Peppermint Hippo Gentlemen's Club II

Blackburne & Sons originated a loan in 2021, for $400,000 and was secured by the subject gentlemen's club. The payments on the original loan were for $3,779/month, but the borrower has been making monthly payments of $10,000 per month since inception. As a result, he has paid down the loan to $102,000 in just three years. Blackburne & Sons has made a total of three loans to this borrower and over the years, he's had just one late payment. One of the borrower’s loans has already been paid in full, and he always pays substantially more each month than the obligated payment amounts on the other two loans.

The borrower now wants to pull some cash out of the subject property to upgrade the frontage of the building, via a refinance with us. The borrower estimates the upgrade will cost approximately $350,000+.

As part of our due diligence for this new cash out request, we recently ordered a new appraisal (5/21/24) from a different appraiser local to the area (MAI certified). The appraiser valued the property at $440,000. We also got a new BPO, which came in at $937,000. Additionally, the appraiser does not believe the proposed property upgrades will increase the value of the property significantly enough to provide an "after repair" value (ARV).

Knowing this, while keeping in mind the borrower's strong payment history, the borrower is now requesting a $440,000 loan. All of the loan proceeds will be used to update the property, as mentioned above. Any remaining funds needed to complete the upgrade will come from outside financing.

A loan amount of $440,000 would be 100% Loan-to-Value based on the current appraised value of the property, and therefore garner significant risk, especially given we do not have an ARV value to work off of.

George says: "The difference in value described above is the difference between just a basic building and a very, very successful business. Hellooo? The borrower has been more than doubling up on his payments! You should agree to invest in this deal. The sun is going to come up every morning, and boys are pretty much always going to want to look at pretty girls. I wish we had a dozen more deals like this."

Blackburne & Sons is pleased to present this first mortgage secured by a 7,440SF commercial building on 2.37 acres, located in North Little Rock, Pulaski County, Arkansas.

The purpose of this loan is to pay off the current loan in the amount $102,000. The rest of the funds will go towards closing costs and cash out for making property improvements on the subject property. Blackburne & Sons will not be holding back funds fro this rehab.

COUNTY INFORMATION

Pulaski County is a county in the U.S. state of Arkansas. With a population of 399,125 as of the 2020 United States Census, it is the most populous county in Arkansas. The county is included in the Little Rock–North Little Rock–Conway metropolitan area. Its county seat is Little Rock, which is also Arkansas's capital and largest city.

Pulaski County is Arkansas's fifth county, formed on December 15, 1818, alongside Clark and Hempstead Counties. Pulaski County is named for Brigadier General Casimir Pulaski, a Polish-born Continental Army officer who was killed in action at the Siege of Savannah during the Revolutionary War. The county was the site of the Battle of Bayou Fourche on September 10, 1863. The Union army took control the same day and occupied Pulaski County until the end of the Civil War. The county was home to Willow Springs Water Park, one of the oldest water parks in the nation, which opened in 1928 and closed in 2013.

CITY INFORMATION

North Little Rock (often abbreviated "NLR") is a city in Pulaski County, Arkansas, United States. It is the twin city of Little Rock. The population was 64,591 at the 2020 Census, making it the seventh-most populous city in Arkansas. The city has been experiencing significant beautification efforts over the past few years, resulting in renewed interest from young families and professionals. Areas such as the Argenta Historic District in Downtown have turned into thriving entertainment districts offering theaters, fine dining, bars, gastropubs, and boutiques. It is also home to Dickey-Stephens Park, which hosts the Arkansas Travelers minor league baseball team, and Simmons Bank Arena, the metropolitan area's main entertainment venue. Farther west is Burns Park, one of the largest municipal parks in the United States. According to the United States Census Bureau, the city has a total area of 47.0 square miles, of which 44.8 square miles is land and 2.2 square miles (4.58%) is water.

In 2022, the median property value in North Little Rock, AR was $165,600, with a homeownership rate of 47.6%, and the median household income was $49,166. The economy of North Little Rock, AR employs 30.7k people. The largest industries in North Little Rock, AR are Health Care & Social Assistance (5,313 people), Retail Trade (2,969 people), and Educational Services (2,949 people), and the highest paying industries are Utilities ($75,601), Information ($70,149), and Real Estate & Rental & Leasing ($60,800). The largest universities in North Little Rock, AR are University of Arkansas-Pulaski Technical College (1,914 degrees awarded in 2022), Paul Mitchell the School-Little Rock (162 degrees), and The Salon Professional Academy (460987) (103 degrees).

