Category Archives: James A. Gibbs

Sunshine and Clouds

January is the time of year when we look back at our previous year of work and accomplishments, and get operations underway for the new year. For Five States, 2013 was productive. We stayed busy throughout, evaluating 115 individual submittals, representing $140.2 million. Of these, only five made it across the finish line by December 31, for a total of $36.7 million of new commitments. However, 14 of the year’s submittals are still “in progress”, awaiting additional data or negotiated terms, so perhaps one or two more could still be accepted. Although the “yield” may seem low, it is typical of previous years’ results. Our challenge for the current year is to continue to increase the number of proposals we receive for review, and to stay alert for projects that can substantially enhance partnership size, quality and financial returns.

By the beginning of spring we had allocated the last of Fund 1’s capital to projects and opened Fund 2 for subscriptions. Fund 2 was closed in late December with commitments of $112 million. During December we agreed to participate in construction of a liquids extraction plant in Kansas (“Haven”) together with the same partner who introduced us to the successful oil gathering and rail transportation project in North Dakota. Our initial allocation of Fund 2 capital is $15 million toward building the Haven plant.

Each year Exxon publishes its global long term energy forecast, updating previous forecasts with new data. For individuals and companies with long investment horizons, Exxon’s view of the future for the oil and gas industry is bright. Exxon expects world energy demand to grow 35% by 2040 as electricity and other energy requirements reach people in the developing world.

According to the forecast, fossil fuels will still supply most of the world’s demand in 2040, with oil and natural gas supplying 60% of total demand. Liquid fuels—gasoline, diesel, jet fuel, and fuel oils—will remain the primary transportation fuels because of their unique combination of affordability, availability, portability, and high energy density. Exxon also predicts that by 2040 the world will consume 40% more energy from natural gas than coal. Coal, currently the second most consumed fuel after oil, is expected to level off and fall to third place by 2025 as countries displace it with less carbon-intensive natural gas.

Optimistically, Exxon estimates that 65% of the world’s recoverable crude oil will still be in the ground in 2040. But because oil will be harder to develop and produce, it will be more expensive, even with continued technological advances in techniques of seismic exploration, horizontal drilling and multistage hydraulic fracturing.

For Five States, Exxon’s projections indicate that opportunities should exist for us to make viable investments into the foreseeable future. We plan to continue development of our business along three primary strategic paths: (1) providing collateralized loans to others for development drilling and lease enhancements, (2) acquiring, enhancing and managing producing properties, and (3) using our equity dollars for construction of midstream assets.

In the shorter term, several issues are clouding the future. Prejudice against the industry is pervasive and deep, and manifests itself through a myriad of adverse policies and activities, from the top down, through many governmental agencies. The results to the industry are delayed or denied operating permits, more intensive regulation, higher taxes, and lack of cooperative governmental support. These conspire to create bottlenecks in activities and uncertain energy policies for all.

A related concern, perhaps engendered by the one above, is the recent trend toward politicization of education about the energy industry, in which science takes a back seat to the politics de jour. A spate of recent industry-related issues are being decided not on the basis of validated facts and decades of experience, but by the pleadings of movie actors, country singers, local politicians or other such authorities.

Hydraulic fracturing may be a hot topic of debate, but few know what the term “fracking” actually means, according to a recent survey gathered by researchers at Oregon State, George Mason and Yale universities. Yet, despite the fact that since 1947 more than a million oil and natural gas wells in the United States have been hydraulically fractured with no reliably validated adverse consequences, industry opponents show up in large numbers to protest the practice wherever hearings are conducted. Largely based on public attitudes, several states have declared absolute moratoriums on fracking, thereby effectively shutting down all petroleum development in those states, and with it all industry-related employment and potential tax revenues.

Perhaps it is no wonder that critical tests of logic are absent from discussions of many substantive issues. Basic math and science courses have generally been given little emphasis in U.S education curricula. In fact, the National Commission and Mathematics and Science Teaching for the 21st Century reports that 25% of high school mathematics teachers and 20% of high school science teachers do not have the academic credentials or back ground necessary to teach these subjects. Until the level of science education is substantially elevated, we may continue to see decisions made by less than well-informed groups who deny scientific knowledge and methodology in forming their opinions, to the ultimate detriment of us all.

