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Business Plan

  1. 1. Cole Real Estate Holdings Marketing & Strategic Business Plan Acquisition and Leasing of Residential Property in Northwest Atlanta January 2008 Cole Real Estate Holdings, LLC President & Managing Partner Garrett D. Cole, P.E. 4601 Ethel Springs Trail Mableton, GA 30126 Cell 404.514.9088 Fax 770.426.0303 E-Mail
  2. 2. TABLE OF CONTENTS Cole Real Estate Holdings, LLC Business Plan 1 TABLE OF CONTENTS....................................................................................................... 1 2 EXECUTIVE SUMMARY .................................................................................................... 2 3 GENERAL COMPANY DESCRIPTION ........................................................................ 4 4 PRODUCTS AND SERVICES ........................................................................................... 7 5 MARKETING PLAN .......................................................................................................... 12 6 OPERATIONAL PLAN...................................................................................................... 17 7 MANAGEMENT AND ORGANIZATION ................................................................. 21 8 FINANCIAL PLAN ............................................................................................................. 24 9 APPENDICES ....................................................................................................................... 27
  3. 3. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ 2 Executive Summary Plan Summary Cole Real Estate Holdings (“CREH”) proposes to bring together investors and potential homeowners through lease-option agreements and commercial financial institutions. CREH will seek out and contract to buy existing residential properties or construct new residential properties. Investors will provide property financing with a financial institution and the necessary seed money for down payments or renovations. This seed money will be the basis of the investment for which a fixed rate of return will be paid to the investor. CREH and the investor will form a partnership via a Limited Liability Corporation (“LLC”) to govern the relationship. CREH will manage the advertising and marketing of the residence, screening and selecting of potential applicants, provision of all property management services, and maintain the administrative services for the partnership’s corporate company (including required tax filings and accounting). Targeted Market Segments CREH will provide affordable, clean residential properties to interested tenants for lease-option. The tenant will have the right to purchase the property after three years at an agreed upon price. During the leasing phase, tenants will have an incentive to maintain the property and improve their respective credit situation in order to exercise the lease-option at the end of the term. At the end of the term, either the property will be sold to the potential tenant and the partnership between CREH and the investor dissolved, or the property will be re-marketed to a new tenant for another lease-option. PAGE 2
  4. 4. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ CREH plans to appeal to middle-income families in the northwest metropolitan Atlanta area (Austell, Mableton, Powder Springs, Smyrna, Marietta, Kennesaw, Acworth, etc.) with incomes ranging from $40,000 to $80,000 per year. Pricing points for residential properties range from $100,000 to $180,000. CREH plans to acquire and lease out approximately 25 homes in the next five years. CREH’s mission is to provide families with clean, affordable housing in good neighborhoods, financial education to improve their future credit standing and financial condition, and the ability to own a piece of the “American Dream”. Investor Participation CREH will provide the investor with a fixed rate of return on the seed money invested, and make a fixed rate, tax-deductible donation, in the company’s name, to a charitable organization designated by the investor. CREH’s management team has extensive experience with property management, residential real estate acquisition (new construction and renovation), and tenant lease-options. This is an excellent opportunity for investors, potential homeowners, and CREH to combine strengths and provide a win-win opportunity for each of the stakeholders, while contributing to a worthwhile charitable organization at the same time. PAGE 3
  5. 5. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ 3 General Company Description Description of CREH Program Cole Real Estate Holdings (“CREH”) will perform real estate services by purchasing or building residential properties, specifically single-family homes, and offering lease- options to potential buyers who want to own a home but may not have sufficient creditworthiness to obtain a loan from a commercial financial institution. In order to provide financing to the potential homebuyers, CREH will partner with investors who will hold the underlying property mortgage while earning an attractive rate of return on their investment. CREH’s mission statement is to offer good people affordable housing and the “American dream” of home ownership, provide investors with an equitable rate of return, and maintain the highest standards of integrity for our customers and shareholders, while giving back to the community through contributions to essential charitable organizations. The company’s goal is to provide 25 families with homes in the northwest metropolitan Atlanta area during the first five years of operation. CREH’s primary business philosophy is to create a win-win scenario for people who want to own a home and investors seeking an equitable return in the real estate market, while benefiting local charitable organizations. The secondary philosophy is to create and maintain excellent relationships with homebuyers, sub-contractors, company employees, vendors, and the investors. CREH’s specific target segment for this service and product will be the middle- income segment and secondary market for high credit risk tenants seeking home ownership. The target segments are more thoroughly described in the Marketing Plan section of the business plan. Home ownership, as compared to renting, has been on the rise for several years due to historically low interest rates. Real estate in Atlanta has been on a progressively PAGE 4
  6. 6. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ upward trend, for the most part, for the past 15 years. During the same time, metropolitan Atlanta has experienced rapid growth in the general population and a continued expansion of residential areas. There are a significant number of people in the middle-income strata that do not have an established credit history or are not able to utilize commercial financial institutions for home mortgages. Particularly given the rising home foreclosures due to sub-prime and interest-only lending risks not properly managed, commercial financial institutions are tightening lending requirements once again. Because of the tightening financial lending market, a growing secondary market is becoming established where individuals are offering private home mortgages to eager buyers. With the expectation for continuing job growth in the foreseeable future and strong population growth in Atlanta, affordable housing will continue to be in demand and so will the interest in home ownership. CREH will primarily focus on serving middle-income Americans with good employment prospectus. Many commercialized lenders, real estate brokers, and sellers ignore the typical individuals with below average creditworthiness. CREH will actively market and solicit these individuals as potential buyers of our homes. Utilizing good customer service and fair practice dealings, CREH will build a reputation within the community as a fair company with whom to conduct business and will strive to provide “second-chance” opportunities to families who are willing to work diligently to improve their credit and financial standing. Corporate Description of CREH CREH’s personnel bring together a unique combination of home construction, renovation experience, and rental management, in addition to the relationship network that has been established with financial institutions, real estate brokers, and sub-contractors. CREH’s management team has extensive experience in managing rental properties, real estate operations, and building relationships with the local community. CREH is a limited liability corporation formed under the laws of the State of Georgia for the purpose of managing residential investment properties. CREH has also acquired the necessary Employer Identification Number (“EIN”) from the Internal Revenue Service (“IRS”) to act in compliance with all federal and state tax regulations. The LLC will form the basis for establishing other business partnerships PAGE 5
  7. 7. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ between CREH and potential investors for future projects. Each real estate project will be a joint venture between CREH and a private investor, and a separate LLC will be created to govern the project. CREH corporate will handle all administrative and overhead operations related to the administration of the new partnership. CREH will handle all accounting, federal/state reporting requirements, property management activities, and all other related overhead operations of the partnership. PAGE 6
