Delta Investment Group, Inc.

Transcription

1 Delta Investment Group, Inc. Real Estate Alternatives & Investments EXECUTIVE SUMMARY Note Banking For the purpose of this document Note Banking shall pertain to the process of acquiring, servicing, negotiating, modifying, holding, or value-add to the purchase and control of discounted real estate and unsecured notes. There are several forums of acquisition and disposition of bank and private notes. There are multiple stress points in the capital market. Wall Street (i.e. Morgan Stanley), large and community banks, FDIC, etc. Bank notes are different than deeded ownership. There is no maintenance, insurance, tenants, repairs, etc. There are asset management responsibilities; making sure the note covenants are maintained, insurance and make sure to be named as a co-insurer, premiums paid, taxes paid, etc. This is different than property maintenance. Notes, as a whole, have greater discounts than the deeded property which hedges the risk of this alternative. The FDIC has the responsibility of disposing bank assets on banks that have been taken over due to insolvency of the bank. Assets of the bank include depositor s cash, savings, and other face valued assets. Among the quiet assets of the bank are their portfolios of notes, both performing and non-performing. Secured asset notes include income real estate, commercial, office, retail, apartments, industrial, and land. The determination of performing vs. those denoted as nonperforming would be determined at the time that the FDIC steps in and therefore not necessarily nonperforming just because the borrower or property is in default. Discounted notes are then pooled or assessed as to the most immediate and beneficial means of disposing, mostly by a bid and other mandatory processes. Note disposition happens relatively fast to the public and institutional communities, usually 6-8 weeks or less on the bid process with a due diligence of 5-10 days. Post bid notes have a shorter period, sometimes as little as 3-5 days, however these are usually notes that have gone through a first bid process unsuccessfully or have been awarded, but not claimed and therefore escalated to dispose of quickly and with a subsequent discount factor attached to them. Having a fund readily available to place a deposit-on-bid and consummate the transaction is the key factor to maximize the opportunity and returns. A deposit to bid is required that may require $100,000 or more which would be forfeited if the bid is awarded and not consummated. Bids can range from a high of on the dollar (most often purchased by banks and institutions) to a low of 5-30 on the dollar or less for off-bid opportunities or unsecured (junk) assets (cars, planes, boats, etc). Many bids (usually performing) are acquired by other institutions (insurance and other banks) due to the leverage of purchasing a on the dollar asset and booking the face value to their balance sheet. This is a discounted tactic to increase the book value of the bank and borrow the spread many times over in new Federal Reserve funds. The left over or less valuable notes take a deeper discount which are the ones that we seek for a greater spread and take advantage of multiple exit strategies Michelson Drive Ste 450 Irvine, CA Fax

2 The value-add for our relationships and approach is saving time, money, and providing a inside look at the opportunities based in part by our association with the Mandate and gateway. The normal process for institutions or individual investors is to hunt down the note opportunities (via FDIC contacts, websites, project, known banks that may have owned the note, etc.) and begin the evaluation process. This is time consuming and costly in that each phase of the analysis requires more due diligence, research for purchase, and frustration relying on third parties to meet a target time line. The second frustration is that the general bidding process (usually sealed) could be missed by pennies on the dollar and thus all the expense and time is wasted. OVERVIEW: 1. ACQUISTION STRATEGY 2. BENEFITS 3. PROCESS 4. STRUCTURE AND OWNERSHIP 5. MANAGEMENT 6. OPPORTUNITY ANALYSIS 7. INVESTOR PROFILE 8. RISK AND MITIGATION 9. BROKER PARTICIPATION 10. EXIT STRATEGIES 11. CASE STUDY 1. ACQUISTION STRATEGY a. Full Service Intermediary Functions: i. Broker (Sell and Buy) ii. Note Servicing iii. Acquisition Manager iv. LLC Manager v. Value-Add Disposition (non-performing to performing) vi. Loan Bank (hold, resell, modify, transition, etc.) vii. Syndication viii. Creates a forum for IRA/401(k) note banking and servicing b. There a several forums to acquire notes including: i. Public bids (FDIC, REO pools, DebtX, First Financial Network) ii. Selective acquisition from non-bid processes, i.e. those that did not get bid on and assumed junk notes for non-performance. iii. Piggyback on other larger bids. iv. Secondary selection (purchasing the note from someone who over committed) v. Other hybrid strategies of acquisition: 1. Purchase from previous note owner. 2. Option the note and assign, acquire to hold and service, or resell. 2

