Filed Pursuant to Rule 424(b)(3)
Registration No. 333-258754

COTTONWOOD COMMUNITIES, INC.

SUPPLEMENT NO. 8 DATED MARCH 31, 2022

TO THE PROSPECTUS DATED NOVEMBER 4, 2021

This document supplements, and should be read in conjunction with, the prospectus of Cottonwood Communities, Inc. dated November 4, 2021, as supplemented by supplement no. 1 dated November 16, 2021, supplement no. 2 dated November 22, 2021, supplement no. 3 dated November 30, 2021, supplement no. 4 dated December 15, 2021, supplement no. 5 dated January 18, 2022, supplement no. 6 dated February 16, 2022 and supplement no. 7 dated March 15, 2022. As used herein, the terms “we,” “our” and “us” refer to Cottonwood Communities, Inc. and, as required by context, Cottonwood Residential O.P., LP, which we refer to as our “Operating Partnership” or “CROP,” and to their subsidiaries. Capitalized terms used in this supplement have the same meanings as set forth in the prospectus. The purpose of this supplement is to disclose:

 

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the status of this offering;

 

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information regarding our portfolio;

 

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information regarding our distributions;

 

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information regarding repurchases;

 

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information regarding fees and expenses payable to our advisor and its affiliates;

 

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updated risks related to this offering;

 

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information regarding compensation to our named executive officers;

 

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updated information regarding related party transactions;

 

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations” similar to that filed in our Annual Report on Form 10-K for the year ended December 31, 2021;

 

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updated experts information; and

 

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our audited financial statements and the notes thereto as of and for the year ended December 31, 2021.

Status of this Offering

As of March 31, 2022, we have raised gross proceeds of approximately $36.0 million from the sale of approximately 2.0 million shares in this offering, including proceeds from our distribution reinvestment plan of approximately $0.6 million. As of March 31, 2022, approximately $964.0 million in shares remain available for sale pursuant to this offering, including approximately $99.4 million in shares available for sale through our distribution reinvestment plan.

Real Estate Investments

As of December 31, 2021, we had a portfolio of $2.1 billion in total assets, with 83.3% of our equity value in operating properties, 10.4% in development and 6.3% in real estate-related investments. We also currently manage approximately 9,800 units in stabilized assets, including approximately 7,300 units in stabilized properties we own or have ownership interests in. The graphic below presents our real estate portfolio by market and investment type by fair value as of December 31, 2021. Refer to the section of this supplement titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Investments” for additional detail regarding our portfolio.

 

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Distribution Information

On March 22, 2022, our board of directors authorized a distribution for the month of March of 0.05916667, or $0.71 annually, reduced for any class-specific expense allocated to the class, for each class of our common stock to holders of record on March 31, 2022, to be paid in April 2022.

Refer to the section of this supplement titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for additional detail regarding our distributions paid for the year ended December 31, 2021.

Repurchases

During the year ended December 31, 2021, we received and repurchased in full eligible repurchase requests for 203,537 shares of Class A common stock for $2.6 million, at an average repurchase price of $12.90. We funded our repurchases with cash available from operations, financing activities and capital raising activities.

Fees and Expenses Payable to Our Advisor and its Affiliates

The table below provides information regarding fees and expenses paid to our advisor and its affiliates in connection with their services provided to us pursuant to the terms of the agreements with them in effect at such times. The table includes amounts incurred for the year ended December 31, 2021. We entered an amended and restated advisory agreement on May 7, 2021 at the effective time of our merger with Cottonwood Residential II, Inc. (the “CRII Merger”). The fees paid prior to May 7, 2021 were earned under our prior advisory agreement (amounts in thousands).

 

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		Year Ended December 31, 2021
Form of Compensation
Operational Stage
Asset management fees(1)		$	8,052
Asset management fees waived by our advisor(2)			(27)
Property management fee(3)			151
Reimbursable operating expenses(4)			331
Performance participation allocation(5)			51,761
		$	60,268

 

(1)

Under our advisory agreement in effect through May 6, 2021, we paid our advisor an annual asset management fee, paid monthly, in an amount equal to 1.25% per annum of our gross assets as of the last day of the prior month. Under the amended and restated advisory agreement entered May 7, 2021, our Operating Partnership pays our advisor a monthly management fee equal to 0.0625% of GAV (gross asset value of our Operating Partnership, calculated pursuant to our valuation guidelines and reflective of the ownership interest held by our Operating Partnership in such gross assets), subject to a cap of 0.125% of net asset value of our Operating Partnership.

 

(2)

In connection with our initial public offering, our advisor agreed to waive its asset management fee each month in an amount equivalent to the 6.0% discount provided to those who purchased Class A shares through certain distribution channels. This was to ensure that we received proceeds equivalent to those received for sales of shares outside of these channels.

 

(3)

Through May 7, 2021, we paid Cottonwood Communities Management, LLC (our subsidiary following the CRII Merger) a property management fee in an amount up to 3.5% of the annual gross revenues of our multifamily apartment communities that it manages. Cottonwood Communities Management, LLC could subcontract the performance of its property management duties to third parties and Cottonwood Communities Management, LLC would pay a portion of its property management fee to the third parties with whom it subcontracts for these services.

 

(4)

Under our advisory agreement in effect through May 7, 2021, we reimbursed our advisor or its affiliates for all actual expenses paid or incurred by our advisor or its affiliates in connection with the services provided to us; provided, however, that we did not reimburse our advisor or its affiliates for salaries, wages and related benefits of personnel who performed investment advisory services for us or served as our executive officers. Under the amended and restated advisory agreement entered into on May 7, 2021, subject to the limitations on total operating expenses, our advisor is entitled to reimbursement of all costs and expenses incurred by it or its affiliates on our behalf, provided that our advisor is responsible for the expenses related to any and all of our advisor’s personnel who provide investment advisory services pursuant to the amended and restated advisory agreement (including, without limitation, each of our executive officers and any directors who are also directors, officers or employees of our advisor or any of its affiliates), including, without limitation, salaries, bonuses and other wages, payroll taxes and the cost of employee benefit plans of such personnel, and costs of insurance with respect to such personnel; provided that we will be responsible for the personnel costs of our employees even if they are also directors or officers of our advisor or any of its affiliates except as provided for in the Reimbursement and Cost Sharing Agreement.

 

(5)

As of May 7, 2021, the “Special Limited Partner,” an affiliate of our advisor, is entitled to receive a 12.5% promotional interest, subject to a 5% hurdle and certain limitations, under the terms of the amended and restated limited partnership agreement of CROP as amended to date. The performance participation allocation is an annual distribution to be made following the end of each year and accrues on a monthly basis. On January 31, 2022, the accrued $51.8 million performance participation allocation was paid in cash to the Special Limited Partner.

Risk Factors

The following risk factors supplement the risk factors and/or supersede and replace the similar risk factors contained in the prospectus and all similar disclosure in the prospectus.

We have paid distributions from offering proceeds. In the future we may continue to fund distributions with offering proceeds. To the extent we fund distributions from sources other than our cash flow from operations, we will have less funds available for investment in multifamily apartment communities and multifamily real estate-related assets and the overall return to our stockholders may be reduced.

Our charter permits us to make distributions from any source, including offering proceeds or borrowings (which may constitute a return of capital), and our charter does not limit the amount of funds we may use from any source to pay such distributions. We intend to make distributions on our common stock on a per share basis with each share receiving the same

 

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distribution, subject to any class-specific expenses such as distribution fees on our Class T and Class D shares. If we fund distributions from financings, our offerings or other sources, we will have less funds available for investment in multifamily apartment communities and other multifamily real estate-related assets and the number of real estate properties that we invest in and the overall return to our stockholders may be reduced. If we fund distributions from borrowings, our interest expense and other financing costs, as well as the repayment of such borrowings, will reduce our earnings and cash flow from operations available for distribution in future periods. If we fund distributions from the sale of assets or the maturity, payoff or settlement of multifamily real estate-related assets, this will affect our ability to generate cash flows from operations in future periods.

During the early stages of our operations, it is likely that we will use sources of funds, which may constitute a return of capital to fund distributions. During our offering stage, when we may raise capital more quickly than we acquire income-producing assets, and for some period after, we may not be able to make distributions solely from our cash flow from operations. Further, because we may receive income from our investments at various times during our fiscal year and because we may need cash flow from operations during a particular period to fund capital expenditures and other expenses, we expect that at least during the early stages of our existence and from time to time during our operational stage, we will declare distributions in anticipation of cash flow that we expect to receive during a later period and we will make these distributions in advance of our actual receipt of these funds. In addition, to the extent our investments are in development or redevelopment projects or in properties that have significant capital requirements, our ability to make distributions may be negatively impacted, especially during our early periods of operation. In these instances, we expect to look to third party borrowings to fund our distributions. We may also fund such distributions from the sale of assets. To the extent distributions exceed cash flow from operations, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize capital gain.

For the years ended December 31, 2021 and 2020, we paid aggregate distributions to common stockholders and limited partnership unitholders of $20.2 million and $5.2 million, including $20.1 million and $4.1 million of distributions paid in cash and $0.1 million and $1.1 million of distributions reinvested through our distribution reinvestment plan, respectively. Our net loss for the years ended December 31, 2021 and 2020 was $106.9 million and $8.6 million. Cash flows provided by operating activities were $5.4 million for the year ended December 31, 2021 and cash flows used in operating activities was $2.8 million during the year ended December 31, 2020. We funded our total distributions paid during 2021, which includes net cash distributions and distributions reinvested by stockholders, with $11.0 million prior period cash provided by operating activities, $5.0 million from our revolving credit facility, and $4.0 million of offering proceeds. We funded our total distributions paid during 2020, which includes net cash distributions and distributions reinvested by stockholders, with $0.6 million prior period cash provided by operating activities and $3.6 million of offering proceeds.

Generally, for purposes of determining the source of our distributions paid, we assume first that we use cash flow from operating activities from the relevant or prior periods to fund distribution payments. To the extent that we pay distributions from sources other than our cash flow from operating activities, we will have less funds available for the acquisition of real estate investments, the overall return to our stockholders may be reduced and subsequent investors will experience dilution. In addition, to the extent distributions exceed cash flow from operating activities, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize capital gain.

We have incurred net losses under GAAP in the past and may incur net losses in the future, and we have an accumulated deficit and may continue to have an accumulated deficit in the future.

For the years ended December 31, 2021 and 2020, we had consolidated net losses of $106.9 million and $8.6 million, respectively. As of December 31, 2021 and 2020, we had accumulated deficit of $55.9 million and $11.9 million, respectively. These amounts largely reflect the expense of real estate depreciation and amortization in accordance with GAAP, which was $63.4 million and $7.0 million during these periods. In addition, the year ended December 31, 2021, also included $51.8 million of charges related to the performance participation allocation.

Net loss and accumulated deficit are calculated and presented in accordance with GAAP, which, among other things, requires depreciation of real estate investments to be calculated on a straight-line basis. As a result, our operating results imply

 

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that the value of our real estate investments will decrease evenly over a set time period. However, we believe that the value of real estate investments will fluctuate over time based on market conditions. Thus, in addition to GAAP financial metrics, management reviews certain non-GAAP financial metrics, funds from operations, or FFO and Core FFO. FFO measures operating performance that excludes gains or losses from sales of depreciable properties, real estate-related depreciation and amortization and after adjustments for our share of consolidated and unconsolidated entities.

Our success is dependent on general market and economic conditions.