Whirlwind of Change

Looking back, I am astonished by the changes that have occurred in the development of U.S. energy supplies over the last decade. In fewer years than a kindergartner becomes a teenager, the U.S. oil and gas industry has found the keys to unlock literally billions of barrels of oil and trillions of cubic feet of natural gas in our country, and to completely reverse the trend of ever increasing dependency on foreign oil. The consequences are truly profound.

As recently as 2000, the energy industry’s consensus was that all the large fields in the United States had been found, oil and gas production in the U.S. would continue to decline, and oil imports from abroad would continue to increase. Although hydraulic fracturing (fracking) has been a standard industry practice since 1947, applied to more than a million wells in the U.S., its use in opening dense oil and gas-bearing shale formations had never been successful. All that changed in 2000 when Mitchell Energy Company finally demonstrated that new hydraulic fracturing techniques, utilized in horizontal sections of wells, could economically recover the treasures stored in tight rocks deep underground.

U.S. oil production peaked in 1970 at 9.6 million barrels of oil per day (bopd). However, by 2009 production had declined to 5.0 million bopd. A Malthusian projection of the trend would have led to the expectation that today’s production would be near 4.5 million bopd. However, owing to the “shale revolution,” U.S. production has risen to almost 7.5 million bopd, and continues to increase . . . a three million bopd difference. At an average price of $90 per barrel the differential amounts to $270 million dollars a day, or almost $100 billion per year, that will not be sent abroad. Perhaps that’s small potatoes by government standards, but it is still very significant to the U.S. balance of trade.

Consider U.S. crude oil imports. In 2005 the U.S. was importing oil at the rate of 10.1 million bopd. By the end of 2012 imports had dropped to 8.5 million bopd, a 1.6 million bopd reduction. In June of this year, Bloomberg reported that U.S. domestic crude oil production exceeded imports for the first time in 16 years. The resurgence of industry activity resulting from the combination of new horizontal drilling techniques and improvements in the sixty-five year old hydraulic fracturing technology has created a tidal wave of new business formations and elicited strategic changes throughout the industry.

Soon after George Mitchell’s early successes in producing oil and gas from the Barnett shale formation in north Texas, other companies immediately seized upon the new technologies to rapidly develop the Fort Worth basin’s Barnett shale and to apply them in other basins. A land grab that rivaled the early days of the 1800s gold rush began.

For the next several years, until around 2007, legions of agents representing individuals and companies of all sizes leased as many acres as they could finance. Larger companies bought acreage to drill; individuals typically bought leases with the intention of “flipping” them to the large companies at a profit.

The beginning of 2013 marked the beginning of a new phase of their operations. By now, most companies have acquired all the leases they could, consolidated their positions into a few core areas, established a drilling inventory that can keep them busy for years or decades, and laid out plans to develop their acreage, or prepare for an IPO, sale or merger.

For Five States Energy the shale revolution has been exciting to witness, but it has offered few opportunities for our participation. A primary strategy of our business is collateral-based investing, not speculative lease buying and selling, technology development, or exploratory drilling. Although massive amounts of capital have been required to fuel the party to date, only a very few situations have been appropriate for Five States to participate.

However, we believe our time is at hand. As new wells are drilled and put on production, money will be needed for pipelines, oil storage facilities, gathering systems, truck and rail terminals, water treatment plants, water supply and disposal wells, and construction of other midstream assets. Without these, producers cannot produce or sell their products. With value created by production from new wells, collateral will be available to support senior and mezzanine debt and development equity.

Will the US Achieve Energy Independence?

I am frequently asked if America can, or will, ever again be energy self-sufficient. The question is more complex than it seems.

For many of those who ask, the question is really about American’s ever-increasing level of oil imports. “Are we likely to develop sufficient production capacity in the US such that we no longer need to import oil from foreign countries?”

Prior to the Arab Embargo of 1973, the US was essentially energy independent. We had sufficient oil production for our own requirements and enough to sell abroad. We were a creditor nation and enjoyed a secure domestic supply, price stability and a favorable balance of trade. However, when our domestic oil demand outstripped production capacity in the early 1970s, the US was forced to buy oil from other countries, some of whom are unstable and/or unfriendly to the US Imports have increased as our population and per-capita usage increased and domestic production decreased.

