1. Freedom Financial Debt Fund I, LP
The information contained herein has been prepared solely for informational purposes and is not an offer to buy or sell or a
solicitation of any offer to buy or sell any Interest in the Fund. Any offer of Interest will be made pursuant to the Fund's
definitive documents and agreements, which shall supersede the information herein, and any decision by a Prospective
Investor to invest should be made only after a thorough review of the Fund's definitive documents.
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2. Executive Summary
The Fund will target loans to professional real estate developers and investors that will use the money
to create or add value to projects primarily located in the western United States. The assets of the
Fund will be primarily loans secured by first lien positions on real property “Senior Debt”.
The Fund is focused on preservation of capital while obtaining solid risk adjusted rates of return. With
a strong credit focus on the people, their credit and the merits of the real estate and a maximum LTV of
65%, calculated on the net value of the asset (after selling costs), the Manager of the Fund has a long
record of making safe and secure loans in the value added real estate space. All loans are sized to
ensure that if an asset is taken back, the Fund’s capital will be preserved.
The Fund is unique because of the experience and successful track record of its Manager, its use of an
independent investment committee to approve its loans and its investor friendly fee structure. The
Fund’s manager is comprised of highly experienced lenders with extensive backgrounds in lending,
credit, workouts, and business operations. The investment committee is comprised of skilled and
successful real estate professionals with extensive product, building, operations and management
knowledge and experience. Further, investment committee members have each invested at least
$1,000,000 in the Fund. The Fee Structure is not only one of the lowest in the private lending space but
it aligns the interests of the Manager with the Fund’s investors.
The Manager and several of its investment committee members worked together as a team to
successfully navigate the great recession. Over a seven year period starting in January 2009 and
ending in February 2016, in a similar fund, the management team originated $925M in loans, had no
losses or foreclosures and generated a yield to investors over the period of approximately 9.6%
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3. The Benefits of Investing in Senior Debt
We believe that originating well structured
senior loans is one of the safest ways to
generate cash flows from investments in real
estate assets.
Senior loans are secured by first position liens
on real property assets. These first position
liens are known as Deeds of Trust or
Mortgages depending on the State.
First liens have the first priority in all cash
flows or value derived from the real estate
asset. This means all cash generated from the
assets, whether through ongoing operations or
sale, must be used first to satisfy the claim of
the first liens. Residual cash flows can then be
distributed to the secondary debt holders and
then finally to the owners of the equity.
Loans generated in the private lending space
can provide yields to investors that on a risk-
adjusted basis are superior to investments in
the equity or junior classes of debt.
Debt
Equity
Deal Capitalization
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4. Focus
Provide senior debt secured by real estate, ownership interests in real
estate, or notes secured by real estate.
Lend only to real estate professionals.
Lend primarily in urban markets in the Western United States unless
lending on leased property with acceptable tenant credit.
Loans are for value add opportunities and are not “Hard Money” or bail
out loans.
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5. Real Estate Asset Classes
Loans secured by projects with a value add strategy, including;
apartments, industrial, retail, office, self-storage, single family
residences and townhomes.
Special (single) purpose buildings and hotels may be considered on an
exception basis with strong sponsorship, cash flow or leases.
The Fund may make loans on land, but land loans will be made either at
well below 50% LTV or to support future inventory for Fund financed
construction projects.
Owner-User, stacked flat condominium, and hillside or large grading
projects will not be considered.
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6. Philosophy of Safety
People, Credit, Real Estate
Management evaluates all loan transactions based on the skills and track
record of the people involved, their credit history and the feasibility of the
plan for the real estate. Management strives to fully understand its
borrowers’ business plans. Further, all business plans are consistently
evaluated in the context of having at least two sources of repayment. In
other words, we are always concerned that there is a viable plan “A” and a
viable plan “B” to ensure the capital of the Fund is being invested with
safety as the number one priority.
