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The Ethical Investment System

DrewBetts

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Hi everyone,

I have something I`d like to share with you. The Ethical Investment System is an innovative due-diligence system that can be used to analyze any investment in real estate before you write a cheque. The knowledge that went into creating this system took 18 months, $100,000 of investment, and many hours with some of the top tax accountants and real estate lawyers on the West Coast. We had originally developed this as an internal system to be used by our firm, but we feel it would be extremely valuable for other investors as well, so we are now offering it to you. This is how and why it was developed...

Over the last 18 months, my firm, Evolve Investment Group, has set up a real estate fund to raise a pool of capital and purchase apartment buildings. Before we built this investment, we took a really close look at the market and what kinds of competitive offerings were available. We performed an extensive competitive analysis of 45 different real estate funds. REITs, limited partnerships, joint ventures, corporations, public, private, you name it.

Most of these investments are offered through a legal disclosure document called an Offering Memorandum. Most investors never read these documents because they`re thoroughly confusing, contain excruciating detail, and are written in nearly unintelligible legalese. This is unfortunate because you`d be shocked at what you find buried in the fine print. We read 45 Offering Memorandums cover to cover (yes there were copious amounts of coffee involved to keep us awake through this!). Our intention was to fully understand the structure of each offering, so we built a due-diligence process to go through with each one. By following our process we could ensure that we didn`t miss anything and that all our bases were covered.

After we`d finished our competitive analysis, we realized that this process had a much more valuable and wide spread application. Rather than keep it to ourselves, we discovered it could be used to help investors make better informed decisions and to force investment firms to offer investments that were more fair and ethical to their clients. This was the inception of the Ethical Investment System. We`ve since uploaded it to our website as a free download. Be our guest and download a copy and feel free to share it with others who you feel it would benefit. Cheers!

Download the Ethical Investment System
 

JoeRagona

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Thank you for this. I`m sure this will be of use to many of us!

Sharing information and helping others succeed should always be at the forefront of our intentions.
 

Thomas Beyer

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You raise a number of good questions that one should ask .. but do YOU care to answer them yourself here for us to see ?

It is beautifully written .. interesting that you note "track record" as one of your criteria .. and transparency .. yet your website shows none of it .. what did you raise ? what did you buy ? what experience do you have ??

Many other, now bankrupt firms had similar beautiful words .. the key is to EXECUTE WELL .. i.e. less talk .. more walk ..

But you`re right: we need less Maddoff .. more Buffett !

related post on 8 mistakes to avoid in real estate syndications: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-13817-Real_Estate_Syndications_-_A_Good_Idea_.html
 

invst4profit

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If ever I am lost for a question that site will definitely be my first place to look.

The $100,000 may have been better spent finding answers.
 

DrewBetts

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Thomas. Thanks for the question; I`m glad you asked. I think it would be somewhat remiss of me to post information like this without being willing, if not eager, to scrutinize our own firm. In fact, in development of the Ethical Investment System we took this stance and I feel it significantly helped us to improve the quality of our offering. By releasing this information, and giving investors the ability and impetus to properly analyze real estate syndicators, we hope to raise the bar by having investors vote with their cheque books against poorly structured funds. Empowered and educated investors will not invest in some the current funds out there, forcing them to either change the way they do business or get out of the industry. Either way, I feel it will be a positive thing for investors.

That being said, here is a quick synopsis of the Evolve Opportunity Fund with respect to the Ethical Investment System:



1) Investment Structure: We are a private, limited partnership. We`ve chosen this structure as it offers distinct benefits over corporations, REITs, joint ventures and mutual fund trusts. The LP structure offers a liability shield for its investors, advantageous tax flow though features, and a private structure where unit values are based on net asset value and are not subject to public market volatility. While we are a newer company, the investment strategy and structure is thoroughly vetted and has been used by many firms, including your firm PrestProp, for years and years with positive results.

2) Exit Strategy: It takes us 5 years to complete our value creation cycle, acquiring, renovating, repositioning, stabilizing and re-financing the properties. We provide an annual exit opportunity each year, starting at year 5. Some funds allow exit earlier than this and collect a "redemption fund" of several million dollars. The challenge with this model is that you reduce your overall rate of return by raising more money than you actually need and allowing it to sit, totally unutilized, for years and years. Not the best idea perhaps? Every year, subsequent to year 5, we allow a minimum of 15% of the pool of investors to redeem their units. This is to prevent a run on the bank that may force the fund to sell assets at a loss if the market timing is not right. If more than 15% want to redeem, we do a partial redemption so everyone gets treated equally. We allow transfer of units into a corporation, trust, family member or other party. Our unit holders must be resident in Canada. Finally, there is no market to buy and sell units as this is a private entity. Any transfers must be negotiated privately.

