Executive Summary

Letter of IntentThe following is a solicitation to land owners whom may be interested in a joint venture opportunity with a developer in order to get rid of their land and make some extra profit. The proposal will depict a researched development opportunity within the South Florida real estate market that is not site-specific. Despite economical housing trends, there are several niche markets in the area that have a great deal of unique potential.

A partnership is requested from the landowner in which they will receive a preferred return that should exceed the current asking price of the land. The underlining and ultimate goal is to have as little risk as possible for each of the players. To do this we propose to create a 501(c) tax-exempt corporation to better secure our financial hurdles. The project can either be held for an undetermined amount of time or sold immediately following completion based on the landowner’s discretion.

If accepted, all documentation associated with the land will be used to determine subsidy eligibility and environmental testing. Upon passing approval, the value of the land plus a guaranteed 12% annual rate of return will be guaranteed to the landowner. At any point before construction the landowner may pull out if not satisfied. If continued, the land will be used as a down payment for the construction loan. If the proposal makes it to this stage, it will have endured strict guidelines that even with the worst-case scenario of bankruptcy, the to-date investment toward the project should by all means exceed the collateral owed to the lender and the landowner may cash-out. The following pages are intended to highlight the appropriate market demands and potential risks accompanied by ways of mitigating that risk.

The same letter has been submitted to ____________________ to be distributed to other possible landowners. We can only select one site, and time is of the essence. Please respond at your earliest convenience.

Development ProposalThe proposed project is a four story multifamily apartment building comprised of 24 units and 10,000 sq. ft of ground floor retail. It will be of modular construction with the foundation prepared to allow for additions or modifications over time. Based on the latest research, it will be designed to appeal to a Hispanic market. So that we do not underestimate the impact of the current down market, we propose all of the residential units to be affordable for low-income families. This will make the project eligible for reimbursement of up to 100% of the construction cost. As the market analysis will explain, there is a long wait list for affordable housing which will guarantee occupancy in our project. The general process of our cost reimbursement will be by applying for the Low Income Housing Tax Credits (LIHTC) through the Florida Housing Finance Corporation (FHFC) and then sell them as tax alleviation for the highest bidding investor.

Joint Venture AnalysisThe joint venture can be structured in a manner of ways and can be negotiated in greater detail based on the landowner’s primary objectives. Since LLC’s are non-recourse, any property or estate of the parties that is not directly associated with the LLC will be protected by law. Financial Insurance for Real Estate (FIRE) can be purchased to secure the involved capital. Possible methods of establishing the joint venture are as follows and are not limited to this list:

1. Create an LLC between the two parties, this would essentially work towards the landowners best interests as if something were to happen (default, a suit, environmental issues) by law it will be non-recourse for the members; the LLC would have full responsibility and the LLC simply bankrupts. However, even after applying worst-case scenarios and excessive contingencies, our calculations show hurdle-rate returns near 12%.

2.    If the landowner does not want any responsibility of the venture for any reason, then they may wish to sell the land for a minimal amount to a trusted shareholder, agent, or family member. That person or group could then do a side contract with the landowner reassuring the landowner’s ultimate compensation after the project has stabilized.

3.   Create a general partnership with our already established LLC and the landowner will serve as a silent partner. (Option 2 is still applicable.)

4. If the landowner is a corporation, LIHTC may be sold to the landowner by entering into a limited partnership or forming a limited liability corporation with 99.99% of the profits, losses, depreciation, and tax credits being owed to the landowner.

No matter the scenario, preferred returns will always be allocated to the landowner and will see compensation before anyone else involved.

Other details and terms of the joint venture can be negotiated, such as a Purchase Money Mortgage a loan taken back by the seller of the land; as the buyer develops the land, new ‐financing is obtained and the seller is paid off. Leasing the land from the seller may also be considered based on potential terms.

In conclusion, we are not intimidated with creative forms of accomplishing this. Any other options are more than welcome.

