sarahplex business plan

2 5 2 4 N o a h S t E u g e n e , O R 9 7 4 0 2 • T : 5 4 1 . 6 8 8 . 3 9 6 0 • M S i n P M @ G M a i l . c o m

SARAHPLEX - A TRIPLEX FOR PERSONAL RESIDENCY

FERGUSON FAMILY LLC Written by Joshua Ferguson (CEO & President)

August 23, 2010


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Disclaimer

The information contained in this document includes statements of Ferguson Family LLC’s belief’s, expectations, hopes or intentions regarding the future. It contains confidential information, including trade secrets, and may not be reproduced without the written permission of the company. All forward thinking statements are made as of the date hereof and are based on the information to the Ferguson Family LLC as of such date. It is important to note that actual outcome and the actual results could differ materially from those in such forward-looking statements. Factors that could cause actual results to differ materially include risks and uncertainties, such as technological, environ-mental, legislative, financial and marketplace changes.

Completed: August 2010. Published August 2010

Available by way of PDF file at www.scribd.com/msinpm

Copyright 2010, Ferguson Family LLC

F e r g u s o n F a m i l y L L C S a r a h P l e x

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Table of Contents

Executive Summary 4

Organizational Plan 4

Summary Description 4

Property - 2403 SW Nebraska St 4

Multiplex Plan 4

Owner / Management 4

Accounting & Legal 4

Insurance 4

Marketing Plan 4

Overview & Goals 4

Market Analysis 4

Marketing Strategy 4

Financial Documents 4

Summary of Financial Needs 4

Construction Cost - Level 1 Detail 4

Comparables 4

Loan Information 4

Future Value of the Asset 4

Taxable Income 4


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NOI 5

GIM 5

CRM & Income Approach 5

DCR 5

NPV / IRR 5

Finance Alternatives 5

Conclusion 5


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Executive Summary

Ferguson Family LLC (the “Company”) is a Dundee, Oregon based company dedicated to pro-viding housing for the middle class families in the Portland Metro area. The current goal of the business is to exchange the one unit housing stock in Dundee to multiple units throughout the Metro area.

The company started in 2009 when the President and CEO, Joshua Ferguson, turned his then personal home into a rental home and then purchased a second home in Southwest Portland. This first rental has proven to do well for the company and in a down market, has been able to maintain 100% occupancy since day one.

With low occupancy rates expected in the Portland Metro area starting in 2012 with no antici-pated relief in site until 2015, Ferguson Family LLC realizes now is the time to start growing their portfolio of rental homes.

When comparing current stock of duplexes for sale in the Newberg / Dundee area with an IRR after the 6th year of 43.94% to Sarahplex with an anticipated 30.36% IRR (Internal Rate of Re-turn) ATCFs (After Tax Cash Flow and Sale) due at the sale of Sarahplex on the 6th year, Ferguson Family LLC believe that a change in direction from constructing a multiplex in the city of Portland to purchasing a duplex in the city of Dundee is a better use of funds.

The Newberg duplex is a lower risk that allows for a more negative outlook while still providing a positive return. This can be noted in the risk partitioning of the IRR where 40.8% of the PV comes from operations with the Newberg duplex whereas only 3.8% come from operations with Sarahplex.

A full review, similar to this one, of the Newberg duplex will need to be done to determine if it will be the 2nd step of growth that the company hopes will help spur future growth in the years to come.


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Organizational Plan

Summary Description

Ferguson Family LLC proposes building a triplex at 2403 SW Nebraska St in the Hillsdale area of Southwest Portland. The project will be targeting middle-income individuals in the area and those new to the area. It will include a 1 bedroom that will be accessible by the disabled, a 3 bedroom that includes a large recreation room and a 2 bedroom on the top floor.

The President and CEO of Ferguson Family LLC will choose to live in either the 2 or 3 bed-room, depending on which one rents first, to allow the subject property to be classified as owner occupied for a better interest rate and ease of obtaining financing.


