Fang Real Estate Investments, LLC
4000310515centerMarch 24, 20143300095000March 24, 2014420003263900880008851265Private Placement MemorandumFang Real Estate investments is a limited liability Company founded in 2013 by Brian Fang. 450000Private Placement MemorandumFang Real Estate investments is a limited liability Company founded in 2013 by Brian Fang. 420003263900175001760220Fang Real Estate Investments, LLC 450000Fang Real Estate Investments, LLC Private Placement MemorandumContents TOC \o "1-3" \h \z \u Executive Summary PAGEREF _Toc383432579 \h 2Description of Offering PAGEREF _Toc383432580 \h 4Use of Proceeds PAGEREF _Toc383432581 \h 5Description of the Acquisition and Value add PAGEREF _Toc383432582 \h 6Description of Revenue and Operating Costs PAGEREF _Toc383432583 \h 8Description of Use of Debt and Related Interest Costs PAGEREF _Toc383432584 \h 8Description of the Exit Strategy and Sale accounting PAGEREF _Toc383432585 \h 9Risks PAGEREF _Toc383432586 \h 11Capital Structure PAGEREF _Toc383432587 \h 13Cash Flow Analysis PAGEREF _Toc383432588 \h 14Financial Statements PAGEREF _Toc383432589 \h 15Appendix A PAGEREF _Toc383432590 \h 18Appendix B PAGEREF _Toc383432591 \h 23Schedule of Assumptions PAGEREF _Toc383432592 \h 25Executive SummaryThis Private Placement Memorandum (“PPM”) is to offer investors equity shares in aggregate purchase price of $388,500 of Fang Real Estate Investments, LLC, (“FREI LLC”) which was founded in 2013 by the Chief Executive Officer, Brian Fang, in Washington, D.C. This PPM describes Fang Real Estate Investments, LLC offering, use of proceeds, description of acquisition and value add, description of revenue and operating costs, description of use of debt and related interest costs, description of exit strategy and sale accounting, potential risks, capital structure, cash flow, finance summary, and finance statements. Fang Real Estate Investments, LLC is a startup investment company seeking to purchase single family residential in Washington, D.C, particularly in the district of Georgetown. Currently, FREI LLC’s first key project is to purchase the single family home on 1213 29th St. NW, Washington, D.C, 20007, operate and renovate the property, lease the property into two separate leases (2 bedroom, 2 bath and 1 bedroom, 1 bath), and sell the single family residential property for profit. This property is located in heart of Georgetown with a walk score of 97/100, which means that this property is located in an area nearby amenities. FREI LLC is offering 388,500 shares at $1 per share, which is 30% equity of the company.Forming a Limited Liability Company is the best option for FREI LLC because it is financially and economically feasible given the asking price of the property by the seller as well as our assumptions in the pro forma statements. This is a great opportunity for FREI LCC to acquire this property, renovate, add value, and flip it for profit.*Side note: After looking at the balance sheet and cash flow statement and seeing that I have negative cash amounts, it was necessary for the purpose of this project to inject $100,000 of working capital from my own pockets to create positive ending cash. Because the balance sheet and cash flow statement shows the company is bankrupt before the injection of $100,000, as an investor looking into this company, I would not invest in this company. With that being said, for the project purposes, the $100,000 of working capital is necessary and must be implemented into FREI LLC for the company to stay alive during the beginning period. Description of oFferingOffering: $388,500 – 388,500 shares @ $1 per shareThe offering for sale of Fang Real Estate Investment, LLC is 388,500 equity shares of the business at $1 per share. Total purchase price in aggregate of the offering is $388,500. Each share is valued at $1 per share determined by the CEO, Brian Fang, with a minimum purchase of 194,250 shares. Currently, FREI LLC is solely owned by the founder and CEO, Brian Fang. With potential investors investing into FREI LLC, each investor will hold ownership directly proportional to their investment into the company and cannot exceed ownership of 49.9%. FREI LLC is targeting two investors, to support the founder, with a minimum of two years of investments. Looking at the two year pro forma statement, FREI needs $388,500 (30% equity financing) between the two investors. The remaining investments