3 2. BENEFITS a. Cash accumulation. b. Wealth creation and preservation. c. Recover stock market losses with investment alternatives that provide more control and exit strategies. d. Income or Cash Flow from modified or performing loans. e. Spread in repositioning a non-performing to performing status. f. Long Term appreciation (i.e. property is increasing in value prior to foreclosure). g. Foreclosure for wealth creation and ownership. h. Leverage (purchase a note discounted and shore up other projects, cross collateral, etc.). i. Rent the asset j. Option (Secondary market needs time to evaluate and will pay for the time to evaluate with an intent for another exit strategy). 3. PROCESS a. There are several public and restrictive websites that offer bidding to the general public and are limited by restrictions based on qualifications (i.e. liquidity, proof of funds, references). b. Differentiating benefits include tracking key notes, note file analysis, and selective acquisition. c. Bids require a deposit that is held pending bid award and completion. d. Deposit most likely will be forfeited if the bid is won and not consummated, so putting up a deposit must be with the sole intent to win and perform. 4. STRUCTURE AND OWNERSHIP a. There will be a Managing Entity (LLC or Corp) that will be responsible for the selection, process of acquisition, and disposition of the notes. b. The Managing Entity will have an ownership in the investment entity (LLC 1, 2, 3, etc.) and retain the position of the Managing Member. c. A separate and single purpose (SP) LLC will be formed to purchase each of the note(s) or portfolio for each investor interest. This SP LLC will disclose the purpose, objective, and limitations for each investor(s) to determine suitability, benefits, and risks. d. The SP LLC (1, 2, 3, etc.) will not commingle benefits or expenses and shall stand on its own merit. e. The Managing Entity will be entitled to a management fee and/or profit pre-determined at the time of the formation of the SP LLC (1, 2, 3, etc.). Managing Entity and SP LLC For Each Note(s) Purchase Note Strategy 1. Foreclosure 2. Buy & Hold 3. Modify 4. Reposition Single Purpose (SP) LLC Managing Entity LLC 1 LLC 2 LLC 3 LLC x Managing Entity Corp or LLC 3

4 5. MANAGEMENT Have a core team a. President/CEO b. COO/Operations/Finance c. VP Sale & Marketing d. Accounting e. Legal 6. OPPORTUNITY ANALYSIS a. The information to the public is general in nature prior to the bid. We provide more indepth detail available through the analysis and gateway process. b. This analysis information is critical in evaluating the benefits, opportunity and potential returns of acquiring the note and its exit strategy. c. Based on the phase of bid there may be more or less information available for buyer analysis. 7. INVESTOR PROFILE a. Have liquidity of $1M or more. Some notes may require less. b. The ideal pool will be $5-10M with a benefit to higher limits (i.e. larger notes may provide a larger discount-to-value or higher valued properties may have more exit strategies and take the same amount of time as smaller notes). c. A new LLC may be formed to create an entity to provide the necessary funds. d. The note may be held in a single purpose LLC for asset and investor protection. e. A possible LLC may be formed with IRA/401(k) investors interested in institutional or commercial notes. f. Acquisition of the notes may require funds to be parked for 6-12 months based on acquisition and exit strategy g. Has experience in alternative investments preferably in notes, hard money yields, loan modification, or note serving. h. Patient Money is a term used for parking of funds for note acquisition meaning the funds can be invested without investor pressure for income, a specific time table, or guarantee of return. i. In some cases where the funds are pooled or in standby mode the investor may get a return on deposit and an equity share. Such structure and preferences are pre-determined at the time the entity is formed with note selection at the sole discretion of the LLC manager. 8. RISK AND MITIGATION a. Where the purchaser is the end Buyer, the responsible to determine the value or opportunity of the notes is the sole responsibility of the Buyer. b. Although not likely, the value of the note may diminish with time, take out, or lack of a secondary market. Since the purchase price of the notes are typical on the dollar, risk can be mitigated with time and exit strategies. c. Although there are multiple exit strategies, events may change that require an optional exit strategy to protect investor/llc equity, limit losses, or take advantage of other opportunities. 4