The lowest level of US production in recent years occurred in 2008, when only 6.7 million barrels per day were produced. Since that time, thanks to the benefits of horizontal drilling and multi-stage hydraulic frac treatments, more than 1.1 million barrels per day have been added, most from shale and tight rock formations in both old and new producing basins. According to the US Energy Information Administration (EIA), the US in 2011 exported more petroleum products, on an annual basis than it imported for the first time since 1949. The increase in foreign purchases of distillate fuel contributed the most to the United States becoming a net exporter of petroleum products. American refiners still imported large amounts of crude oil, some of which is refined and exported as petroleum products, including gasoline.

Admittedly, projections of future production growth are dependent upon many factors and range from 1.5 to 4.0 million additional daily barrels by 2015. This would result in a possible daily total of 9 to 12 million barrels. This is well below our total US petroleum requirements, but constitutes a very beneficial step in reducing our trade deficit.

After 2015, the favorable gap between production and exports is expected to grow, as imports continue to wane. The gap could grow even faster if tight oil plays pan out better than expected. But just because the domestic energy industry is ramping up does not mean the US can stop importing foreign oil tomorrow. Most horizontal wells have steep decline rates, meaning that to increase annual production volumes, new wells must not only overcome declines of existing wells, but add even more new volumes to daily rates. Moreover, it may be unwise to completely eliminate imports from some sources. Each day, the US imports about 2 million barrels from Canada and 1 million barrels from Mexico, two of our most valued and reliable trading partners. To stop deliveries from them could damage relationships and leave us more vulnerable to a catastrophic interruption of supply in our country.

Of course, petroleum is only one segment of the energy budget of the US, comprising about 37% of the total. Of that, about 72% is used in transportation, with most of the remainder allocated to industry, and minor percentages to residential and commercial heating, and electric power generation. At 25% of the energy budget, natural gas is the second most utilized source, divided almost equally among industry, residential and commercial heating, and electric power generation. At 21%, coal is used almost exclusively for electric power generation, as is nuclear (8%) and renewables (9%).

The US is blessed with such an abundance of energy resources that we can logically export some. If total energy is considered, the US is over 70% self-sufficient today. With the world’s largest deposits of coal, estimated by some to be an 800-year supply at current rates of consumption, we are already shipping millions of tons to Europe and Asia. Current and anticipated future development of shale resources is adding natural gas supply in such quantities that prices have been driven down, and natural gas is displacing coal as a cleaner alternative to generating electric power. Even with heavy restrictions on building new refineries or expanding existing ones, we’re still able to export some refined products. Numerous applications to export liquefied natural gas (LNG) overseas are awaiting approval, and more are in the process of being filed. Sometime, in the distant future, we might even have excess oil to export.

Awash in Oil!

Exxon recently published its annual Outlook for Energy issue, in which it projects trends of the world’s energy supply and demand needs to 2040. It makes for interesting reading.

According to Exxon, the world’s population will rise by more than 25 percent from 2010 to 2040, reaching nearly 9 billion. An expanding population, as well as economic growth will require increases in energy sources and uses. At the same time, modern technology is developing new resources and making energy more affordable.

With global energy demand increasing around 35 percent from 2010 to 2040, a more diverse and affordable fuel mix will be needed. Nevertheless, oil and natural gas will supply about 60 percent of global energy demand in 2040, up from 55 percent in 2010. Oil will remain the largest single source of energy to 2040, growing around 25 percent. Production of natural gas is expected to grow faster than any other major fuel source, with demand up 65 percent by 2040. Because they are abundant in supply and more economical to develop than other fuel sources, oil, natural gas, and coal will provide approximately 80 percent of total global energy by 2040.

Thanks to the combined technological developments of 3-D seismic, horizontal drilling and multi-staged hydraulic fracturing, the United States is experiencing an astonishing resurgence of its oil and natural gas industries, the results of which can hardly be overstated. The global energy map is being redrawn…away from the unstable Middle East and to the West.

Most people in the US do not understand the role that energy plays in our economy. They don’t understand that the boom from 1900 to 1925 was fueled primarily by the oil found at Spindletop in Texas in 1901. They don’t understand that much of the success of the US and its Allies in World War II was fueled by oil from the East Texas field and discoveries in the Permian Basin, as were the economic booms that followed in the 1950s and 1960s. The boom in the 1990s was also stimulated by oil and natural gas prices that were well below replacement costs. Literally, the energy that drove all of that productive capacity was initiated with the East Texas discovery of 1930. The East Texas field is the second largest in the US, exceeded only by Alaska’s Prudhoe Bay. However, having yielded more than 5 billion barrels to date, it is still the larger producer.

