The information provided here is intended to supplement the slide deck and video that you should have received.
It’s most useful for seasoned fund investors, wealth managers, and those who generally prefer detailed information.
Most Popular
Category 1
You are welcome to view the fund’s legal paperwork by clicking on the links below:
Private Placement Memorandum (PPM): This document explains the fund to prospective investors in great detail. Those who review PPMs on a regular basis will find the language to be much softer and more pro-investor than is customary.
Company Agreement: This is known as a partnership agreement for some funds. Again, the language is much more pro-investor than is customary.
Subscription Agreement: Investors must review and sign this agreement as part of the investment process. There is no need to print and sign this version of the document, as you’ll be able to DocuSign a customized version of this document as you invest.
Credit Agreement: This agreement provides great detail on the loans between the fund and its borrowers.
The fund has 18 benefits that we have been able to identify. Click here for an explanation of each one.
Various entities work together to carry out the business of the fund and the land business. These are as follows:
Hawthorne Income Fund, LLC is the fund. It is owned by fund investors and is managed by Hawthorne Income Fund Manager, LLC, which is an entity that Doug Smith owns.
Hawthorne Land, LLC is Doug’s entity that purchases and holds title to land. We subdivide, improve and sell the land, so its land ownership is temporary. It borrows from the fund against the land it owns.
Hawthorne Interests, LLC is Doug’s entity that purchases real estate notes, often from Hawthorne Land, and holds them long term. It borrows from the fund against the notes it holds.
Hawthorne Management, LLC and Hawthorne Property Services, LLC are Doug’s entities that cover most of our general overhead and employ many of our team members.
The fund lends to Hawthorne Land at a maximum of 65% of the projected aggregate sales price of the ranchettes for a relevant property. That is widely considered to be a low loan-to-value (LTV), which is important for reducing risk. Each loan is at 10%, interest only.
For each note that Hawthorne Interests buys and holds, the fund lends to it at a maximum amount whereby the monthly payment to the fund will be at least 10% less than the incoming monthly payment to Hawthorne Interests. This means that if the fund had to foreclose on a loan, it would become the owner of a note that provides more monthly income than the original loan. Each loan is at 10%, amortized.
All of this is covered in Section II of the Private Placement Memorandum (PPM) and on Schedule 1 of the Credit Agreement.
Hawthorne Land (HL) seeks out a new property and places it under contract. In this case, it’s 100 acres of land outside of Houston. The purchase price is $1M, which comes out to $10K per acre.
HL’s plan is to subdivide the property into ten 10-acre ranchettes and sell each one for $250K. That’s a cumulative projected sales price of $2.5M.
Because the total projected sales price is $2.5M, Hawthorne Income Fund (the fund, HIF) will lend the lesser of 65% of that amount or the purchase price. The lesser is the purchase price, so it lends $1M to HL upon purchase, secured by a first lien against the property.
Over the coming weeks and months, HL makes improvements to the ranchettes, and HIF issues additional loan funds, also secured by a first lien against the property.
Eventually, HL makes a total of $250K in improvements, and HIF will have loaned an additional $250K against the property, thus taking the total loan amount up to $1.25M. This comes out to a $125K loan against each ranchette.
HL sells each ranchette on owner financing. Each time it does, it collects a down payment of approximately $20K and takes back a note for about $230K at 10.9% over 20 years.
Upon selling the land and generating the note, HL sells the note to Hawthorne Interests (HI). HL pays off its $125K loan to HIF, and HIF lends just shy of $220K to HI with the $230K note as collateral.
In this scenario, the ranchette buyer/borrower pays HI $2,358.40 per month, and HI pays HIF $2,122.56 per month, which is 10% less than the incoming payment. This provides HI with a positive cash flow of $235.84 per month.
HL and HI receive a capital infusion equal to the difference between the $125K loan payoff and the new $220K loan, plus the $235.84 per month in positive cash flow over 20 years.
