FEND Securities Expert Witness
5529 Bedford Avenue Los Angeles, CA 90056
3106493663 fendmase@ca.rr.com FEND Securities Expert Witness
Mason Alan Dinehart III Arbitrator - FEND Securities Expert Witness

SCORECARD

 

REAL ESTATE TENANTS IN COMMON (TIC)

 

LLC SCORECARD

 

 

 

TIC REAL ESTATE LLC SCORECARD

 

Name of Offering – IP of A WEST 86th STREET, LLC - PPM dtd.  10-27-04 and and 1st Supplement to the Confid. Private Placement Memo. dtd. 12-27-04 Size - $3.5M to $7.150M.  Minimum to go effective - $3.5 MM.  Up to 1,430 Investor Units @ $5,000 each, with min. purch. of $25K, or for Tenant in Common Interests - $7,150,000 of equity and $7,100,000 of debt (Min. 5% TIC interest - $357,500 of equity & $355,000 of debt),  Goals – 1.  Retain an interest in the property, subject to the Master Lease.  2.  Provide members with the potential to obtain a combination of short-term cash flow & capital appreciation.  3.  Make monthly distributions to members from the base rent paid by LeaseCo, which may be partially offset by depreciation & amortization expenses.  4.  Within approx. 5 – 7 years, subject to market conditions, have the potential to sell the Co.’s interest at an appreciated value, realizing income, taxable in part as capital gains.  Holding pd.– Sell or refinance within 5–7 years.  TIC addendum 10-27-04.

 

Accredited Investors only per Rule 501 of Reg. D.

 

Sponsor(s) – Manager – IP of A Fund Manager, LLC, a VA LLC. Special Member – IP of A, LLC (LLC Agrmt. Pg. 1).

 

Master Lessor (Landlord) – LeaseCo, a wholly owned subsidiary of IP of A, LLC (Investment Company of America, LLC).  IP of A is wholly owned by Edward H. Okun (Pg. 34).

 

Description – The purpose of the LLC is to acquire & sell undivided TIC interests in an industrial warehouse located at 5201 West 86th Street, Indianapolis, IN.  The property is an approximate 458,909 sq. ft. INDUSTRIAL PARK, 100% leased to Tra-Mel Enterprises, Inc.

 

The price to the LLC is $13,650,000 ($6,550,000 of equity and $7,100,000 of debt) under 1st. Supplement.

 

The Company (Tenant) will master lease the entire property to IP of A West 86th Street LeaseCo, LLC (LeaseCo) as Landlord for 15 years.  The annual rent % under the Master Lease is scheduled to be 8% yrs. 1 – 5; 9.6% yrs. 6 – 10 & 11.2% yrs. 11 – 15.

 

1.               Manager Experience – IP of A Fund Manager, LLC, the manager is a newly formed VA LLC and has a limited operating history.  Edward H. Okun, its sole owner, has acquired, developed and sold over $500,000,000 of real estate during the past 20 years (no summary or listing however).

Score ____5____

 

2.               Net Worth Consideration –Unaudited statements dated 10-27-04 for IP of A West 86th Street Lease Co  and IP of A West 86th Street, LLC both show a net worth of $100.  Edward Okun will provide a guarantee of up to $500,000 for the obligations of LeaseCo under the Master Lease Agreement. This is an insufficient amount when you consider that it is less than the $1 million lease incentive and the annual lease pymt. of $987K.  There is personally prepared financial statement for Mr. Okun.  However, his unaudited stmt. reflects a Net Worth of $43.6 million, virtually all in real estate and illiquid.  It shows a real estate cost of $47 million & debt of $25.2 million.  The PPM states that Mr. Okun’s net worth shall not be reduced below $45,000,000, higher than even shown on his personal statement.

 

Further, he shows an unverified income figure for 2003 of $572K, but contingent liabilities of $438K.  Finally, he indicates being a 3rd. party defendant in a Parkway lawsuit.

