Introduction to FARJHO and SwapRent


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Introduction to FARJHO and SwapRent

  1. 1. FARJHOSM – The Crowdfunding of Home Equity FARJHOSM(Flexible And Reversible Joint Home Ownership) Services Offered at (for Investors) and (for Homeowners) InvestorsAlly, Inc. 888-456-8881 All Rights Reserved. 1
  2. 2. FARJHOSM – The Crowdfunding of Home Equity What Is A FARJHOSM Structure? - 1FARJHOSM was created as a new method of “shared equity” based home ownership toallow both retail and institutional money to come into the home ownership by lettingrenters and property investors co-own the properties in a LLC structure so that there wouldbe a positive yield on their investments, similar to a real estate syndication process oncommercial properties but with much scaled down expenses and complexity.Due to its simplicity, this new commercialized service is ready for use now by bothinvestors and homeowners without having to rely on the participation or any involvementsby the Governments, legislations by Congressional lawmakers, tax payer’s money or theinterventions by any major financial institutions.With this new invention, crowdfunding would also become a reality since FARJHOSMbasically corporatizes the single family home ownership, one home at a time. All Rights Reserved. 2
  3. 3. FARJHOSM – The Crowdfunding of Home Equity What Is A FARJHOSM Structure? - 2A common base structure for the US market is currently composed of a real estatesyndication using an LLC legal entity. Each structure will be put together by a designatedsyndicator with a certain number members in the LLC. One of the co-owner memberswill be renting the property from the LLC and treat the property as his/her ownprincipal residence.FARJHOSM will serve as an additional consumer choice to increase housing affordabilityunder the free market, not meant to replace any housing finance methods already inexistence. It will only become a creative destruction to other existing businessmethods if its economic value is proven and adopted by the consumers through furtherpublic education and awareness. For now it serves as a perfect alternative whenhomeowners either can not afford the conventional borrowing or are not interested inthe burden of debt from a conventional home mortgage. All Rights Reserved. 3
  4. 4. FARJHOSM – The Crowdfunding of Home Equity Definition of FARJHOSMThe distinguishing features of FARJHO as a new business method to implement the equity sharing MSconcept are three-fold: First, FARJHO allows renter/home occupier and joint property investors to own MSonly one home at a time in order to maintain the sanctity and the freedom of the single family residence theownership.ownership This is in sharp contrast to many community oriented equity sharing methods of Co-ops, LandTrusts, Kibbutz or Commune types of older equity sharing methods.Second, as a brand new concept, FARJHO only allows member level debt financing to eliminate the MSforeclosure possibility which exists with conventional property level debt financing as commonly used by aShared Equity Mortgage (SEM), a Shared Appreciation Mortgage (SAM), a Shared Ownership Mortgage(SOM) or any other existing equity sharing schemes to date. In all those older business methods, the homeoccupiers could still get foreclosed whenever they lose their monthly income capability under those oldproperty level financing arrangements. From PBB (Pool-Borrow-Buy) to BPB (Borrow-Pool-Buy).Third, FARJHO provides a natural built-in buffer to conventional renting to avoid potential eviction when MS built-the tenants temporarily lose their monthly income capability. The equity stake of the renter/co-owner of the paymentsFARJHO structure could act as an optional voluntary collateral against missed monthly rent payments and MStherefore provides property investors with enhanced investment security through less credit risks and at thesame time provides the tenants/co-owners with more home occupying stability during the rainy days in theirworking lives. All Rights Reserved. 4
  5. 5. FARJHOSM – The Crowdfunding of Home Equity FARJHOSM Application In The US - Example 1A home seeking person who currently rents, identifies a property in a geographical area ofhis/her choice. He/She has the 10% of the property in cash from his/her own savingsand would like to seek to jointly own the property with other investors as the ideal homeowning structure.The reasons could be because that he/she may not have enough monthly income toqualify for a conventional mortgage, prefers to use the discretionary monthlyincome for other household expenses, does not think the property value mayincrease in the near term, for his/her particular religious belief that rejects thelending/borrowing concepts or simply any other personal preferences.He/She commits to pay a pre-agreed rent to the FARJHOSM LLC that holds the title ofthe property for a specific period of time. The remaining 90% property ownership could beshared among up to nine other individual, corporate institutional or even governmentalentities as members in the same FARJHOSM LLC structure. All Rights Reserved. 5