HIF earns interest income from various sources throughout this process. At first, it earns it from a 10% interest-only loan to HL. Later, it earns it from a 10% amortized loan to HI. In addition, it earns interest income on any capital that it has taken on but has not loaned out.
Combined, these three sources of interest income provide HIF with the income it needs to provide a 10% monthly preferred return to its investors.
You are able to request and receive a return of part or all of your investment should you desire. You can find a detailed explanation of this process in section 4.04 of the Company Agreement.
Below is a simple illustration that shows how this works:
You have $300K invested in the fund, and you provide a written request that we return $250K of it.
We have 120 days to return $100K. We must return another $100K 60 days later (on day 180). Then we must return the final $50K 60 days after that (on day 240).
We are to pay you fees of $100 per month per $100K requested should we be unable to return your capital according to the schedule outlined in the Company Agreement and illustrated above.
Should the fund be accruing or paying fees to any investor for more than two years, the fund is legally obligated to stop issuing new loans and to return capital to all investors as it becomes available.
Our goal is to return as much of your requested capital as possible within a few days of your request. Our ability to do so depends on the amount you request and the fund’s current liquidity. If needed, we can generate additional liquidity through the means shown in the following FAQ.
To date, four investors have requested a return of their capital. All capital was returned within one to four business days. In one case, we returned over $900K in about three business days.
There are several options:
1. The fund typically has a few million dollars that it has taken on but has not yet loaned out. It resides in the fund’s checking account and can be quickly distributed from there. You will find the most recently documented amount at the top of page 2 in this Capital Allocation Report.
2. Hawthorne Land or Hawthorne Interests can pay down a fund loan, thus providing liquidity in the fund’s checking account, which can be distributed. There are usually a few hundred thousand dollars in those accounts or accounts associated with them.
3. Hawthorne Interests can sell one or more notes and pay off the fund in the process, thus providing liquidity.
4. Hawthorne Interests can borrow from a bank against some of its notes. In doing so, the fund’s loans against those notes will be paid off, thus providing liquidity for the fund.
5. Hawthorne Land can sell some of its land for cash or conventionally (not on owner financing) and use those proceeds to pay down a fund loan.
6. The fund can increase its cash position by taking on additional capital from a new or existing investor, just as it does on a regular basis.
7. Doug or another investor can buy out an investor for the amount that’s due to them.
We strive for full transparency and are happy to provide this Capital Allocation Report. You will find asset values, collateral values, links to filed documents, property maps, and more.
Watch this video for an explanation of the report. The video will help you to understand not only the report but how we protect and grow your capital.
Other Important FAQs
Category 2
Sales have been strong, and we’re positioned for another record-setting year. We give credit to both the sales team and a resilient business model.
If we have a weak sales month, it’s generally because we were a little short on inventory or because we were working to push projects along, not because there was a shortage of buyers.
You can view historical ranchette sales by going here. Refer to recent email updates for pictures and more.
This was covered in the video but not the slide deck (PDF).
Investors are receiving $833.33 per month, which is $10,000 per year, on each $100,000 invested. Those who have chosen to automatically reinvest their monthly returns are benefiting from compounding over time. This helps raise their internal rate of return (IRR) to 10.47%.
An investment of $100,000 is projected to be worth $150,000 after 5 years if you choose to take your distributions and leave them in a checking account. That same investment is projected to be worth $164,531 after 5 years if you chose to have your returns automatically reinvested.
A $100,000 investment is projected to be worth $300,000 after 20 years if you take your distributions and leave them in a checking account. That increases substantially to $732,807 if you chose to have them automatically reinvested.
As you can see, reinvesting can lead to vastly improved outcomes over time. This is why Albert Einstein referred to it as the “miracle of compound interest.”
This is a Reg D Rule 506(b) offering and must comply with associated SEC requirements. As a result, investors must be accredited.