  8. 8. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ 4 Products and Services Product/Service Description CREH will acquire single-family residential properties either by purchasing homes and performing the necessary renovation procedures or constructing new homes. These acquisitions will be made primarily in Cobb County or immediately surrounding counties (Douglas, Paulding, Cherokee, or Fulton). Primary target acquisitions will be distressed properties that are below market value or vacant land that is ideally suited for constructing multiple single-family homes or possibly townhomes. The pertinent feature for either acquisition method is to have homes that are in certain, heavily concentrated, but desirable, middle-income communities with a secondary target market for blue collar/semi-professionals. Specific price point thresholds will range from $100,000 to $180,000, depending on the particular area and amenities (school districts, access to major interstates, local infrastructure, access to retail centers, etc.). Once properties are ready for retail sale, a marketing and advertising campaign will be put in place. Ads will be run in local publications, including the Internet, and directionals placed at key intersections. The primary focus will be to inform the community that a home is for sale with no qualifications necessary for home ownership. Responses received to marketing efforts will be handled by members of the management team who will inform the potential homebuyers of the home purchasing opportunity and answer all of the buyer’s immediate questions. The next task will be to execute lease-option agreements with potential homebuyers, provide the appropriate property management activities to maintain the property, and collect monthly leasing revenues. Typical lease-option agreements will have: (1) the buyer provide 3-5% of the purchase price as a down payment, (2) monthly rent prices set at fair market value plus escalation, and (3) a three-year term before the buyer can exercise the option to purchase the home. Of course, each situation will be PAGE 7
  9. 9. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ handled on a case-by-case basis and treated appropriately. For example, a potential homebuyer that wants to put more than 3-5% down would be allowed to obtain a monthly lease payment slightly less than market value. However, in no circumstances will the company accept anything less than 3% down. CREH Services Property management activities will involve property procurement, property advertising, managing the leasing-tenant relationship, maintaining and repairing property, collecting lease payments, enforcing the lease, evicting bad tenants, and all other responsibilities involved with managing the property during the leasing term. The management team of CREH will administer the property management activities, along with property procurement and property disposal. Administrative duties that will be performed by the management team include all corporate governance of the newly established partnerships between CREH and the investor. Several examples of the administrative responsibilities are formation of an LLC in the State of Georgia, including all necessary operating agreements and buy-sell agreements, appropriate tax filings with federal and state entities, annual profit-and-loss statements for investors, and dispersal of funds to investors. Competitive Advantages CREH has several competitive advantages in providing leasing options to the middle-income community. First, CREH’s management team has broad exposure to blue-collar sub-contractors that work with several construction companies that are affiliated with the management team. These construction sub-contractors are excellent potential customers for this particular product, not to mention excellent contacts for other potential clients. In addition, employment history (and income) can be more readily verified with these particular companies. Another key competitive advantage is that CREH’s management team has executed several lease-options and rental agreements with secondary creditworthy tenants with extremely favorable results. By selective screening of these past tenants, the management team has enjoyed profitable leasing arrangements while minimizing PAGE 8
  10. 10. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ adverse situations. Payment timeliness and duration of rental agreements were above industry averages. Lastly, the final key competitive advantage is CREH’s extensive network of reliable sub-contractors, broad experience with rehabbing single-family homes, affiliation with key construction companies, and a diversified management/advisory team. Investor Participation CREH will be partnering with investors who wish to financially participate in real estate ventures without having to endure any of the hassles associated with the daily management activities of rental properties. For the investor who participates in a real estate partnership, CREH will provide an attractive fixed rate of return, manage the property, prepare all required filings (including tax filings), and make a fixed rate, tax-deductible donation, in the company’s name, to a charitable organization designated by the investor. In exchange for the investor securing financing for a particular property and providing the required down payment for the mortgage, CREH will provide a guaranteed annual rate of return of 12.0% on the investor’s down payment investment. In addition, CREH will contribute a tax-deductible amount in the company’s name equal to an annual rate of return of 2.0% on the investor’s down payment to any charitable organization the investor chooses to designate. If the investor does not wish to designate a charitable organization, CREH will select East West Church, Inc. as its default charitable organization with which to make charitable contributions. The established LLC governing the partnership will receive receipts for the tax-deductible, charitable contributions and include in necessary tax filings. Furthermore, if the investor would benefit from managing his/her personal income tax liabilities by sharing in the LLC’s corporate losses for additional tax deductions, CREH is willing to negotiate a mutually favorable arrangement with the investor for sharing tax deductions in exchange for a lower guaranteed annual rate of return. Additional information on the investor’s contribution and return on investment is described in Section 8 – Financial Plan. An example of a real estate investment and related cash-flows is shown in the Appendices. PAGE 9
  11. 11. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ During the lease-option period, CREH will handle all accounting and management of the property, including activities such as making mortgage payments, performing necessary repair/maintenance services, and providing annual profit-and-loss statements to the investor. Investors will not have the burden of any related management activities for the residential property or headaches of dealing with tenants. The partnership between CREH and the investor will terminate upon sale of the residential property. If a potential tenant chooses not to exercise the lease-option rights or is removed from the property, then CREH will determine if the property will be sold or made available for another lease-option. The investor will have the right to dispose of their interest in the property after the initial three-year term via the buy-sell agreement that is in place between CREH and the investor. For the investor, the combination of the fixed rate of return on initial investment coupled with the potential to better manage annual personal income tax liability can provide a very attractive overall rate of return on the original investment, while contributing value to the investor’s preferred charitable organization. With the financial leverage of real estate, investors will be able to put relatively little money down to partake in this generally, low-risk and stable opportunity that will yield excellent returns. Over a three year term, commercial financial institutions cannot guarantee such excellent low-risk yields with such liquidity. Commercial financial institutions throughout the nation offer an equally liquid investment opportunity in a three-year Certificate of Deposit (“CD”), but could only offer an average annual return of 5.55% in 2007. Charitable Organization Involvement CREH also believes strongly in the importance of contributing to the community in which business is conducted. CREH will contribute a tax-deductible amount in the company’s name equal to an annual rate of return of 2.0% on the investor’s down payment to any charitable organization the investor chooses to designate. If the investor does not wish to designate a charitable organization, CREH will select East West Church, Inc. as its default charitable organization with which to make charitable contributions. East West Church, Inc., located in Marietta, GA, has positively contributed to thousands of lives across the metropolitan Atlanta area for over two decades (See for more information). Contributions to PAGE 10
