Do you have a contingent offer or option on the Cabinet Shop property?

We do not.  We have submitteed a letter of intent with a proposed price and a $50,000 deposit.  This is needed to get detailed information and to start due dilligence, like verifying income and expense, vendor contracts, tax abatement agreements etc.  As part of this LOI, the seller and his broker also agrees to stop soliciting new offers through the end of April.

Do you have approval from a bank for the loan.

No firm commitment yet, but after talking to a few banks, financing does not seem to be a problem with this property because it considered a new class A property.  In addition, we have the option to assume the seller's existing loan, which of course has already been underwritten.  There is an assumption fee to do this so we will need to compare that fee with whatever the bank charges in upfront fees as well as interest rate.

Is this the largest project you have ever done? Denbar's recent apartment investment has been around $1.5MM. Just wondering if this is too big a leap in terms of size?

This is the largest project (in terms of purchase price), Denbar has done its own.  But we have done larger projects in partnership with other firms.  This project is large only in terms of purchase price.  In terms of complexity, rehabbing, project management, repositioning, property management etc. it is one of the most straightforward projects we have done.   Some of the reason for this are:

• The base property (ground level) has been completely refurbished and brought up todays building code.

• Above the ground level it is brand new construction.

• All occupancy certification and licenses are in place.

• Fully occupied.

• I plan to contract with a property management firm whose principals I have known and invested with for years.  Their company is nationally recognized and made the Inc 5,000 a few times and Inc 500 once.

• Tenant lead sources already in place

• Draft agreement in place to jointly use an office in an adjacent property as a joint leasing office as part of a neighborhood association initiative.

The financials did not show any start-up costs. On other similar projects, due diligence costs run over $20,000, and upfront loan origination fees and other fees can be significant.

On this project Denbar is funding all due diligence costs and will recover those from ongoing performance fees.  Loan related costs will be amortized over a long enough period of time so that there will not be a material change in returns.

What are the major differences for an investor between the Ankeny commercial building and these apartments? Since both these properties are available at the same time, if I do invest, I will probably have to pick one of them, and I am assuming other investors are in a similar position.

Although I would love it for you to invest in both, there are differences between the two investments which may make one more suitable than the other for different people.  The price per share for the cabinet shop is $100,000, which is double that of Ankeny.  Regardless of anything else, depending on the size of one’s overall portfolio, $100,000 may be too much to invest in a single investment, but $50,000 may be suitable.  This in itself can eliminate one option, although only you or a financial advisor who is familiar with all your investments can answer this.

Beyond the price per share, the Ankeny project should be more stable long term.  And by that I mean it probably will not produce much variance or swings of either cash flow or property value.  On the other hand Ankeny does not have the upside potential that the apartments have.  The apartments could have a lot of upside potential beyond our forecast if that location starts booming.  Even if Ankeny booms, we have long term leases so we will not see an immediate benefit like apartments where rents can be adjusted within a year at the longest.  An anology could be that Ankeny should perform like a CD or Corporate Fixed Deposit, whereas the apartments are more like stock.  Hope I have not confused things more!

Why does Denbar’s waterfall distribution have only one level whereas other sponsors of similar properties have 3 or more levels?

The short answer is I like to keep things simple, and a single hurdle rate after which distributions are split equally between Denbar and investor is simple and easy to comprehend. 

In my opinion, having 3 or more levels is more appropriate for more speculative high risk high return investments where the IRR’s can potentially go above 20%.  I say this because from a practical standpoint, on lower risk stable investments, even if the offering document shows 5 tiers, the distributions probably will never get beyond the first tier.

The project that you sent is me is a good example of this.  It showed a waterfall with hurdles starting at 6% and went up to “29% and over”.  (Note that their 6% is lower than our single hurdle rate).  The project may hit the next tier (10%)  in some years (although it really has to go above it for it to be meaningful).  But there is very little chance that the project will hit the remaining tiers.  So from a practical standpoint the additional tiers are kind of meaningless, or maybe even a little misleading because by stating those high rates, it gives the impression that the project actually gets to those levels or returns. 

For example, similar to what you sent, it may look good if I had a tier that says investors can have 90% of returns over 29% and Denbar just keeps 10%.  It certainly sounds better than the 50/50 split that we currently have.  But to me, that is just a marketing and sales gimicck, because there is slim change we will see returns of over 29%, so that would be a very hollow offer on my part.

