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Mark S. Goldstein, Esq. Brent M. Goldstein, Esq.
(301) 951-9323 (301) 347-3147
APOLLO INVESTMENTS LLC
4800 Hampden Lane, 7th Floor
Bethesda, Maryland 20814
January 13, 2003
RE: PARTICIPATION LOAN TO OLDE MILL VILLAGE, LLC
Dear Investor:
The purpose of this summary description is to outline the salient terms and conditions of an investment offer by Apollo Investments, LLC (“Apollo”), made only to a select number of investors, to acquire a total of eleven (11) investment Units of $100,000 each (or halfunits of $50,000 each) in a participation loan (the "Apollo Loan") for $1,100,000 to Olde Mill Village, LLC, a Virginia limited liability company (the "Company"). The loan will bear interest at twelve percent (12%) per annum and will mature on January 31, 2013 (unless sooner repaid). Both the Company and its wholly owned subsidiary, Olde Mill Sub, LLC (“Owner LLC”) were formed in January, 2003 by Realty Capital Company, LLC (“RCC”) and TCT Investments, LLC for purposes of acquiring the Olde Mill Village Apartments, a one hundred twenty (120) unit apartment complex located 4 blocks from the main campus of James Madison University in Harrisonburg, Virginia (the “Property”). The purchase price for the Property is approximately $8,830,000. The Company intends to use the Apollo Loan proceeds to capitalize Owner LLC’s acquisition of the Property. The Managing Member of the Company is LSW, LLC, a Virginia limited liability company owned and operated by Jack Spector and Bernard Wiesz (see Management section below).
I. PROPERTY BACKGROUND
The Managing Member entered into a Purchase and Sale Agreement, dated as of September 19, 2002 to purchase the Property. The Property is located at 11A South Avenue, Harrisonburg VA 22801 and consists of ten (10) acres fully is improved by 120, 4-bedroom fully furnished apartment units in ten (10) detached three story buildings. The Property contains approximately 156,000 rentable square feet of livable space and 435 surface parking spaces. The Purchase Agreement contains a provision allowing RCC to assign its rights under the Purchase Agreement to the Company. The Company and RCC intend to assign the Purchase Agreement to the Company immediately prior to the Closing, which is scheduled to occur on or before January 24, 2003.
The Property is situated just 4 blocks away from the main campus of James Madison University (“JMU”), an institution with an enrollment of over 15,000 students. The Property was improved in two phases with the first phase completed in 1989 and the second in 1991. The Property is located on Main Street, the main north-south thoroughfare in Harrisonburg, VA and is the best-located multi-family residential community catering to JMU in Harrisonburg. The Property offers a distinct competitive advantage, due to its close proximity to JMU, that allows for easy pedestrian traffic to and from the campus.
RCC believes that the sales price of $8,830,500 ($56.60 per rentable square foot) represents a discount to market value of similar properties. The Property tenant base consists almost exclusively of JMU students or recent graduates. Approximately 95% of the student leases are guaranteed by a parent, with the remaining 5% protected by a double security deposit.
Recent renovations to the Property include the installation of new roofs on 6 of the buildings and new carpeting and vinyl flooring in approximately 2/3 of the units over the last four years.
II. PROPERTY DETAILS
Building Area: Net rentable area of 156,000 square feet in 10 three story buildings
Land Area: 10 Acres
Zoning: R-3, multi-family limited to 12/units per acre
Parking: The parking ratio is 3.62 spaces per unit. Additionally, a city bus line free to JMU students serves the complex.
Number of Floors: Ground level plus two upper floors
Structure: The main structure is wood framing with wood floors dividing each unit from top to bottom.
Foundation: Reinforced concrete footings with reinforced concrete slabs on grade.
Roof: The roof is composed of asphalt shingles over plywood decking and a wood truss support system. Over the last four years, 6 roofs have been replaced with 25-year shingle warranties.
Exterior Walls: Exterior walls consist of brick foundation and painted vinyl siding over wood frame.
Interior Walls and
Finish: All interior walls and ceilings are drywall applied over wood studs. The finish on the interior walls is semi-gloss white paint in the kitchens and bathrooms and flat paint throughout the rest of each unit. Floor finishes consist of wall-to-wall carpet, except for the kitchen, laundry room, bathrooms, entry hallway and HVAC closet which have vinyl floors. Interior ceilings have textured paint in the kitchen and bathrooms and textured flat paint throughout the remainder of each unit.
Windows and Doors: All units have insulated steel doors with wood frames at the main entrance. All interior doors are wood and are painted. All windows are single pane glass with an aluminum frame.
