       —  
Capital gain (loss)
    —       —       —  
Cash Distributions to Investors
                       
Source (on a GAAP basis)
                       
— Investment income
    —       —       —  
— Return on capital
    —       —       —  
Source (on cash basis)
                       
— Sales
    —       —       —  
— Refinancing
    —       —       —  
— Operations
    —       —       —  
— Other
    —       —       —  
Total distributions on a cash basis
    —       —       —  
Amounts (in percentage terms) remaining invested in program properties at the end of the last year reported in the Table
    —       —       3.7 %


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TABLE III
 
OPERATING RESULTS OF PRIOR PROGRAMS — (Continued)
 
         
    CM Notes
 		 
    Program I, LLC  
    2009  
 
Gross Revenues
  $ 70,109  
Profit on sale of properties
    —  
Less: Operating expenses
    46,743  
Interest expense
    57,331  
Depreciation
    —  
Net Loss — GAAP Basis
    (33,965 )
Taxable Income
       
 — from operations
    —  
 — from gain on sale
    —  
Cash generated from operations
    (33,608 )
Cash generated from sales
    —  
Cash generated from refinancing
    —  
Cash generated from operations, sales and refinancing
    (33,608 )
Less: Cash distributions to investors
       
— from operating cash flow
    —  
— from sales and refinancing
    —  
— from other
    —  
Cash generated (deficiency) after cash distributions
    (33,608 )
Less: Special Items (not including sales and refinancing)
    —  
Cash generated (deficiency) after cash distributions and special items
    (33,608 )
Per $1,000 Invested
       
Federal Income Tax Results:
       
Ordinary income (loss)
    —  
— from operations
    —  
— from recapture
    —  
Capital gain (loss)
    —  
Cash Distributions to Investors
       
Source (on GAAP basis)
       
— Investment income
    —  
— Return on capital
    —  
Source (on cash basis)
       
— Sales
    —  
— Refinancing
    —  
— Operations
    —  
— Other
    —  
Total distributions on a cash basis
    —  
Amounts (in percentage terms) remaining invested in program properties at the end of the last year reported in the Table
    0 %


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TABLE V
 
SALES OR DISPOSALS OF PROPERTIES
 
Table V presents summary information on the results of repayment of loans and equity investments by Desert Capital REIT, Inc. during the five years ended December 31, 2009.
 
                                                 
    2005   2006   2007   2008   2009   Total
 
Total Mortgage Loans
  $ 67,649,251     $ 149,588,926     $ 143,462,056     $ 90,333,617     $ 17,333,054          
Number of mortgages purchased during period
    239       133       62       12       —          
Principal receipts
    37,514,383       67,610,886       47,856,291       10,125,104       —       163,106,664  
Total number of loans paid off
    158       159       98       17       —       432  
Number of foreclosed loans liquidated
    —       —       3       3       10       16  
Amount outstanding at liquidation
    —       —       —       —       —       —  
Proceeds from sale of foreclosed loans
    —       —       3,926,613       962,000       2,640,311       7,528,924  
Losses realized
    —       —       548,524       —       54,503       603,027  
Number of loans prepaid in full
    —       —       —       —       —       —  
Foreclosed loans at end of period
    —       —       27,072,376       44,868,463       36,288,278          
Number of foreclosed loans at end of period
    —       —       24       53       60          
 
This table sets forth summary information on the results of the aggregate sale or disposal of loans and equity investments by CM Equity, LLC during the three-year period ended December 31, 2009.
 
                                         
    Total Number of
 		  Total Dollar
 		  Foreclosed Loans
 		  Losses
 		  Principal
Year
  Investments   Amount Invested   at End of Period   Realized   Receipts
 
2007
    2     $ 2,460,000       —       —       —  
2008
    3     $ 420,000     $ 1,960,000       —       —  
2009
    1       —     $ 60,000     $ 1,347,920     $ 78,000  


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100,000,000 Shares
 
CM REIT, Inc.
 
Common Stock
 
 
PROSPECTUS
 
 
          , 2010
 
 
Until           (which is 40 days after the date of this prospectus), all dealers effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
 
 

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PART II
 
INFORMATION NOT REQUIRED IN PROSPECTUS
 
Item 31.   Other Expenses of Issuance and Distribution
 
The following table sets forth an estimate of the fees and expenses payable by the registrant in connection with the registration of the common stock offered hereby.
 
         
SEC
  $ 54,000  
FINRA fee
    75,500  
Printing expenses
    400,000 (1)
Legal fees and expenses
    4,000,000 (1)
Sales Expenses
    3,500,000 (1)
Literature
    1,500,000 (1)
Accounting fees and expenses
    1,250,000 (1)
Blue Sky registration fees
    200,000 (1)
Transfer and Escrow Agents
    500,000 (1)
Bona Fide Due Diligence Expenses
    1,300,000 (1)
Miscellaneous
    100,000 (1)
         
Total
  $ 12,879,500  
         
 
 
(1) Estimated
 
Item 32.   Sales to Special Parties
 
Not applicable.
 
Item 33.   Recent Sales of Unregistered Securities
 
On December 17, 2008, we sold 20,000 of our shares of common stock for $10 per share to CM Group, LLC, as part of the formation and initial capitalization of the Company. This formation transaction was exempt from the registration requirements of the United States securities laws pursuant to Section 4(2) of the Securities Act of 1933, as amended.
 
Item 34.   Indemnification of Directors and Officers
 
Our articles of incorporation and bylaws provide for the indemnification of our directors and officers. Our agents may be indemnified to such extent as is authorized by our articles of incorporation, board of directors or our bylaws. Our articles of incorporation provide that indemnification of directors, officers, employees and agents against certain judgments, penalties, fines, settlements and reasonable expenses that any such person actually incurs in connection with any proceeding to which such person may be made a party by reason of serving in such positions, shall not be provided, unless all of the following conditions are met:
 
  •  the indemnitee has determined, in good faith, that the course of conduct which caused the loss or liability was in CM REIT’s best interests; and
 
  •  the Indemnitee was acting on behalf of or performing services for CM REIT.
 
  •  Such liability or loss was not the result of:
 
  •  negligence or misconduct, in the case that the indemnitee is a director (other than an independent director), officer, advisor or an affiliate of the advisor; or
 
  •  gross negligence or willful misconduct, in the case that the indemnitee is an independent director.
 
  •  Such indemnification or agreement to hold harmless is recoverable only out of CM REIT’s net assets and not from CM REIT’s stockholders.


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Our advisory agreement with our advisor also provides that indemnification of our advisor and its officers, managers, employees and some of its affiliates shall not be provided unless the foregoing conditions are met.
 
In addition, we will not provide indemnification for any loss, liability or expense arising from or out of an alleged violation of federal or state securities laws by such party unless one or more of the following conditions are met:
 
  •  there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the indemnitee;
 
  •  such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the indemnitee; or
 
  •  a court of competent jurisdiction approves a settlement of the claims against the indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the Securities and Exchange Commission and of the published position of any state securities regulatory authority in which CM REIT’s securities were offered or sold as to indemnification for violations of securities laws.
 
We have entered into indemnification agreements with each of our directors and executive officers. The indemnification agreements require, among other things, that we indemnify such persons to the fullest extent permitted by law, and advance to such persons all related expenses, subject to reimbursement if it is subsequently determined that indemnification is not permitted. Under these agreements, we must also indemnify and advance all expenses incurred by such persons seeking to enforce their rights under the indemnification agreements, and may cover our directors and executive officers under our directors’ and officers’ liability insurance. Although the form of indemnification agreement offers substantially the same scope of coverage afforded our directors and officers by our articles of incorporation, it provides greater assurance to our directors and officers and such other persons that indemnification will be available because, as a contract, it may not be modified unilaterally in the future by our board of directors or the stockholders to eliminate the rights it provides.
 
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
 
The foregoing summaries are necessarily subject to the complete text of the MGCL, our articles of incorporation and bylaws, and the indemnification agreements entered into between us and each of our directors and officers and are qualified in their entirety by reference thereto.
 
Item 35.   Treatment of Proceeds from Stock Being Registered
 
None of the proceeds of the offering will be credited to an account other than the appropriate capital share account.
 
Item 36.   Financial Statements and Exhibits
 
(a) Financial Statement Schedules
 
None.
 
(b) Exhibits
 
         
  1 .1   Dealer-Manager Agreement
  1 .2   Form of Participating Dealer Agreement (Included as Appendix A to Exhibit 1.1)
  3 .1   Articles of Amendment and Restatement of CM REIT, Inc.
  3 .2   Bylaws of the Company†


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  4 .1   Form of Reinvestment Plan (included in the Prospectus as Appendix A and incorporated herein by reference)
  4 .2   Form of Share Redemption Plan (included in the Prospectus as Appendix B and incorporated herein by reference)
  4 .3   Form of Subscription Agreement (included in the Prospectus as Appendix C and incorporated herein by reference)
  5 .1   Opinion of Locke Lord Bissell & Liddell LLP regarding the legality of the securities being registered†
  8 .1   Opinion of Locke Lord Bissell & Liddell LLP regarding tax matters†
  10 .1   Advisory Agreement
  10 .2   Loan Origination Agreement
  10 .4   Form of Indemnification Agreement†
  10 .5   Escrow Agreement
  21 .1   List of Subsidiaries†
  23 .1   Consent of Locke Lord Bissell & Liddell LLP (included in Exhibit 5.1 and Exhibit 8.1)†
  23 .2   Consent of Hancock Askew & Co., LLP
  23 .4   Consent of Anthony D. Cinquini†
  23 .5   Consent of Hunt C. Holsomback†
  23 .6   Consent of Darin D. Gilson†
  23 .7   Consent of Robert J. Simmons†
  24 .1   Power of Attorney†
 
 
* To be filed by amendment.
 
† Previously filed.
 
Item 37.   Undertakings
 
The undersigned Registrant hereby undertakes:
 
(1) to file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:
 
(i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
 
(ii) to reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
 
(iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement;
 
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this section do not apply if the Registration Statement is on Form S-8, and the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Registration Statement; and

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Paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this section do not apply if the registration statement is on Form S-3 or Form F-3 and the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement, or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part of the registration statement.
 
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post- effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
 
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
 
(4) That, for purpose of determining any liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
 
(5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:
 
The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
 
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
 
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
 
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
 
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
 
(6) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of


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appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
 
The registrant undertakes: (a) to file any prospectuses required by Section 10(a)(3) as post-effective amendments to the registration statement, (b) that for the purpose of determining any liability under the Act each such post-effective amendment may be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at that time may be deemed to be the initial bona fide offering thereof, (c) that all post-effective amendments will comply with the applicable forms, rules and regulations of the Commission in effect at the time such post-effective amendments are filed, and (d) to remove from registration by means of a post-effective amendment any of the securities being registered which remain at the termination of the offering.
 
The registrant undertakes to provide to the stockholders the financial statement required by Form 10-K for the first full year of operations of the registrant.
 
(7) The Registrant undertakes to file a sticker supplement pursuant to Rule 424(c) under the Securities Act of 1933 during the distribution period describing each property not identified in the prospectus at such time as there arises a reasonable probability that such property will be acquired and to consolidate all such stickers into a post-effective amendment filed at least once every three months, with the information contained in such amendment provided simultaneously to the existing stockholders. Each sticker supplement should disclose all compensation and fees received by the Registrant and its affiliates in connection with any such acquisition. The post-effective amendment shall include audited financial statements meeting the requirements of Rule 3-14 of Regulation S-X only for properties acquired during the distribution period.
 
The Registrant also undertakes to file, after the end of the distribution period, a current report on Form 8-K containing the financial statements and any additional information required by Rule 3-14 of Regulation S-X, to reflect each commitment (i.e., the signing of a binding purchase agreement) made after the end of the distribution period involving the use of ten percent or more (on a cumulative basis) of the net proceeds of the offering and to provide the information contained in such report to the shareholders at least once each quarter after the distribution period of the offering has ended.


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TABLE VI
 
ACQUISITIONS OF SECURED LOANS BY PRIOR PROGRAMS
 
Table VI presents summary information relating to the acquisition of mortgage loans for the five-year period ended December 31, 2009 by Desert Capital REIT, Inc.
 
                                         
    2005   2006   2007   2008   2009
 
Aggregate value of acquisition loans purchased
  $ 61,781,473     $ 135,666,937     $ 41,996,685     $ 9,863,494       —  
Number of acquisition loans purchased
    130       90       24       7       —  
Aggregate value of construction loans purchased
    34,533,166       16,696,100       15,766,738       727,600       —  
Number of construction loans purchased
    108       43       34       5       —  
Aggregate value of commercial property loans purchased
    500,000       —       18,198,900       —       —  
Number of commercial property loans purchased
    1       —       4       —       —  
 
This Table sets forth summary information relating to the acquisition of loans and investments during the three-year period ended December 31, 2009 by CM Equity, LLC.
 
                 
    Total Number of
 		  Total Dollar Amount
Year
  Investments   Invested
2007
    2     $ 2,460,000  
2008
    3       420,000  
2009
    —       —  
 
This Table sets forth summary information relating to the acquisition of loans and investments during the one-year period ended December 31, 2009 by CM Notes Program I, LLC.
 
         
    2009
 
Aggregate value of acquisition and development loans purchased
  $ 568,900  
Number of acquisition and development loans purchased
    7  
Aggregate value of construction loans purchased
  $ 494,900  
Number of construction loans purchased
    5  


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SIGNATURES
 
Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this Amendment No. 7 to the Registration Statement on Form S-11 to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Henderson, State of Nevada, on October 28, 2010.
 
CM REIT, INC.
 
  By: 
/s/  Todd B. Parriott
Name:     Todd B. Parriott
  Title:  Chairman of the Board, Chief Executive
Officer, President and Chief Investment Officer
 
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 7 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
 
             
Signature
 
Title
 
Date
 
/s/  Todd B. Parriott

Todd B. Parriott 		  Chairman of the Board, Chief Executive
Officer, President and Chief Executive
Investment Officer
(Principal Executive Officer) 		  October 28, 2010
         
*

Stacy M. Riffe 		  Executive Vice President, Chief Financial
Officer (Principal Financial and Accounting
Officer) and Treasurer and Director 		  October 28, 2010
         
*

G. Steven Dawson 		  Director   October 28, 2010
 
By his signature set forth below, the undersigned, pursuant to duly authorized powers of attorney filed with the Securities and Exchange Commission, has signed this Amendment No. 7 to the Registration Statement on behalf of the persons indicated.
 
             
         
*By: 
/s/  Todd B. Parriott

        
Todd B. Parriott
Attorney-In-Fact 		       


II-7

Table of Contents

EXHIBIT INDEX
 
         
Exhibit
 		   
No.
   
 
  1 .1   Dealer-Manager Agreement
  1 .2   Form of Participating Dealer Agreement (included as Appendix A to Exhibit 1.1)
  3 .1   Articles of Amendment and Restatement of CM REIT, Inc.
  3 .2   Bylaws of the Company†
  4 .1   Form of Reinvestment Plan (included in the Prospectus as Appendix A and incorporated herein by reference)
  4 .2   Form of Share Redemption Plan (included in the Prospectus as Appendix B and incorporated herein by reference)
  4 .3   Form of Subscription Agreement (included in the Prospectus as Appendix C and incorporated herein by reference)
  5 .1   Opinion of Locke Lord Bissell & Liddell LLP regarding the legality of the securities being registered†
  8 .1   Opinion of Locke Lord Bissell & Liddell LLP regarding tax matters†
  10 .1   Advisory Agreement
  10 .2   Loan Origination Agreement
  10 .4   Form of Indemnification Agreement†
  10 .5   Escrow Agreement
  21 .1   List of Subsidiaries†
  23 .1   Consent of Locke Lord Bissell & Liddell LLP (included in Exhibit 5.1 and Exhibit 8.1)†
  23 .2   Consent of Hancock Askew & Co., LLP
  23 .4   Consent of Anthony D. Cinquini†
  23 .5   Consent of Hunt C. Holsomback†
  23 .6   Consent of Darin G. Gilson†
  23 .7   Consent of Robert J. Simmons†
  24 .1   Power of Attorney†
 
 
* To be filed by amendment.
 
† Previously filed.

EX-1.1 2 d65627a7exv1w1.htm EX-1.1 exv1w1
Exhibit 1.1
CM REIT, INC.
DEALER MANAGER AGREEMENT
Up to $1,000,000,000 in Shares of Common Stock, $0.01 par value per share

October 21, 2009
CM Securities, LLC
1291 W. Galleria Drive
Suite 200
Henderson, Nevada 89014
Ladies and Gentlemen:
     CM REIT, Inc., a Maryland corporation (the “Company”), has registered for public sale (the “Offering”) a maximum of $1,000,000,000 in shares of its common stock, $0.01 par value per share (the “Common Stock”), of which amount: (a) up to $900,000,000 in shares of Common Stock are being offered to the public pursuant to the Company’s primary offering (the “Primary Shares”); and (b) up to $100,000,000 in shares of Common Stock are being offered to stockholders of the Company pursuant to the Company’s distribution reinvestment plan (the “DRIP Shares” and, together with the Primary Shares, the “Offered Shares”). The Primary Shares are to be issued and sold to the public on a “best efforts” basis through you (the “Dealer Manager”) as the managing dealer and the broker-dealers participating in the Offering (the “Participating Dealers”). The Primary Shares will be offered at $10.00 per share (subject in certain circumstances to discounts based upon the volume of shares purchased and for certain categories of purchasers as described below). The Company has reserved the right to reallocate the Offered Shares between the Primary Shares and the DRIP Shares.
     The Company hereby agrees with you, the Dealer Manager, as follows:
     1. Representations and Warranties of the Company. The Company represents and warrants to the Dealer Manager and each Participating Dealer with whom the Dealer Manager has entered into or will enter into a Participating Dealer Agreement (the “Participating Dealer Agreement”) substantially in the form attached as Exhibit A to this Agreement, as of the date hereof and at all times during the Offering Period, as that term is defined in Section 5.1 (provided that, to the extent such representations and warranties are given only as of a specified date or dates, the Company only makes such representations and warranties as of such date or dates as follows):
          1.1 Compliance with Registration Requirements.
               (a) A registration statement on Form S-11 (File No. 333- 156434), including a preliminary prospectus, for the registration of the Offered Shares has been prepared by the Company in accordance with applicable requirements of the Securities Act of 1933, as amended (the “Securities Act”), and the applicable rules and regulations of the Securities and Exchange Commission (the “Commission”) promulgated thereunder (the “Securities Act Regulations”), and was initially filed with the Commission on December 23, 2008 (the “Registration Statement”). The Company has prepared and filed such amendments thereto, if any, and such amended preliminary prospectuses, if any, as may have been required to the date hereof and will file such additional amendments and supplements thereto as may hereafter be required. As used in this Agreement, the term “Registration Statement” means the Registration Statement, as amended through the date hereof, except that, if the Company files any post-effective amendments to the Registration Statement, “Registration Statement” shall refer to the Registration Statement as so amended by the last post-effective amendment declared effective; the term “Effective Date” means the applicable date upon which the Registration Statement or any post-effective amendment thereto is or was first declared effective by the Commission; the term “Prospectus” means the prospectus, as amended or supplemented, on file with the Commission at the Effective Date of the Registration Statement (including financial statements,

 

exhibits and all other documents related thereto filed as a part thereof or incorporated therein), except that if the Prospectus is amended or supplemented after the Effective Date, the term “Prospectus” shall refer to the Prospectus as amended or supplemented to date, and if the Prospectus filed by the Company pursuant to Rule 424(b) or 424(c) of the Securities Act Regulations shall differ from the Prospectus on file at the time the Registration Statement or any post-effective amendment to the Registration Statement shall become effective, the term “Prospectus” shall refer to the Prospectus filed pursuant to either Rule 424(b) or 424(c) of the Securities Act Regulations from and after the date on which it shall have been filed with the Commission; and the term “Filing Date” means the applicable date upon which the initial Prospectus or any amendment or supplement thereto is filed with the Commission. As of the date hereof, the Commission has not issued any stop order suspending the effectiveness of the Registration Statement and no proceedings for that purpose have been instituted or are pending before or threatened by the Commission under the Securities Act.
               (b) The Registration Statement and the Prospectus, and any further amendments or supplements thereto, will, as of the applicable Effective Date or Filing Date, as the case may be, comply in all material respects with the Securities Act and the Securities Act Regulations; the Registration Statement does not, and any amendments thereto will not, in each case as of the applicable Effective Date, contain an untrue statement of material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and the Prospectus does not, and any amendment or supplement thereto will not, as of the applicable Filing Date, contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no warranty or representation with respect to any statement contained in the Registration Statement or the Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with information furnished in writing to the Company by the Dealer Manager or any Participating Dealer expressly for use in the Registration Statement or the Prospectus, or any amendments or supplements thereto.
          1.2 Good Standing of the Company.
               (a) The Company is a corporation duly organized and validly existing under the laws of the State of Maryland, and is in good standing with the State Department of Assessments and Taxation of Maryland, with full power and authority to conduct its business as described in the Registration Statement and the Prospectus and to enter into this Agreement and to perform the transactions contemplated hereby; this Agreement has been duly authorized, executed and delivered by the Company and is a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally, and by general equitable principles, and except to the extent that the enforceability of the indemnity provisions and the contribution provisions contained in Sections 7 and 8 of this Agreement, respectively, may be limited under applicable securities laws.
               (b) The Company has qualified to do business and is in good standing in every jurisdiction in which the ownership or leasing of its properties or the nature or conduct of its business, as described in the Prospectus, requires such qualification, except where the failure to do so would not have a material adverse effect on the condition, financial or otherwise, results of operations or cash flows of the Company taken as a whole (a “Material Adverse Effect”).
          1.3 Authorization and Description of Securities. The issuance and sale of the Offered Shares have been duly authorized by the Company, and, when issued and duly delivered against payment therefor as contemplated by this Agreement, will be validly issued, fully paid and non-assessable, free and clear of any pledge, lien, encumbrance, security interest or other claim, and the issuance and sale of the Offered Shares by the Company are not subject to preemptive or other similar rights arising by operation of law, under the charter or bylaws of the Company or under any agreement to which the Company is a party or otherwise. The Offered Shares conform in all material respects to the description of the Common Stock contained in the Registration Statement and the Prospectus. The authorized, issued and outstanding shares of Common Stock as of the date hereof are as set forth in the Prospectus under the caption “Description of Capital Stock.” All offers and sales of the Common Stock prior to the date hereof were at all relevant times duly registered under the Securities Act or were exempt from the

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registration requirements of the Securities Act and were duly registered or the subject of an available exemption from the registration requirements of the applicable state securities or blue sky laws.
          1.4 Absence of Defaults and Conflicts. The Company is not in violation of its charter or its bylaws and the execution and delivery of this Agreement, the issuance, sale and delivery of the Offered Shares, the consummation of the transactions herein contemplated and compliance with the terms of this Agreement by the Company will not violate the terms of or constitute a breach or default under: (i) its charter or bylaws; or (ii) any indenture, mortgage, deed of trust, lease, or other material agreement to which the Company is a party or to which its properties are bound; or (iii) any law, rule or regulation applicable to the Company; or (iv) any writ, injunction or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company except, in the cases of clauses (ii), (iii) and (iv), for such violations or defaults that, individually or in the aggregate, would not result in a Material Adverse Effect.
          1.5 REIT Compliance. The Company is organized in a manner that conforms with the requirements for qualification as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), and the Company’s intended method of operation, as set forth in the Prospectus, would enable it to meet the requirements for taxation as a REIT under the Code.
          1.6 No Operation as an Investment Company. The Company is not and does not currently intend to conduct its business so as to be, an “investment company” as that term is defined in the Investment Company Act of 1940, as amended, and the rules and regulations thereunder, and it will exercise reasonable diligence to ensure that it does not become an “investment company” within the meaning of the Investment Company Act of 1940.
          1.7 Absence of Further Requirements. As of the date hereof, no filing with, or consent, approval, authorization, license, registration, qualification, order or decree of any court, governmental authority or agency is required for the performance by the Company of its obligations under this Agreement or in connection with the issuance and sale by the Company of the Offered Shares, except such as may be required under the Securities Act, the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the rules of the Financial Industry Regulatory Authority (“FINRA”) or applicable state securities laws or where the failure to obtain such consent, approval, authorization, license, registration, qualification, order or decree of any court, governmental authority or agency would not have a Material Adverse Effect.
          1.8 Absence of Proceedings. As of the date hereof, there are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against the Company at law or in equity or before or by any federal or state commission, regulatory body or administrative agency or other governmental body, domestic or foreign, which would have a Material Adverse Effect.
          1.9 Financial Statements. The financial statements of the Company included in the Registration Statement and the Prospectus, together with the related notes, present fairly the financial position of the Company, as of the date specified, in conformity with generally accepted accounting principles applied on a consistent basis and in conformity with Regulation S-X of the Commission. No other financial statements or schedules are required by Form S-11 or under the Securities Act Regulations to be included in the Registration Statement, the Prospectus or any preliminary prospectus.
          1.10 Escrow Agent. The Company has entered into an escrow agreement (the “Escrow Agreement”) with UMB Bank, N.A., a national banking association, as escrow agent (the “Escrow Agent”), and the Dealer Manager, in the form included as an exhibit to the Registration Statement, which provides for the establishment of an escrow account into which subscribers’ funds will be deposited pursuant to the subscription procedures described in Section 6 below (the “Escrow Account”).
          1.11 Independent Accountants. Hancock Askew & Co., LLP, or such other independent accounting firm that has audited and is reporting upon any financial statements included or to be included in the Registration Statement or the Prospectus or any amendments or supplements thereto, shall be as of the applicable Effective Date or Filing Date, and shall have been during the periods covered by their report included in the Registration Statement or the Prospectus or any amendments or supplements thereto, independent public accountants with respect to the Company within the meaning of the Securities Act and the Securities Act Regulations.

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          1.12 No Material Adverse Change in Business. Since the respective dates as of which information is provided in the Registration Statement and the Prospectus or any amendments or supplements thereto, except as otherwise stated therein, (a) there has been no material adverse change in the condition, financial or otherwise, or in the earnings or business affairs of the Company, whether or not arising in the ordinary course of business, and (b) there have been no transactions entered into by the Company which could reasonably result in a Material Adverse Effect.
          1.13 Material Agreements. There are no contracts or other documents required by the Securities Act or the Securities Act Regulations to be described in or incorporated by reference into the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement which have not been accurately described in all material respects in the Prospectus or incorporated or filed as required. Each document incorporated by reference into the Registration Statement or the Prospectus complied, as of the date filed, in all material respects with the requirements as to form of the Exchange Act, and the rules and regulations promulgated thereunder (the “Exchange Act Regulations”).
          1.14 Reporting and Accounting Controls. The Company has implemented controls and other procedures that are designed to ensure that information required to be disclosed by the Company in supplements to the Prospectus and amendments to the Registration Statement under the Securities Act and the Securities Act Regulations, the reports that it files or submits under the Exchange Act and the Exchange Act Regulations and the reports and filings that it is required to make under the applicable state securities laws in connection with the Offering are recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms and is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure; and the Company makes and keeps books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (a) transactions are executed in accordance with management’s general or specific authorization; (b) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (c) access to assets is permitted only in accordance with management’s general or specific authorization; and (d) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. To the Company’s knowledge, neither the Company, nor any employee or agent thereof, has made any payment of funds of the Company, or received or retained any funds, and no funds of the Company have been set aside to be used for any payment, in each case in material violation of any law, rule or regulation applicable to the Company.
          1.15 Material Relationships. No relationship, direct or indirect, exists between or among the Company on the one hand, and the directors, officers, security holders of the Company, or its affiliates, on the other hand, which is required to be described in the Prospectus and which is not so described.
          1.16 Possession of Licenses and Permits. The Company possesses adequate permits, licenses, approvals, consents and other authorizations (collectively, “Governmental Licenses”) issued by the appropriate federal, state, local and foreign regulatory agencies or bodies necessary to conduct the business now operated by it, except where the failure to obtain such Governmental Licenses, singly or in the aggregate, would not have a Material Adverse Effect; the Company is in compliance with the terms and condition of all such Governmental Licenses, except where the failure to so comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except where the invalidity of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and, as of the date hereof, the Company has not received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect.
          1.17 Subsidiaries. Each “significant subsidiary” of the Company (as such term is defined in Rule 1-02 of Regulation S-X) and each other entity in which the Company holds a direct or indirect ownership interest that is material to the Company (each a “Subsidiary” and, collectively, the “Subsidiaries”) has been duly organized or formed and is validly existing as a corporation, partnership, limited liability company or similar entity in good standing under the laws of the jurisdiction of its incorporation or organization, has power and authority to own, lease

4

 

and operate its properties and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to be so qualified would not reasonably be expected to have a Material Adverse Effect. The only direct Subsidiaries of the Company as of the date of the Registration Statement or the most recent amendment to the Registration Statement, as applicable, are the Subsidiaries described or identified in the Registration Statement or such amendment to the Registration Statement.
          1.18 Possession of Intellectual Property. The Company owns or possesses, has the right to use or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, “Intellectual Property”) necessary to carry on the business now operated by the Company, except where the failure to have such ownership or possession would not, singly or in the aggregate, have a Material Adverse Effect. The Company has not received any notice and is not otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect.
          1.19 Advertising and Sales Materials. All advertising and supplemental sales literature prepared or approved by the Company or CM Group, LLC, a Delaware limited liability company that serves as the Company’s advisor pursuant to the terms of an advisory agreement (the “Advisor”), whether designated solely for “broker-dealer use only” or otherwise, to be used or delivered by the Company, the Advisor or the Dealer Manager in connection with the Offering (the “Authorized Sales Materials”) will not contain any untrue statement of material fact or omit to state a material fact required to be stated therein, in light of the circumstances under which they were made and in conjunction with the Prospectus delivered therewith, not misleading. Furthermore, all such Authorized Sales Materials will have received all required regulatory approval, which may include, but is not limited to, the Commission and state securities agencies, as applicable, prior to use, except where the failure to obtain such approval would not result in a Material Adverse Effect.
          1.20 Compliance with Privacy Laws and the USA PATRIOT Act. The Company complies in all material respects with applicable privacy provisions of the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) and applicable provisions of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act) of 2001, as amended (the “USA PATRIOT Act”).
          1.21 Good and Marketable Title to Assets. Except as otherwise disclosed in the Prospectus:
               (a) the Company and its Subsidiaries have good and insurable or good, valid and insurable title (either in fee simple or pursuant to a valid leasehold interest) to all properties and assets described in the Prospectus as being owned or leased, as the case may be, by them and to all properties reflected in the Company’s most recent consolidated financial statements included in the Prospectus, and neither the Company nor any of its Subsidiaries has received notice of any claim that has been or may be asserted by anyone adverse to the rights of the Company or any Subsidiary with respect to any such properties or assets (or any such lease) or affecting or questioning the rights of the Company or any such Subsidiary to the continued ownership, lease, possession or occupancy of such property or assets, except for such claims that could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
               (b) there are no liens, charges, encumbrances, claims or restrictions on or affecting the properties and assets of the Company or any of its Subsidiaries, which would reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect;
               (c) no person or entity, including, without limitation, any tenant under any of the leases pursuant to which the Company or any of its Subsidiaries leases (as a lessor) any of its properties (whether directly or indirectly through other partnerships, limited liability companies, business trusts, joint ventures or otherwise) has an option or right of first refusal or any other right to purchase any of such properties, except for such options, rights

5

 

of first refusal or other rights to purchase which, individually or in the aggregate, are not material with respect to the Company and its Subsidiaries considered as one enterprise;
               (d) to the Company’s knowledge, each of the properties of the Company or any of its Subsidiaries has access to public rights of way, either directly or though insured easements, except where the failure to have such access would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
               (e) to the Company’s knowledge, each of the properties of the Company or any of its Subsidiaries is served by all public utilities necessary for the current operations on such property in sufficient quantities for such operations, except where failure to have such public utilities could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
               (f) to the knowledge of the Company, each of the properties of the Company or any of its Subsidiaries complies with all applicable codes and zoning and subdivision laws and regulations, except for such failures to comply which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
               (g) all of the leases under which the Company or any of its Subsidiaries hold or use any real property or improvements or any equipment relating to such real property or improvements are in full force and effect, except where the failure to be in full force and effect could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Affect, and neither the Company nor any of its Subsidiaries is in default in the payment of any amounts due under any such leases or in any other default thereunder and the Company knows of no event which, with the passage of time or the giving of notice or both, could constitute a default under any such lease, except such defaults that could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
               (h) to the knowledge of the Company, there is no pending or threatened condemnation, zoning change, or other proceeding or action that could in any manner affect the size of, use of, improvements on, construction on or access to the properties of the Company or any of its Subsidiaries, except such proceedings or actions that could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; and
               (i) neither the Company nor any of its Subsidiaries nor any lessee of any of the real property improvements of the Company or any of its Subsidiaries is in default in the payment of any amounts due or in any other default under any of the leases pursuant to which the Company or any of its Subsidiaries leases (as lessor) any of its real property or improvements (whether directly or indirectly through partnerships, limited liability companies, joint ventures or otherwise), and the Company knows of no event which, with the passage of time or the giving of notice or both, would constitute such a default under any of such leases, except such defaults as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
          1.22 Registration Rights. There are no persons, other than the Company, with registration or other similar rights to have any securities of the Company registered pursuant to the Registration Statement or otherwise registered by the Company under the Securities Act, or included in the Offering contemplated hereby.
          1.23 Taxes. The Company has filed all federal, state and foreign income tax returns which have been required to be filed on or before the due date (taking into account all extensions of time to file), and has paid or provided for the payment of all taxes indicated by said returns and all assessments received by the Company and each of its Subsidiaries to the extent that such taxes or assessments have become due, except where the Company is contesting such assessments in good faith and except for such taxes and assessments the failure of which to pay would not reasonably be expected to have a Material Adverse Effect.
          1.24 Authorized Use of Trademarks. Any required consent and authorization has been obtained for the use of any trademark or service mark in any advertising and supplemental sales literature or other materials

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delivered by the Company to the Dealer Manager or approved by the Company for use by the Dealer Manager and, to the Company’s knowledge, its use does not constitute the unlicensed use of intellectual property.
     2. Covenants of the Company. The Company hereby covenants and agrees with the Dealer Manager that:
          2.1 Compliance with Securities Laws and Regulations. The Company will: (a) use commercially reasonable efforts to cause the Registration Statement and any subsequent amendments thereto to become effective as promptly as possible; (b) promptly advise the Dealer Manager of (i) the receipt of any comments of, or requests for additional or supplemental information from, the Commission, (ii) the time and date of any filing of any post-effective amendment to the Registration Statement or any amendment or supplement to the Prospectus, and (iii) the time and date that any post-effective amendment to the Registration Statement becomes effective; (c) timely file every amendment or supplement to the Registration Statement or the Prospectus that may be required by the Commission or under the Securities Act; and (d) if at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will promptly notify the Dealer Manager and, to the extent the Company determines such action is in the best interest of the Company, use its commercially reasonable efforts to obtain the lifting of such order at the earliest possible time.
          2.2 Delivery of Registration Statement, Prospectus and Sales Materials. The Company will, at no expense to the Dealer Manager, furnish the Dealer Manager with such number of printed copies of the Registration Statement, including all amendments and exhibits thereto, as the Dealer Manager may reasonably request. The Company will similarly furnish to the Dealer Manager and others designated by the Dealer Manager as many copies as the Dealer Manager may reasonably request in connection with the Offering of: (a) the Prospectus in preliminary and final form and every form of supplemental or amended Prospectus; and (b) the Authorized Sales Materials.
          2.3 Blue Sky Qualifications. The Company will use its commercially reasonable efforts to qualify the Offered Shares for offering and sale under, or to establish the exemption of the offering and sale of the Offered Shares from qualification or registration under, the applicable state securities or “blue sky” laws of each of the 50 states, the District of Columbia, Guam, Puerto Rico and the Virgin Islands (such jurisdictions in which qualifications or exemptions for the offer and sale of the Offered Shares are in effect as of a relevant date are referred to herein as the “Qualified Jurisdictions”) and to maintain such qualifications or exemptions in effect throughout the Offering. In connection therewith, the Company will prepare and file all such post-sales filings or reports as may be required by the securities regulatory authorities in the Qualified Jurisdictions in which the Offered Shares have been sold, provided that the Dealer Manager shall have provided the Company with any information required for such filings or reports that is in the Dealer Manager’s possession. The Company will furnish to the Dealer Manager a blue sky memorandum, prepared and updated from time to time by counsel to the Company, naming the Qualified Jurisdictions. The Company will notify the Dealer Manager promptly following a change in the status of the qualification or exemption of the Offered Shares in any jurisdiction in any respect. The Company will file and obtain clearance of the Authorized Sales Material to the extent required by applicable Securities Act Regulations and state securities laws.
          2.4 Rule 158. The Company will timely file such reports pursuant to the Exchange Act as are necessary in order to make generally available to its stockholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the Securities Act.
          2.5 Material Disclosures. If at any time when a Prospectus is required to be delivered under the Securities Act any event occurs as a result of which, in the opinion of the Company, the Prospectus would include an untrue statement of a material fact or omits to state any material fact necessary to make the statements therein, in light of the circumstances under which they are made, not misleading, the Company will promptly notify the Dealer Manager thereof (unless the information shall have been received from the Dealer Manager) and the Dealer Manager and the Participating Dealers shall suspend the offering and sale of the Offered Shares in accordance with Section 4.13 hereof until such time as the Company, in its sole discretion (a) instructs the Dealer Manager to resume the offering and sale of the Offered Shares and (b) has prepared any required supplemental or amended Prospectus as shall be necessary to correct such statement or omission and to comply with the requirements of the Securities Act.

