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Exhibit B -- Specifics of the Loan
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California Residents Only Loan
Number: 1697 |
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PROPERTY Project: DISTRIBUTION WAY WAREHOUSE CONDO Property address: 1351 Distribution Way, Unit 7, Vista, CA Description: The subject property consists of a one-story, concrete tilt up industrial condo of 2,786SF. EQUITY ANALYSIS
OPERATING STATEMENT
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TERMS
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DISTRIBUTION WAY WAREHOUSE CONDO This first mortgage loan is secured by a warehouse condominium located in the city of Vista, in northern San Diego County, California. Vista has a population of about 90,000 and is rated 7th in the US for family life, according to the book 50 Fabulous Places to Raise Your Family. The regional location of the property, as well as its specific location, provides a strong foundation for property value and its potential for future increase. Vista is known for its outstanding school system, close to perfect weather, and desirable business climate. Together with Oceanside and Carlsbad, it makes up the Tri-City area. With sunshine 340 days a year, it's only natural that fun and recreation should dominate Vista's style of life. The city boasts fifteen community parks - six times the national average per square mile. With housing opportunities ranging from garden apartments to ocean view estates, broad-based educational and social service programs targeted to all ages, and an aggressive Economic Development Program that has attracted more than 600 new companies and jobs for over 20,000 employees, Vista advertises that it is ‘there’ to support the most ambitious dreams. This property is located in a six year-old two-building industrial complex in the southern portion of Vista. Its immediate neighborhood is primarily industrial, surrounded by residential neighborhoods, with very limited commercial uses. Its location provides it with adequate visibility and access to major transportation routes. The property improvements consist of a one-story, concrete industrial condominium unit with a total of 2,786SF. It is divided into a 376SF office area and a 2,410SF warehouse space, both with full A/C & Heating. The structure has a concrete slab foundation with concrete/steel framing. The office portion is carpeted with painted sheetrock walls and a bathroom. The warehouse area has bare concrete floors, painted sheetrock walls, and a fire sprinkler system. Our borrower operates her art restoration business from the subject property. Her company is dedicated to the conservation and preservation of paper, posters, art, and other collectibles using the same methods used my museums. She reports a net worth of $690,000, mostly in real property equity (this and three other properties) . Her adjusted gross income according to her 2004 and 2003 federal income tax return was $54,189 and $63,920, respectively. She has average credit with a few lates - consisting of seven small accounts, over the last five years, with 23 as agreed open and closed accounts. These include three open real estate loans, totaling $694,747, two open since 2003. However, she also reflects a paid state tax lien of $5,392 from 2001 and a discharged Chapter 7 Bankruptcy in 1997. Our loan pays off the existing first mortgage holder, which is an SBA loan. Small business owners are often anxious to pay off their variable-rate SBA loans, particularly in a rising interest rate environment, in exchange for a fixed interest rate. Also, private financing affords a certain financial flexibility, as the borrower may have pledged additional collateral (such as their home) to secure the loan. Finally, the SBA usually “ties up” all of the borrower’s business assets; by refinancing the borrower can frequently expand their company with new business credit. At a 70% LTV and a 9.0% yield, this looks like a reasonable investment. Every first mortgage investment involves substantial risk, so be sure to read the Risk Factors section of the Offering Circular before investing. A substantial and prolonged decline in real estate values is possible.
LAND INVESTMENTS FROM BLACKBURNE & BROWN “Land investments, George? Why on earth would I want to invest in land? Yuck. Land doesn’t generate any income.” Exactly. Very few investors can afford to invest in an asset that doesn’t at least pay 2% in interest or dividends. Most investors want at least some current income to supplement their pensions and social security. Less competition is what creates the opportunity to earn great returns by investing in land.