The real estate industry generally and the success of our investment activities in particular will both be affected by global and national economic and market conditions generally and by the local economic conditions where our properties are located. These factors may affect the level and volatility of real estate prices, which could impair our profitability or result in losses. In addition, general fluctuations in the market prices of securities and interest rates may affect our investment opportunities and the value of our investments. Our sponsor’s financial condition may be adversely affected by a significant economic downturn and it may be subject to legal, regulatory, reputational and other unforeseen risks that could have a material adverse effect on its businesses and operations (including our advisor).

A recession, slowdown and/or sustained downturn in the U.S. real estate market, and to a lesser extent, the global economy (or any particular segment thereof) would have a pronounced impact on us, the value of our assets and our profitability, impede the ability of our assets to perform under or refinance their existing obligations, and impair our ability to effectively deploy our capital or realize upon investments on favorable terms. We could also be affected by any overall weakening of, or disruptions in, the financial markets. Any of the foregoing events could result in substantial losses to our business, which losses will likely be exacerbated by the presence of leverage in our investments capital structures.

For example, during the financial crisis, the availability of debt financing secured by commercial real estate was significantly restricted as a result of a prolonged tightening of lending standards. Due to the uncertainties created in the credit market, real estate investors were unable to obtain debt financing on attractive terms, which adversely affected investment returns on acquisitions and their ability to even make acquisitions or tenant improvements to existing holdings. Any future financial market disruptions may force us to use a greater proportion of our offering proceeds to finance our acquisitions and fund tenant improvements, reducing the number of acquisitions we would otherwise make.

In addition, the recent invasion by the Russian Federation of the Ukraine on February 24, 2022 has caused a significant rise in geopolitical tensions and the United States, the United Kingdom and EU member states and other countries have imposed economic sanctions on the Russian Federation, parts of Ukraine, as well as various designated parties. As further military conflicts and economic sanctions continue to evolve, it has become increasingly difficult to predict the impact of these events or how long they will last. Depending on direction and timing, the Russian Federation-Ukraine conflict may significantly adversely affect economic and market conditions.

CROP may be subject to tax indemnification obligations upon the taxable sale of certain of its properties. CROP will not have control of the assets that will be subject to an in-kind redemption transaction under the CROP Tax Protection Agreement.

Pursuant to the tax protection agreement between CROP and High Traverse Holdings, LLC (“HT Holdings”), a Delaware limited liability company, which is beneficially owned by Daniel Shaeffer, Chad Christensen, Gregg Christensen and Eric Marlin, each of who are our executive officers and some of whom are our directors, (the “CROP Tax Protection Agreement”), CROP has agreed, until May 7, 2031, to indemnify HT Holdings (including Daniel Shaeffer, Chad Christensen, Gregg Christensen and Eric Marlin, as beneficial owners of HT Holdings, and their affiliated trusts and certain other entities) (collectively, the “protected partners”) against certain tax consequences of a taxable transfer of all or any portion of the properties that are owned by CROP or any of its subsidiaries as of the closing date of our merger with CROP, subject to certain conditions and limitations. These indemnification obligations could prevent CROP from selling its properties at times and on terms that are in the best interest of CROP, us and the respective equity owners of CROP and us and any indemnification payments that may become payable could be a significant expense for CROP and us. In addition, at any time after the closing

 

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(including after expiration of the tax protection term), each protected partner and CROP will have the right to exercise an in-kind redemption transaction (i.e., a redemption of all of the protected partner’s interest in CROP in exchange for one or more assets of CROP at the then-current market price). This would eliminate CROP’s indemnification obligations to the protected partner(s). The protected partners will have the right to select the assets of CROP necessary to effectuate the in-kind redemption transaction, subject to certain limitations. If an in-kind redemption transaction is effectuated, CROP’s portfolio may become less geographically diverse and thus subject to greater market risk, and CROP may be required to transfer some of its prime assets to the protected partner(s).

In addition, CROP has entered and may in the future into tax indemnification agreements with certain persons who contributed their interests in properties to CROP in exchange for CROP Common Units. These current agreements provide that CROP will indemnify such contributors against certain tax consequences of a taxable sale of the property contributed by such contributors through 2025, subject to certain conditions and limitations. Future tax indemnification agreements entered by CROP may extend such obligations beyond 2025. The obligations of CROP under these and future indemnification agreements may constrain CROP with respect to deciding to dispose of a particular property and may also result in financial obligations for us.

Holders of our preferred stock will have dividend, liquidation and other rights that are senior to the rights of the holders of our common stock.

We have classified and designated 12,800,000 shares of our authorized but unissued preferred stock as shares of non-voting Series 2019 preferred stock. In connection with the CRII Merger, we classified and designated 14,500,000 shares of our authorized but unissued preferred stock as shares of non-voting Series 2016 preferred stock, and designated 5,000,000 shares of our authorized but unissued preferred stock as shares of non-voting Series 2017 preferred stock. We issued one share of our Series 2016 preferred stock for each share of CRII Series 2016 preferred stock outstanding prior to the effective time of the CRII Merger and one share of Series 2017 preferred stock for each share of CRII Series 2017 preferred stock outstanding prior to the effective time of the CRII Merger.

The outstanding shares of our Series 2019 preferred stock are entitled to receive a preferred dividend equal to a 5.5% (subject to an increase to 6.0% in certain circumstances) per annum cumulative but not compounded return. The outstanding shares of our Series 2016 preferred stock are entitled to receive a preferential dividend equal to a 7% cumulative but not compounded annual return. The outstanding shares of our Series 2017 preferred stock are entitled to receive a preferential dividend equal to a 7.5% cumulative but not compounded annual return (subject to an increase to 8% in certain circumstances). As of March 22, 2022, we had 13,983,810 shares of our Series 2016 preferred stock outstanding, which was issued in connection with the CRII Merger and 12,733,485 shares of Series 2019 preferred stock outstanding. We had no Series 2017 preferred stock outstanding.

Holders of the Series 2016 preferred stock and Series 2019 preferred stock are entitled to cumulative dividends before any dividends may be declared or set aside on our common stock, or the redemption of our common stock and a liquidation preference of $10.00 per share plus any accrued and unpaid distributions before any payment is made to holders of our common stock upon our voluntary or involuntary liquidation, dissolution or winding up. This will reduce the remaining amount of our assets, if any, available to distribute to holders of our common stock.

Military conflict may affect the markets in which we operate, our operations and our profitability.

The Russian Federation invaded Ukraine on February 24, 2022. Geopolitical tensions have risen significantly in response and the United States, the United Kingdom, EU member states, and other countries have imposed economic sanctions on the Russian Federation, parts of Ukraine, as well as various designated parties. As further military conflicts and economic sanctions continue to evolve, it has become increasingly difficult to predict the impact of these events or how long they will last. Depending on direction and timing, the Russian Federation-Ukraine conflict may significantly exacerbate the normal risks associated with an investment in real estate and result in adverse changes to, among other things: (i) general economic and market conditions; (ii) shipping and transportation costs and supply chain constraints; (iii) interest rates, currency exchange rates, and expenses associated with currency management transactions; (iv) demand for real estate; (v) available credit in

 

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certain markets; (vi) import and export activity from certain markets; and (vii) laws, regulations, treaties, pacts, accords, and governmental policies. Economic and military sanctions related to the Russian Federation-Ukraine conflict, or other conflicts, have the potential to gravely impact markets, global supply and demand, import/export policies, and the availability of labor in certain markets. There is no guarantee that such sanctions and economic actions will abate or that more restrictive measures will not be put in place in the near term. Moreover, it is expected that the Russian Federation-Ukraine military conflict could spark further sanctions and/or military conflicts which will impact other regions. The foregoing could impact our operations and our ability to realize out investment objectives.

Rent control and other changes in applicable laws, or noncompliance with applicable laws, could adversely affect our portfolio of residential properties.

Lower revenue growth or significant unanticipated expenditures may result from changes in rent control or rent stabilization laws or other residential landlord/tenant laws. Municipalities may implement, consider or be urged by advocacy groups to consider rent control or rent stabilization laws and regulations or take other actions that could limit our ability to raise rents based on market conditions. For example, in 2016 in Mountain View, California, voters passed a referendum that limits rent increases on existing tenants (but not on new move-ins) in communities built before 1995. These initiatives and any other future enactments of rent control or rent stabilization laws or other laws regulating residential housing, as well as any lawsuits against us arising from such rent control or other laws, may reduce rental revenues or increase operating costs. Such laws and regulations may limit our ability to charge market rents, increase rents, evict tenants or recover increases in our operating costs and could make it more difficult for us to dispose of properties in certain circumstances. Expenses associated with investments in residential properties, such as debt service, real estate taxes, insurance and maintenance costs, are generally not reduced when circumstances cause a reduction in rental income from such properties.

Our multifamily apartment communities and multifamily real estate-related assets may be cross-collateralized.

At December 31, 2021, we had $213.0 million of fixed rate debt and $543.7 million of variable rate debt, including our revolving credit facility and including $116.7 million of variable rate debt related to construction loans; $407.0 million, or 74.9% of our variable rate debt is accompanied by interest rate cap hedging instruments as required by the lenders. In addition, CROP has issued unsecured promissory notes in several private placement offerings, in an aggregate amount of $43.5 million at December 31, 2021. We may obtain additional lines of credit or other debt financing, or take additional advances on our existing lines of credit, which we may utilize to acquire multifamily apartment communities and multifamily real estate-related assets and fund our operations. Thus, our assets may be cross-collateralized. Information about the amount and terms of any new lines of credit are uncertain and will be negotiated by our officers. No assurance can be given that future cash flow will be sufficient to make the debt service payments on any loans and to cover all operating expenses.

If our revenues are insufficient to pay debt service and operating costs, we may be required to seek additional working capital. There can be no assurance that such additional funds will be available. The degree to which we are leveraged could have an adverse impact on us, including (i) increased vulnerability to adverse general economic and market conditions, (ii) impaired ability to expand and to respond to increased competition, (iii) impaired ability to obtain additional financing for future working capital, capital expenditures, general corporate or other purposes and (iv) requiring that a significant portion of cash provided by operating activities be used for the payment of debt obligations, thereby reducing funds available for operations and future business opportunities.

Increases in interest rates and the future discontinuation of LIBOR could increase the amount of our interest payments and could reduce the amount of distributions our shareholders receive.

At December 31, 2021, we had $543.7 million of variable rate debt, including our revolving credit facility and including $116.7 million of variable rate debt related to construction loans; $407.0 million, or 74.9% of our variable rate debt is accompanied by interest rate cap hedging instruments as required by the lenders. We may incur additional indebtedness in the future. Interest we pay reduces our cash flows. Since we have incurred and may continue to incur variable rate debt, increases

 

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in interest rates raise our interest costs, which reduces our cash flows. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to sell one or more of our properties at times or on terms which may not permit realization of the maximum return on such investments. Increases in interest rates may cause our operations to suffer and the amount of distributions our shareholders receive and their overall return on investment may decline.

We currently pay interest under our variable rate debt at an interest rate that is determined based on a US Dollar London Interbank Offered Rate (“LIBOR”). In July 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that it will stop encouraging or requiring banks to submit rates for the calculation of LIBOR after December 31, 2021. On March 5, 2021, the FCA announced that all LIBOR settings will either cease to be provided by any administrator or no longer be representative (i) immediately after December 31, 2021, in the case of the 1-week and 2-month US dollar settings; and (ii) immediately after June 30, 2023, in the case of the remaining US dollar settings. The tenors that were extended to June 30, 2023 are more widely used and are the tenors used in our LIBOR-based debt.