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          2.6 Reporting Requests. The Company will comply with the requirements of the Exchange Act relating to the Company’s obligation to file and, as applicable, deliver to its stockholders periodic reports including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
          2.7 No Manipulation of Market for Securities. The Company will not take, directly or indirectly, any action designed to cause or to result in, or that might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Offered Shares in violation of federal or state securities laws.
          2.8 Use of Proceeds. The Company will apply the proceeds from the sale of the Offered Shares as stated in the Prospectus in all material respects.
          2.9 Transfer Agent. The Company will engage and maintain, at its expense, a registrar and transfer agent for the Offered Shares.
     3. Payment of Expenses and Fees.
          3.1 Company Expenses. Subject to the limitations described below, the Company agrees to pay all costs and expenses incident to the Offering, whether or not the transactions contemplated hereunder are consummated or this Agreement is terminated, including expenses, fees and taxes in connection with: (a) the registration fee, the preparation and filing of the Registration Statement (including without limitation financial statements, exhibits, schedules and consents), the Prospectus, and any amendments or supplements thereto, and the printing and furnishing of copies of each thereof to the Dealer Manager and to Participating Dealers (including costs of mailing and shipment); (b) the preparation, issuance and delivery of certificates, if any, for the Offered Shares, including any stock or other transfer taxes or duties payable upon the sale of the Offered Shares; (c) all fees and expenses of the Company’s legal counsel, independent public or certified public accountants and other advisors; (d) the qualification of the Offered Shares for offering and sale under state laws in the states, including the Qualified Jurisdictions, that the Company shall designate as appropriate and the determination of their eligibility for sale under state law as aforesaid and the printing and furnishing of copies of blue sky surveys; (e) filing for review by FINRA of all necessary documents and information relating to the Offering and the Offered Shares (including the reasonable legal fees and filing fees and other disbursements of counsel relating thereto); (f) the fees and expenses of any transfer agent or registrar for the Offered Shares and miscellaneous expenses referred to in the Registration Statement; (g) all costs and expenses incident to the travel and accommodation of the Advisor’s personnel, and the personnel of any sub-advisor designated by the Advisor and acting on behalf of the Company, in making road show presentations and presentations to Participating Dealers and other broker-dealers and financial advisors with respect to the offering of the Offered Shares; and (h) the performance of the Company’s other obligations hereunder. Notwithstanding the foregoing, the Company shall not directly pay, or reimburse the Advisor for, the costs and expenses described in this Section 3.1 if the payment or reimbursement of such expenses would cause the aggregate of the Company’s “organization and offering expenses” as defined by FINRA Rule 2310 (including the Company expenses paid or reimbursed pursuant to this Section 3.1, all items of underwriting compensation including Dealer Manager expenses described in Section 3.2 and due diligence expenses described in Section 3.3) to exceed 15.0% of the gross proceeds from the sale of the Primary Shares.
          3.2

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          Due Diligence Expenses. The Company shall reimburse the Dealer Manager for reasonable bona fide due diligence expenses incurred by the Dealer Manager or any Participating Dealer; provided, however, that no due diligence expenses shall be reimbursed by the Company pursuant to this Section 3.2 which would cause the aggregate of all Company expenses described in Section 3.1, all underwriting compensation paid to the Dealer Manager and any Participating Dealer and the due diligence expenses paid pursuant to this Section 3.2 to exceed 15.0% of the gross proceeds from the sale of the Primary Shares. Such due diligence expenses may include travel, lodging, meals and other reasonable out-of-pocket expenses incurred by the Dealer Manager or any Participating Dealer and their personnel when visiting the Company’s offices or investments to verify information relating to the Company or its properties. The Dealer Manager or any Participating Dealer shall provide a detailed and itemized invoice to the Company for any such due diligence expenses.
     4. Representations, Warranties and Covenants of Dealer Manager. The Dealer Manager hereby represents and warrants to, and covenants and agrees with the Company as of the date hereof and at all times during the Offering Period as that term is defined below (provided that, to the extent representations and warranties are given only as of a specified date or dates, the Dealer Manager only makes such representations and warranties as of such date or dates) as follows:
          4.1 Good Standing of the Dealer Manager. The Dealer Manager is a limited liability company duly organized and validly existing under the laws of the State of Nevada, with full power and authority to conduct its business and to enter into this Agreement and to perform the transactions contemplated hereby; this Agreement has been duly authorized, executed and delivered by the Dealer Manager and is a legal, valid and binding agreement of the Dealer Manager enforceable against the Dealer Manager in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally, and by general equitable principles, and except to the extent that the enforceability of the indemnity provisions and the contribution provisions contained in Sections 7 and 8 of this Agreement, respectively, may be limited under applicable securities laws.
          4.2 Compliance with Applicable Laws, Rules and Regulations. The Dealer Manager represents to the Company that (a) it is a member of FINRA in good standing, and (b) it and its employees and representatives who will perform services hereunder have all required licenses and registrations to act under this Agreement. With respect to its participation and the participation by each Participating Dealer in the offer and sale of the Offered Shares (including, without limitation any resales and transfers of Offered Shares), the Dealer Manager agrees, and, by virtue of entering into the Participating Dealer Agreement, each Participating Dealer shall have agreed, to comply with any applicable requirements of the Securities Act and the Exchange Act, applicable state securities or blue sky laws, and FINRA Conduct Rules, specifically including, but not in any way limited to, Conduct Rules 2310, 2340, 2420, 2730, 2740, and 2750 therein.
          4.3 AML Compliance. The Dealer Manager represents to the Company that it has established and implemented anti-money laundering compliance programs in accordance with applicable law, including applicable FINRA Conduct Rules, Exchange Act Regulations and the USA PATRIOT Act, specifically including, but not limited to, Section 352 of the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the “Money Laundering Abatement Act,” and together with the USA PATRIOT Act, the “AML Rules”) reasonably expected to detect and cause the reporting of suspicious transactions in connection with the offering and sale of the Offered Shares. The Dealer Manager further represents that it is currently in compliance with all AML Rules, specifically including, but not limited to, the Customer Identification Program requirements under Section 326 of the Money Laundering Abatement Act, and the Dealer Manager hereby covenants to remain in compliance with such requirements and shall, upon request by the Company, provide a certification to the Company that, as of the date of such certification (a) its AML Program is consistent with the AML Rules and (b) it is currently in compliance with all AML Rules, specifically including, but not limited to, the Customer Identification Program requirements under Section 326 of the Money Laundering Abatement Act.
          4.4 Accuracy of Information. The Dealer Manager represents and warrants to the Company and each person that signs the Registration Statement that the information under the caption “Plan of Distribution” in the Prospectus and all other information furnished to the Company by the Dealer Manager in writing expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus, or any amendment or supplement thereto,

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does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading.
          4.5 Suitability.
               (a) The Dealer Manager will offer Primary Shares only to persons who meet the suitability standards set forth in the Prospectus or in any suitability letter or memorandum sent to it by the Company and will only make offers to persons in the jurisdictions in which it is advised in writing by the Company that the Primary Shares are qualified for sale or that such qualification is not required. Notwithstanding the qualification of the Primary Shares for sale in any respective jurisdiction (or the exemption therefrom), the Dealer Manager represents, warrants and covenants that it will not offer Primary Shares and will not permit any of its registered representatives to offer Primary Shares in any jurisdiction unless both the Dealer Manager and such registered representative are duly licensed to transact securities business in such jurisdiction. In offering Primary Shares, the Dealer Manager will comply with the provisions of the FINRA Conduct Rules, as well as all other applicable rules and regulations relating to suitability of investors, including without limitation, the provisions of Section III.C. of the Statement of Policy Regarding Real Estate Investment Trusts of the North American Securities Administrators Association, Inc. (the “NASAA REIT Guidelines”).
               (b) The Dealer Manager further represents, warrants and covenants that neither the Dealer Manager, nor any person associated with the Dealer Manager, shall offer or sell Primary Shares in any jurisdiction except to investors who satisfy the investor suitability standards and minimum investment requirements under all of the following: (i) applicable provisions of the Prospectus; (ii) applicable laws of the jurisdiction of which such investor is a resident; (iii) applicable FINRA Conduct Rules; and (iv) the provisions of Section III.C. of the NASAA REIT Guidelines. The Dealer Manager agrees to ensure that, in recommending the purchase, sale or exchange of Primary Shares to an investor, the Dealer Manager, or a person associated with the Dealer Manager, shall have reasonable grounds to believe, on the basis of information obtained from the investor (and thereafter maintained in the manner and for the period required by the Commission, any state securities commission, FINRA or the Company) concerning the investor’s age, investment objectives, other investments, financial situation and needs, and any other information known to the Dealer Manager, or person associated with the Dealer Manager, that (i) the investor is or will be in a financial position appropriate to enable the investor to realize to a significant extent the benefits described in the Prospectus, including the tax benefits to the extent they are a significant aspect of the Company, (ii) the investor has a fair market net worth sufficient to sustain the risks inherent in an investment in Primary Shares in the amount proposed, including loss and potential lack of liquidity of such investment, and (iii) an investment in Primary Shares is otherwise suitable for such investor. The Dealer Manager further represents, warrants and covenants that the Dealer Manager, or a person associated with the Dealer Manager, will make every reasonable effort to determine the suitability and appropriateness of an investment in Primary Shares of each proposed investor solicited by a person associated with the Dealer Manager by reviewing documents and records disclosing the basis upon which the determination as to suitability was reached as to each such proposed investor, whether such documents and records relate to accounts which have been closed, accounts which are currently maintained, or accounts hereafter established. The Dealer Manager agrees to retain such documents and records in the Dealer Manager’s records for a period of six years from the date of the applicable sale of Primary Shares, to otherwise comply with the record keeping requirements provided in Section 4.6 below and to make such documents and records available to (i) the Company upon request, and (ii) representatives of the Commission, FINRA and applicable state securities administrators upon the Dealer Manager’s receipt of an appropriate document subpoena or other appropriate request for documents from any such agency. The Dealer Manager shall not purchase any Primary Shares for a discretionary account without obtaining the prior written approval of the Dealer Manager’s customer and such customer’s completed and executed Subscription Agreement (as defined in Section 6 herein).
               4.6 Recordkeeping. The Dealer Manager agrees to comply with the record keeping requirements of the Exchange Act, including but not limited to, Rules 17a-3 and 17a-4 promulgated under the Exchange Act. The Dealer Manager further agrees to keep such records with respect to each customer who purchases Primary Shares, the customer’s suitability and the amount of Primary Shares sold, and to retain such records for such period of time as may be required by the Commission, any state securities commission, FINRA or the Company.

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          4.7 Customer Information. The Dealer Manager shall:
               (a) abide by and comply with (i) the privacy standards and requirements of the GLB Act; (ii) the privacy standards and requirements of any other applicable federal or state law; and (iii) its own internal privacy policies and procedures, each as may be amended from time to time;
               (b) refrain from the use or disclosure of nonpublic personal information (as defined under the GLB Act) of all customers who have opted out of such disclosures except as necessary to service the customers or as otherwise necessary or required by applicable law; and
               (c) determine which customers have opted out of the disclosure of nonpublic personal information by periodically reviewing and, if necessary, retrieving an aggregated list of such customers from the Participating Dealers (the “List”) to identify customers that have exercised their opt-out rights. In the event either party uses or discloses nonpublic personal information of any customer for purposes other than servicing the customer, or as otherwise required by applicable law, that party will consult the List to determine whether the affected customer has exercised his or her opt-out rights. Each party understands that it is prohibited from using or disclosing any nonpublic personal information of any customer that is identified on the List as having opted out of such disclosures.
          4.8 Resale of Offered Shares. The Dealer Manager agrees, and each Participating Dealer shall have agreed, to comply and shall comply with any applicable requirements with respect to its and each Participating Dealer’s participation in any resales or transfers of the Offered Shares. In addition, the Dealer Manager agrees, and each Participating Dealer shall have agreed, that should it or they assist with the resale or transfer of the Offered Shares, it and each Participating Dealer will fully comply with all applicable FINRA rules and any other applicable federal or state laws.
          4.9 Blue Sky Compliance. The Dealer Manager shall cause the Primary Shares to be offered and sold only in the Qualified Jurisdictions. No Primary Shares shall be offered or sold for the account of the Company in any other states or foreign jurisdictions.
          4.10 Distribution of Prospectuses. The Dealer Manager is familiar with Rule 15c2-8 under the Exchange Act, relating to the distribution of preliminary and final Prospectuses, and confirms that it has complied and will comply therewith.
          4.11 Authorized Sales Materials. The Dealer Manager shall use and distribute in conjunction with the offer and sale of any Offered Shares only the Prospectus and the Authorized Sales Materials.
          4.12 Materials for Broker-Dealer Use Only. The Dealer Manager represents and warrants to the Company that it will not use any sales literature not authorized and approved by the Company or use any “broker-dealer use only” materials with members of the public in connection with offers or sales or the Offered Shares.
          4.13 Suspension or Termination of Offering. The Dealer Manager agrees, and will require that each of the Participating Dealers agree, to suspend or terminate the offering and sale of the Primary Shares upon request of the Company at any time and to resume offering and sale of the Primary Shares upon subsequent request of the Company.
     5. Sale of Primary Shares.
          5.1 Exclusive Appointment of Dealer Manager. The Company hereby appoints the Dealer Manager as its exclusive agent and managing dealer during the period commencing with the date hereof and ending on the termination date of the Offering (the “Termination Date”) described in the Prospectus (the “Offering Period”) to solicit, and to cause Participating Dealers to solicit, purchasers of the Primary Shares at the purchase price to be paid in accordance with, and otherwise upon the other terms and conditions set forth in, the Prospectus, and the Dealer Manager agrees to use its best efforts to procure purchasers of the Primary Shares during the Offering Period. The Primary Shares offered and sold through the Dealer Manager under this Dealer Manager Agreement shall be

11

 

offered and sold only by the Dealer Manager and, at the Dealer Manager’s sole option, by any Participating Dealers whom the Dealer Manager may retain, each of which shall be members of FINRA in good standing, pursuant to an executed Participating Dealer Agreement with such Participating Dealer. The Dealer Manager hereby accepts such agency and agrees to use its best efforts to sell the Primary Shares on said terms and conditions.
          5.2 Compensation.
               (a) Selling Commissions. Subject to any volume discounts and other special circumstances described in or otherwise provided in the “Plan of Distribution” section of the Prospectus or this Section 5.2, the Company will pay to the Dealer Manager selling commissions in the amount of 7.0% of the gross proceeds of the Primary Shares sold, which commissions may be reallowed in whole or in part to the Participating Dealer who sold the Offered Shares giving rise to such commissions, as described more fully in the Participating Dealer Agreement entered into with such Participating Dealer; provided, however, that no commissions described in this clause (a) shall be payable in respect of the purchase of Primary Shares sold: (i) through an investment advisory representative affiliated with a Participating Dealer who is paid on a fee-for-service basis by the investor; (ii) by a Participating Dealer (or such Participating Dealer’s registered representatives and their family members), in its individual capacity, or by a retirement plan of such Participating Dealer (or such Participating Dealer’s registered representatives), or (iii) by an officer, director or employee of the Company, the Advisor or their respective affiliates. The Company will not pay to the Dealer Manager any selling commissions in respect of the purchase of any DRIP Shares.
               (b) Dealer Manager Fee. Subject to special circumstances described in or otherwise provided in the “Plan of Distribution” section of the Prospectus or this Section 5.2, the Company will pay to the Dealer Manager a dealer manager fee in the amount of 3.0% of the gross proceeds from the sale of the Primary Shares (the “Dealer Manager Fee”), a portion of which may be reallowed to Participating Dealers (as described more fully in the Participating Dealer Agreement entered into with such Participating Dealer), which reallowance, if any, shall be determined by the Dealer Manager in its discretion based on factors including, but not limited to, the number of shares sold by such Participating Dealer, the assistance of such Participating Dealer in marketing the Offering and due diligence expenses incurred, and the extent to which similar fees are reallowed to participating broker-dealers in similar offerings being conducted during the Offering Period; provided, however, that no Dealer Manager Fee shall be payable in respect of the purchase of Primary Shares by an officer or director of the Company, or by officers and employees the Advisor and the Advisor’s affiliates.
               (c) Friends and Family Program. As described in the Prospectus, the Dealer Manager may from time to time sell the Primary Shares to certain persons identified by the Company. The purchase price for Shares under this program will be at the public offering price, net of selling commissions. The Dealer Manager agrees to work together with the Company to implement this program and to execute sales under the program according to the procedures agreed upon by the Dealer Manager and the Company.
          5.3 Obligations to Participating Dealers. The Company will not be liable or responsible to any Participating Dealer for direct payment of commissions or any reallowance of the Dealer Manager Fee to such Participating Dealer, it being the sole and exclusive responsibility of the Dealer Manager for payment of commissions or any reallowance of the Dealer Manager Fee to Participating Dealers. Notwithstanding the above, the Company, in its sole discretion, may act as agent of the Dealer Manager by making direct payment of commissions or reallowance of the Dealer Manager Fee to such Participating Dealers without incurring any liability therefor.
     6. Submission of Orders.
               (a) Each person desiring to purchase Primary Shares in the Offering will be required to complete and execute a subscription agreement in the form attached as an appendix to the Prospectus (the “Subscription Agreement”) and to deliver to the Dealer Manager or Participating Dealer, as the case may be (the “Processing Broker-Dealer”), such completed Subscription Agreement, together with a check, draft, wire or money order (hereinafter referred to as an “instrument of payment”) in the amount of $10.00 per Share, subject to discounts for certain categories of purchasers as described above. There shall be a minimum initial purchase by any one purchaser of $2,500 of Primary Shares (except as otherwise indicated in the Prospectus, or in any letter or memorandum from the Company to the Dealer Manager). Until such time as the Company has received and

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accepted subscriptions for at least $2,500,000 in Primary Shares (the “Minimum Offering”) and released the proceeds from such subscriptions from the Escrow Account (or such greater amount as may be applicable in respect of any greater escrow in respect of subscribers from any state), those purchasers who purchase Primary Shares will be instructed by the Processing Broker-Dealer to make their checks payable to “UMB Bank, N.A., as escrow agent for CM REIT, Inc.” Thereafter, those persons who purchase Primary Shares will be instructed by the Processing Broker-Dealer to make their checks payable to “CM REIT, Inc.”
               (b) The Processing Broker-Dealer receiving a Subscription Agreement and instrument of payment not conforming to the foregoing instructions shall return such Subscription Agreement and instrument of payment directly to such subscriber not later than the end of the second business day following receipt by the Processing Broker-Dealer of such materials. Subscription Agreements and instruments of payment received by the Processing Broker-Dealer which conform to the foregoing instructions shall be transmitted for deposit pursuant to one of the following methods:
                    (i) where, pursuant to the internal supervisory procedures of the Processing Broker-Dealer, internal supervisory review is conducted at the same location at which Subscription Agreements and instruments of payment are received from subscribers, then, by noon of the next business day following receipt by the Processing Broker-Dealer, the Processing Broker-Dealer will transmit the Subscription Agreements and instruments of payment to the Escrow Agent or, after the Minimum Offering has been obtained, to the Company or to such other account or agent as directed by the Company; and
                    (ii) where, pursuant to the internal supervisory procedures of the Processing Broker-Dealer, final internal supervisory review is conducted at a different location (the “Final Review Office”), Subscription Agreements and instruments of payment will be transmitted by the Processing Broker-Dealer to the Final Review Office by noon of the next business day following receipt by the Processing Broker-Dealer. The Final Review Office will in turn by noon of the next business day following receipt by the Final Review Office, transmit such Subscription Agreements and instruments of payment to the Escrow Agent or, after the Minimum Offering has been obtained, to the Company or to such other account or agent as directed by the Company.
               (c) Notwithstanding the foregoing, with respect to any Offered Shares to be purchased by a custodial account, the Processing Broker-Dealer shall cause the custodian of such account to deliver a completed Subscription Agreement and instrument of payment for such account directly to the Escrow Agent. The Processing Broker-Dealer shall furnish to the Escrow Agent with each delivery of instruments of payment a list of the subscribers showing the name, address, tax identification number, state of residence, amount of Offered Shares subscribed for, and the amount of money paid.
     7. Indemnification.
          7.1 Indemnified Parties Defined. For the purposes of this Section 7, an entity’s “Indemnified Parties” shall include such entity’s officers, directors, employees, members, partners, affiliates, agents and representatives, and each person, if any, who controls such entity within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act.
          7.2 Indemnification of the Dealer Manager and Participating Dealers. The Company will indemnify, defend (subject to Section 7.6) and hold harmless the Dealer Manager and the Participating Dealers, and their respective Indemnified Parties, from and against any losses, claims (including the reasonable cost of investigation), damages or liabilities, joint or several, to which such Participating Dealers or the Dealer Manager, or their respective Indemnified Parties, may become subject, under the Securities Act or the Exchange Act, or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (a) in whole or in part, any material inaccuracy in a representation or warranty contained herein by the Company, any material breach of a covenant contained herein by the Company, or any material failure by the Company to perform its obligations hereunder or to comply with state or federal securities laws applicable to the Offering, or (b) any untrue statement or alleged untrue statement of a material fact contained (i) in any Registration Statement or any post-effective amendment thereto or in the Prospectus or any amendment or supplement to the Prospectus or (ii) in any Authorized Sales Materials or (iii) in any blue sky application or other document executed by the Company or on its behalf specifically for the purpose of qualifying any or all of the Offered Shares for sale

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under the securities laws of any jurisdiction or based upon written information furnished by the Company under the securities laws thereof (any such application, document or information being hereinafter called a “Blue Sky Application”), or (c) the omission or alleged omission to state a material fact required to be stated in the Registration Statement or any post-effective amendment thereof or in the Prospectus or any amendment or supplement to the Prospectus or necessary to make the statements therein not misleading, and the Company will reimburse each Participating Dealer or the Dealer Manager, and their respective Indemnified Parties, for any legal or other expenses reasonably incurred by such Participating Dealer or the Dealer Manager, and their respective Indemnified Parties, in connection with investigating or defending such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of, or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished either (x) to the Company by the Dealer Manager or (y) to the Company or the Dealer Manager by or on behalf of any Participating Dealer, in each case expressly for use in the Registration Statement or any post-effective amendment thereof, or the Prospectus or any such amendment thereof or supplement thereto. This indemnity agreement will be in addition to any liability which the Company may otherwise have.
     Notwithstanding the foregoing, as required by Section II.G. of the NASAA REIT Guidelines, the indemnification and agreement to hold harmless provided in this Section 7.2 is further limited to the extent that no such indemnification by the Company of a Participating Dealer or the Dealer Manager, or their respective Indemnified Parties, shall be permitted under this Agreement for, or arising out of, an alleged violation of federal or state securities laws, unless one or more of the following conditions are met: (a) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee; (b) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee; or (c) a court of competent jurisdiction approves a settlement of the claims against the particular indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the Commission and of the published position of any state securities regulatory authority in which the securities were offered or sold as to indemnification for violations of securities laws.
          7.3 Dealer Manager Indemnification of the Company. The Dealer Manager will indemnify, defend and hold harmless the Company and its Indemnified Parties and each person who has signed the Registration Statement, from and against any losses, claims, damages or liabilities to which any of the aforesaid parties may become subject, under the Securities Act or the Exchange Act, or otherwise, insofar as such losses, claims (including the reasonable cost of investigation), damages or liabilities (or actions in respect thereof) arise out of or are based upon (a) in whole or in part, any material inaccuracy in a representation or warranty contained herein by the Dealer Manager, any material breach of a covenant contained herein by the Dealer Manager, or any material failure by the Dealer Manager to perform its obligations hereunder or (b) any untrue statement or any alleged untrue statement of a material fact contained (i) in any Registration Statement or any post-effective amendment thereto or in the Prospectus or any amendment or supplement to the Prospectus or (ii) in any Authorized Sales Materials or (iii) any Blue Sky Application, or (c) the omission or alleged omission to state a material fact required to be stated in the Registration Statement or any post-effective amendment thereof or in the Prospectus or any amendment or supplement to the Prospectus or necessary to make the statements therein not misleading, provided, however, that in each case described in clauses (b) and (c) to the extent, but only to the extent, that such untrue statement or omission was made in reliance upon and in conformity with written information furnished to the Company by the Dealer Manager specifically for use with reference to the Dealer Manager in the preparation of the Registration Statement or any such post-effective amendments thereof or the Prospectus or any such amendment thereof or supplement thereto, or (d) any use of sales literature by the Dealer Manager not authorized or approved by the Company or any use of “broker-dealer use only” materials with members of the public concerning the Offered Shares by the Dealer Manager, or (e) any untrue statement made by the Dealer Manager or its representatives or agents or omission to state a fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading in connection with the offer and sale of the Offered Shares, or (f) any material violation by the Dealer Manager of this Agreement, or (g) any failure by the Dealer Manager to comply with applicable laws governing money laundry abatement and anti-terrorist financing efforts in connection with the Offering, including applicable FINRA Rules, Exchange Act Regulations and the USA PATRIOT Act, or (h) any other failure by the Dealer Manager to comply with applicable FINRA or Exchange Act Regulations. The Dealer Manager will

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reimburse the aforesaid parties in connection with investigation or defense of such loss, claim, damage, liability or action. This indemnity agreement will be in addition to any liability which the Dealer Manager may otherwise have.
          7.4 Participating Dealer Indemnification of the Company. By virtue of entering into the Participating Dealer Agreement, each Participating Dealer severally will agree to indemnify, defend and hold harmless the Company, the Dealer Manager, each of their respective Indemnified Parties, and each person who signs the Registration Statement, from and against any losses, claims, damages or liabilities to which the Company, the Dealer Manager, or any of their respective Indemnified Parties, or any person who signed the Registration Statement, may become subject, under the Securities Act or otherwise, as more fully described in the Participating Dealer Agreement.
          7.5 Action Against Parties; Notification. Promptly after receipt by any indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 7, promptly notify the indemnifying party of the commencement thereof; provided, however, the failure to give such notice shall not relieve the indemnifying party of its obligations hereunder except to the extent it shall have been prejudiced by such failure. In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled, to the extent it may wish, jointly with any other indemnifying party similarly notified, to participate in the defense thereof, with separate counsel. Such participation shall not relieve such indemnifying party of the obligation to reimburse the indemnified party for reasonable legal and other expenses (subject to Section 7.6) incurred by such indemnified party in defending itself, except for such expenses incurred after the indemnifying party has deposited funds sufficient to effect the settlement, with prejudice, of the claim in respect of which indemnity is sought. Any such indemnifying party shall not be liable to any such indemnified party on account of any settlement of any claim or action effected without the consent of such indemnifying party.
          7.6 Reimbursement of Fees and Expenses. An indemnifying party under Section 7 of this Agreement shall be obligated to reimburse an indemnified party for reasonable legal and other expenses as follows:
               (a) In the case of the Company indemnifying the Dealer Manager, the advancement of Company funds to the Dealer Manager for legal expenses and other costs incurred as a result of any legal action for which indemnification is being sought shall be permissible (in accordance with Section II.G. of the NASAA REIT Guidelines) only if all of the following conditions are satisfied: (i) the legal action relates to acts or omissions with respect to the performance of duties or services on behalf of the Company; (ii) the legal action is initiated by a third party who is not a stockholder of the Company or the legal action is initiated by a stockholder of the Company acting in his or her capacity as such and a court of competent jurisdiction specifically approves such advancement; and (iii) the Dealer Manager undertakes to repay the advanced funds to the Company, together with the applicable legal rate of interest thereon, in cases in which the Dealer Manager is found not to be entitled to indemnification.
               (b) In any case of indemnification other than that described in Section 7.6(a) above, the indemnifying party shall pay all legal fees and expenses reasonably incurred by the indemnified party in the defense of such claims or actions; provided, however, that the indemnifying party shall not be obligated to pay legal expenses and fees to more than one law firm in connection with the defense of similar claims arising out of the same alleged acts or omissions giving rise to such claims notwithstanding that such actions or claims are alleged or brought by one or more parties against more than one indemnified party. If such claims or actions are alleged or brought against more than one indemnified party, then the indemnifying party shall only be obliged to reimburse the expenses and fees of the one law firm that has been participating by a majority of the indemnified parties against which such action is finally brought; and in the event a majority of such indemnified parties is unable to agree on which law firm for which expenses or fees will be reimbursable by the indemnifying party, then payment shall be made to the first law firm of record representing an indemnified party against the action or claim. Such law firm shall be paid only to the extent of services performed by such law firm and no reimbursement shall be payable to such law firm on account of legal services performed by another law firm.
     8. Contribution.
               (a) If the indemnification provided for in Section 7 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or

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expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, the Dealer Manager and the Participating Dealer, respectively, from the offering of the Primary Shares pursuant to this Agreement and the relevant Participating Dealer Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, the Dealer Manager and the Participating Dealer, respectively, in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations.
               (b) The relative benefits received by the Company, the Dealer Manager and the Participating Dealer, respectively, in connection with the offering of the Primary Shares pursuant to this Agreement and the relevant Participating Dealer Agreement shall be deemed to be in the same respective proportion as the total net proceeds from the offering of the Primary Shares pursuant to this Agreement and the relevant Participating Dealer Agreement (before deducting expenses), received by the Company, and the total selling commissions and Dealer Manager Fees received by the Dealer Manager and the Participating Dealer, respectively, in each case as set forth on the cover of the Prospectus bear to the aggregate initial public offering price of the Primary Shares as set forth on such cover.
               (c) The relative fault of the Company, the Dealer Manager and the Participating Dealer, respectively, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact related to information supplied by the Company, or by the Dealer Manager or by the Participating Dealer, respectively, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
               (d) The Company, the Dealer Manager and the Participating Dealer (by virtue of entering into the Participating Dealer Agreement) agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable contributions referred to above in this Section 8. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 8 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission or alleged omission.
               (e) Notwithstanding the provisions of this Section 8, the Dealer Manager and the Participating Dealer shall not be required to contribute any amount by which the total price at which the Primary Shares sold to the public by them exceeds the amount of any damages which the Dealer Manager and the Participating Dealer have otherwise been required to pay by reason of any untrue or alleged untrue statement or omission or alleged omission.
               (f) No party guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any party who was not guilty of such fraudulent misrepresentation.
               (g) For the purposes of this Section 8, the Dealer Manager’s officers, directors, employees, members, partners, agents and representatives, and each person, if any, who controls the Dealer Manager within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution of the Dealer Manager, and each officers, directors, employees, members, partners, agents and representatives of the Company, each officer of the Company who signed the Registration Statement and each person, if any, who controls the Company, within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution of the Company, respectively. The Participating Dealers’ respective obligations to contribute pursuant to this Section 8 are several in proportion to the number of Primary Shares sold by each Participating Dealer and not joint.

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     9. Survival of Provisions. The respective agreements, representations and warranties of the Company and the Dealer Manager set forth in this Agreement shall remain operative and in full force and effect until the Termination Date regardless of: (a) any investigation made by or on behalf of the Dealer Manager or any Participating Dealer or any person controlling the Dealer Manager or any Participating Dealer or by or on behalf of the Company or any person controlling the Company; and (b) the delivery of payment for the Offered Shares. Following the termination of this Agreement, this Agreement will become void and there will be no liability of any party to any other party hereto, except for obligations under Sections 7, 8, 9, 10, 12, 13, 14 and 16, all of which will survive the termination of this Agreement.
     10. APPLICABLE LAW; VENUE. THIS AGREEMENT WAS EXECUTED AND DELIVERED IN, AND ITS VALIDITY, INTERPRETATION AND CONSTRUCTION SHALL BE GOVERNED BY THE LAWS OF, THE STATE OF NEVADA; PROVIDED HOWEVER, THAT CAUSES OF ACTION FOR VIOLATIONS OF FEDERAL OR STATE SECURITIES LAWS SHALL NOT BE GOVERNED BY THIS SECTION 10. VENUE FOR ANY ACTION BROUGHT HEREUNDER SHALL LIE EXCLUSIVELY IN LAS VEGAS, NEVADA.
     11. Counterparts. This Agreement may be executed in any number of counterparts. Each counterpart, when executed and delivered, shall be an original contract, but all counterparts, when taken together, shall constitute one and the same Agreement.
     12. Entire Agreement. This Agreement and the Exhibit attached hereto constitute the entire agreement among the parties and supersede any prior understanding, whether written or oral, prior to the date hereof with respect to the Offering.
     13. Successors and Amendment.
          13.1 Successors. This Agreement shall inure to the benefit of and be binding upon the Dealer Manager and the Company and their respective successors and permitted assigns and shall inure to the benefit of the Participating Dealers to the extent set forth in Sections 1 and 5 hereof. Nothing in this Agreement is intended or shall be construed to give to any other person any right, remedy or claim, except as otherwise specifically provided herein.
          13.2 Assignment. Neither the Company nor the Dealer Manager may assign or transfer any of such party’s rights or obligations under this Agreement without the prior written consent of the other party.
          13.3 Amendment. This Agreement may be amended only by the written agreement of the Dealer Manager and the Company.
     14. Term and Termination.
          14.1 Termination; General. This Agreement may be terminated by either party upon 60 calendar days’ written notice to the other party in accordance with Section 16 below. In any case, this Agreement shall expire at the close of business on the Termination Date.
          14.2 Dealer Manager Obligations Upon Termination. The Dealer Manager, upon the expiration or termination of this Agreement, shall (a) promptly deposit any and all funds, if any, in its possession which were received from investors for the sale of Offered Shares into the appropriate account designated by the Company for the deposit of investor funds, (b) promptly deliver to the Company all records and documents in its possession which relate to the Offering and are not designated as dealer copies, (c) provide a list of all purchasers and broker-dealers with whom the Dealer Manager has initiated oral or written discussions regarding the Offering, and (d) notify Participating Dealers of such termination. The Dealer Manager, at its sole expense, may make and retain copies of all such records and documents, but shall keep all such information confidential. The Dealer Manager shall use its best efforts to cooperate with the Company to accomplish an orderly transfer of management of the Offering to a party designated by the Company.

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          14.3 Company Obligations Upon Termination. Upon expiration or termination of this Agreement, the Company shall pay to the Dealer Manager all compensation to which the Dealer Manager is or becomes entitled under Section 5 hereof at such time as such compensation becomes payable.
     15. Confirmation. The Company hereby agrees and assumes the duty to confirm on its behalf and on behalf of dealers or brokers who sell the Offered Shares all orders for purchase of Offered Shares accepted by the Company. Such confirmations will comply with the rules of the Commission and FINRA, and will comply with applicable laws of such other jurisdictions to the extent the Company is advised of such laws in writing by the Dealer Manager.
     16. Notices. Any notice, approval, request, authorization, direction or other communication under this Agreement shall be deemed given (a) when delivered personally, (b) on the first business day after delivery to a national overnight courier service, (c) upon receipt of confirmation if sent via facsimile, or (d) on the fifth business day after deposited in the United States mail, properly addressed and stamped with the required postage, registered or certified mail, return receipt requested, in each case to the intended recipient at the address set forth below:
     
     If to the Company:
  CM REIT, Inc.
 
  1291 W. Galleria Drive, Suite 200
 
  Henderson, Nevada 89014
 
  Facsimile: (702) 795-5158
 
  Attention: Chief Executive Officer
 
    
     If to the Dealer Manager:
  CM Securities, LLC
 
  1291 W. Galleria Drive, Suite 210
 
  Henderson, Nevada 89014
 
  Facsimile: (702) 795-5158
 
  Attention: President
     Any party may change its address specified above by giving the other party notice of such change in accordance with this Section 16.
[Remainder of page intentionally left blank.]

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     If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter and your acceptance shall constitute a binding agreement between us as of the date first above written.
         
  Very truly yours,

“COMPANY”

CM REIT, INC.
 		  
  By:   /s/ Stacy M. Riffe   
       Stacy M. Riffe  
       Chief Financial Officer  
 
Accepted and agreed as of the date first above written:
     
“DEALER MANAGER”
 
    
CM SECURITIES, LLC
 
    
By:
 /s/ Todd B. Parriott
 
   Todd B. Parriott
 
   Chief Executive Officer

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EXHIBIT A
CM REIT, INC.
FORM OF PARTICIPATING DEALER AGREEMENT
Up to $1,000,000,000 in Shares of Common Stock, $0.01 par value per share
Dated:              , 20   
Ladies and Gentlemen:
     Subject to the terms described herein, CM Securities, LLC, as the dealer manager (the “Dealer Manager”) for CM REIT, Inc., a Maryland corporation (the “Company”), invites you (“Participating Dealer”) to participate in the distribution, on a “best efforts basis,” of up to $1,000,000,000 in shares of common stock of the Company, $0.01 par value per share (the “Common Stock”) to the public (the “Offering”), of which amount: (a) up to $900,000,000 in shares of Common Stock are being offered to the public pursuant to the Company’s primary offering (the “Primary Shares”); and (b) up to $100,000,000 in shares of Common Stock are being offered to stockholders of the Company pursuant to the Company’s distribution reinvestment plan (the “DRIP Shares” and, together with the Primary Shares, the “Offered Shares”). The Primary Shares will be offered at $10.00 per share (subject in certain circumstances to discounts for certain categories of purchasers). Notwithstanding the foregoing, the Company has reserved the right to reallocate the Offered Shares between the Primary Shares and the DRIP Shares.
     A registration statement on Form S-11 (File No. 333-156434) has been prepared by the Company in accordance with applicable requirements of the Securities Act of 1933, as amended (the “Securities Act”), and the applicable rules and regulations of the Securities and Exchange Commission (the “Commission”) promulgated thereunder (the “Securities Act Regulations”), for the registration of the Offered Shares. Such registration statement, which includes a preliminary prospectus, was filed with the Commission on December 23, 2008. The Company has prepared and filed such amendments thereto, if any, and such amended prospectus, if any, as may have been required to the date hereof, and will file such additional amendments and supplements thereto as may hereafter be required. Copies of such registration statement and each amendment thereto have been or will be delivered to Participating Dealer. The prospectus, as amended or supplemented, on file with the Commission at the Effective Date (as defined below) of the registration statement (including financial statements, exhibits and all other documents related thereto filed as a part thereof or incorporated therein), is hereinafter referred to as the “Prospectus,” except that if the Prospectus is amended or supplemented after the Effective Date, the term “Prospectus” shall refer to the Prospectus as amended or supplemented to date, and if the Prospectus filed by the Company pursuant to Rule 424(b) or 424(c) of the Securities Act Regulations shall differ from the Prospectus on file at the time the registration statement or any post-effective amendment to the registration statement shall become effective, the term “Prospectus” shall refer to the Prospectus filed pursuant to either Rule 424(b) or 424(c) of the Securities Act Regulations from and after the date on which it shall have been filed with the Commission. As used in this agreement, the term “Registration Statement” means the Registration Statement, as amended through the date hereof, except that, if the Company files any post-effective amendments to the Registration Statement, “Registration Statement” shall refer to the Registration Statement as so amended by the last post-effective amendment declared effective, and the term “Effective Date” means the applicable date upon which the Registration Statement or any post-effective amendment thereto is or was first declared effective by the Commission.
     I. Dealer Manager Agreement. The Dealer Manager has entered into a Dealer Manager Agreement with the Company dated October 21, 2010 (the “Dealer Manager Agreement”). Upon effectiveness of this Participating Dealer Agreement (this “Agreement”), you will become one of the Participating Dealers referred to in the Dealer Manager Agreement.
     II. Sale of Shares. Participating Dealer hereby agrees to use its best efforts to sell the Primary Shares for cash on the terms and conditions stated in the Prospectus. Nothing in this Agreement shall be deemed or construed to make Participating Dealer an employee, agent, representative, or partner of the Dealer Manager, the Company, and Participating Dealer is not authorized to act for the Dealer Manager, the Company or to make any

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representations on their behalf except as set forth in the Prospectus and any printed sales literature or other materials prepared by the Company or CM Group, LLC, a Delaware limited liability company that serves as the Company’s advisor pursuant to the terms of an advisory agreement (the “Advisor”), provided that the use of said sales literature and other materials has been approved for use by the Company in writing and all appropriate regulatory agencies (the “Authorized Sales Materials”).
     III. Submission of Orders. Each person desiring to purchase Primary Shares in the Offering will be required to complete and execute a subscription agreement (“Subscription Agreement”) in the form attached as an Appendix to the Prospectus and to deliver to Participating Dealer such completed Subscription Agreement, together with a check, draft, wire or money order (hereinafter referred to as an “instrument of payment”) in the amount of $10.00 per Share, subject to discounts for certain categories of purchasers as described in the Prospectus. There shall be a minimum initial purchase by any one purchaser of $2,500 of Primary Shares (except as otherwise indicated in the Prospectus, or in any letter or memorandum from the Company to the Dealer Manager). Any Subscription Agreement and instrument of payment not conforming to the foregoing instructions shall be returned to such subscriber not later than the end of the second business day following receipt by Participating Dealer of such materials. Subscription Agreements and instruments of payment received by the Participating Dealer which conform to the foregoing instructions shall be transmitted for deposit pursuant to one of the following methods:
          (a) where, pursuant to Participating Dealer’s internal supervisory procedures, internal supervisory review is conducted at the same location at which Subscription Agreements and instruments of payment are received from subscribers, then, by noon of the next business day following receipt by Participating Dealer, Participating Dealer will transmit the Subscription Agreements and instrument of payment to the Escrow Agent (as defined below) or, after the Company has received and accepted subscriptions for at least $2,500,000 in Primary Shares (the “Minimum Offering”), to the Company or to such other account or agent as directed by the Company; and
          (b) where, pursuant to Participating Dealer’s internal supervisory procedures, final internal supervisory review is conducted at a different location (the “Final Review Office”), then Subscription Agreements and instruments of payment will be transmitted by Participating Dealer to the Final Review Office by noon of the next business day following receipt by Participating Dealer. The Final Review Office will in turn, by noon of the next business day following receipt by the Final Review Office, transmit such Subscription Agreements and instrument of payment to the Escrow Agent or, after the Minimum Offering has been obtained, to the Company or to such other account or agent as directed by the Company.
          (c) Participating Dealer understands that the Company and/or the Dealer Manager reserves the unconditional right to reject any order for any or no reason.
          (d) Notwithstanding the foregoing, with respect to any Primary Shares to be purchased by a custodial account, the Participating Dealer shall cause the custodian of such account to deliver a completed Subscription Agreement and instrument of payment for such account directly to the Escrow Agent. The Participating Dealer shall furnish to the Escrow Agent with each delivery of instruments of payment a list of the subscribers showing the name, address, tax identification number, state of residence, amount of Primary Shares subscribed for, and the amount of money paid.
          (e) Participating Dealer hereby agrees to be bound by the terms of the Escrow Agreement, dated October 21, 2010 (the “Escrow Agreement”), by and among UMB Bank, N.A. a national banking association, as escrow agent (the “Escrow Agent”), the Dealer Manager and the Company.
     IV. Participating Dealer’s Compensation.
               (b) Subject to special circumstances described in or as otherwise provided in the “Plan of Distribution” section of the Prospectus, Participating Dealer’s selling commission applicable to the total public offering price of Primary Shares sold by Participating Dealer which it is authorized to sell hereunder is 7.0% of the gross proceeds from the Primary Shares sold by it and accepted and confirmed by the Company, which commission will be paid by the Dealer Manager. For these purposes, a “sale of Primary Shares” shall occur if and only if a Subscription Agreement is accepted by the Company and the Company has thereafter distributed the commission to

