Wednesday, November 25, 2009

The Laurelwood mortage - NOPE is following the money trail

Our cursory search of the Monmouth County Board of Taxation website, though subject to more-extensive review and analysis by the NOPE leadership team, yielded some interesting discoveries about the actual mortgage on the Laurelwood houses at Weapons Station Earle - 30 years at $21.2 million (we still need to find out basic details like principal and interest).

One of NOPE's core contentions remains that the Navy's inability to grant access by April 30, 2010, to Laurelwood Homes, LLC, and owner Teri Fischer will, according to Supplemental Lease No. 43, immediately send the parties to buyout, contrary to the Department of Navy's (DoN) false argument that it cannot pursue this option. In short, the DoN must give Mrs. Fischer unfettered access to build the road and improve the homes by April 30, 2010, ahead of what we worry will be unimpeded access and rental to civilians by September, 2010; the mortgage language bears out the April 30 access notion. DoN compliance with this April 30 deadline appears far from humanly possible, considering our understanding that the DoN has yet to file permit applications for what is typically an arduous NJ DEP and DOT review (i.e. upwards of 12-18 months).

Nonetheless, back to the mortgage...

We also know for a fact that Laurelwood refinanced the mortgage on the 300 Laurelwood townhomes sometime around late-2002/early-2003. Shocklingly, within a year of 9/11, the D0N seemingly signed away its leverage (according to a bank-mandated provision) to exercise the National Emergency Termination clause to void the contract. In short, it gave away its "ace in the hole" (i.e. in terms of being able to get out of this bad contract without payment) to allow (according to our sources) Laurelwood to get a better mortage rate. To be sure, even a buyout in 2002 would have saved the DoN a LOT of money and this current Laurelwood headache.

The mortgage documents we found on file with Monmouth County, in particular one signed May 1, 2003, for a 30-year mortgage valued at $21.2 million, probably raises more questions than answers, namely - what all U.S. citizens should question - what is happening to U.S. taxpayer dollars allocated to military housing? The $21.2 million on the 2003 re-finance is only $1.6 million less than the value of the original mortage of $22.8 million granted to Dick Fischer Developments (DFD), the original Laurelwood developer. Did the owners only pay off $1.6 million of principal on the Laurelwood homes from 1990-2002/2003? It is hard for us to tell, particularly with the secretive nature of LLC and obtaining public documents.

This would be shocking, especially since, according to NOPE's own research and review of the Laurelwood lease (obtained via the U.S. Freedom of Information Act) and supplemental agreements, DFD and Laurelwood, in some shape or form, have earned rents and bonus payments from the DoN (federal government) of $70-$75 million since inception of the Laurelwood "In-Lease" (i.e. military-use portion) in 1990.

Where did all of this money go? Clearly it's beyond NOPE's scope to be financial advisors to property owners with better knowledge of government contracts, but our back-of-the-envelope math would suggest (assuming $70-$75 million revenue and a $21.2 million outstanding mortgage as of May 2003) "cleared" revenue to DFD/Laurelwood of at least $50 million (excluding operating costs, capital improvements, etc) since contract inception. Not bad for a bunch of houses with almost no tenants for the better part of this decade.

NOPE's impending review of the mortgage documents will not so much focus on perceived financial mismanagement or profitability of the Laurelwood contract, but rather show that the papers validate our argument that the U.S. Navy would be wise to pay no more than $17-$20 million to buy out Laurelwood (see our 8-page Business Case Analysis), far less than its contention that a buyout would cost it at least $3.5 million per year (roughly the current annual rent on these vacant homes) through year 2040 (or at least $105 million). The Navy's argument is entirely misleading and inaccurate, and it is clear that public sentiment is in favor of a buyout of the Laurelwood contract (especially since the DoN threw away its right to void the agreement and save taxpayers a lot more money...and in fact might be on the hook for rental payments to Laurelwood, contrary to its own study and public commentary, of up to $20.2 million anyway through 2017).

As always, we welcome your observations, commentary and ideas on this matter.

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