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Property - 2403 SW Nebraska St

The proposed site is located at 2403 SW Nebraska, in Portland, Oregon that is in Multnomah County. These are two separate 7500 square foot lots classified as 1 lot on block 9 in the Bertha subdivision of the Hillsdale area. The APN number is R115812 with an alternate APN of R074301290.

Market value is noted as $140,040 on the tax assessment making it have a total tax amount due of $664.04 annually without improvements. Jane Lundin, the current owner who lives at 1400 Pinnacle Ct, #411 Point Richmond, CA acquired the lot originally in 1998.

The two lots are 50 feet by 300 feet and allowing the proposed structure only utilize half of the available land, leaving the other half for future development.

Two other sites at similar pricing within the same general area have been identified as potential locations if the city building approval and environmental report do not turn out as needed for this project.

Subject Property


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Subject Property


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Multiplex Plan

Plan W30251 from Drummond House Plans is the proposed building. It will be a total of 3540 square feet with 3 units. One will be a 3 bedroom 1 1/2 bath, one a 2 bedroom, 1 bathroom unit and the third a 1 bedroom 1 bathroom unit.

R2 for the city of Portland2 is classified as a low-density multi-dwelling zone. It allows for 22 dwelling units per acre to a max of 32 units or 1 dwelling for every 2000 square feet of land. The city requires a minimum setback for the front of 10 feet, 6 feet for the rear and sides and a 40-foot maximum height all of which will be easily achievable with the size of the proposed building. This includes an 18-foot setback for the carport attached to the building.

The building will be 34 feet wide, 37.6 feet in depth and 31 feet 6 inches in height. This does differ from the current approved building but still fits within the city zoning, R2, for this loca-tion. City approval for the change will need to be gotten prior to the purchase of the land.

To attract prospective residents and lower life cycle costs, the property will be using Energy Star products, have solar panels, have R-38 insulation in the ceiling and will implement many other energy efficient pieces. This will allow the property to qualify for $22,235 in grants and credits through the Energy Trust of Oregon, a group that helps put together federal, state, local as well as their own discounts, grants, credits and deductions for energy efficient building to help the builder or owner take advantage of all possibilities.

1 http://www.drummondhouseplans.com/house-plan-detail/info/1000334.html 2 www.portlandonline.com/auditor/index.cfm?a=53296&c=28197


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Proposed House Plan W3025 by Drummond House Plans


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Legal Structure

Ferguson Family LLC, consisting of three partners, will be creating a separate LLC for Sarahplex as a sole proprietor. It is expected that the loan of the home will need to be done as a personal residence of Joshua Ferguson, however the actual ownership will be an LLC of which he will be the sole proprietor.

The LLC on Sarahplex will allow the property to eliminate any direct tax liability for the entity, allowing any gains to be passed on to Mr. Ferguson’s personal tax liability eliminating any dou-ble taxation. A reduction in any liability for acts and debts is another key area that the LLC will protect the owner and thereby the banks interest.

Heirs of Mr. Ferguson, his parents Christopher and Deborah Ferguson, will receive legal owner-ship of the property as well as all liabilities of the entity should he pass away. This fits in the best interest of the business and the entities that have invested in it as they are the partners in Ferguson Family LLC.

Ferguson Family LLC will be the managing group of the property to add one more degree of separation from the property and the management of the property. There will be no managing fee charged.

Owner / Management

Ferguson Family LLC intends on managing Sarahplex them selves to reduce management cost thereby improving the DCR of the complex. The company believes that the CEO and President, Joshua Ferguson, has the proper experience and knowledge to ensure long-term success for this complex.

Joshua Ferguson has 10 plus years of Property Management experience, is a CPM Candidate with IREM (Institute of Real Estate management), is an active member of MMHA (Metro Multi-family Housing Association), has a Bachelors of Science in Accounting, is working on his Mas-ter of Science in Property Management degree from a tier 1, top 100 ranked University, Drexel University, and currently works for Guardian Real Estate Services, a full service real estate com-pany that manages over 12,000 units, working in the development department assisting with analysis work.


