Baltic Ave Equity Req Df 2 09

Baltic Avenue, LLC

A Residential Home Rehabilitation Company Las Vegas, Nevada, USA

Equity Request Memorandum January 2009

A NRUS Properties, LLC/Watson Development Inc. Co-Development Venture

http://www.wildnatureimages.com/Las Vegas.htm

Baltic Avenue, LLC 1368 Opal Valley Street Henderson, NV 89052

Doug Faddis 310-415-3541

[email protected]

Confidential Investment Summary – January 2009

Information is Deemed Reliable, But Not Guaranteed 2

mailto:[email protected]



I. Executive Summary Baltic Ave, LLC (“Baltic”) is a company formed to take advantage of a specific niche within the financial institution/bank owned properties and the distressed real estate market in Las Vegas and Henderson Nevada. Baltic is a partnership between NRUS Properties, LLC (“NRUS”), a diversified real estate investor and developer and Watson Development, Inc. (“Watson”) who is a long standing local broker and developer in Las Vegas with strong relationships within the real estate community. Today, an unprecedented number of properties are owned by banks or other financial institutions which has created a significant opportunity to target and acquire properties at heavily discounted prices. The traditional “bank sales at the courthouse” are no longer effective due to the volume of transactions. Baltic’s focus is to identify and acquire specific properties in targeted neighborhoods typically purchased in the $30,000 to $70,000 range by leveraging cash offers on multiple properties with a 7 day close. Once acquired, cosmetic improvements based on a strict set of guidelines are made immediately after closing. During the improvement phase, the properties are being marketed to primary home buyers (mainly FHA qualified and first time buyers) with pricing increases of 20% to 50% above total costs. Baltic is responsible for managing the initial acquisition, overseeing the improvements, marketing/resale of the property and all aspects of the rental management for the properties that are not immediately sold. We perform a detailed analysis on targeted acquisitions and are involved in all aspects of Baltic Ave, LLC - from financial support to general business management. The opportunity to purchase properties directly from the financial institutions on a “quick closing” basis has been created due to the reluctance of the banks to accept loan contingencies and longer closing periods from traditional buyers. A typical low income primary home buyer will need to qualify for an FHA loan which will take between 30 and 90 days to close. Most financial institutions are looking for a 15-30 day closing period with no financing contingencies and are willing to take deep discounts in exchange for this. One of Baltic’s key strategies is to purchase homes in this market segment directly from the banks which will allow these primary home buyers the time it takes to obtain the traditional FHA financing. In addition, based on recent legislation, many of these FHA qualified buyers will have tax incentives offered to first time home buyers which we believe will help sustain or even increase activity in the low end market as it is much more affordable for a FHA qualified buyer to purchase a $100K home than to rent. Baltic will strictly focus on homes in this market segment while the banks can be motivated to discount the purchase price in exchange for a quick close, the sales activity remains steady and the rental rates remain favorable for in comparison to the overall cost of the homes. We believe the timing is favorable and the demand will support our model which has multiple strategies that range from cash flow opportunities via rentals, immediate sales that capture high returns and/or long term appreciation with a sustained cash flow. Our goal with this model is to acquire 200 homes and we are currently looking to raise $1,500,000 for Phase 1 which will fund the acquisition and rehab of 25 homes based on a total cost average of $60,000 per house after rehab.

The challenge of the business model is maintaining enough cash flow to keep purchasing properties at or near the bottom of the market and keep enough houses being bought and sold and/or rented to have the business make sense operationally. Since the best prices are obtained by offering 100% cash with relatively short closing periods, individual bank mortgages are not feasible to obtain prior to closing. Therefore, an alternative capital raising strategy is currently being implemented. Baltic currently has 6 houses under contract and/or closed and will be selling and/or renting them in order to prove out the business model. The improvements have already started on the houses that closed first. Typical Business Cycle Timeline Estimate- The typical timeline for an overall transaction for Baltic is estimated to be the following:

• Offer acceptance/deposit-Day 1-2 • Property inspection/appraisal/cost estimate-Day 2-7 • Earnest deposit is non-refundable-Day7-10 • Closing of escrow-Day 14-30 • Improvements started-Day 14-30 • Remarketing of property/search for renters-Day 15-31 • Improvements completed-Day 45-60 • Renter secured(if applicable)-Day 45-60 • Property resale acceptance-Day 45-60 • Property resale closing of escrow-Day 90-120

Primary Considerations for Analyzing or Investing in this Project The key driving factor of this business is to take advantage of the currently undervalued real estate market in Las Vegas and the inefficiencies the financial institutions have encountered trying to resell repossessed homes. The following outlines the general structure of how the business operates:

Confidential Investment Summary – January 2009 Information is Deemed Reliable, But Not Guaranteed

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Buying Strategy-

• The partnership is taking advantage of the undervalued Las Vegas real estate market by writing many all cash and quick closing offers. Watson has engaged a full time broker to continuously review the Multiple Listing Service (MLS) and work with bank contacts and write bulk individual offers at heavy discounts from asking prices. Baltic focuses in certain areas of the city with high population density that are centrally located to the higher employment regions. Generally offers are written at 50%-75% of the bank asking price which is often 20% to 30% of what the current loan was on the property. Approximately 1 of 20 offers actually get accepted. Financial institutions/banks are willing to take these deep discounts in order to get the properties off their books in the short term. In addition, there are not a lot of potential buyers that will pay all cash and close in the short term. It is anticipated that once a Baltic is establishes a track record with the banks, the purchase process will become more efficient and target properties will be more visible.

• Baltic will always have a licensed appraiser give a detailed appraisal on as-is and

improved values. Baltic will also have our contractor (HC Development) give a detailed bid for improvements prior to having a hard deposit at risk.

• About 75% of the financial return for Baltic and its investors is made on the original

purchase side due to the fact that we are buying at a deep discount. It is very important to be able to continually write offers and subsequently close. As Baltic gets a stronger reputation for purchasing these sorts of properties, even more attractive offers will be made available to the company.

Improvement Strategy-

• The company’s improvement strategy is broken into two levels. The first is a simple improvement schedule of mainly cosmetic items which would be required in order to secure a renter at the maximum price. Common focus areas are landscaping, paint, doors, carpet, functional improvements to kitchen and bathrooms, etc.. Generally these first level improvements don’t cost more than $10,000 to $15,000 per house.

• The second improvement schedule is more involved. This schedule is generally reserved

for properties that are intended for immediate resale. The improvements that are included in this level of repair include everything in the first “cosmetic” improvement schedule in addition to replacing of window frames, flooring, kitchen and bath upgrades, etc. These improvements can cost between $15,000 and $30,000.

Resale/Exit Strategy-

• One of Baltic’s exit strategies is to resell the improved homes within 90-120 days of original closing to primary home purchasers. Watson brings very strong network of brokers that focus on the lower income primary home market (many of which are FHA approved and/or first time buyers). Baltic is proving this strategy with 6 homes, one of which is already under contract for resale. (See proforma below)

• Another, potentially more desirable exit option for Baltic is to place a renter in the home

within 30 days from closing to capture a long term cash flow from the rental income



(possibly 10-15 yr hold period) and finally resell the home to individuals or an investor at market prices. This can be done individually or in bulk depending on property availability and investor desirability. This exit strategy may evolve into a viable option as Baltic finds purchasers that have the ability to purchase in bulk in this manner. (see proformas in Schedule C for return scenarios)

o Property Management - Baltic has partnered with McKenna Property

Management to handle the rental management aspects of the homes that are not sold immediately. The strong rental rates compared to the purchase and improvement cost over a 10-15 year hold period could result in the most attractive long term gains for the investor and Baltic. Based on conversations with the Jenni McKenna, the principal broker/manager, she estimates that it will take less than 30 days to rent the property from the date of completion of the improvements at an average price of $800-$1,1000 per month depending on the quality and bedroom configuration. McKenna Property Management currently has over 300 properties that it manages and is considered the one of the best residential property management companies in Las Vegas. Please see www.mckennapropertymanagement.com for more information on their company.