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7. Philosophy of Safety
Limiting Loan to Value
The Fund will limit its exposure to 65% loan to value (LTV). Management
believes that most lenders inadvertently understate real LTV by not
taking into account transaction costs associated with selling or liquidating
an asset. Our LTV calculations are always based on our assessment of an
asset’s value at stabilization less transaction costs required to actually sell
the asset. These costs can be as high as 7% in some markets meaning that
if the selling costs are not taken into account a LTV of 65% is really 70%.
We believe our approach of looking at “net” LTV reflects a more accurate
assessment of the equity cushion protecting the loans in the Fund.
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8. Philosophy of Safety
Equity to Cushion Loss
The Fund will provide 50 to 75% of the capital necessary to complete a
project while the borrower (or sponsor) will provide the rest. Equity is in
the form of cash and is usually invested by the sponsor. In some
transactions, however, especially larger transactions, the sponsor has to
raise cash by offering his or her investors junior debt or various levels of
equity. Regardless of the structure or arrangement offered, the cash
raised will be deeply subordinated to the Fund’s loan and will have the
attributes of equity. We believe that having a 25 - 50% equity cushion
provides adequate protection against loss for investors.
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9. Philosophy of Safety
Loan Sizing and Diversity
The Fund’s philosophy is to lend at a basis or loan amount where the Fund is
indifferent if the loan performs as agreed, the plan “B” has to be implemented or
we have to take over ownership in the event of default.
Further, no single loan will exceed 15% of the assets of the Fund and total loan
exposure to a single sponsor will not exceed 20%. As the Fund grows these limits
will be revised downward to a targeted range of 10% and 15%, respectively.
The target diversity level is to have the average loan represent under 3.5% of the
total assets of the Fund. That level of diversity will limit downside risk for the
pool if a loan should become non-performing. As the Fund grows, the target will
be revised to 2.5%.
Although some lenders believe that having an equal mix of residential and
commercial real estate adds to diversity and the mix should be approximately
balanced between the two, management has found through two major downturns,
one led by housing and the other led by commercial, that within a short period of
time both classes of real estate will tend to perform similarly. Therefore, there
will be no specific target for the mix of commercial and residential.
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10. Preservation of Capital
Because loans are underwritten to the point of indifference, that is, a point
where Management believes it can own the loan or the underlying asset
with a similar return, if a loan goes into default and the situation can not be
resolved without the Fund becoming the owner of the asset, Management
will maintain the flexibility to retain and manage the asset to generate
recurring cash flow or to sell the asset as deemed appropriate to maximize
investor returns.
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11. Loan Sourcing
Deal flow will come from relationships with investors, developers,
bankers, other private lenders, lawyers, brokers and other industry
insiders.
Management has a strong reputation in the marketplace for its ability to
provide quick and reliable execution; often able to close loans
approximately two weeks.
In its prior fund, about 75% of the over $200M a year in deal volume
from 2013 to 2015 was repeat business with established customers.
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12. Each Loan request will be analyzed and approved subject to satisfactory
completion of the following:
A complete internal asset valuation and market understanding.
A full background check of the borrower/sponsor including his or
her track record, credit history and a search for criminal records.
Analysis of the financial capacity of each sponsor.
Clear title and entitlement verification.
Budget and projections validation.
Cash flow modeling and economic viability assessment.
Legal documentation and review.
Loan Origination Process
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13. Investment Committee
A five member Investment Committee made up of outside investors with
at least $1,000,000 of capital invested in the Fund will review each loan
to ensure that all transactions are consistent with the policies and
guidelines of the Fund.
At least three members must approve a loan.
For an “exception” loan, at least four members must approve the loan.
Authority for short-term extensions and small loan transactions may be
delegated to Management by a unanimous vote of the Investment
Committee. Any loan made under this authority will be reported to the
Investment Committee in a month end report.
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14. Management of the Fund
Freedom Financial Funds, LLC is the Manager of the Fund and is comprised of a highly
experienced team with proven track records of success through multiple real estate
cycles. Each member of the team has a deep understanding of real estate, and owns and
invests directly in the asset class.
As leaders of a similar Fund from 2009 to 2016 the team had the following results:
Originated over $900M in loan transactions in the seven year period.
