Commercial Loans Blog

Pretty Cool Syndicate That I Am Assembling

Posted by George Blackburne on Mon, Feb 11, 2019

Fairfield InnThis month I am syndicating a fantastic deal.  Please do not interpret my enthusiasm as any sort of guaranty of success or safety; however, let's face it.  Some investment deals are better than others.  

I predict that this syndication will be the single best investment offering we have ever made in almost 40 years.  The projected return to our accredited investors, over seven years, is projected to be 25.4% annually.  Here is a link to the offering.

 

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Here is what is happening.  A very experienced hotel builder is building a Marriott Fairfield Inn in Roseburg, Oregon.  The Fairfield Inn is a very popular hotel franchise, with over 900 of these hotels worldwide.  The proposed hotel is adjacent to Interstate 5, which runs from the Canadian border to the Mexican border, through central Washington, central Oregon, and Central California.

The reason this opportunity is so promising is because our builder-developer has built sixty (60!!) hotels over the past 23 years.  Wow.

This is also a low-leverage investment.  The construction and takeout loan will only cover 60% of the total cost of the project.  This helps to assure that there will be plenty of cash flow left over after making the mortgage payment.  Obviously numbers like this assume that the hotel gets built on-time and on-budget, and that the hotel will meet its projections for occupancy and average daily rate.

 

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If this was a newbie builder, the construction cost issue would be a source of serious concern; but after building sixty hotels, most of them flagged hotels, it's reasonable to believe that our builder knows what he is doing.  In addition, Fairfield Inns are proven franchises with large followings.  For example, when I used to travel with Culver Military Academy's fencing team, we always stayed in Fairfield Inn's.  They were everywhere.  

In the old days, banks would provide construction loans of 80% loan-to-cost to finance flagged hotels.  Then the Great Recession hit, and commercial construction lenders got slaughtered.  Nowadays, most banks limit their commercial construction loans on hotels to just 60% of cost.

Since the total cost of the project is around $15 million, this means that the developer has to raise almost $6 million in equity.  Our investors will be contributing about $2 million of this required equity.

 

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The 25.4% deal is about half-subscribed as of today.  If you happen to be an accredited investor, and the idea of earning 25.4% annually sounds interesting, please contact Angela Vannucci at 916-338-3232.  You may be reassured to know that Blackburne & Sons has been in business since 1980.

The above deal will soon be sold out, and we will be looking for our next equity investment deal.  Please be on the look-out for deals.

We are looking for development deals, and our maximum equity investment is $2 million.  We want the developer to have plenty of skin in the game, so we really don't want to contribute more than 40% of the required equity.  We like the four major food groups - multifamily, office, retail, and industrial - plus self storage and hospitality. 

 

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If you have a potential deal, please do NOT call or send me some huge package.  Just please send me three sentences.  "I am building a 46-unit apartment building in Des Moines, with a total cost of $12 million.  The bank will only make an $8 million construction loan.  I am short $1.6 million in equity."

Please make the subject line of this email to be exactly, "Equity Contribution Request".  The reason it has to be exact is that I get 1,200+ emails per day.  Please write to me at george@blackburne.com.

 

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Topics: development equity

Commercial Loans, Equity, and the Difference Between Rooms and Keys

Posted by George Blackburne on Wed, Jan 30, 2019

Fairfield InnToday we are going to talk about equity, a concept that may be a little confusing to you.  Of course you understand the concept of the equity in your house, but there is far more to the concept of equity.

Those of you who have been following Blackburne & Sons Realty Capital Corporation for a long time probably remember when the company used to be called Blackburne & Brown Mortgage Company, Inc.  When my sons joined the company, we also changed the second half of the company name to Realty Capital Corporation.

 

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As it pertains to real estate, capital includes debt, equity, and certain hybrids of the two, like mezzanine loans and preferred equity.  When we changed the second half of the company name to Realty Capital Corporation, we were sending a signal that we were now providing more than just mortgage loans.  We were now also providing equity.

Right now the staff of Blackburne & Sons is mobilizing to raise $2 million in development equity for the developer of a hotel in Oregon.  The hotel will cost $15 million, and the construction lender will only go 60% of cost.  This means that the developer will have to raise a whopping $6 million in equity - 40% of the total cost.  Yikes!  

Such is life in the post-Great-Recession era in which we live.  Banks got crushed in construction lending during the Great Recession, so they now require developers to put up vast amounts of equity.

 

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Okay, so what is equity?  It depends on the context.  In everyday life, it means the difference between value of your house and the total amount of the mortgages.  "I have $150,000 in equity in my house."

In the context of the capital markets, equities means investments in stocks, as opposed to investments in bonds, gold, or other commodities.

In the context of the development of real estate, equity refers to how much money the developer has contributed to the project.  It consists of the actual cost of the land, any legal fees the developer spent in changing the zoning, any property appreciation resulting form that zoning change, any additional value created when the developer successfully assembled several adjoining parcels into a prime building site (called assemblage); any prepaid expenses, like toxic reports, title reports, and surveys; any pre-construction costs, such as clearing the land or demolishing structures; and any cash that the developer is prepared to bring to the construction loan closing.

 

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Equity is often called the developer's skin in the game.  It is a measure of how much of the developer's blood will the banker find pooled on the doorstep, if the bank is forced to foreclose.  

What about any appreciation in the value of the land?  The developer bought the land years ago and since then the land has appreciated by 75%.  Nope.  Banks will no longer consider that appreciation, unless it has been almost a decade.  Bank regulators now forbid it, and banks make 98% of all construction loans.   Thank you, Mr. Great Recession.

 

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Here is how we define equity to our own private investors:

"An equity investment is not a loan.  There is no promise to pay, there is no interest rate, and there are no monthly payments.  Instead, an equity investment is the purchase of a share of the ownership of the business, in this case a very popular hotel franchise called the Fairfield Inn and Suites...

"The reward to the equity investor for the success of this construction venture is a share of the distributed positive cash flow, a share of the principal reduction on the underlying first mortgage, and a share of the net sales proceeds when the property is sold.."

 

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Almost done.  In the context of a hotel, what is the difference between rooms and keys?  In the days before hotels with suites, it was customary to refer to an 80-room hotel.

But many 80-unit hotels these days have 120 rooms because the suites have a sitting room, where a lady businesswoman might meet a client, and a separate bedroom, where mom and dad might quietly kiss at night, while the kids slept on a fold-out bed in the other room.  The unit still only has one entrance, and therefore is has become commonplace to refer to these hotel units as keys.

 

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Development equity historically offers yields to private investors much higher than first mortgage investments.  Are you an accredited investor?  Please contact Angela Vannucci at 916-338-3232.  Blackburne & Sons - Since 1980.

 

Topics: development equity