  6. 6. FARJHOSM – The Crowdfunding of Home EquityFARJHOSM Application In The US - Example 2aA group of investors have identified and bought a particular single family house at bargainprice through a syndicated FARJHOSM LLC structure either through a short sale process orfrom a bank’s REO portfolio. The syndicator of the FARJHOSM LLC tries to find a longterm renter of this single family house in order to generate stable long term rental income.Many renters do not commit to the long term and do not usually care about the houses thatthey rent.The syndicator/property manager makes an offer to a qualified renter who has the ability topay for a small percentage of the property value and invites him/her to join the FARJHOSMLLC as a minority stake holder/member himself/herself. Once the renter becomes theminority homeowner, he/she may intend to stay for the long term and would treasurethe property and take good care of it as thought it were his/her own. In fact it isindeed his/her own, albeit partially. Although he/she does not have the economic incomecapability normally required to own the property entirely he/she gets to enjoy the highquality home in the neighborhood of his/her choice. All Rights Reserved. 6
  7. 7. FARJHOSM – The Crowdfunding of Home EquityFARJHOSM Application In The US - Example 2bThrough buy/sell agreements between FARJHOSM LLC members, the homeownerscould increase his/her equity ownership through buying existing member’s interests.Alternatively, he/she could use SwapRentSM contracts to do so when they becomeavailable at REIDeX in the near future. In the worst case scenario, he/she could alsobecome a FARJHOSM LLC member in another property in the same neighborhoodwhenever he/she has the increased economic ability to do so and would like to have moreinvestment exposures.Comparing with conventional commercial property investments, FARJHOSM offersproperty investors less worries about vacancy and expenses. The investor’s SGI(Scheduled Gross Income) equals to his/her GOI (Gross Operating Income) and alsoto his/her NOI (Net Operating Income) since both annual vacancy loss and expensesare most likely zero in a FARJHOSM LLC structure. All Rights Reserved. 7
  8. 8. FARJHOSM – The Crowdfunding of Home Equity FARJHOSM Application In The US - Example 3A homeowner currently has a deeply underwater house. He/She contemplates a strategic default onhis/her own house but does not like the idea of becoming an apartment renter. A buy-and-bail strategysounds more appealing to him/her. He/She could use an all equity based FARJHOSM structure tobecome the minority owner/renter of an alternative property in his/her neighborhood before he/shebegins discussions with his/her current mortgage lending bank to give up his/her existing homes in eithera short sale or a flat out walk-away foreclosure.The strategic defaulters usually could not secure another mortgage to buy another comparable homebefore or after he/she walks away from his/her existing home. To qualify for a new mortgage on asecond home, he/she has to either have 30% net equity in his/her existing home or a very largefully documented monthly income to qualify for the mortgage payments of two homes. This isoften not the case with most upside down homeowners.An all equity based FARJHOSM co-ownership structure makes it convenient for a smoother transitionto a long term comparable or even nicer and often more spacious home through a partial equityownership without having to lose the homeowner status by becoming a conventional apartment or houserenter. It may turn a somewhat embarrassing, face-losing event into a move-up in prestige as a partialowner of a much bigger and nicer house! All Rights Reserved. 8
  9. 9. FARJHOSM – The Crowdfunding of Home Equity FARJHOSM Application In The US - Example 4aIn a FARJHOSM transaction, each individual member co-owner can decide whether to borrow fortheir portion or not. Cash rich investors do not have to borrow. No group decision or action toborrow together is necessary. If some of the co-owner members want to borrow individually forthemselves, then the borrowing leverage (LTV) is up to each of the members individually and theirindividual lenders using their percentage ownership in the legal entity or the corporation as the collateral.So lets say a Texas home which is worth $100,000 is being bought by a FARJHOSM LLC. Threemembers, A (20%), B (40%) and C (40%) pooled the capital to form the LLC to begin with so that theLLC had the money to buy the home. The LLC did not and will not borrow any money or use theproperty as collateral to borrow any more money. Since neither the FARJHOSM LLC nor the homeproperty itself owes any money, therefore there is no possibility of a foreclosure of the homeproperty, ever!Member A was supposed to be the home occupier (AHO), so he pays the LLC a market based rentevery month for 3 years say in a 3-year lease as an example. It could be any lease maturity and will benegotiated and agreed by all the members in the LLC. All Rights Reserved. 9
