25 October 2020, Sunday

 

 

General information

Lending funds to real estate developers, building management companies and other business entities can be highly profitable, including the opportunity to receive additional – investment – income as an extra bonus to your annual interest rate. Our independent analysts thoroughly explore and select the offers for placement on the Platform, including project feasibility study, liquidity of collateral and borrower’s solvency to minimize your risk-return ratio. However, we are unable to completely eliminate the impact of risks, the realization of which can lead to the reduction and/or delay of expected revenues and even a complete loss of your investment.

Inter alia,

1) Past performance is no indicator of future performance. Past performance indicators make no guarantee for future returns.

2) Pledged real estate appraisal and/or other valuations or appraisals do not guarantee its prompt sale for market price.

3) The total forecasted returns on an investment are a forecast, that can change, subject to various factors and risks.

4) Investment income is an option, but not a guarantee.

5) Estimated borrowers’ financial rating does not exclude failure in future.

6) Platform’s historical results, including average profitability, does no guarantee the same in future.

To minimize the negative impact of risks on each separate investor’s quality of living, as a precaution, we strongly recommend not to lend more money than one can afford to lose without altering their standard of living. For additional security, we also recommend to diversify one’s investments by lending to a range of different borrowers as well as spreading the invested funds between various types of projects.

Please note:

Any investment you make via the Platform will be absolutely illiquid which means that you may not be able to withdraw your funds before the end of the investment term (loan maturity date). At the moment, we have not launched a secondary market for the loans and currently have no plans to do so. The only way you can release your money is: a) conventionally, at the end of the investment term; b) in some cases when the property is sold or refinanced, with a different loan being concluded; c) exceptionally - if the investee company is sold or ceases to exist.

How we work

Protecting investors’ funds is our absolute priority. It is always our responsibility to take our best efforts to address each and all of the risks involved to mitigate their effect on your investment.

Our whole approach to risk mitigation, according to FUNDAUS OÜ risk policy, is based on a three-tiered system, which secures maximum protection of investors’ funds.

The three tiers are:

1. Comprehensive Due Diligence

Our experts provide a comprehensive analysis of each project, including exploring legal, AML, financial, economic and marketing issues on the investment object and business (the borrower and associated companies). As the result, we accept only feasible and sustainable projects with sufficient marketability, investment attractiveness and low risk-return ratio, delivered by financially sound developers or other business owners with impeccable reputation.

2. Secured collateral

All projects placed on the Platform are secured with collateral, which is in most cases 1st mortgage of an existing or potential (under development) real estate object with a clear market value and liquidity and a recognized real estate appraisal provided. S.P.V. (Special Power Vehicle), which is FUNDAUS OÜ agent company, is the holder of all documentation associated with pledging and the representative of investors’ interests in case of borrower’s failure. In some cases, additional security is provided with a pledge of assets/shares, personal guarantees, etc.

This ultimate level of legal security provided the investor with a safe position and ensured exit from all our deeds.

3. Remarkable expertise and independence

A team of educated and experienced professionals, forming A Risk Committee, is convened to evaluate each separate project and business entity. Our work is based on previous credentials, best practice and highest ethical standards. Our experts team involves professionals in law, AML and finance, each of them independent in decision making. Each project is accepted for placement on the Platform only provided that it has been unanimously accepted by all Risk Committee members and approved by the Head.

The aforementioned three tiers of security are intended to reduce each of the risks pertaining to lending via the Platform.

Disclamer

Project descriptions provided on the Platform are not exhaustive and not purported to provide complete information to the investors. No information or project, business or borrower placed on the Platform as a whole or a part of it should be interpreted as an advice or invitation to make an investment.

Project description and documentation pertaining to the aforesaid includes certain statements, estimates and projections, provided by the borrower and assessed or derived by the Platform with respect to anticipated future performance of the business. Such statements, estimates and projections reflect significant assumptions and subjective judgements by the Platform experts concerning anticipated results. These assumptions and judgements may or may not prove to be correct and there can be no assurance that any projected results are attainable or will be realized. The calculations, opinions and judgements of the Platform are subject to change at any time.

