Are the returns guaranteed?

 

The SEC regulates private equity funds and has the right to investigate and prosecute any sponsors who represent returns as being “guaranteed.” Based on the fund’s structure and lending criteria, we do not see a feasible way for our investors to lose their investment or fail to receive the projected returns. However, it is up to each investor to assess the risk/reward profile of a prospective investment.

 

Where do the funds come from when I request a return of my capital?

 

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.

 

How does the process of requesting and receiving a return of my capital work?

 

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 lending on land deals 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.

 

What kind of “skin in the game” does the sponsor have?

 

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 $125K per month in interest to the fund via his entities that borrow from it.

 

He is spending about $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.

 

How do I know the fund is making smart loans?

 

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.

 

Can I review the PPM and legal paperwork for the fund?

 

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.

 

What is the flow of funds for a typical land deal (2 of 2)

 

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.

 

How do monthly distributions differ from reinvestments?

 

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.”

 

What is the legal structure of the fund and its borrowers?

 

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 as 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.

 


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