Tic-plan fractional real estate financing

1. Commercial Real Estate Development Finance Series Tic-plan fractional real estate financing

2. What Problem Are We Addressing? Do you have the capital financing for your commercial real estate development project or not? The development of commercial income-producing properties requires the developer to have access to capital financing. The key is the pre-construction phase: lenders don’t support it and equity partners will only fund it if they own the lion’s share of the deal – if then. Mortgage bankers won’t underwrite a construction loan until the developer has the rest of the cash necessary to close – unless the developer is willing to pay a non-refundable commitment fee. Investment bankers are unwilling to undertake a private placement offering unless the developer has the construction mortgage financing in place, unless the developer is willing to pay all their costs and pay by the hour. In all cases, the cart is placed before the horse: the developer is in a Catch -22 and forced to accept all sorts of moral hazards - all with no control over the outcome and no real likelihood of future success.

3. Control Your Destiny… • Controlling your destiny is the name of the game. If you don’t control the project, then you will never control the profits. This means: • You have to control the subject property. • You have to control the project team. • You have to control the due diligence documentation process. • You have to control the capital financing process. • Controlling the capital financing can only occur in the absence of moral hazards and if you control the distribution channel. • Who do you trust more with your project – you or someone else? • Lenders create moral hazards; there is no control vested to the applicant – you just pay and hope the lender can and will fund. Investment bankers make money whether the deal works or not. Every commitment comes with a time limit. The time limit creates even more moral hazards, because; everyone knows your drop-dead date. • The control you seek has to start with the distribution channel: you need an outlet over which you have some measure of control so that you can accurately gauge the odds of success and make budget allocations that will hold up to the test of reality.

4. What’s the Ideal Solution? Equity financing means equity dilution and loss of control. Debt financing means personal guarantees and loss of control. Government-insured financing means extended application periods and higher carrying costs you must fund out of your own pocket. FACT:every capital financing program out there requires you to invest funds, take risks and hope third-parties will work for you instead of themselves. Ideally, we want a source of financing that: Doesn’t dilute your equity stake. Allows you to retain control of the project. Can close ahead of the construction financing. Allows you to withdraw your capital investment sooner. Has a distribution channel and cost structure you can control for your own benefit. Has an affordable interest rate. Has an acceptable repayment /redemption horizon. Is non-recourse to the developer. Now that would be the ideal financing, wouldn’t it?

5. A fractional commercial real estate syndication is the sale of deeded real property ownership interests to the public using mass advertising. The sale period is dramatically compressed by using regional and national advertising to sell the transaction to the public. The business deal is structured to meet the requirements of the retail market’s sales psychology to maximize the response rate. The expected result is an overkill of sales offers, thus over-funding your sales contract escrow closing requirement to ensure success. The public owns deeded real property interests in the project (along with the developer) for a defined period and with a buy-back. • Key Syndicate Participant Benefits… • Transaction structure offers locked-in returns not otherwise available. • The security is stronger than the bank gets for a mortgage loan. • Easy to understand business model and take-out structure that is believable. • Opportunity not dependent upon developer’s financial strength. • Defined cost track – you know what you have to have in your budget to get there. • Defined track to follow for ultimate financing success. • Financing is non-recourse. • Market controls terms. • No equity dilution. • Developer stays in control. • What’s a Fractional Real Estate Syndication? • Key Developer Benefits… Fractional Real Estate Syndications…

6. How Do You Set It Up? • Your business model changes in terms of the timing of your capital elements. The goal is to close the syndicate financing ahead of the construction mortgage financing. This may allow you to reduce your capital investment and/or use syndicate funds as at-risk capital to complete the capital financing cycle. • The due diligence is, more or less, the same. You have to meet the tests of the retail market (not the institutional market) – so you have to substantiate the material representations of the transaction just like you would in a securities offering. Incomplete documentation means failure and you lose. • You have to have a crackerjack project team. The retail market will not “buy a pig in a poke” . A complete team makes for a complete transaction. • Once the due diligence is done, the deal is structured in terms of the capital financing and the business deal to be offered to the retail buyers. You can do this yourself or have Rainmaker create the transaction structure using proTIC. Now you are ready to move into the actual syndication sales process itself.

7. The Syndication Sales Process… • You are using regional/national advertising. • You will do this on a concentrated basis for a period of one week • This mass marketing approach will meet the sales psychology requirements of the retail market. Example: You have a project in Texas with a $30 million budget and you decide to use the fractional real estate sales syndication method to raise approximately 1/3rd of it on a self-administered basis. We may recommend a one-week blitz in the Wall Street Journal for the Southwest edition in conjunction with syndicated radio. The blitz will reach a base of 700,000 subscribers. The expected response rate would be 0.50% - or 3,500 respondents. Closing only 5% of respondents would generate 175 contracts. To sell-out $10 million in fractional real property interests you will need approximately 30 to 50 contracts, so for every contract you accept there would be the expectation that you would have 3 to 5 contracts you would turn away (and contact for your next opportunity). The expected pre-closing costs would be in the range of $350,000 to $500,000.

8. Expected Results… • A typical syndication requires approximately 21 days to schedule and close. Fast enough? • A typical syndication will have approximately $350,000 to $500,000 in advance costs – whether you are selling $150 of real estate or $15 million in real estate. • Retail syndications sell on “herd mentality” psychology – the public participates because the yield is good (greed reflex), the security is outstanding (fear of loss reflex) and the business deal is easy to understand (simplicity reflex). • A good deal, with a good project team, complete due diligence and a strong transaction structure would have a very high expectation of success, but; ALL TRANSACTIONS ARE DIFFERENT AND THERE ARE NO GUARANTEES. Like everything else, you pay your money and take your chances. What worked for someone else has no bearing on your deal. Every deal stands alone.

9. Where Do You Go From Here? Contact Rainmaker Marketing Corporation… On the World Wide Web: http://www.rainmakermarketing.com At our corporate offices in Houston: 281.537.1200 Via Email: consultants@rainmakermarketing.com