Per the SEC, an individual must meet one of the following two criteria to invest:
“Net worth over $1 million, excluding primary residence (individually or with spouse or partner).”
“Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year.”
Find more details on the SEC’s Accredited Investor page.
Because this is a Rule 506(b) offering instead of Rule 506(c), you’re able to self-identify as accredited during the investment process. We do not ask you to provide us with any documentation or other proof.
The SEC regulates private equity funds and has the right to investigate and prosecute any sponsors who represent returns as being “guaranteed.” There is a degree of risk associated with any investment, and it is up to each investor to assess that risk before investing.
Refer to the Private Placement Memorandum (PPM) for details. Start at page 18 of the PPM, which is page 24 of the PDF.
You are to form your own opinion, but we do not see a plausible way for our investors to lose their investment or fail to receive the projected returns. This is due to the fund’s structure and strict lending criteria. That structure involves the fund making quality loans that are secured by first liens.
The following paperwork is common and required each time we buy land or sell a ranchette. Many of these documents protect the fund’s position as a lender:
RMLO Package for a Ranchette Sale: This contains all information related to qualifying and approving a borrower. It is assembled by Texas Pride Lending in Dallas.
Title Package for a Ranchette Sale: This is the documentation that is presented and signed by all parties during the sale of a ranchette at a title company.
Sample Deed of Trust for a Loan Against Land: This document secures the fund’s loan with a first lien against the land. It is filed at the courthouse where the property is located.
Sample Promissory Note for a Loan Against Land: This document details the terms of the fund’s land loan.
Sample Collateral Transfer of Note and Lien: This document secures the fund’s loan with a first lien against a note. It is filed at the courthouse where the property is located.
Sample Promissory Note against a Land Note: This document details the terms of the fund’s loan against a note.
Some of our investors are listed here. Names are excluded to maintain their privacy. It’s an impressive group, and we try to provide networking opportunities as much as we’re able.
There have been several investor events, and more are coming up. View a video and pictures from some of our gatherings:
Video: Helicopter tours with ATVs, BBQ and skeet shooting
Pictures: Football game, wine tasting and party at a microbrewery
Learn all about our origin story, the land business and Doug’s background by listening to this podcast episode on YouTube. It can also be found on iTunes and Spotify.
View this Zoom call for a deep dive into how the fund works. Among other things, we discussed:
– How you might think the fund works versus how it actually works
– How we’re preserving investor capital and generating non-correlated returns
– How our investors will (or will not) be affected by a recession
– Why sales (mostly) don’t matter
– The power of real estate notes
– The advantages of a debt fund and over an equity fund
– How high inflation and rising interest rates are (or are not) affecting usPerceived Economic Risks
Category 3
A little background:
We entered into what’s known as the COVID-19 recession in early 2020. It was one of the deepest recessions in U.S. history, with 14.7% peak unemployment and a 19.2% drop in GDP. By comparison, the Great Recession resulted in only 10% and 5.1% respectively. (Further reading)
For about two months, sales slowed down. In addition, some borrowers mistakenly thought that they didn’t have to make their mortgage payment because of the CARES Act. These issues were quickly resolved, and we went on to sell over $10M worth of ranchettes in 2020. This bodes well for this business’s ability to thrive during a downturn.
Furthermore, selling on owner financing and collecting on those payments is traditionally seen as a recession strategy. Doug and his colleagues saw this work extremely well during and after the Great Recession when selling real estate conventionally often proved difficult.
Our borrowers and the economy:
As a reminder, Hawthorne Interests (HI) is an entity that Doug owns. It derives income by collecting on real estate notes from the land that we have sold on owner financing. It borrows against those notes from the fund and subsequently makes monthly principal/interest payments to the fund.
We are very pleased with how well the notes that HI owns are performing. Should we experience a prolonged recession with large job losses, some of the borrowers on those notes will be affected. That would likely increase the default rate. Although HI is to make monthly payments to the fund each month, regardless of the income it collects, a steady stream of income into HI does help in making those payments.
