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Virtua Hospitality Finance Fund I, LLC

A potential solution for investors seeking an alternative source of monthly income

Private Fund Offering highlights

Fund description: Provides capital to hotel owners seeking to renovate their existing properties or develop new hotels. For more information on this strategy, view our Direct Lending Guide.

Current performance*:

  • Current Portfolio Return: 15.58%[1]
  • 10% cumulative, accrued, annual non-compounded priority return on initial capital contribution due first to investors from Available Cash [2]
  • Distribution frequency: monthly
  • Expected fund close date: December 31, 2024 [3]

*Past performance is no guarantee of future results. All information is subject to change. You should always consult your own investment advisors prior to investing. Investment offerings and investment decisions may only be made on the basis of a confidential private placement memorandum (the “PPM”) issued by the issuing company, or any affiliate, or partner thereof (collectively, “Virtua”). Virtua does not warrant the accuracy or completeness of the information contained herein.

What is mezzanine financing?

Mezzanine debt, otherwise known as subordinate debt or unsecured debt, sits in the capitalization stack beneath senior secured debt and above equity. For a hotel owner, mezz debt can be a useful way to bridge the gap between what the commercial mortgage lenders will lend and the total value of the project or acquisition, without diluting the hotel owner’s equity.

 

 

Investment Overview & Strategy

The Fund’s business plan is to originate short term mezzanine loans and preferred equity investments on hotel and hospitality related properties. Typical loans will fit the criteria outlined below but will depend on both credit characteristics for specific projects and competing market options, if any.

Investments will focus on:

Renovation or Operational Improvement Financing – The Fund will provide financing to borrowers seeking to improve the value of their hotels by either renovating the property or improving the efficiency of its operations. These improvements will result in increased net cash flow and value that will de-lever Fund investments, and make it easier to be repaid through either a refinance or sale of the property.

Ground Up Construction Financing – The Fund will provide financing to borrowers seeking to build new hotels from the ground up in strong markets. The increase in value through completion and operation will de-lever Fund investments, and make it easier to be repaid through either a refinance or sale of the property.

What is a direct lending strategy?

Direct lending strategies are a subset of private credit debt. Where traditional private market funds seek to raise investor capital for a portion of the asset’s equity, direct lending seeks to pool capital to make loans. Direct lending funds have grown in popularity as an alternative source of income, with global assets growing to over $700 billion as of December 2018.[4]

How do direct lending strategies work in general:

  1. Investors contribute capital to the fund by completing the subscription agreement and reviewing offering documents
  2. The Private Equity manager (called the “Sponsor”) aggregates the capital into a fund
  3. The Sponsor identifies opportunities to place financing through pooled capital
  4. The borrower makes interest payments to the direct lending fund
  5. The fund flows distributions back to the investor at regular intervals

Diagram*:

*There is no guarantee that Members will receive all or any part of their Accrued Annual Priority Returns or the return of their Unreturned Capital Contributions.

General Investment Parameters:

  • Investment Amounts: $500,000 – $5,000,000
  • Investment Types: Preferred equity and secured and unsecured loans, including mezzanine debt
  • Default Remedies: Right to assume management and force sale for preferred equity and mezzanine investments; foreclosure for mortgage loans; action on debt for unsecured obligations (including against guarantors)
  • Terms: 1-3 year terms with extension options up to a total of 5 years
  • LTC [5] Constraint: 85% or less
  • LTV [6] Constraint: 80% or less on current value, 70% or less on stabilized value
  • Interest/Return Rates: Fixed or Floating Rates starting at 12.0%
  • Equity Profit Participations: Case-by-case basis
  • Guaranty: Primarily limited recourse [7]
  • Yield Maintenance: At least 12 months
  • Property Types: Hotels, with a focus on select service Marriott- and Hilton-branded hotels
  • Geography: Nationwide, with a focus on primary and secondary markets

Distribution Waterfall

  1. First, 100% of Available Cash to the Class A and B Members until they have received a 10% cumulative, accrued, annual non-compounded priority return on their initial capital contributions
  2. Then, 100% of Available Cash to the Class A and B Members until they have received their Capital Contributions back
  3. Then, 100% of Available Cash shall be distributed 80% to the Class A and B Members and 20% to the Class C Member[8] provided that the Class A and B Members must receive at least an 11.5% Internal Rate of Return
  4. Upon liquidation, Class A and B Members receive a return of 100% of their capital contributions, including any accrued but unpaid Priority Return, then any remaining funds will be distributed 80% to the Class A and B Members and 20% to the Class C Member

 

People

Fund Manager: The Fund Manager of Virtua Hospitality Finance Fund I, LLC is Virtua Capital Management, LLC. There are three managers of the Fund Manager—Quynh Palomino, Lloyd W. Kendall, Jr., and Derek Uldricks.