The Alternative Reference Rates Committee (“ARRC”), a steering committee comprised of U.S. financial market participants, published model LIBOR replacement language for use in bilateral and syndicated loan facilities. ARRC selected the Secured Overnight Financing Rate (“SOFR”) as the replacement to LIBOR. SOFR is a broad measure of the cost of borrowing cash in the overnight U.S. treasury repo market and is a rate published by the Federal Reserve Bank of New York. Our variable rate note remains indexed to LIBOR and not SOFR and includes LIBOR transition language that generally aligns with ARRC recommendations. The transition from LIBOR to SOFR could result in higher all-in interest costs and could reduce the amount of distributions to our shareholders.

Management Compensation

The following discussion supplements the disclosure regarding executive compensation contained in the prospectus.

This section discusses the components of the compensation we provide to our “named executive officers” who are listed in the “Summary Compensation Table” below. In 2021, our named executive officers were Daniel Shaeffer, our Chief Executive Officer; Gregg Christensen, our Chief Legal Officer and Secretary; and Glenn Rand, our Chief Operating Officer.

Prior to the effective time of the CRII Merger on May 7, 2021, we had no employees, and all of our executive officers were employed by our advisor and its affiliates. As such, all of our executive officers were compensated by these entities, in part, for their services to us and our subsidiaries, and except for grants of equity incentive compensation that we made commencing with the fiscal year 2020, we did not provide compensation to our executive officers prior to May 7, 2021.

Following the CRII Merger, we employ certain of our executive officers, including two of our named executive officers, Mr. G. Christensen and Mr. Rand. Because we employed certain of our executive officers for less than a full year in 2021, the discussion below regarding executive compensation reflects the compensation approved by our compensation committee that we expect to pay for a full year commencing in 2022 with our executive compensation tables reflecting only those amounts paid in 2021.

Mr. Shaeffer, along with certain other of our executive officers, continues to be employed by our advisor and its affiliates. Except for grants of equity incentive compensation that we make to all of our executive officers, Mr. Shaeffer and those executive officers employed by our advisor and its affiliates are compensated by these entities (and not us), in part, for their service to us and our subsidiaries. See “Fees and Expenses Payable to Our Advisor and its Affiliates” above and “Compensation” in the prospectus for a discussion of the fees paid to our advisor and its affiliates. All of our named executive officers are officers and/or employees of, or hold an indirect ownership interest in, our advisor and/or its affiliates.

We are a “smaller reporting company” as defined in Rule 12b-2 under the Exchange Act and an “emerging growth company” as defined under the JOBS Act. As such, we are permitted to take advantage of certain reduced reporting requirements that are otherwise applicable generally to public companies.

 

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Compensation of Executive Officers

Executive Compensation Process

Our compensation committee, which is composed of all of our independent directors, discharges our board of directors’ responsibilities relating to the compensation that we pay to our named executive officers. This includes equity incentive compensation grants we make to all of our executive officers as well as additional compensation we pay to those named executive officers employed by us. Prior to the CRII Merger, except for annual grants of LTIP Units and Special LTIP Units (for purposes of our executive compensation discussion, referred to as required by context, collectively as the “LTIP Units”) under our partnership agreement in effect at the time of the award, our named executive officers did not receive any compensation from us.

Our compensation committee acknowledges that the real estate industry is highly competitive and that experienced professionals have significant career mobility. Commencing with fiscal year 2020, our compensation committee determined that through the annual grant of LTIP Units under our partnership agreement, we will attract, motivate and retain highly skilled executive officers who are committed to our core values of prudent risk-taking and integrity. Each year our compensation committee determines, in its sole discretion, the aggregate amount, type and terms of any equity grants to our executive officers, including our employees and employees of our advisor and its affiliates. For the initial grants of LTIP Units in 2020 our compensation committee consulted Ferguson Partners Consulting L.P., f/k/a FPL Associates, L.P. (“FPC”), a nationally recognized compensation consulting firm specializing in the real estate industry.

In making initial compensation decisions following the CRII Merger, the compensation committee reviewed market-based compensation data provided by FPC. The compensation committee also evaluated the performance of our Chief Executive Officer and, together with our Chief Executive Officer, assessed the individual performance of the other executive and senior officers. While the compensation committee considers these recommendations, along with data provided by its other advisors, it retains full discretion to set all compensation to our named executive officers that we pay directly.

Engagement of Compensation Consultant

The compensation committee is authorized to retain the services of one or more executive compensation consultants, in its discretion, to assist with the establishment and review of our compensation programs and related policies. The compensation committee has sole authority to hire, terminate and set the terms of any future engagement of FPC or any other compensation consultant.

For compensation advice following the CRII Merger, the compensation committee engaged FPC to provide market-based compensation data to assist the committee in the implementation of a comprehensive executive compensation program for those executive officers that we employ and an equity incentive compensation program for all of our executive officers that complements the compensation provided to our executive officers by our advisor and its affiliates. In connection with these efforts, FPC prepared for the compensation committee reports that included compensation analyses for each executive position, including those executive positions that are held by employees of our advisor and its affiliates, an analysis of a recommended peer group for the company and a description of the methodology used to provide the compensation analyses. FPC researched competitive market practices, reviewed the proxy statements of its recommended peer group and checked its own proprietary information data bases. The compensation committee reviewed the information provided to the company and approved the executive compensation program which included equity incentive compensation for all of our executive officers and full compensation for those executive officers that we employ.

 

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Components of Executive Compensation

The key elements of our executive compensation program for our executive officers include annual cash compensation, short-term incentive plan compensation as well as equity incentive compensation in the form of time-based and performance-based LTIP Units. Each element is discussed in detail below.

Base Salary. Compensation for each executive officer we employ was established by our compensation committee. We believe that our executive officers’ base salary levels are commensurate with their positions and are expected to provide a steady source of income sufficient to permit these officers to focus their time and attention on their work duties and responsibilities. Base salaries of our named executive officers periodically will be reviewed by the compensation committee. Information about base salary for our named executive officers for 2022 is as follows.

 

Name and Principal Position		Base Salary
Daniel Shaeffer, Chief Executive Officer			(1)
Gregg Christensen, Chief Legal Officer and Secretary		$	400,000
Glenn Rand, Chief Operating Officer		$	400,000

 

(1)

Mr. Shaeffer, along with certain other of our executive officers, is employed by our advisor and its affiliates. Except for grants of equity incentive compensation that we make to all of our executive officers, Mr. Shaeffer is compensated by these entities, in part, for his service to us and our subsidiaries. See “Fees and Expenses Payable to Our Advisor and its Affiliates” above for a discussion of the fees paid to our advisor and its affiliates for the year ended December 31, 2021.

Short-Term Incentive Plan. The short-term incentive plan is intended to compensate our executive officers for achieving annual company and strategic performance goals. The compensation committee believes that the opportunity to earn an annual cash bonus encourages our executive officers to achieve company and strategic performance goals, which fosters a performance-driven company culture that aligns the executives’ interests with the stockholders’ interests.

The short-term incentive plan allows our executive officers to earn a cash bonus based on various pre-defined and pre-weighted company and strategic performance goals established by the compensation committee (at least 50% of which are objective, calculable company performance measurements). Strategic performance goals are assessed subjectively.

The annual cash incentive bonus is the product of the named executive officer’s target bonus (which is a percentage of his base salary) and a formula number that is based on the achievement of predetermined targets. Depending on the achievement of the predetermined targets, the actual annual cash incentive bonus may be less than, but not greater than the target bonus. The compensation committee set Mr. G. Christensen’s target bonus at 90% of his base salary and Mr. Rand’s target bonus at 85% of his base salary.

The annual cash incentive bonus formula number for 2021 consists of the following components: (i) 25% capital formation, (ii) 25% capital deployment efficiency, (iii) 25% portfolio characteristics and objectives, (iv) 15% same store net operating income (NOI) growth relative to the same store NOI growth of a pre-selected peer group, and (v) 10% completion of development projects. With respect to the specific formula components for 2021, the named executive officers received 93% of their target bonus based on the achievement of the predetermined targets.

Equity Incentive Compensation. The compensation committee has made and may make certain awards to the named executive officers in the form of LTIP units. LTIP units are a separate series of limited partnership units of our Operating Partnership, which are convertible into common units upon achieving certain vesting and performance requirements. Awards of LTIP units are subject to the conditions and restrictions determined by our compensation committee, including continued employment or service, computation of financial metrics and/or achievement of pre-established performance goals and objectives. If the conditions and/or restrictions included in an LTIP unit award agreement are not attained, holders will forfeit the LTIP units granted under such agreement. Unless otherwise provided, the LTIP unit awards (whether vested or unvested) will entitle the holder to receive current distributions from our Operating Partnership, and the Special LTIP units (whether vested or unvested) will entitle the holder to receive 10% of the current distributions from our Operating Partnership during the applicable performance period. When the LTIP units have vested and sufficient income has been allocated to the holder of the vested LTIP units, the LTIP units will automatically convert to common units in our Operating Partnership on a one-for-one basis.

 

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The compensation committee has deemed LTIP unit awards to be an effective means to ensure alignment of the executives’ interests with those of the stockholders. LTIP units are structured as “profits interests” for U.S. federal income tax purposes, and we do not expect the grant, vesting or conversion of LTIP units to produce a tax deduction for us based on current U.S. federal income tax law. As profits interests, the LTIP units initially will not have full parity, on a per unit basis, with the common units with respect to liquidating distributions. Upon the occurrence of specified events, the LTIP units can, over time, achieve full parity with the common units in our Operating Partnership and therefore, accrete to an economic value for the holder equivalent to the common units. If such parity is achieved, the LTIP units may be converted, subject to the satisfaction of applicable vesting conditions, on a one-for-one basis into common units, which in turn may be exchanged, upon the occurrence of certain events, by the holder for a cash amount based on the value of a share of our common stock or for shares of our common stock, on a one-for-one basis, at our election. However, there are circumstances under which the LTIP units will not achieve parity with the common units, and until such parity is reached, the value that a holder could realize for a given number of LTIP units will be less than the value of an equal number of shares of our common stock and may be zero. The compensation committee believes that this characteristic of the LTIP units, that they achieve real value only if our share value appreciates, links executive compensation to our performance.

Our compensation committee has approved grants of LTIP units to certain executive officers for fiscal year 2020 and 2021; however, none of our named executive officers received a grant of LTIP units from our compensation committee for 2021 compensation and none have outstanding equity awards as of December 31, 2021.

Our compensation committee currently expects to continue to grant LTIP units awards to our named executive officers annually on the same terms and conditions; however, the committee’s decision whether to approve any such awards in the future will depend on our performance, market trends and practices and other considerations.

Time-Based LTIP Units. The following table sets forth the number and value of the time-based LTIP Units granted to our named executive officers in January 2022. The time-based LTIP Units were issued on January 7, 2022 based on the grant date fair value determined in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification 718, Compensation—Stock Compensation (“ASC Topic 718”). The time-based LTIP Units vest annually in equal installments over a four-year period with the first 25% vesting on January 1, 2023, subject to continued service. Time based LTIP Units (whether vested or unvested) receive the same distribution per unit as the CROP Common Units.

 

Executive Officer		Date of Grant		Number of Time- Based LTIP Units				Value of Time-Based LTIP Units
Daniel Shaeffer		January 7, 2022			23,589			$	407,710
Gregg Christensen		January 7, 2022			7,959			$	137,563
Glenn Rand		January 7, 2022			6,201			$	107,177

Performance-Based LTIP Units. The following table sets forth the number and value of the performance-based LTIP Units granted to our named executive officers in January 2022. The performance-based LTIP Units were issued on January 7, 2022 based on the grant date fair value determined in accordance with ASC Topic 718. The actual amount of each award will be determined at the conclusion of the three-year performance period on December 31, 2024, and will depend on our internal rate of return (as defined in the award agreements).

