Will you personally have a fully funded interest in Denbar Ready LC. It makes us more comfortable when the promotor has some skin in the game.

Yes.  I will purchase at least one share either in my own name, my wife’s name or through an entity we own, such as an LLC of Living Trust.

Since you do not have specific properties selected, how long do you expect it will take before our funds are fully invested?

The concern here was that once and investor sent their check, it could be months before their investment starts earning any money.  Even before receiving this question, my plan was to start searching for properties as soon as I had received commitments from investors by way of a completed subscription/application document and maybe a small deposit.  In this case, I would not request the funds until after I had secured a few projects such that investor’s funds would be put to use within a month.

I have decided to take this one step further and have started actively looking for projects as well as starting making investments on my own and will transfer these investments to Denbar Ready LC as soon as it is funded.  These will be transferred at cost.

In many other investments, Denbar Properties fee is 25% of net profit/cash flow. Why are you charging 50% for this investment?

In many prior investment, Denbar Properties fee was 25% of TOTAL net profit.  So that if an investor made a very small return, Denbar would still get 25% of that small return.  For this investment, we have a base rate called a preferred equity rate set such that we do not earn anything until investors receive this base rate (7%).  Denbar Properties then gets 50% of anything above this base rate.

Therefore, this is a little different from most prior investments

Why is it that the recent Courtyard investment had a base rate of 10% but the new investment base rate is 7%

We purchased Courtyard at a very good price, which is one of the reasons I thought we could work with a 10% base rate.  In addition, the Courtyard investment was made over a year ago and the market has changed.  In my opinion, what is happening is that many people who used to invest only  in traditional publically traded investments are trying out private real estate as an option due to the volatility of the public markets.  Added to that, there are many new private companies offering real estate loans whereas such loans were originated primarily by banks in the past.  As such, funding for real estate has increased considerably which provides opportunities for more real estate operators.

Having said that, we are returns are very competitive with other private real estate investments.

Can you give us an example of the type of short term debt investment you will be making through this fund?

Say a real estate rehabber purchases a house and needs additional funds to renovate and remodel.  So he goes to a company named “Hard Money Lender” to get a 9 month loan for $100,000 to fund the remodel.  This is one scenario of how we can be involved –

• Hard Money Lender underwrites the borrower and project before funding the loan, and then funds the loan using their own funds or a line of credit. 

• Hard Money Lender then splits that loan into 4 shares of $25,000 each.

• Hard Money Lender keeps one share, and sells the remaining 3 to investors. 

• Denbar Ready’s investment will be the purchase this $25,000 share.

How does Hard Money Lender make money?  The hard money lender may earn a one-time fee from the borrower when they fund the loan as well as earn a spread between the rate he charges the borrower and the rate he pays us.

Although Denbar Ready will not directly underwrite the borrower, we can review the underwriting that is done to make sure it meets our standards and risk level.  In addition, we will not invest unless the entire deal is completely transparent.

By investing in third party projects aren't we taking on more risk for a lower return?

When first asked this, my first question was ‘with what are we comparing said lower return’.  If we are comparing it with what the third party is making, then yes, it will be.  But if we are comparing it with what we could do on our own directly, I don’t have a straight answer.  I have not directly invested in some of these types of projects (for example, 2nd lien rehab loans), so can’t say if I could do better.   It’s possible we could do better for projects that we do have experience in, but that might mean waiting for a year to find the appropriate project.

As far as risk is concerned, there is more risk by adding a third party to the investment, however that risk is mitigated by the fact that we will be investing smaller amounts in many projects.  For example, for our own projects, we raise about $250k to $300k to purchase property worth say $1.5 MM.  I this case, our entire amount is invested in one city and typically a single property in that city.  Is that is more risky than investing say $25,000 each in 10 different projects spread across many states?  I personally think it is.  But there is no right or wrong answer for this, so this risk comparison is something you will have to determine for yourself.

Please explain how we can achieve higher returns by adding debt investors?

By taking on debit investments we can leverage our equity investment to get higher returns in the same way buying an apartment building with a loan increases our return versus buying the building for cash.  For example, in addition to raising say $200,000 in equity we raise say $50,000 in 4% debt.  Assuming we invest all in projects paying 10%, the LLC adds $3,000 a year to its normal returns (i.e. assuming no debt).  Specifically our 10% returns becomes an 11.5% return. 

Of course there is more risk with this because if there are any problems, the debt has to be paid back before any equity can be paid back.  So the debt investors are far more secure than equity investors, which of course is reflected in their lower returns.

Since you will be investing in multiple states, does that mean we will receive K-1s or 1099’s from each firm from different states and I will have to file tax returns in each state the investment is in? I am an investor in some of your Iowa projects and I have to file Iowa taxes in addition to our own state, so adding other states will make it a pain.

You will receive K-1s directly from Denbar READY LC.  Depending on the state there may be a filing requirement in the states where our investments are located.  However, here are some ways we are trying to deal with the issue.

1. Per my CPA, an investor can earn up to $2,000 in any state without being required to file a state return.  We will not have investments in any one state that earns more than $2,000 a year per share.  Assuming we get 10 investors, that would mean we have to earn less than $20,000 a year in one State, which should never happen.

2. Some states allows the LLC to file a consolidated return and pay tax if required on behalf of all investors (or maybe it is just out of state investors, I need to check).  If for some reason #1 does not work, we will file such a return so our investors do not have to.  Note that this does not absolve an investor from paying any tax owed.  This is just a way to make it more convenient for you by having Denbar do all the paperwork and pay the tax on your behalf. 

3. We could form an REIT instead of an LLC.  The advantage with an REIT is that they are considered securities like owning mutual funds or stocks, so investors do not owe taxes in the states the investment are physically located.  You would just add the REIT net income to your Federal and State tax return – or just the Federal for those of you who lucky enough to live in income-tax free states.  Yes, I know who you are, investors from Florida and Nevada!  I am still looking into this, but what I have found so far is that setting up and operating a REIT is a lot more cumbersome and expensive.  Also, an REIT requirement to distribute almost all net income every year does not provide the flexibility I have on LLC investments where I can keep a small buffer for a rainy day.

Since you have not raised your minimum amount yet, will you consider moving forward with a lower amount while continuing to raise funds?

Probably not.  Although I reserve the right to change my mind!

The plan is still to raise $300,000 and since this project involves investing in multiple projects, I figured $200,000 is the smallest amount needed in order to be well diversified.  I therefor would not want to go below that amount.  But like I said, I may change my mind, especially if available investment options changes.

If you do not get 10 investors, will you consider a smaller number of investors with larger investment amounts each. For example, say 6 investors investing $50,000 each.

Yes, this is doable.  Nothing really changes in the offering other than the price per share, and this has been done many times in past projects.  Only thing to note is that I am currently still only committed to purchase one share of $30,000.  I need to make sure I can make it work if a higher amount is needed.