will be financed through debt of $777,000 (60% debt) and founder’s equity of $229,500 (17.7% equity). Investors may maintain their ownership in the company as long as they desire, but investors may not withdraw their initial investment within two years. FREI LLC will distribute earnings to members after the initial two year investment. After two years the investors may leave, but the investors who stay with the company will receive a percentage of the company’s profits based on their percentage of ownership. Use of ProceedsFang Real Estate Investments, LLC will use the proceeds from the offering towards the purchase of the residential property at 1213 29th St. NW, Washington, D.C, 20007. The company will receive $388,500 from the proceeds and $74,666 will be used for capital expenditures. The rest of the proceeds will be used for closing costs ($38,850), finance cost ($7,770), Interest Expense Cost ($26,273) and operating costs ($27,107). That will leave a remainder of $240,941 of the proceeds which FREI LLC would put the money into purchasing the single family house. To cover the balance of purchasing the home, future operating expenses, tax expenses, and interest expense costs by FREI LLC, the company plans to borrow $777,000 from East West Bank at an interest rate of 7%. Description of the Acquisition and Value addFang Real Estate Investments, LLC have acquired single family residential property at 1213 29th St. NW, Washington, D.C, 20007 as well as a company vehicle. The value add proposition for this property is to renovate the three bathrooms on each floor by adding new flooring and cabinets. Also, to increase value to the property, FREI LLC decided to renovate the kitchen completely, turning the outdated kitchen into a modern, more tasteful kitchen. Currently, within the house, there are three old wood-burning fireplaces that are not in use and bricks are falling out. Our idea is to replace these fireplaces completely with a more modern fireplace that would complement the wood flooring and the modernized kitchen. For the bedrooms on the top floor, we have decided to turn the wood flooring into carpet. One of the big value add is to completely renovate the basement floor of the house. The living room, kitchen, and bedroom is very outdated so to add value, FREI LLC decided to modernize the kitchen with granite countertops and cabinets, take out the old carpets for the living room and replace it with wood flooring, and add quality carpeting for the bedroom. The basement is an important value add because FREI LLC is planning to lease out the basement separately from the top two floors, generating two rental revenues. Lastly, one big value add is to remodel the backyard by adding new high quality redwood fence and by replacing the old bricks with a new high end concrete patio. This will greatly improve the value of the property in the long run. Pictures of the whole property before renovation is located in Appendix A.This renovation period would be done within the first three months of acquiring the property. During this time, it is also crucial for the marketing team to find tenants immediately after the three months renovation period so we don’t lose any rental revenue. The value add can be recouped when all the renovations is complete and the house is eventually sold for profit. This value add is important because it is increasing the value of the property which will then create profit for the investors. To summarize, the value add is categorized in three major asset categories: building, improvements, and furniture and fixtures. For building, the new painting for the interior will add value to the building. For improvements, fireplaces, vinyl flooring for the bathrooms, carpeting for the bedrooms, wood floor for the basement, granite countertops for the kitchen, and also the backyard with the fence and the concrete patio. For furniture and fixtures, FREI LLC decided to replace all the cabinets, microwaves, sinks, dishwasher, oven, washer and dryer, refrigerator, and radiators. Detailed value add and the related costs is located in Appendix A. Description of Revenue and operating costsThe table below shows the revenue and operating costs for Fang Real Estate Investments, LLC. Description of use of debt and related interest costsFang Real Estate Investments, LLC will take out two loans: Senior mortgage loan and the commercial loan for the capital