 

 

 

 

 

 

 

 

 

 

 

Quinn Palomino – Quinn is principal and co-founder of Virtua Partners and its integrated real estate companies, which support the firm’s expertise in capital management, development, and asset management. Quinn has grown the company to managing over 2.7MM square feet of commercial real estate nationwide. Prior to her current role, Quinn was the Director of Business Development for a commercial real estate workout firm in San Diego, CA where she participated in more than $2B of TIC investments. She also accredits much of her valuable experience to her role as partner at a San Diego-based construction and development firm, where she worked on projects with California state and city governments. Quinn serves on the board of the Arizona Commerce Authority.

 

 

 

 

 

 

 

 

 

 

Lloyd W. Kendall, Jr. – Mr. Kendall is a lawyer, practicing in the San Francisco, California area since 1978 and specializing in real estate and tax law. His specialty is tax free exchanges and related areas of law. He received much of his practical tax law education through his employment with the U.S. Treasury Department, Internal Revenue Service. Mr. Kendall formed and owned Lawyers Asset Management, Inc., acting as “Qualified Intermediary” for tax free exchanges under Section 1031(a) of the Code, until 2006, when his company merged with Commercial Capital Bank. He also served as tax counsel for several title companies and was the President of Equity Investment Exchange, Inc., a competitor owned by Mercury Title Companies of Colorado. He has lectured throughout the United States, providing continuing education for lawyers and realtors. Mr. Kendall has been investing in real estate since the 1970s. Mr. Kendall is the chairman of the board and founding director of United Business Bank, a member of the FDIC with total assets exceeding $1.2 billion, 19 offices in multiple states, and an equity capital base of more than $130 million.

 

 

 

 

 

 

 

 

 

 

 

 

Derek Uldricks – Mr. Uldricks is the President of Virtua Capital Partners. Mr. Uldricks has experience in commercial real estate finance, real estate construction, investment analysis, fund administration, fund accounting, investor relations, and reporting. Mr. Uldricks previously worked for Versant Commercial Brokerage, Inc. as head of business development and investor relations. Mr. Uldricks is a graduate of the University of California, San Diego where he majored in economics with a focus on international and corporate finance and also minored in accounting. Mr. Uldricks is a registered representative and has passed FINRA’s Series 7, 66, and SIE securities examinations.

 

Key Affiliates:

 

 

 

 

 

 

 

 

 

 

Virtua Credit Corporation and Ethan Schelin – Virtua Credit Corporation (together with Virtua Credit (US), LLC, “Virtua Credit”) will facilitate third-party loans for projects invested in by the Fund. Ethan Schelin is the President of Virtua Credit and focuses on originating, structuring, and procuring equity and debt capital for real estate. Mr. Schelin previously raised capital for institutional real estate clients for a Beverly Hills based capital advisory firm, where he was directly involved in the capitalization or sale of more than $500 million in real estate and related assets. He has also been directly involved in the acquisition of more than $300 million in commercial real estate and the asset management of a portfolio valued at more than $2 billion. He received his Bachelor of Arts in Economics from University of California, Davis, and his Master of Business Administration from the University of Southern California. Mr. Schelin is also a licensed real estate broker. Virtua Credit is wholly owned by Virtua International Holdings, LLC.

Hotel Equities – Hotel Equities is a nationally recognized hospitality management firm located in Atlanta, Georgia. Currently, Hotel Equities has approximately 140 hospitality assets under management or development in 25 states and Canada. In total, Hotel Equities manages approximately $2 billion of real estate assets focusing on select service Marriott International and Hilton Worldwide franchises. Hotel Equities also manages Starwood, Hyatt, and IHG assets. Hotel Equities is an affiliate of Virtua International Holdings, LLC


 

Risks of the Offering – For a thorough discussion of risks, please see the PPM. Some of the risks include:

Investors risk losing all capital invested in the Fund and/or may not receive returns at the levels the Fund expects.

