Residential Properties Resources Fund II - Chapter 11 Case Summary

Business Description

Headquartered at 7826 W. Florist Avenue, Milwaukee, WI, Highgrove Holdings Management, LLC ("Highgrove"), together with its affiliated Debtor entities (collectively, the "Debtors"), operates a business investing in and managing residential rental properties.

• The Debtors' business model involves acquiring, rehabilitating, stabilizing, and managing single-family residential rental properties, with rental income serving as the primary source of cash flow.
• All Debtors moved to the W. Florist Avenue headquarters in January 2022, which remains their headquarters. An organizational chart for the Debtors and affiliated companies is attached to the declaration as Exhibit 1.

Debtor Structure

The Debtors comprise six entities—Highgrove, the four Real Estate Companies, and TOMCO—whose cases are the subject of a pending Motion for Joint Administration:

• Highgrove: Manages the residential properties that are rented to individuals.
• Real Estate Companies: The residential properties are held across four entities—Residential Properties Resources Fund II, LLC ("RPR Fund II"), Residential Properties Resources OPZ Fund 1, LLC – Series DI ("OPZ Fund I"), RPRFII CV I, LLC ("CV I") and RPRFII A, LLC ("RPRFII A") (collectively, the "Real Estate Companies").
  • The Real Estate Companies own approximately 240 or more residential real estate properties across a multi-entity ownership structure. These properties generate rental income in which lenders that filed mortgages claim an interest.
• TOMCO Property Services Wisconsin, Inc. ("TOMCO"): Provides maintenance, repairs and other services for the properties.

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Corporate History

David L. Tomblin co-founded Highgrove in 2012 with Albert K Barton, III, a/k/a Trey Barton. At founding, Mr. Tomblin had accumulated approximately 38 years of experience in residential value-added real estate investing, while Mr. Barton had approximately six years of experience in the same field.

• Highgrove qualified as one of 26 national approved bidders for the Fannie Mae Auction in 2012. In 2013, Highgrove won five Fannie Mae national pool auctions, including one property in the Midwest Pool located on Milwaukee's north side.
• Through Tomblin family funding entities, the Tomblin family began purchasing additional Milwaukee properties to transition from California and experiment with the Milwaukee market.

Fund Formation and Expansion

• After purchasing five properties with Tomblin family entities, Highgrove launched RPR Fund II in 2016. RPR Fund II operated as an all-cash business model, acquiring, rehabilitating, and holding free-and-clear distressed and undervalued residential properties for cash flow and appreciation.
  • The fund returned quarterly distributions of just under 17% annualized from 2016 through the onset of the COVID-19 pandemic, reducing distributions to 10% annualized during the pandemic.
• At the end of 2019, the principals established OPZ Fund I to take advantage of Opportunity Zone purchases and associated tax advantages.
• Highgrove negotiated with Core Vest Brokers to obtain a $4 million acquisition line of credit, forming CV I as the new entity to accommodate lender requirements. Mr. Tomblin guaranteed the line of credit.
  • The line of credit was subsequently refinanced with Core Vest, whose successor is U.S. Bank Trust National Association ("U.S. Bank"). RPRFII A was formed as the new entity to accommodate lender requirements, with Mr. Barton guaranteeing the refinanced debt.
• Between 2016 and 2022, the Real Estate Companies purchased close to 300 properties in Milwaukee, with RPR Fund II and OPZ Fund I continuing to acquire large portfolio properties until the end of the first quarter of 2022.
  • During those acquisitions, OPZ Fund I lent approximately $1.5 million to RPR Fund II. With accrued interest, RPR Fund II owes OPZ Fund I approximately $3.5 million.
• TOMCO was formed to employ people to provide property management, maintenance, and related services exclusively for the properties owned by the Debtor entities.

Ownership and Management

• Highgrove controls each of the Debtor entities other than TOMCO. Mr. Tomblin is the CEO and President of Highgrove and owns 100% of the equity shares of TOMCO, which he controls.
• RPR Fund II and OPZ Fund I have investors that are not related to Mr. Tomblin or Mr. Barton.
• Highgrove manages all Debtor entities, with Mr. Tomblin and Mr. Barton serving as principals of Highgrove. All operational and strategic decisions for each Debtor entity are made by and through Highgrove.
• According to the Debtors, their estates are interrelated and interdependent, with business activities intertwined through common ownership. The success of each Debtor's chapter 11 case depends on the success of the other Debtors because of common debts.

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Operations Overview

The Debtors require access to cash in which lenders have an interest in order to pay employees, pay utilities, make repairs, provide ordinary maintenance to rental units, and generally operate their businesses. Without such access, repairs needed for units occupied by tenants and ordinary business expenses cannot be paid.