  12. 12. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ ministries of East West Church, Inc. will be used to enrich additional lives and give back to the community in CREH’s primary market of operations. PAGE 11
  13. 13. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ 5 Marketing Plan Socioeconomic Factors Today, Atlanta’s metropolitan population has now surpassed 4 million people and is projected to continue growing at a 2.8% annual rate (metropolitan Atlanta has four of the ten fastest growing counties in the nation). Numerically, the 28-county metropolitan Atlanta area is the fastest growing metropolitan area in the United States. Median incomes have also been rising steadily over the past ten years while inflation (nationwide) has been relatively stable at 2.4%. The combined effect of these economic indicators has caused property prices in Atlanta to appreciate more rapidly than the national average historically and at the same time allow the new home market to expand voraciously. Despite all the bad press surrounding the “housing slump” and falling home prices, metropolitan Atlanta has maintained an average 1-year home appreciation rate of 2.6% (3Q 2007 report), and the existing “buyer’s market” presents an opportunity to acquire valuable properties below appraisal cost that will provide substantial equity and good credit standing to CREH as the housing market invariably rebounds in future years. Employment opportunities will continue to increase in the metropolitan Atlanta area generally fueled by the endless onslaught of new construction, supporting retail services, and the growth of high-tech companies (Atlanta is home to more than 9,800 technologically related companies). Atlanta is one of the largest metropolitan areas in the country with a below average cost of living standard (compared to other similarly sized metropolitan areas). Socioeconomic factors are another reason for the growth in Atlanta (and the rest of the country). Unfortunately, more and more households are being operated by single parents. BusinessWeek (Oct. 2003) claims that half of all households in America are run by single parents. As more married couples divorce and remain single, they create more demand for housing. In addition, more individuals are purchasing second PAGE 12
  14. 14. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ homes, partially as investment properties and partially as vacation homes. Lastly, Hispanic populations are exploding at an astounding rate. Hispanics are now the largest minority in the United States. Atlanta has a rapidly growing Hispanic community. All of these factors contribute to sustained housing demand in metropolitan Atlanta. Low interest rates have spurred increases in home ownership over the past several years. Most people who have acceptable credit and can qualify with commercial mortgage companies have taken advantage of the opportunities in the residential housing markets and purchased their own home. The rental market has been stagnant for the past three years because of the vast transition from apartment dwellings and rental properties to new residential properties (single-family, townhomes, condominiums, etc.). For families that do not have acceptable credit, the most viable alternative is living in some form of apartment complex. While apartment complexes usually have several advantages to owning a home in suburban Atlanta, they do not allow quality family living, personal space, expanded living quarters, garage and storage options, privacy, etc. These factors are compounded when couples start a family and have greater needs for more space. Home ownership is superior when considering these factors because apartment living is not conducive to this type of lifestyle. Given that the cost of living in an apartment is only slightly less expensive than owning a home, more and more families are looking to home ownership as a viable alternative. The current state of the economy is a big reason why CREH management believes the time is right to create opportunities for potential homeowners. Interest rates are still at 40 year lows, but inflation, which has been very modest for the past few years, will begin to accelerate with the high cost of oil (and related energy indices) and sustained economic recovery and related job growth. The Federal Reserve has just now begun to increase the federal funds rate on a consistent basis, and lending rates will undoubtedly increase. Fortunately, as interest rates rise, the current flood of potential homeowners will decrease as more and more people become ineligible for loans because of higher house payments that decrease cash flow and increase the debt/income ratio. This means the demand for rental properties will increase as more people turn to lease- PAGE 13
  15. 15. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ options over typical financing arrangements for home ownership. Ultimately, this puts pressure on the rental market and allows for higher rental rates and at the same time, higher lease-option payments. Product Specifics Product Features & Benefits CREH is offering a unique product/service for the family that cannot meet the necessary criteria for a commercial mortgage. The opportunity, as seen by the customer, will be the potential for home ownership while the benefits include pride of ownership, financial security, providing for the family, and inclusion in a neighborhood. CREH will provide clean, affordable housing in desirable locations, plus follow-up services, such as designated sub-contractors for repairs (at homeowner’s expense), information on improving creditworthiness, and lenders who provide favorable no-doc loans. Features of the CREH services include clean, affordable housing in thriving communities, or in essence, the idea of owning a part of the “American dream” is the main benefit for the potential tenant. CREH will provide the temporary gap between what a family can qualify for today from a commercial lender, and what they may qualify for in the future. In addition, lease-options will provide the benefit of capturing the increased value of the home’s equity (assuming that real estate prices continue to appreciate at historical averages) while providing a proven, positive payment history that will serve as an excellent credit reference upon applying for a home loan. Customers The specific target customer group will be blue-collar/semi-professional middle- income families who have steady employment and desire to live in the northwest metropolitan Atlanta area. CREH is specifically targeting families who earn $40,000 - $80,000 per year and want to live in the specified suburban areas of northwest Atlanta (Austell, Mableton, Powder Springs, Smyrna, Marietta, Kennesaw, Acworth, etc). PAGE 14
  16. 16. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ More generalized customer groups will include single parents, the Hispanic community, local industry workers, semi-professionals, and young families. Competitors There are many real estate investors in the Atlanta metropolitan area performing various aspects of real estate activities. Many investors attempt to purchase homes at below market cost, perform renovation activities, and then sell the properties or rent them out. Some investors do perform lease-options on a more regular basis. Current research through the two major real estate investment groups (Georgia Real Estate Investors Association and Real Estate Investors of Atlanta) suggests that there are not many investors who are currently providing leasing options to specific population segments in northwest Atlanta. Furthermore, given the magnitude of existing home sales and new home construction in the metropolitan area along with continuing influx of new residents into Atlanta, there will not be a shortage of clientele or potential customers for this type of service. CREH’s competitive advantage lies in the unique balance and experience of the management team members and the extensive network of connections throughout the blue-collar community via the real estate construction companies that CREH interacts with. One competitive disadvantage is that land acquisition is becoming more and more expensive in the key target market areas and the cost of new homes is increasing to keep pace. Niche CREH will concentrate on purchasing/building homes in the $100,000 - $180,000 value range, providing short-term lease-options to blue collar, middle-income families (earning approximately $40,000-$80,000) in the northwest suburbs of Austell, Mableton, Powder Springs, Smyrna, Marietta, Kennesaw, and Acworth. These lease- options will be offered with certain down payment amounts and typically require three years before the option can be exercised. In addition, CREH is dedicated to working with potential tenants to increase their awareness of what actions they can take to improve their chances of successfully qualifying for a commercial mortgage when the lease-option expires. The additional assistance will be provided in the form PAGE 15
