The document discusses how accredited investors can become financial sponsors and earn high returns of up to 42% by lending money through crowdfunding platforms like Open Source Capital to fund real estate projects. As a financial sponsor, the investor would loan money to real estate owners/developers and receive a promote - a percentage of profits from reselling portions of the loan to other investors. An example is provided where a financial sponsor loans $100,000 at 15% interest, sells 90% of the loan for a 20% promote, and earns 42% overall compared to the 12% return for other investors. The document then provides details on the investment process, participants, criteria for sponsors, and how Open Source Capital sources, evaluates and manages

1. FINANCIAL SPONSORSHIPS
THE POWER OF THE PROMOTE
How to make a 42% return by lending on real estate, using Open Source Capital and crowdfunding.
Crowdfunding has opened up a whole new world of finance. Ever wonder why hedge fund managers make so much money, but don’t take much risk? The answer is: the power of promote –the art of finding and controlling an asset, and then selling a portion of that asset, while still controlling a portion of the income.
If you are an accredited investor and have $1,000,000 dollars or more to invest you need to be reading this, because now you can become a Financial Sponsor and make up to 42% on your investment dollars.
As a Financial Sponsor you can loan money to owners of commercial real estate. Savvy Financial Sponsors participate in the funding of loans to borrowers that are purchasing or developing real estate. Once a borrower has agreed to your loan terms, Open Source Capital, markets a portion (between 50 to 90%) of your loan, to other accredited investors, looking to invest in loans secured by real estate. As a Financial Sponsor you receives a “promote” on the portion of the loan that is sold to the other investors, and by doing so, you increase the return on your investment by a substantial amount.
Example: 1 Year Loan
Loan commitment to borrower $100,000.00
Interest on the loan is 15% or $15,000
Financial Sponsor sells 90% of the loan to investors $90,000.00
Financial Sponsor retains 10%
Investors pay the Financial Sponsor a 20% promote out of their profit on the loan
Investors make 15% X $90,000 or $13,500 less 20% $2,700 =10,800 or 12%
Financial Sponsor makes:
15% X $10,000= $1,500 plus $2,700 =$4,200 or 42%
Introduction
Since 2007, there has been a historic consolidation of capital within our financial system. The top four US banks now control over 60% of all domestic deposits. Remember those community banks? Well, since January of 2009 more than 400 of them have been shut down by the FDIC. Many more are

2. operating under a form of “double secret probation” where their operations are hyper scrutinized by federal regulators. The end result is that the large banks are now so large that the typical transaction of the small and mid-sized business is just too small to get their attention, and the small banks remain too financially troubled to ease standards. To make matters worse, there is a strong probability that major consolidation among the remaining community banks is coming soon which will further limit credit availability to smaller entrepreneurs. In a nutshell, there is little institutional interest in any financial transaction under $20 million and nothing to suggest that this trend will reverse in the foreseeable future.
This fundamental market dislocation is a real problem and it’s a real opportunity. As Financial Sponsors we call this a Target Rich Environment.
While I strongly support the notion that there exists a significant profit opportunity in local real estate investing, the goal is not to convince investors that it’s superior to other alternatives. My goal is to provide those with an interest in local real estate investing with a solid understanding of what is in my opinion, the best practices of the most successful investors. The opportunity that awaits you is tremendous, perhaps even generational. However, if you venture down this path, you will soon encounter not only hard work, but a menagerie of amateur investors, incompetent operators and perhaps even outright con artists. The approach I’m suggesting that you subscribe to is a disciplined approach designed to limit risk, provide a method of well informed decision making, gathering of information from the “crow” and when properly practiced, will optimize the likelihood of a successful investment outcome. If you are one of the 20 plus million Americans that watched the value of your saving go down by 40% or more, it may be time for you to explore the merits of investing in your own back yard. The Power of Promote will not only help you learn how to gain access to “off market deals”, but you will be working to help facilitate the flow of capital to community based businesses in your own neighborhood, supporting local job growth, sharing prosperity and building a stream of income that can last for generations.
Building an income stream from real estate lending using the discipline and power of the promote
Hedge fund Managers use numerous different strategies and truthfully, depending on the prevailing market conditions at any moment, any one might outperform the others for some period of time. However, over time, the only real winners are the “managers” that receive the power of the promote.
In simple terms, The Promote always wins big when things go right and loses very little when things go wrong. One of the most famous investors, Warren Buffet, likes to say that the first rule of investing is “don’t lose money,” and the second rule is “never forget the first rule.” Preservation of capital is optimized by the “power of the promote recognizing that an investment’s outcome is more art than science and therefore a nice promote will mitigate much of the losses to the investor. It’s unreasonable to expect to never lose money on an individual investment; however, the cumulative value of the promote will overshadow good work and good luck. I find this approach to be the most reasonable basis under which an intelligent investor would be willing to incur risk.
Hereafter, I will assume that you will have accepted the concept of the promote. I could go on ad nauseam in further support of the power of the promote, but my purpose isn’t philosophical conformity, but rather a practical guide to the tools and methods of successfully earning a promote from a successful investment opportunity that I will attempt to summarize. I further believe that if investors are

