Shelbyville Commercial

Angela says,"This 53.1% LTV, first mortgage at a 10% yield may be one to consider to add to your portfolio… Why? This offering has been structured to address a concern investors may have during COVID-19. That concern may be… how will / can a borrower make his / her payment during the time COVID-19 social distancing orders are in place when tenants are involved? Our response to that with this offering is to include a 6-month payment reserve, to be established at the time of closing. The goal with this is reserve is to mitigate the risk of default (no guarantees implied) due to potential reduced cash flow from tenant rent defaults and / or business closure(s). Six (6) months should allow the borrower time to resolve any defaults with tenants but also provide the borrower a little financial breathing room to get his restaurant fully operational once America is back to work."

Blackburne & Sons is pleased to present this new first mortgage secured by a 6,500SF, 3-unit retail property located in Shelbyville, Kentucky. The borrower owns the subject property free and clear, and the purpose of the loan is to pull cash out in order to purchase other real estate and add to his real estate portfolio. More details on borrower and property below

The City of Shelbyville is located in Shelby County, Kentucky and is the county seat. Shelbyville is famous for being the Saddlebred Horse Capital of the world. It hosts an annual horse show that draws horse enthusiasts from all over the world, including William Shatner. Resting right off Highway 64, which is the main route that connects Kentucky's two largest cities, Louisville (30 miles east) and Lexington (50 miles west), the city has a population of just over 14,000. This population contributes to the population of Shelby County of 42,000, making this county the 23rd most populated in the state. Located in the northwestern part of Kentucky, Shelby County sits directly between the two largest counties, Jefferson County and Fayette County. It should be noted that per the appraiser, Shelby County's employment growth and population growth is higher than the state average.

The subject property is a 6,500SF 3-unit retail property on a 1.02 acre parcel. The property is single story, concrete slab foundation, with brick construction and a pitched metal roof. Per the appraiser, the property is in average condition and no deferred maintenance items were noted.

The property has 3 units and is fully occupied. One unit, which is roughly 4,000SF is occupied by the owner’s Asian buffet, and the other two units are leased to Subway and Boost Mobile. At the time of this bulletin, both tenants were still paying rent during the Kentucky applicable social distancing order(s). Per the rent roll provided by the borrower, Subway, which occupies about 1,600SF pays $1,950 per month and the Boost Mobile store pays $900 for their 900SF unit. The Subway lease runs until July 31, 2023 and the Boost Mobile lease runs until June 1, 2022. Total scheduled monthly rent (including borrower’s Asian Buffet) is $5,650. Both the owner's restaurant and the Subway are still doing carryout/delivery orders during the shelter-in-place period. It should be noted that the subject property is on the same street and within 100 yards of two hotels, the Red Roof Inn and an Eco Lodge.

For this loan, a 6-month payment reserve (est. $23,242) will be held back from the loan proceeds to assist the borrower with payments given the anticipated impact from the COVID-19 virus. Payments will be applied from this reserve each month and once the 6-month reserve is exhausted, the borrower will be required to begin making monthly payments himself. Example: If the first payment on this loan is June 1, 2020, payments from June, 2020 through November, 2020 will be applied from the reserve, and the borrower’s first payment from his own funds will be due December, 2020.

Our borrower is a married man, who holds title to the property personally. His wife will not be on title, nor will she be personally guaranteeing this loan. The borrower purchased the property in 2017 for $790,000, with funds from the sale of another business. It is our understanding that at the time of the purchase, the borrower paid $740,000 cash and then paid the $50,000 balance, a month later.

The borrower owns and operates the Asian buffet that is one of the tenants in the property. He has a mid-credit score of 671 and a reported net worth of $1,799,622. It should be noted that a majority of this net worth is attributed to two rental properties in New York, which have a reported (unconfirmed) combined value of $2,000,000. In 2018, borrower reported net taxable income of $16,857 and $74,806 in 2017. Per the 2018 personal tax return (Schedule E), the subject property generated gross rents of $67,080, and a net income of $45,729, after adding back depreciation.

We engaged a local MAI appraiser who valued this property at $800,000. We also engaged a local broker who performed an opinion of value, and valued this property at $800,000. In addition, as mentioned earlier, the borrower purchased the subject property in 2017 for $790,000.

At a 10.0% yield to the investors and a 51.3% LTV, 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, as a large and prolonged decline in real estate values is possible. 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.
During the S&L Crisis, commercial real estate fell by 45%. Within three years, values reached new highs. During the Dot-Com Meltdown, commercial real estate fell by 45%. Within three years, values reached new highs. During the Great Recession, commercial real estate fell by 45%. Within three years, values reached new highs. Some time in the next decade, we will have another opportunity to snatch up prime commercial real estate at a huge discount. You will be terrified, but when Blackburne and Sons invites you to join a syndicate to buy a nice commercial property at a 35% discount off its prior high, just remember that the best time to invest is when blood is running in the streets. Why not when real estate has fallen by 45%? You’ll never catch the very bottom because historically the bounces off the bottom happen much too fast. Bounce-soar. You will be terrified, but just remember that the best time to invest is when blood is running in the streets.

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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