expenditures. The senior mortgage loan is an interest only loan that has a 7% interest rate which means with the $777,000 loan borrowed from East West Bank, the company will have to pay $54,390 annually. The commercial loan (interest only) has a 9% interest which means the $74,666 loan borrowed for capital expenditures will have an annual interest pay of $6,720. The strategy for FREI LLC is to use the proceeds from the investors to pay off our commercial loan within the first month or before the renovation period (3 months) which will save the company $6,720 a year.Description of the Exit Strategy and Sale accountingExit Strategy:Fang Real Estate Investments, LLC is planning on selling the property at 1213 29th St. NW, Washington, D.C, 20007 at the end of year 10 for a total gain of $708,871. We are planning to sell this property to our Chinese clients that are in the United States or oversees. Georgetown district is very well known globally, and with our connections and expertise, FREI, LLC should be able to sell the property after 10 years for a gain. We held it for 10 years because our property started to project positive free cash flow starting year 5. From year 5 to the end of year 10 the property generated positive free cash flow each year. It was in the best interest of all the members of FREI, LLC to sell this property at the end of year 10.To find the sale proceeds, one must calculate gross sales price, sales expense, and principal repay. The sum of these three equals sale proceeds. To find less: Cost of Sales, use calculation: (gross sales price X the sales expense percentage (in our case, 3%). To find less: NBV, use calculation: (annual depreciation of the building X sale period (in our case, 10 years). To find gain or loss, use this calculation (Sale proceeds – Less: NBV = gain or loss).Side note: X = multiplySale AccountingRisksFang Real Estate Investments, LLC understands the importance in identifying and managing the risks associated with real estate in the Washington DC market. Below are the different risks involved with the project.Market risksWashington DC real estate market is relatively stable compared to the nation, but the value specifically in the Georgetown market can sometimes plummet unexpectedly. Looking at the comparable to the property, a few properties has deducted from their asking price. Although this is true, with the renovation to the property and great marketing, there will not be any deduction from our sale price when we eventually sell it. Funding RisksAlthough East West Bank has guaranteed $777,000 debt issuance, they can potentially terminate the contract if FREI, LLC cannot find investors that are willing to invest the minimum $194,250. If the company cannot receive such investments, the company will definitely go pany RisksSince FREI LLC is a startup, it might be difficult to compete against bigger companies that have already established themselves into this market. Also, many terms negotiated with acquisition and disposition can be unfavorable to the company which can cost the company more money per project. The company members would have to build relationships quickly within this market so we can compete with the bigger companies. Project RisksOne project risk that can potentially happen is the asking price of the property located at 1213 29th St. NW, Washington, D.C, 20007. The asking price can potentially be increased due to many different reasons, which will be harmful to the company. More money needed for the acquisition means that the company would have to find more investors and raise equity. Another project risk is the renovation project. This is a risk because during this process there will be many unknowns. Many unforeseen costs can incur due to hazardous material or structural improvements. Another risk might be vacancy and tenants. The company must find the right tenants to live in the house. Management must be attentive and ask for rents to be due on time. Also, the marketing team must market the property strategically when tenants leases are about to expire. Turnover is crucial and by having low turnover, it will help the company not lose any money due to vacancy. Capital structureThe capital structure for Fang Real Estate Investments, LLC before offering would be 17.7% equity and 90% debt. This would mean the founder, Brian Fang, would put in an initial $229,500 of equity to obtain an initial debt issuance from