3. willing to follow a disciplined and structured approach to promoting a crowdfunded investment, they will have an excellent chance of being remarkably successful.
Getting Started by Investing Locally
Remember the days of knowing your community banker, the owner of the local hardware store, the local butcher? Well, i do and that’s why I want to be a part of the Eat Local, Buy Local, Invest Local movement that is starting to take hold again in America.
The unfortunate fact is that until crowdfunding became legal in 2013, very few individual investors have direct access to “off market” local investments.
Identifying your fundamental desire to get involved as a financial crowdfunding sponsor is a vital first step. At the outset, it is worth emphasizing that there is no set formula or market for crowdfunding. I have selected an approach to crowdfunding that I call a Financial Sponsorship.
There is some information that you will need to learn and understand before you decide to become a Crowdfunding Financial Sponsor. You will also want to establish some “up-front” investment qualifications and requirements before you make your investment.
The Participants:
I. Principal/Borrower– This is the entrepreneur, who has the time and expertise to source opportunities and to personally invest and manage daily operations or to manage contractors and/or professionals as appropriate. The Principal/Borrower also accepts responsibility, either alone, or with other partners for loans or other required guarantees.
i. Advantages to being a Principle/Borrower
i. Will typically stand to earn highest absolute return from a successful project
ii. Has control over daily activities and therefore can exert greatest influence
ii. Disadvantages
i. Typically holds most junior position in capital stack
ii. Investment is illiquid until asset disposition is completed
iii. Often is personally liable for losses above capital investment
iv. Often requires significant time commitment
v. Generally requires specialized skills or knowledge
vi. Generally requires licensing
vii. Generally does not lend itself to a absentee ownership
II. Preferred Equity Investor – A Preferred Equity Investor is a supporter of a specific project along with an active Principal. Typically this investor will have a nominal role in operations and often benefits from a minimum return preference superior to the Principal’s capital and a significant sharing of the profit with the Principle. Typically passive preferred equity investors will not incur personal liability beyond the amount invested. Performance and liquidity are tied to the specific project.
i. Advantages
i. Often enjoys a return and or liquidation preference to Principal
ii. Typically is protected from any liability above your initial capital investment
iii. Limited operational responsibilities

