Borrower Whispering Oaks
At A Glance
| Property Type: | Multifamily |
| Investment Type: | Loan Purchase |
| Estimated Rate of Return: | 8% annualized |
| Loan Term: | 24 months |
| Location: | Houston, TX |
| Purchase Price: | $2,300,000 |
| Loan Amount*: | $2,000,000 |
| Est. Value After Repair: | $2,975,000 |
| Est. LTV After Repair: | 67% |
| Protective Equity: | $975,000 |
*A portion of the borrower's loan funds are disbursed through a fund controlled account serviced by the loan servicer. As the borrower completes property improvements, the corresponding loan amounts will be funded to them. This process is in place to prevent misuse of funds and maintenance of a lien free project.
Summary
Realty Mogul investors have the opportunity to invest in a loan. The loan is tied to payments from an underlying borrower loan that is secured by the property. Realty Mogul intends to fund $300,000 out of the $2,000,000 total loan amount.
The borrower is investing $600,000 of cash to purchase the property. Proceeds from the loan will go towards the purchase price and fund control money to finance a portion of the property improvements. The borrower intends to stabilize and lease-up the property once the renovation has been completed. In addition to these expenditures, the borrower has committed in the loan documents to spend another $400,000 within one year of closing, equating to a total of $900,000 that will be spent on purchasing and improving the property.
The loan servicer will be withholding $250,000 cash at closing. These funds will be released as improvements are completed at the subject property. For each dollar spent the borrower spends, the servicer will reimburse $0.50, so by the time the $250,000 reserve has been exhausted, $500,000 of improvements have been made.
The underlying borrower loan will be secured by a first position lien on the 180-unit apartment complex, commonly known as Whispering Oaks, which is being purchased by the borrower for $2.3 million. The underlying borrower loan will be further secured by a second lien on a 195-unit apartment building known as the Courtyard Apartments. The Courtyard Apartments has been owned by the borrower since 1999 and has had $1.8 million in improvements completed since 2009. The property was recently refinanced by a conventional CMBS lender. The recent appraised value is $6.3 million (attached above), with current debt of $4.1 million, which equates to a remaining equity value of $2.2 million. The excess cash flow after debt service is $350,000 per year. The underlying borrower loan has an assignment of rents for the Courtyard Apartments which allows an appointed receiver to collect this cash flow in the event of a default on the borrower loan.
The borrower plans to obtain conventional financing for Whispering Oaks after the renovation is completed and operations have stabilized. The intention is that conventional financing will be used to repay this loan.
Investors will receive interest payments of 8% annually, paid monthly, with a final balloon payment at the end of the loan term. The underlying security interests for the borrower loan are a deed of trust secured by Whispering Oaks in first position and a deed of trust secured by Courtyard Apartments in second position.
Risk Mitigation**
- There is a personal guarantee on the underlying borrower loan.***
- The borrower is a real estate investor with a history and a track record of success.
- The underlying security interest is a deed of trust in first position and a deed of trust in second position.***
- The borrower loan is protected by title insurance.***
- Investor returns are not contingent on the appreciation of the property value and investor returns do not increase based on any resale price. The borrower is still obligated to repay the corresponding borrower loan.
- In a worst case scenario, a foreclose is possible. Proceeds would be distributed to investors according to the percentage of the total investment opportunity initially funded.
**The above is not intended to be a full discussion of all the risks of this investment. Please see the Risk Factors in the Investor Document Package for a discussion of additional risks.
***An investment in this loan will be made through a borrower dependent payment note issued by Realty Mogul. These promissory notes are dependent for payment on payments that Realty Mogul receives on the underlying borrower loan. While the borrower loan is secured by legal title to real estate, the borrower dependent payment note is not itself secured.
Whispering Oaks was built in 1977 and is a 12-building, 2-story wood and stucco clad garden style apartment complex on 5.02 acres in the Sharpstown neighborhood of southwest Houston.
The property consists of 180 units with a total rentable area of 122,896 square feet, which includes 156 one-bedroom units ranging in size from 602 square feet to the 16 one-bedroom+den units with 812 square feet. There are also eight two-bedroom, one-bathroom units at 812 square feet and 16 three-bedroom, two-bathroom units at 1,059 square feet. The units have individual HVAC units and each unit is separately metered for electricity. The concrete parking lots have room for over 400 cars which is deemed more than adequate for the unit mix. Landscaping is simple lawns with some gardens.
The property's age and unit mix are common for its submarket, which is dominated by Class C properties. Like this property, very few properties in the immediate area offer amenities. The property's pool will be filled in for liability purposes while the club house will be updated as part of the rehabilitation contemplated by the borrower’s budget. Depending on the floor, each unit has either a patio or a balcony. Like the other Class C properties in this submarket, this 1970's building is in constant need of repairs and upgrades to maintain its income stream. Unlike most of the others, mismanagement has allowed the occupancy at Whispering Oaks to fall to 40%. The borrower's objective will be to renovate the property and substantially increase occupancy.
Whispering Oaks is located in the Sharpstown/Westwood submarket of Houston. With 38,541 units, amounting to 7.6% of the total Houston metro inventory, the Sharpstown/Westwood submarket is the second largest of the twenty-three unique Houston submarkets. In the ten-year period since third quarter 2003, there have been no additions to the submarket, and 93 units have been removed by conversion. Although the submarket inventory has remained flat, the metro inventory has grown at an annualized rate of 1.7%.
Houston Area Overview
Houston is the fourth most populous city in the United States, and the metropolitan area has over 6 million people. More than 17 million people live within 300 miles of the city. The metropolitan area consists of ten counties - Austin, Brazoria, Chambers, Fort Bend, Galveston, Harris, Liberty, Montgomery, San Jacinto and Waller. Houston has thrived on expansive and modern infrastructure facilities, affordable living costs, a young and well educated workforce, and vital energy and healthcare industries. The area weathered the global recession and economic volatility better than most of the nation's largest employment bases, and Houston has the distinction of being only one of two of the country's top 20 metropolitan areas to regain all the jobs lost in the recession. In 2012, Houston added over 118,000 jobs across a wide array of sectors.
The city now has a well diversified economy. In 1986 80% of the local economy was tied to the petroleum, natural gas, and chemical industries, but today that number has been reduced to approximately 48%. Houston is home to the largest medical center in the world and its companies are leaders in high-tech sectors as biomedical technology, electronics, computers, software, aerospace, integrated power, and plastics manufacturing. Houston ranks second only to New York in the number of Fortune 500 companies with headquarters there, and more than half of the world's largest foreign corporations have non-retail operations in Houston. The Port of Houston is also one of the few American port facilities to have both import and export traffic.
Houston's employment base is experiencing consistent expansion with over 118,000 new jobs added in 2012 and similar additions expected in 2013 and on. Houston was ranked #1 in the nation for annual job gains in 2012 and is expected to continue with that ranking over the next few years. Job growth is expected to be fueled by continued expansion in both traditional and alternative energy sectors, as well as significant personnel needs in industries such as healthcare, education, trade, transportation, and professional and business services.
According to Rice University's Kinder Institute for Urban Research, Houston was the nation's fastest growing metropolitan area for the decade ending in 2010, adding more than 1.2 million new residents. Future forecasts are similarly strong, estimating that the Houston area will add a further 1.0 million people by 2020 and an additional 2.4 million between 2020 and 2030.