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the Dealer Manager in connection with such transaction. Participating Dealer hereby waives any and all rights to receive payment of commissions due until such time as the Dealer Manager is in receipt of the commission from the Company. Participating Dealer affirms that the Dealer Manager’s liability for commissions payable to Participating Dealer is limited solely to the commissions received by the Dealer Manager from the Company associated with Participating Dealer’s sale of Primary Shares.
               (c) In addition, as set forth in the Prospectus, the Dealer Manager, in its sole discretion, may reallow a portion of the dealer manager fee described in the Prospectus (the “Dealer Manager Fee”) to Participating Dealer as marketing fees or to defray other distribution-related expenses. Such reallowance, if any, shall be determined by the Dealer Manager in its sole discretion based on factors including, but not limited to, the number of Primary Shares sold by Participating Dealer, the assistance of Participating Dealer in marketing the Offering and due diligence expenses incurred, the extent to which similar fees are reallowed to participating broker-dealers in similar offerings being conducted during the Offering and the level of services that the Participating Dealer performs in connection with the distribution of the Primary Shares, including ministerial, record-keeping, sub-accounting, stockholder services and other administrative services; provided, however, that Participating Dealer will not be entitled to receive Dealer Manager Fees which would cause the aggregate amount of selling commissions, Dealer Manager Fees and all other forms of underwriting compensation (as defined in accordance with applicable FINRA rules) received by the Dealer Manager and all Participating Dealers to exceed 10.0% of the gross proceeds raised from the sale of Primary Shares in the Offering. The Dealer Manager’s reallowance of Dealer Manager Fees to Participating Dealer shall be described in Schedule 1 to this Agreement.
               (d) Participating Dealer acknowledges and agrees that no selling commissions or Dealer Manager Fees will be paid in respect of the sale of any DRIP Shares.
               (e) The parties hereby agree that the foregoing selling commissions and Dealer Manager Fees are not in excess of the usual and customary distributors’ or sellers’ commission received in the sale of securities similar to the Primary Shares, that Participating Dealer’s interest in the offering is limited to such selling commissions and Dealer Manager Fees from the Dealer Manager and Participating Dealer’s indemnity referred to in Section XII below, and that the Company is not liable or responsible for the direct payment of such selling commissions and Dealer Manager Fees to Participating Dealer. In addition, as set forth in the Prospectus, the Dealer Manager will reimburse Participating Dealer for reasonable bona fide due diligence expenses incurred by Participating Dealer. Such due diligence expenses may include travel, lodging, meals and other reasonable out-of-pocket expenses incurred by Participating Dealer and its personnel when visiting the Company’s offices or properties to verify information relating to the Company or its properties. Participating Dealer shall provide a detailed and itemized invoice for any such due diligence expenses.
     I. Payment.
          (a) Payments of selling commissions will be made by the Dealer Manager (or by the Company as the agent of the Dealer Manager, as provided in the Dealer Manager Agreement) to Participating Dealer within 30 days of the receipt by the Dealer Manager of the gross commission payments from the Company.
          (b) Participating Dealer, in its sole discretion, may authorize Dealer Manager (or the Company as the agent of the Dealer Manager, as provided in the Dealer Manager Agreement) to deposit selling commissions, Dealer Manager Fees and other payments due to it pursuant to this Agreement directly to its bank account. If Participating Dealer so elects, Participating Dealer shall provide such deposit authorization and instructions in Schedule 2 to this Agreement.
     II. Right to Reject Orders or Cancel Sales. All orders, whether initial or additional, are subject to acceptance by and shall only become effective upon confirmation by the Company and/or the Dealer Manager, which reserves the right to reject any order for any or no reason. Orders not accompanied by the required instrument of payment for the Primary Shares may be rejected. Issuance and delivery of the Primary Shares will be made only after actual receipt of payment therefor. In the event an order is rejected, canceled or rescinded for any reason, Participating Dealer agrees to return to the Dealer Manager any selling commissions or Dealer Manager Fees theretofore paid with respect to such order, and, if Participating Dealer fails to so return any such selling

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commissions, the Dealer Manager shall have the right to offset amounts owed against future commissions or Dealer Manager Fees due and otherwise payable to Participating Dealer.
     III. Prospectus and Authorized Sales Materials. Participating Dealer is not authorized or permitted to give, and will not give, any information or make any representation (written or oral) concerning the Offered Shares except as set forth in the Prospectus and the Authorized Sales Materials. The Dealer Manager will supply Participating Dealer with reasonable quantities of the Prospectus (including any supplements thereto), as well as any Authorized Sales Materials, for delivery to investors, and Participating Dealer will deliver a copy of the Prospectus (including all supplements thereto) to each investor to whom an offer is made prior to or simultaneously with the first solicitation of an offer to sell the Primary Shares to an investor. Participating Dealer agrees that it will not send or give any supplements to the Prospectus or any Authorized Sales Materials to any investor unless it has previously sent or given a Prospectus and all supplements thereto to that investor or has simultaneously sent or given a Prospectus and all supplements thereto with such Prospectus supplement or Authorized Sales Materials. Participating Dealer agrees that it will not show or give to any investor or reproduce any material or writing which is supplied to it by the Dealer Manager and marked “broker-dealer use only” or otherwise bearing a legend denoting that it is not to be used in connection with the offer or sale of Offered Shares to members of the public. Participating Dealer agrees that it will not use in connection with the offer or sale of Offered Shares any materials or writings which have not been previously approved by the Company other than the Prospectus and the Authorized Sales Materials. Participating Dealer agrees to furnish a copy of any revised preliminary Prospectus to each person to whom it has furnished a copy of any previous preliminary Prospectus, and further agrees that it will itself mail or otherwise deliver all preliminary and final Prospectuses required for compliance with the provisions of Rule 15c2-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
     IV. License and Association Membership. Participating Dealer’s acceptance of this Agreement constitutes a representation to the Company and the Dealer Manager that Participating Dealer is a properly registered or licensed broker-dealer, duly authorized to sell Primary Shares under Federal and state securities laws and regulations in all states where it offers or sells Primary Shares, and that it is a member in good standing of FINRA. Participating Dealer represents and warrants that it is currently licensed as a broker-dealer in the jurisdictions identified on Schedule 3 to this Agreement and that its independent contractors and registered representatives have the appropriate licenses(s) to offer and sell the Primary Shares in such jurisdictions. This Agreement shall automatically terminate if Participating Dealer ceases to be a member in good standing of FINRA, or with the securities commission of the state in which Participating Dealer’s principal office is located. Participating Dealer agrees to notify the Dealer Manager immediately if Participating Dealer ceases to be a member in good standing of FINRA or with the securities commission of any state in which Participating Dealer is currently registered or licensed. The Participating Dealer also hereby agrees to abide by the Rules of Fair Practice of FINRA and to comply with Rules 2310, 2340, 2420, 2730, 2740, and 2750 of the FINRA Conduct Rules.
     V. Anti-Money Laundering Compliance Programs.
          (a) Participating Dealer’s acceptance of this Agreement constitutes a representation to the Company and the Dealer Manager that Participating Dealer has established and implemented an anti-money laundering compliance program (“AML Program”) in accordance with applicable law, including applicable FINRA Rules, rules promulgated by the Commission (the “Commission Rules”) and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act) of 2001, as amended by the USA Patriot Improvement and Reauthorization Act of 2005 (the “USA PATRIOT Act”), specifically including, but not limited to, Section 352 of the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the “Money Laundering Abatement Act” and together with the USA PATRIOT Act, the “AML Rules”), reasonably expected to detect and cause the reporting of suspicious transactions in connection with the sale of Primary Shares. Participating Dealer’s acceptance of this Agreement also constitutes a representation to the Company and the Dealer Manager that as of the date hereof, Participating Dealer is in compliance with all AML Rules, specifically including, but not limited to, the Customer Identification Program requirements under Section 326 of the Money Laundering Abatement Act. Participating Dealer covenants that it will perform all activities it is required to perform by applicable AML Rules and its AML Program with respect to all customers on whose behalf Participating Dealer submits orders to the Company. To the extent permitted by applicable law, Participating Dealer will share information with the Dealer Manager and the Company for purposes

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of ascertaining whether a suspicious activity report is warranted with respect to any suspicious transaction involving the purchase or intended purchase of Primary Shares.
          (b) Upon request by the Dealer Manager at any time, Participating Dealer hereby agrees to (i) furnish a written copy of its AML Program to the Dealer Manager for review, and (ii) furnish a copy of the findings and any remedial actions taken in connection with Participating Dealer’s most recent independent testing of its AML Program. Participating Dealer further represents that it is currently in compliance with all AML Rules, specifically including, but not limited to, the Customer Identification Program requirements under Section 326 of the Money Laundering Abatement Act, and Participating Dealer hereby covenants to remain in compliance with such requirements and shall, upon request by the Dealer Manager, provide a certification to Dealer Manager that, as of the date of such certification, (i) its AML Program is consistent with the AML Rules, (ii) it has continued to implement its AML Program, and (iii) it is currently in compliance with all AML Rules, specifically including, but not limited to, the Customer Identification Program requirements under Section 326 of the Money Laundering Abatement Act.
     VI. Limitation of Offer; Suitability.
          (a) Participating Dealer will offer Primary Shares only to persons who meet the suitability standards set forth in the Prospectus and any suitability letter or memorandum sent to it by the Company or the Dealer Manager and will only make offers to persons in the jurisdictions in which it is advised in writing by the Company or the Dealer Manager that the Primary Shares are qualified for sale or that such qualification is not required (the “Qualified Jurisdictions”). Notwithstanding the qualification of the Primary Shares for sale in any respective jurisdiction (or the exemption therefrom), Participating Dealer represents, warrants and covenants that it will not offer Primary Shares and will not permit any of its registered representatives to offer Primary Shares in any jurisdiction unless both Participating Dealer and such registered representative are duly licensed to transact securities business in such jurisdiction. In offering Primary Shares, Participating Dealer will comply with the provisions of the Rules of Fair Practice set forth in the FINRA Manual, as well as all other applicable rules and regulations relating to suitability of investors, including without limitation, the provisions of Section III.C. of the Statement of Policy Regarding Real Estate Investment Trusts of the North American Securities Administrators Association, Inc. (the “NASAA REIT Guidelines”).
          (b) Participating Dealer further represents, warrants and covenants that neither Participating Dealer, nor any person associated with Participating Dealer, shall offer or sell Primary Shares in any jurisdiction except to investors who satisfy the investor suitability standards and minimum investment requirements under all of the following: (i) applicable provisions of the Prospectus; (ii) applicable laws of the jurisdiction of which such investor is a resident; (iii) applicable FINRA Conduct Rules; and (iv) the provisions of Section III.C. of the NASAA REIT Guidelines. Participating Dealer agrees to ensure that, in recommending the purchase, sale or exchange of Primary Shares to an investor, Participating Dealer, or a person associated with Participating Dealer, shall have reasonable grounds to believe, on the basis of information obtained from the investor (and thereafter maintained in the manner and for the period required by the Commission, any state securities commission, FINRA or the Company) concerning such investor’s age, investment objectives, other investments, financial situation and needs, and any other information known to Participating Dealer, or person associated with Participating Dealer, that (i) the investor is or will be in a financial position appropriate to enable the investor to realize to a significant extent the benefits described in the Prospectus, including the tax benefits to the extent they are a significant aspect of the Offered Shares, (ii) the investor has a fair market net worth sufficient to sustain the risks inherent in an investment in Primary Shares in the amount proposed, including loss and lack of liquidity of such investment, and (iii) an investment in Primary Shares is otherwise suitable for such investor. Participating Dealer further represents, warrants and covenants that Participating Dealer, or a person associated with Participating Dealer, will make every reasonable effort to determine the suitability and appropriateness of an investment in Primary Shares of each proposed investor solicited by a person associated with Participating Dealer by reviewing documents and records disclosing the basis upon which the determination as to suitability was reached as to each such proposed investor, whether such documents and records relate to accounts which have been closed, accounts which are currently maintained, or accounts hereafter established. Participating Dealer agrees to retain such documents and records in Participating Dealer’s records for a period of six years from the date of the applicable sale of Primary Shares, to otherwise comply with the record keeping requirements provided in Section XIV below and to make such documents and records available to (i) the Dealer Manager and the Company upon request, and (ii) representatives

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of the Commission, FINRA and applicable state securities administrators upon Participating Dealer’s receipt of an appropriate document subpoena or other appropriate request for documents from any such agency. Participating Dealer shall not purchase any Primary Shares for a discretionary account without obtaining the prior written approval of Participating Dealer’s customer and such customer’s completed and executed Subscription Agreement.
     VII. Due Diligence; Adequate Disclosure. Prior to offering the Primary Shares for sale, Participating Dealer shall have conducted an inquiry such that Participating Dealer has reasonable grounds to believe, based on information made available to Participating Dealer by the Company or the Dealer Manager through the Prospectus or other materials, that all material facts are adequately and accurately disclosed and provide a basis for evaluating a purchase of Primary Shares. Notwithstanding the foregoing, Participating Dealer may rely upon the results of an inquiry conducted by an independent third party retained for that purpose. Prior to the sale of the Primary Shares, Participating Dealer shall inform each prospective purchaser of Primary Shares of pertinent facts relating to the Primary Shares including specifically the risks related to limitations on liquidity and marketability of the Primary Shares during the term of the investment but shall not, in any event, make any representation on behalf of the Company except as set forth in the Prospectus and any Authorized Sales Materials.
     VIII. Indemnification. For the purposes of this Section XII, an entity’s “Indemnified Parties” shall include such entity’s officers, directors, employees, members, partners, affiliates, agents and representatives, and each person, if any, who controls such entity within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act.
          (a) Participating Dealer agrees to indemnify, defend and hold harmless the Company, the Dealer Manager, each of their respective Indemnified Parties, and each person who signs the Registration Statement, from and against any losses, claims, damages or liabilities to which the Company, the Dealer Manager, or any of their respective Indemnified Parties, or any person who signed the Registration Statement, may become subject, under the Securities Act or otherwise, insofar as such losses, claims (including the reasonable cost of investigation), damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) in whole or in part, any material inaccuracy in a representation or warranty by Participating Dealer, any material breach of a covenant by Participating Dealer, or any material failure by Participating Dealer to perform its obligations hereunder, or (ii) any untrue statement or alleged untrue statement of a material fact contained (1) in any Registration Statement or any post-effective amendment thereto or the Prospectus or any amendment or supplement to the Prospectus or (2) in any Authorized Sales Materials or (3) in any application to qualify the Offered Shares for the offer and sale under the applicable state securities or “blue sky” laws of any state or jurisdiction, or (iii) the omission or alleged omission to state a material fact required to be stated in the Registration Statement or any post-effective amendment thereof or in the Prospectus or any amendment or supplement to the Prospectus or necessary to make statements therein not misleading, provided, however, that in each case described in clauses (ii) and (iii) to the extent, but only to the extent, that such untrue statement or omission was made in reliance upon and in conformity with written information furnished to the Company or the Dealer Manager by Participating Dealer specifically for use with reference to Participating Dealer in the Registration Statement or any such post-effective amendments thereof or the Prospectus or any such amendment thereof or supplement thereto, or (iv) any use of sales literature by Participating Dealer not authorized or approved by the Company or use of “broker-dealer use only” materials with members of the public concerning the Offered Shares by Participating Dealer or Participating Dealer’s representatives or agents, or (v) any untrue statement made by Participating Dealer or its representatives or agents or omission to state a fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading in connection with the offer and sale of the Offered Shares, or (vi) any material violation of this Agreement by Participating Dealer, or (vii) any failure of Participating Dealer to comply with applicable laws governing money laundry abatement and anti-terrorist financing efforts in connection with the Offering, including applicable FINRA Rules, Commission Rules and the USA PATRIOT Act, or (viii) any other failure by Participating Dealer to comply with applicable FINRA rules or Commission Rules or any other applicable Federal or state laws in connection with the Offering. Participating Dealer will reimburse the aforesaid parties in connection with investigation or defense of such loss, claim, damage, liability or action. This indemnity agreement will be in addition to any liability which Participating Dealer may otherwise have.
          (b) Promptly after receipt by any indemnified party under this Section XII of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section XII, notify in writing the indemnifying party of the commencement thereof

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and the omission to so notify the indemnifying party shall not relieve the indemnifying party of its obligations hereunder except to the extent it shall have been prejudiced by such failure. In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled, to the extent it may wish, jointly with any other indemnifying party similarly notified, to participate in the defense thereof, with separate counsel. Such participation shall not relieve such indemnifying party of the obligation to reimburse the indemnified party for reasonable legal and other expenses (subject to Section XII (c) below) incurred by such indemnified party in defending itself, except for such expenses incurred after the indemnifying party has deposited funds sufficient to effect the settlement, with prejudice, of the claim in respect of which indemnity is sought. Any such indemnifying party shall not be liable to any such indemnified party on account of any settlement of any claim or action effected without the consent of such indemnifying party.
          (c) An indemnifying party under this Section XII of this Agreement shall pay all legal fees and expenses of the indemnified party in the defense of such claims or actions; provided, however, that the indemnifying party shall not be obligated to pay legal expenses and fees to more than one law firm in connection with the defense of similar claims arising out of the same alleged acts or omissions giving rise to such claims notwithstanding that such actions or claims are alleged or brought by one or more parties against more than one indemnified party. If such claims or actions are alleged or brought against more than one indemnified party, then the indemnifying party shall only be obliged to reimburse the expenses and fees of the one law firm that has been participating by a majority of the indemnified parties against which such action is finally brought; and in the event a majority of such indemnified parties is unable to agree on which law firm for which expenses or fees will be reimbursable by the indemnifying party, then payment shall be made to the first law firm of record representing an indemnified party against the action or claim. Such law firm shall be paid only to the extent of services performed by such law firm and no reimbursement shall be payable to such law firm on account of legal services performed by another law firm.
     IX. Contribution.
          (a) If the indemnification provided for in Section XII hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, the Dealer Manager and Participating Dealer, respectively, from the offering of the Primary Shares pursuant to this Agreement and the Dealer Manager Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, the Dealer Manager and Participating Dealer, respectively, in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations.
          (b) The relative benefits received by the Company, the Dealer Manager and Participating Dealer, respectively, in connection with the offering of the Primary Shares pursuant to this Agreement shall be deemed to be in the same respective proportion as the total net proceeds from the sale of the Primary Shares (before deducting expenses) received by the Company, and the total selling commissions and Dealer Manager Fees received by the Dealer Manager and Participating Dealer, respectively, in each case as set forth on the cover of the Prospectus bear to the aggregate initial public offering price of the Primary Shares as set forth on such cover.
          (c) The relative fault of the Company, the Dealer Manager and Participating Dealer, respectively, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact related to information supplied by the Company or by the Dealer Manager or by Participating Dealer, respectively, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
          (d) The Company, the Dealer Manager and Participating Dealer agree that it would not be just and equitable if contribution pursuant to this Section XIII were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable contributions referred to above in this Section XIII. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party

7

 

and referred to above in this Section XIII shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission or alleged omission.
          (e) Notwithstanding the provisions of this Section XIII, the Dealer Manager and Participating Dealer shall not be required to contribute any amount by which the total amount of selling commissions and Dealer Manager Fees received by them exceeds the amount of any damages which the Dealer Manager and Participating Dealer have otherwise been required to pay by reason of any untrue or alleged untrue statement or omission or alleged omission.
          (f) No party guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any party who was not guilty of such fraudulent misrepresentation.
          (g) For the purposes of this Section XIII, the Dealer Manager’s officers, directors, employees, members, partners, agents and representatives, and each person, if any, who controls the Dealer Manager within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution of the Dealer Manager, and each officers, directors, employees, members, partners, agents and representatives of the Company, each officer of the Company who signed the Registration Statement and each person, if any, who controls the Company, within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution of the Company, respectively. Participating Dealer’s obligations to contribute pursuant to this Section XIII are several in proportion to the number of Primary Shares sold by Participating Dealer and not joint.
     X. Compliance with Record Keeping Requirements. Participating Dealer agrees to comply with the record keeping requirements of the Exchange Act, including but not limited to, Rules 17a-3 and 17a-4 promulgated under the Exchange Act. Participating Dealer further agrees to keep such records with respect to each customer who purchases Primary Shares, his suitability and the amount of Primary Shares sold, and to retain such records for such period of time as may be required by the Commission, any state securities commission, FINRA or the Company.
     XI. Customer Complaints. Participating Dealer hereby agrees to provide to the Dealer Manager promptly upon receipt by Participating Dealer copies of any written or otherwise documented customer complaints received by Participating Dealer relating in any way to the Offering (including, but not limited to, the manner in which the Primary Shares are offered by Participating Dealer), the Offered Shares or the Company.
     XII. Effective Date. This Agreement will become effective upon the last date it is signed by either party hereto.
     XIII. Termination; Amendment.
          (a) Participating Dealer will immediately suspend or terminate its offer and sale of Primary Shares upon the request of the Company or the Dealer Manager at any time and will resume its offer and sale of Primary Shares hereunder upon subsequent request of the Company or the Dealer Manager. Any party may terminate this Agreement by written notice pursuant to Section XX below. This Agreement and the exhibits and schedules hereto are the entire agreement of the parties and supersedes all prior agreements, if any, between the parties hereto relating to the subject matter hereof.
          (b) This Agreement may be amended at any time by the Dealer Manager by written notice to Participating Dealer, and any such amendment shall be deemed accepted by Participating Dealer upon placing an order for sale of Primary Shares after it has received such notice.
     XIV. Assignment. Participating Dealer shall have no right to assign this Agreement or any of Participating Dealer’s rights hereunder or to delegate any of Participating Dealer’s obligations. Any purported assignment or delegation by Participating Dealer shall be null and void. The Dealer Manager shall have the right to

8

 

assign any or all of its rights and obligations under this Agreement by written notice, and Participating Dealer shall be deemed to have consented to such assignment by execution hereof. Dealer Manager shall provide written notice of any such assignment to Participating Dealer.
     XV. Privacy Laws. The Dealer Manager and Participating Dealer (each referred to individually in this Section XIX as a “party”) agree as follows:
               (f) Each party agrees to abide by and comply with (i) the privacy standards and requirements of the Gramm-Leach-Bliley Act of 1999 (“GLB Act”); (ii) the privacy standards and requirements of any other applicable Federal or state law; and (iii) its own internal privacy policies and procedures, each as may be amended from time to time;
          (a) Each party agrees to refrain from the use or disclosure of nonpublic personal information (as defined under the GLB Act) of all customers who have opted out of such disclosures except as necessary to service the customers or as otherwise necessary or required by applicable law; and
          (b) Each party shall be responsible for determining which customers have opted out of the disclosure of nonpublic personal information by periodically reviewing and, if necessary, retrieving a list of such customers (the “List”) as provided by each to identify customers that have exercised their opt-out rights. In the event either party uses or discloses nonpublic personal information of any customer for purposes other than servicing the customer, or as otherwise required by applicable law, that party will consult the List to determine whether the affected customer has exercised his or her opt-out rights. Each party understands that each is prohibited from using or disclosing any nonpublic personal information of any customer that is identified on the List as having opted out of such disclosures.
     II. Notice. All notices will be in writing and deemed given (a) when delivered personally, (b) on the first business day after delivery to a national overnight courier service, (c) upon receipt of confirmation if sent via facsimile, or (d) on the fifth business day after deposit in the United States mail, properly addressed and stamped with the required postage, registered or certified mail, return receipt requested, to the Dealer Manager at: 399 Park Avenue, 18th Floor, New York, New York, 10022, Attention: , and to Participating Dealer at the address specified by Participating Dealer on the signature page hereto.
     III. Attorneys’ Fees, Applicable Law and Venue.
     In any action to enforce the provisions of this Agreement or to secure damages for its breach, the prevailing party shall recover its costs and reasonable attorney’s fees. This Agreement shall be construed under the laws of the State of Nevada. Venue for any action (including arbitration) brought hereunder shall lie exclusively in Las Vegas, Nevada.
[Remainder of page intentionally left blank.]

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on its behalf by its duly authorized agent.
         
“DEALER MANAGER”
 
        
CM SECURITIES, LLC
 
        
By: 
 
 
  Name:   
 
  Title:  
     We have read the foregoing Agreement and we hereby accept and agree to the terms and conditions therein set forth. We hereby represent that the jurisdictions identified below represent a true and correct list of all jurisdictions in which we are registered or licensed as a broker or dealer and are fully authorized to sell securities, and we agree to advise you of any change in such list during the term of this Agreement.
     1. Identity of Participating Dealer:
   
Full Legal Name:  
 
 
to be completed by Participating Dealer)
   
Type of Entity: 
 
 
 to be completed by Participating Dealer)
   
Organized in the State of: 
 
 
(to be completed by Participating Dealer)
   
Tax Identification Number: 
 
 
(to be completed by Participating Dealer)
   
FINRA/CRD Number: 
 
 
(to be completed by Participating Dealer)
     2. Any notice under this Agreement will be deemed given pursuant to Section XX hereof when delivered to Participating Dealer as follows:
   
Company Name: 
 
   
Attention to: 
 
(Name)
(Title)
Street Address:
City, State and Zip Code:
Telephone No.:
Facsimile No.:
Email Address:
Accepted and agreed as of the date below:
“PARTICIPATING DEALER”
 
(Print Name of Participating Dealer)

10

 

       
 
 By:
   
       
 
   Name:
   
       
 
   Title:
   
       
 
   Date:
   

11

 

SCHEDULE 1
TO
PARTICIPATING DEALER AGREEMENT WITH
CM SECURITIES, LLC
NAME OF ISSUER: CM REIT, INC.
     
NAME OF PARTICIPATING DEALER:  
   
     
SCHEDULE TO AGREEMENT DATED:  
   
As marketing fees and to defray other distribution-related expenses, the Dealer Manager will pay ___basis points of the gross cash proceeds on all sales generated by Participating Dealer pursuant to Section IV of this Participating Dealer Agreement. These amounts are in addition to the selling commissions provided for in Section IV of this Participating Dealer Agreement and will be due and payable at the same time as the selling commissions, as more fully described in Section V hereof.
         
“DEALER MANAGER
 
        
CM SECURITIES, LLC
 
        
By: 
 
 
        
 
  Name:
  
 
 
  Title:  
         
“PARTICIPATING DEALER”
 
        
(Print Name of Participating Dealer)
 
        
By: 
 
 
        
 
  Name:   
 
        
 
  Title:  

Schedule 1

 

SCHEDULE 2
TO
PARTICIPATING DEALER AGREEMENT WITH
CM SECURITIES, LLC
NAME OF ISSUER: CM REIT, INC.
     
NAME OF PARTICIPATING DEALER:  
 
     
SCHEDULE TO AGREEMENT DATED:  
 
     Participating Dealer hereby authorizes the Dealer Manager or its agent to deposit selling commissions, reallowances and other payments due to it pursuant to the Participating Dealer Agreement to its bank account specified below. This authority will remain in force until Participating Dealer notifies the Dealer Manager in writing to cancel it. In the event that the Dealer Manager deposits funds erroneously into Participating Dealer’s account, the Dealer Manager is authorized to debit the account with no prior notice to Participating Dealer for an amount not to exceed the amount of the erroneous deposit.
     
Bank
    
Name:
   
     
Bank
    
Address:
   
     
Bank
    
Routing
    
Number:
   
     
Account
    
Number:
   
“PARTICIPATING DEALER”
         
By: 
 
 
        
 
  Name:   
 
        
 
  Title:  
 
        
 
  Date:  

Schedule 2

 

SCHEDULE 3
TO
PARTICIPATING DEALER AGREEMENT WITH
CM SECURITIES, LLC
Participating Dealer represents and warrants that it is currently licensed as a broker-dealer in the following jurisdictions:
     
o Alabama
  o Nebraska
o Alaska
  o Nevada
o Arizona
  o New Hampshire
o Arkansas
  o New Jersey
o California
  o New Mexico
o Colorado
  o New York
o Connecticut
  o North Carolina
o Delaware
  o North Dakota
o District of Columbia
  o Ohio
o Florida
  o Oklahoma
o Georgia
  o Oregon
o Hawaii
  o Pennsylvania
o Idaho
  o Puerto Rico
o Illinois
  o Rhode Island
o Indiana
  o South Carolina
o Iowa
  o South Dakota
o Kansas
  o Tennessee
o Kentucky
  o Texas
o Louisiana
  o Utah
o Maine
  o Vermont
o Maryland
  o Virgin Islands
o Massachusetts
  o Virginia
o Michigan
  o Washington
o Minnesota
  o West Virginia
o Mississippi
  o Wisconsin
o Missouri
  o Wyoming
o Montana
    

Schedule 3

EX-3.1 3 d65627a7exv3w1.htm EX-3.1 exv3w1
Exhibit 3.1
FORM OF
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
CM REIT, INC.
     CM REIT, Inc., a Maryland corporation (the “Corporation”), with its principal Maryland office at c/o The Corporation Trust, Incorporated, 300 East Lombard Street, Baltimore, Maryland 21202, hereby certifies that:
     FIRST: The amendments set forth in these Articles of Amendment and Restatement (“Articles”) were recommended by the Board of Directors of the Corporation and approved by the stockholders.
     SECOND: The Corporation desires to, and does hereby, amend and restate its Articles of Incorporation as currently in effect and as hereinafter amended.
     THIRD: The amendments set forth in these Articles, among other things, make certain changes as required by the Statement of Policy Regarding Real Estate Investment Trusts adopted by the North American Securities Administrators Association on May 7, 2007.
     FOURTH: The amendments set forth in these Articles of Amendment and Restatement have not changed the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of any shares of stock originally authorized in the Articles of Amendment and Restatement.
     FIFTH: The following provisions are all the provisions of the Articles of Amendment and Restatement currently in effect and as hereinafter amended and restated:
ARTICLE I
NAME
          The name of the corporation (which is hereinafter called the “Corporation”) is:
CM REIT, Inc.
ARTICLE II
PURPOSES AND POWERS
          The purposes for which the Corporation is formed are to engage in any lawful act or activity (including, without limitation or obligation, engaging in business as a real estate investment trust under the Internal Revenue Code of 1986, as amended, or any successor statute (the “Code”)) for which corporations may be organized under the general laws of the State of

 

 

Maryland as now or hereafter in force. For purposes of these Articles, “REIT” means a real estate investment trust under Sections 856 through 860 of the Code.
ARTICLE III
PRINCIPAL OFFICE IN STATE AND RESIDENT AGENT
          The address of the principal office of the Corporation in the State of Maryland is c/o The Corporation Trust Incorporated, 300 East Lombard Street, Baltimore, Maryland 21202. The name and address of the resident agent of the Corporation are The Corporation Trust Incorporated, 300 East Lombard Street, Baltimore, Maryland 21202. The resident agent is a Maryland corporation.
ARTICLE IV
DEFINITIONS
          As used in the Charter, the following terms have the following meanings unless the context otherwise requires:
          Acquisition Expenses. The term “Acquisition Expenses” means any and all expenses incurred by the Corporation, the Advisor, or any Affiliate of either in connection with the selection, evaluation, acquisition, origination or development of any Asset, whether or not acquired or originated, as applicable, including, without limitation, legal fees and expenses, travel and communications expenses, costs of appraisals, nonrefundable option payments on property or other investments not acquired, accounting fees and expenses, title insurance premium, and the costs of performing due diligence.
          Acquisition Fee. The term “Acquisition Fee” means any and all fees and commissions, exclusive of Acquisition Expenses, paid by any Person to any other Person (including any fees or commissions paid by or to any Affiliate of the Corporation or the Advisor) in connection with making or investing in Mortgages or the purchase, development or construction of a Property, including real estate commissions, selection fees, Development Fees, Construction Fees, nonrecurring management fees, loan fees, points or any other fees of a similar nature. Excluded are Development Fees and Construction Fees paid to any Person not affiliated with the Sponsor in connection with the actual development and construction of a project.
          Advisor or Advisors. The term “Advisor” or “Advisors” means the Person or Persons, if any, appointed, employed or contracted with by the Corporation pursuant to Section 8.1 hereof and responsible for directing or performing the day-to-day business affairs of the Corporation, including any Person to whom the Advisor subcontracts all or substantially all of such functions.
          Advisory Agreement. The term “Advisory Agreement” means the agreement between the Corporation and the Advisor pursuant to which the Advisor will direct or perform the day-to-day business affairs of the Corporation.

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          Affiliate or Affiliated. The term “Affiliate” or “Affiliated” means, with respect to any Person, (i) any Person directly or indirectly owning, controlling or holding, with the power to vote, 10% or more of the outstanding voting securities of such other Person; (ii) any Person 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled or held, with the power to vote, by such other Person; (iii) any Person directly or indirectly controlling, controlled by or under common control with such other Person; (iv) any executive officer, director, trustee or general partner of such other Person; and (v) any legal entity for which such Person acts as an executive officer, director, trustee or general partner.
          Aggregate Share Ownership Limit. The term “Aggregate Share Ownership Limit” means not more than 9.8% in value of the aggregate of the outstanding Shares.
          Asset. The term “Asset” means any Property, Mortgage or other investment (other than investments in bank accounts, money market funds or other current assets) owned by the Corporation, directly or indirectly through one or more of its Affiliates, and any other investment made by the Corporation, directly or indirectly through one or more of its Affiliates.
          Average Invested Assets. The term “Average Invested Assets” means, for a specified period, the average of the aggregate book value of the assets of the Corporation invested, directly or indirectly, before deducting reserves for depreciation, bad debts or other similar non-cash reserves, computed by taking the average of such values at the end of each month during such period.
          Beneficial Ownership. The term “Beneficial Ownership” means ownership of Shares by a Person, whether the interest in Shares is held directly or indirectly (including by a nominee), and includes interests that would be treated as owned through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms “Beneficial Owner,” “Beneficially Owns” and “Beneficially Owned” have the correlative meanings.
          Board or Board of Directors. The term “Board” or “Board of Directors” means the Board of Directors of the Corporation.
          Business Day. The term “Business Day” means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close.
          Bylaws. The term “Bylaws” means the Bylaws of the Corporation, as amended from time to time.
          Charitable Beneficiary. The term “Charitable Beneficiary” means one or more beneficiaries of the Charitable Trust as determined pursuant to Section 6.2.6, provided that each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code.
          Charitable Trust. The term “Charitable Trust” means any trust provided for in Section 6.2.1.

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          Charitable Trustee. The term “Charitable Trustee” means the Person unaffiliated with the Corporation and a Prohibited Owner, that is appointed by the Corporation to serve as Trustee of the Charitable Trust.
          Charter. The term “Charter” means the charter of the Corporation, as amended from time to time.
          Code. The term “Code” has the meaning as provided in Article II herein.
          Commencement of the Initial Public Offering. The term “Commencement of the Initial Public Offering” means the date that the Securities and Exchange Commission declares effective the registration statement filed under the Securities Act for the Initial Public Offering.
          Common Share Ownership Limit. The term “Common Share Ownership Limit” means not more than 9.8% (in value or in number of Shares, whichever is more restrictive) of the aggregate of the outstanding Common Shares.
          Common Shares. The term “Common Shares” has the meaning as provided in Section 5.1 herein.
          Competitive Real Estate Commission. The term “Competitive Real Estate Commission” means a real estate or brokerage commission paid for the purchase or sale of a Property that is reasonable, customary and competitive in light of the size, type and location of the Property.
          Conflicts Committee. The term “Conflicts Committee” has the meaning as provided in Section 10.4.1 herein.
          Construction Fee. The term “Construction Fee” means a fee or other remuneration for acting as general contractor and/or construction manager to construct improvements, supervise and coordinate projects or to provide major repairs or rehabilitations on a Property.
          Constructive Ownership. The term “Constructive Ownership” means ownership of Shares by a Person, whether the interest in Shares is held directly or indirectly (including by a nominee), and includes interests that would be treated as owned through the application of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code. The terms “Constructive Owner,” “Constructively Owns” and “Constructively Owned” have the correlative meanings.
          Contract Purchase Price. The term “Contract Purchase Price” means the amount actually paid or allocated in respect of the purchase, development, construction or improvement of a Property or the amount of funds advanced with respect to a Mortgage, or the amount actually paid or allocated in respect of the purchase of other Assets, in each case exclusive of Acquisition Fees and Acquisition Expenses.
          Corporation. The term “Corporation” has the meaning as provided in Article I herein.