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Accounting & Legal

Ferguson Family LLC has carefully selected both the accounting firm and legal firm that would best ensure protection for this investment. Throughout his years of experience in the Real Estate industry, Mr. Ferguson has learned the importance of good legal and financial advice to ensure the long-term success of the investment.

PricewaterhouseCoopers3 will the accounting firm that will be used. This firm is highly regarded and respected not only internationally but also locally. A bi-annual review of the financial status of the business will be brought to the firm for advice and tax preparation.

The CEO and President, Joshua Ferguson, has access to the top Real Estate Law firm, Bittner & Hahs, P.C.4, in the Portland Metropolitan area due to his employment with a well known, mid-sized Property Management firm. Their focus on real estate, construction and property manage-ment are a perfect fit for this project. Bittner & Hahs, P.C., is a well-respected law firm that is active in the local real estate politics of the community. They will be utilized when any tenant issues, including eviction, are necessary and during the construction process if there are any legal or local political issues needing attention.

For any LLC or general business related questions, David Kracke5 with Nichols & Associates will be used. This will reduce the overall cost of attorney fees for items that are not real estate oriented.

Insurance

Insurance for the property will be done using State Farm Insurance with Corkey Gourley, the agent, in Springfield, Oregon.

The deductible will be $500, liability at $300,000 with an estimated replacement cost of $425,000. Due to the area not being in a flood zone and earthquakes or other natural disasters having not affected the area in over 150 years, no extra ordinary coverage is anticipated. Insur-ance for the complex has been quoted at $708 per year.

3 www.pwc.com 4 www.bittner-hahs.com 5 www.linkedin.com/pub/dir/David/Kracke/?trk=ppro_find_others


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Marketing Plan Overview & Goals

The owner, Joshua Ferguson, and his family reducing the number of units to rent to only two will fill one of the units in the complex. The Southwest Neighborhoods of Portland have positive demographics and growth potential to make the filling of these additional units easier than it would be for many other neighborhoods throughout Portland.

Having both units pre-rented prior to occupancy is the ultimate goal and with no other new pro-jects coming on line in the area for the next two years, the project will be able to stand out from others in a competitive market place.

Market Analysis

The Summer 2010 Barry Apartment Report 6 states that the vacancy rates for apartment complex throughout Portland is 5.1%, even with a negative 2.0% job growth and unemployment at 10.3%. A real recovery in the local market is not expected until mid 2011 and 2012 with apartment con-struction being at record lows until that point.

Currently the City of Portland7 is putting together a plan on how they want to the city mature be-tween now and 2035. The Southwest Neighborhoods section, the location of the proposed tri-plex, of the plan states that there are 29,100 households in the area having 15,700 being families with the average household size of 2.17, being lower than the city average of 2.28. 10,700 of these homes are renter-occupied. The home values at $381,400 are considerably higher than the citywide average of $268,600 following that of the median household income of the area at $70,700 compared to the city average $54,100. With a low score of 56 as a walking score, as determine by walkscore.com8, it fits that 76% of the residents in the area drive to work verses using public transportation, walking or biking. 94% of the people in Southwest feel safe in their neighborhoods fitting in line with the area having only 3% of the cities total crime committed, the second lowest of the nine areas.

Planners are pushing hard to increase the number of affordable homes in the area for middle-income families with kids. The two bedrooms homes at a cost of less than $1000 per month fit right into this goal.