3) Profitability: Our goal is to generate a 15% compound annual rate of return for our investors over a 5 year time horizon. In our investment presentations, we show how we intend to do this using a detailed 3 part sensitivity analysis (expected, pessimistic and optimistic cases). As a real estate limited partnership, we are one of the most tax advantaged investment structures out there. We have a variety of tax benefits in our favour. Some of these are tax deferred cash-flow using capital cost allowance on our buildings to shelter income, capital gains treatment of appreciation resulting in tax only being paid on half of the gain, renovation work being treated as an expense rather than capitalized over a series of years under certain circumstances, and capital cost allowance on chattels being used to flow out of the LP to tax shelter other income for our investors.

4) Security and Transparency: Our investors gain a liability shield, allowing them protection from liability for mortgage debt or law suits similar to shareholders in a corporation. This is much more advantageous than joint venture structures that often have joint and several liability for these things and direct exposure to risk. Our financial statements are audited by Grant Thorton LLP, one of the nations most well respected audit firms. Our unit values are calculated by taking the portfolio net asset value, as determined by independent AACI certified commercial appraisers (the same ones the banks use) and dividing by the number of units outstanding. This value is exact, not subject to management influence or public market volatility. We place GREAT importance on clear and transparent disclosure of fees. Rather than finding hidden fees, buried on page 33 of an offering memorandum in the fine print, we feel it is essential to detail ALL of them in a plain English guide. As you and I both know, very few investors actually read the offering memorandum. We opted to describe our fee structure plainly and simply in our companion Investment Guide. Here is a direct copy and paste from this guide:



Capital raising

We use a network of agents and brokers to help us raise capital for the fund. In order to compensate them we have a one-time Capital Raising Fee. This is paid at the beginning of the project as investors subscribe for units, and is 7% of the amount of capital raised. This fee is applied to compensate the General Partner, and all affiliated brokers and agents for their capital raising efforts.



Financing / acquisition

When an apartment building is purchased, the General Partner is paid a one-time fee of 3% of the purchase price. This is remuneration for selecting and negotiating the price and details of the deal, and for performing the necessary due diligence, including property inspections and appraisals and all necessary financing application for lenders. The General Partner has agreed to pay 2/3 of its fee, or 2% to Maple Leaf Property for their expertise in the acquisition process.



Asset management

In order to cover the administrative costs of running the fund on a day-to-day basis, the General Partner is paid an Asset Management Fee. This fee, which is broken down into monthly payments is 0.75% of the cost of the buildings in the fund for a given year. Many funds charge a fee based on the value of the portfolio, not its cost, requiring costly appraisals every year that erode investor profits. We have opted to have our fee based on cost because it doesn`t require annual appraisals in the first five years. The General Partner has agreed to pay 1/3 of its Asset Management Fee, or 0.25% to Maple Leaf Property to assist in management of the portfolio.

Property management and improvement



Maple Leaf Property (not the General Partner) is paid a monthly Property Management fee of 10% of gross rents. Although this fee is on the higher end of the spectrum, we have learned over time that property management is one area where it`s important to invest, not skimp on costs. A core part of our strategy is that we treat our `clients` like gold, and we pay our property managers based on the high side of fair market value. This allows us to strategically partner with the best property managers available and compensate them based on their performance.



Loan arrangement

This is what we call a "Standby Fee" - a fee that is only used if `something` is needed. In this case, that `something` is personal guarantees on mortgages. Our plan is to obtain mortgages that do not require personal guarantees; however, given the current credit situation, we can expect that some lenders may demand this. If the only way to finance a building is through the use of a personal guarantee, then the person providing the guarantee (usually a director of the General Partner) would be paid 1% of the amount of the guarantee as a one-time fee. If the General Partner is not able to provide a sufficient guarantee, this provides us the flexibility to compensate a third party to bring their guarantee to the table.



Performance management

The fees listed above are primarily designed to cover the costs of managing the fund and are not intended as a profit center. Where the General Partner makes the majority of its profit is through the Performance Management Fee. This is equal to 30% of the profit in the fund. This fee is calculated whenever there is a distribution of profit from the investment. Remember, this is not paid until investors have received their 9% preferred return. For example, if the fund only made a total of a 9% return, then the General Partner would not be paid any Performance Management Fee. However, if the fund made a 20% return, then investors would receive 14% (70% of profits) and the General Partner would receive 6% (30% of profits).



