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CASE
STUDY – BARR SYSTEMS, INC.
As we have always disclosed, The Rama Fund,
LLC (the “Fund”) has the right to a first look
at all of Athas Capital Group, Inc.’s (“Athas”)
production. If a deal does not fit within the Fund’s
investment parameters or if the Fund is fully invested,
then we will offer the investment opportunity to our network
of private investors as part of our Separately Managed Account
(“SMA”) program. In this case study we outline
what we believe is one of the best, if not the best, deal
that we have ever funded. Unfortunately for SMA investors,
the only way to own a piece of this extremely attractive
deal is through membership interests in the Fund. Fortunately
for SMA investors (and new investors), the Fund is still
accepting new subscriptions.
Loan
Metrics
•
Loan-to-value ratio:
• Loan amount:
• Value of collateral:
• Lien position:
• Other debt: |
8.54%
$540,000
$6,323,000
1st lien
$0 |
•
Guarantor’s FICO:
• Full recourse/personal guarantee:
• Guarantor’s net worth:
• Note rate:
• Term of loan:
|
761
Yes
$10.9M
11.99%
24 months |
Executive Summary
Our borrower, Barr Systems, Inc. (“Barr”), has
owned this building since 1993 and built the property using
its own funds. Barr wanted a very low leveraged loan so
that it could inject some working capital into its business.
The collateral is a pristine office building on 10 acres
with another sister lot - also 10 acres - next door that
is fully entitled and ready for development.
The
Borrower / Narrative
Barr is in the print management and document delivery software
business. Up until May 2006, its primary business operations
were the development, sale and support of a legacy software
application that supported high volume printing. At the
same time, the company was investing in a new R&D software
development project as changing technology was making the
legacy software less competitive in the market and there
were declining sales.
In May
2006, Barr sold 60% of its legacy business to a joint venture
partner who was responsible for revamping the legacy application
while Barr shifted all of its focus to the new R&D software
project. In November 2009, the new R&D project was completed.
The elimination of the software developers and the administrative
staff in accounting, human resources and information services
significantly reduced the operating costs of the company.
Furthermore, the joint venture partner has proven successful
in revamping the legacy software application, which Barr
still owns 40% of.
Why
Conventional Financing Was Not an Option
Barr reported a negative Adjusted Gross Income (“AGI”)
on its 2008 and 2009 taxes in the amounts of ($1,730,462)
and ($2,035,322), respectively. Also, 100% of our loan proceeds
were used as cash-out. In today’s environment, banks
prefer to finance purchase transactions or refinance transactions.
How
We “Won” the Deal
We believe we were exclusively retained to procure financing
for Barr for the following reasons:
-
We
are willing to fund transactions where the use of proceeds
is a cash-out
-
Unlike traditional banks, we do not look primarily at
the borrower’s Debt to Income (“DTI”)
ratio, but rather we focus on the property’s Debt
Service Coverage (“DSCR”) ratio. Because of
this, we were able to get comfortable with this transaction
even though the borrower had negative AGI.
-
Beyond
the property’s DSCR, we carefully scrutinize a property’s
value and one of our principal underwriting metrics is
the Loan to Value (LTV) ratio which is a measure of the
equity cushion protecting our invested capital.
-
We were able to move quickly and processed this transaction
from the execution of our LOI to closing in about one
month.
Exit
Strategy for our Bridge Loan
Our loan proceeds were used by Barr to fund the marketing
and development expenses related to their new software application.
Their new product has received a strong reception in the marketplace
and the company’s financial projections forecast profitability
within 24 months of our loan funding. The company expects
to be able to repay our loan through the cash flows it derives
from its operations. Additional potential avenues for the
exit of our loan are (1) a refinance via conventional sources
once the company has demonstrated a positive financial trend,
or (2) a sale of part or all the of the subject property.
The
Collateral
- Located
in Gainesville, FL
- 4
office buildings with 53,103 heated area square feet, situated
on 10 acres
-
50% of total square footage leased by Barr or its joint
venture partner
-
38% leased to third parties
-
12% vacancy
- 10
acres adjacent to the improved real property, fully entitled
and ready for development
Pictures
of the Subject Property
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