  17. 17. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ of reviews of personal credit history, positive actions that improve credit scores, debt management plans, and assistance in establishing a household budget. This is one example of CREH’s commitment to customer service for this product. Strategy CREH’s marketing efforts will be focused on small, local publications (Marietta Daily Journal, etc.), Internet advertisements, directionals at heavy traffic intersections, and word-of-mouth referrals. These mediums have been found to have the most impact per advertising dollar and concentrate the advertising on the local population segment. No advertising will be done with larger publications such as AJC because of the lack of specific geographic location and past experience has shown that the cost-to-benefit ratios have faired poorly. Likewise, there will be no advertising through radio or television mediums. Once a house is nearing completion (new construction or renovation), “lease to own” signs will be prominently displayed in the immediately surrounding areas. In addition, word will be spread through local personal networks and ads will be placed in the local papers. PAGE 16
  18. 18. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ 6 Operational Plan Acquisition of Residential Properties New Construction For existing home purchases, CREH will have a multi-step process that is described below. For new homes, CREH will review and acquire land to support construction of multiple homes (typically between 3-6 homes). CREH will sub-contract construction to D&H Development Group, LLC (a construction company based in Powder Springs, GA). Construction lead times will take approximately 4-6 months. Once construction is complete, investors will be brought in to obtain permanent financing. Advantages of new construction are instant equity (typically 15% between appraised value and construction cost), low operation and maintenance expense for initial five-year period, and ownership of a known product (no hidden defects). Existing Residential Property CREH will use real estate agents, wholesale real estate investors, foreclosure notices, and point leads to locate and bid on potential real estate properties. CREH has existing relationships with multiple agents and investors that will allow access to many potential properties. In addition, these agents/investors will be supplied with the appropriate criteria regarding type of dwelling and certain home characteristics, location, condition of property, and price points so that efforts are concentrated on just the properties that are potentially viable. After reviewing and inspecting the potential properties, CREH’s acquisition team will calculate renovation estimates, potential rent and market value, monthly cash flows, and time to bring to market. Multiple properties will be compared on both a quantitative and qualitative basis. Qualitative criteria will include access to major highways, employment centers, educational facilities, status of neighborhood, etc. PAGE 17
  19. 19. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ Once CREH has identified the best properties, CREH’s real estate agent will present offers to the sellers (at designated price points). All contracts will have the option to be transferred to future investors. Estimated cycle time from start to finish is 45 - 60 days (assuming a 30 day closing window). Before closing takes place, CREH will coordinate with sub-contractors for repairs and renovations, including obtaining competitive quotes for certain operations. CREH will schedule sub-contractors so that the time spent on property repairs is kept to a minimum. CREH will obtain a temporary loan to purchase the property and finance all repair expenses. CREH will begin making repairs with the expectation that all repairs will be completed within 12-21 days (depending on the nature and extent of the renovation process). After completion of renovation, investors would acquire permanent financing for the residential property. Investors would need to be pre-approved with certain lenders and have appropriate funds on hand for required down payments. Upon completion of major repairs, advertising and marketing efforts will begin in the immediately surrounding areas and in the appropriate local publications. Legal Environment There are different legal aspects to purchasing, leasing, and selling real estate properties in the state of Georgia. Most are minimal intrusions and do not present a significant risk to doing business for CREH or the investors. First, purchasing and closing the properties will be handled by an experienced team of real estate agents, brokers, financiers, and real estate attorneys that CREH’s management and advisory team has developed long-standing relationships with over the years. The investor will have no legal liabilities during this part of the process other than the financial mortgage obligation. CREH will have a fiduciary responsibility for any down payment received from the investor and a contractual partnership agreement will address this responsibility along with other terms of the relationship. Fortunately, most of CREH’s renovation activities will not require many legal compliance efforts. For instance, most home renovations will be completed without PAGE 18
  20. 20. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ requiring permits from the local code enforcement departments. Those that do require permits would be obtained by the licensed sub-contractor performing the repair services. For new construction activities, all licenses and permitting would be obtained by CREH’s builder (D&H Development Group, LLC) and included as a part of the construction services and priced accordingly. Leasing the properties will entail potential exposure from tenants who injure themselves on the property. CREH would be responsible for all injurious claims resulting from maintenance issues on the property. However, the possibility exists for tenants to bring frivolous lawsuits resulting from tenants injuring themselves on the property. Standard property insurance policies provide $5,000 to cover these types of claims and can be tailored to provide more coverage. Investors may wish to consider purchasing an umbrella liability policy that would provide additional protection from lawsuits associated with accidents on rental properties. Naturally, the expectation is that potential tenants who are interested in purchasing the home, upon exercising the option, would have little vested interest in suing the seller (who happens to be their financier and best credit reference). Based on experience, CREH’s management and advisory team believes the investor’s exposure to lawsuits of this nature are extremely minimal. Selling the property to the potential buyer involves almost zero legal responsibility other than selling at the terms as agreed in the contract between CREH and the buyer. All accounting and taxation responsibilities are solely the responsibility of CREH, not only at the time of sale, but for the duration of the partnership between CREH and the investor. The only other legal risk is the financial impact that could arise if the federal government enacts tax legislation at some point in the future that adversely affects real estate investment properties, which would unlikely be enacted without some lead time to react accordingly. Personnel CREH personnel consist of the management team of Garrett Cole, Doug Cole, and Jonathan Cole. These three personnel members combine as the general contractor, property manager, investor relations manager, and corporate governance of CREH. Accounting and property renovation services are assigned to the team of sub- PAGE 19
  21. 21. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ contractors with whom CREH has extensive relationships. All operational decisions are handled by CREH and the CREH management team assumes ultimate responsibility for accomplishment of goals. Payment & Accounting Policies The leasing tenants will have a strong incentive to pay the monthly lease payment on time because of the direct correlation of timely payment and credit history that will enable the lessee to purchase their home. In addition, CREH’s management team places a lease “discount” clause in the lease-option agreement that stipulates the leasing rate is based on receiving payment by the 5th of the month. Any payments received after the 5th are not “discounted”. In all cases, the discounted rate is the actual fair market value as determined by CREH. The non-discounted rate is typically $75/month higher than the discounted rate. CREH will also convey the importance of timely payments by the tenant so that CREH can be a credit reference for the tenant when they apply for a mortgage with a commercial financial institution at the end of the lease term. For tenants who fail to make a payment by the 5th of the month, CREH will follow-up with a phone call and a personal visit. If payment arrangements have not been made by the 10th of the month, then CREH issues a certified letter demanding payment within 5 business days and prepares to file an eviction notice with the local sheriff’s office to have the tenant evicted from the premises by the 25th of the month. If the tenant is evicted, then the marketing and advertising operations will begin along with any necessary clean-up activities. While no one can guarantee if a particular tenant will have to be evicted, CREH uses extensive research and creditworthiness information to minimize the possibility of being forced to evict a tenant. Background checks and thorough personal interviews are the core component of CREH’s application process. PAGE 20