 

Executive Officer		Date of Grant		Number of Performance-Based LTIP Units				Value of Performance-Based LTIP Units
Daniel Shaeffer		January 7, 2022			43,809			$	757,190
Gregg Christensen		January 7, 2022			14,780			$	255,456
Glenn Rand		January 7, 2022			11,517			$	199,059

 

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Pursuant to the terms of the applicable award agreements, our named executive officers may earn up to 100% of the number of performance-based LTIP Units granted, plus deemed dividends on earned units, based on our internal rate of return during the performance period in accordance with the following schedule, with linear interpolation for performance between levels:

 

Internal Rate of Return		Percentage Earned
Less than 6%			—	%
6%			50	%
10% or greater			100	%

None of the performance-based LTIP Units will be earned if our internal rate of return for the performance period is less than 6%, and the maximum number of performance-based LTIP Units will only be earned if our internal rate of return for the performance period is 10% or greater. The earned performance-based LTIP Units will become fully vested on the first anniversary of the last day of the performance period, subject to continued employment with us, or our advisor or its affiliates. During the performance period, performance based LTIP Units (whether vested or unvested) will entitle the holder to receive 10% of the current distribution per unit paid to holders of the CROP Common Units (based on the total number of performance-based LTIP Units granted). At the end of the performance period, if the internal rate of return equals or exceeds the performance threshold (6%), the holder will be entitled to receive an additional grant of LTIP Units equivalent to 90% of distributions that would have been paid on the earned performance-based LTIP Units during the performance period.

Executive Officer Compensation Tables

Summary Compensation Table

The following table sets forth the information required by Item 402 of Regulation S-K promulgated by the SEC. Prior to the effective time of the CRII Merger on May 7, 2021, we had no employees, and all of our executive officers were employed by our advisor and its affiliates. As such, all of our executive officers were compensated by these entities, in part, for their services to us and our subsidiaries and except for grants of equity incentive compensation that we made to certain of our executive officers commencing for the fiscal year 2020, we did not compensate our executive officers prior to May 7, 2021. Therefore, the table below reflect executive compensation that we paid for the partial year commencing May 7, 2021.

 

Name and Principal Position		Year		Salary				Non-Equity Incentive Plan Compensation				Total
Daniel Shaeffer Chief Executive Officer		2021			(1)				(1)				(1)
Gregg Christensen Chief Legal Officer and Secretary		2021		$	375,000			$	315,000			$	690,000
Glenn Rand Chief Operating Officer		2021		$	380,000			$	250,000			$	630,000

 

(1)

Mr. Shaeffer is an officer and employee of our advisor and its affiliates, and is compensated by these entities, in part, for his services to us or our subsidiaries. We do not directly compensate Mr. Shaeffer other than through stock awards. See “Fees and Expenses Payable to Our Advisor and its Affiliates” above for a discussion of the fees paid to our advisor and its affiliates for the year ended December 31, 2021.

Termination and Change in Control Arrangements

Accelerated Vesting of Time-Based LTIP-Units. Pursuant to award agreements with our named executive officers, upon a “change in control” (as defined in the award agreements) or in the event of a termination of the executive officer’s employment by the executive officer for “good reason” (as defined in the award agreements), by the company without “cause” (as defined in the award agreements), or by reason of death or disability, all outstanding time-based LTIP Units will become fully vested.

Accelerated Vesting of Performance-Based LTIP-Units. Pursuant to the terms of award agreements with our named executive officers, upon a “change in control” (as defined in the award agreements) or in the event of a termination of the executive officer’s employment by the executive officer for “good reason” (as defined in the award agreements), by the

 

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company without “cause” (as defined in the award agreements), or by reason of death or disability (each a “Qualified Termination”), after the grant date, but prior to the end of the performance period, the target number of award LTIP Units shall be deemed earned. Upon a Qualified Termination after the end of the performance period, but prior to the vesting of the earned LTIP Units, all unvested earned LTIP Units will become fully vested.

Director Compensation

The following discussion supplements, and supersedes and replaces as appropriate, the disclosure regarding director compensation contained in the prospectus.

Following the CRII Merger, our compensation committee undertook a review of our director compensation and approved a revised compensation structure for our independent directors. The revised compensation structure was approved following a review of peer board compensation data provided FPC.

Annually, with a prorated amount for 2021 based on three quarters, we will pay a cash retainer of $50,000 to each independent director for their service as a director, as well as an equity grant of time-based LTIP Units in the Operating Partnership with a value of approximately $85,000 at the time of grant. The equity will have a one-year vesting schedule. The independent board members serving as chairperson of each of the audit, compensation and conflicts committees will receive an additional annual cash retainer of $15,000, $10,000 and $10,000, respectively.

Previously, each independent director received an annual retainer of $10,000 and we paid independent directors for attending board and committee meetings as follows, (i) $500 in cash for each board meeting attended (including if by teleconference); and (ii) $500 in cash for each committee meeting attended (if at a different time or place than a board meeting and including if by teleconference).

We also reimburse our directors for their travel expenses incurred in connection with their attendance at board and committee meetings.

In addition, in 2020, the special committee of our board of directors (the “Special Committee”) was formed for the purpose of reviewing, considering, investigating, evaluating and, as determined by the Special Committee, negotiating the Mergers or any alternative extraordinary transaction. The members of the Special Committee were Gentry Jensen, R. Brent Hardy and John Lunt, with Gentry Jensen serving as the chairman of the Special Committee. Effective on the closing date of the CRII Merger, R. Brent Hardy and Gentry Jensen resigned from the board of directors. In 2021, we paid each member of our special committee a $70,000 retainer for their service on the special committee.

The table below provides information regarding compensation paid to or earned by our directors during the year ended December 31, 2021 as required by Item 402(k) of Regulation S-K.

 

Name		Fees Earned or Paid in Cash				Stock Awards(1)(2)				Total
Daniel Shaeffer(3)		$	—			$	—			$	—
Chad Christensen(3)		$	—			$	—			$	—
Jonathan Gardner		$	37,500			$	65,074			$	102,574
John Lunt		$	121,750			$	65,074			$	186,524
Philip White		$	37,500			$	65,074			$	102,574
Gentry Jensen(4)		$	73,000			$	—			$	73,000
R. Brent Hardy(4)		$	73,000			$	—			$	73,000

 

(1)	As of December 31, 2021, each of Mr. Gardner, Mr. Lunt and Mr. White held 3,765 unvested LTIP units.

(2)

Represents 3,765 LTIP units granted to each of Messrs. Gardner, Lunt, and White on January 7, 2022 for compensation for the year ended December 31, 2021. The dollar value is computed in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification 718, Compensation—Stock Compensation (“ASC Topic 718”). See Note 11 to our consolidated financial statements included in our financial statements for the year ended December 31, 2021 included herein, for a discussion of our accounting of LTIP units and the assumptions used. The grant date fair value of each award granted on January 7, 2022 was $17.2839.

(3)	Directors who are not independent of us do not receive compensation for their services as a director.

 

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(4)	Effective on the closing date of the CRII Merger, R. Brent Hardy and Gentry Jensen, two of our former independent directors, resigned from the board of directors.

Equity Compensation Plans

As of December 31, 2021, we have granted LTIP Units to certain of our executive officers and registered persons associated with the dealer manager for our public offering. The following table summarizes information, as of December 31, 2021, relating to our equity compensation plans pursuant to which we have granted LTIP units.

 

Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights(1)				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation  plans (2)
Equity compensation plans approved by security holders			—				—				—
Equity compensation plans not approved by security holders (3)			1,099,775				—				—
Total			1,099,775				—				—

 

(1)

Consists entirely of LTIP units that, upon the satisfaction of certain conditions, are convertible into common units, which may then be redeemed for cash, or at our option, an equal number of shares of common stock, subject to certain restrictions. There is no exercise price associated with LTIP units.

(2)	No additional securities have been reserved for issuance.

(3)	Our board of directors has granted awards of LTIP units to our executive officers pursuant to the terms of award agreements and as contemplated in the operating partnership agreement for CROP.

Stock Ownership of Certain Beneficial Owners and Management

The following disclosure supersedes and replaces the disclosure regarding stock ownership of certain beneficial owners and management contained in the prospectus.

The following table sets forth, as of March 31, 2022, the amount of our common stock, CROP’s common units and CROP’s LTIP units beneficially owned (unless otherwise indicated) by (i) any person who is known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock, (ii) our directors, (iii) our executive officers and (iv) all of our directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the SEC and includes securities that a person has the right to acquire within 60 days.

 

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Name and Address of Beneficial Owner(1)		Amount and Nature of Beneficial Ownership  (2)				Percent of all Shares (3)				Percent of all Shares and Common Units  (4)
Daniel Shaeffer			4,283,211	(5)			16.87	%			7.62	%
Chad Christensen			4,283,211	(5)			16.87	%			7.62	%
Gregg Christensen			3,850,024	(5)			15.16	%			6.85	%
Glenn Rand			58,225	(6)				*				*
Enzio Cassinis			50,607	(6)				*				*
Adam Larson			39,069	(6)				*				*
Paul Fredenberg			18,412	(6)				*				*
Susan Hallenberg			50,509	(6)				*				*
Stan Hanks			41,938	(6)				*				*
Eric Marlin			3,567,178	(5)			14.05	%			6.34	%
Jonathan Gardner			10,625	(7)				*				*
John Lunt			8,683	(7)				*				*
Philip White			20,865	(8)				*				*
All directors and executive officers as a group (13 persons)			5,797,682				22.83	%			10.31	%

 

*	Indicates less than 1% of the outstanding common stock.

(1)	The address of each named beneficial owner is 1245 Brickyard Road, Suite 250, Salt Lake City, Utah 84106.

(2)

Ownership consists of shares of our common stock, CROP common units and CROP LTIP units. Subject to certain restrictions, common units may be redeemed for cash, or at our option, an equal number of shares of our common stock. Upon achieving parity with the common units and becoming “redeemable” in accordance with the terms of CROP’s partnership agreement, LTIP units may be redeemed for cash, or at our option, an equal number of shares of our common stock, subject to certain restrictions.

(3)

Based on 25,394,008 shares of our common stock outstanding as of March 14, 2022. In computing the percentage ownership of a person or group, we have assumed that the common units and LTIP units held by that person or persons in the group have been redeemed for shares of our common stock and that those shares are outstanding, but that no common units or LTIP units held by other persons are redeemed for shares of our common stock, notwithstanding that not all of the LTIP units have vested to date.

(4)	Based on 56,242,685 shares of common stock and common units outstanding as of March 14, 2022 on a fully-diluted basis, comprised of 25,394,008 shares of common stock and 30,848,677 shares of common stock issuable upon exchange or conversion of outstanding common units and LTIP units, respectively.

(5)

Includes 93,963, 93,963, 43,850 and 31,339 common units held by each of Messrs. Shaeffer, C. Christensen, G. Christensen and Marlin, respectively, and 687,743, 687,743, 304,669 and 54,334 LTIP units held by each of Messrs. Shaeffer, C. Christensen, G. Christensen and Marlin, respectively. Not all of the LTIP units have vested. Includes 3,481,505 common units held by HT Holdings, an entity owned and controlled by Messrs. Shaeffer, C. Christensen, G. Christensen and Marlin. Also includes 20,000 shares of common stock held by CCA, which is beneficially owned by Messrs. Shaeffer, C. Christensen, G. Christensen and Marlin (through entities they own and control or directly). In addition, Messrs. Shaeffer, C. Christensen and G. Christensen comprise the board of managers of CCA and, as such, may be deemed to have had beneficial ownership of the shares held by CCA.