Managed average loan commitments of approximately $160M spread over an
average of 60 loans in the period from 2013 to 2015.
Incurred no losses over the seven year period.
The Fund earned an average return of 9.6% during the period.
Issued seven clean sets of audited financial statements, all within 45 days of the
fiscal year end and 28 quarterly reports within 15 days of each quarter end.
The Fund was oversubscribed for more than five years.
As the Fund grows, Management will seek to hire the best and brightest people in the
industry. Management believes its success and the quality of its investments is directly
determined by the quality of its staff. Simply said, people are the most important assets
in real estate.
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15. Resumes of the Principals
Michael Klein, Chief Executive Officer
Michael has over 35 years of experience in finance and company operations. He has
successfully started and operated three companies, several divisions for his employers
and has originated, approved or worked out billions of dollars in loans to both corporate
and real estate clients. Michael started his career at Union Bank in Los Angeles, where
he completed the Management and Credit training program. He has worked for money
center, regional and community banks, including Chase Manhattan Bank, Union Bank,
Wachovia Bank and China Trust Bank. Most recently, he co-founded and served as the
Chief Operating Officer of Partners Capital Solutions, Inc. (PCS) where he oversaw the
company’s formation and growth for seven years. During his tenure at PCS the company
originated over $900 Million dollars in loans and returned an average yield to investors
of over 9.6% while suffering zero losses. Michael served his community by spending
eight years as the co-chair of the Citizens Advisory Committee to form and have adopted
the Warner Center 2035 Specific Plan for the City of Los Angeles. He has also served on
the Executive Committee of the Board of Directors for the Building Industry Association
of Los Angeles/Ventura and volunteered as a Mentor at the Marshall School of Business
at the University of California. Michael has a BS in Finance from California State
University at Northridge and an MBA from the University of Southern California.
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16. Resumes of the Principals
Stanley Kafka, Principal
Stan has more than 50 years of experience in the Banking industry. Prior to joining
Freedom Financial Funds, he was a Managing Director at Partners Capital Solutions, an
Executive Vice President, and Division Manager at City National Bank's Real Estate
Group for 16 years preceded by 25 years at Union Bank in Real Estate Loan
Administration underwriting over $10 billion of development financing, and President of
Stanco Properties which provided specialized products and services for Developers. Stan
serves as a Board member at USC's Lusk Center for Real Estate, and is an honor's
graduate from Pepperdine University's PKE/MBA program. Stan also holds Bachelor of
Science degrees in Real Estate and Finance from the University of Southern California,
Certificates in Real Estate and Finance from UCLA, and is a graduate of the California
Military Academy.
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17. Resumes of the Principals
Minda Johnstone, Chief Credit Officer
Minda Johnstone has 33 years of experience in commercial real estate lending. She has
originated, approved and managed over $2 billion of loans over her career. She also
managed problem loan portfolios exceeding $500 million, with substantially favorable
results. Minda spent 4 years at Partners Capital Solutions as its Chief Underwriter,
contributing materially to the firm’s significant increase in loan volume and its absence
of troubled loans. Minda’s banking career started at First National Bank of Chicago in
Chicago; spanned 16 years as Team Manager and Senior Vice President at City National
Bank in Beverly Hills, where she earned its Blue Ladder Award; and continued as the
Commercial Real Estate Manager and Executive Vice President at a community bank in
Century City. Minda served 10 years as Director and Treasurer at HomeAid, Los
Angeles-Ventura County Chapter. She is a Past President of Commercial Real Estate
Women of Los Angeles (CREW-LA), Co-Chaired the 2012 CREW California Conference,
and serves on CREW-LA’s Advisory Board. Minda has a B.A. from Northwestern
University and an MBA from the Cox School of Business at Southern Methodist
University.