Market AnalysisTarget Consumers: retirees, teenagers, and Hispanics Florida, along with Arizona and Georgia are the fastest growing states in the nation. The growth of Florida is due in large part to the huge influx of Baby-Boomers retiring near the Sunbelt. Although there are record numbers of wealthy retirees, not all are as fortunate and the demand for affordable housing will continue to grow with this bracket of patrons. Additional demand for rental units will also come from the Echo-Boomers; born 1977 through 2008. The prime age of renters in Miami is 20 29. ‐ The peak of the echo-boom in 1990 released 4.3 million people into society who will be 20 near the estimated time of completion of this project. These individuals will be looking to move away from parents to live affordably with friends. However, the leading drive that makes Florida one of the fastest growing states in the country is due to immigration from Latin American countries because of its strategic international access. In Miami immigrants contributed to 40% of household formations between 2000 and 2005. Twenty-five percent of renters are foreign born. In addition, two out of three renters in the City of Miami are minorities.1 During 1994 to 2004, the number of minority renters rose by 3 million households, offsetting a comparable decline in the number of Caucasian renters.2 The graph below depicts county statistics from the US Census Bureau.

The Untapped Low-Income Apartment MarketDespite the current trends on mortgage foreclosures, the apartment market remains strong. To reinforce this, the latest CBRE reports indicate that apartments are currently the second best market while condominiums are the least successful of all sectors. Current

1 MiamiDade.Gov2

apartment stock in Miami is insufficiently counterbalancing the distressed 30,000 homeowners from just last year that had to foreclose. The state lands in third for most foreclosures in the nation. It is obvious that these people will need short term means of housing while looking for other homes or simply just cannot afford a 30-year mortgage with their salaries. Sure enough, many of the oversupplied condominiums in Miami have responded by converting to apartments to reflect this offset, however the quality of condominiums when first built are significantly of better quality than that of apartments. This in turn suggests that they are only filling the demand for high-priced luxury apartments and leaving the lower-income apartment market untapped as it steadily builds momentum. There is much lender scrutiny due to the oversupplied market, yet this investigation has unveiled a niche market for low to middle-income short-term housing for minorities in Miami.

Profitable RetailWith an area of more than 5,000 square miles, and a population surpassing 5.5 million full‐time residents, South Florida is one of the largest consumer markets in the US. Miami is the seventh largest metropolitan area in the US with an average household income of over $72,000. Many international companies enter the United States by establishing their first operations in South Florida. The cost of operating a business in Miami is highly competitive compared to other major metropolitan areas. There is a low tax structure with no state or local income tax, and corporate income tax is just 5.5%. Property taxes are currently among the lowest of major US metropolitan areas. Retail hinges on income generating communities. The buying power for our proposed retail can be calculated by figuring out the catchment area of the employed population, which we can assume is within a radius of a two-hour drive. This would encompass close to three million people who have the ability to spend roughly 30% of their Average Median Income of $55,900 annually on housing and leaves $33,540/12months=$2,795 * 3 million people = $8.4 Billion per month just floating around the general area for products and services.

Local Funding SourcesFlorida is being federally funded to meet its housing requirement demands and as a result has created several services to distribute allocated funding to developers. The City of Miami requires a minimum of 15% of units within a 10-mile radius to be affordable. The Economic Development Department created a Community Development Entity (CDE) for purposes of applying and allocating New Markets Tax Credits (NMTC). The NMTC program is recognized for steering low interest, private capital into distressed communities to acquire capital for commercial and residential projects that are hard to fund. Similarly, the Hampton Roads Venture (HRV) is a community development investment firm that has partnered with the City of Miami to help attract private sector investment capital, specifically towards innovative real estate projects in lower income neighborhoods. They are expected to apply for a $75 million allocation exclusively for Miami in which this project could tap into. Last year, the city helped fund 10 projects that represented 1,104 new units and over $277 million in additional affordable housing projects. The city has a goal to develop $1 billion in affordable housing by 2010, and since 2000, they have already spent close to $600 million to show their commitment.

Public and Private DevelopmentPublic and private development may be requested from the local government, where if you provide some public space, local art exhibition space, child or health facilities, or just something relatively good to the general public, the city can do a number of different things such as expedite the application process, increase FAR, zoning variances, and alleviate taxes.

Enterprise and Empowerment ZonesIn addition to all of these opportunities to implement toward the project, Miami Dade ‐County has allocated regions within their political map as distressed areas. These areas have been designated as Enterprise and Empowerment Zones. An Empowerment Zone is a federal targeted to create economic opportunities. Businesses locating there will obtain many governmental benefits such as sales & corporate tax credits and tax exempt bond financing. It is considered, without a doubt, the most powerful engine for the economic revitalization of inner city areas. Doing business in Enterprise Zones will also qualify for tax exemptions among many other things. There are several sectors where the two zones intersect and will hold much potential for the proposed ground floor retail of the development proposal.