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          Dealer Manager. The term “Dealer Manager” means CM Securities, LLC, an Affiliate of the Corporation, or such other Person selected by the Board to act as the dealer manager for an Offering.
          Development Fee. The term “Development Fee” means a fee for the packaging of a Property, including the negotiation and approval of plans, and any assistance in obtaining zoning and necessary variances and financing for a specific Property, either initially or at a later date.
          Director. The term “Director” has the meaning as provided in Section 7.1 herein.
          Distributions. The term “Distributions” means any distributions of money or other property, pursuant to Section 5.5 hereof, by the Corporation to owners of Shares, including distributions that may constitute a return of capital for federal income tax purposes.
          Excepted Holder. The term “Excepted Holder” means a Stockholder for whom an Excepted Holder Limit is created by the Board of Directors pursuant to Section 6.1.7.
          Excepted Holder Limit. The term “Excepted Holder Limit” means, provided that the affected Excepted Holder agrees to comply with the requirements established by the Board of Directors pursuant to Section 6.1.7 and subject to adjustment pursuant to Section 6.1.8, the percentage limit established by the Board of Directors pursuant to Section 6.1.7.
          Excess Amount. The term “Excess Amount” has the meaning as provided in Section 8.10 herein.
          Gross Proceeds. The term “Gross Proceeds” means the aggregate purchase price of all Shares sold for the account of the Corporation through an Offering, without deduction for Selling Commissions, volume discounts, any marketing support and due diligence expense reimbursement or Organization and Offering Expenses. For the purpose of computing Gross Proceeds, the purchase price of any Share for which reduced Selling Commissions are paid to the Dealer Manager or a Soliciting Dealer (where net proceeds to the Corporation are not reduced) shall be deemed to be the full amount of the offering price per Share pursuant to the Prospectus for such Offering without reduction.
          Indemnitee. The term “Indemnitee” has the meaning as provided in Section 12.4(a) herein.
          Independent Director. The term “Independent Director” means a Director who is not, and within the last two years has not been, directly or indirectly associated with the Sponsor or the Advisor by virtue of (i) ownership of an interest in the Sponsor, the Advisor or any of their Affiliates, (ii) employment by the Sponsor, the Advisor or any of their Affiliates, (iii) service as an officer or director of the Sponsor, the Advisor or any of their Affiliates, (iv) performance of services, other than as a Director, for the Corporation, (v) service as a director or trustee of more than three real estate investment trusts organized by the Sponsor or advised by the Advisor, or (vi) maintenance of a material business or professional relationship with the Sponsor, the Advisor or any of their Affiliates. A business

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or professional relationship shall be deemed “material” per se if the aggregate gross revenue derived by the prospective Director from the Sponsor, the Advisor and their Affiliates exceeds 5% of either the prospective Director’s annual gross revenue, derived from all sources during either of the last two years or the prospective Director’s net worth on a fair market value basis. An indirect association with the Sponsor or the Advisor includes circumstances in which a Director’s spouse, parent, child, sibling, mother- or fathers-in-law, sons- or daughters-in-law or brothers- or sisters-in-law is or has been associated with the Sponsor, the Advisor, any of their Affiliates or the Corporation.
          Independent Expert. The term “Independent Expert” means a Person with no material current or prior business or personal relationship with the Advisor or the Directors and who is engaged to a substantial extent in the business of rendering opinions regarding the value of Real Property and/or other Assets of the type held by the Corporation. Membership in a nationally recognized appraisal society such as the American Institute of Real Estate Appraisers or the Society of Real Estate Appraisers shall be conclusive evidence of being engaged to a substantial extent in the business of rendering opinions regarding the value of Real Property.
          Initial Date. The term “Initial Date” means the date on which Shares are first issued in the Corporation’s first Offering.
          Initial Investment. The term “Initial Investment” means that portion of the initial capitalization of the Corporation contributed by the Sponsor or its Affiliates pursuant to Section II.A. of the NASAA REIT Guidelines.
          Initial Public Offering. The term “Initial Public Offering” means the first Offering pursuant to an effective registration statement filed under the Securities Act.
          Invested Capital. The term “Invested Capital” means the amount calculated by multiplying the total number of Shares purchased by Stockholders by the issue price at the time of such purchase, reduced by the portion of any Distribution that is attributable to Net Sales Proceeds and by any amounts paid by the Corporation to repurchase Shares pursuant to the Corporation’s plan for the repurchase of Shares.
          Joint Ventures. The term “Joint Ventures” means those joint venture or partnership arrangements in which the Corporation or any of its subsidiaries is a co-venturer or general partner established to acquire or hold Assets.
          Leverage. The term “Leverage” means the aggregate amount of indebtedness of the Corporation for money borrowed (including purchase money mortgage loans) outstanding at any time, both secured and unsecured.
          Listing. The term “Listing” means the listing of the Shares on a national securities exchange or the trading of the Shares in the over-the-counter market. Upon such Listing, the Shares shall be deemed Listed.
          Market Price. The term “Market Price” on any date means, with respect to any class or series of outstanding Shares, the Closing Price for such Shares on such date. The “Closing Price” on any date means the last sale price for such Shares, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way,

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for such Shares, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the NYSE or, if such Shares are not listed or admitted to trading on the NYSE, as reported on the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which such Shares are listed or admitted to trading or, if such Shares are not listed or admitted to trading on any national securities exchange, the last quoted price, or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or, if such system is no longer in use, the principal other automated quotation system that may then be in use or, if such Shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in such Shares selected by the Board of Directors or, in the event that no trading price is available for such Shares, the fair market value of Shares, as determined in good faith by the Board of Directors.
          MGCL. The term “MGCL” means the Maryland General Corporation Law, as amended from time to time.
          Mortgages. The term “Mortgages” means, in connection with mortgage financing provided, invested in, participated in or purchased by the Corporation, all of the notes, deeds of trust, security interests or other evidences of indebtedness or obligations, which are secured or collateralized by Real Property owned by the borrowers under such notes, deeds of trust, security interests or other evidences of indebtedness or obligations.
          NASAA REIT Guidelines. The term “NASAA REIT Guidelines” means the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association.
          Net Assets. The term “Net Assets” means the total assets of the Corporation (other than intangibles) at cost, before deducting depreciation, reserves for bad debts or other non-cash reserves, less total liabilities, calculated at least quarterly by the Corporation on a basis consistently applied.
          Net Income. The term “Net Income” means for any period, the Corporation’s total revenues applicable to such period, less the total expenses applicable to such period other than additions to reserves for depreciation, bad debts or other similar non-cash reserves. If the Advisor receives an incentive fee, Net Income for the purposes of calculating Total Operating Expenses excludes any gain from the sale of the Assets.
          Net Sales Proceeds. The term “Net Sales Proceeds” means in the case of a transaction described in clause (i)(A) of the definition of Sale, the proceeds of any such transaction less the amount of selling expenses incurred by or on behalf of the Corporation, including all real estate commissions, closing costs and legal fees and expenses. In the case of a transaction described in clause (i)(B) of such definition, Net Sales Proceeds means the proceeds of any such transaction less the amount of selling expenses incurred by or on behalf of the Corporation, including any legal fees and expenses and other selling expenses incurred in connection with such transaction. In the case of a transaction described in clause (i)(C) of such

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definition, Net Sales Proceeds means the proceeds of any such transaction actually distributed to the Corporation from the Joint Venture less the amount of any selling expenses, including legal fees and expenses incurred by or on behalf of the Corporation (other than those paid by the Joint Venture). In the case of a transaction or series of transactions described in clause (i)(D) of the definition of Sale, Net Sales Proceeds means the proceeds of any such transaction (including the aggregate of all payments under a Mortgage on or in satisfaction thereof other than regularly scheduled interest payments) less the amount of selling expenses incurred by or on behalf of the Corporation, including all commissions, closing costs and legal fees and expenses. In the case of a transaction described in clause (i)(E) of such definition, Net Sales Proceeds means the proceeds of any such transaction less the amount of selling expenses incurred by or on behalf of the Corporation, including any legal fees and expenses and other selling expenses incurred in connection with such transaction. In the case of a transaction described in clause (ii) of the definition of Sale, Net Sales Proceeds means the proceeds of such transaction or series of transactions less all amounts generated thereby which are reinvested in one or more Assets within 180 days thereafter and less the amount of any real estate commissions, closing costs, and legal fees and expenses and other selling expenses incurred by or allocated to the Corporation in connection with such transaction or series of transactions. Net Sales Proceeds also includes any amounts that the Corporation determines, in its discretion, to be economically equivalent to proceeds of a Sale. Net Sales Proceeds does not include any reserves established by the Corporation in its sole discretion.
          NYSE. The term “NYSE” means the New York Stock Exchange.
          Offering. The term “Offering” means any offering and sale of Shares.
          Organization and Offering Expenses. The term “Organization and Offering Expenses” means any and all costs and expenses incurred by and to be paid from the assets of the Corporation in connection with the formation, qualification and registration of the Corporation, and the marketing and distribution of Shares, including, without limitation, total underwriting and brokerage discounts and commissions (including fees of the underwriters’ attorneys), expenses for printing, engraving, amending, supplementing, mailing and distributing costs, salaries of employees while engaged in sales activity, telephone and other telecommunications costs, all advertising and marketing expenses (including the costs related to investor and broker-dealer sales meetings), charges of transfer agents, registrars, trustees, escrow holders, depositories, experts, fees, expenses and taxes related to the filing, registration and qualification of the sale of the Shares under federal and state laws, including taxes and fees and accountants’ and attorneys’ fees.
          Person. The term “Person” means an individual, corporation, partnership, estate, trust (including a trust qualified under Sections 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other legal entity and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and a group to which an Excepted Holder Limit applies.

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          Plan of Liquidation. The term “Plan of Liquidation” has the meaning as provided in Article XV herein.
          Preferred Shares. The term “Preferred Shares” has the meaning as provided in Section 5.1 herein.
          Prohibited Owner. The term “Prohibited Owner” means, with respect to any purported Transfer, any Person who, but for the provisions of Section 6.1.1, would Beneficially Own or Constructively Own Shares, and if appropriate in the context, also means any Person who would have been the record owner of Shares that the Prohibited Owner would have so owned.
          Property or Properties. The term “Property” or “Properties” means, as the context requires, any, or all, respectively, of the Real Property acquired by the Corporation, directly or indirectly, including through joint venture arrangements or other partnership or investment interests or mortgage foreclosures.
          Prospectus. The term “Prospectus” has the same meaning given to that term in Section 2(10) of the Securities Act, including a preliminary prospectus, an offering circular as described in Rule 256 of the General Rules and Regulations under the Securities Act, or, in the case of an intrastate offering, any document by whatever name known, utilized for the purpose of offering and selling Securities to the public.
          Real Property or Real Estate. The term “Real Property” or “Real Estate” means land, rights in land (including leasehold interests), and any buildings, structures, improvements, furnishings, fixtures and equipment located on or used in connection with land and rights or interests in land.
          Reinvestment Plan. The term “Reinvestment Plan” has the meaning as provided in Section 5.10 herein.
          REIT. The term “REIT” means a corporation, trust, association or other legal entity (other than a real estate syndication) that is engaged primarily in investing in equity interests in real estate (including fee ownership and leasehold interests) or in loans secured by real estate or both as defined pursuant to the REIT Provisions of the Code.
          REIT Provisions of the Code. The term “REIT Provisions of the Code” means Sections 856 through 860 of the Code and any successor or other provisions of the Code relating to real estate investment trusts (including provisions as to the attribution of ownership of beneficial interests therein) and the regulations promulgated thereunder.
          Restriction Termination Date. The term “Restriction Termination Date” means the first day after the Initial Date on which the Board of Directors determines that it is no longer in the best interests of the Corporation to attempt to, or continue to, qualify as a REIT or that compliance with the restrictions and limitations on Beneficial Ownership, Constructive Ownership and Transfers of Shares set forth herein is no longer required in order for the Corporation to qualify as a REIT.

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          Roll-Up Entity. The term “Roll-Up Entity” means a partnership, real estate investment trust, corporation, trust or similar entity that would be created or would survive after the successful completion of a proposed Roll-Up Transaction.
          Roll-Up Transaction. The term “Roll-Up Transaction” means a transaction involving the acquisition, merger, conversion or consolidation either directly or indirectly of the Corporation and the issuance of securities of a Roll-Up Entity to the Stockholders. Such term does not include:
               (a) a transaction involving securities of the Corporation that have been for at least twelve months listed on a national securities exchange; or
               (b) a transaction involving the conversion to corporate, trust or association form of only the Corporation, if, as a consequence of the transaction, there will be no significant adverse change in any of the following:
                    (i) Stockholders’ voting rights;
                    (ii) the term of existence of the Corporation;
                    (iii) Sponsor or Advisor compensation; or
                    (iv) the Corporation’s investment objectives.
          Sale or Sales. The term “Sale” or “Sales” means (i) any transaction or series of transactions whereby: (A) the Corporation directly or indirectly (except as described in other subsections of this definition) sells, grants, transfers, conveys, or relinquishes its ownership of any Property or portion thereof, including the lease of any Property consisting of a building only, and including any event with respect to any Property which gives rise to a significant amount of insurance proceeds or condemnation awards; (B) the Corporation directly or indirectly (except as described in other subsections of this definition) sells, grants, transfers, conveys, or relinquishes its ownership of all or substantially all of the interest of the Corporation in any Joint Venture in which it is a co-venturer or partner; (C) any Joint Venture directly or indirectly (except as described in other subsections of this definition) in which the Corporation as a co-venturer or partner sells, grants, transfers, conveys, or relinquishes its ownership of any Property or portion thereof, including any event with respect to any Property which gives rise to insurance claims or condemnation awards; (D) the Corporation directly or indirectly (except as described in other subsections of this definition) sells, grants, conveys or relinquishes its interest in any Mortgage or portion thereof (including with respect to any Mortgage, all payments thereunder or in satisfaction thereof other than regularly scheduled interest payments) of amounts owed pursuant to such Mortgage and any event which gives rise to a significant amount of insurance proceeds or similar awards; or (E) the Corporation directly or indirectly (except as described in other subsections of this definition) sells, grants, transfers, conveys, or relinquishes its ownership of any other Asset not previously described in this definition or any portion thereof, but (ii) not including any transaction or series of transactions specified in clause (i) (A) through (E) above in which the proceeds of such transaction or series of transactions are reinvested by the Corporation in one or more Assets within 180 days thereafter.

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          SDAT. The term “SDAT” has the meaning as provided in Section 5.4 herein.
          Securities. The term “Securities” means any of the following issued by the Corporation, as the text requires: Shares, any other stock, shares or other evidences of equity or beneficial or other interests, voting trust certificates, bonds, debentures, notes or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as “securities” or any certificates of interest, shares or participations in, temporary or interim certificates for, receipts for, guarantees of, or warrants, options or rights to subscribe to, purchase or acquire, any of the foregoing.
          Securities Act. The term “Securities Act” means the Securities Act of 1933, as amended from time to time, or any successor statute thereto. Reference to any provision of the Securities Act means such provision as in effect from time to time, as the same may be amended, and any successor provision thereto, as interpreted by any applicable regulations as in effect from time to time.
          Selling Commissions. The term “Selling Commissions” means any and all commissions payable to underwriters, dealer managers or other broker-dealers in connection with the sale of Shares, including, without limitation, commissions payable to CMC Financial Services, Inc.
          Shares. The term “Shares” means shares of stock of the Corporation of any class or series, including Common Shares or Preferred Shares.
          Soliciting Dealers. The term “Soliciting Dealers” means those broker-dealers that are members of the Financial Industry Regulatory Authority, Inc. or that are exempt from broker-dealer registration, and that, in either case, enter into participating broker or other agreements with the Dealer Manager to sell Shares.
          Sponsor. The term “Sponsor” means any Person which (i) is directly or indirectly instrumental in organizing, wholly or in part, the Corporation, (ii) will control, manage or participate in the management of the Corporation, and any Affiliate of any such Person, (iii) takes the initiative, directly or indirectly, in founding or organizing the Corporation, either alone or in conjunction with one or more other Persons, (iv) receives a material participation in the Corporation in connection with the founding or organizing of the business of the Corporation, in consideration of services or property, or both services and property, (v) has a substantial number of relationships and contacts with the Corporation, (vi) possesses significant rights to control Properties, (vii) receives fees for providing services to the Corporation which are paid on a basis that is not customary in the industry, or (viii) provides goods or services to the Corporation on a basis which was not negotiated at arm’s-length with the Corporation. “Sponsor” does not include any Person whose only relationship with the Corporation is that of an independent property manager and whose only compensation is as such, or wholly independent third parties such as attorneys, accountants and underwriters whose only compensation is for professional services.
          Stockholder List. The term “Stockholder List” has the meaning as provided in Section 11.5 herein.

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          Stockholders. The term “Stockholders” means the holders of record of the Shares as maintained in the books and records of the Corporation or its transfer agent.
          Termination Date. The term “Termination Date” means the date of termination of the Advisory Agreement.
          Termination of the Initial Public Offering. The term “Termination of the Initial Public Offering” means the earlier of (i) the date on which the Initial Public Offering expires or is terminated by the Corporation or (ii) the date on which all Shares offered in the Initial Public Offering are sold, excluding warrants offered thereunder and Shares that may be acquired upon exercise of such warrants and Shares offered thereunder that may be acquired pursuant to the Reinvestment Plan.
          Total Operating Expenses. The term “Total Operating Expenses” means all costs and expenses paid or incurred by the Corporation, as determined under generally accepted accounting principles, including advisory fees, but excluding (i) the expenses of raising capital such as Organization and Offering Expenses, legal, audit, accounting, underwriting, brokerage, listing, registration, and other fees, printing and other such expenses and tax incurred in connection with the issuance, distribution, transfer, registration and Listing of the Shares, (ii) interest payments, (iii) taxes, (iv) non-cash expenditures such as depreciation, amortization and bad debt reserves, (v) incentive fees paid in compliance with the NASAA REIT Guidelines; (vi) Acquisition Fees and Acquisition Expenses, (vii) real estate commissions on the Sale of Property, and (viii) other fees and expenses connected with the acquisition, disposition, management and ownership of real estate interests, mortgage loans or other property (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair, and improvement of property).
          Transfer. The term “Transfer” means any issuance, sale, transfer, gift, assignment, devise or other disposition, as well as any other event that causes any Person to acquire Beneficial Ownership or Constructive Ownership, or any agreement to take any such actions or cause any such events, of Shares or the right to vote or receive dividends on Shares, including (a) the granting or exercise of any option (or any disposition of any option), (b) any disposition of any securities or rights convertible into or exchangeable for Shares or any interest in Shares or any exercise of any such conversion or exchange right and (c) Transfers of interests in other entities that result in changes in Beneficial or Constructive Ownership of Shares; in each case, whether voluntary or involuntary, whether owned of record, Constructively Owned or Beneficially Owned and whether by operation of law or otherwise. The terms “Transferring” and “Transferred” shall have the correlative meanings.
          2%/25% Guidelines. The term “2%/25% Guidelines” has the meaning as provided in Section 8.10 herein.
          Unimproved Real Property. The term “Unimproved Real Property” means Property in which the Corporation has an equity interest that was not acquired for the purpose of producing rental or other operating income, that has no development or construction in process and for which no development or construction is planned, in good faith, to commence within one year.

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ARTICLE V
STOCK
          Section 5.1 Authorized Shares. The Corporation has authority to issue 116,000,000 Shares, consisting of 101,000,000 shares of Common Stock, $.01 par value per share (“Common Shares”), and 15,000,000 shares of Preferred Stock, $.01 par value per share (“Preferred Shares”). The aggregate par value of all authorized Shares having par value is $1,160,000.00. All shares shall be fully paid and nonassessable when issued. If Shares of one class are classified or reclassified into Shares of another class pursuant to this Article V, the number of authorized Shares of the former class shall be automatically decreased and the number of Shares of the latter class shall be automatically increased, in each case by the number of Shares so classified or reclassified, so that the aggregate number of Shares of all classes that the Corporation has authority to issue shall not be more than the total number of Shares set forth in the first sentence of this paragraph. The Board of Directors, with the approval of a majority of the entire Board and without any action by the Stockholders, may amend the Charter from time to time to increase or decrease the aggregate number of Shares or the number of Shares of any class or series that the Corporation has authority to issue.
          Section 5.2 Common Shares.
               Section 5.2.1 Common Shares Subject to Terms of Preferred Shares. The Common Shares shall be subject to the express terms of any series of Preferred Shares.
               Section 5.2.2 Description. Subject to the provisions of Article VI and except as may otherwise be specified in the terms of any class or series of Common Shares, each Common Share shall entitle the holder thereof to one vote per share on all matters upon which Stockholders are entitled to vote pursuant to Section 11.2 hereof. Shares of a particular class of Common Shares shall have equal dividend, distribution, liquidation and other rights, and shall have no preference, cumulative, preemptive, conversion or exchange rights. The Board may classify or reclassify any unissued Common Shares from time to time in one or more classes or series of Shares.
               Section 5.2.3 Rights Upon Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up, or any distribution of the assets of the Corporation, the aggregate assets available for distribution to holders of the Common Shares shall be determined in accordance with applicable law. Each holder of Common Shares of a particular class shall be entitled to receive, ratably with each other holder of Common Shares of such class, that portion of such aggregate assets available for distribution as the number of outstanding Common Shares of such class held by such holder bears to the total number of outstanding Common Shares of such class then outstanding.
               Section 5.2.4 Voting Rights. Except as may be provided otherwise in the Charter, and subject to the express terms of any series of Preferred Shares, the holders of the Common Shares shall have the exclusive right to vote on all matters (as to which a common stockholder shall be entitled to vote pursuant to applicable law) at all meetings of the Stockholders.

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          Section 5.3 Preferred Shares. The Board may classify any unissued Preferred Shares and reclassify any previously classified but unissued Preferred Shares of any series from time to time, in one or more classes or series of Shares.
          Section 5.4 Classified or Reclassified Shares. Prior to issuance of classified or reclassified Shares of any class or series, the Board by resolution shall: (a) designate that class or series to distinguish it from all other classes and series of Shares; (b) specify the number of Shares to be included in the class or series; (c) set or change, subject to the provisions of Article VI and subject to the express terms of any class or series of Shares outstanding at the time, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each class or series; and (d) cause the Corporation to file articles supplementary with the State Department of Assessments and Taxation of Maryland (“SDAT”). Any of the terms of any class or series of Shares set or changed pursuant to clause (c) of this Section 5.4 may be made dependent upon facts or events ascertainable outside the Charter (including determinations by the Board or other facts or events within the control of the Corporation) and may vary among holders thereof, provided that the manner in which such facts, events or variations shall operate upon the terms of such class or series of Shares is clearly and expressly set forth in the articles supplementary or other charter document.
          Section 5.5 Dividends and Distributions. Subject to the further provisions of this Section 5.5, the Board of Directors may from time to time authorize the Corporation to declare and pay to Stockholders such dividends or Distributions, in cash or other assets of the Corporation or in securities of the Corporation or from any other source as the Board of Directors in its discretion shall determine. The Board of Directors shall endeavor to authorize the Corporation to declare and pay such dividends and Distributions as shall be necessary for the Corporation to qualify as a REIT under the Code; however, Stockholders shall have no right to any dividend or Distribution unless and until authorized by the Board and declared by the Corporation. The exercise of the powers and rights of the Board of Directors pursuant to this Section 5.5 shall be subject to the provisions of any class or series of Shares at the time outstanding. The receipt by any Person in whose name any Shares are registered on the records of the Corporation or by his or her duly authorized agent shall be a sufficient discharge for all dividends or Distributions payable or deliverable in respect of such Shares and from all liability to see to the application thereof. Distributions in kind shall not be permitted, except for distributions of readily marketable securities, distributions of beneficial interests in a liquidating trust established for the dissolution of the Corporation and the liquidation of its assets in accordance with the terms of the Charter or distributions in which (i) the Board advises each Stockholder of the risks associated with direct ownership of the property, (ii) the Board offers each Stockholder the election of receiving such in-kind distributions, and (iii) in-kind distributions are made only to those Stockholders that accept such offer.
          Section 5.6 Charter and Bylaws. The rights of all Stockholders and the terms of all Shares are subject to the provisions of the Charter and the Bylaws.
          Section 5.7 No Issuance of Share Certificates. The Board of Directors may authorize the issuance of shares of capital stock without certificates. With respect to any shares of capital stock that are issued without certificates, a Stockholder’s investment shall be recorded

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on the books of the Corporation. To transfer his or her Shares, a Stockholder shall submit an executed form to the Corporation, which form shall be provided by the Corporation upon request. Such transfer will also be recorded on the books of the Corporation. Upon issuance or transfer of Shares, the Corporation will provide the Stockholder with information concerning his or her rights with regard to such Shares, as required by the Bylaws and the MGCL or other applicable law.
          Section 5.8 Suitability of Stockholders. Until Listing, the following provisions shall apply:
               Section 5.8.1 Investor Suitability Standards. Subject to suitability standards established by individual states, to become a Stockholder in the Corporation, if such prospective Stockholder is an individual (including an individual beneficiary of a purchasing Individual Retirement Account), or if the prospective Stockholder is a fiduciary (such as a trustee of a trust or corporate pension or profit sharing plan, or other tax-exempt organization, or a custodian under a Uniform Gifts to Minors Act), such individual or fiduciary, as the case may be, must represent to the Corporation, among other requirements as the Corporation may require from time to time:
                    (a) that such individual (or, in the case of a fiduciary account, that the beneficiary, fiduciary, account, or, that the donor or grantor, who directly or indirectly supplies the funds to purchase the Shares if the donor or grantor is the fiduciary) has a minimum annual gross income of $70,000 and a net worth (excluding home, furnishings and automobiles) of not less than $70,000; or
                    (b) that such individual (or, in the case of a fiduciary account, that the beneficiary, fiduciary, account, or, that the donor or grantor, who directly or indirectly supplies the funds to purchase the Shares if the donor or grantor is the fiduciary) has a net worth (excluding home, furnishings and automobiles) of not less than $250,000.
               Section 5.8.2 Determination of Suitability of Sale. The Corporation and each Person selling Shares on behalf of the Corporation shall make every reasonable effort to determine that the purchase of Shares by Stockholders is a suitable and appropriate investment for such Stockholder. In making this determination, each Person selling Shares on behalf of the Corporation shall ascertain that the prospective Stockholder: (a) meets the minimum income and net worth standards established for the Corporation; (b) can reasonably benefit from the Corporation based on the prospective Stockholder’s overall investment objectives and portfolio structure; (c) is able to bear the economic risk of the investment based on the prospective Stockholder’s overall financial situation; (d) has apparent understanding of (1) the fundamental risks of the investment; (2) the risk that the Stockholder may lose the entire investment; (3) the lack of liquidity of the Shares; (4) the restrictions on transferability of the Shares; and (5) the tax consequences of the investment; and (e) is purchasing at least 250 shares.
          Each Person selling Shares on behalf of the Corporation shall make this determination on the basis of information it has obtained from a prospective Stockholder. Relevant information for this purpose will include at least the age, investment objectives,

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investment experiences, income, net worth, financial situation, and other investments of the prospective Stockholder, as well as any other pertinent factors.
          Each Person selling Shares on behalf of the Corporation shall maintain records of the information used to determine that an investment in Shares is suitable and appropriate for a Stockholder. Each Person selling Shares on behalf of the Corporation shall maintain these records for a period of at least six years after the sales transaction.
          Section 5.9 Repurchase of Shares. The Board may establish, from time to time, a program or programs by which the Corporation voluntarily repurchases Shares from its Stockholders; provided, however, that such repurchase does not impair the capital or operations of the Corporation. The Sponsor, Advisor, members of the Board or any Affiliates thereof may not receive any fees arising out of the repurchase of Shares by the Corporation.
          Section 5.10 Distribution Reinvestment Plans. The Board, including a majority of the Independent Directors, may establish, from time to time, a Distribution reinvestment plan or plans (each, a “Reinvestment Plan”). Under any such Reinvestment Plan, (i) all material information regarding Distributions to the Stockholders and the effect of reinvesting such Distributions, including the tax consequences thereof, shall be provided to the Stockholders at least annually, and (ii) each Stockholder participating in such Reinvestment Plan shall have a reasonable opportunity to withdraw from the Reinvestment Plan at least annually after receipt of the information required in clause (i) above.
ARTICLE VI
RESTRICTION ON TRANSFER AND OWNERSHIP OF SHARES
          Section 6.1 Shares.
               Section 6.1.1 Ownership Limitations. During the period commencing on the Initial Date and prior to the Restriction Termination Date, but subject to Section 6.3:
                    (a) Basic Restrictions.
                         (i) (1) No Person, other than an Excepted Holder, shall Beneficially Own or Constructively Own Shares in excess of the Aggregate Share Ownership Limit, (2) no Person, other than an Excepted Holder, shall Beneficially Own or Constructively Own Common Shares in excess of the Common Share Ownership Limit and (3) no Excepted Holder shall Beneficially Own or Constructively Own Shares in excess of the Excepted Holder Limit for such Excepted Holder.
                         (ii) No Person shall Beneficially or Constructively Own Shares to the extent that such Beneficial or Constructive Ownership of Shares would result in the Corporation being “closely held” within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year), or otherwise failing to qualify as a REIT (including, but not limited to, Beneficial or Constructive Ownership that would result in the Corporation owning (actually or Constructively) an interest in

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a tenant that is described in Section 856(d)(2)(B) of the Code if the income derived by the Corporation from such tenant would cause the Corporation to fail to satisfy any of the gross income requirements of Section 856(c) of the Code).
                         (iii) Any Transfer of Shares that, if effective, would result in Shares being beneficially owned by less than 100 Persons (determined under the principles of Section 856(a)(5) of the Code) shall be void ab initio, and the intended transferee shall acquire no rights in such Shares.
                    (b) Transfer in Trust. If any Transfer of Shares occurs which, if effective, would result in any Person Beneficially Owning or Constructively Owning Shares in violation of Section 6.1.1(a)(i) or (ii),
                         (i) then that number of Shares the Beneficial or Constructive Ownership of which otherwise would cause such Person to violate Section 6.1.1(a)(i) or (ii) (rounded up to the nearest whole share) shall be automatically transferred to a Charitable Trust for the benefit of a Charitable Beneficiary, as described in Section 6.2, effective as of the close of business on the Business Day prior to the date of such Transfer, and such Person shall acquire no rights in such Shares; or
                         (ii) if the transfer to the Charitable Trust described in clause (i) of this sentence would not be effective for any reason to prevent the violation of Section 6.1.1(a)(i) or (ii), then the Transfer of that number of Shares that otherwise would cause any Person to violate Section 6.1.1(a)(i) or (ii) shall be void ab initio, and the intended transferee shall acquire no rights in such Shares.
               Section 6.1.2 Remedies for Breach. If the Board of Directors or its designee (including any duly authorized committee of the Board) shall at any time determine in good faith that a Transfer or other event has taken place that results in a violation of Section 6.1.1 or that a Person intends to acquire or has attempted to acquire Beneficial or Constructive Ownership of any Shares in violation of Section 6.1.1 (whether or not such violation is intended), the Board of Directors or its designee shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or other event, including, without limitation, causing the Corporation to redeem Shares, refusing to give effect to such Transfer on the books of the Corporation or instituting proceedings to enjoin such Transfer or other event; provided, however, that any Transfers or attempted Transfers or other events in violation of Section 6.1.1 shall automatically result in the transfer to the Charitable Trust described above, and, where applicable, such Transfer (or other event) shall be void ab initio as provided above irrespective of any action (or non-action) by the Board of Directors or its designee.
               Section 6.1.3 Notice of Restricted Transfer. Any Person who acquires or attempts or intends to acquire Beneficial Ownership or Constructive Ownership of Shares that will or may violate Section 6.1.1(a), or any Person who would have owned Shares that resulted in a transfer to the Charitable Trust pursuant to the provisions of Section 6.1.1(b), shall immediately give written notice to the Corporation of such event, or in the case of such a proposed or attempted transaction, give at least 15 days prior written notice, and shall provide to

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the Corporation such other information as the Corporation may request in order to determine the effect, if any, of such Transfer on the Corporation’s status as a REIT.
               Section 6.1.4 Owners Required To Provide Information. From the Initial Date and prior to the Restriction Termination Date:
                    (a) every owner of more than 5% (or such lower percentage as required by the Code or the Treasury Regulations promulgated thereunder) of the outstanding Shares, within 30 days after the end of each taxable year, shall give written notice to the Corporation stating the name and address of such owner, the number of Shares and other Shares Beneficially Owned and a description of the manner in which such Shares are held. Each such owner shall provide to the Corporation such additional information as the Corporation may request in order to determine the effect, if any, of such Beneficial Ownership on the Corporation’s status as a REIT and to ensure compliance with the Aggregate Share Ownership Limit, the Common Share Ownership Limit and the other restrictions set forth herein.
                    (b) each Person who is a Beneficial or Constructive Owner of Shares and each Person (including the stockholder of record) who is holding Shares for a Beneficial or Constructive Owner shall provide to the Corporation such information as the Corporation may request, in good faith, in order to determine the Corporation’s status as a REIT and to comply with requirements of any taxing authority or governmental authority or to determine such compliance.
               Section 6.1.5 Remedies Not Limited. Subject to Section 7.10 of the Charter, nothing contained in this Section 6.1 shall limit the authority of the Board of Directors to take such other action as it deems necessary or advisable to protect the Corporation and the interests of its stockholders in preserving the Corporation’s status as a REIT.
               Section 6.1.6 Ambiguity. In the case of an ambiguity in the application of any of the provisions of this Section 6.1, Section 6.2 or any definition contained in Article IV, the Board of Directors shall have the power to determine the application of the provisions of this Section 6.1 or Section 6.2 with respect to any situation based on the facts known to it. In the event Section 6.1 or 6.2 requires an action by the Board of Directors and the Charter fails to provide specific guidance with respect to such action, the Board of Directors shall have the power to determine the action to be taken so long as such action is not contrary to the provisions of Article IV or Sections 6.1 or 6.2. Absent a decision to the contrary by the Board of Directors (which the Board may make in its sole and absolute discretion), if a Person would have (but for the remedies set forth in Section 6.1.2) acquired Beneficial or Constructive Ownership of Shares in violation of Section 6.1.1, such remedies (as applicable) shall apply first to the Shares which, but for such remedies, would have been Beneficially Owned or Constructively Owned (but not actually owned) by such Person, pro rata among the Persons who actually own such Shares based upon the relative number of the Shares held by each such Person.

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               Section 6.1.7 Exceptions.
                    (a) Subject to Section 6.1.1(a)(ii), the Board of Directors, in its sole discretion, may exempt (prospectively or retroactively) a Person from the Aggregate Share Ownership Limit and the Common Share Ownership Limit, as the case may be, and may establish or increase an Excepted Holder Limit for such Person if:
                         (i) the Board of Directors obtains such representations and undertakings from such Person as are reasonably necessary to ascertain that no individual’s Beneficial or Constructive Ownership of such Shares will violate Section 6.1.1(a)(ii);
                         (ii) such Person does not and represents that it will not own, actually or Constructively, an interest in a tenant of the Corporation (or a tenant of any entity owned or controlled by the Corporation) that would cause the Corporation to own, actually or Constructively, more than a 9.9% interest (as set forth in Section 856(d)(2)(B) of the Code) in such tenant and the Board of Directors obtains such representations and undertakings from such Person as are reasonably necessary to ascertain this fact (for this purpose, a tenant from whom the Corporation (or an entity owned or controlled by the Corporation) derives (and is expected to continue to derive) a sufficiently small amount of revenue such that, in the opinion of the Board of Directors, rent from such tenant would not adversely affect the Corporation’s ability to qualify as a REIT, shall not be treated as a tenant of the Corporation); and
                         (iii) such Person agrees that any violation or attempted violation of such representations or undertakings (or other action which is contrary to the restrictions contained in Sections 6.1.1 through 6.1.6) will result in such Shares being automatically transferred to a Charitable Trust in accordance with Sections 6.1.1(b) and 6.2.
                    (b) Prior to granting any exception pursuant to Section 6.1.7(a), the Board of Directors may require a ruling from the Internal Revenue Service, or an opinion of counsel, in either case in form and substance satisfactory to the Board of Directors in its sole discretion, as it may deem necessary or advisable in order to determine or ensure the Corporation’s status as a REIT. Notwithstanding the receipt of any ruling or opinion, the Board of Directors may impose such conditions or restrictions as it deems appropriate in connection with granting such exception.
                    (c) Subject to Section 6.1.1(a)(ii), an underwriter which participates in a public offering or a private placement of Shares (or securities convertible into or exchangeable for Shares) may Beneficially Own or Constructively Own Shares (or securities convertible into or exchangeable for Shares) in excess of the Aggregate Share Ownership Limit, the Common Share Ownership Limit or both such limits, but only to the extent necessary to facilitate such public offering or private placement.
                    (d) The Board of Directors may only reduce the Excepted Holder Limit for an Excepted Holder: (1) with the written consent of such Excepted Holder at any time, or (2) pursuant to the terms and conditions of the agreements and undertakings entered into with such Excepted Holder in connection with the establishment of the Excepted Holder

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Limit for that Excepted Holder. No Excepted Holder Limit shall be reduced to a percentage that is less than the Common Share Ownership Limit.
               Section 6.1.8 Increase in Aggregate Share Ownership and Common Share Ownership Limits. Subject to Section 6.1.2(a)(ii), the Board of Directors may from time to time increase the Common Share Ownership Limit and the Aggregate Share Ownership Limit for one or more Persons and decrease the Common Share Ownership Limit and the Aggregate Share Ownership Limit for all other Persons; provided, however, that the decreased Common Share Ownership Limit and/or Aggregate Share Ownership Limit will not be effective for any Person whose percentage ownership in Shares is in excess of such decreased Common Share Ownership Limit and/or Aggregate Share Ownership Limit until such time as such Person’s percentage of Share equals or falls below the decreased Common Share Ownership Limit and/or Aggregate Share Ownership Limit, but any further acquisition of Shares in excess of such percentage ownership of Shares will be in violation of the Common Share Ownership Limit and/or Aggregate Share Ownership Limit and, provided further, that the new Common Share Ownership Limit and/or Aggregate Share Ownership Limit would not allow five or fewer Persons to Beneficially Own more than 49.9% in value of the outstanding Shares.
               Section 6.1.9 Legend. Any certificate representing Shares shall bear substantially the following legend:
The Shares represented by this certificate are subject to restrictions on Beneficial and Constructive Ownership and Transfer for the purpose, among others, of the Corporation’s maintenance of its status as a Real Estate Investment Trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). Subject to certain further restrictions and except as expressly provided in the Corporation’s Charter, (i) no Person may Beneficially or Constructively Own Common Shares of the Corporation in excess of 9.8% (in value or number of Shares) of the outstanding Common Shares of the Corporation unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (ii) no Person may Beneficially or Constructively Own Shares of the Corporation in excess of 9.8% of the value of the total outstanding Shares of the Corporation, unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (iii) no Person may Beneficially or Constructively Own Shares that would result in the Corporation being “closely held” under Section 856(h) of the Code or otherwise cause the Corporation to fail to qualify as a REIT; and (iv) no Person may Transfer Shares if such Transfer would result in Shares of the Corporation being owned by fewer than 100 Persons. Any Person who Beneficially or Constructively Owns or attempts to Beneficially or Constructively Own Shares which cause or will cause a Person to Beneficially or Constructively Own Shares in excess or in violation of the above limitations must immediately notify the Corporation. If any of the restrictions on transfer or

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ownership are violated, the Shares represented hereby will be automatically transferred to a Charitable Trust for the benefit of one or more Charitable Beneficiaries. In addition, the Corporation may redeem Shares upon the terms and conditions specified by the Board of Directors in its sole discretion if the Board of Directors determines that ownership or a Transfer or other event may violate the restrictions described above. Furthermore, upon the occurrence of certain events, attempted Transfers in violation of the restrictions described above may be void ab initio. All capitalized terms in this legend have the meanings defined in the Corporation’s Charter, as the same may be amended from time to time, a copy of which, including the restrictions on transfer and ownership, will be furnished to each holder of Shares of the Corporation on request and without charge. Requests for such a copy may be directed to the Secretary of the Corporation at its principal office.
Instead of the foregoing legend, the certificate may state that the Corporation will furnish a full statement about certain restrictions on transferability to a stockholder on request and without charge. In the case of uncertificated Shares, the Corporation will send the holder of such Shares a written statement of the information otherwise required on certificates.
Section 6.2 Transfer of Shares in Trust.
                         Section 6.2.1 Ownership in Trust. Upon any purported Transfer or other event described in Section 6.1.1(b) that would result in a transfer of Shares to a Charitable Trust, such Shares shall be deemed to have been transferred to the Charitable Trustee as trustee of a Charitable Trust for the exclusive benefit of one or more Charitable Beneficiaries. Such transfer to the Charitable Trustee shall be deemed to be effective as of the close of business on the Business Day prior to the purported Transfer or other event that results in the transfer to the Charitable Trust pursuant to Section 6.1.1(b). The Charitable Trustee shall be appointed by the Corporation and shall be a Person unaffiliated with the Corporation and any Prohibited Owner. Each Charitable Beneficiary shall be designated by the Corporation as provided in Section 6.2.6.
                         Section 6.2.2 Status of Shares Held by the Charitable Trustee. Shares held by the Charitable Trustee shall continue to be issued and outstanding Shares of the Corporation. The Prohibited Owner shall have no rights in the Shares held by the Charitable Trustee. The Prohibited Owner shall not benefit economically from ownership of any Shares held in trust by the Charitable Trustee, shall have no rights to dividends or other Distributions and shall not possess any rights to vote or other rights attributable to the Shares held in the Charitable Trust.
                         Section 6.2.3 Dividend and Voting Rights. The Charitable Trustee shall have all voting rights and rights to dividends or other Distributions with respect to Shares held in the Charitable Trust, which rights shall be exercised for the exclusive benefit of the