  10. 10. FARJHOSM – The Crowdfunding of Home Equity FARJHOSM Application In The US - Example 4bIn terms of borrowing, Member A did not borrow to come up with the $20,000 since as the homeoccupier he wants stability. Cash ownership by him also injects confidence to other co-investors inthe LLC.Member B does not like to be burdened by the debt service so he did not borrow to come up with the$40,000 cash either. Member C likes to punt and strongly believes in using leverage to achieve highreturns. Furthermore, he does not even have enough money for the required $40,000. Say he only has$10,000 in savings so he borrowed $30,000 from a lender using his 40% share or member interests inthe LLC as the collateral for the lender. The leverage that Member C uses is 75% LTV of his partialmember interest in the LLC and his down payment equals to 25% of the value of that partial memberinterest in the LLC.So in the example above, pooled cash was used to purchase the property entirely and noborrowing using the property as the collateral was involved. Borrowing activity, if any, will beconducted only at the member level at each members discretion only. That is exactly the spirit ofhow the new FARJHOSM concept and method to own homes that could be used to eradicate theforeclosure possibilities, irrespective which country the homes or the home owners are located. All Rights Reserved. 10
  11. 11. FARJHOSM – The Crowdfunding of Home Equity Value PropositionEconomic Value: FARJHOSM provides enhanced investment returns for property investors sincethere will be much less vacancy possibility and there is no need to spend money on propertymanagement. The net annual yield from rental income would therefore be much higher than what theconventional renting by a 100% ownership landlord could provide.Social Value: Since there will no longer be any foreclosure possibility in this new home ownershipconcept and method, FARJHOSM helps promote neighborhood stability and social harmony.Technological Value: The portal site eliminates the middle men in the financialtransactions. derives a pre-determined service fee which would be much cheaper thanthe commissions charged by conventional brokers. That is exactly the power of Internet e-commercethat could deliver the service to the consumers at a much cheaper cost but could be rewarded morerevenue by having bigger volume.Social Networking Value: FARJHOSM will motivate home owners to sign up and market themselvesin order to attract potential investors’ attention. potentially could become theFacebook of home owners around the world. All Rights Reserved. 11
  12. 12. FARJHOSM – The Crowdfunding of Home Equity Corporate Structure InvestorsAlly, Inc. – State Licensed Conventional Realty and Home Loans Operations– Crowdfunding of – Social Networking FARJHO LLCs Portal for Homeowners Entry Point for Investors Entry Point for Homeowners All Rights Reserved. 12
  13. 13. FARJHOSM– The Crowdfunding of Home Equity Contact Information Ralph Y. Liu InvestorsAlly, Inc., 23 Corporate Plaza Drive, Suite 133 Newport Beach CA, 92660 Phone: 888-456-8881 x 888 Direct Line: 949-371-9139 Fax: 888-315-3831 All Rights Reserved. 13
  14. 14. SwapRentSM – Sharing Appreciation through Cash Flow Sharing SwapRentSM(Sharing Appreciation through Cash Flow Sharing) Services Offered at (for Investors) and (for Homeowners) InvestorsAlly, Inc. 888-456-8881 All Rights Reserved. 14
  15. 15. SwapRentSM – Sharing Appreciation through Cash Flow Sharing What Is A SwapRentSM Contract?A generic SwapRentSM transaction was created as a new "temporary own-rent switching" contractthat facilitates the realization of the separation of the "Shelter Value" from the "Investment Value" ofowning a real estate property.The shelter value is the right to occupy and use the property similar to those rights of a conventionalrenter. The investment value of a property is best demonstrated by the actual difference betweenthe cost to own and the cost to rent.To put in laymans terms, a SwapRentSM contract allows either a property owner or an investor tochoose between receiving a stream of monthly cash flows vs. receiving a portion of thepropertys future appreciation or depreciation potential and vice versa.Analysis: A monthly cash flow of $3,600 for a 30-year fixed rate mortgage of a single family house $1,200 = the shelter value like that of a renter $1,200 = first 50% of the investment value of the property $1,200 = next 50% of the investment value of the property All Rights Reserved. 15
  16. 16. SwapRentSM – Sharing Appreciation through Cash Flow Sharing SwapRentSM Embedded HELM, FARM and FARJHOSMSeparation of Shelter Value from Investment Value of Owning A Property % of Economic Owning, Increasing 100% Conventional Investment Value 100% Legal Title Renting Ownership 0% Economic 100% Economic % of Economic Renting, Ownership Ownership Decreasing Investment Value FARM or FARJHOSM HELM Flexible And Home Equity Reversible Joint Home Ownership Locking Mortgage All Rights Reserved. 16
  17. 17. SwapRentSM – Sharing Appreciation through Cash Flow Sharing A Generic SwapRentSM Transaction An Optional Financial Intermediary$1,000,000 2% SwapRentSM $800,000 Economic Economic Landlord Tenant$800,000 5% Mortgage Investor Funding Homeowner $500,000$600,000 Cost (MFC) The intermediary could be a bank, mortgage lender, a city, county or state government. Peer-to-peer model operates without a middleman. All Rights Reserved. 17