• The Debtors have prepaid expenses or otherwise have access to cash in which no party has an interest—an approach suggested by counsel to avoid an emergency hearing to approve immediate use of cash. The Debtors will nonetheless need to use cash in which lenders have an interest no later than August 19, 2026.
• The Debtors' cash needs, set forth on Exhibit 2, generally relate to managing and operating the residential rental properties, and include preliminary estimated amounts for professionals the Debtors anticipate seeking to retain, including an accountant, general chapter 11 attorneys, and attorneys to continue handling disputes with the City.

Proposed Adequate Protection

On the advice of counsel, the Debtors propose the following protections for the interests of their secured lenders (collectively, the "Secured Lenders") in connection with the use of cash in which they have an interest:

• Replacement Liens: Replacement liens on post-petition assets to the same extent, validity, and priority as the Secured Lenders' pre-petition liens, including proceeds from property sales and attaching to the Rehabilitation Reserve.
• Receipt of Net Sale Proceeds: 25% of net proceeds from property sales paid directly to the Secured Lender holding a lien against the property sold, with 75% used to improve other properties of the same Secured Lender (the "Rehabilitation Reserve"). Where a Secured Lender has no other collateral, all net proceeds will be paid to that lender.
  • According to the Debtors, improving other properties will increase the value of the Secured Lenders' collateral by more than the amount used to improve the properties.
• Insurance: Maintenance of insurance on all real property at levels at least equivalent to those in effect as of the petition date (July 29, 2026).
• Preservation of Property: Performance of maintenance and repairs sufficient to prevent waste or material deterioration of the collateral.
• Equity Cushion: The aggregate post-rehabilitation fair market value of the real property portfolio is estimated to exceed $22.5 million as shown on Exhibit 3, substantially exceeding aggregate secured claims of approximately $14.6 million, yielding an equity cushion of more than $7.9 million.
  • The values represent Mr. Tomblin's best estimate of fair market value based upon purchase prices, his knowledge of the market, and his more than 50 years of experience in the residential real estate business.
• Monthly Reporting: Monthly reports to the Secured Lenders and their counsel, due on or before the 15th of each month, covering revenues collected, disbursements made, status of property sales, Rehabilitation Reserve balance, and status of rehabilitation projects.

Reorganization Overview

According to the Debtors, there is substantial equity in their assets that can be used to pay all creditors and provide a return to investors. The first step is the filing of the chapter 11 cases in order to regain control of all the properties.

• The Debtors need to collect rents but recognize that tenants may have rights of rent abatement, meaning rents are paid to the City instead of the Debtors. Cash available from rent abatements will be used for repairs and maintenance, and the Debtors anticipate negotiating a working agreement with the City to that effect.
• With available cash, the Debtors will provide maintenance and repairs to improve the rental units, cover the costs of operating the business, and pay the costs of the chapter 11 proceedings.
• The Debtors intend to file a motion to assume all leases with tenants, which will normalize tenant relationships and permit payment deposits as tenants vacate properties.
  • The Debtors will not seek eviction of any tenants for rents due before August 1, 2026 but not paid, for at least two months, after which each situation will be evaluated on a case-by-case basis.
• The Debtors intend to sell properties under the 25%/75% net proceeds split described above, which they state will increase the value of all Secured Lenders' collateral, address the City's concerns regarding inhabitable rental properties for low-income tenants, and generate rental income for the benefit of all creditors, investors and the Debtors.
• The Debtors anticipate proposing a plan of reorganization that continues to rehabilitate and sell properties.
• The Debtors state that the alternative to this course of action is liquidation by a receiver or Secured Lender, at a value likely less than what can be obtained from continued operation under chapter 11, and one that would likely mean lenders do not take steps to improve the properties, leading to increased vacant properties and less housing available to low-income households.

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Prepetition Obligations

The aggregate balance owed to the Secured Lenders, including accrued interest, is approximately $14.6 million. The obligations are secured by liens on substantially all the Debtors' real property and related assets, including rents and proceeds.