4. iv. Available to absentee investors
ii. Disadvantages
i. Investment remains illiquid until disposition
ii. Limited ability to exert control
iii. Larger potential loss exposure to single asset
III. The Financial Sponsor - as a Financial Sponsor, your capital is pooled together with other investors and loan to the Principal/Borrower.
i. Advantages
i. Less potential for loss relative to equity or preferred equity
ii. Can be a source of current income as well as capital appreciation
iii. Consistency of returns
iv. Requires less specialized skills or knowledge than sole operator
v. Requires less time commitment
vi. Requires limited or no operational responsibilities
vii. Low correlation to public markets
viii. Typically provides less reporting
ix. Allows absentee investing
ii. Disadvantages
i. Significant reliance on managers expertise
ii. Limited “Home Run” opportunity
Iv. The Senior Lender- typically a bank or other lender that provides up to 65% of the capital
You will want to carefully evaluate your specific goals, objectives, and tolerances for various types of risk before embarking on a Financial Sponsor investment program. Generals famously proclaim that battle plans rarely survive fist contact with the enemy. Individual private investment projects will similarly be full of surprises. A good Financial Sponsor is constantly reacting to changing circumstances to optimize individual outcomes. This can have meaningful impacts on exit strategies and timing and/or capital requirements. Investing can be both rewarding and profitable, but it can also be unpredictable in the short term, and significant losses most commonly result from forced liquidations, resulting from inability to react appropriately to changing circumstances.
If you have capital to invest and want to limit your risk and personal daily involvement you may determine that being a dequity sponsor is the right approach for you. Others thrive on a greater involvement in asset or project selection. Some like to have a personal connection with individual sponsors or may want to limit their investments to a few opportunities that they believe are truly special. For these or even other reasons, they may prefer to ba an equity investor in individual assets or projects. Many want to build a business around this and have certain special skills and/or expertise that draw them to the Operators role. Our goal here is to help provide you with some of the tools and information that will allow you to feel confident to further explore the idea of Financial Sponsorship.
Open Source Capital’s Investment Approach
We believe that given the risk and time involved, we believe that “dequity investing” is a proper way to obtain superior returns. To achieve this goal, investors must be willing to provide capital to acquire and improve real estate at a time when conventional financing sources are non-existent or extremely

5. limited. This generally applies to projects that are too small to access the public debt or equity markets while conventional bank lending is scarce or not available, or the opportunity requires funds quickly in order to capitalize on a distressed situation.
How Open Source Capital Approaches the Local Market
Open Source Capital has an investment platform in place that allows us to efficiently access information about local demographics, market trends, comparable sales and other information related to local real estate. The key to unlocking potential value add investments lies largely with our ability to recognize local trends and acquaint ourselves with qualified local entrepreneurs that are capitalizing on those trends. Opportunities are everywhere and we continually read, watch, and listen. We constantly review news articles, sales brochures, and coming soon signs, as these are signs of companies that are expanding in a market and may provide the path for value add investments. Market disruptions often produce meaningful opportunities. We try and avoid the herd approach and instead focus on the individual value of each opportunity. We look for opportunities when markets are trading on emotion rather than logic. We believe that markets create virtuous cycles on the upside that tend to lead to overvaluation and vicious cycles on the downside that can lead to undervalued assets. This contrarian approach relies, in part on fads and herd mentalities that lead to fundamental differences between price and value.
In current terms, for example, the housing in Florida had lost more than 50% of its value from peak pricing. Part of this re-pricing results from the frenzied increase in prices leading up to the credit crisis. Part is due to the fact that banks and other forced sellers are liquidating more assets than the market can absorb. This is exasperated by the credit pendulum swinging from too easy to too tight, further limiting the pool of qualified buyers. We believe that this process has produced the opportunity to acquire certain properties at significant discounts and to add value by improving the property and then profitably liquidate those assets as the market normalizes. However, we also believe that the frenzied real estate activity leading to the bubble produced certain properties that never should have been built and have little hope of becoming viable in the foreseeable future.
To build a logical approach to identifying opportunities, we look at historical market data, current and future inventory trends, and changes in demographic or economic trends to gain an understanding of reasonable near term expectations. We then track actual results against our hypothetical outcome along with fresh data to continuously refine and update our outlook.
Establishing Your Investment Criteria
When considering investing in crowdfunding real estate investments, you first need to establish a basic set of underlying guidelines and requirements.
Basic requirements may include:
• A fundamental alignment of Interest between you and the Operator
• Investments must be short term (12 to 48 months)
• Investments must have an exit strategy and provide for an upside profit
• There must be sufficient hard assets as collateral to protect your capital

