Truax Hotel Investment Frequently Asked Questions
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Q: What is Truax Hotel SPE, LLC?
A: Truax Hotel SPE, LLC (the “Company”) is a newly incorporated company formed for the specific purpose of lending to Temecula Hotel Partners Old Town, LLC (the “Borrower”) for the purposes of constructing a 4-Star luxury boutique hotel in the Old Town neighborhood of Temecula, CA. The Company will receive a note which will be secured by a second deed of trust (“Mortgage Loan”) on the hotel property (“Property.”) The project is a not-yet-started project which will require extensive construction.
Q: What are the proposed plans for the construction of the Property?
A: Known as “Boutique Hotel Project” located in Old Town
Temecula, the Property is a proposed five story building consisting of “Turn of
the Century Design” and the latest state of the art technology. The Borrower intends
for the design to include a hotel, banquet, health club spa along with space to
nclude restaurant and retail tenants. The construction plans also include
the construction of a five story, 201 stall valet parking structure. The
Property plans include 108 standard sleeping rooms; 21 deluxe sleeping rooms;
16 premium sleeping rooms; 3 luxury sleeping rooms; 3 penthouses for a total
area of 69,516 consisting of 151 sleeping rooms. The Property plans also
include multiple meeting rooms and other hotel amenities commonly found in a
higher end boutique hotel. Please see our “Property Summary” attached hereto as
an exhibit.
Q: What is the Property?
A: Currently, the Property is land that includes several
parcels along Third Street in Old Town, Temecula, CA. Please see the “Property
Package” that is attached as Exhibit A to this Offering. As construction progresses
and the Property evolves, it is expected that the Property will increase in value,
of which there can be no guarantee. See “Risk Factors.”
Q: Who is the Borrower?
A: The Borrower is Temecula Hotel Partners Old Town, LLC
which is a newly formed California limited liability company formed for the
purposes of acquiring, developing, constructing and managing the Property. The
Borrower has two members: BIIAJ, LLC and an individual, Brad Neste. Mr. Neste
is providing up to $4,000,000 for high risk soft costs such as due diligence,
design review with the City of Temecula and entitlements. BIIAJ, LLC has been
in existence since 1982 and is led by CEO, Bernard L. Truax, II. The Borrower
has acquired, developed, managed, and disposed of commercial real estate
throughout Southern California, concentrating in the Temecula Valley. Please
see more detailed information in the section entitled “About the Borrower.”
Q: What is the term of the Mortgage Loan?
A: The Mortgage Loan is a five (5) year loan with an option
to extend the Mortgage Loan one (1) year.
Q: What is the structure of the Construction Loan?
A: The Construction Loan is to be for 100% of the Boutique
Hotel construction costs. The First Lien Holder will make this Construction
Loan conditioned upon the Borrower having two collateral accounts, one equal to
5% of the Construction Loan (primary collateral) and a second equal to 20% of
the Construction Loan. Both collateral accounts are to be in the form of cash
held in interest-bearing bank accounts for the term of the Construction Loan until
refinanced with a permanent mortgage. The funds raised under this Offering are for
the secondary collateral requirements. The dollar amounts of the construction
loan, primary and secondary collateral or estimates and will be finalized prior
to the closing of the construction loan. The estimates described in this offer
are expected to be within 1 to 2% of the final numbers. The Borrower is
receiving an estimated $80 million Construction Loan (the actual project
construction cost will be determined prior to the Construction Loan closing)
from a bank (“First Lien Holder”) that will be secured by a first deed of trust
on the Property. This $80 million covers 100% of the project costs including an
interest reserve for the debt service of the construction loan until hotel
operations are able to pay the construction loan interest from available cash
flow. Besides the Property, the First Lien Holder is requiring the Borrower to
provide collateral accounts in the form of cash. The $16 million raised from
this Offering will be placed in a segregated interest bearing account as
secondary collateral for the First Lien Holder. The Brad Neste investment of $4
million is the primary collateral and will be held in a similar
interest-bearing account as the Secondary Collateral. There are multiple risks
associated with the proposed project and all potential investors should
carefully read the section entitled “Risk Factors” prior to investing.
