We received the September 2010 MF '08 newsletter in the mail this weekend. Thank you to Walter and Kelly for keeping us abreast of the latest developments.
At first blush, the outlook seems rosier for the '08ers than it does for the REL'ers or the RE Reno'ers. '08 doesn't have a $60+ million line of credit and isn't contemplating a secondary loan of $20 million like RE Loans, nor were they subordinated to junior status like the RE Loans noteholders. '08 also isn't a secured creditor staring down the barrel of a bankruptcy filing by Wild Game Ng/One South Lake/Hi-Five like RE Reno. That's the positive news.
The not-so-positive news is embedded within the newsletter and many of the statements beg for further clarification.
The newsletter states the following:
NEWSLETTER STATEMENT:
"When there is cash available for distribution to investors, each investor will receive a payment prorated based on the amount of that investor’s note, divided by the sum of all notes. This method of distribution is the fairest way."
COMMENT:
Unless the distributions are imminent, why build up hope when so little hope exists? We've all seen these sorts of carrots waved in front of our faces throughout the years. See page 4 of the newsletter regarding the Red Mountain loan. MF '08 is on the hook for another $950,000 due to a failure to fully fund the loan. There's no way Walter & Kelly will be returning principal prior to the $950k being provided to the borrower, as evidenced by this statement: "Investor distributions can begin after we have funded this additional funding
commitment." So, guys, just where, exactly, are you going to find an extra $950,000 given the "current depressed market"?
NEWSLETTER STATEMENT:
"This distribution should be treated as a return of principal, which should not be recognized as interest income. A return of principal should not trigger current taxable income, unless the investor is withdrawing these payments from an IRA or 401K account. If MF08 is subsequently able to pay interest, we will advise the investors of that occurrence. This should minimize taxes incurred by investors and recognizes the possibility that MF08 simply will not be able to pay interest on its obligations."
COMMENT:
Other than the underlined red text above, there's not much to make one believe principal will be repaid, let alone interest. If you do receive a return of principal, be sure to contact your tax specialist just in case.
NEWSLETTER STATEMENT:
"A small group of investors tried to put us in involuntary Chapter 11 Bankruptcy. If they had been successful the costs of the Bankruptcy would have been enormous."
COMMENT:
HOW DARE YOU? Everything is fine as you can obviously surmise from reading the September newsletter!
NEWSLETTER STATEMENT:
"Barney Ng, President of Bar-K since 1975, resigned in September of 2009."
COMMENT:
Like Richard Dawson, the NG family continues to put its investors in the middle of a Family Feud. Has Barney really been the President of Bar-K for 35 years? Who knew?
Finally, did you see how many condo loans have been made as part of the '08 portfolio? It's not like they loaned money to buy or develop buildings full of condos. These are small loans and the payoff on these couldn't be large enough to cover the interest payments you'll likely never receive. It leaves one to ponder whether or not these loans were made as favors to friends or family. Could they be related entity loans? If so, the covenants of the '08 operating agreement may have been broken.
The conclusion of the newsletter states, "Our recovery is dependent upon the recovery of the Real Estate economy. We can begin distribution of cash when some loans pay off. We invite your comments."
To sum up the whole fiasco, the dubious position this fund finds itself in has nothing to do with the management provided, with the exception of Barney, according to Walter & Kelly. It's 100% about the state of the market and economy. While the economy plays a role, no doubt, it's not entirely to blame. Also, I don't think they invite your comments. They probably wish you'd simply leave them alone.
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