Cornerstone Property Management Specialized in small and medium sized multi-unit properties
BUSINESS PLAN M AY 2006
Presented by: Mr Shakir Akbari Mr Ed Fee Ms Cathy Gentry Mr Mauricio Ikegami Ms Kathy Scharko Mr Alex Stoykov Mr Samir Sundar Contact Information: Cornerstone Property Management, LLLP (http://www.cornerstonepropertymanagement.com) One East Jackson Blvd suite 8003 Chicago, IL 60604-2287 Phone: (312) 362-8433 Fax: (312) 362-8432 Email:
[email protected]
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Executive Summary A young woman in her 20s was apartment shopping when she felt she had found the perfect two bedroom apartment to share with a friend. The woman took an application from the harried landlord and called her mother on the drive home, excited by her find. Days later, the young woman walked through the apartment again with her mother, and with a more practical eye, had to admit the apartment was too small for two friends to share comfortably. She returned home and thought about it, then called the landlord the next day to decline the apartment. The landlord requested that the woman return the blank rental application. The woman scheduled an appointment with the landlord to drop off the document. The day of the appointment the landlord had to cancel, and they re-scheduled. Over the next several days, random emergencies and responsibilities at the landlord’s various properties left her unable to meet the woman time and again. One evening, as the landlord called to schedule yet another meeting, the young woman’s mother answered. The landlord, exasperated by all the effort and frustration of trying to do something so simple but not being able to get it accomplished, expressed, “I have so much to do! If only I had someone to do everything for me!” The young woman’s mother who answered the phone happened to be a founding partner and CFA of Cornerstone Property Management, Ms. Kathy Scharko, and she had just found our ideal client. Cornerstone Property Management was founded in 2006 and is currently in the development and planning stages. We are a full-service property management partnership with a vision to profitably and ethically provide high quality property management services to real estate investors, with a focus on personal attention. Real estate investors want the best return on their investment with low-turnover, on-time rent collection, and smoothly running and wellmaintained properties. Tenants want a place they are proud to call home, where they can relax and enjoy their surroundings. Cornerstone Property Management seeks to fulfill all these needs and more with efficiency and dedication. We can do this simply, timely, and cost-effectively. The cornerstone of our business model will be a proprietary web portal that will offer quick and easy service for the use of prospects, tenants, and clients. We will create value for the property owner with superb total maintenance of rental properties, as well as serving as a facilitator between the tenant and the landlord, all coordinated through our proprietary website application. We will leverage the use of technology to automate many manual processes, reducing costs for the property owner. Our refined processes will also allow us to give our tenants a better rental experience by creating open and effective lines of communication between themselves and the property owner, as well as courteous, prompt, and professional service to their home and the property grounds. Our focus is on continual improvement of the value we bring to stakeholders, such as tenants, and especially property owners. We will also strategically grow the business by forging relationships and networking to the fullest extent, as this is the basis of the real estate industry. Our founders have a true understanding of what it takes to stand out in the industry.
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Cornerstone Property Management brings over 15 years of property management and real estate experience to the table, as well as in-depth knowledge in the area of e-commerce and web technologies. Our founding partners are astute professionals who are driven, motivated, and personally involved in the growth and success of this venture. Principal owners and other key personnel are: Mr. Alex Stoykov, MBA and Partner/Brokerage Manager: Bringing over 8 years of real estate experience, including mortgage advisory and property management. Mr. Stoykov previously heading the property management division of a Top 50 real estate company, he managed an annual budget of over 5 million dollars, while simultaneously providing strong leadership for the division. Through his strong sales, management, and leadership skills, within a 4 year time period he was able to raise the division’s performance level from under-performing to the most profitable in the organization. Ms. Cathy Gentry, MBA and Partner/Operations Manager: Bringing over 7 years of property management experience, as well as a vast network of maintenance vendors, Ms. Gentry has personally and successfully managed more than 50 properties at one time. She also brings to the table business operations experience, stemming from a family-run home restoration business later diversifying into property management. In both endeavors, she excelled with her ability to understand and manage the needs and expectations of all stakeholders. Mr. Shakir Akbari, MS and Partner/Technology Manager: Bringing vast e-business experience as the former director of e-business of a very successful bank. Mr. Akbari was also the founder and CEO of e-rentals.com, a B2C portal, connecting hundreds of rental communities with prospective customers. At one point this e-business venture registered over 10,000 users, leading Mr. Akbari to be subsequently nominated as one of the most influential leaders in real estate by “VAR E-Biz magazine” (2000). Ms. Kathy Scharko PHD, CFA, and Financial Advisor: Ms. Scharko, formerly an analyst with Venture Capital Corporation, specialized in e-business firms. She also has immeasurable experience in banking, start-up financing, IPOs, and other market capitalizations. Ms. Scharko is published, most recently a highly regarded white paper on the role and contribution of the CFO in the internet dot.com boom and subsequent bust. Through automation, our web portal is designed to provide a superior quality service to investors while at the same time enable Cornerstone Property Management to achieve a reduction in cost or service. We request a Letter of Credit for $150,000 at a rate of 7.5%, to be repaid in 3 years. This will match the partners’ individual contributions of $50,000 each. The level of real estate industry expertise our partners bring to the table, coupled with our sound business concept and desire to succeed make Cornerstone Property Management a worthy investment for your portfolio. Thank you for your time. 3
Table of Contents Executive Summary.........................................................................................................................2 Table of Contents.............................................................................................................................4 Business Description........................................................................................................................6 The Industry.................................................................................................................................6 Our Company...............................................................................................................................7 Services Offered...........................................................................................................................8 Unique Selling Proposition..........................................................................................................8 Positioning...................................................................................................................................9 Pricing........................................................................................................................................10 The Market.....................................................................................................................................11 Customers..................................................................................................................................11 Market Size and Trends.............................................................................................................11 Competition................................................................................................................................12 Indirect Competition..............................................................................................................12 Direct Competition.................................................................................................................12 Estimated Sales......................................................................................................................13 Development & Production...........................................................................................................15 Development status....................................................................................................................15 Service process...........................................................................................................................16 Capital Requirements.................................................................................................................19 Method of Sales.........................................................................................................................21 Advertising and Promotion........................................................................................................22 Management...................................................................................................................................23 