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We have robust quality controls with detailed checklists and a review of third-party reports.
Big Lots! Borrower
This is an opportunity to invest in a pre-funded debt transaction involving the acquisition of a well located outparcel adjacent to an existing shopping center owned by the Borrower. The Borrower, backed by a corporate guarantee from a Big Lots! subsidiary (BBB- credit), obtained this $2.2MM loan with an 18-month term on 9/1/15 in order to purchase the adjacent outparcel, complete tenant improvements, and lease the currently vacant building to Big Lots!. RealtyMogul.com investors are being presented the opportunity to invest in the underlying loan, with $1.5MM of proceeds being applied to the purchase price and $729K of proceeds being held back (reserved in an account monitored by Realty Mogul, Co. to be distributed incrementally for tenant improvements as they occur). The current balance of this reserve account is approximately $350K (as of 12/1/2015), resulting from total prior distributions of approximately $379K.
Big Lots! is the anchor tenant in the current center and has agreed to occupy the outparcel upon the completion of $700K of tenant improvements. Big Lots! has signed a new 10-year lease, which will go into effect upon completion of the work. The lease has three 5-year options at $9/SF, and the property is required to be delivered to Big Lots! prior to March 1, 2016.
The loan is secured by a senior lien on the Property and is full recourse to the Borrower in the event the building is not delivered to Big Lots! prior to the deadline. The $2.2MM loan is 72% of total project cost, is senior to $874K of Borrower equity, and is expected to produce a stabilized debt yield of 11%.
The Borrower is currently the Chief Financial Officer of a non-profit organization, overseeing the group's multi-million dollar real estate portfolio.
The Property was originally a Longs Drug Store and is currently vacant. The site improvements include asphalt paved parking areas, curbing, signage, landscaping, yard lighting and drainage. Access to the Subject’s shopping center from W 5th Street is provided by 3 two-way drive ways. Access to the center from S 11th Avenue is provided by 1 two-way drive-wa According to Costar, traffic counts at the subject are approximately 17,500 ADT along S 11th Avenue. Traffic counts along Highway 198 are 22,735 ADT.
Hanford is situated in the south central portion of California’s San Joaquin Valley and is the county seat of Kings County California. It is the principal city of the Hanford-Corcoran metropolitan area (MSA Code 25260) which encompasses all of Kings County. The city is located 28 miles southeast of Fresno and 18 miles west of Visalia.
Hanford is a major trading center serving the surrounding agricultural area. According to the California Employment Development Department, as of September 2012, most residents of the Hanford-Corcoran MSA were employed in services (31,000 employees), government (14,400 employees) and farming (6,400 employees) as well as in some manufacturing enterprises (5,700 employees). Major employers within the city of Hanford include the Kings County government, the Adventist Health System, the local School District, the Del Monte Foods tomato cannery with both full time and seasonal employees and Marquez Brothers International, Inc., makers of Hispanic cheese and other dairy products. Many Hanford residents work for other nearby employers such as NAS Lemoore, the U.S. Navy's largest Master Jet Base located 15.5 miles WSW of Hanford and for the California Department of Corrections and Rehabilitation which operates three state prisons in Kings County.
Risk Factors*
- Forward-Looking Statements: Investors should not rely on any forward-looking statements made regarding this opportunity, because such statements are inherently uncertain and involve risks. We use words such as “anticipated”, “projected”, “forecasted”, “estimated”, “prospective”, “believes”, “expects”, “plans”, “future”, “intends”, “should”, “can”, “could”, “might”, “potential”, “continue”, “may”, “will”, and similar expressions to identify these forward-looking statements.
- Market Risk: Investments related to mortgages secured by real estate are subject to market valuation risks that may be caused by changing economic and local market conditions. The property underlying the corresponding borrower loan is expected to have reasonably acceptable loan-to-value ratios and to meet certain other valuation criteria, but estimated values made when the loan is originated may not fully represent current market values, and subsequent market values will in particular be affected by changing economic or local market conditions. Such conditions are beyond the control of Realty Mogul and of the corresponding Borrower on this loan. Such conditions may change due to factors such as local real estate market conditions, prevailing interest rates, the rate of unemployment, the level of consumer confidence, the value of the U.S. dollar, energy prices, changes in consumer spending, the number of personal bankruptcies, disruptions in the credit markets and other factors.
- Single Tenancy Risk: With Big Lots! expected to exclusively occupy the building, revenue will be derived from a singular, non-diversified source. Therefore, although there is a personal guarantee on the underlying borrower loan, property cash flows may become insufficient to cover debt service in the event of a default.
- Potential for Renovation Delays: Big Lots! can terminate the lease if the space is not delivered by 3/1/16. However, the loan becomes full recourse in the event the Borrower fails to deliver the building to Big Lots! in an appropriate length of time due to a failure of the Borrower.
- Tertiary Market with Minimal Growth Prospects: With minimum expected growth, there is the risk that the performance of the property may be effected. Major employers in Hanford, including Adventist Health System, Del Monte Foods and Marquez Brothers International (Dairy products manufacturer), offer employment opportunities for much of the demographic targeted through Big Lots! discount strategy. As stated in Big Lots! most recent 10K, a key part of the company’s sales growth strategy includes relocating stores to stronger locations in existing markets. Big Lots! proactive approach in relocating to the Subject shows their confidence that this location fits their strategy.
- Lease Not Directly Signed by Corporate Parent: PNS Stores Inc., the signee on the lease, is a wholly owned subsidiary of Big Lots! Stores Inc., and is disclosed as such on the 10K. Through discussions with brokers in other parts of the country and other examples of Big Lots! leasing arrangements, it is common practice for Big Lots! to sign store leases through PNS Stores or other similar subsidiaries. Realty Mogul’s External legal counsel has advised that the entity is not a newly formed single lease entity. Upon researching the SNDAs and estoppels of other loans with Big Lots! tenancy, PNS Stores Inc. was found to be the signee on all five Big Lots! stores within the past eight years that were pulled.
- Borrower Payment Dependent Note Structure: Investors are purchasing borrower payment dependent notes issued by Realty Mogul, Co., which are tied to the performance of an underlying borrower loan secured by real property. The notes are special, limited obligations of Realty Mogul, Co. that pay only if, as, and to the extent payments are received on the underlying borrower loan. The notes are not secured by any collateral, including without limitation the assets of the borrower, or guaranteed or insured by any third party.
- Borrower is a Small Individual Investor: With a reported net worth of $3.3MM and liquidity of $420K, the Borrower is a small individual investor. However, the Borrower signed personal financial statements listing joint ownership in properties totaling $4.5MM ($2.8MM net of mortgage balance) based off current market value. Of the reported $420,000 in liquid assets, $380,000 is held in an account controlled by the Borrower, but funded with third party investor capital that is intended to be working capital for the Subject property. There will be substantial equity in the deal at closing totaling $874K, equal to 28%, resulting in conservative leverage and a substantial equity cushion. The total TILC amount will be reserved at closing along with six months of interest reserves.
Risk Mitigation*
- Big Lots! has nearly 1,400 stores, annual sales approaching $5 billion, and carries an investment grade rating of BBB-
- There is a full personal guarantee on the underlying borrower loan
- The Borrower is experienced in real estate and owns the adjoining shopping center
- The security interest for the underlying borrower loan is a mortgage deed
- The underlying borrower loan is protected by title insurance
- The underlying property is protected by hazard 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
*The above is not intended to be a full discussion of all the risks of this investment.