(6)

Includes 3,633, 18,814, 12,543, 7,840, 3,633 and 3,633 common units held by each of Messrs. Rand, Cassinis, Larson, Fredenberg and Hanks and Ms. Hallenberg, respectively, and 54,592, 31,793, 26,526, 10,572, 38,305 and 46,876 LTIP units held by each of Messrs. Rand, Cassinis, Larson, Fredenberg and Hanks and Ms. Hallenberg, respectively. Not all of the LTIP units have vested.

(7)	Includes 10,265 and 8,683 LTIP units held by Messrs. Gardner and Lunt, respectively. Not all of the LTIP units have vested.

(8)	Includes 10,600 shares of our common stock and 10,265 LTIP units held by Mr. White. Not all of the LTIP units have vested.

Related Party Transactions

The following discussion supplements the disclosure in the prospectus regarding other related party transactions.

Cottonwood Multifamily Opportunity Fund, Inc.

Cottonwood Capital Property Management II, LLC (“CCPMII”), a wholly owned subsidiary of CROP, acts as the sponsor, property manager and asset manager for Cottonwood Multifamily Opportunity Fund, Inc. (“CMOF”). Daniel Shaeffer, Chad Christensen and Gregg Christensen are each officers and directors of CMOF. Daniel Shaeffer and Chad Christensen are our affiliated directors and two of our executive officers. Gregg Christensen is one of our executive officers. As the property manager and asset manager for CMOF, CCPMII receives compensation for the acquisition, management and disposition of CMOF’s assets. Total compensation paid to CCPMII as the asset manager of CMOF for the years ended December 31, 2021 and December 31, 2020 were $0.8 million and $0.8 million, respectively. We did not receive fees from CMOF until our acquisition of CCPMII at the closing of our merger with CROP on May 7, 2021.

 

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In addition, prior to the CRII Merger, CROP had made three investments through separate joint ventures with CMOF as follows: Park Avenue Joint Venture (development project), Broadway Joint Venture (development project) and Block C Joint Venture (land held for development) with a percentage ownership interest by CROP as of December 31, 2021 of 23.56%, 18.84%), and 37.02%, respectively, and the balance of a majority of the remaining interest held indirectly by CMOF. None of the joint ventures had any operating activity or distributions from inception through December 31, 2021.

Compensation to Executive Officers and Affiliated Directors

As of the effective time of the CRII Merger, we employ certain of our executive officers, including Gregg Christensen, the brother of Chad Christensen, our Executive Chairman of the Board. As our Chief Legal Officer, Mr. G. Christensen receives an annual base salary of $375,000 and received a discretionary bonus of $315,000. In addition, Mr. G. Christensen participates in our general welfare plans and we expect him to participate in annual equity incentive awards grants to our officers as to be determined by our compensation committee.

On January 7, 2022, our compensation committee approved grants of LTIP Units from the Operating Partnership for fiscal year 2022 to our executive officers and certain of our employees. The compensation committee approved awards of time-based LTIP Units to our executive officers in an aggregate amount of $1,537,553, including $134,750 to Gregg Christensen, our Chief Legal Officer. Each award will vest approximately one-quarter of the awarded amount on January 1, 2023, 2024, 2025 and 2026.

The compensation committee also approved awards of performance-based LTIP Units to our executive officers in an aggregate target amount of $2,773,749, including $250,250 to Gregg Christensen, our Chief Legal Officer. The actual amount of each performance-based LTIP Unit award will be determined at the conclusion of a three-year performance period and will depend on the internal rate of return as defined in the award agreement. The earned LTIP Units will become fully vested on the first anniversary of the last day of the performance period, subject to continued employment with the advisor or its affiliates.

The number of units granted were valued by reference to our November 30, 2021 NAV per share as announced on December 15, 2021 of $16.9316.

Investment in 33^rd and 13^th - Millcreek

On October 26, 2021, we, through a wholly owned subsidiary of our Operating Partnership, entered a real estate purchase contract with 33rd and 13th, LLC (the “Seller”) to purchase a multifamily development project located on 1.76 acres of land and referred to as 33rd and 13th – Millcreek in Millcreek, Utah (the “Project”) for $7.2 million. The Seller is directly or indirectly owned by the following individuals who are also our executive officers: Daniel Shaeffer (11.3636%), Chad Christensen (22.7273%), Gregg Christensen (11.3636%), Glenn Rand (2.2727%), Stan Hanks (2.2727%), Susan Hallenberg (1.8182%) and Eric Marlin (1.3636%). In addition, an unaffiliated third party owns 36.3636% of the Seller and the balance is owned by non-executive employees of the Company or its affiliates. The purchase of the Project was approved by the conflicts committee. In addition, the purchase price for the Project was established based on an appraisal provided by an independent third-party appraisal firm. On October 29, 2021, we acquired the Project.

Membership Interest Purchase Agreement – Sugar House Commons, LLC

On November 1, 2021, we, through a wholly owned subsidiary of our Operating Partnership, entered a Membership Interest Purchase Agreement to sell all of the membership interests of Sugar House Commons, LLC (“Windsor Court”) directly or indirectly to the following individuals who are also our executive officers: Daniel Shaeffer, Chad Christensen, Gregg Christensen and Eric Marlin for $510,000. The sole asset of Sugar House Commons, LLC is a 0.72-acre parcel of land located in Salt Lake City, Utah valued at $510,000 pursuant to a recent third-party appraisal report. The sale was approved by the conflicts committee of the board of directors, which is comprised entirely of independent directors who have no interest in the transaction. The disposition of Windsor Court closed in the fourth quarter of 2021.

 

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Alpha Mill Investment by Related Party

On November 2, 2021, we sold TIC interests in Alpha Mill totaling 43% to certain unaffiliated third parties through a private offering for $34.8 million. Reed Christensen, the father of Chad Christensen, one of our directors and Executive Chairman, and Gregg Christensen, our Chief Legal Officer and Secretary, is expected to invest. Mr. R. Christensen is expected to purchase his shares net of selling commissions in the amount of $244,444. The net proceeds received by us for the sale of the shares will be the same as what we receive from unaffiliated third parties.

Apt Cowork

Certain of our officers and directors expect to have an ownership interest in APT Cowork, LLC (“APT”), an entity recently formed to engage in the business of converting unused common space in multifamily apartment communities or retail space to revenue producing co-working space.

We, through Cottonwood Capital Management, Inc., a wholly owned subsidiary of CROP (“CCMI”), expect to enter into a Reimbursement and Cost Sharing Agreement with APT pursuant to which CCMI will make certain employees available to APT to the extent they are not otherwise occupied in providing services to us and in exchange APT will reimburse CCMI for APT’s allocable share of all direct and indirect costs related to the employees utilized by APT. Under the terms of the agreement as proposed, for any annual period, the amount of reimbursement pursuant to the agreement will not exceed $120,000. In addition, the agreement is expected to have a one-year term, but may be renewed for an unlimited number of successive one-year terms.

In addition to the Reimbursement and Cost Sharing Agreement, we expect to enter a Master Coworking Space Lease Agreement between APT and our property-owning limited liability company (“landlord”) to provide for the terms on which APT may lease space from landlord at landlord’s properties to operate its business.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this supplement. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those in this discussion as a result of various factors, including but not limited to those discussed under “Risk Factors” in the prospectus and herein.

Overview

Cottonwood Communities, Inc. invests in a diverse portfolio of multifamily apartment communities and multifamily real estate-related assets throughout the United States. We are externally managed by our advisor, CC Advisors III, a wholly owned subsidiary of our sponsor, Cottonwood Communities Advisors, LLC (“CCA”). We were incorporated in Maryland in 2016. We hold all of our assets through our Operating Partnership. Our Operating Partnership was Cottonwood Communities O.P., LP (“CCOP”) prior to the CRII Merger and is CROP after the CRII Merger. We are the sole member of the sole general partner of the Operating Partnership and own general partner interests in the Operating Partnership alongside third party limited partners.

Cottonwood Communities, Inc. is a non-traded perpetual-life, net asset value (“NAV”), real estate investment trust (“REIT”). We qualified as a REIT for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2019. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent we annually distribute all of our net taxable income to stockholders and maintain our qualification as a REIT.

 

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As December 31, 2021, we had received net proceeds of $124.5 million from the sale of common stock and $111.9 million from the sale of Series 2019 Preferred Stock. We have contributed our net proceeds to CROP in exchange for a corresponding number of mirrored OP units. CROP has primarily used the net proceeds to make investments in real estate, multifamily real estate-related assets, and real estate related operations.

As December 31, 2021, we had a portfolio of $2.1 billion in total assets, with 83.3% of our equity value in operating properties, 10.4% in development and 6.3% in real estate-related investments. Refer to the section “Our Investments” below for further description of our portfolio.

COVID-19 Pandemic

One of the most significant risks and uncertainties facing the real estate industry generally continues to be the effect of the ongoing public health crisis of the novel coronavirus disease (COVID-19) pandemic. During the year ended December 31, 2021 we did not experience significant disruptions in our operations from the COVID-19 pandemic; however, we continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including how the pandemic will impact our tenants and multifamily communities.

2021 Activities

The following highlights activities that occurred during the year ended December 31, 2021:

Merged with Cottonwood Residential II, Inc. (“CRII”), Cottonwood Multifamily REIT I, Inc, and Cottonwood Multifamily REIT II, Inc. (collectively, the “Mergers”)

 

•

Acquired $1.5 billion of real estate and real estate-related assets.

 

•

Assumed $622.1 million in property-level financing.

 

•

Assumed $64.1 million in construction loans.

 

•

Assumed $144.0 million in Series 2016 and Series 2017 Preferred Stock.

 

•

Assumed $48.6 million of unsecured promissory notes.

Implemented an NAV-Based Perpetual-Life Strategy

 

•

Restructured the classes of shares we offer.

 

•

Revised our compensation arrangements with our advisor and its affiliates.

 

•

Adopted a monthly NAV policy beginning on May 7, 2021. NAV was $10.8315 per share as of May 7, 2021 compared to $17.2839 as of December 31, 2021.

 

•

Amended our share repurchase program to provide additional liquidity to our stockholders.

 

•

Received shareholder approval to remove liquidation provisions in our charter.

Invested and Disposed of Real Estate Assets

 

•

Invested $81.8 million in seven projects under various stages of development in the Salt Lake City, UT market.

 

•

Contributed $12.4 million of preferred equity to Riverfront, a development in West Sacramento, CA.

 

•

Provided a $13.0 mezzanine loan to Integra Peaks, a development in Reno, NV.

 

•

Acquired an additional 54.9% interest in Melrose Phase II for $10.6 million, increasing our ownership to 79.8%.

 

•

Loaned an additional $1.1 million in B Notes to Dolce Twin Creeks, Phase II prior to being repaid the full $9.3 million of those notes.

 

•

Sold a 43% interest in Alpha Mill for $34.8 million.

 

18

Raised Capital and Managed Financing

 

•

Closed an aggregate of $13.4 million in property-level financing and repaid $24.6 million.

 

•

Drew an additional $52.5 million on construction loans.

 

•

Raised $78.9 million of proceeds from the sale of our Series 2019 Preferred Stock.

