Tuesday, July 03, 2007

Louisiana Update

I took part in an hour long conference call this morning with the other mortgage holders on the commercial property project we've got going on in Louisiana. There is really too much to cover in a blog entry, but I will attempt to give the highlights. You shouldn't assume these are the complete details.

The majority holder, I'll call him "Joe," that has been causing everyone else so much trouble, has come to us asking to be bought out. Joe is in over his head on many properties, not just this one. In Louisiana alone, he already has a $1 million judgment against him and he has properties in Texas that are also facing foreclosure. Joe's style is that of the slumlord. He works hard, but he is still a slumlord and tries to do everything the cheapest way possible. For instance, one of the Louisiana buildings has three elevators and only one is working. Rather than call an elevator repair company, he took out an elevator motor and took it to a machine shop to have them fix it. That didn't work, so he tried to cannibalize other properties he owns to get the elevators working again. Needless to say, that didn't work. The other investors have also gotten calls and emails from the construction manager saying Joe is not paying all the vendors. Apparently he feels they are padding their bills and charging him for work done on other jobs, so he refuses to pay. There are more examples, but you get the idea.

However, as I said, Joe is also a hard worker. He just tends to piss people off. Despite this, he has still managed to increase the number of tenants in the property since he took over. This is probably due to local economic conditions more than his skill - the area is doing well thanks to an energy boom. Property values have risen, the town has a new mayor, title companies are reporting increases in business (meaning more people are moving in). The other minority investors feel more optimistic about the area now than they did a year ago when they first got into the investment.

Joe is out of money. He is a distressed seller and has come to us for help. He needs to save some of his other properties from foreclosure, as well as this one, so he has agreed to sell a package of properties. The minority holders, including myself, are represented by a company I will call "TMG." (Other people as well, but they are closely related to TMG.) In fact, TMG is one of the entities foreclosing on another one of Joe's properties, so we have a nice amount of leverage here. (Because the deal is still ongoing, I don't want to give names here, but when it is all done, I will if anyone is interested. I am thoroughly impressed with TMG's integrity, skill, and straightforwardness.)

The package deal is we will buy the four commercial buildings in Louisiana plus roughly 475 apartment units in Houston and about 400,000 square feet of commercial property in Houston for just over $12 million dollars. TMG figures to spend another $8 million or so in acquisition and redevelopment costs, and then the properties will be worth about $30 million, at which point they can keep them or sell them for a nice $10 million profit. The nice part about this deal is that there will be little out of pocket costs for the purchase. Remember how I said Joe was a slumlord? Turns out, the city of Houston will loan us $6 million at 0% interest just to get Joe out of there and redevelop his properties. There are all kinds of other financing terms involved in this deal, but it all looks good. Oh, and did I mention this deal should be completed by the end of the month? Just about as fast as a purchase for a single family house!

So where does all this leave me, as a mortgage lender on the Louisiana properties? First, the existing loans will all be brought current. Second, TMG will be offering us three choices:

  1. We can get paid off in full, plus accrued interest and late fees.
  2. We can trade our mortgage position for an equity position in the whole package.
  3. A combination of 1. and 2.
Since all the terms are not yet finalized, TMG can't give us actual numbers yet, but they are estimating the option 2 will require a 2 year investment and come with an 8% - 9% annual return, paid monthly. Also, at the end of that 2 years, your equity is expected to have increased 150% - 200% (not counting the monthly payments).

So things look very interesting. I'll have to wait for some hard numbers of course, but I am very interested in option 3. Since my investment in this project comes from a HELOC, I'll likely take out some of my money to pay that down, but will keep some invested for the longer term and bigger ROI. For those of you that play Cashflow 101, this is turning into a real Big Deal opportunity!


Roger said...

Hey Shaun,

Great Post.

How do you come across the opportunity to work with this "TMG" group? Any chance that there's any room for additional investors to get involved?


Shaun said...

Through networking. I met up with a guy named Les several years ago through the forums at I did some other investments with him and he brought this one to my attention.

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