6 Barry, M. D. (2010) The barry apartment report - summer 2010. Report for Mark D. Barry & Associates (Portland). 7 The City of Portland, O. (2009) Southwest neighborhoods, inc - the portland plan. IN Planning (Ed.) Portland, The City of Portland. 8 www.walkscore.com


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The Portland Plan9 estimates that the city of Portland will need 1.2 to 1.6% more homes per year to accommodate the growth of the city. Using this figure, the Portland rental market will achieve a healthy occupancy level of 4% by 2011 as also noted by the Barry Report10. The Southwest section of Portland has a minimum net absorption rate of 128 rental homes per year at this time. With zero rental homes scheduled to be built, this creates a super tight rental market with an an-ticipated vacancy rate of 3% or less by 2012. This makes a 2% growth in income very achiev-able and most likely on the lower side of what market indicators are showing.

Most data about the Southwest area of Portland is positive leaving few objections to overcome for prospective residents. By having the home located within 2 blocks of a bus line, 4 blocks from a shopping center and less than 1/2 mile to schools, the only major objective, the walking score, can be overcome.

Comparables for Sarahplex can be difficult to be found as most complexes in the area are built prior to 1975 and have had limited updating done. Even without the age of the competing prop-erties in mind, the proposed pricing of Sarahplex is very competitive to that around it.

- Comparable 3 bedroom homes for rent as of July 7th 2010.

S A R A H P L E X 8 4 3 S W B R O A D W A Y D R

# 6 1

1 2 4 2 S W T E X A S ( S I N G L E

D W E L L I N G )

S H A D O W H I L L S A P A R T -

M E N T S

Rent Amount $1600 $1575 $1700 $985

Square Footage 1690 1054 1720 1200

Year Built 2011 1968 1960 1972

Pets Allowed Yes Yes No Under 25 lbs

Washer / Dryer Hookups Yes Hookups No

Price per sq ft $0.95 $1.49 $0.99 $0.82

9 http://www.portlandonline.com/portlandplan/index.cfm?c=51427&a=283476 10 Barry, M. D. (2010) The barry apartment report - summer 2010. Report for Mark D. Barry & Associates (Portland).


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S A R A H P L E X R A Z F A M I L Y A P A R T M E N T

5 2 3 4 S W 4 2 N D A V E


M E N T S

Rent Amount $1100 $1295 $875 $910

Square Footage 1180 1200 960 875

Year Built 2011 1985 1973 1972

Pets Allowed Yes No Negotiable Under 25 lbs

Washer / Dryer Hookups Yes Yes No

Price per sq ft $0.93 $1.08 $0.91 $1.04


S A R A H P L E X 5 1 5 2 S W 4 9 T H D R I V E

S P R I N G C R E E K A P A R T M E N T

H O M E S


M E N T S

Rent Amount $800 $749 $639 $830

Square Footage 670 600 600 688

Year Built 2011 2010 1966 1972

Pets Allowed Yes Cat only Yes Under 25 lbs

Washer / Dryer Hookups Yes No No

Price per sq ft $1.19 $1.25 $1.07 $1.21


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Marketing Strategy

During construction a marketing flyer will be made to inform those in the area of Sarahplex be-ing built to create initial awareness of the complex. This will be posted at local stores, the com-munity center and promoted at the nearby farmers market.

Two months prior to finalization of the complex a Craigslist ad will be posted informing future renters of the opening date of the complex. A new ad will be added daily to ensure that it is kept near the top of the daily posting on the webpage. During this same time period “For Rent” signs will be put out on the major boulevard, 2 blocks from the home, and in front of the home to cre-ate interest. The sign in front of the complex will include a box that will contain information on the available homes as well an application and rental criteria.

To broaden the attraction of the available homes, non-aggressive pets will be allowed. There will be an additional $500 deposit and $25 per month charge per pet with a maximum of 2 pets. All pets will have to be introduced to the owner and manager, Joshua Ferguson, for final ap-proval. This is inline with most rentals in the area.

The ads will focus on the location being walking distance to the popular shopping complex nearby, walking distance to top rated schools, easy and close access to OHSU, Oregon Health and Science University, the southwest location, nearby mass transit stops and high efficiency of the homes that include solar panels, radiant heat, Energy Star appliances and tankless water heat-ers.