• Another viable option depending on cash flow is for Baltic to finance primary home

buyers that are willing to put down 30% to 50% of the purchase price. Baltic would charge 11% or more interest and only offer this option on properties that do not sell during the first 90-120 days of ownership. The downside to this option is the cash flow constraints this puts on the company but there is limited risk since Baltic and their investors will have almost all their cost out of the home after the down payment.

Additional Unique Attributes of the Business Concept and Partners-

• Experienced and Connected Partners- Baltic has aligned itself with real estate and development professionals that work exclusively in Las Vegas/Henderson and have a deep network of contractors, suppliers, agents, bank contacts and other resources necessary for the business to be successful. Due to the depressed real estate market, currently Baltic is able to obtain bids for improvements at deep discounts. As with any business, alliances with good local partners are a critical component for success. We feel our negotiated structure creates a unique environment of aligned interests.

• Barriers to Entry- Due to the cash requirements of this opportunity and current lack of

liquidity in the market place, the barriers to entry are relatively high. In addition, non-local investors will have a hard time understanding property locations, values and the management of improvements. Lastly, the overall size of this business and investment places it in a capital range where very few institutional investors will become interested.

• Scalability- The model of this business is extremely scalable where its main constricting

factor is available cash for the acquisitions and renovations. It is extremely easy to add additional houses and use the cookie cutter approach for improvements. The primary system and contingency back up plan is already in place for the exit strategy. Finally, the financial institutions have more inventory than they can dispose of currently and there is no more efficient way for them to sell right now. According to the GLVAR there are approximately 140 homes available that match our criteria today. Additional homes that meet the criteria are being added on a daily basis by the banks and Baltic is already

http://www.mckennapropertymanagement.com/



getting calls from financial institutions offering bulk packages of homes in these price ranges.

• Difference in Las Vegas Compared to the Rest of the United States- Over the past

10 years, Las Vegas’ population growth has always been included in the top ten United States cities. Las Vegas still provides a cost of living that is one of the least expensive major cities in the United States. In addition, the State of Nevada is one of 4 states with no income tax which provides potential buyers with even greater disposable income. The buyers for the homes and neighborhoods we target in Las Vegas are mostly FHA qualified and first time home buyers.

• Financial Return Ranges-The estimated financial returns for a property to qualify for a

Baltic acquisition must model out to at least a 20%-35% return on investment amount within a 180 to 240 day period from the date of closing of the acquisition. This will result in even stronger annualized returns provided Baltic can continue deploying capital in additional acquisitions and dispositions. Since 100% of the funds can not always be put to use, actual returns may be slightly lower than the deal by deal returns averaged.

Financial Summary-

Based on 200 Homes Rental Model Resale Model Equity Requirement $11,385,000.00 $13,565,000.00 Total Funding $11,385,000.00 $13,565,000.00 Rental Cap Rate 13.98% N/A Current Annual Net Return on Cash After Management 10.48% N/A Annual Return Assuming House Bought then Sold After Management N/A 44.51% 15 Yr Annualized Return Assume 5% Annual Appreciation 20.55% N/A

II. Typical Unit Description Typical properties Baltic is acquiring fit the following description: Size: 1,200-1,800 Square feet Bedrooms/Bathrooms: 70%- Three bedroom/two bath 25% - Four bedroom/two bath and three bath 5% - One or more than four bedrooms



Location Zip Codes: 89101, 89106, 89107, 89110, 89104, 89108, 89121, 89122, 89115,

89030, 89032, 89169, 89142, 89156, 89015, 89011 List Price Range: $40,000 to $110,000 Purchase Price Range: $15,000 to $70,000 Improvement Costs: $10,000 to $35,000 Resale Price Range: $60,000 to $155,000 Rental Rate Range: $800 to $1,100 per month