Q: How are these funds being used prior to the closing of the Construction Loan?
A: Currently the Primary Collateral is being spent on the
early stage, high risk expenses that are traditionally associated with any
development project. At the time of closing on the Construction Loan, the
Primary Collateral funds spent up to that point on project expenses that are
included in the $80,000,000 project cost will be reimbursed from the
Construction Loan proceeds to establish the $4,000,000 (or 5% of the final Construction
Loan amount) Primary Collateral bank account described above. Any funds spent
from the secondary collateral raised under this offering will likewise be
reimbursed from the construction loan proceeds to establish the full amount of
the Secondary Collateral bank account described above.
Q: What if the Borrower does not have enough money to complete the construction of the Boutique Hotel Project?
A: The Borrower will enter into an agreement with the
General Contractor (“the GC”) for the “design-build” of the project. The
contract is a “Guaranteed Maximum” contract or “GMAX” contract. Under this
agreement the GC is compelled to design and build the project without cost
overruns. The GC will also be posting a completion performance bond to ensure
that the project construction will be completed at a cost to the Project LLC no
greater than the contracted amount. Therefore, the risk of exceeding
construction costs is averted by the Borrower and instead is the responsibility
of the construction company.
Q: Will the Borrower have enough money to pay the interest on all of the debt, including the Mortgage Loan of the Company?
A: The Borrower estimates that the total debt service costs
will equal approximately $3.7 million during the period from closing on the
Construction Loan through the completion of construction, including receiving
the certificate of occupancy (“CO”). This includes interest for the Mortgage
Loan and interest for the Construction Loan held by the First Lien Holder. To
ensure that the Borrower will have the funds to provide for this, it has
budgeted $5.5 million in interest reserves. The balance of the interest reserve
covers the period from CO until the operations of the hotel are sufficient to
pay the debt service from operating profits.
Q: What if the Borrower is unable to refinance the Property at the end of the Construction Loan term with a permanent loan in a sufficient amount to pay off the Construction Loan Principal?
A: In order to refinance the Construction Loan of $80
million with a 75% loan-to-value permanent loan, the Project would need to have
a value of $106,666,667 (the “Required Minimum Value”) at the end of the
Construction Loan term. The Borrower is conservatively anticipating a value of
$111,000,000 in year 5 and a value of $113,000,000 in year 6, the end of the
Construction Loan term. In the event that the Minimum Required Value is not
achieved, then the collaterals will be drawn upon as a principal reduction to the
Construction Loan, to reduce the principal to the amount equal to 75% of the
Project value at the time of refinance. The funds available and the order in
which they will draw upon for the principal reduction are 1) the amount of
accrued net cash flow from hotel operations, which is anticipated to be
$8,000,000 in year 5 of the Construction Loan; 2) the Primary Collateral of
$4,000,000; and 3) the Secondary Collateral of $16,000,000. Borrower reserves
the right to cure any financial deficiencies that may arise from alternate
sources other than the collateral accounts or accrued net cash flow. The total
of the funds available for principal reduction are $28,000,000 which would
reduce the $80,000,000 Construction Loan principal to $52,000,000 and allow the
project to be refinanced with a 75% permanent loan with a Project value as low
as $69,333,333 at the time of refinance.
Q: What will I receive in return for my investment?
A: Investors will receive Membership Interests in the
Company and will become Members of the Company upon acceptance of their
Subscription Agreement by the Company. This Offering is only available to
Accredited Investors that are deemed suitable by the Manager. See “Suitability
Standards.”
Q: How is my investment secured?
A: Individually, Members are not secured as they are
receiving a Membership Interest in the Company which represents an equity
position and not a secured debt position. However, the only asset of the
Company shall be the Mortgage Loan which will be secured by a second deed of
trust on the Property.
Q: What kind of return may be expected by a Member?