Description.................................................................................................................................23 Ownership..................................................................................................................................23 Organization Structure...............................................................................................................23 Support Services........................................................................................................................24 Financials.......................................................................................................................................25 Risks...........................................................................................................................................25 Break-Even Analysis.............................................................................................................25 Cash Flow Statement.................................................................................................................25 Balance Sheet.............................................................................................................................25 Income Statement.......................................................................................................................25 Funding Request and Return......................................................................................................26 Appendix A – Web Site Screenshots.............................................................................................27 Home Page.................................................................................................................................27 About Us....................................................................................................................................27 Tenant Portal - Payment.............................................................................................................28 Tenant Portal – Help Desk.........................................................................................................28 Landlord Portal – Home Page....................................................................................................29 Landlord Portal – Sample Report..............................................................................................29 Appendix B – Cash Flow...............................................................................................................30
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Appendix C – Balance Sheet.........................................................................................................32 Appendix D – Income Statement...................................................................................................33
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Business Description The Industry Real Estate has always been a local phenomenon. The old adage is there are three things that are critically important for real estate, location, location, location! The reasons may be many; proximity to your work, friends, or family, importance of life style choices, or simply investment potential. The city of Chicago has the distinct advantage of having a robust multi-industry economy. Whenever one business leaves it always seems that another new business moves in. The local Chicago economy supports millions of employees who live primarily within the city limits. Having chosen the area they wish to live, the next question becomes one of affordability; do they rent or do they purchase? Recent interest rate trends point to increasing numbers of people postponing purchasing and choosing to rent their next property. Real estate investors desire both upwards appreciation and steady positive cash flows from their investments. The City of Chicago has offered a modest though consistent 6.5% appreciation on property investments though out the national boom and bust real estate cycles. Additionally, the gentrification of older regions of the city has allowed some of the more astute or aggressive investors with the opportunity for even higher rates of appreciation. Therefore Chicago is a prime area for conservative, long term investors in real estate. The City of Chicago rental properties can be broken down into three primary areas. Large multi-tenant buildings and towers with in-house management services. Medium sized buildings with eight or less units with absentee landlord ownership. Small sized buildings with 3 or less units with local landlord provided services. The medium sized buildings, with absentee landlords, dominate with 80% of the City of Chicago market. This is the market segment we are choosing to enter. Though investing in rental properties can be a healthy, long term investment opportunity there can be some downsides. The distraction and costs of administering all the details and issues that inevitably arise in rental properties can be both tiresome and in some cases overwhelming. Paperwork, phone calls, meetings, and irate tenants are all part of investing in rental properties. Property management companies have formed in order to act as intermediaries between the owner/landlords and the renters/tenants. These small companies are usually non-automated and labor intensive type firms. Consisting primarily of handymen and administrators, their main service has been to maintain and repair the rental properties when required. Automation of business processes was not a primary concern and therefore bookkeeping, accounting, and other business processes were slow and prone to error.
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In contrast, large full service, property management companies such as Jones, Lang, LaSalle have streamlined and automated business processes for large property owners such as Motorola, Sun Microsystems, and Dell Computers. These large property owners expect and demand superior service and quick availability of information from their property management professionals and they get what they demand. Small property owners, however, have had little to choice in who they might choose as managers for their investment properties. This lack of competition has resulted in slow rent forwarding capabilities, in slow reporting on property issues, and in low investment in business processing optimization. This creates an opportunity for Cornerstone Property Management to enter into the Chicago rental real estate market and expand quickly by offering superior service and superior information processing to an underserved market segment.
Our Company For the discerning, multi-tenant, real estate investor, Cornerstone Property Management offers quick, easy, and trustworthy property management services in order to remove the challenges associated with those investments. Cornerstone Property Management will provide full service management of real estate properties. Our service is to remove all the headaches and problems associated with property management and thus allow the owners streamlined access to the financial rewards of their investments. The market segment we are seeking to enter has for too long been denied a modern, full service management company. Most of our competitors do not enjoy a web presence, and if they have launched such a presence, it has limited functionality and no actual business processing capabilities. Cornerstone Property Management will focus on a specific market segment of absentee landlords who own property in certain segments of Chicago. Though these owners may be located anywhere on the planet, they will still be able to quickly ascertain the exact status of their investments at any given moment. Those challenges to real estate property management are numerous and Cornerstone Property Management will concentrate on automating most of the mundane paperwork required to properly manage the myriad of details required by investors, tenants, tax authorities, and local and federal government regulations. However, automation will gain us only so much, high touch, personal interaction will be required for building and maintaining close personal networks of Accountants, Lawyers, Service Contractors, Local Officials, and County Clerks. Trust is earned not given and we will prove to our property owners that we have the capabilities to provide every service required in order to minimize distractions and costs associated with real estate investments. Cornerstone Property Management will be set up as a limited partnership with our three founding partners having extensive experience in real estate, finance, and property management.
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Services Offered Property owners – Through our web portal, e-mail, and over the phone, Cornerstone Property Management will provide complete property management services and quick forwarding of rent monies. Unmatched by our competitors, we will offer a worry free business relationship that improves the benefits of real estate investment while reducing the hassles to almost nothing. Our experienced management team will assist the owners in maintaining their investments, filling vacancies, and providing relevant market data on local rents and property values when beneficial. We will ensure that repairs and maintenance work be done in a professional and timely manor. We will screen applicants for credit worthiness and then subsequently periodically inspect rental units for compliance with rental agreements. Politics are a way of life in Chicago and local Aldermen carry a lot clout with regards to property issues and local regulations. Cornerstone will act as a local spokesperson for our absentee owners. Tenants – Through our web portal and through telephone support, we will provide quick remediation of property issues, easy methods of rent payments, and act as a spokesperson for the owners. We will confirm the requirement for repairs in a timely manor, and keep the tenants informed as the status of their requests.
