|Unique Property Acquistion Opportunity
3280 URBANA PIKE, #207 PHONE: 301-831-8575
IJAMSVILLE, MD 21754 FAX: 301-831-8599
TO: General Public
FROM: Chad Tyler
SUBJECT: Unique Property Acquisition Opportunity
DATE: April 17, 2009
I wanted to inform you of an upcoming sale for the balance of land and improvements (both finished and unfinished residential lots and commercial property) in a substantial Planned Unit/Residential Development Community. The community is Lake Linganore in Frederick County, Maryland. The sale will either be handled through a pre-negotiated purchase of a $10,250,000 Bank Note and expenses between you and our client, and the first Note holder or through an auction process. If the property goes to auction, it is likely to occur within the next 3-4 weeks. I will inform you immediately once the specific date and terms are established for the auction, if we (you and my client) are not successful in the preliminary negotiations with the Bank. For planning purposes, it is expected that the terms of the purchase will be as follows. A bidder’s deposit of $100,000 will be required if sold as an entirety or a bidder’s deposit of $20,000 on each parcel, if sold individually in the form of a certified or cashier’s check at the time of the sale will be required of all purchasers, other than the beneficiary or an affiliate. The deposit will be increased by 10% of the purchase price within four business days. Immediately after the sale, the successful bidder shall execute and deliver a contract of sale incorporating all of the terms and conditions which will be made available prior to the auction. The balance of the purchase price together with interest at 12%± per year from the date of the auction will be due within 20 days after final ratification of the sale of the property by the Circuit Court of Frederick County. A specific list of the various parcels will be forwarded to you upon request.
Below is a summary of the project and the available purchase opportunity. If it goes to foreclosure, the property will be offered in two manners (both in its entirety and in separate parts) at the same auction. The property will be sold on the basis of whichever method yields the highest value/sale prices. Correspondingly, one buyer could secure the entire balance of the development or several owners could purchase individual parcels. It is our professional opinion that though the aggregate total of multiple sales of multiple parcels may yield the highest price at the auction, the greatest value to a purchaser would be if all of the property and its corresponding developments rights were purchased as a whole. There are many reasons for our opinion that relate to rights of the declarent, substantial residual density rights, etc. that we would like to review in more detail, at an on site meeting in the very near future. A general outline of the various parcels is included in the summary below. Tyler-Donegan is working on behalf of the second trust holder (Ellis) to ensure that, at minimum, the auction is well publicized and reasonable values are proffered. Nevertheless, we are not the sponsor’s of the auction. The first trust amount is approximately $10,250,000. The second trust is $35,750,000. Both IDOTs are recorded instruments against the property. It’s not expected that a price will be secured to pay both the first and the second trust, albeit it is expected that the price will certainly be above $10,250,000 which would generate some sales proceeds for Ellis, the second trust holder, but not as much as should be, therefore, he is interested in using the value of his substantial second trust as funds to secure his position within a newly formed partnership for the purpose of acquiring all of the remaining holdings of Land Stewards.
There are two opportunities here for you as a prospective buyer of all or part of this project. First, to the extent you have interest in any of the parcels we would highly encourage you to attend and participate if the property goes to sale as an auction by pursuing the purchase of any parcels which might be of interest to you. Second, if you are a prospective buyer for the entire holdings at $10,250,000 the best route to go is to partner with the second trust holder, who, by law and per the subordination agreement, can use/apply its $35,750,000 second trust as additional proceeds/cash towards the purchase. Correspondingly, if you partner with the second trust holder, your success will be virtually guaranteed because a competing buyer would have to bid over $45,750,000 to out bid you and Ellis.
Under a partnership arrangement, the 2nd trust holder is prepared to take a serious discount on the amount of its second trust. This can be done by simply reducing the Note balance and formalizing a new second trust. Alternatively, Ellis will stay in the deal as a partner and risk the potential returns with the principal partner in exchange for canceling the entire second mortgage. Under a partnership arrangement Ellis would propose one of the following:
• Option 1: A new partnership would be formed with a 30/70 equity split between Ellis, the previous Note holder (30%) and the new equity partners at 70% ownership.
• Option 2: A lesser equity amount, while retaining certain parcels amongst the Linganore holdings, the mix to be determined by both parties.
• Option 3: The party wishing to participate in lending to Ellis up to $14 million for the purpose of buying the property and beginning to both develop and engineer the next three sections already approved within the PUD, as well as a three year interest reserve. In exchange for said loan, the lender would get a handsome return both in interest and equity with a preferred first pay out plan within a five year period. Said loan would be a first mortgage against the entire holdings in the PUD, replacing the current $24,000,000 line of credit (which has no interest reserve) and which was based on an appraised value in excess of $48 million with a required debt to equity ratio of a minimum of 50% of value.