The size of the discoveries found recently could dwarf both. More than 20 new major shale plays are currently being drilled in the US Each one of these could contain 20 billion or more barrels of recoverable oil, four times that of East Texas. In fact, some experts are projecting that the one most recently recognized, the Cline shale in west-central Texas, could contain 3.6 million barrels of recoverable oil per square mile, or about 30 billion barrels for the entire shale play.

We are sitting on the biggest economic and financial opportunity in the history of our country. Yet even as the discoveries mount and production increases, all the new oil is creating some current difficulties for producers, as well as opportunities for groups such as Five States.

Lack of local infrastructure is costly. Many of the new oil and gas plays are in areas that do not have the transportation facilities that exist in the more mature producing areas. For example, a new discovery well in North Dakota might be capable of initially producing 1,000 barrels of oil per day. However if the well is located 40 miles from the nearest paved road, and if no pipelines are available, the oil may have to be trucked 1,200 miles to Cushing, Oklahoma in 160-barrel tank trucks for delivery. Hauling charges could be as much as $30 per barrel, easily absorbing much of what otherwise would be profit.

Cushing, Oklahoma, is the point of delivery where the price of West Texas Intermediate (WTI) or oil of equivalent quality is determined. The difference between the price a producer in the Permian Basin receives for his oil has typically been about 85 cents less than the NYMEX posted price. This “differential” is the imputed cost of delivering the oil via pipeline to Cushing. Today, because storage facilities at Cushing are full, the oil coming out of Texas and other producing areas is being penalized by a differential of about ten percent. In other words, with WTI posted at $90 per barrel, the operator receives only about $80 per barrel, less imposed taxes and landowner royalties.

Because of transportation and storage arbitrage, the opportunity exists for Five States to provide funding for gathering and storage facilities, rail terminals, pipelines, and transportation equipment and materials. . . . We are currently reviewing dozens of fund requests to find the few that meet our requirements of those having solid principals, strong collateral and good economics.

What Goes Around

I have previously commented in The Producer about the cyclic nature of the oil and gas industry. For those of us who have been involved in upstream exploration and development for a decade or more, we’ve become accustomed to the ebb and flow of business activities, and acutely sensitive to clues that may indicate the next stage or direction of movement within a cycle.  Correctly interpreting directional trends over the intermediate term allows one to place strategic bets on specific plays and opportunities. Getting these generally right over the long term ultimately determines the success or failure of an enterprise.

Profits emerge from adjusting corporate plans to the constantly changing stream of structural and temporal events that affect every company.  Explosive oil industry growth was initiated in 1972 when the Texas Railroad Commission lost control of its ability to hold world oil prices near $3 a barrel where it had been for decades, allowing OPEC to raise prices to levels never previously seen.  Such a fundamental change in the price structure created conditions that fostered new growth of old companies, the creation of many new ones, and the subsequent intellectual and technological developments in the industry. Results of the change can hardly be overestimated.  Almost none of the oil and gas the world uses today could have been profitably found and produced within the price structure that existed prior to 1972.

Events of such magnitude and significance are rare, but a multitude of other factors that can move commodity prices weigh in daily.  OPEC still maintains production quotas for its members. Policies of non-OPEC countries often determine export volumes. Wars, insurrections and labor strikes throughout the world interrupt orderly supply deliveries. At times, hurricanes, floods and other weather related events require that wells be shut in.  Seasonal weather patterns do not always follow predicted forecasts, causing temporary misallocations of production and product deliveries. In the U.S., federal, state and local politics, public demonstrations and anti-development movements, environmental regulations, tax policies, and a myriad of other issues add cost, uncertainty and delays to planned activities. Each of these factors may cause temporary difficulties, but are generally considered more as annoyances than major issues.

The most recent revolutionary and structural industry game changer has occurred not only as a result of increases in oil and natural gas prices, but by advances in petroleum technologies.

Hydrocarbons can now be produced from shale rocks that contain a high percentage of organic matter that were previously considered too “tight” to produce the oil and natural gas they contain.  The combined application of horizontal drilling within a shale layer and hydraulic fracturing (“fracing”) has opened large new areas of the U.S. and elsewhere to petroleum production. The result has been that estimates of the world’s producible reserves of oil and natural gas are being increased substantially, making the benefits of abundant energy supplies available to millions of additional people.