A: The Company will lend money to the Borrower and in return
will receive a Mortgage Loan. The Mortgage Loan principal is expected to be as
much as $16,000,000 and will bear an interest rate of 8%. The Borrower intends
to deposit up to $20 million in two separate interest bearing accounts as
collateral for the first deed of trust holder (the Company will be the second
deed of trust holder). It is expected that the interest bearing account, for
the duration of Mortgage Loan, will earn interest of up to two (2%) percent. It
is the intention of the Borrower to distribute these earnings (if they so exist
and to the extent that they do exist) to the Company and then to the Members, in
accordance with their pro rata share.
Q: What is the minimum investment amount allowed?
A: Investors must invest a minimum of $50,000, however, the
Manager or Borrower may decrease this minimum investment amount for any
investor, for any reason, at their discretion.
Q: Who may invest?
A: The Membership Interests will be available to Accredited
Investors only and the Manager reserves the right to reject any subscription it
wishes.
Q: Where can I buy Membership Interests?
A: Membership Interests may be purchased through our website
at www.truaxdevelopment.com or by manually executing a Subscription Agreement
which is attached as Exhibit D to this Offering.
Q: How can I sell my Membership Interests?
A: Investors should view an investment in the interests as a
long term investment. In accordance with the Operating Agreement of the
Company, Members may not elect to sell their Membership Interests without express
permission from the Manager and within the confines of this Offering. It is
very unlikely that a Member will be able to sell their Membership Interests.
Members should intend on being invested in the Company for six (6) years.
Q: Do you have a redemption program?
A: No. We do not currently have a redemption program. An
investor should expect to hold their Membership Interests for up to six (6)
years prior to retirement of the Mortgage Loan and return of the Capital
Account Balance of all the Members together with any available distributions.
Q: May I make an investment through my IRA or other
tax-deferred retirement account?
A: Yes. You may make an investment through your IRA or other
tax-deferred retirement account. In making these investment decisions, you
should consider, at a minimum, (1) whether the investment is in accordance with
the documents and instruments governing your IRA, plan or other retirement
account, (2) whether the investment would constitute a prohibited transaction
under applicable law, (3) whether the investment satisfies the fiduciary
requirements associated with your IRA, plan or other retirement account, (4)
whether the investment will generate unrelated business taxable income (“UBTI”)
to your IRA, plan or other retirement account, and (5) whether there is
sufficient liquidity for such investment under your IRA, plan or other
retirement account. You should note that an investment in our Membership
Interests will not, in itself, create a retirement plan and that, in order to
create a retirement plan, you must comply with all applicable provisions of the
Internal Revenue Code of 1986, as amended (the “Code”).
Q: Is there any minimum initial offering amount required to be sold?
A: Yes. We will not start operations until we have raised at
least $3,000,000 in this offering. Until the minimum threshold is met,
investors’ funds will remain in an escrow account and will not be admitted as Members.
Thereafter, we will not spend any investor funds until the remaining
$13,000,000 is raised. See footnote 5 in our “USE OF PROCEEDS” section.
Q: What happens to my subscription if you don’t raise at least the $3,000,000 minimum threshold from third parties in this offering?
A: We will not accept subscription payments associated with
subscription agreements until the minimum threshold is met. We intend to
utilize the escrow services provided by FundAmerica. At the time the minimum
threshold is met, funds will be released from the designated escrow account,
Membership Interests will be issued, and investors will become Members. If we
do not meet the minimum threshold by October 31, 2016 after commencing the
offering, we will cancel the offering and release all investors from their
commitments.
Q: Will I be notified of how my investment is doing?
A: Yes, we will provide you with periodic updates on the
performance of your investment in us, including:
· an annual report;
· quarterly reports;
· current event reports for specified material events within
four business days of their occurrence;
· supplements to the offering circular, if we have material
information to disclose to you; and
· other reports that we may file or furnish from time to
time.
We will provide this information to you by posting such
information on our website at truaxdevelopment.com or via e-mail.
Q: When will I get my detailed tax information?
A: Your Form K-1 tax information, if required, will be
provided by March 31st of the year following each taxable year.
Q: Who can help answer my questions about the offering?
A: You can contact our Manager directly at 41923 2nd St
#401, Temecula, CA 92590 or 951-294-5870
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