  18. 18. SwapRentSM – Sharing Appreciation through Cash Flow Sharing What Is A SwapRentSM Marketplace?• The SwapRentSM transaction is the realization of the newly created consumer financial concept ofeconomic renting while keeping the legal ownership for homeowners and other investment propertyor commercial property owners during the entire contract period. The answer to the perennial questionof to buy or to rent varies as time evolves. Sometimes the rental rate is higher and moreexpensive than buying. Other times the reverse is true.• It would be nice if property owners can have a choice to separate the legal ownership from theeconomic interests and hence the financial risks and rewards of owning a property, a way to continuethe legal ownership and synthetically switch back and forth between owning and renting onlyeconomically according to the market conditions (rent levels vs. interest rates) and their monthlyincome abilities at the time, or their investment views on the future performance of theresidential real estate markets.• That goal is what the SwapRentSM market was designed to achieve. Homeowners could use them inthe new SwapRentSM embedded mortgages (Home Equity Locking Mortgage, HELM) either with theirexisting lenders through a loan mod conversion without refinancing or with any other new lendersthat offer them through a refinancing. All Rights Reserved. 18
  19. 19. SwapRentSM – Sharing Appreciation through Cash Flow Sharing The SwapRentSM Industry Participants Inter-Bank Market (B2B)Investment Banks & Commercial Banks & Brokerage Houses The SwapRentSM Mortgage Lenders (Middlemen, B2C) Marketplace in (Middlemen, B2C) Each Country PILN SwapRentSM & REIOs HELM / PELM REILD FVCM / FARM Local Index Publishers & IPInvestors & Licensors Property Owners &Speculators Home Owners Peer-To-Peer (P2P or C2C) All Rights Reserved. 19
  20. 20. SwapRentSM – Sharing Appreciation through Cash Flow Sharing Shared Equity, Shared Appreciation, Shared Ownership SwapRentSM and FARJHOSMMost people who are new to these concepts can not distinguish whether it is the new "concept" or the new"method" that they are learning. It could be very difficult for them to distinguish the two if both are new to them.At the moment most people are simply amazed at what the new concepts could do to help us build a newalternative housing finance system and to help restore our national economy.Due to the fact that the whole concept is new to them they would not be able to know that the end products areactually results of very different "business methods" to implement the same simple “generic concept” at verydifferent evolutionary stages.Shared equity and/or shared appreciation related generic concepts are not new and they have mostly beenpracticed in the UK for over 30 years. These concepts have not caught on simply because those primitivebusiness methods engaged in the UK and more recently in Australia and the US to provide the economicbenefits to consumers were not good enough. There existed plenty of room for new innovations on new businessmethods in this field back then, similar to the opportunity of how Steve Jobs iPhone had potentially replacedGordon Gekkos Motorola platform shoe sized cell phone. Social sciences evolve with innovations justlike technologies would. All Rights Reserved. 20
  21. 21. SwapRentSM – Sharing Appreciation through Cash Flow Sharing A New Product Class “Shared Cash Flow” - SwapRentSMThe SwapRentSM transaction is the realization of the newly created consumer financial concepts of "economicowning, renting, and temporary own-rent switching" while keeping the existing legal ownership structure forhomeowners and other investment property or commercial property owners during the entire contract period.In fact, unlike the conventional way of using a "shared equity" method to accomplish the shared appreciationobjective, a SwapRentSM contract has created a new class on its own to use an innovative business method ofquantifiable "shared cash flow" to accomplish the shared appreciation objective of owning a real estateproperty.A conventional legal ownership entitles a property owner the right to occupy and use the property, which is the"Shelter Value", "Utility Value" or simply called "Use Value", as well as the right to obtain future financialupside appreciation gains and the obligation of bearing downside depreciation loss, which is the"Investment Value", "Financial Value" or simply called "Economic Value".A SwapRentSM contract aims to separate the investment value of a conventional property ownershipfrom the shelter value in order for the owners to better manage the financial risk and return aspects of aproperty ownership while maintaining their shelter value at all times. All Rights Reserved. 21