  22. 22. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ 7 Management and Organization Management Team Operational management of the day-to-day affairs will be handled by the CREH management team consisting of Garrett Cole, Doug Cole, and Jonathan Cole. Mr. Garrett Cole is the President of CREH with the day-to-day operational role as the property manager and investor relations manager. His specific responsibilities include all property management services, establishing the partnership activities between investors and CREH, including regular correspondence regarding properties and delivery of administrative records. Mr. Doug Cole is the Treasurer of CREH with day-to-day operational responsibilities as the general contractor and property maintenance supervisor. His specific responsibilities include general contractor for any properties that are under construction or renovation, supervising and directing any sub-contractors who work on CREH residences. He will also be responsible for maintenance at all CREH properties. Mr. Jonathan Cole is the Secretary of CREH with the day-to-day operational role as the manager of marketing and administration. His specific responsibilities include all means of marketing properties to prospective lessees and all ongoing company administration (including all initial tax, accounting, and regulatory filings), and handling all administrative services for CREH corporate. There are several activities that will be assigned to a team of sub-contractors such as, internal accounting requirements, property renovation services, and financing arrangements. All operational decisions are handled by the CREH management team and at the same time, the ultimate responsibility for accomplishing financial goals falls on the CREH management team. PAGE 21
  23. 23. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ Professional & Advisory Support The following agents act in these various capacities for the CREH company: • Management Advisory Board o Mark Houston o Chris Dawson D&H Development Group My Home Now, LLC 5678 Harbor Mist Drive 175 Blackwell Lane Powder Springs, GA 30127 Marietta, GA 30062 Phone: 678.910.6900 Phone: 770.356.4781 • Real Estate Agent o Lisa Stover o Chuck Graves Keller-Williams Keller-Williams 695 Mansell Road 3730 Roswell Road, NE Roswell, GA 30076 Marietta, GA 30068 Phone: 404.310.7665 Phone: 404.422.3171 • Accountant o Marsha Mann, CPA o Ed Forscher, CPA Mann & Associates 2270 Byron Court 3938 Floyd Road Marietta, GA 30064 Austell, GA 30106 Phone: 770.428.1385 Phone: 770.435.6650 PAGE 22
  24. 24. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ • Real Estate Attorney o Ralph Walker, Esq. The Walker Firm 9539 Hwy 92 Woodstock, GA 30188 Phone: 770.928.2500 • Insurance Agent o Wendall Silas Georgia Farm Bureau 2850 Powder Springs Road Marietta, GA 30064 Phone: 770.943.3531 • Finance Consultants/Banker o Meg Pagano SunTrust Mortgage 990 Hammond Dr., Ste 1020 Atlanta, GA 30328 Phone: 770.337.2918 • Sponsored Charitable Organization o East West Church, Inc. 1521 Hurt Road Marietta, GA 30008 Phone: 770.435.1152 PAGE 23
  25. 25. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ 8 Financial Plan The CREH concept is broken down into just a few different categories on the business model pro-formas. Primary revenues will be derived from monthly lease obligations and capital gains from the exercise of lease-options. Primary expenses will be the associated mortgage, property operation and maintenance expenses, investor dividends, and charitable contributions. Overhead expenses will be approximately 10% of the monthly lease income. Appendix A shows a projected pro-forma for a sample residence including income statement, balance sheet, and cash flow. The projections are based on the assumption that the investment property is leased beginning July 1, 2008 and sold on July 1, 2011. Estimates shown in the attachments are based on actual and projected expenses associated with a particular investment property in Powder Springs, GA, and CREH believes these estimates are valid for application to multiple properties based on first- hand experience and comparisons from other real estate investors. As expected, the income statement shows an operating loss for all three years of operation until the lease-option is exercised and the property is sold due to depreciation on the property. The operating entity for CREH and the investor will be an LLC. Each year, the LLC files federal tax form 1065 (which is actually a partnership federal tax return) and pays no taxes; however, all losses/gains of the LLC are a pass- through to the LLC partners’ federal tax return. The cash flow statement reveals a slightly positive cash flow because of the depreciation expense associated with the property (depreciation expense is a non-cash item). Based on the pro-forma projections, when the property is sold after three years the investor would receive their initial investment amount back. For the investor, the cash flow distributions would be a combination of the fixed return on the initial investment of 12.0% each year (in this example, based on a $15,000 investment, the annual return would be $1,800) and annual deductions of 2.0% of their initial investment (in this example, based on a $15,000 investment, the annual deductions would be $300) based PAGE 24
  26. 26. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ on the charitable contributions made in the company’s name as designated by the investor. The pro-forma projections are based on expected results, but actual figures will vary based on individual property results. CREH will handle all tax preparation for the LLC partnership and will issue the investor a K-1 at the end of each tax year to include with the investor’s personal tax filing. The investment timeline is the main identifiable risk for investors, and it is primarily limited to the tenant’s exercising of the option. For comparison purposes, approximately two-thirds of lease-options ARE NOT exercised. If a three-year lease option expires, then the investor would have two options available: (1) exit the agreement with CREH by selling the property to CREH at an agreed upon price as stated in the Buy-Sell Agreement, (2) continue the agreement with CREH and enter into a lease-option with a new tenant or the existing tenant for another three years so as to continue receiving the fixed return on investment. If the investor exits the agreement in this case, they will be given their initial investment and any outstanding return, and the partnership would be dissolved. If the investor chooses to continue the agreement, the partnership will continue into another three-year lease-option, and for investor exit options going forward, the rules for proceeding would be the same as the initial formation of the partnership. However, CREH will have sole discretion and control of the property no matter what the investor chooses to do. If a tenant is evicted or leaves before the lease-option has expired, then CREH would expeditiously seek another tenant and exercise a new three-year lease option. The investor’s exit options are two fold: (1) if within the three-year term of a lease-option that the investor agreed to begin, the investor desires to exit the arrangements with CREH, then the partnership would be dissolved (would require a 90 day notice) and CREH would purchase the property back from the investor at the original sales price and return the investor’s initial down payment less closing cost (investor loses any accrued fixed returns for that particular year as well) and (2) if after the initial three year term the investor desires to exit (would require a 90 day notice and would only be done on the anniversary of the agreement), then CREH would purchase the property from the investor relieving the investor of their mortgage obligation with no penalty on fixed returns. The last option strategy would be a mutual arrangement by CREH and the investor to sell a property because of unforeseen events or bad timing (e.g., after four months a tenant has not been located for a particular property), in which case, the property could be sold and the investor and CREH would dissolve the PAGE 25