Score ____2_____

 

3.         Resale Activity (Track Record) – None - No information at all is provided from Mr. Okun or any of these entities regarding track record of re-sales of real estate or re-financings.  Since December 2003, IP of A, LLC has syndicated an office/manufacturing complex in Columbus, Ohio, a 385,000 sq. ft. enclosed mall located in Richmond, Indiana, a retail strip center in Indianapolis and an industrial/office complex in Indianapolis, IN.  Previously, this last property was approximately 70% leased by T&G Leasing (Piper Logistics) which filed for bankruptcy protection.  IP of A had recently regained possession of the property and is actively seeking tenants.  Further, on page 34, it states that IP of A attempted to syndicate a distribution center in Shreveport, Louisiana in December 2003, but was unable to do so due to a variety of factors beyond its control.  Foremost among the reasons the syndication was not completed were timing problems associated with the due diligence review and managing broker-dealer.

Score ____2____

 

4.         Compensation – During the 15-year lease term, LeaseCo will retain all income from the property in excess of rent payable under the Master Lease.  Pg. 24 – Unsubordinated reimbursement for ALL direct costs incurred by the manager and affiliates when performing services on behalf of the Co. and also reimbursement for certain expenses incurred with respect to the acquisition of the property & closing the loan & certain indirect costs allocable to the Co.   Pg. 47 – The manager will be paid or reimbursed reasonable and necessary expenses incurred for operations of the Co.  These may include legal and accounting, organization & offering expenses, marketing costs, travel costs, costs assoc. with regulatory requirements including tax returns, insurance costs, litigation expenses and certain allocated overhead expenses along with similar or related expenses.  Finally the manager will be reimbursed by purchasers of the Co. for ALL costs incurred by manager on behalf of the Company.  A higher than normal unsubordinated property management fee is noted at 5% annually on page 9 of the Property Mgmt. Agrmt. This single tenant property, master leased prop. on a triple net basis should not cost above 3% subordinated                                                                                                                                                                                                         Score _____1_____

 

 

5.         Load Factors – Sales comm. – 8.0%, non-acctble. due diligence expense 1.0% and selling exp. reimb. .5% for a total of 9.5%.   See Page 47 of PPM.

Score _____5______

 

 

6.         Guarantees – Edward Okun guarantees the obligations under the Master Lease to LeaseCo up to $500,000 which I understand was insured to $1,000,000.  This is insufficient!  The annual lease pymt. is $986K and the Lease incentive to the tenant is $1,000,000.  However, there is no audited or accountant prepared financial statement on Mr. Okun verifying his personally stated $43 million Net Worth.

 

LeaseCo to obtain $2,000,000 of general liability insurance but no intention to obtain flood or earthquake insurance.  Manager makes no representation about funding and members can be asked for additional capital contributions to fund capital expenses and fund operating deficits.                                                                                   Score ____1____

 

7.               Self-Dealing (Conflicts of Interest)

 

A.              IP of A or Affiliate will have the first right of refusal to purchase all or a portion of the property at the then appraised FMV from the TIC owners.

 

B.              IP of A, Okun’s Co. had purchased property for $3.3 million in September of 2001 from TruServ and made $1,500,000 in improvements prior to syndicating this offering in 2004. No disclosure of nearly $9 million profit on the sale reaped by IP of A.

 

C.              Okun had pulled $6,100,000 out of the property through a mortgage that was being paid off in connection with the sale of the property to the TIC owner/investors.

 

D.              IP of A was a Special Member of the LLC – LLC Agrmt. Pg. 1.   5.  Underwriter was affiliate of the Manager and thereby conducted  no “independent” due diligence.

 

E.               No limitations on reinvesting sale and refi. proceeds.

 

F.               Reimbursement for gen’l. liability ins.

 

G.              Pg. 2 of the LLC Agreement provides for the LLC to release all funds to the manager upon receipt of the minimum to go effective amt. of $5 million but BEFORE THE MORGAN STANLEY LOAN CLOSES.  The PPM & Supplement fail to disclose that there is an existing mortgage loan of $6.1 million with Dise Group, LLC (which is an Okun Co.) that will be refinanced by the MS. Loan (See Consent of Co-Owners 11-26-05 doc.& Loan Closing Statement).  The Supplement reduces the minimum to go effective to $3.5 million and does not disclose how the minimum equity and $7.1 million loan will pay Okun the $13.65 million purchase.  What we don’t know is whether there would be a default to Okun, or if there is a new loan for $2.5 million and on what terms or with which lender.