  22. 22. SwapRentSM – Sharing Appreciation through Cash Flow Sharing SwapRentSM as A New Alternative Economic Policy Management Tool for GovernmentsA SwapRentSM contract allows either a property owner or an investor to choose between receiving a stream ofmonthly cash flows vs. receiving a portion of the propertys future appreciation or depreciation potentialand vice versa. Real estate property market is regional. The supply and demand is confined in geographicalregion.1.Distressed Homeowners – No more foreclosures and short sales, property selling pressure will ease.2.Property Speculators – Increased buying demand for local properties.3.Small Business Persons and Entrepreneurs – Job creation at the grass root level.4.Wealthy Property Owners without Mortgages – Creating local consumption power in local communities.Homeowners who see the signs of an imminent swift recovery will think twice about their earlier plans to walkaway. The only way for homeowners to feel that they should not purposely make a strategic default and walkaway seems to be to somehow make them feel that they might be missing out on a swift recovery if they do walkaway. The detailed quantitative and technical explanations are available in an article entitled “The SwapRentSMTransactions for Homeowners, HELM and FARM – A New Alternative Housing Finance System” that Ihave published in the Journal or Housing Finance International (HFI) by The International Union ofHousing Finance (IUHF) in December 2009. ( ) All Rights Reserved. 22
  23. 23. SwapRentSM – Sharing Appreciation through Cash Flow Sharing AG SwapRentSM and DP SwapRentSMAG (Appreciation Give-up) SwapRentSM: Short a Covered Call Option Economic -3% AG SwapRentSM Economic Landlord Tenant Investor 5% Mortgage Funding Cost (MFC) Homeowner DP (Depreciation Protection) SwapRentSM: Long a Put Option Economic Economic 10% DP SwapRentSM Landlord Tenant Investor 5% Mortgage Funding Cost (MFC) Homeowner All Rights Reserved. 23
  24. 24. SwapRentSM – Sharing Appreciation through Cash Flow Sharing Settlement of A SwapRentSM Transaction 50% Economic Renting Using Generic SwapRentSM Example$1,000,000 2% SwapRentSM $800,000 Economic Economic (LTV=50%)$800,000 Landlord 5% Mortgage Tenant Funding $500,000$600,000 Cost (MFC) (LTV=80%) Pay the Investor through A New 2nd Mortgage of Only $100,000 (Total LTV ~ 50%) Initial 1st Mortgage Amount Borrowed Receive $100,000 from the Investor $400,000 (LTV ~ 50%) All Rights Reserved. 24
  25. 25. SwapRentSM – Sharing Appreciation through Cash Flow Sharing A Shared Appreciation Example 50% Economic Renting Using AG SwapRentSM Shared Appreciation Example$1,000,000 1% AG SwapRentSM Economic Economic$800,000 Landlord 6% Mortgage Tenant $800,000 Investors Funding Homeowners$600,000 Cost (MFC)Potential Investors: (1) state, county and city public employees or teachers pension funds; (2) profit-driven, free market institutional and individual investors from both the US and abroad to become economic landlords; (3) current home mortgage credit risk holders such as banks, credit unions, other mortgage lenders and MBS, CDO investors.REIDeX levies a small operational service fee on each party to the transaction for providing them with SwapRentSM documentation, education, transactional logistics and settlement procedural support.The Middleman will derive revenue as fees or credit spread from homeowners either as a not-for-profit organization, a private for-profit enterprise or as an SSE (State Sponsored Enterprise), alternatively called a LGSE (Local Government Sponsored Enterprise). All Rights Reserved. 25
  26. 26. SwapRentSM – Sharing Appreciation through Cash Flow Sharing SwapRentSM Embedded Mortgage Home Equity Locking Mortgage (HELM) 50% Economic Renting Using Generic SwapRentSM Example$1,000,000 2% SwapRentSM $800,000 Bank, City, (LTV=50%)$800,000 5% Mortgage Homeowner County or State Funding $500,000$600,000 Cost (MFC) (LTV=80%)Unpaid Balance of HELM AutomaticallyIncreases to ~ $500,000(LTV ~ 50%) Initial 1st Mortgage Amount BorrowedUnpaid Balance of HELM Automatically $400,000Reduces to ~ $300,000(LTV ~ 50%) All Rights Reserved. 26
  27. 27. SwapRentSM – Sharing Appreciation through Cash Flow Sharing The Off-setting SwapRentSM Transaction 50% Economic Renting Using Generic SwapRentSM Example$1,000,000 2% SwapRentSM Economic Bank, City,$800,000 Landlord 5% Mortgage $800,000 County or State Investor Funding$600,000 Cost (MFC)Pay the Investor $100,000(50% Participation) Collect from or Pay to the Homeowner through Their HELMReceive $100,000 from the Investor(50% Participation) All Rights Reserved. 27
  28. 28. SwapRentSM – Sharing Appreciation through Cash Flow Sharing Sample Business Model for the Middleman 50% Economic Renting Using AG SwapRentSM Shared Appreciation Example$1,000,000 1% AG SwapRentSM Economic Economic$800,000 Landlord 6% Mortgage Tenant $800,000 Investors Funding Homeowners$600,000 Cost (MFC) As an example, if the total annual spread that Middleman will get is 4.9% (after 0.1% SwapRentSM transaction fee to REIDeX), it could keep say, 0.2% to 0.5% if it is a not-for-profit entity or 0.5% to 2.0% depending on the homeowner’s credit score, history, LTV, lien seniority, … etc., as its revenue sources for a for-profit operation. The net spread that the homeowners will get after Middleman’s fee is 4.4% to 2.9% depending on each of the individual situations. All Rights Reserved. 28