  27. 27. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ partnership. All governing arrangements would be spelled out in the Buy-Sell Agreement. All cost of refurbishing the property for a new tenant (under the second option) would be borne by CREH, as will all capital expenditures incurred during the leasing option period (e.g., replacement of HVAC, roof, appliances, etc.). CREH will assume all risk with operational expenses of the investment property, capital expenditure risk, finance risk, and tenant risk. Operational expenses include such items as property taxes, maintenance expenses, utilities, and all other expenses that are incurred during the management of the leasing period. Obvious risks under this area are property tax escalation and the abnormal cost of routine maintenance expenses (e.g., repairing toilets/plumbing, exterminators, wear-n-tear items, etc.). Capital expenditure risk includes the cost of replacement and or repair for all major capital replacement items (e.g., roofs, HVAC systems, flooring, appliances, etc.). Finance risk is associated primarily with the interest rates on the secondary financing (which are typically indexed to a variable rate) which could increase substantially during the leasing period. Tenant risk involves potential cost items associated with the activities of the tenant such as repairing property damage, cost of evictions, marketing/advertising cost, etc. These risks are assumed by CREH as incentives to choose quality residential property assets and maintain the properties accordingly in addition to selecting creditworthy tenants who possess the potential to exercise their lease-option and purchase the home. PAGE 26
  28. 28. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ 9 Appendices • Appendix A: Projected Pro-Formas for Sample Investment • Appendix B: Cole Real Estate Holdings, LLC – State/Federal Documents • Appendix C: Partnership Tax Filings for LLC – Form 1065, Schedule K-1 PAGE 27
  29. 29. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ A Appendices Projected Pro-Formas for Sample Investment PAGE 28
  30. 30. Projections for Informational Purposes Only ‐  Actual Results May Vary Cole Real Estate Holdings, LLC PROFORMA FINANCIAL STATEMENTS FOR RESIDENTIAL PROPERTY PROJECTED INCOME STATEMENT Item 2008 2009 2010 2011 TOTAL (a) (b) (c) (d) (e) REVENUES Rental Income $6,600 $13,200 $13,200 $6,600 $39,600 Security Deposit/Down Payment 1 $5,100 $0 $0 $0 $5,100 Sale of House $0 $0 $0 $166,500 $166,500 Total Revenues $11,700 $13,200 $13,200 $173,100 $211,200 OPERATING EXPENSES 1st Mortgage Payment 4,556 9,113 9,113 139,556 $162,338 2nd Mortgage Payment 0 0 0 0 $0 Hazard Insurance 225 450 450 225 $1,350 Property Taxes 900 1,800 1,800 900 $5,400 Property O&M Expense 450 900 900 450 $2,700 Utilities 0 0 0 0 $0 Depreciation 2,090 4,180 4,180 2,090 $12,540 CREH A&G (10%) 660 1,320 1,320 660 $3,960 Investor ROI (12.0%) 900 1,800 1,800 15,900 $20,400 Charitable Contribution (2.0%) 150 300 300 150 $900 Miscellaneous 1,500 0 0 0 1,500 TOTAL OPERATING EXPENSES 11,431 19,863 19,863 159,931 211,088 NET OPERATING MARGIN 269 (6,663) (6,663) 13,169 113 OPERATING TIER 1.06 0.27 0.27 1.09 1.00 Notes: /1 Lease would begin on July 1, 2008 and end on June 30, 2011. Assume house is sold on July 1, 2011. /2 Rental income based on $1100/month for 12 months (6 months in first and last year, assume 1 month vacancy) /3 Down payment based on 3% of sales price. Sales price estimated based on 4.5% annual appreciation for the home. /4 Mortgage payments based on 30 yr first mortgage at 90% LTV (10% down payment). Interest rate is 6.75%. /5 Expenses based on averages for $150k new residential property (insurance, taxes, utilities) /6 Depreciation based on the MACRS, straight-line depreciation for residential rental property. /7 CREH A&G overhead is 10% of rental income and covers all marketing, O&M, and screening of applicants. /8 Return on investment based on $15,000 investment with annual payments at 12.0%. /9 Charitable contribution based on $15,000 investment with annual contributions at 2.0%. CREH, LLC January 2008
  31. 31. Projections for Informational Purposes Only ‐  Actual Results May Vary Cole Real Estate Holdings, LLC PROFORMA FINANCIAL STATEMENTS FOR RESIDENTIAL PROPERTY PROJECTED BALANCE SHEETS 2005 2006 2007 2008 ASSETS RESIDENTIAL PROPERTY Residence $115,000 $115,000 $115,000 $115,000 Land $35,000 $35,000 $35,000 $35,000 Less: Accumulated depreciation (2,091) (6,272) (10,454) (12,544) NET ASSETS 147,909 143,728 139,547 137,456 CURRENT / OTHER ASSETS Cash & cash equivalents 2,359 (124) (2,606) 17,209 Accounts receivable 1,100 1,100 1,100 0 Materials and supplies 100 100 100 0 Deferred charges 0 0 0 0 Total Current Assets 3,559 1,076 (1,406) 17,209 TOTAL ASSETS 151,468 144,804 138,140 154,665 LIABILITIES & PATRONAGE CAPITAL Current Liabilities 260 260 260 260 Mortgage Debt 135,000 135,000 135,000 135,000 Equity/Patronage Capital 15,939 16,207 9,543 6,236 Current Year Margins 269 (6,663) (6,663) 13,169 TOTAL LIABILITIES & EQUITY 151,468 144,804 138,140 154,665 Equity as a % of Assets 10.5% 11.2% 6.9% 4.0% CREH, LLC January 2008
  32. 32. Projections for Informational Purposes Only ‐  Actual Results May Vary Cole Real Estate Holdings, LLC PROFORMA FINANCIAL STATEMENTS FOR RESIDENTIAL PROPERTY PROJECTED CASH FLOW STATEMENT 2005 2006 2007 2008 CASH INFLOWS Operating Margin $269 ($6,663) ($6,663) $1,225 + Interest Income 0 0 0 0 Net Cash Margin 269 (6,663) (6,663) 1,225 Plus: Depreciation & Amortization 2,090 4,180 4,180 2,090 Loan / Capital Gains 0 0 0 166,500 TOTAL CASH PROCEEDS $2,359 ($2,483) ($2,483) $169,815 CASH OUTFLOWS Additions to Residential Property $0 $0 $0 $0 Principal Pymt on Mortgages $0 $0 $0 $135,000 Payback Original Investment $0 $0 $0 $15,000 Change in Working Capital $2,359 ($2,483) ($2,483) $19,815 TOTAL CASH USES $2,359 ($2,483) ($2,483) $169,815 DEBT SERVICE COVERAGE RATIO 1.52 0.73 0.73 0.56 CREH, LLC January 2008
  33. 33. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ B Appendices Cole Real Estate Holdings, LLC State/Federal Documents PAGE 29
  34. 34. Office of the Secretary of State Corporations Division 315 West Tower #2 Martin Luther King, Jr. Dr. Atlanta, Georgia 30334-1530 (404) 656-2817 Karen C Handel Secretary of State Statement Invoice Number: 5481465 Invoice Date: 01/05/2008 08:58 PM Billing Information COLE REAL ESTATE HOLDINGS, LLC 4601 Ethel Springs Trail Mableton, GA 30126 Certification Order Item Amount Product Description Number Date Qty Pages Cost Extended Due ATL-Corp Fees - Expedite Annual 1963973 01/05/2008 1 1 30.00 30.00 Paid Registrations Contact: Garrett D Cole Cust. Ref.#: 07101886 Credit Balance as of 01/05/2008: $0.00 Invoice Total: $30.00 Payment Details: Payment for $30.00 from Web with Credit Card E-Payment, AMEX Acct Payment Total: $30.00 XXXXXXXXXXXXXX1005, Auth: 132181 Contact(s): Garrett D Cole Amount Due: $0.00 Include invoice number on all correspondence and send to: Corporations Division 315 West Tower #2 Martin Luther King, Jr. Dr. Atlanta, Georgia 30334-1530 1/5/2008 8:59:08 PM Invoice Number: 5481465 Page 1 of 1
  35. 35. DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE CINCINNATI OH 45999-0023 Date of this notice: 12-20-2007 Employer Identification Number: 26-1602106 Form: SS-4 Number of this notice: CP 575 B COLE REAL ESTATE HOLDINGS LLC GARRETT DOUGLAS COLE MBR 4601 ETHEL SPRINGS TRL SW For assistance you may call us at: MABLETON, GA 30126 1-800-829-4933 IF YOU WRITE, ATTACH THE STUB AT THE END OF THIS NOTICE. WE ASSIGNED YOU AN EMPLOYER IDENTIFICATION NUMBER Thank you for applying for an Employer Identification Number (EIN). We assigned you EIN 26-1602106. This EIN will identify your business account, tax returns, and documents, even if you have no employees. Please keep this notice in your permanent records. When filing tax documents, please use the label we provided. If this isn't possible, it is very important that you use your EIN and complete name and address exactly as shown above on all federal tax forms, payments, and related correspondence. Any variation may cause a delay in processing, result in incorrect information in your account, or even cause you to be assigned more than one EIN. If this information isn't correct as shown above, please correct it using the tear off stub from this notice and return it to us so we can correct your account. Based on the information from you or your representative, you must file the following form(s) by the date(s) shown. Form 1065 04/15/2008 If you have questions about the form(s) or the due date(s) shown, you can call or write to us at the phone number or address at the top of this notice. If you need help in determining what your tax year is, see Publication 538, Accounting Periods and Methods, available at your local IRS office or you can download this publication from our website at We assigned you a tax classification based on information obtained from you or your representative. It is not a legal determination of your tax classification, and is not binding on the IRS. If you want a legal determination on your tax classification, you may request a private letter ruling from the IRS under the guidelines in Revenue Procedure 2004-1,2004-1 I.R.B. 1 (or superseding Revenue Procedure for the year at issue.) A limited liability company (LLC) may file Form 8832, Entity Classification Election, and elect to be classified as an association taxable as a corporation. If the LLC is eligible to be treated as a corporation that meets certain tests and it will be electing S corporation status, it must timely file Form 2553, Election by a Small Business Corporation. The LLC will be treated as a corporation as of the effective date of the S corporation election and does not need to file Form 8832. Tax forms and instructions are available at the IRS website at or by calling 1-800-829-3676.