Score_____1_____

 

 

 

 

8.               Tenant-in-Common  rights

 

A.        Call Option – Pg. 38 – If at least 80% of TIC’s consent to a sale or refi.,

IP of A will have the right to purchase dissenting TIC interests for 30 days to do so & then must offer to the other TIC holders. While this is beneficial, it is inconsistent with Page 5 of the Tenant in Common Agrmt. (Pg. 118 of PPM) which states 66 2/3% or more, instead of 80%.

 

 

 

B.              It takes 50% of the TIC owners to terminate the Master Lease.

 

 

 

C.              50% of the TIC owners can fire the manager IP of A, BUT ONLY FOR

 

CAUSE!  (Cause is defined as gross negligence or fraud of mgr.; willful misconduct or willful breach of LLC Agmt. by Mgr.; Bankruptcy, insolvency or inability of Mgr. to meet operational duties when due; Conviction of a felony by Edward H. Okun).

 

 

 

D.              Unanimous approval to approve

 

 

 

1.         The Master Lease and all amendments and renewals thereon during the lease term.

 

 

 

2.  All leases, renewals & amendments, after lease term.

 

 

 

3.  All management and brokerage agreements thereof, after lease term.

 

 

 

4.  Pg. 7 – Unanimous vote to approve the sale of the property or to refinance the loan.

 

 

 

5.  Upon vote of 30% of the members, Mgr. will use best efforts to obtain audited financial statements for properties operations.  6 .  Termination of LeaseCo and Mgr. subject to Lender approval.

 

Score ____2____

 

 

            9.         Leverage – Dise Group (an Okun entity) non-recourse Loan of $7,100,000 or 52% of purchase price of $13,650,000.  Loan to include $1,000,000 for tenant improvements and leasing commissions.

Score ____5____

 

10.            Financing – Balloons in 10 years.  The Dise Group Loan has a 10 year term and a 25 year amortization.   The loan interest rate is 5.7% and total debt service including principal and interest is $533,427.35 per year.  Borrower may prepay the note under certain conds.

Score _____3_____

 

 

 

 

11.            Valuation Ratio – MAI Appraisal divided by the LLC consideration (p/c = debt + capital raised).  A Draft MAI appraisal by Cushman & Wakefield prepared November 17, 2004 for CIBC, indicated an appraised value of $12,650,000 utilizing the Discounted Cash Flow method and Direct Capitalization method.  Valuation ratio is 92.7% i.e.  P/C is Debt $7,100,000 + LLC capitalization $6,550,000 or $13,650,000 divided into appraisal of $12,650,000.

Score ____3____

 

12.         Assumptions – The 5201 Industrial warehouse building in PPM is referred to as a prime suburban Industrial park.  The description in the PPM indicates that the property is 100% occupied by Tra-Mel Enterprises, Inc., when in actuality, it is occupied by Brickyard Properties LLC, as tenant of record.  The appraisal (not given to the claimants) states that this is NOT an INVESTMENT-GRADE TENANT, but the PPM does not.  The PPM also fails to make the disclosure that the guarantors have credit problems and are dependent on only 1 customer.  If tenant fails to pay rent for whatever reason, Tra-Mel Leasing & Point-To-Point Express, Inc. are required to fulfill the obligations.  These entities report a net worth on a compilation basis of $673,900 based upon representations of mgmt. as of 12/2003.  There is no support of audited or reviewed financial statements, but only a compilation.  They are subsidiaries of Tra-Mel

 

Enterprises, Ltd.  Projections include a forecast of 10% rental increases every 5 years.  Years 1 – 5 the lease terms are actually 8.5% while the projection for TIC owners is only 8%.  Years 6 – 10 the lease terms are actually 9.375% while the projection for TIC owners is 9.6% and for years 11-15 the lease terms are actually 10.25% while the projection for TIC owners is 11.2%, somewhat aggressive.  DEBT SERVICE PAYMENTS ARE $535,999 AND THE 8% PAYMENT TO INVESTORS TOTALS $524,000 ($6,550,000 X .08) FOR A TOTAL OF $1,059.999.  However, the scheduled Net lease payment from Brickyard, under the master lease is only $986,654 per year, for the first 5 years and there are no funds for reserves.  THIS IS AN ANNUAL SHORTFALL OF $73,345 PER YEAR FOR THE FIRST 5 YEARS!  The Supplement shows a return on $1 million of unspent reserves of 7.33% every year to cover this shortfall, quite unrealistic.   Subsequently, it is revealed that on January 19, 2005, nearly 4 months after the lease with Brickyard/Tra-Mel, that there is a lease incentive payment referred to.  The single-tenant Lease is amended to state the amount of the incentive payment.   It states that the Landlord will provide to the tenant an incentive payment of $1,000,000 payable as follows:

 

A.        $364,777.53 will serve as Landlord’s offset against charges due from Tenant under the lease along with an offset applied to Tenant’s rent.  The incentive indicates this amount was not current and in default.

 

B.              $210,770.83 will be used to fund Tenant’s security deposit under the lease.

 

C.              $424,451.64 will be a cash payment paid by Landlord to Tenant on the date of closing on the refinancing.  Total   $1,000,000. This incentive for merely signing the lease exceeds the net worth shown on the compiled stmts. for the Tra-mel entities, and the incentive undermines the Guaranty of Lease actually executed by Tra-mel and Point-to-Point on

 

 

 

Sept. 16, 2004.  Finally, there is no disclosure of the fact that the building had been vacant for some time prior to its occupancy by Brickyard.                                                                                                      Scor ____1____

 

13.            Percentage of Supply to Demand – I have been informed that according to

opinions of commercial brokers in the area, this section of Indianapolis has had slow and steady growth in commercial real estate but this was not a warehouse that had tripled in value over the last 3 years.  The market value of the property was thought by these commercial brokers to be far below the purchase price.  Even with a purported $1,500,000 of improvements, the warehouse had shown signs of obsolescence because most of the space was built in the late 1950’s.  The appraisal states on page 16, “Almost all modern warehouse/distribution and manufacturing buildings are constructed on a single level, as multi-story facilities (popular in the first half of the century) are FUNCTIONALLY OBSOLETE AND HAVE LIMITED MARKETABILITY IN THE CURRENT MARKET”.  In ours, one half of the warehouse is two stories.  Most critically, the low ceiling height over more than 1/2 of the warehouse floor space prevented the installation of modern racking systems, that are standard in newer warehouse storage.  In the PPM, Bldg. 2 states a ceiling height of 21’5” while the draft appraisal states 18 – 20 feet.  Bldg. 3 in the PPM is shown as 24 feet while the appraisal states 22 feet and Bldg. 4 in the PPM is shown as 26 feet while the appraisal states 24 feet.  These continuous exaggerations are bothersome.  Also noted was the obsolete and narrower loading docks as opposed to the ones standard today, decreasing their efficiency in loading and unloading trucks.  Page 28 of the appraisal summarized the condition of the building as average, whereas the marketing summary (paragraph 5 on the second page) refers to “5201 being well located and in prime condition.”  Finally, rents as determined by commercial brokers in the area were not below market as det. by commercial real estate rental comps.  Page 46  of the appraisal states that the warehouse has been vacant for the last several years undergoing a renovation, but Ex. B to the lease with Brickyard in September 2004, lists all the renovations still necessary.

 

In addition, it would be surprising if renovations took several years to complete and prevented the owner from leasing the warehouse.  Any unsuccessful efforts to lease the building could have been determined by contacting the brokers in the area.                                                                                                                                                      Score ______1_____

 

 

14.            LLC Consideration vs. Competition. – 109.5%.

Score ______4_______

 

