Ferndale Commercial II

THE LOAN OFFERED HEREBY IS A CANNABIS LOAN THAT WILL BE SECURED BY A PROPERTY UTILIZED TO GROW, MANUFACTURE, PROCESS, DISTRIBUTE OR DISPENSE CANNABIS OR CANNABIS RELATED PRODUCTS. THIS LOAN INVOLVES SIGNIFICANT ADDITIONAL RISKS NOT ATTRIBUTABLE TO LOANS UNRELATED TO THE CANNABIS INDUSTRY AND SUCH LOANS ARE NOT SUITABLE FOR ALL INVESTORS. POTENTIAL PURCHASERS OF FRACTIONAL INTERESTS IN THIS LOAN MUST REVIEW AND UNDERSTAND THE INFORMATION SET FORTH IN THE OFFERING CIRCULAR ENTITLED "ADDITIONAL RISKS AND CONSIDERATIONS OF CANNABIS RELATED LOANS" PRIOR TO INVESTING. PURCHASERS OF INTERESTS IN THIS LOAN SHOULD ALSO CONSULT THEIR OWN LEGAL COUNSEL AND INVESTMENT ADVISORS WITH RESPECT TO THESE RISKS TO DETERMINE IF AN INVESTMENT IN THIS LOAN IS APPROPRIATE FOR THEIR PARTICULAR RISK TOLERANCE PROFILE AND FINANCIAL SITUATION.

Blackburne & Sons is pleased to present this first trust deed secured by a 17,144SF industrial/office building/storage building on 1.26 acres, located in Ferndale, Whatcom County, Washington.

Blackburne & Sons made a first trust deed on this property in October 2018 for the purchase of the subject property. The borrowers are refinancing in-house in order to pay off the first deed of trust of $568,734, the seller held 2nd of approximately $265,000, and the rest will be cash out to purchase another property in order to expand their business and start a 2nd cannabis location, also located in Whatcom County. To date, these borrowers have had a perfect pay history on this loan.

Whatcom County is located in the northwestern corner of Washington State, bordering the Canadian province of British Columbia to the north, Skagit County to the south, Okanogan County to the east, and San Juan County and the Strait of Georgia to the west.

Ferndale is located about 100 miles north of Seattle, 11 miles south of the Canadian border, and about 42 miles south of Vancouver, B.C. Ferndale and Blaine are the two cities along the I-5 corridor between Bellingham, the twelfth largest city in Washington State, and the Canadian border. Between 2000 and 2010, the city’s population increased from 8,758 to 11,415, an increase of 30.34%. The city is easily accessible by vehicle from I-5. Bellingham International Airport, about 8 miles south of Ferndale, is served by most major carriers, with service to Seattle, Vancouver, B.C., and Portland. There is also ferry service from Bellingham to Alaska, and seasonal ferry service to Friday Harbor, and Victoria, B.C.

PROPERTY INFORMATION

The subject property is an industrial building (steel frame/metal exterior), a small storage warehouse (wood frame/metal exterior), and small single-story office building (wood frame construction) on a single tax parcel at the terminus of Whitehorn Street., north of Slater Rd. (via Kester Rd.), in the extreme southern portion of the incorporated community of Ferndale, Washington.

Based on Whatcom County Assessor’s data, the industrial building, constructed in 1993, contains 12,742 sq. ft. gross building area, with 3,024 sq. ft. of office area at mezzanine level. The building has a clear height of about 20 ft., and warehouse areas are accessed by at-grade truck doors only. The building is insulated and heated by propane-fired space heaters. The mezzanine office area has central HVAC, and there are two restrooms in the building. The building is fully sprinklered and is currently used by the business entity of subject property ownership as a “502” (named for the ballot initiative legalizing marijuana) grow operation, including a cannabis extraction room used in the marijuana concentrates extraction process.