1. The internal financials of the current land owner, Land Stewards (LS), show a book value of $49,448,425.26 as total work in process with only a partial amount of the $35,750,000 second mortgage booked as land costs.
2. The second mortgage holder (Ellis) is extremely knowledgeable about the Linganore development, Frederick County government, the density and property rights, the HOA and all matters involving the project. Regardless of which method you would opt to be involved or purchase, Ellis will assist in whatever way he can to be helpful to ensure the success of this project.
PROPERTY LOCATION & DESCRIPTION
Lake Linganore is a master planned PUD (planned urban development) located equal distance, approximately 45 miles (one-hour commute) between Washington, DC and Baltimore, Maryland. It is in Frederick County and just 10 minutes from Frederick City, the second largest city in the state of Maryland. Frederick County is among the top three fastest growing counties in the state. The demographics are incredibly strong as sited in a reasonably current appraisal of 1/10/07. This corridor is the third largest population base in the USA and growing such that the area attained “megalopolis” status of which there are only seven others that exist worldwide.
Note: Given the currently proposed Federal Stimulus Plan of approximately $800 billion dollars, along with the revamping of the $350 billion remaining TARF money to be dolled out by the Federal Government, there has been a tremendous shift in power and influence from New York City to Washington DC. With this and specific aspects of the plan itself, the job growth and population increase for the entire Washington MSA is strong for the finance sector, infrastructure projects and the rehab work to higher energy efficiency standards for all federal buildings. Further, the Interstate 270 corridor from Washington DC to Frederick has a substantial concentration of alternative energy companies, including BP’s Solarex, headquarters for the Alternative Energy Division in downtown Frederick, which has doubled in size physically and is increasing in personnel at the very moment. Also, the corridor is home to many telecommunication companies, along with one of the highest concentration of biogenetics firms in the US. All of these are expected to be real growth industries, despite the current world-wide recession. Additionally, the community is close to Fort Detrick in Frederick which has benefited from the Federal Government’s Base Realignment and Closure Act (BRAC). With Fort Detrick being the government’s primary research facility for bio-defense, the Fort and surrounding community has received billions of dollars in investment from both the government and private sector. This money has been largely used to construct buildings and infrastructure whereby one of the byproducts has been the creation of many new jobs.
The total PUD is comprised of 3,700 acres with four lakes (including the largest private lake in the state of Maryland). Three pools with facilities, an 18-hole golf course and club house, tennis pavilion and gym with both indoor and outdoor courts, eight tot lots, and 20 miles of nature trails. All of these amenities have been built and serve the needs of the approximately 7,000 residents that already live in the community. There is public water and sewer throughout the community, except in the undeveloped sections (to be installed when developed), which, fortunately, does not require extensive off-site lines for any of the parcels. There is gas and fiber optics within parts of the community as well. At present, there are four schools already constructed (two elementary, one middle and one high school). The county government is reconstructing a second high school, at its expense, and is requiring the developer to dedicate one more elementary school site to satisfy all of the community’s school needs for the future build out.
Lake Linganore has already sold approximately 2,500 homes and the developer (declarent) has dedicated 850 acres of open space (i.e., four lakes, golf course, trails and parks) to the Lake Linganore HOA. This 850 acre parcel is not a part of the approximate 1,500 acres that the developer still owns to be developed. This acreage offering has density approvals of up to 3,900+ units for single family housing, townhouses and condominiums/apartments units, along with 920,000 s.f. (FAR) of commercial/retail and office space. By challenging the County’s revised approval plan of 2005, and obtaining more contiguous acreage, the remaining unit count for Lake Linganore may be increased to 4,937 units, and 1,700,000 s.f. (FAR) of commercial/retail and office space, if the market warrants such additional expansion. (A detailed legal analysis of this is available upon request.)
A relatively current appraisal, which required over six months of work, was completed on 1/10/07, at a cost of approximately $30,000. This appraisal indicated an “as is” value in excess of $50,000,000. Further, by analyzing only one third of the total residential units and none of the commercial FAR available to develop, the “Future Perspective Value” (discounted for time value of money), the interim (first 10 years of development only) was valued by the appraiser to be $82,000,000. Extrapolating the residential developable ground beyond the first 10 years of absorption by using the same ratios as those first 10 years should produce net profits in excess of $160,000,000 or more, if additional property were purchased and the allowable densities mentioned before were transferred to the additional acreage. In this scenario, the future perspective values would be in excess of $200,000,000 (see attached summary page excerpt from appraisal and approval spreadsheet of lots and parcels). Note: The full appraisal will be forwarded upon request. Further note that Lennar/US Homes (a major national builder of active adult communities) went to contract for less than one-third of the residential holdings of Land Stewards, for a purchase price of $42,000,000 unimproved, plus a willingness to pay up to $10,000,000 for possible off-site improvements to the PUD at large, if required by the County. Note: Said contract included a hard deposit of $2 million, which was forfeited when Lennar/US Homes failed to notify Land Stewards of its intent to not move forward at this time. This section of the PUD has APFO approvals for approximately 1,100 units. The site plans were designed with the aid of current topography by the Lessard Architectural Group, an award winning, nationally recognized land planning firm. Further, the project at large has the benefit of several million dollars of existing engineering available to the new entity.
