fang real estate investments, llc€¦ · web viewmarch 24, 2014. private placement memorandum....

March 24, 2014

Fang Real Estate Investments, LLC

Private Placement Memorandum

Fang Real Estate investments is a limited liability Company FOUNDED IN 2013 BY BRIAN FANG.

FANG REAL ESTATE INVESTMENTS, LLCMarch 24, 2014

Private Placement Memorandum

CONTENTS

Executive Summary......................................................................................................................................................2

Description of Offering.................................................................................................................................................4

Use of Proceeds...........................................................................................................................................................5

Description of the Acquisition and Value add..............................................................................................................6

Description of Revenue and Operating Costs...............................................................................................................8

Description of Use of Debt and Related Interest Costs................................................................................................8

Description of the Exit Strategy and Sale accounting...................................................................................................9

Risks...........................................................................................................................................................................11

Capital Structure........................................................................................................................................................13

Cash Flow Analysis.....................................................................................................................................................14

Financial Statements..................................................................................................................................................15

Appendix A.................................................................................................................................................................18

Appendix B.................................................................................................................................................................23

Schedule of Assumptions...........................................................................................................................................25

1


EXECUTIVE SUMMARY

This 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.

2


*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.

3


DESCRIPTION OF OFFERING

Offering: $388,500 – 388,500 shares @ $1 per share

The 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.

4


USE OF PROCEEDS

Fang 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%.

Sources UsesDebt for Acquisition 777,000$ Purchase Price 1,295,000$ Debt for Renovation 74,666$ Closing Cost 38,850$

Interest Expense Cost 26,273$ Debt Subtotal 851,666$ Operating Expense cost 27,107$

Finance Cost 7,770$ Equity for Acquisition 618,000$ Acquisition subtotal 1,395,000$

Renovation budget 74,666$ Equity Subtotal 618,000$ Additional equity subtotal 74,666$ Total: 1,469,666$ Total: 1,469,666$

5


DESCRIPTION OF THE ACQUISITION AND VALUE ADD

Fang 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

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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 COSTS

7


The table below shows the revenue and operating costs for Fang Real Estate Investments, LLC.

Revenue and Operating Costs 2014 2015Revenue 78,000$ 79,560$ Operating Expenses 27,107$ 27,649$ Depreciation Expense 41,793$ 41,793$ Interest Expense 61,110$ 61,110$ Net Income or loss (74,435)$ (64,970)$

DESCRIPTION OF USE OF DEBT AND RELATED INTEREST COSTS

Fang 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 ACCOUNTING

Exit Strategy:

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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.

Sale Proceeds 966,741$ Less: Cost of Sales ($45,831)Less: NBV 257,870$ Gain or loss 708,871$

Fang Real Estate Investments, LLCGross Sales Price 1,527,705$ Sales Expense (45,831)$ Principal Repay (515,133)$ Sales Proceeds 966,741$


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 = multiply

Sale Accounting

9


Cash 966,741$ Accum of Dep of Building 257,870$ Accum Dep of Improvements 8,730$ Accum Dep of Improvements 34,342$ Accum Dep of Furniture and Fixture 16,324$

Improvements 24,000$ Improvements 34,342$ Furniture and Fixture 16,324$ Land 585,864$ Building 709,136$ Gain on Sale 708,871$

Fang Real Estate Investments, LLC - Sale Accounting

10


RISKS

Fang 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

bankrupt.

Company 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

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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.

12


CAPITAL STRUCTURE

The 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).

$229,50017.7%

$1,165,50090%

FREI, LLC Capital Structure Before Offering

Equity from FREI LLC Founder East West Bank Debt Issuance

$618,00047.7%

$777,00060%

FREI, LLC Capital Structure After Offering

Equity Raised after Offering East West Bank Debt Issuance

13


CASH FLOW ANALYSIS

Operations:

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.

14


FINANCIAL STATEMENTS

Balance Sheet:

2015 2014AssetsCash 36,485$ 34,617$ Land 585,864$ 585,864$ Building 683,349$ 709,136$

Less Accum Deprec (25,787)$ (25,787)$ Improvements 23,127$ 24,000$

Less Accum Deprec (873)$ (873)$ Improvements 27,474$ 34,342$

Less Accum Deprec (6,868)$ (6,868)$ Furniture and Fixture 13,059$ 16,324$

Less Accum Deprec (3,265)$ (3,265)$ Vehicle 30,000$ 35,000$

Less Accum Deprec (5,000)$ (5,000)$ Total Assets 1,357,565$ 1,397,490$

Liabilities Accounts Payable 2,304$ 2,259$ Mortgage Loan 777,000$ 777,000$ Commercial Loan 74,666$ 74,666$

Total Liabilities 853,970$ 853,925$

EquityMembers Capital -$ 618,000$ Retained Earnings -$ (74,434.62)$

Total Equity 503,595$ 543,565$ Total Liabilities + Owner's Equity 1,357,565$ 1,397,490$


15

Fang Real Estate Investments, LLCBalance Sheet

As of December 31, 2015 and 2014


Income Statement:

Fang Real Estate Investments, LLC2015 2014

RevenueRevenue - 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)

16

Fang Real Estate Investments, LLCIncome Statement

For the Periods Ending December 31, 2015 and 2014


Cash Flow Statement:

2015 2014Operating ActivitiesNet Income (64,970)$ (74,435)$ Depreciation Expense 41,793$ 41,793$ Loss on Disposal of Vehicle 10,000$ -$ Changes in Current Liabilities -$ -$ Increase in Accounts Payable 45$ 2,259$

Total Cash from Operating Activities (13,132)$ (30,383)$

Investing ActivitiesAcquisition of Building -$ (709,136)$ Acquisition of Land -$ (585,864)$ Purchase of Improvements -$ (24,000)$ Purchase of Improvements -$ (34,342)$ Purchase of Furniture and Fixture -$ (16,324)$ Purchase of Vehicle -$ (35,000)$ Sale of Vehicle 15,000$ -$

Total Cash from Investing Activities 15,000$ (1,404,666)$

Financing ActivitiesIssuance of Common Stock -$ 618,000$ Issuance of Mortgage Debt -$ 777,000$ Isssuance of Commercial Loan Debt -$ 74,666$

Total Cash from Financing Activities -$ 1,469,666$

Total Changes in Cash -$ 34,617$ Beginning Cash 34,617$ -$ Ending Cash 36,485$ 34,617$


17

Fang Real Estate Investments, LLCCash Flow Statement

For the Year Ended December 31, 2015 and 2014


APPENDIX A

Capital Expenditures and related costs

Proposed Rennovation Plan UnitsTotal Cost Sources

2New Kitchen

Cherry Wood Cabinet 12 $7,572 HomewyseWhirlpool Microwave 2 $2,000 Whirpool.comSink Replacement 3 $2,085 HomewyseWhirlpool Washer 2 $1,898 Whirpool.comWhirlpool Oven 3 $4,498 Whirpool.comGranite Countertops 3 $6,300 Homewyse

Bathrooms Cabinets 3 $1,953 HomewyseVinyl Flooring (100 sq ft) $630 Homewyse

Backyard Redwood Fence (100 linear ft) $1,552 HomewyseConcrete Patio (275 sq ft) $2,950 Homewyse

Furnitures and Fixtures Wood-burning Fireplace

remodel 3 $24,000Heatilator/Homewyse

Wood flooring (Basement) 1 $2,800 HomewyseWasher and Dryer 2 $2,630 Home DepotRadiator 6 $2,298 Houseneeds.comWhirlpool Refrigerator 3 $3,000 Best BuyCarpeting for bedroom 3 $2,300 HomewysePainting Interior (1632 sq ft) $6,200 Homewyse

Total Improvements $74,666

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Backyard

Kitchen #1

19


Kitchen #2

20


Kitchen #3 (basement)

Bedroom (basement)

21


Living room (basement)

Floor plans

22


APPENDIX B

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Fang Real Estate Investments, LLC is planning on selling the property in 10 years.

Operating costs

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10NOI Cost Components

Advertising $2,000 $2,040 $2,081 $2,122 $2,165 $2,208 $2,252 $2,297 $2,343 $2,390Maintenance/ Repairs $3,705 $3,779 $3,855 $3,932 $4,010 $4,091 $4,172 $4,256 $4,341 $4,428Commissions $2,880 $2,938 $2,996 $3,056 $3,117 $3,180 $3,243 $3,308 $3,374 $3,442Insurance $2,592 $2,644 $2,644 $2,644 $2,644 $2,644 $2,644 $2,644 $2,644 $2,644Legal and Professional $3,000 $3,060 $3,060 $3,060 $3,060 $3,060 $3,060 $3,060 $3,060 $3,060Management Fees $1,482 $1,512 $1,542 $1,573 $1,604 $1,636 $1,669 $1,702 $1,736 $1,771Property Tax $8,088 $8,250 $8,250 $8,250 $8,250 $8,250 $8,250 $8,250 $8,250 $8,250Utilities $3,360 $3,427 $3,427 $3,427 $3,427 $3,427 $3,427 $3,427 $3,427 $3,427

Total Operating Expenses $27,107 $27,649 $27,855 $28,064 $28,278 $28,496 $28,718 $28,945 $29,176 $29,412

Interest costs

Projected Use of proceeds Debt Equity (cash) Note100% 60% 40%

Building Acquisition $1,295,000 $777,000 $518,000 Mortgage

Improvements $74,666 Loan

Debt Required $74,666Equity Required $518,000Mortgage Required $777,000

Annual 10 yr sale periodAnnual Interest Senior Mortgage 7% $54,390 $543,900Annual interest commerical Loan 9% $6,720 $67,199

Total Interest Expense $61,110 $611,099

Depreciation costs

24


Asset Cost Service Lives Annual Depreciation Sale period depreciation (10 yrs)Building $709,136 27.5 $25,787 $257,867Improvements $24,000 27.5 $873 $8,727Improvements $34,342 5 $6,868 -$ Furniture and Fixture $16,324 5 $3,265 -$ Vehicle $35,000 7 $5,000 -$ Total Depreciation $41,793 $266,595

SCHEDULE OF ASSUMPTIONS

25


List of Assumptions:

An interest only senior mortgage can be found at 7% for $777,000 over 20 years

A 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 year

Maintenance is 5% of estimated gross income

The property will not exceed a vacancy rate of 5% during rental

Assuming sales cap is 4%. Our incoming cap is around 2.2%

Management fees estimated at 2% of estimated gross income

Property tax provided by Zillow

Used websites Homewyse, Whirlpool, Home Depot, Best Buy, and homeneeds.com

o Homewyse was used for majority of costs with kitchen, backyard, bathrooms,

and furniture and fixtures

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