  29. 29. SwapRentSM – Sharing Appreciation through Cash Flow Sharing PILN (REILD) with SwapRentSM For a Generic SwapRentSM exposure$1,000,000 2% SwapRentSM$800,000 Investor 5% Mortgage Bank $800,000 Funding$600,000 CostCoupon = [Deposit Rate + (2 – 5)]%Principal Redemption = [1 + (Ending Index – Starting Index) / Starting Index] * 100% All Rights Reserved. 29
  30. 30. SwapRentSM – Sharing Appreciation through Cash Flow Sharing Potential Applications of SwapRentSM - 1To summarize, among many other applications, the five key economic advantages thatthe SwapRentSM and its related consumer finance products are:1. For those informed and educated homeowners to hedge the financial value of theproperties that they own by switching between owning and renting economically onlybased on their views on what the overall real estate market will do in the near future whilekeeping the legal ownership of all their properties at all time.2. Considering the relative cost of owning and renting, the less affluent homeownerscould decide to be economic renters or owners solely based on how much monthlysubsidy they could receive to afford legally owning the properties while being partial orentire economic renters for a period of time. This will increase the housing affordabilityfor young first-time would-be homeowners, low income working families and retiredsenior citizens. It is a much better alternative to a reverse mortgage. All Rights Reserved. 30
  31. 31. SwapRentSM – Sharing Appreciation through Cash Flow Sharing Potential Applications of SwapRentSM - 23. Due to the alleviation of moral hazard associated with conventional renting, SwapRentSM will improvethe neighborhood quality of both the public housing projects and the conventional apartment rentalcomplexes. It could thus reduce crimes and improve the overall well-being of the urban environmentsanywhere in the world. With this newly created portable housing affordability, municipalities will nolonger have to waste taxpayers money to build affordable housing complexes that often turn into slums.4. For both institutional and individual investors to become synthetic “economic landlords”; by simplyreceiving SwapRentSM payments and paying out mortgage funding cost for a particular neighborhood orcity. They could establish such cross border reversible long property exposures easily all over the worldwithout worrying about the management of these properties and incurring the normally high transactionalcost and taxes.5. For current apartment or house renters to establish an anticipatory hedge position through receivingSwapRentSM payments based on a particular city level property price index so that they can lock in todaysreal estate price levels for intended purchases of real estate properties in that city in the future. Theywould not be priced out of the market if indeed real estate prices rise sharply in the future. All Rights Reserved. 31
  32. 32. SwapRentSM – Sharing Appreciation through Cash Flow Sharing Application Examples of SwapRentSM - 1As a simple application example, a homeowner who lives in Los Angeles may decide to be the "economictenant" of his/her own home in Los Angeles by paying SwapRentSM rate (at say 1.5% per annum) basedon the Los Angeles metropolitan area index to an investor who is willing to be his/her "economic landlord"investor for a contract maturity of 10 years and simultaneously receiving an annual mortgage fundingcost (MFC) of say 5% from this investor for the duration of the SwapRentSM contract. Once this contract isexecuted, during this 10-year contract period, he/she would have locked in the current price level of his/herown home and would not have any future appreciation potential or any downside depreciation worriesanymore. The homeowner could decide to unwind and terminate this SwapRentSM transaction any time(e.g. 6 months, 1 year or 2 years later) before maturity due to relocation, new jobs with higher monthlyincome, investment timing views (i.e. cutting loss, taking profit, being bullish about the LA property marketagain) or simply free will.The reason why this decision is to be made could be based on either a hedging purpose, an equitywithdrawal or appreciation give-up cash-out purpose since he/she would receive a netted monthlypayment from the investor, both as mentioned above, or simply a pure life style change purpose. All Rights Reserved. 32
  33. 33. SwapRentSM – Sharing Appreciation through Cash Flow Sharing Application Examples of SwapRentSM - 2For example, this person may be retiring in 10 years and may decide to relocate to Hawaiifor his/her retirement. He/She could then enter into another SwapRentSM contract of similarremaining maturity based on the Honolulu metropolitan area index with another counter-party homeowner in Honolulu by receiving a SwapRentSM rate (at say 2.5% per annum) andsimultaneously paying an annual MFC of say 5.5% so that he/she could become an"economic landlord" him/herself in Honolulu. By doing so he/she would be able to move toHonolulu 10 years later to look for an ideal dream house in that city and purchase thechosen house then at a price level (say per sq ft price) that was locked in 10 years earlierthrough the SwapRentSM contract.Both of these two separate SwapRentSM contracts could be unwound and terminatedearlier before or on the final maturity dates, either together or separately, at somefreely traded secondary markets such as REIDeX. Of course they would have to beunwound at the then market rates to reflect a profit or loss, just like how any other financialinstruments operate in their own markets. All Rights Reserved. 33