Unique Selling Proposition The Cornerstone of our business model will be a proprietary web portal that will offer quick and easy service for the use for prospects, tenants, and clients. This portal will both lower our business process costs while improving our service levels. The website infrastructure will maintain the absolute security of all confidential information. The portal will have four main views or sections. Clients – Our target customer wants secure, quick and easy access to the current financial status of his investments. He wants an easy to understand presentation of his revenues and expenses. We will provide such information as rent collections, contractor fees, taxes, and utility bills in an easy to understand graphical and line item format. In addition, at all times the client will be able to view his exact financial status by quickly viewing or down-loading HTML formatted reports. The backend financial applications will generate quarterly reports and forward them to our clients, or their designated agents, within the format of their choice. The portal will facilitate our clearing the rent payments in a timely manor and facilitate our ability quickly forward those monies to a designated bank account by the 10th of every month. The portal will help us create a relationship of worry free, trustworthiness with our client base that will be hard to match by our competition. The industry average for forwarding rents is three weeks; we will deliver in half the time while reducing our transaction costs. Tenants – Our renters will be presented with an easy to use tool to pay their rents online. Though we will accept checks, we will actively promote using online banking, cash
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transfers or paypal accounts for their monthly obligations. Readily available information on building policies, emergency contacts, and utilities will be shown. Finally, if they have any problems with their apartment they will be directed to an easy to fill out request-forservice web form. The portal will assist us in lowering our processing time for collections as well as automating our book keeping functions for further cost reductions. Automating our help desk functions will enable faster and less costly tracking of job order status and completion times. Prospects – The public facing side of the portal will be shown to potential clients to illustrate the ease of working with Corner Stone as your property manager. Simulated reports and activities will be shown such a fashion that our sales staff can quickly show the value proposition of working with our firm. Specific key word coding will enhance our visibility for anyone searching for northern Chicago area property management services. Though the primary sales method will be word of mouth and direct contact, to assist in sales efforts, an online sales tool will be a necessary but inexpensive method of promoting our service. Additionally, placing a presence on the web may generate some interest in our services. Enterprise – The portal will collect all the service requests from the tenants and facilitate the printing of the reports for distribution to the appropriate servicemen to remedy. Status of those requests will be maintained for follow up if needed. Current status of rent payments, vacancies, deposits, and other cumulative financial data will be presented in an easy to view graphical and line item format for reporting functions. All tenant and client data will be readily available for quick access by authorized company staff. This is the corner stone of our business process, automating as many functions as possible in order reduce complexity and costs, speed up process times, and improve services levels to our clients and tenants.
Positioning For absentee owners and remote investors in Chicago area rental properties, we offer worry free, trustworthy property management services. By web enabling our reporting functions we allow our clients unlimited availability to their property’s financial and physical status. The automation of reporting functions and maintaining current investment status dramatically reduces the investor’s worries over problems that may arise. The investors not only receive their rent monies earlier in the month, they now do not have the worry of tenant or building problems being handled in a less than optimal fashion. We want our customers to view us as trustworthy partners who will manage all the multiple demands of the investment properties as if they were their own.
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Pricing The industry standard for management services fees are five percent of rent payments. We propose to maintain that fee structure and also charge five percent of rent monies. Our additional value proposition for those monies will be in our offering easy to understand reports, instant delivery of those reports, and rapid forwarding of rent monies to the clients. Our clients are high net worth individuals who are only interested in receiving monies without any issues interrupting their cash flows. Lowering our fee structure would only hurt our bottom line, while raising our service fees may make it difficult for us to acquire new clients. These high net worth clients are accustomed to paying for good service and should view our high levels of customer service with appreciation. We expect to win over our target client market by offering much superior service at the same price as our competition. By reducing our business processes costs through automation, we will be able to realize better operating margins as we scale up and add additional properties into our management portfolio. Because of our scalability and larger operating profits, if competition starts to copy our methods, we will be better able to reduce our fees while maintaining our return on equity.
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The Market Customers A typical client sought by our company would be a real estate investor with or without experience in building management. A client of ours can own as few as one and as many properties as mutually agreed, as long as the number of units per building does not exceed eight units. Our customers can be broadly identified in two categories: first, those who have jumped into real estate investment because of self-identified opportunities in gentrifying neighborhoods, and second, longtime, and in many cases, multi-generational, property owners whose properties have passed down from parents, to children, and subsequently to grandchildren. The former category may be viewed as a high-income wage earner who hopes to ride the high appreciation trend in a developing neighborhood. He wants to acquire properties at a reasonable cost, economically rehabilitate them, and enjoy the increasing rental rates that such neighborhoods provide. As he enjoys his success and invests in more buildings, he will typically find himself to be incapable of the maintenance issues at the beginning and those frustrations will multiply when coupled with rent collection issues and other service expectations by their tenants. This will be our least challenging customer type to win over of the two types cited above. They will be cost conscious and that will be a first concern, even given the challenge of trying to do the handling of their investments themselves. These are generally very successful people who successfully face a number of professional challenges and may have initially thought that running buildings could be done on a part-time basis. Once shown the cash flow benefits that Cornerstone will provide as far as timely rent collection and that their maintenance issues will evaporate, this should be a lucrative type of customer for us. In the second instance, our marketing territory is rife with multi-family buildings that are owned by second, third, or even fourth generation owners. This will be an entirely different type of customer: one accustomed to the demands of property ownership. Our opportunity lies with the large number of such property owners who no longer rely on apartment rentals as their single source of income and who find themselves stretched for time to properly attend to their real estate holdings. These customers, though, will be more quality conscious when they decide to do business with us, wanting to “protect the family name” and their reputation as responsible landlords. Also, this type of customer will tend to be more concerned with the upkeep of their buildings and we can easily allay their concerns in this area.
Market Size and Trends Currently on the north side of Chicago there are approximately 500,000 multi-unit buildings with less than 8 units per building. We will develop a strategy to attract the property owners who have invested in buildings in addition to their other employment circumstances, but have not accumulated a large enough number of properties to have their own property management firms. 11
During the past five years mortgage rates have hit historic lows. Unemployment rates have been down and personal income rose. All of these factors combined contributed to increased sales of new and existing homes. Large numbers of people who could not previously afford to buy now had a chance to get a mortgage and buy their own home. These events slowed things down on the rental side of the real estate market. Vacancy rates for residential properties were historically high and rents were fairly low for any given market. As interest rates began to rise again and an economic slowdown, many people are renting again. This has already inversed vacancy rates and rents in positive direction for the real estate investor.
