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.
Score
____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. 55 of 75 – 73%)
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.
REAL ESTATE LIMITED PARTNERSHIP SCORECARD