It would be difficult but not impossible for HI’s income to drop below what it pays to the fund. If that happened, we suspect it would only be temporary until HI was able to foreclose on its non-performing loans and originate new ones. During that temporary period, HI could cover the difference with proceeds it regularly receives from borrowing against new notes. Additional capital could also be funneled into HI from our sizable cash reserves.
Although we are prepared for substantially higher default rates, they seem unlikely because: 1) they didn’t occur during the COVID-19 recession, 2) borrowers are incentivized to keep a property that they are proud to own and that they have put a substantial amount of money into via a down payment, mortgage payments and improvements, and 3) we feel that we have properly screened and selected our buyers with the help of Texas Pride Lending, a licensed loan originator.
More to think about:
This is not needed or even desired to get the fund or our business through a recession, but we have seen a strong willingness by the U.S. government to prop up consumers during challenging economic times. This can mitigate foreclosures in all areas of real estate, including rural land.
A recession could empty the pockets of some prospective buyers and simply give other buyers cold feet. Due to the fund’s structure, our ability to provide investor returns is largely independent of how quickly we’re selling land or whether we’re selling for top dollar. Regardless, it’s worth noting that sales are still strong.
In a slowing economy, there is reduced demand across all or most sectors, including real estate. This is extremely good news for us on the buy side. Getting our purchase offers accepted has been a major challenge ever since demand for rural land skyrocketed during the pandemic. We would love for some of the wealthy “buy and hold” investors we compete with to curtail their buying activity so that we can take on more projects.
Lastly, recessions provide us with an opportunity to generate an even stronger track record and thus attract more investor capital going forward.
The bottom line:
A recession would bring a few pros and cons for us, but we have confidence in both our model and your collateral and don’t see it impacting your investment.
Not a day goes by that we’re not reminded of inflation, whether it be in the headlines or as we move about in our lives and businesses.
It’s impacting individuals, companies and governments in various ways, often negative, but sometimes positive… especially for Uncle Sam. Below are some of the ways it’s impacting the business and/or fund that you invest in:
Negative: Inflation has increased our costs. We’re spending more on people and equipment. We’re also spending more on land improvements. Before the pandemic, most wells ran about $6K each, and now they’re typically $10-$11K each. Fencing was about $6K per ranchette, and now it’s about $9.5K.
Positive: Real estate values tend to rise with inflation. That includes rural land. This means that we now must pay more for land when we buy. It also means that we sell for more. Every deal is very different, but we used to buy a typical property for about $4K per acre and sell it for about $12K per acre. On a more recent deal, we paid about $10K per acre and sold it for about $25K per acre. We have gone back and forth on whether this change has been good or bad. We currently believe it has been a net positive because we can squeeze more profits out of each deal for the same amount of time and effort.
Negative: In the short run, inflation tends to squeeze the disposable income of our prospective buyers and current borrowers. This can reduce the demand for rural land or make it more difficult for a borrower to make his or her mortgage payment. The cost of fuel is one particular pain point. The notes we collect on continue to perform well, so that’s reassuring. In addition, sales remain very strong. Still, we are prepared to overcome weakened demand if needed by ramping up our marketing efforts.
Positive: Over time, inflation leads to higher wages and higher profits in nominal dollars. Hawthorne Interests (HI) collects monthly payments from those who bought ranchettes on owner financing. (More on that in this video.) These payment amounts don’t change, thus making them more affordable in comparison with our borrowers’ higher wages and/or profits over time. This helps HI keep its default rate down, which provides HI with a more reliable steam of income. That stream of income is used to make monthly payments to the fund and its investors by extension.
Neutral: Returns on some other types of investments tend to rise with inflation. That could make them more appealing to some of our current or prospective investors, therefore making it more difficult for us to attract or retain investor capital. This has not happened thus far. One reason could be that many of those types of investments are seen as overvalued, high-risk, volatile, or unappealing for other reasons.