Competition Indirect Competition There are thousands of large real estate property management firms in Chicago. Most of them target real estate investors who own larger residential multi-family buildings with more than 20 units per building and/or commercial properties. The fees that they charge vary between 4% and 8% based on location, type and especially size of a given property. Logically, based on economies of scale, the higher fees are paid by landlords who own smaller properties. These larger firms are not our direct competitors because of the higher fees they charge for small buildings.
Direct Competition One of the more established firms in our territory that we will be competing against is Key Management. A ten-year veteran in the industry, they are currently managing about 300 properties and, like Cornerstone, have focused on the eight-or-fewer units per building market; Their sales are just under $5,3 million per month, which makes them a major player in this arena. However, staffing issues have caused some properties they manage to not get the attention that was promised their customers. It is not clear if Key Management is unwilling to hire additional staff in an effort to keep overhead expenses low, or if they feel that the numbers are adequate and are unaware of simmering customer dissatisfaction. Further, they do not maintain a website that can function as both a communication portal and as a means to conduct financial transactions. It is simply an informational site with property locations and office phone numbers provided. Our interactive website will impress our prospects and make customers more satisfied with our property management operation. A second competitor in the territory, J.P. MacDonald and Sons, has been operating in the Ravenswood neighborhood for forty years. This family-run business has long provided management services as well as real estate and insurance services. At one time, it was also the Western Union office in the neighborhood. Now being managed by the two sons, there is no perpetuation plan in place, no website being maintained and no innovation being entertained regarding faster collection of rents. They do, however, manage about 100 properties all over the North side of the city and so enjoy monthly sales of about $1.7 million. Their main customer is the second (or third) generation property owner discussed above, a quaint business leftover from
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the time when neighbors did business with neighbors. This should be a prime opportunity for Cornerstone Property Management, by convincing their existing customers of our increased capabilities.
Estimated Sales Based on estimates, Cornerstone Property Management will rapidly grow during the first year of operations. We project a startup property level of 18 properties (six clients with three properties each), and we project an initial growth of 18 additional properties on average every three months. Projected First Year Sales
$600,000.00
$500,000.00
Sales in Dollars
$400,000.00
$300,000.00
$200,000.00
$100,000.00
$0.00
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
During the second and third years of operations, our growth will slow due to the limits of our geographical region. We project adding 11 properties per quarter. At the end of year three, our net sales will be $2,825,400 per month. We’ll collect 5% of that amount in the form of management fees; therefore, our income before expenses will be (.05 x 2,825,400) $141,270 per month.
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Projected Second & Third Year Sales
$3,000,000
$2,500,000
$1,500,000
$1,000,000
$500,000
$Jul-Sept
Oct-Dec
Jan-Mar
Apr-Jun Jul-Sept Quarter
Oct-Dec
Jan-Mar
Apr-Jun
Sales Growth Projections - 3 years 60
50
40
Growth %
Sales in Dollars
$2,000,000
30
20
10
0 Jul-Sep
Oct-Dec
Jan-Mar
Apr-Jun
Jul-Sep
Oct-Dec
Jan-Mar
Apr-Jun
Jul-Sep
Oct-Dec
Jan-Mar
Quarter
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Development & Production Development status There are two areas that need to be developed before we can fully deploy the enterprise; we need the information technology and the business network to support our enterprise. The information technology will facilitate our business processes, while the business network is needed to create the growth needed to sustain our company. Before development can begin, we will first need a fully functional office. This includes staffing as well as physical goods such as computers. We have evaluated several available software packages but have decided that building our own fully tailored solution to meet our client’s needs would be a stronger long term product. Developing our own software package will enable us to create the documentation needed for future training, attain a complete understanding of the software system, and easily be able to extend the software to create value added services in the future. Our current phase of development is the Prototype Phase. Timeline of Events: 1 2 3 4 5
July 1, 2006 July 5, 2006 July 10, 2006 July 15, 2006 August 1, 2006
6 7 8
August 3, 2006 August 5, 2006 August 7, 2006
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August 10, 2006
10 11 12
August 15, 2006 October 15, 2006 September 15, 2006
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November 15, 2006 November 17, 2006
Raise capital Formation of business entity Setup office with equipment, software, and furniture Start development of software system Complete a “drafted” system (this system will be implemented using Microsoft Access and will provide bare bone functionality to evaluate use cases and our business processes’ capabilities) Create performance metrics and acceptance criteria Design user interface Create system architecture, entity-relationship, data-flow, and class diagrams. Divide software development into three modules and find contingencies within the modules: presentation, application, and data store Hire consultants to implement the software solution we have designed Iterative testing and validation of each module in the application Create documentation for training and for future application development Soft launch of the application to run stress tests Full software launch with kick-off dinner for prospective clients
Assuming the development goes smoothly we can expect to have development completed within 3 months. This is an aggressive time frame, but being well prepared with system diagrams and solid requirements criteria, and, assuming few issues concerning other aspects of the business, we can successfully meet the 3 month deadline. We understand there are potential obstacles to meeting our deadline. Internal delays could include scope creep, unplanned changes, or programming errors. External delays could include challenges with service providers. While these obstacles do have the potential to push our development time line to as
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much as 6 months, this will not cause a delay the core functionality we will provide. A “drafted system” will be in place, enabling the company to operate while awaiting the completion of the implementation of the fully automated system. Once the information technology support system has been enabled, we can continue to our launch plan. The goal of the launch plan is to build a base of clients to support the business' operations. This phase of the enterprise's growth is its network development and will be an ongoing business activity. To build our first set of clients we will draw upon our current contacts in the real estate industry. These contacts will offer the services of Cornerstone Property Management to the landlords which they work with. Current contacts include real estate brokerages and apartment finders; in time we will garner additional industry contacts and will seek to create strategic relationships with these entities to better support both of our businesses goals. While we will make full use of our network assets to gain customers, we will also pursue customers through targeted marketing efforts; refer to the marketing section for details.