  36. 36. CREH Business Plan Acquisition & Leasing of Residential Property January 2008 _____________________________________________________ C Appendices Partnership Tax Filings for LLC Form 1065, Schedule K-1 PAGE 30
  37. 37. Form 1065 U.S. Return of Partnership Income OMB No. 1545-0099 Department of the Treasury Internal Revenue Service For calendar year 2007, or tax year beginning , 2007, ending See separate instructions. , 20 . 2007 A Principal business activity Name of partnership D Employer identification number Use the IRS B Principal product or service label. Number, street, and room or suite no. If a P.O. box, see the instructions. E Date business started Other- wise, C Business code number print City or town, state, and ZIP code F Total assets (see the or type. instructions) $ G Check applicable boxes: (1) Initial return (2) Final return (3) Name change (4) Address change (5) Amended return H Check accounting method: (1) Cash (2) Accrual (3) Other (specify) I Number of Schedules K-1. Attach one for each person who was a partner at any time during the tax year J Check if Schedule M-3 attached Caution. Include only trade or business income and expenses on lines 1a through 22 below. See the instructions for more information. 1a Gross receipts or sales 1a b Less returns and allowances 1b 1c 2 Cost of goods sold (Schedule A, line 8) 2 Income 3 Gross profit. Subtract line 2 from line 1c 3 4 Ordinary income (loss) from other partnerships, estates, and trusts (attach statement) 4 5 Net farm profit (loss) (attach Schedule F (Form 1040)) 5 6 Net gain (loss) from Form 4797, Part II, line 17 (attach Form 4797) 6 7 Other income (loss) (attach statement) 7 8 Total income (loss). Combine lines 3 through 7 8 9 Deductions (see the instructions for limitations) 9 Salaries and wages (other than to partners) (less employment credits) 10 Guaranteed payments to partners 10 11 Repairs and maintenance 11 12 Bad debts 12 13 Rent 13 14 Taxes and licenses 14 15 Interest 15 16a Depreciation (if required, attach Form 4562) 16a b Less depreciation reported on Schedule A and elsewhere on return 16b 16c 17 Depletion (Do not deduct oil and gas depletion.) 17 18 Retirement plans, etc. 18 19 Employee benefit programs 19 20 Other deductions (attach statement) 20 21 Total deductions. Add the amounts shown in the far right column for lines 9 through 20 21 22 Ordinary business income (loss). Subtract line 21 from line 8 22 Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than general partner or limited liability company member manager) is based on all information of which preparer has any knowledge. Sign May the IRS discuss this return Here with the preparer shown below (see instructions)? Yes No Signature of general partner or limited liability company member manager Date Preparer’s Date Preparer’s SSN or PTIN Check if Paid signature self-employed Preparer’s Firm’s name (or yours EIN Use Only if self-employed), address, and ZIP code Phone no. ( ) For Privacy Act and Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11390Z Form 1065 (2007)
  38. 38. Form 1065 (2007) Page 2 Schedule A Cost of Goods Sold (see the instructions) 1 Inventory at beginning of year 1 2 Purchases less cost of items withdrawn for personal use 2 3 Cost of labor 3 4 Additional section 263A costs (attach statement) 4 5 Other costs (attach statement) 5 6 Total. Add lines 1 through 5 6 7 Inventory at end of year 7 8 Cost of goods sold. Subtract line 7 from line 6. Enter here and on page 1, line 2 8 9a Check all methods used for valuing closing inventory: (i) Cost as described in Regulations section 1.471-3 (ii) Lower of cost or market as described in Regulations section 1.471-4 (iii) Other (specify method used and attach explanation) b Check this box if there was a writedown of “subnormal” goods as described in Regulations section 1.471-2(c) c Check this box if the LIFO inventory method was adopted this tax year for any goods (if checked, attach Form 970) d Do the rules of section 263A (for property produced or acquired for resale) apply to the partnership? Yes No e Was there any change in determining quantities, cost, or valuations between opening and closing inventory? Yes No If “Yes,” attach explanation. Schedule B Other Information 1 What type of entity is filing this return? Check the applicable box: Yes No a Domestic general partnership b Domestic limited partnership c Domestic limited liability company d Domestic limited liability partnership e Foreign partnership f Other 2 Are any partners in this partnership also partnerships? 3 During the partnership’s tax year, did the partnership own any interest in another partnership or in any foreign entity that was disregarded as an entity separate from its owner under Regulations section 301.7701-2 and 301.7701-3? If “Yes,” see instructions for required attachment 4 Did the partnership file Form 8893, Election of Partnership Level Tax Treatment, or an election statement under section 6231(a)(1)(B)(ii) for partnership-level tax treatment, that is in effect for this tax year? See Form 8893 for more details 5 Does this partnership meet all three of the following requirements? a The partnership’s total receipts for the tax year were less than $250,000; b The partnership’s total assets at the end of the tax year were less than $600,000; and c Schedules K-1 are filed with the return and furnished to the partners on or before the due date (including extensions) for the partnership return If “Yes,” the partnership is not required to complete Schedules L, M-1, and M-2; Item F on page 1 of Form 1065; or Item L on Schedule K-1. 6 Does this partnership have any foreign partners? If “Yes,” the partnership may have to file Forms 8804, 8805 and 8813. See the instructions 7 Is this partnership a publicly traded partnership as defined in section 469(k)(2)? 8 Has this partnership filed, or is it required to file, a return under section 6111 to provide information on any reportable transaction? 9 At any time during calendar year 2007, did the partnership have an interest in or a signature or other authority over a financial account in a foreign country (such as a bank account, securities account, or other financial account)? See the instructions for exceptions and filing requirements for Form TD F 90-22.1. If “Yes,” enter the name of the foreign country. 10 During the tax year, did the partnership receive a distribution from, or was it the grantor of, or transferor to, a foreign trust? If “Yes,” the partnership may have to file Form 3520. See the instructions 11 Was there a distribution of property or a transfer (for example, by sale or death) of a partnership interest during the tax year? If “Yes,” you may elect to adjust the basis of the partnership’s assets under section 754 by at- taching the statement described under Elections Made By the Partnership in the instructions 12 Enter the number of Forms 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, attached to this return Designation of Tax Matters Partner (see the instructions) Enter below the general partner designated as the tax matters partner (TMP) for the tax year of this return: Name of Identifying number designated of TMP TMP Address of designated TMP Form 1065 (2007)