The $525 allotted for marketing on the expenses will be used for paper, printing, for rent signs and mileage costs for advertising of the community. If the homes are not pre-rented two weeks to the expected occupancy approval date, an ad in the Oregonian, the citywide paper, will be placed.


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Financial Documents Summary of Financial Needs

Ferguson Family LLC will be looking for a construction loan and empty land loan to build the complex as well as a permanent loan. By selling his rental home in Dundee, Oregon, Mr. Ferguson will be able to invest $50,000 in the total project. It is anticipated that the company will have 39% equity, $263,778, in the complex upon completion.

The permanent mortgage is anticipated to be a 30-year conventional loan at 4.47% obtained through Oregon Community Credit Union with a monthly mortgage amount of $2,542 not in-cluding taxes and insurance.

Following the projected income and expense level using the aforementioned mortgage desired, Sarahplex is expected to have a positive BTCF (Before Tax Cash Flow) of $567 in the first full year (2013) giving it a DCR or 0.98. The project shows great promise start in the first year of service.

Construction Cost - Level 1 Detail

The Level 1 Detail of cost outlines the anticipated cost for each category for construction of the complex. Mr. Ferguson is anticipated to be the general contractor working with the U-Build-It11 program to assist in making sure the project is completed on time and within budget.

The building will use mid grade materials with an emphasis on energy efficiency. This includes using appliances and other energy saving devices that offer grant money through the Energy Trust of Oregon. The running estimate for the project is $347,679.

11 http://www.ubuildit.com/


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Comparables

Three comparable triplexes that are located less than 3.6 miles from the subject property were used. These will be used throughout the report for comparisons to the property being proposed.


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Loan Information

Ferguson Family LLC will be pursuing a conventional loan through Oregon Community Credit Union upon completion of the project. During the construction of the project, a construction loan will be gotten from Oregon Community Credit Union. This loan will be for 9 months and will have a 7% annual interest rate charge along with a 1% loan fee. No payments of the loan will be made during the construction phase and the cost of the loan is built into the total cost of construction.

The seller will carry a note for the land at 10% interest for the 9-month building period with a $0 loan fee.

The permanent mortgage pursued will be a 30 year fixed rate mortgage at 4.47% (rate as of 8/7/2010)12 with 0 points paid at closing and a 1% loan fee. The mortgage is expected to be $2,296 per month not including taxes and insurance.

12 https://oregoncommunitycu.mortgagewebcenter.com/Default.asp?bhcp=1


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Future Value of the Asset

The average per square foot cost of the three comps is $191.78. Using that as the basis for de-termining the estimated PV (present value) after construction, the subject property is valued at $678,904. It is expected that there will be no increase in value during year one and two and starting in year three the property will gain 2% in value per year.


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Taxable Income

Since this complex will be the personal residence of Joshua Ferguson, the President and CEO, it will not be taxed when sold. With the property being under an LLC any profits will be taxed at the personal level of Mr. Ferguson at an anticipated amount of 28%.

Even if all three units where rented instead of Mr. Ferguson living in one, thanks to depreciation and interest deductions, there will be no taxable income for the first seven years which is one year beyond the time frame that Ferguson Family LLC intends on holding the property.


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NOI

Gross income is expected to be $42,000 the first full year (2013) and to grow 2% per year in sub-sequent years. With a projected 5% vacancy rate Sarahplex is expected to have the EGI (effec-tive gross income) exceeding $39,000 in the first full year and with operating expenses hovering around 34% to 35% of the EGI for the life of ownership for the company, the NOI should exceed $26,000 on the 2nd full year and beyond.

General Administrative expenses will cover professional fees, landlord association fees and any additional administrative costs, which are anticipated to be low due to the owner managing the property. Repairs and maintenance are priced with the assumption all work will be done by an outside contractor at $35 per hour. Any utilities due will only be from vacant units, as all utili-ties will be charged back to the residents directly. Marketing costs are noted in the marketing section of this report.

