Questions For Northpoint Development in San Jose

How Gilmore & Alex Erickson Defrauded People Over California Condos

Nov 5, 2009

The Erickson's business lured individuals for loans to build condominium high-rises on Delmas and Fifth Street in San Jose, California.

Grandpoint Community Builders, Inc. also operated as Northpoint Development and Next Group in San Jose. The closely held small business managed several LLC's, each named after a development project. Though the Erickson Family Trust had assets worth $38,000,000 they still looked elsewhere for funding.

Delmas Towers and Fifth Street Tower

Northpoint Development needed to raise 7 million to build Delmas Towers and Fifth Street Towers, so they offered a 50% return in 12 months for loans of $100,000 or more. Potential lenders asked many questions about the opportunity, so in 2007 Alex Erickson created a FAQ sheet with his answers.

Answer: The contract, negotiated in 2005. It has a sales value, negotiated before any residential high rise projects broke ground in San Jose. Northpoint's interest is secured by a "Memorandum of Transaction", recorded by the Santa Clara County Recorder. Over $1,000,000 has been spent on achieving entitlements, thus the increased value. This is readily saleable if circumstances dictated.

Answer: Our company Northpoint is the first guarantee and the family trust is the second guarantee. The first level is the equity value of approximately $20,000,000 and the second level is Northpoint. The third level is the family.

Answer: $320 per square foot. In 2005 Northpoint negotiated a contract price of $165 per square foot, and today's price for high rise un-entitled but zoned land is $320 per square foot. Northpoint paid $9,200,000, but the land is today worth $18,400,000

Answer: $85,000 per unit with Northpoint's interest being $20,000,000. The strongest indication of a high rise site's value is the number of units, location, and price for which units will sell. Our opinion of the value, following comparable transactions is $85,000 per unit. That value will increase to $105,000 - $110,000 when all working engineering documents are in place and the project is ready to build. Northpoint's interest is $20,000,000 [Or, 340 x $85,000 ($28,900,000) minus the balance of the purchase price ($8,800,000].

Answer: We think it is not bank financeable. Banks do not finance entitlements, we would have to buy the property.

Answer: Our belief is that there would be expensive carry costs, and it is just not part of our Business Plan. A land loan for this project would cost about 9 1/4% or $67,833 per month. Following our plan, all of the deposits under the contract go toward reducing the purchase price, plus the seller pays the property tax.

Answer: It is less expensive than alternatives. The alternative is a hedge fund that would receive monthly fees, until the last unit is sold and a percentage of the overall profits. We need the loan for a relatively short time. The hedge fund cost is approximately $8,200,000, but these loans cost $2,000,000. This opportunity allows us to have our timing, not a hedge fund, while keeping our profits, and following our plan.

Question: Why don't you tie my loan to a first or second mortgage on a trust property?

Answer: We think that would restrict the trust. It would encumber any asset we might need to sell. Also, to refinance we typically use regular bank financing. It does not follow our model, it is restrictive and could prevent the trust from making appropriate business decisions. Northpoint follows a well thought out Business Plan. If we did decide to tie a loan to a particular asset, we would pay much less to you than what is being offered, as the typical first mortgage rate is under 9% and the typical second mortgage rate is 12% or less. We are using the requested loan to fund a "gap" until the property is bank financed for construction.

Answer: Northpoint is worth approximately $67,000,000. The Trust approximately $34,000,000. The trust figure does not count Northpoint's value.

Answer: No, San Jose has had a minimum effect. The headlines in the biz-tech section of the San Jose Mercury on 12-3-07, "houses are selling in San Jose, unlike the central valley there are no bargains or panic sales." Average price up 8.8% this year. Also the same week home interest rates have hit the lowest level in 2 years.

Answer: No. For the past 20 years San Jose has had a shortage of housing. More jobs mean more houses needed, so we expect the housing market to be under-served for at least the next 10 years.

Answer: A catastrophe in the banking system, beyond the sub-prime issue, or a jet liner crashing in downtown San Jose. A severe earthquake that damages significant infrastructure, bridges, highways, gas and water lines or a west coast terrorist attack are events that would severely slow project progress.

Question: Does the trust have any other guarantees,? Will it guarantee any future money raises?

Answer: Yes--Delmas is guaranteed. However, no future guarantees. The Delmas loan is scheduled to be paid off prior to construction in May of 2008. The trust will make no future guarantees because all future capital raises shall be done through a Private Placement Memorandum.

Promises of Northpoint and Erickson Family

Despite their promise, The Erickson Tust was used as a guarantee to subsequent lenders. The Ericksons then defaulted on the loans, declared Chapter 7 bankruptcy and declared the assets worthless. Alex Erickson blamed the recession of 2008 for the devaluation, though he produced no documentation as proof. In bankruptcy court in October 2009, he said since a catastrophe in the banking system had occurred, his creditors were at their own risk.

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