Secured Debt

• U.S. Bank: U.S. Bank is the Debtors' largest secured lender, with a balance of approximately $8.5 million secured by an approximately 85-real estate parcel portfolio owned by RPRFII A.
  • Rebecca DeMarb was appointed as a receiver with limited powers for U.S. Bank.
• F Street Investments: Holds multiple loans aggregating approximately $3.9 million, secured by discrete real estate parcels owned by RPR Fund II and OPZ Fund I across several tranches (12-parcel, 6-parcel, 10-parcel, 20-parcel, 3-parcel, and 2-parcel tranches).
• Mach 1 Capital: Holds loans secured by real property owned by RPR Fund II and OPZ Fund I, with approximately $1.1 million presently due on the RPR Fund II loans and approximately $450,000 presently due on the OPZ Fund I loans.
• Various Individual Investor Lenders: Individual investors have made loans secured by real estate owned by RPR Fund II and OPZ Fund I, aggregating approximately $270,000 in RPR Fund II investor loans and $320,000 in OPZ Fund I investor loans.
  • The creditors making RPR Fund II investor loans are Minghua Payne, Sara Gallagher, Sean Gallagher, Patrick Gallagher and Steven Straley.
  • The creditors making OPZ Fund I investor loans are 3 DOT 31, Minghua Payne and Sara Gallagher.

Insider Loans

• As the Debtors were strapped for cash, they reduced staff, and Mr. Barton and Mr. Tomblin lent money to the Debtors. With interest, Mr. Barton's loans total approximately $300,000 and Mr. Tomblin's loans total approximately $3.5 million. These insider loans are not included among the Secured Lender obligations that comprise the approximately $14.6 million aggregate balance.

The Debtors believe their assets exceed all claims of lenders with mortgages, such that those lenders and likely all other creditors will be paid in full if the Debtors are able to continue operating their businesses and retain the real properties.

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Events Leading to Bankruptcy

Post-COVID Headwinds and the Shift to a Debt Model

At the end of the first quarter of 2022, RPR Fund II and OPZ Fund I stopped raising capital and ceased return-of-capital distributions to investors, a decision driven by post-COVID challenges including severe labor and material shortages, high inflation, and the bankruptcy of three contractors working on rehabilitation projects.

• A group of larger investors in an advisory group for RPR Fund II and OPZ Fund I recommended transitioning from the all-cash/no-debt model to a debt model in order to take advantage of then-lower interest rates and produce higher internal rates of return. A straw vote among investors affirmed this change.
• Post-COVID high inflation, higher interest rates, and a lack of materials, labor, and contractors created major challenges, while traditional banking credit dried up in mid-2022, 2023, and 2024. After one successful refinancing with U.S. Bank (at the time Core Vest) in 2023, tightening credit conditions prevented a further refinancing.

Investor Litigation, SEC Inquiry and Liquidity Pressure

• In January 2023, a small group of investors—fewer than 30 out of more than 200—sued Highgrove and certain Debtor Funds to take over their management. Both federal and state courts dismissed the suits, which included prohibitions against refiling, and the Debtors reached a settlement with the investors in the summer of 2023. The litigation nonetheless caused additional refinancing problems.
• The SEC opened an inquiry into certain Debtors in May 2024, which the Debtors state may have been prompted by the dismissed investor litigation. The investor suits and SEC inquiry prevented any traditional refinancing and the launch of a new fund. The SEC inquiry ultimately closed with no further action in February 2026.
• Certain Debtors took out hard money loans to cover interim payments to lenders, rehabilitation and operating costs, with lenders including F Street Investments, Mach 1 Capital and individual investor lenders.
  • Three portfolio property sales failed to close from the summer of 2023 to mid-2024 due to lack of financing, although individual one-off property sales did occur.
• Beginning in 2023, the Debtors sought to convert their financial system to a Yardi accounting system. The conversion was not successful and created unresolved accounting issues.

New Fund Launch, City Litigation and Rent Withholding

In March 2026, Highgrove launched a new fund with investment banker DelMorgan & Co in Santa Monica, CA. Part of the funds raised would be used to purchase properties from the Real Estate Companies and pay existing lenders with mortgages against the properties purchased, with the overall goal of satisfying lender claims and providing a return to third-party investors.

• During that process, the Debtors entered into agreements with lenders including U.S. Bank and F Street Investments. The agreements included the ability of U.S. Bank to obtain a receiver with limited powers for RPRFII A, and F Street Investments receiving quitclaim deeds executed by the Debtors to be held in trust that could be recorded if certain payments were not made. The receiver does not presently have the power to sell any of the real property securing U.S. Bank's claim.
• Progress on the new fund was hampered by a lawsuit filed by the City of Milwaukee at the end of March 2026 seeking to declare the Debtors' business practices to be a public nuisance. The Debtors dispute the allegations. Additionally, an organization called Common Ground has encouraged tenants to withhold rent payments.
• The actions of the City and Common Ground received negative news coverage, causing rental collections to drop to approximately 85% of expected levels. The combination of the City's lawsuit, public comments by the City Attorney and actions by Common Ground has made it difficult to conduct business, causing severe cash constraints.