III. Investment Structure Due to the capital intensive nature of this business concept, Baltic is offering the following: Debt Investment Option The preferred option investors have to capitalize on the Baltic business plan is a “fixed return” method. In this plan, investors can deposit between $100,000 and $10,000,000 and obtain a return of 15% per year paid on a quarterly basis. The money will be held in escrow and distributed as properties close (up to $75,000 per property) and will be directly applied to these closings. The difference between the purchase price and the maximum of $75,000 will be transferred to Baltic for improvements and other approved costs included in this document. This return is paid prior to any profit disbursements to the company or the equity partners. It is guaranteed by corporate bonds issued to the investor by Baltic which in turn holds the real estate. Since Baltic is currently forecasted to have very limited to NO debt on the properties at any time combined with the low prices paid for the real estate, there is relatively low risk for the investment principal and interest. The term for investment will be one year which will renew annually unless it is cancelled by Baltic or the investor. Due to cash flow requirements, investors under this scenario have the right to remove their principal with a 6 month notice which will allow Baltic to structure cash flow in a manner that will allow the return of these investments without having to sell properties at a significant discount. Equity Investment Option A secondary investment option is a straight equity investment. This investment will be reserved for people that are interested in investing $250,000 or more and will be structured in a separate company/fund from Baltic(known as Baltic Avenue II, LLC). Baltic will be paid a management fee of 25% of all profits generated on the rental and sale of the properties which will be paid on a quarterly basis. Investment funds will be requested by Baltic on a quarterly basis based on anticipated closings. Funds will be held in a similar escrow account as mentioned in the Debt Investment Option and applied directly to closings or distributed through Baltic for improvements and other approved expenses included in this document. Additional Institutional Investment Options/Structure – TBD



IV. The Development/Management Team Baltic is majority owned by James Reilly and Bill Watson. They have created this company to manage the business operations and to hold the assets purchased as described above. Watson is responsible for the initial acquisitions, management of the general contractor (HC Development), resale marketing and rentals if applicable. Reilly is responsible for overseeing capital raise (headed by Doug Faddis), general management, business strategy and financial oversight. This partnership in turn has engaged a general contractor to manage the rehab work associated with the homes, a property management company and a resale team to support the resale efforts. All parties that have been engaged posses numerous years of experience in their respective fields in the Las Vegas/Henderson markets. Please see the following websites for more information on the parties related to this business: NRUS Properties, LLC www.azureresorts.com Watson Development www.watsondevelopment.com McKenna Property Management www.Mckennapropertymanagement.com Keller Williams www.kellerwilliams.com

http://www.azureresorts.com/

http://www.watsondevelopment.com/

http://www.mckennapropertymanagement.com/

http://www.kellerwilliams.com/

Schedule A Case Study - Financial Summary (3125 Demetrius Avenue)-

Original Purchase Price $ 39,900.00 $27.00/Per square foot Closing Costs $ 1,800.00 Insurance-Interim $ 400.00 Utilities-Interim $ 300.00 Improvements-Based on Resale $ 15,000.00 $10.15/Per square foot Deal Contingency $ 750.00 Total Costs After Improvement $ 58,150.00 $39.37/Per square foot Resale Price $ 95,000.00 $64.36/Per square foot Selling Costs $ 5,700.00 5% Broker charge Selling Tax $ 950.00 Closing Costs $ 1,500.00 Total Profit $ 28,700.00 Gross Return on Investment 49.36% Annualized Return on Investment 74.03%

Photos: 3125 Demetrius Ave


Information is Deemed Reliable, But Not Guaranteed

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Schedule B

Properties Currently Owned by Baltic Avenue, LLC Date ML # Status Property Address Purchased For11/17/2008 882288 Closed 3125 Demetrius $39,000 11/23/2008 886506 Closed 1405 E. McWilliams $45,000 12/5/2008 874707 Escrow 3621 Valley Forge $43,000 12/9/2008 887830 Closed 58 Sacramento Dr. $45,000

12/10/2008 871314 Closed 1313 Pyramid $40,000 12/11/2008 824958 Closed 5220 Forrest Hills $40,000