 

•

Repaid $5.1 million of unsecured promissory notes.

 

•

Launched this offering of up to $1.0 billion of shares of our common stock on November 4, 2021, raising $2.5 million through the end of the year.

Our Investments

Our portfolio of investments consists of ownership interests or structured investment interests in 33 multifamily apartment communities in 13 states with 9,746 units, including 1,373 units in four multifamily apartment communities in which we have a structured investment interest and another 1,079 units in four multifamily apartment communities under construction. In addition, we have an ownership interest in three parcels of land planned for development.

Information regarding our investments as of December 31, 2021 is as follows:

Stabilized Properties ($ in thousands, except net effective rents)

 

Property Name		Location		Number of Units				Average Unit Size (Sq Ft)				Purchase Date		Purchase Date Property Value				Mortgage Debt Outstanding (1)				Net Effective Rent				Physical Occupancy Rate				Percentage Owned by CROP
3800 Main		Houston, TX			319				831			May 2021		$	58,100			$	35,861			$	1,449				93.7	%			50.0	%
Alpha Mill		Charlotte, NC			267				830			May 2021			69,500				39,044				1,438				95.5	%			57.2	%
Cason Estates		Murfreesboro, TN			262				1,078			May 2021			51,400				33,594				1,299				98.1	%			100.0	%
Cottonwood		Salt Lake City, UT			264				834			May 2021			47,300				21,645				1,216				96.6	%			100.0	%
Cottonwood Bayview		St. Petersburg, FL			309				805			May 2021			95,900				47,205				2,163				98.1	%			71.0	%
Cottonwood One Upland		Boston, MA			262				1,160			March 2020			103,600				20,000				2,460				93.1	%			100.0	%
Cottonwood Reserve		Charlotte, NC			352				1,021			May 2021			77,500				38,314				1,299				94.3	%			91.1	%
Cottonwood Ridgeview		Plano, TX			322				1,156			May 2021			70,000				29,800				1,551				96.6	%			90.5	%
Cottonwood West Palm		West Palm Beach, FL			245				1,122			May 2019			66,900				35,995				1,987				95.1	%			100.0	%
Cottonwood Westside		Atlanta, GA			197				860			May 2021			47,900				25,506				1,558				92.9	%			100.0	%
Enclave on Golden Triangle		Keller, TX			273				1,048			May 2021			51,600				34,000				1,443				96.0	%			98.9	%
Fox Point		Salt Lake City, UT			398				841			May 2021			79,400				46,000				1,234				95.2	%			52.8	%
Heights at Meridian		Durham, NC			339				997			May 2021			79,900				33,750				1,379				96.5	%			100.0	%
Melrose		Nashville, TN			220				951			May 2021			67,400				47,100				1,683				96.4	%			100.0	%
Melrose Phase II		Nashville, TN			139				617			May 2021			40,350				21,500				1,505				92.1	%			79.8	%
Parc Westborough		Boston, MA			249				1,008			May 2021			74,000				38,010				2,076				98.4	%			100.0	%
Pavilions		Albuquerque, NM			240				1,162			May 2021			61,100				37,350				1,669				96.7	%			96.4	%
Raveneaux		Houston, TX			382				1,065			May 2021			57,500				26,675				1,274				92.4	%			97.0	%
Regatta		Houston, TX			490				862			May 2021			48,100				35,367				982				95.7	%			100.0	%
Retreat at Peachtree City		Peachtree City, GA			312				980			May 2021			72,500				48,719				1,530				94.9	%			100.0	%
Scott Mountain		Portland, OR			262				927			May 2021			70,700				48,373				1,537				90.8	%			95.8	%
Stonebriar of Frisco		Frisco, TX			306				963			May 2021			59,200				36,400				1,350				96.1	%			84.2	%
Summer Park		Buford, GA			358				1,064			May 2021			75,500				44,620				1,336				98.0	%			98.7	%
The Marq Highland Park (2)		Tampa, FL			239				999			May 2021			65,700				34,613				1,768				95.0	%			100.0	%
Toscana at Valley Ridge		Lewisville, TX			288				738			May 2021			47,700				30,700				1,113				98.6	%			58.6	%
Total / Weighted-Average					7,294				961					$	1,638,750			$	890,141			$	1,495				95.5	%

 

(1)	Mortgage debt outstanding is shown as if CROP owned 100% of the property.

(2)	Excludes the commercial data in units count and physical occupancy.

 

19

Development Properties ($ in thousands)

 

Property Name		Location		Units to be Built				Average Unit Size (Sq Ft)				Purchase Date		Estimated Completion Date				Investment Amount				Percentage Owned by CROP
Cottonwood on Broadway		Salt Lake City, UT			254				817			May 2021			4Q2022			$	6,020				18.84	% (1)
Park Avenue		Salt Lake City, UT			234				714			May 2021			1Q2022				7,824				23.56	%(1)
Sugarmont		Salt Lake City, UT			341				904			May 2021			2Q2022				67,034				99.00	%(3)
Cottonwood on Highland (2)		Millcreek, UT			250				757			May 2021			1Q2023				8,221				36.93	%
Total					1,079													$	89,099

 

(1)	Cottonwood Multifamily Opportunity Fund, Inc., a fund sponsored by a subsidiary of CROP, indirectly owns a majority of the remaining interest.

(2)	Intended to qualify as a qualified opportunity zone investment. Excludes the commercial data in unit count.

(3)

The one percent interest not owned by us has limited rights, including the right to control on behalf of the joint venture the prosecution and resolution of all litigation, claims, or causes of action that the joint venture has or may have against certain third parties associated with the design and construction of Sugarmont, as well as the obligation to defend any cross claims resulting from these actions.

Land Held for Development ($ in thousands)

 

Property Name		Location		Purchase Date		Investment Amount				Percentage Owned by CROP
Block C (1)		Salt Lake City, UT		May 2021		$	1,946				37.02	%
Jasper		Salt Lake City, UT		June 2021			3,307				100.00	%
3300 Cottonwood		Salt Lake City, UT		October 2021			7,521				100.00	%
Total						$	12,774

 

(1)	Cottonwood Multifamily Opportunity Fund, Inc., a fund sponsored by a subsidiary of CROP, indirectly owns a majority of the remaining interest.

Structured Investments ($ in thousands)

 

Property Name		Location				Investment Type				Date of Initial Investment				Number of Units				Funding Commitment				Amount Funded to Date
Lector85			Ybor City, FL				Preferred Equity				August 2019				254			$	9,900			$	9,900
Vernon Boulevard			Queens, NY				Preferred Equity				July 2020				534				15,000				15,000
Riverfront			West Sacramento, CA				Preferred Equity				November 2020				285				15,092				15,092
Integra Peaks at Damonte			Reno, NV				Mezzanine Loan				June 2021				300				13,000				13,000
Total															1,373			$	52,992			$	52,992

 

20

Results of Operations

Our results of operations for the years ended December 31, 2021 and 2020 are as follows ($ in thousands, except share and per share data):

 

		Year Ended December 31,
		2021				2020				Change
Revenues
Rental and other property revenues		$	73,129			$	10,749			$	62,380
Property management revenues			8,597				—				8,597
Other revenues			1,455				576				879
Total revenues			83,181				11,325				71,856
Operating expenses
Property operations expense			27,759				4,570				23,189
Property management expense			11,302				—				11,302
Reimbursable operating expenses			331				1,030				(699	)
Asset management fee			8,052				2,799				5,253
Performance participation allocation			51,761				—				51,761
Depreciation and amortization			63,397				6,966				56,431
General and administrative expenses			9,880				3,354				6,526
Total operating expenses			172,482				18,719				153,763
Loss from operations			(89,301	)			(7,394	)			(81,907	)
Equity in earnings (losses) of unconsolidated real estate entities			(533	)			2,113				(2,646	)
Interest income			207				198				9
Interest expense			(26,954	)			(3,665	)			(23,289	)
Gain on sale of real estate assets			10,912				—				10,912
Other (expense) income			2				197				(195	)
Loss before income taxes			(105,667	)			(8,551	)			(97,116	)
Income tax expense			(1,238	)			—				(1,238	)
Net loss			(106,905	)			(8,551	)			(98,354	)
Net loss attributable to noncontrolling interests:
Limited partners			58,923				—				58,923
Partially owned entities			4,066				—				4,066
Net loss attributable to common stockholders		$	(43,916	)		$	(8,551	)		$	(35,365	)
Weighted-average common shares outstanding			17,603,981				10,781,487				6,822,494
Net loss per common share - basic and diluted		$	(2.49	)		$	(0.79	)		$	(1.70	)

Rental and Other Property Revenues, Property Operations Expense

Due to the Mergers in 2021 our rental and other property revenues and property operating expenses for the years ended December 31, 2021 and 2020 are not comparable. The assets acquired with the Mergers brought additional rental and property revenues of $59.6 million corresponding with additional property operation expenses of $22.3 million. A full year of activity for One Upland, acquired in March 2020, provided $2.1 million of additional revenue and $872.0 thousand of additional operating expenses in 2021 when compared to 2020.

Property Management Revenues and Property Operations Expense

The property management revenues of $8.6 million and property operations expense of $11.3 million are from CRII’s property management business acquired with the Mergers in 2021.

 

21

Asset Management Fee

Asset management fees prior to the advisory agreement restructuring on May 7, 2021 were 1.25% of gross book value. The current asset management fee is the lesser of 0.0625% gross asset value or 0.125% of net asset value each month (0.75% and 1.5% annually), with values updated monthly. The increase in asset management fees of $5.3 million is due to the increase in assets acquired through the Mergers and the increase in value of the portfolio from May to December as well as the revised fee structure. From May 7, 2021 through December 31, 2021, we incurred asset management fees of $6.9 million.

Performance Participation Allocation

Upon the CRII merger in May and the admission of CROP as our Operating Partnership, our advisor received a special limited partner interest in CROP which was subsequently transferred to an affiliate of our advisor. This special limited partnership interest entitles the holder to receive an allocation of CROP’s total return to its capital account of 12.5% over a 5% hurdle with a catch up, so long as the advisory agreement has not been terminated. The performance participation allocation is measured annually and any amount earned by the Special Limited Partner becomes payable as of December 31 of the applicable year. The performance participation allocation of $51.8 million is due to the growth of our NAV from May to December 2021.

Depreciation and Amortization

Due to the Mergers in 2021 depreciation and amortization for the years ended December 31, 2021 and 2020 are not comparable. The assets acquired with the Mergers brought additional depreciation and amortization of $57.3 million. A full year of ownership in One Upland provided additional depreciation in 2021 when compared to 2020. These increases were offset by $2.3 million of in-place leases recorded with the acquisition of One Upland in March 2020 that were fully amortized that year.

General and Administrative Expenses

General and administrative expenses increased $6.5 million for the years ended December 31, 2021 and 2020 primarily due to the Mergers and resulting increase in various corporate level expenses related to the increased size of the Company. Merger costs, professional services, share-based compensation, legal, and insurance expenses all increased during the year ended December 31, 2021 when compared to the corresponding period in 2020.

Equity in Earnings/Losses of Unconsolidated Real Estate Entities

Due to the Mergers in 2021 equity in earnings for the years ended December 31, 2021 and 2020 are not comparable. Equity method investments acquired with the Mergers brought $6.6 million of equity in losses, primarily due to our share of depreciation and amortization in those investments. This was partially offset by increased equity in earnings from additional preferred equity investments.