The provided information has been prepared in good faith based on public and non-public sources of economic, financial, technical and marketing information which we believe to be safe and reliable. The Platform does not assume responsibility for verifying any of statements, estimates and projections, provided by/derived from officially recognized sources and does not make any representations or warranties as to the accuracy or completeness of any estimate or projection provided.

No agent, director, officer, employee, consultant or adviser of the Platform is authorized (nor shall any such person be deemed to be authorized) to make or give any such representation, promise or warranty. Any such representation, promise or warranty purported to be so made or given shall not be relied upon by any investor and, in the absence of fraud, neither the Platform, nor any of its agents or advisers shall have any liability in respect of any such purported representation, promise or warranty.

None of the potential lenders or investors should treat any information provided on/by the Platform as an advice or recommendation for investment. We strongly recommend to retain your own consultants or advisors in financial and legal issues before making any investment decisions.

Risk description

 

Property value decrease risk

Property prices are exposed to cyclic fluctuations in line with economy development as well as temporary increase or drop in prices as a result of a wide range of factors on national, regional and international level. These changes may be sharp and unexpected. Different property types may be more or less prone to recession or negative growth.

Generally, based on our previous experience, rigorous market research and independent experts’ valuations, we acknowledge the factors affecting property value fluctuations and are able to forecast market development trends to some extent and with a certain level of probability. Thus we identify and select the properties that are the most secure investments for placing on the Platform.

In addition to an official real estate appraisal, conducted by a recognized duly certified company, our independent property experts assess the complete set of factors, determining the price of the property and its development potential. We assess the strategic location, including the advantageousness of the locality in terms of investment attractiveness, business climate and employment; accessibility, transport communications, local facilities and amenities. All these and many other factors affect the present and future value of the property.

As every property is different, on as-need basis, we commission an independent expert valuation of a specific property by a Certified Real Estate Specialist (CIPS) – international network of real estate professionals - to verify the specific project values for loan security purposes.

Based on the present and forecasted future value of a property, confirmed by our experts, we figure out what Loan To Value (LTV) ratio we will admit and thus calculate the maximum loan value that would be tolerable for this certain object. This ratio, derived on the base of a rigorous analysis and expertise, is a core part of how we secure investors’ funds protection, providing borrowers with vital information, revealing the potential of their objects at the same time.

LTV is a tool to assess the buffer the developer has to tolerate any negative events, such as a drop in property prices. As a rule, our loans (including the principle and rolled up interest) shall not exceed 70% of the appraised value of the property (LTV ≤ 70%), this provides a substantial buffer for the developer to withstand any adverse events.

For larger projects, developed in stages, we may phase the loan in installments; in this case the project description will contain a clear indication that it will be a multi-phase loan. The LTV will then be calculated for the total loan amount, taking into account the total expected obligations, thus the conditions of the investors of the first phase shall never be worsened compared to the consequent stages.

We use LTV as it is the most relevant metric of the security of the loan. Additionally, we also use Profit on Cost and Loan to Cost in analyzing all deals.

Borrower risks

There are several factors that may result in a default of the borrower, resulting to substantial payment delays or complete failure to fulfil its obligations to the investor. To mitigate this risk, we perform a comprehensive due diligence of the direct borrower, associated companies (if any) and, in some cases, also the main counterparts. This is to ensure that the loan agreement is affordable for the borrower, and we can secure a comfortable position for the Platform investors.

Due Diligence

We work closely with each potential borrower (real estate development company or other business entity that applies to the Platform for a property-backed targeted loan) to confirm their identity through a process of Know Your Client (KYC) checks and we establish their integrity through Anti Money Laundering (AML) searches.

We explore the viability of each proposal from every standpoint: we assess whether the potential borrower’s loan repayment schedule is realistic and their exit strategy (sale of the developed property or refinance), to ensure the most profitable and secure route of action is followed.

The entire Due Diligence process is performed with a direct participation of at least 3 independent experts: lawyer, AML specialist, and financier. Additional experts are retained on as-needed basis.  As the result, an integral financial and non-financial scoring is derived.