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Charitable Beneficiary. Any dividend or other Distribution paid prior to the discovery by the Corporation that Shares have been transferred to the Charitable Trustee shall be paid with respect to such Shares to the Charitable Trustee upon demand and any dividend or other Distribution authorized but unpaid shall be paid when due to the Charitable Trustee. Any dividends or Distributions so paid over to the Charitable Trustee shall be held in trust for the Charitable Beneficiary. The Prohibited Owner shall have no voting rights with respect to Shares held in the Charitable Trust and, subject to Maryland law, effective as of the date that Shares have been transferred to the Charitable Trustee, the Charitable Trustee shall have the authority (at the Charitable Trustee’s sole discretion) (i) to rescind as void any vote cast by a Prohibited Owner prior to the discovery by the Corporation that Shares have been transferred to the Charitable Trustee and (ii) to recast such vote in accordance with the desires of the Charitable Trustee acting for the benefit of the Charitable Beneficiary; provided, however, that if the Corporation has already taken irreversible corporate action, then the Charitable Trustee shall not have the authority to rescind and recast such vote. Notwithstanding the provisions of this Article VI, until the Corporation has received notification that Shares have been transferred into a Charitable Trust, the Corporation shall be entitled to rely on its share transfer and other stockholder records for purposes of preparing lists of stockholders entitled to vote at meetings, determining the validity and authority of proxies and otherwise conducting votes of stockholders.
               Section 6.2.4  Sale of Shares by Charitable Trustee. Within 20 days of receiving notice from the Corporation that Shares have been transferred to the Charitable Trust, the Charitable Trustee shall sell the Shares held in the Charitable Trust to a person, designated by the Charitable Trustee, whose ownership of the Shares will not violate the ownership limitations set forth in Section 6.1.1(a). Upon such sale, the interest of the Charitable Beneficiary in the Shares sold shall terminate and the Charitable Trustee shall distribute the net proceeds of the sale to the Prohibited Owner and to the Charitable Beneficiary as provided in this Section 6.2.4. The Prohibited Owner shall receive the lesser of (1) the price paid by the Prohibited Owner for the Shares or, if the Prohibited Owner did not give value for the Shares in connection with the event causing the Shares to be held in the Charitable Trust (e.g., in the case of a gift, devise or other such transaction), the Market Price of the Shares on the day of the event causing the Shares to be held in the Charitable Trust and (2) the price per share received by the Charitable Trustee (net of any commissions and other expenses of sale) from the sale or other disposition of the Shares held in the Charitable Trust. The Charitable Trustee may reduce the amount payable to the Prohibited Owner by the amount of dividends and Distributions which have been paid to the Prohibited Owner and are owed by the Prohibited Owner to the Charitable Trustee pursuant to Section 6.2.3. Any net sales proceeds in excess of the amount payable to the Prohibited Owner shall be immediately paid to the Charitable Beneficiary. If, prior to the discovery by the Corporation that Shares have been transferred to the Charitable Trustee, such Shares are sold by a Prohibited Owner, then (i) such Shares shall be deemed to have been sold on behalf of the Charitable Trust and (ii) to the extent that the Prohibited Owner received an amount for such Shares that exceeds the amount that such Prohibited Owner was entitled to receive pursuant to this Section 6.2.4, such excess shall be paid to the Charitable Trustee upon demand.
               Section 6.2.5  Purchase Right in Shares Transferred to the Charitable Trustee. Shares transferred to the Charitable Trustee shall be deemed to have been offered for sale to the Corporation, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in such transfer to the Charitable Trust (or, in the case of a

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devise or gift, the Market Price at the time of such devise or gift) and (ii) the Market Price on the date the Corporation, or its designee, accepts such offer. The Corporation may reduce the amount payable to the Prohibited Owner by the amount of dividends and distributions which has been paid to the Prohibited Owner and are owed by the Prohibited Owner to the Charitable Trustee pursuant to Section 6.2.3. The Corporation may pay the amount of such reduction to the Charitable Trustee for the benefit of the Charitable Beneficiary. The Corporation shall have the right to accept such offer until the Charitable Trustee has sold the Shares held in the Charitable Trust pursuant to Section 6.2.4. Upon such a sale to the Corporation, the interest of the Charitable Beneficiary in the Shares sold shall terminate and the Charitable Trustee shall distribute the net proceeds of the sale to the Prohibited Owner.
               Section 6.2.6  Designation of Charitable Beneficiaries. By written notice to the Charitable Trustee, the Corporation shall designate one or more nonprofit organizations to be the Charitable Beneficiary of the interest in the Charitable Trust such that (i) Shares held in the Charitable Trust would not violate the restrictions set forth in Section 6.1.1(a) in the hands of such Charitable Beneficiary and (ii) each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code.
          Section 6.3  NYSE Transactions. Nothing in this Article VI shall preclude the settlement of any transaction entered into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation system. The fact that the settlement of any transaction occurs shall not negate the effect of any other provision of this Article VI and any transferee in such a transaction shall be subject to all of the provisions and limitations set forth in this Article VI.
          Section 6.4  Enforcement. The Corporation is authorized specifically to seek equitable relief, including injunctive relief, to enforce the provisions of this Article VI.
          Section 6.5  Non-Waiver. No delay or failure on the part of the Corporation or the Board of Directors in exercising any right hereunder shall operate as a waiver of any right of the Corporation or the Board of Directors, as the case may be, except to the extent specifically waived in writing.
ARTICLE VII
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS
          Section 7.1  Number of Directors. The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. The number of Directors of the Corporation (each, a “Director” and collectively, the “Directors”) shall be seven, which number may be increased or decreased from time to time pursuant to the Bylaws; provided, however, that the total number of Directors shall not be fewer than three. A majority of the Board will be Independent Directors except for a period of up to 60 days after the death, removal or resignation

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of an Independent Director pending the election of such Independent Director’s successor. The names of the Directors who shall serve until their successors are duly elected and qualify are:
     
 
Todd B. Parriott
  
 
G. Steven Dawson
  
 
Stacy M. Riffe
  
 
Anthony D. Cinquini
  
 
Darin D. Gilson
  
 
Hunt C. Holsomback
  
 
Robert J. Simmons
  
 
 
  
These Directors may increase the number of Directors and fill any vacancy, whether resulting from an increase in the number of Directors or otherwise, on the Board of Directors prior to the first annual meeting of Stockholders in the manner provided in the Bylaws.
          The Corporation elects, at such time as it becomes eligible to make the election provided for under Section 3-802 of the MGCL, that, except as may be provided by the Board of Directors in setting the terms of any class or series of Shares, any and all vacancies on the Board of Directors may be filled only by the affirmative vote of a majority of the remaining Directors in office, even if the remaining Directors do not constitute a quorum, and any Director elected to fill a vacancy shall serve for the remainder of the full term of the directorship in which such vacancy occurred. Notwithstanding the foregoing sentence, Independent Directors shall nominate replacements for vacancies among the Independent Directors’ positions.
          Section 7.2  Experience. Each Director shall have at least three years of relevant experience demonstrating the knowledge and experience required to successfully acquire and manage the type of assets being acquired by the Corporation. At least one of the Independent Directors shall have three years of relevant real estate experience.
          Section 7.3  Committees. The Board may establish such committees as it deems appropriate, in its discretion, provided that the majority of the members of each committee are Independent Directors.
          Section 7.4  Term. Each Director shall hold office for one year, until the next annual meeting of Stockholders and until his or her successor is duly elected and qualifies. Directors may be elected to an unlimited number of successive terms.
          Section 7.5  Fiduciary Obligations. The Directors and the Advisor serve in a fiduciary capacity to the Corporation and have a fiduciary duty to the Stockholders of the Corporation, including, with respect to the Directors, a specific fiduciary duty to supervise the relationship of the Corporation with the Advisor.
          Section 7.6  Extraordinary Actions. Notwithstanding any provision of law permitting or requiring any action to be taken or approved by the affirmative vote of the holders of Shares entitled to cast a greater number of votes, any such action shall be effective and valid if declared advisable by the Board of Directors and taken or approved by the affirmative vote of holders of Shares entitled to cast a majority of all the votes entitled to be cast on the matter.

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          Section 7.7  Authorization by Board of Stock Issuance. The Independent Directors of the Board of Directors may authorize the issuance from time to time of Preferred Shares of any class or series, whether now or hereafter authorized, or securities or rights convertible into Shares of any class or series, whether now or hereafter authorized, for such consideration as the Independent Directors of the Board of Directors may deem advisable (or without consideration in the case of a stock split or stock dividend), subject to such restrictions or limitations, if any, as may be set forth in the Charter or the Bylaws. The Board of Directors may authorize the issuance from time to time of Common Shares of any class or series, whether now or hereafter authorized, or series or rights convertible into Shares of any class or series, whether now or hereafter authorized, for such consideration as the Board of Directors may deem advisable (or without consideration in the case of a stock split or stock dividend), subject to such restrictions or limitations, if any, as may be set forth in the Charter or the Bylaws
          Section 7.8  Preemptive Rights and Appraisal Rights. Except as may be provided by the Board of Directors in setting the terms of classified or reclassified Shares pursuant to Section 5.4 or as may otherwise be provided by contract approved by the Board of Directors, no holder of Shares shall, as such holder, have any preemptive right to purchase or subscribe for any additional Shares or any other security of the Corporation which it may issue or sell. Holders of Shares shall not be entitled to exercise any rights of an objecting stockholder provided for under Title 3, Subtitle 2 of the MGCL or any successor statute unless the Board of Directors, upon the affirmative vote of a majority of the Board of Directors, shall determine that such rights apply, with respect to all or any classes or series of stock, to one or more transactions occurring after the date of such determination in connection with which holders of such Shares would otherwise be entitled to exercise such rights.
          Section 7.9  Determinations by Board. The determination as to any of the following matters, made in good faith by or pursuant to the direction of the Board of Directors consistent with the Charter, shall be final and conclusive and shall be binding upon the Corporation and every holder of Shares: the amount of the net income of the Corporation for any period and the amount of assets at any time legally available for the payment of dividends, redemption of Shares or the payment of other Distributions on Shares; the amount of paid-in surplus, net assets, other surplus, annual or other cash flow, funds from operations, net profit, net assets in excess of capital, undivided profits or excess of profits over losses on sales of assets; the amount, purpose, time of creation, increase or decrease, alteration or cancellation of any reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves or charges shall have been created shall have been paid or discharged); any interpretation of the terms, preferences, conversion or other rights, voting powers or rights, restrictions, limitations as to dividends or Distributions, qualifications or terms or conditions of redemption of any class or series of Shares; the fair value, or any sale, bid or asked price to be applied in determining the fair value, of any asset owned or held by the Corporation or any Shares; the number of Shares of any class of the Corporation; any matter relating to the acquisition, holding and disposition of any assets by the Corporation; or any other matter relating to the business and affairs of the Corporation or required or permitted by applicable law, the Charter or Bylaws or otherwise to be determined by the Board of Directors.
          Section 7.10  REIT Qualification. If the Corporation elects to qualify for federal income tax treatment as a REIT, the Board of Directors shall use its reasonable best efforts to

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take such actions as are necessary or appropriate to preserve the status of the Corporation as a REIT; however, if the Board of Directors determines that it is no longer in the best interests of the Corporation to continue to be qualified as a REIT, the Board of Directors may revoke or otherwise terminate the Corporation’s REIT election pursuant to Section 856(g) of the Code. The Board of Directors also may determine that compliance with any restriction or limitation on stock ownership and transfers set forth in Article VI is no longer required for REIT qualification.
          Section 7.11  Removal of Directors. Subject to the rights of holders of one or more classes or series of Preferred Shares to elect or remove one or more Directors, any Director, or the entire Board of Directors, may be removed from office at any time, but only by the affirmative vote of at least a majority of the votes entitled to be cast generally in the election of Directors.
          Section 7.12  Approval by Independent Directors. Upon such time as the Corporation is subject to the NASAA REIT Guidelines, a majority of the Independent Directors must approve all matters which are specified in sections II.A, II.C, II.F, II.G, IV.A, IV.B, IV.C, IV.D, IV.E, IV.F, IV.G, V.E, V.H, V.J, VI.A, VI.B.4 and VI.G of the NASAA REIT Guidelines.
ARTICLE VIII
ADVISOR
          Section 8.1  Appointment and Initial Investment of Advisor. The Board is responsible for setting the general policies of the Corporation and for the general supervision of its business conducted by officers, agents, employees, advisors or independent contractors of the Corporation. However, the Board is not required personally to conduct the business of the Corporation, and it may (but need not) appoint, employ or contract with any Person (including a Person Affiliated with any Director) as an Advisor and may grant or delegate such authority to the Advisor as the Board may, in its sole discretion, deem necessary or desirable. The term of retention of any Advisor shall not exceed one year, although there is no limit to the number of times that a particular Advisor may be retained. The Advisor, as Sponsor, or its Affiliates has made an initial investment of $200,000 in the Corporation. The Sponsor or any such Affiliate may not sell this initial investment while the Sponsor remains a Sponsor but may transfer the initial investment to other Affiliates.
          Section 8.2  Supervision of Advisor. The Board shall evaluate the performance of the Advisor before entering into or renewing an Advisory Agreement, and the criteria used in such evaluation shall be reflected in the minutes of the meetings of the Board. The Board may exercise broad discretion in allowing the Advisor to administer and regulate the operations of the Corporation, to act as agent for the Corporation, to execute documents on behalf of the Corporation and to make executive decisions that conform to general policies and principles established by the Board. The Board shall monitor the Advisor to assure that the administrative procedures, operations and programs of the Corporation are in the best interests of the Stockholders and are fulfilled. The Independent Directors are responsible for reviewing the fees and expenses of the Corporation at least annually or with sufficient frequency to determine that the expenses incurred are reasonable in light of the investment performance of the Corporation, its Net Assets, its Net Income and the fees and expenses of other comparable unaffiliated REITs. Each such determination shall be reflected in the minutes of the meetings of the Board. The Independent Directors also will be responsible for reviewing, from time to time and at least annually, the performance of the Advisor and determining that compensation to be paid to the Advisor is reasonable in relation to the nature and quality of services performed and the investment performance of the Corporation and that the provisions of the Advisory Agreement

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are being carried out. Specifically, the Independent Directors will consider factors such as (i) the amount of the fee paid to the Advisor in relation to the size, composition and performance of the Assets, (ii) the success of the Advisor in generating opportunities that meet the investment objectives of the Corporation, (iii) rates charged to other REITs and to investors other than REITs by advisors performing the same or similar services, (iv) additional revenues realized by the Advisor and its Affiliates through their relationship with the Corporation, including loan administration, underwriting or broker commissions, servicing, engineering, inspection and other fees, whether paid by the Corporation or by others with whom the Corporation does business, (v) the quality and extent of service and advice furnished by the Advisor, (vi) the performance of the Assets, including income, conservation or appreciation of capital, frequency of problem investments and competence in dealing with distress situations, and (vii) the quality of the Assets relative to the investments generated by the Advisor for its own account. The Independent Directors may also consider all other factors that they deem relevant, and the findings of the Independent Directors on each of the factors considered shall be recorded in the minutes of the Board. The Board shall determine whether any successor Advisor possesses sufficient qualifications to perform the advisory function for the Corporation and whether the compensation provided for in its contract with the Corporation is justified.
          Section 8.3  Fiduciary Obligations. The Advisor shall have a fiduciary responsibility and duty to the Corporation and to the Stockholders.
          Section 8.4  Affiliation and Functions. The Board, by resolution or in the Bylaws, may provide guidelines, provisions or requirements concerning the affiliation and functions of the Advisor.
          Section 8.5  Termination. Either a majority of the Independent Directors or the Advisor may terminate the Advisory Agreement on 60 days’ written notice without cause or penalty, and, in such event, the Advisor will cooperate with the Corporation and the Board and take all reasonable steps requested to assist the Directors in making an orderly transition of the advisory function.
          Section 8.6  Disposition Fee on Sale of Property. If the Advisor provides a substantial amount of services in connection with the Sale of a Property or Properties, as determined by a majority of the Independent Directors, the Corporation shall pay the Advisor a real estate commission upon Sale of one or more Properties, in an amount equal to the lesser of (i) one-half of the Competitive Real Estate Commission, or (ii) 3% of the sales price of such Property or Properties. In addition, the amount paid when added to all other real estate commissions paid to unaffiliated parties in connection with such Sale shall not exceed the lesser of the Competitive Real Estate Commission or an amount equal to 6% of the sales price of such Property or Properties.
          Section 8.7  Incentive Fees. The Corporation shall pay the Advisor an interest in the gain from the Sale of Assets, for which full consideration is not paid in cash or property of equivalent value, provided the amount or percentage of such interest is reasonable. Such an interest in gain from the Sale of Assets shall be considered presumptively reasonable if it does not exceed 15%

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of the balance of such net proceeds remaining after payment to Stockholders, in the aggregate, of an amount equal to 100% of the Invested Capital, plus an amount equal to 6% of the Invested Capital per annum cumulative. The Corporation shall not pay any interest in gain from the Sale of Assets in excess of the amount considered presumptively reasonable. In the case of multiple Advisors, such Advisor and any of their Affiliates shall be allowed such fees provided such fees are distributed by a proportional method reasonably designed to reflect the value added to the Corporation assets by each respective Advisor or any Affiliate.
          Section 8.8  Organization and Offering Expenses Limitation. The Corporation shall reimburse the Advisor and its Affiliates for Organization and Offering Expenses incurred by the Advisor or its Affiliates; provided, however, that the total amount of all Organization and Offering Expenses shall be reasonable and shall in no event exceed 15% of the Gross Proceeds of each Offering.
          Section 8.9  Acquisition Fees. The Corporation shall pay the Advisor and its Affiliates fees for the review and evaluation of potential investments in Assets; provided, however, that the total of all Acquisition Fees and Acquisition Expenses shall be reasonable, and shall not exceed an amount equal to 6% of the Contract Purchase Price, or, in the case of a Mortgage, 6% of the funds advanced, provided, however, that a majority of the Directors (including a majority of the Independent Directors) not otherwise interested in the transaction may approve fees and expenses in excess of this limit if they determine the transaction to be commercially competitive, fair and reasonable to the Corporation.
          Section 8.10  Reimbursement for Total Operating Expenses. The Corporation shall reimburse the Advisor, at the end of each fiscal quarter, for Total Operating Expenses incurred by the Advisor; provided, however that the Corporation shall not reimburse the Advisor at the end of any fiscal quarter for Total Operating Expenses that, in the four consecutive fiscal quarters then ended, exceed the greater of 2% of Average Invested Assets or 25% of Net Income (the “2%/25% Guidelines”) for such year. The Independent Directors shall have the fiduciary responsibility of limiting Total Operating Expenses to amounts that do not exceed the 2%/25% Guidelines unless they have made a finding that, based on such unusual and non-recurring factors that they deem sufficient, a higher level of expenses (an “Excess Amount”) is justified. Within 60 days after the end of any fiscal quarter of the Corporation for which there is an Excess Amount which the Independent Directors conclude was justified and reimbursable to the Advisor, there shall be sent to the Stockholders a written disclosure of such fact, together with an explanation of the factors the Independent Directors considered in determining that such Excess Amount was justified. Any such finding and the reasons in support thereof shall be reflected in the minutes of the meetings of the Board. In the event that the Independent Directors do not determine that excess expenses are justified, the Advisor shall reimburse the Corporation the amount by which the expenses exceeded the 2%/25% Guidelines.
          Section 8.11  Reimbursement Limitation. The Corporation shall not reimburse the Advisor or its Affiliates for services for which the Advisor or its Affiliates are entitled to compensation in the form of a separate fee.

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ARTICLE IX
INVESTMENT OBJECTIVES AND LIMITATIONS
          Section 9.1 Investment Objectives. The Corporation’s primary investment objective is to obtain current income through the real estate-related loans, commercial real estate-related debt securities and real estate-related equity investments while (a) making regular cash distributions; (b) preserving, protecting, and enhancing the Corporation’s assets; (c) qualifying as a REIT for U.S. federal income tax purposes; and (d) providing stockholders with liquidity of their investment, either in whole or in part, by December 31, 2017. The Corporation does not have a stated term, however, the Corporation’s objective is for Listing or liquidation to occur by December 31, 2017. The sheltering from tax of income from other sources is not an objective of the Corporation. Subject to the restrictions set forth herein, if the Corporation elects to qualify for federal income tax treatment as a REIT, the Board will use its best efforts to conduct the affairs of the Corporation in such a manner as to continue to qualify the Corporation for the tax treatment provided in the REIT Provisions of the Code unless and until the Board determines, in its sole discretion, that REIT qualification is not in the best interests of the Corporation; provided, however, that no Director, officer, employee or agent of the Corporation shall be liable for any act or omission resulting in the loss of tax benefits under the Code, except to the extent provided in Section 12.2 hereof.
          Section 9.2 Review of Objectives. The Board has established the written policies on investment and borrowing set forth in this Article IX and shall monitor the administrative procedures, investment operations and performance of the Corporation and the Advisor to assure that such policies are carried out. The Board, including the Independent Directors, shall review the investment policies of the Corporation with sufficient frequency (not less often than annually) to determine that the policies being followed by the Corporation are in the best interests of its Stockholders. Each such determination and the basis therefor shall be set forth in the minutes of the meetings of the Board.
          Section 9.3 Certain Permitted Investments. Until such time as the Shares are Listed, the following investment limitations shall apply:
                    (a) The Corporation may invest in Assets, as defined in Article IV hereof.
                    (b) The Corporation may invest in Joint Ventures with the Sponsor, Advisor, one or more Directors or any Affiliate, only if a majority of Directors (including a majority of Independent Directors) not otherwise interested in the transaction, approve such investment as being fair and reasonable to the Corporation and on substantially the same terms and conditions as those received by the other joint venturers.
                    (c) Subject to any limitations in Section 9.4, the Corporation may invest in equity securities, provided that if such equity securities are not traded on a national securities exchange, such investment shall be permitted only if a majority of Directors (including a majority of Independent Directors) not otherwise interested in the transaction approve such investment as being fair, competitive and commercially reasonable.
          Section 9.4 Investment Limitations. Until such time as the Shares are Listed, the following investment limitations shall apply. In addition to other investment restrictions

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imposed by the Board from time to time, consistent with the Corporation’s objective of qualifying as a REIT, the following shall apply to the Corporation’s investments:
                    (a) Not more than 10% of the Corporation’s total assets shall be invested in Unimproved Real Property or mortgage loans on Unimproved Real Property.
                    (b) The Corporation shall not invest in commodities or commodity future contracts. This limitation is not intended to apply to futures contracts, when used solely for hedging purposes in connection with the Corporation’s ordinary business of investing in real estate assets, loans and mortgages.
                    (c) The Corporation shall not invest in or make any Mortgage unless an appraisal is obtained concerning the underlying property except for those loans insured or guaranteed by a government or government agency. In cases in which a majority of Independent Directors so determine, and in all cases in which the transaction is with the Advisor, Sponsor, Directors, or any Affiliates thereof, such appraisal of the underlying property must be obtained from an Independent Expert selected by the Independent Directors. Such appraisal shall be maintained in the Corporation’s records for at least five years and shall be available for inspection and duplication by any Stockholder. In addition to the appraisal, a mortgagee’s or owner’s title insurance policy or commitment as to the priority of the mortgage or condition of the title must be obtained.
                    (d) The Corporation shall not make or invest in any Mortgage, including a construction loan, on any one property if the aggregate amount of all mortgage loans outstanding on the property, including the loans of the Corporation, would exceed an amount equal to 85% of the appraised value of the property as determined by appraisal unless substantial justification exists because of the presence of other underwriting criteria. For purposes of this subsection, the “aggregate amount of all mortgage loans outstanding on the property, including the loans of the Corporation” shall include all interest (excluding contingent participation in income and/or appreciation in value of the mortgaged property), the current payment of which may be deferred pursuant to the terms of such loans, to the extent that deferred interest on each loan exceeds 5% per annum of the principal balance of the loan.
                    (e) The Corporation shall not invest in indebtedness secured by a mortgage on real property which is subordinate to the lien or other indebtedness of the Advisor, any Director, the Sponsor or any Affiliate of the Corporation.
                    (f) The Corporation shall not issue (i) equity Securities redeemable solely at the option of the holder (except that Stockholders may offer their Common Shares to the Corporation pursuant to any repurchase plan adopted by the Board on terms outlined in the Prospectus relating to any Offering, as such plan is thereafter amended in accordance with its terms); (B) debt Securities unless the historical debt service coverage (in the most recently completed fiscal year) as adjusted for known changes is sufficient to properly service that higher level of debt; (C) equity Securities on a deferred payment basis or under similar arrangements; or (D) options or warrants to the Advisor, Directors, Sponsor or any Affiliate thereof except on the same terms as such options or warrants are sold to the general public. Options or warrants may be issued to persons other than the Advisor, Directors, Sponsor

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or any Affiliate thereof, but not at exercise prices less than the fair market value of the underlying Securities on the date of grant and not for consideration (which may include services) that in the judgment of the Independent Directors has a market value less than the value of such option or warrant on the date of grant. Options or warrants issuable to the Advisor, Directors, Sponsor or any Affiliate thereof shall not exceed 10% of the outstanding Shares on the date of grant. The voting rights per Share (other than any publicly held Share) sold in a private offering shall not exceed the voting rights which bear the same relationship to the voting rights of a publicly held Share as the consideration paid to the Corporation for each privately offered Share of the Corporation bears to the book value of each outstanding publicly held Share.
                    (g) The aggregate Leverage shall be reasonable in relation to the Net Assets and shall be reviewed by the Board at least quarterly. The maximum amount of such Leverage in relation to Net Assets shall not exceed 300%. Notwithstanding the foregoing, Leverage may exceed such limit if any excess in borrowing over such level is approved by a majority of the Independent Directors. Any such excess borrowing shall be disclosed to Stockholders in the next quarterly report of the Corporation following such borrowing, along with justification for such excess.
                    (h) The Corporation will continually review its investment activity to attempt to ensure that it is not classified as an “investment company” under the Investment Company Act of 1940, as amended.
                    (i) The Corporation will not make any investment that the Corporation believes will be inconsistent with its objectives of qualifying and remaining qualified as a REIT unless and until the Board determines, in its sole discretion, that REIT qualification is not in the best interests of the Corporation.
                    (j) The Corporation shall not invest in real estate contracts of sale unless such contracts of sale are in recordable form and appropriately recorded in the chain of title.
                    (k) The consideration paid for Real Property acquired by the Corporation shall ordinarily be based on the fair market value of the Real Property as determined by a majority of the Directors. In cases in which a majority of the Independent Directors so determine, and in all cases in which the Assets are acquired from the Advisor, Directors, Sponsor or Affiliates thereof, such fair market value shall be determined by an Independent Expert selected by the Independent Directors.
ARTICLE X
CONFLICTS OF INTEREST
          Section 10.1 Sales and Leases to the Corporation. The Corporation may purchase or lease an Asset or Assets from the Sponsor, the Advisor, a Director, or any Affiliate thereof upon a finding by a majority of Directors (including a majority of Independent Directors) not otherwise interested in the transaction that such transaction is fair and reasonable to the Corporation and at a price to the Corporation no greater than the cost of the Asset to such Sponsor, Advisor, Director or Affiliate, or, if the price to the Corporation is in excess of such cost, that substantial justification for such excess exists and such excess is reasonable. In no event shall the purchase price of any Property to the Corporation exceed its current appraised value.
          Section 10.2 Sales and Leases to the Sponsor, Advisor, Directors or Affiliates. An Advisor, Sponsor, Director or Affiliate thereof may purchase or lease Assets from the

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Corporation if a majority of Directors (including a majority of Independent Directors) not otherwise interested in the transaction determine that the transaction is fair and reasonable to the Corporation.
          Section 10.3 Other Transactions.
               Section 10.3.1 No goods or services will be provided by the Advisor or its Affiliates to the Corporation, except for transactions in which the Advisor or its Affiliates provide goods or services to the Corporation in accordance with the Charter, unless a majority of the Directors (including a majority of the Independent Directors) not otherwise interested in such transaction approve such transaction as fair and reasonable to the Corporation and on terms and conditions not less favorable to the Corporation than those available from unaffiliated third parties.
               Section 10.3.2 The Corporation shall not make loans to the Sponsor, Advisor, Directors or any Affiliates thereof except Mortgages pursuant to Section 9.4(c) hereof with respect to which an opinion of an independent and qualified adviser has been issued to the effect that such mortgage is fair and at least as favorable to the Corporation as a loan to an unaffiliated borrower in similar circumstances or loans to wholly owned subsidiaries of the Corporation. The Sponsor, Advisor, Directors and any Affiliates thereof shall not make loans to the Corporation, or to joint ventures in which the Corporation is a co-venturer, unless approved by a majority of the Directors (including a majority of the Independent Directors) not otherwise interested in such transaction as fair, competitive, and commercially reasonable, and no less favorable to the Corporation than comparable loans between unaffiliated parties and that no interest or similar charges or fees are paid to the Sponsor in excess of the amount that would be charged by unrelated lending institutions on comparable loans for the same purpose, in the same locality of the property if the loan is made in connection with a particular property. No prepayment charge or penalty shall be required by the Sponsor on a loan to the Corporation secured by either a first or junior or all-inclusive trust deed, mortgage, or encumbrance on the property, except to the extent that such prepayment charge or penalty its attributable to the underlying encumbrance. The Sponsor shall be prohibited from providing financing to the Corporation except as set forth in this Section 10.3.2.
          Section 10.4 Conflicts Committee.
               Section 10.4.1 During any time that the Corporation is advised by the Advisor, there shall be a committee (the “Conflicts Committee”) of the board of directors comprised of all of the Independent Directors who are not also directors of any other program sponsored by the Advisor. The Conflicts Committee is authorized to select and retain its own legal and financial advisors. In addition to those other powers delegated to the Conflicts Committee by this charter or by the board of directors, the Conflicts Committee may act on any matter that may be delegated to a committee under the MGCL if the Conflicts Committee determines that the matter at issue is such that the exercise of independent judgment by the directors who are not members of the Conflicts Committee could reasonably be compromised. (Such determination shall be deemed to have been made even if not separately discussed by the Conflicts Committee or reflected in the minutes of its meeting if the Conflicts Committee acts on a matter that is not expressly delegated to it by this charter or the board of directors.) If a matter cannot be delegated to a committee under the MGCL but the Conflicts Committee has determined that the matter at issue is such that the exercise of independent judgment by the directors who are not members of the Conflicts Committees could reasonably be compromised, both the board of directors and the Conflicts Committee must approve the matter.
               Section 10.4.2 The Conflicts Committee shall approve every related party transaction in which the Corporation engages.

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ARTICLE XI
STOCKHOLDERS
          Section 11.1 Meetings. There shall be an annual meeting of the Stockholders, to be held at such time and place as shall be determined by or in the manner prescribed in the Bylaws, at which the Directors shall be elected and any other proper business may be conducted. The annual meeting will be held upon reasonable notice and within a reasonable period (not less than 30 days) following delivery of the annual report. The Directors, including the Independent Directors, shall be required to take reasonable steps to insure that this is accomplished. The holders of a majority of Shares present in person or by proxy at an annual meeting at which a quorum is present, may, without the necessity for concurrence by the Board, vote to elect the Directors. A quorum shall be 50% of the then outstanding Shares. Special meetings of Stockholders may be called in the manner provided in the Bylaws, including by the president or by a majority of the Directors or a majority of the Independent Directors, and shall be called by an officer of the Corporation upon written request of Stockholders holding in the aggregate not less than 10% of the outstanding Shares entitled to be voted on any issue proposed to be considered at any such special meeting. Notice of any special meeting of Stockholders shall be given as provided in the Bylaws within 10 days after receipt of such request, and the special meeting shall be held not less than 15 days nor more than 60 days after the delivery of such notice. If the meeting is called by written request of Stockholders as described in this Section 11.1, the special meeting shall be held at the time and place specified in the Stockholder request; provided, however, that if none is so specified, at such time and place convenient to the Stockholders. If there are no Directors, the officers of the Corporation shall promptly call a special meeting of the Stockholders entitled to vote for the election of successor Directors. Any meeting may be adjourned and reconvened as the Board may determine or as otherwise provided in the Bylaws.
          Section 11.2 Voting Rights of Stockholders. Subject to the provisions of any class or series of Shares then outstanding and the mandatory provisions of any applicable laws or regulations, the Stockholders shall be entitled to vote only on the following matters: (a) election or removal of Directors, without the necessity for concurrence by the Board, as provided in Sections 11.1, 7.4 and 7.11 hereof; (b) amendment of the Charter, without the necessity for concurrence by the Board, as provided in Article XIII hereof; (c) termination or dissolution of the Corporation without the necessity for concurrence by the Board; (d) merger or consolidation of the Corporation, or the sale or other disposition of all or substantially all of the Corporation’s assets; and (e) such other matters with respect to which the Board of Directors has adopted a resolution declaring that a proposed action is advisable and directing that the matter be submitted to the Stockholders for approval or ratification. Except with respect to the foregoing matters, no action taken by the Stockholders at any meeting shall in any way bind the Board. Without the approval of a majority of the Shares entitled to vote on the matter, the Board may not (i) amend the Charter to adversely affect the rights, preferences and privileges of the Stockholders; (ii) amend provisions of the Charter relating to director qualifications, fiduciary duties, liability and indemnification, conflicts of interest, investment policies or investment restrictions; (iii) liquidate or dissolve the Corporation other than before the initial investment in property; (iv) sell all or substantially all of the Corporation’s assets other than in the ordinary course of business or as in connection with liquidation and dissolution; or (v) cause the merger or reorganization of the Corporation except as permitted by law.

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          Section 11.3 Voting Limitations on Shares Held by the Advisor, Directors and Affiliates. With respect to Shares owned by the Advisor, any Director, or any of their Affiliates, neither the Advisor, nor such Director(s), nor any of their Affiliates may vote or consent on matters submitted to the Stockholders regarding the removal of the Advisor, such Director(s) or any of their Affiliates or any transaction between the Corporation and any of them. In determining the requisite percentage in interest of Shares necessary to approve a matter on which the Advisor, such Director(s) and any of their Affiliates may not vote or consent, any Shares owned by any of them shall not be included.
          Section 11.4 Right of Inspection. Any Stockholder and any designated representative thereof shall be permitted access to all records of the Corporation at all reasonable times, and may inspect and copy any of them for a reasonable charge. Inspection of the Corporation’s books and records by the office or agency administering the securities laws of a jurisdiction shall be provided upon reasonable notice and during normal business hours.
          Section 11.5 Access to Stockholder List. An alphabetical list of the names, addresses and telephone numbers of the Stockholders, along with the number of Shares held by each of them (the “Stockholder List”), shall be maintained as part of the books and records of the Corporation and shall be available for inspection by any Stockholder or the Stockholder’s designated agent at the home office of the Corporation upon the request of the Stockholder. The Stockholder List shall be updated at least quarterly to reflect changes in the information contained therein. A copy of such list shall be mailed to any Stockholder so requesting within ten days of receipt by the Corporation of the request. The copy of the Stockholder List shall be printed in alphabetical order, on white paper, and in a readily readable type size (in no event smaller than ten-point type). The Corporation may impose a reasonable charge for expenses incurred in reproduction pursuant to the Stockholder request. A Stockholder may request a copy of the Stockholder List in connection with matters relating to Stockholders’ voting rights, and the exercise of Stockholder rights under federal proxy laws.
          If the Advisor or the Board neglects or refuses to exhibit, produce or mail a copy of the Stockholder List as requested, the Advisor and/or the Board, as the case may be, shall be liable to any Stockholder requesting the list for the costs, including reasonable attorneys’ fees, incurred by that Stockholder for compelling the production of the Stockholder List, and for actual damages suffered by any Stockholder by reason of such refusal or neglect. It shall be a defense that the actual purpose and reason for the requests for inspection or for a copy of the Stockholder List is to secure such list of Stockholders or other information for the purpose of selling such list or copies thereof, or of using the same for a commercial purpose other than in the interest of the applicant as a Stockholder relative to the affairs of the Corporation. The Corporation may require the Stockholder requesting the Stockholder List to represent that the list is not requested for a commercial purpose unrelated to the Stockholder’s interest in the Corporation. The remedies provided hereunder to Stockholders requesting copies of the Stockholder List are in addition, to and shall not in any way limit, other remedies available to Stockholders under federal law, or the laws of any state.
          Section 11.6 Reports. The Directors, including the Independent Directors, shall take reasonable steps to insure that the Corporation shall cause to be prepared and mailed or

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delivered to each Stockholder as of a record date after the end of the fiscal year and each holder of other publicly held Securities within 120 days after the end of the fiscal year to which it relates an annual report for each fiscal year ending after the Commencement of the Initial Public Offering that shall include: (i) financial statements prepared in accordance with generally accepted accounting principles which are audited and reported on by independent registered certified public accountants; (ii) the ratio of the costs of raising capital during the period to the capital raised; (iii) the aggregate amount of advisory fees and the aggregate amount of other fees paid to the Advisor and any Affiliate of the Advisor by the Corporation and including fees or charges paid to the Advisor and any Affiliate of the Advisor by third parties doing business with the Corporation; (iv) the Total Operating Expenses of the Corporation, stated as a percentage of Average Invested Assets and as a percentage of its Net Income; (v) a report from the Independent Directors that the policies being followed by the Corporation are in the best interests of its Stockholders and the basis for such determination; and (vi) separately stated, full disclosure of all material terms, factors and circumstances surrounding any and all transactions involving the Corporation, Directors, Advisors, Sponsors and any Affiliate thereof occurring in the year for which the annual report is made, and the Independent Directors shall be specifically charged with a duty to examine and comment in the report on the fairness of such transactions.
ARTICLE XII
LIABILITY LIMITATION, INDEMNIFICATION
AND TRANSACTIONS WITH THE CORPORATION
          Section 12.1 Limitation of Stockholder Liability. No Stockholder shall be liable for any debt, claim, demand, judgment or obligation of any kind of, against or with respect to the Corporation by reason of his being a Stockholder, nor shall any Stockholder be subject to any personal liability whatsoever, in tort, contract or otherwise, to any Person in connection with the Corporation’s assets or the affairs of the Corporation by reason of his being a Stockholder. All written contracts to which the Corporation is a party will include a provision that no Stockholder shall be personally liable thereunder.
          Section 12.2 Limitation of Director and Officer Liability; Indemnification.
          (a) Subject to any applicable conditions set forth under Maryland law or in Section 12.2(c) or (d), as the case may be, no Director or officer of the Corporation shall be liable to the Corporation or its Stockholders for money damages. Neither the amendment nor repeal of this Section 12.2, nor the adoption or amendment of any other provision of the Charter or Bylaws inconsistent with this Section 12.2, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.
          (b) Subject to any applicable conditions set forth under Maryland law or in Section 12.2(c) or (d), as the case may be, the Corporation shall indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (i) any individual who is a present or former Director or officer of the Corporation and who is made or threatened to be made a party to the proceeding by reason of his or her service in that capacity, (ii) any individual who, while a Director or officer of the Corporation and at the request of the Corporation, serves or has served as a director, officer, partner or trustee of such corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made or threatened to be made a party to the proceeding by reason of his or her service in that capacity or (iii) the Advisor of any of its Affiliates acting as an agent of the Corporation. The Corporation may, with the approval of the Board of Directors or any duly authorized committee thereof, provide such indemnification and advance for expenses to a person who served a predecessor of the Corporation in any of the capacities described in (i) or (ii) above and to any employee or agent of the Corporation or a predecessor of the Corporation. The Board may take such action as is necessary to carry out this Section 12.2(b) and is expressly empowered to adopt, approve and amend from time to time Bylaws, resolutions or contracts implementing such provisions. No amendment of the Charter or repeal of any of its provisions shall limit or eliminate the right of indemnification provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal.
          (c) Notwithstanding the foregoing, the Corporation shall not provide for indemnification of or hold harmless a Director, the Advisor or any Affiliate of the Advisor (the “Indemnitee”) for any liability or loss suffered by any of them, unless all of the following conditions are met:
          (i) The Indemnitee has determined, in good faith, that the course of conduct that caused the loss or liability was in the best interests of the Corporation.
          (ii) The Indemnitee was acting on behalf of or performing services for the Corporation.
          (iii) Such liability or loss was not the result of (A) negligence or misconduct, in the case that the Indemnitee is a Director (other than an Independent Director), the Advisor or an Affiliate of the Advisor or (B) gross negligence or willful misconduct, in the case that the Indemnitee is an Independent Director.
          (iv) Such indemnification or agreement to hold harmless is recoverable only out of Net Assets and not from the Stockholders.
          (d) Notwithstanding the foregoing, the Corporation shall not provide indemnification for any loss, liability or expense arising from or out of an alleged violation of federal or state securities laws by such party unless one or more of the following conditions are met: (i) there has been a successful adjudication on the merits of each count involving alleged material securities law violations as to the Indemnitee, (ii) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the Indemnitee; or (iii) a court of competent jurisdiction approves a settlement of the claims against the Indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the Securities and Exchange Commission and of the published position of any state securities regulatory authority in which Securities were offered or sold as to indemnification for violations of securities laws.