For Five States, the opportunities to support and finance activities and construction projects in these new areas are increasing.  The number and size of projects that are being submitted to Five States for review and analysis are increasing, and the quality of projects is improving.  As individuals and companies expand their drilling and development commitments they may need additional equity and mezzanine capital, consulting expertise, or a financial partner. Five States has the reputation, funds, experience and personnel to provide help in these situations.

Currently we are processing data on almost a dozen submittals, with a prospective total commitment of $180 million. Typically, only one or two of these are likely to be approved, but others are being received almost daily. Five States’ financing activities are focused in three areas:  infill drilling and lease enhancements of existing properties; infrastructure construction of pipelines, compression facilities and stripping plants; and acquisitions of producing property interests.

In the past two years, we financed a company that owns and operates workover rigs, provided millions of dollars of credit facilities to companies to acquire and develop producing properties and establish water floods, invested with a consortium of industry partners to build a pipeline, loading facilities and a rail line to move oil out of North Dakota to a contracted purchaser, and acquired producing properties for our Fund 1 investors.  In all cases, our focus remains the same: to acquire high quality producing interests and related infrastructure that will generate attractive income.

We anticipate having the remaining committed funds of Fund 1 invested by year-end or early in 2013.  We now are planning to open Fund 2 in early 2013.

Familiar Ground

Articles in two recent investment newsletters reminded me once again how volatile the prices of oil and natural gas can be and how many factors are continually in play to move markets, sometimes dramatically.  Price volatility makes investment planning and project analyses difficult, and can create havoc with investment results over both short and longer terms.

Several years ago, Morgan Stanley issued a report of the relative volatility of all traded commodities, listing oil and natural gas the most volatile of all.  I have not seen a recent update of the statistics, but I would not be surprised to learn that the two continue to top the list.

The June 18, 2012, issue of U.S. Research, produced by Raymond James, discusses future crude oil markets and projects rocky days ahead.  Only four months ago, the publication substantially cut its 2013 oil forecast due to concerns about a rapidly growing U.S. oil supply and a deteriorating outlook for global oil demand growth. In a recent report, U.S. Report lowered its 2013 West Texas Intermediate (“WTI”) price projection to $65 per barrel (down from $83).  The new oil price forecast is well below the WTI futures strip at $85 per barrel and the street consensus at $110 per barrel.  Also lowered was the long-term (10-year) WTI forecast to $80 per barrel.

Goldman Sachs issued its Equity Research Report on the great Marcellus Shale expansion on July 8, 2012, discussing U.S. natural gas prices in depth.  Summarizing its natural gas price estimates for 2013, they “believe 2013 natural gas prices are likely to surprise to the upside versus the current strip as a greater gas rig count will be needed once storage moves to more normal levels, assuming continued low range bound prices for the rest of 2012.” Goldman Sachs believes demand and takeaway constraints warrant ‘price sensitive growth’ for Marcellus development to be in the $4.00 to $4.50 range.

“Getting it wrong” can be costly.  Oil and gas operators who drill wells with a reasonable assumption of a future product price range face capital losses if prices drop below their projected break-even point.  Producers who are well capitalized, have little or no debt, and with substantial current production that can be hedged are the most able to weather periods of low prices.  Producers with high cost structures and weak balance sheets are especially vulnerable to market weakness.

Timing of sales of production may be a major problem in many of the new areas of development.  Many of these are in previously unproven territory–areas with few existing wells to provide good analog data to assess the risk of new exploratory wells and inadequate takeaway infrastructure to provide good markets.  It is a chicken and egg conundrum.  New wells must be drilled and tested before the cost of pipeline construction can be judged as attractive.  Yet expensive, newly completed wells must remain “shut-in” until new facilities are planned and constructed. Because of cost of capital, otherwise economic wells may become non-economic if they remain shut-in for an extended period.

Exacerbating the problem is that many states no longer allow “associated gas”— that which is dissolved in oil in the producing formation and is produced with it–to be flared or vented. These states require that gas must be transported by pipeline to points of sale or use in order for oil to be produced and sold.  In other words, connections to natural gas pipelines are needed as soon as possible after wells are completed. Thus, financing construction of natural gas gathering and transporting systems is a primary investment target for Five States.