Federal Funding SourcesOther subsidies that may be available are from the IRS Treasury such as income tax assistance, reduced real estate taxes, mortgage interest alleviation, and of course the largest subsidy of all, the Low Income Housing Tax Credit (LIHTC) which will serve as the guiding source for the development. Close to half of multifamily projects are funded in part by LIHTC. The project at hand holds much merit oriented towards this source of funding. Resident-Based Section 8 and Site-Based Section 8 is also available from HUD and will be applied for in conjunction to the other subsidies. In 2000, Miami assigned an exclusive “in‐house permit expediter” for affordable housing and has a Universal Application Cycle for many other subsidies.

Risk Factors and Strategies for Risk Mitigation

Economic VolatilityDespite record breaking foreclosures and the oversupplied condo market with another 40,000 units coming online next year, Florida is nevertheless one of the fastest growing states in the nation and will recover smoothly as interest rates decline and job growth picks up. The market has reached or is nearing the bottom where there is nowhere else to go but up. This is the most opportune time in decades to get involved with real estate. However, to evermore safeguard our interest during this time of volatility in the market, affordable housing is distributed in a lottery fashion for a long waitlist of people. If the economy is bad, then the list will increase, thus reassuring a steady income for the project. To continue mitigating the risk of the economy, the proposal is not site-specific in order to expand the geographical area and demographical markets that may have unique potential

in its vicinity. Despite whatever is happening to the economical market, real estate will always be a direct reflection of its local context, hence the term “location, location, location.”

Political RisksThere is little political risk because there is predictability and transparency in the governmental systems. Having well designated laws as they have in Miami as well as the new Miami21 rezoning master plan are beneficial in order to eliminate uncertainties. A large part of the population is Cuban and statistics show that tenants are expected to come from the local area.3 The mayor of both Miami (Manuel Diaz) and Miami-Dade County (Carlos Alvarez) are both Cuban born Hispanics ready to make a difference in the need for housing. Mayor Diaz has recently been reelected and has put housing as a top priority. According to a statement given by the mayor earlier this year, they will encourage joint ventures between for profit developers and non profit agencies, taking politicians out of ‐ ‐the contract award process. Special considerations for several subsidies are given to developments that target specific groups and areas such as this one.

InflationAs more foreclosed assets come online at affordable sale prices and price of materials keeps increasing, it would appear to make sense to rehabilitate or add-value to distressed properties. In the state, site costs keep rising and soft cost are increasing due to the complexity of new and changing laws and codes. Yet labor costs have remained stable in comparison. This is due in large part to the fast growth of immigration. The argument is that while there is less up front risk and costs, if the property will be held for a long period of time, which we are hoping is the case, then the cost of maintenance and upkeep may prove to be less lucrative than a new development on raw land that will have a longer, more durable lifespan. Creating the development from scratch will also allow for a proposed overdeveloped foundation and strong structure to tolerate the opportunity to add to the building if the project proves extremely successful.

Lender ScrutinyLenders are being very careful with their money, but the truth of the matter is that they need to invest their deposits into something or the value of their securities depreciates as inflation increases. Their main concern is high-risk ventures that are usually associated with large-scale developments that can be several millions of dollars. It is only to their best interest leveraging smaller low-risk opportunities that can be easily evaluated and calculated for risk without much capital upfront. Lenders are also allocating variable rates that are unfavorable in an unstable market, yet the current low interest rates on loans and mortgages will positively impact the project’s budget. Leverage risk will further decrease this year because it is a highly liquid and stable debt market. Lower interest rates and the weak dollar will also help to alleviate the current economy that may be considered a risky.

3 Joint Center for Housing Studies

Insurance PricesInsurance risk seems to be an issue in the city; both financial insurance and property insurance. Property insurance is due to a devastating amount of natural disasters. However, it is a high priority for the governor to have some insurance alleviation signed this year that will reduce the overwhelming costs. As for the financial insurance, CBRE states that a possible $32 billion reinsurance will improve availability for banks such as Citizens to expand their policy offerings due to the direct competition with other financial institutions that this will create.

New Construction JustificationThe cost of new construction is also mitigated by using modular home manufactures. Currently two prefab companies, Genesis Homes and Southern Structures have been instrumental in the development of the design to accurately portray efficiency and constructability. They have also provided competitive bids at around $50 per square foot. The modular construction is guaranteed to be of LEED Certification quality thus more easily gaining approvals and accelerating the city application process. At the landowner’s request, Performance Bonds or Completion Bonds may be requested to further reduce construction risk; otherwise construction will be paid monthly on Time and Materials. The latest Building Information Modeling (BIM) software will be used to more accurately communicate between LLC, municipalities, and contractors which in turn will improve transparency for other parties, reduce unforeseen complications like change orders, and reduce the costly construction time.