East West Bank for $1,165,500. Assuming the offering generates $338,500 from investors, East West Bank has guaranteed $777,000 in debt at an interest rate of 7%. This then will create a new capital structure of 47.7% equity ($618,000) and 60% debt ($777,000). cash flow analysisOperations:Fang Real Estate Investments, LLC’s only source of cash is rent payments received on the leased property. Since the company split the property into two separate leases, there should be more revenue incoming compared to renting out the property in one lease. Cash from the operations is deployed to cover operating expenses or put back into the company for future investments.Investing:Fang Real Estate Investments, LLC’s revenue for investing is generated from the sale of the renovated property and the sale of the company car. Our total cash from investing in year one is negative due to the acquiring of the building, land, purchase of improvements, purchase of furniture and fixture, and the purchase of the company car. For year two, our total cash from investing is positive because we sold our car for $15,000 and have already acquired the property, purchased the improvements, and purchased the furniture and fixture. Future investment activities will be voted on by FREI LLC’s founder and the new investors.Financing:Fang Real Estate Investments, LLC’s cash flows from financing will show proceeds from member’s capital, founder’s equity, and debt issued by East West Bank. From the use of the proceeds, $74,666 out of the $388,500 will be used to pay off the commercial loan and the rest will be used to pay off operating expenses, financing costs, closing costs, and to acquire the property.Financial StatementsBalance Sheet:752475181610Fang Real Estate Investments, LLCBalance SheetAs of December 31, 2015 and 201400Fang Real Estate Investments, LLCBalance SheetAs of December 31, 2015 and 2014Income Statement:819150179070Fang Real Estate Investments, LLCIncome StatementFor the Periods Ending December 31, 2015 and 201400Fang Real Estate Investments, LLCIncome StatementFor the Periods Ending December 31, 2015 and 2014Fang Real Estate Investments, LLC20152014RevenueRevenue - Rent $ 75,582 $ 55,575 Loss on Sale of Vehicle $ (10,000)Total Revenues $ 65,582 $ 55,575 ExpensesOperating Expenses $ 27,649 $ 27,107 Depreciation Expenses $ 41,793 $ 41,793 Interest Expenses $ 61,110 $ 61,110 Total Expenses $ 130,552 $ 130,010 Net Income $ (64,970) $ (74,435)Cash Flow Statement:866775179070Fang Real Estate Investments, LLCCash Flow StatementFor the Year Ended December 31, 2015 and 201400Fang Real Estate Investments, LLCCash Flow StatementFor the Year Ended December 31, 2015 and 2014 Appendix ACapital Expenditures and related costsProposed Rennovation PlanUnitsTotal CostSources2New Kitchen???Cherry Wood Cabinet12$7,572HomewyseWhirlpool Microwave2$2,Sink Replacement3$2,085HomewyseWhirlpool Washer2$1,Whirlpool Oven3$4,Granite Countertops3$6,300HomewyseBathrooms???Cabinets3$1,953HomewyseVinyl Flooring (100 sq ft)$630HomewyseBackyard???Redwood Fence (100 linear ft)$1,552HomewyseConcrete Patio (275 sq ft)$2,950HomewyseFurnitures and Fixtures???Wood-burning Fireplace remodel3$24,000Heatilator/HomewyseWood flooring (Basement)1$2,800HomewyseWasher and Dryer2$2,630Home DepotRadiator6$2,Whirlpool Refrigerator3$3,000Best BuyCarpeting for bedroom3$2,300HomewysePainting Interior (1632 sq ft)$6,200HomewyseTotal Improvements?$74,666?BackyardKitchen #1Kitchen #2Kitchen #3 (basement)Bedroom (basement)Living room (basement)Floor plansAppendix BFang Real Estate Investments, LLC is planning on selling the property in 10 years.Operating costsInterest costsDepreciation costsSchedule of assumptionsList of Assumptions:An interest only senior mortgage can be found at 7% for $777,000 over 20 yearsA second interest only commercial mortgage can be found at 9% for $74,666 over 20 years Rent escalation and expense escalation should be 2% increase each yearMaintenance is 5% of estimated gross income The property will not exceed a vacancy rate of 5% during rentalAssuming sales cap is 4%. Our incoming cap is around 2.2%Management fees estimated at 2% of estimated gross incomeProperty tax provided by ZillowUsed websites Homewyse, Whirlpool, Home Depot, Best Buy, and Homewyse was used for majority of costs with kitchen, backyard, bathrooms, and furniture and fixtures ................
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