Interest Expense

Due to the Mergers in 2021 interest expense for the years ended December 31, 2021 and 2020 is not comparable. Interest from property-level debt, Series 2016 Preferred Stock, Series 2017 Preferred Stock, and unsecured promissory notes acquired with the Mergers totaled $18.8 million. We also incurred additional interest expense of $4.7 million from additional Series 2019 Preferred Stock raised during the year ended December 31, 2021. This was partially offset by a reduction in interest expense from non-merger properties as a result of lower interest rates on variable rate debt.

Gain on Sale of Real Estate Assets

The $10.9 million gain on sale of real estate assets is primarily from the sale of a 43% interest in Alpha Mill.

 

22

Policies Regarding Operating Expenses

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 (the 2%/25% Limitation), unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors. For the four consecutive quarters ended December 31, 2021, our total operating expenses exceeded the 2%/25% Limitation.

Based upon a review of unusual and non-recurring factors, including but not limited to outsized performance during this period resulting in increased performance participation allocation expense and the costs of the Mergers, our independent directors determined that the excess expenses were justified.

Liquidity and Capital Resources

Our principal demands for funds during the short and long-term are and will be for the acquisition of multifamily apartment communities and investments in multifamily real estate-related assets; operating expenses, including the management fee we pay to our advisor and the performance participation allocation, capital expenditures and general and administrative expenses; payments under debt obligations; repurchases of common and preferred stock; and payments of distributions to stockholders. We will obtain the capital required to purchase multifamily apartment communities and make investments in multifamily real estate-related assets and conduct our operations from the proceeds of the Private Offering, this offering from our credit facilities, other secured or unsecured financings from banks and other lenders, and from any undistributed funds from our operations, all of which may be adversely affected by the impact COVID-19.

We intend to strengthen our capital and liquidity positions by continuing to focus on our core fundamentals at the property level. Factors which could increase or decrease our future liquidity include but are not limited to operating performance of the properties owned by our joint ventures, including the impact of COVID-19 on the properties owned by the joint ventures, volatility in interest rates, and the satisfaction of REIT dividend requirements.

As of December 31, 2021, we have $213.0 million of fixed rate debt and $543.7 million of variable rate debt, which includes $116.7 million of construction loans. We have interest rate cap hedging instruments on $407.0 million, or 74.9% of our variable rate debt. In addition, CROP has issued unsecured promissory notes in several private placement offerings, in an aggregate amount of $43.5 million as of December 31, 2021.

We have various credit facilities in place that provide us with additional liquidity. Our JP Morgan Revolving Credit Facility has a variable rate and is secured by Cottonwood One Upland. We may obtain advances secured against One Upland up to $74.9 million on the JP Morgan Revolving Credit Facility, as well as finance other future acquisitions up to $125.0 million in total revolving debt capacity. We can draw upon or pay down the JP Morgan Revolving Credit Facility at our discretion, subject to loan-to-value requirements, debt service coverage ratios and other covenants and restrictions as set forth in the loan documents. As of December 31, 2021, we had advances of $20.0 million on the JP Morgan Revolving Credit Facility. Additionally, we have three other credit facilities through Fannie Mae that may provide additional liquidity if necessary, as long as we maintain certain loan-to-value ratios and other requirements as set forth in the loan documents.

We must redeem the Series 2019 Preferred Stock for cash at a redemption price per share equal to $10.00 plus any accrued and unpaid dividends, to the extent there are funds legally available, on December 31, 2023. This date may be extended by two one-year extension options. In addition, we must redeem the Series 2016 Preferred Stock and Series 2017 Preferred Stock for cash at a redemption price equal to $10.00 per share plus any accrued and unpaid dividends to the extent there are any funds legally available, on their respective redemption dates. The initial redemption date was January 31, 2021 for the Series 2016 Preferred Stock and it was extended to January 31, 2023. The Series 2017 Preferred Stock was redeemed on February 1, 2022. Our board of directors has approved the full redemption of the Series 2016 Preferred Stock which we expect to occur by April 30, 2022.

 

23

In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to pay offering costs in connection with the Private Offering and this offering, as well as make certain payments to our advisor pursuant to the terms of our advisory management agreement.

To maintain our qualification as a REIT, we will be required to make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (computed without regard to the dividends-paid deduction and excluding net capital gain). Our board of directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board of directors deems relevant.

Material Cash Requirements

Our expected material cash requirements for the twelve months ended December 31, 2022 and thereafter are comprised of (i) contractually obligated expenditures; (ii) other required expenditures; and (iii) capital expenditures.

Contractually Obligated Expenditures

The following table summarizes our debt payments (excluding extension options), redeemable preferred stock (excluding extension options, deferred financing costs and offering costs), interest payment obligations (excluding debt premiums and discounts, unused fees and deferred financing costs) and obligations under non-cancelable operating leases (excluding renewal options) as of December 31, 2021 ($ in thousands):

 

		Twelve Months Ended December 31, 2022				Thereafter
Debt repayments (1)		$	82,170			$	718,060
Preferred Stock redemptions			142,582				111,863
Interest payments			32,630				113,443
Operating leases			217				147
		$	257,599			$	943,513

 

(1)	Includes mortgages notes, revolving credit facilities, construction loans and unsecured promissory notes. Scheduled interest payments included in these amounts for variable rate loans are presented using rates (including the impact of interest rate swaps) as of December 31, 2021.

Refer to subsequent events below for information on refinances, redemptions, or exercised extension options after December 31, 2021.

Other Required Expenditures

We incur certain other required expenditures in the ordinary course of business, such as utilities, insurance, real estate taxes, third-party management fees, certain capital expenditures related to the maintenance of our properties, and corporate level expenses. Additionally, we carry comprehensive insurance to protect our properties against various losses. The amount of insurance expense that we incur depends on the assessed value of our properties, prevailing market rates, changes in risk. Furthermore, we incur real estate taxes in the various jurisdictions in which we operate. The amount of real estate taxes that we incur depends on changes in the assessed value of our properties, changes in tax rates assessed by certain jurisdictions.

In order to continue to qualify as a REIT for federal income tax purposes, we must meet several organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We intend to continue to satisfy this requirement and maintain our REIT status.

 

24

The following table shows distributions paid and cash flow provided by (used in) operating activities during the years ended December 31, 2021 and 2020 ($ in thousands):

 

		December 31,
		2021				2020
Distributions paid in cash - common stockholders		$	9,482			$	4,145
Distributions paid in cash to noncontrolling interests - limited partners			10,591				—
Distributions of DRP (reinvested)			141				1,107
Total distributions (1)		$	20,214			$	5,252
Source of distributions (2)
Paid from cash flows provided by operations		$	11,044			$	572
Paid from revolving credit facility			5,000				—
Paid from offering proceeds			4,029				3,573
Offering proceeds from issuance of common stock pursuant to the DRP			141				1,107
Total sources		$	20,214			$	5,252
Net cash provided by (used in) operating activities (2)		$	5,424			$	(2,816	)

 

(1)	Distributions are paid on a monthly basis. In general, distributions for all record dates of a given month are paid on or about the fifth business day of the following month.

(2)

The allocation of total sources are calculated on a quarterly basis. Generally, for purposes of determining the source of our distributions paid, we assume first that we use positive cash flow from operating activities from the relevant or prior quarter to fund distribution payments. As such, amounts reflected above as distributions paid from cash flows provided by operations may be from prior quarters which had positive cash flow from operations.

For the year ended December 31, 2021, distributions declared to common stockholders and limited partners were $9.5 million and $11.0 million, respectively. For the year ended December 31, 2021, we paid cash distributions to common stockholders of $9.5 million and limited partners of $10.6 million. For the year ended December 31, 2021, our net loss was $106.9 million. Cash flows provided by operating activities for the year ended December 31, 2021 was $5.4 million.

Capital Expenditures

We deployed $84.7 million during the year ended December 31, 2021 for capital expenditures, funded by debt, proceeds from our offerings and sale of assets, joint venture partners, and property operations. The properties in which we deployed the most capital during the year ended December 31, 2021 are listed separately and the capital expenditures made on all other properties are aggregated in “All other properties” below ($ in thousands):

 

		2021								2022
Property Name, Location		Total Capital Deployed				CCI/CROP Funded				Capital Budgeted				CCI/CROP Funded
Cottonwood on Broadway		$	19,273			$	—			$	17,333			$	—
Sugarmont			17,622				—				10,000				10,000
Park Avenue			15,676				1,907				7,480				1,305
Cottonwood on Highland			16,181				—				27,049				739
All other properties			15,939				10,767				1,005				1,005
		$	84,691			$	12,674			$	62,867			$	13,049

 

25

Cash Flows

The net change in our cash and cash equivalents and restricted cash is summarized as follows ($ in thousands):

 

		For the Year Ended December 31,
		2021				2020
Net cash provided by (used in) operating activities		$	5,424			$	(2,816	)
Net cash used in investing activities			(44,297	)			(83,284	)
Net cash provided by financing activities			79,630				42,991
Net increase (decrease) in cash and cash equivalents and restricted cash			40,757				(43,109	)

Net cash flows provided by operating activities were $5.4 million during the year ended December 31, 2021, primarily as a result of the Mergers which resulted in increased tenant receipts and property management fees. Net cash inflows were also due to income from structured investments partially offset by transaction costs associated with the Mergers, operating expenses and payment of Preferred Stock interest. Cash flows used in operating activities for the same period in 2020 were $2.8 million, primarily as a result of transaction costs associated with the Mergers and increased operating costs offset by tenant receipts, interest income received on the Dolce B-Note, and interest received for cash on deposit combined with the deferral of payment on accounts payable, accrued expenses, and other liabilities.

Cash flows used in investing activities were $44.3 million during the year ended December 31, 2021, primarily due to investments in development projects and capital improvements, funding of preferred equity at Riverfront, purchase of additional interests in Melrose Phase II, and draws on the Integra Peaks mezzanine loan, largely offset by the cash acquired in connection with the CRII Merger, repayment on the Dolce B-Notes, and proceeds from the sale of an interest in Alpha Mill. Cash flows used in investing activities were $83.3 million for the same period in 2020 due to our purchase of Cottonwood One Upland, funding preferred equity investments in Vernon, Lector85, and Riverfront and the Dolce B-Note, as well as cash invested in capital improvements.

Cash flows provided by financing activities were $79.6 million during the year ended December 31, 2021, as a result of net proceeds we received from the issuance of Series 2019 Preferred Stock, proceeds from construction loans and refinances, offset partially by distributions paid to both common stockholders and noncontrolling interest holders, net repayments made on our JP Morgan Revolving Credit Facility, and repurchases of preferred stock, common stock and OP Units. Cash flows provided by financing activities were $43.0 million for the same period in 2020, driven mainly by the net proceeds we received from the issuance of our common stock and our Series 2019 Preferred Stock, offset partially by distributions paid to common stockholders and net repayments made on our JP Morgan Credit Facility.

Critical Accounting Estimates

A critical accounting estimate is one that is both important to our financial condition and results of operations and that involves some degree of uncertainty. The preceding discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may differ from these estimates and assumptions.

We believe that the estimates and assumptions summarized below are most important to the portrayal of our financial condition and results of operations because they involve a significant level of estimation uncertainty and they have had, or are reasonably likely to have, a material impact on our financial condition or results of operations. For a discussion of all of our significant accounting policies, see Note 2 of the consolidated financial statements in our financial statements included herein.