HISTORICAL BACKGROUND OF Land Stewards
(Current Owner of These Holdings)
In 2002, Land Stewards was formed by Robert Wilcox of Calvert Homes, with capital partners from Korea who formed an LC known as Calvert Development SK Group, to purchase all of the holdings, companies and partnerships owned by Frank Ellis, within the Lake Linganore PUD. The purchase price was for approximately $50,750,000 by Land Stewards, who assumed 100% of all debt and outstanding payables (approximately $15,000,000) and a $35,750,000 non-interest-bearing second mortgage payable to Ellis, in the form of a per lot stipend, to be paid as lots were developed and sold to third party purchasers. Additionally, Ellis retained a one-third share in all of the commercial property to be developed and a 1% ownership in Land Stewards. At the time of negotiations, Ellis indicated to Wilcox that, to proceed, Land Stewards would need to provide $10,000,000 of additional working capital, in order to satisfy existing debt and the cash flow needs of the operation. Wilcox stated that the $10,000,000 of capital would not be a problem for his Korean partner. After extensive due diligence, Land Stewards elected to proceed to settlement. At this point, Ellis required a $1,000,000 escrow deposit, which was posted. Approximately 30 days before settlement (which was time sensitive), Ellis required proof of the availability of the $10,000,000 of capital and was told that there were restrictions on how much and how quickly Korean capital was allowed in the USA. Four million in additional capital was promised and settlement was delayed 30 days with no extensions allowed. By settlement, only $5,000,000 of the $10,000,000 had been secured in the USA, but Wilcox had an alternative plan to purchase all of Ellis’ entities. His plan was to settle on the property one day, Chapter 11 Land Stewards (as the new owner of all Ellis’ entities and property) the next day to give Land Stewards partners time to amass the $10,000,000 required to be successful. Ellis was not pleased by this alternative, but he was assured, as documented by the transactional and settlement documents that 100% of all creditors’ balances would be paid in full with interest through a well thought out re-organization plan presented by Wilcox and his attorneys. Again, Ellis preferred otherwise, but, nevertheless, proceeded to settlement with the documented assurances and performance guarantees secured by the property, along with Ellis’ IDOT to be recorded on the land records of Frederick County.
Ultimately, through additional partners (i.e., Elm Street Development) and refinancing (via. M&T Bank’s $21,000,000 line of credit), all secured debt was paid in full, along with the majority of the unsecured creditors, excepting approximately $500,000 still outstanding as of July 30, 2008, and exclusive of Ellis’ IDOT for $35,750,000. Unfortunately, as a result of Wilcox’s/Land Stewards’ lack of the initial $10,000,000 of capital required per Ellis’ purchase outline, Land Stewards had to pay over $1,300,000 in excess legal costs and over $3,000,000 in excess interest cost, not to mention losing almost two years in true production/development of the property.
Once the refinance and confirmed re-organization was finally accomplished at the end of 2003, Land Stewards has been able to develop and sell approximately 150 single-family lots, 50+ townhouse lots, the dedication and completion of state-of-the-art high school (the newest in Frederick County) and, as previously mentioned, a contract purchase from a major national homebuilder with $2,000,000 in hard earnest money for undeveloped parcels, comprised of only 25% of Land Stewards’ holdings for $42,000,000, plus an agreement for the purchaser to fund up to $10,000,000 in shared off-site improvements, if required by Frederick County before the issuance of final permits for development after the Phase III engineering is approved. This section currently has both APFO approval for an active adult community and its Phase II approvals.
CURRENT STATUS OF LAND STEWARDS
Unfortunately, in spite of the fact that Ellis was retained by Land Stewards during the last five plus years, Land Stewards has chosen not to listen or implement any of Ellis’ input, including how to negotiate with the Planning Commission, County Commissioners (FCBC) and Board of Education (BOE). This has resulted in a temporary loss of power/status within the county, a loss of good will from a previously substantial backing by Linganore residents, along with a loss of respect and support from some of Land Stewards’ remaining creditors. This ultimately led to Ellis and several other creditors forcing Land Stewards into involuntary bankruptcy, separate and apart from the previous Chapter 11filing by Land Stewards; which, in essence, was the scheme/methodology of the partners of Land Stewards to purchase Ellis’ property, while being under capitalized back in 2002.