Service process Our service processes are divided into two categories; service to our client (the landlord) and service to their tenants, excluding the initialization process. The moment that our services begin is when we acquire a new client, after that client has agreed to the terms of our service we can the initialize the client’s account. Our first task is to give the client our information packet and walk them through our service structure. This packet will inform the client of our services in detail, our business processes, and other resources they can utilize. After the client feels at home with our business, we will create their account in our information technology system; this entails creating the customer's profile, profiles on their properties that we will manage, and finding and logging the maintenance personnel whom we will call to service their properties. After the client's account has been created the initialization phase will be complete and we can start our service to landlords and their tenants. There are five stakeholders in the daily procedures of our business; the landlords, the tenants, the maintenance companies, banks, and apartment finders. To maintain our responsibilities to all of the stakeholders, we will have redundant systems for insured business continuity. In order of “failure severity” these systems are; a cold backup of the application and the database on a separate server, a semi-automated process using the drafted system, and, lastly, a full manual process. Since we will be launching our business in Chicago we will have to setup our offices there. Geographic location is a major factor in servicing our clients: we must have a local presence to the properties that we will be managing for a number of reasons; to monitor activities, to generate contracts, for emergency issue resolution, and to manage our business partnerships with a personal touch. Tenants The services we provide to the landlords and tenants will be the ongoing business practices that make up our daily activities. Our interactions with the tenants will include; collecting rent, responding to and resolving any maintenance issues that are reported, and also 16
complete scheduled check-ups. To collect the rent we will give the tenants a number of payment options; they can use automated check withdrawal, credit/debit payment online or via an automated phone system, and, the option will still exist to pay by check. We can utilize payment via third party systems, such as PayPal, if situations arise in which the tenant is not comfortable using our online payment services, however the tenant will be incur the increased cost of using a third party system. When we have not received a payment from the tenant, automated alerts are sent via email, phone and letter. These alerts are sent to the tenant, our office personnel, and to the landlord (in the case of extreme delinquency). We will also enable the tenants to report maintenance issues through our web portal, as well as through an automated phone system. After the tenant has created the maintenance request, a work order will be created and sent to the proper maintenance company assigned to that property. After we have a confirmed timeframe to complete the work order, a notice is sent to the tenant with the maintenance company’s information and the timeframe for completion. When maintenance personnel have completed the work order they must contact us and report the issue resolution and give us their bill of work. The tenant can prioritize their issue as an “emergency issue” which will flag the request for immediate resolution. Properties will also have a 6 month check-up which will follow this same procedure, with the exception that we will initialize the process by contacting the tenant about the check-up visit. Property Owners/Investors Our other area of service is our service to our direct clients, the landlords. Every six months we will give the landlord a full report on the condition of their property. This will include the results from a health check; a full check-list on the condition of the units, any required building maintenance, as well as recommendations for improvements that would allow them to charge more rent. This six month report will also capture other areas of their real estate investment including financial performance and information on neighborhood developments. Lastly this report will give the landlord a summary of all issues that have occurred with their properties. While reports will be disseminated to the landlords on a bi-annual basis, our clients will be able to login to our web portal at any time and see the current condition of their properties, any outstanding maintenance issues, and full historical data, including tenant history, rent payment history, maintenance histories, who found the tenant, and their account information. However, our main value to the property owner/investor is the hassle-free maintenance provided. When a property owner enlists our services, all day to day operations, scheduled upkeep, and emergency maintenance of properties will be coordinated via our web portal. In this way, the investor is relieved of headaches associated with their investment. Our services will enable the property owner to enjoy the benefits of their investment without the worries. Labor Requirements The labor required for the execution of our development plans will come from internal resources as well as a number of external sources which will be contracted. The internal resources will consist of the three initial partners; a marketing partner, a real estate partner, and a technical partner, as well as two office personnel; an operations manager, and an administrative
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assistant, their skill requirements are summarized in the following table. Each skill requirement is ranked on a scale of 1; little or no development of the skill, to 5; the skill has been highly developed. Marketing Advisor
Brokage Manager
Technical Manager
Operations Administrative Manager Assistant
Has marketing knowledge
5
4
2
3
1
Has graphics skills
5
4
2
1
1
Can create a marketing kit
5
3
1
1
1
Has sales knowledge
5
4
1
3
1
Can create sales packets
5
3
1
2
2
Has people skills
5
5
2
4
4
Has a network of real estate brokers
3
5
1
1
1
Understands real estate trends
3
5
2
2
1
Is a licensed real estate broker
1
5
1
1
1
Has accounting skills
3
4
2
2
1
Has property management knowledge
2
3
2
5
1
Has basic computer skills
5
5
5
5
5
Can maintain a website
2
2
5
4
2
Can design a “model-viewcontroller” application
1
1
5
1
1
Can write programs in ASP.net
1
1
5
2
2
Can write queries to a database (SQL)
1
1
5
3
2
Has knowledge of telecommunications systems
1
1
5
3
1
Can write test scripts
3
3
5
2
1
Can write technical documentation
5
5
5
3
2
To create the information system which will automate the traditional business processes, we will require services from external sources. We plan to contract two freelance computer programmers. Our technical partner will lead the development of the information system by creating the system diagrams and code structures for the consultants to implement. After all systems development is finished, hired consultants will no longer be needed. The technical partner will assume the responsibility of maintaining the technology system. If, in the future,
18
new features and expansion are needed for the system, Cornerstone Property Management may again hire outside consultants to implement code that is designed in house. For business beyond the initial development, all partners will continue to monitor the firm. The only partner who will be actively hands-on in day to day operations will be the Operations Manager. However all partners will be highly utilized only in times of expansion of the firm, or in the case of the technical partner, when the system malfunctions or needs maintenance. All non-automated business processes will be handled by the administrative assistant and the Operations Manager. The administrative assistant should have a minimum of high-school education; the Operations Manager should have a bachelor’s degree, preferably in Management Information Systems. The partner and acting Operations Manager is an MBA. When either position is hired onto the firm in the future, they will need training for use of our web application. The new-hire training materials will come from the documentation produced in the development of the system, and from sales/marketing materials. We will also have ongoing training and professional development efforts to make our employees industry experts, and to take responsibilities off of the partners.