5/17/16 V3.4 17
18. Resumes of the Principals
Yan Lam, Chief Financial Officer
Yan has been in senior accounting and finance rolls in the real estate industry for over 20
years. Yan started her real estate career with Westrust Ventures, a developer and
investor in 48 neighborhood, community, power and lifestyle shopping centers and
mixed-used projects, totaling $1.09 Billion in value and 4.3M in square feet. Yan was
responsible for managing all accounting matters including tax compliance and auditing,
financial analysis and asset valuations, exit strategy and tax planning for over $500M
assets and cash management. She handled lender relationships, restructured loans and
maintained close relationship with REIT and institutional partners. She was in charge of
asset management, property management and supervised 18 employees. Most recently
she was Vice President of Accounting and Finance at Partners Capital Solutions Inc.,
where she was responsible for all accounting and finance, tax, reporting and information
technology functions for the firm. In addition to her responsibilities in accounting and
finance, Yan was responsible for underwriting renewals and term extensions for the
firm. She received a bachelor's degree in economics with an emphasis in accounting from
the University of California, Santa Barbara.
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19. Alignment of Interests
Management is personally invested in the Fund to ensure that its interests are
aligned with the investors.
The Fund has an independent Investment Committee to review substantially all
loans prior to origination. To be a member of the Investment Committee, the
member must have years of successful experience in real estate and have made
at least $1,000,000 investment in the Fund.
The Fee structure is investor friendly and does not incent Management to take
on additional risk to earn larger personal rewards.
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21. Investor Classes and Leverage
The Fund has two investment classes, Class A “preferred” and Class B
“common”, and may use debt or leverage to help fund the operations of the
Fund. Class A investors are senior in payment, liquidation and lock-out
priority to Class B investors and earn a variable rate of return based on the six
month LIBOR rate plus a spread of 3.00%. Class B investors earn the net
profits of the Fund.
The Fund may employ leverage but with conservative limitations. Total
Leverage in the Fund may not exceed a ratio of 1:1 based on Total Leverage to
Net Worth. Total Leverage includes Class A interests plus any debt of the
Fund. Net Worth equals Class B interests. A limit of 1:1 leverage ensures that
the leverage obligations of the Fund are easily met from cash flow from
operations or from the normal payoff of loans that are short term in nature.
Please see Pro-Forma Financial Statements at the end of the presentation.
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22. Distributions and Reporting
Monthly distributions will be made electronically with email verification.
Monthly statements will include earnings for the period and
confirmation of the investor’s capital account balance.
Quarterly Reports will be sent via email to all investors on the 15th day
after the quarter ends. Reports will include highlights for the quarter,
portfolio composition and performance reports and internally prepared
financial statements for the Fund.
CohnReznick, a national accounting firm, will perform the annual audit of
the financial statements. The audit report and K-1 tax reports will
delivered to investors approximately 45 days after the end of the
calendar year.
Cash will be reconciled daily by a third party Fund Administrator. In
addition, the Fund Administrator will also prepare the Fund’s accounting
records to ensure independent oversight of the Fund’s assets.
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23. Income, Fees and Costs
Class A limited partners in the Fund will be paid monthly based on an annual rate of
interest calculated using the six month LIBOR rate as published on the first business day
after January 1 and June 30 plus a spread of 3.00%. The interest rate paid will be reset
on these publishing dates. Class A payments will be senior to Class B limited partners
payments.
Class B limited partners will receive its income after authorized expenses. Authorized
expenses include:
Payment of Class A limited partners
Payment of the cost of the annual audit, preparation of tax returns and K-1 reports,
the cost of a third party fund administrator and any applicable government fees.
A 2% annual fee paid in monthly installments to the Fund Manager based on the
amount of the loans outstanding (Note: not Assets Under Management or AUM).
After payment of the above, the Fund Manager will be paid 12% of net income and the
balance, or 88% will be paid to the limited partners.
The Manager may collect administrative fees charged directly to the borrower for such
items as loan documents, inspections, appraisals, demands for repayment and the
issuance of re-conveyances.
5/17/16 V3.4 23
24. Lock Out Periods
Class A limited partner’s investment is for 60 day periods and may be
called by the limited partner with 60 days notice. The Manager may
also return Class A limited partner’s investment with 60 days notice.
Class B limited partner’s investment is for one year. After a year, the
partner may give notice to withdraw its investment.
