Many years ago now, I embarked on a journey that was widely received at that time with resistance from many. Our structure was a problem for some. Some brokers felt it was more difficult to explain to clients and essentially harder to sell. And in turn, some clients felt they were more secure holding a physical asset then getting involved with a company that offered the structured security our product offered.
From time to time, I wonder if life would have been a lot easier over the last 5 years if I I’d ignored my beliefs and negated my duty to my Investors; said to hell with it and fell into the conformity of the Overseas Investment Industry and just sold fractional ownership, hotel rooms or small pieces of our development land in any one particular site for which we required investment.
However, as one of our main duties as an investment group is to complete Due Diligence and research Macro and Micro-economic trends, I was uncomfortable with the concept and having one physical asset as security when every aspect of the development or success of that one asset is completely out of your control.
Now of course there are always exceptions and by no means am I trying to suggest all physical asset investment is wrong, However, I believe that diversity is the key to securing our future and protection against the crazy, ever-changing global market in which we find ourselves.
Let’s take for example the Bakken Oil Field. This area of investment was the first of Carlton James’ loans to SW Land & Development. Here was an area that had unprecedented growth due to incomprehensible oil profits being seen at that time. It was seeing 100% occupancy at every hotel in the main counties and further. It was a gold mine for investment. Investing in a hotel development in this area was a sure thing, wasn’t it?? We believed so. However, as economists and with our due diligence hats on, we had to secure ourselves against this not being the case.
At the outset of developing the structure for our investment in the Bakken, the Carlton James team had a meeting to discuss the product and its structure. One of the main points was that this investment was a sure thing. Robert said something that resonated – ‘I mean the only thing that could go wrong here is that Oil prices would plummet!! Hahaha’. This led me to think what would happen in this case. Because when you invest in an area that has one economic driver, you have to ask yourself ‘what if?’
So we structured our investment in a way that secured us, and our investors more than any other party to the development. This was key. No investment is completely risk free, but it can at least offer a product which is structured so that the investors come first and offers the most diverse exit strategies. We took a small ownership in the group that owns the hotel site and acted as the main lender for the development. This allowed us and our investors to take the first place position in any eventuality.
Our first development in this product format was SW – Ray. The goal here was simple: We would lend the SW Land & Development the initial monies to develop the site and they would bring an existing construction lender to the table to refinance the development, meaning us and our clients would be repaid early. This would have worked smoothly if it wasn’t for two main factors.
First of all, SW Land & Development was introduced by the National Association of Home Builders to a lender called North Star. This lender offered a great rate and even better Loan to Value on the loan. However, after paying up front fees and nearly a year of excuses, they were advised that this lender had been arrested by the FBI and was now being investigated by the SEC with their assets frozen! It turns out the company was defrauding many developers for upfront fees and we were one of those that had paid such fees. This was to be one of a number of brokers and lenders that had attempted (and in some cases succeeded) to defraud us with these ‘upfront fee scams’ (but my comments on this should be for another blog). This left us with no lender for the site.
Secondly, during the North Star scam that SW Land & Development was victim to, Oil prices plummeted! Something completely out of our control had now threatened our investment!! The fears for the project were slowly being realised, as were many in the Bakken Oil Fields. Investors were losing money on investments in the Bakken Oil fields left right and centre.
All except Carlton James Investors. Because of the structure of the Carlton James investment product, the Company was able to use their voting power with SW Land & Development to have them increase their assets in more locations and diversify the SW Land & Development portfolio. Meaning all of our investors were secured not only against the hotel they invested in but also everything that the Sky Watch Group owned or developed elsewhere.
The beauty of this structure gave us the ability to allow SW Land & Development to take their time with the Ray project and ride out the storm of the current oil prices, and find the correct lender for that site. Because the group now had a further 4 sites over 60+ acres with over $12m in value, refinancing and sale of other sites would, and did, secure Carlton James’ investment and enable us to make good on our investment terms. After all the hard work and feedback, we initially received on our structure, it was this structure which ultimately saved us and our clients from losing millions and enabled us to still make interest payments of over 50% over the 2-year term. This has to be hailed as a success story for the group, the investors and the brokers that stood by us and entrusted us with their clients’ money.
SW Land & Development continues to diversify its portfolio now over a number of states, and the values of the sites currently owned are in most cases increasing. We have many happy clients who have been paid on time and not one complaint. We made a great decision in lending money this way and we are very proud of our structure and its exit strategies.
And what happened to those investors that required those physical assets? Those that wanted that hotel room in one unbuilt hotel in middle of an oil field after the oil crisis and chose this investment over ours? I will leave that to your imagination.