  34. 34. SwapRentSM – Sharing Appreciation through Cash Flow Sharing Application Examples of SwapRentSM - 3In the foreseeable future, homeowners might be able to apply this on an international scale. For example,a homeowner in London could decide to do a retirement life style change plan through SwapRentSMcontracts so that he/she could retire in Nice in South of France. Homeowners could do the same betweenTokyo and Singapore or between Beijing and Taipei.The decisions could also be financial and investment view driven. A resident in Toronto may think that thefuture real estate property appreciation potential in Australian metropolitan area could be higher for thenext 5 years than Canadian metropolitan area. He/She could then make arrangement through city indexbased SwapRentSM contracts and be a 80% "economic tenant" in his/her own house in Toronto andbe a 40% "economic landlord" investor in both Sydney and Melbourne.Financially speaking, with very little hassle and transactional cost, he/she would then have adiversified investment exposure composed of 20% Toronto, 40% Sydney and 40% Melbourne inhis/her medium term investment portfolio on the residential real estate markets. Socially speaking, he/sheand his/her children will continue to enjoy the comfort of occupying 100% of his/her own house and theassociated neighborhoods in Toronto for the next 5 years and more. Innovations could indeed continue tomake our world even flatter! All Rights Reserved. 34
  35. 35. SwapRentSM – Sharing Appreciation through Cash Flow Sharing Suggested Local Government’s Active RolesFrom the providers delivery perspective, on the Canadian side, the Ontario Provincial Government or Toronto MunicipalGovernment could channel the net positive monthly subsidies from an “economic landlord” investor which it has a separateSwapRentSM contract with to this Toronto homeowner. The Toronto homeowner could then use part of these net monthlyproceeds he/she has received from the local government to become the “economic landlord citizen” in Australia.On the Australian side, the State Governments of New South Wales and Victoria, their housing agencies, or the MunicipalGovernments of Sydney and Melbourne could administer these SwapRentSM programs for their local residents. Amongmany other sources, they could even have a SwapRentSM contract with this Toronto homeowner directly to treat him/her asan “economic virtual citizen” of their cities and channel these net positive monthly subsidies to many other homeownersin their cities who may be in need of these monthly subsidies through another SwapRentSM contract or a HELM contract.For better managing the homeowner counter-party credit issues, the best way would be for the municipal or state/territoryand provincial governments at different geographical locations to communicate with one another for managing thecredit risks of both “economic tenant” homeowners and “economic landlord” investors in their cities, states or provinces inorder to make sure only morally responsible and economically eligible law-abiding citizens get the chance to participate inthese reciprocal programs. These new social innovations derived from the cross-city and cross-border aspects of theSwapRentSM business provide certain privileges to people who behave in a morally decent way in our civilized humaneconomic societies and are definitely not meant for everybody in every city around the world. Local governments activeparticipation and proper regulations could ensure that will remain the case. All Rights Reserved. 35
  36. 36. SwapRentSM – Sharing Appreciation through Cash Flow SharingSignificance in Creating New Housing AffordabilityIn this way, the Australian state/territory or municipal governments could simply accomplishtheir goals of providing housing affordability to their local low income families or otherhomeowners in need without having to resort to any of their own local taxpayers moneysince the money will be provided from private free market sources that may include bothforeign or domestic institutional investors and the individual “economic virtual citizens” oftheir municipalities.In addition, by being the middlemen to administer these SwapRentSM programs, the localgovernments could generate a reasonable fee to enhance the local governments ownfinances for offering these services to their local real citizens and many virtual citizensaround the world so that they could reduce the local property and other tax burdens to theirown local residents.Wouldnt this be a better free market based alternative addition to offer housing affordabilitythat could discourage the abuse of over-leveraging in the various national housing financesystems for the future of our capitalism society? All Rights Reserved. 36
