Message-ID: <1621598.1075845189863.JavaMail.evans@thyme> Date: Tue, 22 May 2001 16:11:11 -0700 (PDT) From: beau@layfam.com To: lay.vittor@enron.com, robyn.vermeil@enron.com, mark.lay@enron.com, kenneth.lay@enron.com, david.herrold@enron.com Subject: Real Estate Investment - Shawn Gross Cc: lay@enron.com, mrslinda@lplpi.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable Bcc: lay@enron.com, mrslinda@lplpi.com X-From: "Beau Herrold" @ENRON X-To: Vittor, Elizabeth Lay , Vermeil, Robyn , Lay, Mark , Lay, Kenneth , Herrold, David X-cc: Lay, Linda X-bcc: X-Folder: \Lay, Kenneth\Lay, Kenneth\Inbox X-Origin: LAY-K X-FileName: Lay, Kenneth.pst I wanted to inform you of an investment opportunity with Shawn Gross. =20 =20 He planning on developing a 2.5-acre tract at the corner of Kirby & Braesw= ood. This location as you know is close to the medical center area and su= rrounded quality old neighborhoods. Two apartments in the area have been = very successful. The Providence across the street is getting rental rates= in the $1.22 per square foot and Kirby Place, an older apartment complex, = is getting $1.13 per square foot. =20 The preliminary plan is to develop three or four story structures with a t= otal of approximately 110 or 150 units, respectively. The total project c= ost are projected to be $8.1 million or $10.9 million. Capital required f= or this development is between $1.6 million (for the three story developme= nt) and $2.2 million (for the four story development). An additional call= later on during development could be around $200,000 due to increasing co= sts (i.e, increase in lumber prices). The property would probably be comp= leted 18 months out. Projected IRRs are between 20% to 28% depending on t= he sale of the property. Return on Cash Invested starts at approximately = 11% in 2002 and increases steadily up 20% around 2006. Assumptions are: $= 1.22 per square foot rents; revenues & expenditures rising 3.5%; vacancy l= oss of 5%; Cap Rate of 8.5%; total project cost between $8.1 million and $= 10.9 million, depending on three or four stories. There is an issue with = the property being in the 100-Year Floodplain, but he is proposing to alle= viate the problem by creating a water feature on the property and raise the= grade of builderable area above the Floodplane. =20 I spoke to Jenard about the project before I've been able to discuss it fu= rther with Shawn. I asked him about some of the assumptions, such as the = rental rates and cap rates which I thought where a bit aggressive. He tol= d me to the contrary, that Shawn's other project is pulling in similar rat= es, as well as other non-Shawn projects. With regards to the cap rate, he= said that he has been seeing 8%, which would call for a greater sales pri= ce than the assumed 8.5% (I can discuss this in further detail for anyone = who doesn't understand cap rates). Jenard is investing 15% of the capital= required as a limited partner (same terms as the rest of the partners) an= d Shawn is investing 5% (4% as a limited partner, 1% as GP). Shawn will b= e the developer, JMG Builders will be doing the construction, and JMG Mana= gers, Ltd. will be managing the property. In otherwords, Dad will have hi= s construction company and management company doing the project. Shawn wi= ll be the developer. While the property is under operation there should b= e distributions (not treated as capital returned). At the time of sale, m= ortgage refinance, or other capital event, after all debts have been repai= d, all of the partners will get their capital contribution back. Then, pr= ofits are distributed. I can go through the partnership structure for tho= se who are interested, which includes distributions and fees. =20 =20 I am considering investing in 1% to 2% of the deal. A 1% percent investme= nt amounts to either $16,000 or $22,000 invested, depending on the three o= r four story scenario, plus the possible additonal cash call of $2,000. T= here are several risks (i.e., softening of rental rates) which dooesn't mak= e the returns a guarantee. However, I feel good about the Houston econom= y and absorption rates in the residental (and commercial) markets for Hous= ton. Feedback from Jenard regarding his developments in Houston and Steve= Keller's South Rice Apartment development have all been extremely positiv= e. Shawn's personal developments include: one in Houston completed and d= oing great; the other Houston project never got developed because someone= offered him so much money on the land, he and his partners had to take it= (not a bad problem considering it took the risk out of developing and ret= urned an enormous IRR to the investors). Although he has not developed mu= ch, his father is an investor and will have some involvement. Money inves= ted would be tied-up for at least two years (unless something happens like= his last project), but up until a sale which could take between 2 to 5 ye= ars (or longer) there could be distributions. That assumes that the proje= ct is doing well. =20 Anyway, please let me know if any of you are interested. The deal is sche= duled to fund June 10. Like I said, I have not heard from him on all the = specifics. Therefore, I don't know at this time how much is of the deal i= s even available. I would be glad to discuss this in greater detail with = any of you that are interested. =20 - Beau