CompetitionCompetitive properties may be developed as soon as this niche market is more closely examined by large institutional firms, thereby increasing the supply thus increasing vacancies. This risk can be mitigated by acting as soon as possible. Furthermore, statistics show that smaller buildings are in higher demand than large-scale apartment complexes, which is beneficial because this project can be considered undersized.4

Application ProcessThe complexities involved with applying and implementing affordable housing may be considered a time risk. However the demand for affordability will always exceed supply.5 Affordable housing is a great way of minimizing uncertainty risk. Government assistance will minimize the developer’s soft costs which has significant influence in the overall total development cost. The subsidies will cover such line items as impact fees, property taxes, ‐and even marketing.

VacancyThe risk of not having a proper demand is important, yet affordable housing tenants are guaranteed as there is a long lottery list which will ensure occupancy. We are only introducing 23 units into the market, which is relatively nothing compared to big developers releasing several hundred units in one ribbon cutting. One and three bedroom units seem to be the most popular, thus the project will incorporate a reasonable 4 Joint Center for Housing Studies5 NLIHC.org

distribution of each. For individuals residing in the market rate units, the marketing of the property will be a joint effort with brokers, lenders, and any investors which should adhere to the current demand. Demand may strengthen even more if interest rates decline or job growth picks up. Elderly rental housing may be a reliable source, however this is old information to major developers who have already began exceeding the demand for that market too.

Securing Retail TenantsThe interior layout of floor retail will be transformable. The partition walls will be dismountable or relocated based on the tenant’s preferences. This allows flexibility in allocating occupancy and reduces the cost of tenant improvements during turnovers. It could be either one unit rented to a mid-sized franchise like CVS or Walgreens or three specialty stores. The rear will allow for a loading dock with trash disposals that can be shared with the residential tenants. It is of upmost importance to provide ‘Class A’ accommodations for the retail because it a superior market currently in Miami and a very profitable sector in real estate in general. This is especially true when located on the ground floor or near public circulation as may be the case. To further reduce risks, the commercial tenants will be secured before construction commences. Fortunately, there are already some interested medical tenants who specialize in eye-care that would enjoy the ability of possibly working in the same building they would live in.

Holding RiskThe ability to adapt and take advantage of short term downturns and to be able to hold ‐property long term has been said to be the key to success in real estate. ‐ Some people would argue that holding the asset for a long period of time is a bad idea because of the ‘opportunity costs.’ In other words, cash in pocket now is better in order to reinvest it into greater opportunities. The fact of the matter is that the value of the asset will keep appreciating, the rents will keep increasing to adjust for inflation, and the property taxes and finance costs steadily decrease. After twenty-seven and a half years the depreciated value of the asset will be completely tax exempt in which the rental income will be strictly profit. Another method to mitigate the long-term financing is through operations cost, by applying triple net leasing. Another method is an expense stop. This is a predetermined amount that the LLC will not pay in excess of from operations; the tenant will take on the additional expenses. To improve the long-term affordability of the building, it will not use cheap alternative materials because good efficient materials will reduce the long-term cost of operation, maintenance and replacement reserves.

Unforeseen Circumstances If the project can no longer support loan payments, it is possible that the lender can take the title of the property without filing a default “deed in lieu of foreclosure”. By using this, ‐both parties may save time and money with the foreclosure costs. This would be ideal, but the types of default procedures will vary by institution. If the parties are in dire need of the equity to reinvest into other opportunities, then with a mutual agreement, the asset can be sold based on the existing cap rates.

Management TeamTo present absolutely all possible risks involved in the project, we will now disclose risks associated with our company. We are a team of four graduate students from Harvard and MIT’s midcareer level and real estate development programs focused on creating mixed-use developments throughout South Florida. Although we do not possess a track record, we have fresh academic expertise and local connections to create a quick and smooth yet lucrative project. To mitigate any uncertainties of our company’s new standing, we will benefit the partners and investors by not including the 10% developer’s fee. We also plan to manage the housing thus also alleviating the 6% management fee. Vacancy, although currently minimal at 3% will be assumed to be 10% to mitigate for any inefficiencies in our calculations. All contingencies have been placed at 10% where the norm is 5%. Replacement reserves are excessive to ultimately absorb any unforeseen complications as we begin work in the ‘real world.’ All of these discounts combined will highly improve the survival of the project. However, once the project is deemed a success and is generating stable income, one unit will be taken into exclusive possession at no additional cost to house the on-site management.