SUBJECT PROPERTY DETAILS

Built in 1991, the subject property is a retail building (Gentlemen’s Club) totaling 7,440SF of net rentable area on 2.37 acres of land. The improvements consist of a good quality specialized retail facility in a free-standing class S building.

The parking lot is improved with an asphalt paved surface, striping, pole-mounted lights, exterior lighting, partially fenced yard, extruded curbing, a private patio and consists of 100 parking spaces. The foundation is concrete poured over crushed gravel fill with vapor barrier and the roof is standing seam metal. Part of the improvements the guarantor would like to make will include re-paving and striping the parking lot.

The borrower purchased this property in January 2020 for $700,000. The business was also purchased for an additional $1,100,000. After the 2020 purchase, the guarantor made $488,000 of improvements to the property. Those improvements included; remodeling both the women and men’s restrooms and locker rooms, new carpeting, new stage, four new air conditioning and heating units, custom cabinetry, custom lighting and sound, 39 security cameras installed, custom walnut paneling with gold trim, new lockers, rewired electrical, updated plumbing, new sign and canopy, new back bar with two new coolers and sinks.

With the cash out from this loan, the borrower plans to further renovate the property. These renovations will include: Demo of the existing canopy, the bollards in front of it and the signage at southeast end of building, move existing "Peppermint Hippo Sign" to south edge of parking lot so it is visible from the highway, installation of new "Peppermint Hippo" LED neon sign on southeast end of building, electrical conduit ran to south edge of parking lot to the relocated sign, design and construction of new illuminated and covered entrance, new light bollard to be installed in front of new entrance, framing, wiring and installation for illuminated panels and new signage, 8’ tall LED exterior light fixtures to be installed on the south facade of the building. The borrower will also be getting new gravel, new paving and new striping of the parking lot on top of the above items. It should be noted that Blackburne & Sons will NOT be holding back any funds for this proposed rehab.

BORROWER SUMMARY

Title to the property is held in a Nevada LLC, which is the real estate holding company. This entity was formed in late 2019 for the purchase of this club. There are 14 members of this LLC. The Managing Member of that LLC, however, has 45% ownership, and will be the only signer on this loan. That managing member is another Nevada LLC owned 100% by our Guarantor. He will also be providing a personal guarantee on our loan.

The LLC that holds title (Real Estate Holding Company) to the property reports 2022 net income of $228,377 and $71,786 in net business income in 2021. The 2023 taxes are not yet filed, but we were provided a profit & loss statement showing $904,723.28 in net income for 2023. This LLC is the holding company to 5 gentleman’s clubs owned by our guarantor. The income it receives is a management fee.

The Managing Member of the borrowing entity (45% ownership) is a Nevada LLC and reports 2022 net income of $1,278,584. In 2021, the net income was $174,515. They have not filed 2023 taxes yet, but provided a 2023 P&L showing $569,061 in net income. This entity receives its income from the other gentlemen's club that it owns.

The operating entity (Gentlemen’s Club) has a special non-profit license that allows the business to stay open until 5AM. All licenses allowed to stay open until 5AM in Arkansas are considered non-profit. There is a lease between the operating entity and holding entity for $10,000 per month through May 2030 to the holding entity. This entity (the business) reported net income of $113,299 in 2022 and $43,486 in net income in 2021. A 2023 P&L we were provided reports $96,317 in net income.

The guarantor is a single man, has a mid-credit score of 711 and reports a net worth of $13,626,293. This will be his 4th loan with Blackburne & Sons. The first loan was originated in January 2019 on a Gentleman’s Club in Wisconsin and had only one late payment throughout the life of the loan. This loan was paid off off in December of 2023. The second loan closed in March 2021 on a Gentleman’s Club in Ohio and it is still on the books with no late payments to date. His third loan is the current loan on the subject property that was originated in 2021.

His 2022 personal tax return reports a loss $130,092. In 2021 he reported adjusted gross income of $227,727. He has not yet filed his 2023 personal tax return as of yet but it is in process.

VALUATION SUMMARY

We hired a local General Certified appraiser who valued this property with an AS-IS value of $440,000.

A local broker was also engaged who performed a drive-by opinion of value (BPO) and valued this property at $937,000.

At a 12.0% yield to the investors and a 100.0% LTV (Appraised Value), keeping in mind the borrower's history with the property, and his immediate plans with the loan proceeds, this appears to be a reasonable investment. Investing in any first trust deed 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. 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 Tom Blackburne
555 University Ave., Suite 150, Sacramento, CA 95825
Telephone: (916) 338-3232 * Fax: (916) 338-2328
Real Estate Broker -- California Department 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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