A total variable expense minus utilities is equal to one months rent to determine the estimated variable expenses.


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GIM

The GIM (gross rent multiplier) is in the middle within the comparable properties found at 16.16x during the first full year (2013) as compared to 15.58x, 16.82x and 16.65x respectfully.


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CRM & Income Approach

At 0.0379 for the R Value (Reversion Value) during the first full year (2013), the proposed site is just below the three comparables at 0.0424, 0.0410 and 0.0384. This can be attributed to it have larger and newer units.

Using the Capitalization Rate Method with the sale happening on the 6th year, the property has a terminal value of $1,590,953.


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DCR

With a negative BTCF (before tax cash flow) of $1,847 during the first full year (2013), Sarahplex will achieve a DCR of 1.07 moving down to 1.01 on the sixth year, the expected year of sale. This gives the property an equity dividend rate of -3.69% during that first year and -0.48% on the 6th year.


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NPV / IRR

The NPV (net present value) for sixth year is -$49,729, and when the NPV is add to the ATCFs (after tax cash flow with sale) it is $154,951 returning an IRR of 21.47%. This is in the range of returns that the owning company is looking to achieve.

When looking at risk partitioning of the IRR, it is noted that 3.8%% of the cash flow will come from operations and 96.2% will come from the sale on the 6th year. This is out of the acceptable range for the company.


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Finance Alternatives

A variable mortgage as well as an interest only balloon mortgage have been studied for this pro-ject, and they do not show a clear advantage.

The variable mortgage is expected to return a DCR of 1.23 in the first full year (2013), a NPV of $148,917 upon sale on the sixth year and an IRR of 14.10%. All indicators show that it is less favorable than the conventional loan.

The interest only balloon mortgage is expected to return a DCR of 0.83 in the first full year (2013), a NPV of $150,824 upon sale on the sixth year and an IRR of 24.42%. The IRR and DCR are better using this method of financing, the NPV is not. Due to the possibility of a sale not happening upon the sixth year in time for the balloon payment being due, Ferguson Family LLC prefers the less risky 30-year conventional loan.


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Conclusion

With the completion date of this project scheduled to be during the full swing recovery of the economy, having the Southwest area of Portland have a net absorption rate of 128 units with no other multiplex projects scheduled and a shortage of middle income housing available in the neighborhood, we anticipate this project could be highly successful.

When comparing this project to purchasing currently built stock in Newberg, we believe this would not be a good investment for Ferguson Family LLC.

The operating expenses for the older property in Newberg is expected to be in the 10% to 11% range as compared to 34% to 35% range for Sarahplex due to the much higher property tax rate. The extra cost of the land and building continue to highlight why the Newberg complex is a bet-ter purchase with a GIM of 8.89x verses the 16.16x GIM expected for Sarahplex. Using the Capitalization Rate Method, the Newberg duplex indicates having a Reversion Value of 0.0929 whereas Sarahplex will be a much lower 0.0372, at the end of the sixth year. With a good DCR of 0.52 and a positive equity dividend rate of 22.37% in the first full year of the Newberg duplex verses the 1.07 DCR for Sarahplex and a negative equity dividend rate of 3.69%, it becomes clear what property will provide a better return on monies invested. There is a higher ATCF (af-ter tax cash flow) of $17,847 for Sarahplex because the initial investment is expected to be $18,000 more. With that noted, the actual IRR (Internal Rate of Return) for the Newberg duplex is a much better 39.28% compared to Sarahplex at 21.47%, using the ATCFs (after tax cash flow with sale). The only advantage Sarahplex has over the Newberg duplex is an ATCFs that is $213,149 as compared to the Newberg duplex of $175,868.

Considering the risk involved with the negative cash flow, the lower expenses, a DCR, GIM, cNPV, IRR and CRM that are not as good as that of the Newberg duplex, the Ferguson Family LLC believes this project is not one they should move forward with.