Capital Requirements The cost to setup and develop the software to launch our business will fall into a small number of categories: office expenses, administrative fees, software licenses, and labor hours. All partners in this enterprise will take equal shares of the profit, but will support themselves until the business creates a positive cash flow. Software Development: Expense Server Hardware Microsoft Windows 2003 Standard Edition Linux Red Hat Enterprise Server MySql Development Presentation module Application module Data store module Testing Documentation Reports Total
# 4 2
Cost per 10,000 500
2
-
2
51,500 100 100 100 100 75 75 140,000
80 180 80 100 100 100
19
Office Expenses: Expense Computers Phones Fax machine Printer Total cost Administrative Fees: Expense Cost to create the firm Real estate license Various account creation Domain name registration Web hosting initialization fee Total cost Software Licenses: Expense Microsoft XP operating system Adobe Photoshop Macromedia Homesite Microsoft Visual Studio .NET Microsoft Office Suite Intuit Accounting Package Total Cost
# 5 5 1 2
Cost per 2500 500 1000 800 17,600
Cost per 3000 100 1000 250 650 5,000 # 5 1 3 3 5 1
Cost per 199 99 99 299 199 10,000 13,283
Operating Expenses: Our operating expenses are either fixed costs or variable costs, and we must be able to pay for these expenses with current cash flow, and not start-up financing. Fixed expenses: Payroll Office space Web connection Web space (x2 for redundancy) Utilities bill (for office) Office supplies Variable expenses: Travel Marketing expenses o Marketing materials o Wine and dine money Sales expenses Phone bill Tax 20
Sales and Marketing Strategy There is no substitute for talent when coupled with experience and a strong desire to succeed. We are determined to provide our clients with a high level of quality and effectiveness in all of our business processes. We value the creation of a strong relationship with every client; all of our relationships are built on a foundation of trust and personal attention. We plan to locate prospective customers using several methods, including networking, market research and building alliances with strategic partners, which will further our market reach. We will work in conjunction with real estate brokerages as additional resources for clients. We will utilize a sales force, which will aggressively pursue the leads generated through networking; they will educate prospects about our value proposition and our service offerings by using the marketing kit we have developed. We will draw in clients by accentuating our vendor resource network, cost effectiveness for property owners, high quality service, and above all, personal attention and trust, which form the basis of our organization. We will also emphasize our ability to provide better pricing through economies of scope, by focusing on our core competency - property management - and by having an in-depth understanding of all aspects in that industry. Our ability to offer our clients better pricing through economies of scale will also be realized by avoiding adverse markets. We will leverage our industry networks, property management knowledge base, expert systems, and top shelf customer service, to bring a low bottom line price to our clients. Our initial focus will be on local real-estate markets and buildings which have up to 8 units and are owned by private investors. We will target these small to medium-sized rental properties, owned by high-income wage earners who want a hassle-free investment, and owners of properties handed down through generations, both of which are an under-served segment of the market. We will seek to grow a network of vendor resources in each geographical area where we establish our service, utilizing the extensive resources brought in by our talented and well-connected partners.
Method of Sales Our sales methods will be based on direct sales to property owners. Leads will be obtained through market research, including (among other sources of real-estate data):
Local newspapers Classified ad websites MLS listings Strategic partners
We will also create and leverage strategic networks by taking advantage of the networking opportunities presented by real estate trade shows, the chamber of commerce, and
21
other industry players such as tax accountants and real estate attorneys. We strive to forge symbiotic relationships with area suppliers, developing a referral strategy.
Advertising and Promotion We will employ various methods to advertise our services, including: Printed brochures Online brochure website Advertisements in the real-estate section of local newspapers (local to the area market we’re entering). Utilization of free classified services, such as www.craigslist.org and other such services, for additional promotion of our services. Utilization of website banner advertising by placing our advertisements at the websites where our potential clients will visit (real-estate oriented sites). Giving away of promotional items (magnets, pens, golf balls, stress balls, etc) to industry players, as well as property owners that we meet while doing business and at trade shows. Making appearances at real estate conventions, where we will set up a promotional booth with staff on hand to get our prospective clients acquainted with our name and brand as well as to educate the industry and potential clients of our services. Utilization of an outside agency to assist in building a brand, advertising, and promotional services.
22
Management Description In order to deliver a cost effective and high quality work, Cornerstone Property Management requires experienced managers in every aspect of the business. Property management services and operations expertise, real estate law and regulation knowledge, real estate and property management market experience, Internet marketing and ebusiness expertise – they are all core requirements to build a solid and successful e-business property management firm. Our General Partners and Board of Advisors (see details in the next sections) have excelled on all requirements during their careers. We have total confidence that the synergy created by their experience and knowledge will provide the foundation for our ultimate competitive advantage: “we know the business and how to do it well in a cost effective way”.
Ownership Legal entity: Limited Liability Limited Partnership (LLLP) founded by 3 general partners that share the profits of the firm in equal proportion. Initially there is no limited partner but it can be considered as a possible alternative for funds.