Schedule C Financial Proformas

Rental Rate Sensitivity (200 Units)-

$800/Month $850/Month $900/Month $950/Month $1000/Month $1100/Month Increase Assumptions -6.25% Baseline 5.56% 5.26% 5.00% 9.09% Annual Rental Revenue $ 1,920,000 $ 2,040,000 $ 2,160,000 $ 2,280,000 $2,400,000 $2,640,000 Expenses-22% Total (Vacancy/Prop Management/Repair) $ 422,400 $ 448,800 $ 518,400 $ 547,200 $ 576,000 $ 633,600 Net Rental Revenue $ 1,497,600 $ 1,591,200 $ 1,641,600 $ 1,732,800 $1,824,000 $2,006,400 Rental Cap Rate 13.15% 13.98% 14.42% 15.22% 16.02% 17.62% Current Net Annual Return on Cash After Management 9.87% 10.48% 10.81% 11.42% 12.02% 13.22% 15 Year Annualized Return Assuming 5% Annual Appreciation 19.93% 20.55% 20.88% 21.48% 22.08% 23.28%



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Rental Scenarios (1 House / 200 Houses): Rental Return Scenario without Financing (1 Unit)- Typical Deal – (1 House) RENTAL STRATEGY Purchase Price $ 40,000.00 Closing Costs $ 2,000.00 Improvements-Rental $ 10,000.00 Estimated Maximum for Rental Misc Holding Costs $ 2,000.00 Utilities, Insurance, Ect. Cap Raise Fee $ 1,800.00 3% of Equity Raise Amount Buyer Premium $ 1,200.00 3%-Watson/Reilly Management Total Acquisition Cost $ 57,000.00 Monthly Rental Rate $ 850.00 Estimated Average Property Management $ 51.00 6% of Rentals Repair Reserve $ 68.00 Estimated at 8% Vacancy Factor $ 68.00 Estimated at 8% Monthly Net Rental Revenue $ 663.00 Annual Net Rental Revenue $ 7,956.00 CAP Rate 13.96% Net Return on Cash Before Management 13.96% $ 7,956.00 Net Return on Cash After Management 9.07% $ 5,171.40 Bank Financing/Equity Requirements Bank Loan $ - 0% of Total Costs Equity $ 57,000.00 100% of Total Costs Interest Expense $ - 7.5% Interest Rate-I/O Total Net Cash Flow $ 7,956.00 Debt Coverage N/A Management Fee $ 2,784.60 25% of Net to Watson/Reilly



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Rental Return Scenario without Financing (1 Unit) - (Continued) 15 Year Resale/Exit - (1House) Total Net Rental Income to Investor $ 77,571.00 After Management for 15 Years Resale of Property $ 171,500.00 Assuming 5% Annual Appreciation Original Cost of Property $ 57,000.00 Profit on Resale $ 114,500.00 Profit on Resale After Management $ 85,875.00 Total 15 Year Net Profit After Management $ 163,446.00 Total Percent Return on Investment 286.75% Annualized 15 Year Return on Investment 19.12% Equity Multiple 2.87



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Rental Return Scenario without Financing (200 Units)- Typical Deal (200 Houses) RENTAL STRATEGY Purchase Price $ 8,000,000.00 Ave of $40,000 per Home Closing Costs $ 400,000.00 Ave of $2,000 per Home Improvements-Rental $ 2,000,000.00 Estimated Maximum for Rental Misc Holding Costs $ 400,000.00 Utilities, Insurance, Ect. Cap Raise Fees $ 345,000.00 3% of Equity Raise Amount Buyer Premium $ 240,000.00 3%-Watson/Reilly Total Acquisition Cost $ 11,385,000.00 Monthly Rental Rate $ 170,000.00 Estimated Ave of $850/Month Property Management $ 10,200.00 6% of Rentals Repair Reserve $ 13,600.00 Estimated at 8% Vacancy Factor $ 13,600.00 Estimated at 8% Monthly Net Rental Revenue $ 132,600.00 Annual Net Rental Revenue $ 1,591,200.00 CAP Rate 13.98% Current Net Return on Cash Before Management 13.98% $ 1,591,200.00 Current Net Return on Cash After Management 10.48% $ 1,193,400.00 Bank Financing/Equity Requirements Bank Loan $ - 0% of Total Costs Equity Requirement $ 11,385,000.00 100% of Total Costs Interest Expense $ - 7.5% Interest Rate-I/O Total Net Cash Flow $ 1,591,200.00 Debt Coverage #DIV/0! Management Fee $ 397,800.00 25% of Net to Watson/Reilly