5 9. CONSULTANT AND REPRESENTATIVE PARTICIPATION a. Like other auction processes, Buyer fees are added to the buyer bid, award, or transfer. b. Broker fees are negotiable. c. Total fees range from 1-3% depending on the size of the transaction. d. A 3% or disbursement agreement is usually 1/3 each to: i. Seller Representative ii. Intermediaries iii. Buyer Representative e. The Intermediary is usually entitled to a Seller and/or Buyer fee and/or a profit. f. Daisy chains of referrals are problematic not just from the commission side, but from keeping the direct Seller or Buyer apart or completing a transaction. g. Referral fees should interfere with the Buyer and Seller or Representatives from completing the transaction. 10. EXIT STRATEGIES a. There are multiple exit strategies when purchasing or funding a note: i. Buy and hold for income, seasoning, and possible foreclosure. ii. Income on interest or forbearance. iii. Long term hold for future evaluation and changing exit strategies. iv. Foreclosure and hold or resell. v. Discounted modification for cash flow or resell to secondary markets. vi. Loan modification to the borrower for refi and cash accumulation. vii. Convert non-performing to performing and resell to institutions i.e. banks, insurance companies, hedge funds, etc. viii. Take down note with opportunity to assign (funds from the assignee must be liquid and in escrow and committed). b. Hybrid using multiple combinations. c. Purchase one or more notes in a package and break up into parts for multiple exit strategies. 5

6 CASE STUDIY: The FDIC has taken over a community bank that has several performing and non-performing notes to liquidate. One instance is: 1. Class A commercial office/medical building in a major metropolitan area that is 100% leased. 2. Current Cap Rate of 7%. 3. Gross income is $763k. 4. The face value of the note(s) is $7M consisting of a non-performing 1 st of $5.1M and a performing 2 nd of $1.9M. 5. Interest rate on the 1 st is approx 6.00%+/- on a 25 year amortized loan with three years of seasoning. 6. Interest rate on the 2 nd is 8.x% +/- interest only and performing. 7. The property is appraised at $10.9M and the expected bid is in the $3M +/- range. 8. The bid may not have been acquired at auction due in part to the non performing status, although the property has performing metrics. 9. The public information is that the note is non-performing; however the analysis and file review would reveal that the property is performing, but the note is not. Acquisition & Exit Strategies: 1. Purchase the note for a buy and hold strategy with cash flow of 6% on face value of $7M or 420k/year. On a $3M purchase the ROI is 14% with lease bumps to increase cash flow and build value over the next several years. 2. Propose a loan modification with the current borrower for cash out and liquidation. The acquired note to current appraised value is 25% LTV and thus a low risk-to-value opportunity. The borrower could obtain new financing of $5M which represents a 45.87% LTV. Assuming a load of 10% on the restructure for fees and legal, the profit on borrower liquidation is $1.5 or 30% with a 12 month window. 3. Season the loan for 4-8 months to convert to a performing status and resell to the secondary market in the on the dollar with a revaluation of $ M or an IRR range of % due to the value-add and short time frame. 4. Foreclose and hold. This could take a year (+/-) based on cooperation of the borrower or potential of a voluntary bankruptcy tactic to delay. Assuming a one year hold on $3M at a blended rate of 8%, the loss of cash flow of $240,000 will result in a wealth accumulation of $10.9M upon foreclosure and not necessarily a default strategy. 6

7 Case Study Summary Appraised Value 10,900,000 Note Face Value 7,000,000 LTV 64.22% Discounted Value 3,000,000 LTV 27.52% Gross Income 763,000 Cap Rate 7.00% Interest Income 420,000 Rate 6.00% ROI 14.00% Loan Modification 5,000,000 LTV 45.87% Gross Profit 2,000,000 Fees and Legal 500, % Net Profit 1,500,000 ROI 30.00% IRR 2nd Market Range-Low 4,200,000 Cents/$ % 2nd Market Range-High 4,900,000 Cents/$ % 7

8 Sub-Wholesale Discounted Notes 1 st Intermediary has purchase rights or intro *1 st Intermediary or Gateway Seller Mandate Seller Mandate obtains information and packages FDIC FDIC acquires Note as part of the Bank takeover and needs to liquidate quickly NOTE Buyer *Selling Broker ESCROW Bids Due Diligence Fees *Buyer Broker Private Lender/Buyer/Note Banker Could be a single party investor, fund, syndication, LLC, or IRA/401(k) accounts to lend funds or retain for cash and/or wealth creation. * Broker(s) could also be Intermediary Self-Directed IRA/401(k) Stragegy Possible purchase or option from Buyer in the name of IRA Account and transferred at closing 8