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          Section 12.3 Payment of Expenses. The Corporation shall pay or reimburse reasonable legal expenses and other costs incurred by an Indemnitee in advance of final disposition of a proceeding if all of the following are satisfied: (i) the proceeding relates to acts or omissions with respect to the performance of duties or services on behalf of the Corporation, (ii) the Indemnitee provides the Corporation with written affirmation of the Indemnitee’s good faith belief that the Indemnitee has met the standard of conduct necessary for indemnification by the Corporation as authorized by Section 12.2(b) hereof, (iii) the legal proceeding was initiated by a third party who is not a Stockholder or, if by a Stockholder of the Corporation acting in his or her capacity as such, a court of competent jurisdiction approves such advancement, and (iv) the Indemnitee provides the Corporation with a written agreement to repay the amount paid or reimbursed by the Corporation, together with the applicable legal rate of interest thereon, if it is ultimately determined that the Indemnitee did not comply with the requisite standard of conduct and is not entitled to indemnification. Any indemnification payment or reimbursement of expenses will be furnished in accordance with the procedures in Section 2-418(e) of the MGCL or any successor statute.
          Section 12.4 Express Exculpatory Clauses in Instruments. Neither the Stockholders nor the Directors, officers, employees or agents of the Corporation shall be liable under any written instrument creating an obligation of the Corporation by reason of their being Stockholders, Directors, officers, employees or agents of the Corporation, and all Persons shall look solely to the Corporation’s assets for the payment of any claim under or for the performance of that instrument. The omission of the foregoing exculpatory language from any instrument shall not affect the validity or enforceability of such instrument and shall not render any Stockholder, Director, officer, employee or agent liable thereunder to any third party, nor shall the Directors or any officer, employee or agent of the Corporation be liable to anyone as a result of such omission.
          Section 12.5 Transactions with Affiliates. The Corporation shall not engage in transactions with the Advisor, the Sponsor, a Director or any of the Corporation’s Affiliates, except to the extent that each such transaction has, after disclosure of such affiliation, been approved or ratified by the affirmative vote of a majority of the Directors (including a majority of the Independent Directors) not Affiliated with the Person who is party to the transaction and:
                    (a) The transaction is fair and reasonable to the Corporation.
                    (b) The terms and conditions of such transaction are not less favorable to the Corporation than those available from unaffiliated third parties.
                    (c) If an acquisition is involved, the total consideration is not in excess of the appraised value of the Property being acquired, as determined by an Independent Expert.

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ARTICLE XIII
AMENDMENTS
          The Corporation reserves the right from time to time to make any amendment to the Charter, now or hereafter authorized by law, including any amendment altering the terms or contract rights, as expressly set forth in the Charter, of any Shares. All rights and powers conferred by the Charter on Stockholders, Directors and officers are granted subject to this reservation. Except for those amendments permitted to be made without Stockholder approval under Maryland law or by specific provision in the Charter, any amendment to the Charter shall be valid only if approved by the affirmative vote of a majority of all votes entitled to be cast on the matter, including without limitation, (1) any amendment which would adversely affect the rights, preferences and privileges of the Stockholders and (2) any amendment to Sections 7.2, 7.5 and 7.11, Article IX, Article X, Article XII, Article XIV and Article XV hereof and this Article XIII (or any other amendment of the Charter that would have the effect of amending such sections).
ARTICLE XIV
ROLL-UP TRANSACTIONS
          In connection with any proposed Roll-Up Transaction, an appraisal of all of the Corporation’s assets shall be obtained from a competent Independent Expert. If the appraisal will be included in a Prospectus used to offer the securities of a Roll-Up Entity, the appraisal shall be filed with the SEC and the states as an exhibit to the registration statement for the offering. The Corporation’s assets shall be appraised on a consistent basis, and the appraisal shall be based on the evaluation of all relevant information and shall indicate the value of the assets as of a date immediately prior to the announcement of the proposed Roll-Up Transaction. The appraisal shall assume an orderly liquidation of the assets over a twelve-month period. The terms of the engagement of the Independent Expert shall clearly state that the engagement is for the benefit of the Corporation and the Stockholders. A summary of the appraisal, indicating all material assumptions underlying the appraisal, shall be included in a report to Stockholders in connection with a proposed Roll-Up Transaction. In connection with a proposed Roll-Up Transaction, the person sponsoring the Roll-Up Transaction shall offer to Stockholders who vote against the proposed Roll-Up Transaction the choice of:
                    (a) accepting the securities of a Roll-Up Entity offered in the proposed Roll-Up Transaction; or
                    (b) one of the following:
                         (i) remaining as Stockholders and preserving their interests in the Corporation on the same terms and conditions as existed previously; or
                         (ii) receiving cash in an amount equal to the Stockholder’s pro rata share of the appraised value of the net assets of the Corporation.
          The Corporation is prohibited from participating in any proposed Roll-Up Transaction:

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                    (a) that would result in the Stockholders having voting rights in a Roll-Up Entity that are less than the rights provided for in Sections 11.1 and 11.2 hereof;
                    (b) that includes provisions that would operate as a material impediment to, or frustration of, the accumulation of Shares by any purchaser of the securities of the Roll-Up Entity (except to the minimum extent necessary to preserve the tax status of the Roll-Up Entity), or which would limit the ability of an investor to exercise the voting rights of its securities of the Roll-Up Entity on the basis of the number of Shares held by that investor;
                    (c) in which investor’s rights to access of records of the Roll-Up Entity will be less than those described in Sections 11.4 and 11.5 hereof; or
                    (d) in which any of the costs of the Roll-Up Transaction would be borne by the Corporation if the Roll-Up Transaction is not approved by the Stockholders.
ARTICLE XV
DURATION
          If Listing does not occur on or before December 31, 2017, then the Board of Directors must adopt a resolution that declares a proposed liquidation be submitted for consideration at either an annual or special meeting of the stockholders. If Listing occurs, the Corporation shall continue perpetually unless dissolved pursuant to any applicable provision of the MGCL.
[Signature Page Follows]

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          IN WITNESS WHEREOF, I have hereunto set my hand this 21st day of October, 2010.
         
     
  By:   Todd B. Parriott  
    Name:  Todd B. Parriott   
    Title:   President   
 
          I, Stacy M. Riffe, Secretary of the Corporation hereby certify that the above is a true and correct signature of Todd B. Parriott, President of the Corporation.
         
     
  By:   Stacy M. Riffe  
    Name:  Stacy M. Riffe  
    Title:   Secretary   
 

39

EX-10.1 4 d65627a7exv10w1.htm EX-10.1 exv10w1
Exhibit 10.1
ADVISORY AGREEMENT
     THIS ADVISORY AGREEMENT (this “Agreement”) is made as of October 21, 2010 (the “Effective Date”), by and between CM REIT, INC., a Maryland corporation (the “Company”), and CM GROUP, LLC, a Delaware limited liability company (the “Advisor”).
RECITALS:
     A. The Company intends to use the net proceeds of borrowings and security offerings and the net returns on its investments which are not otherwise distributed to stockholders in Investments (defined herein) in a manner which allows the Company to qualify as a “real estate investment trust” under the Internal Revenue Code of 1986, as amended (the “Code”) and to qualify for an exemption from being an “investment company” under the Investment Company Act of 1940, as amended (the “Investment Company Act”).
     B. The Company desires that the Advisor undertake, on the Company’s behalf, the duties and responsibilities set forth in this Agreement, subject to the direction and oversight of the Board of Directors of the Company (the “Board of Directors”), on the terms and conditions set forth in this Agreement.
     C. The Advisor desires to undertake, on the Company’s behalf, the duties and responsibilities set forth in this Agreement, subject to the direction and oversight of the Board of Directors, on the terms and conditions set forth in this Agreement.
     NOW, THEREFORE, in consideration of the premises and the mutual covenants of the parties hereto, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
AGREEMENTS:
1. Definitions. Capitalized terms used in this Agreement shall have the respective meanings assigned to them below:
     1.1 “Advisor” has the meaning set forth in the Preamble to this Agreement, and shall include any successor thereto.
     1.2 “Advisor Obligations” has the meaning set forth in Section 2.4.2 of this Agreement.
     1.3 “Advisor Refund” has the meaning set forth in Section 6.2.1(2) of this Agreement.
     1.4 “Affiliate” means, when used with reference to a specified person, any person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the specified person. For purposes of this definition, the term “person” means and includes individuals, corporations, general and limited partnerships, stock companies,

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land trusts, business trusts and other entities and governments and agencies and political subdivisions thereof. For purposes of this definition, “control” (including the correlative meanings of the terms “controlled by” and “under common control with”), as used with respect to any person, shall mean the possession, directly, or indirectly through one or more intermediaries, of the power to direct or cause the direction of the management and policies of such person, whether by contract, through the ownership of voting securities, partnership interests or other equity interests or otherwise.
     1.5 “Annual Second-Tier Amount” shall have the meaning set forth in Section 6.2.1(2) of this Agreement.
     1.6 “Agreement” means this Advisory Agreement dated as of the Effective Date, by and between the Company and the Advisor, as it is amended from time to time in accordance with the terms of this Agreement.
     1.7 “Average Invested Assets” means for any period the average of the aggregate book value of the Company’s assets invested, directly or indirectly, in Investments, before reserves for depreciation or bad debts or other similar non-cash reserves computed by taking the average of such values at the end of each month during any given period.
     1.8 “Average Net Worth” means for any period the average of the net worth of the Company at the end of each month during the period. For purposes of determining the Average Net Worth, the “net worth” means the difference between (i) the aggregate book value of the consolidated assets of the Company and its subsidiaries, before reserves for depreciation, bad debts or other similar non-cash items, and (ii) the aggregate book value of debt of the Company and its subsidiaries.
     1.9 “Board of Directors” has the meaning set forth in Recital B of this Agreement.
     1.10 “Cause” means a reasonable good faith determination of the Board of Directors based on findings of fact which are disclosed to the Advisor that the Advisor was grossly negligent, acted with reckless disregard or engaged in willful misconduct or active fraud while discharging its material duties under this Agreement.
     1.11 “Change of Control” means in any transaction or series of transactions (i) any sale, lease, assignment, transfer or other conveyance of all or substantially all of the Company’s assets, or (ii) any consolidation or merger involving the Company in which all of the stockholders of the Company immediately prior to the consummation of such transaction, considered collectively, do not immediately following the transaction own shares of the surviving entity constituting at least a majority of the voting power of the surviving entity, (iii) any reclassification or other exchange of capital stock, or any other recapitalization of the Company in which any person or group, as those terms are used in Rule 13d-1 promulgated under the Securities Exchange Act of 1934, as amended, that owned 30% of the voting power of the Company immediately prior to the consummation of such transaction do not immediately following the transaction own at least 30% of the voting power of the Company or in which any person or group that owned less than 30% of the voting power of the Company immediately prior to the consummation of the transaction do not immediately following the transaction own

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more than 30% of the voting power of the Company, (iv) any liquidation, dissolution or winding up of the Company, or (v) any time fewer than two members of the Board of Directors are individuals which were selected by the Advisor. In instances where a natural person selected by the Advisor and immediately thereafter appointed to the Board of Directors either resigns or dies, then a Change of Control under clause (v) of the preceding sentence shall not be triggered if (i) the Board of Directors does not elect to terminate the Advisor within 30 days after the first director resigns or dies, or (ii) the qualified individual next selected by the Advisor is appointed as soon as possible after such selection and the Board of Directors does not take any action from the time the Advisor selects the next individual until the time the next Advisor-selected director is appointed.
     1.12 “Code” has the meaning set forth in Recital A of this Agreement.
     1.13 “Company” has the meaning set forth in the Introductory Paragraph of this Agreement, and shall include any successor thereto.
     1.14 “Effective Date” has the meaning set forth in the Preamble of this Agreement.
     1.15 “Federal Reserve Board” means the Board of Governors of the Federal Reserve System.
     1.16 “First-Tier Management Compensation” has the meaning set forth in Section 6.1 of this Agreement.
     1.17 “GAAP” means generally accepted accounting principles, as applied in the United States.
     1.18 “Governing Instruments” means the articles of incorporation or charter, as the case may be, and the bylaws of the Company and its subsidiaries, as those documents may be amended from time to time.
     1.19 “Gross Proceeds” means the aggregate purchase price of all shares of the Company’s common stock sold for the account of the Company through an Offering, without deduction for Organization and Offering Expenses or volume or other discounts.
     1.20 “Independent Directors” are those who are not associated and have not been associated within the last two years, directly or indirectly, with the Company or the Advisor.
     1.21 “Investment Company Act” has the meaning set forth in Recital A of this Agreement.
     1.22 “Investments” means any investments by the Company and its subsidiaries in properties, loans and all other investments in which the Company and its subsidiaries may acquire an interest, either directly or indirectly, other than short-term investments acquired for purposes of cash management.
     1.23 “Last Auditor” has the meaning set forth in Section 6.3 of this Agreement.

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     1.24 “Management Compensation” means the First-Tier Management Compensation and Second-Tier Management Compensation.
     1.25 “Mortgage Assets” means the following:
  (i)   mortgage securities (or interests therein), including (a) pass-through certificates (including GNMA certificates, FNMA certificates and FHLMC certificates), (b) collateralized mortgage obligations, (c) securities representing interests in, or secured by, mortgages on real property other than pass-through certificates and CMOs, (d) certificates and other securities collateralized by loans, mortgage derivative securities, subordinated interests and other mortgage-backed and mortgage-collateralized obligations, (e) mortgage derivative securities and (f) subordinated interests;
 
  (ii)   mortgage loans, including (a) conforming mortgage loans (i.e., mortgage loans which comply with requirements for inclusion in credit support programs sponsored by FHLMC, FNMA or GNMA or are FHA or VA Loans, all of which are secured by first mortgages or deeds of trust on single-family (one to four units) residences, multifamily residences or commercial properties) and (b) non-conforming mortgage loans; and
 
  (iii)   short-term investments, including short-term bank certificates of deposit, short-term U.S. Treasury securities, short-term U.S. government agency securities, commercial paper, repurchase agreements, short-term CMOs, short-term asset-backed securities and other similar types of short-term investment instruments, all of which will have maturities or average lives of less than one year.
     1.26 “Net Income” means for any period the taxable income of the Company and its subsidiaries before deducting (i) the Second-Tier Management Compensation, (ii) any net operating loss deductions arising from losses in prior periods and (iii) any items which the Code permits to be deducted when calculating taxable income for a REIT.
     1.27 “Offering” means any public offering and sale of shares of the Company’s common stock pursuant to an effective registration statement filed under the Securities Act other than a public offering of shares under a distribution reinvestment plan and shares offered under any employee benefit plan.
     1.28 “Organization and Offering Expenses” means all expenses incurred by or on behalf of the Company in connection with and in preparing the Company for registration of and subsequently offering and distributing its shares to the public, which may include, but are not limited to, total underwriting and brokerage discounts and commissions (including fees of the underwriters’ attorneys); expenses for printing, engraving and mailing; salaries of employees while engaged in sales activities; salaries and non-transaction-based compensation paid to employees of the Advisor for performing organizational and offering services for the Company (including, support, accounting, human resources, information technology and marketing support), charges of transfer agents, registrars, trustees, escrow holders, depositaries and experts; and expenses of qualification of the sale of the securities under federal and state laws, including taxes and fees; and accountants’ and attorneys’ fees.

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     1.29 “Reconciliation Notice” has the meaning set forth in Section 6.3 of this Agreement.
     1.30 “REIT” means a “real estate investment trust” as defined under the Code.
     1.31 “REIT Provisions of the Code” means Sections 856 through 860 of the Code.
     1.32 “Remaining Amount” has the meaning set forth in Section 6.2.1(2) of this Agreement.
     1.33 “Second-Tier Amount” has the meaning set forth in Section 6.2.1(1) of this Agreement.
     1.34 “Second-Tier Management Compensation” has the meaning set forth in Section 6.2 of this Agreement.
     1.35 “Short-Term Investments” means short-term bank certificates of deposit, short-term U.S. Treasury securities, short-term U.S. government agency securities, commercial paper, repurchase agreements, short-term CMOs, short-term asset-backed securities and other similar types of short-term investment instruments, all of which will have maturities or average lives of less than one year.
     1.36 “Sub-Advisor” means any third party (other than the Advisor) which has been selected by the Advisor and approved by the Board of Directors to manage all or a portion of the day-to-day operations of the Company and perform the services and other activities described in Section 2.1 of this Agreement. Any approval of a Sub-Advisor by the Board of Directors may be conditioned or limited in any manner determined by the Board of Directors, including, without limitation, the terms and conditions of any such agreement with a Sub-Advisor.
     1.37 “Ten-Year U.S. Treasury Rate” means for any period the average of the weekly average yields to maturity for actively traded current coupon U.S. Treasury fixed interest rate securities (adjusted to a constant maturity of ten years) published by the Federal Reserve Board for each week during such period, or, if such rate is not published by the Federal Reserve Board, any Federal Reserve Bank or agency or department of the federal government selected by the Company. If the Company determines in good faith that the Ten-Year U.S. Treasury Rate cannot be calculated as provided above, then the rate shall be the arithmetic average of the per annum average yields to maturities, based upon closing asked prices on each business day during such period, for each actively traded marketable U.S. Treasury fixed interest rate security with a final maturity date not less than eight nor more than 12 years from the date of the closing asked prices as chosen and quoted for each business day in each such period in New York City by at least three recognized dealers in U.S. government securities selected by the Company.
     1.38 “Threshold Return” has the meaning set forth in Section 6.2.3 of this Agreement.
     1.39 “Tiered Percentage” has the meaning set forth in Section 6.2.2 of this Agreement.

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     1.40 “Total Operating Expenses” means the aggregate expenses of every character paid or incurred by the Company as determined under GAAP, including the Management Compensation, but excluding (i) the expenses or raising capital such as organization and offering expenses, legal audit, accounting, underwriting, brokerage, listing registration and other fees, printing and other such expenses, and tax incurred in connection with the issuance, distribution, transfer, registration, and stock exchange listing of the Company’s shares; (ii) interest payments; (iii) taxes; (iv) non-cash expenditures such as depreciation, amortization and bad debt reserves; (v) incentive fees, if any, paid to the Advisor in connection with the gain from the sale of the Company’s assets; and (vi) acquisition fees, acquisition expenses, real estate commissions on resale of property and other expenses connected with the acquisition, disposition, and ownership of real estate interests, mortgage loans, or other property, (such as the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of property).
2. General Duties of the Advisor.
     2.1 Services. Subject at all times to the direction and oversight of the Board of Directors, the Advisor shall (i) generally manage the day-to-day operations of the Company and perform the services and other activities described below, and (ii) to the extent directed by the Board of Directors, perform similar management and services for any subsidiary of the Company. The Advisor, in its sole discretion with the approval of the Board of Directors, may elect to cause the duties of the Advisor under this Agreement to be provided by a Sub-Advisor. The Advisor shall perform the following services from time to time as may be required for the management of the Company and its assets:
     2.1.1 serving as the Company’s consultant with respect to the formulation of investment criteria and the preparation of policy guidelines by the Board of Directors;
     2.1.2 assisting the Company in developing criteria for Mortgage Asset purchase commitments that are consistent with the Company’s long-term investment objectives and making available to the Company its knowledge and experience with respect to Mortgage Assets;
     2.1.3 representing the Company in connection with the purchase, sale and commitment to purchase or sell Investments that meet in all material respects the Company’s investment criteria;
     2.1.4 managing the Company’s portfolio of Investments;
     2.1.5 advising the Company and negotiating the Company’s agreements with third-party lenders for borrowings by the Company;
     2.1.6 making available to the Company statistical and economic research and analysis regarding the Company’s activities and the services performed for the Company by the Advisor;

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     2.1.7 investing or reinvesting any money of the Company in accordance with the Company’s policies and procedures;
     2.1.8 providing the executive and administrative personnel, office space and services required in rendering services to the Company, in accordance with and subject to the terms of this Agreement;
     2.1.9 administering the day-to-day operations of the Company and performing and supervising the performance of such other administrative functions necessary to the management of the Company as may be agreed upon by the Advisor and the Board of Directors, including the collection of revenues and the payment of the Company’s debts and obligations from the Company’s accounts, and the maintenance of appropriate computer systems to perform such administrative functions;
     2.1.10 advising the Board of Directors in connection with policy decisions;
     2.1.11 evaluating and recommending hedging strategies to the Board of Directors and, upon approval by the Board of Directors, engaging in hedging activities on behalf of the Company consistent with the Company’s status as a REIT;
     2.1.12 supervising compliance by the Company with the REIT Provisions of the Code and maintenance of its status as a REIT;
     2.1.13 qualifying and causing the Company to qualify to do business in all applicable jurisdictions and obtaining and maintaining all appropriate licenses;
     2.1.14 assisting the Company in any executive search for executive officers;
     2.1.15 assisting the Company to retain qualified accountants and tax experts to assist in developing and monitoring appropriate accounting procedures and testing systems and to conduct quarterly compliance reviews as the Board of Directors may deem necessary or advisable;
     2.1.16 assisting the Company in its compliance with all federal (including the Sarbanes-Oxley Act of 2002), state and local regulatory requirements applicable to the Company in respect of its business activities, including preparing or causing to be prepared all financial statements required under applicable regulations and contractual undertakings and all reports, documents and filings, if any, required under the Securities Exchange Act of 1934, as amended, or other federal or state laws;
     2.1.17 assisting the Company in its compliance with federal, state and local tax filings and reports and generally enabling the Company to maintain its status as a REIT, including soliciting stockholders, as defined below, for required information to the extent provided in the REIT Provisions of the Code;

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     2.1.18 assisting the Company in its maintenance of an exemption from the Investment Company Act and monitoring compliance with the requirements for maintaining an exemption from the Investment Company Act;
     2.1.19 coordinating and managing the operations of any joint venture or co-investment interests held by the Company and conducting all matters with the joint venture or co-investment collaborators;
     2.1.20 advising the Company as to its capital structure and capital raising activities;
     2.1.21 handling and resolving all claims, disputes or controversies (including all litigation, arbitration, settlement or other proceedings or negotiations) in which the Company may be involved or to which the Company may be subject arising out of the Company’s day-to-day operations, subject to the approval of the Board of Directors;
     2.1.22 engaging and supervising, on behalf of the Company and at the Company’s expense, the following, without limitation: independent contractors to provide investment banking services, leasing services, mortgage brokerage services, securities brokerage services, other financial services and such other services as may be deemed by the Advisor and the Board of Directors to be necessary or advisable from time to time; and
     2.1.23 so long as the Advisor does not incur additional costs or expenses, performing such other services as may be required from time to time for management and other activities relating to the assets of the Company as the Board of Directors shall reasonably request or the Advisor shall deem appropriate under the particular circumstances.
     2.2 Obligations of the Advisor.
     2.2.1 Verify Conformity with Investment Criteria. Subject to the direction of the Board of Directors, the Advisor shall use commercially reasonable efforts to ensure that each Investment acquired by the Company conforms in all material respects to the investment criteria of the Company and shall seek to cause each seller or transferor of Investments to the Company to make such representations and warranties regarding such Investments as may, in the reasonable judgment of the Advisor, be necessary and appropriate, subject to market custom. In addition, the Advisor shall take such other action as it deems reasonably necessary or appropriate in seeking to protect the Company’s Investments to the extent consistent with its duties under this Agreement.
     2.2.2 Conduct Activities in Conformity with REIT Status and All Applicable Restrictions. Subject to the direction of the Board of Directors, the Advisor shall refrain from any action which, in its sole judgment made in good faith, would adversely affect the status of the Company or, if applicable, any subsidiary of

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the Company as a REIT or (i) which, in its sole judgment made in good faith, would violate any material law, rule or regulation of any governmental body or agency having jurisdiction over the Company or any such subsidiary or (ii) which would otherwise not be permitted by the Company’s or such subsidiary’s Governing Instruments, any material operating policies adopted by the Company, or any agreements actually known by the Advisor, except in each of clauses (i) and (ii) as could not reasonably be expected to have a material adverse effect on the Company. If the Advisor is directed to take any such action by the Board of Directors, the Advisor shall promptly notify the Board of Directors of the Advisor’s judgment that such action would adversely affect such status or cause such violation or not be permitted as aforesaid.
     2.2.3 Reports. Upon the request of the Board of Directors and at the sole cost and expense of the Company, the Advisor shall cause an annual compliance report of the Company to be prepared to determine compliance with the REIT Provisions of the Code and related matters. In addition, the Advisor shall prepare regular reports for the Board of Directors that will review the Company’s Investments, portfolio composition and characteristics, credit quality (if applicable), performance and compliance with the Company’s investment policies and policies that enable the Company to maintain its qualification as a REIT and to maintain its exemption from being deemed an “investment company” under the Investment Company Act.
     2.2.4 Portfolio Transactions. In placing portfolio transactions and selecting brokers or dealers, the Advisor shall seek to obtain on behalf of the Company commercially reasonable terms. In assessing commercially reasonable terms for any transaction, the Advisor shall consider all factors it deems relevant, including the breadth of the market for the security, the price of the security, the financial condition and execution capability of the broker or dealer, and the reasonableness of the commission, if any, both for the specific transaction and on a continuing basis.
     2.3 Cooperation of the Company. The Company (including the Board of Directors) agrees to take all actions reasonably required to permit and enable the Advisor to carry out its duties and obligations under this Agreement, including, without limitation, all steps reasonably necessary to allow the Advisor to file any registration statement on behalf of the Company in a timely manner. The Company further agrees to use commercially reasonable efforts to make available to the Advisor all resources, information and materials reasonably requested by the Advisor to enable the Advisor to satisfy its obligations hereunder, including its obligations to deliver financial statements and any other information or reports with respect to the Company. If the Advisor is not able to provide a service, or in the reasonable judgment of the Advisor it is not prudent to provide a service, without the approval of the Board of Directors or the Independent Directors, as applicable, then the Advisor shall be excused from providing such service (and shall not be in breach of this Agreement) until the applicable approval has been obtained.

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     2.4 Engagement of Third Parties.
     2.4.1 Other Third Parties. The Advisor is authorized to retain, for and on behalf of the Company, the services of third parties (including Affiliates of the Advisor), including, without limitation, accountants, legal counsel, appraisers, insurers, brokers, dealers, transfer agents, registrars, developers, investment banks, financial advisors, banks and other lenders and others as the Advisor deems reasonably necessary or advisable in connection with the management and operations of the Company. The costs and expenses related to the retention of third parties shall be the sole cost and expense of the Company except to the extent the third party is retained to make decisions to invest in and dispose of Investments, provide administrative, data processing or clerical services, prepare the financial records of the Company or prepare a report summarizing the Company’s acquisitions of Investments, portfolio compensation and characteristics, credit quality (if applicable) or performance of the portfolio, in which case it shall be at the sole cost and expense of the Advisor unless otherwise approved by the Board of Directors (collectively, “Advisor Obligations”).
     2.4.2 Affiliates. Notwithstanding anything contained in this Agreement to the contrary, the Advisor shall have the right to cause any services under this Agreement to be rendered by the Advisor’s employees or Affiliates of the Advisor. The Company shall pay or reimburse the Advisor or its Affiliates for the cost and expense of performing services by the Affiliate if (i) the costs and expenses of such Affiliate would have been reimbursable under this Agreement if such Affiliate were an unaffiliated third party, and (ii) the costs and expenses of such Affiliate have been approved by a majority of the Independent Directors or incurred in accordance with a policy adopted by a majority of the Independent Directors.
3. Additional Activities of the Advisor and its Affiliates.
     3.1 Other Activities of the Advisor. Except as provided in the last sentence of this Section 3.1, nothing in this Agreement shall (i) prevent the Advisor, any Sub-Advisor or any of their respective Affiliates, officers, directors or employees, from engaging in other businesses or from rendering services of any kind to any other person or entity, including, without limitation, investing in, or rendering advisory service to others investing in, any type of Investments or other real estate investments (including, without limitation, investments that meet the principal investment objectives of the Company), whether or not the investment objectives or policies of any such other person or entity are similar to those of the Company, or (ii) in any way bind or restrict the Advisor, any Sub-Advisor or any of their respective Affiliates, officers, directors or employees from buying, selling or trading any securities or commodities for their own accounts or for the account of others for whom the Advisor, the Sub-Advisor or any of their respective Affiliates, officers, directors or employees may be acting. The Company acknowledges that the Advisor will base allocation decisions on the procedures the Advisor reasonably and in good faith considers fair and equitable, including, without limitation, such considerations as investment objectives, restrictions and time horizon, availability of cash and the amount of existing holdings. While information and recommendations supplied to the Company shall, in the Advisor’s reasonable and good faith judgment, be appropriate under the circumstances and in

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light of the investment objectives and policies of the Company, they may be different from the information and recommendations supplied by the Advisor, any Sub-Advisor, any Affiliate of the Advisor or any Sub-Advisor to other investment companies, funds and advisory accounts. The Company shall be entitled to equitable treatment under the circumstances in receiving information, recommendations and any other services, but the Company recognizes that it is not entitled to receive preferential treatment as compared with the treatment given by the Advisor, any Sub-Advisor, any Affiliate of the Advisor or any Sub-Advisor to any investment company, fund or advisory account other than any fund or advisory account which contains only funds invested by the Advisor (and not of any of its clients or customers) or its officers and directors. Notwithstanding anything to the contrary in this Section 3.1, for so long as the Advisor is the exclusive advisor of the Company (unless the Advisor is not the exclusive advisor of the Company because the Company has engaged a Sub-Advisor) pursuant to this Agreement, neither the Advisor nor any of its Affiliates shall sponsor any other mortgage REIT that invests primarily in mortgages for the acquisition of, development of and construction on real estate in the Las Vegas, Nevada area other than Desert Capital REIT, Inc., unless otherwise approved by a majority of the Independent Directors.
     3.2 Service to the Company; Execution of Documents. Directors, officers, employees and agents of the Advisor and its Affiliates may serve as trustees, directors, officers, employees, agents, nominees or signatories for the Company or any subsidiary of the Company, to the extent permitted by the Governing Instruments, as from time to time amended, or by any resolutions duly adopted by the Board of Directors pursuant to the Governing Instruments. When executing documents or otherwise acting in such capacities for the Company, such persons shall use their respective titles in the Company.
4. Bank Accounts. At the direction of the Board of Directors, the Advisor may establish and maintain one or more bank accounts in the name of the Company or any subsidiary of the Company, and may collect and deposit into any such account or accounts, and disburse funds from any such account or accounts in a manner consistent with this Agreement, including, without limitation, the following: (a) the payment of the Management Compensation, (b) the payment (or advance) of reimbursable costs and expenses, and (c) such other amounts authorized by the Board of Directors. The Advisor shall from time to time render appropriate accountings of such collections and payments to the Board of Directors and, upon request, to the auditors of the Company or any subsidiary of the Company.
5. Records; Confidentiality. The Advisor shall maintain appropriate and accurate books of account and records relating to services performed under this Agreement, and such books of account and records shall be accessible for inspection by representatives (including the auditors) of the Company or any subsidiary of the Company at any time during normal business hours. Except in the ordinary course of business of the Company, the Advisor shall, and shall use commercially reasonable efforts to cause each of its Affiliates to, keep confidential any and all information it (or such Affiliates) may obtain from time to time in connection with the services it (or such Affiliates) renders under this Agreement.

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6. Compensation of the Advisor.
     6.1 First-Tier Management Compensation. For services rendered under this Agreement, the Company shall pay to the Advisor monthly in arrears commencing on the Effective Date annual first-tier management compensation equal to 1% of the first $200,000,000 of Average Invested Assets during each fiscal year, plus 0.8% of the Average Invested Assets during such year in excess of $200,000,000 (the “First-Tier Management Compensation”). The portion of the First-Tier Management Compensation payable each month shall be calculated by the Advisor within 15 days after the end of such month, and a written statement documenting such calculation in reasonable detail shall be promptly delivered to the Company thereafter. The Company shall pay any amount payable pursuant to this Section 6.1 for such month within 15 days after the receipt of the written statement setting forth the computation of the First-Tier Management Compensation, or, at the Advisor’s election, the Advisor may deduct such amount from the Company’s account or accounts, in any case without demand, deduction, offset or delay (other than any deduction or offset for the liquidated sum of any Advisor Refund).
     6.2 Calculation of Second-Tier Management Compensation. In addition to the First-Tier Management Compensation, the Advisor shall receive second-tier management compensation for each month (the “Second-Tier Management Compensation”).
     6.2.1 The Second-Tier Management Compensation shall be calculated by the Advisor and paid or refunded (as applicable) as follows:
          (1) At the end of each month during each fiscal year, the Advisor shall calculate the Tiered Percentage of the difference of (i) the Net Income for such month (or lesser portion thereof), minus (ii) the Threshold Return for such month (or lesser portion thereof) (the “Quarterly Second-Tier Amount”). If the Second-Tier Amount is a positive number, then at the end of each such month the Company shall pay the Advisor the Second-Tier Amount.
          (2) At the end of each fiscal year and upon any termination of this Agreement, the Advisor shall calculate the Tiered Percentage of the difference of (i) the Net Income for such year (or lesser portion thereof), minus (ii) the Threshold Return for such year (or lesser portion thereof) (the “Annual Second-Tier Amount”). If the aggregate of the Second-Tier Amounts received by the Advisor for such year (but not taking into account any prior years) is less than the Annual Second-Tier Amount, then the Company shall pay the Advisor such shortfall (the “Remaining Amount”). On the other hand, if the aggregate of the Second-Tier Amounts received by the Advisor during such year (but not taking into account any prior years) exceeds the Annual Second-Tier Amount, then the Advisor shall pay the Company such excess (the “Advisor Refund”). The Advisor Refund for any particular year shall not exceed the aggregate of the Second-Tier Amounts received by the Advisor during such year.
     6.2.2 The “Tiered Percentage” shall mean for any period the weighted average of the following percentage rates (weighting to be based on Average Invested Assets attributable to each percentage rate): (i) 20% for the first $200,000,000 of Average Invested Assets; and (ii) 10% for the Average Invested Assets in excess of $200,000,000.

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     6.2.3 The “Threshold Return” shall mean for any period the amount of Net Income for such period that would produce an annualized return on the Company’s average Gross Proceeds equal to the sum of (i) the Ten-Year U.S. Treasury Rate for such period plus (ii) 1.0%.
     6.2.4 Payment Procedure. The Advisor shall calculate the Second-Tier Management Compensation, the Second-Tier Amount, any Remaining Amount and any Advisor Refund and deliver to the Company a written statement setting forth such computation in reasonable detail within 15 days after the end of each month, fiscal year and after the date of any termination of this Agreement, as applicable. The Company shall pay to the Advisor all Second-Tier Amounts and all Remaining Amounts (or, at the Advisor’s election, the Advisor may deduct such amount from the Company’s account or accounts) with respect to each month or year (or lesser portion thereof) within 15 days following the delivery to the Company of the written statement setting forth the computation of the Second-Tier Management Compensation for such month or year (or lesser portion thereof), as applicable, without demand, deduction, offset or delay (other than any deduction or offset for the liquidated sum of any Advisor Refund). The Advisor shall pay the Advisor Refund, if any, with respect to a particular fiscal year within 15 days following the delivery to the Company of the written statement setting forth the computation of the Second-Tier Management Compensation for such year (or lesser portion thereof), without demand or delay. In connection with the Company’s annual audit (or any audit upon termination of this Agreement), the Advisor shall determine any year-end adjustments to the Second-Tier Management Compensation and Advisor Refund payable under this Section 6.2 and deliver to the Company a written statement setting forth such computation within 90 days after the end of each fiscal year. Any required adjustments to the Second-Tier Management Compensation or the Advisor Refund shall be paid by the Company to the Advisor or by the Advisor to the Company, respectively, within 15 days after delivery of such computation to the Company by the Advisor, without demand, deduction, offset or delay (other than any deduction or offset for the liquidated sum of any Advisor Refund).
     6.2.5 Compensation Limitation. Notwithstanding any other provision of this Section 6, the Total Operating Expenses of the Company shall (in the absence of a satisfactory showing to the contrary) be deemed to be excessive if they exceed in any fiscal year the greater of 2% of its Average Invested Assets or 25% of its Net Income for such year. In the event the Independent Directors do not determine such excess expenses are justified, the Advisor agrees to reimburse the Company at the end of the twelve month period the amount by which the aggregate annual expenses paid or incurred by the Company exceed the limitations herein provided.
     6.2.6 Payment in Cash. All Management Compensation shall be paid by the Company in cash. Any Advisor Refund shall also be paid in cash.