Just curious - since you submitted the LOI before getting investor commitment, what happens if you don't raise the funds needed? Do you forfeit the earnest money?

It's a non-binding LOI that lets us start due dilligence and work on a sales contract.  We will not be commited until a sales agreement is executed, and even then, it probably will have a few contingencies, like financing.

Therefore, Denbar does not forfeit the earnest money.  Not yet anyway!

By what date do you need a commitment to reserve a share, and by what date will you need the funds?

Te  commitment date and funding date will be the same.  I have not selected a firm date yet, but I estimate that it will be May 15, or a little earlier.

We are trying to get away from having a separate commitment date and funds due date, because it often happens that we get commitments that don’t pan out.  I thought about asking for a deposit or earnest money when reserving (i.e. commiting) to a unit/share similar to what we have to do when buying a property, but decided against that for various reasons. 

After you get back from Dallas next week, sounds like there is a good chance you will be putting together at least one new project. Since you already have the Memphis apartments and Ankeny, will you give us a chance to look at all three or four before making a decision? Or are the commitment dates spread out or mutual exclusive?

Unfortunately, each project is mutually exclusive and it is possible you may not have an opportunity to wait for all three to be available at the same time.  The main reason for this is because we have no control over the timing of when opportunities come on the market and just a little control in holding on to a property before someone else buys it.  In the current situation, it is pure chance that three or more projects are coming to a head around the same time. 

For example, I have been working on opportunities in Memphis, Dallas, and Phoenix for over a year, but the first investments were only made in January and March of this year (these were infill land development investments in Phoenix that was purchased for the Denbar READY portfolio).  I would have liked to have invested in TN and Texas last year, but nothing came to fruition despite numerous LOIs and a few offers.  Now of course we have the Memphis apartments, but I could not have predicted the timing. 

I would not like to encourage anyone to wait for Texas if the existing investment options matches what you are looking for.  Because there is chance nothing works out in Texas, or maybe you find that what I end up with does not match what you are looking for.

One last comment – this question mentioned that there is a good chance I will be putting something together in Dallas.  I just want to clarify, that I did not actually say there was a “good chance”!   That verbiage was part of someone’s question, so I left it in there.  When some of you ask about things I am working on, I think the info I provide may lead people to think that we are close to purchasing something, when in fact we are still researching.  I do apologize for that and will try and make things more clear.  Or even in the cases we are close – some might not know that we get close on many projects that we don’t end up getting for various reasons – the main one being the ability to move fast enough.  The very nature of a “good deal” or any amount of arbitrage implies it moves quickly! 

(Follow up from the above answer). Due to the dollar amount, if I commit to Memphis, I cannot invest in Ankeny, or any other project this year. So my concern is how long it will take before it actually closes, because until then, you never know if it will go through, and in the meantime I might lose out on other opportunities – either yours or someone else’s. Also concerned that since the amount you are raising is significantly more than earlier projects, there is a higher probability you will not get enough investors.

Fully understand your concern, and unfortunately this is one of the downside of these kinds of investments.  As you mentioned, until we close, there is no guarantee that the investment will go through and your funds will be tied up without 100% assurance of closing.   I am considering other products in the future to eliminate this issue, but that is a topic for another time.  For this project, I can only address the concern of not getting enough investors.

Although I would love to have all of my clients invest, I know that there is a chance I will not be able to raise the total amount, especially with other competing projects of my own.  Therefore, I have the option of funding up to 4 shares with one of the partner firms I am working with.  This is one of the same firms mentioned in the Denbar READY proposal who I have done business with for a while.  Of course this still does guarantee we will close, but it helps.

FYI - This kind of partnership helps both firms, in that I have already invested in some of their projects when they had a few outstanding shares.  And unlike other such partnerships or adding another cost layer in the middle like going through a broker, we can invest in each other’s projects under the same terms as other direct investors.

Will you be using the Simplified LLC Operating Agreement or the newer full blown version?

We stopped using the Simplified LLC Operating Agreement and since last year only use the comprehensive agreement.  The main and probably only reason for using the Simplified version, was because it was much easier for investors who were not familiar with LLCs to understand.  The comprehensive version offers better and more explicit protection for investors and the LLC Manager (Denbar).  As we grow and the size of investments increase, these benefits outweigh the one benefit of the simplified agreement.

If anyone wants to see a draft of the Comprehensive Op Agreement, please email me.  I’ll probably send it next week when I get back to town.