15.            Risk Factors (% of Normal Risk)  A.  TIC’s will rely totally on LeaseCo to

manage & operate the property and pay rent .  B.  A single tenant is not a diversified investment.  C.  There are various conflicts of interest among the mgr., the leasing co. and affiliates.  D.  There are significant limitations on your ability to sell or transfer your interests.  E.  Based on the acquisition price, the property is 52% leveraged.  Based upon the value it is likely over 100% leveraged.  F.  There are significant tax risks for purchasers acquiring interests as replacement property in a section 1031 tax-deferred exchange. G.  The Manager of the LLC can issue capital calls to fund deficits.  H.  A default by one TIC owner could constitute a default under the loan, by all TIC owners.  I.  Joint and several liability on loan repayment.  J.  Significant compensation to LeaseCo, the Mgr. and affiliates unsubordinated to profitable operations.  K.  No audited financials on the sponsor, the mgr. on LeaseCo, the operations or the property.  L.  The TIC manager has no operating history.  M.  An investment in interests is speculative and involves a high degree of risk.  14.  Closing may be delayed, or may not occur at all.  N.  Section 1031 and the related Treasury Regulations permit identification of multiple properties.  O.  Use of exchange funds for certain purposes may result in the receipt of taxable boot.  P.  There are substantial risks associated with the federal income tax aspects of purchasing and owning the interests, especially if the purchase is part of a Section 1031 exchange.  Q. Qualification for exchange treatment varies under state law.  R.  The tax treatment of certain expenses of the Offering, closing costs, financing costs or reserves is unclear and may vary depending upon the circumstances. The IRS may disallow various deductions.  T.  Losses and credits from passive activities are limited.  U.  Taxable Income may exceed cash receipts.  V.  The Purchaser may be subject to the alternative minimum tax.  W.  Purchasers may be subject to accuracy related penalties and interest.  In the event of an audit that disallows a purchaser’s deductions or disqualifies the purchaser’s proposed exchange, investors should be aware that the IRS could assess significant penalties and interest on tax deficiencies, including those associated with a failed exchange.  X.  One or more Tenants in Common may default on their obligations.  Z.  The Tenants in Common may be obligated to fund capital expenses.  AA.  Certain actions require unanimous approval of Tenants in Common.  BB.  Certain short-term loans will be recourse to Tenants in Common.  CC.  The purchaser may lose his deposit.  DD.  The Manager may purchase interests.  EE.  Counsel for the Company and its affiliates do not represent the Tenants in Common.  The proceeds realized from the sale of the property will be distributed among the Tenants in Common, but only after payment of the Loan (and any other loans), satisfaction of the claims of other third-party creditors and certain fees owed to the Manager, LeaseCo and their Affiliates.  The Tenants in Common may not owe any fiduciary duty to one another.

Score ____1____

 

                                                                           Total Score – 37 of 75 = 50%

 

 

·       (Min. Accept. 52 of 75 – 70%)

 

            More serious than what is disclosed in the PPM is what is not disclosed in the offering i.e. the weakness of the tenant, problems revealed in the appraisal and the profit to Okun from the sale of the property to the LLC.  This TIC program fails to meet the reasonable basis suitability test and should not be permitted to enter the due diligence process at any broker dealer.

 

TICs in general have a mark-up of 20% - 30%,including the loads.  The property is purchased by the Sponsor from a third party and flipped to the Tenant in Common investors.  Considering this, all of the 1031 tax benefits are absorbed in these promotional costs and are entirely lost to the TIC investor.  Then, since the property is Master Leased by the Sponsor or its affiliate on a net, net net basis, the normal real estate risks of taxes, insurance and maintenance are taken out of the deal.  All market risk is transferred to the Sponsor as Master Lessee.  By structuring the program this way, the transaction actually becomes a credit or loan transaction.  The real estate becomes the collateral for the loan.  The underlying loans are typically cross-collateralized with other such loans on other TIC deals of the Sponsor.  The Sponsor, under the Master Lease, then projects a guaranteed return for up to 10 years, beginning in the range of 6% to 7% per year on the full cash invested by the TIC investor.  These "guaranteed" returns are secured by a Sponsor that is really credit impaired!  This is the real unspoken risk.  There are usually no audited financial statements on the Sponsor and the statements that are in the PPM are un-reviewed, un-certified and  non-GAAP financial statements.  Typically they are burdened by contingent liabilities that are not even included within the liabilities section of the balance sheet.  The Sponsor's lease obligations on other TIC's are classified as operating leases as opposed to what they really are - capital leases.  Operating leases do not have to be shown as real liabilities on the balance sheet and thereby, increase the net worth proportionally, by this elimination.  The leverage in these TIC deals is usually at least 65% of the purchase price and 50% of the marked-up cost to the TIC investors.  Those investors assume the loan on a pro-rata basis based upon their invested dollars as they bear to the total dollars invested.  These loans remain non-recourse to the investors unless there is a default by the Sponsor and Master Lessee.  When default occurs, the TIC investors become liable for their portion of the loan foreclosed upon as debt forgiveness.  Not only do they lose the property and their entire investment but also have an ordinary income tax event due to the debt forgiveness caused by the foreclosure.