6. • Properties should be able to demonstrate an ability to achieve profitability within an 18-24 month period from the initial investment
What Open Source Capital’s Platform Provides
I. Sourcing Investments
II. Due Diligence
III. Investment Structure
IV. Negotiating the Purchase Price
V. Establishing the Operating Plan & Exit Strategy
VI. Development and Construction monitoring
VII. Managing and Reporting
I. Sourcing Investments
As a very wealthy French investor friend once said “every day when I wake up there is a whole new field of mushrooms.” Origination, the process of sourcing and initiating new deals, requires reviewing as many potential local investment opportunities as possible. It requires not only screening deals that don’t have the potential to be profitable, but you must also have the discipline to pass on deals where you don’t have the expertise to correctly evaluate and underwrite the opportunity. There is no shortage of good deals; however, it is important to understand early on, which deals have a high probability of ultimately closing. As a local investor, time is your most valuable asset, and being able to quickly identify bad deals, marginal deals, or deals that require a lot of due diligence with little chance of getting completed, is tremendously important.
• Where do we look for local investments?
Answer – In your local community
• Who do we talk to in your local community?
Answers:
- Bankers
We consider commercial banks as a major source for acquiring new business. Banks are constantly being asked to make loans by their small business customers. However, many banks are currently undercapitalized or operating under regulatory constraints that limit the amount of money they can lend to small businesses or even on real estate. Banks want to keep their customers happy, so having a local investor as a referral source is good business for them and because we are not in the business of gathering deposits and opening checking accounts, the banks don’t consider us a threat to their business.
- Private Equity and Hedge Funds

7. Over the past several years, hedge funds have been buying large pools of distressed assets. These asset pools often contain a certain amount of smaller size assets that are uneconomical for a large hedge fund to manage, so they typically will hire a local property manager to try and sell these smaller assets to local operators.
- Distressed and Over Levered Sellers
Over the past decade, the Federal Reserve’s easy money policy allowed many companies to borrow large amounts of money and to over-leverage their assets. In today’s market, there exist a large amount of distressed selling taking place, often in the form of short-sales and debt forgiveness.
- Real Estate and Mortgage Brokers
Brokers are a primary lead source. Not only can they pre-screen deals, but they can contribute to the information gathering processes during the due diligence phase.
- Professionals
Lawyer, engineers, architects and other professionals often have relationships with cash starved operators. They often have a professional interest in helping clients with liquidity issues and can be a valuable source of introductions.
- Individual Investors/Operators
Individual investor/operators are a primary source of new business due to the disproportion of credit available to small business.
At this stage of the process, our goal is to weed out projects that will waste time and energy and to focus efforts on the legitimate opportunities most likely to close. The evaluation process will typically consist of:
• Review of development plans or proposals to determine that the investment criteria will meet our client’s needs and that the project is well thought out, appears economically viable and is being offered by a credible seller.
• A detailed site and neighborhood inspection to develop a firsthand impression of the projects economic potential and identify visible issues that could fundamentally changes the economic proposition.
• Due diligence on the Seller to evaluate credibility, expertise and capacity to conclude the transaction. Additionally, it’s important to understand the probability that, subject to completing due diligence, the deal is likely to close.
II. Due Diligence - the mother of every investment

8. Due diligence is as much an art as it is a science. Due diligence starts by both asking questions and gathering information. When a twelve year old child asks to spend the night at a friend’s house, a parents first reaction is to immediately begin asking questions; who will be supervising, what time will the kids be going to bed, who else is staying there, what time will their child need to be picked up. What the parent is doing is essentially what you will be doing during the due diligence period, “assessing risk.”
When performing due diligence our experienced team of associates and other third party consultants will not only be assessing risk, but will also be evaluating opportunity. It is very important during the due diligence period to become deeply involved in understanding every major aspect of the project. This includes understanding the competition, understanding the products and their cost structure and learning how the project pricing compares with the market. Due diligence will include multiple site visits, inspecting comparable ventures or properties, meeting directly with management, talking with other investors, lenders, and stakeholders, performing project underwriting, and engaging with various third parties on legal or other technical matters. One thing we cannot stress enough is the need to continually be expanding our circle of close advisors by aligning yourself with seasoned executives in the markets that we are investing in.
As a potential investor, you are considering investing in an economic entity. Therefore, in simple terms, the goal of due diligence is to use the best available information to arrive on a valuation of your ownership interest in the venture. The method best suited is to work backwards by starting with the amount and timing of revenue, then evaluating costs and subtracting costs from revenue to determine total profit. The investment decision then is based upon the price that you can acquire the property and your confidence in the likelihood of an ultimate outcome being reasonably close to the predicted outcome.
To exemplify, let’s look at the case of a project to acquire a partially completed spec home that was foreclosed on by a local bank. The house was under construction by a reputable builder and was to be sold for $1 million dollars. The bank took the property back at approximately 75% completion two years ago with a loan balance of $750k. Since foreclosure, the property has been without utilities and only nominally maintained.
Our first goal is to determine a reasonable liquidation price for the asset assuming that it’s properly completed. We will want to interview several local Realtors, review historical price data, and look at comparable properties. Further, we will evaluate competitive inventory and review the pending foreclosure pipeline to evaluate the competitive landscape. Finally, we will use this data to develop a hypothetical most likely selling price for the asset. In addition, we will develop hypothetical best and worst case sales prices to help evaluate downside risk and upside opportunity.
Next, we will look in detail at costs. We will look at engineering reports on the property condition to determine if some of the existing structure requires replacement and construction time and cost estimates from reliable contractors to develop a reliable construction budget and schedule. Then we will add soft costs, such as, professional fees, legal, insurance, permitting costs, closing, recording, and/or other fees, and any interest on loans utilized to finance the project. Finally, we will determine if there are any unusual acquisition requirements and related costs. Banks often sell properties, as-is where-is, requiring the buyer to evaluate the potential for title issues and to plan accordingly.