Positive: On occasion, HI must foreclose on a borrower, take possession of the underlying land and resell it. A desirable outcome is reselling the land for more than it was first sold for and generating an even larger note with a larger monthly payment coming in. This is much more likely when land values and/or incomes have gone up, even if it’s only in nominal dollars. Inflation has caused and is causing both of those things to happen.
Rising interest rates have been top of mind of late, so it’s worth addressing their impact on the land business.
A little background:
We do not borrow from banks for these land deals, so they are not in a position to increase rates on loans we do not have and do not plan to take out.
Instead, we borrow from the fund (that’s you) at a fixed 10%. That rate is already well above going mortgage rates of 5-6%, but it is acceptable to us because the terms are favorable and allow this business model to work.
Pros and cons of higher rates:
Pro: We sell ranchettes on owner financing, typically at rates exceeding 10%. Rising rates (chart) amongst other lenders have had the positive effect of making our rates much more palatable to prospective ranchette buyers, thus helping with sales.
Con: Higher rates are causing consumers to pay more for other purchases that they finance. This could squeeze the disposable income of some of our prospective buyers and therefore hurt sales a bit.
Con: It’s probable that rising rates are beginning to soften the real estate market, which includes rural land. We welcome this shift. A hot market attracted a lot of “buy and hold” land investors with deep pockets who have been competing with us as we attempt to buy. In a softer (or simply normalized) market, we can buy with greater ease and sell with what historically has also been relative ease.
The bottom line
Rising rates may be a net positive for our business, and we don’t see it impacting our investors.
Even higher rates and your investment:
Some fear that rates could rise much further. What might that look like?
It’s important to keep in mind that the Federal Reserve is not incentivized to increase rates to levels that would have a crippling impact on the government or the economy.
The U.S. federal government carries substantial debt, and sky-high rates would result in it paying out substantially higher amounts via regular interest payments. According to this WSJ article, “if the average interest rate were to rise from 1.5% to 5% … the federal government’s interest bill would balloon from $400 billion to more than $1 trillion.”
Sky-high rates would also be devastating for the countless people who carry consumer debt. That is not a pain that the Federal Reserve is eager to inflict upon Americans.
Should bond rates follow climbing interest rates, you may come to believe that your capital would be better placed in bonds or elsewhere. In that case, you may request a return of capital. That process will be carried out according to the information in the “return of capital” FAQ in the first section of this FAQ page. We are typically able to return your funds within 1-3 business days.
In the unlikely case that bond rates were to rise above 10%, we would consider a temporary increase in the fund’s loan rates and preferred returns to match those of bonds.
While broad demand for rural land has ebbed and flowed over the years, our target “blue collar plus” buyers have displayed a relatively constant interest in purchasing our ranchettes.
We have seen high demand in the following markets: 1) before the COVID-19 recession, 2) during that recession, 3) during the subsequent boom, and 4) in the current economic climate. It’s reassuring that demand for our product has far exceeded our ability to supply it across very different market cycles.
Sales are strong right now. But if we were to see them slowing down, we are well-positioned to ramp up our currently modest marketing efforts to attract more interest.
If we were to witness an alarming drop in demand for our ranchettes, we could certainly curtail buying activity. In the unlikely scenario where we needed to stop buying, we would finish out current projects and provide investors with preferred returns and a return of their capital over time.
We tend to own each parcel of land for just a few months, so there typically isn’t much time for us to benefit from rising values or be hurt by falling values.
Land values for the Texas Gulf Coast region fell by 13.5% following the Great Recession (source), so they can and do fall on rare occasions. But when they do drop, that drop has historically been much smaller than what you see in the housing market. Some of the reasons for that are as follows:
– A change in access to financing or financing terms (think interest rates) doesn’t affect land as much because many more transactions are done with cash or large down payments.
– When demand for rural land softens and prices would otherwise fall, many or most landowners have a high enough net worth to simply wait it out. This is unlike what is generally seen in the housing market.