Loan calculation

We use several metrics to set up the limits of funding a borrower will be allowed to raise via our Platform (total sum of loan principles). First, we explore the borrowers financial plan, examine the projected costs of a project, the potential sale price and assess how realistic they are. From this we make conclusions on the estimated profit the developer will make. Risk adjusted profit and collateral then will be the basis for determining the maximum loan amount that will be tolerable.

First legal charge

As a rule, we take our first legal charge on the pledged properties, which is secured by the 1st mortgage on the collateral. S.P.V. will enable us to do this on a contractual basis.

Any funds recovered from the sale of the pledge would be used to with the aim of returning all principal and interest to the lenders. In the event of borrower’s insolvency signs, the Platform will contact the lenders via the means of electronic communication.

Extensions 

In some exceptional cases, an extension of further advances on the loan are necessary due to the factors beyond the borrower’s control, for delays in construction/putting in commission terms that result to the delay in the final sale of the finished property. Not always such delays mean increased risks for the project or the investors.

Should a borrower apply for an extension, we carefully assess the case before agreeing. Generally, in the event that a project overruns, the investors shall gain an extra income, as the borrower will pay a higher interest rate from the original due date up until the loan is settled. The additional interest will be paid along with the original principal and pre-agreed interest at the completion of the extended loan.

We monitor the progress of the project constantly, until the loan is fully repaid, and provide timely and comprehensive information to our investors.

Although we cannot guarantee a complete mitigation of risks, associated with crowdfunding, we believe that a comprehensive due diligence has a major impact on securing investors’ funds.

Premature repayment

An opposite situation is the case when the investor shall not receive the foreseen interest payments in full due to premature repayment of the loan by the borrower, the proceeds of which the Platform is obliged to distribute between the investors in accordance with their share with no delay.

Some projects may envisage a compensation for this premature repayment, but, even such is applied, it is not intended to cover the interest payments for the entire loan period in full. We will do our best to satisfy our investors’ demands in alternative offers with similar quality and risk profile to invest the repaid funds as soon as possible if they wish so.

Platform insolvency

Crowdfunding platforms are not subject to any specific law in Estonia and do not require any special permits or licenses. In principle, if a platform were to fail, or become insolvent, their investors could lose all of the money they have pledged.

However, FUNDAUS has obtained an Operating License from the Financial Intelligence Unit (FIU) of Estonia, and undertakes to meet the best practice standards as well as to fulfil strict requirements in protection of investors’ funds if the Platform were to fail:

1) Investors funds that have been transferred to the Platform, but not been lent to borrowers, are held on a segregated account (the according amount of money owned by each investor is reflected on its virtual account on the Platform). Same is for Money on Hold (frozen during a pool completion, but not yet invested). These funds are completely separate from FUNDAUS’s own money and we are prohibited from using the investors’ money for our own business activities. These funds do not form part of our assets, which means that they would not be available to creditors in the event of our insolvency. They are not reflected on our balance sheet either.

2) We have an S.P.V. servicing arrangement in place. This means that in case of emergency, even if FUNDAUS ceases to trade, the S.P.V. would take our place in operational management, including administration of all existing loan agreements between investors and borrowers. The S.P.V. would continue to receive loan repayments from borrowers, to process and to distribute these payments between the investors thereafter. In practice, this means that if our Platform does fail, all of investors’ existing loans would remain safe and all payments due would be secured.

3) The first legal charge that we take out on all property projects on your behalf, would still stand, if FUNDAUS became insolvent, and so would be any other collaterals. This would continue to safeguard investors’ money, so even in case of the borrower’s default simultaneously or after the default of the Platform, the S.P.V. would operate on investors’ behalf and take over the project to recover and repay the funds to the investors.

Our current S.P.V. is FUNDAUS TRUST AGENT OÜ, a duly registered company in Estonia, holding Operating License in the field of service of trust funds and companies, issued by FIU. It would be able to take over the administration of the loans, issued by the investors via FUNDAUS platform.

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