Investment Advising Case

Background:

In the summer of 2012, John Smith moved to Northern Colorado from California. John had been a contractor for the last eight years servicing commercial and residential properties in all aspects. John obtained an MBA from UCLA and an additional construction management degree. John felt a move to Northern Colorado would serve his company well with an expansion of his current line of his work. Contractors of Colorado LLC was created and John, along with his wife and three kids, saved nearly $50,000 over the last five years to start a new business venture.

The Smith family wants to create alternative income sources to build retirement. At the age of 31, John and his wife have a monthly expense of $5,600. They expect their monthly expenses to increase 1% each year. John found while living in California, if he leveraged his time appropriately, he could generate $8,000 a month working 40 hours a week. Time management and money leverage was key to their success. It had been very important to the Smith family over the last eight years to also re-invest their savings into multiple sources of investment opportunities. They had dabbled into ETF stocks earning 20% ROI, currency trading at 15%, short term rental properties (2-3 years) for 10%, and over 30 homes that were purchased/renovated and resold for a profit. The home flipping market was changing paths and could no longer produce a positive NPV. The Smith family did not feel they could keep relying on this source for retirement full time.

John has multiple like/similar contacts in Northern Colorado and he feels confident he can keep the same quantity of work. The last two years stands as proof he can match the $8,000 per month. They expect a 2% growth in revenue each year. On average, John and his wife put 7.5% of their yearly gross revenue from this business under their bed for retirement purposes.

In order for John and his wife to maximize their time and money, they have considered two different investment projects to dump their savings into. In addition, three different sources of financing options have been considered to help finance the project. As their financial advisor, using the information provided in the project proposals and financing sources, which project would you consider recommending and how should it be financed. In addition to your recommendations, there are numerous due diligence items to be considered. What recommendations do you have for the chosen project?

(Two possible Investment Ideas and Three possible Debt Servicing options are provided below)

Investment Idea #1: Build an RV storage facility

*Smiths will be purchasing a 2 acre parcel that will house 120 RVs

*Each space will be rented out for $75/month, expecting a .6% increase annually

*The facility requires 10 hours per week from an employee

*One employee will cost $15 an hour

*Business tax rate is 39%

*Property insurance expense represents 2% of gross revenue

*Each RV stall costs $1250 to build

*A two acre parcel that will house 120 units will cost $100,000

*Vacancy rate averages 20%

*John can sell the facility in 20 years for 115% of initial building cost plus 1.75 years worth of gross revenue

*John thinks he should expect to earn 17% on this investment considering the risk

Investment Idea #2: Purchase and build 20 billboards all over Northern and Central Colorado

*Cost to build 12x24 billboard- $12,150

*Each side can produce $400 per month per side, expecting .6% increase in gross revenue each year

*All Land will be rented for the billboards at a rate of $125 per month per billboard

*The advertising installation company charges the owner of the billboard $150 per side to change the advertisement

*The advertising installation charge is passed on to the client

*A salesman is hired for 20% of the ad revenue

*Assume one year contracts

*Business tax rate is 39%

*Assume 25% vacancy rate

*At the end of the investment, John can sell each billboard for initial cost to build x 110%+ .78 yrs. worth of fully rented contract value

*John thinks he should expect to earn 17% on this investment considering the risk

Debt Servicing:

Option 1: Bank terms

*Requires 20% down

*20 year loans

*APR rates on commercial loan are 6.25% respectively

*Loan fees of 3% of total loan value must be paid upfront

Option 2: Private money lender

*No down-payment required, but will use $50,000 from savings to lower payment

*Requires annual interest only rate of 12% paid monthly

*In 5 years the principle will have to be paid in full

*He expects bank terms offered 5 years out to be: 15 year loan, 5.75% APR and bank fees are paid up front at a rate of 4% of TLV

*In addition to the interest rate, the private investors require a financing fee of 2% paid up front.

Option 3: Private money lender with equity stake

*No down-payment required, but will front $50,000 toward total loan to lower the equity stake of the private money lender to 30%

*Requires 4% of loan value upfront

*Wants 30% of net revenue as an equity stake in the company paid annually

*When John sells the property at the end of the 20 years, the private money lender wants 15% of the total project value