Organization Structure General Partners: • Brokerage Manager: Mr. Alex Stoykov, MBA Mr. Stoykov brings more than 8 years of experience in real estate, mortgage advisory, and property management to Cornerstone Property Management He once headed the corporate property management division of a top 50 real estate company and was responsible for an annual budget of more than US $ 5 million. He leaded the department from an underperformer to the most profitable activity of that company within 4 years. • Operations Manager: Ms. Cathy Gentry, MBA Ms. Gentry has over 7 years of experience in property management, having more than 50 properties at one time under her care. She has several contacts in an extensive network of people related to property maintenance (electricians, plumbers, general contractors, cleaning companies, architects, civil engineers, snow removal etc). She used to work in a home restoration business that her family owned, and later decided to diversify her family’s investments in real estate, leading her to deal with property management. • Technology Manager: Mr. Shakir Akbari, MS Mr. Akbari has vast experience working in Internet e-business, being the former director of e-business for a very successful bank. Founder and CEO of e-rentals.com, a B2C portal that connected hundreds of rental communities with prospective customers, reaching at one point more than 10,000 23
registered users, he was nominated one of the most influential leaders in real estate business by the “VAR E-Biz” magazine in 2000. Board of Advisors: • Financial Advisor: Ms. Kathy Scharko, PHD, CFA Former analyst in Venture Capital Corp, specialized in e-business firms, with experience in banking, start-ups finance, IPOs and other market capitalizations. Ms Scharko has been analyzing many e-business failures and recently released a highlyregarded white-paper where she provides an insightful view of the role and contribution of CFOs in the Internet boom and subsequent downfall. • Marketing Advisor: Mr. Samir Sundar, MBA Mr. Sundar has been part of several marketing agencies, leading e-marketing campaigns for many S&P 500 companies. One of his most visible works is the e-marketing of a leading news portal that targeted a very well defined segment, with great success and worldwide stir. • Real Estate Legislation & Regulations Advisor: Mr. Ed Fee, Attorney at Law Nominated one of the top 20 real estate attorneys in Chicago by the Illinois State Bar Association in 2005, Mr. Fee represented many real estate investors during negotiations with state and local government bodies, having a major role in some very visible high rise ventures in downtown Chicago. Employees: • Administrative Assistant.
Support Services Initially all maintenance will be outsourced, implying that a wide range of support services will be required. • Accounting services: provided by Grant Thornton (www.gt.com), one of the top accounting firms in the United States – initial contact thanks to our financial advisor Ms Scharko (she mentored some of their current top employees and worked with some of the partners). • Maintenance services: we are partnering with www.servicemagic.com (the nation's leading online marketplace connecting homeowners with prescreened and customerrated home service professionals, founded in 1998 and ranked 60th in the list of fast growing privately held companies from Inc 500 magazine in 2004) in order to provide a list of prescreened (properly licensed and insured) local plumbing, landscaping, painting, electrical, heating, cooling, cleaning, pest control, and handyman services that will be used to quote estimates and perform the job.
24
Financials Risks A key business driver and therefore a risk to Cornerstone Property is the rental market in Chicago. If there is a major downturn in this market there is risk of high vacancies. Chicago has a strong rental market and our partner in this area is cognizant of the communities and trends in this market and has an excellent track record of projecting industry trends. Our clients depend on us to maintain and manage their properties, so timely and proper service is necessary to protect their investment and maintain their trust in us. Our partner in operations management has built the relationships with a wide network of vendors and extensive knowledge about building maintenance. System failure is a risk that can cause operational issues and cash flow concerns. If tenants are unable to pay rents via the web portal for any length of time, cash flows impacts could be substantial. Redundant systems and contingency plans are in place to mitigate this risk.
Break-Even Analysis Average number of units per property Average monthly rent per unit Average monthly income per property Average net income per property (5%) Average net income per property (95% occupancy rate)
6 1,170 7,020 351 333.45
Monthly expenses
12,975
Break-even # of properties
12,975/333 = 39 properties
Cash Flow Statement See Appendix B
Balance Sheet See Appendix C
Income Statement See Appendix D
25
Funding Request and Return The request is for a letter of credit in the amount of $150,000. The interest rate we are requesting is 7.5%. This request is built on the following cost projections: Software development Marketing and branding Legal/Accounting startup Operating costs (6 months) Total Startup Cost
$200,000 $ 50,000 $ 5,000 $ 45,000 $300,000
Each partner is planning to contribute $50,000. The cash flow statement displays the timing of when the money is anticipated to be needed during the first year and timing for payoff over years two and three.
26
Appendix A – Web Site Screenshots Home Page
About Us
27
Tenant Portal - Payment
Tenant Portal – Help Desk
28
Landlord Portal – Home Page
Landlord Portal – Sample Report
29
12,635
Retain 10% cash for repair reserves
12,635
12,688
75,000
75,000
Appendix B – Cash Flow
13,287
0
Ending Balance Cash
Distribution to partners
Purchase Long-term assets
Purchase other current assets
Long-term liabilities principal repayment
Principal Repayment of Current Borrowing