  39. 39. Form 1065 (2007) Page 3 Schedule K Partners’ Distributive Share Items Total amount 1 Ordinary business income (loss) (page 1, line 22) 1 2 Net rental real estate income (loss) (attach Form 8825) 2 3a Other gross rental income (loss) 3a b Expenses from other rental activities (attach statement) 3b cOther net rental income (loss). Subtract line 3b from line 3a 3c Income (Loss) 4 Guaranteed payments 4 5 Interest income 5 6 Dividends: a Ordinary dividends 6a b Qualified dividends 6b 7 Royalties 7 8 Net short-term capital gain (loss) (attach Schedule D (Form 1065)) 8 9a Net long-term capital gain (loss) (attach Schedule D (Form 1065)) 9a b Collectibles (28%) gain (loss) 9b c Unrecaptured section 1250 gain (attach statement) 9c 10 Net section 1231 gain (loss) (attach Form 4797) 10 11 Other income (loss) (see instructions) Type 11 Employ- Deductions 12 Section 179 deduction (attach Form 4562) 12 13a Contributions 13a b Investment interest expense 13b c Section 59(e)(2) expenditures: (1) Type (2) Amount 13c(2) d Other deductions (see instructions) Type 13d 14a Net earnings (loss) from self-employment 14a ment Self- b Gross farming or fishing income 14b c Gross nonfarm income 14c 15a Low-income housing credit (section 42(j)(5)) 15a b Low-income housing credit (other) 15b Credits c Qualified rehabilitation expenditures (rental real estate) (attach Form 3468) 15c d Other rental real estate credits (see instructions) Type 15d e Other rental credits (see instructions) Type 15e f Other credits (see instructions) Type 15f 16a Name of country or U.S. possession Foreign Transactions b Gross income from all sources 16b c Gross income sourced at partner level 16c Foreign gross income sourced at partnership level d Passive category e General category f Other 16f Deductions allocated and apportioned at partner level g Interest expense h Other 16h Deductions allocated and apportioned at partnership level to foreign source income i Passive category j General category k Other 16k l Total foreign taxes (check one): Paid Accrued 16l m Reduction in taxes available for credit (attach statement) 16m n Other foreign tax information (attach statement) Other Information Minimum Tax 17a Post-1986 depreciation adjustment 17a (AMT) Items Alternative b Adjusted gain or loss 17b c Depletion (other than oil and gas) 17c d Oil, gas, and geothermal properties—gross income 17d e Oil, gas, and geothermal properties—deductions 17e f Other AMT items (attach statement) 17f 18a Tax-exempt interest income 18a b Other tax-exempt income 18b c Nondeductible expenses 18c 19a Distributions of cash and marketable securities 19a b Distributions of other property 19b 20a Investment income 20a b Investment expenses 20b c Other items and amounts (attach statement) Form 1065 (2007)
  40. 40. Form 1065 (2007) Page 4 Analysis of Net Income (Loss) 1 Net income (loss). Combine Schedule K, lines 1 through 11. From the result, subtract the sum of Schedule K, lines 12 through 13d, and 16l 1 2 Analysis by (ii) Individual (iii) Individual (v) Exempt (i) Corporate (iv) Partnership (vi) Nominee/Other partner type: (active) (passive) organization a General partners b Limited partners Schedule L Balance Sheets per Books Beginning of tax year End of tax year Assets (a) (b) (c) (d) 1 Cash 2a Trade notes and accounts receivable b Less allowance for bad debts 3 Inventories 4 U.S. government obligations 5 Tax-exempt securities 6 Other current assets (attach statement) 7 Mortgage and real estate loans 8 Other investments (attach statement) 9a Buildings and other depreciable assets b Less accumulated depreciation 10a Depletable assets b Less accumulated depletion 11 Land (net of any amortization) 12a Intangible assets (amortizable only) b Less accumulated amortization 13 Other assets (attach statement) 14 Total assets Liabilities and Capital 15 Accounts payable 16 Mortgages, notes, bonds payable in less than 1 year 17 Other current liabilities (attach statement) 18 All nonrecourse loans 19 Mortgages, notes, bonds payable in 1 year or more 20 Other liabilities (attach statement) 21 Partners’ capital accounts 22 Total liabilities and capital Schedule M-1 Reconciliation of Income (Loss) per Books With Income (Loss) per Return Note. Schedule M-3 may be required instead of Schedule M-1 (see instructions). 1 Net income (loss) per books 6 Income recorded on books this year not included 2 Income included on Schedule K, lines 1, 2, 3c, on Schedule K, lines 1 through 11 (itemize): 5, 6a, 7, 8, 9a, 10, and 11, not recorded on a Tax-exempt interest $ books this year (itemize): 3 Guaranteed payments (other than health 7 Deductions included on Schedule K, lines 1 insurance) through 13d, and 16l, not charged against 4 Expenses recorded on books this year not book income this year (itemize): included on Schedule K, lines 1 through a Depreciation $ 13d, and 16l (itemize): a Depreciation $ b Travel and entertainment $ 8 Add lines 6 and 7 9 Income (loss) (Analysis of Net Income (Loss), 5 Add lines 1 through 4 line 1). Subtract line 8 from line 5 Schedule M-2 Analysis of Partners’ Capital Accounts 1 Balance at beginning of year 6 Distributions: a Cash 2 Capital contributed: a Cash b Property b Property 7 Other decreases (itemize): 3 Net income (loss) per books 4 Other increases (itemize): 8 Add lines 6 and 7 5 Add lines 1 through 4 9 Balance at end of year. Subtract line 8 from line 5 Form 1065 (2007)