All equipment in the building is considered personal property and is not valued in this appraisal report. The subject is valued as a generic light industrial building. The freestanding office building, constructed in 1993 and containing 3,362 sq. ft. gross building area, has a reception area, perimeter offices, lunchroom, open office areas, work rooms, and two restrooms. It is served by heat pumps situated on pads north of the building. A small, insulated, unheated storage building was constructed in the parking area south of the office building in 2020. This building contains 1,040 sq. ft. gross building area. Total building area amounts to 17,144 sq. ft. gross building area.

Based on Whatcom County Assessor’s data, the single tax parcel comprising the subject site contains a total gross land area of 54,875 sq. ft., or 1.26 acres. The site is level and at the grade of Whitehorn Street. The subject site is accessed directly from Whitehorn Street. The property is zoned M, Manufacturing, by the City of Ferndale. All public utilities (except natural gas) are available.

The borrowers have been occupying this subject property since 2014 and then purchased the real estate in 2018 for $1,680,000. The seller held back a second deed of trust in the amount of $380,000, and the guarantors put down $402,000 cash. Blackburne & Sons provided a loan of $975,000, of which has already been paid down to $568,734.

Our borrowers hold title through an LLC, which is the real estate holding company. The cannabis business is held through a corporation, which is the sole member of the LLC. There are three members of the corporation, but only two will provide a personal guarantee on this loan. The parties are in litigation to get this third member removed from the business.

The real estate holding company (LLC) 2021 tax return is currently in process, but not yet completed. In 2020, the LLC reported a loss of $5,986, however after adding back depreciation and interest, the net income was actually $121,880. In 2019, the LLC reported a loss of $81,828, but after adding back depreciation and interest, the net income was actually $194,369.

The cannabis business (Corporation) pays rent of $17,589.35 per month to the real estate holding company LLC. There is one single man who will sign as President on behalf of the corporation. The 2021 tax returns are in process but not yet completed. In 2020, the cannabis business reported net income of $1,346,628, and in 2019 the cannabis business reported $1,255,368 in net income.

The cannabis business is a corporation that became incorporated in late 2013. They are producers and processors of recreational cannabis. Their products are currently sold in over 140 retail dispensaries and has a waiting list of over 160 dispensaries requesting their products. About 3/4ths of the currently operating retail stores are in the state of Washington.

Guarantor #1 has a law degree from Seattle University and 9 years of experience in marketing, branding, logistics, and administration. He is the CEO/CFO and sales manager of the company. He reports a $2,052,200 net worth and has a mid-credit score of 739. His 2021 personal tax returns are currently in process, but not yet done. In 2020 he reported $217,848 in adjusted gross income, and 2019 he reported $56,434 in adjusted gross income.

Guarantor #2 has a bachelor’s degree in economics and experience in general contracting. He is the facilities and operations manager for the company. He reports a net worth of $2,237,000 and has a mid-credit score of 784. In 2021, he reported 88,143 in adjusted gross income and in 2020 reported $79,111 in adjusted gross income.

The cannabis industry has a unique way in which they are taxed. Section 280(e) of the Internal Revenue Code disallows deductions on federal income tax returns associated with the trafficking of Schedule 1 drugs, so they cannot deduct many expenses that every other business in the country can write off (marketing expenses, for example).

Functionally, this means that they are taxed on their gross income, not their net profit. This creates incentive to maximize their cost of goods sold to minimize their gross profit and thereby reducing their taxable income. They accomplish this by reclassifying many outlays from expenses to costs of goods sold, and have been assured by their accountant that there is nothing untoward about this practice. In 2018, we also personally reached out to our own CPA for Blackburne & Sons to confirm that this is in fact true.

We engaged a local MAI appraiser who valued this property at $2,045,000. This is the same appraiser who valued the property in 2018.

We also engaged a local broker who drove by the property and took photos and performed an opinion of value (BPO). He valued this property at $2,200,000- $2,350,000 (AS-IS).

At a 65.0% LTV (Appraised Value) and a 9.0% yield, this appears to be a reasonable investment. Investing in any First Trust Deeds involves substantial risk. A large and prolonged decline in real estate values is possible. Be sure to read the Risk Factors section of the Offering Circular carefully before investing. 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
555 University Ave., Suite 150, Sacramento, CA 95825
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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