– The majority of rural land is owned free and clear, and property taxes are generally low due to ag exemptions. As a result, most landowners don’t feel the financial pressure from monthly PITI payments to sell during a period of weak demand.
– Landowners aren’t usually forced to move and sell when a major life event takes place during a down market, as is often seen with single-family housing.
– Land values don’t tend to inflate and then deflate due to the addition and subsequent removal of easy financing as we saw with housing leading up to and during the Great Recession.
If land values do fall, our typical “blue collar plus” buyer is unlikely to notice or care to the extent one might think. For the most part, they do not purchase a ranchette based on what other land is selling for. They purchase based on whether they can afford the monthly payments. For that reason, falling values do not necessarily lead to our buyers paying less for our properties.
If a large majority of our target buyers were to suddenly be willing to pay much less for a ranchette, our profits could get squeezed to some extent, but the fund and its investors should not.
In a typical scenario, we’ll buy a property for $1M, put $250K in improvements into it and sell for $2.5M in total. That’s a $1.25M gross profit. If our buyers were to pay an unprecedented 20% less than expected, those numbers might be as follows: $1M purchase, $250K in improvements, and a $2M sales price. The result would be a $750K gross profit, which is still well in the black.
Other Perceived Risks
Category 4
It is important that we choose our buyers wisely when selling on owner financing. This provides the fund with solid collateral on its loan against such notes, and it leads to a steady stream of payments coming into Hawthorne Interests over time. Those payments provide the cash flow that service the associated loans made from the fund to Hawthorne Interests.
We heavily screen our buyers and involve a RMLO (residential mortgage loan originator) for each owner financing sale. This dramatically increases the probability of a successfully performing note. Regardless, some loans will go into default. Here is how that process is handled:
1. When a note that we are collecting on goes into default, we continue paying the fund on its loan against that note as we foreclose on the property (ranchette) or have the buyer/borrower deed it back to us.
2. As we take ownership of the ranchette, we pay off the fund’s loan against the note, as that note (the collateral) is low quality and will soon be eliminated.
3. The fund then issues a new loan against the land at a maximum amount equal to what we have invested in the ranchette (purchase + improvements) or 65% of its projected sales price, whichever is lower.
4. We are typically able to sell the ranchette again on owner financing within two to three months. When we do, we pay off the land loan from the fund.
5. At that point, the fund issues a new loan against the new note. The maximum amount shall be equal to the amount whereby the monthly payment to the fund will be at least 10% less than the incoming monthly payment to Hawthorne Interests.
The outcome for us can be positive or negative each time this scenario plays out. We are always able to collect a new down payment and are sometimes able to sell the land for more the second time around. This is more likely if land values have appreciated over time and/or the buyer made improvements to the property.
The fund lends to Doug Smith’s entities, which are primarily Hawthorne Land (HL) and Hawthorne Interests (HI). It collects monthly payments in return.
In the “flow of funds” FAQ, you can see that HL receives ample liquid capital each time it sells a ranchette. This capital, along with capital already available in HL and Doug’s other personal and business checking accounts, provides substantially more resources than are needed to service the loans made to HL.
HI should not have an issue covering loan payments either, as it receives more income each month from its borrowers on each note than it must pay to the fund each month for the associated fund loan.
In an unlikely and unforeseeable worst-case scenario, the fund has mechanisms in place for fund management or fund investors to take possession of assets that the fund has loaned against. It could either hold or sell them at that point.
The fund is a lender. Lenders are unlikely to get sued unless they are violating lending laws, which the fund does takes great care not to do.
In any case, the borrower would generally need to sue the lender, and Doug’s entities are the borrower. Doug has no reason to sue the fund that he and his team created to serve as a “friendly lender.” In addition, any suit would almost certainly get tossed out because his entity is managing the fund.