 

26

Investments in Real Estate

In accordance with Accounting Standards Codification Topic 805, Business Combinations, we determine whether an acquisition qualifies as a business combination or as an asset acquisition. We account for business combinations by recognizing assets acquired and liabilities assumed at their fair values as of the acquisition date. We account for asset acquisitions by allocating the total cost to the individual assets acquired and liabilities assumed on a relative fair value basis. Acquired assets and liabilities include land, building, furniture, fixtures and equipment, identified intangible assets, and debt.

We may use significant subjective inputs in determining fair values. The methods we use are similar to those used by independent appraisers, and include using replacement cost estimates less depreciation, discounted cash flows, market comparisons, and direct capitalization of net operating income. The fair value of debt is a present value application which discounts the difference between the remaining contractual and market debt service payments at an equity discount rate. The equity discount rate is an estimated levered return and is calculated using the LTV, unlevered property discount rate, and a market rate.

Subsequent Events

The following events occurred subsequent to December 31, 2021:

Series 2016 Preferred Stock Extension

In January 2022, we extended our Series 2016 Preferred Stock redemption date to the maximum extension date of January 31, 2023. On March 22, 2022, our board of directors approved the full redemption of our Series 2016 Preferred Stock which we expect to occur before the end of April 2022. We will continue to pay the extension dividend rate of 7.0% until the earlier of January 31, 2023 or the full redemption of the Series 2016 Preferred Stock. We intend to use funds from our Follow-on Offering, proceeds from financing activities discussed below, and our revolving credit facility to redeem the Series 2016 Preferred Stock.

Series 2017 Preferred Stock Payoff

Our Series 2017 Preferred Stock was fully redeemed on February 1, 2022 for approximately $2.6 million.

Financing Activity

On January 28, 2022, we refinanced Parc Westborough and placed it on our revolving credit facility, drawing an additional $1.7 million on that line. We also refinanced Sugarmont’s construction loan to a permanent $105.0 million mortgage, receiving net proceeds of $43.8 million.

In March 2022, we refinanced seven properties through individual, uncrossed loans with one lender for $362.2 million, receiving net proceeds of $111.7 million. All of the loans are on a 5 year term and carry a 3.4% fixed interest rate. Two of the properties are unconsolidated.

Performance Participation Allocation Payment

On January 31, 2021, the accrued $51.8 million performance participation allocation was paid in cash.

Loss of Third-Party Management Contracts

On February 14, 2022, a portfolio of 12 properties which we managed for a third-party was sold to another group, resulting in the loss of approximately 3,500 units under management.

 

27

Status of the Private Offering

We sold 1,547,184 shares of Series 2019 Preferred Stock for aggregate gross offering proceeds of $15.4 million. In connection with the sale of these shares in the Private Offering, the Company paid aggregate selling commissions of $1.0 million and placement fees of $0.3 million. The offering was fully subscribed in March 2022.

Status of the Follow-on Offering

We sold the following through our Follow-on Offering ($ in thousands):

 

		Class
		T				I				A				TX				Total
Shares issued through Primary Offering			1,394,087				442,888				—				—				1,836,975
Shares issued through DRP Offering			19				456				26,120				—				26,595
Gross Proceeds		$	25,000			$	7,888			$	458			$	—			$	33,346

Distributions Declared - Common Stock

We declared the following monthly distributions after December 31, 2021:

 

Shareholder Record Date		Monthly Rate				Annually
January 31, 2022		$	0.05833333			$	0.70
February 28, 2022		$	0.05916667			$	0.71
March 31, 2022		$	0.05916667			$	0.71

Grant of LTIP Unit Awards

On January 7, 2022, grants of 105,826 time-based LTIP Units and 170,731 performance-based LTIP units were issued to executives, directors and employees. An additional grant of 14,7554 time-based LTIP units were issued to directors on February 7, 2022.

Equity Incentive Plan

On March 22, 2022, our board of directors approved the Cottonwood Communities, Inc. 2022 Equity Incentive Plan (the “Plan”) to attract, retain and reward certain employees, consultants and/or directors for services they perform on behalf of the Company. The plan allows for the issuance of a maximum of 300,000 shares of common stock issued through restricted stock units or restricted stock awards. Awards may (but need not) be subject to service or performance vesting conditions. Upon adoption of the Plan, the compensation committee of the board of directors approved an aggregate grant of 20,038 restricted stock units with a four-year vesting schedule. We do not intend to issue awards to executive officers or directors pursuant to the Plan.

Experts

The consolidated financial statements of Cottonwood Communities, Inc. as of December 31, 2021 and 2020, and for each of the years in the two-year period ended December 31, 2021, have been included herein in reliance upon the report of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

 

28

Index to Consolidated Financial Statements

 

Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID: 185)			F - 2
Consolidated Balance Sheets as of December 31, 2021 and 2020			F - 3
Consolidated Statements of Operations for the Years Ended December  31, 2021 and 2020			F - 4
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2021 and 2020			F - 5
Consolidated Statements of Cash Flows for the Years Ended December  31, 2021 and 2020			F - 6
Notes to Consolidated Financial Statements			F - 8
Financial Statement Schedule
Schedule III - Real Estate and Accumulated Depreciation			F - 31

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

 

F - 1

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Cottonwood Communities, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Cottonwood Communities, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes and financial statement schedule III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting 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.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2016.

Denver, Colorado

March 29, 2022

 

F - 2

Cottonwood Communities, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share data)

 

		December 31,
		2021				2020
Assets
Real estate assets, net		$	1,408,483			$	161,092
Investments in unconsolidated real estate entities			190,733				30,000
Investments in real-estate related loans			13,035				8,255
Cash and cash equivalents			27,169				4,362
Restricted cash			18,221				271
Other assets			29,249				825
Total assets		$	1,686,890			$	204,805
Liabilities, Equity, and Noncontrolling Interests
Liabilities
Mortgage notes and revolving credit facility, net		$	642,107			$	70,320
Construction loans, net			116,656				—
Preferred stock, net			245,268				29,825
Unsecured promissory notes, net			43,543				—
Performance participation allocation due to affiliate			51,761				—
Accounts payable, accrued expenses and other liabilities			46,886				2,577
Total liabilities			1,146,221				102,722
Commitments and contingencies (Note 12)
Equity and noncontrolling interests
Stockholders’ equity
Common stock, Class I shares, $0.01 par value per share, 275,000,000 shares authorized; 151,286 shares issued and outstanding at December 31, 2021. No Class I shares were outstanding at December 31, 2020.			2				—
Common stock, Class A shares, $0.01 par value per share, 125,000,000 authorized; 23,445,174 and 12,214,771 shares issued and outstanding as of December 31, 2021 and 2020, respectively.			234				122
Common stock, Class TX shares, $0.01 par value per share, 50,000,000 authorized; 17,520 and 17,518 shares issued and outstanding as of December 31, 2021 and 2020, respectively.			—				—
Additional paid-in capital			252,035				121,677
Accumulated distributions			(17,273	)			(7,768	)
Accumulated deficit			(55,864	)			(11,948	)
Total stockholders’ equity			179,134				102,083
Noncontrolling interests
Limited partners			291,258				—
Partially owned entities			70,277				—
Total noncontrolling interests			361,535				—
Total equity and noncontrolling interests			540,669				102,083
Total liabilities, equity and noncontrolling interests		$	1,686,890			$	204,805

See accompanying notes to consolidated financial statements

 

F - 3

Cottonwood Communities, Inc.

Consolidated Statements of Operations

(in thousands, except share and per share data)

 

		Year Ended December 31,
		2021				2020
Revenues
Rental and other property revenues		$	73,129			$	10,749
Property management revenues			8,597				—
Other revenues			1,455				576
Total revenues			83,181				11,325
Operating expenses
Property operations expense			27,759				4,570
Property management expense			11,302				—
Reimbursable operating expenses			331				1,030
Asset management fee			8,052				2,799
Performance participation allocation			51,761				—
Depreciation and amortization			63,397				6,966
General and administrative expenses			9,880				3,354
Total operating expenses			172,482				18,719
Loss from operations			(89,301	)			(7,394	)
Equity in earnings (losses) of unconsolidated real estate entities			(533	)			2,113
Interest income			207				198
Interest expense			(26,954	)			(3,665	)
Gain on sale of real estate assets			10,912				—
Other (expense) income			2				197
Loss before income taxes			(105,667	)			(8,551	)
Income tax expense			(1,238	)			—
Net loss			(106,905	)			(8,551	)
Net loss attributable to noncontrolling interests:
Limited partners			58,923				—
Partially owned entities			4,066				—
Net loss attributable to common stockholders		$	(43,916	)		$	(8,551	)
Weighted-average common shares outstanding			17,603,981				10,781,487
Net loss per common share - basic and diluted		$	(2.49	)		$	(0.79	)

See accompanying notes to consolidated financial statements

 

F - 4

Cottonwood Communities, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

 

		Cottonwood Communities, Inc. Stockholders’ Equity																																Noncontrolling interests
						Par Value												Additional Paid-In Capital				Accumulated Distributions				Accumulated Deficit				Total Stockholders’ Equity				Limited Partners				Partially Owned Entities				Total Equity and Noncontrolling Interests
		Shares				Common Stock Class I				Common Stock Class A				Common Stock Class TX
Balance at December 31, 2019			8,851,759			$	—			$	89			$	—			$	87,974			$	(2,370	)		$	(3,397	)		$	82,296			$	—			$	—			$	82,296
Issuance of common stock			3,301,213				—				33				—				32,795				—				—				32,828				—				—				32,828
Distribution reinvestment			110,624				—				1				—				1,105				—				—				1,106				—				—				1,106
Common stock repurchased			(31,307	)			—				(1	)			—				(268	)			—				—				(269	)			—				—				(269	)
Share-based compensation			—				—				—				—				71				—				—				71				—				—				71
Distributions to investors			—				—				—				—				—				(5,398	)			—				(5,398	)			—				—				(5,398	)
Net loss			—				—				—				—				—				—				(8,551	)			(8,551	)			—				—				(8,551	)
Balance at December 31, 2020			12,232,289				—				122				—				121,677				(7,768	)			(11,948	)			102,083				—				—				102,083
Issuance of common stock			151,286				2				—				—				2,532				—				—				2,534				—				—				2,534
Offering costs			—				—				—				—				(1,705	)			—				—				(1,705	)			—				—				(1,705	)
Distribution reinvestment			8,662				—				—				—				141				—				—				141				—				—				141
Common stock/OP Units repurchased			(203,537	)			—				(2	)			—				(2,624	)			—				—				(2,626	)			(2,386	)			—				(5,012	)
Contributions from noncontrolling interests			—				—				—				—				—				—				—				—				—				869				869
Acquisition of noncontrolling interests			—				—				—				—				—				—				—				—				(1,271	)			(280	)			(1,551	)
CRII Merger			430,070				—				4				—				4,654				—				—				4,658				363,278				218,380				586,316
CMRI Merger			5,762,253				—				58				—				70,036				—				—				70,094				—				(79,447	)			(9,353	)
CMRII Merger			5,232,957				—				52				—				57,324				—				—				57,376				—				(63,752	)			(6,376	)
Share-based compensation			—				—				—				—				—				—				—				—				1,570				—				1,570
Distributions to investors			—				—				—				—				—				(9,505	)			—				(9,505	)			(11,010	)			(1,427	)			(21,942	)
Net loss			—				—				—				—				—				—				(43,916	)			(43,916	)			(58,923	)			(4,066	)			(106,905	)
Balance at December 31, 2021			23,613,980			$	2			$	234			$	—			$	252,035			$	(17,273	)		$	(55,864	)		$	179,134			$	291,258			$	70,277			$	540,669

See accompanying notes to consolidated financial statements

 

F - 5