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Rental Return Scenario without Financing (200 Units)- (Continued) 15 Year Resale/Exit - (200 Houses) Total Net Rental Income to Investor $ 17,901,000.00 After Management for 15 Years

Resale of Property $ 34,300,000.00 Assuming 5% Annual Appreciation

Original Cost of Property and Improvements $ 11,385,000.00 Profit on Resale $ 22,915,000.00 Profit on Resale after Management $ 17,186,250.00 Total 15 Year Net Profit after Management $ 35,087,250.00 Total Percent Return on Investment 308.19% Annualized 15 Year Return on Investment 20.55% Equity Multiple 3.08



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Resale Scenarios (1 House / 200 Houses): Resale Return Scenario WITHOUT Financing (1 Unit)- Typical Deal - 1 House RESALE STRATEGY Purchase Price $ 40,000.00 Closing Costs $ 2,000.00 Improvements-Resale $ 15,000.00 Estimated Maximum for Rental Misc Holding Costs $ 2,000.00 Utilities, Insurance, Ect. Cap Raise Fee $ 1,890.00 3% of Equity Raise Amount Buyer Premium $ 1,600.00 4%-Watson/Reilly Total Acquisition Cost $ 62,490.00 Resale Price $ 95,000.00 Estimated Average Resale Commission $ 5,700.00 6% of Resale Price Closing Costs-Seller $ 1,900.00 Estimated at 2% Total-Seller Net Revenue $ 87,400.00 Net Profit $ 24,910.00 Net Return on Cash Before Management 39.86% $ 24,910.00 Net Return on Cash After Management 29.90% $ 18,682.50 Annual Net Return on Cash Before Management 59.79% Assuming 9 Month Turns Annual Net Return on Cash After Management 44.85% Assuming 9 Month Turns Bank Financing/Equity Requirements Bank Loan $ - 70% of Total Costs Equity $ 62,490.00 30% of Total Costs Total Net Cash Flow $ 24,910.00 Management Fee $ 6,227.50 25% of Net to Watson/Reilly



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Resale Return Scenario WITHOUT Financing (200 Units)- Typical Deal - 200 Houses RESALE STRATEGY Purchase Price $ 8,000,000.00 Ave of $40,000 per House Closing Costs $ 400,000.00 Ave of $2,000 per House Improvements-Resale $ 3,000,000.00 Ave of $15,000 per House Misc Holding Costs $ 400,000.00 Utilities, Insurance, Ect. Cap Raise Fee $ 405,000.00 3% of Equity Raise Amount Buyer Premium $ 320,000.00 4%-Watson/Reilly Total Acquisition Cost $ 12,525,000.00

Resale Price $ 19,000,000.00 Estimated Ave-$95,000/Home

Resale Commission $ 1,140,000.00 Estimated 6% of Resale Price

Closing Costs-Seller $ 380,000.00 Estimated at 2% Total-Seller

Net Revenue $ 17,480,000.00 Net Profit $ 4,955,000.00 Net Return on Cash Before Management 39.56% $ 4,955,000.00 Net Return on Cash After Management 29.67% $ 3,716,250.00 Annual Net Return on Cash Before Management 59.34% Assuming 9 Month Turn Annual Net Return on Cash After Management 44.51% Assuming 9 Month Turn Bank Financing/Equity Requirements Bank Loan Requirement $ - Equity Requirement $ 12,525,000.00 Total Net Cash Flow(Before Management) $ 4,955,000.00 Management Fee $ 1,238,750.00 25% of Net to Watson/Reilly

Real Estate

Baltic Ave Equity Req Df 2 09