  37. 37. SwapRentSM – Sharing Appreciation through Cash Flow SharingAn Example of Islamic Applications of SwapRentSMA home seeking person could start out as a regular renter for a residential property in a location of hischoice. The bank will purchase the property into a trust or simply in a co-ownership legal structure forhim. In the trust, the person could buy into a portion of the legal ownership between 0% to 100%. Either5%, 10% or 20% could be a good starting point depending on the issuing banks credit standard. He couldbuy into more of the legal ownership vehicle now or later at the then prevalent market price. Meanwhilethrough these new economic owning or economic renting concepts, this new home occupier couldmake proper arrangements with the bank to become an economical owner or renter for whateverproportion of the total value of the property any time in a totally flexible and reversible manner (eitherbuying or selling) for whatever length of time through making SwapRentSM transactions at a renter gives a person the rights to occupy and use of a property. Being an owner will give him theright for the financial gains if there is future appreciation by the time he decides to sell, in addition to thesame rights to occupy and use that a typical renter would have during his ownership. Of course he willalso have to bear the risk of depreciation if he has to give up ownership at any given time pre-maturely. Toput it in a very simplified way, the cost differential between the cost to rent and the cost to own willdetermine whether a person will be entitled to the future financial gains of the appreciation and theresponsibility of bearing the risk of loss due to depreciation, meanwhile he could continue to occupyand use the property regardless what the financial value of the property is. All Rights Reserved. 37
  38. 38. SwapRentSM – Sharing Appreciation through Cash Flow Sharing Introducing FARM and FARJHOSM – Flexible And Reversible Joint Home OwnershipFurthermore, if he is only interested in obtaining future appreciation potential, he may pay abit more in monthly payments to acquire that appreciation potential only with AGSwapRentSM contracts instead, so that he would not have to bear the downside risk if theproperty value goes lower in the future. It should be easily understandable that an AGSwapRentSM contract will be more expensive than a corresponding Generic SwapRentSMcontract since it will only gives the acquirer the right of future appreciation without theresponsibility of the risk of downside losses.It would be very interesting to note that in a non-recourse mortgage loan, as currentlyuniquely practiced in many states of the US, the same financial profile could be simulated byconventional renting plus owning AG SwapRentSM contracts, i. e. appreciation only, bythe home occupier. Whereas for the rest of the world, where recourse mortgage loans areusually practiced, the financial profile is equivalent to conventional renting plus GenericSwapRentSM contracts, i.e. the ownership units (either conventional legal or the neweconomic) always come automatically with the responsibility of downside depreciation risksfor the owners. All Rights Reserved. 38
  39. 39. SwapRentSM – Sharing Appreciation through Cash Flow Sharing Historical Time Line of the Development of SwapRentSM and FARJHOSM• 2001 – 2004 Launching REIFO (Real Estate Index Futures and Options) Exchange. The predecessor to CME’s Options and Futures Exchange Trading on Real Estate Indices.• 2004 – 2006 Introducing RMB Interest Rate Swaps in the inter-bank market and Fixed Rate Mortgages to home owners in China.• 2006 Researching and creating SwapRentSM, HELM, PELM, FVCM, REILD, PILN, SPIM and REIDeX. Filing patents in major countries.• 2007 Working with banks in the UK, Australia, Hong Kong, Singapore as well as Wall Street firms and banks in the US. Campaigning to the Federal government agencies, Treasury and the Fed.• 2008 Exploring municipal applications of SwapRentSM with State, County and City governments across the US, setting up REIDeX, Inc.• 2009 Exploring Islamic finance applications with central banks and financial institutions in the Gulf Region of the Middle East.• 2010 Farming out the FARJHOSM structure away from SwapRentSM embedded FARM (Flexible And Reversible Mortgage), setting up InvestorsAlly, Inc. as a separate entity for easier commercialization.• 2011 Launching PeoplesAlly Foundation to assist low income working families. All Rights Reserved. 39
  40. 40. SwapRentSM – Sharing Appreciation through Cash Flow Sharing Corporate Structure InvestorsAlly, Inc. – Fully Licensed Conventional Realty and Home Loans Operations– For SwapRentSM – Social Networking Transactions Portal for Homeowners Entry Point for Investors Entry Point for Homeowners All Rights Reserved. 40
  41. 41. SwapRentSM– Sharing Appreciation through Cash Flow Sharing Contact Information Ralph Y. Liu InvestorsAlly, Inc., 23 Corporate Plaza Drive, Suite 133 Newport Beach CA, 92660 Phone: 888-456-8881 x 888 Direct Line: 949-371-9139 Fax: 888-315-3831 All Rights Reserved. 41