 

 

 

 

 

REAL ESTATE LIMITED PARTNERSHIP SCORECARD

 

 

 

 

 

Public Offering - PUBLIC STORAGE INVESTORS 12, a Cal. L.P. 5-2-88

 

Size - $5,650,000 (113 units @ $50M each - staged 3-5 yrs.) Min. $1,750,000. Goals: 1. Pres. of capital. 2. Produce rental income to offset expenses., service debt & prov. cash avail for dist. 3. Provide pot. cap. gain thru apprec. of props. Private placement. Hld. pd. - 7-10 yrs. - pg. 6. Suitability - Accred. + 35 non-accred. - Income in curr. yr. - $75M + N/W of $150M or $200M of N/W alone(excl. h,c, & f). Staged - curr. liquidity - $45M/unit - Gross inc. 20% of N/W - $270M. G.P. may request tax returns.

 

Sponsor - Public Storage Investors, Inc. (PSII) & B. Wayne Hughes, 75% owner of PSI.

 

Description - L.P. org. to acq. 3 parcels of land to be developed & held for rental income & apprec. as self storage facilities offering storage space for pers. & bus. use (mini-warehouses). There are two props located in Calif. - San Francisco and Montebello (L.A.) The other prop. is located in Baltimore, Md. L.P. has completed dev't. on only one of the props. (Baltimore) and is developing the other 2 parcels.

 

1. General Partner Experience - Public Storage Investors, Inc. was org. in 1984 (pg. 60). PSI, not the G.P. was org. in 1972 but began syndicating in 1976 (PSP I).

 

Score ______2______

 

2. Net Worth Consideration - 12-21-87 - Audit of PSII Corp. G.P. - $1,254,020. Pg. 60. B. Wayne Hughes, indiv. repres. a N/W of $1,000,000. HE IS PERSONAL GUARANTOR OF OTHER PSI L.P.'S TO THE EXTENT OF $50,000,000!

 

Score ______1______

 

3. Resale Activity (Track record) - Pg. 59 - PSI - 31 Public L.P.'s & 27 privates along with 19 foreign progs. As of 12-31-87, 726 facilities under mgmt., dev'd 443 projects, 398,000 rental spaces and 82 projects under dev't. Only 1-2 sales shown in notes!

 

Score ______2______

 

4. Compensation - Mgmt. fees & R/E comm. unsubordinated. G.P. cash flow partic. is 5%, unsubord. and 5% profits on sale, also unsubord.

 

Score ______1______

 

5. Load Factors - Sales Comm. - 10.0%, O & O - 5.0%, Acquisition fees - 5.4% (pg. 38) loan guar. fee & stand-by fee - 5.2% for a total of 25.6%. 6% of acq. cost = $304,080.

 

Score ______1_______

 

6. Guarantees - No dealer, salesman or any other person has been auth. to give any info. or to make any rep. not contained in this offering memorandum. No liquidity. Pg. 31 - If required by lender, PSI has agreed to guarantee pymt. of prin. & int. on the first mtg. until NOI reaches a spec. level. Pg. 36 - PSI to prov. perm. fin'g. if none can be obtained. PSI gets a 1%-3% fee. Note - stand-by cash advances are ltd. to $400M max. - pg. 36. G.P. may loan funds but they are not subordinated. pg. 10.

 

Score ______3______

 

7. Self-Dealing (Conflicts of Interest) -1. L.P. may buy prop. from PSI & reimb. them for cost + carrying charges. 2. Placement agent - PSI Securities - Affil. No indep. due dilig. 3. PSI rec. 4% contractors profit and 6% of aggreg. acq. & dev't. cost. 4. Competition from PSI to develop near these props. 5. Pg. 41 - 15% of G.P. ints. in L.P. may be reallowed to placement agent - PSI Securities, Christopher Weil or Focus Securities (affils). 6. San Francisco prop. not appraised! If less than acq. & dev't. cost, PSI will return diff. to L.P. (Note - Why not wait till appraised?) 7. Pg. 32 - PSI rec. 1-3% annual stand-by loan guar. fee. 8. Pg. 66 - Sales incentives to B.D.'s and reps. selling deal.

