Hagerstown Commercial

George IV says, “This deal has several strengths. First, the borrower spent $780,000 rehabbing the properties; before he even owned them. This implies that the borrower is invested in the success of these properties. In addition, the purchase price was set in 2014, before the rehab was complete. It is encouraging that the BPO and appraised values came in much higher than the purchase, as it implies that the renovations added value and that there is protective equity."

Blackburne & Sons is pleased to present this new purchase money first trust deed secured by a 39,200SF eight-story hotel/mixed-use property (Property 1) and an 18,480SF five-story commercial building (Property 2). Both properties are located in Hagerstown, Maryland.

Washington County is comprised of 458 square miles and is centrally located between Baltimore and Washington, D.C. and has the Pennsylvania State line serving as its northernmost boundary. The population of the county is 150,292 and is projected to grow to 162,100 by 2020, according to the Maryland Department of Planning.

Hagerstown is the county seat of Washington County and has an estimated population of 40,205, as of 2018. Despite its semi-rural Western Maryland setting, Hagerstown is a center of transit and commerce. Interstates 81 and 70, CSX, Norfolk Southern, the Winchester and Western railroads, and Hagerstown Regional Airport form an extensive transportation network for the city. Hagerstown is also the chief commercial and industrial hub for a greater Tri-State Area that includes much of Western Maryland as well as significant portions of South Central Pennsylvania and the Eastern Panhandle of West Virginia.

The subject properties are located in the downtown area of Hagerstown, Maryland. Land uses within this neighborhood are fairly diverse, including residential (single family, duplex), residential apartments, office, and residentially supportive commercial and retail development. The University of Maryland Systems and Global Campus are located two-three blocks from the subject properties. This area of Hagerstown is identified as the “City Center” by the City of Hagerstown’s Office of Economic Development.

The two properties are one block away from a planned stadium site for the town's minor baseball team, the Hagerstown Suns. The 6.25-acre location at the corner of West Baltimore Street and Summit Avenue was determined to be the best site for a new ballpark. The new ballpark is estimated to cost between $35 million and $45 million, and draw just under 200,000 people to baseball games and other events.

In 2014, our guarantor started leasing both properties and has spent approximately $788,000 on improvements/renovations throughout the years. Those improvements consist of repairs to the façade and exterior structure wall on the 8th floor, a new roof on the Crown Hotel, and a complete rehab of the college hall dorms. The rehab included new floors, paint, lighting, and bathrooms. He upgraded the lobby and completed a full renovation of the 6th and 7th floors of the Crown Hotel. A new elevator motor and mechanisms were installed, along with new wiring for video cameras, and Wi-Fi.

The subject property is currently improved with an eight-story mixed-use building which includes approximately 39,200 gross square feet of building area, and is known as the “Crown Hotel”. The building is constructed with concrete block and a flat rubber membrane roof. There are 115 rooms total. 80 of the rooms are furnished for hotel/extended stay use. There are several common area rooms in the basement which includes a playroom, two laundry rooms, a game room, gym, and storage rooms. The first floor contains four offices, two retail rooms, a storage room, and common area foyer. The first, sixth, and seventh floors have been extensively renovated. The ground floor is the hotel lobby and also has a liquor and convenience store.

The majority of the tenants at this property are extended stay. Nightly rental rates are $59.99 plus tax, and nightly rental rates for the 6th and 7th floors are $89.99 plus tax. Weekly rentals are $215 plus tax, and monthly rentals are $755 plus tax. Per the guarantor, there are no written leases. Due to the zoning and licensing, they fall under the Hotel/Motel Bylaws and can lockout any client for non-payment of rent, without any legal issues or having to go through the court system to evict. The guarantor wants to keep to month-to-month tenancy with no written leases.

Although the sixth floor is fully renovated and rented at a higher rate, it is currently non-operating. This is due to a fire/sprinkler system needing to be installed. The owners are in contact with a company to perform the work, which will cost approximately $10,000. Once the work is complete, they will be able to open up the floor to additional rooms, bringing in rents of approximately $13,000 per month. The work will be completed within the next two weeks.

The purchase price for this property is $1,464,000. A local, MAI appraiser was engaged and valued the property at $2,470,000 AS-IS. We also engaged a local commercial broker who drove by the subject property and performed an AS-IS opinion of value, concluding a value of $2,979,000.

The subject property is currently improved with a five-story dormitory building which includes approximately 18,480 gross square feet of building area, and known as “College Hall Dorms”, and includes 5,160 square feet of land. The building is constructed with concrete block with a flat rubber membrane roof. There are 57 rooms total consisting of 50 dormitory rooms, five (5) kitchens, 5.5 bathrooms per floor, and two storage rooms. The property is on public sewer and water, level with street grade, and contains no off-street parking.

The building operates as a dormitory. The weekly rental rate is $180 plus tax. The monthly rental rates are $555 for a shared bathroom, and $705 for a private bathroom. Per the guarantor, there are no written leases with these tenants. Due to the zoning and licensing, they fall under the Hotel/Motel Bylaws and can lockout any client for non-payment of rent, without any legal issues or having to go through the court system to evict. The guarantor prefers to keep to month-to-month tenancy with no written leases.

Title to this property is held through two newly formed Maryland limited liability companies (LLCs). Both of the LLC's are real estate holding companies.

Tax returns provided for the College Hall and Crown Hotel properties report taxable net income of $44,493 in 2018 and $46,874 in 2017, after adding back depreciation.

Tax returns provided for the liquor and convenience store reported net income of $4,662 in 2018 and $2,848 in 2017, after adding back depreciation.

The borrower lives in Virginia and works as an investigator for the U.S. Government. He has been working with an Operations Manager for 16 years, who runs and manages the subject properties day to day. He reports to our borrower on a weekly basis, and they get together twice a month.

The guarantor reported personal taxable income of $185,363 in 2018 and $142,149 in 2017. He has a mid-credit score of 661 and a reported net worth of $1,729,000, and will personally guaranty this loan.

VALUATION SUMMARY

A local, MAI appraiser was engaged who valued both properties at a combined value of $4,050,000 AS-IS. We also engaged a two local commercial brokers who drove by the subject properties and performed an AS-IS opinion of value, concluding a combined value of $4,642,200.

At a 10.0% yield to the investors, a 40.5% LTV (based on appraised value) and an 80.5% LTV (based on purchase price), this appears to be a reasonable investment. Investing in any first mortgages 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 George Blackburne IV
4811 Chippendale Drive, Suite 101, Sacramento, CA 95841
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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