Since this forced involuntary bankruptcy of November 21, 2008, Land Stewards has now chosen to place itself into voluntary Chapter 11 status in the same Federal Bankruptcy Court with the same judge presiding as before from the 2002 case. For many reasons, too complex to detail in this summary, Land Stewards is not choosing to fight the first mortgage holder from foreclosing on the property. In preliminary negotiations with M&T Bank, Ellis has an understanding in writing that M&T Bank is willing to sell the Note outright at full face value without recourse to Ellis or his new purchasing entity.
At present, the property has two recorded Deeds of Trust (IDOT). The first Deed of Trust is a line of credit with M&T Bank for up to $27,000,000. The current first IDOT balance is approximately $10,250,000, after a recent principal curtailment of $9,000,000, at half of one percent above prime. The second IDOT is held by Frank Ellis, the previous owner and developer of many of the 2,500 homes that now exist. This IDOT is for $35,750,000 and is to be paid as lots are developed and sold to third-party purchasers.
CURRENT CIRCUMSTANCES AND OPPORTUNITIES
The present owner of the property is an LLC known as Land Stewards (LS), which is owned by Calvert Development SK and Frank Ellis. Calvert Development SK’s partners are all major developer/builders with over three dozen other projects in Virginia, Maryland and Delaware. In short, given current national market and financial conditions, they collectively are over stretched and want out of numerous projects, including Lake Linganore, given its debt load of almost $48,000,000. For reasons too complex to address in this summary, Ellis (who is not as leveraged) is the only party, as a result of his $35,700,000 IDOT, who can purchase the entire holdings for approximately $10,250,000 (including the purchase of the first IDOT held by M&T Bank), plus restructuring his second IDOT or partnering the property through purchasing either M&T Bank’s first IDOT (mortgage) or purchasing the holdings at foreclosure.
MORE DETAILED PURCHASE / FINANCE OPTIONS
FOR HOLDINGS AT LAKE LINGANORE PUD
I. Purchase/Loan Option 1:
Ellis would borrow a total of $14 million using $10,250,000± to purchase the Note, including all property secured by the M&T Bank IDOT, along with all corresponding density rights, plus an additional $2,000,000 to fund a three year interest reserve (until bringing the next 1,100 units to market). Plus, an additional $1,750,000 to fund engineering costs, modest overhead and legal fees. The additional funds above the initial purchase of the Note could be staggered evenly over the next three years. All loans to be repaid in full within five years, through sales and refinance, once additional lots are sold. This loan would be secured by a recorded first IDOT against all of the holdings. Interest rate and other terms to be determined, including equity position for the lender of 10% of all of the Linganore Holdings of Ellis.
II. Purchase Option 2:
Purchasing entity to provide funds to purchase first mortgage from M&T Bank at full principal balance (plus interest or legal fees). Rounded amount required is $10,250,000. Ellis would opt to exchange his receivable for a percentage of ownership in the new purchasing entity. This being said, the ideal proposal would be as follows:
A. Purchase the M&T Bank’s first mortgage for approximately $10,250,000.
B. Once mortgage is owned by the new entity, any remaining personal guarantee amounts would be called against three of the primary principals of Land Stewards.
C. Excepting the full amounts currently owed to Ellis by Land Stewards, Ellis will exchange his current IDOT of $35,750,000 for 30% equity, as a full-fledged partner in the new purchasing/owner entity.
D. Alternatively, Ellis would remain as a secured creditor for $25,750,000 per the terms of the original transactional documents and IDOT recorded against the property, with no equity position in the new purchasing entity. Some land trade/ IDOT credits are also possible should the purchasing entity prefer.
E. Utilizing Ellis’ position as a secured creditor with a second position IDOT of $35,750,000, he (on behalf of the new partnership) could buy the property and all its rights via foreclosure of the first, while transferring ownership of the property to the new entity. Ellis would exchange his second trust for a combination of Paragraphs C & D above, and/or a combination of both and obtaining some of the parcels within the PUD.
In closing, at this point in time, circumstances are such that Ellis is the only person in the position to purchase this entire assemblage for approximately $10,250,000 (depending on which alternative is exercised) with the known availability of $3,750,000 for sufficient working capital for interest expense and to engineer, develop and legally challenge all known obstacles. Further, he is the person most familiar with the entire history, scope, needs and contacts to successfully execute this particular project. He has dedicated approximately 25 years of his life to this project, when he began purchasing bulk parcels in the early 80’s. He is just as passionate about the current and future success of the community as he was when he finally assembled and purchased the majority of the holdings, when there was no public water and sewer, no schools and less than 100 houses within the boundaries of Lake Linganore.
For additional Information Contact:
301-831-8575 ext 227
EXECUTIVE SUMMARY PAGE FROM APPRAISAL 1/10/07
ENGINEER AND LAND PLANNERS’ ASSESSMENT
OF ACTUAL DENSITY RIGHTS