Additional Cash Spent:
27,100
37,850
Subtotal Spent on Operations
25,350
95,000
37,850
95,000
32,000
6,502
6,502
13,287
32,000
19,137
6,502
12,635
-
Aug
1,750
$
Jul
Payment of Accounts Payable
Cash spending
Expenditures:
New investment received
Sale of Long-term assets
Sale of other current assets
New Long term borrowings
New Current borrowing
Additional Cash received:
Subtotal Cash from Operations
Cash from management and other fees
Cash retained from collections
Cash from operations:
Beginning Cash
Cash Flow : Year One
12,635
14,215
75,000
75,000
22,975
2,625
20,350
93,000
23,000
70,000
6,502
6,502
12,688
Sep
25,270
26,441
50,000
50,000
13,413
3,063
10,350
50,000
50,000
25,638
13,003
12,635
14,215
Oct
25,270
25,719
0
13,725
3,375
10,350
0
13,003
13,003
26,441
Nov
25,270
24,997
0
13,725
3,375
10,350
0
13,003
13,003
25,719
Dec
30
37,985
36,530
12,000
12,000
13,725
3,375
10,350
5,000
5,000
32,258
19,543
12,715
24,997
Jan
37,985
40,317
12,000
12,000
13,756
3,406
10,350
10,000
10,000
19,543
19,543
36,530
Feb
37,985
41,041
15,000
15,000
13,819
3,469
10,350
10,000
10,000
19,543
19,543
40,317
Mar
52,180
53,140
15,000
15,000
13,881
3,531
10,350
0
40,981
26,786
14,195
41,041
Apr
52,180
56,044
15,000
15,000
13,881
3,531
10,350
5,000
5,000
26,786
26,786
53,140
May
52,180
53,917
15,000
15,000
13,913
3,563
10,350
0
26,786
26,786
56,044
Jun
Retain 10% cash for repair reserves
Ending Balance
Additional Cash Spent: Principal Repayment of Current Borrowing Long-term liabilities principal repayment Purchase other current assets Purchase Long-term assets Distribution to partners
Expenditures: Cash spending Payment of Accounts Payable Subtotal Spent on Operations
Additional Cash received: New Current borrowing New Long term borrowings New investment received Subtotal Additional cash received
Cash from operations: Cash retained from collections Cash from management and other fees Subtotal Cash from Operations
Beginning Cash
Cash Flow : Year Two- Year Three
66,180
45,000 65,000 68,575
45,000 65,000 59,439 59,180
20,000
20,000
26,247 3,563 29,810
26,247 10,924 37,171
104,307 111,307
93,332 100,332
0
7,000
73,180
58,500 78,500 75,561
20,000
26,247 10,549 36,796
115,282 122,282
7,000
Year 2 Oct-Dec Jan-Mar 59,439 68,575
7,000
Jul-Sept 53,917
80,180
67,500 87,500 84,897
20,000
26,247 10,174 36,421
126,257 133,257
7,000
Apr-Jun 75,561
87,180
67,500 87,500 97,857
20,000
33,972 9,799 43,771
137,232 144,232
7,000
Jul-Sept 84,897
31
94,180
81,000 101,000 104,964
20,000
33,972 12,128 46,100
147,207 154,207
7,000
94,180
90,000 110,000 96,446
20,000
33,972 11,753 45,725
147,207 147,207
Year 3 Oct-Dec Jan-Mar 97,857 104,964
94,180
90,000 100,000 98,303
10,000
33,972 11,378 45,350
147,207 147,207
Apr-Jun 96,446
5,000 175,000 180,000
2,500,000 2,602,500 1,077,500 3,680,000
Total Liabilities
Net worth
Total Liabilities and Net worth
100,000 2,500 102,500
3,680,000
5,000,000 (1,500,000) 3,500,000
Stoykov
Long term liabilities
Liabilities and Net Worth Current Borrowings Other Current Liabilities Subtotal Current Liabilities
Total Assets
Long Term Assets Accumulated Depreciation Total Long Term Assets
Assets Cash Other Current Assets Total Current Assets 8,000 75,000 83,000
1,433,000
221,500
1,211,500
1,200,000
10,000 1,500 11,500
1,433,000
1,500,000 (150,000) 1,350,000
Gentry
Balance Sheet of Individual Partners at April 30, 2006
Appendix C – Balance Sheet
7,500 85,000 92,500
1,442,500
368,300
1,074,200
1,050,000
22,000 2,200 24,200
1,442,500
1,350,000
1,350,000
Akbari
32
Net profit
(33,098)
(21,473)
(21,473)
(33,098)
Income From Operations
Interest expense
27,975
39,600
200
Total Expenses
200
Professional Services
200
700
15,000
200
Insurance 30,000
700
Office rent
200
200
1,350
2,625
7,500
Start Up Costs
200
Utilities
1,350
Sales and marketing expenses 200
1,750
Office Expenses
5,000
Payroll taxes and other benefits
500 6,502
500
6,002
Aug
6,502
6,002
Jul
Payroll Expenses
Expenses
Total Income
Other fees
Management fees on rent collected
Income
Income Statement: Year One
(16,911)
438
(16,473)
22,975
10,000
200
200
700
200
200
1,350
2,625
7,500
6,502
500
6,002
Sept
(722)
750
28
12,975
200
200
700
200
200
1,350
2,625
7,500
13,003
1,000
12,003
Oct
Appendix D – Income Statement
(722)
750
28
12,975
200
200
700
200
200
1,350
2,625
7,500
13,003
1,000
12,003
Nov
(722)
750
28
12,975
200
200
700
200
200
1,350
2,625
7,500
13,003
1,000
12,003
Dec
5,787
781
6,568
12,975
200
200
700
200
200
1,350
2,625
7,500
19,543
1,500
18,043
Jan
33
5,724
844
6,568
12,975
200
200
700
200
200
1,350
2,625
7,500
19,543
1,500
18,043
Feb
5,662
906
6,568
12,975
200
200
700
200
200
1,350
2,625
7,500
19,543
1,500
18,043
Mar
12,904
906
13,811
12,975
200
200
700
200
200
1,350
2,625
7,500
26,786
2,000
24,786
Apr
12,873
938
13,811
12,975
200
200
700
200
200
1,350
2,625
7,500
26,786
2,000
24,786
May
12,873
938
13,811
12,975
200
200
700
200
200
1,350
2,625
7,500
26,786
2,000
24,786
Jun
Vacancy Rate Management fee rate Inflation rate
Net Income
95% 5% 3%
47,161
2,813 57,511
2,438
59,948
49,973
Income From Operations
Interest Expense
23,175 8,111 1,500 200 210 750 206 206 34,358
23,175 8,111 1,500 200 210 750 206 206 34,358
Payroll Expenses Payroll taxes and other benefits Sales and marketing expenses Leased Equipment and software Utilities Office rent Insurance Professional Services Total Expenses
94,307 10,000 104,307
84,332 9,000 93,332
Apr-Jun
67,861
2,063
69,923
23,175 8,111 1,500 200 210 750 206 206 34,358
104,282 11,000 115,282
Jul-Sept
Year 2
Management fees on rent collected Other fees
JanMar
Income Statement: Year Two - Year Three
78,211
1,688
79,898
23,175 8,111 1,500 200 210 750 206 206 34,358
114,257 12,000 126,257
Oct-Dec
78,132
1,313
79,445
30,900 10,815 1,500 200 210 750 206 206 44,787
124,232 13,000 137,232
Jan-Mar
34
88,482
938
89,420
30,900 10,815 1,500 200 210 750 206 206 44,787
134,207 13,000 147,207
Apr-Jun
88,857
563
89,420
30,900 10,815 1,500 200 210 750 206 206 44,787
134,207 13,000 147,207
Jul-Sept
Year 3
89,232
188
89,420
30,900 10,815 1,500 200 210 750 206 206 44,787
134,207 13,000 147,207
Oct-Dec