9. Now, if we have confidence in our evaluation of selling price, marketing time, costs and construction time, we can apply a simple discounted cash flow calculation to arrive at an appropriate asset value. Having arrived at this value by using information sourced independently of the Seller, we now have a meaningful tool to compare and evaluate the original proposal and projections provided by the Seller or the Sellers agent. We are also now prepared to evaluate the structural elements of the investment and its implications on risk, opportunity, and sensitivity to changing circumstances.
The importance of due diligence, its quality, and the importance of its integrity, cannot be overstated. This is the detailed-oriented, unglamorous, but disciplined approach that separates the professionals from the hacks. We take pride in establishing and using industry best practices, sources and methods to independently verify all assumptions with the highest quality and most relevant data, in addition to our ability to organize and present both data and results into a concise and logical presentation. This is a capability we have build over time by researching and following some of the best institutional professionals in the business.
III. Investment Structure
Before deciding to invest, you must consider the implications of various investment vehicles and their related structural implications.
There are several options for operators to choose from, but generally they will focus on one or two of the more common forms of investment ownership, such as:
1. Personal ownership
2. Limited Liability Company LLC
3. Limited Partnership
4. S Corporation
5. C Corporation
6. Trust
IV. Negotiating the Purchase Price
One of the biggest advantages of local investing is that no one shoe fits every situation. We have learned when to speak and when to listen. As veteran local investors, we pay attention and listen to a borrower’s presentation before we present a specific idea, price or capital plan. It is important for local investors to remember that the lack of competition and non-commoditized nature of local investing allows for flexibility and the ability to extract more favorable terms for you as the investor. By focusing on small and mid-sized local deals, we are providing a service to a tremendously capital inefficient customer base. Sophisticated lenders are usually large institutional investors with no appetite for small deals. Because our Borrowers are typically less sophisticated and have dramatically fewer options than larger operators, we are not be competing against hedge funds or large private equity players for the best deals and we routinely are able to achieve better terms than our clients. The capital inefficiencies relative to small to mid-sized properties have been exacerbated by the recent downturns in the markets that has led many banks – large and small – to lower the amount of capital serving local real estate, if not withdrawing from the market altogether. This contraction in the traditional capital supply to small to mid-sized properties has not only increased the need for your capital, but has also enhanced your pricing power.
V. Establishing the Investment Plan

