Friday, July 27, 2007

Louisiana Update

Another conference call for the Louisiana investment just concluded and it looks like TMG, the investment group that is taking control of this project, is giving us investors a pretty good deal. As usual, there are lots of details, but I'll try to keep it simple here.

Those of us that are currently on the first mortgage for the commercial properties in Louisiana have the following options:

  1. Get cashed out. Your investment will be paid off and you'll get your money back.
  2. Roll your investment into a new second mortgage. The second will be collateralized not only by the two buildings in Louisiana, but also a couple of other commercial properties in Houston (a strip mall and some apartment complexes). The second mortgage will be for about a year, although it is likely it will be refinanced and paid off early. (We will be guaranteed at least 6 months interest though.) The second will be at the same interest rate we are getting now (12%). In addition, we will be getting 4 points cash up front.
  3. If we decide to stay in the investment, we will also get the option to convert our investment into an equity position in about a year (a "right of partnership of ownership"). The terms for this will be worked out later, but it is likely equity position holders will get monthly payments at 9% APR plus a preferred position on the investment, which means they will get their money back before anyone else when the places are sold. So even if everything goes south and the properties need to be sold at a loss, the preferred positions will have an excellent chance of getting all their money back. This is optional, so if we don't want to become equity holders, we don't have to. They expect to sell all the properties after an additional year for a profit of around $10 million dollars and investors could be looking at doubling their investment.
This whole deal is set to close the end of next week. The original investment was originally set to end in March, 2008 and this new one will expire a year from close of escrow. So if I decide to keep my money in the investment, I'll be paid 4 points to extend my investment by about 5 months. And that money will be paid upfront at the close of escrow in a week or two.

To me, this is a no-brainer. The slumlord who took over control of the investment will be gone. The new first mortgage holder will be TMG, the group that already has about $400,000 invested in the current second. The president of TMG also will be personally responsible for $1 million of the new mortgage and he is putting his personal residence up as collateral.

This investment is turning out to be pretty profitable for me. I had some months where there were no payments, but we are now current and have been paid late fees. So my return including the late fees is around 12.6%. Now I'll be getting another four points, which jacks the ROI for this year up to 16.6%. Then there is the prospect of getting 9% for another year plus a 100% or more return on our principle when the buildings are sold.

But technically, my ROI is infinite now, since my investment cash came from my HELOC, so it's not even my money I'm using. But it's just not the same to say my new ROI will be infinite-er :-)

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