HVAC: Each apartment has its own independent unit consisting of a pad-mounted condensing unit at grade outside each building and air-handling unit inside each apartment.
Electrical: Each unit is individually metered with an ample complement of electrical outlets and switches.
Plumbing: Water supply systems to the buildings are via PVC pipe and via copper within the buildings. Storm and sanitary drainage piping is PVC.
Utilities: All public utilities are available via underground lines.
Kitchen Features: The kitchens have quality wood cabinetry, laminated plastic tops and splashes and stainless steel sinks. Appliances include range ovens, frost-free refrigerators, dishwashers, microwave ovens, vent hood, washers and dryers (contained in each unit’s independent laundry area).
Bathroom Features: Fiberglass tub, wood cabinets, formica vanity tops, and a ceramic toilet and lavatory. Each unit has two full bathrooms.
Furniture: Each unit is fully furnished including living area, kitchen/dining area, bedrooms and computer workstations.
Telephone/Internet
Cable: All units are wired directly to the JMU campus Internet system. Included in the rent are free local telephone, 40-station cable television and Internet.
The Company will purchase the Property “As-Is,” subject only to certain limited exceptions set forth in the Purchase Agreement.
For additional information about the Property, including photographs, floor plans, and maps, please visit the website maintained by current ownership at www.oldemillvillage.com.
III. THE HARRISONBURG REAL ESTATE MARKET
The metropolitan area of Harrisonburg and Rockingham County is experiencing strong economic growth fueled by a number of colleges and universities such as James Madison University, Eastern Mennonite University and Bridgewater College. Many well known companies are operating within the area such as Coors Brewing Co., Merck & Co., Ethan Allen, Sysco Foods, AMP, Tenneco Packaging, Verizon, RR Donnelley. The area is served by the only hospital in the county, Rockingham Memorial Hospital. Harrisonburg’s economic growth is partially due to its strategic location on I-81 and its proximity to Washington, DC, Richmond, VA, Roanoke, VA and Greensboro, NC.
IV. THE TRANSACTION
The Managing Member believes that the Property is an attractive and lucrative investment for the following reasons:
· First, the Property is in an excellent location in the heart of the Harrisonburg, VA, just a few short blocks from the JMU campus.
· Second, the Property is being acquired below value. The formal appraisal performed by Crosson Dannis, Inc. on behalf of the first mortgage lender valued the Property at $9,230,000, which is $400,000 more than the purchase price. Additionally, the Managing Member estimates that the replacement cost to build a new structure on comparable land is between $9.4 million and $10.1 million.
· Third, the Property’s current rental rates are below market. There are 13 comparable student apartment complexes, from which the Property ranks 10th out of 13 in all-in average monthly rents per bed ($305/mo.). The average monthly rent per bed among the 13 similar projects is approximately $330. Although the Managing Member expects to raise the rents for the 2003-2004 school year, it conservatively projects (in the financial summary) only a 3.5% rental increase ($10 per bed), still well under the market average.
· Fourth, as set forth in Third above, the Managing Member has attempted to be conservative in its projections and budgeting, using only a moderate rental increase (3.5% per annum) over the revenues derived from the Property by the current owner. It projects increases compatible with past operating history. Over $250,000 will be set aside at closing for capital expenditure reserves and working capital and another $54,000 per year are allocated toward replacement reserves. Also, standard vacancies have been budgeted despite the fact that the Property is expected to be nearly 100% leased.
· Fifth, the Managing Member strongly believes that there are several avenues available to reduce projected operating expenses. For one, it can take advantage of its own established vendor relationships to reduce the projected costs for suppliers of carpet, vinyl, appliances and HVAC service. Additionally, it can replace above-market maintenance and repair services charged to the Property by the managing partner of the current owner with charges negotiated at arm’s length. Finally, plans are underway to replace the current cable, phone and Internet service contracts with a 10%-15% savings under current budget.
· Sixth, as of the date of this Offering, the first mortgage financing for the Property (as discussed in more detail below) is expected to be provided by GE Real Estate Capital at an interest rate in the range of 6%.
V. FIRST MORTGAGE LOAN AND EQUITY CONTRIBUTION
The Company has a commitment for a conventional first mortgage loan from GE Real Estate Capital for approximately $7,100,000 with a closing to occur on or before January 24, 2003. The loan will be secured by the Property, with a term of 10 years and will bear interest at a fixed rate to be based on the 10-year Treasury Note plus 185 basis points. The first mortgage loan will be non-recourse, except for customary carve outs regarding fraud, waste and the like that will be guaranteed by the Managing Member. The Managing Member and 3rd party investors (the “Class B Members”) will invest $1,350,000 in equity into the Company. Messrs. Spector and Weisz have represented that at least $150,000 of the $1,350,000 of equity will be provided by them and by members of their families. The remaining $1,200,000 will be invested by affiliates. The equity at all times will be subordinate to the Apollo Loan.