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     6.3 Annual Reconciliation. The calculation of the Management Compensation shall be subject to audit and reconciliation at the end of each fiscal year and upon any termination of this Agreement. If at any time the Advisor disagrees with such audit and reconciliation and the dispute cannot be resolved between the Independent Directors and the Advisor within 10 business days after the Advisor’s receipt of such audit and reconciliation provides written notice to the Company of the dispute (the “Reconciliation Notice”), then the matter shall be resolved by an independent auditor of recognized standing selected jointly by the Independent Directors and the Advisor within not more than 20 days after the Reconciliation Notice. In the event the Independent Directors and the Advisor cannot agree with respect to such selection within the aforesaid 20 day time-frame, the Independent Directors shall select one such independent auditor and the Advisor shall select one independent auditor within five business days after the expiration of the 20 day period, with one additional such auditor (the “Last Auditor”) to be selected by the auditors so designated within five business days after their selection, and these three auditors together shall determine the final amount of the amounts in question. Any decision made by the auditors shall be deemed final and binding upon the Board of Directors and the Advisor and shall be delivered to the Advisor and the Company within not more than 15 days after the selection of the Last Auditor. The expenses of the auditors shall be paid by the party with the estimate which deviated the furthest from the final valuation decision made by the auditors.
7. Expenses of the Advisor and the Company.
     7.1 Expenses of the Advisor. The Advisor shall be responsible for the following expenses:
     7.1.1 except as set forth in Section 7.2 of this Agreement, employment expenses of the personnel employed by the Advisor (including the executive officers of the Company which are also employed by the Advisor), including, without limitation, salaries, wages, payroll taxes and the cost of employee benefit plans of such personnel;
     7.1.2 rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Advisor required for the Company’s day-to-day operations, including bookkeeping, clerical and back-office services provided by the Advisor; provided, however, that the Company shall reimburse the Advisor for the Company’s pro rata portion of such rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses to the extent that the Company’s employees, officers, representatives and/or agents (who are not also employed by the Advisor) use such facilities or incur such expenses; and
     7.1.3 unless otherwise approved by the Board of Directors, the cost and expense of the Sub-Advisor, if any.
     7.2 Expenses of the Company. The Company shall pay all of the costs and expenses of the Company and the Advisor incurred on behalf of the Company or any subsidiary or in connection with this Agreement, excepting only those expenses that are specifically the

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responsibility of the Advisor pursuant to Section 7.1 of this Agreement. Without limiting the generality of the foregoing, it is specifically agreed that the following costs and expenses of the Company or any subsidiary of the Company shall be paid by the Company and shall not be paid by the Advisor or the Affiliates of the Advisor:
     7.2.1 Organization and Offering Expenses; provided, however, that the Company shall not reimburse the Advisor to the extent such reimbursement would cause the total amount spent by the Company on Organization and Offering Expenses to exceed 15%, or 11.5% after at least $2,500,000 of Gross Proceeds have been raised, of the Gross Proceeds raised as of the date of the reimbursement and provided further that within 60 days after the end of the month in which an Offering terminates, the Advisor shall reimburse the Company to the extent the Company incurred Organization and Offering Expenses exceeding 15%, or 11.5% after at least $2,500,000 of Gross Proceeds have been raised, of the Gross Proceeds raised in the completed Offering; the Company shall not reimburse the Advisor for any Organization and Offering Expenses that are not fair and commercially reasonable to the Company, and the Advisor shall reimburse the Company for any Organization and Offering Expenses that are not fair and commercially reasonable to the Company;
     7.2.2 all costs and expenses in connection with the acquisition, disposition, financing, hedging, administration and ownership of the Company’s or any subsidiary’s Investments (including, without limitation, the Mortgage Assets) and, including, without limitation, costs and expenses incurred in contracting with third parties, including Affiliates of the Advisor, to provide such services, such as legal fees, accounting fees, consulting fees, trustee fees, appraisal fees, insurance premiums, commitment fees, brokerage fees, guaranty fees, ad valorem taxes, costs of foreclosure, maintenance, repair and improvement of property and premiums for insurance on property owned by the Company or any subsidiary of the Company;
     7.2.3 all costs and expenses relating to the acquisition of, and maintenance and upgrades to, the Company’s portfolio accounting systems to the extent such upgrades are required for the Company’s business and operations;
     7.2.4 all costs and expenses of money borrowed by the Company or its subsidiaries, including, without limitation, principal, interest and the costs associated with the establishment and maintenance of any credit facilities, warehouse loans and other indebtedness of the Company and its subsidiaries (including commitment fees, legal fees, closing and other costs);
     7.2.5 all taxes and license fees applicable to the Company or any subsidiary of the Company, including interest and penalties thereon;
     7.2.6 all legal, audit, accounting, underwriting, brokerage, listing, filing, rating agency, registration and other fees, printing, engraving, clerical, personnel and other expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and stock exchange listing of the Company’s or any subsidiary’s equity securities or debt securities;

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     7.2.7 other than for the Advisor Obligations, all fees paid to and expenses of third-party advisors and independent contractors, consultants, advisors and other agents (other than the Advisor or any Sub-Advisor) engaged by the Company or any subsidiary of the Company or by the Advisor for the account of the Company or any subsidiary of the Company (other than the Advisor or Sub-Advisor) and all employment expenses of the personnel employed by the Company or any subsidiary of the Company (including, without limitation, a chief financial officer of the Company, but excluding any personnel which are also employed by the Advisor or Sub-Advisor), including, without limitation, the salaries, wages, equity based compensation of such personnel, payroll taxes and the incremental cost for administering employee benefit plans of the Advisor which are used by such personnel;
     7.2.8 all insurance costs incurred by the Company or any subsidiary of the Company, including, without limitation, any costs to obtain liability or other insurance to indemnify the Advisor and underwriters of any securities of the Company;
     7.2.9 all custodian, transfer agent and registrar fees and charges;
     7.2.10 all compensation and fees paid to directors of the Company or any subsidiary of the Company (excluding those directors who are also employees of the Advisor), all expenses of directors of the Company or any subsidiary of the Company (including those directors who are also employees of the Advisor), the cost of directors and officers liability insurance and premiums for errors and omissions insurance, and any other insurance deemed necessary or advisable by the Board of Directors for the benefit of the Company and its directors and officers (including those directors who are also employees of the Advisor);
     7.2.11 all third-party legal, accounting and auditing fees and expenses and other similar services relating to the Company’s or any subsidiary’s operations (including, without limitation, all quarterly and annual audit or tax fees and expenses);
     7.2.12 all legal, expert and other fees and expenses relating to any actions, proceedings, lawsuits, demands, causes of action and claims, whether actual or threatened, made by or against the Company, or which the Company is authorized or obligated to pay under applicable law or its Governing Instruments or by the Board of Directors;
     7.2.13 any judgment or settlement of pending or threatened proceedings (whether civil, criminal or otherwise) against the Company or any subsidiary of the Company, or against any trustee, director or officer of the Company or any subsidiary of the Company in his capacity as such for which the Company or any subsidiary of the Company is required to indemnify such trustee, director or officer by any court or governmental agency, or settlement of pending or threatened proceedings;

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     7.2.14 all travel and related expenses of directors, officers and employees of the Company and the Advisor, incurred in connection with attending meetings of the Board of Directors or holders of securities of the Company or any subsidiary of the Company or performing other business activities that relate to the Company or any subsidiary of the Company, including, without limitations, travel and expenses incurred in connection with the purchase, financing, refinancing, sale or other disposition of Investments or other investments of the Company; provided, however, that the Company shall only be responsible for a proportionate share of such expenses, as determined by the Advisor in good faith, where such expenses were not incurred solely for the benefit of the Company;
     7.2.15 all expenses of organizing, modifying or dissolving the Company or any subsidiary of the Company and costs preparatory to entering into a business or activity, costs of winding up or disposing of a business of activity of the Company or its subsidiaries;
     7.2.16 all expenses relating to payments of dividends or interest or distributions in cash or any other form made or caused to be made by the Board of Directors to or on account of holders of the securities of the Company or any subsidiary of the Company, including, without limitation, in connection with and dividend reinvestment plan;
     7.2.17 all expenses of third parties relating to communications to holders of equity securities or debt securities issued by the Company or any subsidiary of the Company and the other bookkeeping and clerical work necessary in maintaining relations with holders of such securities and in complying with the continuous reporting and other requirements of governmental bodies or agencies, including any costs of computer services in connection with this function, the cost of printing and mailing certificates for such securities and proxy solicitation materials and reports to holders of the Company’s or any subsidiary’s securities and reports to third parties required under any indenture to which the Company or any subsidiary of the Company is a party;
     7.2.18 subject to Section 7.1, all expenses relating to any office or office facilities maintained by the Company or any subsidiary of the Company exclusive of the office of the Advisor and/or Affiliates of the Advisor, including, without limitation, rent, telephone, utilities, office furniture, equipment, machinery and other office expenses for any persons or employees the Board of Directors authorizes the Company to hire;
     7.2.19 all costs and expenses related to the design and maintenance of the Company’s web site or sites and associated with any computer software or hardware that is used solely for the Company;
     7.2.20 other than for the Advisor Obligations, all other costs and expenses relating to the Company’s business and investment operations, including, without limitation, the costs and expenses of acquiring, owning, protecting, maintaining, developing and disposing of Investments, including, without limitation, appraisal, reporting, audit and legal fees;

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     7.2.21 other than for the Advisor Obligations, all other expenses actually incurred by the Advisor, its Affiliates or any Sub-Advisor or their respective officers, employees, representatives or agents, or any Affiliates thereof, which are reasonably necessary for the performance by the Advisor of its duties and functions under this Agreement (including, without limitation, any fees or expenses relating to the Company’s compliance with all governmental and regulatory matters); and
     7.2.22 all other expenses of the Company or any subsidiary of the Company that are not the responsibility of the Advisor under Section 7.1 of this Agreement.
     7.3 Expense Reimbursement to the Advisor. Any individual cost or expense exceeding $100,000 (or such other limit as may be approved by the Board of Directors from time to time) shall be approved by the Board of Directors, unless such item was previously reflected in the Company’s budget approved by the Board of Directors. Costs and expenses incurred by the Advisor on behalf of the Company shall be reimbursed monthly to the Advisor or, at the Advisor’s election, offset against any funds of the Company in the Company’s account or accounts held by the Advisor or otherwise. The Advisor shall prepare a written statement in reasonable detail documenting the costs and expenses of the Company and those incurred by the Advisor on behalf of the Company during each month, and shall deliver such written statement to the Company within 15 days after the end of each month. Unless deducted directly by the Advisor as aforesaid, the Company shall pay all amounts payable to the Advisor pursuant to this Section 7.3 within three days after the receipt of the written statement without demand, deduction, offset or delay. Cost and expense reimbursement to the Advisor shall be subject to adjustment at the end of each calendar year in connection with the annual audit of the Company.
8. Limits of Advisor Activities; Indemnity.
     8.1 Limits of Advisor Activities. Notwithstanding any provision in this Agreement to the contrary, the Advisor shall not take any action that, in its sole judgment made in good faith, would (i) adversely affect the ability of the Company to qualify or continue to qualify as a REIT under the Code, (ii) subject the Company to regulation under the Investment Company Act, (iii) violate any law, rule, regulation or statement of policy of any governmental body or agency having jurisdiction over the Company, its shares or its other securities, (iv) require the Advisor to register as a broker-dealer with the SEC or any state, or (v) violate the Governing Documents of the Company. In the event that an action would violate (i) through (v) of the preceding sentence but such action has been ordered by the Board of Directors, the Advisor shall notify the Board of Directors of the Advisor’s judgment of the potential impact of such action and shall refrain from taking such action until it receives further clarification or instructions from the Board of Directors. In such event, the Advisor, any Sub-Advisor and their respective Affiliates, directors, officers, stockholders, equity holders, employees, representatives and agents, and any Affiliates thereof, shall have no liability for acting in accordance with the specific instructions of the Board of Directors so given.

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     8.2 Indemnification by Company. Except as prohibited by the restrictions provided by the laws of the State of Maryland, the Governing Documents, or this Section 8.2, the Company and its subsidiaries shall reimburse, indemnify and hold harmless the Advisor, any Sub-Advisor, and their respective Affiliates, directors, officers, stockholders, equity holders, employees, representatives and agents, and any Affiliates thereof (each, an “indemnitee”) from and against any and all expenses, losses, costs, damages, liabilities, demands, charges and claims of any nature whatsoever, actual or threatened (including, without limitation, reasonable attorneys’ fees), arising from or in respect of any acts or omissions, errors of judgment or mistakes of law (or any alleged acts or omissions, errors of judgment or mistakes of law) performed or made while acting in any capacity contemplated under this Agreement or pursuant to any underwriting agreement or similar agreement to which Advisor is a party that is related to the Company’s activities to the extent that such expenses, losses, costs, damages, liabilities, demands, charges and claims are not fully reimbursed by insurance. The Company shall not indemnify or hold harmless any indemnitee for any liability or loss suffered by the indemnitee, nor shall it provide that any indemnitee be held harmless for any loss or liability suffered by the Company, unless all of the following conditions are met: (i) the indemnitee has determined, in good faith, that the course of conduct which caused the loss or liability was in the best interests of the Company; (ii) the indemnitee was acting on behalf of or performing services for the Company; (iii) such liability or loss was not the result of negligence or misconduct by the indemnitee; and (iv) such indemnification is recoverable only out of the Company’s net assets and not from the Company’s stockholders. Notwithstanding the foregoing, the Company shall not indemnify any indemnitee for any losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws by such party unless one or more of the following conditions are met: (i) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee; (ii) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee; or (iii) a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the Securities and Exchange Commission and of the published position of any state securities regulatory authority in which securities of the Company were offered or sold as to indemnification for violations of securities laws.
     8.3 Limitation on Payment of Expenses. The Company shall pay or reimburse reasonable legal expenses and other costs incurred by the Advisor, any Sub-Advisor, and their respective Affiliates, directors, officers, stockholders, equity holders, employees, representatives and agents, and any Affiliates thereof, in advance of the final disposition of a proceeding only if (in addition to the procedures required by the Maryland General Corporation Law, as amended from time to time) all of the following are satisfied: (a) the proceeding relates to acts or omissions with respect to the performance of duties or services on behalf of the Company; (b) the legal proceeding was initiated by a third party who is not a stockholder or, if by a stockholder acting in his or her capacity as such, a court of competent jurisdiction approves such advancement; and (c) the indemnitee undertakes to repay the amount paid or reimbursed by the Company, together with the applicable legal rate of interest thereon, if it is ultimately determined that the particular indemnitee is not entitled to indemnification.

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9. No Joint Venture. The Company and the Advisor are not partners or joint venturers with each other, and nothing in this Agreement shall be construed to make them such partners or joint venturers or impose any liability as such on any of them. The Advisor is an independent contractor and, except as expressly provided or authorized in this Agreement, shall have no authority to act for or represent the Company.
10. Term; Termination.
     10.1 Term. This Agreement shall commence on the Effective Date and shall have an initial term of one year. Thereafter, this Agreement shall automatically renew for an additional year, unless terminated in accordance with the terms and conditions of this Agreement.
     10.2 Termination Without Cause. Notwithstanding any other provision of this Agreement to the contrary, after the first anniversary of the Effective Date, (i) the Company shall have the right to terminate this Agreement without cause at any time after 60-days prior written notice to the Advisor and the affirmative vote of a majority of the Independent Directors to do so and (ii) the Advisor shall have the right to terminate this Agreement without cause at any time after 60-days prior written notice to the Board of Directors. If the Company terminates this Agreement without cause, the Company shall pay to the Advisor within 15 days after the effective date of termination without demand, deduction, offset or delay or, at the Advisor’s election, the Advisor may deduct such payments from any account or accounts of the Company, all unpaid reimbursable costs and expenses permitted under the Agreement and all earned and unpaid Management Compensation.
     10.3 Termination by Company for Cause. In the event that the Independent Directors shall have made a reasonable good faith determination based on findings of fact which are disclosed to the Advisor that cause exists, then a majority of the Independent Directors shall have the right to terminate this Agreement for cause at the following time: (i) immediately, if the Independent Directors determined in good faith that its claims are based primarily on criminal activity or active fraud or (ii) after not less than 30 days after written notice to the Advisor, if the Independent Directors determined in good faith that its claims are based other than as described in clause (i) above and the Independent Directors shall have determined that cause still exists after written notice to the Advisor disclosing the findings of the Independent Directors and a reasonable opportunity to cure. In the event that the Agreement is terminated for “cause” in accordance with the provisions of this Section 10.3, the Company shall pay the Advisor all unpaid reimbursable costs and expenses and all earned and unpaid Management Compensation.
     10.4 Change of Control. In the event of a Change of Control of the Company, the Advisor shall have the right to terminate this Agreement upon 60 days prior written notice, provided that the Advisor delivers such notice within 90 days after such Change of Control has occurred. In the event of a termination of this Agreement in connection with a Change in Control, the Company shall pay the Advisor all unpaid reimbursable costs and expenses permitted under the Agreement and all earned and unpaid Management Compensation.

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11. Action Upon Termination. From and after the effective date of termination of this Agreement, except as specified in Section 10.2, 10.3 or 10.4 of this Agreement, the Advisor shall not be entitled to any payment or compensation and as of the date of termination, this Agreement shall terminate and be cancelled without consideration. Upon such termination, the Advisor shall promptly:
     11.1.1 pay over to the Company or any subsidiary of the Company all money collected and held for the account of the Company or any subsidiary of the Company pursuant to this Agreement;
     11.1.2 pay over to the Company any unpaid Advisor Refund and any amounts payable to the Company pursuant to Section 6.2.5 hereof;
     11.1.3 deliver to the Board of Directors an accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Board of Directors with respect to the Company or any subsidiary of the Company; and
     11.1.4 deliver to the Board of Directors all property and documents of the Company or any subsidiary of the Company then in the custody of the Advisor.
12. Limited Right to Offset; Survival of Payments. Notwithstanding anything to the contrary, the Company shall not have any right to offset any amount whatsoever from any payments in Sections 6, 7, 10, 11 or otherwise and the Company’s obligation to make such payments shall survive the termination of this Agreement, except that the Company shall have the right to offset against the liquidated sum of any Advisor Refund.
13. Assignments.
     13.1 Assignment by the Advisor. Other than transfers and assignments by operation of law (including transfers in connection with a change of control of the Advisor), this Agreement shall terminate automatically in the event that the Advisor assigns this Agreement, unless such assignment is consented to in advance in writing by the Company with the consent of a majority of the Independent Directors. In the event an assignment by the Advisor is consented to by the Company in accordance with this Section 13.1, such assignment shall bind the assignee under this Agreement in the same manner as the Advisor is bound, and the Advisor shall be released from all of its obligations, duties and responsibilities under this Agreement and all liability therefore and in respect hereof. In addition, the assignee shall execute and deliver to the Company a counterpart of this Agreement naming such assignee as Advisor.
     13.2 Assignment by the Company. This Agreement shall not be assigned by the Company without the prior written consent of the Advisor.
14. Release of Money or Other Property Upon Written Request. The Advisor agrees that any money or other property of the Company or any subsidiary of the Company held by the Advisor under this Agreement shall be held by the Advisor as custodian for the Company or such subsidiary, and the Advisor’s records shall be appropriately marked clearly to reflect the ownership of such money or other property by the Company or such subsidiary.

Advisory Agreement—Page 21

 

     14.1 Procedures. Upon the receipt by the Advisor of a written request signed by a duly authorized officer of the Company or an authorized member of the Board of Directors requesting the Advisor to release to the Company or any subsidiary of the Company any money or other property then held by the Advisor for the account of the Company or any subsidiary of the Company under this Agreement, the Advisor shall release such money or other property to the Company or such subsidiary of the Company within a reasonable period of time, but in no event later than 90 days following such request; provided, however, that the Advisor shall have the right to offset any First-Tier Management Compensation, Second-Tier Management Compensation reimbursable costs or any other sums due and owning to the Advisor under this Agreement against payment of any money or property held by the Advisor for the account of the Company or any subsidiary of the Company under this Agreement.
     14.2 Limitations. The Advisor, any Sub-Advisor and their respective Affiliates, directors, officers, stockholders, equity holders, employees, representatives and agents, and any Affiliates thereof, shall not be liable to the Company, any subsidiaries of the Company, the Independent Directors or the Company’s or its subsidiaries’ stockholders for any acts performed or omissions to act by the Company or any subsidiary of the Company in connection with the money or other property released to the Company or any subsidiary of the Company in accordance with this Section 14, except to the extent that the Board of Directors shall have made a reasonable good faith determination based upon findings of fact which are disclosed to the Advisor that the Advisor was grossly negligent, acted with reckless disregard or engaged in willful misconduct or active fraud while discharging its material duties under this Agreement.
     14.3 Indemnification. The Company and any subsidiary of the Company shall indemnify the Advisor, any Sub-Advisor and their respective Affiliates, directors, officers, stockholders, equity holders, employees, representatives and agents, and any Affiliates thereof, against any and all expenses, costs, losses, damages, liabilities, demands, charges and claims of any nature whatsoever, which arise in connection with the Advisor’s (or a Sub-Advisor’s) release of such money or other property to the Company or any subsidiary of the Company in accordance with the terms of this Section 14, if all of the following conditions are met:
     14.3.1 The indemnitee has determined, in good faith, that the course of conduct which caused the loss or liability was in the best interests of the Company.
     14.3.2 The indemnitee was acting on behalf of or performing services for the Company.
     14.3.3 Such liability or loss was not the result of negligence or misconduct by the indemnitee.
     14.3.4 Such indemnification is recoverable only out of the Company’s net assets and not from its stockholders.
     Indemnification pursuant to this provision shall be in addition to any right of the Advisor, any Sub-Advisor and their respective Affiliates, directors, officers, stockholders, equity holders, employees, representatives and agents, and any Affiliates thereof, to indemnification under Section 8 of this Agreement.

Advisory Agreement—Page 22

 

15. Representations, Warranties and Covenants.
     15.1 Company in Favor of the Advisor. The Company hereby represents and warrants to the Advisor as follows:
     15.1.1 Due Formation. The Company is duly organized, validly existing and in good standing under the laws of Maryland, has the power to own its assets and to transact the business in which it is now engaged and is duly qualified to do business and is in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Company and its subsidiaries, taken as a whole. The Company does not do business under any fictitious business name.
     15.1.2 Power and Authority. The Company has the power and authority to execute, deliver and perform this Agreement and all obligations required under this Agreement and has taken all necessary action to authorize this Agreement on the terms and conditions hereof and the execution, delivery and performance of this Agreement and all obligations required under this Agreement. Except as shall have been obtained, no consent of any other person, including, without limitation, stockholders and creditors of the Company, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Company in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required under this Agreement. This Agreement has been, and each instrument or document required under this Agreement will be, executed and delivered by a duly authorized officer of the Company, and this Agreement constitutes, and each instrument or document required under this Agreement when executed and delivered under this Agreement will constitute, the legally valid and binding obligation of the Company enforceable against the Company in accordance with its terms.
     15.1.3 Execution, Delivery and Performance. The execution, delivery and performance of this Agreement and the documents or instruments required under this Agreement will not violate any provision of any existing law or regulation binding on the Company, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Company, or the Governing Instruments of, or any securities issued by, the Company or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Company is a party or by which the Company or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the Company and its subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking (other than the pledge of amounts payable to the Advisor under this Agreement to secure the Advisor’s obligations to its lenders).

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     15.2 Advisor in Favor of the Company. The Advisor hereby represents and warrants to the Company as follows:
     15.2.1 Due Formation. The Advisor is duly organized, validly existing and in good standing under the laws of Delaware, has the power to own its assets and to transact the business in which it is now engaged and is duly qualified to do business and is in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Advisor and its subsidiaries, taken as a whole. The Advisor does not do business under any fictitious business name.
     15.2.2 Power and Authority. The Advisor has the power and authority to execute, deliver and perform this Agreement and all obligations required under this Agreement and has taken all necessary corporate action to authorize this Agreement on the terms and conditions hereof and the execution, delivery and performance of this Agreement and all obligations required under this Agreement. Except as shall have been obtained, no consent of any other person including, without limitation, stockholders and creditors of the Advisor, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Advisor in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required under this Agreement. This Agreement has been and each instrument or document required under this Agreement will be executed and delivered by a duly authorized officer of the Advisor, and this Agreement constitutes, and each instrument or document required under this Agreement when executed and delivered under this Agreement will constitute, the legally valid and binding obligation of the Advisor enforceable against the Advisor in accordance with its terms.
     15.2.3 Execution, Delivery and Performance. The execution, delivery and performance of this Agreement and the documents or instruments required under this Agreement will not violate any provision of any existing law or regulation binding on the Advisor, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Advisor, or the governing instruments of, or any securities issued by, the Advisor or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Advisor is a party or by which the Advisor or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the Advisor and its subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage indenture, lease, contract or other agreement, instrument or undertaking.

Advisory Agreement—Page 24

 

16. Notices. Unless expressly provided otherwise in this Agreement, all notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received when (1) delivered by hand, (2) otherwise delivered against receipt therefor, or (3) upon actual receipt of registered or certified mail, postage prepaid, return receipt requested. The parties may deliver to each other notice by electronically transmitted facsimile copies, provided that such facsimile notice is followed within 24 hours by any type of notice otherwise provided for in this Section 16. Any notice shall be duly addressed to the parties as follows:
if to the Company:
CM REIT, Inc.
1291 W. Galleria Drive, Suite 200
Henderson, Nevada 89014
Attention: Stacy M. Riffe
Telephone: (702) 736-5490
     with a copy given in the manner prescribed above (which shall not constitute notice), to:
Locke Lord Bissell & Liddell LLP
2200 Ross Avenue
Suite 2200
Dallas, Texas 75201
Attn: X. Lane Folsom, Esq.
if to the Advisor:
CM Group, LLC
1291 W. Galleria Drive
Henderson, Nevada 89014
Attention: Todd B. Parriott
Telephone: (702) 795-7930
Any party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section 16 for the giving of notice.
17. Binding Nature of Agreement; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns as provided in this Agreement.
18. Entire Agreement. This Agreement contains the entire agreement and understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducements and conditions, express or implied, oral or written, of any nature whatsoever with respect to the subject matter hereof. The express terms hereof control and supersede any course of performance or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing.

Advisory Agreement—Page 25

 

19. Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement shall be governed by and construed, interpreted and enforced in accordance with the laws of the State of Maryland, notwithstanding any Maryland or other conflict of law provisions to the contrary.
20. No Waivers. Neither the failure nor any delay on the part of a party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver.
21. Titles Not to Affect Interpretation. The titles of paragraphs and subparagraphs contained in this Agreement are for convenience only, and they neither form a part of this Agreement nor are they to be used in the construction or interpretation hereof.
22. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories.
23. Provisions Severable. The provisions of this Agreement are independent of and severable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part.
24. Gender. Words used herein regardless of the number and gender specifically used shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context requires.
25. Attorneys’ Fees. Should any action or other proceeding be necessary to enforce any of the provisions of this Agreement or the various transactions contemplated hereby, the prevailing party will be entitled to recover its actual reasonable attorneys’ fees and expenses from the non-prevailing party.
26. Amendments. This Agreement may not be amended, modified or changed (in whole or in part), except by a formal, definitive written agreement expressly referring to this Agreement, which agreement is executed by all of the parties hereto and, in the case of the Company, approved by a majority of the Independent Directors. The parties hereto expressly acknowledge that no consent or approval of the Company’s stockholders is required in connection with any amendment, modification or change to this Agreement.

Advisory Agreement—Page 26

 

27. Authority. Each signatory to this Agreement warrants and represents that he is authorized to sign on behalf of and to bind the party on whose behalf he, she or it is signing.
[Signature page follows]

Advisory Agreement—Page 27

 

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date.
         
  THE COMPANY:

CM REIT, INC.,
a Maryland corporation
 		  
  By:   /s/ Stacy M. Riffe   
    Stacy M. Riffe   
    Chief Financial Officer   
 
  THE ADVISOR:

CM GROUP, LLC,
a Delaware limited liability company
 		  
  By:   /s/ Todd B. Parriott   
    Todd B. Parriott   
    Chief Executive Officer   
 

Advisory Agreement—Page 28

EX-10.2 5 d65627a7exv10w2.htm EX-10.2 exv10w2
Exhibit 10.2
LOAN ORIGINATION AGREEMENT
     THIS LOAN ORIGINATION AGREEMENT (this “Agreement”) is entered into as of the 21st day of October, 2010 (the “Effective Date”), by and between CM REIT, Inc., a Maryland corporation (“CMR”), CM Capital Services, LLC, a Nevada limited liability company (“CMCS”) and for the purposes of Paragraphs I and J of Article I hereof, CM Group, LLC, a Delaware limited liability company (“Parent”).
RECITALS:
     WHEREAS, CMCS is regularly and actively engaged in the business of arranging for the financing of and servicing mortgage loans for the acquisition of, development of, and construction on real estate (collectively, “Mortgage Loans”);
     WHEREAS, CMR is a real estate investment trust that originates and invests in, among other things, Mortgage Loans; and
     WHEREAS, CMCS and CMR desire to enter into this Agreement to set forth certain rights and obligations between the parties regarding the origination and servicing of Mortgage Loans by CMCS and the funding of Mortgage Loans by CMR.
     NOW, THEREFORE, in consideration of the foregoing and of the mutual premises hereinafter expressed, the parties hereto do mutually agree as follows:
ARTICLE I. FUNDING PROCESS.
     A. CMCS shall continue to originate Mortgage Loans in accordance with its historical practices. CMCS shall send a weekly report (a “Mortgage Loan Report”) to CMR presenting in reasonable detail Mortgage Loans identified by CMCS and that CMCS believes satisfy the investment criteria of CMR and are appropriate for investment by CMR (each, a “Potential Qualifying Loan”). CMR shall then have a period of two (2) business days from the date of such notice (an “Initial Election Period”) to elect to fund all or a portion of those Potential Qualifying Loans by delivering written notice to CMCS (each, a “Preliminary Funding Notice”). Each Preliminary Funding Notice shall constitute an offer by CMR to fund all or the specified portion of each Potential Qualifying Loan listed in such Preliminary Funding Notice upon the terms and conditions set forth in the Mortgage Loan Report as modified by any requested changes set forth in such Preliminary Funding Notice, with such changes thereto as CMR shall deem appropriate for its funding thereof. If CMR fails to deliver a Preliminary Funding Notice to CMCS prior to the expiration of the Initial Election Period, or if the Preliminary Funding Notices delivered by CMR does not include all of the Potential Qualifying Loans listed on the Mortgage Loan Report, then CMCS may arrange for the funding of all or any such portion, as the case may be, of the remaining Potential Qualifying Loans set forth in the applicable Mortgage Loan Report that were not selected by CMR through one or more other investment programs sponsored by Parent (each, a “Competitive Program”) or third parties.

 

 

     B. No later than two (2) business days after its receipt of a Preliminary Funding Notice (an “Election Period”), CMCS may elect to accept any changes set forth in the applicable Preliminary Funding Notice that CMR requests be made to the terms of any Potential Qualifying Loan listed in such Preliminary Funding Notice. If CMCS rejects any of the modified terms requested by CMR, it may withdraw from the Preliminary Funding Notices each Potential Qualifying Loan with respect to which modified terms were requested and shall permit CMR to fund all or the specified portion of any remaining Potential Qualifying Loans listed on the Preliminary Funding Notices. If CMCS agrees to all modified terms requested by CMR in a Preliminary Funding Notice, then CMCS shall permit CMR to fund all or the specified portion of the Potential Qualifying Loan listed in the Preliminary Funding Notice upon the modified terms requested by CMR.
     C. CMCS may freely arrange for the funding of any Potential Qualifying Loan that was set forth in a Mortgage Loan Report or portion thereof that CMR did not elect to fund or as to which any modified terms set forth in the Preliminary Funding Notice were not accepted by CMCS.
     D. For any and all Mortgage Loans that CMR should choose to fund, as soon as available following the delivery of a Preliminary Funding Notice, CMCS shall deliver to CMR the due diligence materials, reports and documents described in Attachment “B” hereto (the “Specified Materials”) relating to the Mortgage Loan to be funded, participated in or purchased by CMR then in the possession of CMCS. Upon receipt of all Specified Materials, CMR shall have three (3) business days to review and approve or object in writing to the Specified Materials received. In addition, CMCS shall provide CMR with any additional documents and other information that CMR may reasonably request with respect to any Mortgage Loan to be funded by CMR hereunder. It shall be a condition to the obligation of CMR to fund any Mortgage Loan at a Closing (hereinafter defined) that CMCS shall have timely provided to CMR all of the Specified Materials (and any other documents and other information reasonably requested by CMR). In the event that with respect to any Mortgage Loan, (i) CMR does not approve the Specified Materials initially delivered to CMR, or (ii) the Specified Materials received by CMR thereafter do not support or conform to the representations and description of the Mortgage Loan provided by CMCS to CMR in the Mortgage Loan Report, including, without limitation, the borrower, loan amount, collateral type, ownership, appraised value, lien priority and environmental condition, CMR shall have no obligation to fund such Mortgage Loan at a Closing.
     E. Each closing of a funding of a Mortgage Loan by CMR hereunder (each, a “Closing”) shall take place at the principal offices of CMR, at the address specified in Article XII hereof, on the business day specified as the closing date for the applicable Mortgage Loan in the applicable Mortgage Loan Report. At each Closing, CMCS shall arrange for the execution and delivery to CMR of a standard set of investment documents, in form and substance reasonably acceptable to CMR (and shall provide CMR with customary representations and warranties as well as adequate assurances that such Mortgage Loans are valid and enforceable obligations of the respective borrowers and that no default, event of default, or similar event has occurred of which Consolidate Mortgage could reasonably be expected to be aware with respect to such Mortgage Loans). At each Closing, unless otherwise agreed upon by the parties, CMR shall fund all or the specified portion of each Mortgage Loan in the applicable amount payable in immediately available funds.

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     F. CMR may, at its election, request periodic accounting and other financial records from CMCS that demonstrate its compliance with this Agreement. Any proprietary information and associated products, copyrights, trademarks and logos developed by parties to this Agreement shall remain the property of the party which developed them.
     G. Each party hereto shall, in a professional manner, take all steps reasonably necessary to perform its duties hereunder.
     H. In addition to the other matters set forth in this Article I, the parties agree to the covenants and other matters set forth in Attachment “A” hereto, which are incorporated by reference as if fully set forth herein.
     I. As promptly as possible but in any event within thirty (30) days (or such later date as the parties may agree) after (i) any person or entity engaged in the business of originating or brokering commercial loans becomes an Affiliate (as defined in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act of 1934, as amended) of Parent and/or CMCS, or (ii) any Affiliate of Parent and/or CMCS becomes engaged in the business of originating or brokering commercial loans, Parent shall provide CMR with written notice thereof setting forth information in reasonable detail describing the business of such person or entity and shall, if requested by CMR, within thirty (30) days after the date of such notice, cause each such person or entity to deliver to CMR a joinder agreement in form and substance reasonably acceptable to CMR pursuant to which such person or entity becomes a party to and agrees to be bound by the terms and provisions of this Agreement.
     J. Subject to the rotation process described in this Paragraph J, each investment opportunity in a Potential Qualifying Loan will be offered by CMCS to CMR, to the extent that CMR then has available capital in an amount sufficient to allow CMR to participate in such investment opportunity. CMCS may also offer certain Mortgage Loans it has identified as satisfying the investment criteria of a Competitive Program and appropriate for investment by such Competitive Program to such Competitive Program to the extent that such Competitive Program then has sufficient funds to allow the Competitive Program to participate in such Mortgage Loans. However, if the Parent’s investment committee determines that any Potential Qualifying Loan satisfies the investment criteria of CMR and one or more Competitive Programs and CMR and each such Competitive Program then has sufficient capital to invest in such Potential Qualifying Loan, then each such Potential Qualifying Loan, shall be subject to a rotation process that gives CMR and all applicable Competitive Programs sequential opportunities to be presented and acquire Potential Qualifying Loans. This rotation process shall continue such that CMR or a Competitive Program shall in turn be offered each Potential Qualifying Loan investment opportunity. The foregoing rotation process shall apply regardless of the number of applicable Competitive Programs, such that each has a fair and equitable opportunity, in an orderly and consistent rotation, to evaluate an applicable Potential Qualifying Loan. The foregoing notwithstanding, if the party next-in-line declines a Potential Qualifying Loan, then such Potential Qualifying Loan shall be presented to the next-in-line after the declining party, provided, that the failure by CMR or any Competitive Program to accept a Potential Qualifying Loan shall not affect its right to be offered any future Potential Qualifying Loan in accordance with the rotation process described in this Paragraph J (it being understood that CMR or a Competitive Program that declines to accept a Potential Qualifying Loan goes to

Page 3 of 13

 

the end of the rotation line behind all other applicable rotating parties). Parent’s investment committee shall allocate Mortgage Loan investment opportunities among CMR and all other Competitive Programs first, in accordance with the investment criteria that is best satisfied by the Mortgage Loan and second, pursuant to the foregoing rotation policy. To the extent that any investment opportunity does not satisfy CMR’s investment criteria, such investment opportunity shall not be subject to the rotation process described in this Paragraph J and CMCS may present such Mortgage Loan investment opportunity to any other Competitive Programs without presenting it to CMR.
ARTICLE II. CONTINUING OBLIGATIONS OF CMCS.
     CMCS agrees to comply with all applicable regulations and statutes affecting licensing status, and/or the origination and processing of Mortgage Loans. CMCS further agrees to properly supervise any agents or employees of CMCS which directly or indirectly handle any phase of origination or processing of its Mortgage Loans. CMCS shall immediately notify CMR of any claims, administrative proceedings or actions by a government or private entity, which could affect CMCS’ status as a licensed entity. CMCS shall notify CMR in writing of any changes in its ownership structure or its address for notice within thirty (30) business days of such change. Furthermore, CMCS does hereby represent and warrant that it is solvent and has adequate financial capitalization to properly engage in the business of originating and processing Mortgage Loans. CMCS shall immediately notify CMR should CMCS become insolvent, incur claims or obligations which could make it insolvent, or experience a material change in its financial condition that could impair its ability to perform under this Agreement.
ARTICLE III. CMCS WARRANTIES.
    CMCS hereby represents and warrants to CMR:
  (a)   No Untrue Statements: None of the statements or information contained in any Mortgage Loan package, to the best of CMCS’ knowledge after a reasonable investigation with due diligence, will contain any untrue or erroneous statement, and CMCS shall not omit any facts material to any Mortgage Loan package.
 
  (b)   Duly Licensed and Authorized: CMCS is duly licensed under the laws of the state of operation and possesses all necessary licenses, permits and authority to engage in the activities contemplated by this Agreement. CMR may require CMCS to provide copies of such licenses or permits upon renewal. If CMCS originates any loans outside the state where it is physically located, CMCS warrants that it has obtained the required state agency approvals, territorial authority, and/or license to originate such loans, and will provide such upon request.
 
  (c)   Regulatory Compliance: CMCS will comply with all applicable federal, state and local laws and regulations with respect to its business activities and all loans, including all anti-predatory lending laws. Specifically, in connection therewith, CMCS has given all applicable required local, state, federal and/or agency disclosures to borrowers with respect to any loan.

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  (d)   No Other Fees: Except as otherwise disclosed to CMR in writing, prior to the funding of any transaction by CMR, CMCS shall not receive any direct or indirect payment or consideration from any third-party with respect to the transaction, including, but in no way limited to, payments involving escrow, appraisal or sale.
 
  (e)   No Pending Suits: Unless otherwise disclosed to CMR in writing, there is not pending or threatened any suit, action, arbitration or legal, administrative or other proceeding or governmental investigation (including any allegation of fraud) against CMCS or its current or former owners, agents, or employees that could have a material adverse effect on CMCS’ business, assets, financial condition, or reputation.
 
  (f)   Borrower Processing: No borrower shall have had in his or her direct or indirect possession or control any credit, income or deposit verification document submitted to CMR with respect to any loan.
 
  (g)   Corporate Good Standing: CMCS is a duly organized and validly existing entity that is in good standing under the applicable laws and regulations of its state of organization, all jurisdictions in which it conducts business and the United States of America. CMCS has the requisite power, authority and capacity, corporate or otherwise, to execute and deliver this Agreement and perform its obligations hereunder. At any time, with reasonable notice, CMR may require CMCS to provide copies of CMCS’ corporate or other organization documents.
 
  (h)   No Violations of Law: CMCS’ execution and delivery of this Agreement, and performance hereunder, does not and will not violate any law, rule or regulation (federal, state or local); any order, writ, judgment, injunction, decree, determination or award; or any other agreement or instrument to which Seller is a party or by which it may be bound or affected. This warranty applies whether any of the above are presently effective or known by CMCS to become effective.
 