The investment is illiquid and members may not withdraw nor transfer their ownership without consent of the Fund Manager and, then, only in compliance with all laws, rules, and regulations.

We are subject to the risks inherent in lending against the security of a trust deed and other security interests on commercial real estate.

We may secure our Loans with fractionalized deeds of trust with non-affiliates in which we may be a minority or majority holder.

We compete with a number of banks, savings and loan associations, mortgage banking companies, and investment firms.

State usury laws may impose restrictions on the interest we can charge.

There could be a delay in the investment of proceeds from this Offering.

Due to the size of the Fund, we may be limited in the amount of diversification we can achieve.

We may invest entirely in projects owned and managed by our affiliates.

 

Real Estate Risks

The Fund’s business is subject to all the risks associated with the real estate industry.

Investments in real estate are speculative in nature.

Many of these factors are not within the Fund’s control and could adversely impact the value of the Fund’s investments. These factors include, but are not limited to:

downturns in worldwide, national, regional and local economic conditions;

conditions affecting real estate in specific markets in which the Fund may invest, such as oversupply or reduction in demand for real estate;

changes in interest rates and availability of attractive financing;

changes in real estate and zoning laws;

environmental and/or engineering issues unforeseen in due-diligence, and changes in environmental legislation and related costs of compliance;

condemnation and other taking of property by the government;

changes in real estate taxes and any other operating expenses; and

the potential for uninsured or underinsured property losses.

 

The contents of this communication: (i) do not constitute an offer of securities or a solicitation of an offer to buy securities, (ii) offers can be made only by the PPM which is available upon request by emailing investors@virtuacapital.com (iii) do not and cannot replace the PPM and are qualified in their entirety by the PPM, and (iv) may not be relied upon in making an investment decision related to any investment offering by the issuing company, or any affiliate, or partner thereof (collectively, “Virtua”). All potential investors must read the PPM and no person may invest without acknowledging receipt and complete review of the PPM.  With respect to the “targeted” goals and performance levels outlined herein, these do not constitute a promise of performance, nor is there any assurance that the investment objectives of any program will be attained. These “targeted” factors are based upon reasonable assumptions more fully outlined in the Offering Documents/ PPM. Consult the PPM for investment conditions, risk factors, minimum requirements, fees and expenses and other pertinent information with respect to any investment. These investment opportunities have not been registered under the Securities Act of 1933 and are being offered pursuant to an exemption therefrom and from applicable state securities laws. Past performance is no guarantee of future results. All information is subject to change. You should always consult your professional advisors prior to investing. Virtua does not warrant the accuracy or completeness of the information contained herein.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Emerson Equity LLC is not affiliated with Virtua or its subsidiaries or affiliates.


[1] As of December 31, 2019

[2] See Distribution Waterfall. First, 100% of Available Cash to the Class A and B Members until they have received a 10% cumulative, accrued, annual non-compounded priority return on their initial capital contribution.

[3] The Manager reserves the right to extend the Fund’s closing date by two one-year extensions. This is an illiquid investment and there is no guarantee the Fund will exit in the time forecasted. There is no guarantee that return on invested capital will be achieved.

[4] https://www.bloomberg.com/news/articles/2019-03-06/who-needs-a-bank-why-direct-lending-is-surging-quicktake-q-a

[5] Loan-to-cost is a metric used in commercial real estate construction to compare the financing of a project (as offered by a loan) with the cost of building the project. The LTC ratio allows commercial real estate lenders to determine the risk of offering a construction loan. It also allows developers to understand the amount of equity they retain during a construction project. The formula is LTC = Loan Amount/Construction Cost

[6] Loan-to-value is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage. Typically, assessments with high LTV ratios are higher risk and, therefore, if the mortgage is approved, the loan costs the borrower more.*

[7] Limited recourse debt is a debt as to which the lender’s right to collect against the borrower is subject to specified limits.  For example, the lender may be barred from any action on the debt (besides foreclosing against its collateral) unless there have been material misrepresentations or breach of bankruptcy-remote conditions.

[8]  The Class C Member is Virtua Partners (US), LLC, an Arizona limited liability company, an affiliate of the Fund Manager.

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