VI. THE PARTICIPATION LOAN
The Apollo Loan will be an unsecured loan of $1,100,000 evidenced by a Loan Agreement and a series of Promissory Notes (collectively, the "Note"). The Apollo Loan will be financed by a private investor group (collectively the "Participants") arranged by Apollo Investments LLC ("Apollo"), a Maryland limited liability company owned and managed by Mark Goldstein and Brent Goldstein. Interest payments on the Apollo Loan will be subordinate to the $7.16 million first mortgage, but will be superior to any distributions to the Company's equity members.
The Apollo Loan will bear interest at the rate of 12% per annum. Commencing May 10, 2003 and continuing on the 1st day of August, November, February and May thereafter through January 31, 2013, the Company will make equal quarterly installments of INTEREST ONLY at 12% per annum (the May 1, 2003 payment shall include all interest accrued between the earlier of (a) January 27, 2003 or (b) the date of closing on the Property, and January 31, 2003). All payments to the Participants, excluding Bonus Interest distributions as herein provided, are hereinafter collectively referred to as "Loan Payments.”
The Company may extend the Apollo Loan term for an additional five years after maturity (the "Renewal Term") provided (i) there is no current default on the Apollo Loan (i.e., all annual 12% current interest payments have been made timely and in full), and (ii) the Company provides written notice to Apollo at least 60 days prior to the end of the Initial Term of its intention to extend the loan term. Commencing May 1, 2013 and continuing through January 31, 2018, the Company will make 20 quarterly installments of INTEREST ONLY at 14% per annum.
If the Apollo Loan is not repaid in full as of January 31, 2018, the Participants will thereafter be entitled to receive 100% of the Company's operating cash flow (i.e. cash flow following payment of operating expenses, including first mortgage payments, but before any Member to the Managing Member or any affiliates of the Company) until such time as the Apollo Loan and all accrued interest is repaid in full. During this period, interest will continue to accrue at the rate of 14% per annum on the unpaid principal balance from time to time outstanding.
Sale/Refinance and Bonus Interest. Upon the sale or refinancing of the Property, the proceeds of such transaction, after payment of the first mortgage and certain closing costs, will be distributed as follows: first to the Participants, to pay all accrued and unpaid interest on the Apollo Loan. Second, to the Participants, to pay off or reduce the principal balance remaining on the Apollo Loan. Third, to the Company's Class B Members to return their initial capital contributions (to the extent unreturned). Fourth, to the Company's Class B Members an amount sufficient to give them a cumulative annual internal rate of return of 14% on their capital investment, from time to time outstanding. Fifth, from any remaining Capital Proceeds, to Apollo Investments, LLC, an amount equal to 10% of such remaining Capital Proceeds. The Participants will be entitled to 100% of such Bonus Interest payable to Apollo until such time as they have collectively received an amount sufficient to provide them with a cumulative annual return of 13% on their net invested capital, from time to time outstanding. Once such return is achieved, all further Bonus Interest will be split 50/50 between the Participants and Apollo.
Prepayment. While there is no expectation to prepay the Apollo Loan, the Company may prepay the entirety, but not any part (except upon refinancing of the Property), of the principal balance plus any unpaid accrued 12% interest due on the Apollo Loan at any time during the first 36 months of the initial 10 year term of the Apollo Loan upon payment of a prepayment penalty equal to an amount which, when combined with the 12% interest paid to the Participants, will result in the Participants’ receiving a cumulative compounding annual interest return of 14% on the initial principal balance of the Apollo Loan during the period commencing with the closing date of the Apollo Loan and ending on the date of such prepayment, PLUS (a) $22,000 if the Apollo Loan is prepaid prior to the 1 year anniversary of the closing of the Apollo Loan, (b) $16,500 if the Apollo Loan is prepaid after the 1 year anniversary of the closing of the Apollo Loan but prior to the 2 year anniversary of the closing of the Apollo Loan, or (c) $11,000 if the Apollo Loan is prepaid after the 2 year anniversary of the closing of the Apollo Loan but prior to the 3 year anniversary of the closing of the Apollo Loan. After the 3 year anniversary of the closing of the Apollo Loan, provided the Company is not in default (or has cured any default), the Company may prepay the principal balance due and owing on the Apollo Loan in its entirety or in $100,000 increments, plus accrued interest due on the Apollo Loan without penalty. Any prepayment penalties paid by the Company to the Participants will be credited, dollar for dollar, against the Bonus Interest described in the preceding paragraph.