STARS CABARET GENTLEMEN'S CLUB

George says, "Over the years we have had excellent luck financing such gentlemen's clubs, with the only problem being is that if they are run right, the owners make so much money that they double up (or more) on the payments. In addition, the loan amount is small, making the payments small."

Blackburne & Sons is pleased to present this new purchase money first mortgage secured by a 1.74 acre site, improved with a one and two story 15,248SF mixed-use property, consisting of a 13,208SF gentlemen’s club and 2,040SF upstairs apartment located in Neenah, Winnebago County, Wisconsin.

The Town of Neenah is located in the southwest part of the Fox Cities Metropolitan Area, in Winnebago County. As of 2010, Winnebago County had a population of 166,994.

The Fox Cities of northeastern Wisconsin are the cities, towns and villages surrounding the Fox River as it flows from Lake Winnebago northward into the Bay of Green Bay. The Fox Cities includes 20 communities made up of multiple cities, villages and towns located throughout Outagamie, Calumet, and Winnebago Counties. The Fox Cities Area is one of the fastest growing urban centers in Wisconsin with more than 297,000 residents.

The main access to Fox Cities is Interstate 41, which connects to Green Bay 30 miles north and Oshkosh 20 miles south. Interstate 41 circles the north and west side of the metropolitan area, while State Highway 441 completes the circle on the east and south sides. Downtown Appleton is at the very center of this circumferential highway system, with Neenah residing only 8 miles away.

The subject property is found nine minutes south of Neenah’s downtown alongside Interstate 41, one of the major arterials in eastern Wisconsin. The median household income within 5 miles of the subject property is $59,325 and the median age is 40.

Built in 1950, (per assesor) the subject property is a one and two story 15,248SF mixed-use property, which operates as an adult club and a upstairs apartment. The 13,208SF, first floor tavern space includes a main bar area, a special events room with bar and stage, a stage area, private dance booth area, and storage areas. The 2,040 square foot, second floor, three bedroom/two bathroom apartment is in fair condition. The apartment needs new flooring, paint, and kitchen work. Currently, the apartment is vacant and being used as extra storage. The borrower has no immediate plans to use the apartment for anything other than storage. The subject property was built on a concrete slab, and is in average condition. There is 107 parking spaces outside, in the subject property’s asphalt-paved parking lot.

Our borrower is a single man and will be holding title through his LLC, which was formed in 2013. He has a mid-credit score of 767, and a stated personal net worth of $584,722. His personal tax return reports income of $138,721 in 2017 and $99,533 in 2016. His LLC reports a net worth of $1,034,722. His background is in operations, and was the director of business development for Spearmint Rhino Las Vegas, the busiest and most successful club in the nation, per the borrower. The borrower specializes in distressed gentlemen’s clubs and turns them profitable.

He is purchasing the real estate for $550,000 and will be putting down approximately $139,000, inclusive of closing costs. After the purchase is complete, our borrower will own 51% of the business currently occupying the subject, while the seller will retain 49% ownership. The seller is holding back a $100,000 2^nd mortgage with no interest and no payments. The note has to be repaid upon the sale of the property. Our office is not aware of any plans for the borrower to sell in the near future. The LLC will be leasing this property back to the seller's operating entity, with rental payments at $6,000 per month, until 2023. Our buyer will be at the club once the purchase is complete to set up operations. This means overseeing everything from liquor cost to hiring new staff. He will bring in his General Manager from another club for a couple of months to help train the new staff and get the club operating to where it should be.

We received tax returns from the seller for 2017 and 2016, as well as a profit & loss statement through October 2018. In 2016, the club had $118,540 profit after adding back depreciation. In 2017 the business lost $8,516 after adding back depreciation, and as of October 2018 lost $60,401, after adding back depreciation.

A local MAI appraiser was engaged who valued this property at $810,000, however the appraiser did not include an income approach. The appraiser says this is because these types of properties are typically owner occupied, not leased. We also engaged two local brokers who drove by the property and took exterior photos and performed an as-is opinion of value. They each valued this property at $405,000-$419,000 and $438,000-$447,000.

At a 11.0% yield to the investors, and a 43.2% LTV based on the appraised value and a 63.6% LTV based on the purchase price, this appears to be a reasonable investment. Investing in any first mortgage involves substantial risk, so be sure to read the Risk Factors section of the Offering Circular carefully before investing. A large and prolonged decline in real estate values is possible. Be sure to read the Risk Factors section of the Offering Circular carefully before investing. Foreclosed commercial properties almost always need to be renovated before they can be leased or sold, so be sure to maintain some liquidity.

You should spread your mortgage investment portfolio out among lots of different deals. If you have $300,000 to invest, you should invest $10,000 to $20,000 in 15 to 20 different fractionalized first trust deeds. For example, if the deal is a $300,000 first trust deed on an office building in Boise, with a $15,000 investment you would own 5% of the loan. By spreading your money out into a bunch of different deals, you are achieving the diversity of a fund without the failed fund sponsor problem. If you are extremely wealthy, you could double (or even triple) my suggested investment amounts, but be careful about pouring too much money into a single deal. We once had a whole building fall into an old coal mine. Ouch.
Be wise and resist investing in any first trust deed yielding more than 9%. I would personally never invest in a first trust deed with a double-digit yield. The payments slowly grind the borrowers into the dust.
Blackburne’s Law theorizes that a portfolio of 8% and 9% first trust deeds will outperform a portfolio of 11% and 12% first trust deeds over a seven-year term. Only our wisest (and eventually the happiest) investors listen to me.
You can also buy some of our smaller deals in their entirety, but I only recommend this if you are richer than Crassus.
It is very easy to lose money in hard money first mortgages, so fight-fight-fight against the temptation to invest in high-yield deals. As Nancy Reagan used to say, “Just say no.” But if you choose 7% to 9% first mortgages, I predict that you will be very, very pleased.

Blackburne & Sons Realty Capital Corporation--For more information, contact Angela Vannucci
4811 Chippendale Drive, Suite 101, Sacramento, CA 95841
Telephone: (916) 338-3232 * Fax: (916) 338-2328
Real Estate Broker -- California Bureau of Real Estate -- License Number 829677 -- NMLS Number 103430
Publicly advertised to California residents only under California Department of Business Oversight business plan permit.
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