“Great returns, my eye. I’ve known land values to fall by 65% during recessions.” You’re absolutely right. Land values can be extremely volatile. But just as land prices can fall precipitously in recessions, well-located land has been known to rise quite handsomely in value when it finally becomes ripe for development. This is why land must often be held for at least ten to fifteen years before the timing is right to sell. When you invest in land in California, you are betting on the proposition that the population of this sunny state will continue to increase and that the urban sprawl will continue to expand. The history of California has shown that this is a pretty reasonable bet. “Why even bother with land, George? Why take the risk?” Ahhhh, here’s the reason - Land and improvements appreciate at different rates,
Suppose a Bay Area resident bought his home twenty-five years ago for $50,000 and the home is now worth over $750,000. That’s a pretty common story, right? Do you really think that the cost to build a 2,200 square foot home has increased by fifteen-fold in twenty-five years? No way! That $50,000 home probably cost around $40,000 to build in 1981. If it burned to the ground, it could probably be rebuilt today for less than $280,000 ($127/sf). Building costs may have increased seven times over the past twenty-five years. The rest of the appreciation was due to the appreciation in the land! In our hypothetical example above, the Bay Area resident bought the home for $50,000 - of which $40,000 was the cost of the bricks and sticks. The cost of the lot was around $10,000. Now if the home is worth $750,000 today and the bricks and sticks are worth only $280,000 - then the lot is now worth on the order of $470,000. That’s a forty-seven-fold increase over twenty-five years. Now you can see why the wise investor will invest at least a small part of his real estate portfolio in land. Land and improvements appreciate at different rates ... and land can sometimes appreciate much more.
“Why does land appreciate so much more than buildings?” The supply of land is finite, as opposed to lumber, steel, and concrete, for example, which are renewable resources. In addition, land that will not be suitable for development for 15 years can often be purchased for just a tiny fraction of the cost of land that is ripe for development today. After all, very few developers can afford to hold land in inventory for 15 years. Finally, there are two major forces driving land values higher - inflation and populationgrowth. “So if I invest in land, Blackburne & Brown is guaranteeing
me a 47-fold return over twenty-five years?” No-no-no! We are merely demonstrating a concept using an example you have probably observed from your own experience. We cannot guarantee you any return, and you could easily lose most of your investment. The only thing we are guaranteeing is what Will Rogers once said, “Buy land. They ain’t making any more of the stuff.” “But George, I just can’t get past the fact that this investment doesn’t generate any return. In fact, I’ll have to pay my share of the real estate taxes, right?” That’s true. If you invest in land with Blackburne & Brown, you will have to pay every year your pro rata share of the real estate taxes, the liability insurance, and the LLC’s property management fee. While these expenses are modest, this investment will have a negative return for 15 years. That’s why many accredited investors over 60 years of age may not be suitable to invest in land deals from Blackburne & Brown. If you need income, or you can foresee the need to access these funds anytime over the next 15 years, these land investments are definitely not for you. But for some investors, land might be a very fine investment. Example: Let’s suppose you are like me, George Blackburne. You want to receive at least $100,000 a year upon retirement, and in order to earn $100,000 a year in interest at 5%, you will need to have a portfolio of $2 million. In order to grow a $300,000 portfolio to $2 million in just 15 short years, you are going to need some big winners, some five-baggers and ten-baggers. Investing in land, and owning it free and clear (that’s important), is one reasonable way to swing for the fence without risking your entire investment. Example: Your kid finally gives you a grandchild. A $20,000 investment in a desirable piece of land, one located in the future path of growth, if held for 15 years, could make a big dent in your grandchild’s future college tuition. And because the investment is in something tangible, you can be more confident of it’s continued existence and purchasing power. We have all seen high-flying stocks become worthless.
“George, you said something about free and clear ...” That’s right. We will buy the land for cash. There will be no debt on it. That means there will be little pressure to sell the land in a bad market. Your investment will enjoy staying power, the ability to hold on through the tough markets and sell at a more opportune time.
Nope. You can invest with as little as $20,000. Investing in an all-cash land purchase is arguably less risky than a leveraged, improved-property purchase. There is no fire risk, no flood risk, no earthquake risk, no leasing risk, and no tenant risk. You are not going to lose your investment because the first mortgage lender foreclosed on the property. You just buy now, hold, and sell at an opportune time. In the meantime, inflation and population growth may work in your favor. Nevertheless, investing in land still involves significant risk. Be sure to read of Risk Factors section of the Offering Circular before investing. “Since I can’t spend my IRA money until I retire anyway, can I use IRA funds?” Yes. Blackburne & Brown can introduce you to an IRA firm that will handle this investment. Financial Suitability First of all, you must be a California resident. Secondly, an individual investor must have a net worth in excess of $1 million (including your home, furnishings, and automobile) and the investor must have either (a) a net worth of at least $250,000 and an annual income of at least $65,000 or (b) a net worth of at least $500,000; not including your home, furnishings, and automobiles. Finally, the investor must appreciate that this will be a long-term investment. The investor must not reasonably foresee the need for these funds for 15 years. “Okay, I am willing to bet a little dough on California
land and want to see an Offering Circular for more information. What
do I do?”
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Hypothetical:
“Do
I have to risk a lot of money?” 