  (i)   Fair Lending Statement: CMCS acknowledges that it does not discriminate against applicants on the basis of age, race, color, gender, ethnic background, national origin, religion, marital status, familial status, veteran status, handicap, sexual orientation, receipt of public assistance, because rights have been exercised under the Consumer Credit Protection Act, or any other prohibited basis.
ARTICLE IV. PERIOD OF PERFORMANCE.
     This Agreement shall be effective as of the Effective Date and its initial term shall expire on the one-year anniversary of the Effective Date unless any party gives written notice of termination to the other party at least 90 days prior to the scheduled date of expiration. If no notice of termination is given by either party, this Agreement shall be automatically renewed for

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successive one-year periods. Notwithstanding the foregoing, this Agreement shall be earlier terminated (x) at any time by mutual agreement of the parties, or (y) at any time by CMR or CMCS upon thirty (30) days’ advance written notice after an event constituting “cause” has occurred with respect to the other party. For purposes of this Agreement “cause” means a judgment by a court of competent jurisdiction that the subject party has committed fraud either against third parties or against the other party to this Agreement; the bankruptcy, insolvency or dissolution of the subject party; or the material breach of this Agreement by the subject party (that is not cured by the subject party within 30 days after receipt of written notice). Time is of the essence in the performance of the obligations under this Agreement.
ARTICLE V. MANAGEMENT.
     Each party shall designate a partner, officer or other senior person to be responsible for the overall administration of such party’s responsibilities under this Agreement. Neither party shall have management authority over the other outside the scope and performance of this Agreement.
ARTICLE VI. CONFIDENTIAL INFORMATION.
     CMCS acknowledges and agrees that in the course of the performance of this Agreement or additional services pursuant to this Agreement, it may be given access to, or come into possession of, confidential information of CMR, which information may contain trade secrets, proprietary data or other confidential material of CMR. CMCS agrees, during the term of this Agreement, to hold in confidence and, except as provided herein, not publish or disclose to any third parties any of CMR’s Confidential Information (hereinafter defined) without the prior consent of CMR. CMCS agrees to use the same degree of care (and in any event not less than reasonable care) to safeguard the confidentiality of the Confidential Information that it uses to protect its own secret information. CMCS agrees to limit any disclosure of the Confidential Information only to those of its affiliates and its and its affiliates’ employees, directors, officers and outside professional advisors who have a need to know and to advise such persons of Capital Service’s obligations under this Agreement. Notwithstanding anything in this Agreement to the contrary, each party hereto agrees that any party to this Agreement (and any person or entity to which Confidential Information is disclosed by a party as permitted hereby) may disclose to (without limitation) its: (i) regulators; (ii) auditors; and (iii) persons or entities who need to know the tax treatment and tax structure of the transactions contemplated by this Agreement, and all materials of any kind (including opinions or other tax analyses) related to such tax treatment and tax structure.
     The term “Confidential Information” shall include all financial, marketing and other information concerning the Mortgage Loans and CMR which CMR discloses to CMCS in connection with this Agreement or otherwise. Confidential Information shall not include, and the parties agree that this Agreement is not intended to restrict use or disclosure of, any portion of such information which:
     is now or later made known to the public through no default by CMCS of its obligations under this Agreement;

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     is received by CMCS from a third party provided CMCS has no actual knowledge such third party is breaching an obligation of confidentiality to CMR in providing such information to CMCS;
     is independently developed by CMCS by persons who did not have access to Confidential Information of CMR;
     is disclosed by CMCS after receipt of written permission from CMR; or
     is required to be disclosed by law, order or regulation of a governmental agency or court of competent jurisdiction.
ARTICLE VII. NO PARTNERSHIP.
     Nothing herein contained shall be construed to imply a joint venture, partnership or principal-agent relationship between CMR and CMCS, and neither party shall have the right, power or authority to obligate or bind the other in any manner whatsoever, except as otherwise agreed to in writing. The parties do not contemplate a sharing of profits relating to the business of CMR or CMCS so as to create a separate taxable entity under Section 761 of the Internal Revenue Code of 1986, as amended, nor co-ownership of a business or property so as to create a separate partnership under the law of any jurisdiction, including, without limitation, the state of Nevada or Maryland. Revenues and expenses relating to the Mortgage Loans hereunder and any activities relating thereto shall be reported separately by the parties for tax purposes. This provision does not eliminate the possibility that the parties may enter into various revenue or equity sharing agreements with regard to any Mortgage Loans that the parties may consider on a case by case basis. During the performance of any of the contemplated business activities set forth herein, CMR’s employees, if any, will not be considered employees of CMCS, and vice versa, within the meaning or the applications of any federal, state or local laws or regulations including, but not limited to, laws or regulations covering unemployment insurance, retirement or medical benefits, worker’s compensation, industrial accident, labor or taxes of any kind.
ARTICLE VIII. TRADEMARK, TRADE NAME AND COPYRIGHTS.
     This Agreement does not give any party any ownership rights or interest in another party’s trade name, trademarks or copyrights.
ARTICLE IX. ADDITIONAL CMCS WARRANTIES.
     CMCS represents and warrants that all Mortgage Loans submitted to CMR shall meet the following conditions, in addition to any other requirements set out in this Agreement:
  (a)   Appraisers:
  a.   CMCS warrants that the appraiser’s compensation was not affected by the approval or disapproval of the loan, or contingent upon returning a minimum appraised value.

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  b.   CMCS reserves the right to refuse appraisals from any appraiser or appraisal firm whose work has been deemed unacceptable in CMR’s sole discretionary judgment.
  (b)   CMCS shall execute all documentation required to close and fund loans to be purchased by CMR, including, if applicable, the assignment of the loans transferring and assigning to CMR all right, title and interest in and to said loans, free and clear of any and all claims, charges, defenses, offsets, demands, or encumbrances of any kind whatsoever.
 
  (c)   The Note and Security Instrument executed in connection with a Mortgage Loan shall not be modified without CMR’s prior written permission. All documents affecting said Mortgage Loan shall be genuine and each shall be legal, valid and binding upon borrowers.
 
  (d)   CMR may fund a Mortgage Loan and may temporarily withhold CMCS’ compensation until all funding conditions have been met.
 
  (e)   A Mortgage Loan shall not be subject to any right of rescission, offset, counterclaim or defense, including the defense of usury.
ARTICLE X. INDEMNIFICATION.
     Each of CMR and CMCS, at its own expense, shall indemnify, defend and hold the other, its partners, members, shareholders, directors, officers, employees and agents harmless from and against any and all third-party suits, actions, investigations and proceedings, and related costs and expenses (including, reasonable attorney’s fees), resulting solely and directly from the indemnifying party’s gross negligence, willful misconduct or material breach of this Agreement. Neither CMR nor CMCS shall be required hereunder to defend, indemnify or hold harmless the other or its partners, shareholders, directors, officers, employees and agents, or any of them, from any liability resulting from the gross negligence, willful misconduct or material breach of this Agreement by the party seeking indemnification or by any third party. Each of CMR and CMCS agrees to give the other prompt written notice of any claim or other matter as to which it believes this indemnification provision is applicable.
ARTICLE XI. INTELLECTUAL PROPERTY.
     Work performed pursuant to this Agreement by either CMR or CMCS and information, materials, products and deliverables developed in connection with business endeavors pursuant to this Agreement shall be the property of the respective parties performing the work or creating the information. All underlying methodology utilized by CMCS and CMR, which was created or developed prior to the date of this Agreement and utilized in the course of performing their duties pursuant to this Agreement, shall not become the property of the other.

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ARTICLE XII. GENERAL PROVISIONS.
     A. Entire Agreement. This Agreement, together with the Attachments hereto and all documents executed in connection herewith or incorporated by reference herein, constitutes the entire and sole agreement between the parties hereto with respect to the subject matter hereof and supersedes any prior agreements, negotiations, understandings or other matters, whether oral or written, with respect to the subject matter hereof. This Agreement cannot be modified, changed or amended, except in writing signed by a duly authorized representative of each of the parties hereto.
     B. Conflict. In the event of any conflict, ambiguity or inconsistency between this Agreement and any other document which may be annexed hereto, the terms of this Agreement shall govern. Any conflicts or disputes that are not amicably settled in the due course of this business relationship shall be settled through binding arbitration, in accordance with the latest edition of rules as set forth by the American Arbitration Association, such arbitration to be held in Las Vegas, Nevada. Said rulings in arbitration shall be considered final and binding on the parties hereto and shall be enforceable in any competent United States court.
     C. Assignment and Delegation. No party shall voluntarily assign or delegate this Agreement or any rights, duties or obligations hereunder to any other person or entity without prior express written approval of the other party, provided that, notwithstanding the foregoing, a party may assign this Agreement by operation of law to any successor to such party by merger or consolidation (without the prior consent of the other parties).
     D. Notices. Any notice required or permitted to be given under this Agreement shall be in writing, by hand delivery, commercial overnight courier or registered or certified U.S. Mail, to the address stated below across from such party’s name, and shall be deemed duly given upon receipt, or if by registered or certified mail three business days following deposit in the U.S. Mail. The parties hereto may from time to time designate in writing other addresses expressly for the purpose of receipt of notice hereunder.
     
If to CMR:
  CM REIT, Inc.
 
  1291 Galleria Drive, Suite 200
 
  Henderson, Nevada 89014
 
  Attention: Stacy M. Riffe
 
  Telephone: (702) 736-5490
 
    
If to CMCS:
  CM Capital Services, LLC
 
  1291 Galleria Drive, Suite 220
 
  Henderson, Nevada 89014
 
  Attention: Todd B. Parriott
 
  Telephone: (702) 795-7930
     E. Severability. If any provision of this Agreement is declared invalid or unenforceable, such provision shall be deemed modified to the extent necessary and possible to render it valid and enforceable. In any event, the unenforceability or invalidity of any provision shall not affect any other provision of this Agreement, and this Agreement shall continue in full force and effect, and be construed and enforced, as if such provision had not been included, or had been modified as above provided, as the case may be.

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     F. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada without giving effect to its choice of law principles.
     G. Headings. The article and paragraph headings set forth in this Agreement are for the convenience of the parties, and in no way define, limit, or describe the scope or intent of this Agreement and are to be given no legal effect.
     H. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
     I. Attachments. The Attachments attached hereto are made a part of this Agreement as if fully set forth herein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK —
SIGNATURE PAGE IMMEDIATELY FOLLOWS]

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     IN WITNESS WHEREOF, the parties, by their duly authorized representatives, have caused this Agreement to be executed as of the date first written above.
         
  CM REIT, INC.
 		  
  By:   /s/ Stacy M. Riffe   
    Stacy M. Riffe   
    Chief Financial Officer   
 
  CM CAPITAL SERVICES, LLC
 		  
  By:   /s/ Todd B. Parriott   
    Todd B. Parriott   
    President   
 
  CM GROUP, LLC
 		  
  By:   /s/ Todd B. Parriott   
    Todd B. Parriott   
    Chief Executive Officer   
 

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ATTACHMENT “A”
Additional Provisions
In accordance with the provisions set forth in the foregoing Loan Origination Agreement of which this Attachment forms an integral part, it is agreed and understood between the parties as follows:
  1)   CMCS is entitled to retain origination fees with respect to any Mortgage Loans funded by CMR hereunder.
 
  2)   CMR is acquiring loans on a servicing-released basis, and CMCS shall have no right under this Agreement to service any Mortgage Loans funded by CMR hereunder. Notwithstanding the foregoing, CMR and CMCS may enter into a separate servicing agreement pursuant to which CMCS may service some or all of the Mortgage Loans funded by CMR hereunder.

 

 

ATTACHMENT “B”
Specified Materials
1.   All customary due diligence reports, documents, and analyses including, without limitation, all appraisals, title commitments and related exception documents, surveys, engineering reports, environmental reports, UCC, tax and judgment lien searches, organizational documents, construction contracts, architect’s plans and specifications, rent rolls, leases, management agreements and other material agreements, reports and analyses.
 
2.   All other materials, documents and information reasonably requested by CMR.
 
3.   Contents of a Complete Credit File, including, without limitation:
  a.   Loan Application
 
  b.   Current Credit Reports on all Principals (60-days)
 
  c.   Fully Executed Purchase Agreement and any and all addenda, as applicable
 
  d.   Appraisal and Valuation documents
 
  e.   Title Documents and Reports
 
  f.   Underwriting Approval
 
  g.   Asset Documentation (60-days)
 
  h.   All Disclosures
 
  i.   Financial Information and Income Documentation

 

EX-10.5 6 d65627a7exv10w5.htm EX-10.5 exv10w5
Exhibit 10.5
ESCROW AGREEMENT
     THIS ESCROW AGREEMENT (this “Agreement”) made and entered into as of this 27th day of October, 2010 by and among CM Securities, LLC a Nevada limited liability company (the “Dealer Manager”), CM REIT, Inc., a Maryland Corporation (the “Company”) and UMB Bank, N.A., as escrow agent, a national banking association organized and existing under the laws of the United States of America (the “Escrow Agent”). This Agreement shall be effective as of the effective date of the Company’s registration statement filed with the Securities and Exchange Commission containing the Prospectus (hereinafter defined) (the “Effective Date”).
RECITALS
     WHEREAS, the Company proposes to offer and sell, on a best efforts basis through the Dealer Manager and selected broker-dealers (the “Participating Dealers”) up to 90,000,000 shares of common stock (excluding the shares of its common stock to be offered and sold pursuant to the Company’s distribution reinvestment plan) of the Company (the “Shares”) to investors (the “Offering”) pursuant to a prospectus as amended from time to time and filed with the Securities and Exchange Commission as a part of the Company’s registration statement on Form S-11 (File No. 333-156434) (the “Prospectus”), at an initial purchase price of $10.00 per share.
     WHEREAS, the Company has agreed that the subscription price paid by subscribers for shares will be refunded to such subscribers if payment from persons who are not affiliated with the Company for an aggregate of at least $2,500,000 in Shares (such amount, the “Minimum Offering”) has not been raised on or before the date that is one year from the Effective Date (the “Outside Date”).
     WHEREAS, the Company desires to establish an escrow account (the “Escrow Account”) as further described herein in which funds received from subscribers will, except as otherwise specified herein, be deposited, and the Escrow Agent is willing to serve as escrow agent for such Escrow Account upon the terms and conditions herein set forth.
     WHEREAS, deposits received from residents of the State of Pennsylvania (the “Pennsylvania Subscribers”) and deposits received from residents of the State of Tennessee (the “Tennessee Subscribers”) will remain in the Escrow Account until the conditions of Sections 3 and 4, respectively, hereof have been met.
     WHEREAS, the Escrow Agent has engaged DST Systems, Inc., a Massachusetts corporation (the “Processing Agent”) to receive, examine for “good order” and facilitate subscriptions into the Escrow Account as further described herein and to act as record keeper, solely in the capacity of agent for the Escrow Agent and not in any capacity on behalf of the Company or the Dealer Manager, nor shall it have any interest other than that provided in this Agreement in assets in the Processing Agent’s possession as the agent of the Escrow Agent.

 

 

     WHEREAS, in order to subscribe for Shares during the Escrow Period (as defined below), a subscriber must deliver an executed subscription agreement in substantially the form of Appendix C to the Prospectus together with the full amount of its subscription: (i) by check, draft or money order made payable to the order of UMB Bank, N.A., as Escrow Agent for CM REIT, Inc., in U.S. dollars or (ii) by draft, wire transfer of immediately available funds or Automated ClearingHouse (ACH) in U.S. dollars transmitted directly to the Escrow Account in accordance with the instructions provided in Section 12(2) (collectively, the “Payment”).
AGREEMENT
     NOW, THEREFORE, the Dealer Manager, the Company and Escrow Agent agree to the terms of this Agreement as follows:
1. Establishment of Escrow Account; Escrow Period. On or prior to the commencement of the Offering, the Company shall establish the Escrow Account with the Escrow Agent, which shall be entitled “Escrow Account for the Benefit of Subscribers to Shares of CM REIT, Inc.” This Agreement shall be effective on the Effective Date and the Company shall notify the Processing Agent and the Escrow Agent of the Effective Date. All monies deposited in the Escrow Account are hereinafter referred to as “Escrowed Funds.” During the Escrow Period, the Company will cause the Dealer Manager and the Participating Dealers to instruct subscribers to make checks for subscriptions payable to the order of “UMB Bank, N.A., as Escrow Agent for CM REIT, Inc.” Except as otherwise set forth herein for the Pennsylvania Subscribers and the Tennessee Subscribers, the “Escrow Period” shall commence upon the effectiveness of this Agreement and shall continue until the earlier of (i) the date upon which the Escrow Agent receives confirmation from the Company and the Dealer Manager that the Company has raised the Minimum Offering, (ii) the Outside Date, or (iii) the termination of the Offering by the Company prior to the receipt of the Minimum Offering. Any payments received prior to the time, if any, that the Escrowed Funds are deliverable to the Company pursuant to the provisions of Section 2(b) below that are made payable to a party other than the Escrow Agent shall be returned to the Participating Dealer who submitted the Payment. After the Escrow Period, except as otherwise required for Pennsylvania Subscribers and the Tennessee Subscribers, the Escrow Agent shall promptly return to the Processing Agent for deposit into an account designated by the Company any Payments received by the Escrow Agent or deposited into the Escrow Agent’s account, pursuant to Section 2(b) below.

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2. Operation of the Escrow.
(a) Deposits into the Escrow Account. During the Escrow Period, completed subscription agreements and Payments for the purchase price for the Shares shall be remitted by the broker dealers or registered investment advisors, as applicable, on behalf of persons subscribing to purchase shares directly to the Escrow Agent as provided in Section 12 by noon of the next Business Day following receipt of any such subscription agreements and Payments or, if final internal supervisory review is conducted at a different location, by noon of the next Business Day following receipt of any such subscription agreements and Payments by the office conducting the final internal supervisory review. The Escrow Agent hereby agrees to maintain the funds contributed by the Pennsylvania Subscribers and the Tennessee Subscribers in a manner in which they may be separately accounted for by the records of the Processing Agent so that the requirements of Sections 3 and 4 of this Agreement can be met. Deposits shall be held in the Escrow Account until such funds are disbursed in accordance with this Section 2. Prior to disbursement of the funds deposited in the Escrow Account, upon receipt of the subscription agreements and Payments, Escrow Agent shall fax or scan a listing of the subscriber name and purchase price to the Company and the Processing Agent, together with all other subscription documents sent with the Payments. Prior to disbursement of the funds deposited in the Escrow Account, such funds shall not be subject to claims by creditors of the Company or any of its affiliates. If any of the Payments are returned to the Escrow Agent for nonpayment prior to receipt of the Break Escrow Affidavit (as described below), the Escrow Agent shall promptly notify the Processing Agent and the Company in writing via mail, email or facsimile of such nonpayment, and the Escrow Agent is authorized to debit the Escrow Account, as applicable in the amount of such returned Payment and the Processing Agent shall delete the appropriate account from the records maintained by the Processing Agent. Within seven (7) days from the date of receipt of each subscription, the Company will determine whether or not the subscription is to be accepted or rejected in whole or in part. Within ten (10) Business Days of receipt by the Escrow Agent of written notice from the Company, or as soon thereafter as practicable, that a subscription has been rejected, the Escrow Agent shall transfer by check the funds, without interest and without deduction, if any, earned thereon, of any subscribers whose subscription has been rejected since the commencement of the Offering. The Processing Agent will maintain a written account of each sale, which account shall set forth, among other things, the following information: (i) the subscriber’s name and address; (ii) the subscriber’s social security number; (iii) the number of Shares purchased by such subscriber; and (iv) the amount paid by such subscriber for such Shares. During the Escrow Period neither the Company nor the Dealer Manager will be entitled to any principal funds received into the Escrow Account. As used in this Agreement, the term “Business Day” means any day except Saturday, Sunday or a day on which commercial banks in New York, New York or Kansas City, Missouri are not closed in respect of a federal or state holiday.

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(b) Distribution of the Escrowed Funds to the Company. If at any time on or prior to the Outside Date, the Minimum Offering has been raised, then upon the happening of such event, the Escrowed Funds shall remain in the Escrow Account until the Escrow Agent receives written direction provided by the Company instructing the Escrow Agent to deliver the amount of such Escrowed Funds as the Company shall direct (other than any funds, together with any interest thereon, received from Pennsylvania Subscribers and Tennessee Subscribers which cannot be released until the conditions of Sections 3 and 4, respectively, have been met). An affidavit or certification from an officer of the Company to the Escrow Agent and Processing Agent stating that at least the Minimum Offering has been timely raised, shall constitute sufficient evidence for the purpose of this Agreement that such event has occurred (the “Break Escrow Affidavit”). The Affidavit shall indicate (i) the date on which the Minimum Offering was raised and (ii) the actual total number of Shares sold as of such date.
(c) Return of the Escrowed Funds to the Subscribers. If the Escrow Agent has not received a Break Escrow Affidavit on or prior to the Outside Date, the Escrow Agent shall obtain from the Processing Agent the information needed to return the principal amount of the funds in the Escrow Account, together with any interest thereon, to each respective subscriber, and the Escrow Agent shall promptly create and dispatch checks and wires drawn on the Escrow Account to return

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the principal amount of the funds in the Escrow Account, together with any interest thereon, without deduction, penalty or expense, to the respective subscribers, and the Escrow Agent shall notify the Company and the Dealer Manager of its distribution of the Escrowed Funds. The subscription payments returned to each subscriber (including those, if any, returned to Pennsylvania Subscribers and Tennessee Subscribers pursuant to Sections 3 and 4, respectively) shall be free and clear of any and all claims of the Company or any of its creditors.
3. Distribution of the Funds from Pennsylvania Subscribers.
(a) Notwithstanding anything to the contrary herein, disbursements of funds paid by Pennsylvania Subscribers may only be distributed in compliance with the provisions of this Section 3. Irrespective of any disbursement of funds from the Escrow Account pursuant to Section 2 hereof, the Escrow Agent will continue to place deposits from the Pennsylvania Subscribers into the Escrow Account, until such time as the Company notifies the Escrow Agent in writing that total subscriptions (including amounts in the Escrow Account previously disbursed as directed by the Company and the amounts then held in the Escrow Account) equal or exceed $50,000,000, whereupon the Escrow Agent shall disburse to the Company, at the Company’s request the principal amount of the funds from the Pennsylvania Subscribers received by the Escrow Agent for accepted subscriptions, together with any and all interest earned thereon.
(b) If the Company has not received total subscriptions of at least $50,000,000 within one hundred twenty (120) days of the date the Company first receives a subscription from a Pennsylvania Subscriber (the “Initial Escrow Period”), the Company shall notify each Pennsylvania Subscriber by certified mail or any other means (whereby receipt of delivery is obtained) of the right of Pennsylvania Subscribers to have their investment returned to them. If, pursuant to such notice, a Pennsylvania Subscriber requests the return of his or her subscription funds within ten (10) days after receipt of the notification (the “Request Period”), the Escrow Agent shall promptly refund within fifteen (15) calendar days after receipt of such Pennsylvania Subscriber’s request, with a pro rata share of any interest earned thereon and without deduction, directly to each Pennsylvania Subscriber the funds deposited in the Escrow Account on behalf of the Pennsylvania Subscriber.
(c) The funds of Pennsylvania Subscribers who do not request the return of their funds within the Request Period shall remain in the Escrow Account for successive 120-day escrow periods (each a “Successive Escrow Period”), each commencing automatically upon the termination of the prior Successive Escrow Period, and the Company and Escrow Agent shall follow the notification and payment procedure set forth in Section 3(b) above with respect to the

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Initial Escrow Period for each Successive Escrow Period, until the occurrence of the earliest of (i) the termination of the offering by the Company prior to the receipt of $50,000,000 of total subscriptions, (ii) the receipt and acceptance by the Company of total subscriptions that equal or exceed $50,000,000 and the disbursement of the Escrow Account on the terms specified in this Section 3, or (iii) all funds held in the Escrow Account that were paid by Pennsylvania Subscribers having been returned to the Pennsylvania Subscribers in accordance with the provisions hereof.
(d) If the Company has not received total subscriptions of at least $50,000,000 within 365 days after the Outside Date, all funds in the Escrow Account that were contributed by Pennsylvania Subscribers will be promptly returned in full to such Pennsylvania Subscribers, together with their pro rata share of any interest earned thereon pursuant to instructions made by the Company, upon which the Escrow Agent may conclusively rely.
4. Distribution of the Funds from Tennessee Subscribers.
(a) Notwithstanding anything to the contrary herein, disbursements of funds contributed by Tennessee Subscribers may only be distributed in compliance with the provisions of this Section 4. Irrespective of any disbursement of funds from the Escrow Account pursuant to Section 2 hereof, the Escrow Agent will continue to place deposits from the Tennessee Subscribers into the Escrow Account, until such time as the Company notifies the Escrow Agent in writing that total subscriptions (including amounts in the Escrow Account previously disbursed as directed by the Company and the amounts then held in the Escrow Account) equal or exceed $10,000,000, whereupon the Escrow Agent shall disburse to the Company, at the Company's request, the principal amount of the funds from the Tennessee Subscribers received by the Escrow Agent for accepted subscriptions. However, the Escrow Agent shall not disburse those funds of a subscriber whose subscription has been rejected or rescinded of which the Escrow Agent has been notified by the Company, or otherwise in accordance with the Company's written request.
(b) If the Company has not received total subscriptions of at least $10,000,000 within 365 days after the Break Escrow Affidavit is delivered by the Company pursuant to Section 2(b), the Processing Agent shall provide the Escrow Agent the information needed to return the principal amount of the funds in the Escrow Account that were contributed by Tennessee Subscribers, together with any interest thereon, to the respective Tennessee Subscribers, and the Escrow Agent shall promptly create and dispatch checks and wires drawn on the Escrow Account to return the principal amount of the funds in the Escrow Account that were contributed by Tennessee Subscribers, together with any interest thereon, without deduction, penalty or expense, to the respective Tennessee Subscribers, and the Escrow Agent shall notify the Company and the Dealer Manager of its distribution of the funds.
5. Escrowed Funds. Upon receipt of the funds received from subscribers to the Offering, the Escrow Agent shall hold the Escrowed Funds in escrow pursuant to the terms of this Agreement. All Escrowed Funds shall be invested and reinvested in bank accounts or bank money market accounts and any other investments permitted under Rule 15c2-4 of the Securities Exchange Act of 1934, as amended, at the direction of the Company. All Escrowed Funds shall at all times be placed in interest-bearing accounts.
     The Escrow Agent shall be entitled to sell or redeem any such investment as necessary to make any distributions required under this Agreement and shall not be liable or responsible for any loss resulting from any such sale or redemption.
     Income, if any, resulting from the investment of the funds received from subscribers to the Offering shall be distributed according to this Agreement.
     The Escrow Agent shall provide to the Company monthly statements (or more frequently as reasonably requested by the Company) on the account balance of the Escrow Account and the activity in the account since the last report.
6. Duties of the Escrow Agent. The Escrow Agent shall have no duties or responsibilities other than those expressly set forth in this Agreement, and no implied duties or obligations shall be read into this Agreement against the Escrow Agent. The Escrow Agent is not a party to, or bound by, any other agreement among the other parties hereto, and the Escrow Agent’s duties shall be determined solely by reference to this Agreement. The Escrow Agent shall have no duty to enforce any obligation of any person, other than as provided herein. The Escrow Agent shall be under no liability to anyone by reason of any failure on the part of any party hereto or any maker, endorser or other signatory of any document or any other person to perform such person’s obligations under any such document.

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7. Liability of the Escrow Agent and the Processing Agent; Indemnification. The Escrow Agent acts hereunder as a depository only. The Escrow Agent is not responsible or liable in any manner for the sufficiency, correctness, genuineness or validity of this Escrow Agreement or with respect to the form of execution of the same. Each of the Escrow Agent and the Processing Agent shall not be liable for any action taken or omitted by it, or any action suffered by it to be taken or omitted, in good faith, and in the exercise of its own best judgment, and may rely conclusively and shall be protected in acting upon any order, notice, demand, certificate, opinion or advice of counsel (including counsel chosen by the Escrow Agent or the Processing Agent), statement, instrument, report or other paper or document (not only as to its due execution and the validity and effectiveness of its provisions, but also as to the truth and acceptability of any information therein contained) which is believed by the Escrow Agent or the Processing Agent to be genuine and to be signed or presented by the proper person(s); provided, however, the Processing Agent and Escrow Agent shall be liable for damages arising out of their negligence, willful default or misconduct under this Agreement. Each of the Escrow Agent and the Processing Agent shall not be held liable for any error in judgment made in good faith by an officer or employee of either unless it shall be proved that the Escrow Agent or the Processing Agent, as appropriate, was grossly negligent or reckless in ascertaining the pertinent facts or acted intentionally in bad faith. The Escrow Agent shall not be bound by any notice of demand, or any waiver, modification, termination or rescission of this Agreement or any of the terms hereof, unless evidenced by a writing delivered to the Escrow Agent signed by the proper party or parties and, if the duties or rights of the Escrow Agent are affected, unless it shall give its prior written consent thereto.
     Either of the Escrow Agent and the Processing Agent may consult legal counsel and shall exercise reasonable care in the selection of such counsel, in the event of any dispute or question as to the construction of any provisions hereof or its duties hereunder, and it shall incur no liability and shall be fully protected in acting in accordance with the reasonable opinion or instructions of such counsel.
     Each of the Escrow Agent and the Processing Agent shall not be responsible, may conclusively rely upon and shall be protected, indemnified and held harmless by the Company, for the sufficiency or accuracy of the form of, or the execution, validity, value or genuineness of any document or property received, held or delivered by it hereunder, or of the signature or endorsement thereon, or for any description therein; nor shall the Escrow Agent or the Processing Agent be responsible or liable in any respect on account of the identity, authority or rights of the persons executing or delivering or purporting to execute or deliver any document, property or this Agreement.
     In the event that either the Escrow Agent or the Processing Agent shall become involved in any arbitration or litigation relating to the funds received from subscribers to the Offering, each is authorized to comply with any decision reached through such arbitration or litigation.
     The Company, hereby agrees to indemnify both the Escrow Agent and the Processing Agent for, and to hold it harmless against any loss, liability or expense incurred in connection herewith without gross negligence, recklessness or willful misconduct on the part of either of the Escrow Agent or the Processing Agent, including without limitation legal or other fees arising out of or in connection with its entering into this Agreement and carrying out its duties hereunder, including without limitation the costs and

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expenses of defending itself against any claim of liability in the premises or any action for interpleader. Neither the Escrow Agent, nor the Processing Agent, shall be under any obligation to institute or defend any action, suit, or legal proceeding in connection herewith, unless first indemnified and held harmless to its satisfaction in accordance with the foregoing, except that neither shall be indemnified against any loss, liability or expense arising out of its own gross negligence, recklessness or willful misconduct. Such indemnity shall survive the termination or discharge of this Agreement or resignation of the Escrow Agent.
8. The Escrow Agent’s Fee. Escrow Agent shall be entitled to fees and expenses for its regular services as Escrow Agent as set forth in Exhibit A. Additionally, Escrow Agent is entitled to reasonable fees for extraordinary services and reimbursement of any reasonable out of pocket and extraordinary costs and expenses related to its obligations as Escrow Agent under this Agreement, including, but not limited to, reasonable attorneys’ fees. All of the Escrow Agent’s compensation, costs and expenses shall be paid by the Company.
9. Security Interests. No party to this Escrow Agreement shall grant a security interest in any monies or other property deposited with the Escrow Agent under this Escrow Agreement, or otherwise create a lien, encumbrance or other claim against such monies or borrow against the same.
10. Dispute. In the event of any disagreement between the undersigned or the person or persons named in instructions given pursuant to this Agreement, or any other person, resulting in adverse claims and demands being made in connection with or for any papers, money or property involved herein, or affected hereby, the Escrow Agent shall be entitled to refuse to comply with any demand or claim, as long as such disagreement shall continue, and in so refusing to make any delivery or other disposition of any money, papers or property involved or affected hereby, the Escrow Agent shall not be or become liable to the undersigned or to any person named in such instructions for its refusal to comply with such conflicting or adverse demands, and the Escrow Agent shall be entitled to refuse and refrain to act until: (a) The rights of the adverse claimants shall have been fully and finally adjudicated in a court of competent jurisdiction over the parties and money, papers and property involved herein or affected hereby, or (b) All differences shall have been adjusted by agreement and the Escrow Agent shall have been notified thereof in writing, signed by all the interested parties.
11. Resignation of Escrow Agent. Escrow Agent may resign or be removed, at any time, for any reason, by written notice of its resignation or removal to the proper parties at their respective addresses as set forth herein, at least sixty (60) days before the date specified for such resignation or removal to take effect; upon the effective date of such resignation or removal:
     (a) All cash and other payments and all other property then held by the Escrow Agent hereunder shall be delivered by it to such successor escrow agent as may be designated in writing by the Company, whereupon the Escrow Agent’s obligations hereunder shall cease and terminate;
     (b) If no such successor escrow agent has been designated by such date, all obligations of the Escrow Agent hereunder shall, nevertheless, cease and terminate, and the Escrow Agent’s sole responsibility thereafter shall be to keep all property then held by it and to deliver the same to a person designated in writing by the Company or in accordance with the directions of a final order or judgment of a court of competent jurisdiction.

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     (c) Further, if no such successor escrow agent has been designated by such date, the Escrow Agent may petition any court of competent jurisdiction for the appointment of a successor agent; further the Escrow Agent may pay into such court all monies and property deposited with Escrow Agent under this Agreement.
12. Notices. All notices, demands and requests required or permitted to be given under the provisions hereof must be in writing and shall be deemed to have been sufficiently given, upon receipt, if (i) personally delivered, (ii) sent by telecopy and confirmed by phone or (iii) mailed by registered or certified mail, with return receipt requested, delivered to the addresses set forth below, or to such other address as a party shall have designated by notice in writing to the other parties in the manner provided by this paragraph:
     
(1) If to Company:
  CM REIT, Inc.
 
    
 
  1291 W. Galleria Drive, Suite 200
 
    
 
  Henderson, Nevada 89014
 
    
 
  Attention: Stacy M. Riffe
 
    
 
  Telephone: (702) 739-9090
 
    
 
  Facsimile: (702) 739-7735
 
    
 
    
 
  Company Wire Instructions:
 
    
 
  To be provided by the Company
 
    
 
    
(2) If to the Escrow Agent:
  UMB Bank, N.A.
 
    
 
  1010 Grand Blvd., 4th Floor
 
    
 
  Mail Stop: 1020409
 
    
 
  Kansas City, Missouri 64106

- 9 -

 

     
 
  Attention: Lara Stevens,
 
    
 
  Corporate Trust
 
    
 
  Telephone: (816) 860-3017
 
    
 
  Facsimile: (816) 860-3029
 
    
 
    
 
  Escrow Agent Wiring Instructions:
 
    
 
  UMB Bank, N.A.
 
    
 
  ABA Routing Number: 101000695
 
    
 
  Account Number: To be provided by UMB Bank, N.A.
 
    
 
  Account Name: Escrow Account for the Benefit of Subscribers to Shares of CM REIT, Inc.
 
    
 
    
 
  Checks Payable Information:
 
    
 
  UMB Bank, N.A., as Escrow Agent for CM REIT, Inc.
 
    
 
  Attention: Lara Stevens, Corporate Trust
 
    
 
  1010 Grand Boulevard, 4th Floor
 
    
 
  M/S 1020409
 
    
 
  Kansas City, Missouri 64106
 
    
 
    
(3) If to Dealer Manager:
  CM Securities, LLC
 
    
 
  1291 W. Galleria Drive, Suite 200
 
    
 
  Henderson, Nevada 89014
 
    
 
  Attention: Todd B. Parriott
 
    
 
  Telephone: (702) 739-9090
 
    
 
  Facsimile: (702) 739-7735

- 10 -

 

     
(4) If to Processing Agent:
  DST Systems, Inc.
 
    
 
  430 West 7th Street
 
    
 
  Kansas City, Missouri 64105
 
    
 
  Attention: Executive Vice President
 
    
 
  Facsimile: (816) 435-3455
13. Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Missouri without regard to the principles of conflicts of law.
14. Binding Effect; Benefit. This Agreement shall be binding upon and inure to the benefit of the permitted successors and assigns of the parties hereto.
15. Modification. This Agreement may be amended, modified or terminated at any time by a writing executed by the Dealer Manager, the Company and the Escrow Agent.
16. Assignability. This Agreement shall not be assigned by the Escrow Agent without the Company’s prior written consent.
17. Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. Copies, telecopies, facsimiles, electronic files and other reproductions of original executed documents shall be deemed to be authentic and valid counterparts of such original documents for all purposes, including the filing of any claim, action or suit in the appropriate court of law.
18. Headings. The section headings contained in this Agreement are inserted for convenience only, and shall not affect in any way, the meaning or interpretation of this Agreement.
19. Severability. This Agreement constitutes the entire agreement among the parties and supersedes all prior and contemporaneous agreements and undertakings of the parties in connection herewith. No failure or delay of any party hereto in exercising any right, power or remedy may be, or may be deemed to be, a waiver thereof; nor may any single or partial exercise of any right, power or remedy preclude any other or further exercise of any right, power or remedy. In the event that any one or more of the provisions contained in this Agreement, shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, then to the maximum extent permitted by law, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement.

- 11 -

 

20. Earnings Allocation; Tax Matters; Patriot Act Compliance; OFAC Search Duties. The Company or its agent shall be responsible for all tax reporting under this Escrow Agreement. The Company shall provide to Escrow Agent upon the execution of this Agreement any documentation requested and any information reasonably requested by the Escrow Agent to comply with the USA Patriot Act of 2001, as amended from time to time. The Escrow Agent, or its agent, shall complete an OFAC search, in compliance with its policy and procedures, of each subscription check and shall inform the Company if a subscription check fails the OFAC search. The Dealer Manager shall provide a copy of each subscription check in order that the Escrow Agent, or its agent, may perform such OFAC search.
21. Miscellaneous. This Agreement shall not be construed against the party preparing it, and shall be construed without regard to the identity of the person who drafted it or the party who caused it to be drafted and shall be construed as if all parties had jointly prepared this Agreement and it shall be deemed their joint work product, and each and every provision of this Agreement shall be construed as though all of the parties hereto participated equally in the drafting hereof; and any uncertainty or ambiguity shall not be interpreted against any one party. As a result of the foregoing, any rule of construction that a document is to be construed against the drafting party shall not be applicable.
22. Third Party Beneficiaries. The Processing Agent shall be a third party beneficiary under this Agreement, entitled to enforce any rights, duties or obligations owed to it under this Agreement notwithstanding the terms of any other agreements between the Processing Agent and any Party hereto.
23. Termination of the Escrow Agreement. This Agreement, except for Sections 7 and 11 hereof, which shall continue in effect, shall terminate upon written notice from the Company to the Escrow Agent. Unless otherwise provided, final termination of this Agreement shall occur on the date that all funds held in the Escrow Account are distributed either (a) to the Company or to subscribers and the Company has informed the Escrow Agent in writing to close the Escrow Account or (b) to a successor escrow agent upon written instructions from the Company.
24. Relationship of Parties. The Dealer Manager and the Company are unaffiliated with the Escrow Agent and the Processing Agent, and this Agreement does not create any partnership or joint venture among either the Dealer Manager or the Company and the Escrow Agent or the Processing Agent.
25. Licenses and Qualifications. From and after the Effective Date, the Processing Agent and Escrow Agent shall obtain, and continue to maintain until the termination of this Agreement, any and all required licenses and qualifications necessary or desirable to perform the services and obligations contemplated by this Agreement.

- 12 -

 

[SIGNATURE PAGES FOLLOW]

- 13 -

 

     IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed by their duly authorized representatives as of the date first written hereinabove.
         
  DEALER MANAGER:

CM SECURITIES, LLC
 		  
  By:   /s/ Todd B. Parriott   
 
     Todd B. Parriott   
 
     Chief Executive Officer   
 
  COMPANY:

CM REIT, INC.
 		  
  By:   /s/ Stacy M. Riffe   
 
     Stacy M. Riffe   
 
     Chief Financial Officer   

- 14 -

 

         
  ESCROW AGENT:

UMB BANK, N.A.
 		  
  By:   /s/ Lara L. Stevens  
 
     Lara L. Stevens   
 
     Vice President   

- 15 -

 

EXHIBIT A
ESCROW FEES AND EXPENSES
         
Acceptance Fee
        
 
        
Review escrow agreement and establish account
   $ 3,000  
 
        
 
        
Annual Fee
        
 
        
Maintain account
   $ 3,000  
 
        
 
        
Transaction Fees
        
 
        
(a) per outgoing wire transfer
   $ 35.00  
 
        
(b) per Form 1099 (Int., B or Misc.)
   $ 10.00 *
 
        
(c) per investment purchase, sale or settlement
   $ 35.00 **
 
*   Not anticipated to be charged
 
**   Excludes money market mutual fund transactions
Fees specified are for the regular, routine services contemplated by the Escrow Agreement, and any additional or extraordinary services, including, but not limited to disbursements involving a dispute or arbitration, or administration while a dispute, controversy or adverse claim is in existence, will be charged based upon time required at the then standard hourly rate. In addition to the specified fees, all expenses related to the administration of the Escrow Agreement (other than normal overhead expenses of the regular staff) such as, but not limited to, travel, postage, shipping, courier, telephone, facsimile, supplies, legal fees, accounting fees, etc., will be reimbursable. Acceptance and first year annual fees will be payable at the initiation of the escrow and annual fees will be payable in advance thereafter. Other fees and expenses will be billed as incurred.

- 16 -

 

EXHIBIT B
Form of Subscriber List

- 17 -

EX-23.2 7 d65627a7exv23w2.htm EX-23.2 exv23w2
Exhibit 23.2
(H & C Logo)
Hancock Askew & Co llp
Accountants & Advisors
Consent of Independent Registered Public Accounting Firm
CM REIT, Inc.
Henderson, Nevada
We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated April 20, 2010 relating to the balance sheets of CM REIT, Inc. as of December 31, 2009 and 2008, which are contained in that Prospectus.
We also consent to the reference to us under the caption “Experts” in the Prospectus.
Respectfully submitted,
(-s- Hancock Askew & Co. L.L.P.)
Savannah, Georgia
October 28, 2010
        1870 The Exchange SE
100 Riverview Drive       Suite 235
Savannah, GA 31404       Atlanta, GA 30339
T 912-234-8243       T 678-387-3960
F 912-236-4414   www.hancockaskew.com   F 678-387-3964

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