10. When investing it is mandatory that an Operating Plan is established. Some of the more important elements to be addressed in the plan will include:
A. What type of legal entity or investment vehicle will be formed?
B. What are the operating objections and pro forma assumptions?
C. What are the total resources required?
D. What licenses and permits will be needed?
E. Tax considerations
F. Equity requirements
G. Progress payments and draw downs
H. Outside consultant and managers
I. Handling Disputes
J. Marketing
K. Market Studies
L. Reporting Requirements
M. Insurance
N. Exit Strategy or payback schedule
O. Developing the budget
a. Hard cost
b. Soft cost
c. Marketing
Backgrounder
Over the last twelve years, the OSC Management team has invested hundreds of millions of dollars in real estate. The idea of helping others to invest in local real estate came about from lessons we have learned along the way. We have all witnessed that the business of real estate investing is highly cyclical. In 2007 we had a loan portfolio that was based on a high concentration in residential construction loans. Residential construction loans were impacted more than most by the weak housing market. Since we held all of our loans from the date of origination to final payoff, it was inevitably that we would be holding assets during the stress time of the cycle.
Broadly speaking, there are two primary risks associated with real estate assets: Operational Risk and Market Risk. Operational Risk is the risk that the property will not meet its anticipated operating results. Market Risk is the risk that the value of the asset will decline such that the proceeds from liquidation will be inadequate to pay off the debt and return the owners equity.
We believe we did all we could to address the Operational Risk. Within our real estate portfolio we limited the financing of preliminary development activities. We withheld funding or delayed closing altogether until all of the preconditions for development were satisfied. Preconditions included final zoning, permitting, executing the construction contract with the general contractor and internal, as well as, third party review of construction plans and specifications. In addition, we attempted to limit Operational Risk through careful underwriting practices. The underwriting process focused on (1) the borrower’s and general contractor’s experience at building comparable buildings, (2) the adequacy of

11. the project’s budget, (3) the adequacy of the plans and specifications, (4) the requirement of a substantial investment of equity, and (5) personal guarantees from the borrowers.
When assessing Market Risk, we considered both the estimated sell-out price of the units, and the pace at which the units could be sold. Presales were typically required to address market risk, as they provide insight into the extent of consumer demand for a project, as well as, provide a measure of value at the time of the loan’s origination. Regardless of how confident we were about our portfolio, future economic events rendered our confidence meaningless.
Assessing risk is as much an art as it is a science. In that regard, an experienced management team and highly capable asset managers are critical to a company’s success. Our management team has more than 20 years of experience in real estate development and lending. This includes structuring and pricing, visiting sites and inspecting comparable properties, meeting directly with borrowers, underwriting and approving loans, consulting on documentation issues, and making various decisions in the course of servicing loans.
Unfortunately, even with our underwriting and risk avoidance strategies, the geographic concentration of residential construction loans exclusively in Florida was overwhelming.
Over the last few years, we have discussed the various strategies we have pursued in our real estate investment business. Our general investment approach has not changed as a result of the housing market meltdown; however, we are always fine-tuning our methods and have learned quite a bit from the latest downturn. While we understand that this business brings with it certain risks, we feel that it is important to focus on a business that we know thoroughly and we are still pleased with the risk-reward ratios that we perceive in this business, particularly when viewed over multiple business cycles. For the last few years, we have been buying large distressed real estate projects in a partnership with one of the world’s most successful private equity funds. Having learned from experience and having witnessed the severe credit crises over the last several years, we believe there has never been a better time than now to be in this business.
We hope that we can give our clients the motivation and comfort they need to become “Financial Sponsor” and help to contribute and promote the desire of operating and owning a portfolio of successful real estate assets. If you believe in investing local give us a call and let’s get America moving again! You can become a Financial Sponsor and start practicing the Power of the Promote by calling me at 954-650-6798
Good luck and safe investing,
Kyle Meyer
Managing Director
Open Source Capital, LLC
Disclosure Statement
This manuscript has been prepared solely for information only and is not intended for use by investors interested in considering any investment, with any specific investment, including any investment with Open Source Capital, LLC., any employee, officer or director. This manuscript may not be reproduced, in whole or in part, nor may the information contained herein be used for any other commercial purpose

12. without the expressed prior written consent of the author. This manuscript is the property of the author and by taking receipt hereof, recipient agrees to be bound by the foregoing conditions and the following understandings.
The information contained herein has been prepared to assist interested parties in making their own evaluation of the merits of investing in small local companies and does not purport to contain all of the information that may be required to evaluate a possible investment in any particular company. In all cases, interested parties should conduct their own investigation and analysis of any company they intend to invest in. The authors of this manuscript will not be deemed to have made any representation or warranty, whether written or oral, to any person or investor whatsoever. Statements, which involve matters of opinion, whether or not identified as opinion, are intended to be only that and not a representation of fact. Neither the author, Open Source Capital, LLC, nor any employee, officer, director, stockholder or agent shall have any liability resulting from any use of, or reliance on this manuscript.