As with anyone or any company involved in a business undertaking, Hawthorne Land, Hawthorne Interests or Doug Smith could get sued. Innocence and/or insurance would protect us in most cases. Access to our own capital reserves would resolve the issue in other cases.
Regardless, the fund has first liens on our assets and would therefore be in a first position to get paid should assets need to be sold to resolve legal issues.
Investor capital goes into the fund. The fund is an entity known as Hawthorne Income Fund. It could not go out of business or file for bankruptcy because it is not operating as a business in the traditional sense. Instead, it is an entity that owns assets and has no debt.
The borrowers are entities that Doug Smith owns. Those are Hawthorne Land and Hawthorne Interests. Those entities are unlikely to go out of business for multiple reasons. But if they did, the fund’s secured liens against their land and land notes would remain firmly in place.
As was mentioned in the prior FAQ, in a far-fetched worst-case scenario, the fund has mechanisms in place for fund management or fund investors to foreclose on assets that the fund has loaned against. It could either hold or sell them at that point.
Any fund manager could mismanage or squander funds. Fortunately, this is fairly rare because most managers are seasoned professionals who wish to 1) maintain a solid reputation, 2) avoid legal problems, and 3) secure repeat investors and referrals so that they can do more deals.
Mismanagement of this fund is largely prevented by this fund’s structure and strict lending criteria. The only thing that could feasibly be stolen is liquid capital, which typically represents a very small percentage of fund assets. In addition, most of the fund’s cash is only accessible to Doug and two key employees.
Fund capital is highly accounted for via our partnership with Cobalt Fund Services, which is an accounting firm that handles bookkeeping and reporting. Another accounting firm, Whitley Penn, conducts an annual audit, which is provided to our investors.
In addition, we provide regular emails and reports that show the properties and notes that the fund is lending against.
Finally, all fund investors are welcome to stop by our offices during normal business hours to view the checking accounts, loan paperwork, accounting reports and more.
People are making money in the vast majority of private equity investments that we have seen. There is an occasional fund or investment that that ends badly, and these are the ones that are widely discussed and/or covered in the news.
It is very rare, but a fund manager could have a business model that makes no or minimal profits, instead providing investors with “returns” by falsifying statements and/or distributing “returns” from the capital provided by other investors. This is difficult to do with third-party administration and audited financials, which are in place with this fund. This fund also makes a substantial profit each month in the form of interest income.
Equity funds that borrow against their assets, and therefore place that debt ahead of their investors in the capital stack, expose their investors to some risk. If the asset values drop or do not increase as planned, the debt can get paid back first, leaving investors with little or nothing. In contrast, this is a debt fund that does not owe any debt but instead owns it.
Lastly, many people have lost most or all of their investment simply by investing in something that was high risk. Examples of high-risk investments would be startups, cryptocurrencies and unsecured loans.
The fund is managed by Hawthorne Income Fund Manager, LLC, which is owed by Doug Smith. The manager can be removed and replaced by a two-thirds vote of investors (by number) and investor interests (by investment amount). This is a lower threshold than is typically seen with private equity funds and is therefore pro-investor. This removal and replacement process is outlined in Section 7.03 of the Company Agreement.
Doug is in excellent health, but the fund and business have structures, systems and processes in place that should remain in place if Doug passes away. Current team members are capable of rising up to fill his shoes, and a new but seasoned executive could even be hired.
If the team does well, the business will grow at the same pace or faster. If it falls short, business will slow down. In either case, existing fund loans, all of which are secured by real assets, will stay in place, and fund returns can continue being paid out.
In addition, the fund can continue lending against assets that meet its strict lending criteria.
If any investor wishes to withdraw his or her capital before or after Doug’s passing, he or she is welcome to request that as outlined in the “return of capital” section. The fund’s management is required to carry out those requests or face negative consequences.
FAQs about the Sponsor
Category 5
Many investors find it important that the sponsor, Doug Smith in this case, have a vested financial interest in the fund. This “skin in the game” is being provided in various ways:
Doug is currently paying over $200K per month in interest to the fund via his entities that borrow from it.