Marketing and Sales Plan

OpportunityAs mentioned earlier there is $400 million destined for investment toward the development of affordable housing to be used by 2010. The current slow trend on real estate is expected to gain some more momentum in the years during this project. If interest rates keep declining as they have, and job growth continues to grow with the rise of immigration to the state, then this project should prove to be a successful and lucrative

venture. The soon to be oversupplied market of Class A apartments will leave a big business opportunity for the less expensive apartments.

ObjectivesThe financial goal of the venture will be to get a 12% leveraged IRR. Even though it may be considered low by some standards, it is a direct reflection of this low risk venture. The rent from residential will be further described in the Financial Analysis of this report. The aim for leasing the retail is either to be introduced at $35 per square foot or be based on 5% of that retailer’s monthly income of sales are, such that NOI x 5% = rent. The greater sum of the two will be the method chosen. Our service objective will be to create a better standard of living for distressed families in Miami and use this project as a launch pad for more low-income developments that will stimulate communities and ultimately raise the quality of life for the families and surrounding neighborhood.

StrategyStatistics show that 95% of people who apply for apartments previously resided within one mile of that location, and even more so for low-income. Four out of five apartment tenants come from the local area. A major factor is that the population of Miami is 35% Cuban. Because of this marketing will be done strategically toward that market sector. The building as a whole will have a whimsical design reminiscent of typical architecture found in the downtown areas of San Juan and Havana. The structure it’s self will be considered a Garden Style Building because it is below five stories in height and will not require an expensive elevator.

Key PlayersLocal attorneys have already been identified to facilitate any discrepancies. BMC Capital will most likely serve as the lender for the construction loan, and permanent loan will possibly be obtained from the City of Miami Public Bonds. Southern Structures or Genesis Homes will do the construction and the government will market the product.

LocationDowntown areas have the greatest demand for housing and will be sought after during our selection process of a site. However, waterfront property will be on the top of our list. Studies show that demand will always stay strong for waterfront properties. Waterfront development may be considered expensive in the front-end, but in the long run it is where the majority of humans would prefer to live. Not just for the vistas but access to the water is important, thus boat slips or swimming areas would be a major plus for the project. Areas deemed ‘distressed’ by the city would also complement the investment returns of this venture while doing ethical good and will be highly prioritized.

LIHTCWe propose 100% low-income units yet not all the units need to be affordable. To be eligible for the maximum amount of local government benefits, 20% of the units need to be affordable to individuals that make less than 50% of the monthly Average Median Income

(AMI) of $4,100.6. However, by providing all affordable units will allow for 100% of the construction cost to be reimburse from the LIHTC.

Financial Analysis

Breakdown of LIHTCAll low-income tenants will be charged 30% of 60% of $55,900 (AMI) which is depicted in the chart below using the HUD’s designated Family Median Incomes (FMI).

The project’s eligible amount will be 100% of the construction cost which is $ 3,384,122. The full amount of the credits can be sold at about .85 cents on the dollar to thrifty investors, banks, or Fannie Mae and Freddie Mac. It will be reimbursed at a rate of 9% or $370,350 annually for 10 years.

ProfitsBeing a 501(c) non-profit organization, the project will be tax-exempt and profits will be reinvested toward the corporation only after the land has been fully paid off along with a 12% annual interest gain. As shown in the table below the first year of operation is assumed to have $341,403 in profit.

Tax-exempt status will also allow greater chances of allocation rights as the government has a portion of their allocations “set aside” for non-profits. By financing through the City of Miami Public Bonds will also add preference to this project during the city’s allocation rounds. The project will be required to stay affordable to tenants for a minimum of 15 years. This means that an investor wishing to exit the partnership before the end of the compliance period may do so by posting a surety bond to avoid credit recapture.

Have in mind the land owners ultimately gain will be repayment of the original value of the land plus 12% interest gained per year for every year it has not been paid back in full. The following is just to illustrate the potential for the landowner who wishes to stay involved long-term.

6 NLIHC.org

10 Year Projected Returns

Sources and UsesFor your reference, depicted in the chart below, the sources and uses have been separated on a month-to-month basis during construction.

Legal DisclaimerThis document is intended to serve as a detailed explanation of the proposal and is by no means a binding contract if one should wish to pursue it.