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25.4% Annual IRR? Huh? What?

This Must Be a Con Job.

You are about to learn that filthy-rich investors have been earning yields (IRR’s) in the mid-20% level in real estate development projects for half a century. “Really?” you might be thinking. “Why wasn’t I ever allowed to get in on those deals?" 

I am not going to talk to you about any specific securities offering today. Instead, I am only going to talk today about how real estate developers raise the equity for their development projects. Suppose, ten years ago, a real estate developer wanted to build a $15 million apartment building. The developer would sit down with this banker, and his banker would say, “Danny Developer, your proposed apartment building construction project looks good. As usual, the bank will make you a construction loan covering 80% of the total cost ($12 million), and you will have to raise the remaining 20% of the total cost ($3 million) from your investors.

Now Danny Developer had some of his own personal capital in the project, known in the industry as skin in the game. He paid $100,000 for an option to buy the land for $800,000. Danny then paid $50,000 in attorneys fees to get the land rezoned from agricultural to multifamily. He had another $55,000 in architectural fees and another $35,000 in engineering fees. Altogether, Danny had shelled out $240,000 in cash - plus his bank agreed that getting the land rezoned for multifamily use increased its value from $800,000 to $1.6 million. Therefore, as far as the bank was concerned, Danny Developer already had $1,040,000 in equity in the deal. Since Danny needed to raise a total of $3 million in equity, he was now short $1,960,000 in equity.

Danny would then quietly - shush - prepare a Private Placement Memorandum (“PPM”). Taking advantage of certain securities registration exemptions, Danny would privately - shush - take his 40-page Private Placement Memorandum to his friends, acquaintances, and people with whom he had a prior business relationship and invite them to participate in a limited liability company (“LLC”) that he was assembling to build this apartment building. Each of these invitees had to be an accredited investor - basically someone with an investment portfolio in excess of $1 million, not including their home, auto’s, and furnishings.

All of this money-raising from filthy-rich guys had to be done - shush - privately. The developer could NOT send out fliers. He could NOT put an advertisement in the newspaper or in a magazine. He could NOT rent a meeting room and invite unknown investors to a presentation. This money-raising process had to be done privately, quietly… shhh. This is probably why you have never heard of 25% returns on development equity.

I want you to please mentally look over the skyline of Los Angeles, San Francisco, Chicago or New York. Think of the buildings taller than two stories but smaller than, say, five stories. Probably almost half of those buildings were build by developers who raised their equity from private, accredited investors. In these small-to-midsized projects, a great many of these equity investors earned yields in the mid-20% range. This was a commonplace yield for equity. It truly was a case of the filthy-rich getting even richer. Shhhh.

A great many of the small to medium-sized commercial commercial buildings you see were constructed using equity investments from accredited investors earning IRR’s in the mid-20% range.

But then something happened. Something wonderful. At the nadir of the Great Recession, President Obama signed the JOBS Act. For many years hedge funds had been publicly advertising to accredited investors, and hedge funds had raised tens (hundreds?) of billions of dollars for their investments. The argument was that accredited investors were smart enough not to fall for get-rich-quick schemes. In order to jumpstart the economy, Congress passed the Jumpstart Our Business Start-ups (JOBS) Act, which now allows sponsors to publicly advertise their investment opportunities to accredited investors. The sponsors merely had to inspect the underwear of their investors (a little humor) to verify that these investors were, in fact, accredited investors.

Let’s pause for a moment to give you some trust in the author, George Blackburne III (a licensed attorney in California and Indiana) and Blackburne & Sons Realty Capital Corporation (established in 1980). You’ve heard of that fancy new term, crowdfunding, right? You may faintly recall reading about crowdfunding firms like Kickstarter, IndieGoGo, and LendingClub. These crowdfunding firms are just other firms taking advantage of the JOBS Act.

With the passage of the JOBS Act, we can now talk publicly and candidly about these investments opportunities, without librarians and securities regulators going shush. 

A development equity investment opportunity is NOT automatically a fraud or a con job, just because the projected yield is in the mid-20% range.

Such huge yields are commonplace in real estate development. Now you can still lose every single penny of your development equity investment in bad deals. Our list of ways to lose money in development equity investment deals is so extensive that the list goes on and on. I you ever look at one of our specific deals, you’ll see this voluminous - but far from exhaustive - list of risks; but the point of today’s Special Investor Letter From George is that the very high IRR’s on development equity deals are NOT conclusive proof that the investment is obviously fraudulent or a con job.

Many of you have been with me for decades. Many of you invest with us because your parents invested with us. (The mere thought of that makes my eyes mist up. Thank you.) If you are one of our old-timers, you may recall me talking about my famous $10 K-Mart crystal ball. Using this crystal ball, I become Carnac the Magnificent, the great seer. Let me tell you the future:

I tend to be the first in my industry to try anything, and my early investors make a killing. Then competition drives down the returns of our early investors. It is a fundamental principle of capitalism that, “Outrageous profits breeds competition.” Therefore, Carnac the Magnificent predicts that soon competition will drive yields on development equity deals down to just 13%. Today we are talking about yields (IRR’s) in the mid-20% range annually.

During the Great Recession, the investors in our very first farm deal doubled their money. This was during the Great Recession! The investors in our first (and unfortunately only) industrial building purchase nine years ago did quite well. Heavens, I wish we had bought twenty more industrial buildings! No one was building them for a decade.

There is a lesson to be learned from investing with ‘ole George Blackburne III. Don’t be a late joiner. Get in on the very first deal because history has shown that those investors do the best. Just sayin’.

Warm Regards,

George Blackburne III, Esq. (aka Carnac the Magnificent)

Owner & President

Blackburne & Sons Realty Capital Corporation

4811 Chippendale Drive, Suite 101

Sacramento, CA 95841

P: (916) 338-3232

F: (916) 338-2328

CA DRE #829677

NMLS #103430


George graduated from law school with honors, and he is an attorney licensed in California and Indiana. He graduated from the University of Santa Clara with a BS in Finance and an MBA in Finance. He owns both Blackburne & Sons Realty Capital Corporation and C-Loans, Inc., the large commercial mortgage portal. He is also a California Real Estate Broker (License #00623143). 


Important Disclosures

Investing in first mortgages involves substantial risk. A severe and prolonged decline in real estate values is possible. Foreclosed property almost always needs substantial renovation, so be sure to maintain some liquidity. This is not an offer to sell securities. Such an offer is only made when accompanied by a Private Placement Memorandum.


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You probably have money set aside for your retirement and for the cost of college for your children and grandchildren. It shouldn't all be invested in the stock market. In California, the first trust deed investment business is huge. A recent law change - the JOBS Act - now allows accredited investors nationwide to also invest in these same first trust deeds and first mortgages.

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