About Pacific Horizon Financial

 

Summary of the Pacific Horizon Financial Construction Joint Venture Program

The Construction Joint Venture (JV) has been formulated by Pacific Horizon Financial in 2014 as a way to provide worthy Developers a capital source for small, infill residential construction projects in San Diego, CA. Most banks are still not making construction loans and those that are, demand a formidable balance sheet and normally, a prior relationship.

Construction lending is difficult and typically the best scenario for the lender is to get its stated yield. The other side of the coin is a lackluster return, or even a loss, after a great deal of effort and oversight. Based on the losses incurred by banks after the 2008 collapse, few institutions perceive that the risk/reward ratio is adequate and they continue to abstain from the construction lending sector.

Therefore, Developers/Contractors who would like to build while the market is good, suffer from lost opportunity while most banks remain paralyzed.

The solution - and opportunity - for both Lender and Developer is to align their interests by getting on the same side of the table (or pulling in the same direction) and rethink the concept to provide more yield and safety.

This is accomplished with the Pacific Horizon Financial Construction Partner JV. There are 3 partners in the Joint Venture:
            1. Capital/ Lender Investor
            2. Developer/ Entrepreneur
            3. Manager/ PHF

Capital/ Lender Investor:

Capital provides up to 90% of the funding for the project and has the following attributes:

  • Capital contributors are members of their own LLC and have voting rights within the LLC in direct proportion to their dollars. Each construction project has its own LLC. Capital has one vote as to matters concerning the JV.
  • The Capital LLC is the owner of the project and with the Manager's (PHF) vote can control the Developer/Contractor, including the pricing of the finished product.
  • The Capital LLC is not leveraged, it provides all the necessary funding for the project (less the amount provided by the Developer).
  • Capital has a high minimum return as stated in the JV agreement (currently 14%), and that is expected to be exceeded by profit sharing. In the event of cost overruns that are not paid by the Developer, Capital's share of profit will be increased and Developer's share of profit will be diminished until projections are met or the Developer profit is extinguished.
  • The Capital LLC does not need to foreclose to get control of the project – it owns it as of day one.
  • To the extent the Developer has equity or contributes capital to the project, (his 10% or more), that contribution is recognized as capital, but the Developer is not a member of the Capital LLC. (Developer capital will have the same distribution as other capital.)
  • The advantages to the Capital/ Lender Investor with this structure are:
       o The priority similar to a 1st TD and a yield between a 1st TD and an equity participation (14-20%).
       o The control of ownership without the headache, Pacific Horizon takes care of management of the project,        Fund control(by a 3rd party), accounting, etc. Additionally, Pacific Horizon’s compensation is based        solely on its share of profit. No Profit, No Compensation.
       o The safety of not having to foreclose or suffer through a borrower’s bankruptcy or being individually        named in the unlikely event of litigation.

    • Developer/ Entrepreneur:

    The Developer provides the sourcing, planning, at least 10% of cost, supervises the construction and sale of the project and has the following attributes:

  • A share of profits from the sale of the project.
  • Developer has one vote as to matters concerning the JV.
  • As long as the project proceeds according to projections, the Developer manages the contractor(s) and the sales team.
  • The Developer has only his profit at risk. Capital contributed by Developer has the same protection and distribution as other capital(except in the event of uncovered cost overuns).
  • Developer does not face foreclosure or bankruptcy due to unforeseen or uncontrollable events.
  • Should the budget, milestones, or timelines be breached, Capital plus Manager have the power to make decisions and can alter pricing or even contracting to finish the project.
  • Cost overuns, time delays, drops in market all affect Developer's compensation in favor of Capital's share of profit. Developer has every motivation to perform as projected and is required to have 9% contingency in the budget.

    Manager/ PHF:

    The Manager brings the Capital and the Developer together and has the following attributes:

    • Manager is not the controlling Member of Capital, the majority of the Capital LLC members control it, but Pacific Horizon will provide administrative support for the Capital LLC.
    • Manager provides initial structure and underwriting of the project. Manager has one vote as to matters concerning the JV.
    • Manager's compensation is based solely on profit. No profit, No fee. Manager has every motivation to ensure that only highly predictable and profitable projects are undertaken. Lots of work for no compensation does not a happy Manager make! (Manager is paid a small initial draw against profit that is refundable in the event Capital does not earn a profit.)

    Thus, the Construction JV offers a path of greater safety to all parties and an adjustment of the feast or famine returns to a more equitable arrangement. Capital is handsomely rewarded with minimized risk; Developer can profit from good projects with minimized risk and Manager makes money only when Capital makes money. It provides a mechanism where the parties work as a team and make the most from what they contribute.

     

     

     

     

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