Even where adequate infrastructure and markets exist, events may have negative effects on wellhead prices.  Punitive governmental policies and regulations, weaker domestic and foreign economies, shortages of drilling and completion supplies and equipment, unseasonably mild weather, and increased competitive factors can all diminish profits.

We at Five States spend much of our staff time discussing current conditions and possible future events which could impact our business.  Fortunately, as has been discussed in previous issues of The Producer, hedging has become a major risk mitigation strategy of Five States. Tom Costantino, our chief hedging tactician, brings more than 20 years of knowledge and experience as an institutional commodities trader.  We are delighted to have Tom aboard to help us.  Having weathered several previous business cycles, all of us are very aware of the deleterious consequences of poor planning, lack of foresight or bad decisions, and we remain focused on our business plan of making money for our investors while building an inventory of long life, high quality producing oil and gas interests.

Mezzanine Financing: Portal to Profits

Recently, Arthur, Don and I, along with members of the Five States staff, have been meeting with investor groups throughout the country. We have been explaining the business plan of our capital partnerships and reporting on the ongoing activities and results of our currently active funds. What we have learned as we have committed capital to FSEC Fund 1 and those projects have matured, is that each project has yielded interesting insights about the clients with whom we are investing, while also providing opportunities to enhance the profitability of individual deals and to participate in financing other developing oil and gas projects. As we anticipated when we modified our business plan in 2007, the business of providing mezzanine financing is proving to be an effective means of opening doors to relationships that would not otherwise have been available to us.

The basic strategy of Five States is classic and fundamental: provide capital on projects in which we would like to own an interest. We provide capital to operators who need funds for making acquisitions, drilling development wells, buying lease equipment, constructing pipelines and gathering systems, and for other capital needs, while placing our investment in a preferred position. During the period funds are employed, Five States receives monthly interest payments and most of the revenue the project generates, before any payments are received by the operator, thus reducing our overall risk. When Five States recovers its committed funds and interest payments, it also receives an additional financial benefit. Most often this takes the form of a working interest in the production, but sometimes it may be a net profits interest or some other previously contracted fee. The ultimate objective of Five States is to accumulate equity interests in long-life, high-quality producing oil and gas properties. Therefore, we are always interested that the “residual interest” earned will have value for ourselves and our investors for years into the future.

For Five States, success in achieving our anticipated economic target depends largely on two factors: the character and ability of the operator to effectively manage the project, and the credit quality of the collateral available to guarantee the loan. An early decision about the operator and his staff’s reputation, knowledge, experience, and history is often sufficient to deter us from devoting excess time analyzing and evaluating the collateral.

Fortunately, during the more than 25 years of purchasing oil and gas properties, Five States has developed a highly qualified team of reservoir and operational engineers, financial analysts, and staff. These same people analyze the producing properties pledged as collateral with the same diligence and expertise they used in analyzing properties for acquisition. Although we never enter into a transaction with the expectation of foreclosing on the operator’s collateral, we need to ensure the collateral is of sufficient value to provide recovery of our loaned funds should it become necessary to do so.

The type of “bonus” opportunities that can occur in mezzanine financing are exemplified by two projects that evolved in the current partnership. One was a request to provide mezzanine financing to participate in drilling as many as 40 horizontal wells within the limits of a known East Texas field. Upon analysis, the capital required was more than the applicant was comfortable borrowing. As a result, Five States financed the borrower for as much as he needed, and Five States allocated partnership funds to also participate in drilling as a working interest owner. The partnership’s projected rate of return is estimated at 19%, and may prove even higher.

Another project involved a request by a company to participate in drilling unconventional Bakken wells in North Dakota. After review, we authorized a $16.2 million loan to be drawn from an $85 million facility, to be expended over a period of two or three years. However, soon afterwards, the borrower sold its position in the project to a third party, who paid off the Five States loan and plans to drill the field with the third party’s own resources. We would have preferred the initial borrower to remain as owner since the wells would have generated more revenue to Five States, but for us the transaction was profitable as a short-term investment. The partnership’s realized rate of return was 56% (about 28% “cash on cash” with the high IRR due to the short investment period).

The two lessons we have learned thus far are that by having funds available to offer for mezzanine projects, we attract “deal flow” that often provides associated opportunities to enhance the economic returns of a project for both parties. Second, the relationships and mutual trust developed with operators during the period of examination and negotiating one project often results in the operator bringing other projects to Five States for funding or participation that we may not otherwise learn about.