He is spending over $100K per month on payroll and general overhead (office, equipment, advertising, etc.) through his entities that buy, improve and sell the land.
He fronts the money for improvements. Invoices can add up to over $100K at times.
He has invested up to $1.4M in the first two funds, and much of his net worth is allocated to land deals.
He was the sole investor for the first 2+ years of the business.
His business reputation is tied to Hawthorne Capital. He protects that and his investors above all else.
These are not bank loans, but Doug still thinks it’s important that investors know about his character and credit worthiness. With that in mind, here are those reports:
Background Check: Ehlert Law, PC investigated Doug’s background and compiled this report. It shows no criminal activity.
Credit Check: This credit check from Identity Guard shows no late payments and a credit score of 810.
Doug Smith is the manager and/or owner of the various business entities that comprise Hawthorne Capital.
Hawthorne Capital was a natural evolution of Doug’s business career, which involved buying and selling over 100 houses. In his early days as an investor, he and his team bought, fixed and resold or leased properties, often employing creative strategies to maximize profits. These strategies included short sales, wholesaling, subject-to and lease-options. He went on to teach many of these techniques in seminars, courses and articles. Later, he and a JV partner bought dozens of houses for cash and then resold them on owner financing. It was here that Doug discovered the power and profitability of this technique, which he and his team now use to sell rural land.
Doug has remained active in areas apart from his property investments. He serves as the founder and partner of a company (REINetworkLP.com) that lists other investors’ real estate deals on a website (MyHouseDeals.com). This nationwide listing service has landed on the Inc. 5000 Fastest Growing Companies list multiple times. In addition, it has appeared on the lists of HBJ (Houston Business Journal) 100 Fastest Growing Companies and HBJ Best Places to Work. It currently employs about twenty people with the website receiving about two million visitors per year.
Doug was admitted into and actively participates in Entrepreneurs Organization (EO), which is an exclusive group for business owners with substantial gross revenues. He was also named to the HBJ 40 Under 40 list and learned Spanish after spending a year studying Spanish and traveling in Spain and Chile. To give back, he regularly invests in veteran-owned businesses through the Veterans Biz Battle at Rice University, mentors fledgling local entrepreneurs and provides annual scholarships to graduating seniors from the high school he attended.
Long before his business career blossomed, Doug spent his time growing up in the country, just south of Lubbock, Texas. He attended school, played in baseball leagues with his twin brother, and paid his dues by working on his dad’s cotton farm. After graduating as the valedictorian of Cooper High School, he made the short drive to the campus of Texas Tech University where he proceeded to spend four years studying, socializing, and preparing for his future. A serious student, Doug majored in Management Information Systems, minored in Spanish, served as the president of the largest student organization, wrote a senior thesis, and interned as a software engineer at IBM in Austin. His hard work was rewarded when he finished with a 4.0 GPA and was named the top graduate out of 570 students in the MIS department, the College of Business and the Honors College.
He then moved to Houston to work as a software developer for ExxonMobil. After reading Rich Dad, Poor Dad and several other business books, he was inspired to resign from corporate America to pursue his dream of becoming an entrepreneur and investor.
Doug is proud to have built and maintained a solid reputation in the local business community. Although he values written agreements because of the clarity they provide, he has successfully executed on many deals that were made on a handshake. He has never had a foreclosure, filed for bankruptcy or even missed a mortgage payment or bill that he is aware of. He maintains a blemish-free credit report with a credit score of over 800.
He is grateful that he was able to build up his net worth from around $25,000 when he began investing to several million and that he was able to use those funds to enter the land business. But with that said, he does acknowledge the importance of both borrowing and pooling funds to do even larger deals, more deals and to maximize the returns on those deals. That, of course, brings us to the creation of Hawthorne Income Fund, which he encourages you to participate in should it meet your investment objectives.