Volume 9, Number 2 2021 YEAR-END REPORT January, 2022
by Fund Manager Datta Khalsa
The second half of 2021 was a busy time for the management team here at Firmus. At our midway point through the year, we were carrying 19 investments, 10 of which had stopped accruals due to challenges ranging from supply-chain and other Covid-related delays to a pair of situations requiring our legal council’s heft to resolve.
We managed to trim much of our non-performing inventory along the way, resulting in a more manageable total of five properties where we hold the majority stake, along with three in which we hold a minor share, and four notes. In addition to consolidating our real estate holdings, we also assigned an overdue note to an outside investor to free up additional frozen capital to meet unexpected cost increases due to supply chain issues and lender pull-back.
As returns were down for most of the year, there was a corresponding decline in new capital coming into the fund. Simultaneously we encountered multiple financial obligations that took priority over being able to return capital to investors for the first time in the history of our fund. Instead, the proceeds from each consolidating event went to expenses of covering the spread between reduced lender commitments and higher construction costs to keep both of our largest development projects on track, being forced to also move additional capital to a frozen account required by the lender to secure funding in one case.
Through all of this, members of the management team stepped up in response, deferring or waiving portions of our compensation, even providing a personal guarantee on a construction loan for which the lender had previously not required direct participation. Thanks to these added measures, our 15-townhome development in Aptos has finally been able to break ground, and we are excited to see construction start on this legacy project that our investors can drive by for years to come, knowing the team effort that helped make it happen.
We are also pleased to report that the fund was able to prevail in a legal settlement that single-handedly freed us of four non-performing assets after a long and bitterly-contested contractual dispute that involved a string of broken promises by our partner after multiple proposed workout agreements. We successfully recovered 100% of the principal along with our accrued returns, plus all legal fees in a single lump-sum settlement, with the only condition being a non-defamation clause. That deprived us of being able to warn others of his practices, but all told it was a clear victory that gave Firmus the vindication it deserved.
Our 20-townhome development in Phoenix suffered a string of delays, including materials shortages and the necessary replacement of a bad framing subcontractor with portions of their work needing to be redone. Each delay pushed the estimated date for completion back by months, but the project has finally returned to a reliable timeline, and the current flow charts indicate we are on track for completion by the end of April, positioning us for a targeted sale towards the end of the second quarter of 2022, which will be our next liquidity event.
We have one remaining house to sell in Georgia that is nearing completion at around that same time. We are also proceeding with legal action against two contractors to help mitigate anticipated losses on that project, but regardless of whether we prevail in that action, the much larger Phoenix development—where property values have continued to rise at some of the fastest rates in the country—stands to more than offset losses endured on our smaller flip projects on the East Coast. And while the contractor lawsuits may provide additional capital down the road if we are able to prevail and collect, we aren’t counting their targeted settlements until we earn them.
In Chicago, economic recovery from the pandemic has been excruciatingly slow, where the foreclosure of our note on a 4-plex there has been frozen for another year due to court shutdowns and moratoria on evictions and foreclosures. The process is nearing resolution, with the defaulted borrower finally putting the property on the market. The equity from that sale appears sufficient for us to recapture our legal costs along with over a year’s default interest at 18% in addition to the full payments owed on an investment that has been paying us nothing for over two years, even as they were allowed to collect rents from their tenants. It will be nice to get that one reconciled, at long last, to get our investors back the returns that
have been due.
We have also taken closer control of the search for a new buyer for our fully entitled development in Blythe, California, where we have a new team who has refined the offering and revamped the marketing campaign. To broaden the pool of viable candidates, we have also offered a portion of the project in smaller single operator parcels which can be built to suit with access to the same low operating costs and overhead that differentiates the project in the marketplace for larger conglomerate buyers. These adjustments have brought increasing numbers of new inquiries on the project which bodes well for us to get that property back into escrow on more solid footing.
Even on some of our smaller-share holdings in a few hotel development and redevelopment projects, we have become increasingly involved in keeping the investments viable as the hospitality industry climbed back from the pandemic abyss. This has included weekly Zoom meetings to assist in oversight of our Branson hotel project in particular, with the active participation of two of our largest investors. The teamwork there has been amazing, and the hotel is now on track for an estimated opening date next month, at which time our investment can start generating revenue after nearly 18 months of delays.
The temporary impact of all of these events had led us to reduce the fund’s accruals to very conservative levels during the majority of 2021 as we navigated considerable obstacles without any guarantees of how things would resolve, but we are pleased to report with the efforts and victories over the past six months the fund has started a clear recovery which has allowed us to bring our returns back up to a respectable 7.81% Year over Year, putting the average annualized returns for our 8 year history at 12.26%.
Given the number of challenges we faced over the past few years, there is a sense of satisfaction in having weathered the storm, and we have greatly appreciated the trust and patience of our investors as we actively navigate back towards our more profitable historic levels of returns.
Datta Khalsa is a licensed Real Estate Broker (Cal DRE#01161050) and a member of the management team for Firmus Financial, LLC. He can be reached at (831)818-0181 or datta@mainstrealtors.com
Firmus Financial, LLC is a small-pool investment fund that is regulated by the State of California per exemption with the SEC and open to accredited investors in all 50 states. Any projections made herein, whether specific or implied are purely speculative as past results are not indicative of future performance. Prospective investors are able to purchase shares by signing a Subscription Agreement after reviewing the fund’s Operating Agreement and Private Placement Memorandum. Interested parties are advised to consult a qualified financial advisor and/or tax professional before making any investment.