5) Track Record: As a real estate syndicator, Evolve has a limited track record as this is a new avenue of business for us. To mitigate this, we decided to form a strategic partnership with who we feel is the top management team in Canada, Maple Leaf Property. Maple Leaf has been successfully engaging in this business for the last 30 years and has an exemplary track record. Here is more information on them: http://www.mapleleafproperty.com/who.php We are currently the exclusive firm they do business with. To see what Evolve`s current clients are saying about us, check here: http://www.investwithevolve.com/about-us/accolades

6) Investment Manager Incentives: We have put nearly a year of sweat equity into the development of this project and it is our sole offering we are promoting. It has our full attention. Our compensation has been set up to be very performance based, with our 9% preferred return. We do not earn a performance management fee unless our investors have first earned a 9% simple, cumulative ROI annually. Our investors also receive a full 70% profit share in the lift in unit values. Many syndicators don`t offer a preferred return at all, let alone a 70% profit share. In addition, we avoid conflicts of interest by not purchasing buildings outside the fund and selling into the syndicate at a profit. It raises too many questions and it`s impossible to act in the best interest of the investors when standing to gain a personal profit. Whatever we buy at, our investors buy at, directly into the limited partnership. No grey area.

7) Business Plan: Our business plan is detailed in both our Investment Guide and our offering memorandum; however I will post the "lite" version below. In addition, we have an extensive analysis of risk factors described in our offering memorandum.

Where we buy

Initially, the fund will be focusing on opportunities in Western Canada. Our economic fundamentals have helped us to identify Alberta as a particularly appealing target market, although we will also be giving consideration to opportunities in select areas in BC and Saskatchewan.

Investment term and exit strategy

Real estate achieves its best results as a medium-term investment. Our proven investment process takes 5-7 years to maximize investment value. We require that investors commit to a minimum investment term of 5 years, but will provide exit opportunities on an annual basis after this. When investors do wish to exit this opportunity, we will accommodate this by refinancing or selling select buildings, using accumulated cash, or a combination of both. The value of individual units will be based on the value of the fund as a whole. We will have independent commercial certified appraisers inspect each building and determine its market value to accurately appraise the equity in the fund. This will be done once after the 5th year to reduce the unnecessary expense of annual appraisals. The value of each unit is equal to the total equity in the fund, divided by the number of Limited Partnership units. This method of determining value is an attractive feature because the value of each unit is based on tangible assets, as opposed to wild and unpredictable swings in the stock market, which is the case with public REITs and corporate shares. Of course, investors will not be required to exit the opportunity after the fifth year. In fact, it is our hope that investors will choose to continue with their investment. Once we have done all the work to build a high-quality portfolio, the passive income potential from cash-flow provides a fairly compelling reason to stay in. As long as at least 20% of the investment units are still in play, the fund can continue. Our investment model provides investors with the flexibility to choose whether to exit or continue to participate in the ongoing returns.

Profit centres

Our investment strategy in multifamily buildings is based upon the following seven profit centres:

1) Forced appreciation

This is integral to our business model. Because this is a commercial asset, as the net operating income (NOI) increases, so too will the value of the property. This will result in a higher cash flow for investors.

2) Natural appreciation

We focus on 6 economic fundamentals, and have access to high-quality research to ensure we are buying in the right growth regions. Even in a flat market this investment has the ability to pay 15% return on investment, but over the long- term, natural appreciation can be anticipated for a minimum 5 year term.

3) Positive cash flow

One of the most advantageous features of a multifamily real estate investment is that tenants are excellent clients. Tenants pay all of our debt-service costs, operating costs, and even provide us with our cash flow. In addition, we are able to write off many expenses against taxes. All our

investments will be positioned to positively cash flow in the first 18 months. This is a very positive feature compared with land investments or large development projects that do not produce income.

4) Mortgage reduction

If we were to put 20% down on a building, and received no profits from any other profit centre, the fund would make five times the initial investment in 25 years or 16% simple interest.

5) Leverage

The fund takes on leverage risk on the investors behalf, which is very beneficial for investors. As a result the investment capital is leveraged using the bank`s money, amplifying the investment returns and shielding the Investor from any leveraged losses.

6) Tax deduction

The fund is structured to be a tax-flow-through entity, meaning that expenses from the fund`s activity can be passed off to individual investors, which is extremely beneficial for investors.

7) Depreciation tax credits

Multifamily buildings can typically be depreciated by 4% every year. We anticipate that this will be enough to shelter most of the cash-flow distributions from tax in the short term. In the event that the property is sold, tax will eventually be paid (through a recapture of Capital Cost Allowance), but will be able to be deferred until this time.
 