The Manager will be required to make its best efforts to honor withdrawal
requests on a timely basis but will not be required to liquidate loans to
accommodate such requests. Withdrawal requests will be paid from
proceeds from new investors or loan repayments. Further, there are
limitations on the maximum amount of withdrawals that will be paid in a
given quarter.
5/17/16 V3.4 24
25. Conclusion
Management has a demonstrated track record of creating safe and secure loans
that provide an excellent risk and return balance.
The Fund will have competitive advantage through it’s Manager’s reputation for
quick and reliable execution.
The underwriting focus on People, Credit, and Real Estate is proven to maximize
risk adjusted rates of return.
Loans will be sized to a point of indifference. The Fund can own the loan or the
asset and be equally satisfied.
Loans will not exceed 65% of the net LTV.
Targeted rates of return for Class B investors: 8.0%
Cash flow paid monthly.
Low management cost and no promote taken by Management.
Audited financial statements and quarterly detailed reporting.
Short Lock-out Periods.
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26. Pro-Forma Financial Data
5/17/16 V3.4 26
Assumptions Year 1 Year 2 Year 3 Total
Loan Production 25,000,000 50,000,000 60,000,000 135,000,000
Estimated Average Loan Balance Outstanding 17,500,000 42,500,000 50,000,000
New Capital Required 17,500,000 25,000,000 7,500,000 50,000,000
Allocation of New Capital Required
Class A Investment 20.00% 3,500,000 5,000,000 1,500,000 10,000,000
Class B Investment 70.00% 12,250,000 17,500,000 5,250,000 35,000,000
Bank Line of Credit 10.00% 1,750,000 2,500,000 750,000 5,000,000
Total 17,500,000 25,000,000 7,500,000 50,000,000
Cumulative Capital Allocation Summary
Cumulative Class A Investment 3,500,000 8,500,000 10,000,000
Cumulative Class B Investment 12,250,000 29,750,000 35,000,000
Total Cumulative Capital Investment 15,750,000 38,250,000 45,000,000
Cumulative Balance - Line of Credit 1,750,000 4,250,000 5,000,000
Total Assets in Management 17,500,000 42,500,000 50,000,000
Blended Note Rate Earned 8.00% 8.00% 8.00%
27. Pro-Forma Financial Data
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Pro-Forma Income Statement Year 1 Year 2 Year 3 Total
Interest Income 1,400,000 3,400,000 4,000,000 8,800,000
Loan Orgination Fees 2.00% 500,000 1,000,000 1,200,000 2,700,000
Total Income 1,900,000 4,400,000 5,200,000 11,500,000
Servicing Fee 2.00% 350,000 850,000 1,000,000 2,200,000
Fund Admin Fee 0.10% 17,500 42,500 50,000 110,000
Bank Line of Credit Interest 5.00% 87,500 212,500 250,000 550,000
Audit & Tax 45,000 46,350 47,741 139,091
Insurance 15,000 15,450 15,914 46,364
Other Misc Exp and Govermental Fees 12,000 12,000 12,000 36,000
Total Expenses 527,000 1,178,800 1,375,654 3,081,454
Net Income 1,373,000 3,221,200 3,824,346 8,418,546-
Class A Investment Return (6 Month LIBOR + 3%) 4.00% 140,000 340,000 400,000 880,000
1,233,000 2,881,200 3,424,346 7,538,546
Class B Investment Return on Capital 88.00% 1,085,040 2,535,456 3,013,424 6,633,920
Manager 12.00% 147,960 345,744 410,922 904,626
Class A Return on Capital 4.00% 4.00% 4.00% 4.00%
Class B Return on Capital 8.86% 8.52% 8.61% 8.66%
Gross Return on Total Assets 10.9% 10.4% 10.4%
DSCR - Bank Line of Credit 15.69 15.16 15.30
DSCR - (Class A Investment + Bank Line of Credit) 6.04 5.83 5.88
Disclaimer: These proformas are highly speculative. Investors should proceed with caution and consult
with their own advisers prior to investing.
