Marsel's Pizzeria

George says, “Small first mortgages like this one are - in my personal opinion and with no guarantees implied - some of the best income-producing investments available for retired folks; but there is a problem. After enjoying 7% with few issues, the very human temptation to reach for 8% and then 9% becomes irresistible. Somewhere along the line investors reach for too much yield, and they get hurt. Stupid first mortgages! Stupid hard money broker! Please fight, fight, fight the urge to reach for higher and higher yields.”

Blackburne & Sons is pleased to present this new first mortgage secured by a 3,060sf restaurant building on a 0.184 acre parcel located in Milwaukee, Wisconsin.

The purpose of this first mortgage is to reimburse some of the borrower’s out-of-pocket expenses for renovations to the subject property, and working capital for the pizzeria. The property is currently free and clear of any liens, so this is a cash-out refinance.

Milwaukee County is located in southeastern Wisconsin, bordering Lake Michigan. There are 19 cities in this county, the largest city of the 19 being Milwaukee, West Allis, Wauwatosa, Oak Creek, and Greenfield, respectively. With an estimated population of 948,201 in 2018, Milwaukee County is the most densely populated county in Wisconsin, and ranks in the top 50 most populated counties in the United States. The county is home to two major-league professional sports teams, and the world's largest music festival, Summerfest.

The City of Milwaukee is the county seat of Milwaukee County (see above) and is the main cultural and economic center of the Milwaukee metropolitan area, with a population of 2,043,904 per the 2014 census estimate. It is the third-most densely populated metropolitan area in the Midwest, surpassed only by Chicago and Detroit, respectively. Since the early 21st century, the city has been undergoing its largest construction boom since the 1960s. To read more about the City of Milwaukee and what the area has to offer its residents and visitors, please click here.

SUBJECT PROPERTY DETAILS

Located on a minor arterial roadway in the city of Milwaukee, the area in which the subject property is located has a mix of commercial, industrial, and residential uses. The neighborhood is fully developed. The area has reportedly adequate freeway accessibility, as well sufficient traffic patterns.

The subject is a single-story restaurant with a basement foundation, currently occupied as a pizzeria, that not only serves pizza, but also pasta, seafood, chicken and more. Equipped with masonry exterior walls and a flat rubberized roof, the subject improvements occupy most of the 0.184 acre site; therefore, there is minimal landscaping, which is typical of similar buildings in the area. Other site improvements are minimal with service walks at the entrances of the building and exterior lighting. In addition, there is a post-sign between the subject building and the front sidewalk. The building is approximately 63 years old with an estimated useful life of 25 years.

The borrower purchased the subject property in 2017 from the City of Milwaukee through a tax foreclosure sale for $38,500, and completed approximately $100,000 of renovations. The new pizzeria location has been operating since July of 2019 and getting positive online reviews. To view the pizzeria's website, please click here.

Our borrower holds title to this property through his corporation and will also be providing a personal guarantee. He is a single man with a mid-credit score of 512, and a combined net worth (personal and business) of $257,800. His personal tax return reported income of $50,723 in 2017 and $50,110 in 2016. Due to the death of the borrower's CPA, his 2018 personal tax return was never filed. However, the borrower's new accountant is currently preparing his 2018 personal tax return. The borrower did provide his W2 for 2018 showing $27,352 in wages from a part-time second job, where he works for a construction company during the summer months driving a dump truck. This job is worked during the morning hours, and then works at the pizzeria from 3pm until close.

The borrower’s corporation tax return for the pizzeria reported net income of $17,911 in 2017 and net income of $18,918 in 2018, after paying rent at the previous pizzeria’s location. As for rent paid in these years, a total of $17,582 was paid in 2017 and $16,560 paid in 2018. A 2019 profit & loss statement was provided on the corporation, reporting a $35,955 net income as of September, 2019. This also includes $7,436 in rent paid for the previous pizzeria’s location.

As mentioned above, the borrower had been leasing a location prior to purchasing the subject property, in which annual rent of $17,582 in 2017 and $16,560 in 2018 were paid. With our new loan, annual scheduled loan installments are $11,338, saving him roughly $5,222 each a year.

VALUATION SUMMARY

We engaged a local MAI appraiser who valued this property at $175,000. We also engaged a local broker who drove by the property and performed an as-is opinion of value, concluding with a value of $245,000.

At a 7.0% yield to the investors, and a 57.0% LTV (Appraised Value), this appears to be a reasonable investment. Investing in any first mortgage 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.

Blackburne & Sons Realty Capital Corporation--For more information, contact Angela Vannucci
4811 Chippendale Drive, Suite 101, Sacramento, CA 95841
Telephone: (916) 338-3232 * Fax: (916) 338-2328
Real Estate Broker -- California Bureau 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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