 

Score _____ 2_______

 

8. Limited Partners Rights - Removal of G.P. is by simple majority but ONLY FOR CAUSE, INCLUDE. BREACH OF FID. DUTY, INTENT. MISCONDUCT, GROSS NEGLIGENCE OR INSOLVENCY. All other limited partner democratic. rights are by simple majority, but require the G.P. concurr. Pg. 105

 

Score ______3_______

 

9. Leverage - Cost of acq. & dev't. - $11,138,000. Debt - $9,112,000 for leverage of 81%. However, the L.P. antic. add'l financing in 1993!

 

Score ______2______

 

10. Financing - No first mtg. loan commit. made. Antic. 10 yr. $9MM, 11% - 30 yr. amort. Secondary fin'g. - 5 yr. interest only! May obtain variable rate fin'g. with neg. amortiz. Construct. loans mature as follows: 1. S.F. - 11'86 (6 mos. extension poss. for a fee). 2. L.A. (Montebello) - 1'89 (6 mos. extension poss. for a fee). Balloon of $8.2MM due 12-31-98.

 

Score _____ 2______

 

11. Valuation Ratio - Only 2 appraisals obtained for comparison purposes! 1. Baltimore - $3.2MM (assum. 90% occup.) Both appraisals are as of 12-15-87 and done on an "as if completed & operating at stabilized occupancy"! 100 % capital raised - 25.6% load = 74.4% going into the property. Very low!

 

Score _____ 1______

 

12. Assumptions - Pg. 10 - The forecast assumes a rate of expense increase to be 1/2 the rate of revenue increase. Should be the same! Goal is 90% occup. A 9% cap. rate is projected on sale. Using the 8% rent inc. projections ( there is also 4% & 6%), the 1990 proj. NOI is $1,082,455. Based on the L.P. loaded cost on the 3 props. (debt of $9MM + cash raised of $5.650MM, the L.P. consideration is $14,652,000. The cap. rate is only 7.34%. Extremely low!

 

Score ______3_______

 

13. Percentage of Supply to Demand - Pg. 12 - Each prop. will face sig. competition from other mini-warehouses within each respective mkt. area. surveys of comps. pre- pared IN HOUSE, NOT INDEPENDENTLY. SAN FRAN. NOT APPRAISED! Mini-warehouses are a new business with much competition and increasing. 1. Baltimore - existing 6 story bldg. + basement. 56,163 sq. ft. of rentable storage area. 674 units rennov. completed 3'88 - 3 COMPETING FACILITIES WITHIN 3 MI. Occup.- 75%-80%. 2. San Fran. - exist. 3 story bldg. with basement curr. being rennov. 45,055 sq. ft. - 674 units completion date - 10-1-88. THERE ARE 12 MINI-WAREHOUSES WITHIN 3 MI. AND 4 WITHIN 1 MI.! Occup. ave. 80-90% with 2 in rent up phase. 3. Montebello (L.A.) One story M/W bldg. One 3 story M/W bldg. 68,630 sq. ft. with 761 units to be comp. 11-1-88. THERE ARE 6 MINI - WAREHOUSES WITHIN 3 MI. ) ONE DEV'D BY PSI). 2 are in rent up and the others ave 85-90% occupancy.

 

Score ______2_______

 

14. Limited Partnership Consid. vs. Comp. -125.6%

 

Score ______1______

 

15. Risk Factors (% of normal risk) 1. Liquidity risk. 2. Inv't. of 2 props. (S.F. & Balt.) not independently surveyed, S.F. not appraised! 3. Dev't. risk. 4. R/E operating risk.. 4. Competition. 5. Diff. to deal with defaults. 6. Delays in sale or refi. 7. Uninsured losses. 8. Energy supply shtgs. & allocs. 9. Leverage risk. - 90% +, ultimately. 10. Balloon pymt. risk. 11. Tax risk.

 

Score ______2______

 

Total Score ___28 of 75 = 37%

 

* (Min. Accept. 52 of 75 = 70%)

 

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