DrewBetts

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QUOTE (ThomasBeyer @ Nov 4 2009, 06:07 PM)
You raise a number of good questions that one should ask .. but do YOU care to answer them yourself here for us to see ?



It is beautifully written .. interesting that you note "track record" as one of your criteria .. and transparency .. yet your website shows none of it .. what did you raise ? what did you buy ? what experience do you have ??



Many other, now bankrupt firms had similar beautiful words .. the key is to EXECUTE WELL .. i.e. less talk .. more walk ..



But you're right: we need less Maddoff .. more Buffett !



related post on 8 mistakes to avoid in real estate syndications: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-13817-Real_Estate_Syndications_-_A_Good_Idea_.html




Thomas, I would also invite you to follow your own guidance and take a stab at analyzing Prestigious Properties most recent offering, the PRISM-A Limited Partnership with the Ethical Investment System. It was actually one of the 45 offerings we analyzed when creating the Ethical Investment System and I think many of us would welcome the opportunity to hear your thoughts on the structure of your offering.
 

Thomas Beyer

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QUOTE (DrewBetts @ Nov 25 2009, 10:49 PM)
Thomas, I would also invite you to follow your own guidance and take a stab at analyzing Prestigious Properties most recent offering, the PRISM-A Limited Partnership with the Ethical Investment System. It was actually one of the 45 offerings we analyzed when creating the Ethical Investment System and I think many of us would welcome the opportunity to hear your thoughts on the structure of your offering.


I think it lines up well with your useful (but rather lengthy and thus too complicated) list of criteria .. but the key issue is always execution .. and many firms (including ours) have executed well over a decade .. and some firms have not ..



Rather than analyzing 45 OMs on paper a better path is to actually operate the asset class under consideration (apartment buildings in this case) in the real world and show battle scars .. websites and marketing and fancy charts and education and paper and spreadsheets are all great .. but only doing it .. repeatedly .. and fail and learn and improve is the path to growth and excellent execution !!



Successful generals were foot soldiers once and did not only fight wars in heated simulation rooms (or blogs for that matter) .. but at the cold front !
 

MikeDix

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QUOTE (ThomasBeyer @ Nov 26 2009, 01:32 PM)
I think it lines up well with your useful (but rather lengthy and thus too complicated) list of criteria .. but the key issue is always execution .. and many firms (including ours) have executed well over a decade .. and some firms have not ..



Rather than analyzing 45 OMs on paper a better path is to actually operate the asset class under consideration (apartment buildings in this case) in the real world and show battle scars .. websites and marketing and fancy charts and education and paper and spreadsheets are all great .. but only doing it .. repeatedly .. and fail and learn and improve is the path to growth and excellent execution !!



Successful generals were foot soldiers once and did not only fight wars in heated simulation rooms (or blogs for that matter) .. but at the cold front !




Hats off to both you and Thomas! The research I have done on MIC's/Syndication schemes puts both of your offerings at the top of the pile for fair terms and straight talk. I believe you are a credit to our industry. Best wishes for the launch of Evolve, and the continued success of Prestigious Properties. If you'd care to publish your results from the 45 scheme study I think you'd be doing a great service to the novice investors out there (and some of the sophisticated ones too!).
 

cmduw

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I noticed that Evolve Investment Group`s website doesn`t exist anymore. Anybody know what happened to them?
 

julieCEO

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QUOTE (cmduw @ Apr 10 2010, 01:06 PM)
I noticed that Evolve Investment Group's website doesn't exist anymore. Anybody know what happened to them?




I also notice this. I think they have merged with any other company.
 

housingrental

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There is another thread where the original poster has confirmed there no longer offering new investments
 

brad

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QUOTE (ThomasBeyer @ Nov 26 2009, 05:32 PM) I think it lines up well with your useful (but rather lengthy and thus too complicated) list of criteria .. but the key issue is always execution .. and many firms (including ours) have executed well over a decade .. and some firms have not ..
Rather than analyzing 45 OMs on paper a better path is to actually operate the asset class under consideration (apartment buildings in this case) in the real world
and show battle scars .. websites and marketing and fancy charts and education and paper and spreadsheets are all great .. but only doing it .. repeatedly .. and fail and learn and improve is the path to growth and excellent execution !!

Successful generals were foot soldiers once and did not only fight wars in heated simulation rooms (or blogs for that matter) .. but at the cold front !


Thomas, your last sentence is gold!!!!!
 
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